SECURITIES AND FUTURES COMMISSION v. MANSION HOUSE CAPITAL LTD.

1998, MP 6485

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS

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J U D G M E N T

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1. This is an application by the Securities and Futures Commission (SFC) for a declaration that it has jurisdiction over the Defendant to require it to produce, under section 30 of the Securities and Futures Commission Ordinance, documents and records identified in a schedule; and that there should be an inquiry by the Court under section 32, with a view to ordering the Defendant to comply with the requirement if there has been failure without reasonable excuse so to comply.

2. The SFC is a regulatory body which is concerned to ensure, so far as possible, that dealers in securities who are required to be registered, are fit and proper persons to conduct their business and comply with the Code of Conduct for such registered persons. It is also concerned to protect individuals who entrust their business to dealers. The maintenance of financial probity, efficiency and professional standards in this trade is a priority. In view of the reactions of the Defendant and its legal advisers, and some of the arguments advanced earlier and at this hearing, I need to return to this aspect at a later stage; it appears to me that some misconception of the role of the SFC persists.

3. The provisions of section 30 and the basis for them are at the heart of this application and the consequential dispute. It is not always appropriate to condense or paraphrase sections of a statute, particularly where its language is straightforward. Certain powers are given to an authorised person (whose authority is in written form) ...

"... for the purpose of ascertaining whether a person who is, or at any time has been, a registered person is complying or has complied with any provisions of or any requirement under the relevant ordinances or the terms and conditions of any certificate of registration issued to him."

They are, "at all reasonable times"

to "a) enter the premises of the registered person notified by him to the Commission ...; and

b) inspect and make copies of any record or other document or part there of ... relating ... to the business to which such certificate of registration applies."

In order for the powers of inspection and the making of any copies to be exercised that authorised person

"... may require the registered person or any other person whom he reasonably believes is in possession of or has under his control any record or other document mentioned in that subsection ((1)(b)) to produce it to him." [my underlining].

Subsection (3) does not add much if anything to the powers under ss(1)(b) and (2), but covers "access to such records or other documents as may reasonably be required for the inspection," being afforded by "the registered person or any other person."

4. Mansion House Securities (FE) Limited ("MHS") is a registered securities dealer and a member of the Stock Exchange of Hong Kong. Mansion House Capital Limited ("MHC"), the Defendant in these proceedings, is a finance company registered under the Moneylenders Ordinance, and provides margin finance (credit facilities). Both companies are wholly-owned subsidiaries of Mansion House Group Limited. I am told that there is no cross shareholding between the two subsidiary companies. The Group's principal activities include securities, futures, share trading and share margin financing.

5. The two subsidiaries (the registered dealer and the defendant finance company) share premises at 37A Bank of China Tower. These are the premises notified by the dealer under section 27 of the Ordinance.

6. The Managing Director of 'MHS', Ms. So Wai Yin, is also a Director of 'MHC'. The two subsidiaries have a common back office staff and facilities, including shared computer accounting and stock and credit control systems. The Managing Director of MHC, Mr. Philip Poon is a registered dealing director of MHS. Mr. Kin Chow, the Group's Financial Controller, is responsible for the accounting books and records of both subsidiaries.

7. Sometimes, perhaps often, clients of Securities dealers do not have sufficient available cash with which to trade and use what is termed 'margin finance' - or credit facilities. There is a widespread practice whereby securities dealers make available such facilities through related finance companies. It is not in dispute that 'MHC' makes available margin finance to clients of 'MHS' for the purpose of such trade, though this may not be exclusively so. The sharing of premises and management by such legally separate but closely linked businesses is a common feature.

8. The concerns which the SFC has in relation to this practice were set out in a letter of the 6th February 1998 to all securities' dealers. The principal and obvious ones were where the registered dealer recommended the services of a related finance company where there was no proper explanation of the terms of the applicable margin agreement or of the use to which client assets may be put; where there was inadequate credit control, inadequate prudential practice or where risk management controls are known to be poor; where clients of the securities dealer who have no need for credit facilities are nonetheless referred or introduced to the finance company through which their trading and settlement, and eventual custodianship of assets are transacted; where assets of clients of the finance company are mixed in one fund for the purposes of the finance company's own trading. Since such finance companies, where related to the registered securities dealer, have common premises, account executives and management, there is a reasonable risk that any poor risk management in the finance company with poor or inadequate capitalisation, would call into question the competence of the registered securities dealers' business.

9. The only area of the Defendant's affirmations which deals with these concerns - or more accurately with the linkage between the two companies which gives rise to these concerns - is in paragraph 43 of Miss Irene So's affirmation. It is accepted that 'Securities' and 'Capital' have clients in comment. 'Capital' acts upon its clients instructions to settle their security trades with 'Securities'. Paragraphs 48 and 49 comment upon the commingling of assets which appeared, as stated earlier, to be one of the concerns (and I am bound to say in my view a substantial one) of the SFC. I have noted from the minutes of the meeting of the 18th February 1998 at the premises of the two companies between the SFC representatives and Miss So, Mr. Chow and Miss Tse that, in contrast with the practice adopted by and required of MHS as a registered dealer, MHC does not segregate clients' monies from its own. This lends force to the concern of the SFC. All that Miss So says is that she interprets Mr. Raymond Wong's affirmation as suggesting that there may have been improper conduct and that he has misrepresented matters. There is no justification for her reaction or substance in her contention. Mr. Wong, I accept, was simply giving vent to some of the problems and risks where there is such a relationship - particularly where the controlling individuals are one and the same and simply wearing different hats of convenience as and when the nature of the business demands it. Mr. Wong was underlining considerations which a regulatory body must have an eye or mind to when performing its function and as its very "raison d'être".

10. The fundamental objection of the Defendant is that the SFC is not empowered by section 30 to require the production and inspection of any documents within the possession and control of the Defendant. Though there had been meetings and correspondence between the SFC and the Defendant or its solicitors prior to 17 April 1998, during which the relevant documents had been requested and discussed, this was the date of the formal notice, four documents being served. I will return to these later for a consideration of the points advanced.

11. Mr. Gerard McCoy S.C., for the Defendant argues, as the linchpin of his case, that the reference to "any other person" in sub-section 2 cannot encompass a third party such as the Defendant finance company but must be and can only be a reference to servants or agents of the securities dealer. His argument is in my view fatally flawed. The wording of the section is such as to draw a distinction between "the registered person" and "any other person." The registered person is a body corporate. It acts through its directors and employees or other servants or agents under the control of the directors. The term includes those directors, employees or servants or agent. It is quite unnecessary for it to identify these categories. By imposing the requirement upon the registered corporation, it is implicit that it can only meet its requirement by such categories of persons under its control. "Other person" must relate to a third party, not someone in the categories above under the control of the registered corporation, If it were to bear that restricted meaning it would be quite superfluous to the section.

12. Section 30(1) is concerned with the power to enter the registered persons premises (a) and inspect and make copies of any record or document relating to the [registered] business (b). Subsection (2) however deals with the power to require production of any record or document mentioned in (b) either from the registered person or from "any other person" whom he reasonably believes is in possession of or has under his control any such record or document. [My underlining]. There is a clear distinction to be drawn between documents or records under the control of or in the possession of the registered person (which must include the control and possession of its directors, servants or agents) and that of any other person. Subsection (4) goes on to provide for reimbursement of the registered person for any copy of a record or document supplied by the registered person. There is no similar provision covering "any other person" because the only requirement of "any other person" is to produce a record or documents or afford access for inspection. Finally to seek to restrict "any other person" to an employee or servant or agent of the registered person is to impose an unnatural limitation upon the wording. It is an unfettered description. Mr. McCoy argues that to give it that unrestricted meaning is to make any person in Hong Kong subject to the subsections and that this cannot be what the legislature intended. But to argue that simpliciter is to ignore the qualifying words "whom he reasonably believes is in possession of or has under his control any record or other document." The object of the power is to ascertain whether the registered person is complying or has complied with a provision or requirement under the ... Ordinances. To do this there is a power of entry, inspection, making copies and requiring production of records and documents relating to the business of the registered securities dealer. If there is a reasonable belief that some third party is in possession or control of records or documents which relate to that business, then that third party may be required to produce it wherever he may be in Hong Kong.

13. It does not need a re-iteration of the potential risks and problems giving risk to a concern about the interaction of two almost inextricably related companies to illustrate how that reasonable belief can arise and why the regulated power has been conceived.

14. Mr. McCoy also advanced a "geographical limit" argument on the basis that the power of entry of the premises of the registered person as notified by him to the Commission (under section 27) limits the ambit of inspection, copying and production to these premises. That cannot be correct. A straightforward example illustrates this. On Mr. McCoy's argued construction and giving the term "any other person" its logical meaning of third party, the powers would apply where they shared the premises as in this case, but not if MHC, with its identical form, staff and relationship with MHS, were to be on another floor in the same building or even in another part of Hong Kong with fax, telephone and computer link with MHS. That would, I have to say, make a nonsense of the power which the section of the ordinance bestows upon the SFC. I do not have to decide that point in the context of this case but since it has been raised on behalf of the defendants as part of its argument in the construction of "any other person", I need to deal with it. Furthermore since the construction of section 30(1) and (2) is pivotal to the argument as to the ambit of the power of the SFC, it would not have been sensible to leave it out of the reckoning. I add in passing, though it is not without substance, that subsection (2) stands on its own as an aspect or extension of the power. If every aspect of the power were intended to be determined within the narrow confines of the registered premises it could had been dealt with comprehensively within one subsection. The very fact that power to require production is dealt with separately, and brings in "any other person" as subject to that requirement, indicates unequivocally in my view that there is no geographical circumscription.

15. The final construction point concerns the expression "relating to the [registered] business." Again Mr. McCoy suggests that it is so general and broad a term that it must be more strictly defined. The premise of this argument is faulty. The purpose of the section is, I have to state again, to exercise a regulatory power. It one was to add the word "directly" or "indirectly" to qualify "relating" it could give rise only to argument and a degree of uncertainty. It would, on the face of it qualify, but lack precision as a consequence.

16. Mr. McCoy prays in aid that the requirement, construed in the manner argued for by the SFC, "would necessarily or incidentally intrude on the property and freedom enjoyed by the subjects ... it should be construed in such a manner that should avoid inconvenience in the business, not exposing subjects to the unreasonable harassment cast by the authority." The answer to this is short and straightforward. A registered business has to accept regulation. The powers concerned are to ensure compliance. Of course their exercise involves some degree of inconvenience, but it is a distortion of language to suggest that the exercise of the powers under section 30 results in harassment. Insistence and persistence in the face of resistance is not harassment.

17. It is conceded on behalf of the Defendant that the documents required relate to the financing mode of some customers in the securities trade. No doubt this concession emanates from the affirmation of Miss So, (para. 43). The financing mode of customers of MHC who are also customers of MHS is highly significant. Documents are generated which relate to both businesses. The financing of securities trading through an adjunct of the registered business, though itself a separate legal entity and not requiring registration, is inextricably involved with the registered business. The very fact of the relationship between the two businesses calls into question the funding mechanisms, their effect upon the registered business, and the judgment of those involved, in the conduct of such business.

18. Mr. McCoy relied upon the decision of the High Court of Australia in Tooheys Limited - v - Commissioner of Stamp Duties 1960-61 105 C.L.R. (p.602) and in particular an observation made by Taylor, J. at p.620:

"There can be no doubt that the expression 'relating to' is extremely wide but it is also vague and indefinite ... That being so, all that a court can do is to endeavour to seek some precision in the context in which the expression is used."

There are many synonyms for the expression such as: concerning, connected with, touching, about, but it is the context which determines the ambit. In section 30 the term 'business of the registered dealer' must include the documents and records of the clients of the dealer which have resulted from the obtaining of financial facilities or services by those clients from a related company for such trade. These documents and records are within the possession or control of the finance company. I do not consider that construction of the meaning should be any more precise than that in the context of their case.

19. The form of the request by the SFC is also attacked on the basis that it does not set out the entitlement to the disclosure or production, and that as a consequence it is invalid. I will deal with the documents concerned as constituting the request, shortly, because there is no merit in this point.

20. The letter of the 17the April 1998 to 'MHC' identified the three staff members of the commission who would carry out the supervisory inspection. It referred to the authorization notice of the 23rd March 1998 which included the names of those three staff members. A third document set out the provisions and powers of section 30 of the SFCO 1989. Subsections (6) and (7) deal with the effects of wilful non-compliance with subsection (3) and the production of a document or record which is known to be false or misleading. The document also disposes of any objection which might be raised by the Defendant under the Personal Data (Privacy) Ordinance. Finally the fourth document is the "Schedule of Records and documents required" contemplated in subsection(3). The service of these documents which in my judgment, meet all the requirements necessary for the exercise of the powers under section 30, followed detailed earlier contacts which in their form and content had left the Defendant in no doubt as to what powers were to be exercised, the basis of them, and the material required.

21. In advancing his argument on this aspect Mr. McCoy relied upon the decision of the Federal Court of Australia in SA Brewing Holdings Ltd. - v - Baxt. 89 ALR 105. That was concerned with notices served pursuant to a statutory requirement which contained what the notices should specify. Since what was alleged was that a contravention of the Act had been or may have been committed, the court understandably held that the notice must disclose the necessary relationship between the information sought and the matter in respect of which it was sought.

22. The SFC's request was not a statutory notice. It did not relate to contraventions of a statute but to compliance with the provisions of the ordinance. It was patently clear on the face of the papers constituting the request that identified documents were required to be produced for inspection for the purpose set out in section 30(1).

23. Mr. McCoy's skeleton argument contained the following - "The principal issue is an analysis of the jurisdiction of the SFC to exercise its power under Section 30 of the Ordinance in relation to a registered money lender." This is, I have to say, incorrect. It is a notion which has been vented in the course of the Defendant's argument and is misleading. The exercise of the powers may incidentally relate to the records of the registered moneylender but the regulation of the business of the finance company is not the object of the power nor the consequence of its exercise. The reference to the statement of the Chairman of the SFC, Mr. Anthony Neoh S.C. is something of a red herring. My attention was directed by Mr. McCoy to the paragraph (on page 562 of the bundle) in which the sentences appear:

"As the commission had no regulatory powers over finance companies, much resistance was encountered in the course of these inspections. But by sheer perseverance we did manage to persuade the brokerages most exposed to margin lending to reduce the level of credit extended to their clients .---"

The first sentence is a straightforward statement of fact (or law). I am asked to derive from the second an acknowledgment that the SFC has no power to require production of documents from a related finance business relating to the business of its [related] securities dealer associate company. No such inference can logically be drawn. The phrase "by sheer perseverance" is not to be taken as indicating that s.30 does not give the SFC the power contended for. The power may have been threatened in some cases, I know not . A regulatory body seeks to achieve its purpose by cooperation, persuasion and a mutual recognition of the need to maintain public confidence in financial institutions. It does not always need to wave 'the big stick'. To some extent its success as a regulatory body may be measured by the extent to which it achieves such objects by consensus. That saves time, effort and money on both sides and is conducive to goodwill. There is no substance in the points taken in respect of the Chairman's Statement.

24. The Defendant also seeks to derive some support from the speech of the Financial Secretary to the Legislative Council in January 1989, when moving the second reading of the Securities and Futures Commission Bill. It is true that the speech recorded in Hansard at p.869, where reference is made to clauses 28 to 34, does not make mention of the "any other person" provision of Section 30(2) when dealing with the powers of the commission. But this cannot be taken as indicating there are no such powers extending to "any other person". The emphasis was on spot checks of registered businesses. It would be an unacceptable addition to the rules of construction to suggest that an omission by a Minister of State, or Policy Secretary, in a debate in relation to a bill, to mention a particular subsection, may be, by inference, declaratory of the absence of a power, particularly when such power is nonetheless expressed to be in addition to the power in relation to the registered dealer.

25. Finally, the fact that a draft composite 'Securities and Futures Bill' - the Commission's "wishlist" as Mr. McCoy referred to it - specifically provided for regulation or supervision of intermediaries, cannot be regarded as excluding the proper construction of section 30(2). As earlier stated this case has nothing to do with regulating intermediaries, whether moneylending finance companies or not.

26. It may be that the Defendant's desire to find some way of avoiding disclosure in accordance with a statutory provision which in my view is straightforward and unambiguous, stems from the approach reflected by the opening sentence of the second complete paragraph of the second page of the letter of 18th March 1998 from the Defendant's Solicitors to the Director of Intermediaries Supervision:

"- Unless the SFC can establish that the non-registered third party holds books and records of the registered third party or, the SFC has reasonable grounds to believe the non-registered third party company holds evidence of the registered company's failure to comply ... with any provision of or any requirement under the relevant ordinance or the terms and conditions of [its] certificate of registration ... then prima facie the SFC has no business attempting to force access to the books of the non-registered party and the SFC has no jurisdiction to realise s.30(2) to broaden the scope of its inspection of the registered dealer."

The wholly unjustified gloss put upon section 30 may have emanated from the "wish being father to the thought". Under section 30 the SFC has to establish nothing. If it has reasonable ground for belief that it has such records or documents, it can require the third party to produce and afford access. Whilst I am satisfied that the documents required exist (that is not disputed) and that they relate to the registered person's business (the Defendant admits that it makes available credit facilities for the clients of MHS and this relationship generates the type of records identified in the list), there is no need for the SFC to establish that such records and documents are so held. Similarly the statutory requirement cannot be re-written so as to suggest that the SFC has to have reasonable grounds to believe that the third party holds evidence of failure to comply. At the risk of repetition I have to state that the regulatory body's function is to see whether or not there is or has been compliance. It is as simple as that. To the extent that the assertions formed advice it was in my view flawed.

27. Of course section 33 is aimed at a different state of affairs. It is not the SFC who has confused its rights of inspection and production under section 30 with its rights under other provisions. It is the Defendant who has sought to equate the basis of section 30 with the different considerations where there is evidence for, or a reasonable belief that an offence has been committed. The term 'search warrant' is not appropriate to describe the section 30 powers and the arguments designed to apply to them the considerations where there is investigation or search pursuant to suspicion of a criminal offence are misconceived.

28. I make the Declaration sought that the SFC has jurisdiction over the Defendant to the extent provided for in Subsections (2) and (3) of section 30, the Defendant being "any other person";

that the Defendant has without reasonable excuse failed to produce the documents listed in the schedule. I do not regard a declared willingness to cooperate which is qualified by a denial of entitlement, as a reasonable excuse. Reliance upon the advice of lawyers does not in this case at least constitute reasonable excuse;

that the Defendant do produce the identified documents to the Plaintiff within 7 days. In view of the lapse of time since these were requested, and that there is no uncertainly as to their identity or existence, they must be and can be produced within such a period.

29. The Defendant shall pay the Plaintiffs costs of this application to be taxed if not agreed.