SECURITIES AND FUTURES COMMISSION v. WONG YUEN YEE AND OTHERS

HCMP 241/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 241 OF 2015

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D E C I S I O N

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1. This is the petitioner’s (“SFC”) Summons for leave to file and serve expert evidence on Mainland law (“Summons”) in respect of certain allegations made: (a) by the 1^st  to 4^th respondents (“Respondents”) in paras 126 to 130 of the affirmation of the 2^nd respondent filed on 30 July 2015 (“Affirmation”) on behalf of the Respondents; and (b) in pages 36 and 37 of a Circular dated 13 April 2011 (“Circular”) issued by the 5^th respondent (“Inno-Tech”) and referred to in para 126 of the Affirmation. 

Background

2. Inno-Tech was incorporated in Bermuda on 19 November 2001 as a limited liability company, and was registered in Hong Kong under the now repealed Part XI of the Companies Ordinance, Cap 32, as an overseas company on 1 March 2002.  Its shares were listed on the Growth Enterprise Market Board of the Stock Exchange of Hong Kong Limited on 12 August 2002 and remain so listed.  Trading in the shares of Inno-Tech was suspended on 26 January 2015. Trading has resumed since 15 August 2016. 

3. At all material times, Inno-Tech was (and is) an investment holding company, and made investments via its various subsidiaries. The Respondents were the only executive directors of Inno-Tech at the material times.

4. A summary of SFC’s case can be found at paras 15-16 of the Petition filed on 30 January 2015 (“Petition”).  Briefly, these proceedings concern Inno-Tech’s acquisitions and subsequent disposals of :

(i)   Interests in three hotel properties in the Mainland, namely, the Xindu Hotel (Nos 106 and 107 Guangming Road, Kaiping); the Kaiping Hotel (No 22 Xijiao Road, Zhang Sha, San Bu Town, Kaiping City, Guangdong); and the Changlin Hotel (Nos 216 and 218, Tianjin Street, Jilin City, Jilin); and

(ii)  Interests in a gold mine called Zhang Jia Fan Gold Mine at De Xing City in the Mainland (“Gold Mine”).

5. The present application concerns the Gold Mine.  SFC says that with the knowledge, consent and participation of the Respondents, Inno-Tech (through a wholly-owned subsidiary, Inno Gold Mining Ltd (“Inno Gold”)) acquired a 62.6% interest in Gaofeng Holding Co Ltd (“Gaofeng”) which held 81.5% of the Gold Mine for a total of HK$99,500,000 in May and June 2009.  In October 2010, that interest was sold for HK$15,000,000.

6. The Petition was issued pursuant to s.214 of the Securities and Futures Ordinance,  Cap 571 (the “Ordinance”), seeking the following relief :

(i)   An order that Inno-Tech shall bring in its name civil proceedings against the Respondents for compensation or damages arising from the loss and damage suffered by it as a result of the Respondents’ breach of duty of care at common law in relation to the acquisitions and/or subsequent disposals of the Xindu Hotel and/or the Kaiping Hotel, the acquisition and/or subsequent termination of acquisition of the Changlin Hotel, and/or the acquisition and/or subsequent disposal of the interests in the Gold Mine;

(ii)  In the alternative to (i), an order, pursuant to s.214(2)(e) of the Ordinance, that the Respondents, and each of them, shall pay compensation or damages to Inno-Tech for such of Inno-Tech and/or Inno Hotel Investment & Management Holdings Ltd and/or Inno Gold’s losses as the court shall find to be caused by their breach of duty of care at common law, together with interest;

(iii)   Disqualification orders under section 214(2)(d) of the Ordinance;

(iv)   Such further or other orders, accounts or inquiries as may be necessary for the purpose of any order made under s.214(2)(b) or 214(2)(e) of the Ordinance as the court thinks fit; and

(v)  Costs.

7. The Affirmation was filed in opposition to the Petition.

8. Subsequently to the filing of the Petition, Inno-Tech has commenced proceedings against the Respondents in respect of the acquisition of the hotels and the Gold Mine.  Therefore, the Petition has become disqualification proceedings against the Respondents.

9. The SFC’s allegations against the Respondents in respect of the Gold Mine are that they had failed :

(i)   to carry out adequate investigation into or due diligence prior to the acquisition of the Gold Mine;

(ii)  to assess the suitability or appropriateness of investing in the Gold Mine;

(iii)   to negotiate the consideration for the interest in the Gold Mine;

(iv)   to assess the purchase price of the interest in the Gold Mine properly;

(v)  to give adequate consideration to the appointment of appropriate directors and/or who to put in charge in respect of gold mining matters; and

(vi)   to supervise the running of the Gold Mine properly.

10. The Affirmation contains the Respondents’ case on the acquisition and disposal of the Gold Mine.  For present purposes, it is relevant to consider paras 126 to 130 of that document, where it is alleged that in light of the “three major new regulations in the PRC” referred to in para 126 (“Regulations”), regulatory requirements were tightened, there were “substantial changes in the regulatory requirements governing mineral companies”, and “all the disruptions, changes and the resultant delay caused to the original operation plan were unexpected by [the Respondents] at the beginning”.

The arguments

11. The SFC says that the Mainland law evidence sought to be introduced under the Summons goes directly to the allegations made in paras 126 to 130 of the Affirmation.  Such evidence is relevant and would assist the court in determining whether the allegations about the potential effect of the Regulations are correct.

12. This application is not resisted by Inno-Tech (adopting a neutral stance), who no longer has any active interest in these proceedings. 

13. On behalf of the Respondents, it is argued that the Summons should be dismissed because :

(i)   The SFC, in breach of para 20 of Practice Direction 5.2 (“PD”), has failed to identity the intended expert witness and the issue to which the evidence will relate, and therefore failed to justify the prima facie admissibility of the proposed expert evidence;

(ii)  The proposed evidence is irrelevant (a) to any material issues in these proceedings and (b) in nature;

(iii)   This application is based on a misapprehension of the evidence of the Respondents.

Analysis

14. In respect of the first ground of objection, I disagree with Ms Lau, appearing for the SFC, that the PD does not apply to these proceedings.  Para 1 of the PD states that it “applies to all civil actions in the Court of First Instance …”.  These proceedings do not fall within any of the exceptions identified in that paragraph.  I would add that it makes good litigation sense for the requirements in questions to be complied with in most cases.

15. However, in Ms Lau’s Supplemental Skeleton Arguments, the proposed expert has been identified.  Taken in conjunction with the Summons and the two Skeleton Arguments of the SFC, I do not believe that the first ground can be taken much further as a threshold objection. 

16. On the other hand, looking at the CV of the proposed expert, it appears that his experience is in the field of litigation with no specialisation in the mining industry.  The court is in a position to read the Regulations, and will be assisted by the parties in doing so.  With respect, it is unclear as to what specific assistance will be rendered to the court by a Mainland litigation lawyer in connection with the Regulations. 

17. The 2^nd and 3^rd grounds of objection are concerned with the proper understanding of the issues in this case.  Based on paras 126 to 130 of the Affirmation as well as pages 36 and 37 of the Circular, I am inclined to agree with Mr Mak, appearing for the Respondents, that it is not the Respondents’ case that the disposal of the Gold Mine was caused by the Regulations.  Rather, it was the impairment loss deposed to in para 131 of the Affirmation which led to the “thinking of forgoing the Gold Mine”. 

18. Properly understood, the Regulations were part of the factual background against which the SFC may say that the Respondents’ actions or non-action would have to be examined.  I do not believe that the Regulations constituted a particularly significant part of the factual background. 

19. Further, the proposed evidence will, at the highest, only assist the court in understanding the Regulations[1].  It will not shed any light on how businessmen would have thought of those matters. 

20. There is some suggestion that the Respondents were acting upon advice on applicable Mainland regulations.  Ms Lau complained that the contention is devoid of any particulars.  There are established procedures which may be relied upon by the SFC to address that deficiency in the Respondents’ evidence.  For the present purpose, the relevance of the point is that it is the advice allegedly received by the Respondents which are more important for purposes of examining their actions or non-action. 

21. In the premises, I agree with Mr Mak that at this stage of the proceedings at least, no issue has been identified which the court cannot resolve without the proposed evidence (see Barings Plc (in liq) v Coopers & Lybrand (Lexis Transcript, Evans-Lombe J, 9 February 2001, §§43-45).  Accordingly, I am not satisfied that the proposed evidence should be admitted.

Conclusions

22. By reason of the aforesaid, this application is dismissed with costs to the Respondents.  I also make an order nisi that Inno-Tech, who appeared today by its solicitor, should also have its costs paid by the SFC.

23. I am grateful to counsel for their assistance. 

[1] Ms Lau has suggested that the Regulations might not be more onerous than what were already in existence at the time when the Gold Mine was acquired.  With respect, the point is speculative in the absence of any evidence.