Securities and Futures Commission v. Mo Shau Wah and Others

CACV 207/2017

2018 HKCA 191

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 207 OF 2017

(ON APPEAL FROM HIGH COURT ACTION NO 353 OF 2013)

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Before:  Hon Cheung and Yuen JJA in Court

Date of Hearing and Judgment:  23 March 2018

Date of Reasons for Judgment:  28 March 2018

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R E A S O N S   F O R   J U D G M E N T

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Hon Cheung JA:

1.I agree with the reasons for judgment of Yuen JA.

Hon Yuen JA:

2.This is an application[1] by China Pacific Securities Limited (“CPSL”) for leave to adduce fresh evidence at the hearing of an appeal[2] by the 1^st defendant from a Judgment of DHCJ Francis given on 25 July 2017 in HCA353/2013 (“the Judgment”).  At the end of the hearing, we granted the application and ordered that the costs of the summons be costs in the cause of the appeal, but that the costs of the hearing be paid by the 1^st defendant to CPSL.  My reasons appear below.

Background

3.In HCA353/2013, the plaintiff is the Securities and Futures Commission (“SFC”). I shall refer to this action as “the SFC action”.  The 1^st and 2^nd defendants were, at material times, the employees of CPSL which is a securities company.  The other defendants are related to the 1^st defendant by marriage or blood.  CPSL was not a party in the SFC action when it commenced[3]. 

- The SFC action

4.1.In the SFC action, the SFC alleged the following:

(1)  the 1^st and 2^nd defendants had since about 2004, misappropriated securities belonging to CPSL’s clients and, in contravention of the Securities and Futures Ordinance (“SFO”), produced false or misleading records to the SFC during inspections in 2006 and 2012;

(2)  on 26 November 2012, CPSL’s shareholders and directors gave an undertaking to the SFC that CPSL, its shareholders and directors would fully compensate any clients affected by the misappropriation of client securities;

(3)  on 29 November 2012, CPSL appointed JLA Asia Ltd[4] to investigate into and identify the client securities that had been misappropriated;

(4)  on 4 December 2012, CPSL’s shareholders and directors (as settlors) executed a Trust Deed whereby they made available to JLA Asia (as trustees) securities and funds to be applied in replacing the misappropriated client securities and compensating clients affected by the misappropriation; and

(5)  CPSL, its shareholders and/or directors have replaced the misappropriated securities in order to restore affected clients to the position they were in before the misappropriation, and in doing so, CPSL’s shareholders and directors have suffered loss of $156,417,704.62; further or alternatively CPSL has suffered loss of $160,785,224.

4.2.The SFC action sought the following relief:

(1)  declaratory orders that the 1^st and 2^nd defendants had contravened certain provisions of the SFO;

(2)  pursuant to s.213(2)(b) SFO[5], an order requiring the defendants to take such steps as the Court may direct, including payment of sums or transfer of securities to CPSL and/or its shareholders and directors and/or the trustees, so as to restore them to the position they were in before the misappropriation; and

(3)  further or alternatively, pursuant to s.213(8) SFO[6], an order requiring the 1^st and 2^nd defendants to pay damages to such persons as the Court may direct.

- Mareva injunction

5.1.The writ in the above action was issued on 26 February 2013.  On the same day, Tong J granted an ex parte Mareva injunction restraining the 1^st defendant from disposing of her assets up to the value of $156,471,705.

5.2.On 1 March 2013, Poon J varied the Mareva order, but only to the extent that the 1^st defendant was allowed to spend a necessary and reasonable sum (not exceeding $100,000) for medical expenses.

5.3.On 9 May 2017, Au-Yeung J further varied the Mareva order by consent (“the consent order”), to the extent that the 1^st defendant was allowed to withdraw $100,000 per week as legal costs from 9 May 2017 until the total sum withdrawn reaches $4,205,000 or until the completion of trial in HCCC12/2017[7], whichever is the sooner.  The consent order did not specify the financial resource from which the funds could be withdrawn.

6.The 1^st defendant had a securities account with CPSL.  The last known balance as at 31 December 2012 was given as $3,361,869.97.

1^st defendant’s attempt to withdraw funds from CPSL account

7.The 1^st defendant sought, pursuant to the consent order, to liquidate her CPSL account and to withdraw the proceeds.

The 1st defendant’s summons

8.1.This led to the 1^st defendant’s summons issued on 12 June 2017[8] the final form of which was as follows:

(1)  CPSL be ordered to desist from obstructing and/or impeding the SFC and the 1^st defendant from carrying out the order of Poon J as varied by the consent order;

(2)  CPSL be ordered to sell all shares of the 1^st defendant held in its account and hold all net proceeds until further order; and

(3)  the said net proceeds be placed in a bank account to be managed by the 1^st defendant’s solicitors subject to their undertaking to comply with certain provisions of Tong J’s order as varied by Poon J’s order and the consent order.

8.2.The summons was heard by DHCJ Francis on 16 and 20 June 2017.  The hearing was attended by the 1^st defendant, the SFC, and CPSL which had been served with the summons.  At this stage, CPSL had not yet applied to be an intervener in the SFC action, nor had it commenced any proceedings of its own against the defendants.

8.3.However it is recorded in DHCJ Francis’s Judgment that:

“The subject of jurisdiction [of the court over and the standing of CPSL as a non-party to the action][9] formed a not insignificant part of the written submissions of counsel for each of the 1^st defendant and CPSL, however, I need not make any finding in this regard as in the event the matter was shortly resolved by, at the court’s invitation, CPSL agreeing that it to be made a party to the 1^st defendant’s application pursuant to Order 15, rule 6(2)(b)(ii)[10]. The joinder of CPSL was not opposed (on the contrary it was welcomed) by the 1^st defendant[11] and I ordered accordingly (with costs reserved)”. (Emphasis added).

The deputy judge’s Judgment

9.On 25 July 2017 the learned deputy judge gave judgment.  It is not appropriate at this stage to analyse the Judgment in detail as the appeal has yet to be heard.  The deputy judge focused on two issues:

(1)  what was the test to be applied when the court considers a defendant’s application to release funds which have been made the subject of a Mareva injunction; and

(2)  in applying the test in the present case, what is the position of CPSL (which, at that time, was not a party to the SFC action, nor had commenced proceedings of its own against the 1^st defendant).

10.1.In relation to issue (1), the deputy judge applied principles set out in Hong Kong Life Insurance Ltd v Fung Siu Cheung Michael and others HCA1164/2012, 21 February 2014, §§33-34, where the court considered the question whether funds which are the subject of an injunction should be released to a defendant to allow him to meet the costs of defending himself in related criminal proceedings.  In that case, the court held that:

(1)  where the injunction involves a proprietary claim by the plaintiff, the court in exercising its discretion would consider:

(a) whether the defendant had demonstrated with full and frank evidence that there were no other available assets that can be used to pay his legal expenses, and

(b)  if so, then the court must balance the potential injustice to the parties respectively, taking all relevant circumstances into account, in particular the strength of the parties’ respective cases (“the Proprietary Test”);

(2)  where the plaintiff is not asserting a proprietary claim to the assets in question, the court should consider whether the defendant has shown by sufficient evidence that:

(a) he does not have other assets available to meet the legal expenses, and

(b)  the purpose of the application is not to dissipate the asset so as to frustrate execution of the judgment by the plaintiff (“the Non-Proprietary Test”).

10.2.In summary, DHCJ Francis took the view that the 1^st defendant had failed even to pass the Non-Proprietary Test, for the 1^st defendant[12]:

(a) had a number of bank accounts (albeit in joint names) with sizeable cash balances;

(b)  had two properties (albeit jointly owned), in respect of which no evidence had been adduced as to any rental income or potential equity on a sale or mortgage; and

(c) had failed to disclose the means by which she had acquired the securities in her CPSL account.

11.1.More material to the present application before this court is issue (2), ie whether CPSL had a “claim” against the 1^st defendant so as to affect her application to liquidate the account and withdraw funds from it.

11.2.CPSL submitted (among other things) that since it has compensated affected clients, it has by the process of subrogation stepped into the shoes of those affected clients, and thus became entitled to the relief of restoration and/or damages sought in the SFC action[13].

11.3.DHCJ Francis held that CPSL had:

(1)  a potential claim against the 1^st defendant which may well be of a proprietary or trust nature given that the 1^st and 2^nd defendants were CPSL’s employees[14], and

(2)  having regard to the compensatory arrangements described in the statement of claim in the SFC action, it was in any event highly likely that CPSL had a substantial claim in damages which was larger than the value of the 1^st defendant’s securities account with it[15].

11.4.The deputy judge concluded that[16]:

“whether having regard to the claim as currently formulated and being pursued by the SFC in the [SFC action] ... which seeks relief that might ‘restore’ or make CPSL whole, or the prospective claim, proprietary and/or in damages, that CPSL is very likely to have based on the facts and matters alleged in the Statement of Claim of the SFC, it is appropriate that I deal with the 1^st defendant’s application on the basis that there is a pending ‘claim’ such that the principles ... in [Hong Kong Life Insurance Ltd ] are applicable”.

11.5.Indeed the deputy judge was informed at the hearing that CPSL was prepared to bring a claim of its own against the 1^st defendant[17].

12.In the circumstances and for the reasons given in the Judgment, the deputy judge refused the 1^st defendant’s application.

Leave to appeal

13.1.The 1^st defendant’s application for leave to appeal was heard by the deputy judge on 1 September 2017.

13.2.One day prior thereto, the 1^st defendant produced on affirmation the Deed of Undertaking and the Agreement between CPSL and JLA Asia in an effort to support her argument that it was not CPSL itself, but only its shareholders and directors, who had suffered loss in compensating affected clients.

13.3.As the 1^st defendant’s affirmation was filed late, the deputy judge permitted CPSL to hand up at the hearing[18] CPSL’s audited accounts and financial statements for the year ended 31 December 2012 and for the period 1 January 2013 to 30 April 2013.  These documents showed that for the year ended 31 December 2012, provision had been made for a sum of more than $160 million “for making good the loss of clients securities misappropriated and related expenses”, and that for the subsequent period, the sum had been reduced to zero.

13.4.The deputy judge allowed all four documents to be adduced in evidence for the purposes of the application for leave to appeal, although he expressly stated that his permission did not extend to the appeal (presumably because that was within the remit of the appellate court).

13.5.For reasons given in his judgment of 6 September 2017, the deputy judge gave leave to appeal in respect of paras. 2 and 3 of the 1^st defendant’s summons[19].

14.The appeal is due to be heard in June 2018.  In the meantime,

(1)  on 7 September 2017, CPSL filed a summons for leave to join in the SFC action as an intervener, which was granted on 16 March 2018 after a hearing in January 2018, and

(2)  on 18 September 2017, CPSL issued a writ in HCA2174/2017 against the 1^st defendant containing claims for breach of fiduciary duty and breach of trust, and seeking orders for damages or equitable compensation for breach of fiduciary duty and breach of trust, and a declaration that it is entitled by way of subrogation to the rights of affected clients.

CPSL’s application to adduce evidence at appeal

15.1.On 30 November 2017, CPSL issued a summons in the appeal proceedings for leave to adduce the following 7 Items at the hearing of the appeal, as follows:

(1)  the Deed of Undertaking

(2)  the Agreement between CPSL and JLA Asia

(3)  CPSL’s audit report for the year ended 31 December 2012

(4)  CPSL’s audit report for the period 1 January 2013 to 30 April 2013

(5)  CPSL’s audit report for the year ended 31 December 2013

(6)  An audit confirmation dated 24 November 2017 of CPSL’s former auditors

(7)  the writ and Statement of Claim in CPSL’s own action against the defendants

15.2.The 1^st defendant objected to the summons.

Discussion

16.1.It is clear that in the exercise of the court’s discretion, these documents should be adduced at the hearing of the appeal.

16.2.Items (1) and (2) had been adduced by the 1^st defendant herself.  They were only adduced at the application for leave to appeal, but the deputy judge was prepared to consider them.  Items (3) and (4) were adduced by the plaintiff in response to Items (1) and (2) and were also considered by the deputy judge in arriving at his decision to grant leave to appeal.  As these documents Items (1) to (4) were relevant to the grant of leave to appeal, it follows that the Court of Appeal should hear and determine the appeal with the same materials before it.  The 1^st defendant’s objection is unarguable.

16.3.Items (5) and (6) update the information in Items (3) and (4), and Item (7) would have been allowed in, in any event, as they are court documents created since the hearing before the deputy judge which are clearly relevant to the subject matter of the appeal.

Order

17.Accordingly we gave leave to CPSL to adduce all items referred to in its summons.  As the opposition to the application was completely unjustified, the 1^st defendant was ordered to pay the costs of the hearing, although the costs of the summons was made costs in the cause of the appeal.

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

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