SECURITIES AND FUTURES COMMISSION v. C.L. MANAGEMENT SERVICES LTD AND ANOTHER

FAMC No. 34 of 2016

IN THE COURT OF FINAL APPEAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

MISCELLANEOUS PROCEEDINGS NO. 34 OF 2016 (CRIMINAL)

(ON APPLICATION FOR LEAVE TO APPEAL

FROM HCMA 382 OF 2014)

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DETERMINATION

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Mr Justice Ribeiro PJ:

1.  At the hearing, we dismissed this application for leave to appeal and now provide the reasons for so doing.

2.  The 1^st applicant (“CLMS”) was convicted before the Magistrate[1] of having held itself out as carrying on business in a regulated activity, namely, advising on corporate finance, contrary to section 114(1)(a) of the Securities and Futures Ordinance (“SFO”).[2] 

3.  The 2^nd applicant (“Ms Au”) was CLMS’s sole shareholder and director.  She was convicted under SFO section 390 of having aided, abetted, counselled, procured or induced CLMS to commit the section 114 offences or on the basis that such offences had been committed with her consent or connivance or that they were attributable to her recklessness.[3]

4.  CLMS was fined a total of $900,000 and Ms Au a total of $600,000.  Ms Au was also sentenced to a total term of imprisonment for 6 months suspended for 18 months.  M Poon J dismissed the applicants’ appeals against conviction[4] and refused a certificate[5] for the purposes of leave to appeal to this Court.

5.  This ought to have been a simple and straightforward case.  However, the applicants have sought to introduce wholly unwarranted complications.  They lodged a Notice of Application for Leave to Appeal which purports to identify three points of law of allegedly great and general importance containing numerous sub-points and spanning three single-spaced pages.  They have also sought to advance two grounds on the substantial and grave injustice basis spanning eight further pages.

The nature of the offences

6.  Section 114(1)(a) provides:

“(1) Subject to subsections (2), (5) and (6), no person shall-

(a) carry on a business in a regulated activity; or

(b) hold himself out as carrying on a business in a regulated activity.”

7.  Section 114(2) makes it clear that the prohibition is against such conduct by unlicensed actors, excluding from the prohibition in subsection (1), corporations, financial institutions and persons duly authorized to carry on the relevant regulated activities.[6]  It was not in dispute that neither CLMS nor Ms Au were licensed or authorized.

8.  Advising on corporate finance is a Type 6 regulated activity[7] and a person who “without reasonable excuse, contravenes subsection (1) commits an offence”.[8]

9.  Section 390(1) provides:

“Where the commission of an offence under this Ordinance by a corporation is proved to have been aided, abetted, counselled, procured or induced by, or committed with the consent or connivance of, or attributable to any recklessness on the part of, any officer of the corporation, or any person who was purporting to act in any such capacity, that person, as well as the corporation, is guilty of the offence and is liable to be proceeded against and punished accordingly.”

10.  The immediately relevant question was whether, as a matter of fact, CLMS had held itself out as carrying on a business of advising on corporate finance.  If, on proof of CLMS’s acts, the answer was “Yes”, then the actus reus would have been established.  One would then have had to examine the mental state of Ms Au, and thus of CLMS, in relation to those acts.  Since it is highly unlikely that holding oneself out as carrying on a business of advising on corporate finance could occur other than intentionally,[9] one would not expect the offence to raise any genuine mens rea issue.  If anyone sought to suggest that there was a reasonable excuse for carrying out the prohibited acts, that excuse would have to be examined.  If CLMS’s liability was established, attention could then be given to Ms Au’s liability as a secondary party under section 390.

11.  However, instead of beginning with the facts regarding the company’s conduct, the applicants plunged into a complex and abstract discussion of strict liability and mens rea, debating various possible applications of Hin Lin Yee v HKSAR[10] and Kulemesin v HKSAR,[11] causing difficulty and confusion.  They also sought to conjure up purported questions of statutory and contractual construction and of corporate attribution which served only to obfuscate the real issues.

The case against the applicants

12.  The case against the applicants was that CLMS, at the instigation of Ms Au, held itself out to three different companies, namely, 3 Wells Group Holdings Limited (“3 Wells”); UK Fur Ltd (“UK Fur”) and New Bonus Holdings Ltd (“New Bonus”), as carrying on a business of advising on corporate finance, willing and able to assist them to secure listings on the Growth Enterprise Market (“GEM”) Board of the Hong Kong Stock Exchange. 

13.  Each of those companies entered into agreements with CLMS, signed by Ms Au, on terms which leave no room for doubt that CLMS thereby held itself out, as part of its business, to be ready and willing to advise on corporate finance.  That this had occurred in relation to three separate companies underlined the “business” character of CLMS’s activities.

14.  Each agreement was headed “Professional Financial Consultation Services Agreement”, appointing CLMS “as the exclusive financial advisor” in relation to each company’s intended listing.  The scope of the services to be provided by CLMS included: “professional financial advice[s] in relation to the application for the listing”; “drawing up a listing scheme or proposal on the basis of an initial evaluation”; assisting and guiding each company “on the formulation of a restructuring plan, and a timely tracking and monitoring program for the intended listing, and on the implementation thereof”; active participation in the preparation work for the listing “including the preparation of the financial information to be contained in documents such as the prospectus”; assisting in the engagement of “listing-related intermediaries”, such as “accountants, lawyers and listing managers ... including securities brokers and [underwriters]”; assisting “in performing the required due diligence in respect of the listing project”; and assisting “with respect to the questions raised by” the Exchange and the SFC.  Such services were agreed to span stated periods[12] and for such services, CLMS would be paid annual sums and would also be issued with share options upon a successful listing.[13]  

15.  Mr Russell Coleman SC,[14] endeavoured to suggest that the abovementioned express terms had somehow been overridden as a matter of construction because of Ms Au’s evidence as to the parties’ subjective intentions to the effect that the agreements involved only promises to introduce clients to suitable professional intermediaries.  We were unable to see any legal basis for that suggestion and, in any event, Ms Au’s evidence was rejected by both the Magistrate and the Judge.  As M Poon J found,[15] the suggestion that CLMS’s role was limited to “lining up” professionals was wholly untenable.

16.  There was evidence of steps to implement the 3 Wells contract having been taken in Hong Kong and on the Mainland by a CLMS employee named Michael Ang, involving meetings and assessments of 3 Wells’s suitability for a listing.  Such steps do not require further examination since the holding out was established by proving what CLMS had contractually promised by way of advice and assistance, regardless of the extent to which those agreements were actually carried out.

17.  The contracts were obviously the result of an intentional process of negotiation and agreement, especially as to the sums payable by each of the client companies, the number of share options to be issued and the period over which services were to be rendered.  There can be no doubt that Ms Au, CLMS’s sole director and shareholder, intentionally executed them on the company’s behalf and thereby intentionally caused CLMS to hold itself out in contravention of section 114(1)(a).  No issues arose as to whether a conviction could be sustained without proof of mens rea or whether any lesser mental state would suffice so that Hin Lin Yee and Kulemesin are irrelevant.  As M Poon J points out, the importation of additional mental elements added an “unnecessary gloss to the interpretation of the section, when the statutory construction is plain and obvious.”[16]

18.  Nothing capable of amounting to a reasonable excuse for such holding out arose.  Purported issues regarding corporate attribution and statutory and contractual construction; attempts to qualify the express terms of the contracts (which are stipulated in each case to be the entire contract) by evidence of prior “understandings”; and claims that Ms Au did not know “the exact terms” of the agreements and was not aware of what Michael Ang had done, were all red herrings with no legal merit.

19.  It is equally clear that as a result of Ms Au causing CLMS to enter into the agreements and executing them on its behalf, CLMS’s offences were intentionally aided, abetted, counselled, procured or induced by, or committed with the consent or connivance of, Ms Au.

20.  No arguable basis for granting leave to appeal exists and the application was accordingly dismissed with costs.