FRIEDMANN PACIFIC GREATER CHINA INVESTMENTS LTD v. PRUDENCE SECURITIES CO LTD

HCMP 1642/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1642 OF 2003

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REASONS FOR JUDGMENT

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1. The defendant applied for a discharge of the ex parte order made by Chu J on 16 April 2003 as varied by Jackson J on 23 April 2003. The matter was adjourned for argument on the return day on 25 April 2003 when I continued the order as varied until the adjourned hearing or until further order. After hearing arguments on 2 May 2003 I ordered that the ex parte order of Chu J as varied by Jackson J on 23 April 2003 and as continued by me on 25 April 2003 be discharged and that the costs of the application to discharge, including the costs reserved on 23 April and 25 April 2003, be costs to the defendant to be taxed on a common fund basis. I indicated at the time that reasons in writing would be given later. This I now do.

2. The background facts show that the plaintiff is a listed company. As was deposed to by Ann Yeung, for the plaintiff, in her affirmation complaints were received from shareholders of the plaintiff in mid-February 2003 alleging unauthorized transfer of their shares in the plaintiff. There were extraordinary movements of the plaintiff's shares in the market and a sudden plunge in the share price which led to the suspension of trading in the plaintiff's shares. The plaintiff did its own investigation under the Central Clearing and Settlement System ("CCASS") and discovered that the defendant had 6 million shares of the plaintiff registered in its account maintained with CCASS on the relevant date i.e. 14 February 2003. The defendant, as the evidence shows, is and was at all material times a stockbroker with the said shares placed in its account with CCASS. The defendant has no interest in the said shares other than as a stockbroker buying and selling the shares on behalf of its clients.

3. As at 27 March 2003 the defendant only had 2.432 million shares in the plaintiff in its account maintained with CCASS. According to the affirmation of Kenneth Or Wai Hung, of the defendant, the defendant first received two letters dated 14 February 2003 at 13.10 and 13.11 hours on 14 February 2003 from the plaintiff's solicitors which put the defendant on notice that some 12 million shares in the plaintiff had been stolen from two shareholders and had been transferred into the account of a Mr. Stephen Lee maintained with the defendant. However, by the time of the receipt of the said two letters by the defendant on 14 February 2003 the defendant no longer held any of the said 12 million shares on behalf of the said Mr. Lee. He had sold the shares on the morning of that day.

4. About a month after the plaintiff received the complaints from the said shareholders and after the plaintiff had done its own investigation under the CCASS system, the plaintiff on 11 March 2003 set up an independent committee to investigate the matter and to advise the Board of Directors of the plaintiff. This led to the issuance by the plaintiff on 27 March 2003 of the letter to the defendant for the information sought ("the 1st letter") which was issued pursuant to Section 18 of the Securities (Disclosure of Interests) Ordinance (Cap. 396) ("the SDIO"). This in effect gave the defendant one and a half working days to supply the information sought.

5. The Securities and Futures Ordinance (Cap. 571) ("the SFO") came into effect on 1 April 2003 and the SDIO was repealed at the same time. That being so, the plaintiff saw fit to issue another letter to the defendant dated 12 April 2003 ("the 2nd letter") for the information sought pursuant to Section 329 of the SFO. By the 2nd letter the defendant was in effect given half a working day to supply the information sought.

6. As the plaintiff failed to receive the information sought by the 2nd letter within the time stipulated the plaintiff applied ex parte on 16 April 2003 before Chu J for the relief that was ordered. She ordered as follows :

“ (1) the Defendant do within 3 days after being served with this Order answer the requests for information under s.329 of the Securities and Futures Ordinance (Cap. 571) made in the Plaintiff's letter dated 12th April 2003, a copy of which is annexed hereto as Annex I;

(2) the Defendant be restrained until after the hearing on 25th April 2003 from dealing with the 2.432 million Shares in the Plaintiff and deposited with the Defendant, more particularly referred to in paragraph 4 of the First Affirmation of Yeung Mo Sheung Ann subject to the restrictions under Division 12 of Part XV (Disclosure of Interests) under the Securities and Futures Ordinance (Cap. 571). "

7. On 23 April 2003 the defendant's solicitors gave a substantive reply to the 1st letter on behalf of the defendant. On the same day the defendant applied through counsel to the Duty Judge, Jackson J, on notice to the plaintiff for a variation of the order of Chu J. It was ordered that para. 1 of the order of Chu J be varied as follows :

“ the Defendant do answer the requests for information under Section 329 of the Securities and Futures Ordinance (Cap. 571) made in the Plaintiff's letter dated 12th April 2003, a copy of which is annexed to the said Order, within 3 days after the determination of the Defendant's application to discharge the said Order or until further order. "

8. On the return day on 25 April 2003 the matter was adjourned for argument with para. 2 of the order of Chu J being continued until after the adjourned hearing or until further order.

9. Mr. Ronald Tang, counsel for the defendant, submitted that the ex parte application and order was made under the SFO and not under the repealed SDIO. This was contrary to the provisions of Section 86 of Schedule 10 to the SFO. The point made was that the 1st letter was issued pursuant to an investigation carried out by the plaintiff. The SFO came into effect on 1 April 2003 and the SDIO was repealed on that date. However, by 1 April 2003 the investigation had not been completed.

10. Section 86 of Schedule 10 to the SFO provides that :

“ Where an investigation is carried out under the repealed Securities (Disclosure of Interests) Ordinance but has not been concluded before the commencement of Part XV of this Ordinance -

(a) any power that is exercisable under that Ordinance for the purposes of the investigation shall, upon such commencement, remain exercisable as if this Ordinance had not been enacted; and

(b) the provisions of the repealed Securities (Disclosure of Interests) Ordinance shall continue to apply to the exercise of the power and to any other matters relating thereto as if this Ordinance had not been enacted. "

11. Mr. Alex Lok, for the plaintiff, submitted that with the repeal of the SDIO the plaintiff issued the 2nd letter in effect abandoning the request for information made by the 1st letter and that it was therefore the SFO and not the repealed SDIO that governed the matter.

12. I am unable to accept Mr. Lok's submission. First, there is no suggestion at all in the evidence that the plaintiff ever abandoned the request for information made by the 1st letter. As I pointed out to Mr. Lok in the course of his submissions, far from abandoning the request made under the 1st letter the plaintiff by the 2nd letter of 12 April 2003 stated unequivocally at page 2 that :

“ We repeat that you are under legal duty and obligation to provide to the Independent Committee the confirmation and information we require under our said letter to you dated 27th March 2003 ....... "

I am unable to accept the submission that the plaintiff abandoned the investigation under the 1st letter of 27 March 2003.

13. Secondly, the position is, in my view, clear. Section 407(1) of the SFO provides as follows :

“ Part 1 of Schedule 10 provides for the savings, transitional and supplemental arrangements that apply on, or relate to, the commencement of this Ordinance or any part thereof. "

14. Section 86 of Part 1 of Schedule 10 set out above applies. This clearly provides that where, as here, an investigation is carried out under the repealed SDIO but has not been concluded before the commencement of Part XV of the SFO any power that is exercisable under that Ordinance for the purposes of the investigation shall upon such commencement remain exercisable as if the SFO had not been enacted and that the provisions of the repealed SDIO shall continue to apply to the exercise of the power and to any other matters relating thereto as if the SFO had not been enacted. It is not a question of the plaintiff opting to proceed either under the repealed SDIO or under the SFO. Section 86 is clear. Where the investigation is carried out and has not been concluded before the commencement of the SFO on 1st April 2003, as is the case here, then the provisions of the SDIO continue to apply. It was wrong for the plaintiff to apply for an order under the SFO. I accept Mr. Tang's submissions. It seems to me that the order of Chu J ought to be discharged on this ground alone.

15. Mr. Tang further submitted that there is no jurisdiction to compel the defendant to answer the request for information made either under the repealed SDIO or under the SFO. Mr. Tang submitted that whether the application is made under the repealed SDIO or the SFO the statutory scheme did not provide a mechanism to compel the addressee to answer the request for information.

16. Mr. Lok accepted that there was no express provision in either the repealed SDIO or the SFO whereby an addressee could be compelled to answer the queries. However, he relied on the inherent jurisdiction of the court.

17. I am unable to accept Mr. Lok's submission. The clear legislative intent is that the listed company is given a power to investigate ownership of interests in its shares by Section 18 of the repealed SDIO or by Section 329 of the SFO. Where the addressee fails to give the information properly requested under the statutory provisions within the time specified, the listed company may apply to the Court of First Instance for an order directing that the shares in question be subject to the restrictions set out in the Ordinance. And a person who fails to comply with the notification commits a criminal offence. But there is no provision in either of the two Ordinances for an order to compel the addressee to answer the request for information made by the notification. The application was made under the SFO. However, I am satisfied that there is no jurisdiction to compel an addressee to comply with the notification by ordering him to answer the request for information as was done in this case. I accept Mr. Tang's submission that the SFO contains a self-contained code listing out all the consequences for failure to comply with a notification. These are set out in the SFO. The repealed SDIO was also a self-contained code listing out all the consequences for failure to comply with a notification. There is no room, in my view, for the Court to invoke its inherent jurisdiction to make the order sought. As was said by Kempster JA in The Board of Trustees of Chung Chi College and another v. Chanway Investment Co. Ltd. [1993] 1 HKLR 203 at page 207 :

“ The inherent jurisdiction is confined to making good procedural lacunae and preventing abuse of legal machinery when the interests of justice so demand. "

In my judgment there was no jurisdiction to make the order sought and the order ought to be discharged.

18. Mr. Tang also submitted that the provisions of either the repealed SDIO or the SFO did not give jurisdiction to restrain the defendant from dealing with the shares. He referred to Vol. 9 of Atkin's Court Forms (1995 Issue), Form 200 for the type of order made in England. The legislation in Hong Kong closely followed the Companies Act 1985 in the United Kingdom. The form of the order in Atkin's Court Forms clearly shows that the order to be made is an order in effect freezing the shares. It does not restrain the respondent from doing anything. The consequences of an order made under the SFO directing that the shares in question be subject to the restrictions under the SFO are set out in the SFO. These include, for instance, the consequence that any transfer of those shares is void as is any agreement to transfer those shares (Section 369 of the SFO). That was also the position under the repealed SDIO (Section 44). The statutory scheme shows that the restraint is on the shares rather than a restraint on the addressee of the notification given. It seems to me that Mr. Tang's objection on this ground is also well founded.

19. Mr. Tang also relied on the fact that insufficient time was given to comply with the notification given. The 1st letter gave one and a half working days to respond and the 2nd letter gave only half a day.

20. It is plain that the time for compliance specified in the notice must be a reasonable time. If a reasonable period of time is not given to respond then the notification given is invalid. That being so, no order can be founded on the invalid notification (Re Lonrho plc. (No.2) [1989] BCLC 309, Vinelott J at page 316).

21. What is a reasonable time, of course, depends on the circumstances of the case. The evidence shows that the matters giving rise to the investigation by the plaintiff occurred on 14 February 2003. Trading in the shares of the plaintiff was also suspended on that day. The plaintiff, however, did not form the independent committee for the investigation until about a month later on 11 March 2003. The 1st letter was issued about a fortnight later only on 27 March 2003. The 2nd letter was issued on 12 April 2003. The plaintiff took its time over the matter and I am unable to accept that in the circumstances the plaintiff was justified in giving only one and a half working days to answer the 1st letter and only half a working day to answer the 2nd letter. I am satisfied that a reasonable period was not given to the defendant to answer the request for information made by the notification. The order was founded on the notification given by the 2nd letter which only gave half a working day to answer the request for information. In my judgment the notification given was invalid and the order founded on it ought to be discharged.

22. It is not necessary for me to deal with the other points made by Mr. Tang in his submissions for the discharge of the order of Chu J.

23. In my judgment the plaintiff's application to Chu J was misconceived and I was satisfied that the order ought to be discharged. On 2nd May 2003 I ordered that the ex parte order of Chu J as varied on 23 April 2003 and continued on 25 April 2003 be discharged.

24. It seems to me also that there was no justification for the plaintiff making the application ex parte without notice to the defendant. As I have stated above, the matters giving rise to the investigation occurred on 14 February 2003. The evidence shows that the plaintiff and its solicitors were in correspondence with the defendant and its solicitors thereafter. It was only on 11 March 2003 that the plaintiff appointed its independent committee and about a fortnight later issued the 1st letter on 27 March 2003. It is trite law that ex parte relief should only be applied for in cases of urgency or where it is necessary to keep the proceedings secret at the ex parte stage. There was no question of the latter reason in this case. There was also no question of urgency in this case justifying the absence of notice of the application to the defendant or its solicitors. Mr. Lok was unable to point to any urgency in the matter except to say that the plaintiff wanted the status quo to be maintained. In my judgment, quite apart from the fact that the application was misconceived, there was no justification for making the application ex parte without notice to the defendant.

25. In the circumstances I considered that it was appropriate that the costs to the defendant should be taxed on a common fund basis.