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

HCMA 288/2015
HCMA 382/2014
(Heard together)

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MAGISTRACY APPEAL NO 288 OF 2015

(ON APPEAL FROM ESS 30671-30672/2013)

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J U D G M E N T

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1.  The 1^st respondent (R1) was convicted of holding itself out to 3 Wells Group Holdings Limited (“3 Wells”) as carrying on a business in advising on corporate finance, contrary to s 114(1)(b) and 114(8) of the Securities and Futures Ordinance, Cap 571 (“the Ordinance”); whilst being acquitted of carrying on a business in a regulated activity, contrary to s 114(1)(a) of the Ordinance.

2.  The 2^nd respondent (R2) was convicted of “being an officer of R1, has aided, abetted, counselled, procured or induced R1 to hold itself out as such, whilst being acquitted of aiding, abetting, counseling, procuring or inducing R1 to carry on such a business”, contrary to s 390 of the same Ordinance.

3.  This is an appeal by way of case stated against that decision of the magistrate to acquit R1 and R2 of carrying on and aiding, abetting the carrying on business in a regulated activity.

S 114 and s 390 of the Ordinance

4. S 114 provides:

“(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 . . .”

5.  S 390 deals with liability of officers of corporations for offences by corporations, and of partners for offences by other partners.

The evidence

6.  R1 is a company registered in Hong Kong and R2 is the sole shareholder and director of R1.

7.  The Prosecution case is that between July 2011 and January 2012, R1 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”).  R2 procured the signing of a “Professional Financial Consultation Services Agreement” with 3 Wells around July or August 2011 (“3 Wells Agreement”), Exhibit P12. Afterwards, R1 assigned and authorise a team of her staff headed by Michael Ang (“Michael”) to have meetings with senior officers of 3 Wells both in Hong Kong office as well as factory located in Mainland with a view to assessing their capability of being listed on the GEM Board.  R2 and Michael, representing A1, 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.

8.  Two payments in the sum of HK$150,000.00 each to R1 on 31 August 2011[1] and 14 May 2012[2] were paid by 3 Wells pursuant to the agreement.

9.  Around September or October 2012, Michael told Cheuk, the Chairman of 3 Wells, that there were problems of “internal audit”, it was suggested that the 3 Wells Agreement with A1 be terminated.  Michael drafted a letter backdated to 31 May 2012 to that effect.  Cheuk said that the agreement was terminated upon A1’s promise that a full refund of HK$300,000.00 would be made by A1 to 3 Wells. However, no refund was ever made by A1.

The magistrate’s findings

10.  The magistrate found that what R2 and Michael had done amounted to giving advice on corporate finance.  In considering whether R1 was “carrying on a business in advising on corporate finance”, she said:

“7. . . . Applying the principle set out in Lee Yee Shing and Fung Yee Man, I do have reservation in concluding beyond all reasonable doubt that what the 1^st respondent 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 the 2^nd respondent, give 3 Wells ‘some bits and pieces’ advisory services on its listing during the material times. PW1 testified that several months after the agreement had been signed, he realized that the 1^st respondent actually did not do much in the listing process, as opposed to what he had expected. On the evidence, the advisory services provided by the 1^st respondent to 3 Wells was abruptly terminated upon the 1^st respondent’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.”

The questions posed

11.  The questions of law posed for the opinion of this court are:

(1)   Firstly, did the magistrate err in applying the authority of Fung Yee Man in the present case in determining whether the 1^st respondent did carry on a business in its dealings with 3 Wells?

(2)   Secondly, did the magistrate err in not finding that the 1^st respondent did carry on a business in its dealings with 3 Wells in that no reasonable tribunal of facts, applying its mind to the proper considerations and giving itself the proper directions, could have failed to come to such a finding (Li Man Wai v Secretary for Justice (2003) 6 HKCFAR 466)?

The appellant’s submission

12.  Senior Counsel for the appellant submitted that Fung Yee Man pronouncing the principle that a “one‑off” transaction does not constitute “carrying on a business”, is itself per incuriam and the magistrate was wrong to rely on such.  It was also submitted that the magistrate was wrong in regarding that the undertaking of activities on an intermittent basis was incapable of amounting to “carrying on a business”.  Senior Counsel submitted the following principles are applicable in determining whether there was “carrying on a business” in the present case in the context of the objective of the Ordinance:

(1)   Whether any transaction or activity amounts to a “carrying on a business” is a question of fact and degree (Lee Yee Shing v Commissioner of Inland Revenue[2008] 3 HKLRD 51);

(2)   The word “business” carries a meaning “which conformed to what in ordinary parlance would be described as a business transaction as opposed to something personal or casual” (Morgan Grenfell & Co v Welwyn Harfield DC [1995] 1 AER 1);

(3)   Frequency of transaction of a relevant type can be no more than a guide.  It is equally possible that the every first time it enters into such a contract it is doing so by way of business because it is doing as part of its own overall business activities. (Morgan Grenfell & Co);

(4)   Intermittent activities of the same type which are undertaken for gain is capable of constituting “carrying on a business” – notwithstanding that ordinary a business connotes a serious of acts which are continuous and repetitive (American Leaf Blending Co Sdn Bhd v Director‑General of Inland Revenue [1979] AC 676);

(5)   The nature of the activities, particularly whether they have the purpose of profit‑making may be important (Ferguson v Federal Commissioner of Taxation [1979] 26 ALR 307; GD Capital Bank Ltd v Rushton [2006] 1 WLR 899);

(6)   Repetition and regularity of the activities are also important.  However, even isolated activities may in the circumstances he held to be the commencement of carrying on business (Ferguson v Federal Commissioner of Taxation; GD Capital Bank Ltd v Rushton); and

(7)   Organization of activities in a business‑like manner, the keeping of books, records and the use of system may all serve to indicate that a business is being carried on (Ferguson v Federal Commissioner of Taxation).

13.  It was submitted that had the magistrate applied the correct legal principles to the facts of the present case, having found that the activities were in pursuance of a single venture, pursuant to the contractual obligations in the agreement, the only conclusion open to her would be to find that R1 did carry on a business on the evidence of the present case.

Respondent’s reply

14.  The respondent submitted that the issues raised by the appellant were simply to dress up question of facts as question of law.  Senior Counsel submitted that Fung Man Yee never set out a general principle as alleged by the appellant, namely, that a one‑off transaction does not constitute “carrying on a business”. The magistrate did not come to the view that R1 was not carrying on a business either because only a one‑off transaction was involved here, or that because the activities were carried out on an intermittent basis, then the transaction/activity was incapable of amounting to “carrying on a business”.  The Statement of Findings clearly demonstrated that she took the “continuity factor” as one of the factors to be considered but having a careful consideration of the authorities and applying them to the facts of the present case, she was not satisfied beyond reasonable doubt that what R1 did amounted to “carrying on a business”.  These are pure findings of facts.  The respondents further submitted that the magistrate, feeling unsure and declined to convict, was not making any findings.  It is not the function of an Appellate Court to compel the magistrate to feel sure of that fact and to convict.

My judgment

15.  Appeals by way of case stated are governed by s 105 of the Magistrates Ordinance, Cap 227:

“. . . either party thereto or any person aggrieved thereby who desires to question by way of appeal any conviction, . . . determination . . . on ground that it is erroneous in point of law, . . . may apply in writing to the magistrate to state and sign a case setting forth the facts and the grounds on which the conviction, . . . determination was granted and the grounds on which the proceeding is questioned, for the opinion of a judge. . . .” [underline added]

16.  The Court of Final Appeal in Li Man Wai v Secretary for Justice (2003) 6 HKCFAR 466, held that a court would intervene in appeal by way of case stated when:

“. . . there was an error of law or an excess of jurisdiction. Where a magistrate came to a conclusion or finding of fact which no reasonable magistrate, applying his mind to the proper considerations and giving himself the proper directions, could have come to, this was an error of law, often described as a ‘perverse’ conclusion or finding. This was the case where the magistrate had misdirected himself on the facts or misunderstood them, or had taken into account irrelevant considerations or overlooked relevant considerations. In such a case, the court was entitled to intervene and the magistrate’s conclusion or finding would not be allowed to stand.”

17.  In considering whether the activities of Michael/A1/A2 amounted to carrying on the business of advising on corporate finance, the magistrate said this in the Statement of Findings:

“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” connoted 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[3].  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[4]. As there is no commission of the relevant offence in s 114(1)(a), D2 must also be acquitted of the ‘attributable offence’ of ESS 30672/2013 laid under s 390 of the Ordinance.”

18.  The appellant noted that the magistrate, when quoting the dictum in Fung Yee Man in paragraph 7 of the case stated, underlined the words “one‑off sale and purchase transaction”.  Thus, it was submitted, demonstrated that the magistrate had placed weight on a principle which is per incuriam.  However, it is worth noting that in the preceding paragraph, the magistrate also referred to the Court of Final Appeal judgment in Lee Yee Shing v Commissioner of Inland Revenue (2008) 11 HKCFAR 6, at paragraph 38, that:

“. . . whether something amounts to the carrying on of a trade or business is a question of fact and degree to be answered by the fact‑finding body upon a consideration of all the circumstances. . . .”

19.  Deputy Judge Pang (“as he then was”), in Fung Yee Man, also held that:

“. . . whether a business is being ‘carried on’ must in the end depend on the circumstances of the particular case. . . .”

Fung Yee Man is clearly fact sensitive.  The court was dealing with whether the sale and purchase transactions constituted business that was carried on for the purpose of registration under the Business Registration Ordinance.  The judge made it plain that neither at trial or on appeal did any party provide the court with relevant case law, but held that “as a matter of common sense, a one-off sale and purchase transaction does not constitute “carrying on”.  That case can in no way be construed as laying down any principles, and not per incuriam.

20.  In the present case we are dealing with regulated activities and not sale and purchase transactions.  The magistrate was well aware of the principles enunciated in the authorities as stated above.  She took into account Lee Yee Shing and Fung Yee Man (paragraph 6 and 7).  Having found what A2 and Michael did amounted to giving advice on corporate finance, the magistrate went on to consider whether the evidence led her to conclude that A1 was carrying on a business in advising on corporate finance in relation to 3 Wells.  The magistrate was alive to the submission by the appellant that it is sufficient that an entity carried on the relevant activity for profit on a one‑off basis (paragraph 5, case stated).  She found, on the evidence, that the advisory services provided by Michael and R2 were “bits and pieces”.  By such, it meant that the activities provided by Michael or R2 provided were small things or jobs of different nature, nothing systematic.  She did not refer to the lack of continuity of the activities or that they were intermittent.  The example given by the appellant that the magistrate’s findings would create a loophole and would entitle an unlicensed offender who gives corporate advice on an intermittent basis or incorporate different companies to undertake regulated activities at different stages of the listing process to be acquitted is taking it to the extremities.  Each case, including the present, is to be judged on its own facts, as what amounts to carrying a business is a matter of fact and degree.

21.  The magistrate’s findings were not so perverse that no reasonable tribunal would ever have come to.

Conclusion

22.  Due to the aforesaid, my answer to the 2 questions posed in the case stated is as follows:

(1)   Question (1): “No”.

(2)   Question (2): “No”.

23.  I wish to thank counsel for their assistance.