Securities and Futures Commission v. Isidor Subotic and Others
Read the full judgment text of CACV 510/2021 on BabelCite. This Court of Appeal judgment was delivered on 30 December 2022.
1. In the first quarter of 2016, a company called Ching Lee Holdings Ltd (“the Company”) proposed a listing on the Growth Enterprise Market of the Hong Kong Stock Exchange by the placement of 300,000,000 shares in an initial public offering. Trading commenced on 29 March 2016.
Cites 6 cases
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CACV 510/2021 [2022] HKCA 1909 CACV 510/2021 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF APPEAL CIVIL APPEAL NO 510 OF 2021 (ON APPEAL FROM HCA NO 1277 OF 2019) __________________________________
__________________________ AND CAMP 530/2021 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF APPEAL MISCELLANEOUS PROCEEDINGS NO 530 OF 2021 (ON AN INTENDED APPEAL FROM HCA NO 1277 OF 2019) ________________________
________________________ (Heard Together) Before: Hon Yuen and Au JJA in Court Date of Hearing: 24 June 2022 Date of Judgment: 30 December 2022 ___________________ J U D G M E N T ___________________ Hon Yuen JA (giving the Judgment of the Court): Background 1.In the first quarter of 2016, a company called Ching Lee Holdings Ltd (“the Company”) proposed a listing on the Growth Enterprise Market of the Hong Kong Stock Exchange by the placement of 300,000,000 shares in an initial public offering. Trading commenced on 29 March 2016. 2.1. The Securities and Futures Commission (“SFC”) alleges that from February to September 2016, a number of individuals and companies (“the Syndicate”) acted together in a scheme (“the Scheme”) to carry out false trading in the shares, and/or to create or maintain an artificial price for them, in contravention of s.274(1) and s.274 (3)1 respectively of the Securities and Futures Ordinance Cap.571 (“SFO” or “the Ordinance”). 2.2. The SFC alleges that the Syndicate or their nominees
2.3. The SFC says that as a result of the Scheme,
The Action 3.In HCA1277/2019 (“the Action”)2, the SFC brought proceedings against 18 defendants3 who are alleged to be members of the Syndicate, asserting that they had contravened the SFO4. The proceedings were brought under s.213 SFO. Section 213 SFO 4.The material parts of s.213 SFO for the purposes of this appeal are summarized below. ss.(1)
ss.(2) (2) The orders are:
ss.(3A)
ss.(4)
ss.(6)
ss.(7)
ss.(8)
ss.(9)
Claims/relief 5.The following, in summary, were sought in the RASOC:
The Eastmore defendants 6.The matters before this court involve only the 2nd, 3rd, 13th, 14th, 18th and 19th defendants (“the Eastmore defendants”). The 2nd defendant is a national of Canada, and the 3rd defendant is a national of the United States. The 13th defendant is incorporated in the Cayman Islands, the 14th and 19th defendants are incorporated in Delaware, USA, and the 18th defendant is incorporated in the Republic of Seychelles. It was therefore necessary to serve them out of the jurisdiction. Affirmation in support of application for service out 7.On 11 July 2019, Ma Wing Shan, a Senior Manager in the Enforcement Division of the SFC, made an affirmation6 of 100 pages in support of its application for service out on the Eastmore defendants. In the affirmation, Ma stated on the basis of the exhibited documents that there was strong evidence to show that each of the defendants “has contravened”7 s.274 and/or s.2958. DHCJ Liu’s Order 8.On 15 July 2019, the SFC applied ex parte before DHCJ Liu (“the deputy judge”) for leave to serve the Eastmore defendants out of the jurisdiction under Order 11 rule 1(1)(f) (“Gateway F”9) and rule 1(1)(b) (“Gateway B”10) of the Rules of the High Court (“RHC”). The deputy judge gave an order:
Gateway F 9.1. This gateway under Order 11 rule 1 provides that service of a writ out of the jurisdiction is permissible with the leave of the Court if in the action begun by the writ –
Gateway B 9.2. Gateway B provides that service of a writ out of the jurisdiction is permissible with the leave of the Court if in the action begun by the writ –
Subsequent applications to the Court 10.1. There were a number of subsequent applications to the Court, including the following.
Gateway C 10.2. Gateway C provides that service out of the jurisdiction is permissible with the leave of the Court if in the action begun by the writ –
The Main Decision 11.1. The Set Aside application and the Gateway C application, together with another application which is immaterial to this appeal, were heard on 19 March 2021 by Au-Yeung J (“the judge”). 11.2. On 23 July 2021, the judge gave a detailed Decision (“the Main Decision”)13 holding that the SFC had demonstrated a good arguable case for service out of the jurisdiction on the Eastmore defendants under both Gateways F and B. Accordingly, she dismissed the Set Aside application. 11.3. In those circumstances, it was not necessary for the judge to consider the Gateway C application. Nevertheless, the judge held that she would not have exercised her discretion to give leave, as the SFC had not applied to extend the validity of the writ (which had not expired at the time when the Gateway C application was filed, but had expired by the time of the hearing), and had not properly supported it with affidavit evidence. Eastmore defendants’ application to CFI for leave to appeal 12.1. On 6 August 2021, the Eastmore defendants issued a summons in the Court of First Instance for leave to appeal the Main Decision, and for a stay of proceedings pending determination of the appeal. 12.2. A draft notice of appeal containing 7 grounds was attached. Grounds (2) to (6) dealt with Gateway F. Ground (7) dealt with Gateway B. Ground (8) was a “wrap-up” ground for the contention that no gateway at all is available for regulatory enforcement claims under the SFO. The judge’s Leave to Appeal Decision 13.After written submissions were filed by both sides, the judge gave a decision on 8 November 2021 (“the Leave to Appeal Decision”) in which she gave leave to appeal only for Grounds (2) - (5), i.e. in relation to Gateway F. The judge declined to grant a stay. Eastmore defendants’ appeal in CACV510/2021 14.1. Pursuant to the leave given by the judge, on 17 November 2021, a Notice of Appeal was filed in CACV510/2021. 14.2. We note that the text in some of the grounds in the Notice of Appeal are different from those for which the judge gave leave. In Grounds (2) and (3) of the Notice of Appeal, the word “Applications” has been substituted for the word “Claims”. Presumably, the substituted word was thought to be more consistent with the Eastmore defendants’ argument that the SFC can only make “applications” under s.213 SFO and does not have “claims” as such. Nevertheless, any changes made to grounds of appeal for which a first instance judge has given leave should have been made the subject of amendments, and should not have been “slipped in” without prior notice to the other party and the court. 14.3. On 1 December 2021, the SFC filed a Respondent’s Notice to affirm the Main Decision on the ground that once leave is obtained under Gateway B, such leave is for the entire action regardless of whether it also obtained leave under Gateway F. Eastmore defendants’ renewed application for leave to appeal in CAMP 530/2021 15.On 22 November 2021, the Eastmore defendants filed a summons in this court in CAMP530/2021 for leave to appeal on the grounds rejected by the judge. Directions 16.On 24 February 2022, the court gave directions for the hearing of CACV510 and a “rolled-up” hearing of the application for leave to appeal in CAMP530. SFC’s draft application 17.Before the hearing, on 10 June 2022 the court received a copy of a letter from the SFC to the solicitors for the Eastmore defendants indicating that in the event that the appeal is allowed, the SFC would apply for a new injunction against the 2nd, 3th, 14th and 19th defendants, and suggesting certain directions. The correspondence was accompanied by a draft summons applying for leave to serve out under Gateway C. Issues before this court 18.In short, the issues before this court were:
If the Eastmore defendants succeed on issues (a) and (b), then this court would have to consider whether to give leave to the SFC to serve out under Gateway C. Discussion Legal principles to be applied in applications for service out of the jurisdiction 19.1. In Fong Chak Kwan v Ascentic Ltd and others 14, one of the issues before the Court of Final Appeal (“CFA”) was whether the critical consideration in interpreting Gateway F was:
19.2. Lord Collins (with whom the rest of the court agreed) held that the gateways should be construed in their natural and ordinary meaning. He held:
19.3. Thus, when the court construes the gateways, it should not superimpose an additional requirement of a “real” or “substantial” connection between the foreign defendant and Hong Kong. It will give permission to serve out of the jurisdiction if there is a good arguable case that a claim passes through a gateway (within both the letter and the spirit [§117]) and it is shown that Hong Kong is the proper place to bring the claim [§112]. As for the merits, the court would have to be satisfied that there is a serious issue to be tried. This is the approach to be applied to all applications for service out of the jurisdiction. Power to serve proceedings under s.213 out of the jurisdiction 20.1. We will deal first with the overarching argument15 of Mr Alder, counsel for the Eastmore defendants, that there is no power under existing legislation to effect service out of the jurisdiction of an originating process issued pursuant to section 213 SFO. 20.2. This argument is based on a passage in the judgment of Kwan J (as she then was) in SFC v C16(the title of which case was changed to Kayden in the CFA17) where she said:
20.3. In Kayden, the proceedings, based on s.213, were commenced by the SFC by way of originating summons (“OS”). There were four defendants, Kayden (a BVI company) being the 4th defendant. Kwan J was persuaded to give an ex parte order for service out on Kayden under Gateway B, but later discharged the order at the inter partes stage, not only for material non-disclosure, but also on the ground that the case was outside the scope of Gateway B. 20.4. The Court of Appeal18 allowed the appeal from Kwan J on new grounds. The matter then went to the CFA which overturned the Court of Appeal on the new grounds and restored Kwan J’s order. 20.5. However, the following aspects of that case (set out in the CFA Judgment) are relevant to the proper understanding of §55 in Kwan J’s judgment on which Mr Alder relies:
21.1. It would be noted from the above that by “keeping open” the question referred to above, the CFA did not adopt Kwan J’s view in §55 (if that view is construed broadly to mean that there was a lacuna in the legislation to effect service out of all proceedings based on s.213 SFO, whatever the relief - interim or final - sought in those proceedings). The CFA expressly said that Kayden “was not the occasion for pronouncing on the point raised by Lord Pannick QC for the [SFC] on the true construction and therefore scope of s.213 of the [SFO] ...” [§2]20. 21.2. In any event, we do not consider that §55 of Kwan J’s judgment in Kayden should be construed so broadly. Kwan J was faced with a case where the SFC only sought interim relief in the OS, with the result that, it was simply not permissible for the court to give leave to serve out under Gateway B (Mercedes Benz v Leiduck). At §63, the judge said “I reach my decision with regret that this court cannot properly give leave to serve the [OS] on the 1st, 3rd and 4th defendants out of the jurisdiction under [Gateway B], but I have no discretion in the matter” [§63]. It was in the context of the interim nature of the relief sought that she drew a comparison with the Arbitration Ordinance, for which Order 73 r.7 RHC provides:
21.3. So understood, it is clear that Kwan J was not holding that under no circumstances could proceedings under s.213 SFO be served out of the jurisdiction, and §55 of her judgment should be understood to refer to cases where interim relief only was sought. In the present case, the RASOC clearly contains claims for final and substantive relief. Leave to serve out under Gateway F 22.Gateway F applies to a claim which is founded on a tort. 23.1. The Eastmore defendants do not dispute the judge’s summary21 of the characteristics of torts, including statutory torts, of which the following are material in the present case:
23.2. The elements emphasized above which are the primary ingredients of a tort are found in s.213. In particular, ss.(8) expressly provides for a claim for unliquidated damages. 24.1. The nub of the Eastmore defendants’ argument is that s.213 SFO does not empower the SFC, which is a regulator and not a market investor, to make a claim founded on a tort. We do not agree. First, purely as a matter of construction, ss.(1) stipulates that the SFC is the only entity that is empowered to make an application under s.213. And yet where the court has power to make an order against a person under ss.(1) or ss.(3A), the court expressly has power under ss.(8) to order23 damages to be paid to “any other person”. The wording of s.213 as a whole makes it clear that the “other person” does not refer to the SFC. Since that “other person” cannot claim damages by making an application under s.213 SFO himself, it follows that such a claim could only be made through the SFC, otherwise ss.(8) would be rendered completely meaningless. Accordingly, s.213 clearly entitles the SFC to make a claim for ss.(8) damages on behalf of the “other person(s)”, being in the present case, the market investors and the lenders. 24.2. Further, in Tiger Asia, the Court of Appeal held that there may be circumstances when proceedings may be taken by the SFC for the benefit of investors, citing as an example, executory contracts which the court may declare void under ss.(2)(e)24. The Court of Appeal and the CFA in that case rejected the arguments that the court had jurisdiction under s.213 only where the defendant has been found by a criminal court or the Market Misconduct Tribunal to have contravened provisions in the SFO. 24.3. Lord Hoffmann held:
25.1. Mr Alder argued that the use of the word “may” in ss.(1) and what he called the “smorgasbord of remedies” under s.213 militate against the claim being founded on a tort. 25.2. We do not agree. First, ss.(1) gives the court powers to make one or more of the orders in ss.(2). Some of those orders are discretionary in nature, hence the need to use the word “may” in ss.(1). In any event, even reading the word “may” as giving the court a discretion in relation to the making of all the orders in ss.(2), it would be difficult to envisage a situation where ss.(1) and ss.(4)27 would result in a court exercising a discretion not to order damages if the ingredients of a statutory tort are found to exist. The court has held that “the width of the section and of the powers it confers on the court are ‘characterised by their extreme flexibility’ and ‘should not be judicially cut down’”28. It would be ironic if such width and flexibility had the contrary effect of negating or nullifying the ingredients of a tort which the court has found to exist and which would otherwise result in liability. 25.3. In Lew, the court held: [§181]
26.1. The Eastmore defendants do not dispute for present purposes that:
26.2. In Tiger Asia, the Court of Appeal held34 that s.213 was complementary to the civil liabilities created by s.281 and s.305. It would be illogical if claims under s.281 or s.305 brought by individual market investors would pass through Gateway F, but claims brought for their benefit by the SFC under s.213 would not. As G Lam J said in Qunxing35:
27.In respect of the other elements of the jurisdictional test, the Eastmore defendants also do not dispute that:
28.As for the merits of the case, the Eastmore defendants also accept for present purposes that the RASOC raises a serious issue to be tried against each of them (but excluding entitlement to remedies)39. 29.1. Finally, we agree with the judge that leave to appeal should not be given for Ground (6), in which the Eastmore defendants argue that there was no finding that the contraventions of the individual defendants took place in Hong Kong, and the court should not have “grafted” common law concepts of joint tortfeasorship or conspiracy onto the claim under the SFO. If that argument is correct, then it would have been necessary for the SFC to establish a good arguable case that the double actionability rule was satisfied. 29.2. First, s.213(1)(v) refers expressly to a conspiracy, but contains no specific definition of the term. As such, the judge was clearly entitled to adopt the common law concept of conspiracy. Further, as the judge held in the Leave to Appeal Decision, she had considered in substance where the conspiracy was committed and found that it was in Hong Kong [§§99-100 of the Main Decision]. There is no challenge to the principles applied by the judge at §§94-98 of the Main Decision before arriving at that view. 30.For the reasons set out above, we reject the arguments of the Eastmore defendants that the claim was not founded in tort and we see no error in the judge’s grant of leave to serve out under Gateway F. Leave to serve out under Gateway B 31.The judge refused to give leave to appeal against her decision to give leave under Gateway B. The Eastmore defendants argued that the SFC had adduced no evidence to show a continuing breach or risk of further breach by them, and that the injunction sought was lacking in specificity. 32.It is clear from the Main Decision that the judge was well aware that an injunction would only be granted if the court finds that there is an appreciable risk of future conduct by the defendants [§103], and that the court would not grant an injunction that was too wide or ill-defined or which sought to restrain conduct outside the jurisdiction [§105]. The judge was also well aware of the Eastmore defendants’ arguments but rejected them for the reasons set out in §§109-118. 33.1. In their renewed application for leave to appeal, the Eastmore defendants are challenging the judge’s evaluative assessment of the evidence. In AmTrust Europe Ltd v Trust Risk Group SpA40, the UK Court of Appeal explained the reason for circumspection by an appellate court in its approach to a first instance judge’s assessment of the merits at the interlocutory stage of a jurisdictional challenge [§32]. Even in a case of an appeal from the judge’s construction of a contract, the appeal court held that at the interlocutory stage, the question is not “what does the contract mean” but “who has much the better of the argument” [§35]. Some circumspection is needed even where the decision is one to which there can only be one correct answer [§42]. In the present case, there was evidence on the scale and sophistication shown in the Scheme in which the Eastmore defendants are alleged to have played important roles. There was evidence entitling the judge to take the view that an injunction was required to restrain such activities41. 33.2. In challenges to jurisdiction, “the interlocutory stage must not become a trial”. If less circumspection is shown at the appellate stage of what remains an interlocutory process stage, first instances judges may be led to an approach “which is closer to a determination of the issue than is required by the application of the test” of who has the better argument [§38]. 33.3. Applying this approach, it is clear that this court should not give leave to appeal on Gateway B as the proposed appeal has no reasonable prospect of success and there is no other reason in the interests of justice why it should be heard. Disposition 34.In light of our conclusion on Gateways F and B, it is not necessary to deal with the SFC’s Respondent’s Notice or its draft application on Gateway C. The appeal in CACV 510/2021 and the summons in CAMP530/2021 are dismissed. It follows that the application for a stay is also dismissed. We would make an order nisi that the Eastmore defendants pay the SFC’s costs with certificate for two counsel. As this was a hearing of the appeal together with the application for leave to appeal, we would order costs to be taxed rather than attempt a summary assessment.
Mr Bernard Man SC and Ms Sheena Wong, instructed by Securities and Futures Commission, for the plaintiff Mr Edward Alder, instructed by MinterEllison LLP, for the 2nd, 3rd, 13th, 14th, 18th and 19th defendants 1 And s.295, which makes the contraventions an offence. 2 Writ issued on 16 July 2019, Re-Amended Statement of Claim (“RASOC”) filed on 8 January 2021. 3 The action has been discontinued against the 16th defendant and the 20th defendant. 4 RASOC, Section F. 5 See definition of “relevant provisions” in Schedule1, Part 1, SFO. 6 Filed on 16 July 2019. 7 This places the SFC’s case under s.213(1)(a) SFO, to be contrasted with the situation in Kayden Ltd v SFC (2010) 13 HKCFAR 696 (“Kayden”), in which the SFC was not seeking to prove a contravention, but was seeking an injunction on only the “appearance” or “suspicion” basis under s.213(1)(b) SFO [§26]. 8 Ma Wing Shan I, §§6, 189. 9 Set out below. 10 Set out below. 11 Not including the 3rd and 18th defendants. 12 Set out below. 14 [2022] HKCFA 12, delivered after the Main Decision. 15 Which the judge regarded as arguable, resulting in leave to appeal being given (Leave to Appeal Decision §10). 16 HCMP727/2008, 22 October 2008. 17 [2011] 2 HKC 44. 18 CACV319/2008, 22 May 2009, Le Pichon JA and A Cheung JA (as he then was). 19 [1996] 1 AC 284, 301. 20 The CFA subsequently affirmed in SFC v Tiger Asia Management LLC (2013) 16 HKCFAR 324 the judgment of the Court of Appeal (Tang VP, Kwan and Fok JJA) [2012] 2 HKLRD 281 that the orders in s.213(2) were final relief which the CFI had jurisdiction to give. 21 Main Decision, §65. 22 Lew Footwear Holdings Pty Ltd v Madden International Ltd [2014] VSC 320. 23 In addition to, or in substitution for, any order under ss.(1) or ss.(3A). 24 [§24]. 25 In the context, this does not mean that s.213 is a remedy in the technical “public law” sense. 26 [§16]. 27 As G Lam J (as he then was) remarked in SFC v Qunxing Paper Holdings Co Ltd (No.2) [2018] 1 HKLRD 1060, “desirability and fairness are highly general concepts which do not lend themselves to definition or precise exposition” [§57]. 28 Qunxing, §54. 29 Main Decision, §47. 30 Civil liability of persons who had committed market misconduct to pay compensation to persons who have sustained losses. 31 Civil liability of persons involved in insider dealing to pay compensation to persons who have sustained losses. 32 Civil liability of persons involved in false or misleading public communications to pay compensation to persons who have sustained losses. 33 Eastmore Defendants’ Skeleton Argument §9(5). 34 [§35]. 35 [§49]. 36 Eastmore Defendants’ Skeleton Argument §4. 37 Eastmore Defendants’ Skeleton Argument §4. 38 Main Decision, §47. 39 Main Decision, §47. 40 [2015] EWCA Civ 437. 41 Ma Wing Shan III, §181.3. |
Cases cited in this judgment
Further hearings and rulings under CACV 510/2021