Convoy Global Holdings Ltd and Another v. Kwok Hiu Kwan and Another

CACV 330/2020

[2021] HKCA 1594

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 330 OF 2020

(ON APPEAL FROM HCA NO 2000 OF 2018)

________________________

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Before: Hon Kwan VP, Cheung JA and G Lam JA in Court

Date of Hearing: 19 October 2021

Date of Judgment: 19 October 2021

Date of Reasons for Judgment: 29 October 2021

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

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Hon Kwan VP (giving the Reasons for Judgment of the Court):

Introduction

1.This is the plaintiffs’ appeal against the judgment of Coleman J on 10 July 2020 (“the Judgment”)^[1], by which he ordered the writ of summons and the statement of claim be struck out and this action against the 1^st and 2^nd defendants be dismissed.  We dismissed their appeal at the conclusion of the hearing, with costs to the defendants.  These are the reasons of the court.

2.The 1^st plaintiff, Convoy Global Holdings Ltd (“Convoy”), is a Cayman Islands limited company listed on the Main Board of the Hong Kong Stock Exchange.  Convoy owns the 2^nd plaintiff, CSL Securities Ltd (“CSL”), through four layers of subsidiaries.  CSL is a corporation licensed by the Securities and Futures Commission (“SFC”) under section 116 of the Securities and Futures Ordinance, Cap 571 (“SFO”) to carry out Type 1 and Type 4 regulated activities.

3.The 1^st defendant Kwok Hiu Kwan (“Kwok”) and the 2^nd defendant Chen Pei Xiong (“Chen”) are the registered owners of 29.91% and 7.97% respectively of the issued shares of Convoy.  Together, they hold a stake of approximately 37% of the issued shares (“37% Stake”).

4.The plaintiffs’ claim against the defendants was pleaded in §8 of the statement of claim in these terms:

“Independent of the causes of action relied upon in the Main Action^[2] and entirely without prejudice to the relief of rescission sought, the Plaintiffs’ case in these proceedings is that Kwok and Chen acquired the 37% Stake contrary to sections 131 and 132 of the SFO, and by operation of the SFO are therefore not entitled to exercise the voting rights of Convoy.”

5.In the general indorsement of claim and the prayer of the statement of claim, the plaintiffs claimed these reliefs (all stated to be without prejudice to the relief of rescission of the 37% Stake sought inter alia in the Main Action):

(1)  a declaration that Kwok and/or Chen has/have contravened section 131 of the SFO, in that Kwok and/or Chen (acting as associates or otherwise) has/have become and continued to be (purported) substantial shareholder(s) of CSL, by purportedly acquiring and continuing to hold the 37% Stake without the necessary approval to do so from the SFC under section 132 of the SFO;

(2)  a declaration that Kwok and/or Chen has/have contravened section 131 of the SFO, in that Kwok and/or Chen has/have purported to exercise the voting rights conferred by the 37% Stake (or any part thereof) which is not exercisable by virtue of section 131(4) of the SFO; and

(3)  an injunction order prohibiting Kwok and Chen from exercising the purported voting rights conferred by the 37% Stake, unless and until the SFC approves Kwok and/or Chen to become and continue to be substantial shareholder(s) of CSL under section 132 of the SFO.

6.The defendants sought to strike out the writ and the statement of claim on the ground that the general indorsement of claim and the pleading disclose no reasonable cause of action and amount to an abuse of process.

Background

7.The relevant background matters, as set out in the Judgment, are as follows.

8.The reliefs claimed in this action (“the SFO Action”)^[3] as well as the Main Action^[4] and other related proceedings are based on an allegation that over several years up to 2017, a wrongdoer and fraudster called Roy Cho wrongfully and illicitly acquired and maintained secret ownership in and control over Convoy (and, through Convoy, CSL).  As described in the judgment of the Court of Appeal in CACV 197/2020 and CAMP 38/2020^[5] at §64:

“… Roy Cho exercised control and acquired ownership in Convoy through appointment of his associates, nominees and/or agents to occupy key positions in Convoy without himself holding a formal position. Through such secret control and ownership, he was able to commit the serious wrongs complained of, which in many respects involved manipulations of the corporate affairs of Convoy and other listed companies in a dishonest manner. As can be seen from the summary above, the scale of these wrongdoings is very substantial and sophisticated. Most of them were carried through complicated schemes with dishonesty and fraud practised not only against Convoy or CCL, but also the other shareholders of the listed companies involved. In our judgment, the concealment of a person’s actual ownership and control over the affairs of a listed company in the manner that Roy Cho allegedly did in order to evade one’s fiduciary obligations to listed companies and side-step compliance with the rules imposed by regulatory authorities designed for the protection of the general investing public is a serious form of dishonest deception. …”

9.The allegations in the SFO Action were summarised by the judge as follows:

“15. In the SOC, it is alleged that following a raid conducted on Convoy’s offices by the SFC in June 2017, Kwok and Chen knowingly acquired the 37% Stake from associates, nominees, and/or agents of Roy Cho in July to October 2017. It is said that although the 37% Stake was acquired from the open market, there were matching buy and sell orders whereby Kwok and Chen’s acquisitions were matched with a co-ordinated disposal by Roy Cho’s associates, nominees, and/or agents (reflected inter alia by the unusual availability of a controlling stake, unusually high trading volumes, and minimal fluctuations in price).

16. It is also pleaded that:

(1) In acquiring the 37% Stake, Kwok and Chen colluded between themselves and/or with a Francis Choi, knowingly to further the improper purposes of Roy Cho.

(2) One of the purposes for acquiring the 37% Stake was to allow Kwok and Chen, or (through them) Francis Choi, to control a secret interest in Convoy.

(3) Kwok and Chen are therefore “associates” of each other for the purposes of the SFO, in that Chen is accustomed or obliged to follow the instructions of Kwok, or both Kwok and Chen are accustomed or obliged to follow instructions of Francis Choi.

(4) Kwok and Chen have attempted to exercise their voting rights on the 37% Stake, including in particular attempting to replace the board of Convoy with Kwok’s own nominees whilst retaining two directors who had been arrested by the ICAC and who are Roy Cho’s associates.

(5) Because Kwok and Chen became “substantial shareholders” of CSL without SFC approval, they contravened sections 131(1) and 132(1) of the SFO, and also contravened section 131(5) by seeking to exercise their voting power.

(6)  By operation of section 131(4) of the SFO, Kwok and Chen cannot exercise their voting rights because of their contravention of sections 131(1) and 132(1).”

10.In respect of the Main Action (brought by Convoy, CSL and Convoy Collateral Limited), it was alleged that certain shares allotted by Convoy in October 2015 were void or voidable.  Of the 41 defendants, Kwok and Chen were named as the 27^th and 28^th defendants respectively. It was alleged that the shares of Convoy that Kwok and Chen purchased from the open market via CCASS, and which formed the 37% Stake, can be traced from the disputed allotment of October 2015, and ought to be rescinded as being null and void or invalid.  The plaintiffs in the Main Action sought various declarations and injunctions so as to restrain Kwok and Chen from exercising the voting rights of, or transferring or otherwise dealing with their interest in, the 37% Stake.

11.HCMP 41/2018 was another related proceeding.  This concerned the exercise of Johnny Chan’s powers as chairman of Convoy when, at Convoy’s 2017 EGM held on 29 December 2017, he refused to allow Kwok and Chen to exercise their voting power pursuant to their respective shareholdings in the 37% Stake.  Harris J dismissed Kwok’s application in HCMP 41/2018 for a declaration that Johnny Chan’s decision was unlawful, void and of no legal effect^[6].

The Judgment and this appeal

12.The judge struck out the writ and the statement of claim on these grounds:

(1) The plaintiffs have no real interest in seeking the declaratory reliefs, on a proper interpretation of section 131(4). (“Ground (1)”)

(2) The declarations sought are impermissible declarations of criminality. (“Ground (2)”)

(3) The SFO Action is an abuse of process in that it seeks to litigate a cause of action already litigated in the Main Action. (“Ground (3)”)

13.The plaintiffs sought to challenge all three grounds on appeal.

14.In respect of Ground (1), they contended that on the proper interpretation of section 131(4), this provision has the effect of substantively barring and/or invalidating the rights of Kwok and Chen to vote on the 37% Stake.  It is at least arguable that the plaintiffs have sufficient interest in obtaining declarations as to whether Kwok and Chen can exercise their voting rights in the 37% Stake in that:

“(1) From the perspective of corporate governance, Convoy has a real interest in ascertaining where it stands as regards the validity of the voting rights of Kwok and Chen. In particular, a shareholder’s voting rights is governed by the articles of a company, being a contract between the company and all shareholders, where the company has a duty to the shareholders to enforce and police the limits of the articles, including limits on shareholder voting rights imposed by general law.

(2) From the perspective of the best interests of the Company, Convoy and CSL have a real interest in ensuring that CSL continues to be a “fit and proper” person to be a licensed corporation. If Kwok and Chen, who have demonstrated they are not “fit and proper” by failing to seek SFC approval, are allowed to act as substantial shareholders of Convoy, CSL faces the risk of losing its valuable status as a licensed corporation. It may also jeopardise Convoy’s own resumption of trading application.

(3) Convoy has a real interest in ensuring that its continuous investigative efforts into the past wrongdoings of its directors and cooperation with regulatory agencies will not be hindered or unwound by virtue of Kwok and Chen assuming control over Convoy.”^[7]

15.Mr William Wong, SC, who appeared for the plaintiffs^[8], put the crux of the appeal as the challenge of Ground (1).  He submitted that the judge’s conclusions on Grounds (2) and (3) would take on a very different complexion depending on how section 131(4) is interpreted in relation to Ground (1).  He contended that if the proper and correct interpretation of this provision is as submitted by the plaintiffs, it must follow the judge is also in error in respect of the other two grounds.  Mr Paul Shieh, SC, who appeared for Chen^[9], did not agree with Mr Wong that the correctness of the judge’s conclusion on grounds (2) and (3) would depend on how section 131(4) is interpreted. Mr Johnny Mok, SC, who appeared for Kwok^[10], took a similar stance.  We are inclined to agree with Mr Shieh and Mr Mok.

The statutory provisions

16.The relevant provisions are in Part V of the SFO, which relates to “Licensing and Registration”.  They are set out in Section F of the Judgment and repeated here for ease of reference.

17.Section 116 provides for “Corporations to be licensed for carrying out regulated activities”.  CSL is a licensed corporation. Section 116(3) provides that:

“(3) The Commission [i.e. the SFC] shall refuse to grant a licence to carry on a regulated activity under subsection (1) unless the applicant satisfies the Commission that –

(a) it is a fit and proper person to be licensed for the regulated activity;

(b) it will be able, if licensed, to comply with the financial resources rules; and

(c) it –

(i) has lodged and maintains with the Commission such security in accordance with rules made under subsection (4); or

(ii)  is insured in accordance with rules made under subsection (5).”

18.Section 129 makes provision for the determination of fit and proper by the SFC:

“129. Determination of fit and proper

(1) In considering whether a person is a fit and proper person for the purposes of any provision of this Part, the Commission or the Monetary Authority (as the case may be) shall, in addition to any other matter that the Commission or the Monetary Authority (as the case may be) may consider relevant, but subject to section 134, have regard to –

(a) the financial status or solvency;

(b) the educational or other qualifications or experience having regard to the nature of the functions which, if the application is allowed, the person will perform;

(c) the ability to carry on the regulated activity competently, honestly and fairly; and

(d) the reputation, character, reliability and financial integrity,

of –

(i) where the person is an individual, the person himself;

(ii) where the person is a corporation (other than an authorized financial institution), the corporation and any officer of the corporation; or

(iii)  where the person is an authorized financial institution, the institution and any director, chief executive, manager … and executive officer of the institution.”

19.Section 131 is crucial to the plaintiffs’ case and the entire provision reads as follows:

“131. Restriction on substantial shareholding, etc.

(1) A person shall not become and continue to be a substantial shareholder^[11] of a corporation licensed under section 116 without first being approved by the Commission under section 132(1)(a).

(2) A person who contravenes subsection (1) commits an offence and is liable –

(a) on conviction on indictment to a fine of $1,000,000 and to imprisonment for 2 years, and to a further fine of $5,000 for every day during which the person continues to be such substantial shareholder without the Commission’s approval under section 132(1)(b); or

(b) on summary conviction to a fine at level 6 and to imprisonment for 6 months, and to a further fine of $500 for every day during which the person continues to be such substantial shareholder without the Commission’s approval under section 132(1)(b).

(3) It is a defence for a person charged with an offence under subsection (2) to prove –

(a) that he did not know, and could not have by the exercise of reasonable diligence ascertained, the existence of the act or circumstances by virtue of which he became such a substantial shareholder; and

(b) where he subsequently became aware of such act or circumstances, that he applied under section 132(1)(b), as soon as reasonably practicable and in any event within 3 business days after he became so aware, for approval to continue to be a substantial shareholder of the corporation.

(4) If a person becomes a substantial shareholder of a corporation licensed under section 116 without the Commission’s prior approval under section 132(1)(a) by virtue of –

(a) a transfer of shares;

(b) an issue of shares; or

(c) a transfer of the right to be issued with shares,

then, unless and until the Commission approves the person to continue to be a substantial shareholder of the corporation under section 132(1)(b), the voting rights conferred by the shares concerned are not exercisable.

(5) A person who purportedly exercises any voting right that is not exercisable by virtue of subsection (4) commits an offence and is liable –

(a) on conviction on indictment to a fine of $200,000 and to imprisonment for 1 year; or

(b) on summary conviction to a fine at level 6 and to imprisonment for 6 months.

(6) It is a defence for a person charged with an offence under subsection (5) to prove that he –

(a) did not know; and

(b) could not have by the exercise of reasonable diligence known,

that the voting right which he purportedly exercised is by virtue of subsection (4) not exercisable.”

20.As noted by the judge, two offences are created in this provision, under section 131(2) and section 131(5).  They are regulatory offences for the protection of members of the public dealing with or using the services of a corporation licensed under section 116.  The statutory mechanism in section 131 requires the shareholder: (1) under sections 131(1) to (3), to seek the prior approval of the SFC to become a substantial shareholder; and (2) under sections 131(4) to (6), to seek the approval of the SFC to continue to be a substantial shareholder before exercising his voting rights, because the definition of “substantial shareholder” is tied to the voting rights which give him the relevant element of control over the licensed corporation.  Approvals are required from the SFC before becoming or continuing to be a substantial shareholder, so as to ensure that the licensed corporation will remain as a fit and proper person^[12].

21.Section 132 provides for SFC approval as follows:

“132. Approval to become or continue to be substantial shareholder

(1) The Commission may, upon application in the prescribed manner and payment of the prescribed fee, approve the applicant –

(a) to become; or

(b) to continue to be,

as the case may be, a substantial shareholder of a corporation licensed under section 116.

(2) The Commission shall refuse to approve an applicant to become or continue to be (as the case may be) a substantial shareholder of the licensed corporation concerned unless the applicant satisfies the Commission that the corporation will remain a fit and proper person to be licensed if the application is approved.

(3) An approval under subsection (1)(a) or (b) shall be subject to such reasonable conditions as the Commission may impose on the applicant and on the licensed corporation concerned, and the Commission may at any time, by notice in writing served on the approved substantial shareholder and the corporation, amend or revoke any such condition or impose new conditions as may be reasonable in the circumstances.

(4) Where the Commission by notice in writing amends or revokes any condition or imposes any new condition under subsection (3), the amendment, revocation or imposition takes effect at the time of the service of the notice or at the time specified in the notice, whichever is the later.

(5) Without limiting the generality of subsection (3), it shall be a condition of an approval under subsection (1)(a) or (b) that the approved substantial shareholder shall –

(a) at all times keep the Commission informed of particulars of his contact details including, in so far as applicable, his business address, residential address, telephone and facsimile numbers and electronic mail address; and

(b)  inform the Commission of any change in the particulars within 14 days after the change takes place.”

22.Section 133 provides for the power of the SFC to give directions and is material to the construction of section 131(4).  The relevant provisions in section 133 read as follows:

“133. Commission’s power to give directions

(1) Where a person became a substantial shareholder without the Commission’s prior approval under section 132(1)(a), whether or not he has applied under section 132(1)(b) for approval to continue to be such shareholder and regardless of whether such approval is granted or not, the Commission may by notice in writing direct the licensed corporation concerned —

(a) not to permit or acquiesce in the involvement of the person in the management of the business of the corporation;

(b) to deem void and of no effect any votes cast by the person and any of his associates (if any) at any meeting of the corporation;

(c) to reconvene any such meeting for voting anew on the business on which the votes were cast; and

(d) to take such other reasonable steps as it may specify in the notice.

(2) Without prejudice to the operation of subsection (1), where the Commission refuses to approve an application to continue to be a substantial shareholder made under section 132(1)(b), it may by notice in writing direct the applicant —

(a) to reduce, within such reasonable time as the Commission may require, the interest in shares by virtue of which he became a substantial shareholder of the licensed corporation concerned to the extent that he is no longer a substantial shareholder of the corporation; and

(b) to take such other reasonable steps as the Commission may specify in the notice.

(3) If a person fails to comply with any direction under subsection (1) or (2), the Commission may, by originating summons or originating motion, make an application to the Court of First Instance in respect of the failure, and the Court may inquire into the case and —

(a) if the Court is satisfied that there is no reasonable excuse for the person not to comply with the direction, order the person to comply with the direction within the period specified by the Court; and

(b)  if the Court is satisfied that the failure was without reasonable excuse, punish the person, and any other person knowingly involved in the failure, in the same manner as if he and, where applicable, that other person had been guilty of contempt of court.”

23.The judge reasoned that by virtue of section 133, it is open to the SFC inter alia to direct the licensed corporation to “deem void and of no effect any votes cast” by the shareholder who has not sought the prior approval of the SFC to becoming or continuing to be a substantial shareholder, hence absent such a direction from the SFC, that would suggest that the votes cast by the shareholder are not automatically deemed void and of no effect, contrary to the plaintiffs’ contention^[13].

24.The last provision that should be noted is section 213, which deals with injunctions and other orders.  The relevant parts of section 213 read as follows:

“213. Injunctions and other orders

(1) Where -

(a) a person has –

(i) contravened –

(A) any of the relevant provisions [which includes section 131];

(B) any notice or requirement given or made under or pursuant to any of the relevant provisions;

(C) any of the terms and conditions of any licence or registration under this Ordinance; or

(D) any other condition imposed under or pursuant to any provision of this Ordinance;

(ii) aided, abetted, or otherwise assisted, counselled or procured a person to commit any such contravention;

(iii) induced, whether by threats, promises or otherwise, a person to commit any such contravention;

(iv) directly or indirectly been in any way knowingly involved in, or a party to, any such contravention; or

(v) attempted, or conspired with others, to commit any such contravention; or

(b) it appears, whether or not during the course or as a result of the exercise of any power under Part VIII, to the Commission that any of the matters referred to in paragraph (a)(i) to (v) has occurred, is occurring or may occur,

the Court of First Instance, on the application of the Commission, may, subject to subsection (4), make one or more of the orders specified in subsection (2).

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

(a) an order restraining or prohibiting the occurrence or the continued occurrence of any of the matters referred to in subsection (1)(a)(i) to (v);

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

(c) an order restraining or prohibiting a person from acquiring, disposing of, or otherwise dealing in, any property specified in the order;

(d) an order appointing a person to administer the property of another person;

(e) an order declaring a contract relating to any securities, structured product, futures contract, leveraged foreign exchange contract, or an interest in any securities, structured product, futures contract, leveraged foreign exchange contract or collective investment scheme to be void or voidable to the extent specified in the order;

(f) for the purpose of securing compliance with any other order made under this section, an order directing a person to do or refrain from doing any act specified in the order;

(g)  any ancillary order which the Court of First Instance considers necessary in consequence of the making of any of the orders referred to in paragraphs (a) to (f).”

25.The judge made these remarks about section 213 with which we agree.  This provision creates a limited jurisdiction for the court to grant orders, on the application of the SFC.  As the SFC is the approval authority and the applicant under section 213, it is unlikely that the SFC will have resort to this provision unless (a) after due investigation, it has made a finding that a shareholder is a “substantial shareholder”; (b) that shareholder has declined to apply for approval under section 132(1) to continue to be a substantial shareholder; and (c) the SFC has considered whether to pursue criminal sanctions prescribed under section 131(5) to deter the substantial shareholder from acting in breach of section 131(4) in future^[14].

Relevant legal principles

26.Relevant principles on statutory interpretation and the principles on striking out applications are not in dispute.

27.In gist, the court adopts a contextual and purposive approach to statutory interpretation.  Words are given their natural and ordinary meaning.  The court cannot give a provision a meaning which the language, understood in the light of its context and purpose, cannot bear. The court should, if possible, give meaning to every word in the statute.  It should avoid results which are absurd, impracticable or unworkable.  The legislative framework and history form part of the context and the court may review background legislative materials in the course of ascertaining the legislative intent.  To purposively interpret a regulatory statute, the court should look at the reasoning behind the legislation, the harm the provision is designed to prevent or the good it is intended to engender, and interpret the provision in accordance with that aim.

28.The power to strike out is to be exercised only in plain and obvious cases.  Where the court comes to the conclusion after full argument that the case is plainly apt for striking out, it should not decline to do so merely because the issues are difficult or complicated.  Where the application to strike out is on the basis there is no reasonable cause of action, the facts pleaded in the claim must be assumed to be true.  Further, on any other basis for striking out, disputed facts are to be taken in favour of the party sought to be struck out.

29.In respect of the jurisdiction of the court to grant declaratory relief, there is no dispute that an applicant has to satisfy these requirements:

“(1) that he has a real interest in the subject matter of the declaration (the real issue requirement);

(2) that he has a real interest in obtaining a declaration against the adverse party (the real interest requirement); and

(3) that the adverse party is a proper contradictor (the proper contradictor requirement).”

30.See the judgment of Deputy High Court Judge To in Koo Ming Kown v Rev Mr Mok Kong Ting & Ors, HCA 2337/2016, 4 May 2018 at §20, in which the legal principles were summarised having considered a number of authorities including the decision of the English Court of Appeal in In re S (Hospital Patient: Court’s Jurisdiction) [1996] Fam 1^[15].

31.The judge further elaborated on the “real issue requirement” at §55 of the Judgment:

“As to what constitutes a “real interest in the subject matter of the declaration”, that means a real interest of a material character to be enforced or protected as opposed to a merely academic or hypothetical question or one raised out of curiosity.  Whether a plaintiff has shown an interest in the outcome of the proceedings is a question of fact.”

32.In ordering the plaintiffs’ claim to be struck out and dismissed on Ground (1), the judge came to the conclusion it is plain and obvious that neither of the plaintiffs can satisfy the “real issue requirement” as he decided against them on the factual question that neither has shown an interest in the outcome of the proceedings.  It follows that they cannot show a real interest in obtaining a declaration against Kwok and Chen (the “real interest requirement”), even if – which is logically open to doubt – Kwok and Chen are regarded as proper contradictors^[16].

33.We turn to consider the arguments advanced to challenge Grounds (1) to (3).

Ground (1): no real interest in seeking the declaratory reliefs

34.The judge did not find it helpful to be focused on whether there is a viable “cause of action” being asserted by the plaintiffs in the SFO Action, as whether there is a private right of action is just a different way of describing whether there is a statutory duty enforceable by individuals in a civil suit.  The real focus should be on whether there is a proper and sustainable basis for the plaintiffs to seek declaratory relief and the answer to this is to be found in the statutory regime^[17].  There was no or no serious dissent from this approach.  We agree with the judge.

35.The judge took the view that section 131 is purely an offence-creating section, creating two offences which are regulatory offences for the protection of members of the public dealing with or using the services of licensed corporations.  It is the SFC that is the enforcement authority.  There is nothing on the face of the statute to suggest that the offences are intended to regulate any private rights as between a licensed corporation and its shareholders, or as between the shareholders themselves.  That it is open to the SFC under section 133(1) to direct inter alia the licensed corporation to deem void and of no effect any votes cast by the person who has not sought the SFC’s prior approval to becoming or continuing to be a substantial shareholder indicates that the votes cast by that person are not automatically deemed void and of no effect. As for the court’s role, there is limited jurisdiction to make injunctions and other orders pursuant to section 213 on the application of the SFC and jurisdiction in judicial review to review the decision-making process of the SFC (as opposed to the merits of the decisions of the SFC)^[18]. 

36.The judge held that the words “not exercisable” in section 131(4), viewed in the context of the other provisions, do not mean that the shareholder cannot vote his shares in the sense that he has no voting rights.  These words only mean that the voting rights attached to the shares may not be exercised without exposing the shareholder to the risk of potential prosecution and criminal penalty under section 131(5) or a possible direction by the SFC under section 133(1)(b) that the votes purportedly cast be deemed void and of no effect^[19]. Other than the shareholder, it is the SFC as the regulator who has interest in ascertaining and ensuring whether the voting rights conferred by the shares concerned are exercisable or not.  The legal right to create the relevant interest as might found jurisdiction to grant a declaration is the right of the SFC to prosecute under section 131(5) or to deem void the votes purportedly cast when the voting right is not exercisable^[20].

37.The judge reasoned that by the declarations sought, the plaintiffs are essentially asking the court to confirm that the facts contended by them have brought sections 131 and 132 into play, under which the SFC (which is not bound by the declarations) may take further steps under sections 131(5), 133 and 213.  The court does not need to declare what the sections state, or what the sections bring into effect or permit by operation of their terms.  There are no legal rights really in issue and no practical purpose or utility in the declarations sought.  If the plaintiffs want any steps to be taken because of sections 131 and 132, they should look to the SFC as the regulator. It is not appropriate for the court to usurp the SFC’s role^[21].

38.Mr Wong took issue with the judge’s interpretation of section 131(4).  He contended that section 131 does not merely create two criminal offences; the effect of section 131(4) is to create a “substantive suspension” of voting rights.  In support of this “substantive effect interpretation” of section 131(4), and his contention that this provision should be widely construed to give effect to the wider legislative intent of self-regulation in the securities and futures industry for the protection of public investors, he referred to the legislative history and made these submissions:

(1)  The predecessor provisions of section 131(4), namely, section 26A(12) of the Securities and Futures Commission Ordinance, Cap 24 and section 14A(12) of the Leveraged Foreign Exchange Trading Ordinance, Cap 451, stipulated that if a person becomes a substantial shareholder without SFC approval, until the SFC approves the transfer of shares is “of no effect at law or in equity” and “voting rights are not exercisable for the shares”.  The new provision in the SFO removed the stipulation rendering the share transaction invalid and retained the stipulation regarding voting rights.  In the meeting of the Bills Committee on 10 July 2001, the Deputy Secretary for Financial Services referred to the predecessor provision in section 26A and stated:

“原有的限制就是，如果某人不是事先得到證監會的批准而成為大股東，有關的股份交易就會失效，該人也不可以行使投票權。經檢討後，我們覺得股份交易本身可能是合法的，很難讓它失效，對第三方的權益可能會產生不良的影響，所以我們覺得那部分的限制應該取消。其實，有關限制主要是針對不適合做大股東的有關人士，他們不應該參與這股票行的管理和制訂政策等工作。我們現在作出修訂後，限制集中在他不可以行使投票權。主要的修訂就是把限制的範圍收窄，股份在進行交易後會繼續有效，而證監會可能有方法發出指示，請他減持股份，若他不是持有10%的股權，就不是證監會規定的大股東。”

(2)  Mr Wong submitted it is apparent from the above statements that the purpose of the predecessor provisions was to prevent any unapproved person from participating in the management and operations of a licensed corporation through the exercise of shareholder power.  There was substantive bar against the exercise of voting rights under the old provisions.  The new provision merely removed invalidating the share transaction (as this was considered inappropriate) whilst fully retaining the prohibition on the exercise of voting rights, to ensure the same protection to public investors.

(3)  He also cited this statement of a legislator who chaired the Bills Committee meeting on 10 July 2001:

“我同意在他未經批准的前提下沒有投票權”

(4)  Reference was made to these statements of the Secretary for Financial Services at the meeting of the Legislative Council on 13 March 2002 in moving the amendments to clause 11^[22] of the Securities and Futures Bill:

“The financial market is regulated under a three-tier regulatory structure; namely, self-regulation by those in the market front line, market regulation by the SFC and the Government ensures effective regulation by the SFC and sufficient co-ordination with other regulatory organizations. Issuing directions to the SFC ensures the effective operation of the three-tier regulatory structure and minimizes market participants’ worries about the powers of the SFC.”

(5)  He submitted it is apparent from the above explanation of the Secretary for Financial Services that the regime under the SFO clearly envisages roles to be played not only by the SFC as regulator, but also by private individuals through self-regulation in the three-tier regulatory structure.  He also pointed to section 5(1) of the SFO which provides that one of the functions and powers of the SFC is to “promote and develop an appropriate degree of self-regulation in the securities and futures industry”.  Hence, the judge erred in regarding the SFC as the sole entity with the powers and standing to enforce rights and restrictions and to invoke the protections under the SFO.  Under the three-tier regulatory structure, as the first line of protection, the licensed corporation can rely on section 131(4) to “substantively resist” any attempt by an unapproved substantial shareholder to improperly exercise his voting rights.  The SFC, as the second line of protection, can invoke its overarching powers such as the power to bring criminal prosecution under section 131(5), to deem void the votes purportedly cast under section 133, or to seek injunctions and other orders from the court under section 213.

39.We do not agree with the above submissions.

40.Explanations given by a minister in promoting a bill are admissible for a limited purpose only, to enable the court to understand the factual context in which the statute was enacted and the mischief at which it was aimed.  This is not the same as treating the statements of the executive about the meaning and effect of the proposed legislation as reflecting the will of the legislature. (Director of Lands v Yin Shuen Enterprises Ltd & Anr (2003) 6 HKCFAR 1 at 15F to H; PCCW-HKT Telephone Ltd v Telecommunications Authority (2005) 8 HKCFAR 337 at §20)  Hence, the statements made by the Deputy Secretary for Financial Services at the Bills Committee meeting are only admissible to show that section 131(4) was aimed at restraining those who are unfit to be substantial shareholders from participating in the management and operations of a licensed corporation through the exercise of voting rights and that this provision was enacted for the protection of public investors dealing with licensed corporations.  The Deputy Secretary’s statements are inadmissible as to the meaning and effect of section 131(4).  As rightly submitted by Mr Shieh, it is a quantum leap to contend that because this is the mischief at which section 131(4) was aimed, the consequence is that any votes cast by an unapproved substantial shareholder would be invalidated.  Furthermore, the statement made by the chairman of the Bills Committee is plainly inadmissible. (PCCW-HKT Telephone Ltd v Telecommunications Authority at §27)

41.Nor do we think it particularly helpful to have regard to the predecessor provisions in aid of the construction of section 131(4).  Mr Shieh made a valid point that under the old provisions, if a person becomes a substantial shareholder without the SFC approval, the transfer of shares is “of no effect at law or in equity”.  If the transfer of shares is rendered void, any votes cast in exercise of the voting rights attached to the shares would be void as a matter of course.  There were no provisions in the old statutes similar to section 133(1)(b) of the SFO which conferred power on the SFC to direct the licensed corporation to deem void and of no effect any votes cast by the unapproved substantial shareholder.

42.As for the statements made by the Secretary for Financial Services at the Legislative Council meeting about self-regulation by those in the market front line as part of the three-tier regulatory structure and section 5(1) of the SFO, Mr Wong has sought to read far too much into these statements.  We agree with Mr Shieh that whilst the SFO might be designed to promote, among other things, an appropriate degree of self-regulation in the securities and futures industry, it simply means that market participants should be encouraged to act in compliance with the provisions of the SFO.  It does not mean that market participants should have the right to enforce section 131(4) of the SFO by seeking declaratory relief from the court, without regard to the other provisions of Part V and the statutory framework as a whole.

43.Mr Wong argued that the plain and ordinary meaning of the phrases in section 131(4) (“the voting rights conferred by the shares are not exercisable”) and in section 131(5) (“purportedly exercises any voting right that is not exercisable by virtue of subsection (4)”) is consistent with his “substantive effect interpretation” of section 131(4).  He submitted that the wording of “not exercisable” would be wholly superfluous if section 131 were merely to create two criminal offences.  And if that were so, the latter part of section 131(4) should be worded differently along the lines such as “unless and until the Commission approves the person to continue to be a substantial shareholder of the corporation under section 132(1)(b), any exercise by the person of voting rights conferred by the shares shall constitute an offence”, with section 131(5) spelling out the penalties for the offence created.

44.We do not agree with his submissions on the plain and ordinary meaning of “not exercisable” and “purportedly”.  As the judge has held, the words “not exercisable” of themselves do not remove the bundle of rights attached to the shares^[23]. We agree with the judge that viewed in the context of the other provisions, these words mean that the voting rights attaching to the shares may not be exercised without exposing the shareholder to the risk of potential prosecution and criminal penalty, or to a possible direction by the SFC that the votes purportedly cast be deemed void and of no effect^[24].  As for the word “purportedly”, it is consistent with doing something one is not supposed to do and does not necessarily connote invalidity, as rightly submitted by Mr Shieh.

45.There is no merit in Mr Wong’s contention that the latter part of section 131(4) would have to be worded differently if the legislative intent of section 131 is merely to create two criminal offences.  Mr Shieh has pointed to a number of examples in the SFO in which the drafting technique was used in first setting out what cannot be done in one provision, and then providing for the consequences in another provision^[25].  Properly construed, it is clear that section 131(4) provides for the prohibition of the relevant act (the exercise of voting rights attached to the shares of a substantial shareholder prior to SFC approval) and section 131(5) creates the offence for the prohibited act.  Section 131(4) does not have the effect of automatically invalidating the votes cast by the substantial shareholder.

46.Mr Wong further contended that the judge’s interpretation of section 131(4) (that it merely creates two criminal offences and the licensed corporation is unable to do anything except to make a complaint to the SFC) would give rise to impracticable, unworkable and absurd results.  It would be nonsensical to assume that the SFC is able to address every complaint brought to its attention.  The SFC may not be able to act immediately or quickly for a variety of reasons.  It would be highly difficult for an application for judicial review to be brought regarding the decision-making process of the SFC in taking no action or in not acting immediately or quickly.  And even if there are viable grounds for judicial review, significant time would have lapsed for the application for judicial review to be dealt with.  This would give rise to the unsatisfactory position that unapproved and unfit substantial shareholders would be left in control of licensed corporations for a long time, to the detriment of the corporations and the investing public, and this cannot be consistent with the aims of the SFO and section 131(4) in particular.  In contrast, the “substantive effect interpretation” of section 131(4) put forward by the plaintiffs would allow them to “self-help” by bringing the SFO Action, and thus alleviate the absurd and impracticable consequences.

47.We do not accept that the judge’s construction of section 131(4) would give rise to impracticable, unworkable and absurd results.  Mr Wong’s submissions are speculative with no factual basis in support.  There is no basis for the assumptions that the SFC would not take effective action or would be dilatory in dealing with complaints brought to its attention, or that a “self-help” court action would necessarily be speedier in obtaining redress.  To the contrary, if an interested party can come to court to ask for pronouncement of the validity of the votes cast or to be cast by a substantial shareholder, this would be usurping the role of the SFC as the regulator, which is conferred extensive powers to investigate and determine whether the shareholder is a substantial shareholder and whether the licensed corporation will remain as a fit and proper person, and if appropriate to take consequential actions.

48.The judge is clearly right in his interpretation of section 131(4). He has correctly taken into consideration other provisions in Part V and the statutory framework as a whole.  We have already mentioned section 131(5) (which provides that a person who purportedly exercises any voting right that is not exercisable by section 131(4) commits an offence is liable to a fine or imprisonment on conviction), section 133(1)(b) (which gives power to the SFC to direct the licensed corporation to deem void and of no effect any votes cast by the substantial shareholder and his associates), and section 213 (which creates a limited jurisdiction for the court to grant injunctions and other orders on the application of the SFC where there is contravention of the provisions of the SFO).  Section 133(3) should also be noted in that it provides the SFC may apply to court and the court may order the licensed corporation which has failed to comply with the SFC’s direction to do so and punish the person and any other person knowingly involved in the failure as if he had been guilty of contempt of court.

49.Viewed in context, the offence created in section 131(5) is for the protection of members of the public who have dealings with or use the services of a licensed corporation.  The licensed corporation, being the regulated entity, is not within the class of protected persons envisaged by this provision, as emphasised by Mr Mok and Mr Shieh.  As an aside, Convoy is not even a licensed corporation and it owns CSL through four layers of subsidiaries.  Quite clearly, it is for the SFC, as the regulatory and enforcement authority, to take action for the contravention of section 131(4) to protect public investors; such action would include the options under sections 131(5), 133(1)(b), 133(3) and 213.

50.Mr Mok referred us to provisions in the SFO which expressly stipulate the creation of civil right of action corresponding to the criminal offences in favour of any interested person (sections 108, 281, 305, 307Z and 391), in stark contrast with the above mentioned provisions in Part V. Where the statute provides some other method of enforcing the duty, that will normally indicate that the duty was intended to be enforceable by that method alone, and not by private right of action. (Bennion on Statutory Interpretation (8^th ed), pp 343 to 344, 346)

51.The alleged “real interest” the plaintiffs have in seeking declaratory relief mentioned in §56 of the Judgment and §1.2(b) of the Notice of Appeal is either speculative (such as the risk of being subject to regulatory action or criminal prosecution) or not based on any legal right (such as the interest to safeguard Convoy’s investigative efforts into past wrongdoings of directors by pre-empting the defendants’ right to vote).  Any interest Convoy may have in ascertaining where it stands as regards the validity of the voting rights of the defendants can be resolved in civil proceedings (such as the Main Action and other related proceedings brought by Convoy) without invoking section 131(4).

52.In our judgment, the judge has correctly construed section 131(4) after full argument and rightly concluded that there is no proper and sustainable basis to seek declaratory relief as there are no legal rights really in issue.  The exercise of his discretion to strike out and dismiss the SFO Action on Ground (1) cannot be faulted.

Ground (2): impermissible declarations of criminality

53.The judge held that the declarations as sought (that the defendants have contravened sections 131(1) and (4)) would in effect amount to declarations as to criminality, once it is understood that the purpose of section 131 is to create the offences.  Applying the established principles (which are not in dispute)^[26] that civil courts would normally refuse declaratory relief that certain conduct amounts to criminal conduct and should be wary of embarking on this jurisdiction when (1) it involves existing, and not merely prospective future conduct; (2) what is sought is a declaration of criminality rather than non-criminality; and (3) the facts are in issue, the judge decided to strike out the SFO Action also on the ground that a civil court would decline to exercise its jurisdiction to grant declaratory relief in this situation^[27].

54.Mr Wong argued that if his “substantive effect interpretation” of section 131(4) is correct, it follows that the judge was in error in Ground (2).  We have rejected the “substantive effect interpretation” of section 131(4).  In any event, the declarations sought to declare that the defendants have contravened sections 131(1) and (4).  A person who contravenes sections 131(1) and (4) commits an offence under sections 131(2) and (5).  They are plainly declarations of criminality.

55.Mr Wong repeated his submissions before the judge that the declarations sought are just declarations of fact in civil proceedings with civil law consequences, with only incidental overlap of elements and have no effect on criminal proceedings.  He prayed in aid the statements of Lord Hoffmann NPJ in SFC v Tiger Asia Management LLC (2013) 16 HKCFAR 324 at §17:

“But the SFC is not seeking a declaration that Tiger has committed a criminal offence. It is seeking a declaration that it has done acts which found the jurisdiction under s.213 but which also happen to be criminal offences. The question of whether Tiger has committed a criminal offence remains entirely a matter for the criminal court. There is no question of the civil court’s declaration being admitted or in any way influencing a criminal trial. If there were a prospect of such a trial, the court would have jurisdiction to put in place protective measures to ensure that publication of material arising in the civil proceedings did not prejudice the accused. The effect of a declaration by the Court of First Instance under s.213 that Tiger has contravened the prohibition on insider dealing is therefore no different from a finding by a civil court that Tiger is liable on the same grounds for damages under s.305.”

56.In light of how the declarations are worded, we do not think they could be said to be just declarations of fact in civil proceedings with civil law consequences.  Nor do we think the statements of Lord Hoffmann would assist the plaintiffs.  As Lord Hoffmann had said, the SFC was not seeking a declaration that Tiger had committed a criminal offence, but a declaration that Tiger had done acts which found jurisdiction under section 213, which also happened to be criminal offences under some other provisions of the SFO.  Section 213 does not give rise to criminal consequences.  In the present situation, the plaintiffs are not merely seeking declarations that the defendants had done certain acts or of the legal effect of those acts but are seeking declarations that the defendants have contravened sections 131(1) and (4) and such contravention would amount to the commission of criminal offences.

57.Insofar as the plaintiffs have sought to argue that the terms of the declaration could be subject to review and amendment by the trial judge, this must be rejected.  The plaintiffs have not even proposed any amendment to the declaratory relief sought.

58.There is no basis to challenge the judge’s decision that the SFO Action should be struck out and dismissed on Ground (2).

Ground (3): abuse of process

59.The judge also held it was an abuse of process to bring the SFO Action relying on the same factual averments which are already included in the Main Action^[28].

60.Mr Wong argued that if the “substantive effect interpretation” of section 131(4) is correct, the judge had also erred in Ground (3).  We have held that the “substantive effect interpretation” is not correct.  Ground (3) is separate and distinct and does not depend on how section 131(4) is to be interpreted.

61.Mr Wong submitted that two causes of action can only be said to be the same if the material facts required to establish them are the same.  In the present case, whilst the particulars and evidence relied on in the Main Action heavily overlap with the SFO Action, the causes of action are different.  The causes of action in the Main Action arise from fraud, conspiracy, dishonest assistance etc.  In the SFO Action, declaratory relief is sought based on the substantive effect of section 131(4).  As there is no overlap in the causes of action, there is no abuse of process.

62.A cause of action is a factual situation which can give rise to a remedy. (Letang v Cooper [1965] 1 QB 232 at 242G to 243A)  It is clear that the same factual situation has been pleaded and asserted in the Main Action and the SFO Action.  As mentioned in §89 of the Judgment, a substantial portion of the statement of claim in the SFO Action was copied from the statement of claim in the Main Action.  The plaintiffs claim the same relief in both actions to restrain the defendants from exercising the voting rights attached to the 37% Stake.  It is immaterial that additional facts have been relied on to sustain the causes of action of fraud, conspiracy, dishonest assistance in the Main Action.  We agree with Mr Shieh it is an abuse of process to bring the SFO Action relying only on some of facts already pleaded in the Main Action, as the narrower factual situation has already been asserted and it would have been open to the plaintiffs to claim in the Main Action the reliefs sought in the SFO Action. 

63.There is nothing in Mr Wong’s contention that any risk of inconsistent findings due to the overlap in particulars and evidence can be dealt with by having the two actions tried together.  There would be no saving in time and costs in that eventuality, and it does not answer the question why the SFO Action needs to be brought at all.

Conclusion

64.For the reasons given above, we have dismissed the appeal. The judge is correct in ordering the SFO Action to be struck out and dismissed on each of Grounds (1) to (3).

Mr William Wong SC, Mr Christopher Chain, Mr Avery Chan and Mr Lai Chun Ho, instructed by Charles Chu & Kenneth Sit, for the Plaintiffs (Appellants)

Mr Johnny Mok SC and Ms Frances Lok, instructed by Zhong Lun Law Firm LLP and Mr Frederick Hui, solicitor advocate of Zhong Lun Law Firm LLP, for the 1^st Defendant (1^st Respondent)

Mr Paul Shieh SC and Mr James Man, instructed by So, Lung & Associates, for the 2^nd Defendant (2^nd Respondent)