SECURITIES AND FUTURES COMMISSION v. MO SHAU WAH AND OTHERS

HCA 353/2013

[2018] HKCFI 596

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 353 OF 2013

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D E C I S I O N

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THE APPLICATION

1.  By Summons dated 7 September 2017, China Pacific Securities Limited (“Company”) seeks to be joined as an intervener in these proceedings.

2.  The Summons, the notice of hearing and the relevant documents have been served on all the parties to these proceedings^[1]. The 2^nd and 5^th defendants do not take part in this application.  The plaintiff and the 4^th defendant take a neutral stance.   The 1^st and 3^rd defendants (“Defendants”) oppose the present application. 

THE ACTION

3.  The action herein was commenced by the Securities and Futures Commission (“SFC”) pursuant to section 213 of the Securities and Futures Ordinance (Cap. 571) (“SFO”) on 26 February 2013 following discovery of a suspected fraudulent scheme of misappropriation of the securities held by the Company for its clients by its then employees, the 1^st and 2^nd defendants herein.  All the defendants are suspected to be the recipients of the proceeds of the misappropriation.

4.  On the same day, an ex parte injunction (“Injunction Order”) was granted by the Honourable Mr Justice Tong against the defendants.  It was continued with variation on an inter parte basis by an order made by the Honourable Mr Justice Poon on 1 March 2013. The defendants were restrained from removing from Hong Kong or in any way disposing of or dealing with any assets within or outside Hong Kong to the value of HK$156,471,705.  The subject matter of the Injunction Order consists of securities (“Securities”) of substantial value^[2] in the securities accounts maintained by the defendants (except the 2^nd defendant) with the Company as well as funds in several bank accounts maintained by the defendants with local and overseas banks (“Frozen Assets”).

5.  A statement of claim was filed by SFC on 6 April 2017.  Its contents which are relevant to the present application are as follows : -

(a)   the 1^st and 2^nd defendants, being the employees of the Company, in breach of their fiduciary duties and/ or duties as trustees owed to the Company, fraudulently procured the securities belonged to the Company’s clients held by the Company to be sold purportedly as the 1^st, 4^th and 5^th defendants’ securities between 2005 to 2012 (“Alleged Scheme”) and by doing so, defrauded the Company;

(b)   a substantial amount of the proceeds of sale from the misappropriation were used to settle the purchase of securities through the defendants’ securities accounts with the Company;

(c)   after discovery of the alleged wrongful acts, the Company, its shareholders and/or directors compensated the clients who were affected by the Alleged Scheme by replacing the misappropriated shares and the Company has borne the affected clients’ loss (or part thereof) and the related expenses and therefore suffered a loss of HK$160,785,224;

(d)   SFC seeks, inter alia, declarations that the defendants are persons within s. 213(2)(b) of the SFO and an order that the defendants take such steps as the Court may direct, by transfers of securities or payments, to restore the Company’s position in the same position it was in before the defendants’ misappropriation (“Restorative Relief”).

6.  No defence has been filed by the defendants except the 1^st defendant.

7.  On 9 May 2017, the Injunction Order was varied by consent between SFC and the 1^st defendant allowing the latter to withdraw HK$100,000 per week as legal costs until the total withdrawal reaches HK$4,205,000 or until completion of the criminal trial relating to the Alleged Scheme against her (“Consent Order”).  The Consent Order does not specify from which assets could withdrawals be made.  It was granted without the knowledge of the Company.

8.  The 1^st defendant, through a letter of her solicitors, instructed the Company to liquidate the 1^st defendant’s securities held with the Company (part of the Frozen Assets) for the purpose of financing her legal expenses in the present action (which was not provided for in the Consent Order) and the criminal trial.

9.  The non-compliance of the Company led to a summons being issued by the 1^st defendant on 12 June 2017 seeking an order that the Company be desisted from obstructing her and SFC from carrying out the Consent Order and be compelled to sell her securities which were frozen under the Injunction Order (“the 1^st Defendant’s Summons”).

10.  At the hearing before the Honourable Deputy High Court Judge N. Francis, the Company was joined, at the Court’s invitation and without opposition, as a party in that application pursuant to O.15 r.6(2)(b)(ii) Rules of the High Court (“RHC”) for the purpose of opposing the 1^st Defendant’s Summons.  By judgment (“Judgment”) dated 25 July 2017 (see [2017] 4 HKLRD 347), the 1^st Defendant’s Summons was dismissed.  On 6 September 2017, His Lordship granted leave to appeal to the 1^st defendant.

11.  It is against such background the present application was taken out.  Subsequently, on 18 September 2017, the Company commenced an action against the same defendants herein under action no. HCA2174/2017 (“Company’s Private Action”) seeking, inter alia, proprietary remedies on the basis of their breaches of fiduciary duties, breaches of trust and/ or subrogation.  The action is based substantially on the same set of facts of the present action.

12.  On 19 December 2017, the 3^rd defendant took out a Summons for variation of the Injunction Order for payment of her legal expenses (“the 3^rd Defendant’s Summons”).  On 21 December 2017 the Company applied to join in that application by a Summons (“Company’s Joinder Summons”).  Both Summonses have been adjourned for substantive argument before Judge with one day reserved.

THE COMPANY’S POSITION

13.  At the hearing of the present Summons, Mr Mak, Senior Counsel for the Company, agrees that, at present, the Company indeed has no active role to play in the present proceedings.  It does not apply to be joined as a plaintiff or a defendant for it has no cause of action against SFC and its claim against the defendants herein has been covered by the Company’s Private Action.  Likewise, neither SFC nor the defendants have any claim against it.

14.  It has no intention to file any pleadings or take part as a party to the action in discovery of documents, exchange of witness statements or case management hearings, not until there is change of circumstances.

15.  It has once been suggested for the Company that it might think of seeking an order for it to be notified of the progress of the proceedings and be at liberty to participate at any stage as it finds fit.  Mr Mak nevertheless acknowledges the fact that the extent of the Company’s participation will depend heavily on how SFC and the defendants conduct their respective case as the proceedings go along.  He also agrees that this Court should not be invited to make an order target for some unidentified and unrestricted situations that might or might not happen, bringing uncertainties to the proceedings and causing unnecessary costs and time, nor should this court make an order that put the other parties into an embarrassing situation not knowing what role the Company would play and what case they would have to meet at every stage of the proceedings.

16.  Finally, Mr Mak explains what concerns the Company, at the moment, is to protect its interest in the Securities.  It is keen to obtain a right to be notified of any applications for variation of the Injunction Order so as to secure a chance to oppose them whenever the situation warrants.

17.  He limits the scope of the order sought in this application to:-

“without prejudice to the right of the Company to apply for further order, the Company be joined as an intervener of the present proceedings limited to receiving notices of all subsequent applications for variation of the Injunction Order, with liberty to oppose to those applications as it finds fit.”  (“Order Sought”)

18.  He seeks to rely on O.15 r.6(2)(b) RHC and submits that the Order Sought is necessary to protect the Company’s legal and proprietary interest in the subject matter of this litigation, as recognized by His Lordship in the Judgment.

19.  Mr Chu and Mr Lai, Counsel for the 1^st and 3^rd defendants respectively, agree this Court has the jurisdiction and power to make the Order Sought.  They however argue that such order should not be made because the Company has mere commercial interest in the outcome divorced from the subject matter of the present action.

LEGAL PRINCIPLES

20.  Under O.15 r.6(2)(b) RHC, a person may be joined if:-

(i)   his presence is necessary to ensure that all matters in the dispute in the cause or matter may be effectually and completely determined and adjudicated upon (O.15 r.6(2)(b)(i) RHC) (“First Limb”); or

(ii)   there may exist a question or issue arising out of or relating to or connected with any relief or remedy claimed in the matter which in the opinion of the Court it would be just and convenient to determine as between him and that party, as well as between the parties to the matter (O.15 r.6(2)(b)(ii) RHC) (“Second Limb”)

21.  There is no disagreement on the legal principles governing joinder application under O.15 r.6(2)(b) RHC:-

(a)   a liberal approach should be given to this rule so as to ensure that, as far as possible, all matters in dispute between the parties are completely and finally determined, and all multiplicity of legal proceedings with respect to any of those matters is avoided. 

   Lin Man Yuan v Kin Ming Holdings Ltd  [2012] 3 HKLRD 550 DHCJ M Chan (as she then was) at §15.

(b)   The Second Limb requires : -

a.    the intervener to possess some interest which in some way directly related to the subject matter of the action;

b.    the existence of a cause of action between the intervener and one of the parties is not a necessary prerequisite for this purpose; 

c.    there must exist between the intervener and any party to the cause or matter a question or issue arising out of or relating to or connected with any relief or remedy claimed in the cause of matter which the court considers it would be just and convenient to determine as between the intervener and that party as well as between the parties to the cause of matter. 

d.    even where the interest in the subject matter alleged by the intervener is doubtful, the court is nevertheless prepared to exercise its discretion to allow the joinder so that the alleged interest could be properly tested at trial.

   Man Whi Chung v Man Ping Nam [2003] 1 HKC 549

(c)   there is no legal requirement for an applicant to show merit of his case. 

Shek O Development Co Ltd v Chan Kwok Tung [2017] 2 HKLRD 374

THE ARGUMENTS

22.  With these principles in mind, I turn to consider the arguments of the parties.

23.  Mr Mak says that for the First Limb, the matter in dispute between the Company and the parties to this action is “whether the Company be in any way be responsible for the activities in the defendants’ securities accounts held with the Company as alleged by the 1^st defendant in paragraph 9 of the 1^st defendant’s Defence, i.e. the allegation that the Company at all material times had exerted complete and effective control of the defendants’ securities accounts.”

24.  That said, in agreement with the observation that the 1^st defendant’s defence is so vague, without slightest particulars or evidence in support, that it cannot give rise to any identifiable matter in dispute between the Company and any party to this action, Mr Mak does not pursue this argument any further.

25.  In my view, this Court has no jurisdiction to add the Company under the First Limb as the present action is a regulatory action against the defendants for breach of SFO.  It is a statutory claim by a public body with statutory duties to discharge and there can be no personal disputes between the Company and the defendants be resolved.  The issue to be adjudicated upon is whether there is any breach of SFO and if so, the remedial actions to be taken.  For the factual disputes involved in this action, the Company can be listed as a witness for SFC.

26.  For the Second Limb, the position is less clear.  Mr Mak says that the requirements for the second limb are satisfied for under the Restorative Relief, the defendants may be ordered to transfer the Securities or make payments to the Company.  The question relating to or connected with the relief or remedy claimed in this matter to be determined is “the amount of restoration and from what assets those restorations should be made to the Company”.

27.  He contends that such question should not be considered solely from the aspect of the Company being the beneficiary under the Restorative Relief but also in light of the Company’s legal and proprietary claim for the Securities in the present action as well as the Company’s Private Action (collectively as the “Two Actions”).  The facts giving rise to the alleged Company’s legal and proprietary interests as pleaded in the respective statements of claim of the Two Actions include:-

(a)   the Company has incurred substantial loss in making good its clients’ loss (caused by the Alleged Scheme) by causing replacement shares borrowed from or purchased in the market utilizing funds from the Company’s directors and/ or shareholders. 

(b)   the proceeds of sale from the misappropriation were used by the defendants to purchase the Securities.

28.  It is accordingly suggested that a question of whether the Securities, forming a majority part of the subject of an injunction which was obtained in support of a proprietary claim by SFC for the victims of the alleged fraud including the Company, should be released to the defendants for their own purposes, including defending the criminal actions relating to the Alleged Scheme against them, is a matter between not only SFC and the defendants but the Company as well.

29.  Contrary to this, the Defendants argue that the Company’s interest lies solely in the outcome of the present action and a potential beneficiary of the action merely has commercial interest that does not justify the Order Sought.

30.  At the hearing, the bulk of the Defendants’ arguments rest on whether the Company has any loss to claim.  They contend that the compensations were made to the affected clients by its directors and/ or shareholders and there is no evidence showing it has actually repaid them. They say that:-

(a)   under the deed of undertaking between the Company’s directors and shareholders and SFC dated 26 November 2012 (“Deed”), it was the Company’s directors and shareholders who undertook to compensate the Company’s clients of their loss caused by the Alleged Scheme but not the Company.  The Company was not a party to it.  Accordingly, the Deed has not imposed any obligation or liability on the Company.

(b)   in each of the Company’s audited reports for the year of 2012, 2013 and its interim audit report for year of 2013 (collectively as the “Audited Reports”), there was only a provision for liabilities and charges booked as “for making good the loss of client securities misappropriated and related expenses” in the sum of HK$160,785,224.  Therefore, the Company only has a liability on its books for an uncertain amount in the indefinite future.  Further, as repayment was remarked as not to be demanded if such payment would jeopardize the going concern of the Company therein, the Company needs not make any repayments because of financial difficulties.

ANALYSIS

31.  Given a necessary party should be joined irrespective of the apparent strength of his case shown at the stage of joinder application, it is neither necessary nor appropriate for this Court to make a finding on the limited evidence presently before me other than those germane to the present application.  The test is satisfied if there exists a claim of a proprietary nature and not necessary that the proprietary claim is proved. In particular, the Two Actions are still at an early stage and the parties’ respective case will be subject to further development.

32.  On the question of whether the Company ultimately bearing the loss for which its clients were compensated, the respective statement of claim of the Two Actions contains a plea that the Company is a party suffering the loss for which its clients were compensated and on the evidence produced so far, it is not right to say that the Company does not have an arguable case that such loss rests finally with it, even if initially the funds and the replacement shares were provided to the affected clients by its shareholders and/ or director.  

33.  First, the Defendants’ attacks are based heavily on the face value of the Deed and the Audited Reports.   Apart from those attacks, there is indeed no solid evidence to challenge the evidence given by Ms Ng Yick Yee Belinda who deposed that the loss was ultimately borne by the Company.  Given she is a director and shareholder of the Company, a party to the Deed who was liable to compensate the Company’s clients, her evidence should not be lightly disbelieved in the absence of solid contradictory evidence at this stage.

34.  Second, her evidence is supported with an audit confirmation (“Audit Confirmation”) given by the Company’s former auditors dated 24 November 2017 confirming the Company had suffered a loss of HK$159,626,091.05 in compensating its clients^[3].

35.  Third, the evidence shows that the Company has taken active steps in the process of compensating its clients.  It has entered into an agreement with JLA Asia Limited to engage the latter to investigate and identify the securities misappropriated for the purpose of compensating the affected clients.  The fees for such services form part of the loss claimed by the Company in the Two Actions. 

36.  I also accept that the Company has an arguable proprietary claim against the defendants as regards the Securities basing on the facts and/ or allegations that the Company is:-

(a)   the owner of the business and the former employer of the 1^st and 2^nd defendants throughout the period of the alleged fraudulent acts.  The latter made use of their position and/ or the funds and assets of the Company as part of the alleged fraud.  The relationship gave rise to trust and fiduciary duties;

(b)   the holder of the Securities.  The Company claims they were acquired with the sale proceeds of the fraud on it;

(c)   a victim of the Alleged Scheme

(d)   one of the beneficiary seeking to be compensated by transfer of the Securities or payments under the Restorative Relief;

(e)   the plaintiff of the Company’s Private Action claiming in its own right with regard to the Securities by reason that the sale proceeds from the misappropriation were used to purchase the Securities and that it has compensated those affected clients, it argues that it is entitled to step into the Securities for a proprietary claim becomes available to it.

37.  Absent any explanation from the defendants as to how the Securities were acquired, it is difficult to deny the Company, alleged to be the victim of the Alleged Scheme, and who has since suffered loss from the alleged fraud and its compensation to its affected clients, has an arguable claim for legal and proprietary interest in the Securities separately from SFC, a question relating to or connected with the relief claimed in the matter in the present action, not only because it is expressly named as a party in respect of whom, the Restorative Relief is sought but also of its claim as regards the Securities, both in damages and of a proprietary nature. 

38.  Considering the intended intervention is limited to be notified of any application for variation of the Injunction Order, the Company has sufficient interest to be joined for such purpose irrespective of the strength of its case at the stage of joinder application. 

JUST AND CONVENIENCE

39.  I also accept that it is just and convenient to join the Company for such limited purpose.

40.  Undoubtedly, to allow the defendants accessing the Securities would reduce or extinguish the Securities available to be transferred to satisfy the Company’s proprietary claim and claim for damages, bearing in mind the Company’s claim far exceeds the value of the Securities. There is no reason the Company should not be notified of such applications and to consider whether to oppose them.

41.  The Company says that it has never been notified of any application for variation of the Injunction Order and its request to SFC for such notices upon SFC’s receipt of them met with no success.  By the Consent Order and the 3^rd Defendant’s Summons, the 1^st and 3^rd defendants respectively sought to withdraw almost all of their respective assets being frozen under the Injunction Order without notifying the Company. 

42.  The delay of the service of the 1^st defendant’s Summons on the Company has caused unnecessary delay and cost as elaborated in the Judgment.  Prior to the 1^st Defendant’s Summons, the Company had been made aware of neither the terms of the Consent Order, nor the 1^st Defendant’s plan of compelling it to liquidate part of the Securities for her use.  The embarrassment to the Company is obvious. 

43.  Having considered all the circumstances and on a just and convenience balancing exercise, it is clear to me that the Company has a genuine need to be notified of any variation application.  Such exercises will neither incur much costs or time nor give an undue advantage to the Company.  The complaint that the Company’s present application carries an ulterior motive to sabotage the Defendants’ defence in criminal proceedings has not been made out.

44.  In view of the limited intervention as sought by the Company, there is no room for any persuasive argument that the joinder would unnecessarily expand the scope of the present action, confuse or complicate the clear issue to be determined.

45.  Likewise, I find no solid basis for any suggestion that the defendants will be subject to double jeopardy under the Two Actions.  A notice of application for variation of the Injunction Order will, at most, lead to an opposition to that application.  Similar applications will not be made in the Company’s Private Action for the chance of obtaining a fresh injunction order over the Securities under that action is flimsy.  I am also alive to the fact that the remedies under s.213 of SFO are complementary to but not substitute for civil rights.

46.  In my view, a refusal of the present application will shut the Company out from properly arguing his claim for interest in the Securities when they subsequently arise for consideration upon variation application relating to the Securities.  It defies fairness and justice.

47.  On the other hand, I should be slow to give liberty to the Company to oppose to whatever applications for variation as it finds fit.  The Company gives no valid explanation as to why it has not applied for direction for such purpose under the Injunction Order. 

48.  Apart from the Securities, the Frozen Assets consist of funds in local and overseas bank accounts, solely or jointly owned by some of the defendants with someone not being parties to this action.  The Company has made no specific reference to nor substantiated any solid claim against such funds or persons in the present application.  The origin of such funds and the relationship between the parties involved have not been elaborated in any details. 

49.  In consideration of the coverage, nature and purpose of variation applications would vary in scope and impact, it is not just and convenient to give an unlimited liberty as sought by the Company with the limited evidence before me at this stage.  This is without prejudice to the Company to make proper application for such purpose when the situations subsequently require.

50.  For the moment, the Company’s interest has not been prejudiced for the Company’s Joinder Summons has been fixed to be heard together with the 3^rd defendant’s Summons in a substantive hearing before Judge.  The Company’s concern at this stage will be addressed in a fuller picture for both parties have already filed detailed affirmations for the purpose of those two summonses.

CONCLUSION

51.  Having considered all the submissions and evidence of the Company and the Defendants, I am satisfied that the Company has a question relating to the relief sought in this action with regard to the Securities between the Company, SFC and the defendants which warrants an order that notices of variation applications be given to the Company.

52.  I order that : -

Without prejudice to the right of the Company to apply for further order, the Company be joined as an intervener of the present proceedings limited to receiving notices of all subsequent applications for variation of the Injunction Order from the parties making such applications.

COSTS

53.  As regards costs of the present Summons, I have been given to understand that SFC and the 4^th defendant do not apply for costs.  The 2^nd and 5^th defendants take no part in this application.  I therefore make no order as to costs for them.

54.  With regard to the question of costs as between the Company and the 1^st and 3^rd defendants, costs should follow the event.  I make an order nisi that costs of and occasioned by the present Summons, including all costs reserved, with certificate for counsel, be paid by the 1^st and 3^rd defendants to the Company, to be summarily assessed by the court.

55.  The above costs order nisi shall become absolute 14 days from the date hereof if no application has been made to vary it.

56.  For the purpose of summary assessment, the Company do lodge into Court and serve on the 1^st and 3^rd Defendants its statement of costs within 7 days.  The 1^st and 3^rd Defendants do lodge and serve their respective reply within 7 days thereafter. 

57.  Lastly, I thank all counsel for their assistance in this matter.