SECURITIES AND FUTURES COMMISSION v. SUN MIN

HCMP 2236/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 2236 OF 2015

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REASONS FOR DECISION

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1.  On 22 November 2016 the parties submitted to the Court a consent summons for declarations that the Defendant had contravened section 270(1)(e) and (f) of the Securities and Futures Ordinance (Cap 571) (“SFO”) in her trading in shares in China Huiyuan Juice Group Limited and was a person within sections 213(1)(a)(i)(A) and 213(2)(b) of the SFO and various ancillary orders including orders for payments by the Defendant to counter parties to the trades.

2.  My Clerk wrote to the Parties informing them that the Court does not make declarations by consent and drawing to their attention Hong Kong Civil Procedure 2017, vol 1 para 19/7/20.

3.  A revised consent summons was submitted under cover of a letter dated 13 December 2016 from the SFC.  The summons removed the paragraph seeking declarations.  Instead the principal paragraph of the new consent summons commenced: “Pursuant to section 213(2)(b) of the SFO the Defendant shall restore and/or compensate all counterparties…”.

4.  The relevant parts of the covering letter read:

“1. On 1 March 2013, the Market Misconduct Tribunal (the ‘MMT’) found that the Defendant was culpable of insider dealing contrary to section 270(1)(e) of the SFO and the culpability relates to her Relevant Trading. For ease of reference, the MMT findings are set out in paragraph 25 of the affirmation of Chan Tak Ching filed by the Commission on 26 November 2015. Part I of the MMT report was exhibited at ‘CTC-8’ to that affirmation.

2. Under section 284 of the SFO, where a person is identified by the MMT as having engaged in market misconduct, that person shall be regarded as having contravened the provisions of Part XIII of the SFO, and any reference in the SFO to contravention of a provision of the SFO shall have application accordingly.

3. Under section 213(1)(a)(i)(A) of the SFO where a person has contravened any of the relevant provisions (defined in Schedule 1 of the SFO as meaning the provisions of the SFO (and provisions of a number of other Ordinances)), 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).

4. By virtue of the MMT finding that the Defendant has engaged in insider dealing contrary to section 270(1)(e) of the SFO, the Defendant is a person within sections 213(1)(a)(i)(A) and 213(2)(b) of the SFO.”

5.  The MMT Report runs to some 136 pages. 

6.  My Clerk wrote to the Parties informing that I did not consider that the application as it had been submitted to me could be dealt with on the papers and directed that the matter be listed.

7.  I have received comprehensive written submissions from Mr Benjamin Yu SC and Mr Norman Nip on behalf of the SFC and short written submissions from Mr James Man on behalf of the Defendant confirming the Defendant’s agreement to the SFC’s submissions. 

8.  Mr Yu’s written submissions suggest that the Parties may have misunderstood the reasons why I declined to make an order on the papers.  A significant proportion of Mr Yu’s submissions and authorities focused on the issue of whether or not the court needs to exercise any independent judgment in approving consent orders, final or otherwise, and demonstrating an overarching principle that the court should approve consent orders even if it is suspicious of the terms or disapproves of them.  As general proposition I do not consider it to be contentious.  This is subject to the qualification, which I understood Mr Yu to accept, that the court must have the power to make the order, which the parties have agreed.  The parties cannot by agreement confer on the court a power that the court would not otherwise have and, similarly, if a power can only be exercised if the court is satisfied that certain matters have been established the parties must do so.

9.  My concerns were twofold.  First, that the application had not been presented in a way that was adequate if what was sought was an order on the papers.  Secondly, I had concerns about ordering the proposed payments to counter parties and wanted the opportunity to consider this with counsel.

10.  Section 213(2)(b) provides that the court is empowered by the section to make an order:

“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”.

11.  The court, therefore, has to be satisfied that a person has contravened one of the relevant sub-sections of section 213(1)(a)(i) to (v).  Where there is no dispute that there has been a contravention satisfying the court that section 213(2)(b) is engaged should present no difficulty, but it is necessary for the Parties to put before the court evidence that does this and that evidence should be in the most easily and efficiently assessed form possible.  It is not satisfactory simply to send to the court a copy of the MMT report and make reference to an affirmation on the court file which contains a paragraph summarising the report’s principal findings and invite the court to make an agreed order and even less so to send no more than a consent summons.  The application should comply with PD 3.5 “Applications in writing in the Companies Court” dated 27 April 2010, which would include written submissions guiding the Court through the evidence, address relevant legal principles and explain how the requirements of the section are satisfied.

12.  In practice I would expect the most efficient way for an application of this sort to be dealt with would be by a set of agreed facts (which was the procedure adopted in SFC v Tsoi Bun[1]), to which is appended the report and for the agreed facts to identify those parts of the report in which the agreed facts have been found by the MMT to be proved.  The Defendant would file a short affidavit confirming that he or she agreed the agreed facts.  The SFC’s submissions would address relevant legal principles, highlight the most critical parts of the evidence and invite the court to make an order in the terms to which the Defendant had confirmed he or she has no objection.

13.  Having read the relevant parts of the Report I am satisfied that a contravention of the relevant provisions of the SFO has been established and that section 213(1)(a) is engaged.  The next issue for consideration is whether an order should be made restoring the counter parties to the position in which they were in before the relevant shares trades as permitted by section 213(2)(b).

14.  In SFC v Tsoi Bun[2] Godfrey Lam J explained section 213(2)(b) in the following way after a brief consideration of the English Court of Appeal’s decision in Securities and Investments Board v Pantell SA (No 2)[3] and section 6(2) of the Financial Services Act 1986:

“11. It seems to me that the position regarding s.213(2)(b) of the Ordinance is distinguishable from the statutory context of s.6(2) of the Financial Services Act 1986. The language of s.213(2)(b) is wider than s.6(2). Whereas s.6(2) empowers the court to direct that steps be taken:

… for restoring the parties to the position in which they were before the transaction was entered into,

section 213(2)(b) simply enables the court to make an order requiring the relevant person or persons:

… 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.

12. The breadth of this language is striking and while the nature of the steps that may be required may be limited by the spirit and intendment of the statute and the content and purpose of the application under s.213, I see no reason why they are confined to making full restitution in specie. There appears to me to be no basis for reading such restriction into the provision. As Mrs Justice Le Pichon said in Securities and Futures Commission v C [2009] 4 HKLRD 315, [36], this point not being affected by the decision of the Court of Final Appeal in that case:

Section 213(2)(b) enables an order to be made that would restore all the parties to the transaction to their respective former positions. In other words, it is restitutionary in nature and, in conjunction with an order under 213(2)(c) would provide compensation to those who have sustained losses through the wrongdoing in question, in the present case, insider-dealing.

13.  In my view, the section permits an order to be made requiring restoration of the parties to their relevant financial position prior to the transaction impugned. In the circumstances of this case, in terms of s.213(4), I am satisfied that it is desirable that the order sought be made and that the order will not unfairly prejudice any person.”

15.  Mr Yu relied on this analysis with which I agree.  I also agree with Mr Yu that the decision is consistent with the remedial and investor protection objectives of section 213(2)(b) as explained by the Tang VP as he then was in paras 34-35 of his judgment in Securities and Futures Commission v Tiger Asia Management LLC [4] and Lord Hoffmann in the same case in the Court of Final Appeal at para 16 [5] of his  judgment.

16.  Section 213 gives the court a discretion to make an order pursuant to section 213(2)(b) where a contravention has taken place. In my view that means that I must be satisfied that the order sought is one which the section empowers the court to make.  Mr Yu submitted that as long as the order comes within the section whether or not it is appropriate or otherwise is not a matter with which the court need be concerned for the reasons referred to in para 8 above.

17.  I had some concerns about whether or not an order that the Defendant pay to a counter party to a transaction who sold her shares an amount assessed on the basis of the difference between the sale price and a valuation of the shares based on the price in the market once the inside information became known to the market, was a windfall for the seller rather than restitutionary in nature as section 213(2)(b) envisages.

18.  Mr Yu’s argument is that it is apparent from the inclusion of section 213(8), which allows damages to be claimed by the SFC on behalf of a counter party to a transaction, that section 213(2)(b) is not concerned with compensating a counter party for any loss caused to him or her.  Section 213(2)(b) requires the court to make the assumption that the counter party retained the shares and ignore the sale.  On this assumption it is legitimate to calculate the amount to be paid by way of restitution by looking at what the position of the counter party would have been if he or she had retained the shares and been in a position to sell them when the share price rose.

19.  Whilst I understand the argument and accept that given the agreement of the parties the order sought in the present case is one that can be made, and will accordingly make an order in the terms of the originating summons subject to certain minor changes in the periods for payment, I must say that I harbour reservations about how section 213(2)(b) operates.  It does seem to me that section 213(2)(b) applied as explained by Mr Yu results in a defendant having to pay a sum that neither represents (a) disgorgement of profit improperly made by the insider nor (b) restoration of loss suffered by another person trading in the shares as a consequence of the insider’s conduct.  It seems to fall into a separate category, which I have difficulty in characterising.  As, however, the order is agreed and I have not had the benefit of full argument before me I think it is best that I go no further.  It may be that this is an issue, which will come back before the court at some time in the future in circumstances in which it can be more fully considered.