NAM PEI HONG (HOLDING) LTD. AND OTHER v. THE STOCK EXCHANGE OF HONG KONG LTD.

HCAL 36/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ADMINISTRATIVE LAW PROCEEDINGS NO. 36 OF 1998

----------------------

----------------------

J U D G M E N T

----------------------

Godfrey, J.A. :

Introduction

1. This is an application for a judicial review. The respondent is the Stock Exchange of Hong Kong ("the respondent"). The respondent's Listing Committee has found Nam Pei Hong (Holdings) Ltd ("the company"), a listed company, and three of its directors ("the applicants") to be in breach of their respective obligations owed to the respondent in relation to the listing of the company. The Listing Committee has resolved that the applicants should be publicly censured for these breaches. The applicants complain, saying that, on the facts now disclosed here, it can be seen that there is a real danger that the members of the Listing Committee who decided to proceed against, and ultimately to censure, the applicants had allowed themselves, in advance of hearing it, to be influenced against the applicants' case. The respondent does not accept this; anyway, it says, even if it were so, the applicants have a right of appeal, and should accordingly be left to that remedy for the redress of their grievance.

2. I have to decide whether the applicants have made out their case, which, in a word, is a case of bias; and, if so, whether the existence of the remedy suggested by the respondent justifies refusing the applicants a judicial review.

The facts

3. On 9 November 1991, the company as Issuer entered into a Listing Agreement with the respondent. The following provisions are material :-

"2. Generally and apart from compliance with all the specific requirements of this Agreement, the Issuer shall :-

(1) keep the Exchange, members of the Issuer and other holders of its listed securities informed as soon as reasonably practicable of any information relating to the group (including information on any major new developments in the group's sphere of activity which is not public knowledge) which :-

(a) is necessary to enable them and the public to appraise the position of the group;

(b) is necessary to avoid the establishment of a false market in its securities; and

(c) might be reasonably expected materially to affect market activity in and the price of its securities;

.....

38. The Issuer shall respond promptly to any enquiries made of the Issuer by the Exchange or the Commission concerning unusual movements in the price or trading volume of its listed securities or any other matters by giving such relevant information as is available to the Issuer or, if appropriate, by issuing a statement to the effect that the Issuer is not aware of any matter or development that is or may be relevant to the unusual price movement or trading volume of its listed securities and shall also respond promptly to any other enquiries made of the Issuer by the Exchange or the Commission."

(The form of Listing Agreement has been revised since 1991; references to "the Commission" have been deleted, and what was then para. 38 appears in the new form as para. 39.)

4. It is of course the obligation of a listed company, and of its directors, to comply with the provisions of the Listing Agreement.

5. Further, listed companies are subject to the Rules governing the listing of securities published by the respondent as amended from time to time ("the Listing Rules").

6. Under the Listing Rules, the Listing Committee may issue a public censure of a company or director in breach of the rules : see Rule 2A.09(3). It must, if requested, give its reasons in writing for so doing : see Rule 2A.19. The party censured (the appellant) has a right to have the decision against it or him referred back to the Listing Committee for review. If the Listing Committee modifies or varies the earlier ruling, it must, if requested by the appellant, give in writing its reasons for the modification or variation, and; in the case of a public censure, the appellant has the right to a further and final review by the Listing Appeals Committee : see again Rule 2A.19.

7. Between 16 July 1997 and 23 July 1997 there were unusual movements in the company's share price and a large turnover in its shares.

8. On 24 July 1997, the respondent suspended dealings in the company's shares.

9. On the same day, Lawrence Fok, the Secretary of the Listing Division, reported this suspension to the Listing Committee. In a minute of what transpired at that meeting, Lawrence Fok is recorded as having "elaborated" on this as follows :-

"LF elaborated on the Company's suspension as the Division was particularly concerned with the Company's huge turnover and increase in share price (90%) since 16th July, 1997. Since that time, the Company has repeatedly said it has been unaware of anything that would trigger the increase and has issued 39.2 announcements to this effect. Today, however at 4.00 p.m., following the standard response by the Company to the Division's enquiries, the Division was advised by the Company's advisers that the substantial shareholder, ITC sold a complete block on market amounting to 33% of the Company's issued share capital at HK$1.50 a share (15% above the last traded price). The Company has since said that they had been approached by a third party that morning but the Company Secretary had not at that time been able to speak to the Company's directors regarding this proposal. The Division is concerned with the Company's behaviour in relation to this transaction and will be following up and reporting back to the Committee."

10. The Chairman of the Listing Committee, Gordon Kwong, is recorded as having remarked :-

"that the SFC will be looking into the possibility of insider dealing. From the Exchange's viewpoint, it was very important that companies make para 2 announcements on a timely and accurate basis."

11. The Listing Committee is recorded as having agreed as follows :-

"The Committee agreed that until the position is clarified and there is an acceptable explanation, the Company should remain suspended as there may be an uninformed market in the shares presently. Also, given the chronology of events, it was highly unlikely that the directors could make an instant decision to sell a controlling block today having been completely unaware of the transaction in the preceding days. The Committee was also mindful that to allow a resumption would undermine the purpose of issuing para 2's."

12. Finally, the minute records under "Any other business" that the Chairman stated as follows :-

"GK raised the subject of the recent red chip phenomenon, commenting that the Committee should support the Division in taking a tough stand on red chips which abuse the system (referring to instances such as Nam Pei Hong and making statements with no substance) as such incidents do little to enhance Hong Kong' position in the international arena and may result in Hong Kong being seen in terms of an emerging market. The Exchange is now looking at this from a strategic perspective as there are concerns about red chips affecting Hong Kong's market in the longer term."

13. All this led in due course to the institution of disciplinary proceedings against (among others) the applicants. Such proceedings envisage a "First Instance Hearing" with witnesses under "Disciplinary Procedures" committed to writing and adopted by the respondent's Listing Committee (para. 5, "Attendance at the First Instance Hearing"; and para. 6, "Conduct of the First Instance Hearing"). There is a right of appeal, to a "Review Hearing", before persons who were not present at the First Instance Hearing : see the Listing Rules, para. 2A.39. The procedures at the "Review Hearing" (para. 9, "Attendance at Review Hearing", and para. 10, "Conduct of the Review Hearing") are identical with those prescribed for the "First Instance Hearing".

14. The First Instance Hearing in the present case took place on 21 October 1997. Its decision was communicated to the company's solicitors on 17 November 1997. I will read the decision in full. It reads as follows :-

"The Listing Committee of the Exchange has recently concluded a hearing into the conduct of the Company and the Executive and Non-Executive Directors (the "Directors") in respect of the Company's obligation pursuant to Paragraphs 2 and 39 of the Listing Agreement as contained in Appendix 7 (the "Listing Agreement") to the Rules Covering the Listing of Securities on the Exchange (the "Exchange Listing Rules") and in respect of the Director's obligations pursuant to their Declaration and Undertaking with regard to Directors (the "Undertaking") as contained in Appendix 5 to the Exchange Listing Rules arising from the sale of shares in the Company by International Tak Cheung Holdings Limited and Paul Y. - ITC Construction Holdings Limited (together, the "Vendors") to Victory Hunter Holdings Limited, a company controlled by Mr. Yau Wai Ming ("Mr. Yau"), a PRC party resident in Hong Kong.

It is noted that Mr. Charles Chan Kwok Keung ("Charles Chan") and Mr. Simon Yuen Chi Choi resigned as directors of the Company with effect from 6 August 1997.

The Listing Committee is of the view that the obligations imposed by Paragraphs 2 and 39 of the Listing Agreement are aimed at ensuring the prompt, fair and even dissemination of information so as to avoid the establishment of a false market in the securities of an issuer and to maintain an orderly market.

In the light of the evidence contained in the oral and written submissions made by the relevant parties, the Listing Committee found, inter alia, that :

1. In the submissions dated 24th July 1997 the Company stated that the Directors were aware for several days prior to 22nd July 1997 of rumours of an acquisition of shares in the Company by a PRC party but concluded that there was 'no substance' in the rumours. On that basis, the Directors authorised the issue of the unqualified Paragraph 39 announcements on 16th July 1997, 21st July 1997 and 22nd July 1997 stating that the Company did not know the reason for the increase in the Company's share price.

2. If the Directors were aware of the reasons (or, even, a possible reason) for the fluctuations in the Company's share price and the substantial trading volume of the Company's shares, namely rumours of an acquisition by a PRC party, the Exchange should have been informed of this. The obligation to inform the Exchange extends to commenting on market rumours and should not be limited to matters which are factually correct.

3. More importantly, the conclusion that there was no substance in the rumours is difficult to reconcile with the fact that Mr. Ken Cheung Kwok Wah ("Ken Cheung") had met on 15th July 1997, 17th July 1997, 22nd July 1997 with Mr. Yau at which time Mr. Yau had expressed interest in the Company. Both Mr. Charles Chan and Mr. Ken Cheung were aware of Mr. Yau's expressions of interest in the Company and had supplied information regarding the Company to Mr. Yau. They were also aware of the Listing Division's concern as to the position, as indicated by the Listing Division's Paragraph 39 persistent enquiries on 16th July 1997, 21st July 1997 and 22nd July 1997.

4. The Listing Committee therefore considers that there was no basis upon which Mr. Charles Chan, Mr. Ken Cheung and Mr. Tse Cho Tseung could reasonably conclude in the circumstances that there was 'no substance' to the rumours. Even if Mr. Charles Chan and Mr. Ken Cheung regarded Mr. Yau's interest as not being serious, or even if they doubted Mr. Yau's ability to complete any acquisition, the fact remains that Mr. Yau's interest was a possible explanation for the increased share activity and trading volume of which they were aware.

In the light of the above, the Listing Committee has on 21st October 1997 determined that the Company failed :-

a. upon enquiry by the Exchange pursuant to Paragraph 39 of the Listing Agreement on 16 July 1997, 21 July 1997 and 22 July 1997, to disclose to the Exchange matters that might have had relevance to unusual movements in the price or trading volume of the Company's shares, such matters being meetings and discussions which had been taking place among Mr. Charles Chan, Mr. Ken Cheung, Mr. Tse Cho Tseung, three of the Executive Directors of the Company and Mr. Yau relating to, inter alia, the Company's operations and financial position, and

b. pursuant to paragraph 2, to notify the Exchange as soon as reasonably practicable of information which might be reasonably expected materially to affect market activity in and the price of the Company's shares, such information being the making of an offer by Mr. Yau to purchase the Vendor's interest in shares of the Company (representing 33 per cent of the entire issued share capital of the Company) at a sales price of HK$1.50 per share and which substantiated rumours existing in the market at that time.

The Listing Committee has found that by virtue of the determinations made above the Company is in breach of paragraphs 2 and 39 of the Listing Agreement and should be publicly censured in respect of such breaches. Further, by reason of the aforesaid determinations that three of the Executive Directors of the Company, being, Mr. Charles Chan Kwok Keung, Mr. Ken Cheung Kwok Wah and Mr. Tse Cho Tseung should be publicly censured for being in breach of their undertakings to comply to the best of their abilities with the Exchange Listing Rules from time to time in force, the Listing Agreement, and to use their best endeavours to procure that the Company so complies."

15. The decision was accompanied by the public censure announcement proposed to be made, which I need not read.

16. On 26 February 1998 (after an unsuccessful application for judicial review which is irrelevant for present purposes), the company's solicitors intimated to the respondent that the company wanted a review hearing before the Listing Committee. One was scheduled, for 12 May 1998. But, at the request of those solicitors made on that date, the hearing was adjourned to 16 June 1998. This hearing did not proceed. It was stalled by the present application for judicial review, made on 8 June 1998 after the respondent had made available to the applicants on 11 May 1998 the minute of the Listing Committee's meeting of 24 June 1997, from which I have already extensively quoted.

17. The applicants had not previously seen these minutes. They considered that what had transpired at that meeting, and the fact that the minutes had been circulated to all members of the Listing Committee, gave the applicants justification for concluding that the members of the Listing Committee would, or might, have been led to view with disfavour the applicants' case in answer to the Listing Division's allegations before the applicants had had any chance to advance at any first instance hearing their own side of the story.

18. The applicants accordingly launched, as I have said, this present application for judicial review; and I have now to decide the issues which I adumbrated in introducing this judgment.

The first issue - bias?

19. Following what was said by Lord Goff of Chieveley in R. v. Gough [1993] A.C. 646 at p.670, the first issue may be framed thus :

20. Is there here a real danger that the members of the Listing Committee who attended the first instance hearing were led, either by reason of their having been present at the meeting on 24 July 1997 or by reason of their having received the minutes of that meeting, into prejudging the question of the applicants' guilt or innocence of the charges against them before hearing the applicants' case?

21. This is a matter of impression. So much I think is clear from the decision of the Privy Council in Panel on Takeovers and Mergers and Another v. William Cheng Kai-man [1995] 2 H.K.L.R. 302. In that case, the impression of the judge of the letter there under consideration was that it did not disclose bias on the part of the writer. The Court of Appeal in Hong Kong (of which I was a member) were unanimously of a different opinion. Our impression was that the letter in question did disclose bias on the part of the writer. The Privy Council was unanimously of the opinion that the judge was right. The letter had not disclosed bias on the part of the writer. Obviously, different minds can form different opinions when it comes to matters of impression.

22. If there was here any real doubt about the matter, the applicants would, in my judgment, be entitled to the benefit of it. But I have to say I do not have any such real doubt. As it seems to me, the comments made at the meeting of 24 July 1997 go no further than to express concern that the applicants had been guilty of offences which, if they were guilty of such offences, would be the proper subject of disciplinary action. I can see no real foundation for the suggestion that the members of the Listing Committee who attended the first instance hearing might have been led by these comments into denying a fair hearing to the applicants. The applicants accordingly fail on this issue.

The second issue : alternative remedy?

23. The second issue, alternative remedy, does not strictly speaking, arise. But since this issue was fully argued, I will briefly state my conclusions on this issue as well.

24. I agree with Wade and Forsyth (see Administrative Law, 7th Edition, 1994, at p.721) that despite the wealth of dicta in the books (including pronouncements of the Privy Council, not to mention of this court : see Stock Exchange of Hong Kong Ltd v. Onshine Securities Ltd [1994] 1 HKC 119 which can be read as suggesting otherwise) there is no reason in principle why an applicant otherwise entitled to a judicial review should be denied relief simply because he has an alternative remedy which he has not exhausted. I quite see that there may be good reasons for this in practice; judicial review is a discretionary remedy, and applicants should be encouraged to use the court as a last resort, not a first resort. So, in practice, the court does require the applicant for judicial review who has not exhausted all his available remedies to show some special or exceptional circumstances why the court should, nevertheless, assist him.

25. In my judgment, it should be enough for a court to ask itself the same question, or the same sort of question, in these circumstances as it asks itself when considering whether or not to grant or refuse an application for an interlocutory injunction. Do the interests of justice require the court to intervene in this dispute at this stage?

26. When the interests of justice do not require such an intervention, then, in my judgment, the court should refuse so to intervene.

27. If, in the present case, I had been of the opinion that there was a real danger that the members of the Listing Committee who attended the first instance hearing had been led to prejudge the applicants' case, I would have thought it right to quash the decision arrived at at that hearing, however inconvenient for the respondent that might have proved. It would, as it seems to me, have been unjust, and indeed illogical, to leave the applicants to take their chance at a review hearing before different members of the same Listing Committee. If the whole panel of decision makers is tainted, how can the wrong be put right by a fresh hearing before different members of the same tainted panel? If, perhaps, there are now five or more members of the Listing Committee, none of whom were present at the meeting of 24 July 1997 or had received the minutes of the meeting held on that date, an offer by the respondent to constitute the review panel from among their number might have been enough to persuade me that the interests of justice did not require the grant of any relief to the applicants by way of judicial review. But none of this arises, in the light of my decision on the first issue.

The result

28. For the reasons I have given, I propose to dismiss this application, with costs.

(Gerald Godfrey)

Justice of Appeal