SECURITIES AND FUTURES COMMISSION v. C.L. MANAGEMENT SERVICES LTD AND ANOTHER

ESS 30671-30676/2013
ESS 39231-39232/2013

IN THE EASTERN MAGISTRATES COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CASE NO. ESS 30671-30676 OF 2013 AND ESS 39231-39232 OF 2013

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STATEMENT OF FINDINGS

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Introduction

The Summonses

1. In the present case, a total of 8 summonses have been laid against C.L. Management Services Limited (“D1”), a company registered in Hong Kong and Madam AU Suet-ming, Clarea (“D2”), being the sole shareholder and director of D1. The summonses are summarised as follows:

a.   Summonses against D1 (four summonses in total[1]):

(I) ESS 30671/2013 and alternative summons ESS 39231/2013: It is alleged that D1, without reasonable excuse, has carried on a business in a regulated activity, namely, advising on corporate finance, in relation to a client company, 3 Wells Group holdings Limited (“3 Wells”) without licence[2] (ESS 30671/2013). Alternatively, it is alleged that D1 has held itself out to 3 Wells as carrying on a business in advising on corporate finance[3](ESS 39231/2013);

(II) ESS 30673/2013 and 30675/2013: it is alleged that D1 has respectively held itself out to another two client companies, UK Fur Limited (“UK Fur”) and New Bonus Holdings Limited (“New Bonus”) as carrying on a business in advising on corporate finance[4].

b.   Summonses against D2 (four Summonses in total[5]): It is alleged that D2, being an officer of D1, has aided, abetted, counselled, procured or induced D1 in committing the above offences under section 114 of the Ordinance, or these offences were committed with the consent or connivance of D2 or was attributable to her recklessness.[6]

2.   I convicted, after trial, D1 of three summonses, i.e. ESS 39231/2013, 30673/2013 and 30675/2013 concerning the “holding- out” offences under section 114(1)(b) of the Ordinance and D2 of the three corresponding attributable offences under section 390 (summonses ESS 39232/2013, 30674/2013 and 30676/2013).  Upon conviction, I imposed fines in a total sum of $900,000[7] and $600,000[8] on D1 and D2 respectively.  I also sentenced D2 to a total term of imprisonment for 6 months suspended for 18 months[9]. D1 and D2 now appeal against both their convictions and sentences.

The Issues

3. The main issues on the law raised at trial are:

I. Whether the summonses against D1 are strict liability offences? and if so, what defence is available and the burden of proof?

II. Whether the term “without reasonable excuse” under section 114(8) creates an element of the offence or a defence only?

III. Could D1 be liable for acts of Michael, being D2’s agent?

4. While the issues on the evidence are:

I. Was Michael acting on behalf of D2 within her actual and specific authority to give advice on corporate finance?

II. Whether D1 was “carrying on” the business in advising on corporate finance in respect of its dealing with 3 Wells?

III. Whether D1 was “holding out” as carrying on such business in advising on corporate finance in respect of its dealings with the three clients concerned?

IV. Could the defences, if any, be factually made out by D1/D2, i.e. 1) did D2 know the content of the agreements or 2) did D2 know what Michael was doing on her behalf?

Background

The Prosecution case

5. The facts of the case are largely undisputed.  The prosecution case mainly relied on the evidence given by four prosecution witnesses.  They were either the chairmen/senior officers of the 3 respective client companies.  Mr Clement CHEUK, PW1, (“Cheuk”) wasthe Chairman, and Ms Phoebe Lee, PW2, (“Lee”) was the Chief Financial Officer of 3 Wells. They were called to give evidence relating to 3 Wells. While Mr Pat WONG, PW3 (“P Wong”), the Chairman of UK Fur and Mr WONG Kam-fai, PW4 (“KF Wong”), the chairman of New Bonus gave evidence relating to UK Fur and New Bonus respectively.  The Prosecution originally intended to call a Michael ANG (“Michael”), who was engaged by D2 as her agent at the material times responsible for dealing with the three respective client companies.  However, after Michael was called and taking oath, he suddenly, on his own initiative, raised with court that he was unwilling to give evidence as he worried that what he said might incriminate himself.  The Prosecution finally informed the court that they decided not to call Michael and would not rely on his evidence at all. [10]

3 Wells

6. Regarding 3 Wells, it is alleged by the Prosecution that, during the period between July 2011 and January 2012, D1 has carried on a business in advising on corporate finance for 3 Wells with a view to assisting the latter to be listed on the Growth Enterprise Market (“GEM”) Board of the Stock Exchange of Hong Kong Limited (“SEHK”).  By signing a detailed and unequivocal “Professional Financial Consultation Services Agreement” (“3 Wells Agreement”), Exhibit P12, with 3 Wells around July/August 2011, which was procured by D2, D1 did assign and authorise a team of her staff headed by Michael ANG (“Michael”) to have meetings, both in Hong Kong office as well as factory located in Mainland, with senior officers of 3 Wells with a view to assessing their capability of being listed on the GEM Board.  D2 and Michael, representing D1, also assisted 3 Wells to line up a professional team consisting of the right professionals, including lawyers, accountants and sponsors to substantially handle the listing matters.

7. Pursuant to the aforesaid 3 Wells Agreement, 3 Wells made two payments in the sum of HK$ 150,000 each to D1 on 31 August 2011[11] and 14 May 2012[12] respectively. 

8. Around September/October 2012, upon request by Michael, representing D1, allegedly due to problems of “internal audit”, 3 Wells agreed to terminate the 3 Wells Agreement with D1.  This was done by way of a letter drafted by Michael and finalised by Cheuk and Lee.[13] Cheuk said that the agreement was terminated upon D1’s promise that a full refund of HK$300,000 would be made by D1 to 3 Wells.  However, no refund was ever made by D1.

9. It is the prosecution case that what D1 has done amounted to carrying on a business in “advising on corporate finance”, or alternatively holding itself out to 3 Wells as doing so.[14] Moreover, D2, in her capacity as an officer of D1, did aid, abet, counsel, procure or induce the commission of the offence under section 114 by D1 or the offence was committed by D1 with her consent or connivance or was attributable to her recklessness.[15]

UK Fur and New Bonus

10. The evidence given by P Wong and KF Wong was relatively brief.  The prosecution said that the mere fact that a similar written Professional Financial Consultation Services Agreement had been signed between D1 and UK Fur (“UK Fur Agreement”) as well as between D1 and New Bonus (“New Bonus Agreement”) respectively was sufficient to prove that D1 had held itself out to the above two companies as carrying on a business in advising on corporate finance. 

11. As a matter of fact, by completing the UK Fur Agreement, UK Fur has paid a total sum of HKD $600,000 to D1 in four instalments during the period between 20 October 2010 and 30 June 2011.  Additionally, pursuant to the UK Fur Agreement, upon submission of UK Fur’s listing application to SEHK, D1 was granted 14,400,000 option shares at the exercise price of HKD $ 0.26 per share on 1 August 2012 which was accepted by D2 on 2 August 2012.[16] With respect to New Bonus, in pursuant to the New Bonus Agreement, a sum of HKD $ 170,000 was paid to D1 by New Bonus on 3 January 2011.

12. The prosecution said that all the summonses against D1 laid under section 114 of the Ordinance require prosecution to prove “without reasonable excuse” as an element of the offence and that the prosecution has succeeded in proving beyond reasonable doubt that D1 had at the material times, without reasonable excuse, held itself out to the UK Fur and New Bonus as carrying on a business in advising on corporate finance and D2, being an “officer” of D1, was liable attributably in all the commission of the offences.

Defence case

13. D2 elected to give evidence herself but called no defence witness.  She basically said that although she had signed all the relevant written agreements with the respective clients, she was not aware of the actual content stated therein and had no intention at all to carry on or hold herself out to the respective clients as carrying on a business in advising on corporate finance.  What she actually had done was offering to the client companies that she, with the assistance of Michael, could line up a team of suitable professionals and participate in the liaison work for the listing matters only.  After signing the contracts and attended the first introductory meeting with the professionals for the respective clients, she basically did nothing and was not sure what Michael and his team was doing to the respective clients.  The three written agreements in question[17] were all prepared by Michael upon her instruction but she has not read through them before signing. 

14. Defence contended that first of all, what D1 and D2 have done in respect of 3 Wells did not amount to carrying on a business in advising on corporate finance.  Additionally, neither was there any sufficient evidence to prove D1 had held itself out to the respective companies as carrying on a business in such an activity.  D2 had no intention whatsoever in carrying on or holding herself out as carrying on a business in advising on corporate finance.  The defence submitted that the prosecution was required to prove mens rea for all the summonses against D1 and that the prosecution has failed to do so.  Further, what D2 said in her evidence could amount to a reasonable excuse and the statuary defence had been made out factually.  It was submitted by the defence that as the commission of offences by D1 could not be proved, D2 should not be liable for all the “attributable” offences under section 390 of the Ordinance.

Analysis

Discussion on the Law

15. There are quite a number of legal issues raised during the trial by both parties that I need to resolve before analysing the evidence.

Issue I: Whether the summonses against D1 are strict liability offences?

The Five Alternatives

16. The question of whether the summonses against D1, in contravention of section 114 (1) and (8) of the Ordinance, created strict liabilities or offences with full intent is never an easy one.  The principles and application of the same have been thoroughly discussed in Hin Lin Yee v HKSAR (2010) 13 HKCFAR 142 and subsequently Kulemesin Yuriy & Tang Dock Wah v HKSAR, FACC 6 and 7 of 2012, now the landmark cases in this area of law decided by the Court of Final Appeal.

17.  Hin Lin Yee has helpfully set out, at paragraph 96, five possible alternatives which were subsequently reformulated, by addressing the possible alternative mental requirements relating to the consequences and not just the circumstances of the defendant’s conduct, in another decision of the Court of Final Appeal, Kulemesin Yuriy & Tang Dock Wah v HKSAR, FACC 6 and 7 of 2012, unreported , at paragraph 83:

(a)  first, that the mens rea presumption persists and the prosecution must prove knowledge, intention or recklessness as to every element of the offence (“the first alternative”);

(b)  second, that the prosecution need not set out to prove mens rea, but if there is evidence capable or raising a reasonable doubt that the defendant may have acted or omitted to act in the honest and reasonable belief that the circumstances or likely consequences of his conduct were such that, if true, liability would not attach, he must be acquitted unless the prosecution proves beyond reasonable doubt the absence of such exculpatory belief or that there were no reasonable grounds for such belief (“the second alternative”);

(c)   third, that the presumption has been displaced so that the prosecution need not prove mens rea but that the accused has a good defence if he can prove on the balance of probabilities that he acted or omitted to act in the honest and reasonable belief that the circumstances or likely consequences of his conduct were such that, if true, he would not be guilty of the offence (“the third alternative”);

(d)  fourth, that the presumption has been displaced and that the accused is confined to relying on the statutory defences expressly provided for, the existence of such defences being inconsistent with the second and third alternatives mentioned above (“the fourth alternative”); and

(e)   fifth, that the presumption is displaced and the offence is one of absolute liability so that the prosecution succeeds if the prohibited act or omission is proved against the accused, regardless of his state of mind regarding the relevant elements of the offence in question (“the fifth alternative”).”

Should “mens rea” be displaced?

18. I have born in mind the principle stated by Ribeiro PJ in Hin Lin Yee, at paragraph 41,that “where the offence-creating provisions are silent or ambiguous as to the mental requirements, it is generally accepted that the starting-point is that the statute must be construed adopting the presumption that it is incumbent on the prosecution to prove mens rea in relation to each element of the offence”. As Lord Scarman emphasised that the presumption of mens rea “can be displaced only if this is clearly or by necessary implication the effect of the statute”.[18]

19. To summarise what Ribeiro PJ said in Hin Lin Yee[19], the considerations that are relevant to the proper statutory construction in respect of the issue of displacement of presumption of  mens rea include:

(a)  The statutory language;

(b)  The nature and subject matter of the offence;

(c)   The legislative purpose.

The statutory language

20. Section 114(1) and (8) provides that:

“(1) Subject to subsections (2), (5) and (6), no person shall-

(a) carry on a business in a regulated activity; or

(b) hold himself out as carrying on a business in a regulated activity….

(8) A person who, without reasonable excuse, contravenes subsection (1) commits an offence and is liable-

(a) on conviction on indictment to a fine of $5,000,000 and to imprisonment for 7 years and, in the case of a continuing offence, to a further fine of $100,000 for every day during which the offence continues; or

(b) on summary conviction to a fine of $500,000 and to imprisonment for 2 years and, in the case of a continuing offence, to a further fine of $10,000 for every day during which the offence continues.”  [my emphasis]

21. Reading through section 114(1), I cannot see there are words or text stated therein which can be construed as carrying a connotation of knowledge or intention.  For example, the common words of criminal intention like “knowingly”, intentionally” or “recklessly” are absent from the provision. However, the word “shall” is used is used in the provision. 

22. In LI Yiu-kee v Chinese University of Hong Kong, unreported, CACV No.93 of 2009, when the Court of Appeal considered the meaning of “shall” appearing in the provision concerned, the entry below stated in the Hong Kong English-Chinese Legal Dictionary, Butterworth, 2005 was quoted with assistance:

"Mandatory -- enforcing strict compliance; not directory. Whether a provision in a statute conferring a power or imposing a condition to be observed is mandatory is a question of the intention of the legislature in the context of the statute as a whole … . While the use of the word 'shall' or 'must' is prima facie indicative of a mandatory provision, care should be taken before identifying a provision to be mandatory to ascertain the consequences if the requirement is not complied with, particularly when such consequences are not spelt out in the provision …" (my emphasis)

The nature and subject matter of the offence

23. While exceptions exist, the more serious the offence in terms of penalty and social obloquy, the less likely it is that the presumption will be held to have been supplanted.[20] On the other hand, as Ribeiro PJ said at paragraph 142 of his judgment in Hin Lin Yee, there is generally less need to feel inhibited about overriding the presumption in relation to what may compendiously be call “regulatory offence”.  Lord Reid in R v Warner [1969] 2 AC 256, at paragraph 271, gave some examples of such offences which in the English context, were held to impose absolute liability.  They were offences under public health, licensing and industrial legislation.

24. It is of note that the long title of the Ordinance provides that:

“An Ordinance to consolidate and amend the law relating to financial products, the securities and futures market and the securities and futures industry, the regulation of activities and other matters connected with financial products, the securities and futures market and the securities and futures industry, the protection of investors, and other matters incidental thereto or connected therewith, and for connected purposes.”[My emphasis]

25. The subject matter and nature of offences governed under section 114 are obviously “regulatory” in nature concerning “licensing” matters and the Ordinance aims at protecting the investors. I have not lost sight that the maximum penalty upon conviction on indictment is 7 years’ imprisonment, and on summary conviction is 2 years’ imprisonment. However, despite the relatively heavy penalty, and possibly the serious professional ramification imposed on the offenders upon conviction of the offence, carried by the provision, I consider that this is an offence attaches comparatively less “social obloquy” or “stigma” to the offender, especially when this kind of offence would most commonly be committed by a corporate body. 

26. It is worth noting that when reading section 114(1) and section 390 together, it is clear that when an officer is involved or contributed to the commission of the offences of s.114, the provision of s.390 then deliberately require proof of mens rea, namely “recklessness”, “with consent” “induced” or “procured” etc.  It is not difficult to infer that it must be due to the presumption of mens rea and the fact that stigmatising effect on a natural person is much more than on a corporate body.

The legislative intent

27. Ribeiro PJ continued, at paragraph 143, in his judgment of Hin Lin Yee: “the legislative purpose is obviously important.  If, in the light of the nature and subject matter of the offence, construing the provision to require full mens rea would make successful prosecution so unlikely that the statutory objectives would be frustrated, this must be given weight.  Where this is a legitimate consideration, the response should often be to consider whether the adoption of an intermediate basis of liability accords with the true legislative intention.”

28. Having considered the subject matter and nature of the offences in question, I consider that the statutory objective of section 114(1) of the Ordinance will be frustrated if proof of full mens rea is required.  It is very difficult for the prosecution to prove a company or the directing mind of it is intentionally or knowingly carrying on or holding itself out as carrying on the business in advising on corporate finance.  It is common sense that companies of securities and futures industry normally involve sophisticated division of labour due to its complex nature of work.  The actual works and daily operations usually are not carried out by the directing mind of the company but its professional staff.  It will defeat the whole purpose of the Ordinance to protect the investors many of which may not have much knowledge of the industry and rely heavily on the conducts and integrity of their financial adviser.  The onerous duty to prove full mens rea would render the regulatory function of the governing body and enforcement of the provision ineffective.

29. Furthermore, sections 114(1) and 390 of the Ordinance cannot be read in isolation.  It is very clear that the legislation deliberately requires proof of mens rea in respect of section 390 when “officer” is targeted.  I am of the view that it does shed light on the legislative intent.  If mens rea is required for section 114(1), the legislator could have easily spelt it out like what it is done in section 390 of the Ordinance.

30. Taking into account all the relevant principles of statutory construction set out in Hin Lin Yee, I consider that the presumption of mens rea should be displaced in respect of the offences created in section 114(1).

Are the offences under section 114(1) absolute liabilities?

31. Regulatory offences do not as a rule involve conduct falling within the fifth of the aforementioned categories where absolute liability may be justified.  Many regulatory offences may fall within other categories of the five alternatives. The legislative policy underlying the regulatory offence may justifiably be to require diligent proactive management or supervision on the part of the person subjected to the duty.

32. In the case Kulemesin Yuriy, Ribeiro PJ “noted that when dealing with a serious as opposed to regulatory offence, a court considering whether the presumption of mens rea should be displaced – and if so, replaced by what – is likely to find it more appropriate to infer that the second (rather than the third) alternative best reflects the presumed intention of the legislature since that alternative lies closer to the full mens rea end of the spectrum and does no violence to the presumption of innocence, as befits a serious offence.  On the other hand, the third alternative is likely to be more compelling in relation to a regulatory offence.”[21]  That is also in line with the observation made by him in Hin Lin Yee at, paragraph 161, that “the policies underlying regulatory offences are likely to be best reflected by construing the offences as falling within the third alternative, founding liability on the absence of due diligence or the absence of honest and reasonable belief”.

33. Since section 114(1) carries heavy penalty with maximum term of 7 years’ imprisonment upon indictment, I consider the fifth alternative of absolute liability should be put out of the picture in the present case.  In other words, I consider the first (full meas rea required) and fifth alternative (absolute liability) of liability as set out in Hin Lin Yee are not applicable in the present case. 

Issue II: “Without reasonable excuse” ---an element of the offence or a defence only?

34. There remain three alternatives: the second, the third and the fourth, which are regarded as intermediate basis of liability[22]. It is of note that the phrase “without reasonable excuse” appears in the offence-creating provision, namely section 114(8).  Before deciding which alternative (2^nd, 3^rd or 4^th) the offences under section 114(1) should fall in, I shall deal with another separate but related legal issue that has been raised in the trial: whether “without reasonable excuse” should be regarded as an element of the offence or just a defence under section 114(1)?

35. In fact, the issue has previously been discussed in the Court of First Instance by Barnes J in Securities and Futures Commission v Yu Ka Tak [2007] HKCLRT 728. It was held by Barnes J, at paragraph 20, that “without reasonable excuse” is an element of the offence under section 114(1):

“20. In the present case, the contents of s.114, particularly ss.114(3) and 114(9), show that the legislation has included “without reasonable excuse” as an element of the offence. Of course, this case also involved the prosecution’s allegation that the respondent was “without licence”, and under s.94A of the Criminal Procedure Ordinance, it was not necessary for the prosecution to prove that the respondent was “without licence”. If the respondent wished to prove that he had a licence, the burden of proof would be on him on a balance of probabilities. However, this does not mean that it was unnecessary for the prosecution to prove that the respondent had contravened s.114(3) without reasonable excuse. The present case is not significantly different from HKSAR v Lam Yuk Fai, and the principles stated therein are also applicable to this case.”

36. Barnes J further observed that:

“21. Although, generally speaking, whether a person has a“reasonable excuse” is probably something that only that person himself will know, this does not mean that there is anything improper in requiring the prosecution to prove the element of“without reasonable excuse” (as held by the Court of Final Appeal in HKSAR v Lam Yuk Fai and the Court of First Instance in HKSAR v Ng Po On).

22. Apart from the fact that the provision reflects that “without reasonable excuse”is one of the elements, I have also taken the legislative spirit into consideration. Had the legislative intent been that any person who contravened s.114(3) committed an offence subject to the defence of “without reasonable excuse”, the provision could have expressly said so, as in s.118(5) of the Copyright Ordinance (Cap.528) and s.9(4) of the Trade Descriptions Ordinance (Cap.362).

23. The contravention involved in this case is quite different from the offence of “possessing an offensive weapon in a public place” contrary to s.33 of the Public Order Ordinance (Cap.245). It would be rather difficult for the prosecution to prove that a defendant was in possession of an offensive weapon in a public place“without reasonable excuse”. Given that the legislation is intended to protect the well being of a person, it is neither improper nor unfair for “without reasonable excuse” to be made not an element of the offence which the prosecution has to prove but a defence. Furthermore, the fact that prosecutions have to be sanctioned by the Secretary for Justice serves to provide considerable protection to a person. Lord Woolf also mentioned similar offences in HKSAR v Lam Yuk Fai (see para.18 above).

24. The scenario in this case is different. The prosecution’s case was that the respondent carried on a regulated activity (leveraged foreign exchange trading) as business, and the case involved three persons going to the company for which the respondent worked to open accounts and carry out foreign exchange transactions. The respondent also told them that his company would charge 18% of the profit as commission etc.

25. The prosecution alleged that the respondent did not have a licence. If the respondent claimed the contrary, he had to prove it on a balance of probabilities. If he exercised his right not to give evidence, the defence would not have any evidence to show that he had a reasonable excuse. Under such circumstances, the court could, on the evidence adduced by the prosecution, determine whether the only reasonable inference to be drawn was that the respondent was “without reasonable excuse” and had contravened s.114(3) accordingly.”

37. Nevertheless, subsequently in Securities and Futures Commission and Liu Su Ke [2010] 2 HKLRD 673, Lunn J considered the same issue but came to a different conclusion.  He ruled that “without reasonable excuse” was not an ingredient of the offence, and in pursuance to s. 94 A of the Criminal Procedure Ordinance (Cap 221), a defendant bore the persuasive burden of proving reasonable excuse.  However, there were no compelling reasons to justify the abrogation of the presumption of innocence in this way and applying the proportionality test, s. 94A would be read down, so that an evidential burden was imposed on a defendant to point to evidence that raised the issue of reasonable excuse. [23]

38. Although in Liu Su Ke, the court was concerned with a different provision namely, section 328 (a) of the same Ordinance,the wordings and drafting of both provisions of 328 and 114 are actually very similar.  As a matter of fact, the case of Yu Ka Tak was submitted to Lunn J for his consideration by Senior Counsel for the Respondent in favour of his contention that “without reasonable excuse” should be an element of the offence[24], however Yu Ka Tak was not discussed in the judgment by Lunn J.

39. Lunn J made it plain, at paragraph 74 to 76, that

“74. In my opinion, Mr Bell has identified succinctly the correct approach to the construction of the relevant provisions of this Ordinance:

   “Specific conduct or omission prohibited by a statutory provision may or may not be sufficient to constitute an offence. The essential criterion is whether the prohibited conduct or omission is inherently culpable.”

75. It is apparent from the long title of the Ordinance that one of the purposes and objectives in regulating activities in the securities market is, and is stated, to be the "protection of investors". Clearly, the requirement of a disclosure of interests in shares, on acquisition or cessation of that interest, is the better to inform the market and is for the protection of investors. Importantly, the ingredients of the offence alleged against the appellant require proof by the prosecution of knowledge in the appellant of the occurrence of the relevant event. It is only with that knowledge, that culpability is imposed in consequence of a failure to make disclosure of a notifiable interest….

76. In my judgment, in the context of the objects and purposes of the Ordinance, in particular the regime of disclosure to better inform and protect investors that is an inherently culpable act and those are the ingredients of the offence”

40. I am of the view that the above principle stated in Liu Su Ke also applies in the present scenario.  Although Liu case concerned a difference provision relating to criminal act of “non-disclosure”, advising on corporatefinance without licence in the present situation is also, in my view, inherently culpable. And we are here concerned of the same Ordinance with the same objective of protecting investors and regulating the securities and futures industry. 

41. In the present case, Senior Counsel for the Defence, Mr Duncan, in court, as opposed in the defence written closing submission,[25] did fairly agree that the terms “without reasonable excuse” should be considered as a defence instead of an ingredient of the offence while Miss PO Wing Kay for the Prosecution maintained her view that “without reasonable excuse” should be considered as an element of the offence relying on the judgment by Barnes J.  Be that as it may, Miss PO frankly admitted in the court that she was not aware of the subsequent judgment of Lunn J on the same issue.

42. Having carefully considered both aforesaid authorities from the Court of First Instance, I ruled that the term “without reasonable excuse” should be regarded as a defence to be raised by defendants on evidential burden. I note that Liu Su Ke case was delivered after Yu Ka Tak case and that the Court of Final Appeal Judgment of HKSAR v Ng Po On [2008] 4HKLRD 176 had not been delivered when Yu case was decided.

What defence is available and the standard of proof?

43. By now, I have decided that a statutory defence, namely “without reasonable excuse” is available for offences under ss. 114 (1) and (8).  The effect of any statutory defences applicable to the offence charged is obviously important where the presumption of mens rea relating to the offence-creating provision is displaced.  The key question is whether the statutory defence, if properly construed, is inconsistent with the availability of the second or third alternative. If so, only the statutory defence could be relied on.[26] That was regarded as the fourth alternative liability as defined in Hin Lin Yee.

44. Further, Ribeiro PJ subsequently observed in Kulemesin Yuriy, at paragraphs 85- 89, that:

“85. Hin Lin Yee was concerned with the mental element to be proved in relation to a regulatory offence, namely, breach of section 54(1) of the Public Health and Municipal Services Ordinance. The offence involved selling drugs which were intended for use by man but unfit for that purpose (because they had been contaminated by a certain contaminant). It was an offence punishable on summary conviction by a maximum fine of $50,000 and imprisonment for 6 months….

86. The present case involves an offence which is not merely regulatory but involves serious criminal liability, being triable on indictment and punishable by a fine of up to $200,000 and by imprisonment for up to 4 years. In cases like the present, a conviction is also likely to have serious professional ramifications for the mariners involved. As we have seen, a constitutional challenge was made to the reverse onus apparently imposed by the statutory defences provided for.

87. I concluded in Hin Lin Yee that the halfway house to be adopted in Hong Kong was the third (reverse onus) and not the second (evidential burden) alternative, on the basis that once the Court was prepared to go so far as to accept as a halfway house, the imposition of a reverse onus on the defendant, there was little to be said in favour of the second alternative. I also remarked that the latter alternative was less straightforward, since it requires the prosecution to proceed subject to the contingency that the accused discharges an evidential burden as to his having had reasonable grounds for an exculpatory belief. The prosecution would then have to prove either the absence of an honest belief or the absence of reasonable grounds for such belief.

88. Such reasoning is apt when the Court is dealing with a merely regulatory offence and no constitutional issue is raised. Given the relatively minor gravity of the offence, the Court may be prepared to adopt the reverse onus alternative which falls close to the absolute liability end of the spectrum as best reflecting the presumed legislative intent upon displacement of the presumption of mens rea. Such alternative remains available and may be compelling when construing regulatory offences.

89.    However, where, as in the present case, the Court is not dealing with a merely regulatory offence, it may conclude that the presumption of mens rea has been displaced but may not accept that adoption of the third alternative would reflect the legislative intent.  Where a serious offence carrying severe penalties is involved, a reverse onus may also be regarded as making excessive inroads into both the presumption of mens rea and the constitutionally protected presumption of innocence.  In such cases, the Court may find it more appropriate to infer that the second alternative best reflects the presumed intention of the legislature, doing no violence to the presumption of innocence.”

45. Given the serious criminal liability and severe penalty carried by the s.114 offences and the fact that the standard of proof of the statutory defence held in Liu Su Ke to require evidential burden only is consistent with that of the second alternative set out in Hin Lin Yee, I, having considered all the above steps of statutory construction, find that the present offences under sections 114(1) and (8) are offences to which the second alternative of intermediate basis of liability applies.  In other words, they are offences where:

(a)  The prosecution is required to prove beyond reasonable doubt that the D1 did carry on or hold itself out to the company clients in question as carrying on a business in advising on corporate finance;

(b)  If D1 is able to reply on evidence which, if unrebutted, raises reasonable doubt as to whether he acted or omitted to act in the honest belief on reasonable grounds that her conduct was not carrying on or holding itself out as carrying on a business in advising on corporate finance, D1 is entitled to be acquitted unless at the end of the day, the prosecution establishes beyond reasonable doubt that the D1 either did not have such belief or that his belief, although honestly held, was not based on reasonable grounds (common law defence);

(c)   Furthermore, given the existence a statutory defence, if D1 is able to reply on evidence which, if unrebutted, raises a reasonable doubt as to whether a reasonable excuse exists for its conduct, D1 is entitled to be acquitted unless at the end of the day, the prosecution establishes beyond reasonable doubt that no such excuse exists or that the excuse relied on is not reasonable[27] (statutory defence).

Issue III: Could D1 be liable for acts of Michael?

46. Concerning the criminality of a corporate body, there is no dispute by both parties that the current law is that the company will have imputed to it the acts and state of mind of those of its director and managers who represent its “directing mind and will”.  And it is also common ground that D2 in the present case was the directing mind of D1, being the sole shareholder and director of D1.  The issue is whether the acts of Michael, having been engaged by D2 to deal with the respective clients in question, could be attributed to D1?

47. The key question was identified by Lord Reid in Tesco Supermarkets Ltd v Nattrass [1972] AC 153 , in two passages at pp. 170 and 171 respectively:

“I must start by considering the nature of the personality which by a fiction the law attributes to a corporation. A living person has a mind which can have knowledge or intention or be negligent and he has hands to carry out his intentions. A corporation has none of these: it must act through living persons, though not always one or the same person. Then the person who acts is not speaking or acting for the company. He is acting as the company and his mind which directs his acts is the mind of the company. There is no question of the company being vicariously liable. He is not acting as a servant, representative, agent or delegate. He is an embodiment of the company or, one could say, he hears and speaks through the persona of the company, within his appropriate sphere, and his mind is the mind of the company. If it is a guilty mind then that guilt is the guilt of the company. It must be a question of law whether, once the facts have been ascertained, a person in doing particular things is to be regarded as the company or merely as the company's servant or agent. In that case any liability of the company can only be a statutory or vicarious liability.”

“Normally the board of directors, the managing director and perhaps other superior officers of a company carry out the functions of management and speak and act as the company. Their subordinates do not. They carry out orders from above and it can make no difference that they are given some measure of discretion. But the board of directors may delegate some part of their functions of management giving to their delegate full discretion to act independently of instructions from them. I see no difficulty in holding that they have thereby put such a delegate in their place so that within the scope of the delegation he can act as the company. It may not always be easy to draw the line but there are cases in which the line must be drawn….”

48. Also, a contrast can be drawn between the offences of strict liability and those require proof of mens rea.  Lord Templeman said at p.465 in re Supply of ready mixed concrete, HL, (No.2) [1995] AC 456 that:

“the first principle is that a company is an entity separate from its members but, not being a physical person is only capable of acting by its agents. The second principal is that a company, in its capacity as a supplier of goods, like any other person in the capacity of taxpayer, landlord, or in any other capacity, falls to be judged by its actions and not by its language. An employee who acts for the company within the scope of his employment is the company. Directors may give instructions, top management may exhort, middle management may question and workers may listen attentively. But if a worker makes a defective product or a lower manager accepts or rejects an order, he is the company.

49. It is recently held by the Court of Appeal of England in R v St Regis Paper Co. Ltd [2011] EWCA Crim 2527 that the above principles however have no application to the regulation in question in that case which required proof of full intent.  It again distinguished between offences of strict liability and offences which required proof of mens rea.

50. On the other hand, in HKSAR v Timful Garment Ltd, HCMA 770 of 2001, Deputy Judge Toh, as she then was, quoted what Litton JA said in the R v Wong Tak Choy [1994] 3 HKC 353:

"The Import and Export "General" Regulations do not by express terms make an employer liable for a servant's act of taking article out of Hong Kong contrary to the provision of the export licence unless he has caused the servant to do so. The effect of the verb to cause in the context of the Import and Export Regulations has been exhaustively analyzed by the Privy Council in AG v Tse Hung Lit [1986] AC 876. There the Privy Council expressively approve of the passage in the judgment of the High Court of Australia in O'Sullivan v Truth and Sportmans Limited 1957-96 CLR 2001 where the High Court was dealing with the offence of causing a newspaper to be offered for sale containing certain prohibited matters. The passage is in these terms:

"(The expression to cause) should be interpreted as confined to cases where the prohibited act is done on the actual authority, express or implied, of the party said to have caused it or in consequence of his exerting some capacity which he possesses in fact or law to control or influence the acts of the other. He must moreover contemplate or desire that the prohibited act will ensue."

51. Deputy Judge Toh, as she then was, further observed that:

“15. The appellant in Wong Tak Choy case was not a limited company. The appellant was one of the three partners of a garment factory. In Wong Tak Choy case there was evidence that a Mr Tsang who was in charge of the Shipping Department had carried out some import and export transactions and that the Appellant did not authorise it and knew nothing about it.

16. The Magistrate in Wong's case decided that Wong was vicariously liable for what Mr Tsang had done. Litton JA (as he then was) held that the decision was wrong and that the Appellant could only be found guilty if there was evidence to show that he did cause the servant to commit the crime.

17. I agree with the Respondent that the present case can be distinguished from Wong Tak Choy case in that the Appellant is a limited company and its mind and will must, of course, be exercised by the Company Directors and Managers, and the Company had through its board of directors, given full authority to Mr So to act on its behalf, as its production manager, in charge of not only production but import and export.

18. The learned Magistrate correctly found that a company "will have imputed to it the state of mind, both of its directors and managers, who represent its directing will and mind. So any mistakes or intentional flouting of the law by Mr So can be imputed to the Company.”

52. As I have ruled the offences under section 114(1) are strict liability to which the second alternative applies and that D1 is a corporate body instead of a natural person, I consider that, by applying the principles stated in the authorities above, what Michael (being an agent of D2)’s acts done could be attributable to not only D2 but also D1, subject to the finding of facts as to whether Michael was acting within the actual and specific authority of D2.

Directions and reminders

53. In reaching the verdict, I have reminded myself that the prosecution is required to prove the guilt of the defendants beyond reasonable doubt. The defendants have nothing to prove except D1 to raise the defence with evidential burden in respect of s.114 offences. If I were to disbelieve D2’s evidence in court that does not mean she or D1 is guilty of the offence. Were I to disbelieve what she said in court I am also required to consider the evidence I do accept and decide if that satisfies me of the guilt of the defendant to the required standard.

54. In assessing the credibility of witnesses, I reminded myself that each case has its own particular features and sweeping generalization should not be made. I bore in mind that I had to consider the inherent probabilities of the evidence and that the demeanour of the witnesses could be relied on only as a last resort.

55. D2 has a clear record and I have followed the guideline laid down in the case of Berrada and regarded her as having a lower propensity to crime and  a higher degree of credibility.

56. I also reminded myself that where the prosecution relies on circumstantial evidence, the court can only draw an inference from facts proved beyond reasonable doubt and such an inference must be the only reasonable inference that can be drawn from such facts.  It must also be an irresistible inference.

57. This case involved similar summonses laid against D1 and D2 under sections 114 and 390 respectively of the Ordinance, I have reminded myself that I have to deal with evidence for each summons separately.

Discussion on the Evidence

58. The credibility of all the prosecution witnesses are generally not in issue, except the defence challenged Cheuk had actually not read the content of the written agreements before his signature, which Cheuk firmly disagreed.  In the following paragraphs, I will firstly deal with the evidence concerning summonses laid under s.114(1)  against D1, i.e. C.L. Management Services Ltd, in relation to its dealing with the 3 respective client companies: 3 Wells, UK Fur and New Bonus.  The “carrying-out” offence under section 114(1)(a) only concerned 3 Wells while the “holding-out” offences under section 114(1)(b) concerned all three companies in question. 

Summonses against D1

The “carrying-out” offence in respect of 3 Wells (ESS 30671 of 2013)

Background of D1, D2 and Michael

59. D1, C.L. Management Services Ltd, was and is a registered company in Hong Kong and D2 was the sole director and shareholder of the company at all material times. D1 shared the same office at the address stated in the agreements in question with Cheong Lee Securities Limited (“Cheong Lee”) which was and is a securities company owned by D2.  It is admitted by both parties that neither D1 nor D2 were licensed with SFC in any capacity or in relation to any regulated activities under the Ordinance. [28] Neither was it disputed that D2 knew that she was not licensed to do so at the material times.

60. D2 is educated and received part of her education in Australia.  She was divorced having 4 children.  She has been actively participating in the charitable work held by Yan Oi Tong where she met Cheuk’s wife who was the chairlady of Yan Oi Tong.  D2 was also elected as a vice-president of Yan Oi Tong before.  She was a stockbroker and a licensee as a securities’ dealer between 1991 and 2003.  D2 acquired Cheong Lee in 2007 which was and is a company engaged in the business of dealing in securities and futures.  In March 2011, the holding company of Cheong Lee, CL Group (Holdings) Limited (“CL Group”) was listed on the GEM board of SEHK and D2 was and is the major shareholder.  D2 knew the listing procedures from the past listing experience of her own company, CL Group and as a result of which, she knew a number of professional parties, including lawyers, accountants and sponsors for listing matters.

61. As testified by D2, Michael was a certified public accountant and also a chief financial officer of a listed company.  D2 knew him since 2004 and CL Group had employed Michael as a company secretary in 2005 for 6 months.  Between 2004 and 2007, D2 hired Michael to handle accounting matters for her personal companies. As far as D2 knew, Michael was conversant with the listing procedures. D2 regarded Michael as a person of experience and one could handle matters very well, as she had worked with him for a long time.  In the present case, D2 alleged that he had engaged Michael to prepare the agreements in question and liaise with the respective three client companies for her.  She also asked Michael to look into the internal audit of 3 Wells for allegedly “her own assessment” only as to whether 3 Wells were capable of being listed before she introduced the professional parties handling the listing procedures of 3 Wells.  D2 maintained that Michael was not an employee of D1 at the material times.

Before 3 Wells Agreement was signed

62. According to the evidence, what D2 and Michael have done to 3 Wells before the 3 Wells Agreement had been signed were as follows:

(a) In early 2011, about half a year before signing the agreement, D2 firstly raised with Cheuk if he was interested to be instructed by her to upgrade 3 Wells, meaning getting it to be listed;

(b) Cheuk subsequently visited several times D2 at the address of D1, as stated in the 3 Wells agreement for the purpose of knowing more about D1’s scale of business (though in his mind he only knew Cheong Lee) and considering whether to choose D1 for the listing matters.  Every time he saw D2 working inside the office and it was Michael who received and discussed the matter with Cheuk;

(c) Cheuk also, during the half year before the agreement was signed, has gathered information in respect of provider of consultancy services in listing matters. He said the price was generally from $300,000 to $500,000;

(d) Cheuk was not familiar with the listing procedures and therefore he needs advice on the procedures, human resources and a professional party to line up all the right professionals for the listing application; Cheuk admitted that apart from the payment and lining up of professionals, the other terms on scope of services were not discussed with D2 in details.  Those were only confirmed when the agreement was signed;

(e) What Cheuk understood was that D2 and Michael would act like a “martial-art instructor” to help 3 Wells in the listing procedures.  He expected that D2’s party would supervise or even work with the team of professionals to ensure the smoothness of the listing of 3 Wells;

(f) Michael was the first “staff”, as said by Cheuk, D2 had introduced to Cheuk;

(g) D2 instructed Michael to prepare the 3 Wells agreement for Cheuk to sign.  Cheuk signed the agreement first at 3 Wells’ office, the agreement was subsequently sent to Michael for D2’s signature at her own office; A signed copy by both parties was later sent to 3 Wells;

(h) Cheuk said he did read the content of the agreement before he signed.  Because of their friendship and D2’s reputation on both her profession and charity, Cheuk said that he did not care much about whether D2 was signing the contract on behalf of Cheong Lee or any other company of her.  Nor did he care much about the date of the agreement;

(i) Cheuk knew well that he was appointing D1 as 3 Well’s “exclusive financial adviser” and he did believe D2 was capable of providing such service as a professional financial adviser for 3 Well’s listing and D2 being a consultant should provide such service as a whole.

Relevant clauses in the 3 Wells Agreement 

63. The written agreement[29] signed between D1 and 3 Wells is not at all a complicated one.  The terms stated in are in fact clear and easy to understand.  I quote below the relevant ones:

“PROFESSIONAL FINANCIAL CONSULTATION SERVICES AGREEMENT

Name of Party A : 3 Well Groups Holdings Limited (referred to as “Party A”)

Office of Party A : Units 1503 – 6, 15/F, Tower 1, Ever Gain Plaza, 88 Container Port Road, Kwai Chung, N.T., Hong Kong

Name of Party B : C. L. Management Services Limited (referred to as “Party B”)

Office of Party B : Room 1106, 11/F, Mass Mutual Tower, 38 Gloucester Road, Wan Chai, Hong Kong

In view of Party A’s intention to apply for a listing status on the Growth Enterprise Market (GEM) Board of the Hong Kong Stock Exchange, Party A and Party B hereby enter into this Engagement Agreement on matters about the engagement of Party B as an exclusive financial advisor in relation to Party A’s listing upon arm’s length negotiation :

1. Engagement

With the effective from the confirmation and signature of this Agreement by Party A, Party B is duly appointed by Party A as the exclusive financial advisor of Party A and its subsidiaries (hereinafter referred to as the “Group”) in relation to the listing in Hong Kong.

2. Scope of Services

Party B shall make full endeavour to use its resources and advantages for the listing of Party A, in order to enable Party A to be listed on the Hong Kong Stock Exchange. The responsibilities of Party B in relation to this listing include :

(1) to provide professional financial advices in relation to arrange of the application for the listing on the Hong Kong Stock Exchange and to assist in resolving the relevant important issues;

(2) to provide technical advice on all related foreign and domestic policies, and to assist Party A in drawing up a listing scheme or proposal on the basis of an initial evaluation;

(3) to assist and guide Party A on the formulation of a restructuring plan, and a timely tracking and monitoring program for the intended listing, and on the implementation thereof;

(4) to assist Party A in preparing the financial statements of the Group in accordance with the Hong Kong Accounting Standards;

(5) to guide and assist the Group in the preparation of the listing financial information (including the preparation of the financial information to be contained in documents such as the prospectus of Party A) in accordance with the standard requirements, and to actively participate in the preparation work for Party A’s application for listing;

(6) to assist Party A in the engagement of various listing-related intermediaries in relation to the intended listing, such as accountants, lawyers and listing managers (including securities brokers and underwrites etc., which shall be internationally-renowned institutions). The selection of the aforesaid institutions shall be confirmed by Party A, and the payment of costs to each of the intermediaries shall be made by Party A;

(7) to assist Party A in performing the required due diligence in respect of the listing project and to coordinate with other intermediaries;

(8) to enthusiastically follow up audit work in connection with the listing matters with the Hong Kong auditors for and on behalf of Party A;

(9) to assist Party A in the overall arrangement with respect to the questions raised by the Hong Kong Stock Exchange and the Securities and Futures Commission (SFC), including the review and submission of replies on financial information;

(10) to consult with Party A to frame a practicable listing schedule in order to ensure the timely completion of the required work;

(11) The advisory services shall span over the financial accounting years from September 2011 to December 2012.

…….

5. Payment of Costs

Party A agrees and undertakes to pay a cost of HK$600,000 annually to Party B as compensation for acting as its financial adviser. Upon successful listing of Party A on the Stock Exchange of Hong Kong, Party A shall grant an additional number of share options, being equivalent to 1.5% of the issued shares, to Party B. The payment should be made within 7 days when this agreement effective. The payment terms is as follows

Time of payment		Payment
Within 7 days after signing this Engagement		HK$150,000
Agreement and payment in quarter
The date on which the listing application submit to the Stock Exchange of Hong Kong		Share options equivalent to 1.5% of the number of issued shares

The accommodation expenses incurred by Party A during its work should be financed by Party A.” (My emphasis)

64. I find the above 3 Wells Agreement a very clear and comprehensible agreement representing that D1 would during the period covered by the agreement act as an “exclusive financial advisor” providing a comprehensive scope of advisory services for 3 Wells concerning the compliance with and in respect of the listing rules.  The reasons are:

(a) The agreement was clearly named as “Professional Financial Consultation Services Agreement”;

(b) It was stated therein twice[30] that D1 was engaged by 3 Wells as an “exclusive financial advisor” in relation to 3 Wells’ listing in Hong Kong;

(c) All the terms in Clause 2 “Scope of Services” clearly concerned advisory services on listing matters, including compliance with and in respect of the listing rules, of 3 Wells;

(d) In Clause 5, the payment of costs was clearly for D1 acting as 3 Wells’ “financial adviser”.  It is of note that the payment of costs to other professional listing-related intermediaries, e.g. lawyers, accountants and listing managers, were to be separately and additionally paid by 3 Wells[31];

(e) The advisory services shall span over the financial accounting years from September 2011 to December 2012[32].

After  3 Wells Agreement was signed

65. On the evidence, after the agreement was signed, D2 and Michael did provide part of the services as stated in Clause 2 of the agreement:

(a) 1-2 weeks after 31 Aug 2011 when 1st payment of HK$ 150,000[33] was paid by 3 Wells to D1 in pursuance of the agreement, Cheuk and Lee met Michael and his team for the listing matters;

(b) Michael, and his team, then requested to assess each department of 3 Wells by interviewing each department head and visiting the mainland factory;

(c) On 1 September 2011, Geoffrey WONG [34] (“Geoffrey”) of Michael’s team, sent a outstanding list and time table for the listing purpose to Lee;[35]  The same was forwarded to Michael;

(d) Between 16 September and 17 October 2011, Lee sent, as requested by Geoffrey, a list of 3 Wells’ internal documents[36] to Alex Tse (“Alex”) and Geoffrey, for the purpose of reviewing the internal control.  Alex sent their comments on the internal control to 3 Wells on 22 September 2011. As seen from the email, meetings for the same purpose were held on 19 September, 4, 13 and 17 October 2011, all the emails were forwarded to Michael and Cheuk;

(e) Cheuk understood that all the above documents were sent to Michael and his team for their consideration as to whether 3 Wells was capable of being listed;

(f) Before D2 lining up the professional team, Cheuk recalled that either D2 or Michael had come back to him and told him that 3 Wells should be eligible to be listed;

(g) On 3 October 2011, Michael and Cheuk’s team had the first meeting with the company lawyer [37];

(h) On 21 October 2011, Lee sent to Geoffrey another list of 3 Well’s information[38] which would be forwarded to Sponsor’s consideration;

(i) On 25 October 2011, Michael attended the first meeting with the Sponsor and Cheuk’s team ;[39]

(j) On 12 December 2011, Michael attended a meeting with the Sponsor and Cheuk’s team concerning the extension of the listing on GEM project for one year to September 2013[40];

(k) On 16 January 2012, Michael attended a meeting with Cheuk’s team and the Sponsor for the purpose of outlining the execution plan for GEM project[41];

(l) On 14 May 2012, 3 Wells paid a second payment of $150,000 [42]to D1 in pursuance of the agreement;

(m) Around September/ October 2012, Michael called Lee repeatedly and urgently requesting 3 Wells to terminate the 3 Wells Agreement due to problem of “internal audit”. It was promised that a refund of a total of $300,000 will be made to 3 Wells by D1.  The request was agreed by Cheuk and a letter was finalised, drafted by Michael and amended on Cheuk’s instruction, and sent to D1’s address and to the attention of D2[43];

(n) D2 admitted that she had received the termination letter[44] but did not pay heed to it and therefore did not act on it;

(o) No refund was ever made by D1 to 3 Wells until now;

(p) Cheuk all along understood that D2, Michael and their team, apart from lining up the professionals including the lawyers, accountants and sponsors, would supervise and work with them to make the listing process successful.  However, several months after the agreement, it seemed that D2 and her team did not do much in the listing process;

(q) Upon lining up the professionals, D2 said she had attended the first introductory meeting after which he did not take part in the process.  She relied on Michael to do all the liaison work for 3 Wells’ listing matters;

(r) D2 admitted that out of the total sum of $300,000 D1 had received from 3 Wells, $150,000 was paid to Michael.

Was Michael acting on behalf of D2 within her actual and specific authority?

66. It is contended by the Defence the acts by Michael and his team to 3 Wells were not done within D2’s actual and specific authority.

67. On the evidence, D2 was the sole shareholder and director of D1.  The scale of D1, as testified by D2, was not a huge one.  She said in evidence that it was her another company Cheong Lee assigning a room at the address in question for her to work for D1.  Cheuk said that Michael was the first staff D2 had introduced to 3 Wells responsible for the listing project.  Michael was working in the same office as that of D2 in respect of the dealing with 3 Wells as testified by Cheuk.  It is reasonable to infer that D2 and Michael did work together closely during the material times.  According to Cheuk and Lee, if there was anything they wanted to inform D2, they would do it through Michael, e.g. D2 signing the 3 Wells agreement or Lee sending the termination letter to D2.  3 Wells’ party always understood Michael being the agent/staff of D2. At no stage did D2 inform 3 Wells that such her relationship with Michael had been changed.

68. Further, I found Michael was actually working as a delegate/agent of D2, being responsible for the services provided to 3 Wells about the listing matters. On the evidence, it is clear that after D2 getting the business from 3 Wells by using her connection and reputation acquired both from her charity and professional works, she then left the actual operation to her able assistant, Michael.  As admitted by D2, Michael was conversant with listing procedures as he was a certified public accountant and a chief financial officer of a listed company before.  Michael has also been employed by D2 as company secretary for CL Group in the past.  It was mainly Michael and his team to follow up the listing matters of 3 Wells.  As a matter of fact, what Michael and his team did was generally consistent with the agreement terms, although it turned out to fall short of performance as expected by Cheuk.  No doubts Cheuk and his team understood that Michael was all along acting on behalf of D2. 

69. Even during the termination of the contract, the letter was sent to D2’ attention. D2 admitted that she had received the termination letter which showed that she remained in control and was the person in charge of the whole process on behalf of D1. Before the 3 Wells Agreement was terminated, a total of HKD$300,000 was paid to D1 by 3 Wells on schedule which has never been refunded as promised by Michael over the phone.  Out of HKD$300,000, Michael was rewarded with half of the remuneration, i.e. HKD $ 150,000, as admitted by D2.  All of these are consistent with Michael’s role as an agent for D2.  It makes no sense that Michael, without any reasons, would be or intended to be in any way acting outside D2’s authority. Having reviewed all the evidence, I found that Michael was all along acting on behalf of D2.  D2 had delegated her duties for 3 Wells to Michael and that Michael had acted within D2’s actual and specific authority and within the scope of her delegation.

70. As I have ruled above that offences under section 114 created strict liability of 2^nd alternative and the fact that D1 was a corporate body in the summons concerned, together with my finding that D2 had delegated her duty in respect of 3 Wells to Michael who had acted within D2’s delegation and authority, I consider that what Michael had done on 3 Wells was attributable to D1.  In other words, D1 was liable for not only D2’s, but also Michael’s acts.

What amounted to “advising on corporate finance”?

71. It is common ground that the meaning of “advising on corporate finance” is defined in Part 2 of Schedule 5 of the Ordinance and the relevant part concerned in the present case in my view is confined only to the first part of subsection (a):

“advising on corporate finance means giving advice-

(a) concerning compliance with or in respect of rules made under section 23 or 36 of this Ordinance governing the listing of securities….;

72. On reading the above extract of the definition, it seems that the provision aims at covering a wide range of areas of any advice given concerning compliance with or in respect of rules governing the listing of securities.

73. As analysed in paragraphs 61-64 above, I am of the view that what D2 and Michael did to 3 Wells before, during and after the 3 Wells Agreement was signed obviously amounted to advising on matters concerning compliance with or in respect of the rules governing the listing of securities.  Although what D1 did fell short of what it had promised in the written agreement and what was expected from Cheuk.  On the evidence, D2, Michael and his team were but trying to give assistance and advisory services on the listing matters for 3 Wells on behalf of D1.  The services provided were generally in line with what D2 had promised to 3 Wells both in the oral and written agreements. 

74. Defence said that D2 was just using her experience and connections to line up a professional team for 3 Wells’ listing and that was it, which fell short of amounting to advising on corporate finance. I disagree with it.  That in fact was just part of D2’s work.  As said above, D2, after signing the 3 Wells Agreement, also sent her team headed by Michael, as testified by Cheuk and Lee, to have meetings with Cheuk, Lee and their department heads, both in Hong Kong and Mainland.  They also helped to review a list of internal documents to access whether 3 Wells had the capability to be listed.  Such advices were indeed given to them before D2 lined up the professionals for the listing of 3 Wells. After that, D2 (even for the first introductory meeting only as said by her) and Michael had also met up with Cheuk’s party and other professional intermediaries concerning 3 Wells’ listing.

75. I do not accept Defence contention that D2 was not aware of Michael and his team’s doing all along.  D2 was a professional in the securities industry and she was involved from the beginning until the end, although she was not the person who actually did most of the liaison or advisory work.  This part will be considered in more details later in my verdict.

Did D1 “carry on” a business in advising on corporate finance?

76. As to the meaning of “carrying on” a business,  it was held in Lee Yee Shing v Commissioner of Inland Revenue (2008) 11 HKCFAR 6 at paragraph 38, that “whether something amounts to the carrying on a trade or business was a question of fact and degree to be answered by the fact finding body upon the consideration of circumstances.”

77. Further, it was held in HKSAR v Fung Yee Man [2001-2003] HKCLRT 464 by Deputy Judge Pang, as he then was, that:

“A business must be “carried on” in order to become registrable, and the term “carry on” cannoted a degree of continuity.  As a matter of common sense, a one-off sale and purchase transaction did not constitute “carrying on”.

78. I have found above that what D2 and Michael had done amounted to giving advice on corporate finance, I still have to consider whether on the evidence D1 was “carrying on” a business in advising on corporate finance.  Applying the principle set out in the abovecases, I do have reservation in concluding beyond all reasonable doubt that what D1 had factually done to 3 Wells could satisfactorily be regarded as “carrying on” a business in advising on corporate finance, although the evidence showed that it did at some stage, through Michael and D2, give 3 Wells “some bits and pieces” advisory service on its listing during the material times[45]. Cheuk testified that several months after the agreement had been signed, he realised that D1 actually did not do much in the listing process, as opposed to what he had expected.  On the evidence, the advisory service provided by D1 to 3 Wells was abruptly terminated upon D1’s request around September or October 2012 before the agreement was completed. At that moment, 3 Wells was not able to be listed as originally scheduled.  Analysed as the above, I acquit D1 of ESS 30671/2013 on the “carrying-out” offence[46]. As there is no commission of the relevant offence in section 114(1)(a), D2 must also be acquitted of the “attributable offence” of ESS 30672/2013 laid under section 390 of the Ordinance.

The “holding-out” offences (ESS 39231, 30673 & 30675 of 2013)

79. As stated above, the “holding-out” offence against D1 [47]concerned all three client companies.

Meaning of “Holding- out”

80. From the Hong Kong Bilingual Legal Dictionary, it is said that the term “hold out” means:

“To represent or pretend. It is an offence for an unqualified, unlicensed or unregistered person to hold out, advertise or represent that he or she is qualified or licensed to provide professional or regulated services”

Evidence relating to 3 Wells

81. On the evidence set out above in paragraph 62, Cheuk said that before signing the 3 Wells agreement, D2 had asked him twice whether he would like to promote 3 Wells to a higher level, which he understood was to have 3 Wells being listed. D2 asked if Cheuk was interested to be instructed by her for such purpose which Cheuk understood D2 would act like a martial art instructor in the whole listing process of 3 Wells.  Cheuk had actually considered this issue for about half a year, during which he had gathered information about other companies providing similar consultancy services concerning listing procedures and visited D2’s office to learn about the scale of her business.

82. Before the written agreement was signed, the payment terms and paying schedule were largely agreed.  As to the scope of services to be provided by D1, D2 and Cheuk did not discuss it in details before signing the agreement.  What Cheuk understood was that, apart from introducing the right professional parties to handle the listing process for 3 Wells, D2 and his team would also supervise or work together with other professional parties to ensure the listing process would be smooth. 

83. The Defence disputed that Cheuk had actually not read every term of the agreement before he signed it which was firmly disagreed by him.  Cheuk explained that what he told SFC that he did not care about the contract meant that he did not care about the company’s name, the scope of services in details and the date of the agreement.  Neither did he care to check whether each term of the contract was duly carried out by D2 in the course of the process after signing the agreement. It was because he trusted D2 very much.  But he did read and understand every term of the contract before he signed.  After considering the content of his evidence as a whole and observing the way in which Cheuk was giving evidence, I accept all what Cheuk said in court and I found him a very honest and reliable witness. 

84. In any event, what the court mostly concerned is not what Cheuk had understood, but what D2 had held herself out before, during and after she had signed the agreement. The terms stated therein the 3 Wells Agreement are clear and simple.  D2 is educated and has been working in the profession of securities and futures for a long time.  The agreement was prepared upon her instruction.  The evidence also showed that there was abundant time for her to read and understand the contract before signing the agreement.

85. Apart from the conduct of D2 before and when she signed the agreement with 3 Wells, what she and Michael performed to 3 Wells after signing the agreement as stated above in paragraph 65 also supported the conclusion that, at the time when D2, on behalf of D1, signed the agreement, D1 did held itself out to 3 Wells as carrying on a business in advising on corporate finance.  It was also in line with 3 Wells’ understanding all along until the termination of the contract.

86. The fact that D1, urgently and strangely, requested 3 Wells to terminate the agreement also strengthened the inference that D1 did at the outset held out to 3 Wells as carrying on a business in advising on corporate finance which was later discovered to be unlawful and needed to be terminated.

87. In light of the foregoing, I have no hesitation to conclude that D1 did, at the time when the 3 Wells Agreement was signed, hold itself out to 3 Wells as carrying on a business in advising on corporate finance.

What if Michael’s acts do not count?

88. Even if I were wrong in concluding D1 should be liable for Michael’s acts, I still found that D2 being the “directing mind and will” of D1, had held herself out to 3 Wells as carrying on such a business. 

89. Taking into account the above facts concerning the acts of D2 alone performed to 3 Wells before, during and after the agreement was signed together with other circumstantial evidence, in particular her background and the clear content of the 3 Wells Agreement as set out above at paragraphs 59-65 and analysed at paragraphs 81-86, I am sure that D1 did, at the time when the 3 Wells Agreement was signed, hold itself out to 3 Wells as carrying on a business in advising on corporate finance.

Evidence relating to UK Fur

90. The Prosecution only called PW3, P WONG, the Chairman and executive director of UK Fur, which was in the business of fur trading.  P WONG knew D2 for over 20 years. P Wong’s evidence was relatively brief.  What D2 had done to UK fur included:

(a)  D1 entered into a “Professional Financial Services Consultation Agreement”[48] with UK Fur signed by P Wong and D2, on or around 20 October 2010;

(b)  The draft of the above agreement was prepared by Michael which was sent[49] to D2 for consideration before signature.  After three days, D2 replied Michael, by way of email, that the draft had no problem. D2 also emphasised to Michael to make sure the payment would be well received; [50]

(c)   The UK Fur Agreement contained very similar terms as the one signed with 3 Wells which included:

-   The agreement was named as “Professional Financial Services Consultation Agreement”;

-   Engaging D1 as UK Fur’s “exclusive financial adviser” in relation to its listing in Hong Kong (Clause 1);

-   Purporting to provide very similar scope of advisory services as stated in Clause 2;

-   Providing for payment of $600,000 and the granting of share options equivalent to 1.5% of the number of issued shares upon successful listing as stated in Clause 5 by UK Fur to D1 which were for the latter acting as the “financial adviser”;

-   The payment of costs to other professional listing-related intermediaries, e.g. lawyers, accountants and listing managers, were to be separately and additionally paid by UK Fur[51];

-   The advisory services shall span over the financial accounting years from 2009 to 2011.[52]

(d) UK Fur had paid a total sum of $600,000 [53]to D1 in 4 instalments as stated in Clause 5 of the agreement;

(e) During the oral discussion with D2 before signing the agreement, P Wong said that D2 only had offered services of lining up of a team of professionals for the listing matters, which he agreed upon cross examination that was what he expected too;

(f) P Wong admitted that he knew nothing about the listing procedures;

(g) When signing the agreement, although he had read it, he did not understand the content of it;

(h) On 26 October 2011[54], UK Fur and D1 entered into a Supplemental Agreement [55]. This agreement varied the payment terms under clause 5 of P2 in that the consideration for the services was changed from $600,000 to $700,000.  However, the additional $100,000 was not paid to D1;

(i) D2 introduced various professional parties to UK Fur including  lawyers, accountants and sponsors for the listing process;

(a) By a Confirmation Letter dated 18 November 2011[56], signed by D2 and P WONG, the parties confirmed that D2 did not and would not perform the services stated in the original agreement.  Instead, there was a totally different list of other services stated therein the letter that D1 had and would provide during the contractual period;

(b) Further, the role of D1 being a “financial advisor” was changed to “financial consultant” pursuant to the Confirmation Letter.

(c) P Wong said that the confirmation letter was prepared on the advice of the Sponsor of UK Fur’s listing application as it was said that the services stated in clause 2 of the original agreement should have been provided by the sponsor but not D1;

(d) UK Fur’s holding company was listed on the GEM board of SEHK on 24 August 2012;

(e) On 1 August 2012, UKF Holdings granted an option of $14,400,000 shares equivalent to 1.5% of the number of issued shares in favour of D1 at the exercise price of $0.26. On 2 August 2012, D1 accepted  the option in a letter signed by D2 on behalf of D1[57]

91. Given the unequivocal terms stated in the contract signed between D2 and P Wong, I consider that there is sufficient evidence to show that D2 did hold itself out to UK Fur as carrying on such business in advising on corporate finance.  I note that P Wong said that he did not understand the terms of the contract and expected D2 did nothing more than the introductory service. However, what the court concerned the most was what D1 had held itself out to be. I must say that I did have reservation on some part of the evidence of given by P Wong, who was a good friend of D2 for more than 20 years, concerning what he understood about the scope of services provided by D2 before the agreement was signed. The court is entitled to accept part of the evidence given by a witness.  In any event, the clear representation stated on the written agreement[58] should be considered as the most forceful and reliable evidence of what parties were agreeing and representing.   

92. Defence said that P Wong’s understanding of what D2 said orally was in contrast with what was stated in UK Fur Agreement.  Normally, the written contract should be considered as overriding if there is any discrepancy between the oral and written agreement.  For example, in D2’s evidence, she orally agreed with the respective clients that she would charge around HKD$50,000 each month for her services.  But in all the agreements concerned, the payment terms stated therein were quite different from what she told the clients before.  This also showed that D2 intended to finalise all the terms of her service with her clients in the written but not the oral agreement. 

93. Strangely enough, the term about “Scope of Services” (Clause 2) has been substantially amended and the role of D1 being a “financial advisor” was changed to “financial consultant” by way of a Confirmation Letter[59] dated 18 November 2011 after almost 13 months when the UK Fur Agreement was firstly signed.  A compelling inference could be drawn that either the advisory services stated in Clause 2 of the original agreement had not actually been carried out or should not have been carried by D1, which was somehow discovered and needed to be rectified by UK Fur during the listing process. In either situation, it further supported the irresistible inference that D1 did, at the time when signing the contract, hold itself out to UK Fur as carrying on a business in advising on corporate finance.  On the other hand, the fact that, D1 did, at some stage after signing the agreement and performing part of the unregulated activity, try to rectify its legal status with UK Fur only showed that it might not be aware what it/D2 was doing was not permitted by the law.  However, ignorance of law is no defence.  

94. Clearly, section 114 does not only target those who actually carried on a business in the regulated activity but also those who held itself out to others as carrying on such business.  In light of the unequivocal terms set out in the UK Fur Agreement and the other circumstantial evidence as set out above, I am sure that D1, at the time when the UK Fur Agreement was signed, actually held itself out as carrying on the business in advising on corporate finance.

Evidence in relation to New Bonus

95. The Prosecution only called PW4, KF WONG, another friend of D2 and also the director of New Bonus, which was in the business of selling luxury yachts.  His evidence was quite similar to what was given by P Wong of UK Fur.  On the evidence, what D2 had done to New Bonus included:

(a)  Around the end of December 2010 and early January 2011, KF WONG on behalf of New Bonus entered into a Professional Financial Services Consultation Agreement[60]with D2 signing on behalf of D1;

(b)  The New Bonus Agreement was also in very similar terms as 3 Wells Agreement[61] and UK Fur Agreement[62] which included:

-   The agreement was named as “Professional Financial Services Consultation Agreement”;

-   Engaging D1 as New Bonus’s “exclusive financial adviser” in relation to its listing in Hong Kong (Clause 1);

-   Purporting to provide very similar scope of advisory services as stated in Clause 2;

-   Providing for payment of $680,000 and the granting of share options equivalent to 3% of the number of issued shares upon successful listing as stated in Clause 5 by New Bonus to D1 were for the latter acting as the “financial adviser”;

-   The cost for other professional parties were to be separately and additionally paid by New Bonus;

-   The advisory services shall span over the financial accounting years from November 2011 to December 2012.[63]

(c)   D1 was paid $170,000 by New Bonus within 10 days after the written agreement was signed;

(d)  KF WONG said, upon cross-examination, that before signing the written agreement, he and D2 did discuss about D2 introducing professional parties to New Bonus for the listing application and that he himself did not expect D2 to provide other services regarding the listing process. 

96. I have to consider whether D2, on behalf of D1, by signing of an unequivocal written agreement as well as providing the introductory services to New Bonus could amount to “holding-out” in carrying on a business in advising on corporate finance.  Clearly, D2, on behalf of D1, did represent in the New Bonus Agreement that services of advising on corporate finance would be provided to New Bonus.  In fact, the first instalment of $170,000 was paid to D1 by New Bonus shortly after the agreement was signed.  The listing application of New Bonus was somehow not proceeded with, but part of the services, namely the introductory service as specified in Clause 2 had been provided by D2 as admitted by her.  In light of all the evidence concerning what D2, on behalf of D1, had done to New Bonus before, during and after the signing of the New Bonus Agreement, I have no hesitation to conclude that D1, at the time when the contract was signed, did hold itself out to New Bonus as carrying on the business in advising on corporate finance.

97. Defence said that KF Wong himself did not expect D2 would provide services other than the introductory services.  As what I have said earlier, the court is mostly concerned of what D2 was doing on behalf of D1.  Although KF Wong testified that during prior discussion what he understood from D2 was that she would be introducing some professional parties for the New Bonus’s listing, but that would not negate the clear fact that D2, on behalf of D1, had later on by way of an unequivocal written agreement[64] held herself out as carrying on the business in advising on corporate finance.  I therefore consider that D1 had at the material time held itself out to New Bonus as carrying on the business in advising on corporate finance.

Can the defence be made out by D1 factually?

98. I pray in aid of the holding in HKAR v Adams Secuforce (International) Limited [2008] 1 HKLRD 207[65] relating to the steps in considering the defence of “reasonable excuse”:

“the defence of “reasonable excuse” had first to be examined and identified; secondly, that it was necessary to determine whether the excuse was genuine; and thirdly, an assessment was necessary to determine if the excuse was reasonable. The Court said that the defendant's belief or his state of mind were relevant factors and may afford some assistance to the trier of fact but the final answer must always come from an objective assessment of the particular facts of each case. The Court said that that assessment required a consideration of not merely the defendant's belief and state of mind but it required the application of community standards.”

99. In a recent case HKSAR v Li Fung Ching Catherine [2012] 3 HKLRD 377, the Court of First Instance also held that[66]:

   “In relation to non-payment of wages under section 23 of the Employment Ordinance, the question of “reasonable excuse” should be considered from the perspective of a reasonable man, namely whether there was a cause which a reasonable man would regard as an excuse, consistent with a reasonable standard of conduct.  Regard must be had to the objective of the Ordinance, which was to provide for the protection of the wages of employees.”

100. In reaching my conclusion as to whether the defence could be made out factually, I bear in mind the principles above and the objective of the Ordinance in question which is to protect the investors and regulate the industry of securities and futures.  The defence contended that D2 firstly, was not aware of the content of all the agreements she had signed with the respective clients and secondly, did not know what Michael had done to 3 Wells.  I have to consider whether the defence has successfully proved the above two assertions, if unrebutted, could amount to a “reasonable excuse” (i.e. the statutory defence) or an honest belief on reasonable grounds that what she did was not holding herself out as carrying on a business in advising on corporate finance (i.e. the common law defence).

101. D2 elected to give evidence and I accept that the evidential burden for both statutory and common law defence has been satisfied by the defence.  What I have to do next is to consider whether the prosecution could successfully rebut, beyond all reasonable doubt, that what was said by D2 in her evidence could never be a “reasonable excuse” (statutory defence) nor in any way an “honest belief on reasonable grounds” (common law defence).

Did D2 know the content of the agreements?

102. As narrated earlier, D2 is an educated lady and understands English.  She has been dealing in the securities industry for years and her own company has gone through the process of listing in 2009-2011.  She testified that the three agreements in question[67] were prepared by Michael on her request but she did not have chance of reading through them in details before signing.  She said she had told Michael to look for similar agreement which provided only introductory services for listing.  On the evidence, the draft of UK Fur Agreement was sent to D2 by Michael for her perusal. [68]  The draft was subsequently approved by her as showed from the e-mail he replied to Michael.

103. D2 however told the court that the first time when she had a chance to read the terms in details of the three respective agreements was when she was asked to do so during her evidence-in-chief in court.  She said what she concerned the most was to get money from the clients on time and she was not concerned with other terms of the agreement because the three clients were all her friends. She even told the court that the agreements were not important. She also excused that she was just too busy, both in family and work, to read the content of the agreements.

104. I must say that D2’s above assertions in court were in my view no more than a pack of lies.  Being such a professional in the industry, how can one believe that she would not read carefully the terms before signing the contracts? D2 said what she concerned the most was the receipt of payment which could most effectively be showed and enforced in the agreements. Payment could only be collected when the duties of D1 was duly performed as specified in the agreement. Therefore, both the terms of payment and scope of services were equally important.  D2’s saying that she only had a glance on the payment clause but not other terms was totally unreasonable.  The most utterly unbelievable part was that she only read it for the very first time when she was giving evidence in court.  How could one believe such a dishonest and ridiculous piece of evidence?

102. At least, D2 would read the agreements when she was informed, on two occasions, that the same had problems.  Regarding UK Fur’s case, a Supplemental Agreement[69] dated 26 October 2011 and Letter of Confirmation[70] dated 18 November 2011 were signed by both parties, specifying the substantial changes of scope of services and the role of D1.  Similarly, in the case of 3 Wells, a letter back-dated to 31 May 2012[71] to terminate the original 3 Wells Agreement was received by her in late 2012.  D2 although admitted that she had received all the abovesaid documents denied that she had paid much attention to the same.  That again in my view defies all common sense.  The above documents were unusual in nature and hardly can one be convinced that D2, being the directing mind of the party concerned of the agreements, would not have paid any attention to them.  It is wholly unconvincing that D2 have not read again what she had signed when the terms of the agreements had been substantially changed.  It is also absurd that D2 would not have read the contracts again when she was being investigated by SFC which was well before giving evidence in court. 

105. In any event, I do not believe that D2 have not read through the respective agreements before she signed each of them.  There is no evidence suggesting she was in a rush at all.  As a matter of fact, the first draft of UK Fur Agreement was sent to her email account by Michael for her perusal and was approved three days later.[72] In 3 Wells’ case, Cheuk said that after he signed the 3 Wells Agreement, the same was sent to D2’s office for her signature.  In both cases, D2 had plenty of time to read and understand the agreements before signing.

106. Although Michael did not give evidence, D2’s evidence did not suggest any ground that Michael, being her reliable agent all along, would depart from her instructions on preparing the appropriate agreements without any reasons.  On the other hand, D2 said that she had known Michael for a long time and that she regarded Michael as a very competent assistant of her who could handle things very well. These must be the reasons why D2 would employ him as the company secretary before and in the present case the person responsible for most of the dealings with the clients concerned.  D2 said Michael was very familiar with the listing procedures and she herself also had the experience and knowledge of the same as CL Group had gone through the listing process before.  I have no doubt that the agreements must have been prepared according to D2’s instructions.

107. If D2’s evidence were true, all the agreements prepared by Michael turned out to be substantially departing from her instructions.  If the services D2 intended to provide were just so simple as alleged by her, why Michael would not have just drafted an agreement with very simple terms but acted against D2’s instructions and prepared a much more detailed one instead? On the evidence, all the money was firstly paid to D1 and the substantive work was mostly done by Michael. What was the point for Michael to perform so much more arduous duties for the clients if the same amount of money would be received by D2 and him by just doing the introductory services? This is again illogical.

108. D2 also testified that as she trusted Michael very much and she was very busy both at work and family, she simply did not care to read through them but just signed them right away. Such excuses are unacceptable to me. It is entirely improbable that D2 would not have read such clear and comprehensible terms even once. Each agreement contained only several pages and the terms were all very similar, clear and easy to understand.  D2’s such excuse/belief was neither reasonable nor honest at all in my view.  I am sure that D2 must have full knowledge of the content of all the agreements in question.

109. Also, after signing the contract, D2 was still involved in the process, at least by introducing the professional parties for and attending the first meeting with the respective clients as she testified. The receipt of payment on schedule did further infer that what she signed was what she meant.  Further, the considerable monetary remuneration, let alone saying the granting of share options, received by D1 from the clients was incompatible to D2’s allegation that she intended to provide and had provided introductory services only.  From Cheuk’s evidence, he did conduct some research on the fees charged for similar advisory services for listing provided by other companies which ranged from $300,000 to $500,000.  Defence submitted that the prosecution should have called independent evidence to prove the normal charges for such advisory service for listing before one could comment on the reasonableness of the costs charged by D1 for the introductory service, I consider common sense, Cheuk’s evidence and other circumstantial evidence suffice to rebut D2’s assertion that the cost D1 had received from the clients only intended to cover introductory and liaison services.

110. With the above reasons, I am of the view that the prosecution has successfully rebutted beyond all reasonable doubt that D2’s assertion that she was not aware of the content of the agreement concerned when she signed each of them.  The allegation of such “belief” or “excuse” was neither honest/genuine nor reasonable.

Did D2 know what Michael was doing on her behalf

111. Regarding D2’s contention that she was not aware of Michael’s acts on 3 Wells, it is also improbable and illogical to me.  Michael was her able assistant, receiving a handsome amount of monetary remuneration i.e. almost half of what D1 had received[73]. Michael and D2 were working in the same office at least for the project of 3 Wells, as Cheuk testified that he did see Michael whenever he visited D2. And it was always Michael receiving and discussing the matters with him.  Cheuk said clearly that the first staff D2 had introduced to him was Michael.  All along, Cheuk understood Michael was acting on D2’s behalf.  No one has ever informed 3 Wells that the relationship between D2 and Michael had changed in any way.

112. It was D2’s admission that she had entrusted Michael to look into the internal information of 3 Wells to assess its capacity to be listed for her own benefit but not for 3 Wells.  It was said by defence that as Cheuk had testified that 3 Wells already “knew” that they were capable of being listed and therefore there was simply no need for 3 Wells to be advised by D1 on the listing matter.  This submission, with respect, was convoluted and misleading in my view.  I find that D2 was simply trying to explain away the fact that Michael had on the undisputed evidence looked into 3 Wells’ internal audit and gave advice as to its ability for listing.  Although Cheuk was confident about his own company, it did not mean that he did not need D1’s advice on its capacity and procedures to be listed.  In fact, that was the whole purpose for Cheuk to engage D1 as he was not familiar with the listing procedures and manpower and he did believe D2, like a martial art instructor as said more than once by Cheuk, had the ability to advise 3 Wells on the listing process as a whole.  The assertion of D2 that the assessment of listing capacity of 3 Wells by Michael was only for her but not 3 Wells was without force.

113. Further, when Michael telephoned Lee to discuss the urgent request for termination of 3 Wells Agreement, the finalised letter was sent to and received by D2.  All these could provide the court with sufficient evidence to draw an irresistible inference that D2 was well aware of Michael’s acts to 3 Wells all along and that Michael was acting with D2’s actual and specific authority at all material times.  I am satisfied that the prosecution has disproved beyond reasonable doubt that the allegation of honest and reasonable belief/excuse that D2 was not aware of Michael’s doing and therefore thought that she was not holding out as carrying on the business in advising on corporate finance does not exist. Neither is such excuse/belief, if ever existed, relied on reasonable.

114. As such I consider the prosecution has proved beyond reasonable doubts all the elements of all “holding-out” offences against D1 and rebutted beyond reasonable doubt all the possible defences.  I therefore convict D1 of summonses ESS 30673, 30675 and 39231 of 2013.

Fallback position--- Did D1 have mens rea in the “holding-out” offences?

115. If I were wrong in ruling the “holding-out” offence against D1 under section 114 as creating strict liability falling within the category of second alternative, meaning the offences in fact require proof of full mens rea on the part of D1, I still find D1 guilty of the offences. 

116. On the evidence, as I have analysed as above which I do not intend to repeat, it showed clearly that D2, being the directing mind of D1, knew full well the content of all the Professional Financial Consultancy Agreement signed with the three respective clients.  She was clearly in control of D1 and she was the one who received the payments and then shared almost half of it with Michael in each and every case.  Cheuk and Lee of 3 Wells said that they understood Michael was all along working on behalf of D1/D2.  I am sure that what Michael did to the clients was all within D2’s authority and delegation.  Further, she was also responsible for using her own connection and knowledge to introduce the professional teams for her clients’ listing applications.  D2 must have knowledge that D1 did represent itself as carrying on a business in advising on corporate finance. When signing the respective agreements, D1, with D2’s directing mind, did intend to hold itself out to all respective clients as carrying on a business in advising on corporate finance which were clearly shown in the agreements and supported by all the circumstantial evidence.

Summonses against D2

117. As I have found D1 guilty of summonses ESS 30673, 30675 and 39231of 2013 laid under section 114(1) and (8) of the Ordinance, I now move on to consider whether D2 should be liable for the respective “attributable” offences on the same facts laid against her under section 390.

118. It is stipulated in section 390 of the Ordinance that:

“1) Where the commission of an offence under this Ordinance by a corporation is proved to have been aided, abetted, counselled, procured or induced by, or committed with the consent or connivance of, or attributable to any recklessness on the part of, any officer of the corporation, or any person who was purporting to act in any such capacity, that person, as well as the corporation, is guilty of the offence and is liable to be proceeded against and punished accordingly.”

119. In Schedule I of the Ordinance, “officer” in relation to a corporation is defined as:

“officer (高級人員)-

(a) in relation to a corporation, means a director, manager or secretary of, or any other person involved in the management of, the corporation;”

120. The meaning of “connivance” has been considered, at paragraphs 60-65, in HKSAR v Li Fung Ching Catherine [2012] 3 HKLRD 377:

“60. The terms used in s.64B of the Employment Ordinance are "consent", "connivance" and "neglect". It is spelt out clearly that the intention is to target the three different situations.

61. In the Ordinance, there is no definition given to the term "connivance". Therefore, the term "connivance" should be interpreted in accordance with its usual meaning.

62. The New Longman Advanced Chinese Dictionary defines the word "connivance" as indulgence and non-interference of misconduct.

63. To connive at someone's act, whether or not one agrees or disagrees with it is not important, what is important is one fails to stop it from happening knowingly.

64. The term "connivance" is used in the English version of the Ordinance. According to the Shorter Oxford English Dictionary, the definition of "connivance" includes assistance in wrongdoing by conscious failure to prevent or condemn; or tacit permission. The word "connive" means shutting one's eyes to (something) .

65. In the English-Chinese Dictionary of Joint Publishing, "connivance" carries the meaning of "turning a blind eye to an action one ought to oppose; and tacit permission" which corresponds with the translation given in The Oxford (one wrong character) English-Chinese Dictionary.”

121. It is not in dispute that D2 was an officer of D1 at the material times.  As I have ruled above that D2 did have knowledge of what D1, with the assistance by Michael, was doing all along and the content of the respective agreements, I have no difficulty at that to conclude that all the “holding-out” offences under section 114 could not have been committed by D1 without the assistance or consent or connivance of D2. The whole thing was procured and induced by D2 as elicited in the trial. At the very least, the commission of the offences must be attributable to the recklessness on the part of D2.  As such I find that the commission of the offences by D1 were all aided, abetted, counselled, procured or induced by, or committed with the consent or connivance of, or attributable to any recklessness on the part of D2.  Without any doubt, I find D2 guilty of all the summonses laid against her under 390 offences in respect of each of convicted offences stated above.  In other words, I convicted D2 of summonses nos. ESS 30674, 30676 and 39232 of 2013 accordingly.

Conclusion

122. To conclude, I am satisfied that the prosecution has proved beyond all reasonable doubt that D1 is guilty of summonses nos. ESS 30673, 30675 and 39231 of 2013 and D2 is guilty of summonses nos. ESS 30674, 30676 and 39232 of 2013 accordingly.   

[1] ESS 30671, 30673, 30675 of 2013  and 39231 of 2013 being an alternative to ESS 30671/2013

[2] In contravention of sections 114(1) (a) and 114(8) of the Securities and Futures Ordinance, Cap 571 (“the Ordinance”)

[3] In contravention of section 114(1) (b) and (8) of the Ordinance

[4] In contravention of section 114(1) (b) and (8) of the Ordinance

[5] ESS 30672, 30674, 30676 of 2013  and 39232 of 2013 being a summons alternative to ESS 30671/2013

[6] In contravention of section 390 of the Ordinance

[7] ESS 30673/13 concerning UK Fur: $400,000; ESS 30675/13 concerning New Bonus: $200,000; ESS 39231/13

concerning 3 Wells: $300,000

[8] ESS 30674/13 concerning UK Fur: $300,000; ESS 30676/13 concerning New Bonus: $100,000; ESS 39232/13

concerning 3 Wells: $200,000

[9] ESS 30674/13 concerning UK Fur: 3 months; ESS 30676/13 concerning New Bonus: 3 months; ESS 39232/13 concerning 3 Wells: 6 months, all imprisonment to be served wholly concurrently.

[10] The issues of immunity and/or risk of Michael incriminating himself when giving evidence were actually raised by the court at the outset of the trial after Prosecution’s opening.  SFC replied to the court, with no satisfactory reasons given, that such matter was still in the process of exploring and could not be decided until the last minute when Michael was called. Michael’s refusing to give evidence, on his own initiative, after taking oath due to obvious risk of incriminating himself was out of prosecution’s expectation.  It was however obviously revealed in Prosecution’s opening (see para.35 and 36 of Prosecution’s Opening) that Michael’s involvement would incriminate himself without the protection of an immunity. Those matters should have been thoroughly considered and settled well before trial.  The court has expressed its concern to SFC that such undesirable situation should not recur in future.

[11] Exhibit P13 and P14

[12] Exhibit P21 and P22

[13] Exhibit P25, the letter was back-dated to 31 May 2012 upon request by Michael

[14] Concerning summons ESS 30671/2013 and alternative summons ESS 39231/2013

[15] Concerning summons ESS 39672/2013 and alternative summons ESS 39232/2013

[16] Exhibit P11

[17] Exhibit P2, P12 and P26

[18] Hin Lin Yee at paragraph 139, quoting Gammon (Hong Kong) Ltd v Attorney General of Hong Kong [1985] 1 AC 1 at paragraph14

[19] Paragraphs 139-142 of Hin Lin Yee

[20] Kulemesin Yuriy at paragraph 59 and Hin Lin Yee at paragraph 141, quoting He Kaw Teh v The Queen (1985) 157 CLR 523 at paragraph 535,

[21]Kulemesin Yuriy at paragraph 107

29 Exhibits D3, D4 and D16

[22] Page 196 of Hin Lin Yee

[23] Paragraph 91 of Securities and Futures Commission and Liu Su Ke [2010] 2 HKLRD 673

[24] Paragraph 28 of Securities and Futures Commission v Yu Ka Tak [2007] HKCLRT 728

[25] Paragraph 23 of Defence’s Closing Submission

[26] Paragraph 164 of Hin Lin Yee

[27] Applying paragraph 109 of  Kulemesin Yuriy case 

[28] Admitted Facts, paragraph 2.

[29] Exhibit P12

[30] The paragraph right after the name of Parties and Clause 1 “Engagement”

[31] Sub-clause (6) of Clause 2

[32] Sub-clause (11) of Clause 2

[33] Exhibit P14

[34] Geoffrey Wong was also known as Wong Chi Fai in the email concerned

[35] Exhibit 15, page 56 of Exhibit Bundle

[36] The documents included MFGpro System work flow, Quality manual, dales cycle notes, purchase cycle notes, inventory cycle notes, shipment notes, the accounting entry flow and the payment and approval procedure and system notes for expenses, fixed asset cycle, treasury cycle and financial accounting cycle. Please see exhibit P15.

[37] Exhibit P16

[38] The documents included 3 Well’s organisation chart, history and development, projected profit and loss for 2011 and list of directorship and ownership: please see Exhibit P18

[39] Exhibit P17

[40] Exhibit P19

[41] Exhibit P20

[42] Exhibit P21

[43] First draft: Exhibit P23; Amended version by Cheuk: Exhibit P24 and final version: Exhibit P25

[44] Exhibit P25

[45] Paragraph 61 referred

[46] Contrary to section 114 (1)(a) of the Ordinance

[47] Under section 114(1) (b) of the Ordinance

[48] Exhibit P2

[49] The email attaching the draft agreement was sent by Michael to D2 on 8 October 2010

[50] Exhibit P1

[51] Sub-clause (6) of Clause 2

[52] Sub-clause (12) of Clause 2

[53] Respective cheques were paid on 20 October 2010 (P3), 17 January 2011(P5), 4 April 2011 (P7) and 30 June 2011 (P9)

[54] About 1 year after signing the UK Fur Agreement (Exhibit P2)

[55] Exhibit P2A

[56] Exhibit P2B, signed about 13 months after the UK Fur Agreement (Exhibit P2)

[57] Exhibit P11

[58] Exhibit P2

[59] Exhibit P2B

[60] Exhibit P26

[61] Exhibit P12

[62] Exhibit P2

[63] Sub-clause (12) of Clause 2

[64] Exhibit P26

[65] The court relied on a New Zealand case of Oosterman v New Zealand Police [2007] NZAR 147 where Harrison J quoted the case of Mark & Others v Henshaw (1998) 85 FCR 555 (FCA).

[66] HKSAR v Ching Yeung Development Co Ltd [2001-2003] HKCLRT 343 applied.

[67] Exhibits P2, P12 and P26

[68] Exhibit P1

[69] Exhibit P2A

[70] Exhibit P2B

[71] Cheuk said the letter was sent to D1 (attention to D2) in around October 2012

[72] Exhibit P1

[73] D2 told the court that she gave Michael $300,000 out of $600,000 she had received from UK Fur, $150,000 out of $300,000 received from 3 Wells, and several ten thousand dollars out of $170,000 from New Bonus.