Securities and Futures Commission v. Mo Shau Wah and Others

CACV 207/2017

2018 HKCA 370

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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REASONS FOR JUDGMENT

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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 appeal by the 1^st Defendant (“D1”) against a Judgment of DHCJ Francis given on 25 July 2017 in HCA353/2013 (“the Judgment”) in which he dismissed D1’s summons filed on 12 June 2017 (“the Summons”). The Summons contained three paragraphs[1]. On 6 September 2017 the learned deputy judge gave leave to D1 to appeal his order on paras. 2 and 3 only. 

3.At the conclusion of the hearing of the appeal, the appeal was dismissed.  My reasons appear below.

Background

4.From 2004 to 2012, D1 and the 2^nd Defendant (“D2”) were employees of China Pacific Securities Limited (“CPSL”) a securities company.   D1 was an account executive and D2 was a settlement clerk.  D3 is D1’s elderly mother-in-law. D4 is D3’s sister, who held a bank account jointly with D1.  D5 is D1’s cousin who lives overseas.  D3-D5 had accounts with CPSL, as did D1 herself. 

5.In November 2012, the Securities and Futures Commission (“SFC”) undertook an inspection at the office of CPSL.  The SFC says that irregularities were found, in that it was falsely recorded that D1 and D3-5 had deposited physical shares with CPSL.  When orders were given by or on behalf of D1, D3, D4 or D5 to sell their (non-existent) shares, CPSL duly sold those numbers of shares in its account with CCASS, the central clearing and settlement system of the Stock Exchange.  What CPSL actually sold were shares belonging to its other clients, but the proceeds of sale were paid to D1, D3, D4 or D5.  Substantial sums were allegedly paid into bank accounts of or controlled by D1.     

The SFC action

6.1.On 26 February 2013 the SFC, pursuant to its powers under the Securities and Futures Ordinance, Cap.571 (“SFO”) issued proceedings against D1-5 in HCA353/2013 (“the SFC action”).  CPSL was not a party in the SFC action.

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

(1)   D1 and D2 had since about 2004, misappropriated securities belonging to CPSL’s clients and, in contravention of the SFO, produced false or misleading records to the SFC during inspections in 2006 and 2012;

(2)   after the misappropriation was discovered, 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 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.

6.3.The following relief were sought in the SFC action:

(1)   declaratory orders that D1 and D2 had contravened certain provisions of the SFO;

(2)   pursuant to s.213(2)(b) SFO, 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, an order requiring D1 and D2 to pay damages to such persons as the Court may direct.

Mareva injunction

7.1.The writ in the SFC action was issued on 26 February 2013.  On the same day, Tong J granted an ex parte Mareva injunction restraining D1 from disposing of her assets up to the value of $156,471,705.

7.2.On 1 March 2013, Poon J[2] varied the Mareva order, but only to the extent that D1 was allowed to spend a necessary and reasonable sum (not exceeding $100,000) for medical expenses.

7.3.On 9 May 2017, Au-Yeung J further varied the Mareva order by consent between the SFC and D1 (“the consent order”), to the extent that D1 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 her criminal trial in HCCC12/2017, whichever is the sooner.  The consent order did not specify the financial resource from which the funds could be withdrawn.

8.As mentioned earlier, D1 had a securities account with CPSL.  The balance as at 31 December 2012 was given as $3,361,869.97. Since then, there have been some dividends paid into the account.

D1’s attempt to withdraw funds from CPSL account

9.In 2017, D1 sought to liquidate her CPSL account and to withdraw the proceeds.  CPSL refused to comply with her request. 

D1’s summons

10.1.This led to D1’s Summons the final form of which read as follows:

(1)   CPSL be ordered to desist from obstructing and/or impeding the SFC and D1 from carrying out the order of Poon J as varied by the consent order;

(2)   CPSL be ordered to sell all shares of D1 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 D1’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.

10.2.The Summons was heard by DHCJ Francis on 16 and 20 June 2017. The hearing was attended by legal representatives of D1, the SFC, and CPSL which had been served with the summons.  Before the hearing, 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.

10.3.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] 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 aparty to the 1^st defendant’s application pursuant to Order 15, rule 6(2)(b)(ii). The joinder of CPSL was not opposed (on the contrary it was welcomed) by the 1^st defendant and I ordered accordingly (with costs reserved)”. (Emphasis added).

The deputy judge’s Judgment

11.1.On 25 July 2017 the judge gave judgment.  He 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 D1).

11.2.In relation to issue (1), the judge applied principles set out in Hong Kong Life Insurance Ltd v Fung Siu Cheung Michael and others[3] at §§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, B Chu J 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”).

DHCJ Francis took the view that D1 had failed even to pass the Non-Proprietary Test, for she:

(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.

11.3.As for issue (2), ie whether CPSL had a “claim” against D1 so as to affect her application to liquidate the account and withdraw funds from it, 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.

11.4.DHCJ Francis held that CPSL had:

(1)   a potential claim against the D1which may well be of a proprietary or trust nature given that she was CPSL’s employee, 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 D1’s securities account.

11.5.The judge concluded that:

“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”. (Emphasis added).

11.6.In the circumstances and for the reasons given in the Judgment, the judge dismissed the Summons with an order that D1 pay 50% of CPSL’s costs.

Events after the Judgment –

-   CPSL action

12.1.The judge was informed at the hearing that CPSL was preparing to bring a claim of its own against D1. Subsequently on 18 September 2017, CPSL issued proceedings in HCA2174/2017 (“the CPSL action”) against the same defendants as the SFC action.  As far as D1 was concerned, CPSL claimed against her for breach of fiduciary duty and breach of trust, and sought 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.

-   Order for intervening

12.2.Further on 16 March 2018, CPSL obtained an order that it be joined as intervener in the SFC action limited to receiving notices of subsequent applications for variation of the Mareva injunction.

Appeal

13.The judge granted leave for D1 to appeal the dismissal of paras 2 and 3 of the Summons.  Mr Bernard Mak, counsel for CPSL, has helpfully formulated the submissions of Mr George Chu, counsel for D1, as follows:      

(1)   CPSL, not being a party to the SFC action, had no locus standi to intervene in the consent order which resulted from an agreement between the SFC and D1, and hence the judge had no jurisdiction to determine the dispute (Ground 1);

(2)   Even assuming CPSL could intervene in the consent order, the judge applied the wrong test and adopted the wrong burden of proof in determining whether the assets covered by the Mareva injunction (as varied by the consent order) should be released (Ground 2);

(3)   Even assuming that the judge had adopted the correct test, on the facts of the case, the judge erred in (a) finding that CPSL had a proprietary claim and (b) disregarding D1’s “clear evidence” that she had no other means to meet the legal costs of the criminal proceedings, and it was not open to the judge to prioritise which assets D1 should dispose of first (Ground 3).

Discussion

14.In relation to Ground 1, it is incorrect for D1 to characterize the consent order as a private agreement between the SFC and herself, with CPSL merely a third party outwith the agreement who must comply with her instructions to liquidate the securities account. 

15.1.In the first place, the consent order sets out only the consent reached on the amount of money which D1 may withdraw for her legal expenses.  The order did not include any consent on the financial resource for such withdrawal. The SFC has taken a neutral stand in the Summons, but it has not at any stage agreed that the securities account should be liquidated to fund the withdrawal.

15.2.More importantly, the consent order cannot override the interests of a third party (ie CPSL) in D1’s securities account.  Even before the commencement of the CPSL action, it is clear from the statement of claim in the SFC action that the acts D1 has allegedly done, whilst an employee of CPSL, result in her incurring liability to CPSL for substantial amounts, for which CPSL can look to her securities account for set-off, restitution or equitable compensation.  As such, CPSL is an entity whose interests would be adversely affected if D1’s application were granted, and therefore it was clearly entitled to intervene in her application to liquidate the account for her legal expenses[4].  In any event it is trite law that it would be contrary to the principles of natural justice that any judicial order adversely affecting a party’s interest should be made without the party being given a reasonable opportunity of being heard[5].  The judge ordered pursuant to Order 15 rule 6(2)(b)(ii)[6] Rules of the High Court that CPSL be made a party for the purpose of the Summons.  As mentioned earlier, CPSL has since obtained an order that it be joined as intervener in the SFC action limited to receiving notices of subsequent applications for variation of the Mareva injunction.  D1 has not appealed that order, thereby acknowledging CPSL’s legitimate interests concerning the protected assets.

16.I turn now to Ground 2.  Mr Chu argues, without reference to any legal authority, that the test for determining whether a Mareva injunction should be varied does not apply where the opponent to the variation is an intervener, and not the plaintiff in the proceedings. 

17.It is correct that normally the plaintiff in an action is the party that has suffered loss, and in those cases, the court considers whether that party has a proprietary or non-proprietary claim to the assets covered by the Mareva injunction when considering whether the defendant should be allowed to vary the injunction.  However it is clear from the statement of claim in the SFC action[7], which is an action commenced by the SFC pursuant to rights given by statute, that the SFC has pleaded that it has not suffered loss itself, but that others have suffered loss whom the action is instituted to recompense:

“In order to restore the affected clients of CPSL to the position in which they were before the 1^st and 2^nd Defendants’ misappropriation of Client Securities:

(1) the CPSL Shareholders and CPSL Directors have borne the affected clients’ loss (or part thereof). As a result, the CPSL Shareholders and CPSL Directors have suffered loss of HK$156,417,704.62;

(2) 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”. (Emphasis added).

The relief sought therefore includes the following[8]:

“Pursuant to section 213(2)(b) of the SFO, an order requiring the 1^st … Defendants to take such steps as the Court may direct, including payment of such sum as the Court thinks fit or the transfer of any monies or securities to (i) the CPSL Shareholders and CPSL Directors and/or (ii) the Trustees and/or (iii) CPSL for the purpose of restoring the CPSL Shareholders, CPSL Directors and/or CPSL to the position in which they were in before the 1^st … Defendant’s misappropriation of the Client Securities …”. (Emphasis added).

18.Therefore it is clear that the Mareva was obtained in the SFC action in order to protect[9] (amongst others) CPSL. 

19.Pausing here, D1 has sought to argue that CPSL itself has not suffered any loss, only its shareholders and/or directors who have, pursuant to the undertaking given to the SFC, set aside cash and/or securities which have been utilized to compensate clients.  However there is prima facie evidence that these cash and/or securities have been provided by way to loans to CPSL, and so the entity that has suffered loss is CPSL.  I refer to the document dated 24 November 2017 issued by CPSL’s auditors for the years ended 31 December 2012 and 2013, which certified that in 2013, the clients’ lost securities were settled as follows:

(i)   (a) $50m was advanced as loans to CPSL and (b) CPSL itself paid out internal funds of $20m;

(ii)   (a) a further loan of $20m was made to CPSL and (b) approximately another $70m in securities (either sold or transferred) was made by way of loan to CPSL.

20.1.Mr Chu suggested that the shareholder loans were “not reflected on any of the balance sheets from 2013 onwards”[10]. I assume he is referring to the balance sheet as at 31 December 2013.  However as a balance sheet is just a “snapshot” of the company’s financial position on the day in question, it would not reflect the individual loans which Mr Chu apparently had in mind. 

20.2.Moreover, the court is not concerned at this stage with individual shareholders’ allocation of loans to CPSL.  The point is that in order to compensate its clients, CPSL had to borrow cash and/or securities which it will have to repay.  It has therefore suffered loss and will be seeking set-off, restitution and/or compensation from the assets protected by the Mareva.     

21.Consequently I cannot see why there should be a different test in the present case.  The issue is the same: ie should the protection from the Mareva injunction be reduced by the variation sought by the defendant?

22.This takes me to Ground 3.  Generally speaking, a court would be sympathetic to a defendant’s application to vary a Mareva injunction so that he or she could pay for legal expenses in criminal proceedings, but it is well-established that an appellate court would not interfere with a judge’s exercise of discretion unless the appellant shows that there has been an error of law, or a misapprehension of material facts, or that a matter has been wrongly taken into account or not taken into account, or the exercise of discretion is plainly wrong. 

23.In the earlier parts of these Reasons for Judgment, I have rejected D1’s submissions challenging the judge’s jurisdiction and his application of the test in Hong Kong Life Insurance, and I will not repeat them here.

24.1.There remains Mr Chu’s argument first, that the judge disregarded D1’s evidence that she has no other means to meet the legal costs in the criminal proceedings.  However it is clear from the Judgment that the judge was well aware of D1’s evidence in this regard.  He addressed this issue in paras. 40-44 of the Judgment which I will not repeat here. 

24.2.I do not see any ground to disagree with the exercise of his discretion.  Since the purpose of a Mareva injunction is to protect assets, a judge is entitled to consider whether the variation sought complies with that purpose. Unless there is clear evidence of a falling market, the judge was entitled to consider that liquid assets such as cash at bank should be used up first, instead of liquidating a securities account.  In this connection, there was evidence that D1 had quite substantial cash balances in bank accounts in Singapore, which accounts had not hitherto been disclosed.  It does not assist her case that she claims she “cannot recall” the numbers of these bank accounts, and that the court has not been provided with updated evidence from the banks to which her solicitors had written for statements as long ago as April 2017.

24.3.Quite apart from cash, the judge took into account the fact that D1 and her husband own two properties, one in Hong Kong and one in Shenzhen.  It was disclosed that the Hong Kong property was subject to a legal charge, but it would appear that that is not the case for the Shenzhen property.  D1 does not live at either property.  As there is no evidence that she has been separated from her husband, presumably he does not occupy either property as well.  As the judge noted, no evidence was presented as to whether these properties were occupied, and if so, what income is derived from such occupation, and where that income has been deposited over the past few years. 

24.4.The judge was also entitled to take into account the fact that D1 did not disclose the source(s) of income from which (on her case) she derived funds to purchase securities worth more than $3m.

24.5.Such information should have been supplied by way of D1’s affirmation in a properly-prepared application for variation of the Mareva, and it is noteable that no such evidence was made available even during the adjournment prior to the second hearing before the judge, when CPSL’s opposition to the proposed variation was made clear to D1.

25.1.Finally it was argued that the judge, in the exercise of his discretion, should have taken into account the fact that CPSL had not asserted a claim to the securities account for many years, and not even when D1’s solicitors wrote to it asking for an updated statement. 

25.2.That is factually correct, but the judge was entitled to give these matters relatively little weight.  First, the securities account was covered by the Mareva injunction already, and as noted above, the SFC was not a rival claimant as against CPSL.  Second, when D1’s solicitors asked CPSL for an updated statement of the account, it did not inform CPSL that she was intending to liquidate that account in her application for variation of the injunction.

Order

26.For the reasons set out above, the appeal was dismissed.  The SFC did not apply for costs. CPSL applied for a wasted costs order against D1’s legal representatives.  The court gave directions for written submissions to be supplied.  Upon receiving and considering those submissions, we will deal with costs as between D1 and CPSL in a separate decision to be handed down in due course.

Hon Kwan JA:

27.I agree with the Reasons for Judgment of Yuen JA.

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

Mr Lau Ka Kin, instructed by the Plaintiff, Securities and Futures Commission