Waddington Ltd v. Securities and Futures Commission

HCAL 199/2015

[2018] HKCFI 2544

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTITUTIONAL AND ADMINISTRATIVE LAW LIST

NO 199 OF 2015

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Before: Hon Au J in Court

Dates of Hearing: 21 - 22 June 2017

Date of Judgment: 16 November 2018

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J U D G M E N T

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A.   INTRODUCTION

1.By way of a report dated 15 May 2015 (“the Report”) submitted to the Securities and Futures Commission (“the SFC”), the applicant (“Waddington”) made a complaint (“the 2015 Complaint”) to the SFC.  In the Report, Waddington asked the SFC (in discharge of its statutory duties) to:

(1)   Commence a formal investigation under the applicable provisions of the Securities and Futures Ordinance (Cap 571) (“the SFO”) in respect of suspicious transactions set out in the Report.

(2)   Petition to the court under section 214 of the SFO against Mr Chan Chun Hoo Thomas (“Thomas Chan”), in light of the fact the court in a judgment (“the Judgment”) dated 18 December 2013 under HCA 3291/2003 (“the Action”) ruled that Thomas Chan was in breach of fiduciary duties in relation to the affairs of a listed company.

(3)   Seek appropriate directions from the court to ensure the proper application of the balance of the sum (“the Judgment Sum”) (ordered by the court in the Judgment to be repaid by Thomas Chan) paid into court.

2.The SFC made a decision (“the Decision”) in August 2015[1] refusing to take the 2015 Complaint further.  In particular, it refused to carry out the above as requested by Waddington in Report.  The SFC later further set out its reasons for making the Decision in a letter dated 15 May 2015.

3.This is Waddington’s judicial review application seeking to challenge the Decision, in particular (a) its refusal to carry out the investigations, and (b) to take out a section 214 Petition against Thomas Chan.[2]

4.Waddington is represented by Mr Benjamin Yu SC (together with Mr Justin Lam), and the SFC, in opposing this application, is represented by Mr Horace Wong SC (together with Mr Jonathan Chang).

5.To understand the grounds of challenge, and the competing arguments raised in this application, it is necessary to first set out below the checkered and long history leading to the 2015 Complaint and Decision in some details.  This is not in much dispute and is principally taken from the helpful summary set out in the respective skeletons of Waddington and the SFC.

B.   THE BACKGROUND

B.1    Waddington’s complaint in 2001 and the SFC’s investigation

6.Thomas Chan has been the Chairman, Executive Director and controlling shareholder of Playmates Holdings Ltd (“Playmates”), a listed company in Hong Kong.

7.Waddington is a company controlled by Albert Chan, brother of Thomas Chan.  Waddington was a minority shareholder of Playmates.

8.On 7 June 2001, Waddington first filed a complaint (“the 2001 Complaint”) to the SFC relating to dealings in the shares of Prestige Properties Holdings Limited (“Prestige”), another company listed in Hong Kong.  The complaints related to what Waddington said to be suspicious transactions (which also form the subject-matter of the 2015 Complaint) as follows:

(1)   Prior to a series of transactions in 2000, Thomas Chan had and had exercised effective control of over 50% shareholding interest in Prestige.  He had also been the chairman and director of Prestige. Specifically:

(a)   47.04% of the shares in Prestige were held through Chansam Investments Limited (“Chansam”).  85.19% of the shares in Chansam were held on trust for the benefit of Thomas Chan and his family.

(b)   5.14% of the shares in Prestige were held through Profit Point Limited (“Profit Point”), a wholly-owned indirect subsidiary of Playmates (then known as Interactive Entertainment Limited), another company listed in Hong Kong.  As mentioned above, Thomas Chan was Playmates’ chairman and director.  Further, Chansam held close to 50% of the shares in Playmates.

(2)   On 4 March 2000, Prestige announced that 132.8 million new shares would be placed with not less than six placees, independent of Prestige, its directors or substantial shareholders (“the March Placement”). The price per share was HK$0.50.  The new shares equated to about 20% of the then issued share capital of Prestige and about 16.66% of the enlarged share capital of Prestige.  The announcement explained that the proceeds would be used to pay off bank borrowings and as working capital.  However, Prestige declared a dividend of HK$16 million on 23 March 2000, which Waddington says indicating that immediate funds were not required.

(3)   As a result of the March Placement:

(a)   Chansam’s interest in Prestige was reduced from 47.04% to 39.20%.

(b)   Playmates’ interest in Prestige (held through Profit Point) was reduced from 5.14% to 4.28%.

(c)   Thus, Thomas Chan’s effective majority voting control over Prestige was reduced from over 50% to 43.48%, for no apparent commercial or other reason.

(4)   Between 22 and 24 May 2000, Playmates (through Profit Point) sold its entire 4.28% shareholding in Prestige (34 million shares) at prices ranging from HK$0.60 to HK$0.70 per share (“the Profit Point Sale”).  Notably, the trading volume generated by this disposal in the course of three days exceeded the annual trading volume of Prestige shares for 1999 viz 28,409,865 shares.  Waddington says there was no apparent commercial or other reason for the transaction.  This was so as Playmates had always indicated that its holding in Prestige was a long-term investment and it was so classified in its annual accounts for 1997, 1998 and 1999.  Playmates was cash rich at that time but such sale resulted in a loss to Playmates.

(5)   Thereafter, by an agreement dated 28 July 2000, Yugang International Limited (“Yugang”) (through its wholly-owned subsidiary Funrise Limited (“Funrise”)) acquired 273 million shares in Prestige from Chansam at HK$2.20 per share (“the Yugang Transaction”). This amounted to a 34.25% stake in Prestige.  Cheung Chung Kiu (“CCK”) was the chairman of Yugang.  It is Waddington’s allegation that the Yugang Transaction was expressly designed such that it would not reach the trigger point of 30% for a general offer as required under the Takeovers Code (defined below).  Such general offer obligation would have been triggered if CCK, Yugang and their respective agents, nominees or persons acting in concert with them or any of them acquired 35% or more of the shares in Prestige.  Funrise sought and obtained from the SFC confirmation that it would not be required to make a general offer.

(6)   By an agreement dated 1 December 2000, just about two months after completion of the Yugang Transaction, Playmates (through its wholly‑owned subsidiary) agreed to purchase from Prestige a company holding a property at 100 Canton Road, Tsimshatsui, Kowloon with an agreed valuation of HK$498 million (“the Canton Road Property”) (“the Canton Road Property Transaction”).  However, the value was significantly lower than the value of the Canton Road Property of approximately HK$736 million adopted in the Yugang Transaction.  As a result, for no apparent commercial or other reason, Prestige recorded a loss of about HK$238 million.

(7)   It is Waddington’s case under the complaint that these transactions formed part of an overall arrangement, as there was no other justifiable reason for the transactions to be undertaken in such a manner, especially when it had the effect of completely extinguishing Thomas Chan’s majority control over Prestige before selling his interest in Prestige:

(a)   Thomas Chan and CCK had come to a secret agreement for CCK to acquire a controlling stake in Prestige, without triggering the general offer obligation.

(b)   By the March Placement, Thomas Chan procured Prestige to place shares at HK$0.50 per share to placees who were indirectly acting for CCK or Yugang, thereby reducing his overall percentage of Prestige shares held by Thomas Chan, which shares would be taken over by nominee or concert parties of CCK or Yugang.

(c)   Further, by the Profit Point Sale, Thomas Chan procured Profit Point to sell shares at HK$0.60 to HK$0.70 at the market, again, having the effect of reducing the overall percentage of Prestige shares held by Thomas Chan, which shares would be taken up by purchasers who were either nominees or concert parties of CCK or Yugang.

(d)   This would allow Yugang to acquire a controlling interest in Prestige shares without triggering the general offer obligation under the Takeovers Code.

(e)   As a reward, Thomas Chan would be able to dispose of the Prestige shares held through Chansam at a high price of $2.2 per share.  This price was not only 266.67% above market price, but also above the net asset value per share of Prestige after adjusting for the placement and the Canton Road Property Transaction.

(f)   In order to justify to the Yugang shareholders that Yugang should acquire from Chansam its interest in Prestige at such a high price under the Yugang Transaction, Yugang agreed to accept a high NAV of Prestige by reference to the value of inter alia the Canton Road Property, ie, more than HK$700 million.  Nonetheless, by the Canton Road Property Transaction, the Canton Road Property was sold only a few months later at a much lower value to Playmates with an agreed valuation of HK$498 million.

(8)   If Yugang in fact acquired 35% or more of the shares in Prestige through the abovementioned transactions, the following provisions (amongst others) would have been breached:

(a)   The requirement to make a general offer to shareholders of Prestige under Rule 26 of the Code on Takeovers and Mergers then in force (“the Takeovers Code”);

(b)   Insider dealing in Prestige’s shares with knowledge of the arrangement between Thomas Chan and CCK contrary to section 9 of the Securities (Insider Dealing) Ordinance (Cap 395) (“the SIDO”) then in force; and

(c)   Breach of the requirement to disclose interests in shares contrary to section 3 of the Securities (Disclosure of Interests) Ordinance (Cap 396) (“the SDIO”) then in force.

(9)   The general offer requirement would have been breached so long as Yugang or its concert parties had acquired just 0.75% more Prestige shares either through the March Placement or the Profit Point Sale. The threshold for triggering the requirement is very low.

9.In the premises, central to the 2001 Complaint is Waddington’s contention that there was a scheme agreed between Thomas Chan and CCK under which Thomas Chan agreed to assist Yugang to acquire a controlling interest in Prestige without Yugang’s shareholding in Prestige exceeding 35% to avoid making a general offer to other shareholders of Prestige.  The scheme led to the following four impugned transactions which formed part of a linked series or scheme:

(1)   In March 2000, Prestige placed new shares at $0.50 per share to placees allegedly connected to CCK and Yugang who intended to ultimately vest the shares in Yugang and give Yugang control of them (ie, the March Placement).  Waddington contended that the placement was to assist Yugang to acquire a substantial portion of Prestige shares at a low cost and increase its control over Prestige to a level beyond 35% but avoiding the general offer obligation after completion of the Yugang Transaction.

(2)   In May 2000, the Profit Point Sale took place such that Thomas Chan would not need to procure Playmates to sell the Profit Point shares to Yugang in the Yugang Transaction to keep Yugang’s acquisition to below 35% to avoid the general offer obligation and enable Thomas Chan (through Chansam) to reap the entire profit from the Yugang Transaction. Waddington contended that the Profit Point shares were believed to have been acquired by CCK and Yugang or their related parties.

(3)   In July 2000, the Yugang Transaction took place through which Yugang acquired 34.25% in Prestige at $2.20 per share which was at a premium of about 266.67% over Prestige’s closing price of $0.60 per share on 28 July 2000 (the last trading day before announcement of the Yugang Transaction) but at a discount of about 20.86% to the 31 December 1999 consolidated Net Asset Value per share (ie, at approximately $2.78 per share).

(4)   In December 2000, Playmates purchased from Prestige a property situated at 100 Canton Road, Tsimshatsui, Kowloon (which was the headquarters of Playmates) at a consideration of $495 million based on a valuation of the property at $498 million (ie, the Canton Road Property Transaction), which would improve Prestige’s financial position by enabling it to receive $257 million cash from Playmates and reducing its debts by $238 million (being short-term mortgage loan assumed by Playmates).

10.Hence, Waddington’s case theory requires proof that Yugang’s nominees or concert parties acquired Prestige shares in the March Placement or the Profit Point Sale and had agreed to hold such shares at the direction of Yugang.

11.After receiving the 2001 Complaint, the SFC in fact conducted inquiries and investigated the transactions (“the 2001/2002 Investigations”).

12.In particular, in the 2001/2002 Investigations, the SFC investigated on the connection, if any, between the placees in the March Placement and the buyers in the Profit Point Sale with Yugang, which, according to Waddington, were suspicious.  Among other things, the SFC:

(1)   wrote to Tai Fook Securities Company Limited (“Tai Fook”) (the placing agent for the March Placement) on 5 July 2001 pursuant to section 31 of the Securities and Futures Commission Ordinance (Cap 24) (“the SFCO”)[3] to require details of all placees in the March Placement;[4]

(2)   wrote to Chung Nam Securities Ltd (“Chung Nam”) (one of the top three buying brokers of Prestige shares in the whole year of 2000) on 18 July 2001 pursuant to section 31 of the SFCO to require details of all the placing executed in the March Placement;[5]

(3)   required eight brokerage firms (including Tai Fook and Chung Nam) to provide details of all dealings in Prestige shares during the period of the Profit Point Sale;[6]

(4)   wrote to the Stock Exchange of Hong Kong on 23 July 2001 to request all information in connection with the March Placement, including the identities of the places;[7]

(5)   wrote to Chung Nam and Tai Fook on 8 November 2001 to request details of deposits and withdrawals by the individual and corporate placees respectively in the March Placement in their securities accounts;[8]

(6)   issued a direction to investigate under section 33 of the SFCO on 31 January 2002 in respect of the share dealing in Prestige during the period from 1 March 2000 to 30 September 2000;[9]

(7)   issued a notice under section 33(4) of the SFCO to Chung Nam on 18 March 2002 to require production of documents relating to the dealings in the securities accounts of four individual placees in the March Placement who executed their placing through Chung Nam, including the sources and recipients of funds;[10] and

(8)   wrote to Peace Town Securities (which received and later disposed of Prestige shares from Chung Nam after the March Placement) on 19 April 2002 to request information relating to the dealings in Prestige shares.[11]

13.Having investigated and reviewed the information obtained from the investigation, the SFC found that:

(1)   In relation to the March Placement:

(a)   The placement appeared to be a pure commercial decision and it was difficult, if not impossible, to challenge its commercial sense.[12]

(b)   There was no clear evidence linking any of the corporate or individual placees to Yugang to suggest that they had colluded to avoid making a general offer.[13]

(c)   There was no evidence connecting the corporate places with Yugang.  The fact that the corporate placees all held shares in Prestige and Qualipak (a subsidiary of Yugang) may be by reason that Tai Fook was the placing agent in both placements.

(d)   Whilst four placees with Chung Nam passed almost all their 40 million placed Prestige shares to China United almost immediately after the March Placement, there was no conclusive evidence to suggest any concert party relationship between Yugang and China United.[14]

(e)   A search within SFC’s internal system did not reveal any relationship among the individual placees and Yugang.  Each of the individual placees had an active trading record in many different stocks.  This makes it less likely that they were merely holding the Prestige shares as nominees for Yugang.  The fact that they had some common shareholdings may simply mean that Tai Fook and Chung Nam had been successful in procuring their clients to take up the placing shares.

(f)   Even if it was established that the individual placees were related to each other in one way or another, there was a missing link between them and Yugang.

(g)   There was no concrete evidence to suggest CCK or Yugang had deemed interests in the shares held by the March Placement placees.[15]

(2)   In relation to the Profit Point Sale:

(a)   The sale price of $0.60 to $0.70 was within the market range at around the time of disposal.  It was difficult to say that the Profit Point Sale was improper and had jeopardized the minority interest of Playmates.[16]

(b)   There was no concrete evidence to suggest CCK or Yugang had deemed interests in the shares held by the major buyers in the Profit Point Sale.[17] There was no apparent breach of the SDIO.[18]

(c)   Whilst CUPAC Technology Ltd (which China United held 43.3%) had acquired 9,084,000 Prestige shares during the period of the Profit Point Sale (whereupon 34 million odd Prestige shares were sold in the market), Yugang and China United had no common directors and there was no conclusive evidence to suggest any concert party relationship between them.

(3)   In relation to the Yugang Transaction:

(a)   There was no case for insider dealing.[19]

(b)   There was insufficient evidence that Yugang had breached Rule 26.1 of the Takeovers Code (to make a general offer to all shareholders of Prestige),[20] given (as set out above) there was insufficient evidence to connect the placees and buyers of Prestige shares in the March Placement and Profit Point Sale to CCK or Yugang.

(4)   In relation to the Canton Road Property Transaction:[21]

(a)   The difference in valuation of the property by different valuers did not necessarily imply irregularity given the difference in valuation was only about 3%.

(b)   As Playmates then already occupied about six floors of the property, the transaction did not seem totally unreasonable and outside Playmates’ ordinary course of business.

(c)   Proper disclosure and approval had been made and sought by Prestige and Playmates, and their auditor’s reports were clean without qualification in respect of this transaction.

14.In light of the result of the 2001/2002 Investigations, on 1 August 2002, the SFC replied Waddington in relation to the 2001 Complaint and stated that “[b]ased on the information available to us, we concluded that there is no conclusive evidence indicating any breach of the Takeovers Code and the Executive will not proceed further on this matter” (emphasis added), with the same for the allegations of possible breaches of the SDIO and the SIDO.

B2.    Commencement of the Action by Waddington

15.In view of the SFC’s rejection of the 2001 Complaint, Waddington commenced a derivative action in HCA 3291/2003 (ie, the Action) on behalf of Playmates against Thomas Chan for breach of fiduciary duties owed to Playmates and its subsidiaries in September 2003. However, in October 2003, Thomas Chan took out an application to strike out the Statement of Claim.  The application was finally disposed of in the Court of Final Appeal in September 2008 and the Action was allowed to proceed as a multiple derivative action on behalf of Profit Point primarily in relation to the Profit Point Sale.

B3.    Further requests to the SFC

16.Whilst the Action progressed, Waddington maintained its efforts to ask the SFC to reconsider its earlier decision in relation to the 2001 Complaint.  On 5 November 2004, Waddington informed the SFC that it had commenced legal proceedings to seek justice for themselves, in light of the SFC’s response.  Waddington urged the SFC to review its decision on the matter.  On 7 December 2004, the SFC confirmed its decision that there was no conclusive evidence indicating any breach of the Takeovers Code and that the SFC would not proceed further on the matter.

17.Waddington followed up on the complaint by a letter dated 21 December 2004.  By its letter dated 31 December 2004, the SFC maintained its decision not to take further action.

18.Thereafter, on 29 April 2005, Barma J (as he then was) handed down a judgment in the Action in relation to the striking out application, holding, among others, that there was a prima facie case against Thomas Chan and Chansam in relation to the Profit Point Sale.  By a letter dated 27 May 2005, Waddington informed the SFC about the judgment and urged the SFC to review its decision on the matter.

19.By its letter dated 7 June 2005, the SFC stated that the implications of the judgment were discussed and “it was felt that it would be premature for the [SFC] to commence any investigation of matters still before the Court” (emphasis added).

20.The Court of Appeal upheld the judgment in favour of Waddington in the striking-out application, which Waddington informed the SFC on 14 August 2006.  By its letter dated 28 August 2006, the SFC stated that “the Committee is of the view that the SFC should not take up the matter at this stage” and that they are “studying the materials provided”.

21.When the Court of Final Appeal upheld the judgment in favour of Waddington, Waddington informed the SFC once again on 6 February 2009 and urged the SFC to take up the matter. However, in its letter dated 12 March 2009, the SFC confirmed its earlier decision that “there is no conclusive evidence indicating any breach of the Takeovers Code and consider this matter closed”.

B4.    Judgment in the Action

22.Judgment in the Action after trial was finally handed down by Recorder P Fung SC on 18 December 2013 (“the CFI Judgment”).  It was held that Thomas Chan breached his fiduciary duties towards Profit Point by procuring the Profit Point Sale to the disadvantage of Profit Point and to the benefit of Thomas Chan and Chansam.  In coming to that conclusion, the court made the following relevant findings of fact:

(1)   Thomas Chan and CCK had negotiated and agreed on the sale price of HK$2.20 per Prestige share in the Yugang Transaction in early 2000, by reference to the consolidated NAV of Prestige as at end of December 1999.  The learned Recorder refused to accept Thomas Chan’s evidence that the negotiations for the Yugang Transaction first took place at the end of June 2000.

(2)   After Thomas Chan and CCK had well been into negotiations or had even arrived at an understanding or agreement in principle regarding what eventually became the Yugang Transaction (“the Secret Negotiations/Agreement”), Thomas Chan procured the Profit Point Sale for the sole or main purpose of preparing for the implementation of the Yugang Transaction, so that the trigger point of 35% for a general offer would not be reached.

23.The CFI Judgment was upheld on appeal by the Court of Appeal’s judgment dated 20 May 2016 (“the CA Judgment”).  The Court of Appeal held at paragraph 30 that:

“... Based on the evidence before the court, the judge is fully entitled to find that [Thomas Chan’s] explanation was wholly unsatisfactory and it is entirely proper to draw an adverse inference against him that as negotiations had started on the basis of the old NAV, that was a strong pointer that the negotiations had commenced prior to the time when the adjusted NAV became available [ie, 23 March 2000].”

See Waddington Limited v Chan Chun Hoo Thomas (unreported, CACV 10/2014, 20 May 2016).

24.Thomas Chan’s applications for leave to appeal to the Court of Final Appeal were dismissed by the Court of Appeal on 14 October 2016 and the Court of Final Appeal on 14 February 2017.

25.Waddington regards the findings of fact in the CFI Judgment as highly significant to its complaint to the SFC.  It is Waddington’s position the fact that, at the time of March Placement and the Profit Point Sale, Thomas Chan and CCK already had the Secret Negotiations/Agreement (a) means that CCK and Yugang had already contemplated acquiring a controlling interest in Prestige before the March Placement; and (b) makes it virtually inconceivable that CCK and Yugang would stand by whilst other parties acquired substantial interest in Prestige at a huge discount of what CCK and Yugang agreed to pay Thomas Chan.  It is Waddington’s case theory that this can be demonstrated by a series of simple propositions:

(1)   Given that Thomas Chan and CCK had already contemplated CCK acquiring a controlling interest in Prestige or agreed on the price of HK$2.20 per share for the Yugang Transaction, upon noticing that the March Placement would place a significant block of shares at only HK$0.50 per share, there is every reason for CCK and Yugang to acquire those shares or part thereof (at a much cheaper price than through the Yugang Transaction) through agents, nominees or concert parties.

(2)   Similarly, upon noticing that Profit Point was dumping 4.28% in Prestige on the market in May 2000 at HK$0.60 to HK$0.70 per share, there is every reason for CCK and Yugang to acquire those shares or part thereof (at a much cheaper price than through the Yugang Transaction) through agents, nominees or concert parties.

(3)   In any event, it makes absolutely no commercial sense for CCK and Yugang to hold on to their agreement or understanding with Thomas Chan to pay Chansam HK$2.20 per share when CCK and Yugang see that the same shares in huge volumes are available in the market at HK$0.50 to HK$0.70 per share.

(4)   In other words, unless CCK and Yugang approved the March Placement and the Profit Point Sale, there would be no commercial reason for CCK and Yugang to proceed with the Yugang Transaction at the end of July 2000.  It is highly probable that CCK and Yugang approved the March Placement and the Profit Point Sale because the placees and purchasers in these transactions are persons they approved.  They would have to be either their nominees or their concert parties.

(5)   This also explains why Thomas Chan was willing to carry out a series of transactions which were prima facie contrary to his own commercial interests, ie, reducing his more than 50% control over Prestige through the March Placement and the Profit Point Sale before going on to sell his majority interest in Prestige.

(6)   This also explains why the March placement took place notwithstanding that Prestige had the funds to declare a dividend and why the sale of Prestige shares by Profit Point in the market in May 2000 could have been achieved in such vast volumes over a short period of three days without significant reduction in the price.

B5.   The 2015 Complaint and the SFC’s refusal to take action

26.Having obtained the CFI Judgment, Waddington decided to renew its complaint to the SFC by sending the Report and the 2015 Complaint on 15 May 2015, which updated the SFC as to the significant developments from the Action.  As mentioned above, by the 2015 Complaint, Waddington requested the SFC to commence formal investigations, seek a disqualification order (“DQ Order”) against Thomas Chan and applied to court for directions as to the proper application of the balance of the Judgment Sum.

27.By a letter dated 4 August 2015, the SFC replied and stated that “we have decided not to take the matter further”.  The SFC followed up with a letter on 10 August 2015, referring to the case of Winnie Ho Yuen Ki v SFC (unreported, HCAL 113/2005, 16 January 2006) to support its decision.

28.Waddington was not satisfied with the SFC’s response.  As a result, on 14 October 2015, Waddington applied for leave to judicially review the Decision.  Thereafter, the SFC wrote a further letter on 29 October 2015 (“the 29/10/15 Letter”) to set out the reasons (“the Written Reasons”) for the Decision.

29.As the Written Reasons are fundamental to the challenge in the judicial review, it is useful to set them out in full as follows:

“(1) The transactions have already been subject to the Court’s scrutiny and determination in [the Action]. Although [Waddington] eventually dropped its claim in respect of the Canton Road Property transaction in the action, we note that Barma J (as he then was) has decided that no prima facie case had been shown in relation to Playmates [sic] (through its wholly-owned subsidiary) acquisition of Pretty Star Limited which held the Canton Road Property.

(2) The action commenced by [Waddington] was a multiple derivative action brought on behalf of all innocent shareholders in Playmates, Playmates International and Profit Point for wrongs allegedly done to and damage suffered by Profit Point (Playmates’ indirectly wholly owned subsidiary). A substantial Judgment Sum was awarded in favour of Profit Point and the Judgment Sum plus interest was fully paid into Court by Thomas Chan.

(3) As the plaintiff in [the Action] and a shareholder of Playmates, [Waddington] is entitled to seek directions in respect of the [Balance in Court]. We believe that the Court hearing any such application in [the Action] will be best placed to make the appropriate directions.

(4) Although the judgment by Mr Recorder P Fung SC was handed down in December 2013, this does not obviate the need for the [SFC] to conduct its own investigation to obtain admissible evidence, if the [SFC] were to take on the complaint. The events took place some 15 years ago and the long lapse of time will have inevitably complicated any [SFC] investigation as it is likely that a lot of evidence (documentary or otherwise) would no longer be available. It would also diminish the regulatory value of any action taken when compared with more contemporaneous competing demands upon the [SFC’s] resources.

(5) We note that [Kao, Lee& Yip], on behalf of [Waddington] and Albert Chan, have lodged complaints to the [SFC] regarding substantially the same matter in the past. The [SFC] reviewed the matter and concluded that there was no conclusive evidence indicating any breach of the [Takeovers Code] and that no further action was warranted regarding allegations of other breaches.

(6) As noted by Mr Recorder P Fung SC in paragraph 1 of the [CFI Judgment], the case was part of a long-running saga of disputes between two brothers, Albert Chan and Thomas Chan. It is not an efficient use of the [SFC’s] resources to intervene in the aftermath of the dispute, which is substantially a family matter that has been adjudicated upon by the Court.

You will appreciate that the[SFC] is not under an absolute duty to take every possible action including to investigate all complaints that it receives to discharge its statutory functions. It would not be possible for the [SFC] to do so with its limited resources and we are obliged as part of our statutory duties to have regard to the need to make efficient use of our resources in pursuing the [SFC’s] regulatory objectives and performing its functions. The [SFC] has a discretion as .to how it discharges its function, and is firmly of the view that the discretion has been exercised properly and reasonably in this case.”

30.It was also subsequently disclosed in this application that the reasons for the Decision were also set out in an internal document of the SFC entitled “Close case file note” (“the Close Case File Note”) (on which the contents of the 29/10/15 Letter appear to be based).  It stated relevantly that:

(1)   In relation to the request to commence a formal investigation into further suspicious transactions:

“A similar complaint about breaches of Takeovers Code was received back in 2002. At that time Takeovers Team reviewed the matter and concluded that there was no evidence to suggest any connectedness between placees of the placing conducted in March 2000 and the acquirer and decided NFA [ie, no further action].”

(2)   In relation to the request to seek a DQ Order against Thomas Chan:

“Although the SFC is not precluded from initiating disqualification proceedings under section 214 of the SFO, the following was noted: (a) the events took place 15 years ago; (b) the case has already been to trial and judgement [sic] has been awarded and paid; and (c) Playmates currently has net assets of HK$6.1 billion and profits of HK$758 million – under the directorship of Thomas Chan.”

C.   THIS JUDICIAL REVIEW

31.Waddington has raised a number of grounds of judicial review.

32.Some of these are only raised in the draft Re-Re-Amended Form 86 (“RRAF86”) annexed to the summons dated 6 June 2017 filed about two weeks before the hearing.  Mr Yu submits that these amendments should be allowed as they are clearly relevant to the proper determination to the matters raised in the judicial review, and the additional grounds have only become known to Waddington after seeing the materials disclosed by the SFC in their opposition evidence, in particular in relation to the details of the 2001/2002 Investigations and the reasons provided in the Close Case File Note.

33.Mr Wong opposes the amendments primarily on the basis of delay, and also on the basis that they are not reasonably arguable.

34.I propose to consider all the grounds of judicial review below on merits and then to determine at the end whether I should allow the amendments in relation to additional grounds.

35.Waddington challenges two aspects of the Decision: (a) its refusal to commence investigation, and (b) its refusal to take out a section 214 Petition seeking the DQ Order against Thomas Chan.

36.The grounds of challenge under each of these aspects have been summarized by Mr Yu as follows.

37.For the SFC’s failure to commence a formal investigation in respect of the suspicious transactions:

(1)   The SFC applied the wrong legal threshold.

(2)   The SFC’s reasons are Wednesbury unreasonable and involved a consideration of irrelevant matters.

(3)   The SFC failed to take into account a clearly relevant matter, namely an assessment of the impact of the findings contained in the CFI Judgment on the result of its previous investigations.

38.For the SFC’s failure to seek the DQ Order against Thomas Chan:

(1)   The SFC failed to provide any reasons in the 29/10/15 Letter as to why it did not take the obvious course of seeking a DQ Order against Thomas Chan following the court’s finding in the Action that he breached his fiduciary duties towards Playmates and Profit Point through the Profit Point Sale and irrationality should be inferred in such circumstances.

(2)   In any event, even if one considers the reasons set out in the Close Case File Note, they were clearly Wednesbury unreasonable.

39.I will consider the challenges made respectively under each of these aspects in turn.

C1.   The refusal to commence investigation

C1.1  The SFC applied the wrong legal threshold

40.It is common ground between the parties that the SFC has a discretion to decide whether or not to commence an investigation.  Hence, under section 179 of the SFO, the SFC is empowered to require the production and explanation of records and documents concerning the listed company from, among others, an officer of the company if “it appears to the [SFC] that there are circumstances suggesting that” relevant breaches have occurred.

41.Further, under sections 182 and 183 of the SFO, the SFC is also empowered to conduct investigations where the SFC has “reasonable cause to believe” that any relevant breach, offence or market misconduct has been committed and to investigate persons “whom the investigator has reasonable cause to believe has in his possession any record or document which contains, or which is likely to contain, information relevant to an investigation … or whom the investigator has reasonable cause to believe otherwise has such information in his possession”.

42.It is Mr Yu’s submissions that, according to the SFO:

(1)   The standard for exercising the power to require the production and explanation of records and documents concerning a listed company under section 179 of the SFO is that “it appears to the [SFC] that there are circumstances suggesting that” relevant breaches have taken place;

(2)   The standard for conducting an investigation and investigating relevant persons under sections 182 and 183 of the SFO is that the SFC has “reasonable cause to believe” that any relevant breach, offence or market misconduct has been committed and there are persons “whom the investigator has reasonable cause to believe has in his possession any record or document which contains, or which is likely to contain, information relevant to an investigation ... or whom the investigator has reasonable cause to believe otherwise has such information in his possession”.

43.However, says Mr Yu, the SFC has repeatedly used the wrong (and higher) legal standards in coming to the decision not to take the complaint further:

(1)   The report prepared by David Kwok dated 24 October 2001 stated that “on a balance of probability” it was less likely that the corporate placees were nominees of or parties acting in concert with Yugang.

(2)   The letter dated 30 January 2002 from the SFC stated that “there is no conclusive evidence indicating any breach of the Takeovers Code”.

(3)   The report prepared by Larry Chan and David Kwok dated 25 July 2002 stated that “[w]e have however found no conclusive evidence to suggest any concert party relationship between Yugang and China United...”.

(4)   The letter dated 1 August 2002 from the SFC stated that “there is no conclusive evidence indicating any breach of the Takeovers Code”.

(5)   The letter dated 12 March 2009 from the SFC stated that “we confirm our earlier decision that there is no conclusive evidence indicating any breach of the Takeovers Code”.

(6)   The 29/10/15 Letter stated that it has “reviewed the matter and concluded that there was no conclusive evidence indicating any breach of the Code on Takeovers and Mergers...”.

44.Mr Yu also says the SFC continues to apply the wrong standard even in its evidence filed in this application, where Kwok Kam Lun in his 2^nd Affirmation at paragraph 21 states that “the [CFI Judgment] does not alter the conclusion reached in 2002 … that there was no conclusive evidence to suggest that the places in the March Placement were acting in concert with Yugang”.

45.Mr Yu therefore contends that the SFC has consistently applied the wrong (and a much higher) threshold in deciding whether to conduct further investigations, as if it were adjudicating the matter itself.  The SFC’s approach is tantamount to requiring the case to be proved before the SFC would act.  Given that the SFC has so misdirected itself by applying a wrong legal test to the question before it, the decision should be quashed: Secretary of State for Education and Science v Tameside Metropolitan Borough Council [1977] AC 1014 at 1031A-B; Town Planning Board v Society for the Protection of Harbour Ltd (2004) 7 HKCFAR 1 at paragraph 62.

46.With respect to Mr Yu, I am unable to agree that the SFC has misapplied the wrong threshold.

47.As rightly submitted by Mr Wong, when one reads the materials concerning the 2001/2002 Investigations carefully and as a whole, it is clear that the SFC, upon receiving the 2001 Complaint had in fact commenced the statutory investigations under sections 31 and 33 of the then SFCO (which are for the present purposes equivalent to sections 179, 181 and 182 of the SFO).  These investigations were carried out as it appeared to the SFC that there were circumstances (based on the matters raised in the 2001 Complaint) suggesting that relevant breaches had occurred.  The investigations were extensive (see paragraphs 12 ‑ 14 above).  It was only after those investigations that the SFC had come to the conclusion that there was “no conclusive evidence” to show that the Takeovers Code was breached in relation to “the suspicious transactions” that Waddington complained of.

48.In particular, as highlighted by Mr Wong (which I agree):

(1)   The SFC’s internal report dated 24 October 2001 refers to “balance of probabilities” and concluded by recommending that further enquiries should be made.  Accordingly, the SFC conducted the enquiries in the 2001/2002 Investigations.  It is clear from the incontrovertible documentary evidence that despite the reference to “balance of probabilities”, the SFC did exercise its investigative powers to conduct investigations.

(2)   The SFC’s internal memorandum dated 25 July 2002 recorded that “[w]e have however found no conclusive evidence to suggest any concert party relationship between Yugang and China United”.  It is clear from section 33 of the SFCO[22] direction and notices that by the time when the memorandum was prepared, the SFC had already exercised its investigative powers, and the drafters of the memorandum concluded, based on the evidence before them after the investigation, that there was no breach of the Takeovers Code.

(3)   The SFC’s letter dated 1 August 2002 to Waddington’s solicitors, Kao Lee & Yip stated that the SFC had “considered your submission carefully and conducted enquiries ... Based on the information available to us, we conclude that there is no conclusive evidence indicating breach of the Takeovers Code and the Executive will not proceed further on this matter.”  The letter was issued after the SFC had already exercised its statutory investigative powers.  It is important to note that the letter went on to say that “the [Takeovers] Executive will not proceed”.  In view of the statutory framework and reading the letter as a whole, it can only mean that the Takeovers Executive would not proceed with disciplinary proceedings after the SFC’s investigation had concluded that there was insufficient evidence found to substantiate a breach of the Takeovers Code.

(4)   As for the SFC’s letter dated 12 March 2009, which stated that “we confirm our earlier decision that there is no conclusive evidence indicating any breach of Takeovers Code”.  This letter must be read together with the “earlier decision”, ie, said letter dated 1 August 2002.

(5)   Paragraph (5) of the 29/10/2015 Letter says “The Commission reviewed the matter and conclude that there was no conclusive evidence ...”.  The paragraph simply referred to an undisputed fact: In 2001/2002, the SFC had reviewed the matter and had concluded that there “was” no conclusive evidence.  Notably the SFC was saying that “there was no conclusive evidence” (emphasis added), instead of “there is no conclusive evidence” as it was no doubt referring to its conclusion in 2002.

(6)   In the premises, it is clear that the SFC did exercise its powers to investigate and they formed their view on the quality and sufficiency of evidence after the investigations.

49.Hence, the references to “no conclusive evidence” in the records and notes relating to the 2001 Complaint were all made in the context that, after having carried out the investigations, the SFC was satisfied as a matter of conclusion that there was no sufficient evidence to show the relevant breaches.  There is no question that the SFC had adopted the wrong threshold to decide whether or not to even commence an investigation.

50.Insofar as the same reference was used by the SFC in relation to the 2015 Complaint (see paragraphs 43(6) and 44 above), read in its proper context and objective, all that the SFC was saying is this: given that (a) it had already concluded after the 2001/2002 Investigations that there was no conclusive evidence to show the breaches as suggested by Waddington, and (b) in its view, the CFI Judgment did not add anything to this earlier conclusion,[23] there was nothing that would “appear” to the SFC that relevant breaches had occurred so that fresh investigations had to be carried out.  This does not amount to the SFC adopting a wrong threshold to decide whether or not to commence fresh investigation under the 2015 Complaint.

51.I would therefore reject this ground of challenge.

52.In this respect, it is convenient for me to next turn to consider Waddington’s ground of challenge that SFC failed to properly take into account the impact of the CFI Judgment.

C1.2  The SFC failed to take into account a clearly relevant matter, namely an assessment of the impact of the findings contained in the CFI Judgment on the result of its previous investigations

53.It is common ground that, in relation to considering the 2015 Complaint, the SFC had indeed read the CFI Judgment, which was annexed to the Report.  It is also not the SFC’s case in this application that the CFI Judgment was irrelevant to its consideration.

54.As advanced at the hearing, Mr Yu’s real complaint under this ground is that the SFC had failed to properly engage the question raised by Waddington in its reliance on the CFI Judgment to support the 2015 Complaint.  Waddington’s case is that the CFI Judgment should cast new light on the conclusion reached under the 2001/2002 Investigations, and thus provide new cause for the SFC to commence a fresh course of investigations.  In failing to properly engage the issue as raised, the SFC was in breach of its Tameside duty in considering whether to exercise its statutory duties to investigate.  It also amounts effectively to the SFC’s failure to properly take into account this relevant factor.

55.The way the SFC has relied on the CFI Judgment to further support its complaint has been set out at paragraphs 24 - 31 of the Report as follows:

“24. The principal business of Prestige was investment holding of real properties. Based on the evidence given by Thomas Chan at the trial, the parties to the Yugang Transaction negotiated and agreed on the sale price of the Prestige shares in such transaction by reference to the consolidated NAV of Prestige. Despite the fact that the Yugang Agreement was only entered into by the parties in July 2000 (after the March Placement), the Court’s finding of fact based on the evidence of Thomas Chan himself is that the parties negotiated and agreed on the sale price of the Prestige shares in the Yugang Transaction (being HKS2.20 per share) by reference to the consolidated NAV of Prestige as of the end of December 1999, which was HKS2.79 per share, but not the adjusted consolidated NAV of HK$2.41 per Prestige share following the March Placement (please see Paragraphs 18 and 19 above and paragraphs 65 to 70 of the Judgment). This fact was also confirmed in the joint announcement issued by Prestige and Yugang on 1^st August 2000 in respect of the Yugang Transaction (‘Joint Announcement’) (copy enclosed as Annexure III) (please see paragraph 68 of the Judgment). Based on this, the Court refused to accept Thomas Chan’s allegations that the negotiations between him and CK Cheung in relation to the Yugang Transaction first took place at the end of June 2000. Based on the Court’s findings referred to at paragraphs 25 and 26 below, it must follow that such negotiations took place before the March Placement.

25. The Court found that it was clear from Thomas Chan’s evidence given at trial that the adjusted NAV figure of HK$2.41 per Prestige share following the March Placement did not form the basis of the negotiation between the parties and was not even referred to in such negotiations. For a transaction of such kind and of such size, the Court took the view that Mr. Cheung Chung Kiu (‘CK Cheung’) (who was at all material times the Chairman and a controlling shareholder of Yugang) and Yugang must have been well advised by lawyers and accountants before making an offer to take over Prestige. If, as alleged by Thomas Chan in the Action, that CK Cheung had approached Thomas Chan at the end of June 2000 and then made offer to Thomas Chan in respect of the Yugang Transaction, the Court found it inconceivable that CK Cheung would not have been aware of and would not rely on the lower NAV figure of HKS2.41 per Prestige share published on 23^rd March 2000 in his negotiations with Thomas Chan. The Court refused to accept Thomas Chan’s allegations that the negotiations between Thomas Chan and CK Cheung in relation to the Yugang Transaction first took place at the end of June 2000 as alleged by Thomas Chan (please see paragraphs 65 to 70 and 75(i) of the Judgment).

26. The Court’s findings of fact was that Thomas Chan and CK Cheung had well been into negotiations or had even arrived at an understanding or agreement in principle regarding what eventually became the Yugang Transaction before the Profit Point Sale in May 2000 (please see paragraph 75(ii) of the Judgment). Further, as referred to in Paragraph 25 above and as confirmed by the Court in paragraph 69 of the Judgment, the adjusted Prestige NAV of HK$2.41 per share following the March Placement never formed the basis of negotiations between Thomas Chan and CK Cheung on the sale price for the Yugang Transaction and was not even referred to in such negotiations. It is therefore irrefutable that such negotiations/understanding/agreement should have already been made or reached between Thomas Chan and CK Cheung even before the March Placement.

27. It is also clear from the evidence given by Thomas Chan in the Action that the said understanding/agreement in principle on the Yugang Transaction reached between Thomas Chan and CK Cheung before the March Placement include the sale price for the Prestige shares in the Yugang Transaction (i.e. HK$2.20 per share), the number of shares to be sold in such transaction (i.e. 34.25% shareholding interest of Prestige) and the condition of no general offer for the other Prestige shares is required to be made (please see pages 53 to 54 of the Transcript (as referred to and defined in paragraph 30 below)). Thomas Chan in his own evidence admitted that these had been agreed between he and CK Cheung before they instructed their respective legal advisers on the Yugang Transaction (please see pages 29 to 54 of the Transcript).

28. If Profit Point had not sold its block of Prestige shares in May 2000, by reason of Thomas Chan’s fiduciary duties owed to Playmates, Playmates International and Profit Point, Thomas Chan would be duty bound to include Profit Point’s block of Prestige shares (or at least a pro rata thereof) as part of the block of Prestige shares to be sold to Yugang under the Yugang Transaction. This would have inevitably reduced the amount of consideration which Thomas Chan (through Chansam) would receive from the Yugang Transaction. The Court’s findings of fact are that Thomas Chan therefore caused Profit Point to sell its entire block of Prestige shares in the market between 22^nd to 24^th May2000 at a price between HK$0.60 to HK$0.70, for the sole or main purpose of preparing for the implementation of what eventually became the Yugang Transaction subsequently entered into in July 2000. so that the trigger point of 35% for a general offer would not be reached (paragraph 75(iii) of the Judgment).

29. The Court concluded that (i) the sale of the Prestige shares by Profit Point in May 2000 was to the disadvantage of Profit Point and indirectly to Playmates International and Playmates, and to the benefit of Thomas Chan and Chansam; and (ii) that Thomas Chan should have included Profit Point’s block of Prestige shares (or at least a pro rata part thereof) as part of the Prestige shares to be sold to Yugang in the Yugang Transaction. If Thomas Chan had done so, Profit Point would have been able to benefit from a sale of its Prestige shares (or at least a pro rata part thereof) at HKS2.20 per share, instead of HKS0.60 to HK$0.70 per share in the market. The Court found that Thomas Chan had been in breach of his fiduciary duties owed to Profit Point, Playmates International and Playmates and ordered Thomas Chan to compensate Profit Point for its loss (please see paragraph 75 of the Judgment). The Court held at Paragraphs 130 and 131 of the Judgment that the loss suffered by Profit Point by reason of Thomas Chan’s breach of fiduciary duties as aforesaid be calculated on a ‘pro rata sale’ basis (see Scenario (ii) in Appendix B to the Judgment), which amount is HK$33,511,220.32 (i.e. the Judgment Sum). Please note that the calculation of loss on such basis is one of the issues appealed on by Waddington, which appeal is to be heard by the Court of Appeal on 5th January 2016 (with 4 days reserved).

30. In this regard, we refer you to paragraphs 54 and 55 of the Judgment, which has included certain parts of Thomas Chan’s evidence given at trial under cross-examination by the Leading Counsel for Waddington, Mr. Benjamin Yu S.C., on Day 10 of the trial as regards the Yugang Transaction. We enclose herewith copy of the transcript of the hearing on Day 10 of the trial (‘Transcript’) as Annexure IV which sets out relevant parts of the evidence given by Thomas Chan at the trial as to how he and CK Cheung had commenced negotiations and reached agreement on the crucial terms of the Yugang Transaction (including the sale price and the percentage of shareholding interest in Prestige to be sold and the no general offer condition) before legal advisers were instructed. The Court did not accept Thomas Chan’s evidence as true (please see paragraphs 56 to 74 of the Judgment).

31. Hence, based on the Court’s findings in the Action summarized in Paragraphs 24 to 30 above and the evidence given by Thomas Chan in the trial (please see the Transcript):

(a) Thomas Chan and CK Cheung had reached an understanding/agreement in principle regarding what eventually became the Yugang Transaction before the March Placement in March 2000.

(b) The said understanding/agreement in principle reached between Thomas Chan and CK Cheung before they instructed their respective legal advisers on the Yugang Transaction include the sale price of HKS2.20 per share for the sale and purchase of Chansam’s 34.25% shareholder interest in Prestige and the condition that CK Cheung/Yugang group would not be obliged to make any general offer for the other Prestige issued shares.

(c) Following such understanding/agreement in principle reached between Thomas Chan and CK Cheung, Thomas Chan then caused the Profit Point Sale to occur in May 2000 for the sole or main purpose of preparing for the implementation of what eventually became the Yugang Transaction, so that the trigger point of35% for a general offer would not be reached.

(d) As the Profit Point Sale occurred in May 2000 and the Yugang Agreement for the Yugang Transaction was only entered into by the parties on 28^th July 2000, by reason of the Court’s findings in the Action as summarized in Paragraphs 24 to 30 above, the Court’s findings confirmed that the Profit Point Sale and the Yugang Transaction are a linked series of transactions. Thomas Chan had procured the Profit Point Sale for the purpose of implementing the Yugang Transaction, so as to benefit himself at the expense and to the detriment of Playmates and its public shareholders.”

56.Hence, in gist, it is Waddington’s position that the relevant findings of the CFI Judgment support the complaint that there was a breach of the Takeovers Code through Thomas Chan and CCK/Yugang, whereby they had a secret arrangement reached before the March Placement, that through the Yugang Transaction, the March Placement and the Profit Point Sale (together with the Canton Road Property Transaction), CCK would in fact acquire (through parties connected with him) more than 35% shareholding in Prestige without triggering the general offer requirement.

57.However, in refusing to commence fresh investigations, Mr Yu submits that the SFC has singularly failed to explain at all in the Written Reasons, the Close Case File Note and the various affirmations filed by the SFC in this application, as to why it regarded Waddington’s above reliance and analysis incorrect.  There is also no evidence to show the SFC, in considering the 2015 Complaint and the Report, indeed engaged itself with Waddington’s above analysis and formed a view as to why this would not be sufficient (coupled with all the findings in its previous investigations) to amount to circumstances that would “appear” to the SFC that the Takeovers Code might be breached in these transactions.

58.I accept Mr Yu’s submissions.

59.In my view, Waddington through its above analysis in the Report has put forward to the SFC a distinct and relevant issue as to how the CFI Judgment has given an important support to its complaint.  In the premises, in its consideration on whether or not to exercise its discretion to conduct the investigations, the SFC has a duty to engage this issue.

60.The absence of any explanation in its reasons as to why the SFC did not find Waddington’s above reliance and analysis amounting to additional sufficient cause to investigate the matter shows objectively that it had failed to properly engage this issue. It therefore had also failed to properly take this relevant factor into account.

61.Mr Wong at the hearing has made various submissions by way of examples to try to demonstrate that different persons (including the SFC) may come to a different view as to the value, if any, of the findings of the CFI Judgment in relation to Waddington’s case theory under the complaint.  Leading counsel therefore submits it cannot be shown that the SFC had failed to engage that issue or take into account that factor.  This is particularly so, says Mr Wong, as both parties agree that SFC must have read the CFI Judgment.

62.With no disrespect to Mr Wong, I do not find it necessary to consider the examples given by Mr Wong.  The difficulty with Mr Wong’s submissions is that there is simply no evidence before me to show that the SFC had indeed considered this issue in the way as Mr Wong has tried to demonstrate by way of examples.  With the matters as they stand, I am satisfied that, objectively, the SFC had failed to engage this issue properly, and hence it also failed to properly take into account this relevant factor in deciding not to commence fresh investigations.

63.For this reason, I would quash the decision not to commence investigations and remit the same to the SFC to reconsider.  In the reconsideration, the SFC should take into consideration the above analysis raised by Waddington in relation to the findings of the CFI Judgment (the findings of which are now confirmed by the CA Judgment).[24]

C1.3  The SFC’s reasons are Wednesbury unreasonable and involved a consideration of irrelevant matters

64.Under this ground of challenge, Mr Yu contends that, looking at the SFC’s Written Reasons (quoted at paragraph 29 above), a number of them are clearly irrational or irrelevant.  Leading counsel’s arguments run as follows.

65.Reason 1 of the Written Reasons states:

“The transactions have already been subject to the Court’s scrutiny and determination in [the Action]. Although [Waddington] eventually dropped its claim in respect of the Canton Road Property transaction in the action, we note that Barma J (as he then was) has decided that no prima facie case had been shown in relation to Playmates [sic] (through its wholly-owned subsidiary) acquisition of Pretty Star Limited which held the Canton Road Property.”

66.Mr Yu submits that the reference to Barma J’s judgment and to say that the court had already decided that no prima facie case was shown in relation to the Canton Road Property Transaction is irrational and irrelevant because:

(1)   Barma J’s judgment is an interlocutory judgment in relation to the striking out application taken out by Thomas Chan.  Barma J held at that time that there was no prima facie case in Waddington’s pleaded claim in relation to the Canton Road Property Transaction.  However, that part of the conclusion was later reversed by the Court of Appeal on appeal.

(2)   Further, Waddington at the end day when the Action in fact went to trial dropped the claim in relation to the Canton Road Property Transaction.

(3)   In the premises, it was wrong (and thus irrational) for the SFC to say in Reason 1 that (a) the transactions had been decided by the court, and (b) Barma J had already ruled that there was no prima facie case in relation to the Canton Road Property Transaction.

(4)   In any event, the SFC should be well aware that the purpose of civil proceedings is fundamentally different from the purpose of regulatory investigations and actions.  The fact that the court has considered certain transactions from the perspective of a civil claim provides no reason for the SFC to abdicate its responsibility to look into potential breaches of regulatory requirements, which may be followed by regulatory and penal orders beyond the scope of civil proceedings.  Cf: R v Chance [1995] BCC 1095 at 1101 per Henry LJ.

67.Reason 4 of the Written Reasons states:

“Although the judgment by Mr Recorder P Fung SC was handed down in December 2013, this does not obviate the need for the [SFC] to conduct its own investigation to obtain admissible evidence, if the [SFC] were to take on the complaint. The events took place some 15 years ago and the long lapse of time will have inevitably complicated any [SFC] investigation as it is likely that a lot of evidence (documentary or otherwise) would no longer be available. It would also diminish the regulatory value of any action taken when compared with more contemporaneous competing demands upon the [SFC’s] resources.”

68.Mr Yu contends that it is irrational for the SFC to rely on the lapse of time as a reason not to commence investigation.  As mentioned at paragraphs 19 ‑ 21 above, it is the SFC which had previously said to Waddington that it was premature for it to commence any investigation of matters that were still before the court (see the SFC’s letter dated 7 June 2005).  Further, in August 2006, the SFC reiterated its view that it should not “take up the matter at this stage”, meaning that it would await the final outcome of the Action.  It is therefore irrational now for the SFC to say that, because of the very wait that it had asked for, it would not commence the investigations.

69.Reason 6 of the Written Reasons states:

“As noted by Mr Recorder P Fung SC in paragraph 1 of the [CFI Judgment], the case was part of a long-running saga of disputes between two brothers, Albert Chan and Thomas Chan. It is not an efficient use of the [SFC’s] resources to intervene in the aftermath of the dispute, which is substantially a family matter that has been adjudicated upon by the Court.”

70.Mr Yu says it is irrational for the SFC to effectively say it was not an efficient use of its resources to intervene as the dispute was “substantially a family matter”, because:

(1)   The impugned transactions involve a significant public interest and materially affect the interests of public shareholders of Prestige (including Waddington).  It is difficult to comprehend why the fact that Albert Chan and Thomas Chan are brothers in an acrimonious relationship makes any difference to the SFC’s decision-making process, if the public interest does require enforcement action by the SFC.

(2)   Furthermore, the SFC has completely disregarded the fact that significant players such as Yugang, CCK and his associates were also involved in the impugned transactions.  There is clearly no element of “family matter” between Thomas Chan/Albert Chan and such persons.

71.Further, the “family dispute” consideration must also be irrelevant to the SFC’s consideration as to whether it should exercise its statutory duty in discharge of its functions as a regulator (a) to promote, encourage, and enforce the proper conduct, competence and integrity of persons carrying on activities regulated by the SFC under any of the relevant provisions in the conduct of such activities; (b) to take such steps as it considers appropriate to ensure that the relevant provisions are complied with; (c) to secure an appropriate degree of protection for members of the public investing in or holding financial products; and (d) to suppress illegal, dishonourable and improper practices in the securities and futures industry.  See: section 5(l)(d), (f), (l) and (n) of the SFO.

72.Reason 5 of the Written Reasons states:

“We note that [Kao, Lee& Yip], on behalf of [Waddington] and Albert Chan, have lodged complaints to the [SFC] regarding substantially the same matter in the past. The [SFC] reviewed the matter and concluded that there was no conclusive evidence indicating any breach of the [Takeovers Code] and that no further action was warranted regarding allegations of other breaches.”

73.Mr Yu submits that the complete reliance by the SFC on the findings from the 2001/2002 Investigations in deciding not to take the 2015 Complaint further (a) involves a failure on the part of the SFC to take into account the clearly relevant factor of the findings of the CFI Judgment, and (b) is Wednesbury unreasonable.

74.In opposing these challenges, Mr Wong SC submits that the court must bear in mind the following principles in deciding whether the Written Reasons are Wednesbury unreasonable or irrational as submitted.

75.First, Mr Wong has rightly submitted to this court that the SFC’s exercise of discretion in deciding whether to commence statutory investigations or to issue a section 214 Petition is akin to an exercise of discretion in making prosecutorial decisions.  In this respect, leading counsel again has rightly reminded this court that it is well established jurisprudence that the court would not lightly interfere such decisions, and should give a wide margin of discretion to the decision maker.  The court would only be prepared to so interfere in exceptional cases.  See: Shek Lai San v Securities and Futures Commission [2010] 4 HKC 168 at 188D-F per A Cheung J (as the learned Permanent Judge then was); R v Commissioner of Police of the Metropolis, ex p Blackburn [1968] 2 QB 118 at 136D-E perLord Denning MR; Re Ng Shek Wai (CACV 213/2016, 27 April 2017, Kwan JA) at paragraph 20; Waterhouse v The Independent Commission Against Corruption (No 3) [2015] NSWSC 261 at paragraph 119 per Garlin J.

76.Second, in relation to a challenge that the decision maker has failed to take into account a relevant factor or has taken into account irrelevant considerations, it is again now trite that it is important to distinguish:

(1)   matters which are clearly identified in the relevant legislation (expressly or impliedly) as considerations as to which regard must be had;

(2)   matters clearly identified by the legislation as considerations to which regard must not be had; and

(3)   matters to which the decision may have regard if, in its judgment and discretion, it thinks it right to do so.

See: BI v Director of Immigration [2016] 2 HKLRD 520 at paragraph 47.

77.As regards discretionary considerations, to the extent that the SFC has decided to take into account any particular factor as being relevant to the exercise of its discretion, the weight to be given to that factor is a matter for the SFC, not for the court: BI (supra) at paragraph 47.  The court will only interfere on this ground if the weight accorded to the consideration in question is “manifestly disproportionate”, that is to say “unequivocally outside the range of reasonably acceptable possibilities” such that “no reasonable decision-maker could sensibly have given it the weight which it was given”: R v Financial Conduct Authority, ex p Julien Grout [2015] EWHC 596 (Admin)at paragraph 40.

78.Third, Mr Wong further highlights to this court the following statutory context in relation to the SFC’s exercise of statutory functions and powers to investigate and prosecute.

79.The SFC is a statutory body established under the SFCO.  Its regulatory objectives, functions and powers and general duties are set out in sections 4, 5 and 6 of the SFO respectively.

80.Section 5 of the SFO sets out the functions of the SFC, which include, “so far as reasonably practicable “:

(1)   taking such steps as it considers appropriate to ensure that the relevant provisions are complied with: section 5(l)(f);

(2)   maintaining and promoting confidence in the securities and futures industry in such manner as it considers appropriate: section 5(l)(g);

(3)   suppressing illegal, dishonourable and improper practices in the securities and futures industry: section 5(l)(n); and

(4)   performing functions conferred or imposed on it by or under the SFO or other Ordinance: section 5(l)(r).

81.When performing its functions, the SFC is required under section 6(l) of the SFO to, “so far as reasonably practicable “, act in a way which (a) is compatible with its regulatory objectives, and (b) ”it considers most appropriate for the purpose of meeting these objectives”.

82.Section 6(2)(e) of the SFO also provides that the SFC, in pursuing its regulatory objectives and performing its functions, shall have regard to, inter alia, “the need to make efficient use of its resources”.

83.In the premises, as regards the SFC’s power to investigate or take enforcement action:

(1)   There is no strict legal duty for the SFC to investigate or take any enforcement action under the SFO.

(2)   Under section 179(1) of the SFO, the SFC “may” give a direction for the production of records and documents concerning a listed corporation where “it appears to the Commission that there are circumstances suggesting” misconduct in the listed corporation.

(3)   Under section 182(1) of the SFO, the SFC “may” start an investigation where “the Commission has reasonable cause to believe”, inter alia, that an offence under any of the relevant provisions may have been committed, or market misconduct or a breach of a disclosure requirement may have taken place.

(4)   Under section 214(l) of the SFO, the SFC “may” petition to the court for relief where “it appears to the Commission” that any of the conditions stated in the section is satisfied.

(5)   The wording of these provisions, read together with sections 5 and 6 of the SFO, clearly show that a “very broad discretion” is conferred on the SFC, rather than a duty or obligation, to investigate any complaint made to it or take enforcement action: Waterhouse v The Independent Commission Against Corruption (No 3) [2015] NSWSC 261 per Garling J at paragraphs 94 - 95.

(6)   Further, these provisions vest the power in the SFC to form an opinion on the sufficiency of the evidence to trigger the exercise of its powers under these provisions.  This is a classic situation calling for appropriate restraint by the court in judicial review: see R v Hillingdon London Borough Council, ex p Puhlhofer [1986] AC 484 at 518D-E per Lord Brightman as follows:

“Where the existence or non-existence of a fact is left to the judgment and discretion of a public body and that fact involves a broad spectrum ranging from the obvious to the debatable to the just conceivable, it is the duty of the court to leave the decision of that fact to the public body to whom Parliament has entrusted the decision-making power save in a case where it is obvious that the public body, consciously or unconsciously, are acting perversely.” (emphasis added)

(7)   See also Fordham’s Judicial Review Handbook (6^th edn) at paragraph 13.2:

“A classic situation calling for appropriate restraint is where the public body is criticised for its conclusion of fact, or ‘fact and degree’. Courts do not, and could not possibly, interfere by judicial review every time the judge might have reached an appraisal of the facts different from that reached by the primary decision-maker.” (emphasis added)

84.Mr Wong hence summarizes the principles that the court should adopt in considering Waddington’s challenges under this ground as follows:

(1)   Irrationality or Wednesbury unreasonableness are used to describe “a decision which is so outrageous in its defiance of logic or of accepted moral standards that no sensible person who had applied his mind to the question to be decided could have arrived at it”: Council of Civil Service Unions & Ors v Minister for the Civil Service [1985] AC 374 at 410 per Lord Diplock.

(2)   In the context of decisions of regulatory bodies like the SFC, the court “will not lightly interfere with [their] exercise of discretion”: Shek Lai San (supra) at paragraph 75 per A Cheung J (as he then was).

(3)   Instances of unreasonableness include taking into account of irrelevant considerations or failing to take relevant considerations into account: Capital Rich at paragraph 63 (relied upon by Waddington at paragraph 86 of its submissions).

(4)   Although the question of what is a relevant or material consideration is a question of law, the question of what weight is to be given to it is a matter within the province of the decision maker: Chu Hoi Dick & Anor v Secretary for Home Affairs (No 1) [2007] 4 HKC 263 at paragraph 21 per Lam J (as he then was).

(5)   “In proceedings for judicial review, the ground of failure to take into account a relevant consideration can only be made out if the decision-maker has failed to take into account a consideration which he is bound to take into account in making that decision: see Mason J in Minister for Aboriginal Affairs v Peko-Wallsend Ltd (1986) 162 CLR 24 at 39.  What factors he is bound to take into account is determined by construing the statute conferring the power.  If an administrator misconstrues a statute and asks himself the wrong question, or fails to ask himself the right question, the Court can properly intervene and quash his decision on the ground of illegality.  But that question must be clearly identified: A vague statement pointing to ‘all relevant matters’ is not enough”: Lau Kong Yung & Others v Director of Immigration (1999) 2 HKCFAR 300 at 339A-C per Litton PJ.

(6)   Ultimately, it is not for the courts to say how a decision should have been made. It is only where the administrator “has acted beyond the range of responses reasonably open to him under the statutory scheme” that the court’s power of intervention can be properly invoked: Lau Kong Yung (supra) at 334G-H.

85.Mr Yu rightly and fairly does not take any serious issues in relation to the above general principles.

86.Bearing the above principles and approach in mind, I will now proceed to consider the parts of the Written Reasons as challenged by Mr Yu.

87.In relation to Reason 1, fairly read as whole, what the SFC meant objectively is that the allegations made against the Canton Road Property Transaction are likely to be weak.  This is so since even Waddington itself had dropped its claim in the Action vis-à-vis this transaction and that (as a matter of background context) Barma J had also once concluded that the claim did not bear a prima facie case.

88.In my view, it clearly cannot be said to be Wednesbury unreasonable for the SFC to take into account the apparent merits of the allegations made in relation to the Canton Road Property Transaction:

(1)   This is a transaction which constitutes one of the “suspicious transactions” identified by Waddington in support of its complaints.  As mentioned above, it is central to Waddington’s case theory in the complaint that all these transactions were connected and planned so as to get around the Takeovers Code.

(2)   In the premises, the merits of the allegations made in respect of the Canton Road Property Transaction must be relevant to the assessment of whether the suspicious transactions as identified as whole amount to circumstances to show that there might be a breach of the Takeovers Code that should cause the SFC to carry out investigation.

(3)   As result, it cannot be said to be irrational for the SFC (or any reasonable decision maker in its position) to take into account the fact that Waddington itself had dropped its claim in relation to that.

89.Mr Yu has also submitted that the SFC should not have regard to the fact Waddington had dropped the claim as it was made in relation to a private civil claim.  This in my view does not assist him.

90.Central to the allegations made against the Canton Road Property Transaction was that it was subsequently shortly sold by Prestige to Playmates at a value significantly below the NAV adopted in the Yugang Transaction, resulting in Prestige having suffered a loss of about $238 million for no good reason.  This alleged un-commerciality of the Canton Road Property Transaction was relied on by Waddington to support the complaint that all the identified suspicious transactions were related and pre-arranged as a scheme by Thomas Chan and CCK to avoid the Takeovers Code.

91.At the same time, this central allegation of the below value and un-commerciality sale also forms part of Waddington’s claim vis-à-vis the Canton Road Property Transaction in the Action.[25]  Waddington’s abandonment of the claim at the trial must reasonably be relevant for the SFC to consider the merits of this allegation itself.

92.I therefore do not accept that it is Wednesbury unreasonable for the SFC to take this into account in considering whether to commence investigation.  SFC therefore also had not taken into account an irrelevant consideration in this respect.

93.In relation to Reason 4, the staleness of a complaint relating to the alleged suspicious transactions committed some 15 years ago must in any view be relevant to a public authority’s consideration as to whether or not to commence investigations to see whether eventual prosecution should be made.  This is particularly so when the resources and time of the public authority is limited, and the SFC has to prioritise its use.

94.In this respect, Mr Eugene Goyne of the SFC has explained at paragraphs 73 ‑ 75 of his Affirmation that:

(1)   In recent years, there has been a substantial increase in the number of investigations handled by the SFC, with a much slower rate of increase in the manpower in the corresponding period.

(2)   The workload of the SFC (investigating, considering and seeking advice on evidence and other legal issues arising from the investigations, and conducting legal proceedings commenced by the SFC) is very demanding.

(3)   Given the limited resources and manpower, the SFC has to reasonably prioritize its work in order to achieve the regulatory objectives of “providing an appropriate degree of protection for members of the investing public” and “minimizing crime and misconduct in the securities and futures industry” in a broader sense.  In light of this, cases that are more serious or more current would generally be given a higher priority when there are competing regulatory demands on the SFC.

95.The fact that the SFC had in the past indicated to Waddington to the effect that it should return to the SFC for its further consideration of the complaints with the outcome of the Action cannot be regarded as “a promise” by the SFC as to whether it would commence fresh investigations again.  Understood objectively, all it means is that the SFC would consider the matter again by that time.  This cannot then make the SFC’s consideration of the factor of the lapse of time as irrational or irrelevant.

96.I therefore also reject the complaint made against Reason 4.

97.In relation to challenge that it was irrational and irrelevant for the SFC to take into account the “family dispute” factor in Reason 6, Mr Wong submits that, when properly read in its context, that factor was considered only in relation to Waddington’s request to seek appropriate directions from the court to ensure the proper application of the balance of the Judgment Sum paid into court.[26] In that context, it certainly cannot be said to be irrelevant as the SFC had to consider whether public resources should be used to facilitate the enforcement of the CFI Judgment, when the Action was essentially a matter between the brothers.

98.I think Mr Wong is correct.  I note that in respect of the SFC’s consideration of this request, it has been relevantly recorded in the Close Case File Note as follows:

“…

i. Waddington requested the SFC ensure proper allocation/application of a judgement sum pursuant to an Order of the Court dated 10th March 2014 (‘Court order’).

Pursuant to the Court Order, Thomas Chan was required to pay the Court directly. This amount was paid on 21 March 2014. After deducting payments to Waddington, a balance of approximately HK$21.6 million remains in Court.

Waddington is concerned that any amount paid to Playmates would effectively be reverted back to the control of Thomas Chan by reason of his control of Playmates. LSD advised that the SFC has the power to intervene in court proceedings under section 385 of the SFO if it is satisfied that it is in the public interest to do so. However it is not clear what the public interest would be in the SFC intervening in the aftermath of this family matter.” (emphasis added)

99.Once Reason 6 is read and understood together with this part of the reasons set out in the Close Case File Note (in particular the italicised part), I agree that the reference to the “substantially family matter” consideration was made in relation to Waddington’s request in the Report asking the SFC to seek appropriate directions from the court to ensure the proper application of the balance of the Judgment sum paid into court.  In that context, the factor is clearly relevant to the SFC’s consideration as to whether it was a proper use of its resources and time in acceding to this request.

100.I therefore also reject this ground of challenge against Reason 6.

101.In relation to Mr Yu’s submissions concerning Reason 5, they are indeed the flip side of the ground of challenge that the SFC failed to properly engage the issue of the impact of the CFI judgment.  The Wednesbury unreasonableness in this respect is that it would be irrational for the SFC to rely completely on the previous investigations without considering the impact of the CFI Judgment.

102.As I have already accepted this ground of challenge above under section C1.2, it is unnecessary for me to look at this part of the argument against Reason 5 under this ground.

103.For all the above reasons, I reject this ground of judicial review.

C2.   The refusal to seek a DQ Order against Thomas Chan

104.Under this ground, Mr Yu effectively submits that it must be Wednesbury unreasonable for the SFC not to seek a DQ Order against Thomas Chan in light of the fact that he had been found by the court in the Action to have been in breach of fiduciary duty.

105.Mr Yu also submits that the following factors apparently taken into account by the SFC as set out in the Written Reasons and the Close Case File Note in deciding not to take out a section 214 Petition against Thomas Chan are clearly irrelevant when considered in light of this finding:

(1)   In relation to the factor that “the events took place 15 years ago”: it is irrational and wholly unfair for the SFC to rely on the long lapse of time as an excuse, especially when the SFC had previously decided to wait for the court’s adjudication in the Action before taking proceeding further.  See also paragraph 68 above.

(2)   In relation to the factor that “the case has already been to trial and a judgement [sic] has been awarded and paid”: this is clearly an irrelevant consideration as civil and regulatory proceedings serve different purposes, as submitted in paragraph 66(4) above.  It is not open to Waddington (as a private party) to seek a DQ Order against Thomas Chan, which could only be done by the SFC in section 214 proceedings.  It should be noted that the potential disqualification period for a deliberate and dishonest breach to the benefit of the defaulting director (as in the case of Thomas Chan) would be 10 to 15 years: see Re China Best Group Holding Ltd (unreported, HCMP 745/2013, 30 May 2016) at paragraphs 3 - 7.

(3)   In relation to the factor “Playmates currently has net assets of HK$6.1 billion, and profits of HK$758 million – under the directorship of Thomas Chan”: This is self-evidently an irrelevant consideration as to whether the SFC should seek a DQ Order against Thomas Chan for his deliberate and dishonest breach of duty to Playmates and Profit Point.

106.With respect to Mr Yu, I agree with Mr Wong’s following submissions that the complaint of irrationality under this ground is without merits.

107.As emphasized by Mr Wong, it is important to note the nature of Waddington’s claim against Thomas Chan in the Action and the findings in the Judgment:

(1)   Waddington is a minority shareholder in Playmates.  Playmates indirectly wholly owns Profit Point.  Playmates through Profit Point held 4.28% in Prestige until 22 to 24 May 2000 when those shares were sold in the market at between $0.60 and $0.70 per share.  This sale is the subject complaint in the Action (ie, the Profit Point Sale).

(2)   Also as at May 2000, Chansam owned 39.20% in Prestige.

(3)   In July 2000, Chansam sold 34.25% in Prestige to Yugang (via Funrise) at $2.20 per share, and the transaction was completed in September 2000 (ie, the Yugang Transaction).

(4)   Also in September 2000, Chansam sold its remaining 4.95% in Prestige in the market.

(5)   Thomas Chan at all material times controlled Playmates, Profit Point and Chansam: paragraph 75(iii) of the Judgment.

(6)   Waddington’s case is that Thomas Chan should have included Profit Point in the benefit of the Yugang Transaction such that Profit Point’s shares in Prestige would have been sold at $2.20 per share to Yugang rather than at $0.60 to $0.70 per share to the market, thereby causing loss directly to Profit Point and indirectly to Playmates as its ultimate parent company.  Thomas Chan was said to be acting in breach of his fiduciary duty towards Profit Point and Playmates, and should compensate Profit Point for its loss: paragraph 31 of the Judgment.

(7)   Thomas Chan’s main defence was that the Yugang Transaction was only negotiated or agreed in June 2000 which was after the Profit Point Sale: paragraph 32 of the Judgment.  The Recorder rejected his case and found that at the time of the Profit Point Sale, Thomas Chan and CCK for Yugang “had well been into the negotiations or had even arrived at an understanding in principle regarding what eventually became the Yugang transaction”: paragraph 75(ii) of the Judgment.

(8)   The Recorder found in favour of Waddington as claimed and ordered Thomas Chan to pay damages of $33 million odd (being the loss to Profit Point for selling its Prestige shares in May 2000 at $0.60 to $0.70 rather than at $2.20 in the Yugang Transaction) to Profit Point: paragraph 131 of the Judgment.

(9)   The judgment sum and interest was paid into the court by Thomas Chan under an order made by the Recorder in March 2014.  Upon deducting an interim payment to settle Waddington’s legal costs in the Action, $21 million remained in court pending further directions: paragraph 28 of the 1^st Affirmation of Albert Chan.

108.Further, section 214 of the SFO provides:

“Where, in relation to a corporation which is or was listed, it appears to the Commission that at any relevant time the business or affairs of the corporation have been conducted in a manner –

(a) oppressive to its members or any part of its members;

(b) involving defalcation, fraud, misfeasance or other misconduct towards it or its members or any part of its members;

(c) resulting in its members or any part of its members not having been given all the information with respect to its business or affairs that they might reasonably expect; or

(d) unfairly prejudicial to its members or any part of its members,

the Commission may, subject to subsection (3), by petition apply to the Court of First Instance for an order under this section.”

109.The grant of a DQ Order under section 214(2)(d) is therefore not mandatory but is always within the discretion of the court: Re First China Financial Network Holdings Ltd [2015] 5 HKLRD 530 at paragraph 7 per Anthony Chan J.

110.Moreover, as noted by G Lam J in Securities and Futures Commission v Wong Yuen Yee [2017] 1 HKLRD 788, disqualification proceedings are not ordinary adversarial proceedings but have an element of public interest and may entail penal consequences (at paragraph 33).  There is a duty on the prosecuting authority to present the case against each respondent fairly (at paragraph 33).  A disqualification order involves “a substantial interference with the freedom of the individual” so that in the conduct of such proceedings, “the rights of the individual must be fully protected” (at paragraphs 31 - 35).  Such dicta reinforced the need for the SFC not to commence disqualification proceedings as a matter of course.

111.In any event, there is nothing in the SFO, in particular under section 214, which requires the SFC to seek a disqualification order whenever a director of listed corporation is found by the court in private litigation to be liable for breach of fiduciary duties.

112.In the premises, the fact that Thomas Chan has been found to have acted in breach of his fiduciary duty in 2000 does not necessarily mean that the court will impose a DQ Order against him if the SFC were to issue a section 214 Petition as Waddington demanded in (or after) 2015, 15 years after the misconduct.

113.The SFC thus has to engage in a balancing exercise to consider whether it is a proper and efficient use of its limited resources and time to seek a DQ Order against Thomas Chan.  In that exercise, it took into consideration the following factors:

(1)   The full payment of the Judgment Sum and interest by Thomas Chan such that the victim in his misdeed, namely Profit Point, has been fully compensated.  There is therefore no current victim who still suffers by reason of Thomas Chan’s breach.  This clearly has a bearing on the SFC’s enforcement priorities.

(2)   The long lapse of time since Thomas Chan’s misconduct in 2000.  In this regard, the SFC’s consideration of the time lapse could not be said to be irrational: it simply reflected the fact that a long time has lapsed since the misconduct such that the case is not a “current one” which again has a clear bearing as regards the SFC’s enforcement priorities.

(3)   The lack of evidence of any further misconduct by Thomas Chan for 15 years since the subject complaint in the Action.

(4)   Possible mitigating factors of Thomas Chan: including delay, full compensation having been paid, and no suggestion of any further or on-going breach of fiduciary duty or misconduct on his part.

114.In this respect, Mr Yu has submitted a list of past cases set out in Appendix 1 of the Amended Form 86 to show that the SFC has previously taken out disqualification proceedings against directors who had been found to have committed a breach of duty on a single occasion.

115.However, I agree with Mr Wong that this does not assist Mr Yu for the simple reason that each case depends on its own facts and the SFC’s considerations and balancing exercise in each case are different.  These past cases cannot properly be characterised as “like cases”.

116.Furthermore, it must be noted that the discretion exercised by the SFC is not merely one of assessing how easy it is to establish breach of fiduciary duties on the part of Thomas Chan in an application for the DQ Order against him.  Even if the evidence in that regard (because of the findings in the CFI Judgment) is strong or even conclusive, the SFC is entitled to consider other relevant factors, including those mentioned in paragraph 113 above, in exercising its discretion on whether to commence section 214 proceedings in the first place.

117.As to the weight to be accorded to the SFC’s different considerations in the overall balancing exercise, this is a matter for the SFC, not the court.

118.Having looked at these factors, and having reminded myself the principles that the court should only interfere this kind of decision in exceptional circumstances as set out in paragraphs 75 ‑ 84 above, in my view, it must be reasonably open to the SFC to conclude that it would not be an efficient use of its limited resources in terms of manpower and costs to pursue section 214 proceedings against one single director and without any remedial order also being sought, in the light of the competing demands upon the SFC’s investigation and litigation resources.[27]

119.I would therefore also dismiss this ground of challenge.

D.   CONCLUSION

120.Waddington is successful only on the ground of challenge that, in deciding not to commence fresh investigation, the SFC failed to properly consider the impact of the findings in the CFI Judgment as explained above at paragraphs 59 - 63.

121.I will therefore quash this part of the Decision and remit it back to the SFC for reconsideration in light of the court’s above ruling.

122.I would however dismiss all the other grounds of challenge.

123.As a matter of completeness, I would allow Waddington’s application to Re-Re-Amend the Form 86 as in the draft annexed to its summons dated 6 June 2016.  I accept that the proposed amendments are necessitated by reasons of the materials subsequently provided by the SFC in the evidence in this application, and necessary for the proper disposal of this judicial review.  I also find the amended grounds of judicial review, if considered for leave purposes, to be reasonably arguable (even though I have for the above reasons refused some of them after the substantive hearing).  Costs of the amendments be in the costs of this judicial review.

124.Given that Waddington is only successful in part, and taking into account all the arguments raised in this application, I think a fair and just costs order should be that Waddington should have one-third of the costs of this application.  Therefore, there shall be a costs order nisi that one-third of the costs of this application be to Waddington to be taxed if not agreed, with certificate for two counsel.

125.Lastly, I thank counsel for their helpful assistance in this matter.

Mr Benjamin Yu, SC & Mr Justin Lam, instructed by Kao, Lee & Yip, for the applicant

Mr Horace Wong, SC & Mr Jonathan Chang, instructed by Securities and Futures Commission, for the respondent