KAYDEN LTD v. SECURITIES AND FUTURES COMMISSION

FACV No. 1 of 2010

IN THE COURT OF FINAL APPEAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

FINAL APPEAL NO. 1 OF 2010 (CIVIL)

(ON APPEAL FROM CACV NO. 319 OF 2008)

________________________

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Chief Justice Ma :

1.  For the reasons contained in the judgment of Mr Justice Ribeiro PJ, I would allow the appeal and make the orders set out therein.

Mr Justice Bokhary PJ :

2.  The decision of the Privy Council in Mercedes Benz AG v. Leiduck [1996] 1 AC 284 having been mentioned, I would respectfully record my preference for the dissenting opinion of Lord Nicholls of Birkenhead to the view taken by the majority in that case.  As appears from Mr Justice Ribeiro PJ’s judgment, the situation in the present case is wholly different from the situation in that case.  For the reasons which he gives, I would allow this appeal in the terms which he proposes.  As he has so cogently demonstrated, this is not the occasion for pronouncing on the point raised by Lord Pannick QC for the Securities and Futures Commission on the true construction and therefore scope of s.213 of the Securities and Futures Ordinance, Cap.571.  The Court may have to do so on a future occasion – unless the legislation is amended to put the position beyond doubt, which is a matter for the legislature.

Mr Justice Chan PJ :

3.  I agree with the judgment of Mr Justice Ribeiro PJ.

Mr Justice Ribeiro PJ:

4.  Relying on section 213 of the Securities and Futures Ordinance (“SFO”),[1] the Securities and Futures Commission (“SFC”) persuaded Kwan J[2] (as Kwan JA then was) to make ex parte orders freezing the assets of four defendants and granting leave for three of them to be served outside the jurisdiction. Kwan J subsequently discharged those orders at the inter partes hearing.[3] However, the Court of Appeal[4] overturned her judgment and reinstated the asset-freezing injunctions and granted the SFC leave to amend its originating summons and leave to serve it afresh on the foreign defendants.

5.  Leave to appeal was granted by the Appeal Committee to the three foreign defendants.[5]  Two of them have since abandoned their appeal and the only appellant is now the 4^th defendant.   However, an understanding of the issues makes it necessary to indicate the nature of the SFC’s proceedings against all four defendants.  The SFC obtained a direction from Kwan J at the ex parte stage that the defendants should not be named but should be designated as “C”, “D”, “E” and “F”.  As the parties accept, there is now no reason to maintain anonymity and in this judgment, the parties are referred to by name.

6.  The appellant contends in the first place that the Court of Appeal was wrong to permit the SFC to rely upon a new and different basis for justifying the orders obtained ex parte and wrong to reverse Kwan J on such basis.  Moreover, the appellant complains that in argument before this Court, the SFC has purported to rely on a radically modified claim as a foundation for the aforesaid orders.  The appellant also raises two questions of law.  The first is whether, as a matter of statutory construction, the Mareva type orders obtained fall outside the scope of section 213(2)(c) on which the SFC grounded those orders.  And the second is whether the orders obtained by the SFC under section 213 give substantive relief so as to provide a basis for foreign service of process pursuant to Order 11 of the Rules of the High Court.

A.   Section 213

7. In so far as material, section 213 provides as follows:

(1) Where-

(a) a person has-

(i) contravened-

(A) any of the relevant provisions;

(B) ...

(C) ...

(D) ...

(ii) aided, abetted, or otherwise assisted, counselled or procured a person to commit any such contravention;

(iii) induced, whether by threats, promises or otherwise, a person to commit any such contravention;

(iv) directly or indirectly been in any way knowingly involved in, or a party to, any such contravention; or

(v) attempted, or conspired with others, to commit any such contravention; or

(b) it appears ... to the Commission that any of the matters referred to in paragraph (a)(i) to (v) has occurred, is occurring or may occur,

the Court of First Instance, on the application of the Commission, may, subject to subsection (4), make one or more of the orders specified in subsection (2).

(2) The orders specified for the purposes of subsection (1) are-

(a) an order restraining or prohibiting the occurrence or the continued occurrence of any of the matters referred to in subsection (1)(a)(i) to (v);

(b) where a person has been, or it appears that a person has been, is or may become, involved in any of the matters referred to in subsection (1)(a)(i) to (v), whether knowingly or otherwise, an order requiring the person to take such steps as the Court of First Instance may direct, including steps to restore the parties to any transaction to the position in which they were before the transaction was entered into;

(c) an order restraining or prohibiting a person from acquiring, disposing of, or otherwise dealing in, any property specified in the order;

(d) an order appointing a person to administer the property of another person;

(e) an order declaring a contract relating to any securities, futures contract, leveraged foreign exchange contract, or an interest in any securities, futures contract, leveraged foreign exchange contract or collective investment scheme to be void or voidable to the extent specified in the order;

(f) for the purpose of securing compliance with any other order made under this section, an order directing a person to do or refrain from doing any act specified in the order;

(g)   any ancillary order which the Court of First Instance considers necessary in consequence of the making of any of the orders referred to in paragraphs (a) to (f).

(3) ...

(4) The Court of First Instance shall, before making an order under subsection (1), satisfy itself, so far as it can reasonably do so, that it is desirable that the order be made, and that the order will not unfairly prejudice any person.

(5) The Court of First Instance may, before making an order under subsection (1), direct that a notice of the application made in respect thereof be given to the persons it considers appropriate, or be published in the manner it considers appropriate, or both.

(6) Where the Court of First Instance considers it desirable to do so, it may grant such interim order as it considers appropriate pending the determination of an application made pursuant to subsection (1).

(7) ...

(8) Where the Court of First Instance has power to make an order against a person under subsection (1), it may, in addition to or in substitution for such order, make an order requiring the person to pay damages to any other person.

(9) The Court of First Instance may reverse, vary or discharge an order made or granted by it under subsection (1) or (6) or suspend the operation of the order. ...”

8.  The “relevant provisions” referred to in section 213(1)(a)(i)(A) are defined as the provisions of the SFO and certain provisions of the Companies Ordinance.

B.   The ex parte application before Kwan J

9.  On 6 June 2007, a creditor’s petition was presented to wind up Asia TeleMedia Limited (“ATL”), a Bermudan company listed on the Hong Kong Stock Exchange.  On the following day, trading in its shares was suspended.  When trading resumed on 18^th October 2007, its share price dropped by 62%.  On 17 January 2008, the SFC started a formal investigation into suspected insider dealing and on 18 March 2008, ATL was ordered to be wound up.

B.1    The SFC’s case on the ex parte injunctions

10.  About a month later, on 16 April 2008, the SFC made the ex parte application before Kwan J.  It was supported by an affirmation of that date made by Wong Mei Mei (“Ms Wong”), an officer of the SFC’s Enforcement Division.  In it Ms Wong set out the SFC’s allegations against the defendants which may be summarised as follows:

(a)  The first defendant, Mr Lu Ruifeng (“Mr Lu”), is a resident of Shenzhen in the PRC.  He was chairman, chief executive officer and a substantial shareholder of ATL. 

(b)  The 2^nd defendant, Tin Yin Kwan (“Madam Tin”), is the wife of Yao Wen Pei (“Mr Yao”), who was referred to as “X” below.  Mr Yao is the father of ATL’s then financial director, Charles Yiu Hoi Ying.

(c)  Beginning on 24 April 2007, the day after the petitioning creditor had served a statutory demand on ATL, Mr Lu began to sell off his ATL shares in the market.  He sold a total of 51.25 million shares during the month or so that followed and realised about $37.5 million from such sales.  Mr Yao, acting as Mr Lu’s nominee, sold a total of 48.61 million shares during the same period, realising about $39 million.  Those sales, according to the SFC, constituted insider dealing and were made in order to avoid anticipated losses.

(d)  Madam Tin, Clear Excel Limited (“Clear Excel”, the 3^rd defendant) and Kayden Limited (“Kayden”, the 4^th defendant and the present appellant) became involved in the insider dealing by receiving the proceeds of those sales. 

(e)  Mr Lu paid a total of about $23.65 million into his personal account from which he transferred $25 million into Kayden’s Singapore bank account.  Kayden is a BVI company.

(f)  Mr Yao paid about $37.8 million into the Hong Kong bank account of his wife, Madam Tin, who then transferred $32.4 million of that amount into Kayden’s Singapore bank account.  Madam Tin is a Hong Kong resident and has been served with the proceedings in Hong Kong. 

(g)  Mr Yao also paid about $1.25 million into Clear Excel’s bank account in Hong Kong, Clear Excel being a BVI company whose sole shareholder and director is Mr Lu.

11.  Ms Wong explained that the application was made under section 213(1)(b), that is, on the footing that it appeared to the Commission that the defendants had either contravened or become involved in contravention of the insider dealing provisions in sections 270 and 291 of the SFO.[6]  This was reiterated by counsel then instructed (not Lord Pannick QC) for the SFC in their skeleton argument.[7]

12.  The SFC’s case, as Counsel explained, was that the interim injunctions to freeze the defendants’ assets being sought came within section 213(2)(c), adding that the Court also had jurisdiction under section 213(6) to grant such injunctions pending the determination of a section 213(1) application.[8]  They cited Kwan J’s judgment in Securities and Futures Commission v A,[9] as providing guidance on the threshold requirements for such interim orders and submitted:

“There is no doubt that the Court has jurisdiction to grant an injunction to freeze a sum equal to the loss avoided by persons suspected of engaging in insider dealing, just as the same section applies to injunctions freezing profits or penalties.”[10]

13.  Ms Wong set out the SFC’s calculation of loss allegedly avoided by Mr Lu in the sum of $43,661,568.[11]  She stated:

“Without the grant of an injunction, it is very likely that Lu will not have sufficient funds to satisfy any order for the disgorgement of loss avoided by the Market Misconduct Tribunal or any other order of the Court.”

B.2    The SFC’s case for service out of the originating summons

14.  The SFC sought leave to serve Mr Lu, Clear Excel and Kayden outside the jurisdiction with an originating summons (subsequently issued on 18 April 2008) claiming orders:

(a)   “pursuant to section 213” against Mr Lu, Madam Tin and Clear Excel, restraining them from removing from Hong Kong or disposing of or dealing with their assets in Hong Kong up to the value of $43,661,568, including assets listed in a schedule; or diminishing the value of such assets;

(b)   restraining Kayden in like terms, save that in its case, the order was to apply to its assets worldwide; and,

(c)   requiring disclosure by the defendants of information as to the location, value and other details of their assets.

No other relief was sought against the defendants.

15.  Ms Wong stated in her affirmation[12] (and counsel confirmed[13]) that the SFC was relying on O 11 r 1(1)(b) of the Rules of the High Court as the ground for service out of the jurisdiction.  The rule materially states as follows:

“(1) ...service of a writ out of the jurisdiction is permissible with the leave of the Court if in the action begun by the writ ... (b) an injunction is sought ordering the defendant to do or refrain from doing anything within the jurisdiction (whether or not damages are also claimed in respect of a failure to do or the doing of that thing)...”

B.3    The order made

16.  The ex parte injunctions granted by Kwan J were identical to the orders sought in the originating summons.  Thus, it was ordered that Mr Lu, Madam Tin and Clear Excel:

“must not:-

(a) remove from Hong Kong any of their assets which are within Hong Kong, ... up to the value of $43,661,568; or

(b) in any way dispose of, deal with, or diminish the value of any of their assets which are within Hong Kong ... up to the value of $43,661,568. This prohibition includes in particular any money in the accounts listed in Schedule 2 and the assets listed in Schedule 3 to this Order”.

17.  A like injunction was granted against Kayden except that it was applicable to “any of its assets, whether within or outside Hong Kong”.  These were accordingly injunctions in the familiar Mareva form and contained the usual notices to third parties affected, and so forth.

18.  The Order was to remain in force until the return day, then stated to be 2 May 2008 unless varied or discharged in the meantime.  The SFC was also granted leave to serve Mr Lu, Clear Excel and Kayden outside the jurisdiction, giving those defendants 14 days to acknowledge service.

C.   The defendants’ responses

19.  On 21 April 2008, the SFC took out an inter partes summons for continuation of the injunctions and for the disclosure orders sought in the originating summons.  The riposte of Mr Lu, Clear Excel and Kayden was, on 30 April 2008, to apply under O 12 r 8 for service to be set aside and for the ex parte orders to be discharged on the grounds that the SFC’s claims did not fall within Order 11 and that there had been material non-disclosure.

20.  Madam Tin was served in Hong Kong and on 22 May 2008, consented to an order discharging the ex parte order on her undertaking not to deal with sums “deriving from the sum of HK$37,778,751.77 paid into her HSBC account on 8 June 2007” and to disclose what she knew of the whereabouts of sums deriving from that payment.

21.  In support of its O 12 r 8 application, Kayden filed an affidavit sworn on 7 July 2008 by Charles Simon Hotton (“Mr Hotton”), one of its directors.  Mr Hotton stated that he was managing director of ING Trust Company (Jersey) Limited (“ING Jersey”) and that Mr Lu, as settlor, had established a Jersey law discretionary trust on 4 July 2006.   ING Jersey was the trustee and the beneficiaries were Mr Lu and his three children.  The trust was revocable during Mr Lu’s lifetime and allowed him to direct investments but not withdrawals or distributions, which were only made upon the exercise by the trustee of its discretion.

22.  Mr Hotton explained that Kayden was a BVI company which was an asset of the trust and used as a holding company.  Its shareholders were nominee companies belonging to the ING Jersey group and its directors were ING Jersey employees.  He asserted that there were no and had never been any assets of the trust or Kayden in Hong Kong.  He identified four sums totalling HK$60.9 million paid by Madam Tin and Mr Lu respectively into Kayden’s bank account with ING Asia Private Bank in Singapore in June and July 2007, but denied knowledge of the matters complained of by the SFC.

23.  Mr Hotton also pointed out that the SFC had obtained documents so that at the time of making the ex parte application, it was aware of the fact that Kayden was held by the trust and not owned by Mr Lu, a matter not disclosed to Kwan J.

D.  Kwan J’s judgment on the inter partes hearing

D.1    The problems faced by the SFC

24.  Given the way the application and the originating summons had been constituted, the SFC faced formidable problems when trying to sustain the ex parte orders obtained at the inter partes stage. As we have seen,  the application against the foreign defendants proceeded solely in reliance on section 213(1)(b) in combination with section 213(2)(c) which, it was claimed, together justified service out of the jurisdiction under O 11 r 1(1)(b).

25.  In other words, it was being asserted merely that it “appeared to” the Commission that Mr Lu had contravened the SFO by engaging in insider dealing (bringing the SFC within section 213(1)(b)), so as to trigger its claim for an order freezing the defendants’ assets (under section 213(2)(c)).  Since an order “restraining or prohibiting a person from acquiring, disposing of, or otherwise dealing in, any property specified in the order” under section 213(2)(c) was in substance an injunction, a claim for such relief enabled the SFC, so it was argued, to invoke the extra-territorial jurisdiction of the court under O 11 r 1(1)(b) which permits service out where the action is for an injunction ordering the defendant to do or refrain from doing something within the jurisdiction.

26.  The first major problem faced by the SFC, as Kwan J recognized,[14] is that the application so constituted was plainly for relief which was interim in nature, mirroring pure Mareva relief.  It did not involve the institution of any proceedings seeking final or substantive relief for insider dealing or for any other contravention of the SFO.  The position could hardly be otherwise since the SFC was not suggesting that it had proven or was seeking to prove a contravention (whether in the Market Misconduct Tribunal (“MMT”) or elsewhere, whether pursuant to the originating summons or some other originating process).  Its case rested on section 213(1)(b) as the basis for seeking the relevant orders under section 213(2) asserting suspected contraventions or involvement.  The originating summons as issued merely sought orders identical to the interim orders obtained ex parte (and adjectival disclosure orders) and no final relief based on a determination of contraventions under section 213(1).

27.  This entirely undermined its application under O 11 r 1(1)(b).  As Lord Mustill pointed out in the Privy Council on appeal from Hong Kong in  Mercedes Benz AG v Leiduck,[15] “it is not enough simply to say that since a Mareva injunction is an injunction it automatically falls within Ord 11, r 1 (1)(b)”.  Emphasising that Order 11 is premised on there being an “action begun by writ”[16] and that O 11 r 4 requires the affidavit leading the application to state the belief of the deponent that the plaintiff has “a good cause of action”, his Lordship explained:

“...the purpose of Ord 11, r 1 is to authorise the service on a person who would not otherwise be compellable to appear before the English court of a document requiring him to submit to the adjudication by the court of a claim advanced in an action or matter commenced by that document. Such a claim will be for relief founded on a right asserted by the plaintiff in the action or matter, and enforced through the medium of a judgment given by the court in that action or matter. The document at the same time defines the relief claimed, institutes the proceedings in which it is claimed, and when properly served compels the defendant to enter upon the proceedings or suffer judgment and execution in default. Absent a claim based on a legal right which the defendant can be called upon to answer, of a kind falling within Ord 11, r 1(1), the court has no right to authorise the service of the document on the foreigner, or to invest it with any power to compel him to take part in proceedings against his will.”[17]

He added:

“Thus, at the centre of the powers conferred by Order 11 is a proposed action or matter which will decide upon and give effect to rights. An application for Mareva relief is not of this character. When ruled upon it decides no rights, and calls into existence no process by which the rights will be decided. The decision will take place in the framework of a distinct procedure, the outcome and course of which will be quite unaffected by whether or not Mareva relief has been granted.”[18]

28.  Another basic problem faced by the SFC concerned Kayden in particular.  The evidence filed by the latter (which was not challenged) was that it had no and had never had any assets in Hong Kong. Accordingly, as Kwan J noted,[19] any injunction against Kayden restraining the disposal, etc, of its assets would not involve “ordering the defendant to do or refrain from doing anything within the jurisdiction”, taking the case in any event outside O 11 r 1(1)(b).  This particular objection was not available to Mr Lu or to Clear Excel since there was evidence that they had bank balances totalling about $3.5 million in Hong Kong at the time of the ex parte orders.[20]

29.  Thirdly, as Kwan J quite properly found,[21] there had been material non-disclosure by the SFC in respect of Kayden.  It was aware that “there was a trust structure and an express exclusion of power in the limited power of attorney for [Mr Lu] to withdraw cash or securities from [Kayden’s] accounts” but did not disclose those obviously material facts to the court.

D.2    The SFC’s attempts to modify its case before Kwan J

30.  Counsel then acting for the SFC sought to salvage the position by suggesting three responses.  First, in an attempt to conjure up something which Kayden might be ordered to do or refrain from doing within this jurisdiction, an amendment to the originating summons was proposed so as to claim against Kayden an order requiring it to:

“...return to Hong Kong and maintain the same in a designated account the funds representing the monies and securities in the accounts listed in Schedule 4 hereto [this should be a reference to Schedule 3]. The sums in such designated account shall not be disposed of or encumbered in any way other than as the Court shall direct.”[22]

31.  That was misconceived and rightly rejected.  It involved asking for an order directing someone to do something outside Hong Kong, ie, to transfer funds to Hong Kong (which the court lacked jurisdiction to do in the first place), so that thereafter, there would be assets for the injunction to bite on within this jurisdiction, in the hope of founding an argument for the applicability of O 11 r 1(1)(b).

32.  Secondly, without proposing any amendment, counsel sought to argue that the relief claimed in the existing originating summons was not confined to Mareva type injunctive relief but included relief under section 213(2)(b) which permits the court to make:

“... an order requiring the person to take such steps as the Court of First Instance may direct, including steps to restore the parties to any transaction to the position in which they were before the transaction was entered into...”

33.  It was argued that no amendment was required since the SFC had listed in the margin of the originating summons, not only section 213(1)(b) and section 213(2)(c), but also section 213(2)(b), now sought to be relied on.

34.  In my view, the attempt to rely on section 213(2)(b) was rightly rejected, even if one assumes that a claim under that section was properly before Kwan J.  In the first place, as with injunctive orders under section 213(2)(c), orders under section 213(2)(b) may be sought on an “appearance” or “suspicion” basis.  The SFC’s case as then advanced was undoubtedly such a case, seeking purely interim relief pursuant to section 213(1)(b).  Even if one assumes (without deciding) that it is possible to institute a claim under section 213(2)(b) as a claim for final or substantive relief, that is not the type of claim being asserted by the SFC before Kwan J.  It therefore would have fallen foul of Mercedes Benz AG v Leiduck[23] by lacking any substantive claim within Order 11, as discussed in Section D.1 above in relation to Mareva type relief.[24]

35.  Secondly, the SFC’s attempted reliance on section 213(2)(b) runs counter to the principles developed in the line of cases commencing with Parker v Schuller.[25]  There, the plaintiff had obtained leave to serve a foreign defendant alleging breach of a contract within the jurisdiction consisting of a failure to deliver goods at Liverpool.  It later sought to allege instead that the breach was of an obligation to deliver the documents required under the CIF contract.  The English Court of Appeal refused to entertain the new basis for establishing jurisdiction.  Romer LJ stated:

“... an application for leave to issue a writ for service out of the jurisdiction ought to be made with great care and looked at strictly. If a material representation upon which the leave was obtained in the first instance turned out to be unfounded, the plaintiff ought not to be allowed, when an application was made by the defendant to discharge the order for the issue of the writ and the service, to set up another and a distinct cause of action which was not before the Judge upon the original application.”[26]

36.  The need for a strict approach is dictated by at least three related considerations.  First, it is grounded on recognition of the need for special care given the extraordinary nature of the long-arm jurisdiction asserted under Order 11.  As Lord Mustill pointed out, it involves seeking to compel a foreign defendant to submit to adjudication by the court or suffer judgment and execution in default.[27]

37.  Secondly, as indicated in the passage from Parker v Schuller cited above, the court acts on the faith of the plaintiff’s representations made to it ex parte when granting leave for service of process abroad.  Given the extraordinary nature of the jurisdiction which the court would thereby be asserting, it insists on special care on the plaintiff’s part and full disclosure of the basis upon which that jurisdiction is invoked.

38.  Thirdly, as Neill LJ pointed out in Excess Insurance Co Ltd v Astra SA Insurance and Reinsurance Co:[28]

“ ... it is not only the court which must be apprised of the cause of action alleged. The defendant must know the basis of the claim which he has to meet so that, if so advised, he can challenge the order which asserts the court's jurisdiction over him.”

39.  In Metall und Rohstoff AG v Donaldson Lufkin & Jenrette Inc,[29] Slade LJ emphasised the need for strict adherence to the legal basis advanced in support of service out but was prepared to admit of a possible exception:

“...if the draftsman of a pleading intended to be served out of the jurisdiction under Ord 11, r 1(1)(f) (or indeed under any other sub-paragraph) can be reasonably understood as presenting a particular head of claim on one specific legal basis only, the plaintiff cannot thereafter, for the purpose of justifying his application under Ord 11, r 1(1)(f), be permitted to contend that that head of claim can also be justified on another legal basis (unless, perhaps, the alternative basis has been specifically referred to in his affidavit evidence, which it was not in the present case). With this possible exception, if he specifically states in his pleading the legal result of what he has pleaded, he is in our judgment limited to what he has pleaded, for the purpose of an Order 11 application. To permit him to take a different course would be to encourage circumvention of the Order 11 procedure, which is designed to ensure that both the court is fully and clearly apprised as to the nature of the legal claim with which it is invited to deal on the ex parte application, and the defendant is likewise apprised as to the nature of the claim which he has to meet, if and when he seeks to discharge an order for service out of the jurisdiction.”

40.  Applying those principles to the present case, Kwan J was entirely justified in refusing to allow the SFC to rely on section 213(2)(b) as an alternative basis for upholding leave to effect foreign service.  The SFC had a duty to make clear to the Court exactly what the basis of its invocation of the Order 11 jurisdiction was.  A mere reference to the section in the margin of the originating summons could not possibly be sufficient. As we have seen,[30] the body of the originating summons sought nothing other than Mareva type relief.  The affirmation leading the application and counsel’s skeleton argument both clearly confined themselves to justifying Mareva type relief.  It was on that representation that Kwan J granted leave and the possible exception referred to by Slade LJ does not arise. 

41.  Section 213(2)(b) is open-textured, authorising the ordering of “such steps as the Court of First Instance may direct”.  If an order was being sought under that provision, the Court and the defendants were entitled to know exactly what steps the defendants were to be directed to take.  If it had to do with restoring “the parties to any transaction to the position in which they were before the transaction was entered into”, the Court and the defendants had to be told what against which persons the order was to be directed, what transactions were involved, who the parties to those transactions were and the legal basis for seeking to reverse those transactions.  None of this featured in the SFC’s leave application.  Here, it was not even a case of ambiguity.  The alternative basis sought to be relied on was not even hinted at in the affirmation in support.  There was simply nothing put before the Court beyond a marginal reference to section 213(2)(b).

42.  The third response suggested by the SFC at the inter partes hearing was aimed at meeting the difficulty that there was nothing to restrain Kayden from doing within the Hong Kong jurisdiction so as to come within O 11 r 1(1)(b).  It was submitted that leave to serve out could be justified under O 11 r 1(1)(c) which relevantly provides:

“...service of a writ out of the jurisdiction is permissible with the leave of the Court if in the action begun by the writ ... the claim is brought against a person duly served within or out of the jurisdiction and a person out of the jurisdiction is a necessary or proper party thereto...”

43.  It was submitted that Kayden could be served as a necessary or proper party to the proceedings brought against Mr Lu and Clear Excel or to those brought against Madam Tin.  Kwan J rejected this suggestion since she had held that Mr Lu and Clear Excel had not been duly served and since there was “no live issue” in the proceedings between the SFC and Madam Tin to which Kayden might be a “necessary or proper party”.  Her Ladyship was plainly correct.  On the proceedings as instituted – seeking purely interim relief against Madam Tin – there were no live issues as she had agreed to give undertakings in terms of the orders sought.

E.   Proceedings in the Court of Appeal

E.1    The amended notice of appeal

44.  The SFC’s appeal to the Court of Appeal was argued on the basis of the un-amended originating summons.  However, in its amended notice of appeal, it sought leave to serve Kayden out of the jurisdiction pursuant to O 11 r 1(1)(c), that is, as a necessary or proper party.  The amended notice stated that the Judge had erred in holding that there was no live issue as between Mr Lu, Madam Tin and Clear Excel on the one hand, and Kayden on the other, but did not identify the action brought against each of them which had allegedly been duly served upon the same.  As there was no mention of any reliance upon section 213(2)(b), the amended notice of appeal could only have proceeded on the footing that the action duly served on those three defendants was the SFC’s claim for injunctive relief under section 213(2)(c). 

45.  The SFC accordingly approached the Court of Appeal on the basis that (i) Kwan J was wrong to hold that the asset-freezing injunctions sought under sections 213(1)(b) and 213(2)(c) were not in the nature of final or substantive relief and therefore wrong to hold that they fell outside O 11 r 1(1)(b); (ii) that she was wrong to refuse the SFC leave to serve Kayden out of the jurisdiction as a necessary or proper party to the claims for injunctive relief against the other three defendants; and (iii) that she was wrong to find that there had been material non-disclosure.

E.2    The Court of Appeal’s decision

E.2.a Service on Mr Lu and Clear Excel

46.  Le Pichon JA (with whom A Cheung J agreed) held in the SFC’s favour on the “substantive relief” point regarding Mr Lu and Clear Excel and concluded that Mercedes Benz AG v Leiduck was distinguishable.  Her Ladyship’s reasoning ran as follows:

“37. As the judge recognised, an order granting an injunction under section 213 does not require an underlying claim ‘as the jurisdictional basis is all found in section 213’. It is sui generis. Nevertheless, the wrongdoing which founds the relief would invariably have taken place in Hong Kong since that is the relevant market regulated by the SFC and within which the acts constituting such wrongdoing ‘has occurred, is occurring or may occur’. It is in respect of such wrongdoing within the jurisdiction that the relief would be sought.

38. Another relevant consideration is the fact that relief under section 213(2) is entirely free-standing and is not contingent or conditional on there being proceedings in the Market Misconduct Tribunal. Further, while an order under section 213(2)(c) is not an end in itself in that, sooner or later, the assets frozen will have to be dealt with, subsection (9) enables the court ‘to reverse, vary or discharge’ such an order. Thus the relief sought in section 213 proceedings is entirely self-contained.

39.  It will have become apparent that the juristic nature of an order made under section 213(2)(c) is intrinsically very different from that of a Mareva injunction although the form of the order may be similar.  Jurisprudentially, relief by way of a free-standing injunction is a creature of statute and available only in respect of a certain type of wrongdoing.  In proceedings for an order under section 213(2)(c), the substantive relief to be decided can only ever be whether an order should be granted and that would depend entirely on whether the SFC can establish its statutory entitlement to the relief sought by showing that the conditions set out in section 213(1) are satisfied.  In my view, the Mercedes-Benz case is distinguishable and its reasoning does not apply to injunctions specifically created by statute.”

47.  I am, with respect, unable to agree.  As pointed out above, the appeal was argued on the basis of the un-amended originating summons which sought – and sought only – interim orders pursuant to section 213(2)(c) to restrain the defendants from acquiring, disposing of, or otherwise dealing in the property specified, founded on the assertion that it appeared to the SFC that there had been contraventions of the Ordinance (in accordance with section 213(1)(b)).  Accordingly, for the reasons developed in Section D.1 above, only interim, and not substantive or final, relief was being claimed and the problems identified in the Mercedes Benz case came squarely to the fore. 

48.  In holding that the relief claimed was substantive, her Ladyship stated:

“Section 213(1) empowers the court to make a range of substantive orders on the application of the SFC if the SFC is satisfied that the contravention of any of the relevant provisions ... ‘has occurred, is occurring or may occur’.”[31] (Italics supplied)

49.  However, I am respectfully unable accept that the statutory intention is to permit the court to make substantive orders affecting legal and equitable rights and obligations – as opposed to granting interim relief – merely on the basis of what appears to the SFC to be the position or, to use her Ladyship’s words, if the SFC – rather than the court or the MMT – is satisfied that there has been a contravention.

50.  It is not to the point to describe the injunctive relief claimed under section 213(2)(c) as “sui generis” (as stated in §37 quoted above).  The same was said of  Mareva injunctions by Lord Mustill in Mercedes Benz AG v Leiduck.[32]  Nor is it to the point to say that insider dealing occurred within the jurisdiction.  The relief sought in the originating summons concerned the freezing of assets and not any action or claim for insider dealing within the jurisdiction.  If it had advanced such a claim, the question would have arisen as to whether an action based on insider dealing falls within any of the paragraphs of Order 11 r 1 (1).  That was not in issue.

51.  A certain ambivalence is apparent in §§38 and 39 quoted above.  On the one hand, her Ladyship asserts that “relief under section 213(2) is entirely free-standing and is not contingent or conditional on there being proceedings in the Market Misconduct Tribunal” and that it is “a free-standing injunction” and “a creature of statute ... available only in respect of a certain type of wrongdoing”; but on the other hand, she accepts that in the context of this case “an order under section 213(2)(c) is not an end in itself in that, sooner or later, the assets frozen will have to be dealt with”, pointing out that section 213(9) “enables the court ‘to reverse, vary or discharge’ such an order”.

52.  I respectfully agree that the Ordinance does not require MMT or some other court proceedings first to have been instituted before an order under section 213(2)(c) can be sought, and in that sense, it is not contingent on there being such proceedings.  However, as her Ladyship acknowledges, such an order, when interim, is not an end in itself.   It was the SFC’s express representation to Kwan J that its aim was to preserve funds belonging to Mr Lu with a view to anticipated disgorgement proceedings in the MMT or to satisfying some other order of the Court.  But, as noted above, the originating summons as served sought the abovementioned interim orders and nothing else.  The fact that section 213(9) gives the court power to discharge or vary it does not make a section 213(2)(c) order substantive.  On the contrary, a final order affecting legal or equitable rights would not normally be subject to a discretionary variation by the court.  A discharge or variation under section 213(9) might be sought, for instance, after the conclusion of substantive insider dealing proceedings in the MMT and a variation might be sought for discretionary reasons pending their determination.

53.  The difficulty in the Court of Appeal’s reasoning is evident from its conclusion on this point:

“So far as [Mr Lu and Clear Excel] are concerned, since the acts constituting the alleged wrongdoing in respect of which redress is sought occurred in Hong Kong and there are proceeds of that wrongdoing that are within the jurisdiction, Order 11 rule 1(1)(b) plainly applies.”

54.  The originating summons did not allege or seek redress for any wrongdoing occurring in Hong Kong but, as noted above, merely sought asset-freezing orders and disclosure.  Nor was any such wrongdoing the basis on which the Order 11 jurisdiction was invoked.  The fact that there were proceeds in Hong Kong was, as held in the Mercedes Benz case, insufficient to found jurisdiction here.  It is therefore my view that the Court of Appeal did not have any proper basis for overturning Kwan J’s ruling in relation to Mr Lu and Clear Excel that the relief sought was not substantive and that service out was invalid for the reasons stated in the Mercedes Benz case.  Although Mr Lu and Clear Excel have abandoned their appeal, this remains relevant because of the SFC’s case on serving Kayden as a “necessary or proper party” to claims against those defendants.

E.2.b Service on Kayden

55.  The SFC accepted in the Court of Appeal that Kayden could not be served outside the jurisdiction under O 11 r 1(1)(b), no doubt because there was nothing to order it to do or refrain from doing within Hong Kong.  The focus was instead on the SFC’s application for leave to serve Kayden as a necessary or proper party to the proceedings against Mr Lu, Madam Tin and Clear Excel.  In approaching that question, the Court of Appeal did not give any weight to Kayden’s objections based on the Parker v Schuller line of cases, to which I shall return.

56.  Since Kwan J had held, in my view correctly, that there was no jurisdiction to serve the proceedings as constituted on either Mr Lu or Clear Excel, there could be no basis for saying that they had duly been served so as to permit the SFC to found jurisdiction against Kayden under O 11 r 1(1)(c) as a necessary or proper party. 

57.  Madam Tin, on the other hand, had been duly served in Hong Kong but Kwan J had found that Kayden was not a necessary or proper party to the SFC’s proceedings against Madam Tin since there were no live issues between them: only interim relief had been sought against her and she had given undertakings equivalent to such relief leading to discharge of the orders by consent.  Le Pichon JA held that Kwan J was wrong to find that there were no such live issues:

“...the action against the second defendant is still extant: there has been no court order made in relation to the second defendant and the action has not yet been disposed of. While, as earlier explained, the matter to be decided can only ever be whether the SFC is entitled to the order that it seeks, it may nevertheless require determination by the court should the second defendant wish to be released from the undertakings given and the SFC were to refuse.”[33]

58.  With respect, that proposition proceeds on the basis, which I cannot accept, that in the proceedings as constituted, there was some “action” waiting to be determined by the Court.  The orders against Madam Tin had been sought and granted on the “appearance” or “suspicion” basis under section 213(2)(b) and were necessarily interim in character.  There was furthermore no suggestion that Madam Tin would seek to be released from her undertaking.  If she had wished to contest the order, she would not have tendered an undertaking in the first place.

59.  In any case, on the footing that the claim against Madam Tin was solely for injunctive relief, it is hard to see how Kayden can possibly have been a necessary or proper party to that claim.  The validity or otherwise of the SFC obtaining orders to freeze Madam Tin’s assets in Hong Kong have nothing whatever to do with Kayden.  It follows that the claims against Madam Tin and Kayden as set out in the un-amended originating summons do not, in my view, afford any ground for permitting Kayden to be served as a necessary or proper party under O 11 r 1(1)(c).

60.  The Court of Appeal, however, did not regard the case against Madam Tin as confined to a claim for such injunctive relief. Although the amended notice of appeal made no mention of section 213(2)(b), it approached the case as if an order was being sought against Madam Tin under that section. And it evidently thought that Kayden could validly be treated as a necessary or proper party to such a claim.

61.  Thus, at §36 of her judgment, Le Pichon JA stated:

“For the purposes of this appeal, in addition to section 213(2)(c) the effect of which has already been considered, the relief afforded by section 213(2)(b) is also relevant. It was indorsed in the margin to the originating summons issued by the SFC. Section 213(2)(b) enables an order to be made that would restore all the parties to the transaction to their respective former positions. In other words, it is restitutionary in nature and, in conjunction with an order under section 213(2)(c), would provide compensation to those who have sustained losses through the wrongdoing in question, in the present case, insider dealing.” (Emphasis added)

62.  And in §48, she said:

“Given the fact that it was to [Kayden] that [Madam Tin] had channelled over 87% of the $37 million of the proceeds from the alleged insider dealing, [Kayden] is plainly a proper party to the claim against [Madam Tin].”

63.    Furthermore, in §49 her Ladyship stated:

“As regards relief, the provisions of section 213(2)(b) are also relevant. It has already been explained that the relief, if granted, which is restitutionary in nature could operate (in conjunction with an order under section 213(2)(c)) to provide compensation to those who have sustained losses by the alleged wrongdoing.”

64.  The aforesaid approach is highly problematical since it envisages the introduction of section 213(2)(b) into the present proceedings as a substantive or final restitutionary claim aimed at providing “compensation to those who have sustained losses through” insider dealing.  That is of course a vastly different case since the SFC as plaintiff was obviously not claiming that it had suffered any losses as a result of the suspected insider dealing and was not seeking restitution.  The SFC’s case for Mareva type relief as set out in the originating summons and the inter partes summons, as explained ex parte to Kwan J, was based essentially on the need to secure Mr Lu’s assets with a view to potential disgorgement proceedings. 

65.  Nevertheless, to enable the SFC to serve Kayden as a necessary or proper party, the Court of Appeal granted the SFC leave to amend the originating summons “to demonstrate its claim under section 213(2)(b)”, with the observation that there was no prejudice to Kayden:

“...since the SFC’s claim under section 213(2)(b) was included in the margin to the originating summons (served before the discharge of the ex parte injunctions) and thus put the defendants on notice of such a claim.”[34]

66.  The order as drawn up granted the SFC leave to amend its originating summons “to demonstrate its claim under section 213(2)(b)” and to serve it afresh out of the jurisdiction.  And the injunctions imposed at the ex parte stage against Mr Lu, Clear Excel and Kayden were re-imposed.  It should also be noted that leave to amend was granted without the Court of Appeal being shown any formulated draft amendment, a matter to which I shall return.

67.  As noted above, Kwan J had exercised her discretion against permitting the SFC to rely on a claim pursuant to section 213(2)(b) as the basis for service out on Kayden as a necessary or proper party.  She did so on the basis that it was a new case not sufficiently put forward by means of the marginal reference to that sub-paragraph and that such reliance ought to be disallowed adopting the strict approach prescribed by the Parker v Schuller line of authorities.  However, the Court of Appeal overrode that discretion, seeking to distinguish “the authorities relied on, such as Metall und Rohstoff AG v Donaldson Lufkin & Jenrette Inc,”[35] on the basis that they “were cases where the amendment was made to introduce a cause of action not previously specified” and that: “That is not the present case”.[36] 

68.  I do not think that Le Pichon JA was suggesting that a claim brought under section 213(2)(b) as opposed to section 213(2)(c) was not a different cause of action.  It plainly involves a claim for different relief on the assertion of different facts, particularly if viewed as giving rise to a restitutionary claim aimed at compensating those who had suffered loss.  What her Ladyship evidently had in mind was the reference to section 213(2)(b) in the margin of the originating summons as a sufficient basis for considering such a claim as something that had been “previously specified”. 

69.  With respect, for the reasons given in Section D.2 above, that marginal reference was quite inadequate and the Court of Appeal was not entitled to interfere with Kwan J’s discretion which was, in my view, entirely properly exercised. 

F.      The hearing before this Court

70.  It is the general practice of the court not to give leave to amend any originating process or pleadings without having sight of a formulated amendment.  That is obviously as it should be since the court ought to be clear as to how precisely the applicant is seeking to modify its existing case and the other party ought to have a proper opportunity to object to the amendment.  The Court of Appeal departed from that sound practice in the present case when giving leave to the SFC “to demonstrate its claim under section 213(2)(b)”.

71.  The SFC’s amended originating summons[37] purportedly served pursuant to the leave granted in fact made far-reaching modifications to its case which, in my view, went significantly beyond the scope of such leave.  Some of its principal features are as follows:

(a)  Whereas its case had previously proceeded merely on the “appearance” or “suspicion” ground pursuant to section 213(1)(b), the SFC now seeks declarations by the Court that Mr Lu “has contravened” sections 291(1)(a) and (b) and 291(8) of the SFO – that is, that he has committed the criminal offence of insider dealing – and is “a person within section 213(1)(a)(i)(A)”.

(b)  The same applies to Madam Tin, Clear Excel and Kayden, declarations now being sought as to their actual involvement in Mr Lu’s alleged contraventions.  In Kayden’s case, the declaration sought is that it “has, directly or indirectly, been knowingly involved in” such contraventions.

(c)  In a re-amendment effected pursuant to leave granted by Master Levy on 22 September 2010, the SFC added a claim for an order requiring the defendants “to take such steps as the Court may direct including to restore the parties to the transactions in the dealing referred to [in relation to Mr Lu’s alleged insider dealing] to the position in which they were before the transactions entered into”, tracking section 213(2)(b).  However, the amendment proceeded to seek “alternatively ... financial compensation or restitution in such sums and to such persons as the court may direct, being persons who entered into the transactions in the dealings pleaded ...” 

(d)  Returning to the amendment, the SFC now seeks an account of profit gained or loss avoided by the defendants; the appointment of a receiver to whom the defendants should pay such sums and who in turn should distribute such sums “among such persons as the court may direct”, being persons appearing to have entered into transactions involving Mr Lu’s alleged insider dealing; with all “further proper accounts, inquiries and directions”.

(e)  Finally, the SFC claims “alternatively, if on the true construction of section 213(2)(b), an account of profits and a class distribution are not available”, an inquiry (presumably by the Court) “in relation to each transaction” as to who the parties were; “the nature of the transaction”; “what assets or money each party to the transaction had paid or transferred to others”;  “whether each investor is willing that there should be a rescission of the transaction in question ... and willing and able to return any shares or money received under the transaction”; among other matters.

72.  There can be no doubt that these changes incorporate a profoundly different case from that which had grounded leave for service out of the jurisdiction on Kayden and the other foreign defendants. The Court is being asked for the first time to determine whether Mr Lu did in fact contravene the criminal insider dealing provisions of the Ordinance (in the context of a civil case) and whether the other defendants were involved (knowingly in relation to Clear Excel and Kayden).  The case is no longer being put merely on the “appearance” or “suspicion” basis.  For the first time, there is a claim for relief in the nature of orders requiring the defendants to account for “profit gained or loss avoided” and to pay money found due to a receiver appointed by the court on an improvised class action to benefit investors having individual claims for loss caused by the alleged insider dealing.  There is also an alternative claim for the Court to conduct an inquiry so as to build up from scratch a body of claimants to whom distribution of recovered funds might be made.

73.  Lord Pannick QC, who came into the case with Mr Roger Beresford only at the present stage of the proceedings, sought to justify service out of the jurisdiction on Kayden on the basis of the case as reconstituted by the amendments.  However, as emerged at the hearing, it is a case which is not only new and different, but one which raises numerous difficult questions of law and statutory construction, not least as to whether the court has jurisdiction to adjudicate on alleged contraventions under section 213 and to grant orders of the kind sought in the amendments – questions which have not previously been canvassed or ruled upon in the courts below.  It would be quite inappropriate for this Court to entertain such questions without a proper foundation for their exploration having been laid.

G.      Conclusion

74.  It is plain that the SFC does not now seek to defend its service out of the jurisdiction on Kayden on the original basis but seeks to rely (impermissibly) on its reconstituted case.  This renders moot for present purposes the first of the two questions of law identified at the start of this judgment, namely as to whether the Mareva type orders obtained fall outside the scope of section 213(2)(c).  As to the second question, namely, as to whether the orders originally sought give final or substantive relief and provide a basis for service of process abroad pursuant to Order 11, the SFC now seeks to justify service out on the basis of its reconstituted case which expressly purports to seek final relief.  As indicated above, I consider that the question of whether final relief can validly be sought under section 213 has not properly been brought before the Court and therefore has to be kept open.  However, the position adopted by the SFC renders that second question (which was formulated with the approach of the Court of Appeal based on the un-amended originating summons in mind) also moot in the present context.

75.  In my view, the radically altered nature of the SFC’s case exposed by the purported amendments amply confirms the correctness of Kwan J’s adoption of the strict Parker v Schuller approach in the present case.  The SFC’s attempt to sustain service out on Kayden on the basis of such a fundamentally different case cannot be countenanced. 

76.  It is unnecessary to deal with the complaint concerning material non-disclosure.

77.  I would accordingly make the following orders in respect of the appellant Kayden, namely, that:

(a)  Kayden’s appeal be allowed;

(b)  the orders of the Court of Appeal dated 22 May 2009 granting leave to amend the originating summons in respect of Kayden and leave to serve it afresh on Kayden be set aside;

(c)  the order of the Court of Appeal re-imposing on Kayden the injunction which Kwan J had discharged be set aside;

(d)  its order nisi for costs and any consequent order as to costs against Kayden in favour of the SFC be set aside;

(e)  all subsequent procedural orders and directions given in these proceedings in respect of Kayden, including the order of Master Levy dated 22^nd September 2010 granting the SFC leave to re-amend the originating summons and statement of claim be set aside; and

(f)  there be an order nisi that the SFC pay Kayden’s costs here and below, with liberty to the parties to lodge written submissions as to costs within 21 days of the date of this judgment, such order to stand as an order absolute in default of such submissions.

 

Sir Anthony Mason NPJ :

78. I agree with the judgment of Mr Justice Ribeiro PJ.

Chief Justice Ma :

79.  For the above reasons, the Court unanimously allows the appeal and makes the orders set out in the final paragraph of the judgment of Mr Justice Ribeiro PJ.