China Trends Holdings Ltd v. The Stock Exchange of Hong Kong Ltd
Read the full judgment text of CACV 652/2020 on BabelCite. This Court of Appeal judgment was delivered on 8 July 2021.
1. The Applicant appeals against Chow J’s (as he then was) judgment of 8 December 2020 dismissing its application for judicial review of the decision of the Respondent’s GEM Listing (Review) Committee (“the Review Committee”) on 10 March 2020 (“the Review Decision”). By the Review Decision, the earlier decisions of the Listing Division and the Listing Committee to suspend the trading of the Applicant’s shares at the Stock Exchange was upheld.
Cited by 4 cases · Cites 6 cases
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CACV 652/2020 [2021] HKCA 980 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF APPEAL CIVIL APPEAL NO 652 OF 2020 (ON APPEAL FROM HCAL 818/2020) ____________________
____________________ Before: Hon Lam VP, Au and G Lam JJA in Court Date of Hearing: 29 April 2021 Date of Judgment: 8 July 2021 ________________________ JUDGMENT ________________________ Hon Lam VP (giving the Judgment of the Court): Introduction 1.The Applicant appeals against Chow J’s (as he then was) judgment of 8 December 2020 dismissing its application for judicial review of the decision of the Respondent’s GEM Listing (Review) Committee (“the Review Committee”) on 10 March 2020 (“the Review Decision”). By the Review Decision, the earlier decisions of the Listing Division and the Listing Committee to suspend the trading of the Applicant’s shares at the Stock Exchange was upheld. 2.That decision was made initially on 10 June 2019 by the Respondent’s Listing Division (and subsequently affirmed by the Listing Committee on 13 November 2019) under the GEM Listing Rules 9.04 and 17.26 (as in force prior to 1 October 2019) which provided as follows:
3.By way of a note to Rule 17.26, it was also stated in the GEM Listing Rules:
4.In the appeal, Mr Mok SC and Mr Ng represented the Applicant which was represented by another team of counsel below. Mr Pao SC and Mr Ho represented the Respondent both here and below. After hearing oral submissions from counsel on 29 April 2021, we reserved our judgment. We now give our judgment in the appeal. Factual background 5.The Applicant had been listed on the Growth Enterprise Market (“GEM”) Board of the Respondent since 31 July 2002. After the disposal of its original business in sales of mobile phone appliances and related application solutions in 2009, the Applicant’s business operations consisted of two principal lines of business: (i) trading in electronic technology and related products; and (ii) provision of digital solutions, media and e-commerce platforms. 6.Since then, the trading business of the Applicant only recorded minimal profit or loss and no revenue had been generated from the media business. The level of its business operations had continuously been low for several years. For the financial years from 2014 to 2018, it had been operating at net losses with negative operating cash flow. 7.On 24 January 2019, the Respondent’s Listing Division issued a letter to the Applicant noting that the Applicant’s share price had been trading at HK$0.01 since mid-September 2018 and maintained at that level. The highest trading price in the past year was not more than HK$0.018. In that letter the Respondent requested the Applicant to provide a proposal to resolve the issue as the Respondent had concerns under GEM Rule 17.76 when the market price of the shares approached the extremities of HK$0.01. 8.Further, on 20 March 2019 the Respondent’s Listing Division issued a letter to the Applicant setting out detailed analysis on the financial results of the Applicant and its businesses supporting its tentative view that the Applicant might have failed to maintain sufficient operations or assets as required under GEM Rule 17.26 to warrant the continued listing of the Applicant’s shares. The Listing Division invited the Applicant to provide written submissions as to why the Respondent should not suspend trading in the Applicant’s shares. As stated at [13] of the letter, the suspension of trading would be followed by delisting procedure which gives 12 months to an issuer to re-comply with GEM Rule 17.26, failing that the listing of the shares would be cancelled. 9.The Applicant provided its written submissions on 10 April 2019. After considering the same, the Respondent’s Listing Division issued its written decision on 10 June 2019 to suspend trading in the Applicant’s shares pursuant to GEM Rule 9.04. 10.On 14 June 2019, the Applicant requested a review of the Listing Division’s decision by the GEM Listing Committee. After receiving written submissions from the Applicant, the review was heard by the Listing Committee on 29 October 2019. 11.The GEM Listing Committee issued its written decision on 13 November 2019. The Listing Committee was of the view that the Applicant had failed to comply with GEM Rule 17.26 and upheld the Listing Division’s decision to suspend trading in the Applicant’s shares and proceed with the delisting process under GEM Rule 9.14A. The Applicant had 12 months to re-comply with GEM Rule 17.26. 12.The Applicant then applied to the Review Committee on 21 November 2019 for a review of the GEM Listing Committee’s decision. After receiving written submissions from the Applicant, the hearing before the Review Committee took place on 25 February 2020. 13.On 10 March 2020, the Review Committee issued the Review Decision. The Review Committee was of the view that the Applicant had failed to comply with GEM Rule 17.26 and upheld the decision to suspend trading in the Applicant’s shares pursuant to GEM Rule 9.04. In the reasons set out in the Review Decision, the Review Committee examined both the scale of operations of the Applicant (in respect of both the trading business and the media business) as well as its level of assets. 14.On the scale of operations, the Review Committee noted that the Applicant had only generated revenue from the trading business and the scale of operation was limited with recorded net losses or limited profit (excluding non-recurring expenses) over the years. The situation did not appear to be a temporary downturn or decline. The Review Committee was concerned that, notwithstanding the submissions of the Applicant, the trading business and the media business were of no substance and they were not viable and not sustainable. 15.On the level of assets, noting the nature of the assets of the Applicant (mainly consisting of trade receivables, cash and bank balances), the Review Committee was concerned that the operations of these assets might not enable the Applicant to carry out businesses with sufficient level of operations to justify the continued listing of its shares. 16.The Review Committee also considered the submission of the Applicant that it had conducted its trading business for more than 10 years and no issue had been raised by the Respondent in the past. The Applicant also said it had outperformed many GEM listed issuers and it had been operating without any debt. The Review Committee rejected these submissions at [8] of the Review Decision:
17.As a result of the Review Decision, trading in the Applicant’s shares was suspended on 11 March 2020. At the hearing, we were told that after the expiry of the 12-month’s period, on 16 April 2021 the Respondent decided to cancel the listing of the Applicant’s shares. Relevant legislation and Listing Rules 18.The Respondent operates the Hong Kong Stock Exchange pursuant to the Securities and Futures Ordinance, Cap 571 (“the SFO”). Under Section 21(1) of the SFO, the Respondent has a duty to ensure, so far as reasonably practicable, an “orderly, informed and fair market”. Further, as provided by section 21(2) of the SFO, the Respondent should act in the interest of the public, having particular regard to the interest of the investing public in the discharge of its duty. 19.The GEM Listing Rules are made by the Respondent pursuant to Section 23 of the SFO which empowers the Respondent to make rules for such matters as are necessary or desirable for the proper regulation and efficient operation of the stock market. Section 23(2)(c) of the SFO specifically authorizes the Respondent to make rules for the cancellation and withdrawal of the listing of, and the suspension and resumption of dealings in, securities. In addition to the rules cited at [2] and [3] above, the following rules are also relevant for the purposes of this appeal:
20.As held by Chow J at [22] of the judgment below:
21.GEM Rule 17.26 is the equivalent to Rule 13.24 in the Main Board Listing Rules. As mentioned by the Review Committee, the purpose of these rules and guidance on their application had been discussed in some previous decisions of the Listing Committee and Listing Division. The relevant principles (which were not disputed by Mr Mok) were summarized by Chow J at [34] of the judgment:
22.In light of the statutory framework under which the GEM Listing Rules were issued, the power to suspend trading of listed securities must be exercised for the maintenance of an orderly, informed and fair market and the protection of the investing public. These were precisely the objectives as stated in Rule 9.01. Rules 9.04 and 17.26 should be read and construed with such objectives in mind. In particular, as highlighted by Chow J at [22] of the judgment, the overriding criterion of Rule 17.26 is that the continued listing of the issuer’s securities is warranted. 23.As explained in the guidance set out at [34] of Chow J’s judgment, the continued listing of a company without a viable and sustainable business of substance would attract speculation on their possible acquisitions in the future and lead to opportunities for market manipulation, insider trading and unnecessary volatility in the market which are not in the interest of the investing public. This is obviously a different consideration from the financial health of the company in terms of its solvency since a ‘blue sky company’ can be financially stable and solvent. 24.Such reading of the rules is, in our judgment, important when we consider whether in the present context the Applicant had demonstrated that it had a viable and sustainable business or sufficient assets that enabled it to have a viable and sustainable business. We shall have to elaborate on this aspect of the case at greater length below in addressing Mr Mok’s submissions. In short, we are of the view that in the context of Rules 9.04 and 17.26, viability and sustainability has to be examined from the prism of the continued listing of the shares being warranted. We would emphasize that such examination is different from reviewing the viability and sustainability in terms of the solvency of the company. Application for judicial review 25.On 29 April 2020, the Applicant applied for judicial review of the Review Decision. In the Amended Form 86 dated 28 August 2020, two grounds of review were advanced, as summarized by Chow J at [18] of his judgment:
26.The judicial review application was heard by Chow J. By his judgment on 8 December 2020, the learned judge dismissed the Applicant’s application for judicial review. Chow J addressed the Applicant’s first ground of review at [38] to [46] of the judgment. His Lordship held that the two requirements under Rule 17.26, though disjunctive, are tied to the ultimate question of whether the continued listing of the issuer’s securities is warranted. 27.After alluding to the fact that the Review Committee had taken account of: (a) the scale of operations of the Applicant’s trading business and media business; and (b) the level of assets of the Applicant before coming to the conclusion that the Applicant failed to demonstrate that it had a viable and sustainable business or sufficient assets that enable it to have a viable and sustainable business, the judge held that the Review Committee had considered the two requirements under Rule 17.26 disjunctively and was of the view that the Applicant failed to satisfy either requirement. 28.As it is inappropriate to permit a company’s shares to be listed on a stock exchange if the company does not in fact have operations or assets to enable a viable and sustainable business to be carried out, the judge held that the Review Committee was entitled to regard the sufficiency of a company’s level of operations or assets to enable the carrying out of a viable and sustainable business as the criterion for determining whether the continued listing of the company’s shares was warranted. 29.The judge rejected the submission that the decision of the Review Committee was unreasonable/irrational in light of the following:
30.The judge further held that it was a matter of professional judgment for the Review Committee to assess if the Applicant’s level of operations, or assets, were sufficient to enable a viable and sustainable business to be carried out. In the present case, there was no valid or sufficient basis for the court to interfere with such assessment. 31.As regards the adequacy of the reasons given by the Review Committee, Chow J had this to say at [53] of his judgment:
Appeal to this Court 32.In its Notice of Appeal dated 29 December 2020, the Applicant raised three grounds of appeal as follows:
33.By a Respondent’s Notice dated 12 January 2021, the Respondent contended that Chow J’s judgment should be affirmed on the additional or alternative ground that:
34.At the oral hearing before us, Mr Mok intimated that he need not rely on the argument that the Review Committee did not consider the two requirements under Rule 17.26 disjunctively. For the purpose of this appeal, counsel was contented to focus on challenging the conclusion of the Review Committee that the Applicant failed to demonstrate that its business was viable and sustainable to warrant the continued listing of its shares. 35.Mr Mok referred to [9] of the Listing Decision 118‑2018 and submitted that Rule 17.26 should be applied in a manner which struck a balance between the existing shareholders’ interest (in having access to the market at the Stock Exchange) and the need to maintain market quality. Hence, the Respondent should only exercise the power to suspend and delist in extreme cases. 36.Counsel submitted that one must have regard to the overall financial position of a company and a loss-making company is still sustainable and viable when its asset position is sufficient to support the business operation. If a company is solvent and could therefore be carried on in the foreseeable future, it is sustainable and viable despite that it has been operating at a loss. 37.Amongst companies listed on the GEM Board, Mr Mok said it was not infrequent to have companies which were not operating at a profit. In this connection, Mr Mok referred to the submission of the Applicant before the Review Committee on 13 January 2020 in which comparison was made between the Applicant and other GEM listed companies. In that document, it was said that the financial results of the Applicant in 2019 outperformed 143 GEM listed companies (in terms of total assets), 233 GEM listed companies (in terms of revenue) and 232 GEM listed companies (in terms of net profit). 38.In respect of the Applicant, Mr Mok submitted that the matters set out by Chow J at [42] of the judgment[3] could not reasonably show that the Applicant’s business was not sustainable and viable. Counsel submitted that the Applicant was far from being an extreme case because, among other things, in 2018 and 2019 it had significant assets exceeding its liabilities and its business operation had been continuing in the same model for 10 years and was sustainable despite these matters. 39.Bearing in mind the policy of confining the power to suspend to extreme cases and the Note to Rule 17.26, Mr Mok submitted it should only be used where a company would cease business or where a company is in a financially dire position viz insolvent or nearly insolvent or its level of assets is so low that its existing business will no longer be viable. 40.Though the Applicant advanced submissions based on the protection of private property under Article 105 of the Basic Law, this is a new point raised by the Applicant for the first time. This point had not been put forward in either the Form 86 or the Notice of Appeal. After this Court referred counsel to the recent authority of K v Commissioner of Police [2021] HKCA 523 on the practice of this Court regarding raising new point on appeal in judicial review, Mr Mok did not pursue this argument further at the oral hearing. Discussion 41.In light of the focus of Mr Mok’s submissions at the oral hearing, we need not discuss in great length if the Review Committee and Chow J had applied the two requirements in Rule 17.26 disjunctively. It is clear from the reasons of the Review Committee that they had considered the matter from the angles of the scale of operations as well as the level of assets. 42.As held by Chow J, the two requirements are tied to the ultimate question of whether the continued listing of the issuer’s securities is warranted. This must be correct in light of our analysis on the correct approach to the construction and application of Rule 17.26 at [22] to [24] above. It seems to us this was exactly the approach adopted by the Review Committee in giving considerations to these requirements in the Review Decision. 43.There is no merit in the contention that the Review Committee erred in law in their approach to Rule 17.26 and that Chow J erred in rejecting such argument in the court below. 44.Turning to the submissions of Mr Mok that the Review Decision’s conclusion that the Applicant had failed to maintain a sufficient level of operations or have assets of sufficient value to warrant the continued listing of its shares is irrational or Wednesbury unreasonable, we are of the view that the main difference between Mr Mok and Mr Pao as to what is meant by the business was not “viable and sustainable” as opined by the Review Committee in its conclusion at [8]:
45.As mentioned above, Mr Mok submitted that a company should only be regarded as not viable and sustainable when it would cease business or where a company is in a financially dire position viz insolvent or nearly insolvent or its level of assets is so low that its existing business will no longer be viable. In short, according to Mr Mok, viability and sustainability is to be tested by reference to the solvency of a business. 46.We have already highlighted at [22] to [24] above that this is not the right approach in view of the objects and purposes of Rule 17.26. We do not find the Note to Rule 17.26 to be of much assistance in this regard as it only provides for some instances (without stating the same to be exhaustive) where non-compliance could be established. 47.It is also clear to us that the Review Committee did not adopt such restrictive meaning on viability and sustainability since they alluded to the fact that the Applicant had no debt for 2018 and 2019. 48.In the context of the application of Rule 17.26, the expression “viable and sustainable” is derived from paragraph (5) of the guidance extracted from earlier Listing decisions and summarized by Chow J at [34] of the judgment. That paragraph reads:
49.Viability and sustainability is to be examined in the context of a qualitative assessment as to whether an issuer has a viable and sustainable business which warrants the continued listing of its shares. Under the statutory framework and the GEM Listing Rules, whether the threshold of viability and sustainability warranting continued listing has been met is a matter of professional judgment for the members of the Listing Division, the Listing Committee and the Review Committee, see Sanyuan Group Ltd v The Stock Exchange of Hong Kong CACV 191/2008 (21 July 2009). In the absence of any error of law or failure in taking account of relevant matters or taking irrelevant matters into account, the court should not intervene with such professional judgments. 50.Though the Court of Appeal in that case was concerned with a specific question as to whether the Stock Exchange should have informed the applicant of the quantum of turnover, profit or assets which would be sufficient to satisfy Rule 13.24 of the Main Board Listing Rule, we do not accept Mr Mok’s submission that the rationale was only confined to the determination of that specific issue. 51.In this regard, we agree with Chow J’s summary at [37] of the judgment of the relevant principles that can be extracted from that case. These principles are also applicable in the present context:
52.We also agree with Mr Pao that there is no justification to read in a “proximity to insolvency” requirement in the application of Rule 17.26. Such requirement would lead to the absurd result that notwithstanding the risk to market speculation and manipulation, insider trading and unnecessary volatility, the Respondent would not be entitled to suspend the listing of a dormant issuer or one with negligible business activity so long as it has assets which have not been, and will not be, meaningfully deployed in the course of business. 53.Also, such requirement does not accord with past practices. Previously, the Respondent had found issuers to be in breach of Rule 17.26 or its equivalent after such issuers had disposed of their principal businesses even though they were solvent and the remaining businesses still generated minimal profits. 54.Paragraph (6) of the guidance set out in the earlier listing decisions also negated such “proximity to insolvency” approach:
55.Further, the flexible qualitative assessment by the Respondent on whether an issuer maintains a viable and sustainable business that warrants the continued listing of its shares should also be a holistic exercise. Thus, we agree with Mr Pao that the level of operations and the level of assets should not be looked at in isolation from the Applicant’s actual business. The Respondent was entitled to examine how the assets have actually been deployed in the past and the likely use of those assets in the future in connection with the actual business. Equally, it was relevant to consider, as the Listing Division, the Listing Committee and the Review Committee did, the Applicant’s net losses and negative operating cash flows for several consecutive years from 2012 to 2019. 56.For these reasons, a comparison of the Applicant with other GEM listed companies on two or three isolated factors cannot be of any avail. 57.Likewise, there is no merit in Mr Mok’s submission that the application of Rule 17.26 in this manner failed to give a single meaning to the rule and instead wrongly ascribed an unfettered discretion to the Review Committee. Placing reliance on Shiu Wing Steel Ltd v Director of Environmental Protection & Airport Authority (No 2) (2006) 9 HKCFAR 478 at [23], Mr Mok submitted that the power under Rule 17.26 is circumscribed by the guidance published by the Respondent. Counsel said that there should be a single meaning for “viable and sustainable business” and the meaning he contended for (tied in exclusively with the solvency of the business) was the one rejected by us at [45] and [46] above (as further explained at [52] to [54]). The single meaning for that expression is the one we stated at [49] above. Bearing in mind the nature of the exercise and its object and purpose, we respectfully concur with the analysis of Rogers VP in Sanyuan Group Ltd v The Stock Exchange of Hong Kong, supra, that the assessment has to be conducted qualitatively by reference to the circumstances of a particular company individually. It is inherent in such exercise that it is inappropriate to single out one or two aspects pertaining to the finance of the company and rigidly apply some quantitative benchmarks as conclusive. 58.With the meaning of viability and sustainability of a business properly understood in the context of Rule 17.26, Mr Mok’s argument based on solvency and the lack of complaint as to the Applicant’s existing business model in the past loses much of its force. 59.Given the holistic nature of the assessment, we cannot accept Mr Mok’s submission that the matters set out at [42] of the judgment below are irrelevant to that assessment. There is no merit in the submission that the Review Committee took account of irrelevant matters. 60.In respect of Mr Mok’s submission that the Review Committee erred in exercising the power of suspension when the Applicant’s case did not fit the profile of extreme cases at paragraph (4) of the guidance set out [34] of the judgment below, counsel advanced this submission by making comparison with other GEM listed companies on some selected factors. As we have held, such comparison was unhelpful. 61.Further, the extreme cases are those with these characteristics:
62.The Review Committee plainly regarded the Applicant as fulfilling (a) and (b) in its discussion on the scale of operations. In respect of (c), given the nature of the assets as alluded by the Review Committee, its conclusion that the operations of the assets might not enable the Applicant to carry out businesses with sufficient level of operation to justify the continued listing is tantamount to a finding that (c) is established. 63.Thus, according to the assessment of the Review Committee, the Applicant’s situation did fit the profile of extreme cases warranting suspension. 64.We do not see any basis for the court to intervene with this assessment as being Wednesbury unreasonable. 65.We therefore reject the first ground of appeal which was the main ground argued by Mr Mok. 66.Regarding the other grounds, Mr Mok only relied on them as supportive of the main ground: see [17] of his skeleton submissions. We can dispose of them shortly. 67.In respect of the duty to give reasons, Mr Mok’s only submission before us is, as set out at [17(1)] of the skeleton submissions, that the Review Committee failed to set out its understanding or interpretation with reference to the guidance published by the Respondent of the criterion of level of assets sufficient to enable the Applicant to carry out businesses with sufficient level of operation. 68.We have explained above the correct approach in light of the statutory framework, the object and the purpose of the rules and the guidance. In our judgment, the Review Committee acted in accordance with such approach. We agree with Chow J at [51] and [53] of the judgment below that the Review Committee had given adequate reasons from a public law point of view based on the test discussed by Au J (as Au JA then was) in Ng Shek Wai v Hong Kong Institute of Certified Public Accountants [2019] HKCFI 2439, at [41]. 69.As regards the ground concerning deference to the professional judgment of the Review Committee, the only point made by Mr Mok at [17(2)] of the skeleton submission hark back at his argument on single meaning. We have already addressed the same in the discussion at [57]. 70.Notwithstanding the valiant efforts of Mr Mok, the Applicant failed to persuade us that there is any ground for reversing the judgment of Chow J. 71.We dismiss the appeal with costs, with certificate for two counsel.
Mr Johnny Mok SC and Mr Tom Ng, instructed by Wilkinson & Grist, for the applicant Mr Jin Pao SC and Mr Martin Ho, instructed by Hogan Lovells, for the respondent [1] Rule 17.26 was amended in October 2019. The amended version reads:
[2] Set out at footnote 1 above. [3] Set out by us at [28] above. |
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