SECURITIES AND FUTURES COMMISSION v. ISIDOR SUBOTIC AND OTHERS

HCA 1277/2019

[2021] HKCFI 3350

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1277 OF 2019

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D E C I S I O N

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1.  By a decision handed down on 23 July 2021 (“July Decision”), this Court dismissed the Eastmore Defendants’ application to set aside leave to serve the writ out of jurisdiction on them and ordered costs against them.  This Court also ordered SFC to pay the costs of the Eastmore Defendants on the Gateway C Summons.

2.  This is a Summons by the Eastmore Defendants for (i) leave to appeal, (ii) stay of proceedings pending determination of the appeal and (iii) variation of the costs order nisi.  This decision should be read with the July Decision and the abbreviations therein are adopted here.

Legal principles on leave to appeal

3.  The applicant must satisfy the court that the intended appeal has (a) a reasonable prospect of success, or (b) there is ‘some other reason in the interests of justice’ for it to be heard. Under limb (a), prospects must be ‘reasonable’ and therefore more than ‘fanciful’, without having to be ‘probable’: Hong Kong Civil Procedure 2021, Vol 1, §59/2A/4, E1/14AA/5 and SMSE v KL [2009] 4 HKLRD, §17, Le Pichon JA.

4.  Leave may be granted even if the Court is not satisfied the appeal has a reasonable prospect of success but eg considers the issue should in the public interest be examined by the Court of Appeal or the issue raised is one where the law requires clarifying: Ma Bik Yung v Ko chuen [2009] 3 HKC 359, Leong JA.

5.  If there is a serious issue on what appears to be a lacuna in the statute or a point of general public importance, that merits consideration by the Court of Appeal: Taching Petrolelum Company, Ltd v Meyer Aluminium Ltd [2020] HKCA 1005, §25.

Leave to appeal in respect of Gateway F (grounds 2-6 of the draft notice of appeal)

6.  I do not agree with Mr Alder that Order 11 or Order 12, rule 8 determinations form a special category that is different from other interlocutory matters, insofar as the treatment of an application for leave to appeal is concerned.  The same tests for granting leave apply.

7.  The intended grounds of appeal are of 2 limbs: (i) against this Court’s holding that the claim was in the nature of a tort (grounds 2-5) and (ii) that this Court erred in applying common law concepts of joint tortfeasorship or conspiracy onto SFO (ground 6).  Ground 8 (that no gateway is available to SFC at all), in my view, has no independent existence from the other grounds.

8.  With regard to limb (i), this Court took the route of construing various sections of SFO and examining authorities of common law jurisdictions on the meaning of tort in order to arrive at its decision.

9.  In §19 of his written submission, Mr Alder submits that there was no indication that the Court assessed the existence of doubt or the legal imperative to resolve it against a construction facilitating leave in favour of the Eastmore Defendants.  With respect, that was because this Court, after analyzing the authorities and applied them to the facts, had no doubt that SFC’s claim was in the nature of a tort.  The decision was not reached because it was considered “pragmatic” or “realistic” to expand the scope of Gateway F and apply it to the Eastmore Defendants.

10.  Having said that, before the July Decision, there has been judicial comment that there was an “apparent lacuna” in the rules regarding service of a writ out of jurisdiction in regulatory enforcement action under section 213 of SFO (§19 of the July Decision).  The intended grounds of appeal as to whether the claims of SFC are in the nature of torts and whether authorities on private tort claims apply to regulatory enforcement actions are arguable and not fanciful. 

11.  Further, the SFO has extra-territorial effect.  A decision on appeal will have impact beyond the present case as the SFC may have to serve writs for similar claims out of jurisdiction in future.  Limb (i) involves points of general public importance that merit consideration by the Court of Appeal.

12.  With regard to limb (ii), if Gateway F is satisfied and the damage was sustained in Hong Kong, Mr Alder submits that the July Decision did not, amongst others, say that the personal contraventions of the Eastmore Defendants took place in Hong Kong. He submits that this Court erred in “grafting” common law concepts of joint tortfeasorship or the tort of conspiracy onto SFO.  Alternatively, if the common law approach to conspiracy is relevant, the proper approach is to locate where such a conspiracy took place as set out in ETF Holdings, Inc v Marinteknik Shipbuilders (S) Pte Ltd [2014] 1 SLR 860 (CA), §53, Menon CJ.  That approach was not followed by SFC and, if followed, the locus of the conspiracy would be in the USA and the double actionability rule was not satisfied.

13.  Without disrespect, I am unable to agree with Mr Alder.  Different statutes may penalize a person for different activities, in the present case, false trading.  However, there is no definition of conspiracy in SFO.  It is fanciful to suggest that the Court cannot apply common law conspiracy principles to a claim under SFO.

14.  ETF Holdings, §53, held that

“To identify the place where the tort was committed, the court applies the ‘substance of the tort’ test by examining the series of events constituting the elements of the tort to determine where, in substance, the cause of action arose. … the key factors to consider for the tort of conspiracy are ‘the identity, importance and location of the conspirators, the locations where any agreements or combinations took place, the nature and places of the concerted acts or means, the location of the plaintiff and the places where the plaintiff suffered losses”. (emphasis added)

15.  Although ETF Holdings was not cited at the substantive hearing, this Court has done just what that authority required – to consider in substance where the conspiracy was committed and that was in Hong Kong (§§99-100 of the July Decision).  Mr Alder has not shown how this Court’s reliance on the authorities in §§94-98 of the July Decision was erroneous.

16.  It is also of no moment for the Eastmore Defendants to complain that no proper claim or sufficient particulars of conspiracy have been pleaded.  The re-amended statement of claim has pleaded the acts of each Eastmore Defendant, and the scheme under which the syndicate was to commit false trading.  Particulars are for the purpose of informing a party of the case he has to meet. Despite not using the word “particulars”, the pleaded case of SFC has properly informed the Eastmore Defendants of the case they have to meet.

17.  Limb (ii) has no reasonable prospect of success and there is no other reason in the interest of justice to grant leave.

18.  With regard to Gateway F, I therefore grant leave to appeal, limited to grounds 2-5 of the draft notice of appeal.

Leave to appeal in respect of Gateway B (ground 7 of the draft notice of appeal)

19.  The only intended ground of appeal is that SFC has adduced “no evidence to show a continuing breach or risk of further breach of the further provisions of SFO by the Eastmore Defendants”. 

20.  That ground is plainly unarguable.  SFC has adduced much evidence which was referred to in the Decision.  False trading did not require the wrongdoer to have physical presence in Hong Kong and the Eastmore Defendants did not have much physical presence in Hong Kong when carrying out the false trading (§109-110).  In any case, D2 and D3 frequently travelled to Hong Kong during the Relevant Period (§111).  When a non-resident defendant could engage in false trading like the Eastmore Defendants, the risk of further breach was apparent (§112).

21.  The width, utility and practicality of enforcement of the injunction as stated in §§24 – 27 of Mr Alder’s submission do not arise at the stage of considering Gateway B.

22.  Mr Alder further submits that if the Eastmore Defendants’ objections to leave under Gateway F are well-founded, but if leave were to be granted under Gateway B, such leave could only be for the claim for injunction but not other claims.  One cannot “piggyback” a non-gateway claim onto a gateway claim.

23.  Mr Man SC disagrees.  He submits that the plain wording of Order 11, rule 1(1)(b) states that leave for service out may be granted if in the action begun by writ, an injunction is sought, not if “only an injunction [and no other claim or relief] is sought”.  The “piggyback” argument does not apply to the present case.

24.  Whilst I agree with Mr Man SC that Gateway B is open to the SFC as an independent and proper basis for service out, I do not agree that once SFC passes Gateway B, it does not have to pass Gateway F as well.  This is because the rest of the claim on eg damages, restorative relief or declarations are sought under section 213 of SFO but they are not in lieu of or alternative to the injunction (also sought under section 213).  To be able to assert the claims other than the injunction against the Eastmore Defendants, SFC has to pass Gateway F as well, even if the facts to establish Gateway F are substantially the same as those for Gateway B.

25.  Accordingly, I decline to grant leave to appeal in respect of Gateway B, but grant leave under Gateway F.

Stay of proceedings on appeal

26.  SFC relies on the same pleaded facts for the injunction claim and the tort claims.  Even if the Eastmore Defendants succeed on the appeal in respect of Gateway F, they still have to answer the same set of pleaded facts for the injunction claim.  I fail to see how it could be said that the appeal would be rendered nugatory if proceedings are not stayed now.  I decline to grant an order for stay.

Variation of costs order nisi

27.  SFC concedes that it had not served the costs statement on the Eastmore Defendants but only gave it to the judge’s clerk.  I therefore consider the question of costs afresh in the light of the affirmation evidence, submission and costs statements on both sides.

28.  For interlocutory matters, costs to follow the event is an option.  The Court takes into account a wide range of matters, including the conduct of the parties, whether it was reasonable to raise particular issues and whether a party has succeeded only on part of his case: Order 62, rule 5(1)(e), (f) and rule 5(2), Rules of the High Court.  There is nothing to prevent the Court from making a global order, taking into account the relative success of each party on each summons.  It would have the advantage of avoiding more than one taxation or summary assessment.

29.  The incidence of costs as set out in paragraph 2 of the Summons is not disputed.  SFC should get the costs of the hearing as regards the Amendment Summons as well.  It is only a question of quantum.

30.  SFC had an overwhelming success.  Although its Gateway C Summons was eventually dismissed, that Summons was issued for good cause at a time when the writ has not expired.  It was necessitated by the Eastmore Defendants’ refusal to concede valid service out of jurisdiction under other gateways.  Had the Eastmore Defendants conceded the Gateway C Summons, the substantive hearing would have been saved.

31.  To clarify, I have not ordered indemnity costs against Eastmore Defendants and did not consider it appropriate to do so.  The fact that the Court grants all or a substantial part of what is claimed in a costs statement does not mean that costs are on an indemnity basis.  This is because practitioners are expected to and ought honestly to present a costs statement only on party-and-party basis unless the Court has ordered costs on a different basis or for good reasons (such as based on a contractual clause); and the Court acts on such bases.  There is nothing to prevent the Court from allowing costs claimed in a costs statement in full if those costs appear to be reasonable, necessary or proper.

32.  Having regard to the affirmation evidence filed on both sides, the complexity of the issues under the Eastmore Defendants’ Summons and the Court’s own experience on summary assessment, I do not find the costs of $625,650 claimed by SFC to be unreasonable.  That Summons justified the use of 2 counsel and 2 fee earners of less than 10 years’ post-qualification experience with supervision of a more senior solicitor.  If the Eastmore Defendants incurred costs of $214,648 just for a Gateway C Summons, they can hardly complain against SFC for the costs of resisting the much more complex Eastmore Defendants’ Summons.

33.  For the Gateway C Summons, there was only one affirmation filed by SFC and the Eastmore Defendants have not filed any.  Much of the background was already covered by the affirmation in the Eastmore Defendants’ Summons. Evidence about service of other Defendants in Hong Kong has no complexity. What was additional evidence was the good cause of action and forum conveniens.  The focus was on legal arguments.  The written submission of Mr Alder and time spent in Court on arguments relating to the Gateway C was little compared to the other issues on service out of jurisdiction.  I make no reduction to counsel’s fees.  I summarily assess costs of the Gateway C Summons at $120,000.

34.  Setting off one set of costs against the other, the Eastmore Defendants should pay SFC a sum of $505,650 for costs.  The order nisi on costs is varied to this extent.

Conclusion

35.  I order as follows:

(1)  There be leave to appeal on grounds 2-5 in the draft notice of appeal;

(2)  The application for stay of proceedings pending appeal is refused; and

(3)  The costs order nisi made on 23 July 2021 be varied such that after set off of costs, the Eastmore Defendants shall pay a net amount of $505,650 as costs to SFC.

36.  The parties have relative success in the Summons:

(1)  SFC is successful in part in resisting leave in respect of Gateway B and stay of proceedings.  In the only affirmation filed by SFC, the written submissions for the substantive hearing were exhibited.  It was wholly unnecessary as it is always more convenient for the Court to refer to the (usually heavily marked) submissions for considering costs.  I therefore disallow that part of SFC’s costs.  In principle, SFC should have costs in respect of Gateway B and the stay application.  The balance of the costs of SFC and the costs of Eastmore Defendants in respect of Gateway F shall be in the cause of the appeal.

(2)  The variation of costs order nisi was necessitated by SFC’s failure to serve the costs statement on the Eastmore Defendants.  The Eastmore Defendants are successful in having the amount of costs reduced by $57,435 (over 10%).  In principle, the Eastmore Defendants should have costs on the variation issue.  I do not consider it necessary, however, for such substantial affirmation evidence (as opposed to submissions) to be filed on a costs issue involving summary assessment.

37.  I make a global order under the Summons that only the costs of the application for leave to appeal as regards Gateway F be in the cause of the appeal.  The parties shall bear their own costs on the rest of the issues.

38.  I thank counsel for their assistance.