THE QUEEN v. LAM NAI SUM, ROBIN AND ANOTHER

Magistracy Appeal No. 817 of 1991

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HEADNOTE

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SECTION 80 (1) (a) OF THE SECURITIES ORDINANCE CAP. 333 DOES NOT DESCRIBE AN OFFENCE OF STRICT LIABILITY.

IN THE SUPREME COURT OF HONG KONG

(APPELLATE JURISDICTION)

MAGISTRACY APPEAL NO. 817 OF 1991

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JUDGMENT

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1. This is an appeal against conviction, the appellants having been convicted by Miss Mary Yuen Magistrate, at Western Magistracy, of offences against section 80(1) of the Securities Ordinance, Cap 333 They were in fact accused of short selling a number of shares of International Tak Cheung Holdings Limited (ITC).

2. The 1st appellant and the 2nd appellant are son and father. The 1st appellant is a sales manager of Mansion House Securities (F. E.) Limited which is an authorised dealer at the Unified Stock Exchange. The 2nd appellant, the father of the 1st appellant, trades in securities only through Mansion House Securities (F. E.)Limited. It is his son, the 1st appellant, who looks after his dealings in securities.

3. It is not in dispute that the 1st appellant, as agent for the 2nd appellant, sold 150,000 of the 1992 Warrants of ITC in three batches, one of 70,000, one of 30,000, and one of 50,000 on 26th September 1990. Interviews conducted with the appellants pursuant to s.33(6) of the Securities and Futures Commission Ordinance, Cap 24, the admissibility of which interviews was not in dispute, were to the effect that both appellants had made a mistake in believing that the 2nd appellant still had ITC shares when 150,000 shares in the three batches as alleged were sold on his behalf by the first appellant. The 2nd appellant said he thought he still had the shares when he asked his son to sell 150,000 ITC Warrants, and the, 1st appellant said he forgot that he had sold all of his father's ITC Warrants before receiving instructions to sell those which are the subject matter of the charges.

4. At the conclusion of the Crown case, it was submitted that there was no case for either appellant to answer on the basis that s.80 (1) of the Securities Ordinance, Cap 333 requires proof of mens rea, so that the Crown must establish not only that the securities were not within the disposable rights of the appellants, but that the appellants had no reasonable or honest belief that they were. The learned magistrate ruled that there was a case to answer against both appellants. She determined that s.80(1) creates an offence of strict liability and therefore that it was unnecessary for the Crown to establish mens rea in the appellants. She then said this .-

"Having accepted that s.80(1) creates an offence of strict liability, it is unnecessary for me to decide if negative averment (section 94A of the Criminal Procedure Ordinance, Cap 221) applies here.

This was in answer to a Crown submission that s.80(1) was either an offence of strict liability or that it created a negative averment situation. It is not now seriously contended that this is a negative averment situation though it was advanced by the Crown as an alternative argument at trial.

She went on to say:-

 

"the burden was therefore on the defendant to establish, on a balance of probability, that they either owned the security in question or that they entertained an honest and reasonable belief that they had the ITC Warrants at the time of the short selling"

5. For her decision she relied on the dictum of Lord Scarman in the case of Gammon (Hong Kong) Ltd. v. A.G. [1984] 2 All ER 503 at 508 where he said:-

"In their Lordships' opinion, the law relevant to this appeal may be stated in the following propositions (the formulation of which follows closely the written submission of the appellants counsel, which their Lordships gratefully acknowledge): (1) there is a presumption, of law that mens rea is required before a person can be held guilty of a criminal offence; (2) the presumption is particularly strong where the offence is 'truly criminal' in character; (3) the presumption applies to statutory offences, and can be displaced only if this is clearly or by no implication the effect of the statute;(4)the only situation in which the presumption can be displaced is where the statute is concerned with' an issue of social concern; public safety is such an issue; (5) even where a statute is concerned with such an issue, the presumption of mens rea stands unless it can also be shown that the creation of strict liability will be effective to promote the objects of the statute by encouraging greater vigilance to prevent the commission of the prohibited act."

6. In that case, the appellants had been charged with offences against s.40 (2A) and (2B) of the Buildings Ordinance. Their Lordships concluded that these two sections created offences of strict liability, but they said this :-

"Whether, therefore, a particular provision of the statute creates an offence of full mens rea or of strict liability must depend on the true meaning of the swords of the particular provision construed with reference to its subject matter and to the question whether strict liability in respect of all or any of the essential ingredients of the offence would promote the object of the provision." [my emphasis]

7. In her findings, and after reference to Lord Scarman's propositions in Gammon, the learned magistrate said this :-

"Though we were not dealing with building regulation contraventions or food hygiene offences where the physical safety to members of the public is at risk, I am of the opinion that the economic stability of the society is at least, if not more, of equal importance to that of human safety. This is very much a head of social concern within Lord Scarman's ratio for permitting strict liability construction.

 

It is clear that the Securities Ordinance, Cap 333 is enacted from the purpose of regulating the healthy operation of the securities market. Firstly Section 80 (1) is not truely criminal in nature. Half of the time the short seller himself stands to loose financially. Secondly greater vigilance on the part of dealers or brokers is certainly called for to ensure the smooth running of this sector of the investment industry. I am of the opinion that Section 80 (1) creates an offence of strict liability and section 80 (1) (b) is a defence written into the section to exempt an honest seller who at the time of the sale entertains a reasonable belief that he or his principal owns a present exercisable and unconditional right to dispose of the 'securities."          

 

Section 80 (1) of the Securities Ordinance provides that :-

 

	"     (1)    A person shall not sell securities at or through the Unified Exchange unless, at the time he sells them-
		(a)	he has or, where he is selling as agent, his principal has; or
		(b)	he reasonably and honestly believes that he has or, where he is selling as agent, that his principal has,

                   a presently exercisable and unconditional right to vest the securities in the  purchaser of them."

Section 80(4) is to the following effect:-     "(4) Subsection (1) does not apply to or in relation to-           

Subsections (4)(c) and (4) (d) are not relevant to the issues in this appeal.

8. It seems to me that before there is any consideration of Lord Scarman's propositions it is essential to look to the wording of the provision for any indication of the nature of the offence, or to see if the legislature intended that the presumption `of mens rea be displaced.

9. Reading s.80 (1) and s.80(4) (a) and (b) together, I think it is clear that the legislation prohibits short' selling of securities, but that it specifically does not apply to those persons who, acting in good faith in the reasonable and honest belief that they have a right, title, or interest to the securities sell them when in fact they do not. Only those, therefore, who sell shares short and who do not have an honest or reasonable belief that they have the right to dispose of the shares can be guilty of the offence described by s .80 (1). The magistrate has to be satisfied of those matters beyond a reasonable doubt before a conviction can be entered. There is nothing, it seems to me, in the wording of s.80 (1) (b)and 80 (4) or in the concept they propound, which suggests that the onus of establishing honest and reasonable belief should shift to the defence.

10. Offences are described in this Ordinance in a variety of ways : Sections 72, 73, 74, 75 and 79, it was submitted, create offences of strict liability; Sections 77 and 78, Were described as negative averment situations; and section 76 was sown to expressly create a defence to be proved by the accused on the balance of probabilities. Whether the sections to which I refer do create offences of strict liability or are negative averment situations does not fall to me to decide. Suffice it to say that while section 80(4)(a) and (b) are similar in style to Section 72 (5) (a), (b), (c) & (d), Section 73 (3) (a), (b) & (c) and Section 74 (2) (a) and (b) in that they are exemption provisions and no indication exists in the wording of the legislation as to where lies the onus of establishing them, only Section 80 deals with a defendant's state of mind which it is usually for the prosecution to establish.

11. Mr Whitehouse who appeared for the prosecution on the appeal quoted extensively from Chapter 6 of sixth edition of Smith v. Hogan's Criminal Law. That Chapter deals with "Crimes of Strict Liability". Relying on that text he submitted that in some instances there might be a half-way house between mens rea and strict liability and that this was such a case. That proposition has not found a place in established principle, and the English authorities fail far short of suggesting that it should.

12. However he also put before me the case of R. v. HUNT [1987] 1 AC 352. In that case the House of Lords dealt specifically with the burden of proof and possible exceptions to the rule that that burden always rests on the prosecution. The case dealt with the Misuse of Drugs Act 1971 and the Misuse of Drugs Regulations 1973. Their Lordships held that the burden of proving the accused’s guilt was on the prosecution, save in the case of the defence of insanity and subject to statutory . exceptions; they found that such exceptions might be express or implied and where a reading of the terms of the legislation did not indicate clearly where the burden lay the court could look to other considerations to determine the intention of the legislature.

 

They said this:

"However their Lordships (in the case of Nimmo v. Alexander Cowan v. Sons Ltd. [1968] AC 107) were in agreement that if the linguistic construction of the statute did not clearly indicate upon whom the burden should lie the court should look to other considerations to determine the intention of Parliament such as the mischief at which the act was aimed and practical considerations affecting the burden of proof and, in particular, the ease or difficulty that the respective parties would encounter in discharging the burden. I regard this last consideration as one of great importance for surely Parliament can never lightly be taken to have intended to impose onerous duty on a defendant to prove his innocence in a criminal case, and a court should be very slow to draw any such inference from the language of a statute.

 

When all the cases are analysed those in which the courts have held that the burden lies on the defendant are cases in which the burden can be easily discharged" (My insertions)

13. It was submitted by Mr Whitehouse that it was placing too onerous a burden on the prosecution to expect them to prove that the defendants did not have a reasonable and honest belief. I do not agree. There is in my view little or no greater difficulty for the prosecution in proving belief than in proving intent; both are to be inferred generally from the facts and circumstances of the case, unless admissions have been made in relation to them, and the absence of an honest and reasonable belief that shares are available to be disposed of equates easily with mens rea. In effect, in relation to both the crown are asked to prove that the short selling was deliberately dishonest.

14. Mr Whitehouse further submitted that, the wording of s.80 did not clearly state where the burden of. proof lay, and that s.80 (1) (b) established a statutory defence, so that the burden lay on the appellants to establish that defence on the balance of probabilities. Once again he was relying on the sixth edition of Smith v. Hogan's Criminal Law at p.118 where it is said:

"Statutory defences do not always take this complicated form. More commonly they simply impose on the accused the burden of proving that he had no mens rea and was not negligent. Thus one who sells feeding stuffs containing deleterious ingredients is liable unless he proves 'that he did not know and could not with reasonable care have known that the article contained' such an ingredient. [Fertiliser and Feeding Stuffs Act 1926 Sec. 7 (1]. The effect of such a provision is that the prosecution need do no more than prove that the accused did the prohibited act and it is then for him to establish, if he can, that he did it innocently. provisions are a distinct advance but they are still a deviation from the fundamental principle that the prosecution must prove the whole of their case and an extensive use of offences of strict liability, even when so qualified, is to be deplored:"

15. It seems to he that it has become a feature of such statutory defences such as-that provided for in Section 7(1) of the Fertiliser and Feeding Stuffs Act 1926 that the defendant is specifically required to prove the. defence. A local example of that is s.76 of the Securities Ordinance, Cap 333; another is s.171(1A) of the Immigration Ordinance, Cap 115 which allows a defendant to escape the consequences of employing an illegal immigrant if he can "prove" that he took all practicable steps to discover the immigrant's status. Section 80 of the Securities Ordinance is couched in different terms, with no requirement on the defendant to establish his bona fides, and I would suggest that courts should be very slow to shift the onus to a defendant where the wording of legislation does not specificially require it. I am satisfied that no recognisable principles of contruction or substantive law are offended by a finding that it is for the crown to establish beyond reasonable doubt that the short selling, made an offence by s.80 (1) (a), was done in the absence of an honest and reasonable belief that shares were available and disposable.I am satisfied that there are no "practical considerations" which contra-indicate such a finding. I am satisfied that a "linguistic construct 'on" of the provision is not inconsistent with such a finding.

16. Obviously if the only evidence before a magistrate is to the effect that short selling has taken place, and there is no evidence of honest and reasonable belief, then a conviction will inevitably follow. There is then, nothing in the evidence to lead the magistrate to have a reasonable doubt about the fact that the short selling was deliberately dishonest. But if, as in this case, evidence is before the magistrate of an honest and reasonable belief, and whether that evidence is part of the Crown case, or adduced in the course of the defence case,before, there can be a conviction, the magistrate must be satisfied beyond reasonable doubt that no such honest and reasonable belief exists. It goes without saying that the onus of so satisfying the magistrate is at all times upon the Crown.

17. It follows, therefore, that I find that the magistrate was wrong when she said; "the burden was therefore on the defendant to establish, on a balance of probability, that they either owned the security in question or that they entertained an honest and reasonable belief that they had the ITC Warrants at the time of the short selling."

18. Accordingly I allow the appeal, quash the convictions and set aside the.sentence.