Mak Kwong Yiu and Others

[English Translation - 英譯本]

CACC 239/2021, [2024] HKCA 217

ON APPEAL FROM: [2021] HKDC 1196

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CRIMINAL APPEAL NO 239 OF 2021

(ON APPEAL FROM DCCC NO 657 OF 2019)

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JUDGMENT

Hon Anthea Pang JA (giving the Judgment of the Court):

I Introduction

1.On 20 September 2021, the four applicants (D1 to D4) were convicted after trial by Deputy District Judge Newman Wong (“the trial judge”) of the following charges:

Conspiracy to defraud[1] (1^st Charge)[2]

Particulars of Offence

[D1], [D2], [D3] and [D4], between the 1^st day of June 2014 and the 27^th day of April 2017, both dates inclusive, in Hong Kong, conspired together to defraud Convoy Financial Services Holdings Limited later renamed as Convoy Financial Holdings Limited (“1019”), its Board of Directors, shareholders, and potential investors by dishonestly:

(i)    causing [1019] to enter into agreements with Gransing Securities Co., Ltd. (“Gransing”) to purportedly engage Gransing as the placing agent for the placement of bonds to be issued by [1019];

(ii)   arranging Gransing to enter into agreements with Convoy Investment Services Limited (“CIS”) to purportedly engage [CIS] as the sub-placing agent of the said bonds;

(iii)  concealing or failing to disclose that [CIS] was the actual placing agent of the said bonds; and

(iv)  causing [CIS] to be paid a total commission of $49,600,680 Hong Kong currency for the said placement of the bonds.

Conspiracy to defraud (3^rd Charge)

Particulars of Offence

[D1], [D2] and [D3], between around the 1^st day of June 2014 and the 31^st day of January 2016, both dates inclusive, in Hong Kong, conspired together to defraud The Stock Exchange of Hong Kong Limited (“SEHK”) by dishonestly concealing that [CIS] was the actual placing agent for the placement of bonds to be issued by [1019]; thereby causing SEHK not to:

(i)    raise any enquiries in relation to the said placement of the bonds with [1019]; and

(ii)   request [1019] to comply with the relevant rules governing the listing of securities on SEHK.

2.All four applicants applied for leave to appeal against conviction.

II  Background

3.This case arose from bonds issued by 1019 on four occasions between 2014 and 2015.

4.Gransing was the placing agent on the four occasions while CIS was Gransing’s sub-placing agent (“the arrangement”). At the material time, D1 was an executive director of 1019; D2 was the financial controller/chief financial officer of the 1019 Group; D3 was a manager/senior manager of the Finance and Accounts Department of the 1019 Group; and D4 was the general manager of Gransing (a licensed corporation under the Securities and Futures Commission).

5.CIS was not a subsidiary of 1019, but at the time of the offences, D1 was a director of CIS whereas D1 and two other executive directors of 1019 [Wong, Lee Man Quincy (“Quincy Wong”) and Fong, Sut Sam Rosetta] all indirectly held shares in CIS. There is no dispute that due to the amount of shareholding Quincy Wong had in CIS, CIS was a connected person of 1019. In other words, if there was a direct transaction between 1019 and CIS, the transaction would be a connected transaction.

6.In this case, the prosecution mainly relied on the testimony of PW1, the Accounting Manager of CIS, the WhatsApp messages between D2 and D3 and the relevant emails and documentary evidence to prove the existence of a conspiracy.  PW1 said that back in June 2014, D1 already indicated that Gransing would act as the placing agent for 1019’s issuance of bonds and CIS would be the sub-placing agent. As to the WhatsApp messages between D2 and D3, they referred to the use of Gransing as a “buffer” and also to “CT”. (The prosecution submitted that CT stands for connected transaction. The defence had no dispute in this regard but stated that the CT was not about the placing agent arrangement between 1019 and CIS. Instead, it related to another company.)

7.In a nutshell, the prosecution case was that, right from the start, D1 had intended to have CIS as the placing agent; however, as D1 was worried that connected transactions were involved, he decided to use Gransing as a cloak to avoid the need to follow the relevant provisions of the Listing Rules on connected transactions. Towards that end, D1 concealed the truth and D2 to D4 were knowing participants who assisted in the concealment.

8.D1 to D4 elected not to testify. Their position was that, in view of the evidence in this case, the prosecution had failed to prove any of the elements of the offence.

III.  Grounds of appeal

9.The four applicants raised altogether 24 grounds of appeal, but the main complaints can be summarised as follows:

(1)  The trial judge erred in finding that the arrangement constituted a connected transaction or a continuing connected transaction;

(2)  The trial judge erred in finding that Gransing was a cloak, or that the applicants were guilty when there was not any finding that the arrangement amongst the three parties was a sham; and

(3)  The trial judge erred in finding that the arrangement resulted in prejudice to the interests of the company’s shareholders and potential investors, or caused them to suffer economic loss, or led to failure on the part of SEHK to perform its duties.

IV  Major issues

10.Although in this case the prosecution summoned 15 witnesses to testify before the court, read the evidence of four witnesses pursuant to Section 65B of the Criminal Procedure Ordinance, Cap 221, and submitted over 10,000 pages of documentary exhibits, and the trial judge compiled a 74-page Reasons for Verdict, as a matter of fact, if the following issues are resolved, the other related matters are basically undisputable:

(1)  “Did the arrangement constitute a connected transaction or could it be deemed a connected transaction?”; and

(2)  “Was conflict of interest alone sufficient to constitute the basis for conviction of the offence of conspiracy to defraud in this case?”

A  Connected transactions

A1  The prosecution case

11.The prosecution case seems nebulous. During the closing submissions and the hearing of this appeal, the prosecution insisted on the one hand that there was no need to prove that the arrangement was a connected transaction, but on the other hand, they submitted that they had successfully proved that the arrangement was a connected transaction.

12.The former contention is based on the fact that the prosecution did not specify in the particulars of the offence that the arrangement was a connected transaction, unlike what was done in HKSAR v Cheng Chee Tock Theodore (No 2)[3] (“Theodore”). Therefore, the issue of connected transactions is merely the relevant background against which the offences were committed by the applicants, which was not something that the prosecution had to prove.  As to the latter, its basis is that Gransing was merely a cloak in the arrangement, and 1019 and CIS should be considered to have had direct transactions between them. In the premises, the relevant transactions were certainly connected transactions referred to in Rule 14A.25 of the Listing Rules:

“14A.25 Any transaction between a listed issuer’s group and a connected person is a connected transaction.”

A2  Findings at trial

13.Having considered all the evidence, the trial judge concluded as follows:

“128. …The only reasonable conclusion is that those responsible for arranging the placement have always regarded [CIS] as the actual (or genuine) placing agent, and Gransing was only used as a ‘buffer’, a tool for concealing (or disguising) the role of [CIS].

129. Looking at the matter from this perspective, the defence argument that as Gransing also had other duties, the placement agreement was still valid and enforceable, and therefore the court cannot take Gransing’s participation as a sham is unconvincing.

…

133. In the circumstances, my view is, no matter if the placement agreement (or sub-placement agreement) was still valid or enforceable, it would have no bearing on whether Gransing was used as a tool to disguise the role of [CIS].

134. By the same token, I am of the view that when the prosecution said that Gransing was a cloak, whether they meant it was a sham or a front or disguise is not of real significance in this case. As mentioned earlier, what is important is that the evidence clearly shows that Gransing was used to disguise the actual or genuine role of [CIS] in the placement arrangement. From this perspective, I believe that Gransing was undoubtedly a cloak. But for that reason, I do not see any other reason why Gransing had to be instructed. The existence of Gransing was inexplicable by any other commercial reason.” [4]

14.The trial judge then pointed out the following:

“135. The next issue is, based on the above analysis, whether the arrangement between [1019] and [CIS] for the placement of the bonds in question constitutes a connected transaction.

136. Without a doubt, if [1019] indeed engaged Gransing as placing agent, the transaction between them would not be a connected transaction. However, if [1019] merely used Gransing as a cloak to conceal the fact that it actually (genuinely) engaged [CIS], would it be the case that as they had Gransing as a ‘buffer’, the transaction between them would not be a connected transaction either?

…

144. Based on the above facts, my view is that as far as the relevant placement of bonds is concerned, the transaction between [CIS] and [1019] was (or amounted to) a connected transaction. (I also took the view that the placement of the four batches of bonds in question can be deemed as a Continuing Connected Transaction / CCT. When calculating transaction amounts, they should be calculated as a whole)[5].” (Emphasis added)

15.In other words, the findings made by the trial judge regarding cloak and connected transactions are:

(1)  There is no need to make any finding that the arrangement involving the three parties was a sham; and

(2)  The transaction between 1019 and CIS was a connected transaction.

A3  Discussion

A3.1   Cloak and sham

16.In paragraphs 82 and 83 of their written closing submissions, the prosecution made it clear that:

“82. …The Listing Rules aim to ensure that investors have confidence in the market, and the rules on connected transactions are aimed at ensuring that the overall interests of shareholders in connected transactions can be taken care of. In the premises, the prosecution submitted that the arrangement of having [CIS] as placing agent or sub-placing agent of the bonds in question is a connected transaction and a continuing connected transaction which should not and would not become anything different under the arrangement even though there was Gransing acting as an ‘intermediary’. Otherwise, as long as a listed issuer engages an independent third party as an ‘intermediary’ for their transactions, all transactions conducted indirectly between them and a connected person would then be free from any regulation under the Listing Rules, which cannot be the original intention of SEHK or that of the Listing Rules, and it is contrary to common sense.

83. When it is established that the arrangement of having [CIS] as placing agent or sub-placing agent of the bonds in question is a connected transaction and a continuing connected transaction, [1019] would then need to see whether the transaction can be exempt from the relevant requirements. …” [6]

17.The above contention of the prosecution was that the court should disregard Gransing’s existence as an intermediary or a cloak, and consider that it was a direct transaction between 1019 and CIS, but the question is whether such a contention is tenable.

18.Firstly, upon enquiries by this court, the prosecution confirmed that it was not their allegation that the arrangement amongst 1019, Gransing and CIS was a sham. In fact, the evidence shows that all three parties acted in accordance with the placement agreement and sub-placement agreement, and CIS did rely on a genuine arrangement so that Gransing would pay them commissions in respect of the placements.

19.On the definition of a “sham”, in the English Court of Appeal case of Snook v London and West Riding Investments Ltd [7], Lord Diplock said:

“… a ‘sham’, it is, I think, necessary to consider what, if any, legal concept is involved in the use of this popular and pejorative word. I apprehend that, if it has any meaning in law, it means acts done or documents executed by the parties to the ‘sham’ which are intended by them to give to third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any)…” [8]

20.In this case, the prosecution alleged that the four applicants had concealed the truth from 1019 so that 1019 was unaware that CIS was Gransing’s sub-placing agent. If so, when 1019 signed the agency agreement with Gransing, the actual intention of 1019 could not be replacing Gransing with CIS and to conduct transactions directly with CIS. In other words, it is not possible that 1019 had falsely made an agreement with Gransing and falsely effected the appointment of Gransing as the placing agent while in reality CIS was appointed.

21.With the above analysis, one can see that the use of the word  “purportedly” in the charge is simply inconsistent with the prosecution case. As confirmed by Mr Jonathan Man, Deputy Director of Public Prosecutions (“DDPP”), at the appeal hearing, the arrangement amongst the three parties was not a sham and did not merely give the appearance of (“purportedly”) creating legal rights and obligations which in fact were different from the actual rights and obligations of the three parties.

22.We consider that if the arrangement in this case is not a sham and there are no other reasons for the court to ignore Gransing’s existence, the trial judge would have no basis to exclude Gransing and take the arrangement as a direct transaction between 1019 and CIS.

A3.2   The case of Theodore

23.In Theodore, Ribeiro PJ pointed out that:

“… Rule 14A.13(1)(a)[9] … There can be no doubt as to what ‘between’ means in that context: the listed issuer and the connected person must be mutual parties to the transaction. There is no room for suggesting that the rule can be construed so that a ‘connected transaction’ is constituted by a transaction between a listed issuer and someone who is not a ‘connected person’. …” [10]

24.It is undisputed that there is no transaction “between” 1019 and CIS in this case, but only transactions “between” 1019 and Gransing plus transactions “between” Gransing and CIS. According to Theodore, we are in no position to expand the interpretation of the word “between” referred to in Rule 14A.25 of the Listing Rules.

25.Therefore, when the trial judge said in paragraph 144 of the Reasons for Verdict as cited above that “the transaction between [CIS] and [1019] was (or amounted to) a connected transaction”, no matter if he meant that a transaction was considered to have taken place “between” the two and they were mutual parties to a direct transaction; or that Rule 14A.25 could be interpreted that way, he was equally incorrect.

26.In this case, not only did the trial judge fail to make any finding as to whether it was a sham, the prosecution even accepted at the appeal hearing that the respective agreements “between” the three parties were not sham transactions. The ensuing problem is that, under the circumstances, the trial judge simply had no basis to disregard the existence of Gransing and to consider that actually there were transactions conducted “between” 1019 and CIS. Therefore, Rule 14A.25 does not apply.

B  Deemed Connected Transactions: Rule 14A.20

B1  Prosecution’s stance

27.Putting aside Rule 14A.25, the position of the prosecution is that as long as the arrangement constitutes a possible connected transaction, the prosecution would be able to prove their case. We understand that the so-called “possible connected transaction” should be a reference to “deemed connected transactions” under the Listing Rules, and so far as this case is concerned, the relevant rules are Rule 14A.19 and Rule 14A.20.

28.We first deal with Rule 14A.20. Upon our enquiry, Mr Man, DDPP, confirmed that the rule applies to this case.  The reason is that 1019 entered into a transaction with Gransing and appointed Gransing as a placing agent, and it was D1 who made arrangements for Gransing to become the agent. Thus, D1 and Gransing had an agreement on the said transaction. According to Mr Man, since D1 was a director of 1019 (a connected person as defined in Rule 14A.07 (1)), when Gransing and D1 entered into the agreement on the placing agent transaction, Gransing should be deemed a connected person, and any transaction between 1019 and Gransing should be deemed a connected transaction.

B2  Findings at trial

29.In paragraph 142 of his Reasons for Verdict, the trial judge said:

“ 142. …Based on my analysis in the paragraphs above, the purpose of appointing Gransing as the agent was to use it as a tool/means to disguise [CIS]. From this perspective, not only does the decision of the Court of Final Appeal in Theodore not support what D1 said on this issue, it also serves to demonstrate why [CIS] should be deemed a connected person of [1019] in the relevant placement of bonds.” (emphasis added)

30.It is worth noting that although the trial judge used the expression “should be deemed” in the paragraph cited above, by which he meant that CIS “should be deemed” a connected person of 1019, the applicants had never disputed, neither at trial[11] nor during this leave hearing, that CIS was indeed a connected person of 1019, and the issue of “should be deemed” does not arise.

31.Unfortunately, as the trial judge did not go into any further discussion on the Listing Rules, we are not sure of his approach to the above finding and whether he had, in his deliberation, relied on Rule 14A.19 or Rule 14A.20.

B3  Discussion

32.First of all, we have great reservations as to Mr Man’s submission that Rule 14A.20 is applicable in this case.

33.The rule reads as follows:

“14A.20 ‘A deemed connected person’ includes a person:

(1) who has entered, or proposes to enter, into:

(a) a transaction with the listed issuer’s group; and

(b) an agreement, arrangement, understanding or undertaking (whether formal or informal and whether express or implied) with a connected person described in rule 14A.07(1), (2) or (3) with respect to the transaction; and

(2) who, in the Exchange’s opinion, should be considered as a connected person.”

34.As pointed out by Mr Derek Chan, SC, for D1, if Mr Man’s interpretation is correct, whenever “a director, the chief executive or a substantial shareholder” of a listed company acts on behalf of the company and engages in negotiations with a third party on a certain transaction, reaches an agreement and arranges the third party to enter into the transaction with the listed company, the relevant transaction would then come within the ambit of Rule 14A.20. That apparently does not make sense.  We are of the view that adopting Mr Man’s interpretation would distort the meaning of Rule 14A.20.

35.Besides, in respect of such an interpretation of Rule 14A.20, Mr Man had not mentioned it before, neither during the trial nor in his written closing submissions. It was at this hearing that the applicants first learnt of the prosecution’s present interpretation. Likewise, as the trial judge had not heard any submission from the prosecution in this regard, it is not possible that he had reached his finding of “should be deemed” after considering the prosecution’s present submission. Moreover, when using the phrase “should be deemed”, the trial judge was referring to CIS instead of Gransing.

36.There is, in any event, no concrete evidence in this case to suggest that D1 (a director of 1019) had personally reached an agreement with Gransing. Taking it to its highest, the evidence only shows that CIS (perhaps through D1’s arrangement) had reached an agreement with Gransing.

37.In the circumstances, the agreement between CIS and Gransing would not come within Rule 14A.20(1)(b) as CIS is not caught by Rule 14A.07(1), (2) or (3)[12]: CIS was not a director, the chief executive, or a substantial shareholder of 1019 or any of its subsidiaries (Rule 14A.07(1)); CIS had not been a director of 1019 or any of its subsidiaries in the preceding 12 months (Rule 14A.07(2)); and CIS was not a supervisor referred to in Rule 14A.07(3).  In fact, PW16, Mr Chau Ying Kit, when testifying on behalf of SEHK, also confirmed under cross-examination that the arrangement between CIS and Gransing did not fall under Rule 14A.20(1)(b)[13].

38.Admittedly, PW16 also said that in addition to Rule 14A.20, SEHK may also invoke Rule 14A.19 and treat a third party as a “deemed connected person” (to be discussed below).

39.Pausing here, we would first summarize the issues on connected transactions and Rule 14A.20:

(1)  The trial judge’s finding that CIS should be deemed a connected person of 1019 is unnecessary. CIS is indeed a connected person of 1019, but this fact does not help prove the prosecution case as the evidence shows that there was no transaction “between” 1019 and CIS, and it is not the prosecution’s allegation that the agreement amongst 1019, Gransing and CIS is a sham. (Rule 14A.25 is not applicable)

(2)  Mr Man’s present submission concerning the application of Rule 14A.20 in this case is not only far-fetched, but also lacks evidential support. (Rule 14A.20 is not applicable)

(3)  The disclosure obligation under Rule 14A.22[14] only relates to Rule 14A.20(1) or Rule 14A.21(1), and the purpose is clearly to help SEHK decide whether to treat a third party as a connected person after the relevant particulars have been obtained. If the case falls outside the ambit of Rule 14A.20(1) or 14A.21(1), Rule 14A.22 does not impose any mandatory obligation on 1019 to make disclosure. It follows that the prosecution’s allegation of concealment arising from their reliance on the disclosure obligation cannot stand. (The disclosure obligation under Rule 14A.22 is not applicable)

(4)  Without the disclosure obligation under Rule 14A.22 of the Listing Rules, it is not enough to allege a conspiracy to conceal amongst the applicants solely based on the Code of Conduct set out in the 1019 Staff Handbook (“the 1019 Staff Code of Conduct”)[15]. According to the reporting procedure referred to in the 1019 Staff Code of Conduct, a report shall be made if a staff member genuinely and reasonably believes that a breach of the law or legal obligation, some unethical business practice, or a deliberate concealment of information relating to any of the above has occurred or is likely to occur. However, if the arrangement is not contrary to the Listing Rules, the basis of the prosecution’s allegation that D1 to D3 had violated the 1019 Staff Code of Conduct would be highly questionable. Furthermore, D4 was not a staff member of 1019, so he would not have any knowledge about the 1019 Staff Code of Conduct, and he was not obliged to comply with it. In the circumstances, the prosecution’s allegation of conspiracy to conceal emanating from a violation of the disclosure obligation is basically untenable. (The Staff Code of Conduct is not applicable)

C    Deemed connected transaction: Rule 14A.19

C1  Prosecution case

40.PW16 gave evidence that although Rule 14A.20 does not apply to this case, SEHK is nevertheless entitled to invoke Rule 14A.19 and treat Gransing as a connected person.

C2   Findings at trial

41.As mentioned above, since the trial judge did not match his findings of fact with the relevant provisions of the Listing Rules and analyse accordingly, we simply have no clue whether the trial judge had considered Rule 14A.19 or not.

C3   Discussion

42.Rule 14A.19 is extremely broad: “The Exchange has the power to deem any person to be a connected person.”

43.In this case, Rule 14A.19 is material in two respects.

44.Firstly, the applicants stress that Rule 14A.19 does not have a corresponding disclosure obligation. Therefore, even if it applies to this case, it would not be necessary for the applicants to make disclosure; and if it does not involve any obligation to make disclosure, it would not possibly involve any act of concealment or constitute any dishonest intent. The prosecution appears not to have raised any objection regarding this argument.

45.Secondly, PW16 pointed out that the power “to deem… to be a connected person” is essentially forward-looking, in that if a certain person is regarded as a connected person and that person enters into a transaction with a listed company in future, SEHK may then consider the transaction a connected transaction[16].

46.In other words, owing to the fact that during the period(s) covered by the charge(s) (or even up till now), SEHK had not deemed Gransing as a connected person by virtue of Rule 14A.19, from the applicants’ point of view, Gransing is but an independent third party, not a connected person. Under these circumstances, the agreements which Gransing entered into with 1019 and CIS respectively are at least, on the face of it, not improper and they do not involve any issue of declaration or disclosure.

47.Another point worth noting is that, back in 2016, the Board of Directors of 1019 was already aware of the arrangement, but the evidence shows that the board members had been debating whether the arrangement was a connected transaction and was unable to reach a conclusion.  They had not published any announcement as a remedial measure or made any other relevant arrangements pursuant to the Listing Rules.

D  Conflict of interest

D1  Prosecution’s submissions

48.In his written submissions, Mr Man submitted that conflict of interest alone is sufficient to constitute the basis for conviction of the conspiracy to defraud in this case. However, during his oral submissions, Mr Man seemed to contend that the alleged conflict of interest does not only refer to D1’s shareholding in CIS, but also, in a broad sense, includes the applicants’ attempt to conceal the role of CIS in the arrangement, so that CIS could benefit from the arrangement.

D2  Findings at trial

49.In paragraph 164 of his Reasons for Verdict, the trial judge said this:

“164. According to PW18’s evidence,… had he known of the conflict of interest in the placement involving D1 and/or Quincy Wong before signing the written resolution, even if he was unsure whether it constituted a connected transaction, he would still have asked for a board meeting to discuss it pursuant to Appendix 14 of the Listing Rules. …” [17]

D3 Discussion

50.The conflict of interest in the broad sense that Mr Man referred to essentially revolves around issues such as connected transactions and “deemed connected transactions”. Since the issues have already been discussed above, we are not going to repeat them here.

51.It is true that the prosecution relies not only on the disclosure obligation under the Listing Rules, but also the fiduciary duty of D1 to D3 to make disclosure, as well as D1’s obligation as a director to make a declaration of interest under section 536 of the Companies Ordinance, Cap 622, Laws of Hong Kong. However, where no connected transaction was involved, it seems that when 1019 was to decide whether Gransing should be engaged as a placing agent, it would not be necessary for D1 to make any declaration of interest regarding his shareholding in CIS. At that juncture, what the Board of Directors needed to consider was whether they should enter into an agreement with Gransing, which had nothing to do with CIS at all. Nevertheless, if the Board had made it clear that they did not wish Gransing to appoint any connected person of 1019 as a sub-placing agent, the situation might have been different, but that is not the case of the prosecution.

52.In any event, regarding D1’s shareholding in CIS, we accept Mr Chan’s submission that if it was the only basis that the prosecution relied on, it simply would not constitute the conspiracy to defraud as specified in the 1^st Charge, the reason being that it is alleged under the 1^st Charge that there was a conspiracy of the applicants to defraud 1019, its Board of Directors, shareholders, and potential investors.  However, if the case did not involve any connected transaction, there would be no need for 1019 to publish an announcement or convene a shareholders’ meeting. In other words, even if there were a conspiracy, it would not involve defrauding shareholders and potential investors, and therefore it could not be the conspiracy alleged by the prosecution as specified in the 1^st Charge.

53.Furthermore, as pointed out by the applicants, there is no evidence in this case to show how the Board of Directors would decide if they were made aware of D1’s shareholding in CIS. After all, D1 just indirectly held an approximately 12% shareholding in CIS, and the trial judge had mentioned at the sentencing stage that even if D1 had made a disclosure to the Board of Directors, 1019 “likely would still agree to appoint [CIS] as a placing agent”[18].

54.In the circumstances, the element of prejudicing economic interests as set out in the 1^st Charge is not proved.

55.Likewise, when this case only involves D1’s shareholding in CIS but not any connected transaction, the element of “causing SEHK not to fulfil its public duty” in the 3^rd Charge could not be proved either.

V  Evidential disputes

56.It is true that the applicants and the respondent have divergent views regarding how to handle the testimony of PW1 and the WhatsApp messages between PW2 and PW3, but even if D1 did arrange CIS to take up the sub-placing work, and D2 and D3 were aware of such a role of CIS, the prosecution would still be unable to resolve the above issues raised by this court and would fail to prove its case. Therefore, we would not go into any further discussion on these evidential disputes.

57.In SJ v Global Merchant Funding Ltd [19], Ribeiro PJ said:

“21. In our view, the above-mentioned approach is applicable in the present case. The MLO’s definition of a ‘loan’ to include ‘every agreement (whatever its terms or form may be) which is in substance or effect a loan of money’ must be understood to be referring to an agreement which has the legal substance or effect of a loan and not an agreement with such an economic or commercial substance or effect. Methods of financing which may be economically indistinguishable from a loan repayable with interest may well be differently categorised in law.

22. Assuming that the transaction is not merely a sham, the Court can only decide whether a transaction is or is not a loan by construing the relevant documents and analysing the legal effect of what the parties have actually agreed. The language used by the parties is relevant but if it is inconsistent with what, as a matter of law, they have mutually agreed, the Court disregards the parties’ terminology in categorising the transaction.” (Emphasis added)

58.The major dispute in the above case is whether the Merchant Cash Advance Sale and Purchase Contracts entered into between the defendant and the merchants constitute a “loan” within the meaning of the Money Lenders Ordinance, Cap 163, Laws of Hong Kong (MLO). The Court of Final Appeal held that the definition of a “loan” under the MLO refers to an agreement which has the legal substance or effect of a loan and not an agreement with such an economic or commercial substance or effect.

59.We are of the view that the observation is also helpful in resolving the dispute in this case: the focus is not whether the effect of the arrangement would avoid (or would likely avoid) connected transactions. What matters is the legal substance or effect of the arrangement. In other words, when the prosecution confirmed that the arrangement was not a sham and when they failed to prove that the Listing Rules relied on were applicable in this case, even if the prosecution’s evidence showed that the arrangement might have the effect of avoidance, the court could not, on that account alone, ignore the legal substance and effect of the arrangement, or even treat it as a sham and infer that the applicants harboured a “dishonest” intent.

VI  Conclusion

60.When the prosecution cannot resolve the various issues mentioned above, it clearly follows that the alternative charge of fraud, which also has concealment as the main theme, likewise cannot be proved.

61.The analysis we set out in the preceding paragraphs as to whether the Listing Rules are applicable is based on the evidence and factual background of this case. As the Court of Final Appeal pointed out in Theodore, whether a series of related transfers or commercial arrangements constitutes any connected transaction all depends on the evidence in the case and the application of the Listing Rules, which cannot be generalized.

VII  Decision

62.Based on the above, the applicants’ application for leave to appeal against conviction is allowed and treated as the appeal proper. We allow the appeal, with the convictions quashed and their respective sentences set aside.

Translated by the Court Language Section of the Judiciary and vetted by Ms Jenny Chung, Solicitor.