RE THE STOCK EXCHANGE OF HONG KONG LTD.

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HEADNOTE

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UPON THE TRUE CONSTRUCTION OF THE PROVISIONS OF THE STOCK EXCHANGES UNIFICATION ORDINANCE, CAP. 361, THE REVOCATION UNDER PART VI OF THE SECURITIES ORDINANCE, CAP. 333, OF A PERSON'S REGISTRATION AS A DEALER DOES NOT EXTINGUISH HIS RIGHTS, LIABILITIES OR PRIVILEGES AS A MEMBER AND SHAREHOLDER OF THE STOCK EXCHANGE OF HONG KONG LIMITED.

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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JUDGMENT

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1. By law the stock market here is to be operated by a company to be known as "the Exchange Company". And that is what happens in fact. The applicant, the Stock Exchange of Hong Kong Limited, is that company. It brings these proceedings. That it does for itself and - by way of representative proceedings - for the persons identified in its originating summons as persons who may be affected by the matters upon which the Court is being asked to pronounce.

2. Section 11(1) of the Stock Exchanges Unification Ordinance, Cap. 361, provides that : "No person shall become, or remain, a member of the Exchange Company unless he is eligible to be a member under section 12 or 13". Section 12 deals with individual members, while section 13 deals with corporate members. Looking at them, one sees at once that no individual or body corporate shall be eligible to be a member of the Exchange Company unless he or it is a dealer registered under Part VI of the Securities Ordinance, Cap. 333. Such registration may be revoked by the Securities and Futures Commission under section 55(2) of that Ordinance.

3. The Exchange Company and the Commission - each advised by two leading counsel - disagree as to the legal effect of such revocation.

4. Although served, the Commission has not appeared. The disadvantage to me of that has been redressed by the balanced way in which Mr Litton, who leads for the Exchange Company, has presented his case. No doubt the Commission and its legal advisers took the view - rightly of course - that any trust reposed in Mr Litton's fairness is trust safely reposed.

5. It appears that the Commission's stance in regard to the effect of the revocation of a member's registration as a dealer is this. Either it extinguishes that member's share or - in the words of one of the leading counsel advising the Commission and quoted by it in correspondence - it "acts as a sort of automatic surrender or confiscation of his share" unless he had disposed of it before the revocation took effect.

6. I am unable to accept either the "extinguishment" argument or the "surrender or confiscation" argument. The former involves a reduction of capital. The latter raises a question to which there is no satisfactory answer, namely, surrendered or confiscated to whom? Both involve the taking away of a person's property - a consequence against which there is a presumption - and, what is more, the taking away of his property without compensation - a consequence against which there is an even stronger presumption.

7. The language of the relevant legislation does not support the Commission's stance. Nowhere is it provided that a person's share in the Exchange Company shall be extinguished or automatically surrendered or confiscated upon the revocation of his registration as a dealer. No expression such as "extinguishment", "surrender" or "confiscation" is used. Nor is there any warrant for implying any such concept. There is no linguistic support for any such construction. What is more, those concepts face the difficulties which I have identified earlier when I spoke of a reduction of capital, the want of a satisfactory answer to the question as to whom the shares are to be surrendered or confiscated, the presumption against the taking away of a person's property and the stronger one against that without compensation.

8. So Mr Litton is, in my judgment, plainly right on the questions of extinguishment and of automatic surrender or confiscation. Revocation of registration as a dealer does not lead to any of those things. A person being liable to exclusion from membership of a company is one thing. His losing his right to the price of his share in that company is another.

9. Moving on, Mr Litton also argues that the revocation of a person's registration as a dealer does not automatically terminate his membership of the Exchange Company. Certainly there is no express provision to the effect that it does. Is there any necessary implication to that effect? In my judgment, there is none.

10. If a person's share in a company continues in existence and it is not taken away from him, then he remains a member of the company until something is done to divest him, or compel him to divest himself, of that share. Section 11(2) of the Stock Exchanges Unification Ordinance, Cap. 361, provides in terms what might well have been the position even in the absence of an express provision, namely, that : "Subject to this Ordinance and to any other law, the rights, liabilities and privileges of members of the Exchange Company shall be governed by the constitution of the Exchange Company". Under its articles the Exchange Company has ample power to expel one of its members whose registration as a dealer has been revoked (so that his remaining a member of it is in contravention of section 11(1) of that Ordinance) and to allot or transfer his share to an applicant for membership. There is no reason to suppose that the Exchange Company would not exercise such power. But if it did not, the Commission would be able to require it to do so under - quite apart from any other power - the Commission's power under section 50(l) of the Securities and Futures Commission Ordinance, Cap. 24. And if necessary the Attorney General could seek injuctive relief directed at preventing the Exchange Company from doing the wrong thing and compelling it to do the right one.

11. The declaration which I am invited to make - and which I do make - is this. Upon the true construction of the provisions of the Stock Exchanges Unification Ordinance, Cap. 361, the revocation under Part VI of the Securities Ordinance, Cap .333, of a person's registration as a dealer does not extinguish his rights, liabilities or privileges as a member and shareholder of the Stock Exchange of Hong Kong Limited. I so declare.

12. I should add that the Commission does not take the view that it would be desirable for the law to be contrary to what the Exchange Company contends - and I hold - it to be. Rather the Commission's view was that the law is uncertain in the present and connected respects, and that legislation is necessary or desirable. The point is one of wide implication obviously; and I am far from discouraging legislation. But the Exchange Company is entitled to seek declaratory relief on the law as it stands. Indeed, it is precisely when the point is arguable that people feel the need - and have the right in appropriate cases - to come to the Court for a declaration of their rights.