FORMER DEALING DIRECTOR OF FOREGROUND SECURITIES CO LTD v. SECURITIES AND FUTURES COMMISSION

CACV 252/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 252 OF 2005

(ON APPEAL FROM HCA NO. 2966 OF 2004)

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REASONS  FOR  JUDGMENT

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Hon Tang JA (giving the reasons for judgment of the Court):

Introduction

1.  The plaintiff’s claim against the Securities and Futures Commission (“SFC”), was struck out by Deputy Judge To on the ground that it disclosed no reasonable cause of action.

2.  The plaintiff appealed to us.  At the conclusion of the hearing of the appeal, we dismissed the appeal with costs to be taxed if not agreed, but reserving our reasons, which we now provide.

Background

3.  The plaintiff owned and controlled Foreground Securities Company Limited (“Foreground”), which was incorporated in July 1993.  Foreground was a member of the Stock Exchange of Hong Kong Limited (“Stock Exchange”).  It carried on business as stock brokers.  Foreground was ordered to be wound up on 17 May 1999 for its inability to pay its debt.

4.  Foreground was a registered dealer under the Securities Ordinance, Cap. 333 (“Securities Ordinance”).  The plaintiff was registered as Foreground’s sole accredited dealer.

5.  The origin of the plaintiff’s claim can be traced to the end of October 1997 when trading of Foreground was suspended.

6.  The plaintiff’s case is that the Stock Exchange wrongly presented Foreground with the stark choice of either having its trading suspended by the Stock Exchange, or a voluntary suspension.  Foreground chose a voluntary suspension.  It is the plaintiff’s case that all the events which he complained of resulted from this wrongful act.  It seems that the following is a correct summary of the plaintiff’s complaint:

“14.   … at 9am on 31 October 1997, Ms Mandy Lam of the SEHK informed Foreground by telephone that according to SEHK’s computation, Foreground did not meet the liquid capital requirement.  Foreground insisted that it met the requirement and asked for an opportunity to verify and identify the discrepancy.  The SEHK refused and required Foreground to decide in 15 minutes whether voluntarily to suspend trading or be ordered to suspend.  Foreground voluntarily suspended trading.”  See Decision of the Securities and Futures Appeals Panel dated 17 May 2001.

It is unnecessary for the purpose of this appeal for the court to determine whether there was any basis for the Stock Exchange’s view that Foreground had inadequate liquid capital as at 29 October 1997. 

7.  The events which followed included the winding up of Foreground as well as the revocation of the registration of Foreground and the plaintiff as registered dealers by the SFC.

8.  We deal with their revocation as dealers first.

9.  On 1 September 1998, two letters of Mindedness were sent to Foreground and the plaintiff respectively informing them of the tentative conclusion that their dealers’ registration would be revoked on the ground of misconduct.  It is unnecessary to go into the grounds alleged in the letters.

10.  Following representations by Foreground and the plaintiff on 25 January 1999, by two letters of the same date together with a statement of reasons under Section 56(4) of the Securities Ordinance, Foreground and the plaintiff were informed of the SFC’s decision to revoke their registration as dealers under the Securities Ordinance.  Each of these letters concluded by informing Foreground and the plaintiff respectively, that the decision would not come into effect until the time for the making of an appeal against the decision had expired or, when an appeal was made, the appeal was determined or withdrawn.  Foreground and the plaintiff were entitled to appeal to the Securities and Futures Appeals Panel (“the Panel”) under Section 19(1) and 21(3)(a) of the Securities and Futures Commission Ordinance, Cap. 24 (“SFC Ordinance”).  If an appeal is lodged, the SFC’s decision would not come into operation until the appeal is determined or withdrawn in Section 21(4) of the SFC Ordinance.

11.  On 22 February 1999, both the plaintiff and Foreground duly appealed to the Panel.

12.  On 14 April 1998, the SFC issued a notice under Section 40 of the SFC Ordinance restricting dealings of assets by Foreground.  The notice is in the following terms:

“THE COMMISSION HEREBY GIVES NOTICE THAT

Foreground Securities Company Limited, a registered securities dealer and member of the Stock Exchange of Hong Kong Limited is, pursuant to section 40 of the SFC Ordinance, required until further notice, -

(a)     to obtain the prior written consent of the Commission before dealing, in any manner, with any asset held by it, whether as principal or agent.  Such consent to be granted by the Executive Director of Intermediaries Division or Director of the Intermediaries Supervision Department.

THE COMMISSION HEREBY CONSENTS AS FOLLOWS:

(b)     Foreground Securities Company Ltd may, until further notice, take all actions necessary to settle securities transactions in the Central Clearing and Settlement System in Hong Kong, including, but not limited to, the related delivery or receipt of securities and funds and matters incidental thereto.

This Notice comes into effect on 14 April 1998.

Under sections 19, 21(3) and 44 of the SFC Ordinance, an appeal may be made to the Securities and Futures Appeals Panel against this Notice by any person on whom it is served, within thirty days commencing on the day on which this Notice is served on that person.  An appeal will not affect the coming into force of this Notice.

By virtue of section 43 of the SFC Ordinance, a person on whom the Notice is served or who is affected by it may apply to the Commission for the Notice to be withdrawn, substituted or varied.”

13.  The Statement of Reasons required under Section 42(3)(a) of the SFC Ordinance are (where relevant) in the following terms:

“2. In the course of an inspection of Foreground Securities Company Limited by Commission staff, it was found that:

a) Foreground Securities Company Limited had pledged cash clients’ securities to obtain banking facilities without obtaining proper authorization; and

b) Foreground Securities Company Limited and its related company, Foreground Finance Company Limited had liquidity and solvency problem.

3. Foreground Securities Company Limited voluntarily suspended its business on 31 October 1997 and had since been looking for a new buyer to purchase a majority stake in the company and to inject additional funding.  On 24 March 1998, Foreground Securities Company Limited admitted there appeared to be no serious interested buyer.

4. On 25 March 1998, the Stock Exchange of Hong Kong Limited suspended the membership of Foreground Securities Company Limited.  The Commission also suspended the registration of Foreground Securities Company Limited for breaches of the requirements of Financial Resources Rules under section 65c(2)(a) of the Securities Ordinance on the same day.

5. The Commission has therefore decided to exercise its powers under section 40 of the SFC Ordinance to restrict Foreground Securities Company Limited on its dealing with assets in the manner specified in the restriction notice issued on 14 April 1998, on the ground that the exercise of the powers is desirable in the interest of the investing public.”

14.  One of the plaintiff’s complaints in relation to the winding up proceedings is that Foreground was unable to pay its employees’ wages as a result of the Section 40 notice.  In the reasons handed down by Le Pichon J (as she then was) on 31 May 1999, it was recorded that Foreground was indebted to the petitioner as well as to seven other employees for about $830,000.  In relation to the plaintiff’s complaint that Foreground was unable to pay because of the Section 40 notice, Le Pichon J said in para. 5 of her reasons:

“It is immediately obvious that there was nothing to prevent the Company from applying to the SFC for payment of an award made by the Labour Tribunal.  Under the terms of the restriction notice, all that was required was prior consent from the SFC.  Clearly, an application could and should have been made by the Company to the SFC to meet the award.  It was not.  In fact, nothing has been done by the Company to have the restriction notice (which has been in place for over a year) removed.  Effectively, the Company has not been doing any business since its imposition.”

15.  Foreground had not appealed or applied to vary the Section 40 notice.

16.  Following the appointment of the Official Receiver as the provisional liquidator of Foreground, the Section 40 notice was withdrawn on 21 June 1999.

17.  On 3 April 2000, Messrs Joseph Lo kin-ching and Dermot Agnew, both of Deloitte Touche Tohmatsu, were appointed joint and several liquidators of Foreground on 3 April 2000.

18.  By letter dated 10 May 2000, the liquidators informed the Panel that the liquidators did not consider that continuing the Foreground’s appeal against its registration as a dealer would be beneficial to the winding up or the creditors, and that the plaintiff had no authority to represent Foreground in the appeal.

19.  As a result, on 19 December 2000, the appeal by Foreground was dismissed on the ground that it had been abandoned by the liquidators of Foreground and that the plaintiff had no right to pursue the appeal on behalf of Foreground.

20.  However, the plaintiff’s own appeal proceeded and on 29 December 2000, after hearings on 19 and 21 December 2000, the Panel confirmed the decision of SFC to revoke the registration of the plaintiff as a dealing director of Foreground.  In its reasons, the Panel said:

“43.   The Tribunal is unanimously of the view that, in view of

(a) the Appellant’s own admission before this Tribunal that he had been over aggressive in margin lending;

(b) Foreground’s continuing breach of the Financial Resources Rules since 30 November 1997;

(c) the opinion of Foreground’s liquidators that there was no prospect for Foreground to resume its business in the future;

(d) the Appellant as the sole dealing director of Foreground is responsible for Foreground’s state of affairs, and

(e) a dealing director may carry on business only in relation to his corporation,

the Appellant is not a fit and proper person to be registered as a dealer.  The decision of the Respondent is thus confirmed.”

21.  Subsequently, the plaintiff applied under Section 22 of the SFC Ordinance to the Panel to state a case for the consideration of the Court of Appeal.  The application was made late and in any event, on 27 July 2001, the Panel refused to state the case because:

“We do not find that the applicant has raised or established any question of law which is fit for reference to the Court of Appeal relating to his appeal.  Therefore, his application is refused.”

Plaintiff’s claim

22.  We now turn to the statement of claim.  The substance of the plaintiff’s claim is that everything could be traced to the suspension of trading, thus he said:

“萬佛歸宗都是由於被暫停証券交易開始所致，上訴人的生計斷絕，精神受困擾，名譽財產遭受重大損害。這是在不公平、不公正原則下進行的上訴聆訊！因此，要求平反恢復上訴人交易商的註冊。並且要求名譽及財產重大損失的賠償。”

23.  The learnt Deputy Judge in a carefully prepared and detailed judgment analyzed and dealt with each of the complaints which could be discerned from the plaintiff’s statement of claim.  We are in complete agreement with the learned Deputy Judge.  That being the case, it is only necessary for us to state our reasons briefly.

Claim against SFC

24.  Insofar as the plaintiff’s claim against the SFC is based on the SFC’s breaches of statutory duties under the SFC Ordinance, we agree with the judge that on the proper construction of the SFC Ordinance, no private law cause of action was created in favour of registered dealers such as the plaintiff.  As Lord Browne-Wilkinson in X (Minors) v Bedfordshire County Council [1995] 2 AC 633 at 730:

“… The breach of a public law right by itself gives rise to no claim for damages.  A claim for damages must be based on a private law cause of action.”

25.  And at 731:

“The principles applicable in determining whether such statutory cause of action exists are now well established, although the application of those principles in any particular case remains difficult.  The basic proposition is that in the ordinary case a breach of statutory duty does not, by itself, give rise to any private law cause of action.  However, a private law cause of action will arise if it can be shown, as a matter of construction of the statute, that the statutory duty was imposed for the protection of a limited class of the public and that parliament intended to confer on members of that class a private right of action for breach of the duty.”

26.  In Kaisilk Development Limited v Urban Renewal Authority [2004] 1 HKLRD 907, a decision of this court, the same approach was adopted by this court in relation to an attempt to bring a private law action against the Land Development Corporation under the Land Development Corporation Ordinance, Cap. 15, on the basis that the Land Development Corporation had failed to take reasonable steps to acquire property, prior to seeking resumption.

27.  We believe it is clear that no private cause of action was created by the SFC Ordinance in favour of registered dealers such as Foreground or the plaintiff.  If a registered dealer is aggrieved by the SFC’s decision to revoke its registration, the redress provided by the SFC Ordinance is one of appeal to the Panel, followed possibly by a case stated on a point of law to the Court of Appeal.

28.  It is not clear whether the plaintiff also complained of breaches of duties under the Securities Ordinance since the revocation of Foreground and his registration as dealers were made under the Securities Ordinance.  For the sake of completion, we would state that no private cause of action was created under the Securities Ordinance.

29.  As for the plaintiff’s claim for damages.  Insofar as the claim for damages is based on the suspension of trading of Foreground in October 1997, we agree with the judge that the proper claimant for such damages is Foreground and not the plaintiff.  It would also seem that the proper defendant would be the Stock Exchange and not the SFC.  Moreover, we also agree with the judge that in any event, any such claim has become statue barred prior to the commencement of the present action.

30.  The plaintiff also relied on Articles 35, 38 and 105 of the Basic Law, and claimed that he has been denied access to the court.  The plaintiff has not been denied access to the court.  The plaintiff’s claim has been struck out on the basis that it did not disclose a reasonable cause of action.  It would have been an abuse of process to permit the claim to continue.  As the Chief Justice has said in Ng Yat Chi v Max Share Limited and Another [2005] 8 HKCFAR 1, at para. 5 in page 14:

“The right of access

5. The constitutional right of access to the courts is well established under the common law and is guaranteed by the Basic Law (art.35).  But it would be absurd to suggest that the right of access involves a right to abuse the court’s process.  The pursuit of abusive proceedings would be an improper exercise of the right of access and may be regarded as adversely affecting the right of access of others with meritorious cases.”

31.  Lastly, the plaintiff submitted that the SFC Ordinance had been repealed by Securities and Futures Ordinance, Cap. 571 (“SFO”).  The SFO came into effect on 1 April 2003 and that the SFC Ordinance has been repealed by it as from 1 April 2003.  Since the events complained of by the plaintiff took place well before 1 April 2003.  The repeal of the SFC Ordinance is irrelevant.  Again, for the sake of completeness, we add that the repeal of the Securities Ordinance is also irrelevant.

32.  The plaintiff also complained of alleged delay by the SFC regarding the hearing of his appeal to the Panel.  We have seen no evidence of that.  The three letters dated 26 March, 9 April and 11 May 1999 from SFC’s counsel to the Panel referred to by the plaintiff, do not show the SFC to have delayed the hearing of the appeal.  On the contrary, the third letter revealed that the plaintiff’s own counsel had until then not responded to the Panel’s request in March 1999 for an estimate of the length of the appeal hearing and indication of the available dates of counsel.  But in any event, it cannot give rise to a private law cause of action and is therefore irrelevant.