Securities and Futures Commission v. Lee Sung Ho and Others

HCA 2177/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2177 OF 2011

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J U D G M E N T

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The background to this application

1.On 20 December 2011, the Securities and Futures Commission (“the SFC”) applied for and obtained ex parte Mareva injunctions against the 1^st to 6^th Defendants in these proceedings in respect of their assets in or outside Hong Kong. 

2.The Mareva injuctions were obtained in support of proceedings issued by the SFC against the Defendants the following day, in which the SFC sought various declarations and orders against the Defendants under section 213 of the Securities and Futures Ordinance (Cap 571) (“the Ordinance”).

3.Apart from the Mareva injunctions, the ex parte order also granted leave for the issue of a concurrent writ for service on the 1^st, 3^rd, 4^th and 6^th Defendants out of the jurisdiction.

4.The SFC alleged, on the basis of evidence set out in an affidavit of Mr Liang Lu Kar, Lucas, a Senior Manager in its Enforcement Division, dated 19 December 2011, that the 1^st to 5^th Defendants had been guilty of insider dealing in relation to the shares of a listed company called Schramm Holding AG (“Schramm”) in June and July 2011, in contravention of sections 270 and/or 291 of the Ordinance, and therefore liable to have orders made against them under section 213(2) of the Ordinance.  The details of the allegations of insider dealing are not relevant for the purposes of the present application.

5.The case against the 6^th Defendant is not that it was itself guilty of a contravention of either section 270 or section 291 of the Ordinance, but that it has been, knowingly or unknowingly, involved in the insider dealing so as to be liable to have an order made against it under section 213(2)(b) of the Ordinance.  The involvement of the 6^th Defendant is described in paragraph 58 of Mr Liang’s affidavit as follows:-

“As to [the 6^th Defendant], it is a wholly owned subsidiary of [the 5^th Defendant] is controlled by [the 5^th Defendant]. By receiving a substantial portion of the sale proceeds [of the alleged insider dealing], [the 6^th Defendant] has been involved in, whether knowingly or otherwise, the contraventions by [the 1^st, 2^nd and/or 5^th Defendants].”

6.The receipt by the 6^th Defendant of the proceeds of the insider dealing is said to have been the end result of a number of transfers of the sale proceeds of the Schramm shares which are the subject of the allegations.  These involved the proceeds moving from the 2^nd and 4^th Defendants (who had dealt in the shares) to a company called Paker Develop Limited (“Paker”), which then transferred the sums it received to a company in Korea called Alkenz Co. Ltd (“Alkenz”).  Alkenz in turn transferred what it received to another Korean company called SSCP Co Ltd (“SSCP”) (the parent company of the 5^th Defendant), which almost immediately transferred the funds on to the 6^th Defendant.  The flow of funds is described in paragraphs 43 to 52 of Mr Liang’s affidavit.

7.For the purposes of the present application, it is important to note that the 6^th Defendant is a Korean company, with no apparent presence in Hong Kong, and which has no known assets in Hong Kong.  The funds which are said to represent the proceeds of the insider dealing are said to be held by it in a bank account maintained by it in Korea.

8.The SFC has, as a result of further investigations and information obtained by it, decided not to pursue these proceedings against the 1^st Defendant.  However, the proceedings are being pursued against the remaining Defendants.

9.By its summons dated 17 January 2012, issued under RHC Order 12 rule 8, the 6^th Defendant seeks orders that the service of the writ upon it out of the jurisdiction be set aside, and that the ex parte orders granting leave for the writ to be issued against and served on it outside the jurisdiction be similarly set aside or discharged, along with the other parts of the ex parte order of 20 December 2011 that affect the 6^th Defendant.

The parties’ arguments

10.At the hearing, the 6^th Defendant was represented by Mr Sussex SC.  He submitted that the order of 20 December 2011 and the subsequent service of the writ on the 6^th Defendant in Korea should be set aside on a number of grounds, namely:-

(1)  That the court has no jurisdiction to grant final or substantive relief against the 6^th Defendant under section 213 of the Ordinance, and thus had no jurisdiction to grant leave to serve the proceedings on it outside the jurisdiction under RHC Order 11 rule 1.

(2)  That the court also lacked jurisdiction because the SFC’s claim against the 6^th Defendant did not amount to a cause of action, since it involved no claim to relief founded on a legal right, and so could not be the subject of an application for leave to serve out of the jurisdiction pursuant to RHC Order 11.

(3)  There was no basis for granting leave to serve out of the jurisdiction against the 6^th Defendant because the SFC had failed to establish a “good arguable case” for granting the relief sought, in that there was no evidence to show that the 6^th Defendant had any knowledge of the alleged insider dealing, or the source of the funds transferred to it, and because (in any event), the 5^th Defendant had already paid into court an amount equivalent to the whole of the profits allegedly arising from the alleged insider dealing.  There was therefore no need for any orders against the 6^th Defendant, and thus no good arguable case for granting any relief against it.

(4)  (a point developed by Mr Sussex at the hearing) That there was no jurisdiction to give leave to serve the 6^th Defendant out of the jurisdiction because the case did not fall within RHC Order 11 rule 1(b) (which was the rule relied upon to obtain service out against the 6^th Defendant), since this was not a case in which the relief sought was an injunction requiring the 6^th Defendant to do or refrain from doing an act within the jurisdiction – rather, it would require the 6^th Defendant to take steps outside the jurisdiction to transfer monies to Hong Kong, whether for payment into court, or for payment to the counterparties to the alleged insider dealing transactions.

11.Two other points raised in the 6^th Defendant’s summons were not pursued by Mr Sussex at the hearing.  These were:-

(1)  An argument that the ex parte order should be set aside for material non disclosure on the part of the SFC when applying for the order.

(2)  An argument that the affidavit of Mr Liang that formed the basis of the ex parte application did not meet the requirements of RHC Order 11 rule 4(b), so that there was no sufficient evidence in support of the ex parte application.

12.Mr Beresford, who appeared for the SFC (as he did at the ex parte application) resisted the 6^th Defendant’s application.  He responded to Mr Sussex’s arguments as follows:-

(1)  The court did have jurisdiction (or at least it was well arguable that it had jurisdiction) to grant final or substantive relief under section 213 of the Ordinance, and accordingly could grant leave to serve the proceedings out of the jurisdiction.

(2)  A claim under section 213 of the Ordinance was a sufficient “cause of action” for the purposes of RHC Order 11.

(3)  There was a good cause of action against the 6^th Defendant in the present case, as knowledge on the part of the 6^th Defendant of the alleged insider dealing was not a necessary condition for the making of an order against it under section 213(2)(b).

(4)  The relief likely to be sought against the 6^th Defendant would be an order requiring the 6^th Defendant to make a payment of money into court or to the counterparties to the trades constituting the alleged insider dealing in Hong Kong, which was an order to do an act in Hong Kong (that being the location where the payment would be made), and therefore an injunction requiring the doing of an act within the jurisdiction, within the meaning of RHC Order 11 rule 1(b).

The relevant statutory provisions

13.Before considering the merits of the competing arguments, it will be helpful to set out the terms of the relevant parts of sections 213(1) and (2) of the Ordinance, and of the relief sought under the SFC’s writ.

14.Section 213 of the Ordinance provides relevantly as follows:-

“(1) Where –

(a) a person has –

(i) contravened –

(A)  any of the relevant provisions [which include sections 270 and 291];

…

(ii)  aided, abetted, or other assisted, counselled or procured 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 … 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 for 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 of 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).

…

(6)  Where the court of First Instance considers it desirable to do so, it may grant such interim order as it considers appropriate pending the determination of an application made pursuant to subsection (1).

…

(8)  Where the Court of First Instance has power to make an order against a person under subsection (1), it may, in addition to or in substitution for such order, make an order requiring the person to pay damages to any other person.”

15.In the present case, the SFC does not rely on section 213(1)(b).  Nor does it rely on the part of section 213(2)(b) which provides for the possibility of an order being made under that subsection on the basis that “it appears that a person has been, is or may become” involved in one of the matters referred to in subsection (1)(a).

16.Both Mr Sussex and Mr Beresford agreed that, in this case, before any order could be made under section 213(2), it had to be established that some person had contravened a relevant provision, within the meaning of section 213(1)(a)(i)(A), or came within one of the other sub-paragraphs of section 213(1)(a).  If this were established, the court would have power to make one or more of the orders mentioned in section 213(2). They also agreed, I think rightly, that the orders made under paragraphs (a), (c), (d) and (e) of that subsection could only be made against such a person (i.e. one who came within one or more of sections 213(1)(a)(i) to (v)). On the other hand, provided that some person had contravened a relevant provision, an order under section 213(2)(b) could (as its terms suggest) be made either against that person, or against a different person (i.e. someone who did not fall within any of sections 213(1)(a)(i) to (v)), where that other person had become, knowingly or unknowingly, involved in the contravention or other matter covered by those sub-paragraphs.  In this case, as the 2^nd to 5^th Defendants were alleged to have contravened sections 270 and 291 or to fall within some of the other subparagraphs of section 213(1)(a), if this could be established against one or more of them, the result would be that section 213(2)(b) could be invoked against the 6^th Defendant, if the 6^th Defendant had become involved in the contravention or other matter referred to, whether knowingly or not.

The relief sought in these proceedings

17.As for the relief sought in these proceedings, the indorsement of claim on the SFC’s writ seeks, in paragraphs 1 to 4, declarations against the 1^st to 5^th Defendants to the effect that each of them is a person within (variously) section 213(1)(a)(i)(A), (ii), (iv) or (v) and section 213(2)(b).  Paragraph 5 of the indorsement relates to the 6^th Defendant alone, and seeks a declaration that the 6^th Defendant has been involved in, whether knowingly or unknowingly, the contraventions of sections 270 and/or 291 of the Ordinance and is accordingly a person within section 213(2)(b).  Orders are then sought against all the Defendants pursuant to sections 213(2)(a) (paragraph 6 of the indorsement), 213(2)(c) and (f) (paragraph 7 of the indorsement), 213(2)(b) (paragraph 8 of the indorsement), 213(8) (paragraph 9 of the indorsement) and 213(2)(e) (paragraph 10 of the indorsement).  By paragraph 11 of the indorsement, interim orders under section 213(6) are asked for.  The indorsement concludes with claims for further or other directions and costs.

18.Although paragraphs 6 to 10 of the indorsement seek orders against all the Defendants, it follows from what I have noted in paragraph 16 that, so far as the 6^th Defendant is concerned, given that the 6^th Defendant is not alleged to be a person within section 213(1)(a), an order can only be made against it pursuant to section 213(2)(b).  Thus, the only relevant relief claimed against the 6^th Defendant is that mentioned in paragraph 8 of the indorsement, namely:-

“… an order requiring the Defendants to take such steps as this Honourable Court may direct, including steps to restore the parties to any transaction to the position in which they were before the transaction was entered into”.

19.Although paragraph 9 of the indorsement, seeking an order requiring the Defendants to pay damages is expressed as an alternative to the order sought under section 213(2)(b) mentioned in the preceding paragraph, it is clear from the terms of section 213(8) that such an order can only be made against a person falling within section 213(1), and thus cannot be made against the 6^th Defendant here.

20.I turn now to consider the arguments raised by Mr Sussex in support of the 6^th Defendant’s application.

Whether the court can make a finding of contravention and grant substantive relief under section 213(2)(b)

21.Mr Sussex’s first argument was that under the scheme of the Ordinance, it was not open to the Court of First Instance, exercising its civil jurisdiction, to make a determination that there had been a contravention of the relevant provisions of the Ordinance, as the question of determining whether any such contravention had taken place was exclusively reserved to the Market Misconduct Tribunal in proceedings brought before that body, or the court exercising its criminal jurisdiction in cases brought before it.  Although the  Court of First Instance could make orders that might be final in nature under section 213, it could only do so where there had been a determination that there had been a contravention of a relevant provision by either the Market Misconduct Tribunal or the court exercising its criminal jurisdiction (although it might be possible to bring proceedings under section 213 and obtain interim orders pursuant to section 213(6) if proceedings had been commenced but not yet concluded in those other fora).  This submission was based on the decision of Harris J to this effect in Securities and Futures Commission v Tiger Asia Management LLC (unreported, HCMP 1502/2009, Harris J, 21 June 2011).

22.Mr Sussex pointed out that in the present case, no proceedings had been commenced in the Market Misconduct Tribunal and no criminal prosecution had been brought.  Declarations as to contravention were only sought in these proceedings, which the court had, he submitted, no jurisdiction to make.  Consequently, there could be no good arguable case such as would enable the court to grant leave to serve out of the jurisdiction so far as the final relief claimed was concerned.  Although there was also a claim for interim Mareva injunctions, the court had no jurisdiction to grant leave for service out for that limited purpose, where no substantive relief was sought: Kayden Limited v Securities and Futures Commission (2010) 13 HKCFAR 696, where the Court of Final Appeal so held, applying Mercedes Benz AG v Leiduck [1996] 1 AC 284.

23.Mr Beresford disputed this, submitting that Tiger Asia was wrongly decided, and was under appeal, and that as Tiger Asia was not binding on me, I should consider the arguments on their merits, and (if necessary) decline to follow it.

24.In the event, it is not necessary for me to consider whether or not I should follow Harris J’s decision in Tiger Asia. This is because the Court of Appeal has now handed down its decision on appeal from Harris J Securities and Futures Commission v Tiger Asia Management LLC (unreported, CACV 178/2011,CA, 23 February 2012), in which that court has held, reversing Harris J, that the Court of First Instance does have jurisdiction to determine, for the purposes of applications under section 213 of the Ordinance, whether or not there has been a contravention of relevant provisions of the Ordinance.  That decision is binding upon me, and is dispositive of this point, as it means that it cannot be said that the claims for final relief under the various sub-paragraphs of section 213(2) are bad, so that there is no power to give leave to serve the writ out of the jurisdiction.

Whether there is any “cause of action”

25.As to Mr Sussex’s second point – that there is in this case no cause of action, and thus no basis for granting leave to serve the 6^th Defendant out of the jurisdiction, the argument was that the SFC’s claim against the 6^th Defendant was not a cause of action as it did not amount to a claim for relief founded on a legal right. Mr Sussex submitted that this conclusion followed from the decisions in Mercedes Benz and Kayden, relying particularly on a statement in the opinion of the Privy Council in Mercedes Benz (at page 301F-H of the judgment), where Lord Mustill said:-

“… Absent a claim based on a legal right which the defendant can be called upon to answer, of a kind falling within Ord 11 r 1(1), the court has no right to authorise the service of the document on the foreigner, or to invest it with any power to compel him to take part in the proceedings against his will.”

26.Mr Sussex suggested that here, section 213(2)(b) did not give rise to any cause of action in that it was simply a mechanism by which the court could, in its discretion, grant ancillary relief, and as such did not give the SFC any legal right to relief.  He also suggested that as section 213(2)(b) was a statutory provision, it should be regarded as creating a statutory offence, which could not have extraterritorial effect.

27.I do not agree with these submissions.  It is quite clear from both Mercedes Benz and Kayden that what the courts were there concerned with was the question of whether it was possible to grant leave to serve out of the jurisdiction in a case in which the only relief sought was interim in nature, and no final relief was being sought.  The answer that was given was that this was not possible.  Here, however, there is a claim for final relief against the 6^th Defendant, in the form of the claim for an order under section 213(2)(b) mentioned in paragraph 8 of the indorsement of claim.  I do not think that the fact that there is no absolute right to such relief at the suit of the SFC (because the court has a discretion whether or not to grant it) means that there is no “cause of action” in the Mercedes Benz sense.  Nor do I think that the argument as to extraterritoriality as a good one – that applies to criminal offences, whereas the remedies sought under section 213(2)(b) are matters falling within the court’s civil jurisdiction.

No arguable case because no relief against 6^th Defendant necessary as 5^th Defendant has made a payment into court

28.Mr Sussex’s third point was that there was no good arguable case for granting the relief sought, because there was no evidence to show that the 6^th Defendant had any knowledge of the alleged insider dealing, or the source of the funds transferred to it, and also because the 5^th Defendant had already paid into court an amount equivalent to the whole of the profits allegedly arising from the alleged insider dealing, so that there could be no need for any relief against the 6^th Defendant.

29.I do not think these arguments are well-founded either.  So far as the lack of evidence of knowledge on the 6^th Defendant’s part, either of the alleged insider dealing, or of the source of the funds it had received, is concerned, it seems clear from section 213(2)(b), which enables an order to be made against a person who knowingly or unknowingly becomes involved in a contravention, that such knowledge is not a matter that needs to be established before relief can be granted.

30.As for the argument based on the fact that the 5^th Defendant has already paid funds into court, whether or not this would obviate the need for relief against the 6^th Defendant depends, as Mr Beresford rightly submitted, on whether the claim against the 6^th Defendant necessarily stands or falls with the claim against the 5^th Defendant.  If the position truly were that the 6^th Defendant could only be liable if the 5^th Defendant were also liable, there would be force in this submission.  It would not then matter that the 5^th Defendant has taken out an application to discharge the orders granted against it, and to have the monies paid into court by it returned. 

31.However, I do not think that the 6^th Defendant’s liability is wholly dependent on a finding of liability against the 5^th Defendant.  The involvement of the 6^th Defendant that is relied upon in order to found the claim to relief against it lies in its receipt of what are said to be the proceeds of the insider dealing, via the 2^nd and 4^th Defendants, Paker, Alkenz and SSCP.  The 5^th Defendant is not said to be part of this chain of fund movements.  Thus, it would be possible for the 6^th Defendant to be liable to have an order made against it under section 213(2)(b) on the basis of its receipt of the funds, and a finding of a contravention on the part of the 2^nd, 3^rd and 4^th Defendants, even if the 5^th Defendant were to succeed in having the claim against it dismissed and the orders made against it discharged.  As the claim against the 6^th Defendant does not, therefore, stand or fall with that of the 5^th Defendant, the fact that the 5^th Defendant has made a payment in is neither here nor there.  If that payment in is released, the relief against the 6^th Defendant could well be required.

Whether the claim comes within RHC Order 11(1)(b)

32.That leaves Mr Sussex’s final point.  This was that the case against the 6^th Defendant did not fall within RHC Order 11 rule 1(1)(b), as the relief sought against it was not an injunction requiring the 6^th Defendant to do or refrain from doing an act within the jurisdiction – rather what was really being sought was an order that would require the 6^th Defendant to take steps outside the jurisdiction to transfer monies to Hong Kong, whether for payment into court, or for payment to the counterparties to the alleged insider dealing transactions.  This was because there was no evidence that the 6^th Defendant had any bank accounts or other assets within Hong Kong, and the alleged proceeds of the insider dealing were said to have been transferred to a bank account held by it in Korea.  Thus, in order to restore any person to the position in which he had been prior to the transactions giving rise to the contravention of sections 270 and/or 291, it would be necessary to order the 6^th Defendant to do things outside Hong Kong.  This did not, Mr Sussex said, fall within the ambit of Order 11 rule 1(1)(b).

33.Although Mr Liang also relied on Order 11 rule 1(1)(d) in his affidavit in support of the ex parte application, it was rightly not suggested by Mr Beresford that this limb of Order 11 rule 1(1) could be prayed in aid against the 6^th Defendant.  That limb was relied upon by Mr Liang in respect of the orders sought pursuant to 213(2)(e), which cannot be obtained against the 6^th Defendant (for reasons explained in paragraph 16 above).

34.However, Mr Beresford submitted (by way of further authorities lodged after the conclusion of the hearing) that, as the type of order sought under section 213(2)(b) was one for the making of restitution to the counterparties to the affected contracts, this would involve an order to make payment into court in Hong Kong, or to the counterparties in Hong Kong, and as such, would be an order to do an act within the jurisdiction, since the authorities showed that the place in an obligation involving payment was performed was the place in which the payment was received by the counterparty to the payment, i.e. Hong Kong.  Thus, said Mr Beresford, the order to be made would be one requiring the performance of an act in Hong Kong, and accordingly should be regarded as an injunction requiring the doing of an act within the jurisdiction.

35.I do not think that this argument is well founded.  This is for the following reasons:-

(1)  I note first that the writ itself does not specify the acts which it is suggested that the 6^th Defendant should be ordered to do pursuant to section 213(2)(b).  It seems to me that in order to found an application for service out under Order 11 rule 1, it must at least be necessary for the plaintiff to identify the acts which it is said should be done in Hong Kong.  This was not done here.  It is not, therefore, clear from the writ that it does in fact seek an order against the 6^th Defendant that could properly be described as an injunction requiring the defendant to do or refrain from doing anything within the jurisdiction.

(2)  In any event, even if one were to proceed on the basis that the order sought would be one for the payment of money to a counterparty within Hong Kong, I do not think that, in the context of Order 11 rule 1(1)(b), an order for the payment of money should be regarded as an “injunction”.  I think this follows from the fact that the sub-rule itself refers to damages (which involves the payment of money) as an alternative to the injunction claimed, and also because if an order for the payment of money to a party in Hong Kong were to be regarded as an injunction for the purposes of Order 11 rule 1(1)(b), any case in which there was a claim for damages or monetary payment to a Hong Kong based plaintiff would ipso facto fall within that sub-rule, rendering many of the other sub-rules to a large extent unnecessary.

(3)  Even if this is not right, I do not think one can ignore the fact that what the 6^th Defendant would have to be ordered to do would be either to transfer the funds it received (which are alleged to be the proceeds of insider dealing) from Korea to Hong Kong, or to otherwise initiate in Korea a process that would result in payment eventually being made in Hong Kong.  Neither of these acts would be an act done in Hong Kong so as to fall within Order 11 rule 1(1)(b).

(4)  Alternatively, even if the correct analysis of what the 6^th Defendant would be ordered to do is (contrary to my view) something that should be regarded as being done in Hong Kong, and that (also contrary to my view) an order for payment of money should be regarded as an injunction for the purposes of Order 11 rule 1(1)(b), I think that having regard to the fact that injunctions are not usually granted where they cannot be made effective, there is not in this case a good arguable case for the granting of such relief.  Here, given that the 6^th Defendant is a foreign corporation with no presence or assets within Hong Kong, it seems to me that there would be no way in which the court could grant an effective injunction against it.  In these circumstances, the court would be very unlikely to exercise its discretion in favour of granting such an injunction, and there is accordingly no sufficiently arguable case made out to justify the granting of leave to serve the writ on the 6^th Defendant out of the jurisdiction.

36.I am therefore satisfied that Mr Sussex’s fourth argument is a good one. 

Disposition and costs

37.It follows that this was not an appropriate case for leave to have been granted to serve the 6^th Defendant out of the jurisdiction, and I shall therefore make an order in the terms sought by the 6^th Defendant’s summons.  So far as costs are concerned, I see no reason why these should not follow the event, and I shall therefore make an order nisi that the SFC should pay the 6^th Defendant its costs of this application, to be taxed on the party and party basis if not agreed.