INNOVISIONS LTD. v. CHARLES CHAN SING CHUK AND OTHERS

H E A D N O T E

Contract - misrepresentation - whether amendment to defence should be allowed - whether alleged insider dealing can afford a defence of illegality - Securities Ordinances Cap. 333, Part XIIA - whether issue should be heard separately from main trial.

1990 NO. A4517

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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BETWEEN

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J U D G M E N T

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1. The defendants seek leave to amend their defence in order to plead that the plaintiff's claim for misrepresentation is defeated by illegality namely insider dealing said to be contrary to section 141B(1) of the Securities Ordinance, Cap. 333.

2. If successful in that application, the defendants then seek to have the issue of illegality tried as a separate issue in advance of the main trial. Clearly, the main trial will not be necessary if the plea of illegality is a good one and the claim defeated by reason of the ex turpi causa rule.

3. The plaintiff is a Hong Kong company whose guiding light is Mr. Dickson Poon.

4. The 1st defendant is a director and chairman of Continental Holdings Ltd. (Continental) the Holding company in a group of companies involved in the jewelry business in Hong Kong.

5. The 2nd and 3rd defendants were at all material times the registered shareholders of 200,000,125 and 124,999,375 shares in the capital of Continental respectively.

6. As at 30th June 1989, the 1st defendant (Mr. Chan) was the beneficial shareholder of 11,907,025 shares in the capital of Continental. Mr. Chan and his wife were the beneficiaries of several discretionary trusts who together through the 2nd and 3rd defendants were the beneficial owners of approximately 325m, shares in the capital of Continental. As at 30th June 1989. Mr. Chan together with his wife beneficially owned 72% of the issued share capital of Continental.

7. In April 1989, Mr. Poon and Mr. Chan met at a social occasion and commercial collaboration was discussed between them. Paragraphs 8 and 9 of the Statement of Claim set out the misrepresentations relied upon and I set them out in full.

"8. On or about 9th May 1989 in a meeting between the First Defendant and Mr. Dickson Poon the First Defendant stated and represented as follows:

(i)     Continental would positively and certainly achieve the profit for the year ended 30th June 1989 of not less than HK$88,000,000 recorded in a prospectus issued by Continental as part of an issue of 125,000,000 dated 17th October 1988 (hereinafter referred to as "the Prospectus").

(ii)     For the financial year 1st July 1989 to 30th June 1990 Continental would achieve a profit of not less than HK$100,000,000.

9. Further, on or about 7th July 1989 in a meeting between the First Defendant and Mr. Dickson Poon, the First Defendant stated and represented as follows:

(i)     The orders in hand for Continental in the coming year were so much that Continental could not cope with them all.

(ii)     On the basis of orders already received Continental would achieve a profit of not less than HK$100,000,000 for the year 1st July 1989 to 30th June 1990."

8. At the meeting of 7th July 1989. Mr. Poon agreed on behalf of the plaintiffs with Mr. Chan for himself and the other defendants that Mr. Chan would sell 70m shares to the plaintiff provided that the plaintiff would purchase a further 30m on the open market. It was further agreed that the plaintiff would be entitled to nominate a director to sit on the board of Continental in order that the plaintiff could have access to all necessary financial information.

9. On 8th August 1989, a price of $1.14 for each of the 70m shares was agreed. The plaintiffs allege that they so agreed "acting on the basis of the representations and induced thereby". As for the 30m shares they were purchased by the plaintiffs on the open market on the 10th August 1989.

10. The plaintiffs complain that the representations were untrue and made fraudulently, alternatively negligently. The plaintiffs claim rescission of the share purchase agreement and the return of some $118m. There is a further and alternative claim under section 141 of the Securities Ordinance.

11. The writ was dated 9th July 1990. The defence which denied liability was dated 27th October 1990.

12. The three new paragraphs which the defendants seek to add to their defence are as follows:-

  "     AMENDMENT TO THE DEFENCE

21A.   Further or in the alternative if which is denied the 1st Defendant made the representations as alleged by paragraphs 8 and 9 of the Statement of Claim, such representations were or comprised relevant information regarding Continental within the meaning of Section 141D(1) of the Securities Ordinance.

21B.    If which is not admitted the Plaintiff was induced by the said alleged representations or either of them to enter into the agreement complained of in Paragraph 13 of the Statement of Claim, by reason of the matters referred to in the preceding paragraph hereof the said agreement constituted insider dealing within the meaning of Section 141B(1) of the Securities Ordinance and was and is thereby rendered unlawful.

21C. In the premises the Plaintiff cannot maintain this action and/or recover the damages claimed herein in that the same would be contrary to public policy alternatively by virtue of the principle embodied in the maxim ex turpi cause non pritur action."

In order to consider whether this is a defence available to the defendants, it is necessary to consider Part XIIA of the Securities Ordinance Cap 333. This Part contains sections 141A-L.

13. There is no doubt that this Part of the Ordinance applies to Continental.

Section 141A(2) is important because it states;

"    No transaction shall be void or voidable by reason only that it is an insider dealing within the meaning of this Part."

14. Section 141B tells as when insider dealing takes place,

"141B. When insider dealing takes place

(1)     Insider dealing in relation to the securities of a corporation takes place and pursuant to section 141C may be culpable for the purposes of this Part -

(a)     when a dealing in the securities is made, procured or occasioned by a person connected with that corporation who is in possession of relevant information concerning the securities;

(b)     when relevant information concerning the securities is disclosed by a person connected with that corporation, directly or indirectly, to another person and the first- mentioned person knows or has reasonable grounds for believing that the other person will make use of the information for the purpose of dealing, or procuring another to deal, in those securities.

    (2)    A dealing in the securities of a corporation is occasioned by a person connected with that corporation for the purposes of subsection (1)(a) when a person who has obtained relevant information in the circumstances described in subsection (1)(b) actually makes use of that information for the purpose of dealing or procuring another to deal in those securities."

15. Section 141C sets out when a person who enters into a transaction when is in insider dealing within section 141B is not culpable. I do not feel it necessary to set out this section in full. However, reference must be made to sub-section (6) of section 141C which provides as follows:-

"    Subject to this section the culpability of any person in relation to an insider dealing within section 141B is a matter for the Tribunal to determine under section 141H(3)."

16. Section 141D contains a definition of 'relevant information':-

"    Relevant information in relation to securities means information which is not generally available but if it were, would be likely to bring about a material change in the price of those securities."

17. Section 141E gives a definition of persons connected with corporations.

18. Section 141G establishes the Insider Dealing Tribunal (the Tribunal). It is chaired by a Supreme Court judge and he sits with two members who shall not be public officers. It is very obvious that the Governor would appoint two non-public officers who have experience within the securities industries.

19. Section 141H provides that only the Financial Secretary can require the Tribunal to inquire into a matter.

20. Sub section (3) of section 141H provides that:

" The object of an inquiry shall be to determine within the Tribunal's terms of reference -

(a)     whether culpable insider dealing in relation to the securities of a corporation was taken place; and

(b)     the identity of the persons involved therein and the extent of their culpability."

Sub section (4) provides:

" In making a determination under sub-section (3)(b), the Tribunal shall not be limited to the identity and culpability of an immediate party to an insider dealing; subject to section 141C

(a)     include any other person connected with the dealing;

(b)     in the case of a body corporate include the individuals no exercise control in the management thereof."

21. By section 141I the Tribunal issues its report to the Financial Secretary and thereafter in the circumstances set out in Sub-section (5) can cause the report to be published. Sub section (5) gives protection to persons found not to be culpable who are entitled to object to publication.

22. Sub-section (3) makes it a criminal offence to publish any material received by the Tribunal for the purposes of an enquity.

23. Sections 141J and K deal with the powers of the Tribunal and section 141L deals with privilege.

24. I think the following principles can be extracted from Part XIIA.

(1)     Not all insider dealing is culpable.

(2)     The legislature was only concerned with culpable insider dealing.

(3)     The only person who can institute such an inquiry is the Financial Secretary.

(4)     Once initiated by the Financial Secretary the only body who can declare whether culpable insider dealing has taken place is the Tribunal.

(5)     Insider dealing is not a criminal offence.

(6)     The only sanction against insider dealing is public obloquy.

25. These provisions have been considered by Kempster, J.A. sitting as an additional judge of the High Court in Re Chow Chin & Others [1987] HKLR 73. In that case a Tribunal had made certain findings which were published. Kempster J.A. held that the Tribunal was amenable to judicial review but dismissed the applications. In the course of so doing he said this at p. 74:-

"No disqualification, penalty or other consequences criminal or civil result from such determinations. Indeed section 141A(2) expressly provides that No transaction shall be void or voidable by reason only that it is an insider dealing within the meaning of this part. Public obloquy is the only sanction: presumably on the footing that the purest treasure mortal times afford is spotless reputation (Richard III)."

26. It is true that Kempster, J.A. was not dealing with the same point as before me but nevertheless, it is clear that he considered the scheme of Part XIIA and was able to express his conclusions on their effect as stated above.

27. Mr. Griffiths Q.C. who appeared for the defendants relied heavily on the analysis of the law of illegality made by Kerr L.J. in Euro Diam v Bathurst (1988) 1 Lloyd's Rep 228. At 233 he said:

"The law: Illegality

    The relevant principles and authorities are reviewed in detail at pp. 187-194 and 1370 to 1388 of the reports of the judgment under the heading "Tainted with illegality". A similar discussion is to be found in Chitty on Contracts 25th ed. vol. 1 at p 626 et seq under the heading "The maxim ex turpi causa non oritur actio and related rules". I do not think that it is necessary to repeat the Judge's helpful analysis of the cases. Subsequent to his decision in the present case this Court had to deal with a somewhat similar problem in Saunders v. Edwards [1987] 1 W.L.R. 1118 (Court of Appeal). In the same way as in that case. I propose to refer to the submissions raised on behalf of the defendant in this case compendiously as the "ex turpi causa defence". In my view the relevant principles can then be summarised as follows

    (1)     The ex turpi causa defence ultimately rests on a principle of public policy that the Courts will not assist a plaintiff who has been guilty of illegal (or immoral) conduct of which the Courts should take notice. It applies if in all the circumstances it would be an affront to the public conscience to grant the plaintiff the relief which he seeks because the Court would thereby appear to assist or encourage the plaintiff in his illegal conduct or to encourage others in similar acts: see (2)(iii) below.

    The problem is not only to apply this principle but also to respect its limits, in relation to the facts of particular cases in the light of the authorities."

28. At p 234 he added that "the ex turpi causa defence must be approached pragmatically and with caution depending on the circumstances. See e.g. per Mr Justice Bingham in Saunders v Edwards (Sup) at 1134".

29. Mr Griffiths farther referred me to Kirknam v. Chief Constable of Manchester [1990] 2 WLR 987. In that case a remand prisoner with suicidal tendencies committed suicide in prison and his estate sued the Chief Constable for damages in negligence. One of the defences was the ex turpi causa defence. At p. 993 Lloyd L.J. dealt with the point in the following way,

"Ex turpi causa non oritur actio

    This is the most difficult part of the case. Prior to 1961 suicide was a crime. Although there appears to be no reported case directly in point. I do not doubt that a claim based on the failure of the authorities to prevent a suicide would have failed. The courts would have declined to lend their aid to enforce such a claim. But by section 1 of the Suicide Act 1961 the rule of law whereby it was a crime for a person to commit suicide was abrogated. The question is whether the Suicide Act 1961, by abrogating the criminal nature of suicide has taken away the defence of ex turpi causa. The judge took the straightforward line that the defence depends on some causally related criminal activity. He referred to Hardy v. Motor Insurers Bureau [1964] 2 Q.B. 745 and Murphy v Culhane [1977] Q.B. 94 and considered that since suicide is no longer a crime the defence ex turpi causa is no longer available Unfortunately the judge was not referred to three recent cases in which ...(illegible) It would be superfluous to summarise the pnnciples here. It is sufficient to quote two sentences from Kerr L.J. S Judgment in the Euro Diam case at p. 35:

"The ex turpi causa defence ultimately rests on a principle of public policy that the courts will not assist a plaintiff who has been guilty of illegal (or immoral) conduct of which the courts should take notice. It applies if in all the circumstances it would be an affront to the public conscience to grant the plaintiff the relief which he seeks because the court would thereby appear to assist or encourage the plaintiff in his illegal conduct or to encourage others in similar acts..."

It is apparent from these authorities that the ex turpi causa defence is not confined to criminal conduct. So we cannot adopt the simple approach favoured by the judge. We have to ask ourselves the much more difficult question whether to afford relief in such a case as this, arising as it does directly but of a man's suicide, would affront the public conscience, or, as I would prefer to say shock the ordinary citizen. I have come to the conclusion that the answer should be in the negative."

30. Relying upon these authorities Mr. Griffiths also referred me to passages in the Hay Davidson report which said that insider dealing undermines the fairness of the system. He referred to the moral climate and suggested that there was a role for the courts to play in refusing to allow parties to benefit from transactions, the subject matter of insider dealing. As to section 141A(2) which says no transaction is rendered void or voidable by reason of insider dealing he asked whether it was a relevant consideration on the facts of this case. He submitted that it obviously prevents the unravelling of transactions. But he asked whether it covers a person in Mr Poon s position and whether he can, in all the circumstances be allowed to sue on such a contract. Mr. Griffiths relied very heavily upon the immoral aspect of the ex turpi rule acknowledging as he must that insider dealing is not a criminal offence in Hong Kong.

31. Mr. Robert Tang Q.C. submitted that leave to defend should not be granted because the ex turpi causa defence will fail for three reasons.

(1)     Part XIIA is not intended to have civil consequences;

(2)     As a matter of construction there is no culpable insider dealing because misrepresentations can not be information within the meaning of the Ordinance;

(3)     On the facts such culpable insider dealing as might be found by any court would not persuade any reasonable court to deny a plaintiff relief.

32. Basically he is submitting that the issue as to whether or not there has been insider dealing, is not justiciable in these proceedings and he relies heavily upon what Kempster J.A. said in the above guoted case.

33. In response to these submissions. Mr. Griffiths asked "why shouldn't the ordinary principles of illegality in contracts apply?" He then posed the question whether the conscience of the court is affronted by these allegations. He said that the ordinary criminal law should be applied. He said that the Financial Secretary might have had special reasons for not ordering an investigation. He further added that if it was intended that an examination into insider dealing should be restricted to the Tribunal then the legislature would have said so in terms.

34. Applying the Euro Diam test together with the observations of Lloyd L.J. in Kirknam. I have to ask myself the following questions. Firstly is the conduct in question illegal or immoral? If it is would the affording of relief to the plaintiff on the facts of this case affront the public conscience or shock the ordinary citizen.

35. Insider dealing is not illegal in Hong Kong. No criminal offence is provided for it. The only sanction is publicity. No transaction is rendered void or voidable by reason of it. In England it is a criminal offence with a maximum sentence of 7 years imprisonment (see s 8 Company Securities (insider dealing) Act 1985). There is in England nevertheless the same section preventing transactions being rendered void or voidable. Palmer's Company Law 24th Eu page 479 puts the matter this way after stating that proceedings day only be instituted by the secretary of state or the D P.P.

"No civil remedies are created by the Act and section 8(3) specifically provides that no transaction shall be void or voldable by reason only of having been entered into in breach of the prohibitions. No specific provision for disgorement of profits made out of insider dealing is contained in the Act but ... a court by whom a person is convicted may make a compensation order ....."

36. Is it immoral? It was argued that because the legislature thought it necessary to legislate in respect of insider dealing it must follow that at the very least it is immoral. It is said to be immoral because it involves someone stealing a March on others. It goes against the level playing field concept of securities legislation and regulation. That insider dealing was thought to be undesirable is fairly clear. If it was not undesirable there would have been no point in Part XIIA.

37. However it is necessary to have regard to the scheme and structure of Part XIIA. In the present case the Financial Secretary has not ordered any enquiry and it follows therefore the Tribunal has not considered whether the matters complained of constituted culpable insider dealing. Given this situation. I do not see now the proposed amendments assist the defendants. The legislature was very careful to limit the ambit of Part XIIA. The Tribunal is intended to be composed of persons with experience in the ways of the market. I do not think that it was ever intended nor in my judgment does it follow from the sections themselves that the investigation into insider dealing should be carried out by anyone other than the special Tribunal appointed for that purpose.

38. Section 141C(6) makes it clear that the culpability of any person in relation to insider dealing is a matter for the Tribunal to determine. It could be said that civil courts frequently have to make decisions as to whether something is illegal for this purpose whereas the actual decision on whether an offence has been committed is the province of another court. That may well be the position where one is dealing with a situation where the legislature has made it clear that a particular act or course of conduct is a criminal offence. But in this case the legislature has fallen well short of creating any criminal offence and have in my judgment made it clear that there should be no civil consequences in a finding of culpable insider dealing. Section 141A(2) is the strongest possible indication that to quote Kempster J.A. again "no ....... penalty or other consequence civil or criminal results from such determination". It is to be noted that he was there considering a situation where culpable insider dealing had been found by the Tribunal. In the present case the matter has not even been referred to the Tribunal.

39. It could be said that Part XIIA is a compromise between those who would like to see insider dealing rendered unlawful and those who would like to see it continue unaffected by legislation as it was prior to the coming into effect of Part XIIA. Given that this legislation is a compromise, I find it is possible to conclude that the matters sought to be raised by the amendments would shock the ordinary citizen or affect the public conscience. One must have regard to the pragmatic approach of the illegality defence.

40. I therefore conclude that these proposed amendments would be bound to fail. Only the Tribunal can determine whether culpable insider dealing has taken place, and then only when the Financial Secretary asks it to consider such a question. It was not intended that other courts unaided by two lay persons appointed by the Governor should delve into these matters.

41. Even if I were held to be wrong about the effect of the scheme in Part XIIA. I would also have concluded that insider dealing not being illegal would not affect the public conscience and could not give effect to an illegality defence. As a matter of law. I do not see now this defence can possibly succeed and thus there can be no point in giving leave to make a hopeless amendment.

42. I should have added that I was not convinced by Mr Griffiths attempt to circumvent the effect of section 141A(2).

43. Mr. Tang also submitted that it was somewhat unreasonable to rely on this insider dealing as the essence of the claim made by the plaintiff was that what the defendant had said was untrue. It what the defendant said was true then insider dealing or not the plaintiff's claim would fail. The plaintiff would only succeed if what the defendant said was untrue and therefore the whole question of insider dealing is totally irrelevant. I think there is a lot of force in this submission but in view of my primary finding it is not really necessary for me to go into that aspect of the case. I think it might be helpful if I say that were this the only point in the case. I would have allowed the amendment so that Mr. Griffiths submission to the contrary could be examined in some detail.

44. Mr. Tang further submitted that disclosure had been made by an annoucement in the South China Morning Post the day after the transaction had been concluded and thus section 141C(5) came into play. There may or may not be force in this submission but again if this were the only ground upon which the amendment were opposed. I would have allowed the amendment because this is a matter which cannot be dealt with on an application for leave to amend.

45. I should make it clear that I accept entirely Mr Griffiths submission that unless the amendments which he seeks to make are totally unarguable leave should be given. In my judgment the plaintiffs have satisfied me that these amendments give rise to a claim which is totally unarguable and therefore leave to amend is not granted.

46. Having come to this conclusion it is unnecessary for me to make a decision on whether or not I would have granted the application for a separate issue. But in case this matter should go further, it may be helpful if I very briefly state what my conclusions would have been had I granted leave to amend.

In Tin Shui Wai Development Limited v The Attorney General CL987 No. 5 Godfrey J on 17th October 1989 had before him an application to deal with some issues in a long trial before other issues. In considering the approach of the court. He said this at p 7 of his judgment:

"In my judgment the modern approach must be this. The policy of the court in line with the reforms introduced by the Judicature Acts is that all matters in dispute between the plaintiff and the defendant should be tried together at one hearing; but if either of them can satisfy the court that the just and convenient course would be to have separate trials of different issues the court should not be innibited by authority from exercising the power in that behalf conferred on it by the rules."

47. So the issue is whether the defendants have satisfied me that the balance of justice and convenience comes down demonstrably in their favour.

48. Mr Griffiths conceded that if this issue were tried first there would necessarily have to be some evidence. He emphasised that it would not be all the evidence in the trial but clearly there would be some and he made a rough calculation showing a difference between the time taken for the preliminary issue and the likely period for trial. He said the difference of approximately two weeks was substantial enough to justify the court taking the course of ordering the insider dealing point being decided first.

49. Mr. Tang for his part submitted that there were in fact many more areas of evidence which would be necessary and that it would be somewhat unfair to the plaintiff to have to start off by dealing with an allegation of illegality in the full glare of publicity without the rest of the case being gone into at the same time.

50. Having considered the rival contentions. I do not consider that the defendants have satisfied me that the balance of justice and convenience comes down clearly in their favour. Had I not refused leave to amend I would nevertheless have in the exercise of my discretion, refused to order the insider dealing point tried in advance of the main trial. Given the sensitivity of the allegations I think justice clearly requires that the whole matter be gone into at one time and I believe that this is the only fair and sensible course to take. There is always the problem of now to deal with appeals from preliminary issues and the possible delay that that might cause to the ultimate resolution of this unfortunate dispute.

51. As the defendants have failed in their applications for leave to amend. I propose to make an order nisi for costs against the defendants.