RE CHOW CHIN WO

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

Miscellaneous Proceedings Nos 1145 to 1151 of 1986

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JUDGMENT

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Kempster J.A. :

1. On 2nd November 1984 the Financial Secretary required the Insider Dealing Tribunal, established pursuant to the provisions of section 141G of the Securities Ordinance, to determine whether culpable insider dealings as therein defined had taken place in relation to the ordinary shares of International City Holdings Ltd (ICH) or any related company between 1st January and 30th June 1984 and, if so, the identity of the persons involved and the extent of their culpability. The Tribunal proceeded to conduct an inquiry covering some 61,000 share dealings pursuant to section 141 I(1) of the Ordinance following which, on 27th March 1986, they presented the Financial Secretary and, in due course, the public at large with a detailed and closely-reasoned Report in two volumes which included positive determinations as to culpable insider dealing. References to its paragraphs will be made in parenthesis. No disqualification, penalty or other consequence, criminal or civil, results 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 II). Since all those persons not found culpable after investigation of their dealings elected, pursuant to section 141I(5), to have their names omitted from the Report, so that not even the fact that they dealt in ICH shares will be known, the sanction would appear to be effective.

2. On 24th May Deputy High Court Judge Barnett granted the seven applicants Mr. Chow Chin-wo, Starpeace Limited (Starpeace), Mr. Albert Chow Nin-mow, Mr. George Magnus, Cheung Kong (Holdings) Limited (CKH), Mr. Li Ka-shing and Mr. George Zang leave to apply for the Judicial Review of the determinations by which each had been found party to culpable insider dealing. Others so found have not sought to challenge the Tribunal’s approach.

3. Para. 10.134 of the Report reads:

By these proceedings, brought pursuant to RSC Order 53, the applicants seek to quash such determinations or, alternatively, the grant of a declaration that they are "null and void and of no effect whatsoever". They feel aggrieved to have been found parties to transactions said to be regarded by the legislature as dishonest” (12.13) and stigmatised by a former Financial Secretary as "essentially fraudulent behaviour" (2.49, 12.2). Whether or not the commercial community has hitherto adopted a hostile approach to insider dealers or demonstrated a lively appreciation of the existence or provisions of the Ordinance may be open to question (12.6). In Sutton's Hospital Case⁽¹⁾ Sir Edward Coke said of corporations:

They cannot commit treason, nor be outlawed, nor excommunicate, for they have no souls -

He might have been surprised to learn that by 1984 in this small but commercially vigorous part of Cathay they would have become capable of culpable insider dealing. At least two successful and influential men of business in good standing in Hong Kong were, it appears, indeed surprised so to learn (10.108, 10.116).

4. "Culpable" in the context of the Ordinance and of culpable insider dealing means no more than "blameworthy" and, not being used in any unusual sense,

per Lord Reid in Cozens v Brutus⁽²⁾. Section 141C(6) of the Ordinance so confirms. Right thinking members of society would not without more ado equate a determination of culpability with a finding either of fraud or dishonesty. After reading the relevant report they might do so though not in the present instance where, as I would emphasise, the facts established are wholly inconsistent with such a finding in relation to any applicant save, possibly, C.W. Chow. Had the Tribunal so construed "culpable" as necessarily to require such a mental element it would and could not have made the determinations it did save in relation to that one applicant and it is unfortunate if cursory reading of the Report has given rise to erroneous conclusions in this regard. Of the personal, as opposed to the corporate, applicants there was no evidence that any save C. W. Chow was even aware of the material share-dealings (10.106). Nonetheless the implications for all the applicants of the determinations impugned are, beyond question, serious and far reaching. A finding of culpable insider dealing necessarily predicates the purchase or sale of shares in circumstances where unfair advantage has been taken of other traders in the securities market not possessed of relevant information. "Relevant information" is defined in section 141D(1) in relation to securities as

- 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.

 

5. Following a comment in the 1966 Report of the Royal Commission on Tribunals of Inquiry (Cmnd 3121) the Tribunal adopted for itself, as it made known to the applicants and their legal advisers in the course of oral hearings, a more rigorous standard of proof than the applicants could, as a matter of law, have demanded of them. We should find no dealing to be a culpable insider dealing for the purposes of the Ordinance unless we were satisfied that it was established beyond doubt by the most cogent evidence -" (2.48, 2.52). As Lord Diplock explained in Mahon v Air New Zealand⁽³⁾:

The adoption of a higher standard, upon which the applicants must be deemed to have relied when deciding whether or not to seek adjournments or to adduce further evidence, can only have redounded to their advantage and was but one example of the Tribunal's conspicuous concern to act fairly in the conduct of its investigations.

6. In the absence of argument to the contrary I have no hesitation in making the necessary preliminary finding that, constituting as they do an inquisitorial body with statutory duties to perform, the members of the Insider Dealing Tribunal of Hong Kong are amenable to the process of judicial review at the instance, at least, of persons affected by their determinations in circumstances where no alternative remedy exists. Review is not to be equated with an appeal. The High Court can only interfere if it be shown that in the discharge of its statutory obligations the Tribunal exceeded its jurisdiction, which is not suggested, in law, came to wholly unsupportable conclusions or acted unfairly. To concern itself with the merits of the determinations would be to usurp the Tribunal’s functions.

7. The Report owes its origin to a widely reported property transaction which took place during the currency of the Sino-British negotiations on the future of Hong Kong. By two documents, each dated 23rd January 1984, Zangforce Ltd. (Zangforce) a wholly owned subsidiary of ICH, agreed to enter into formal contracts to sell to Cheery Bright Ltd. (Cheery Bright), the holding company for the Ever Bright Group of companies, at stipulated prices exceeding $900 million in all, eight blocks of residential property at City Garden in Hong Kong. Cheery Bright paid Zangforce deposits amounting to some $94 million. The contracts were to be concluded before the expiry of six months but not earlier than 30th April unless, within that time, Cheery Bright had given Zangforce two days notice of cancellation. In that event the deposit or deposits as the case might be was or were to be repaid with interest at the rate of 10 percent per annum. The Tribunal found that at a time when he did not believe that the “break clauses would ever be invoked Mr. Wang, the chairman of the Ever Bright Group who had come to Hong Kong in April 1983 from China, where he held a number of responsible posts, misrepresented the transaction to the public of Hong Kong as one of sale and purchase (1.11). The Tribunal nonetheless found that the transaction was not merely a device to talk up the market by publicity for some improper ulterior motive (6.75). In relation to the motivation both of Wang and K. S. Li it was a genuine business transaction. (5.59).

8. The projected sales became but a matter of history when, on 26th June, Cheery Bright gave Zangforce the necessary two days' notice.

9. When the transaction first excited public attention there was, inevitably, a demand for the shares of ICH and the sales already mentioned (10.134) took place before its true nature became known to the public at large.

10. Section 141B of the Ordinance provides as follows:-

(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 -

         (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.

Information about any anticipated or actual “break clauses” certainly comes into the category of "relevant information".

11. Following, like the Tribunal, the pattern of the Ordinance it is appropriate first to consider whether the determination in relation to the admitted sales by Starpeace, procured by C.W. Chow, is susceptible to successful challenge. If it is, the determinations in relation to the other applicants will not be sustainable as there would have been no insider dealing in which they could have been found involved pursuant to section 141H. If it is not so susceptible further matters will fall for consideration. No reliance was placed by the Tribunal when considering the possible culpability of C.W. Chow on knowledge derived from ICH Board Circular No. 3/84 dated 7th February 1984 the last paragraph of which reads: -

12. All hinges on the finding that C.W. Chow, who was a mature and trusted director of CKH and Starpeace, financial controller of the CKH Group, and a non-executive director of ICH and therefore connected with that company within the meaning of section 141E, was aware of the “break clauses” or the likelihood of “break clauses” (10.23) by 16th January 1984 when the first of the material sales of ICH shares took place (10.65); a finding from which it necessarily followed that he had lied to the Tribunal (10.86 and 10.96). Nothing in the Report suggests that the Tribunal relied on mendacity as being probative of any substantive conclusion.

13. It is contended that this finding in relation to the knowledge of C.W. Chow was made without affording him the opportunity of explanation or denial; an issue raised on the first day of the hearing before this Court and, with leave, added to the grounds of application by amendment. I turn again to Lord Diplock’s opinion in Mahon v Air New Zealand ⁽³⁾:

It had earlier been said by the English Court of Appeal in Maxwell v Department of Trade ⁽⁴⁾ that inspectors holding an inquiry under section 165 of the Companies Act 1948 were required to do no more than put to the witnesses the substance of the evidence on the basis of which they were subsequently criticised in a report. They were not required to put their tentative conclusions to the witnesses for their comments or in order to allow further evidence to be adduced. As Lord Denning M.R. said at p.534 “That would hold up the inquiry indefinitely.”

C.W. CHOW

14. It is apparent from the terms of paragraph 5 of his statutory declaration made on 11th May 1985 that C.W. Chow, who had been warned by letter from counsel for the Tribunal dated 25th April that consideration was being given to his possible implication in culpable insider dealing, was well aware that any adverse finding would probably depend upon his knowledge of the “break clauses”, or the likelihood of “break clauses”, before he had a sight of the ICH Board Circular. It was the first matter about which he was examined in chief by Mr. Wright, counsel instructed on behalf of all the applicants. In my opinion the cross-examination by Mr. Litton, leading counsel for the Tribunal, which followed and included express reference to policy changes as regards Starpeace’s holdings of ICH shares did nothing to dispel his reasonable apprehensions. When asked “But you say it (the option to withdraw) was not known to you” he failed to answer. In written submissions respectively dated 31st August and 11th November, 1985, Mr. Litton contended C.W. Chow’s possession of relevant information before 7th February 1984 is a matter of inference from the surrounding facts - and Mr. Wright “There is no direct evidence that Chow Chin-wo had knowledge of the option before he saw Board Circular No. 3/84. - There is no cogent evidence before the Tribunal to establish that C.W. Chow knew - ”.

15. Mr. Wright went on to make the valid point, repeated before the Court, that it had never been put to C.W. Chow that either George Zang or Albert Chow had informed him of the option or that he had learnt of it by overhearing such a conversation between them as he had deposed to in his statutory declaration. There is no admission from either George Zang or Albert Chow that they told him. Mr. Wright’s written submission also relates and, with reference to paragraphs 10.61 and 10.62 of the Report, it is to be observed that C.W. Chow was not asked about any inquiry he might have made when he learnt of the deposits or about the circumstances in which he acquired knowledge of Wang’s wishes in relation to the circular. When finally addressing the Tribunal on 5th December 1985 Mr. Litton suggested more than once that if he said anything which occasioned surprise Mr. Wright could seek an adjournment to deal with it and sought to rebut any charge of procedural unfairness in the following terms:-

The Chairman agreed. I am not seeking to have these gentlemen recalled stated Mr. Wright in due course. In my opinion it was not then incumbent upon the Tribunal to recall them.

16. The risk of a finding being made against him on the basis subsequently appearing in the Report was known to C.W. Chow throughout. He was not left in the dark or deprived of the opportunity to adduce additional material. Albeit he was not cross-examined on behalf of the Tribunal with the particularity which would have been appropriate to a “lis inter partes” the substance of the material evidence, as opposed to the Tribunal’s tentative conclusion, was put to him.

17. The inferential finding that C.W. Chow was aware of the “break clauses” or the likelihood of “break clauses by 16th January 1984 was based on a radical departure in the investment policy of Starpeace (10.88, 10.89, 10.90 and 10.91) and on his inevitable interest in and need to know about and ability to ascertain details relating to the City Garden transaction of which he had learnt (10.25, 10.30 and 10.32). As from 23rd January, he was aware deposits had been paid. He was, it was remarked, financial controller of the CKH Group responsible for dealing in ICH shares and expected to furnish information to auditors (10.54, 10.55, 10.57, 10.62 and 10.65). Reliance was also placed by the Tribunal on C.W. Chow’s knowledge, prior to 7th February or thereabouts, that C. Y. Wang wanted the “break clauses” kept secret (10.61).

18. These primary facts constituted most cogent evidence from which the Tribunal, constituted to reflect commercial as well as legal knowledge and understanding, and applying its own high standard of proof, might “logically and inevitably” draw, as it did, the inferences complained of. Such inferences are readily to be distinguished from conjecture or speculation. Accordingly, the Tribunal’s finding that insider dealing in relation to the securities of ICH took place when C.W. Chow procured Starpeace to sell 55,634,000 of that company's shares between 16th January and 1st March 1984, during the whole of which period he was in possession of “relevant information” concerning the securities, cannot be faulted as involving any error of law or unsupportable conclusion.

            "The touchstone of culpability was held by the Tribunal to be “making use of relevant information in dealing in securities.” (2.10) Culpability “is a matter for the Tribunal to determine -” Sections 141B(1) and 141C(6). It is common ground that the dealings were motivated by market considerations (10.68) so that sub-section (3) of section 141C, cannot be invoked any more than sub-sections (1), (4) and (5). In the course of an exhaustive analysis of the sales and purchases of ICH shares between 16th January and 31st December 1984 the Tribunal drew the further inference from the “relevant information” which C.W. Chow had been found to possess that “he knew full well that he was dealing in ICH shares at a time when their price was unusually high and, for much of the time until the 6th February, continuing to rise as a result of misinformation given to the public and he also knew that at any moment there could be a material drop in the price of the shares if the truth about the negotiations for, and later the City Garden transaction was made public - In such circumstances we were satisfied that in making his dealing decisions - C.W. Chow must have been motivated by his knowledge that the unusually high price of ICH shares was unjustifiable - (10.9 and 10.98). On this footing he was found culpable (10.100 and 10.107). Again I can find no error of law or any conclusion or inference that can be stigmatised as unsupportable.

19. Section 141H reads as follows:

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

20. Sub-section (3)(b) requires the Tribunal to determine the extent of the culpability of persons found, like C.W. Chow, to have been involved in culpable insider dealing. In other words the degree of blame to be attributed to a person so involved falls for determination. No grounds have been shown warranting any interference by this Court with the finding that C.W. Chow’s culpability was “of a high degree.”

STARPEACE LTD.

21. Starpeace was involved in the material share dealings as a principal and connected with ICH by virtue of section 141E(2). The relevant information known to C.W. Chow, one of its directors, and his use of it was to be imputed to Starpeace. The Tribunal found that he represented its directing mind (10.20) and that the extent of its culpability was of the same high degree (10.108). In making this determination the Tribunal accepted the proposition advanced by Mr. Wight in his written submissions that “the acts and thought-processes of C.W. Chow are the acts and thought-processes of - Starpeace.” Very properly he did not seek to rely on any limitation upon C.W. Chow’s authority to deal. “But a master - is liable even, for acts he has not authorised, provided they are so connected with acts which he has authorised that they may rightly be regarded as modes - although improper modes - of doing them.” Salmond on Torts 9th ed p.95 adopted by Lord Thankerton when giving the opinion of the Privy Council in Canadian Pacific Railway Co. v Lockhart⁽⁵⁾. That this aspect of the law was well in the mind of the draftsman is apparent from the term of section 141C(2).

22. There are no grounds which entitle the Court to interfere with the determinations in relation to this company. What has been said about fairness in relation to C.W. Chow applies, mutatis mutandis, to Starpeace which also received a separate warning letter dated 25th April 1985.

CHEUNG KONG (HOLDINGS) LTD.

23. By letter dated 23rd April 1985 CKH was warned that the Tribunal is inquiring into the possibility that the company may have been implicated in culpable insider dealing during the relevant period by reason of dealings in shares in International City Holdings Ltd. by your subsidiary companies during this period. Starpeace was a wholly owned subsidiary of CKH (10.15). If, as has been found, no complaint of unfairness can legitimately be made by C.W. Chow no such complaint can be made by CKH any more than by Starpeace.

24. In his statutory declaration C.W. Chow stated “My authority to handle share dealings was given by Li Ka-shing verbally about 4 or 5 years ago. This authority continues up to the present date -” He went on to mention the limitations on such authority as to which what has been said in relation to Starpeace equally applies to CKH. C.W. Chow does not state on whose behalf Li Ka-shing gave him authority, however. Nor does Li Ka-shing himself in his statutory declaration the material parts of which are in similar terms. To that extent paragraph 10.5 of the Report is literally inaccurate. But the inaccuracy is not material because in the course of their oral evidence C.W. Chow said he had been making acquisitions of ICH shares right through calendar years 1981, 1982 and 1983 on behalf of CKH and Li Ka-shing that C.W. Chow could use any CM subsidiary he chose for share dealing. The implication that effectively C.W. Chow was acting for and on behalf of CKH is overwhelming. In any event Mr. Wright conceded in his written submissions that the acts and thought-processes of C.W. Chow are the acts and thought-processes of CKH (as well as of Starpeace) and if C.W. Chow is not culpable then likewise neither of these two companies is culpable. The converse must necessarily apply. The submissions continue C.W. Chow was the director who alone represented the directing mind and will of each company with respect to the dealings in ICH shares under consideration. This was not to say that what C.W. Chow knew as a director of Starpeace was ipso facto to be imputed to CKH because he was a director of that company also. The Tribunal was entitled, if it so wished, to accept such admissions, from which no attempt was made to resile, without further inquiry and as or in substitution for the most cogent evidence. C.W. Chow for and on behalf of CKH and acting within the constraints described in paragraphs 3.4 and 10.16 of the Report procured Starpeace, who were the beneficial owners of the shares, to enter into the material share dealings.

25. There are no grounds which entitle the Court to interfere with the determinations in relation to this company either (10.107 and 10.108).

THE OTHER DIRECTORS

26. Of the applicant directors of CKH and Starpeace only C.W. Chow and George Magnus received letters warning them of the possibility of personal culpability and Magnus was initially given to understand that the possibility of such culpability arose in the context of a share-dealing as to which, in the event, no adverse determination was made. But it must have been apparent to K. S. Li, Albert Chow and George Zang, at the latest when Mr. Litton’s written submissions of 15th November 1985 were to hand, that they were and risk. No real warning was given to Magnus until the oral hearing on 5th December when first the Chairman of the Tribunal and later Mr. Litton suggested that his position in law and in fact was no different from that of the others. The basis for possible personal culpability put to them was that they should have taken positive action if aware that a company of which they were directors might engage in culpable insider dealing. Before the Tribunal turned to other matters the following exchanges took place between the Chairman and Mr. Wright:

27. Having regard to his specific reference to section 141H(4)(b) of the Ordinance Mr. Wright can only have used the expression comment as a synonym for determination and so have been understood by the Chairman. Thus, by the very end of the investigation into the relevant dealings each of the applicant directors, by his counsel, was aware that he might be found to have been involved in culpable insider dealing, on the basis of undisputed evidence, as an individual who exercised control in the management of CKH and Starpeace. No application was made for an adjournment or to call further evidence. Had a reasonable application been made, and it is difficult to think of any further evidence that could have been relevant, I am quite satisfied that it would have been granted. In the premises these applicants cannot validly complain of procedural unfairness or irregularity or contend that any reasonable expectation was not met. The Tribunal had not only apprised them of the risk of adverse determinations but gone so far as to put its tentative conclusions to them, by their counsel, for comment or to allow further evidence to be adduced.

28. Once a Tribunal has determined that culpable insider dealing has taken place, pursuant to the provisions of sections 141B, 141C(6) and 141H(3)(a), it is required, within its terms of reference, also to determine the identity of the persons involved therein and the extent of their culpability. Section 141H(3)(b). And in making any such further determinations the Tribunal need not confine its attention to an immediate party to the insider dealing found culpable. It may determine that any other person, which includes a corporation, connected with such dealing was involved and, when that person is a corporation, that the individuals, which term excludes corporations, who exercised control in its management were also involved. Put another way they may cast their net more widely than is provided by section 141B. In any event the Tribunal has to undertake the further task of assessing the extent of the blameworthiness of any individual or corporation so identified. Section 14lH(4)(a) and (b).

29. In my view these provisions convey the salutary warning that individuals who at material times have exercised control in the management of a corporation found party to culpable insider dealings, as had these directors, may, in the exercise of the Tribunal’s judgment, themselves be found involved and culpable. The words in relation to the dealing are conspicuously absent from subsection (b) of section 141H(4). Directors, for example, cannot expect to escape adverse determinations under these provisions by delegating their powers of management to one of their number or to an employee as by the normal application of law and equity they might expect. In Re City Equitable Fire Insurance Co.⁽⁶⁾; Huckerby v Elliott⁽⁷⁾. A director may be found culpable if he neglects to take reasonable steps to ensure that the law in relation to insider dealing is observed by his company. A general direction to subordinates to comply with the law may not be sufficient. However, in the instant inquiry the Tribunal again adopted a higher standard; setting for itself the further test of personal involvement in the relevant culpable dealing (2.24 and 2.25). As in relation to the standard of proof this can only have redounded to the applicants' advantage and discloses neither that the Tribunal asked itself the wrong question nor that it was guilty of any error of law of which the applicants can complain. Subject to the element of discretion this is a very similar test to that applicable to directors and other officers in relation to offences under the Ordinance. Section 147(1).

30. Involvement, the Tribunal found, could arise when directors “were implicated or concerned in events which led up to or induced the relevant dealing particularly where a situation had arisen where they were aware or ought to have been aware of a real risk that their company might embark on culpable insider dealing but they took no action to prevent such dealing.” (2.26). The action or rather inaction of the applicant directors at the material times was found, expressly or by inference, to render them involved and culpable (10.110).

31. In giving C.W. Chow his sole authority to deal in ICH shares on behalf of CKH, Starpeace and another subsidiary company, Wyncor Ltd., K. S. Li had stipulated that no transaction was to contravene any ordinance or regulation. The culpable insider dealings were modest in relation to the size of the companies concerned and no motive of personal gain is ascribed to K. S. Li. Being possessed of “relevant information” at all material times he had also authorised the issue of Board Circular No. 3/84 which, in relation to the “break clauses”, required secrecy rather than public disclosure. In that situation, the Tribunal declared, he should have given C.W. Chow definite instructions not to procure dealings in ICH shares (10.114) and have ensured that he understood the Ordinance (10.117). Li was to be regarded as culpable in the relevant dealings and culpable to a high degree accordingly (10.117). This determination, like those made in relation to the other directors, was essentially based on omissions.

32. George Zang and Albert Chow were found involved and appreciably culpable by reason of their “relevant information” throughout and of their knowledge both of the reactions of the market to the City Garden transaction and of C.W. Chow's authority and, being so aware, of their failure to take steps to safeguard CKH and Starpeace from potential determinations of culpable insider dealing (10.120, 10.122 and 10.123).

33. George Magnus was found involved and culpable to a modest but more than minimal degree in relation to the culpable insider dealings which took place between 20th February when, reading the Board Circular, he first became possessed of “relevant information” and 1st March 1984. This was on the basis that, being already aware that C.W. Chow was procuring Starpeace to deal in ICH shares he, as from 20th February, failed to take steps to safeguard CKH and Starpeace from potential determinations of culpable insider dealing (10.132 and 10.133).

34. Available to support the Tribunal’s findings of involvement, culpability and the extent of culpability, none of which were susceptible to challenge on grounds of irrationality, was cogent evidence apt to satisfy its own stringent tests applicable to the directors and, a fortiori, those required by the terms of the Ordinance.

35. Each of the applications before the Court fails and must be dismissed.

(1) [1603] 10 Co. Rep. 32b

(2) 1973 AC 854 at p.861

(3) 1984 AC 808 at pp.820 and 821

(4) 1974 QB 523

(5) 1942 AC 591 at p.599

(6) 1925 Ch 407 at p.429

(7) 1970 1 ALL ER 189