SECURITIES AND FUTURES COMMISSION v. “C”AND OTHERS

HCMP 727/2008

[2021] HKCFI 2112

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 727 OF 2008

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DECISION

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A. Introduction

1.  By an order dated 14 August 2020, I allowed the Plaintiff’s application to join China United Telecom Limited as the 6^th Defendant to these proceedings and, in addition to various consequential amendments, to amend its Re-Re-Amended Originating Summons and the Amended Statement of Claim to inter alia advance a case against China United pursuant to S.213(2)(b) of the Securities and Futures Ordinance (Cap 571) (“the S.213(2)(b) Claim”).

2.  The relevant background and reasoning underlying the above-mentioned order is set out in my decision dated 14 August 2020 (“the Joinder Decision”). This decision should be read together with the Joinder Decision. For the purposes of this decision, I adopt the nomenclature, abbreviations and references in the Joinder Decision.

3.  By Summons dated 26 August 2020 (“the Direction Summons”), China United seeks a direction as to whether that part of the Joinder Decision allowing the SFC to assert a case against China United pursuant to S.213(2)(b) of the SFO is one within Order 59 rule 21(1)(a), RHC, in that it is one which determines in a summary way the substantive rights of China United (in this instance, depriving China United of a limitation defence by reason of S.35(1) of the LO).

4.  In the event the Court directs that that part of the Decision referred to above is not one within Order 59 rule 21(1)(a), RHC, China United further seeks leave to appeal against that part of the Decision on the proposed grounds of appeal set out in the Schedule attached to the Summons. For reference purposes, the Schedule is reproduced in this decision as Annex I.

5.  At the hearing of the Direction Summons on 12 April 2021, a point arose in that if I were to direct that the relevant part of the Joinder Decision did not determine China United’s substantive rights in a summary way (ie an appeal lies as of right), then they would be out of time in terms of filing of the Notice of Appeal, and no time extension had yet been sought. I thus directed that China United do file a summons seeking such extension in the event I were to decide that an appeal lies as of right (“EOT Summons”). This was done accordingly on 13 April 2021. Insofar as is necessary, I will address the EOT Summons below.

6.  At the April 2021 hearing, the SFC was represented by Mr Horace Wong SC and Mr Norman Nip SC, and China United was represented by Mr Benjamin Chain and Mr Tony Chow.

7.  I set out below my decision on the Direction Summons and the reasons therefor.

B. Whether the Joinder Decision determines China United’s substantive rights in a summary way

8.  Generally, leave to appeal is required in respect of interlocutory judgments given by the Court of First Instance of the High Court (Order 59, rule 2B, RHC; S.14AA of the High Court Ordinance (“HCO”)). However, there are exceptions. By Order 59, rule 21(1)(a), RHC, a judgment determining in a summary way the substantive rights of a party to an action does not require leave.

9.  The core question in this instance appears to me to be as follows: Where, upon an application to add a party and amend existing pleadings to add a claim against such new party, the said party raises a limitation issue in answer to the application, does an order allowing the amendment (effectively deciding that the limitation issue is no answer to the proposed amendment) determine the substantive rights of the intended defendant? 

10.  China United takes the position that by allowing the SFC to amend the RRAOS and ASOC to add the S.213(2)(b) Claim, the Joinder Decision has determined its rights summarily in that it is deprived of a limitation defence.  If this be the case, then leave to appeal is not required, but an extension of time to file its Notice of Appeal would be required. 

11.  The SFC, on the other hand, submits that no findings on the substantive issues between the parties on the merits were made, and that the Joinder Decision (including that part on the S.213(2)(b) Claim and the limitation issue) was merely a procedural one. It follows, the SFC says, that leave to appeal is required.

12.  There is, somewhat surprisingly, no case authority directly relevant to such a question. I summarize below the authorities helpfully referred to by counsel in their submissions.

13.  I do not understand it to be in dispute that a decision to allow joinder of a party, in and of itself, does not determine the substantive issues between parties and thus does not fall within the exception referred to in paragraph 8 above (see eg Tsui Yun Bun Barry v Law Wan Tung [2020] HKCFI 3038 at paragraphs 26 to 28).

14.  China United’s point is that the consideration of the amendment to add the S.213(2)(b) Claim, and consequently, consideration of the limitation issues in answer, goes beyond mere joinder and into the substantive issues between the parties.

15.  In support of this argument, Mr Chain for China United cited Bright Shipping Ltd v Changhong Group (HK) Ltd. [2019] 2 HKLRD 220. In that case, the defendant’s application for a stay of proceedings on the ground of forum non conveniens was refused, and the defendant appealed without first seeking leave under S.14AA, HCO. The plaintiff’s application to strike out the appeal was successful, on the basis that the application for a stay was interlocutory, and thus, the defendant ought to have first sought leave to appeal under S.14AA, HCO.

16.  The crux of the reasoning in paragraphs 9 to 11 of Bright Shipping cites the decision of the Court of Final Appeal in Shell Hong Kong Ltd v Yeung Wai Man Kiu Yip Co Ltd (2003) 6 HKCFAR 222:-  

“9. In Shell Hong Kong, the Court of Final Appeal had to consider the application of this approach in a case where a determination under O.14A did not finally determine the entire cause or matter, but only an issue in the cause or matter. In such context, the Court of Final Appeal held that the application approach involved the consideration of the purpose and substance of the application, the issue determined by the court and the effect of such determination on the rights of the parties, the further conduct of the proceedings and the final disposal of the whole action.

10.   Chan PJ discussed the procedure under O.14A at length and then considered how the application approach was to be applied in the abovementioned context at [27]-[33]. In particular, at [31], His Lordship said:

In my view, what one can extract from these cases is that where an order or judgment given in an application does not finally dispose of the whole action but only an issue in the action, it is necessary to consider the purpose and substance of the application, the issue dealt with and determined by the court and the effect of a determination of this issue on the rights of the parties, the further conduct of the proceeding and the final disposal of the whole action. A broad commonsense approach should be adopted. If the issue dealt with and determined by the court is ‘a substantive part of the final trial’ (Holmes v Bangladesh Biman Corp [1988] 2 Ll Rep 120 at p.124); or ‘a crucial issue’ in the case or a point ‘that goes to the root of the case’ (First Pacific Bank Ltd v Robert HP Fung [1990] 1 HKLR 527 at p.532), or ‘a dominant feature of the case’ ( Korso Finance Establishment Anstalt v Wedge (unrep, 15 Feb 1994 at p.7), then the order or judgment, even if it does not finally dispose of the whole action, should nevertheless be regarded as a final judgment. (Our emphasis.)

11. In our judgment, it is important to bear in mind the context in which Chan PJ made those observations.  It was said in relation to a decision that finally determined an issue on the substantive rights between the parties.  In other words, the issue in question has to be an issue on the merits as opposed to the procedural steps for bringing or preparing a case before it is presented to the court for final determination on the merits.”  (emphasis added)  

17.  The essential question, therefore, is whether the issue considered in the Joinder Decision (viz. the limitation issue) was in substance an issue on the merits as opposed to merely a decision on a procedural step. There are a number of points to be considered in this regard.  

18.  First, China United and the SFC are in agreement on the general proposition that a limitation defence is of itself procedural in nature and needs to be expressly pleaded (see Ronex Properties Ltd v John Laing Construction Ltd [1983] QB 398 at 404-405).  

19.  Second, from the available cases which counsel have been able to locate where there were decisions on various limitation issues (either in the context of joinder and/or amendment applications), it would appear that parties have tended to assume that these are interlocutory in nature and leave to appeal is required.  

20.  Hence, in Highfit Development Co Ltd (In Liquidation) v Koo Siu Ying & Ors [2018] HKCA 238, leave to appeal was sought by the 1^st and 2^nd defendants where the judge had affirmed the master’s decision permitting the plaintiff’s joinder of a third defendant and amendments to the statement of claim.

21.  In Highfit the impugned transactions took place in August to September 2000, and the writ was issued on 10 March 2015. The amendment summons seeking to add the third defendant and amend the statement of claim was issued on 2 June 2016.  The defendants argued that by reason of the relation-back rule in S.35(1)(b) of LO, if joinder was permitted, the third defendant would be deprived of an accrued limitation defence. The judge rejected that contention and held that the relation-back rule was not engaged, for the fact that the action was brought against the existing defendants more than 14 years after the impugned transactions, and prima facie, the action was time-barred in any event.

22.  As recorded in paragraphs 9 to 11 of the Court of Appeal’s decision:

“9. Whether Holdings was sued on the date of the writ (10 March 2015) or 2 June 2016 (the date the amendment summons was filed), the plaintiff would need to rely on section 20(1) of the Limitation Ordinance (which deals with limitation period in respect of trust property) to overcome the limitation period prescribed by statute.

10. Hence, the judge held that permitting the joinder would not prejudice Holdings in depriving it of an accrued limitation defence. … Holdings is free to apply to strike out the action which is prima facie time-barred, or if it accepts whether section 20(1) may be relied on by the plaintiff is a matter for trial, raise the counter arguments at trial. …

11. Mr Richard Khaw, SC, who appeared with Ms Kay Seto for the defendants, accepted that in this instance the relation-back rule would not cause ‘any direct prejudice to the Defendants in the sense that they would not be deprived on a limitation defence’. …”

23.  Mr Chain sought to distinguish Highfit on the basis that the plaintiff in that case would need to rely on S.20, LO to surmount the limitation issue (and this was the basis of the Court permitting the amendment), whereas the present case is factually different in that it concerns the operation of S.35(1), LO whilst there is no similar S.20, LO point which would require consideration at trial.  

24.  Similarly, see Sun Focus Investment Ltd v Tang Shing Bor [2012] 1 HKLRD 738; and Global Bridge Assets Ltd v Sun Hung Kai Securities Ltd [2012] 4 HKLRD 474. As fairly acknowledged by Mr Chain, those are also decisions where the courts have made determinations on amendment applications involving limitation issues, in which parties similarly assumed it was necessary to (and accordingly proceeded to) seek leave to appeal.  

25.  Third, to test the parties’ contentions, at the hearing, I raised the question with Mr Wong SC as to what the SFC’s position would be if China United sought to raise the limitation defence further down the line, for example by seeking to strike out the S.213(2)(b) Claim or to take this as a defence at trial. His response was that the SFC would take the position that China United would be debarred from raising any further limitation arguments, essentially owing to the reasoning set out in the Joinder Decision. This reasoning is consistent with the relevant approach as set out in Welsh Development Agency v Redpath Dorman Long Ltd [1994] 1 WLR 1409 (cited in Sun Focus at paragraph 13 and Global Assets at paragraph 19 to 22), which states at 1425G-H that:  

“Our view is that Judge Hicks was correct in concluding that where section 35(1) does, or may well, give the plaintiff an advantage a different test, namely that enunciated by Purchase LJ in the Grismby Cold Stores case, should be applied. In such a case, leave to amend by adding a new claim should not be given unless the plaintiff can show that the defendant does not have a reasonably arguable case on limitation which will be prejudiced by the new claim, or can bring himself within O.20, r.5.”

26.  Notwithstanding the above, the SFC’s position was that the limitation issue was merely procedural in nature and not determinative of the substantive issues between the parties on the merits.

27.  Fourth, Mr Chain refers to the examples set out in Order 59, rule 21(2)(i), RHC wherein an order refusing to allow an amendment of a pleading to introduce a new claim or defence or any other new issue constitutes an order determining a party’s substantive rights. He then suggests that the converse (ie allowing the amendment in the face of a limitation issue) must also amount to determination of a party’s substantive rights.

28.  Fifth, reference may be made to other passages from Bright Shipping where the Court of Appeal discussed the effect of S.14AA, HCO:

“14. There are many cases in which a party cannot proceed further or would be placed under constraints in the future conduct of an action or a set of proceedings by virtue of interlocutory decisions, e.g. decisions on security for costs, decisions on admission of evidence, case management decisions, decisions refusing extension of time to do certain acts. Since the introduction of the s.14AA leave requirement, this Court has regarded these decisions as interlocutory by nature even though the decision has the practical effect of debarring further proceedings: see eg Kwok Cheuk Kin v Leung Chun Ying [2018] 4 HKC 440 ; Leung So Hung Siem v Carson Wen [2019] HKCA 94, [2019] HKEC 178 (23 January 2019). Thus, we cannot accept Mr Alder's submission that the stay decision is a critical one due to its profound effect on the parties.

…

18. It is perhaps useful to remind ourselves of the purpose of the s.14AA leave requirement.  The requirement was introduced to curtail unmeritorious interlocutory appeals which would delay the litigation process and escalate costs of the proceedings.  It was introduced to promote the proper and efficient use of judicial resources and the avoidance of oppressive and unproductive appeals.  It is a filtering process instead of an absolute bar. For meritorious appeals which serve useful purposes, leave would be granted. An intended appellant is given adequate opportunity to advance submissions in the application for leave.  After a failure to obtain leave in the court below, an applicant can renew the application in the Court of Appeal.”

29.  Having considered matters in the round, I agree with the SFC that the decision on the limitation issue contained within the Joinder Decision is procedural in nature:

(1)  There is, as noted above, no dispute as to the general proposition that a limitation defence is procedural in nature.

(2)  The substantive issues between the parties, particularly in relation to the S.213(2)(b) Claim itself, are yet to be determined and will be considered at trial. These include inter alia the ownership of the Subject Shares and Frozen Shares, the extent of China United’s involvement in the alleged insider dealing, and the degree of China United’s culpability.

(3)  Whatever complaint one may have about the lack of clarity caused by the examples in Order 59, rule 21(2), RHC, it is telling that the allowing of an amendment to add a new claim was not included within the list of examples. It is easier to see why the refusal of an application to add a new claim or defence would be seen as determining a party’s substantive rights, for in such circumstance, the party would be debarred from pursuing the substance of its desired claims or defences altogether.

(4)  There is no authority in support of China United’s proposition that appeal lies as of right from a joinder and amendment application as in the present case. Reasoning from first principles (as discussed in inter alia Bright Shipping), it does not appear to me that a departure from what has hitherto been accepted practice is warranted.

30.  I proceed then to consider whether leave to appeal ought to be granted to China United.

B. Whether leave to appeal should be granted

31.  The parties are agreed on the trite test to be applied in respect of leave to appeal. China United must show that its appeal has a reasonable prospect of success or that there is some other reason in the interests of justice why the appeal should be heard. “Reasonable prospect of success” involves the notion that the prospects of the appeal must be more than “fanciful” without having to be “probable”. (S.14AA, HCO; SMSE v KL [2009] 4 HKLRD 125 at §17; Wynn Resorts (Macau) S.A. v Mong Henry [2009] 5 HKC 515). As to the “interests of justice” limb, leave may be granted if the question is one of general principle decided for the first time; or a question of importance upon which further argument and a decision of the Court of Appeal would be to the public advantage (Hong Kong Civil Procedure 2021, §59/2A/4).

32.  The Proposed Grounds of Appeal as set out in the Schedule to the Direction Summons largely seek to reargue points which had been considered in the Joinder Decision. This is not the appropriate occasion on which to repeat my reasoning therein.  As such, the proposed grounds are only briefly addressed below. I would note generally that the proposed grounds are essentially specific to the facts and, save for Ground 6, do not seek to raise points regarding the legal principles underlying the Joinder Decision.

33.  Grounds 1 and 2 have been addressed in paragraphs 78 to 79 of the Joinder Decision.

34.  As to Ground 3:

(1)  The argument during the substantive hearing was not pitched in quite the same way.

(2)  Regardless, whether China United was “a party involved in” the insider dealing in question within the meaning of S.213, SFO does not only arise after the Court has reached the conclusion that at least part of the shares were not beneficially owned by Lu. The nature and extent of China United’s involvement is a question of fact that will be explored at trial.

(3)  As to the circumstances in which restitutionary remedies may be ordered, and the breadth of the same, this has already been addressed in paragraphs 43 to 47 of the Joinder Decision.

(4)  If the complaint is that not all relevant parties are before the Court, then either those parties themselves can apply to intervene if they so wish, or if China United considers it appropriate, they can always seek to join those parties themselves.

35.  As to Grounds 4 to 5, these have essentially been addressed in paragraphs 75 to 76 and 80 of the Joinder Decision.  

36.  As to Ground 6, this is really more a question for the Court of Appeal. I do not consider it appropriate for me to express a view on this ground.

37.  In addition to the above, a new or alternative Ground 3A was put forward in China United’s skeleton submissions. This was not contained in the Direction Summons or draft proposed grounds of appeal. In any event, it essentially repeated what had been argued in the substantive hearing (viz. that the only order that could be made was an order for payment of money). This has, similarly, already been addressed in the Joinder Decision at paragraphs 75 to 77.

38.  At the 12 April 2021 hearing, I also raised with Mr Wong SC whether it was appropriate that leave to appeal be granted on the basis that this appears to be the first decision on the relevant limitation period applicable to S.213, SFO claims. Whilst the legal point is somewhat novel, this is not a specific ground that has been raised by China United in the Proposed Grounds of Appeal, and it does not, of itself, render the other grounds of appeal meritorious.

C. The EOT Summons

39.  For completeness’ sake, I would add that if I were wrong on the above, and that part of the Joinder Decision relating to the S.213(2)(b) Claim is considered to be summarily determinative of China United’s rights on the limitation defence, then I would have granted China United an extension of time to file its notice of appeal. Although there had been some delay in taking out the EOT Summons, this was explained at least partly by the fact that China United had taken out the Direction Summons, which was then fixed to be heard before me. To such extent, there was no surprise and limited (if any) prejudice to the SFC in that it would have been aware since the filing of the Direction Summons what the proposed grounds of appeal were. In any event, given the reasoning above, these observations are strictly obiter.

D. Conclusion

40.  In the circumstances:

(1)  I direct that that part of the Joinder Decision allowing the SFC to assert the S.213(2)(b) Claim is not one within Order 59 rule 21(1)(a), RHC; and

(2)  I decline to grant leave to appeal on the basis of the Proposed Grounds of Appeal set out in the Schedule to the Direction Summons.

41.  As to costs, I make a costs order nisi that China United shall pay the SFC the costs of and occasioned by the Direction Summons, with certificate for two counsel.

Annex I

PROPOSED GROUNDS OF APPEAL

1.  That the learned judge erred in holding that on the facts of this case, there can still be any true restitutionary or restorative orders and/or the unwinding any of the alleged insider dealing transactions other than a payment of money;

2.  that the learned judge further erred in failing to have any or any sufficient regard to the fact that insofar as the Frozen Shares were concerned, no question of unwinding would arise, and that for the Subject Shares, the Court would either have held that they were beneficially owned by the 1st Defendant in which event China United would not "only" be a person involved within the meaning of s.213; but if the Court has to consider China United's position "only" as a person involved, it would have already reached the conclusion that the Subject Shares were again not beneficially owned by the 1st Defendant (see ground 3 below), in which case there would again not be any unwinding exercise either as a matter of principle or on the facts of the present case;

3.  that the learned judge further erred and failed to have any or any sufficient regard to the fact that the need to consider China United being a party involved within the meaning of s.213 would only arise after the Court has already reached the conclusion that at least some of the shares (e.g. the Frozen Shares) were not beneficially owned by Dl, in which case on either party's case (and in particular having regard to the fact of replenishments) those shares would not be beneficially owned by China United, and therefore could only be owned by the Mainland employees and/or some third parties, and it would be idle and/or impossible to consider true restitutionary remedies (the possibility of which is in any event denied) without having any of such parties before the Court.

4.  that insofar as there will be a scheme (as in Qunxing) which might require China United to participate in, such "restitutionary" exercise will not be a true restitution in the technical sense; and therefore whatever steps China United might be required to take including to co-operate with, and/or comply with directions from, a receiver etc., would only be consequential on an Order of payment being made, and the learned judge therefore erred in holding that any Order for payment would be consequential on such restitutionary exercise (in the wider sense);

5.  in that regard the learned judge erred in equating the quantification exercise (to arrive at a figure China United might be Ordered to pay) with steps which China United might be required to take to implement a scheme (which would only arise, and therefore consequential on a scheme being set up, which in turn would only arise after an Order of payment was made);

6.  that insofar as the Court of Appeal is in the light of the Court of Final Appeal's decision in Solicitor (24/07) v Law Society of Hong Kong (2008) 11 HKCFAR 117 (at paragraphs 45 to 51) prepared to re-consider its own decisions in Lim Ban Thoon v Chintung Securities Ltd. [1991] 2 HKC 204 and Bowardley Enterprises Ltd. v Millennium Group Ltd. [2006] 4 HKC 329, that the court ought to have held that for the purpose of s.35(3) of the Limitation Ordinance, Cap.347, the relevant date is the date of decision/when leave to amend was granted and not the date of application.