SECURITIES AND FUTURES COMMISSION v. "C" AND OTHERS

Edited as directed by the Honourable Madam Justice Kwan on 31 October 2008

HCMP 727/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 727 OF 2008

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D E C I S I O N

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The ex parte order

1.  On 16 April 2008, I made an order (“the Order”) granting an interim injunction pursuant to section 213(6) of the Securities and Futures Ordinance, Cap. 571 on the ex parte application of the Securities and Futures Commission (“the SFC”) against the 1^st to 4^th defendants in these terms:

(1) the 1^st to 3^rd defendants are restrained from disposing of or dealing with any of their assets, which are within Hong Kong, up to the value of HK$43,661,568.00; this prohibition includes money in the accounts listed in schedule 2 to the order and the assets listed in schedule 3 to the order; and

(2) the 4^th defendant is restrained from disposing of or dealing with any of its assets, whether within or outside Hong Kong, up to the value of HK$43,661,568.00; this prohibition includes money and securities listed in the accounts in schedule 4 to the order.

2.  The duration of the interim injunction was up to the return date of the inter partes summons on 2 May 2008.

3.  The Order also provided that the names of the 1^st to 4^th defendants are to appear as “C”, “D”, “E” and “F” respectively in any report in this action and in the titular page and any judgment released to the public, and the naming or publication of anything leading to the identification in this action of the defendants be prohibited until further order.  This was to preserve the anonymity of the defendants, as the investigations of the SFC into suspected insider dealing are ongoing. 

4.  The 1^st defendant is an individual resident outside Hong Kong.  The 3^rd and 4^th defendants are companies incorporated in the British Virgin Islands.  By the same order, leave was granted to serve these defendants out of the jurisdiction the originating summons filed in this action as per the draft produced to the court, the supporting affirmation of the SFC in the ex parte application, the skeleton submissions of the SFC and the Order.  In applying for leave to serve the documents out of the jurisdiction, the SFC relied on Order 11 rule 1(1)(b) of the Rules of the High Court, which governs the case where “an injunction is sought ordering the defendant to do or refrain from doing anything within the jurisdiction (whether or not damages are also claimed in respect of a failure to do or the doing of that thing)”. 

The originating summons

5.  The originating summons in this action was filed on 18 April 2008.  The reliefs sought are threefold: restriction on disposal of assets in Hong Kong (as against the 1^st to 3^rd defendants), restriction on disposal of assets worldwide (as against the 4^th defendant), and disclosure of information (as against all four defendants).  The application for restriction on disposal of assets was made pursuant to sections 213(1)(b) and (2)(c) and is along the same lines as the interim injunction granted in the Order. 

The present applications

6.  The SFC issued an inter partes summons on 21 April 2008 for continuation of the interim injunctions in the Order, until it is varied or discharged by a further order of the court.  By this summons, the SFC also sought disclosure of assets and payments made by the defendants identical to the reliefs sought in the originating summons.

7.  On 30 April 2008, a summons was issued on behalf of the 1^st, 3^rd and 4^th defendants pursuant to Order 12 rule 8(1)(a), (c), (f), (g) and rule 9 of the Rules of the High Court seeking these reliefs:

(1) leave to serve the originating summons outside of the jurisdiction on the 1^st, 3^rd and 4^th defendants be discharged and any purported service of the same be set aside on the grounds, inter alia, that

(a)    the SFC’s claims, whether in whole or in part, are not claims in respect of which leave could, or ought properly to, have been given to serve outside of the jurisdiction under Order 11 rule 1 of the Rules of the High Court;

(b)   further or alternatively, there was serious material non-disclosure by the SFC in the ex parte application; and

(2) discharge of the Order and a declaration that the court has no jurisdiction over the 1^st, 3^rd and 4^th defendants in respect of the subject matter of the claim or the relief or remedy sought.

8.  The above summonses came before me on 2 May 2008, when the 4^th defendant was represented by separate counsel and solicitors, notwithstanding that an acknowledgment of service was filed by other solicitors on behalf of the 1^st, 3^rd and 4^th defendants on 30 April 2008.  The 4^th defendant reserved its right to contest jurisdiction and subsequently filed a separate acknowledgment of service.  The 1^st and 3^rd defendants have also filed an amended acknowledgment of service.  I ordered both summonses be adjourned for argument, gave directions for the filing of evidence, and provided that pending the determination of the summonses the Order is to be continued save as varied to increase the limit allowed on spending on legal advice and representation for various defendants and save as further varied or discharged by subsequent orders. 

9.  On 23 May 2008, the 4^th defendant issued a summons seeking reliefs similar to the summons issued on 30 April 2008 and in addition dismissal of the originating summons against the 4^th defendant on the following grounds:

(1) the claim of the SFC is not one in respect of which leave could, or ought properly to, have been given to serve out of jurisdiction under the sub-rule of Order 11 rule 1 of the Rules of the High Court relied upon or at all; 

(2) the court has no jurisdiction over the 4^th defendant in respect of the subject matter of the claim;

(3) the case is not a proper one for service out of the jurisdiction; and

(4) material non-disclosure by the SFC in the ex parte application.

10.  This summons of the 4^th defendant was ordered to be heard with the adjourned summons of the SFC and the adjourned summons now made on behalf of the 1^st and 3^rd defendants. 

The broad issues

11.  At the forefront of the opposition is the challenge mounted by the 1^st, 3^rd and 4^th defendants to the jurisdiction of the court over them in respect of the claim or relief sought in the originating summons, exercised through the extended jurisdiction of the Hong Kong court under Order 11 rule 1(1) to effect service on these defendants out of the jurisdiction.  There is no inherent extra-territorial jurisdiction.  The only valid means of bringing a defendant outside jurisdiction before this court is to effect service of the originating process on him as authorised under Order 11 rule 1(1).  This is the first time in which a jurisdictional challenge of this nature was raised in proceedings brought by the SFC seeking injunctive relief under section 213.  How this is resolved will have a material impact on the effectiveness of the measures that may be invoked by the SFC under section 213 in future. 

12.  The broad issues raised in the three summonses before me may be stated as follows:

(1) if the SFC has shown a good arguable case that the claim or relief sought in the originating summons, namely, orders under section 213 of Cap. 571, fall within Order 11 rule 1(1)(b) of the Rules of the High Court;

(2) if the SFC has shown a serious issue to be tried in respect of the following matters:

(a)    if a person resident out of Hong Kong is amenable to the jurisdiction of proceedings in the Market Misconduct Tribunal;

(b)   if there is a prima facie case of insider dealing or market misconduct on the part of the 1^st defendant;

(c)   if there is a claim against the 4^th defendant;

(d)   if there is any real risk of dissipation of the defendants’ assets;

(3) if the SFC has failed to disclose material information to the court in the ex parte application;

(4) if sections 213(1)(b) and (2)(c) have contravened article 105 of the Basic Law and are therefore unconstitutional and unenforceable; and

(5) if disclosure orders should be made.

The background matters

13.  I will first set out the relevant background matters.

14.  The 1^st defendant, a resident of the Peoples’ Republic of China, was at all material times the chairman, chief executive officer and a substantial shareholder of the company concerned (“the Company”), the shares of which were the subject of the suspected insider dealing.  It is the case of the SFC that the 1^st defendant, together with the father of the financial director of the Company, had engaged in insider dealing in the Company’s shares contrary to sections 270 and 291 of Cap. 571.  I will call the father “X”.  The 2^nd defendant shared the same residential address as X and they own the property jointly.  The 1^st defendant is the sole shareholder and director of the 3^rd defendant, a company incorporated in the British Virgin Islands. 

15.  The 4^th defendant was also incorporated in the British Virgin Islands and was acquired by a trust (“the Trust”) established under Jersey law on 4 July 2006 with the 1^st defendant as settlor under an instrument of trust.  Its directors are personnel of [a trust company] (“the Trust Company”) and its shareholders are nominee companies holding the shares on trust for [the Trust Company] as trustee of the Trust.  The beneficiaries of the Trust are the 1^st defendant and his three children, two of whom are minors.  The Trust is known as a settlor investment directed trust.  It is revocable during the settlor’s lifetime and allows him to direct the investments but not withdrawals or distributions, which cannot be made without the trustee exercising its discretion in this matter.  A limited power of attorney for the investment management was granted to the 1^st defendant effective 4 July 2006.  Assets of the Trust were contributed from the 1^st defendant and the 2^nd defendant, as described below.  There are no nor have there ever been any assets of the Trust or the 4^th defendant in Hong Kong.  The validity of the Trust under the laws of Jersey is not in issue. 

16.  The SFC sought an injunction against the four defendants as HK$57,729,815.12, being part of the proceeds of the suspected insider dealing in the total sum of HK$77,243,344.20, were transferred to bank accounts controlled by these defendants in Hong Kong and Singapore.

17.  According to the results of the Company for the year ended 31 December 2006 published on 20 April 2007, it had a loss before taxation of HK$16 million and net liabilities of HK$58 million.  Included in the current liabilities was a loan payable of HK$58 million owed to a third party, the repayment arrangement of which was in the process of negotiation between the Company and the third party.  In view of this uncertainty, the auditors disclaimed their opinion in respect of the going concern basis.  Further, they were unable to assess whether any impairment should be recognised in respect of an amount of HK$27 million included in the receivables in current assets.  They declined to express an opinion whether the Company’s financial statements gave a true and fair view of the state of its affairs as at 31 December 2006. 

18.  On 7 June 2007, trading of the Company’s shares was suspended at its request.  On 15 June 2007, the Company announced that a creditor’s winding-up petition was served on it on 6 June 2007 in which it was alleged that the Company had failed to satisfy a debt to the petitioner of approximately HK$70 million. 

19.  In the winding-up petition, it was alleged that it was agreed between the Company and a creditor in April 2004 that the Company would settle the amount due of a total sum of HK$58 million odd with interest in three payments.  The Company only paid the first payment and defaulted on the rest.  On 1 February 2007, in consideration of HK$25 million paid by the petitioner, the creditor assigned to the petitioner all her interests and rights in the debt of about HK$58 million in outstanding principal with accrued interest of about HK$12 million and notice of the assignment was given to the Company on 5 February 2007.  The petitioner served a demand for the debt on the Company on 26 April 2007 pursuant to section 178(1)(a) of the Companies Ordinance, Cap. 32.

20.  The information that the petitioning creditor had served a statutory demand on the Company on 26 April 2007 was not disseminated to the investing public at the time.  As chairman and chief executive officer of the Company, the 1^st defendant knew that the Company had received the statutory demand on or about 26 April 2007 and ought to know that the Company was unable to pay the debt demanded.

21.  On 7 May 2007, the Company through its solicitors offered to pay the petitioner HK$8 million by instalments in full and final settlement of the debt.  The petitioner did not respond to the offer.  On 22 May 2007, the Company through its solicitors made a second offer to pay HK$8 million in a lump sum in full and final settlement of the debt.  The petitioner did not respond and presented the winding-up petition on 5 June 2007.

22.  The share price of the Company rose steadily between 8 May 2007 and 6 June 2007.

23.  From 27 April 2007 to 30 May 2007, the 1^st defendant sold 50.25 million shares of the Company (held by a company of which 35% of the issued shares was owned by an entity wholly owned by the 1^st defendant).  There was no record that the 1^st defendant made disclosure of the disposal under Part XV of Cap. 571.  HK$23,100,000.00 being part of the sale proceeds was deposited into his personal bank account on 8 June 2007.  On 11 July 2007, a sum of HK$25 million (including the sale proceeds of HK$23,100,000.00 and interests) was transferred from his personal account to the bank account of the 4^th defendant with [a private bank in Singapore] (“the Private Bank”).

24.  Between 14 and 23 May 2007, the 1^st defendant sold a further 1 million shares of the Company from his own securities account and part of the sale proceeds in the sum of HK$550,000.00 was deposited into his personal bank account on 30 May 2007.

25.  Between 14 and 29 May 2007, X sold 48.61 million shares of the Company held by an entity of which he was the sole director and shareholder.  Of the net proceeds of sale in the amount of HK$39,033,206.78, HK$1,254,455.01 was transferred to the bank account of the 3^rd defendant on 22 May 2007 and the remaining balance of HK$37,778,751.77 was transferred to the bank account of the 2^nd defendant on 8 June 2007, out of which HK$32,400,000.00 was transferred to the 4^th defendant’s bank account with [the Private Bank] on 15 and 16 June 2007.

26.  Trading in the shares of the Company resumed on 18 October 2007 and the share price dropped by 62%.  The Company was ordered to be wound up by the court on 18 March 2008.

27.  It is the contention of the SFC that by selling the shares of the Company before the announcement of price sensitive information on 15 June 2007, loss was avoided in the dealings made by the 1^st defendant and X.  The SFC believes X might have acted as a nominee of the 1^st defendant, as money had been withdrawn from the 3^rd defendant’s bank account for the operating expenses of the entity of X that was used to hold shares in the Company.  Using the method of notional calculation adopted in cases of insider dealing, the SFC calculated the loss avoided by the dealings of the 1^st defendant at HK$20,965,420.00 (for 50,250,000 shares) and HK$316,000.00 (for 1 million shares) and the loss avoided by the dealings of X at HK$22,696,148.00.

28.  Two weeks after the resumption in trading of the Company’s shares and on 31 October 2007, the SFC conducted a general enquiry on the Company and requested it to provide information in relation to the winding-up petition.  In the meantime, on 26 October and 9 November 2007, the SFC also requested a subsidiary of the Company engaged in securities broking to provide information on all trades in the Company’s shares during the period from 27 April 2007 to 6 June 2007.

29.  Having reviewed the information thus provided, the SFC issued a direction on 17 January 2008 to commence a formal investigation under section 182(1) of Cap. 571 whether offences of insider dealing might have been committed in respect of dealing in the Company’s shares during the period of 26 April 2007 (the service of the statutory demand) and 6 June 2007 (the service of the winding-up petition).  The investigation was also to inquire whether during the period from 4 April 2007 to 17 January 2008, persons having an interest in the shares of the Company might have committed offences contrary to Part XV (Disclosure of Interests) of Cap. 571.

30.  On 25 January 2008, the SFC raided the offices of the Company and the subsidiary aforesaid and issued a notice to the 1^st defendant to attend an interview on 4 February 2008 as a person under investigation in that the SFC has reasonable cause to believe that offences of insider dealing might have been committed.  The 1^st defendant failed to attend the interview.  He does not appear to have any connection with Hong Kong other than his position as the chairman and chief executive officer of the Company.  He has not visited Hong Kong since 24 December 2007.  His solicitors informed the SFC in January 2008 that he was hospitalised in Beijing and it might take five months before he would be fit to travel.  Despite this alleged inability to travel, he went to Japan and the United States for medical treatment during 26 January 2008 to 6 April 2008.  The SFC telephoned his solicitors on 3 occasions in February 2008 to ascertain if he would agree to be interviewed in Beijing but were told they were waiting for his instructions. 

31.  The SFC asserted there is a real risk the sale proceeds of the suspected insider dealing held in the bank accounts of the defendants might be further dissipated.  From its investigations, the SFC ascertained the total net proceeds of suspected insider dealing to be HK$77,243,344.20, of which HK$57,729,815.12 was transferred to the defendants’ bank accounts in Hong Kong and Singapore.  Of the amounts transferred to the 4^th defendant’s bank account with [the Private Bank] of HK$32,400,000.00 (transferred on 15 and 16 June 2007) and HK$25 million (transferred on 11 July 2007), US$2,469,548.12 had remained in this bank account by 31 March 2008.  The purpose of the interim injunction is to ensure that the 1^st defendant would have sufficient funds to satisfy any order of the Market Misconduct Tribunal for the disgorgement of loss avoided or any other order of the court.  Further, without the benefit of further information being disclosed by the defendants, it would be very difficult for the SFC to establish what has become of the entire sale proceeds of the suspected insider dealing and where the sale proceeds may now be situated. 

If the originating summons falls within Order 11 rule 1(1)(b)

32.  An applicant for leave to effect service of an originating process out of the jurisdiction must establish: (1) a good arguable case that the claim or relief sought in the originating process falls within one or more of the sub-paragraphs of Order 11 rule 1(1), and that the case must fall within the spirit as well as the letter of the sub-paragraph relied on (Hong Kong Civil Procedure 2009, Vol. 1, paras. 11/1/7 and 11/1/8; Johnson v. Taylor Bros. & Co. Ltd. [1920] AC 144 at 153); (2) there is a serious issue to be tried (a lower degree of proof than good arguable case) between the parties on the merits (Hong Kong Civil Procedure, op. cit., para. 11/1/8B); and (3) the case is a proper one for the exercise of the discretion to grant leave (Order 11 rule 4(2)).  The matter in (1) goes to the jurisdiction of the court, those in (2) and (3) go to discretion.  The onus to establish these matters remains on the applicant where the defendant makes an application under Order 12 rule 8 to set aside the leave granted (Hong Kong Civil Procedure, op. cit., para. 11/4/8F; Ren Yun Liang & Ors. v. China Merchants Bank Co. Ltd. & Ors., HCA No. 1456 of 2005, Recorder B. Yu, SC, 29 January 2007).

33.  The SFC has chosen to rely on Order 11 rule 1(1)(b).  In respect of the serious issue to be tried, the SFC would need to show there is a reasonable prospect of an injunction being granted as sought in the originating summons (Hong Kong Civil Procedure, op. cit., para. 11/1/15; Watson v. Daily Record [1907] 1 KB 853).

34.  Mr. Sussex, SC submitted on behalf of the 1^st and 3^rd defendants that the fundamental difficulty of the SFC lies in the nature of the injunctive relief sought, namely, to restrain the dealing or disposition of property and it is not to enforce any substantive right to the property but merely for the purpose of aiding in future execution.  The relief sought in the originating summons is peripheral and incidental to the potential claims by the SFC against the defendants for suspected insider dealing.  Mr. Bartlett, who appeared for the 4^th defendant, made a similar submission.

35.  The originating summons in these proceedings seeks relief pursuant to sections 213(1)(b) and (2)(c) of Cap. 571. Section 213(1)(b) provides that, where it appears to the SFC that any of the matters in subsections (1)(a)(i) to (v) has occurred, is occurring or may occur, the Court of First Instance, on the application of the SFC, may make one or more of the orders specified in subsection (2).  The matters in subsections (1)(a)(i) to (v) include where a person has “contravened any of the relevant provisions” of Cap. 571, “aided, abetted, or otherwise assisted … a person to commit any such contravention”, “directly or indirectly been in any way knowingly involved in, or a party to, any such contravention”.  Section 213(2)(c) is for “an order restraining or prohibiting a person from acquiring, disposing of, or otherwise dealing in, any property specified in the order.” Section 213(2)(g) is for “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).” Section 213(6) provides that “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).”

36.  Mr. Sussex argued that an application for an order under section 213(2)(c) is not intended to determine, nor is it capable of determining, any substantive rights between the SFC on the one hand, and the defendants on the other hand.  Indeed, in the initial submissions of the SFC, it has regarded the application as analogous to a Mareva injunction in civil proceedings.  Mr. Sussex submitted that the question whether the originating summons falls within the intent and spirit of Order 11 rule 1(1)(b) is covered squarely by Mercedes Benz AG v. Leiduck [1996] 1 AC 284, a decision of the Privy Council on appeal from Hong Kong.

37.  The first of the two issues as framed by Lord Mustill in Mercedes Benz AG v. Leiduck at 301F was this:

“Whether an extra-territorial jurisdiction grounded only on the presence of assets within the territory is one which sub-paragraph (b) [of Order 11 rule 1(1)] and its predecessors were intended to assert”.

38.  Lord Mustill answered the question of territorial jurisdiction in this way at 301G to 302H:

“Their Lordships are satisfied that it is not.  In their opinion the purpose of Ord. 11, r. 1 is to authorise the service of a person who would not otherwise be compellable to appear before the English court of a document requiring him to submit to the adjudication by the court of a claim advanced in an action or matter commenced by that document.  Such a claim will be for relief founded on a right asserted by the plaintiff in the action or matter, and enforced through the medium of a judgment given by the court in that action or matter.  The document at the same time defines the relief claimed, institutes the proceedings in which it is claimed, and when properly served compels the defendant to enter upon the proceedings or suffer judgment and execution in default.  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 proceedings against his will.

Thus, at the centre of the powers conferred by Order 11 is a proposed action or matter which will decide upon and give effect to rights.  An application for Mareva relief is not of this character.  When ruled upon it decides no rights, and calls into existence no process by which the rights will be decided.  The decision will take place in the framework of a distinct procedure, the outcome and course of which will be quite unaffected by whether or not Mareva relief has been granted.  Again, if the application succeeds the relief granted bears no resemblance to an orthodox interlocutory injunction, which in a provisional and temporary way does seek to enforce rights, or to the kind of interim procedural measure which aims to make more effective the conduct of the action or matter in which the substantive rights of the plaintiff are ascertained.  Nor does the Mareva injunction enforce the plaintiff’s rights even when a judgment has ascertained that they exist, for it merely ensures that once the mechanisms of enforcement are set in motion, there is something physically available upon which they can work.

This opinion, that Order 11 is confined to originating documents which set in motion proceedings designed to ascertain substantive rights, is borne out by its language.  Thus, the opening words of rule 1(1) define the extra-territorial jurisdiction by reference to the relief claimed in ‘the action begun by the writ’.  Looking at Ord. 11, r. 1(1) in the round, it seems to their Lordships plain that this expression refers to a claim for substantive relief which will be the subject of adjudication in the action initiated by the writ, and not to proceedings which are merely peripheral; … It is true that R.S.C., Ord. 11 r. 9 makes Order 11 applicable to the service of an originating summons, but the imprint of rule 1(1) does in their Lordships’ view remain on the entire scheme of extra-territorial jurisdiction, and relates it to proceedings for substantial and not incidental relief.

Again, R.S.C., Ord. 11, r. 4 requires the affidavit leading the application to state the belief of the deponent that the plaintiff has ‘a good cause of action.’ … in their Lordships’ opinion, the requirement in rule 4 read in the context of the jurisdiction created by Ord. 11, r. 1 can only mean a substantive right enforceable by proceedings in the English court.  In one sense, it might be said that a valid claim for the infringement of a substantive right is a cause of action even if no action lies in the English court to enforce it; but this obviously cannot be what is contemplated by Order 11.” (Emphasis supplied.)

39.  Mr. Scott, SC submitted on behalf of the SFC that notwithstanding the statements of general principle of Lord Diplock in Siskina (Cargo Owners) v. Distos S.A. [1979] AC 210 at 256D to F that the court has no power to grant an interlocutory injunction except in protection or assertion of some legal or equitable right which it has jurisdiction to enforce by final judgment and that a right to obtain an interlocutory injunction is not a cause of action, the present situation is different.  He drew on the approach in Channel Tunnel Group Ltd. v. Balfour Beatty Construction Ltd. [1993] AC 334.  Whilst maintaining that an interim injunction had to be incidental to an attempt to enforce a substantive right and could not exist in isolation, and that the defendant had to be amenable to the jurisdiction of the court, the House of Lords held it is not necessary that an interim injunction should be ancillary to a claim for relief to be granted by an English court, but could be ordered in aid of proceedings in a foreign court, if the English court has power to grant the substantive relief.

40.  By parity of reasoning, Mr. Scott contended that the SFC has an underlying justiciable claim in Hong Kong for final relief against the defendants under Cap. 571 for the insider dealing activities that took place in Hong Kong.  The injunction applied for in the originating summons pursuant to sections 213(1)(b) and (2)(c) of Cap. 571 is incidental to the enforcement of an underlying claim, which is justiciable by the Hong Kong court if submitted to the court for adjudication.  Thus, the injunction cannot be said to have been sought out of thin air.

41.  The fact that by virtue of sections 213(1)(b) and (2)(c) of Cap. 571, the SFC is entitled to bring proceedings seeking an injunction as the sole relief, in anticipation of and to protect the enforcement of relief in other proceedings, is in my view immaterial.  As submitted by Mr. Sussex, the challenge to The Siskina approach (if an injunction could properly be granted as a freestanding relief in support of separate proceedings) is a different question not concerned with territorial jurisdiction (it is the second of the two issues identified in the majority decision in Mercedes Benz AG v. Leiduck, at 298B to C, D to E).

42.  What matters here is when the court rules on the originating summons, whether it determines any substantive rights between the SFC and the defendants.  As mentioned earlier, Mr. Sussex and Mr. Bartlett submitted that the answer is no.  Mr. Scott has argued to the contrary.  His argument ran as follows.

43.  Sections 213(1)(b) and (2)(c) of Cap. 571 confer power on the SFC to pursue a form of statutory injunction as a freestanding relief by originating summons, and it is a justiciable claim by the Hong Kong court.  In granting such injunctive relief, there is no need for an underlying claim, as the jurisdictional basis is all found in section 213.  The order sought under section 213(2)(c) is different from that in section 213(6), which is an “interim order … pending the determination of an application made pursuant to subsection (1).” The ‘final’ and interim orders are all found in section 213.  By virtue of this statutory entitlement, the relief sought in the originating summons can stand on its own.  The substantive proceedings are not the proceedings in the Market Misconduct Tribunal which go on a parallel track, but the proceedings in the originating summons here (this seems inconsistent with his earlier argument in which he contended that the final relief is in separate proceedings under Cap. 571).  As Lord Mustill had said in Channel Tunnel Group Ltd., supra. at 362C, a substantive right “usually although not invariably takes the shape of a cause of action”.  It is not a must that the statutory claim in the originating summons should constitute a cause of action. 

44.  In my judgment, an order under section 213(2)(c) to restrain or prohibit a person from acquiring, disposing of or otherwise dealing in any property specified in the order is not a substantive relief, as it does not decide upon rights or give effect to rights in respect of the property under restraint.  It is merely to preserve the property pending the completion of investigation by the SFC of the contravention of any of the relevant provisions in Cap. 571, or the completion of proceedings that should be brought as a result of the investigation.  The decision of substantive rights will take place in the framework of a distinct and separate procedure, such as proceedings to be brought in the Market Misconduct Tribunal. 

45.  In the affirmation of the SFC in support of its application to serve the originating summons on the 1^st, 3^rd and 4^th defendants out of the jurisdiction, the deponent stated her belief that the SFC has “good cause of action” against these defendants, in order to comply with the requirement in Order 11 rule 4.  She has not identified the “cause of action”, but this would appear to be the “cause of action” in the originating summons, i.e. for injunctive relief under sections 213(1)(b) and (2)(c).  This is not a claim for the infringement of a substantive right enforceable through a judgment or order in these proceedings. 

46.  I am inclined to agree with Mr. Sussex and Mr. Bartlett that the situation here is governed by Mercedes Benz AG v. Leiduck, which is binding on this court.  Applying the reasoning of the majority of the Privy Council, I hold that as a matter of interpretation, the statutory enlargement of territorial jurisdiction in Order 11 rule 1(1)(b) does not empower the court to permit service of an originating process which does not seek the adjudication of substantive rights, enforceable through the medium of a judgment or order in the same proceedings, and that the SFC has failed to establish a good arguable case that Order 11 rule 1(1)(b) applies to the sui generis form of relief in section 213(2)(c).  To borrow the words of Lord Mustill at 303C, the extra-territorial jurisdiction of the court in Order 11 rule 1 has not gained an extra dimension when section 213(2)(c) was enacted to empower the SFC to seek a form of statutory injunction to protect the enforcement of relief in other proceedings. 

47.  Mr. Scott tried a different tack and argued that the originating summons also seeks relief under section 213(2)(b), and that the nature of an order under this subsection is a final order, it affects substantive rights and is capable of falling within Order 11 rule 1(1)(b).  Section 213(2)(b) provides that 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 subsections (1)(a)(i) to (v), whether knowingly or otherwise, an order may be made requiring the person to take such steps as the 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”.

48.  He referred to Securities and Investments Board v. Pantell S.A. & Ors. (No. 2) [1993] 1 All E R 134, in which the English Court of Appeal considered section 6(2) of the Financial Services Act 1986 in the context of a striking out application, this provision has some similarities with section 213(2)(b).  It was held that an order could be made under section 6(2) not just against the contravener, but against a person knowingly concerned in the contravener’s breaches of the Act, notwithstanding that person had received nothing from the transaction resulting from or constituting the contravention, so as to restore all parties to the transaction to their former positions, provided that the steps directed by the order were reasonably capable of doing so.  So an order ought not to require a contravener to repay to an investor the purchase price of shares sold to the investor unless the obligation to pay is conditional upon the return of shares by the investor, otherwise only one of the parties is being restored to his former position.  This independent remedy is a form of statutory rescission and restitution. 

49.  He submitted that under section 213(2)(b) (which is couched in even wider language than section 6(2) of the Act), an order may be made requiring the person or persons that had been involved, whether knowingly or otherwise, in insider dealing to take such steps to restore the parties to any transaction to the position in which they were before the transaction was entered into, provided that the steps directed by the order are reasonably capable of doing so.  There is no restriction placed on the type of steps that the court may order under section 213(2)(b) to restore the parties to their former financial position, provided that the pre-condition stipulated in the subsection for the exercise of the power is met.  It is possible for the SFC to seek an order under section 213(2)(b) to reverse the sale of the shares being the subject of the insider dealing.  Investors who had purchased the shares in the transactions could return the shares and the defendants may be required to repay the purchase price to the investors.  Restoration may be difficult in this situation but not impossible. 

50.  There are a number of difficulties about this submission of Mr. Scott.

51.  Firstly, as submitted by Mr. Sussex, this is a massive shift of ground of the SFC.  Although section 213(2)(b) was included in the statutory provisions referred to in the margin of the originating summons, it is clear from the body of the originating summons that no order or relief was sought under that provision.  The only claims in the originating summons are for an order under section 213(2)(c) restraining disposal of assets, and an ancillary order for disclosure of information under section 213(2)(g).  There is no claim for an order under section 213(2)(b) before the court.  Nor has the SFC put forward any proposed amendment of the originating summons.  Applying the principle in Parker v. Schuller (1901) 17 TLR 299 (see Hong Kong Civil Procedure, op. cit., para. 11/4/10), where leave is given on one statutory claim to serve out of the jurisdiction, such leave does not extend to cover a different unspecified statutory claim and the leave cannot be sustained on such a claim after the event by way of resistance to an application to set aside.  Unlike the situation in Walton Insurance Ltd. v. Deutsche Bank Ruck (UK) Reinsurance Co. Ltd., 20 November 1990, English Court of Appeal, Lexis transcript, I do not consider the new claim for a different statutory relief not specified in the originating summons is merely to cure a technical shortcoming.

52.  Secondly, as submitted by Mr. Sussex and Mr. Bartlett, it is doubtful if an order under section 213(2)(b) could be made against the 4^th defendant.  Mr. Bartlett has queried how it could be said that the 4^th defendant was “involved” in the contravention of the relevant provisions, given that the 4^th defendant was not even the direct recipient of any proceeds from the sale of shares.

53.  Thirdly, as submitted by Mr. Bartlett, there are no proceedings on foot which introduced a restitution aspect.  All that we have at the moment is an investigation by the SFC, which is highly contingent, and it is not known if any proceedings may or may not be brought as a result.  Any order specified in section 213(2), including section 213(2)(b), is made pursuant to an application of the SFC under section 213(1)(b), where it appears to the SFC, whether or not during the course or as a result of the exercise of its powers of investigation, that any of the matters referred to in subsections (1)(a)(i) to (v) has occurred, is occurring or may occur.  The court is not required to be satisfied of the contravention of any relevant provision before an order can be made.  In contrast, a restitution order under section 6(2) of the Financial Services Act is made if “the court is satisfied that a person has entered into any transaction in contravention of section 3”.  Notwithstanding the apparent width of the order that may be made in section 213(2)(b), having regard to the pre-condition under which such an order may be applied for in section 213(1)(b), I have considerable reservations if an order under section 213(2)(b) is determinative of substantive rights.  I am inclined to think that an order in section 213(2)(b), like an order in section 213(2)(c), is to prepare the ground for enforcement where substantive rights have been determined in other proceedings. 

54.  Even if I were to consider the application for leave to serve outside jurisdiction on the basis that the claim in the originating summons is for an order under section 213(2)(b), I cannot be satisfied that the SFC has established a good arguable case that a claim for relief under section 213(2)(b) would fall within Order 11 rule 1(1)(b).

55.  There is an apparent lacuna in the existing legislation to provide for a power to effect service out of jurisdiction of an originating process issued pursuant to section 213 of Cap. 571.  There is no separate provision in the Rules of the High Court for this, unlike the provision made for an originating summons under the Arbitration Ordinance, Cap. 341 in Order 73 rule 7.

56.  On the recommendation of the Chief Justice’s Working Party on Civil Justice Reform[1], amendments were made to the High Court Ordinance, Cap. 4 and the Rules of the High Court in 2008[2], reversing Mercedes Benz AG v. Leiduck to arm the courts with power to provide interim relief in aid of foreign proceedings and arbitrations as a freestanding form of relief, without being ancillary or incidental to substantive proceedings commenced in Hong Kong, and making it possible for a plaintiff who seeks such relief to obtain leave to serve a defendant out of the jurisdiction.  By the new section 21M(1) in the High Court Ordinance, the court may grant interim relief in relation to proceedings which have been or are to be commenced in a place outside Hong Kong and are capable of giving rise to a judgment which may be enforced in Hong Kong under any Ordinance or at common law.  Order 11 rule 1(1) is amended by adding a new sub-paragraph (oc), to provide that service of a writ out of the jurisdiction is permissible for a claim “for interim relief or appointment of a receiver under section 21M(1) of the [High Court] Ordinance.”

57.  These amendments, which are not yet in operation and which relate to interim injunctions in aid of foreign proceedings, do not erode the reasoning of the majority decision in Mercedes Benz AG v. Leiduck in respect of other forms of interim injunctions that are ancillary or incidental to substantive proceedings to be commenced in Hong Kong, nor do they cure the lacuna in the existing legislation to provide for service out of jurisdiction of an originating process issued pursuant to section 213.

58.  Mr. Bartlett raised an additional point on behalf of the 4^th defendant.  To bring its case within Order 11 rule 1(1)(b) (which is a claim for an injunction ordering the defendant to do or refrain from doing anything within the jurisdiction), the injunction in question must relate to something “within the jurisdiction”.  The Order against the 4^th defendant covers its assets “whether within or outside Hong Kong”.  However, the bank account of the 4^th defendant with [the Private Bank] is the only asset of this defendant known to the SFC.  The SFC does not know of any asset of the 4^th defendant in Hong Kong and has not adduced any evidence from which prima facie inference can be drawn of the existence of any such asset.  A director of the 4^th defendant has confirmed that there are no assets, nor have there ever been any assets, of the Trust or of the 4^th defendant in Hong Kong.

59.  Notwithstanding the 4^th defendant has no assets here, a domestic injunction was sought with a worldwide injunction against the 4^th defendant in the inter partes summons.  Mr. Bartlett submitted that this was done to give the appearance of complying with Order 11 rule 1(1)(b), the domestic injunction was used as a Trojan horse for the worldwide injunction, to enable purported compliance with sub-paragraph (b), and is an abuse of process.  For this reason as well, leave to serve out of the jurisdiction against the 4^th defendant cannot be sustained.

60.  Mr. Scott relied on Derby v. Weldon (Nos. 3 & 4) [1990] Ch 65 at 77F to 80G, for the proposition that the presence of some assets within the jurisdiction is not a pre-condition for granting a Mareva injunction in respect of assets outside the jurisdiction.  Mr. Bartlett acknowledged that a worldwide Mareva injunction can be granted against a Hong Kong resident solely in respect of his overseas assets.  Derby v. Weldon (Nos. 3 & 4) was not concerned with the requirement that must be fulfilled in Order 11 rule 1(1)(b) before the court can assume “long arm” jurisdiction over a person resident abroad and does not assist.  I am inclined to agree with Mr. Bartlett that is an additional reason for holding that the SFC has not made out a good arguable case that the injunction sought against the 4^th defendant in the originating summons falls within Order 11 rule 1(1)(b).

61.  To salvage the position, Mr. Scott sought leave to amend the originating summons by adding an additional relief against the 4^th defendant in these terms:

“and must return to Hong Kong and maintain the same in a designated account the funds representing the monies and securities in the accounts listed in Schedule 4 hereto [this should be a reference to Schedule 3].  The sums in such designated account shall not be disposed of or encumbered in any way other than as the Court shall direct.”

62.  There is an element of artificiality about the proposed amendment.  The 4^th defendant has no bank account in Hong Kong.  The injunction is to restrain dealing with assets.  Until the 4^th defendant raised objection to jurisdiction, the SFC had regarded it sufficient to restrain this defendant from dealing with the funds maintained in its bank account in Singapore.  The amendment is just to enable the SFC to meet the requirement in Order 11 rule 1(1)(b) that the injunction sought relates to something to be done within the jurisdiction.  It does not seem to me appropriate to permit amendment of the originating summons when the injunction sought is not a genuine part of the relief but is claimed merely to bring the case technically within the rule (Hong Kong Civil Procedure, op. cit., para. 11/1/15; Rosler v. Hilbery [1925] 1 Ch 250 at 261 to 262).

63.  I reach my decision with regret that this court cannot properly give leave to serve the originating summons on the 1^st, 3^rd and 4^th defendants out of the jurisdiction under Order 11 rule 1(1)(b), but I have no discretion in the matter.  The question whether or not the case meets the conditions prescribed for service out of the jurisdiction does not involve an exercise of discretion, but goes to the jurisdiction of the court.  Leave to serve the originating summons on these defendants must be set aside and the Order discharged against them.  In view of this conclusion I have reached, it is strictly unnecessary to consider the other broad issues raised by counsel.  I will deal with them nevertheless as I have heard submissions on these matters.

If a foreign resident is amenable to the jurisdiction of proceedings in the Market Misconduct Tribunal

64.  Mr. Sussex buttressed his argument with the submission that a person residing outside Hong Kong cannot be brought to court to answer any alleged misconduct in the Market Misconduct Tribunal.  Although section 269(f) of Cap. 571 provides that the Chief Justice may make rules providing for the service of any document for the purposes of Part XIII or in Schedule 9 (both relate to the Market Misconduct Tribunal), no rules have been made in that respect.  According to Mr. Sussex, section 400 (which provides for modes of service of notices or other documents, subject to, inter alia, any rules made under section 269) contemplates only a domestic regime.  He referred to Craies on Legislation, 8^th ed., paras. 11.2.2 to 11.2.5 for the presumption that in the absence of express provision to the contrary, an enactment will apply generally to things done and people in the territory and the legislature does not intend to assert extra-territorial jurisdiction.

65.  Mr. Sussex contended there is a jurisdictional problem to bring a foreign party to court for the purpose of an injunction to restrain dealing with assets when the Market Misconduct Tribunal would have no power to bring before it a foreign party alleged to have engaged in market misconduct.  As a matter of discretion, this court should not make an ancillary order giving leave to serve the originating summons out of the jurisdiction when the notice to institute substantive proceedings in the Market Misconduct Tribunal cannot be served on the foreign party. 

66.  Pursuant to section 252(2), market misconduct proceedings in the Tribunal are instituted by the Financial Secretary by a notice in writing, with a statement specifying such matters as are prescribed in Schedule 9.  This is not the institution of proceedings of the civil type requiring an originating process to be served personally on the defendant who is to acknowledge service, contemplated for instance in section 281(5).  The only requirement is that the Tribunal shall not identify a person as having engaged in market misconduct without first giving the person a reasonable opportunity of being heard (section 252(6)), or make any of the orders stipulated in section 257(1) at the conclusion of the hearing in respect of a person or an officer of a corporation identified as having engaged in market misconduct without first giving him a reasonable opportunity of being heard (sections 257(3) and 258(3)).  I agree with Mr. Scott that so long as the notice and statement would have come to the notice of the foreign party, and he is given a reasonable opportunity to be heard, the proceedings can continue in his absence if he chooses not to participate.

67.  I do not accept Mr. Sussex’s contention there is no serious issue to be tried that the 1^st and 3^rd defendants are not amenable to the jurisdiction of market misconduct proceedings.

Is there a prima facie case of insider dealing or market misconduct on the part of the 1^st defendant

68.  The standard of proof for this issue is a serious issue to be tried.  The court will not attempt to try disputes of fact on affidavit and will look primarily at the case of the SFC, although it is open to the defendants to show that the evidence of the SFC is incomplete or is plainly wrong.  Mr. Sussex has accepted that the threshold of a prima facie case of insider dealing is fairly low.

69.  Two matters in defence were raised by the 1^st defendant.

70.  Firstly, it was contended that there was no “relevant information” (as defined in sections 245(2) and 285(2)) as the public already knew from the results of the Company published on 20 April 2007 that its financial position was dire, and that there was a loan of $58 million owed to a third party for which the Company was negotiating repayment.  It was patently clear the Company was insolvent and was liable to be wound up at any time.  The undisclosed information that a statutory demand for the loan was served on the Company on 26 April 2007 was not likely to materially affect the price of the Company’s shares and could not have been “relevant information”.  A statutory demand was unnecessary and superfluous to wind up the Company, there was no need to rely on the deeming effect of a statutory demand under section 178(1)(a). 

71.  I am satisfied the SFC has made out a prima facie case on “relevant information”.  It was not merely the statutory demand that was not known to the public, but also the fact that the loan was assigned from the original lender to a new entity in February 2007 (this suggested that the environment for negotiation of a settlement of the debt might have changed) and there were two failed attempts by the Company to settle the debt on 7 and 22 May 2007.  These matters indicated the increased possibility of the Company being wound up.  Such information could materially affect the price of the shares and constitute “relevant information”. 

72.  Secondly, the 1^st defendant relied on the defence in sections 271(1) and 292(3) and contended that the purpose for which he dealt in the shares was not to secure or increase a profit or avoid a loss, whether for himself or another, by using relevant information.  He alleged that the reason for the sale of the shares was pursuant to the requests of certain employees of the Company in Beijing and Shenzhen, who wished to exercise their share options and to sell the shares, as the price of the shares was on the rise at that time.  He claimed he had not counselled or procured the employees to exercise their options or to sell their shares.  As these employees did not have bank accounts or securities accounts in Hong Kong, the transactions were handled through his accounts.  He produced evidence to show that money was drawn from a securities account operated by him to pay for the exercise of the share options.  Out of the net proceeds of sale of the shares, HK$23,100,000.00 was transferred to his personal bank account in Hong Kong.  Owing to foreign currency control in China and the difficulty of transferring the funds to China, he paid the employees out of his own funds in China.  Hence, the proceeds in Hong Kong belonged to him.

73.  The SFC has suspected that these employees might have acted as the 1^st defendant’s nominees in the sale of the shares.  As pointed out by Mr. Scott, the 1^st defendant has not provided any contemporaneous evidence to back up his assertion that (1) the payments made for the acquisition of the shares as a result of the exercise of the options had come from the employees; and (2) he had actually made payments to these employees after the sale of the shares.

74.  There are also reasonable grounds to suspect that X was acting as a nominee of the 1^st defendant when he caused 48.61 million of the shares to be sold.

75.  I agree that a prima facie case of insider dealing is made out in this instance.

Is there a claim against the 4^th defendant

76.  In a letter of [the Trust Company] dated 4 July 2006, it was stated that the 4^th defendant is wholly owned by the Trust and that the ultimate beneficial owner is the 1^st defendant.  As explained subsequently by a director of the 4^th defendant, that letter was provided by [the Trust Company] to [the Private Bank] for the purpose of opening a bank account with the latter, as, for anti-money laundering reasons, banks now insist that trust companies should disclose the individual who is the principal behind a trust structure.  It was incorrect to state in the letter that the 1^st defendant is the ultimate beneficial owner of the 4^th defendant, as the 4^th defendant is legally and beneficially owned by the Trust and administered for the benefit of the beneficiaries, being the 1^st defendant and his three children.  The 4^th defendant is a separate legal entity.  Its shareholders have no property in its assets. 

77.  The bank accounts of the 4^th defendant are controlled by its directors and ultimately by [the Trust Company] as the trustee of the Trust.  The 1^st defendant had been granted a limited power of attorney so he can direct investments, but is not empowered to make any withdrawal from the accounts.

78.  The directors of the 4^th defendant, who are personnel of [the Trust Company], have no knowledge of the alleged insider dealing of the 1^st defendant and X, or that the assets of the Trust contributed from the 1^st and 2^nd defendants were allegedly the proceeds of insider dealing. 

79.  It is not in dispute the SFC has no proprietary interest in the assets of the 4^th defendant, being the subject of the injunction. 

80.  Mr. Bartlett submitted that there are no reasonable prospects of the court making an order against the 4^th defendant under section 213(2)(c) to restrain dealing with the 4^th defendant’s assets, which are not owned or controlled by the alleged culprits in insider dealings, to abide the outcome of processes that are beset with contingencies. In this instance, mere control of the assets is irrelevant as it is not associated with beneficial ownership.  He further submitted that the standard of proof here is the higher standard of a good arguable case, as the SFC is seeking a worldwide injunction against the 4^th defendant (Hong Kong Civil Procedure, op. cit., para. 29/1/76).

81.  Related to the contention that there are no reasonable prospects of an order under section 213(2)(c) is the risk of dissipation of assets.  Mr. Bartlett made the point there is no allegation of any risk that the 4^th defendant or the Trust would seek to dissipate the 4^th defendant’s assets.  The limited power of attorney granted to the 1^st defendant did not support any risk of dissipation, on the contrary it would undermine the risk, as the 1^st defendant has no right of withdrawal of the assets.  As for the assertion of the SFC that the ultimate beneficial owner can give directions to the trustee to act according to his instructions under the rule in Saunders v. Vautier (1841) Cr. & Ph. 240, this rule is applicable if the beneficiaries are of full age and capacity and all have consented.  It does not apply to the Trust as two of the beneficiaries are minors.  Mr. Bartlett further argued it is unlikely that the 1^st defendant would wish to revoke the Trust now, as the 1^st defendant would seem better off with the assets belonging to the Trust rather than bring them back to his ownership given that the SFC is going after his assets.

82.  Mr. Scott contended that in reality the assets of the 4^th defendant belong to the 1^st defendant and are effectively or ultimately controlled by him, as he has an absolute discretion to revoke the Trust at any time in respect of the whole or part of the Trust fund, whether income or capital, under the power reserved solely to him in the instrument of trust.  Even though he is prevented from making any withdrawal from the accounts of the 4^th defendant, he could easily unravel this at any time by revoking the Trust, and the title to the whole or such part of the Trust fund would be vested in him absolutely.  The claim against the 4^th defendant is in the nature of a tracing claim requiring the gratuitous recipient of monies obtained unlawfully to disgorge them under sections 213(2)(b), (c), (f) and (g).

83.  An order under subsection (2)(c) is premised on the basis that the assets under restraint belong to the 1^st defendant and should be made available to satisfy any order for the disgorgement of loss avoided that may be made by the Market Misconduct Tribunal or any other order of the court.  The difficulty of the SFC is that the 1^st defendant has no legal or beneficial ownership of the assets held by the 4^th defendant.  The claim to the 4^th defendant’s assets is on the basis that the 1^st defendant has ultimate control over them by the exercise of his power of revocation of the Trust.  I have reservations if that is sufficient to make out a good arguable case for an order against the 4^th defendant pursuant to section 213(2)(c).  I doubt if the 1^st defendant could be compelled to exercise his power of revocation to re-vest the Trust fund in him in the event an order for disgorgement is made.  I am also sceptical about the legal basis of a tracing claim proposed to be advanced against the 4^th defendant, in the absence of any proprietary right of the SFC.  Furthermore, I am not persuaded a case is made out that there is a risk of dissipation of the assets held by the 4^th defendant in the special circumstances here to justify an order under section 213(2)(c). 

84.  I have considered subsection (2)(b) in the earlier part of this decision.  There is no claim in the originating summons for an order under subsection (2)(b) and no proposed amendment for such claim.  Subsections (2)(f) and (g) are in the nature of ancillary orders.

85.  As a fallback position, Mr. Scott submitted that the relief against the 4^th defendant is ancillary to the claim against the other defendants and he sought leave to amend the inter partes summons to include leave to serve the 4^th defendant out of the jurisdiction pursuant to Order 11 rule 1(1)(c), on the basis that the injunction against the 4^th defendant is ancillary to the potential proceedings against the 1^st defendant within Hong Kong, and the 4^th defendant is a necessary and proper party to proceedings against the 1^st and 3^rd defendants in Hong Kong, citing The Hong Kong Housing Authority v. Hsin Yieh Architects & Associates Ltd. & Ors. [2005] 1 HKLRD 801 and [2006] 4 HKLRD 316.  The Court of Appeal in thatcase affirmed the decision of Reyes J that leave to serve outside jurisdiction could be granted under Order 11 rule 1(1)(c) where, in a three-party situation, there was a justiciable claim against another party within the domestic forum, the plaintiff sought ancillary relief against the foreign party on the basis that the foreign party was a necessary or proper party to the claim.  Mr. Scott submitted that the amendment should be allowed as the statutory basis for the claim to freeze assets in the originating summons has not changed, the proposed amendment is just to cure a technical shortcoming and to provide a nexus that the 4^th defendant is a necessary and proper party to proceedings against the 1^st and 3^rd defendants in Hong Kong.

86.  The application to amend was opposed by Mr. Bartlett for a number of reasons.  It is necessary to mention only one of them.  The necessary or proper party ground in Order 11 rule 1(1)(c) is premised on a claim brought against a person duly served within or out of the jurisdiction.  I have held that the court has no jurisdiction over the 1^st and 3^rd defendants.  Although the 2^nd defendant had been served within the jurisdiction, there is no live issue between the SFC and this defendant (Dallah Albaraka (Ireland) Ltd. v. Symphony Gems NV & Ors. [2005] 3 HKLRD 703 at 711E to F, para. 24).  It would be futile to amend the summons to allow reliance on Order 11 rule 1(1)(c). 

87.  I rule in favour of the 4^th defendant that the SFC has not established a good arguable case that there are reasonable prospects of the court making an order against the 4^th defendant as sought in the originating summons.

Is there any real risk of dissipation of the defendants’ assets

88.  I have answered this question in the negative insofar as the assets held by the 4^th defendant are concerned. 

89.  Mr. Sussex contended that the SFC has fallen short of showing any real or appreciable risk of dissipation of assets on the part of the 1^st and 3^rd defendants.  The 1^st defendant became aware that the SFC was making enquiries on 26 October 2007 and on 25 January 2008, the SFC raided the offices of the Company.  The 1^st defendant received a letter from the SFC on the same day informing him that he was the subject of investigation.  It was argued that throughout this time, if these defendants had any intention to put their assets out of reach of the SFC, they would have done so, but there was no attempt to dissipate their assets during this period.  Mr. Sussex also pointed to the fact that after the initial transfers of the proceeds of sale of the shares out of Hong Kong in May and June 2007, the 1^st and 3^rd defendants had made deposits into their accounts and maintained substantial balances in their accounts up to the time the Order was made.

90.  The fact remains that a large part of the proceeds of sale of the shares was transferred out of the jurisdiction within one to two months of the transactions.  It is immaterial there was no substantial withdrawal from these defendants’ bank accounts after October 2007.  The total bank balances maintained by the 1^st and 3^rd defendants in Hong Kong at the time the Order was made in April 2008 amounted to just about HK$3.5 million.  Various shares held under the 1^st defendant’s name are virtually worthless.  He has stayed away from Hong Kong since December 2007.  He failed to attend an interview by the SFC in Hong Kong and declined to indicate if he would agree to be interviewed in Beijing.  I am not persuaded that the SFC has failed to establish a real risk of dissipation of assets in the case of the 1^st and 3^rd defendants.

If there is material non-disclosure

91.  There were various complaints of material non-disclosure by all three defendants.  I will first identify what they are.

92.  The 1^st and 3^rd defendants alleged there was material non-disclosure at the ex parte application in these respects:

(1) that the 1^st defendant was aware of the investigation of the SFC as early as 26 October 2007 and he made no attempts thereafter to dissipate assets; and

(2) that his solicitor had raised no objection for him to be interviewed by the SFC in Beijing and merely indicated it would be necessary to take instructions from him to arrange such an interview.

93.  The 4^th defendant’s allegations of material non-disclosure were as follows:

(1) that there was a trust structure and the 4^th defendant was owned by the Trust, not by the 1^st defendant; and

(2) that there was a limited power of attorney granted to the 1^st defendant that specifically excluded any form of withdrawal of securities or cash from the accounts by the 1^st defendant.

94.  The allegation of material non-disclosure advanced on behalf of the 1^st and 3^rd defendants may be disposed of shortly.  I do not think it material that these defendants did not dispose of assets since they became aware of the investigations of the SFC in October 2007, for the reasons given when I rejected their contention in relation to the risk of dissipation of assets.  As for the alleged willingness of the 1^st defendant to be interviewed, I do not think a case of non-disclosure is made out.  On the evidence, the 1^st defendant had not indicated he was willing to be interviewed in Beijing.  In any event, the alleged non-disclosure would not have affected the court’s decision whether to grant the interim injunction.

95.  I am satisfied there was material non-disclosure as alleged by the 4^th defendant.  The fact that there was a trust structure was not brought to the attention of the court at the ex parte hearing.  On the contrary, it was asserted in the supporting affirmation that the 1^st defendant “owned the entire share capital” of the 4^th defendant.  The skeleton submission of the SFC stated erroneously that the 1^st defendant was “the sole shareholder” of the 4^th defendant.  This understanding of the SFC was apparently derived from the letter of [the Trust Company] dated 4 July 2006 mentioned earlier, in which it was stated erroneously that the 1^st defendant is “the ultimate beneficial owner” of the 4^th defendant.  The letter also mentioned that the 4^th defendant is wholly owned by the Trust.  I appreciate the SFC did not have the instrument of trust at the time and had no details of the Trust.  Nevertheless, it is not sufficient to exhibit this letter and the certificate of incumbency (which contained particulars of the current directors and shareholders of the 4^th defendant) in a bundle of exhibits without drawing attention to these documents in the supporting affirmation or the skeleton submission (Standard Chartered Securities Ltd. v. Lai Arthur & Ors. [1993] 1 HKC 375 at 381 and 388).  The same criticism applies to the limited power of attorney, which was merely included in the exhibits without specific mention of it in the supporting affirmation or the skeleton submission.

96.  That there was a trust structure and an express exclusion of power in the limited power of attorney for the 1^st defendant to withdraw cash or securities from the 4^th defendant’s accounts are material to the consideration of the discretion whether to grant an interim injunction, as demonstrated in the conclusion I have reached in respect of the risk of dissipation of assets held by the 4^th defendant.  These matters are also material in deciding whether the SFC has established a good arguable case that there are reasonable prospects of the court making an order against the 4^th defendant as sought in the originating summons, for the purpose of giving leave to serve the originating summons out of the jurisdiction (Wo Fung Paper Making Factory Ltd. v. Sappi Kraft (Pty.) Ltd. [1988] 2 HKLR 346; Netcom Telecom (Europe) Ltd. v. Telephone Systems International Inc. [2003] EWHC 2890 (QB)).

97.  It is academic to consider, notwithstanding the material non-disclosure concerning the 4^th defendant, whether I should exercise my discretion afresh to grant an interim injunction or grant leave to serve the originating summons out of the jurisdiction, in view of the conclusions I have reached on the other issues in favour of the 4^th defendant.

If sections 213(1)(b) and (2)(c) have contravened article 105 of the Basic Law

98.  All three defendants mounted a challenge to the constitutionality of an order made pursuant to sections 213(1)(b) and (2)(c), relying on article 105 of the Basic Law, which provides, inter alia, that:

“The Hong Kong Special Administrative Region shall, in accordance with law, protect the right of individuals and legal persons to the acquisition, use, disposal and inheritance of property and their right to compensation for lawful deprivation of their property. … The ownership of enterprises and the investments from outside the Region shall be protected by law.”

99.  Mr. Sussex acknowledged that a person’s rights under article 105 are not absolute and can be abrogated in accordance with law.  Section 213(2)(c) has the effect of interfering with the property of the person against whom the order is directed.  As this provision interferes with the freedoms guaranteed in article 105, it is only valid if it constitutes a legitimate and proportionate limitation on the freedom.  Citing Leung Kwok Hung & Ors. v. HKSAR (2005) 8 HKCFAR 229 at 253I, para. 36, which was concerned with the right to freedom of assembly, he submitted that the proportionality test formulated by the Court of Final Appeal, adapted to refer to the freedom to acquire, use and dispose of property, may be expressed in this way:

(1) the restriction must be rationally connected with one or more of the legitimate purposes; and

(2) the means used to impair the freedom must be no more than is necessary to accomplish the legitimate purpose in question.

100.  Mr. Sussex did not dispute the restriction in section 213(2)(c) is rationally connected with the legitimate aims of Cap. 571, in that the purpose of this provision is to prevent the dissipation of assets which would have the effect of frustrating any order for the disgorgement of profit or loss avoided made by the Market Misconduct Tribunal or any other order of the court.  He contended however that the scope of this provision is disproportionately wider than necessary to achieve such aims for the following reasons:

(1) Section 213(1)(b) allows the court to make an order under section 213(2)(c) where it appears to the SFC that any of the matters referred to in subsections (1)(a)(i) to (v) has occurred, is occurring or may occur.

(2) To invoke the powers of the court under section 213(2)(c), it is not necessary for any substantive proceedings to have been commenced in the Market Misconduct Tribunal or for such proceedings to commence within any specific period of time.

(3) Although the court has power under section 213(9) to reverse, vary, discharge or suspend any order made under section 213(2)(c), an order made under this provision may be indefinite, notwithstanding it does not determine any rights between the parties and only holds property “in limbo” until the order is discharged or varied.  There is no definite time limit for how long such an order can be in effect.

(4) In contrast to sections 213(1)(b) and (2)(c), safeguards are imposed in restraint orders prohibiting a person from dealing with realisable property made section 15 of the Organised and Serious Crimes Ordinance, Cap. 455 or section 10 of the Dangerous Drugs (Recovery of Proceeds) Ordinance, Cap. 405 in that:

(a)    proceedings must have already been instituted in Hong Kong against the defendant for a specified offence, or an application for a confiscation order had already been made (section 14(1)(a) of Cap. 455; section 9(1)(a) of Cap. 405);

(b)   if proceedings have not been commenced or an application has not been made, the court has to be satisfied that there is reasonable cause to believe that the defendant may be charged with an offence after further investigation is carried out, and in which case, the court must specify a date on which the restraint order shall expire (sections 14(1)(ba) and (1A) of Cap. 455; sections 9(1)(ba) and (1A) of Cap. 405);

(c)   such a date must be no later than is reasonably necessary for the purposes of the investigation and in any case not later than six months after the order is made (section 14(1A)(a) and (b) of Cap. 455; section 9(1A)(a) and (b) of Cap. 405);

(d)   although the court may extend a restraint order, it has to be satisfied that the defendant would be charged with an offence after further investigation is carried out and in any event, it may not do so for more than six months (section 14(1B)(a) to (c) of Cap. 455; section 9(1B)(a) to (c) of Cap. 405).

(5) In the absence of similar safeguards as in Cap. 455 and Cap. 405, the potential interference from section 213(2)(c) on a defendant’s freedoms under article 105 is far greater and disproportionate to the aims of Cap. 571, and hence the operation of sections 213(1)(b) and (2)(c) is unconstitutional and contrary to the Basic Law.

101.  Mr. Bartlett relied also on article 6 of the Basic Law, which provides that “The Hong Kong Special Administrative Region shall protect the right of private ownership of property in accordance with law”, and article 109, which provides that “The Government of the Hong Kong Special Administrative Region shall provide an appropriate economic and legal environment for the maintenance of the status of Hong Kong as an international financial centre.”  He emphasised that article 105 extends protection to non-residents, as it provides that “The ownership of enterprises and the investments from outside the Region shall be protected by law”, and that the protection is guaranteed to individuals and corporations (“legal persons” as stated in article 105).  The protection of the right to property in the Basic Law departs from the general rule that rights are restricted to natural persons and to residents (Hong Kong’s New Constitutional Order, by Yash Ghai, 2^nd ed., page 434).  This has particular relevance in the case of the 4^th defendant.

102.  Permissible restriction on the right to property guaranteed by the Basic Law must be “in accordance with law” (articles 6 and 105).  The expression “in accordance with law” or “prescribed by law”, when used in the context of international human rights jurisprudence, mandates the principle of legal certainty (Shum Kwok Sher v. HKSAR (2002) 5 HKCFAR 381 at 401J to 402A, para. 60).  This incorporates the requirement that the relevant law must be adequately accessible to the citizen and formulated with sufficient precision to enable the citizen to regulate his conduct (Shum Kwok Sher, supra. at 402D to 403J, paras. 60, 62 to 65).  A law which conferred discretionary powers on public officials, the exercise of which might interfere with fundamental rights, must give an adequate indication of the scope of the discretion; the degree of precision required of the law in this connection will depend upon the particular subject matter of the discretion (Leung Kwok Hung, supra. at 182C to D, paras. 28 and 29).

103.  Mr. Bartlett argued that an interim injunction freezing the off-shore assets of a foreign resident simply by reason of the commencement of an investigation to abide the delay and contingencies of the outcome and any proceedings in the Market Misconduct Tribunal is unreasonable and disproportionate, it violates the permissible restriction and does not strike a fair balance with legitimate public interest served by section 213, citing JA Pye (Oxford) Ltd. v. United Kingdom (2005) 19 BHRC 705, para. 46, that there must be “a reasonable relationship of proportionality between the means employed and the aim sought to be realised by any measure depriving a person of his possessions or controlling their use.”

104.  It is common ground that the right to property protected under the Basic Law is not absolute but can be abrogated in accordance with the law.  The question is whether the interference with this right by sections 213(1)(b) and (2)(c) meets the requirements of proportionality and the principle of legal certainty. 

105.  Mr. Scott relied on the judgment of the European Court of Human Rights in Raimondo v. Italy (1994) 18 EHRR 237, in which the applicant contended that the order for the preventive seizure of a number of his assets with a view to their possible confiscation under the Italian criminal law was, inter alia, in breach of article 1 of Protocol No. 1 of the European Convention of Human Rights, which provides as follows:

“Every natural or legal person is entitled to the peaceful enjoyment of his possessions.  No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law.

The preceding provisions shall not, however, in any way impair the right of a State to enforce such laws as it deems necessary to control the use of property in accordance with the general interest or to secure the payment of taxes or other contributions or penalties.”

106.  The Italian government did not deny there had been an interference with the applicant’s right to peaceful enjoyment of his possessions, but asserted that the seizure and confiscation was justified on the basis of the exceptions allowed under article 1.  It was held there was no violation of article 1, as the seizure was “clearly a provisional measure intended to ensure that property which appears to be the fruit of unlawful activities carried out to the detriment of the community can subsequently be confiscated if necessary.  The measure as such was therefore justified by the general interest and, in view of the extremely dangerous economic power of an ‘organisation’ like the Mafia, it cannot be said that taking it at this stage of the proceedings was disproportionate to the aim pursued” (para. 27).

107.  The approach in Raimondo v. Italy was approved by the English Court of Appeal in In re S (Restraint Order: Release of Assets for Legal Representation) [2005] 1 Cr App R 239 at 251 para. 56:

“Raimondo v. Italy … makes it clear that there is a distinction between depriving a person of his possessions and temporary measures to prevent him from using them. A restraint order constitutes a control in the use of property which will be lawful if, as in the present case, it serves a legitimate aim, namely the preservation of property believed to be the proceeds of crime for confiscation, so as to deprive offenders of their benefit from crime.”

108.  On the legitimate aims of Cap. 571, Mr. Scott referred to these observations of Jones J regarding the predecessor of this Ordinance in Re an Investigation under Section 33 of the Securities and Futures Commission Ordinance, HCMP No. 3039 of 1992, 8 January 1993 at para. 81:

“The object of the legislation is to supervise trading in the market and to ensure that it is carried out honestly for the benefit of private investors and in the public interest.  Effective regulation is essential to the continuance of Hong Kong’s economic prosperity as a commercial and international financial centre.  By the Joint Declaration and the Basic Law, Hong Kong’s free trade policy and its position as a free port have been guaranteed to continue for 50 years after the territory reverts to Chinese sovereignty in 1997.  It is therefore of vital importance that the regulatory authorities have sufficient powers to investigate suspected malpractice.  As it is the persons who carry out the actual trading in the market who will have the information that is required it is essential that the Commission should be invested with the powers in s. 33(4) of the SFC Ordinance to investigate suspected malpractices.  Those powers are reasonable and necessary to enable the Commission to carry out its statutory duty of investigation.”

109.  It is also of relevance in this regard to note section 4 of Cap. 571 which sets out the regulatory objectives of the SFC, and section 5(1) which provides for the functions and powers of the SFC, in particular subsections (d), (f) and (n).

110.  Mr. Scott submitted that as far as proportionality is concerned, orders made under sections 213(2)(c) and 213(6) are wholly justified and not disproportionate to the legitimate aims pursued in Cap. 571, as stated above by Jones J.  Such orders are designed to ensure that the investigations of the SFC and any future order that may be made by the Market Misconduct Tribunal or in a disciplinary action would not be rendered futile and academic.  The orders do not deprive the person under restraint of his assets but only temporarily prevent him from using the same (Raimondo v. Italy; In re S).  They are necessary to protect the public interest and the consequential abrogation of an individual’s right to property is not disproportionate to the legitimate aims of Cap. 571.

111.  I am inclined to agree with Mr. Scott.  The freezing of assets by the orders under sections 213(2)(c) and 213(6) are temporary and reversible.  Although an application may be made when it appears to the SFC that any of the matters referred to in subsections (1)(a)(i) to (v) has occurred, is occurring or may occur, it is stipulated in section 213(1)(b) that the making of an order is subject to section 213(4).  By the latter provision, the court shall, before making an order, satisfy itself, so far as it can reasonably do so, that it is desirable that the order be made, and that the order will not unfairly prejudice any person.  By section 213(6), where the court considers it desirable to do so, it may grant such interim order as it considers appropriate pending the determination of an application under section 213(1).  Further, it is provided in section 213(9) that the court may reverse, vary or discharge an order made under sections 213(1) or (6) or suspend the operation of the order.

112.  As for Mr. Sussex’s submission that an order under section 213(2)(c) is open-ended with no definite time limit, unlike a restraint order made under Cap. 405 or Cap. 455, I do not think this would necessarily work to the disadvantage of the person whose property is under restraint, as he is at liberty to apply to the court at any time under section 213(9) to reverse, vary, discharge or suspend the operation of the order.

113.  Where substantive proceedings have not been brought against the person who is the subject of the order, to satisfy the court under section 213(4) that it is desirable the order be made and it will not unfairly prejudice any one, the matters to be taken into consideration would not be substantially different from those specified in section 14(1)(ba) of Cap. 455 or section 9(1)(ba) of Cap. 405 (see Corporate Affairs Commission (NSW) v. Walker & & Ors. (1986-1987) 11 ACLR 884 at 888; Securities and Futures Commission v. A [2008] 1 HKC 89 at 98I to 99B, paras. 29 and 30). 

114.  The discretion to be exercised by the court in making an order of this nature is not unrestricted.  The scope and manner of exercise of the relevant discretion has been indicated with reasonable clarity in the case law in this area, see Australian Securities and Investments Commission v. Mauer-Swisse Securities Ltd. & Anr. (2002) 42 ACSR 605 at 613 to 614, para. [36]; Australian Securities and Investments Commission v. Triton Underwriting Insurance Agency Pty. Ltd. & Ors. (2003) 48 ACSR 249 at 256, para. [25]; Tang Yoke Kheng (trading as Niklex Supply Co.) v. Lek Benedict & Ors. [2004] 3 SLR 12 at 19, paras. 19 and 20; Australian Securities and Investments Commission v. Arafura Equities Ltd. (2006) 56 ACSR 429 at 441, para. [41]; Securities and Futures Commission v. A, supra. at 98F to H, para. 27).

115.  It does not appear to me that this interference with the right to property would have contravened the requirements of proportionality or the principle of legal certainty.  I reject the contention that sections 213(1)(b) and (2)(c) are unconstitutional and unenforceable.

If disclosure orders should be made

116.  The disclosure orders sought in the inter partes summons of assets and payments by the defendants are identical to the disclosure orders sought in the originating summons.  The purpose of the disclosure orders is to establish what has become of the entire sale proceeds of the suspected insider dealing and where the sale proceeds may now be situated.  Mr. Scott relied on section 213(2)(g) in seeking the orders.  This subsection provides for “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).”

117.  An ancillary order may be made under section 213(2)(g) consequent upon the making of an order under section section 213(2)(c).  I am not at this stage concerned with an application for an order under section 213(2)(c).  It does not appear to me section 213(2)(g) may be invoked when an interim order is sought under section 213(6), pending determination of an application for an order under section 213(2)(c).  I would have declined to make any disclosure order sought in the inter partes summons for this reason without going into the merits. 

Orders on the applications

118.  I make the following orders on the present applications:

(1) the Order is discharged;

(2) leave granted to serve the originating summons out of the jurisdiction on the 1^st, 3^rd and 4^th defendants is discharged and any service of the same on these defendants is set aside; and

(3) the inter partes summons issued by the SFC on 21 April 2008 is dismissed. 

119.  I make an order nisi that the SFC is to pay the costs of the 1^st, 3^rd and 4^th defendants on each of the summonses before the court.  I certify in respect of the 1^st and 3^rd defendants that the matter is fit for two counsel.

[1] Civil Justice Reform – Final Report, Section 12.2, Recommendations 45 to 49. 

[2] By the Civil Justice (Miscellaneous Amendments) Ordinance, Ord. No. 3 of 2008 and Rules of the High Court (Amendment) Rules 2008, the Ordinance and the Rules shall come into operation on a day to be appointed by the Chief Justice by notice published in the Gazette.