SECURITIES AND FUTURES COMMISSION v. WONG WAI KWONG DAVID AND OTHERS

CACV 150/2020

[2021] HKCA 897

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 150 OF 2020

(ON APPEAL FROM HCMP NO 1227 OF 2011)

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J U D G M E N T

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Hon Kwan VP (giving the Judgment of the Court):

1.  This is an appeal brought by the Securities and Futures Commission (“SFC”) against the judgment of Coleman J on 7 May 2020 ([2020] 3 HKLRD 606; “the Judgment”), in which he made disqualification orders against three former directors (the 1^st to 3^rd respondents or “the Former Directors”) of EganaGoldpfeil (Holdings) Ltd (the 4^th respondent or “the Company”) but refused to exercise his power under section 214(2)(e) of the Securities and Futures Ordinance, Cap 571 (“SFO”) to make a compensation order against each of the Former Directors.

2.  On appeal, there is no challenge by any party of the findings in the Judgment made after a six-day trial.  Nor is the power to make a compensation order challenged by any party on appeal.  This appeal is concerned solely with the judge’s exercise of his discretion in refusing to make a compensation order.

3.  The 1^st respondent, Wong Wai Kwong David, who acted in person throughout, was absent at the hearing of the appeal and has not lodged any written submission.  The Company, which has been in liquidation for more than ten years, has been excused by court order to take part in these proceedings.  But that is not to say the liquidators had no involvement.  Ms Tiffany Wong and Mr Fergal Power (one of the liquidators), both of KPMG, gave evidence at the trial in support of the case of the SFC. On 3 June 2021, Mr Power (by then the sole liquidator) instructed the Company’s solicitors to write to this court to provide information pertaining to the conduct of these proceedings and the position of the Company with respect to the relief sought by the SFC.  The information provided is relevant to the exercise of discretion and will be mentioned later.

Background

4.  The relevant background matters may be stated as follows.

5.  These proceedings were brought by the SFC on 30 June 2011 under section 214(1)^[1] of the SFO against inter alia the Former Directors for their roles in a large-scale misapplication of funds belong to the Company and its subsidiaries (“the Group”).  The Company was formerly listed on the Hong Kong Stock Exchange and was ordered to be wound up by the court on 29 July 2009.  The liquidators were appointed on 9 September 2011.

6.  Of the findings made by the judge on various misapplication of funds, the following facts are relevant for present purpose.

7.  On 15 June 2007, the Company entered into a three-year loan agreement with a syndicate of banks for a HK$1 billion term loan facility (“the Syndicated Loan”).  HK$622 million of the Syndicated Loan (together with a further HK$137.8 million from the Group, making a total of HK$759.8 million) was subsequently transferred from the Company’s account through various subsidiaries in the Group (“Group Companies”), which the judge found to be mere conduits and the funds transferred through them were without genuine commercial reason, and paid to three “debtors”, namely, Uni-Star Corporation, Goloda Enterprises Ltd and Elite Choice Group Ltd, pursuant to three purported “deeds of debt” and a purported “memorandum of agreement”.

8.  These transactions (“the Transactions”) took place within a short span of time in June and July 2007.  They were viewed by the judge as a composite scheme or a “big picture” involving the Group Companies as conduits of the funds.  The three “debtors” were found to be not truly independent parties and were not genuine trading entities, but were directly or indirectly acting under the instructions of the 1^st respondent.

9.  The HK$759.8 million received by the three “debtors” was transferred to Peninsula International Ltd (“Peninsula”), which then used the money to effect a buy-back of a controlling stake in the Company from another company called Compagnie Financiere Richemont SA (“Richemont”).

10.  The Transactions were found not to be proper commercial transactions and to have lacked commercial rationale.  The “deeds of debt” were highly questionable; they were produced in a standardised format on a single piece of paper and only imposed an obligation on the debtors to make “best endeavours” to repay.  In respect of the “memorandum of agreement”, no legal advisor was engaged for the Group throughout the negotiation and documentation of the proposed investment of HK$170 million to be made by the Group.  And the use of the proceeds from the Syndicated Loan for financing Peninsula’s buy-back of the shares in the Company held by Richemont is inconsistent with the purpose for the Syndicated Loan stated in the Company’s announcement dated 15 June 2007.

11.  Each of the Former Directors has been found to have acted in breach of duties for their involvement in the Transactions.

12.  The 1^st respondent admitted to (1) a breach of the duty of care and skill; (2) a breach of the duty to act in the best interests of the Company; (3) putting himself in a position of conflict of interest when acting as a director of the Company in relation to the transfer of funds to Peninsula to finance the latter’s buy-back of the shares in the Company, when he was also a director of Peninsula.

13.  The 2^nd respondent, Lee Ka Yue Peter, failed to perform his duty to exercise reasonable care, skill and diligence to protect the Group Companies’ best interest by pre-signing blank cheques or other documents used for the Transactions without taking any steps subsequently to find out what happened to them, and in signing non-blank documents without checking their contents.  He was also in breach of the duty to act in the Company’s best interests by failing to apply his mind to whether the Transactions were in the Company’s best interests.  He admitted that the business affairs of the Company had been conducted in a manner involving misfeasance or other misconduct towards the Company and its members and/or unfairly prejudicial to its members.

14.  The 3^rd respondent, Chik Ho Yin Tony, admitted to a failure to exercise reasonable care, skill and diligence (1) to protect the Group Companies’ best interests, before approving the Transactions and/or causing, procuring or permitting the Group Companies to enter into substantial transactions and make substantial payments to third parties which gave rise to the “Doubtful Receivables” analysed in the report of KPMG; (2) in relation to the payment of the HK$622 million; (3) before approving the Transactions and/or permitting the Group Companies to enter into the Transactions and make payments to the three “debtors”.  He also admitted to (4) a failure to ensure that proper procedures, due inquiries and due diligence were carried out to protect the interests of the Group Companies; and (5) the fact that the business or affairs of the Company had been conducted in a manner involving misfeasance or other misconduct towards the Company and its members and/or unfairly prejudicial to its members.

15.  To recap, each of the Former Directors was found to be in breach of duty to the Company in relation to the Transactions in these respects:

(1)  Each of them had breached his duty of care and skill^[2].

(2)  In respect of the 1^st respondent, he also breached his duty to act in the best interest of the Company, and his duty not to put himself in a position of conflict^[3].

(3)  For the 2^nd and 3^rd respondents, they also breached their duty to act in the best interest of the Company^[4].

16.  Each of the Former Directors was found to have acted in defalcation, misfeasance or other misconduct (under section 214(1)(b)), in failing to make relevant disclosures to members of the Company (under section 214(1)(c)), and in a manner unfairly prejudicial to the members of the Company (under section 214(1)(d))^[5].

17.  Section 214(2) provides for the orders and remedies that may be granted if the court is satisfied that one or more of the matters complained of in section 214(1) are established.  The re-amended petition of the SFC sought disqualification orders against the Former Directors (under section 214(2)(d)); a compensation order in the sum of HK$622 million (being part of the Syndicated Loan paid to the three “debtors” under the Transactions) and other sums in respect of other matters complained of, or damages or compensation for the Company’s losses caused by the Former Directors’ breach of fiduciary duty and/or duty of care at common law and/or the Listing Rules (under section 214(2)(e)); in the alternative to a compensation order, an order that the Company shall bring in its name such proceedings as the court considers appropriate against the Former Directors to recover the sums sought under the compensation order (under section 214(2)(b)), and consequential orders including an order directing the Company to take necessary steps to enable relevant Group Companies to bring proceedings to recover the sums sought under the compensation order.

18.  At the outset of the trial, the SFC informed the judge that it would not pursue the relief sought pursuant to section 214(2)(b) and any consequential orders to an order made under that provision.  In respect of the compensation order sought under section 214(2)(e), the SFC indicated that it would only seek payment of HK$622 million (being part of the Syndicated Loan paid to the three “debtors” under the Transactions) and abandon the claim of any other amounts, damages or compensation^[6].

The judge’s reasoning

19.  As mentioned, there is no dispute on the jurisdiction of the court to make a compensation order as being “any other order [the court] considers appropriate” under the “or otherwise” limb of section 214(2)(e)^[7].

20.  The judge made the observation that section 214(2)(e) is “widely drawn with the intention of providing wide powers to the Court to achieve the requirements of justice on the facts of any individual case”^[8]. He considered Re Styland Holdings Ltd (No 2) [2012] 2 HKLRD 325 and Securities and Futures Commission v Yeung Chung Lung & Ors, HCMP 205/2013, 17 February 2017, in which compensation orders were made.

21.  In Re Styland Holdings Ltd, the order for compensation was in respect of amounts which were readily ascertainable in relation to sums which had been misappropriated by the directors for themselves. (at §139) Barma J (as he then was) declined to make a compensation order in respect of the investment losses suffered by the company since the amount was not readily ascertainable.  As for the suggestion that an order for inquiry as to the loss and damage of the company should be ordered, he took the view it was preferable for this to be done, if at all, under the power to order the company to bring proceedings under section 214(2)(b). (at §§141 to 142) However, in the circumstances of that case, he did not think it appropriate to direct the company to bring proceedings.  He decided to leave it to the company to consider whether it would be in its interests to do so having taken legal advice on the issues identified in his judgment, being the likelihood of a limitation defence succeeding, the ascertainment and proof of investment losses and the extent they were attributable to breaches of duty of the directors, the likelihood of success of enforcement of any judgment obtained and costs implications. (at §§143 to 147)

22.  In Yeung Chung Lung, the petition of the SFC originally sought an order that the company should issue proceedings to recover HK$85 million odd embezzled by the 1^st respondent and proceedings had been issued by a company (in which the claims of the company were vested as a result of the restructuring) to recover this sum, but owing to a number of reasons including difficulties over service, the proceedings had not been pursued.  DHCJ Hunsworth noted that any fresh action for recovery would by then be statute barred so the SFC no longer sought an order under section 214(2)(b). (at §108) He made a compensation order of the HK$85 million odd against the 1^st respondent to pay the money to the legitimate assignee of the company’s claim, so that any sum which might be recovered would be available for distribution to the company’s creditors. He noted that the scheme administrators had indicated their consent to the proposed order. (at §109)

23.  In the present case, the judge accepted that a compensation order can, in an appropriate case, be made irrespective of whether a respondent has received any financial benefits, and that a compensation order under section 214(2)(e) is not necessarily the same thing as a “restitution order” or a “repayment order”, where compensation is the usual basis of awarding a monetary sum to a claimant for a loss he has suffered^[9].

24.  The judge pointed out that the SFC does not act merely as a cipher for the company or the liquidators and it brings the proceedings under section 214 primarily for public benefit.  So where the person or persons actually suffering the loss could have brought, or could still bring, an action of the more typical sort in which compensation or damages are claimed and the entitlement proved, a compensation order under section 214(2)(e) “may not be a necessary exercise of the power to do justice”^[10].

25.  The judge’s reasons for refusing to exercise his power to make a compensation order are encapsulated in the following paragraphs of the Judgment:

“215.  I accept that the power to make a compensation order arises to enable the Court to do the widest possible things to achieve justice on the facts of any particular case.  I also accept that there may be certain breaches where principles of foreseeability and remoteness do not come into play.  I do not instinctively warm to the submission made for Peter Lee and Tony Chik that the “but for” test might not be satisfied because David Wong would have ensured that the Company’s money reached Peninsula, irrespective of their own actions or inaction. Nevertheless, I do not think that issues relating to time bar, remoteness, causation and mitigation are necessarily entirely straightforward, and I do not think that they have been sufficiently addressed in these proceedings for me to resolve them.  That is not to criticise the way in which the proceedings have been brought by the SFC.  Rather, it simply identifies that proceedings brought by the SFC, exercising its public or regulatory functions by reference to section 214(1), may not always be the appropriate proceedings within which to resolve matters relating to “damages” or “compensation”, irrespective of the obvious desire to achieve the widest possible justice within one set of proceedings where appropriate.

216.  I accept, therefore, that it should remain with the Liquidators to assess the efficacy as to whether it would be beneficial to bring proceedings in the name of the Company against any party.

217.  On balance, and in the exercise of my discretion, I decline to make any compensation order against the Directors in these proceedings.  Therefore, questions of interest do not arise.”

Analysis

26.  This is an appeal against the exercise of the judge’s discretion. The principles governing the grounds for intervention by the appeal court are well established.  The function of the appeal court is one of review.  It will not disturb the judge’s exercise of discretion unless he had misdirected himself with regard to the principles or the evidence or had misunderstood the law or evidence in accordance with which his discretion had to be exercised, or had wrongly taken into account irrelevant matters or failed to take into account relevant matters, or that his exercise of discretion was plainly wrong.  It is only if and after the appeal court has reached the conclusion that the judge’s exercise of discretion must be set aside for one or more of these reasons that it would exercise an original discretion of its own.

27.  The judge declined to make a compensation order holding that “it should remain with the Liquidators to assess the efficacy as to whether it would be beneficial to bring proceedings in the name of the Company against any party”.  That would seem to be consistent with his reaction at the outset when the SFC indicated that it would abandon the relief sought under section 214(2)(b), namely, that it is “essentially for the company to pursue its own remedy”^[11]. That must be premised on the thinking that the pursuit of proceedings by the Company could be a viable alternative, otherwise it would be pointless to refer the matter to the liquidators to consider whether it would be in the interest of the Company to bring proceedings against the Former Directors for breach of duty in relation to the Transactions.

28.  The only relevant information gleaned from the Judgment would appear to be as follows:

“209. As has been pointed out by Mr Ko^[12], the Company has been in the control of the Provisional Liquidators since 6 March 2009, and they were appointed Liquidators on 9 September 2011. There was no impediment to prevent the Liquidators bringing proceedings in the Company’s name against any alleged wrongdoers, in order to recover damages. However, no action has been commenced in the Company’s name in this regard.” (Emphasis supplied)

29.  It is not entirely clear whether the judge had accepted the contention there was “no impediment” for the liquidators to bring proceedings against the Former Directors.  If he had so found, there is no evidence in support of this.  If he had not, he had failed to assess whether there was any impediment in bringing separate proceedings.  Either way, the judge was in error.

30.  Even without the further information provided to this court by the solicitors for the Company, on the facts known to the judge at the hearing in 2019, it is unlikely that it would be viable for the Company to bring proceedings.  The Company was ordered to be wound up in July 2009, ten years before the trial of the present proceedings.  No proceedings had been brought by the liquidators against Former Directors, unlike Yeung Chung Lung where proceedings were brought but were not pursued owing to a number of reasons including difficulties over service. The matters complained of took place in June and July 2007, and came to light when the report of KPMG was delivered in October 2007 which considered that the genuineness and recoverability of the sums paid to the three “debtors” were doubtful.  As recognised by Mr Ko, if proceedings were to be brought by the Company, “time bar is obviously an issue”^[13].  As mentioned earlier, Ms Tiffany Wong and Mr Power gave evidence before the judge in support of the case of the SFC.  Ms Wong was the substantive drafter of the KPMG report which contained an analysis of the “Doubtful Receivables”.  No suggestion was made to them that the liquidators were at fault in not bringing proceedings against the Former Directors before the claim became time barred.

31.  The information provided by the sole liquidator prior to this appeal further clarified the position.  No proceedings have been commenced in the name of the Company for more than ten years due to the lack of funds.  The reason why the liquidators did not previously bring proceedings against the Former Directors was not a live issue at trial. Otherwise, there would have been an opportunity for the liquidators to provide a full explanation behind their decision to support the SFC’s case by giving evidence and not commencing separate proceedings.  The Company has no objection to the making of compensation order under section 214(2)(e) with respect to the HK$622 million loss suffered by the Company, as any recovery in this regard would be payable to the Company and increase the amount of assets available for distribution to its creditors. Further, as more than ten years have accrued in the liquidation, in addition to time bar concerns, there is limited cash available in the liquidation.  The Company’s liquidation and legal fees outstanding before taxation are in excess of the available remaining cash.  Accordingly, there would be limits on the liquidator’s ability to commence fresh actions against the Former Directors.

32.  These are clearly relevant matters that would need to be taken into account in the exercise of the discretion whether to make a compensation order, contrary to Mr Ko’s contention.

33.  The amount of compensation sought by the SFC is HK$622 million, which, on the unchallenged evidence, was part of the funds of the Syndicated Loan paid to the Company and channelled through a series of intra-Group transfers until the eventual transfers out of the Group, to fund Peninsula’s buy-back from Richemont.  This amount, which was misapplied through the wrongful activities of the Former Directors, is a loss readily ascertainable.  That was the submission made on behalf of the SFC by Mr Eugene Fung, SC before the judge^[14]. It is not apparent from the Judgment that the judge had rejected Mr Fung’s submission in that respect, although he had mentioned some arguments made by Mr Bernard Mak for the 2^nd respondent that the compensation sum is not readily ascertainable^[15]. Mr Ko also sought to cast “some doubt” as to the amount of the Company’s loss, praying in aid the distinction drawn in Re Styland Holdings Ltd on the amount misappropriated by the directors and the investment losses (which we do not think would assist him at all), and a “possible discrepancy” which did not find favour with the judge^[16]. Having considered the arguments on readily ascertainable loss as recorded in the Judgment and on appeal advanced by Mr Mak and Mr Ko, we are of the view that they are untenable and should have been rejected by the judge.

34.  The judge mentioned in §215 that he accepted “there may be certain breaches where principles of foreseeability and remoteness do not come into play” and went on to express the view that he “[did] not think that issues relating to time bar, remoteness, causation and mitigation are necessarily entirely straightforward” and he did not think “they have been sufficiently addressed in these proceedings for [him] to resolve them”.  On appeal, Mr Mak and Mr Ko repeated their arguments raised before the judge on potential defences in the Company’s civil claim of causation, foreseeability, mitigation, contributory negligence, limitation^[17], contending that these issues have not been sufficiently addressed in the proceedings brought by the SFC and they can be properly raised as defences should the liquidators commence proceedings in the name of the Company.

35.  This argument of the 2^nd and 3^rd respondents is a red herring. There is no reason why the court should be concerned with potential defences that may be raised in a civil action to be brought by the Company when it is fairly clear that no separate proceedings would be brought.

36.  Mr Fung accepted before us that in making a compensation order against the Former Directors in respect of their breach of duty to the Company in relation to the Transactions as found by the judge, there ought to be some causal connection between the breach and the loss to the Company, see Libertarian Investments Ltd v Hall (2013) 16 HKCFAR 681 at §76.  However, as Ribeiro PJ stated in the same paragraph, the authorities show that the rules on causation are of varying strictness depending on the type of duty and breach in question.

37.  Mr Fung submitted that the required degree of causal connection is satisfied in this instance. With regard to each of the Former Directors, the judge did not only find that they had breached their duty of care and skill (which is indistinguishable from a common law duty of care, the fiduciary relationship merely provides a setting for the duty, see Libertarian at §77).  For all of them, the judge also found they had breached their duty to act in the best interest of the Company and in respect of the 1^st respondent he also breached his duty not to put himself in a position of conflict.  That being the case, the breaches are within the second category of breaches referred to in §75 of Libertarian, being breaches “involving an element of infidelity or disloyalty which engage the conscience of the fiduciary”.  As stated by Evans LJ in Swindle v Harrison [1997] 4 All ER 705 at 716f to g:

“Equity has also recognised duties going beyond the common law duties of skill and care which may be undertaken by individuals, depending on ‘the circumstances in which they were acting’ … These are the duties of fidelity and loyalty which are described as ‘fiduciary’ and which exist independently of, though often in conjunction with, a duty of care.”

38.  Both Evans LJ (at 716h to j) and Hobhouse LJ (at 720a to c) quoted Millett LJ in Bristol and West Building Society v Mothew [1997] 2 WLR 436 at 449 to 450:

“The distinguishing obligation of a fiduciary is the obligation of loyalty. The principal is entitled to the single-minded loyalty of his fiduciary. This core liability has several facets. A fiduciary must act in good faith: he must not make a profit out of his trust; he must not place himself in a position where his duty and his interest may conflict; he may not act for his own benefit or the benefit of a third person without the informed consent of his principal. This is not intended to be an exhaustive list …”

39.  For breaches of the second category, causation is established on a “but for” basis without the constraints of the common law causation rules on remoteness and foreseeability.  The policy of the law in these circumstances is generally to hold the fiduciary responsible if, but for the breach, the loss or damage would not have occurred.  Once the plaintiff has shown a loss arising out of a transaction to which the breach was material, the plaintiff is entitled to recover unless the defendant fiduciary, upon whom is the onus, shows that the loss or damage would have occurred in any event, ie without any breach on the fiduciary’s part.  Policy dictates that fiduciaries be allowed only a narrow escape route from liability based on proof that the loss or damage would have occurred even if there had been no breach. (Libertarian at §§79 to 82)

40.  We reject the contention of Mr Mak and Mr Ko, which is contrary to the authorities mentioned above, that the breaches of fiduciary duty of the Former Directors as found by the judge to act in the best interest of the Company (additionally in the case of the 1^st respondent, placing himself in a position of conflict) did not fall within the second category of breaches and to which the common law causation rules on remoteness and foreseeability would apply.  The judge has failed to come to a proper view on the law in light of his findings, merely accepting that “there may be certain breaches where principles of foreseeability and remoteness do not come into play”.

41.  Applying the relevant legal principles, it is incumbent on the Former Directors to show that the loss or damage would have occurred in any event, ie without any breach on their part.  This they have clearly failed to establish. There is no evidential basis for the assertion made on behalf of the 2^nd respondent that the 1^st respondent would in any event have brought about the misapplication of the HK$622 million even without the action of the 2^nd respondent. The judge indicated that he “[did] not instinctively warm to the submission made for Peter Lee and Tony Chik that the “but for” test might not be satisfied because David Wong would have ensured that the Company’s money reached Peninsula, irrespective of their own actions or inaction”^[18].  We agree with the SFC that the required degree of causal connection has been established in this case.

42.  In light of the errors of fact and law made by the judge as mentioned above, this is a proper case for intervention by the appeal court. The judge’s discretion must be set aside and it is for this court to exercise the discretion afresh.

43.  This is not a case where the amount of compensation sought is not readily ascertainable.  The required degree of causal connection has been made out.  It is clear that no separate proceedings will be brought by the Company.  There are no other good reasons for refusing the compensation sought by the SFC.  The application has the full support of the liquidators.  Any recovery would be payable to the Company and be made available for distribution to the creditors.

Conclusion and orders

44.  We therefore allow the appeal of the SFC, set aside the judge’s order to the extent that it declined to make any compensation order, as well as his costs order (made upon the respondents’ application to vary the costs order nisi) that the 1^st to 3^rd respondents do pay 70% of the petitioner’s costs in these proceedings.

45.  We make an order in substitution that the 1^st to 3^rd respondents do, jointly and severally, pay to the Company HK$622 million within 30 days hereof, together with interest thereon at 1% above the HSBC prime rate from 13 July 2007 until 7 May 2020, and thereafter at the judgment rate until full payment.  We direct the Company to notify the petitioner in writing of receipt of any recovery from the compensation order made and to provide supporting documents within seven days of receipt of the same.

46.  In respect of the petitioner’s costs below, we restore the order nisi of the judge and order the 1^st to 3^rd respondents do pay the petitioner’s costs in these proceedings, including all reserved costs, on a joint and several basis, to be taxed if not agreed, with certificate for two counsel.

47.  For the costs of this appeal, there is no dispute that costs should follow the event.  We order the 1^st to 3^rd respondents do pay the petitioner’s costs in this appeal, on a joint and several basis, to be taxed if not agreed, with certificate for two counsel.