SECURITIES AND FUTURES COMMISSION v. LU RUIFENG AND OTHERS

CAMP 346/2021 & CACV 50/2022
(Heard together)

[2022] HKCA 326

CAMP 346/2021

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

MISCELLANEOUS PROCEEDINGS NO 346 OF 2021

(ON INTENDED APPEAL FROM HCMP 727 OF 2008)

and

CACV 50/2022

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 50 OF 2022

(ON APPEAL FROM HCMP 727 OF 2008)

_________________

J U D G M E N T

_________________

Hon G Lam JA (giving the Judgment of the Court):

Introduction

1.  The issue in this appeal is whether the plaintiff, the Securities and Futures Commission (“Commission”), should be permitted to amend its originating summons and statement of claim by joining the 6^th defendant, China United Telecom Ltd (“China United”), and raising a claim against it under section 213 of the Securities and Futures Ordinance (Cap 571) (“SFO”).  China United contends that the claim is time-barred and that for that reason the amendments should be rejected.  The judge below, Deputy High Court Judge Rachel Lam SC (“Judge”), allowed the amendments.  China United seeks to appeal to this court.

2.  An ancillary question has arisen as to whether the Judge’s order determined China United’s substantive rights in a summary way so that pursuant to Order 59 rule 21(1)(a) of the Rules of the High Court (Cap 4A), it does not need leave to appeal.

Background

3.  The action below (“Action”) has a long history and the underlying matters have generated a multitude of legal proceedings.[1]  It is unnecessary to refer to all the details here.  The facts relevant for present purposes may be stated as follows.

4.  Asia TeleMedia Ltd (“ATML”) was a Bermudan company listed on the Hong Kong Stock Exchange.  Mr Lu Ruifeng (“Lu”), the 1^st defendant in the Action, was its Chairman, Executive Director and CEO at the material times.  Lu was also the sole shareholder of Asia TeleMedia Holdings Ltd, which held 35% of the issued shares of China United, a BVI company, which together with a subsidiary in turn held 711.5 million shares in ATML as at December 2007.  Lu was the sole director of China United until January 2012 when an additional director was appointed, and resigned as a director in September 2014.

5.  The Commission’s case is that in the period from 27 April to 30 May 2007, Lu counselled or procured China United to sell 50.25 million ATML shares in the market, based on insider information, soon after a statutory demand had been served on ATML on 26 April 2007 by an assignee of a debt owed by ATML called Goodpine, demanding payment of over $70 million (comprising the debt of over $58 million and interest).  The insider information is said to be that ATML was informed of the assignment of the debt to Goodpine and was subject to the statutory demand which it could not satisfy and that it was in consequence liable to face a winding-up petition.  The proceeds of the sale of shares amounted to approximately $37.56 million, of which $23.1 million was transferred to Lu’s personal bank account on 8 June 2007. 

6.  In addition, the Commission says that on 14 and 23 May 2007 Lu had sold a total of 1 million ATML shares by himself, and that he further counselled or procured one Mr Yao Wen Pei (“Yao”), the father of the finance director of ATML, to sell, through a company (TeleMedia Capital Inc), another 48,610,192 ATML shares, resulting in proceeds of sale of about $39.03 million.  The Commission says that in these dealings Yao was acting as Lu’s nominee.

7.  On 5 June 2007, Goodpine actually presented a petition for winding up ATML.  Two days later, trading in ATML shares was suspended.  When trading resumed on 18 October 2007, its share price dropped by 62%.

8.  The Commission says that Lu had contravened provisions of the SFO by engaging in insider dealing in ATML shares and that others were involved in his contraventions and that they, as a result, avoided a loss estimated at $43,661,568 in the sale of a total of 99,860,192 ATML shares.  Within this, the alleged loss avoided in relation to the sale of shares by China United amounted to $20,649,420.

9.  Following investigation, on 16 April 2008, the Commission obtained an ex parte Mareva injunction from the court up to the amount of $43,661,568 against (i) Lu; (ii) Madam Tin, the 2^nd defendant herein, who is Yao’s wife; (iii) Clear Excel Ltd, the 3^rd defendant herein; and (iv) Kayden Ltd, the 4^th defendant herein.  The 3^rd and 4^th defendants were BVI companies allegedly involved in the insider dealing by receiving proceeds of sales.  The injunction covered 675,950,000 ATML shares held in China United’s name, which thereby became frozen (“Frozen Shares”).  The Action was commenced by originating summons two days later against these four defendants.  Yao was joined as the 5^th defendant in September 2010.

10.  The ex parte injunction was discharged by Kwan J in October 2008 on jurisdictional grounds, but reinstated by the Court of Appeal in May 2009, though it was discharged again as against the 4^th defendant by the Court of Final Appeal in December 2010.

11.  A winding up order was made against ATML in March 2008, but it was subsequently taken out of liquidation and renamed Reorient Group Ltd (“Reorient”).  Its issued shares were consolidated and, as a result, the Frozen Shares became 13,519,000 shares in Reorient.  The new share price remained low for a long time but shot up in April 2015.  Taking the opportunity to benefit from the enhanced share price, China United obtained from the court an order for its frozen Reorient shares to be sold.  Out of the proceeds, the sum of $43,661,568 was paid into court in June 2015.

12.  Meanwhile, the Commission had also initiated proceedings in the Market Misconduct Tribunal (“MMT”) against four individuals, including Lu, alleging insider dealing in the shares of ATML.  In November 2015, the MMT published its report, in which it made no findings of insider dealing against Lu, on the ground that because of acute illness, he had not had an opportunity of being heard during the proceedings.  There was no appeal by the Commission against this conclusion.[2]

13.  In June 2016, China United applied to intervene in the Action seeking a variation of the injunction to allow it to obtain the funds paid into court.  This was opposed by the Commission, who cross-applied by summons dated 26 August 2016 for joinder of China United as the 6^th defendant and for leave to amend its originating summons and statement of claim to add claims against China United.  In his decision dated 4 May 2017, Lok J dismissed China United’s summons and adjourned the Commission’s summons, which eventually came to be heard before the Judge.

The Commission’s claims

14.  The Commission had already pleaded previously that Lu contravened provisions of the SFO by counselling or procuring China United to deal in the 50.25 million ATML shares (“Subject Shares”).  What the Commission seeks to do by the amendments is to add China United as the 6^th defendant, and to add a plea that China United has been involved in Lu’s contravention of the relevant statutory provisions by reason of its sale of the Subject Shares and transmission of part of the sale proceeds to Lu, and is accordingly a person within section 213(2)(b) of the SFO (the terms of which quoted in §52 below).

15.  The effect of the proposed amendments would be to extend to China United the claim for reliefs pursuant to section 213(2)(b) of the SFO already made against the other defendants.  As amended, the reliefs claimed in the re-amended statement of claim are as follows:

“ (1) There be declarations that:

…

(f) The 6th Defendant has been involved in the contravention [by Lu of section 291(1)(b) and (8) of the SFO in counselling or procuring another person, namely China United, to deal, in the listed securities of ATML between 27 April and 30 May 2007 having information he knew was relevant information to ATML], whether knowingly or otherwise, and is a person within section 213(2)(b) of the Securities and Futures Ordinance.

(g) The Defendants are not entitled to receive for their own benefit or retain any profits for or in respect of the dealings pleaded in paragraphs 1A(1), (2)(a) and (2)(b) of the Re-Re-Re-Amended Originating Summons herein.

(1A) The defendants be required to take such steps as the court may direct including to restore the parties to the transactions in the dealings referred to in paragraphs 16 to 21 above to the position in which they were before the transactions were entered into alternatively to order financial compensation or restitution in such sums and to such persons as the court may direct being persons who entered into the transactions in the dealings pleaded in paragraphs 16 to 21.

(2) Further or alternatively, the Defendants do account for the profit gained or loss avoided by the Defendants or any of them or by any persons on their behalf as trustee or agent as a result of the dealings pleaded in paragraphs 1A(1), (2)(a) and (2)(b) of the Re-Re-Re-Amended Originating Summons herein or any part thereof.

(3) The Defendants do pay to the receiver appointed under paragraph 1AD of the Re-Re-Re-Amended Originating Summons herein the amount of profits or loss that it is found that they have gained or avoided respectively upon taking such account together with interest thereon …

(4) A proper person be appointed to recover, receive, and administer such sum as appears to the court to be just having regard to the profits appearing to the court to have been gained or to the loss avoided from the dealings pleaded in paragraph 1A of the Re-Re-Re-Amended Originating Summons herein and interest thereon and for that purpose all necessary and proper directions may be given.

(5) Any amount recovered from a person by the said receiver shall be paid out to such person or distributed among such persons as the court may direct, being a person or persons appearing to the court to have entered into transactions with any of the defendants in the dealings pleaded in paragraph 1A of the Re-Re-Re-Amended Originating Summons herein as a result of which the profits or loss referred to in paragraph 1AD of the Re-Re-Re-Amended Originating Summons herein appear to have been gained or avoided respectively.

(6) There be all further proper accounts, inquiries and directions.”

China United’s case

16.  China United denies that it was a personal vehicle of Lu.  It says that in around 2007, Lu’s company, Asia TeleMedia Holdings Ltd, only held 35% of the issued shares of China United, with the rest being held directly or indirectly by other investors.  In relation to the Subject Shares, China United says that they were sold on behalf of 10 Mainland employees of ATML.  These employees wished to exercise their ATML share options in light of the surge in share price at the time, but because they did not have a securities trading account in Hong Kong and it took time for shares to be issued to them pursuant to the options, China United “lent” the Subject Shares to be sold by them, and that their shares obtained from the options, when allotted, were deposited back into China United’s account.

17.  In relation to the Frozen Shares, China United says it beneficially owned them and that it therefore owns the sum of $43,661,568 held in court.

18.  China United opposed the Commission’s application below on the grounds that (i) the proposed new claim is time-barred or at least arguably time-barred, and (ii) since the Subject Shares were not owned by Lu but by the Mainland employees who replenished the shares held by China United, there is no factual basis to pursue China United.

The decision below

19.  As argued before the Judge, there were two distinct grounds relied upon by the Commission for joining China United as a defendant.  First, the Commission contends that Lu had ownership or control over the Frozen Shares which may therefore be amenable to enforcement of any judgment the Commission may eventually obtain against Lu.  As the person who held those shares (and now the funds in court) in its name, China United may be joined as a defendant pursuant to what has been called the Chabra jurisdiction of the court,[3] even if no cause of action is asserted against it.  The Judge considered it appropriate to join China United for the purpose of the Chabra jurisdiction.[4]  China United does not seek to appeal against this part of the Judge’s decision.

20.  The bone of contention is the claim against China United as a person involved pursuant to section 213(2)(b) of the SFO. China United opposed being joined for the purpose of this claim on the ground of limitation.

21.  Section 35(3) of the Limitation Ordinance (Cap 347) (“LO”) provides:

“ Except as provided by section 30 or by rules of court, the court shall not allow a new claim within subsection (1)(b), other than an original set-off or counterclaim, to be made in the course of any action after the expiry of any time limit under this Ordinance which would affect a new action to enforce that claim.”

22.  It was common ground before the Judge that insofar as the proposed amendments sought to add a substantive claim under section 213(2)(b) against China United, it constituted a “new claim” as defined in section 35, which could not be allowed to be made within the Action if, by the date of the Commission’s summons (26 August 2016), it was already time-barred.[5]

23.  There are two rival limitation periods, both in section 4 of the LO, as follows:

“ (1) The following actions shall not be brought after the expiration of 6 years from the date on which the cause of action accrued, that is to say –

…

(d) actions to recover any sum recoverable by virtue of any Ordinance or imperial enactment, other than a penalty or forfeiture or sum by way of penalty or forfeiture …

…

(3) An action upon a specialty shall not be brought after the expiration of 12 years from the date on which the cause of action accrued:

Provided that this subsection shall not affect any action for which a shorter period of limitation is prescribed by any other provision of this Ordinance.”

24.  The Commission contends that the new claim is based on the SFO which is an instrument under legislative seal and therefore a specialty.  The claim is thus an action upon a specialty the limitation period for which is 12 years under section 4(3), and was therefore within time as at the date of the summons.  In contrast, China United contends that the claim is in substance an action that falls within section 4(1)(d) and therefore subject to a limitation period of 6 years, and was too late by the time of the summons.

25.  The Judge, after considering the authorities, concluded that the substance and essential nature of the relief sought against China United under the proposed amendments is not for recovery of a sum but, rather, involves substantive orders to be made that China United participate in the restitutionary exercise that seeks to unwind any insider dealing transactions proved at trial.  The order for payment of money would be consequential on this restitutionary exercise.[6] In so holding, she took account of the fact that the reliefs sought are for a comprehensive scheme to unwind the insider dealing transactions, involving a broad spectrum of steps and orders against the defendants that go beyond a mere order for payment of money even insofar as China United is concerned.[7]  Any order for the payment of money by China United or otherwise would be made at the end of any assessment exercise to be carried out.[8]  Insofar as any “unwinding” is sought in relation to the Subject Shares, there is a spectrum of factual findings that could be made against China United in terms of its knowledge and culpability.  One cannot assume that China United would not be made subject to any restitutionary or restorative orders in relation to those shares.[9]  The same observations apply to the Frozen Shares.[10]  The relief sought under section 213(2)(b) of the SFO in this case is analogous to and indeed more complex than the situation in The Joint and Several Liquidators of Faith Dee limited v Yip Shu Chee & others (HCCW 237/2005, 5 February 2013) where the court held that the main purpose of the relief sought was to unwind the transfers and payments in question as unfair preferences, with monetary reliefs sought as a consequence of the unwinding of the transactions.[11]

26.  Accordingly, the Judge held that the new claim is not an “action for the recovery of any sum” within the meaning of section 4(1)(d) and that the applicable limitation period is 12 years under section 4(3), and granted the Commission’s summons.

27.  Within 14 days of the decision, on 26 August 2020, China United filed a summons seeking (i) a direction as to whether the decision to allow the new claim was one within Order 59 rule 21(1)(a), i.e. “a judgment or order determining in a summary way the substantive rights of a party to an action”; and (ii) if not, leave to appeal.

28.  After a hearing, the Judge decided that, first, her decision granting the Commission’s summons was procedural in nature and did not fall within rule 21(1)(a), and, secondly, leave to appeal should not be given.  She added that if rule 21(1)(a) was applicable so that no leave to appeal was required, she would have granted China United an extension of time to file a notice of appeal.[12]

Whether leave to appeal required

29.  By summons dated 19 August 2021, China United seeks from this Court: (i) if the Judge’s decision is one within Order 59 rule 21(1)(a), an extension of time to serve a notice of appeal; (ii) if it is not within rule 21(1)(a), leave to appeal.  A rolled-up hearing has been directed for the application for leave to appeal and, if leave is granted, the appeal itself.

30.  At the hearing we decided that leave to appeal was not required.  Our reasons are as follows.  Section 14(1) of the High Court Ordinance (Cap 4) provides that, subject to subsection (3) and section 14AA, an appeal shall lie as of right to the Court of Appeal from every judgment or order of the Court of First Instance in any civil cause or matter. Section 14(3) sets out a number of specific exceptions which are not relevant here.  Section 14AA(1) makes general provision that, except as provided by rules of court, no appeal lies to the Court of Appeal from an interlocutory judgment or order of the Court of First Instance in any civil cause or matter unless leave to appeal has been granted.  Section 14AA(2) provides that rules of court may specify a judgment or order of any prescribed description to which section 14AA(1) does not apply and accordingly an appeal lies as of right from the judgment or order.  These exceptions provided by rules of court are to be found in Order 59 rule 21, which bears the heading “Cases where Leave to Appeal is not required for Interlocutory Appeals”.

31.  It follows that whether an order is an interlocutory one within the meaning of section 14AA(1) is a separate question from whether it falls within Order 59 rule 21.  It is envisaged that there may be orders which are interlocutory and therefore prima facie require leave to appeal but which fall within rule 21 and may therefore be appealed as of right. This reflects the view expressed in the Final Report on Civil Justice Reform that: “Where a judgment deciding the substantive rights of a party is obtained through a summary process, by way of exception, there should be an appeal as of right notwithstanding the interlocutory nature of that decision.”[13]

32.  Within rule 21, rule 21(1)(a) is a general category comprising any “judgment or order determining in a summary way the substantive rights of a party to an action”.  Rule 21(2) sets out a number of specific types of judgments or orders that fall within this category but expressly without affecting its generality.  Rule 21(3) enables the parties to seek a direction from the judge as to whether a judgment or order falls within rule 21(1)(a).  It has been held that a judge’s direction that an order falls within rule 21(1)(a) is not binding on the Court of Appeal: China Medical Technologies Inc (in liq) v Bank of China (Hong Kong) Ltd [2019] HKCA 402, §§17-19.  The Commission, rightly in our view, does not dispute that a judge’s direction that an order falls outside rule 21(1)(a) is likewise not binding on this court, for the question affects whether this court has jurisdiction to grant leave to appeal.

33.  The cases show that to decide whether an order falls within rule 21(1)(a), one has to examine what the order actually determines, rather than its collateral practical effect.  Thus, for example, it has been held that an order setting aside an extension of the validity of a writ of summons, which concerns the exercise of the court’s discretionary power under Order 6 rule 8(2) having regard to all the circumstances of the case, does not determine the substantive rights between the parties, notwithstanding that the collateral effect of the order is that the action fails: China Medical Technologies Inc (in liq) v Bank of China (Hong Kong) Ltd, supra, at §23.  Likewise, a refusal to extend time for the payment of security of costs does not summarily determine the substantive rights of the parties, even though the effect is that the proceedings become permanently stayed: Lo King Yeung v Eddie Chu Hoi Dick [2017] 4 HKLRD 723 (Au J) and (CAMP 18/2017, 6 November 2017) (CA).  These are cases where there is no decision on any issue of substantive merit between the parties, even though the effect of the decision may well spell the end of the proceedings in question.

34.  It is plain that, ordinarily, an order giving leave to the plaintiff to join a defendant and amend the statement of claim is not one that determines any substantive rights.  What it decides, usually, is merely that the plaintiff has an arguable case against the defendant.  But an amendment that adds a claim based on a new cause of action or against a new defendant in the face of an objection that the applicable limitation period has expired stands on a different footing.  Section 35(1)(b) LO means that, once added, the new claim relates back to the date of commencement of the original action.  If the limitation period for the new claim had not expired by that earlier date, the time-bar defence would be lost to the defendant forever.  This is why before such an amendment is to be permitted, the court has to be satisfied that the limitation defence is not reasonably arguable anyway: Sun Focus Investment Ltd v Tang Shing Bor [2012] 1 HKLRD 738, §§11-15; Global Bridge Assets Ltd v Sun Hung Kai Financial Ltd [2012] 4 HKLRD 474, §§14-26.  As stated in Welsh Development Agency v Redpath Dorman Long Ltd [1994] 1 WLR 1409 at 1425G-H: “In such a case, leave to amend by adding a new claim should not be given unless the plaintiff can show that the defendant does not have a reasonably arguable case on limitation which will be prejudiced by the new claim, or can bring himself within R.S.C. Ord. 20 r. 5.”  It follows that a decision giving leave to amend in such a case necessarily determines that the defendant does not have a limitation defence.

35.  This is indeed the position in the present case.  The Judge decided that the new claim was not time-barred as at the date of the Commission’s summons since the applicable limitation period is 12 years rather than 6 years, and granted leave to amend on that basis.  Once added, the new claim relates back to the date of the originating summons, namely 18 April 2008, which would be within either limitation period. The Commission submitted that on that basis, China United would be debarred from raising any further limitation defence at the trial of the Action, a submission which the Judge seems to have accepted.[14]

36.  The Judge, however, relying on Bright Shipping Ltd v Changhong Group (HK) Ltd [2019] 2 HKLRD 220, considered that the essential question is whether the issue decided is an issue on the merits as opposed to merely a decision on a procedural step,[15] and eventually decided that the decision on the limitation issue was procedural in nature.[16]

37.  A number of observations may be made on this reasoning.  First, the issue in Bright Shipping Ltd v Changhong Group (HK) Ltd [2019] 2 HKLRD 220 was whether the decision below should be characterised as a final or interlocutory one.  It was expressly conceded in that case that it did not come within Order 59 rule 21.[17]

38.  Secondly, when the Court of Appeal in Bright Shipping highlighted the distinction between “merits” and “procedural steps”, it was referring to the “procedural steps for bringing or preparing a case before it is presented to the court for final determination on the merits”.  It does not seem to us that by “procedural steps” the court intended to refer to matters which may be characterised as belonging to procedure for certain purposes (such as choice of law) but which like the question of time-bar directly determine the existence or extent of liability.

39.  Thirdly, with respect to the Judge, to say that a decision that finally determines the viability of a limitation defence falls outside rule 21(1)(a) takes too narrow a view of both the rights enuring to a defendant from limitation statutes and the scope of the phrase “substantive rights” in rule 21(1)(a).  The Judge said that there was no dispute that a limitation defence is “procedural in nature”.  It is true that most of the limitation periods in the LO, upon expiry, simply bar the bringing of an action rather than extinguish the plaintiff’s right or title,[18] that limitation is a separate defence that needs to be pleaded rather than a constituent element of the plaintiff’s cause of action, and that limitation, where it only bars a remedy, is regarded as a matter of procedure in conflict of laws.  But even so, an established limitation defence is a most valuable right; it is a complete defence to an action.  Once time has expired, the law regards the potential defendant as having an “accrued right” based on the limitation statutes.  As has been said in Yew Bon Tew v Kenderaan Bas Mara [1983] 1 AC 553, “an accrued right to plead a time bar, which is acquired after the lapse of the statutory period, is in every sense a right, even though it arises under an act which is procedural”; and “an accrued entitlement on the part of a person to plead the lapse of a limitation period as an answer to the future institution of proceedings is just as much a ‘right’ as any other statutory or contractual protection, against a future suit”.[19]  Similarly, in Maxwell v Murphy (1957) 96 CLR 261 at 277, Williams J said: “Statutes which enable a person to enforce a cause of action which was then barred … could hardly be described as merely procedural.  They would affect substantive rights.”  The Court of Appeal in Gohind Mohan & another v Brian Shane McElney & others [1983] HKLR 308, applying these cases, held that the then Order 20 rule 5(5) of the Rules of the Supreme Court was ultra vires because, the empowering statute for the rules being confined to procedure and practice, there was no authority to allow a time-barred cause of action to be added and thereby to deprive a defendant of what was “in every sense a right”.

40.  The fact that section 35 of the LO was amended subsequent to Gohind Mohan demonstrates that primary legislation was needed to deal with accrued rights from limitation and, contrary to the submissions of counsel for the Commission, does not show any legislative intention to regard limitation as mere procedures.  In our respectful opinion, the Judge was in error to think that no substantive rights were determined simply because a limitation defence is for some purposes characterised as procedural in nature.

41.  The Judge also drew support from Order 59 rule 21(2)(i) which provides that an order refusing to allow an amendment of the pleading to introduce, inter alia, a new claim is an order determining in a summary way the substantive rights of a party.  But it does not follow, in our view, that an order allowing an amendment that pleads a new claim cannot fall within rule 21(1)(a) if, on proper analysis from principle, it does determine substantive rights.

42.  The Commission relies on Highfit Development Co Ltd v Koo Siu Ying [2018] HKCA 238 where the court refused leave to appeal against an order for joinder of an additional defendant when the claim was prima facie outside the limitation period of 6 years.  However, the situation in that case is very different.  The matters complained of occurred in 2000; the writ was issued in 2015; and the joinder and amendment summons was issued in 2016.  Whether or not the new claim related back to the date of the writ did not matter for limitation purposes: in either case there was a prima facie time-bar and the plaintiff had to rely on section 20(1) LO to overcome the long lapse of time.  The limitation defence would not be prejudiced by the provision for relation back.  In permitting the joinder the judge therefore did not have to decide, and did not decide, that the defendant had no reasonably arguable limitation defence.  The order for joinder did not therefore fall within Order 59 rule 21(1)(a).

43.  There are also cases in which leave was granted for the defendant to appeal from an order giving leave to add a new claim despite a potential limitation defence: see Sun Focus Investment Ltd v Tang Shing Bor (CACV 82/2011, 13 April 2011); Global Bridge Assets Ltd, supra, at §1; Shenzhen Futaihong Precision Industry Co Ltd & others v BYD Co Ltd & others [2018] HKCA 408, §§1 & 79.  However, the argument had apparently not been raised in any of them that leave was not required because of rule 21(1)(a), and, as leave to appeal was granted, the point was immaterial to the outcome.  They should not be taken as decisions that an order such as that in the present case does not fall within rule 21(1)(a).

44.  In our opinion, the order below did determine in a summary way the substantive rights of a party, and therefore falls within Order 59 rule 21(1)(a).  China United did not need leave to appeal, but issued a summons within time to seek a direction pursuant to rule 21(3) as to whether the order was one within rule 21(1)(a).  In the circumstances we see no reason to differ from the Judge’s exercise of discretion (albeit on a contingent basis) that China United should be given an extension of time to serve a notice of appeal, and we therefore granted an extension of 7 days at the hearing.

45.  We would add that, applying the conventional “application test”,[20] the Judge’s order appealed from is nevertheless an interlocutory one for the purpose of section 34B(4)(a) of the High Court Ordinance, so that this court is duly constituted by two judges.  Out of caution, the parties had at our invitation filed their consent under section 34B(4)(c) before the hearing for the appeal to be dealt with by the court consisting of two judges.

The appeal

46.  The provisions of section 4(1)(d) and (3) LO have been set out above.  It is common ground that the Action is an “action” within the meaning of the LO, and that the claim against China United, being a claim based on section 213 of the SFO, is an action upon a specialty, for which a limitation period of 12 years is laid down by section 4(3).  It is also agreed that the cause of action accrued at the time of the relevant events in 2007.  Because of the proviso to section 4(3), the crucial question is whether section 4(1)(d), which prescribes a shorter period of 6 years, is applicable, or, in other words, whether the claim against China United here is an “action to recover any sum recoverable by virtue of any Ordinance”.

47.  A number of English cases and one Hong Kong decision have been cited to us on this question.  In Re Farmizer (Products) Ltd [1997] BCC 655, the liquidators of a company had commenced proceedings under section 214 of the (UK) Insolvency Act 1986 against certain former directors of the company for wrongful trading.  That section empowered the court on the application of a liquidator to declare that a director “is to be liable to make such contribution (if any) to the company’s assets as the court thinks proper”.  The liquidators sought a contribution of at least £1.25m, being the alleged loss incurred during the relevant period of wrongful trading.  The defendant applied for dismissal of the claim for want of prosecution and in that context, the issue arose as to which of the two statutory provisions[21] equivalent to those concerned on this appeal prescribed the applicable limitation period.  At first instance, Blackburne J held that the “substance” and “essential nature” of the liquidators’ claim was for the payment of a sum of money,[22] and that the 6‑year limitation period was applicable.  The Court of Appeal affirmed his decision, holding that the basis of the claim was to compensate for loss caused to the creditors of the company through wrongful trading and that the liability in respect of which the court could make a declaration was in respect of a sum of money.

48.  In Re Priory Garage (Walthamstow) Ltd [2001] BPIR 144, the liquidator of a company issued proceedings under sections 238-241 of the (UK) Insolvency Act 1986 against a former director, seeking to set aside as transactions at an undervalue or as unlawful preferences two previous transfers by the company to the director of the leases of two flats.  On the trial as a preliminary issue of the limitation defence, Deputy Judge John Randall QC, after a detailed review of the authorities, held that that the primary relief sought, which reflected the substance of the position, was for the setting aside of the two transfers of leases which the liquidator would have every reason to wish to have restored to the company.  He saw no reason to believe either that this primary relief would not be pursued at trial or that there was no realistic prospect it would be granted.  In his summary of the legal principles, he stated:

“ (4) Where there is doubt as to whether a claim falls into the first (that is, 12 year) category, or the second (that is, 6 year) category, the ‘look and see’ approach adopted by Lord Goddard CJ in the West Riding case and approved by Peter Gibson LJ in the Farmizer Products case at 599F should be applied, and the court should look to see what the substance or essential nature of the relief truly sought by the applicant in the particular case before it is. The court is not limited just to the words of the pleading. The court may look at the substance behind the pleading. However, provided the pleaded claim to set aside is a bona fide claim, which is neither a sham nor bound to fail, the applicant is entitled to pursue it …

(5)   Given the possibility that a six year, rather than a twelve year, limitation period may apply in any particular case, liquidators — and for that matter, other office holders within the meaning of these sections — would be well advised to ensure that any such proceedings are commenced within this shorter six year period.  Those who allow such a claim to drift past the first six years after accrual of the cause of action before commencing proceedings, as appears to have occurred here, do so at the risk of finding either all, or possibly part, of their claim lost.”

49.  In Faith Dee Ltd, the company, Faith Dee, had transferred 4 properties to a director and his own two companies for $1.94m in February and March 2005.  At around the same time the company paid $1.931m by cheques to the director, allegedly as repayment of the money the director had paid to the company’s mortgagees on its behalf.  The company was wound up in June 2005.  In June 2012 its liquidators brought proceedings against the former director and his two corporate vehicles under section 266B of the then Companies Ordinance (Cap 32), alleging that the payments constituted unfair preferences, that the net effect of the disposal of the 4 properties together with the payments was that the properties were transferred to the defendants for free, and that the transfer of the properties was in essence a preferential repayment in kind to the director.  By way of relief the liquidators claimed a declaration that the transfer of the 4 properties to the defendants were unfair preferences and void and an order that those properties be vested in the liquidators, “and/or alternatively” a declaration that the payments to the director were unfair preferences and void and an order that he repay $1.931m to the company.  On the defendants’ application to strike out the claim as being time-barred, Deputy High Court Judge Marlene Ng held that it was arguable there had been a scheme whereby the defendants acquired the 4 properties with almost the whole of the consideration paid being immediately returned to the director via the impugned payments.  She did not think that the claim for the 4 properties was a mere tactical move or bound to fail.  She considered that the main purpose of the action was to unwind the transfers and payments, and that the monetary relief sought, whether in the alternative or not, was a consequence of the application to invalidate the scheme. Accordingly, the action did not fall within section 4(1)(d) and the 12-year limitation period applied.

50.  The principles relevant to the present case that may be derived from the authorities can be stated as follows:

(1)  An action brought by the Commission under section 213(2)(b) of the SFO is an action upon a specialty subject prima facie to a limitation period of 12 years under section 4(3) LO.  By section 4(1)(d) LO and by way of exception to the general rule for specialties, a 6-year limitation period is imposed on claims for monetary relief under an enactment.

(2)  The word “sum” in section 4(1)(d) LO in its ordinary and natural meaning means any sum of money, and is not restricted to debts or liquidated sums.  The relevant distinction is between claims under an enactment for non-monetary relief and claims under an enactment for monetary relief whether in a form of debt, damages, compensation or otherwise.[23] An action may be for a sum recoverable by virtue of an Ordinance and may accrue even though the sum is not and cannot be quantified when the action is commenced.[24]

(3)  Where the statutory provision relied upon empowers the court to make orders that give monetary relief or relief in non‑monetary form, one has to look to see what is actually claimed.[25]

(4)  In so doing one has to look to see what the substance or essential nature of the relief truly sought is.  The court is not limited to the words of the pleading, but may look at the substance behind the pleading.

51.  With the above in mind we turn to consider the claims against China United.  Leaving aside the joinder of China United for the purposes of the Chabra jurisdiction, what remains is the claim against China United under section 213(2)(b) of the SFO.

52.  Section 213 of the SFO provides, so far as relevant, as follows:

“ (1) Where –

(a) a person has —

(i) contravened —

(A) any of the relevant provisions;

(B) any notice or requirement given or made under or pursuant to any of the relevant provisions;

(C) any of the terms and conditions of any licence or registration under this Ordinance; or

(D) any other condition imposed under or pursuant to any provision of this Ordinance;

(ii) aided, abetted, or otherwise assisted, counselled or procured a person to commit any such contravention;

(iii) induced, whether by threats, promises or otherwise, a person to commit any such contravention;

(iv) directly or indirectly been in any way knowingly involved in, or a party to, any such contravention; or

(v) attempted, or conspired with others, to commit any such contravention; or

(b) it appears, whether or not during the course or as a result of the exercise of any power under Part VIII, to the Commission that any of the matters referred to in paragraph (a)(i) to (v) has occurred, is occurring or may occur,

the Court of First Instance, on the application of the Commission, may, subject to subsection (4), make one or more of the orders specified in subsection (2).

(2) The orders specified for the purposes of subsection (1) are –

(a) an order restraining or prohibiting the occurrence or the continued occurrence of any of the matters referred to in subsection (1)(a)(i) to (v);

(b) where a person has been, or it appears that a person has been, is or may become, involved in any of the matters referred to in subsection (1)(a)(i) to (v), whether knowingly or otherwise, an order requiring the person to take such steps as the Court of First Instance may direct, including steps to restore the parties to any transaction to the position in which they were before the transaction was entered into;

(c) an order restraining or prohibiting a person from acquiring, disposing of, or otherwise dealing in, any property specified in the order;

(d) an order appointing a person to administer the property of another person;

(e) an order declaring a contract relating to any securities, structured product, futures contract, leveraged foreign exchange contract, or an interest in any securities, structured product, futures contract, leveraged foreign exchange contract or collective investment scheme to be void or voidable to the extent specified in the order;

(f) for the purpose of securing compliance with any other order made under this section, an order directing a person to do or refrain from doing any act specified in the order;

(g) any ancillary order which the Court of First Instance considers necessary in consequence of the making of any of the orders referred to in paragraphs (a) to (f).

……

(4) The Court of First Instance shall, before making an order under subsection (1), satisfy itself, so far as it can reasonably do so, that it is desirable that the order be made, and that the order will not unfairly prejudice any person.

……

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

……”

53.  As explained in Securities and Futures Commission v Qunxing Paper Holdings Co Ltd (No 2) [2018] 1 HKLRD 1060, section 213 creates a statutory cause of action which is vested in the Commission and is not merely a representative machinery for enforcing investors’ pre-existing rights.  The purpose is to provide a statutory regime whereby the Commission, as regulator, can take action to obtain civil remedies for the benefit of investors who may otherwise be deterred by cost and other considerations from instituting legal proceedings individually to obtain redress for their relatively small losses.  The width of the section and the powers it confers on the court are characterised by their extreme flexibility.  Section 213(2)(b) in particular empowers the court to require a defendant to take such steps as the court may direct, including steps to restore the parties to any transaction to the position in which they were before the transaction was entered into.  The defendant need not be a counterparty to the investors in respect of the transactions in question and may be a person who has simply been directly or indirectly in any way knowingly involved in the contravention found.[26]

54.  In Qunxing, it was found that misstatements had been made in public announcements in relation to the company’s business and finances, painting a far rosier picture than the actual position, resulting in the contravention of various relevant statutory provisions.  Orders were eventually made under section 213(2)(b), inter alia, requiring the defendants to make payments to the holders of shares[27] in the company representing their costs of acquisition of the shares, subject to their making counter-restitution by delivering up their shares, with a view to restoring them to the positions in which they were before their subscription or purchase of the shares.[28]

55.  In two previous cases, Securities and Futures Commission v Young Bik Fung [2016] 1 HKLRD 1249 and Securities and Futures Commission v Sun Min [2017] 4 HKLRD 211, the defendants had engaged in insider dealing by acquiring shares on the market based on insider information.  They were eventually ordered under section 213(2)(b) to pay monetary compensation to the parties who sold them their shares in the impugned transactions.

56.  In the present case, the contraventions alleged are the sales of the Subject Shares in the name of China United between 26 April and 30 May 2007, which are said to constitute insider dealing.  The Commission aims to obtain redress for the counterparties to those sales, i.e. the buyers of the shares from China United on the market, who might have suffered a loss because, soon after they bought the Subject Shares, the share price plummeted when the insider information became public.  The orders that the Commission seeks against China United pursuant to section 213(2)(b) are broadly: (i) a declaration that China United has been involved in Lu’s contraventions, (ii) orders requiring China United to take such steps as the court may direct including to restore the parties to the relevant transactions to the position in which they were before the transactions were entered into, alternatively orders for financial compensation or restitution in such sums and to such persons as the court may direct, (iii) an account of the profit gained or loss avoided, and in order for payment to the administrator the amount of profits gained or loss avoided together with interest.[29]

57.  The declaration sought is merely incidental to the main object which is to compensate the counterparties to the insider dealing or restore them to their position before purchasing the Subject Shares in 2007.  As explained by Mr Wong SC for the Commission, what is envisaged is that ultimately the Commission will seek orders in the Action broadly on the basis that (1) the buyers who had subsequently disposed of the purchased shares at a loss would recover monetary compensation for their loss; (2) the buyers who have retained the shares purchased (which have since become shares in Reorient) would be entitled to recover the price they paid, subject to their giving up the shares held; and (3) the buyers who had subsequently disposed of the shares at a gain or without a loss would not obtain any remedy.  As in Qunxing, as part of the order an accountant may need to be appointed to gather information, identify the transactions and the buyers, calculate their entitlements, collect from the defendants the payments ordered against them, distribute the money to the entitled buyers, and generally to administer the scheme.

58.  In relation to the second category of buyers, it may be said that the relief sought will be in the nature of rescission ab initio of the sale and purchase of shares, and that any payment that China United may be ordered to make will be part of the undoing of the transactions, in conjunction with an order for China United to receive the shares returned by the buyers by way of counter-restitution. 

59.  The same cannot, in our view, be said in relation to the first category.  It is not suggested that rescission will still be possible for those investors.  What will be sought for their benefit will be a sum of money, pure and simple, to compensate them for their loss.  It has not been argued that because the Commission is making a claim not for its own benefit, it is therefore not an action to recover any money.  Mr Wong has argued however that since an order under section 213(1)(b) is apparently made in the discretion the court (see Qunxing, §56), the action cannot be described as one for the recovery of a sum.  We do not agree with this submission.  It seems to us that to “recover” simply means to obtain or secure by legal process, and “recoverable” should be similarly construed.  These words in section 4(1)(d) do not in our view exclude actions in which the plaintiffs invoke a discretionary power of the court to award monetary relief. Although section 213(1) uses the word “may”, any discretion conferred is nonetheless a judicial discretion to be exercised in a principled manner.

60.  If one asks: what is the substance and essential nature of the action so far as investors in the first category are concerned, the answer surely is: a claim to recover monetary compensation for their losses.  If one further asks: by virtue of what is such compensation recoverable, the answer plainly is: by virtue of section 213 of the SFO.  It seems to us at least reasonably arguable that the action is in essence, to the extent it seeks compensation for the first category of investors, an action to recover a sum of money recoverable by virtue of the SFO, and subject to a limitation period of 6 years.

61.  The Commission has provided no information as to how many investors there are in each of the three categories.  Given the many intervening years and events, however, it is at least possible that a substantial proportion, if not virtually all, of the initial purchasers of the Subject Shares have already disposed of them.

62.  As mentioned in §34 above, leave to add the new claim by amendment should not be given where the effect (by operation of section 35(1)(b) LO) might be to deprive China United of an accrued limitation defence, unless the Commission shows that there is no reasonably arguable time-bar applicable.  On the available materials we do not think that the Commission has discharged this burden.

63.  In her decision, the Judge placed weight on a number of considerations in arriving at a contrary conclusion.  First, she said that the orders sought go beyond a mere order for payment of money, since China United may be ordered to take steps to facilitate the exercise to unwind the insider dealing transactions, such as complying and cooperating with the administrator appointed by the court.[30] But even if what is claimed is an order for a scheme with various steps to be performed by various persons including possibly an administrator, one has to focus on what China United will be ordered to do.  Simply to say that it may be ordered to participate in the scheme or to cooperate is to mask the requisite analysis.  If what is meant is the production of documents and information, that would be ancillary to any substantive remedy.  In relation to the first category of investors identified above, there is no transaction to unwind but simply a loss to be compensated.  Any order for China United to cooperate in the steps taken by the administrator is arguably simply ancillary to the essential relief, namely, the payment of money by China United.

64.  Secondly, the Judge says that any order for the payment of money by China United or otherwise would be made at the end of any assessment exercise to be carried out.[31] But the assessment exercise envisaged, such as that in Qunxing, is for the purpose of quantification of the money to be paid to each qualifying investor.  This does not alter the nature of the action.  A claim for damages to be assessed does not cease to be an action to recover money within section 4(1)(d) LO because of the need for assessment.

65.  Thirdly, the Judge recognises that there may be a spectrum of possible factual findings that may be made against China United in terms of its knowledge and culpability in relation to the contraventions and that the ultimate order will depend on the degree of culpability.  She concluded that “one cannot assume that China United would not be made subject to any restitutionary or restorative orders to be made in relation to the Subject Shares”.[32] With respect, this reverses the burden.  As has been laid down in Sun Focus and Global Bridge (see §34 above), before making an order that will forever preclude China United’s limitation argument, the Judge has to be satisfied that there is no reasonable possibility that the action against it may properly be characterised as an action for monetary relief by reason of the nature of the remedy actually sought.  It is not sufficient to point to a possibility that an order for non-monetary relief may be made against China United in the end.

66.  Fourthly, the Judge noted China United’s argument that the Frozen Shares belonged to itself, were not tainted by any allegation of insider dealing and would not be the subject of any unwinding, but said that it did not affect whether China United would be required to take part in any restitutionary or restorative exercise, and did not take China United’s argument any further.[33] This is correct as far as it goes, but the point does not advance the Commission’s argument either.

67.  On this appeal Mr Chain has again placed reliance on the fact that the Frozen Shares have since 2015 been represented by the funds paid into court and argued that this shows that the claim must ultimately be one for the recovery of money.  We reject this argument.  The Frozen Shares and now the funds in court are simply assets from which the Commission may seek the enforcement of any order it may eventually obtain.  If the order requires payment of money by China United as part of the rescission of the sale and purchase of the Subject Shares (in relation to the second category of buyers, if any), then the mere fact that payment is ordered and the money is to be taken from the funds in court does not in itself mean that the action is in essence and in substance one for the recovery of money.

68.  Fifthly, the Judge referred to the case of Faith Dee Ltd (which has been described in §49 above) which similarly involved an unwinding of the impugned transactions and consequential repayment of money, and said that the relief sought in the present case is more complex as it involves setting aside or unwinding potentially a large number of transactions.  What must be noted, however, is that in Faith Dee Ltd the 4 properties that had been transferred to the defendants shortly before winding up were still held by them at the time of the action, and the liquidators were seeking an order for the recovery of the properties in specie, together with or in the alternative to orders for monetary payment for the purpose of unwinding the defendants’ scheme.  The court expressly noted that the claim for the properties was not a mere tactical move and was not bound to fail.  In contrast, in the present case, except in relation to the second category of buyers (if there are still any of them left), there is no question of any rescission or unwinding of the transactions, and any payment of money eventually ordered in favour of the investors will simply be an outright payment of compensation.

69.  For these reasons, we take the view that the Commission has not been able to demonstrate that as at the date of its summons, China United had no reasonably arguable limitation defence to the new claim if it had been brought as a separate action, and that leave to amend should therefore have been refused.  Accordingly, we allow the appeal, set aside the Judge’s order allowing the amendments in so far as they relate to the new claim against China United under section 213, and substitute an order dismissing that part of the Commission’s application. 

70.  On a nisi basis, we order that the costs of China United’s summons below dated 26 August 2020 for direction and leave to appeal, and the costs of the summons in this court dated 19 August 2021 and of the appeal, be paid by the Commission to China United, with a certificate for two counsel.  As to the costs below of the Commission’s summons dated 26 August 2016 for joinder and amendment, we propose to determine their incidence on the basis of written submissions, to be lodged by the Commission within 14 days hereof and by China United within 7 days thereafter.