Edmund Kung Chiu Nam v. The Insider Dealing Tribunal

CACV 176/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 176 OF 2006

(ON APPEAL FROM HCAL 120 OF 2005)

________________________

BETWEEN

Before : Hon Cheung JA, Yuen JA and Waung J in Court

Date of Hearing : 11 January 2007

Date of Judgment : 23 January 2007

________________________

J U D G M E N T

________________________

Hon Cheung JA :

The background

1.On 2 November 2000 the Financial Secretary issued a notice pursuant to section 16 of the Securities (Insider Dealing) Ordinance, Cap. 395 (‘S(ID)O’) requesting the Insider Dealing Tribunal (‘the Tribunal’) to conduct an inquiry on whether there had been insider dealing in relation to the listed securities of two companies, namely, the HKCB Bank Holding Company Limited (‘HKCB’) and Hong Kong China Limited (renamed as Lippo China Resources Limited) (‘HKC’) by Mr. Carlton Poon Kam Tao (‘Mr. Poon’), Mr. Edmund Kung Chiu Nam (‘Mr. Kung’) and two other persons. 

2.The request for inquiry arose out of trading in these two companies’ securities in May 1997 through an account in Mr. Kung’s name at Worldsec International Limited (‘Worldsec’).  Worldsec was a brokerage firm of which Mr. Poon was a director and a market analyst.

3.Mr. Kung’s account in Worldsec was set up and operated as a discretionary account by Mr. Poon.  Starting at the beginning of 1993 Mr. Poon had used this account to conduct certain of his own personal trades.  Mr. Kung had agreed to him doing this provided Mr. Poon kept track of those trades and kept the dealings separate. 

4.Before the section 16 notice was issued, the Securities and Futures Commission (‘SFC’) had investigated the trade of the securities of these two companies on suspicion of insider dealing.  When the SFC officers interviewed Mr Kung on 13 May 1998 he told them that he had given instructions for the purchase of the securities.  Mr Poon himself had been interviewed by the SFC and in anticipation of the SFC interviewing Mr. Kung, persuaded Mr. Kung to mislead the SFC about the transactions in HKCB and HKC by falsely telling the investigators that Mr. Kung himself had given specific instructions for these purchases.

5.Mr. Kung maintained his story in correspondence with the SFC and during a second interview on 8 August 1998. 

6.On learning that he was to be an implicated person in the insider dealing inquiry and after he had taken legal advice Mr. Kung told the SFC investigators on 26 March 2001 that he had permitted Mr. Poon to use his account and that Mr. Poon had purchased the securities without his knowledge.

7.Pursuant to the section 16 notice the Tribunal comprising of Mr. Justice Lugar Mawson (now retired) as chairman and two members conducted the inquiry.  It took place between 16 July 2001 and 11 October 2004. 

8.The conclusion by the Tribunal was that Mr. Poon and his wife had engaged in insider dealing of the securities.  As to Mr. Kung the Tribunal found that

‘ As we accept Edmund Kung’s evidence in substance, the trades carried out in his account were not his and were carried out without any of the information needed to constitute insider dealing on his part.

Even had we believed and accepted Carlton Poon’s evidence of what happened between Edmund Kung and himself; that would not provide evidence that Edmund Kung had the necessary knowledge of relevant information for him to have acted in contravention of section 9(1)(e) of the Ordinance (i.e. the S(ID)O).’

9.Mr. Kung then applied for his costs of the inquiry from 1 May 2001 which was about six weeks after he told the SFC investigators that he had permitted Mr. Poon to use his account and that Mr. Poon had purchased the securities without his knowledge.  The Tribunal refused to award him costs. 

The judicial review

10.Mr. Kung applied by way of judicial review to challenge that decision.  The judicial review was heard by Chu J and Reyes J of the Court of First Instance of the High Court (‘the Full Bench’).  The Full Bench quashed the order of the Tribunal and awarded costs of the inquiry in favour of Mr. Kung. 

The appeal

11.The Financial Secretary who is an interested party in these proceedings now appeals against that decision. 

Section 26A

12.The award of costs in relation to the inquiry at the time when the application for costs was made was governed by section 26A of the S(ID)O.  It provided that

‘(1) Subject to subsection (5), at the conclusion of an inquiry or as soon as reasonably practicable thereafter, the Tribunal may award to­―

(a) any witness;

(b) any person whose conduct is, in whole or in part, the subject of the inquiry,

such sum as it thinks fit in respect of the costs reasonably incurred by him in relation to the inquiry.

(2) Any costs awarded by the Tribunal under subsection (1) shall be charged on the general revenue. 

(3) The Tribunal may order that any costs awarded under subsection (l) may be taxed on the basis of any one of the scales of costs set out in the Schedules to Order 62 of the Rules of the High Court (Cap. 4 sub. leg.).

(4) Subject to any rules made by the Chief Justice under section 36, Order 62 of the Rules of the High Court (Cap. 4 sub. leg.) shall apply to the award and taxation of any costs awarded by the Tribunal under this section.

(5) This section shall not apply to any person referred to in subsection (1) who is­―

(a) a person who has been identified as an insider dealer in a determination under section 16(3);

(b) an officer of a corporation who has been identified as such officer in a determination under section 16(4);

(c) a person who and in respect of whom it appears to the Tribunal has by his own acts or omissions caused or brought about (whether wholly or in part) the Tribunal to inquire into his conduct subsequent to the institution of the inquiry under section 16 or during the course of that inquiry; or

(d) any other person who and in respect of whom it appears to the Tribunal has by his own acts or omissions caused or brought about (whether wholly or in part) the institution of the inquiry under section 16.’

13.Section 26A(5) precluded four categories of persons from applying for costs, one of which was someone who by his own acts or omissions caused or brought about (whether wholly or in part) the institution of the inquiry under section 16.  An issue that arose before the Tribunal was whether Mr. Kung was such a person.  The Tribunal ruled that Mr. Kung was not such a person and hence it had jurisdiction to consider his application for costs. 

14.Section 26A(4) expressly provided that subject to any rules made by the Chief Justice, Order 62 of the Rules of the High Court shall apply to the award and taxation of any costs awarded by the Tribunal under this section. 

15.No rules had been made by the Chief Justice under section 36.  Notwithstanding the reference to the provisions of Order 62 the Tribunal held that it was not precluded from applying the principles in criminal cases in the exercise of the discretion on costs.  It relied on the principle in criminal cases that costs should be denied to an acquitted defendant where his conduct has brought suspicion on himself or misled the investigating authorities into thinking that the case against him is stronger than it is. 

Reasons given by the Tribunal

16.The reasons given by the Tribunal that Mr. Kung should be deprived of costs were first that Mr. Kung had lied.  It held that

‘Were we to grant Edmund Kung his costs we would only be rewarding deceit and mendacity’. 

17.The second reason was that

‘ Mr. Kung allowed Mr. Poon to use his account without excising any form of control over how Mr. Poon used it.  At the very least he was grossly negligent in that regard.  At the worst it could be said that he was condoning or hiding possible inappropriate or illegal transactions on Carlton Poon’s part’. 

Civil or criminal principles?

18.The Full Bench held that it was wrong to apply the principle in criminal cases in considering costs.  The only basis for the exercise of discretion should be under the provisions of Order 62. 

19.I agree with this view.  The wording in sections 26A(3) and (4) provided the clearest indication as to how the award of costs should be made and they were to be made on the basis of Order 62 of the Rules of the High Court.  There was no room for the application of the principle in criminal cases.  Mr. Cooney, counsel for the Financial Secretary, did not argue otherwise. 

The correct principles

20.The correct principles are : first, under Order 62, rule 2(4) the award of costs is in the discretion of the Court; second, under Order 62, rule 3(2) the Court in the exercise of the discretion should order the costs to follow the event, except when it appears to the Court that in the circumstances of the case some other orders should be made as to the whole or any part of the costs.  In the context of this case the reference to the Court will be substituted with that of the Tribunal. 

21.In Ritter v. Godfrey [1920] 2 KB 47 it was held by Atkin LJ that in the case of a wholly successful defendant the judge must award him costs unless there is evidence

1) that the defendant brought about the litigation; or

2) has done something connected with the institution or the conduct of the suit calculated to occasion unnecessary litigation and expense; or

3) has done some wrongful act in the course of the transaction of which the plaintiff complains.

The Full Bench’s approach

22.As the Tribunal had applied the wrong test in awarding costs it had not properly exercised the discretion and the decision was vitiated.  I would have thought that the appropriate order then would be for the Full Bench to quash the decision and remit the matter to the Tribunal for reconsideration based on the correct principles. 

23.I am aware that Mr. Justice Lugar-Mawson had since retired and no longer lives in Hong Kong and if the matter was to be remitted to the Tribunal, there might be practical difficulties involved in reconstituting the Tribunal.  But these were matters for the Administration to resolve.

24.Instead of doing so, the Full Bench then considered and rejected the two reasons given by the Tribunal.  It considered how the discretion should be exercised, exercised the discretion itself and awarded the costs of the inquiry to Mr. Kung.  Reyes J who delivered the main judgment of the Full Bench held that,

‘ 43. The Tribunal’s decision refusing costs to Mr. Kung is quashed.  I think that no reasonable tribunal could arrive at any conclusion other than that, Mr. Kung having effectively prevailed on the allegation of involvement in insider dealing, he should have his costs as from 1 May 2001.  I propose to substitute an Order granting Mr. Kung such costs.’

25.Chu J held that,

‘ 44. I agree.  I agree too that in the circumstances of this case it is appropriate for this Court to make the Order proposed by Reyes J instead of remitting the matter to the Tribunal for re-consideration.’

The Court lacks jurisdiction

26.In my view the Full Bench was wrong to exercise the discretion itself because section 26A does not confer jurisdiction on the Court to exercise the discretion itself.  This has been authoritatively decided by the Court of Final Appeal in Financial Secretary v. Wong (2003) 6 HKCFAR.  At paragraph 71 of the judgment Ribeiro PJ held that ‘the Court lacks jurisdiction to make such an order’.  He further held (at page 505),

‘71. ....the particular order proposed to be made as a consequential order is an order for costs which is a matter expressly regulated and, indeed, constrained, by statute, namely, by s.52A of the High Court Ordinance (Cap.4) and s.26A of the Ordinance.  One must obviously give effect to those statutory provisions and the general power to make consequential orders cannot displace or be exercised inconsistently with any constraints imposed by such provisions.

72. Section 52A confers on the Court a statutory power to award costs, subject to rules of court, in respect of “the costs of and incidental to all proceedings in the Court of Appeal in its civil jurisdiction and in the Court of First Instance,” with full power to determine by whom and to what extent the costs are to be paid. This Court enjoys the same power by virtue of s.17 of its statute. This is, however, a power to award costs of and incidental to proceedings before the Court itself and does not empower the Court to make such orders in respect of non-court proceedings.

73. It is s.26A which specifically addresses the entitlement to costs of persons implicated in an insider dealing inquiry.  It plainly seeks to provide a complete code concerning such entitlement.  Thus, it expressly allocates liability for such costs as a charge on the general revenue.  It provides for such costs to be taxed on one of the bases of taxation provided for by the High Court Rules and makes O.62 of those Rules generally applicable to such costs. Most importantly, it restricts eligibility to such costs to those implicated persons who have neither been identified as insider dealers nor been found to have brought the inquiry on themselves.

74. In my view, that legislative framework does not allow room for the Court to make a costs order at large, which is not subject to any such constraints, purely on the jurisdictional basis that it is consequential to an order quashing the Tribunal’s findings. This is particularly so where the payment of those costs is to be met out of the general revenue. It is for the legislature and not the Courts to determine what is and what is not to be a charge on the general revenue.  The legislature has expressly made such provision in respect of the costs of implicated persons in insider dealing proceedings, subjecting such entitlement to the conditions specified in s.26A.’

27.Similar views were expressed by Chan PJ and Litton NPJ.  Although Bokhary PJ was of the view that the Court might have jurisdiction, he was prepared to abide by the majority view.  Millett NPJ agreed with Bokhary PJ.

28.In Wong the application for costs was premature because the inquiry had not been concluded.  This was contrary to section 26A.  I do not regard the view expressed by the Court in Wong on jurisdiction to be confined to the fact that the application was pre maturely made.  In my view the decision the Court made on jurisdiction was of general application.

Amendment of notice of appeal

29.The lack of jurisdiction of the High Court to deal with the costs of the inquiry was not one of the grounds of appeal in the Notice of Appeal.  The Court at the beginning of the appeal invited counsel to address us on this point.  Mr. Cooney said he intended to rely on this point and he had notified Mr. Kung’s lawyers before the hearing of his intention to amend the Notice of Appeal.  Mr. Barlow, counsel for Mr. Kung, opposed the application.  We allowed the amendment because the question of jurisdiction was clearly a highly relevant matter in this case.

The ‘mix and match’ approach

30.In my view, in light of the decision in Wong the High Court in judicial review proceedings when considering the lawfulness of the exercise of discretion by the Tribunal should adopt the following approach : if it finds that the decision was unlawful in the sense that it was erroneously exercised or based on wrong principles, it may, of course, quash the decision and remit the decision to the Tribunal for further consideration.  However it does not have jurisdiction to exercise the discretion itself. 

31.The Full Bench’s approach might well be due to the submission of Mr. Cooney who had invited it to dismiss the judicial review.  He submitted to the Full Bench, as he did before us, that the Tribunal had considered the conduct of Mr. Kung in refusing him costs and that the Tribunal had in effect adopted the second and third principles laid down by Atkin LJ in Ritter. 

32.In my view it is wrong to adopt this approach.  This is tantamount to fitting the reasons provided by the Tribunal into another set of well established principles which in fact had not been relied upon by the Tribunal in the first place.

33.The two sets of principles although similar are not identical.  As Litton PJ (as he then was) observed at page 535 in Tong Cun Lin v. HKSAR (1999) 2 HKCFAR 531, which was a criminal case dealing with the costs application by an acquitted person :

‘Since, however, the discretion is being exercised in the context of an acquittal ― the averments constituting the charges having been found by the jury as not amounting to the crimes alleged ― it follows that, generally speaking, the conduct most relevant to the matters under consideration must be the defendant’s conduct during the investigation and at the trial: How he first responded to the investigators, the answers he gave when confronted with the accusations, the consistency of those answers with his subsequent defence, etc.  Wrapped up with this is the strength of the case against the defendant and the circumstances under which he came to be acquitted: These too are relevant to the exercise of the discretion to deprive him of his costs, so long as the judge is not, indirectly, thereby punishing him by taking a view of the facts palpably different from that taken by the jury and reflected in the not-guilty verdict.  The person in the best position to weigh those matters is clearly the judge himself.’

34.The emphasis in criminal cases is on events in the investigation and at the trial whereas in civil cases as the third situation in Ritter shows the Court is also entitled to look at events connected with the underlying transaction as well.  In my view it is wrong to suggest that somehow one can ‘mix and match’ the two sets of principles.  The fact that the Tribunal might have relied on reasons which might fit into another set of principles does not mean that the Tribunal had properly focused on the correct principles.

Exercise of discretion

35.Mr. Barlow opposed the matter to be remitted to the Tribunal.  He submitted that first, the Full Bench did not exercise the discretion itself and he had not asked the Full Bench to exercise the discretion which he accepted could only be exercised by the Tribunal.  He referred to the Form 86A in which the relief he sought was first for a certiorai to quash the decision of the Tribunal and then

‘An order of mandamus requiring the Tribunal to award to the Applicant the costs reasonably incurred by him in relation to the inquiry.’

36.The same relief was sought in the Notice of Motion for Judicial Review.  Mr. Barlow submitted that the wording of the Full Bench’s order did not accurately reflect the relief that Mr. Kung had sought from the Full Bench.

37.Consequential upon granting leave to the Financial Secretary to amend the notice of appeal we also allowed Mr. Barlow’s application to serve a respondent’s notice out of time whereby he sought the following order in place of the original order made by the Full Bench :

‘2. An order of mandamus hereby issues to require the Insider Dealing Tribunal to perform their public duty under s. 26A of the Securities (Insider Dealing) Ordinance, Cap. 395 by awarding the Applicant the costs reasonably incurred by him in relation to the Inquiry from 1^st May 2001 to be taxed if not agreed ― which the Insider Dealing Tribunal may do in writing without the necessity of a formal meeting.’

38.The original order made by the Full Bench was :

‘2. The Applicant be awarded the costs reasonably incurred by him in relation to the Inquiry from 1 May 2001 to be taxed if not agreed.’

39.I do not regard the proposed order and the actual order made by the Full Bench to be concerned only with matters of form and not substance.

40.In my view the Full Bench had exercised the discretion itself.  The judgments I have quoted earlier speak for themselves.

Error of the Full Bench

41.Secondly, Mr. Barlow submitted that the Financial Secretary had not demonstrated how the Full Bench had erred at all: as a general rule a successful party is entitled to his costs and since the Full Bench had found the two reasons given by the Tribunal were wrong it means the decision of the Tribunal was vitiated and Mr. Kung should be entitled to his costs. 

42.I am also unable to accept this submission because it proceeds on the basis that in the first place the Tribunal had applied the correct principles but only came to an erroneous decision.  In my view the fundamental mistake made by the Tribunal was that it had not applied the correct principles in the first place.  Once this has been identified it means that the discretion had not been properly exercised at all.  The fact that the Full Bench did not agree with the two reasons given by the Tribunal does not mean that Mr. Kung should be entitled to his costs.  And as the Full Bench has no jurisdiction in the matter, the discretion could not be exercised afresh.

43.Even if, for the purpose of argument, the Full Bench had only considered the lawfulness of the decision of the Tribunal and that it was entitled to do so by reference to two of the principles in Ritter, I am still of the view that its rejection of the first of the two reasons given by the Tribunal was plainly wrong.

44.The giving of a false statement by Mr. Kung did not preclude his case from coming within the second principle in Ritter, namely, it was something done which was connected with the institution or conduct of the investigation which eventually led to the inquiry.  The purpose was to cause unnecessary delay in the inquiry and expense.  The fact that Mr. Kung was found by the Tribunal not to have brought about the inquiry which was covered by the first principle in Ritter does not preclude this reason from being applied.  The focus of the first principle in Ritter must be on whether Mr. Kung was engaged in insider dealing, while the second principle was in respect of his conduct in the course of the investigation which led to the inquiry.  

45.This error vitiates the Full Bench’s decision and as such it is not necessary for me to comment further on its rejection of the second reason of the Tribunal.  Whether the third principle is also engaged has to be considered by the Tribunal in the light of the evidence it had heard.

The best person to deal with costs

46.Mr. Barlow described the defences of Mr. Kung and Mr. Poon at the inquiry as a ‘cut throat’ defence.  Although in the First Report of the Tribunal at page 149, the Tribunal stated that

‘Carlton Poon lied in his interviews with the SFC and he compounded this by requesting Edmund Kung to lie to the SFC when they interviewed him on 13 May 1998.  Both men admit this.’  (emphasis added),

Mr. Barlow also informed the Court that Mr. Poon’s counsel challenged the correctness of Mr. Kung’s corrective statement. 

47.This is not a situation where Mr. Kung had been providing consistent statements which might assist the Tribunal in its task.  The consequence of giving two contrary statements would mean that the Tribunal had to resolve the conflict in the evidence.

48.This Court does not know the length of time taken by the Tribunal to resolve the conflict.  The Tribunal had conducted the inquiry over a substantial period of time.  It must be the best person to decide on this issue and consequently whether Mr. Kung was entitled to costs.

49.Mr. Barlow had very properly referred to the Tribunal the principles in Ritter which the Tribunal chose not to adopt.  He had also submitted to the Tribunal that it might consider applying a Bullock order (i.e. the Government was to pay Mr. Kung his costs which was to be recovered from Mr. Poon) or a Sanderson order (i.e. Mr. Poon paying Mr. Kung’s costs directly).  In my view the possibility of making these two types of order further emphasizes the importance of allowing the Tribunal who heard the evidence to make the decision on costs itself.

Conclusion

50.Accordingly I will allow the appeal to the extent that the order of costs made by the Full Bench is set aside and in its place there should be an order remitting Mr. Kung’s application for costs to the Tribunal for consideration.

Costs of the court proceedings

51.The costs order that I propose to make are provisional in nature.  Three sets of costs are involved :

1. Costs of the amendment of the Notice of Appeal

This is the amendment applied for on the day of the hearing of the appeal which has a substantial impact on the outcome of the case.  The Financial Secretary should bear the costs incurred and thrown away by the amendment.  This will include the costs incurred by Mr. Kung in respect of the respondent’s notice.

2. Costs of the appeal

The Financial Secretary succeeded partially in the appeal, namely, setting aside the judgment of the Full Bench in awarding costs of the inquiry to Mr. Kung.  He failed to affirm the decision on costs made by the Tribunal.  He is entitled to half of the costs of the appeal.

3. Costs in the Court of First Instance

The Full Bench should only have quashed the order made by the Tribunal and should have remitted the matter to the Tribunal for consideration.  In other words Mr. Kung only succeeded partially in the Court of First Instance.  He is entitled to half of the costs there.

Hon Yuen JA :

52.I have had the benefit of reading in draft Cheung JA’s judgment.  I agree with it.  In any event, the Tribunal should be asked to consider the issue of costs afresh, applying principles under Order 62 and in the light of all the evidence it had heard, only part of which had been placed before the Full Bench.  I agree with the order proposed by Cheung JA and with the order nisi as to costs.

Hon Waung J :

53.I agree with the judgment of Cheung JA.

Mr. Barrie Barlow, instructed by Minter Ellison, for the Applicant

Respondent in person, absent

Mr. Nicholas Cooney, instructed by Department of Justice, for the Interested Party