SECURITIES AND FUTURES COMMISSION v. "C" AND OTHERS

HCMP 727/2008

[2020] HKCFI 1806

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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D E C I S I O N

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A. INTRODUCTION

1.  By a summons dated 26 August 2016, the Plaintiff, the Securities and Futures Commission (“SFC”) seeks to join China United Telecom Limited (“China United”) as the 6^th Defendant to these proceedings, as well as to amend its Re-Re-Amended Originating Summons (“the RRAOS”) and the Amended Statement of Claim (“the ASOC”) (“the Joinder Summons” / “the Joinder Application”).

2.  The Joinder Summons was first heard before Hon Lok J on 5 September 2016 (“the September 2016 Hearing”), together with a summons dated 17 June 2016 issued by China United for: (a) joinder as an intervener in these proceedings; and variation of an injunction order that had been granted by Hon Kwan J (as she then was) on 16 April 2008 (“the Injunction Order”), and as varied by Hon Lok J on 1 June 2015 (“the China United Summons” / “the Variation Application”).

3.  The China United Summons was dismissed by the learned Judge for the reasons set out in his Decision dated 4 May 2017 (“the May 2017 Decision”). However, the Joinder Summons was adjourned, so that certain issues as to service of the said summons on the other Defendants to this action could be addressed (see §54 of the May 2017 Decision).

4.  The service issues having been addressed, the Joinder Summons was relisted, and the matter substantively argued before me on 16 July 2020. At the hearing, the SFC was represented by Counsel Mr Horace Wong SC and Mr Norman Nip, and China United was represented by Counsel Mr Benjamin Chain and Mr Tony Chow.

5.  I set out below my decision on the Joinder Application and the reasons therefor.

B.      BACKGROUND

6.  The background to this matter is helpfully summarized in §§2-11 of the May 2017 Decision, the relevant portions of which I set out below and respectfully adopt for the purposes of this decision:

“BACKGROUND

2. On 16 April 2008, the SFC applied for and obtained an ex parte Mareva injunction order against the 1^st to 4^th Defendants (“the Injunction Order”). It is the SFC’s case that the 1^st Defendant, one Mr Lu (“Lu”), and an acquaintance (“Y”) had engaged in insider dealings. The 2^nd Defendant was Y’s wife. The 3^rd and 4^th Defendants were wholly-owned companies of Lu.

3. The substantive matter was to be heard before the Market Misconduct Tribunal (“the MMT”). The Injunction Order was obtained in anticipation of the possible finding by the MMT that Lu and others were culpable of insider dealing of shares in Asia TeleMedia Ltd (“ATML”), which was a company listed on the stock exchange of Hong Kong. The SFC seeks restoration and other ancillary orders under s 213(2) of the Securities and Futures Ordinance, Cap 571 (“the SFO”) with a view to compensating the losses suffered by the counterparties to the insider dealing trades.

4. Although Kwan J subsequently discharged the Injunction Order on 22 October 2008, it was re-imposed by the Court of Appeal on 22 May 2009. The matter went to the Court of Final Appeal and it discharged the Injunction Order against the 4^th Defendant only.

5. The Injunction Order covered 675,950,000 shares in ATML held in China United’s name (“the Shares”) [1]. China United had been the majority and controlling shareholder of ATML, and Lu was at all material times the sole director of China United.

6. On 22 September 2010, the SFC amended its Statement of Claim to add Y as the 5^th Defendant.

7. Since the making of the Injunction Order, ATML had been taken out of liquidation. Its issued shares including the Shares were consolidated and substantially diluted. ATML also changed its name. The Shares became 13,519,000 shares in Reorient Group Ltd (“Reorient”).

8. The price of the Shares remained low for a long time. In April 2015, it shot up multifold upon rumours of Mr Ma Yun of Alibaba and others investing in Reorient. This resulted in the application by China United for release of the Shares and payment of the consequential fund raised by the Shares into court.

9. There was no serious objection to the application. By the Amended Injunction Order dated 1 June 2015, [Hon Lok J] allowed the release of the Shares so that China United could raise fund with the Shares and pay the fund into court. Eventually, the sum of $43,661,568 was paid into court on 18 June 2015 (“the Fund”).

10. China United then became embroidered in litigation with the party who provided the Fund. The dispute was settled and China United took out the China United’s Summons on 17 June 2016.

11. In the meantime, the SFC’s case against Lu and 3 others was heard before the MMT. By a report dated 26 November 2015 (“the MMT Report”), the MMT made no findings in relation to Lu because he had been hospitalised and did not have a reasonable opportunity to be heard at the trial. The MMT determined that the other 3 individuals had not engaged in insider dealings. The SFC appealed. …”

7.  Since the September 2016 Hearing, the following developments have occurred.

8.  First, as set out in the May 2017 Decision, Hon Lok J dismissed the China United Summons, the reasons being fourfold, as summarized in §21 therein:

“21. Having carefully considered the submissions of China United, I do not accept that there is sufficient reason for the court to vary the terms of the Injunction Order so as to allow China United to obtain the Fund paid into court. The reasons are 4 fold:

(i) there was no change in circumstances or good reasons to justify the Variation Application;

(ii) there was serious delay in making the Variation Application;

(iii) there is substantial evidence to show that the Shares were beneficially owned or at least controlled by Lu at the material times; and

(iv) the SFC has an arguable case that China United was “involved in” Lu’s insider dealing activities, which would entitle the court to make restoration or other ancillary orders against it under s 213(2) of the SFO.”

9.  The consequence of the aforementioned dismissal was that the Injunction Order (as varied on 1 June 2015) remained undisturbed, the Fund remains in Court, and China United was not joined as an Intervener.

10.  I pause here to note that:

(1)  At the present hearing of the Joinder Summons, the Court was asked to take note of China United’s change of stance. As reflected in §54 of the May 2017 Decision, Counsel acting for China United at the time of the September 2016 Hearing (not Mr Chain and Mr Chow) had indicated that China United had “no objection to the joinder even if it fails in the Variation Application.” The point was made that the present opposition to the Joinder Summons represented an about turn from its stance in September 2016. In any event, Mr Wong SC indicated that he was not taking any point along the lines that China United was estopped from opposing the Joinder Summons. In the circumstances, I have proceeded to decide the matter substantively without regard to the change in stance (noting that this factor may nonetheless be taken into account on any decision on costs to be made).

(2)  Further, whilst I have had regard to the May 2017 Decision and the matters discussed therein, insofar as there are issues which arise in the context of and relate to the decision to be made on the Joinder Summons, I have considered these independently of the reasons given by Lok J. In any event, I do not understand China United to be taking any issue on the references to the May 2017 Decision by the SFC in their submissions. Nor do I understand the SFC to be advancing an argument that I am bound by reason of any issue estoppel(s) arising as a result of the reasons as set out in the said decision. Regardless, as will be seen below, where there are areas of overlap, I have not differed substantially from the reasons set out in Lok J’s decision.

11.  Second, the MMT’s decision in respect of the dealings of two other former executives of ATML (Charles Yiu and Marian Wong) was appealed all the way to the Court of Final Appeal (“CFA”). By its Judgment dated 12 October 2018, the CFA held that their dealings in ATML’s shares subsequent to 26 April 2007 amounted to insider dealing. The MMT finding in respect of Lu was not appealed.

12.  Third, since the September 2016 Hearing, the SFC has effected service of the Joinder Summons on all of the Defendants in these proceedings (some by way of substituted service). No issue of service is taken by China United at this hearing. None of the Defendants entered an appearance at this hearing.

C.  THE PARTIES’ PLEADED CASES

13.  In order to understand the issues arising in the Joinder Application, it is necessary to first summarise the gist of the SFC’s case as currently pleaded, and the stance taken by Lu to the SFC’s assertions.

C1.  The SFC’s Case

14.  As to the SFC’s case, in essence:

(1)  By the RRAOS and the ASOC, the SFC asserts a case that Lu engaged in insider dealing of 50.25 million ATML shares (“the Subject Shares”), contrary to S.291 of the Securities and Futures Ordinance (“SFO”).

(2)  The relevant information which Lu is said to have been in possession of when dealing with the Subject Shares is two-fold:

(a)  On 5 February 2007, ATML was given notice of an assignment of a debt of over HK$58 million (“the Debt”) owed by ATML from a Liu Lien Lien to Goodpine Ltd (“Goodpine”).

(b)  On about 26 April 2007, Goodpine through its solicitors served a statutory demand on ATML demanding payment of over HK$70 million (comprising the original Debt, with interest) (“the Statutory Demand”).

(3)  At the material time, Lu was inter alia:

(a)  The Chairman, Executive Director, and Chief Executive Officer of ATML, which was a listed entity. He was “connected with” ATML for the purposes of S.291, SFO.

(b)  A 100% shareholder of the issued share capital in Asia TeleMedia Holdings Limited, which in turn held 35% of the issued share capital in China United. As at 28 December 2007, Asia TeleMedia Holdings Limited directly held 1,389,808 shares of the Company, and held a total of 711,500,000 shares of the Company via China United and its subsidiary.

(c)  The only person authorized to operate China United’s securities account maintained with Mansion House Securities (FE) Ltd (“Securities Account”).

(d)  The sole director of China United until 26 January 2012, with a Ms Chu Dongmei (“Chu”) having been appointed on or about that date. Lu eventually resigned as a director on or about 26 September 2014.

(4)  The SFC’s case is that in the period from 27 April 2007 to 30 May 2007, Lu counselled or procured China United to sell the Subject Shares through its Securities Account. On 8 June 2007, part of the proceeds of sale in the amount of HK$23.1 million was transferred to Lu’s personal bank account.

(5)  It is also the SFC’s case that in addition to the dealings in the Subject Shares, Lu had sold other ATML shares, either by himself or through other nominees.

(6)  On 5 June 2007, Goodpine presented a petition for winding up against ATML. On 7 June 2007, trading in ATML’s shares was suspended. On 18 October 2007, trading in ATML’s shares resumed. The share price dropped by 62.05%.

(7)  The SFC’s case is that as a result of the dealings by Lu (and the other defendants involved in his share dealings), he avoided a loss estimated at HK$43,661,568.

15.  The relevant reliefs presently sought in the RRAOS and the ASOC against the existing Defendants are as follows:

(1)  In the RRAOS:

“1A. There be declarations that:

(1) The 1^st Defendant has contravened section 291(1)(a) and (8) of the Securities and Futures Ordinance (Cap 571), and is a person within sections 213(1)(a)(i)(A) and (2)(b) of the Securities and Futures Ordinance.

…

(2) The 1^st Defendant has contravened section 291(1)(b) and (8) of the Securities and Futures Ordinance (Cap 571), and is a person within sections 213(1)(a)(i)(A) and (2)(b) of the Securities and Futures Ordinance.

…

Particulars of Contravention

(a) The 1^st Defendant, between 27 April 2007 and 30 May 2007, in Hong Kong being connected with a listed corporation namely, ATML, and having information he knew was relevant information to that corporation, namely that it was subject to a statutory demand that it could not satisfy and that it was in consequence liable to face a petition for its winding-up by the court, counselled or procured another person, namely China United Telecom Limited, to deal in the listed securities of ATML.

[pleas that the 2^nd, 3^rd and 4^th Defendants have been involved, knowingly or otherwise, in the contraventions set out in paragraph 1A and are persons within section 213(2)(b) of the SFO]

1AA. The Defendants be required to take such steps as the Court may direct including to restore the parties to the transactions in the dealings referred to in paragraph 1A above to the position in which they were before the transactions were entered into, alternatively to order 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 in paragraph 1A above.

1AB. Further or alternatively, the Defendants do account for the profit gained or loss avoided by the Defendants or any of them or by any persons on their behalf as trustee or agent as a result of the dealings pleaded in paragraphs 1A(1), 2(a) … or any part thereof.

1AC. The Defendants do pay to the receiver appointed under paragraph 1AD the amount of profits or loss that it is found that they have gained or avoided respectively upon taking such account together with interest thereon at Hong Kong and Shanghai Banking Corporation’s prime rate plus one per cent from the date of receipt until the date of payment, or at such rate and for such period as to the court seems fit.

1AD. A proper person be appointed to recover, receive, and administer such sum as appears to the court to be just having regard to the profits appearing to the court to have been gained or to the loss avoided from the dealings pleaded in paragraph 1A and interest thereon and for that purpose all necessary and proper directions may be given.

1AE. Any amount recovered from a person by the said receiver shall be paid out to such person or distributed among such persons as the court may direct, being a person or persons appearing to the court to have entered into transactions with any of the defendants in the dealings pleaded in paragraph 1A above as a result of which the profits or loss referred to in paragraph 1D above appear to have been gained or avoided respectively.

1AF. There be all further proper accounts, inquiries and directions.

1AG. Alternatively, if on the true construction of section 213(2)(b) an account of profits and a class distribution are not available:

(1) an inquiry be made in relation to each transaction:

(i) (a) who were the parties (b) what the nature of the transaction was and (c) what assets or money each party to the transaction had paid or transferred to the others;

(ii) whether each investor is willing that there should be a rescission of the transaction in question and whether each investor is willing and able to return any shares or money he has received under the transaction; and

(2) where the parties are capable of being restored to their former positions and the investors are willing,

a. An order declaring the relevant contract to be void or voidable to the extent specified in the order;

b. The defendants pay such sum and in such manner as the Court thinks fit to each such investor and each such investor shall take all steps in his power necessary to transfer the shares back to the relevant defendant.”

(2)  The Prayer in the ASOC essentially mirrors the reliefs sought in the RRAOS.

16.  As can be seen from the above summary, China United features significantly in the factual context and background to the case. The RRAOS and ASOC contain quite a number of references to China United in the context of setting out the case against Lu and the other Defendants.

C2.  Lu’s Defence

17.  In Lu’s Defence dated 2 July 2010:

(1)  He admits inter alia that:

(a)  At the material time, he was the 100% shareholder of the issued share capital in Asia TeleMedia Holdings Limited, which in turn held 35% of the issued share capital in China United.

(b)  At the material time, he was the sole director of China United.

(2)  Whilst accepting that China United had sold 49.25 million shares of ATML in the period from 27 April 2007 to 30 May 2007, he avers that the reason for these dealings was that the Subject Shares in fact belonged to ATML’s employees, who wished to exercise their share options under a staff share option scheme that had been established in June 2002. He further avers that he had never told these employees about the assignment of the Debt to Goodpine, nor of the Statutory Demand.

D.  THE JOINDER SUMMONS AND AMENDMENTS SOUGHT TO BE MADE

18.  By the Joinder Application, the SFC now seeks to:

(1)  Join China United as the 6^th Defendant in these proceedings.

(2)  Make various amendments to the RRAOS and the ASOC, said to be consequential to the joinder.

19.  Whilst some of the proposed amendments are indeed purely consequential on the joinder (for example, amending the references from “China United” to “the Sixth Defendant”), there are a number of material additions proposed in the draft pleadings (respectively, the Draft Re-Re-Re-Amended Originating Summons (“Draft RRRAOS”) and the Draft Re-Amended Statement of Claim (“Draft RASOC”)). These are as follows (“the Proposed Amendments”):

(1)  In the Draft RRRAOS, the proposed addition of a paragraph 5A:

“(5A) The 6^th Defendant has been involved in the contravention set out in paragraph 1A(2)(a), whether knowingly or otherwise, and is a person within section 213(2)(b) of the Securities and Futures Ordinance.”

(2)  In the Draft RASOC, the proposed addition of the following plea:

“35A. The Sixth Defendant has been involved, whether knowingly or otherwise, in the First Defendant’s contravention of sections 291(1)(b) and (8) of the Securities and Futures Ordinance by reason of its sale of the Company’s shares and its transmission of part of the sale proceeds to the First Defendant as pleaded in paragraphs 16 and 17 above, and accordingly, is a person within section 213(2)(b) of the Securities and Futures Ordinance.”

(3)  Also in the Draft RASOC, the proposed addition to the Prayer:

“(1) There be declarations that: …

  (f)  The 6^th Defendant has been involved in the contravention set out in paragraph 1A(2)(a) of the Re-Re-Re-Amended Originating Summons herein, whether knowingly or otherwise, and is a person within section 213(2)(b) of the Securities and Futures Ordinance.”

20.  The effect of the Proposed Amendments would be to make China United liable to reliefs granted pursuant to S.213(2)(b), SFO, and in particular, to make it subject to the reliefs sought in the RRAOS and ASOC against the other Defendants as set out in paragraph 15 above.

E.  CHINA UNITED’S POSITION

21.  China United filed two affirmations of Chu (her 2^nd and 3^rd Affirmations respectively) in support of the Variation Application. In those affirmations, China United took inter alia the following position on the facts:

(1)  It accepted that Lu has a 35% interest in China United, but rejected the assertion that China United was Lu’s nominee or personal company or vehicle.

(2)  It disputed the SFC’s allegation that the 675,950,000 shares in ATML held by China United as at the date of the granting of the Injunction Order (“the Frozen Shares”) belonged to Lu. However, insofar as the June 2015 application was concerned, it had been content to make arrangements for the Fund to be paid into Court on 18 June 2015 in the circumstances set out in the Background section above.

(3)  It averred that the Frozen Shares all along belonged to China United, having been purchased for itself, using its own funds (and not those of Lu), in its own name.

(4)  Insofar as the Subject Shares were concerned (ie the 50.25 million shares that were dealt with during the period from 27 April 2007 to 30 May 2007), China United took the same stance as Lu, namely, that these shares belonged to “Mainland staff”. In support of this allegation, it relied on an assertion in Chu’s 2^nd Affirmation that:

“31.  …the trading, although through China United’s account, clearly did not belong to it or was for its benefit. What the SFC did not inform the Court is that every disposition of ATML shares from China United’s account was shortly followed by a deposit back into the account of the same number of shares. Indeed, if the Shares had belonged to Mr. Lu and (as the SFC alleged against Mr. Lu) the trading through China United’s account was for his benefit, there would have been no reason for Mr. Lu to “replenish” every disposition of shares from China United’s account.”

(5)  In further emphasis of this “replenishment” assertion, in Chu’s 3^rd Affirmation, it sought to make the point that:

“8. … since whatever shares Mr. Lu caused to be sold from China United’s account were soon replenished in the account, the SFC’s tracing the proceeds of those sales does not logically support the argument that the shares belonged to Mr. Lu. First, the shares now in China United’s account were not the shares sold. Second, the fact that shares sold on Mr. Lu’s instructions were replenished tends more to show that the shares did not belong to him than the other way.”

22.  It was on the basis of the above assertions (and the other matters discussed in the 2^nd and 3^rd Affirmations of Chu) that China United had sought the release of the Fund by way of the Variation Application (which was dismissed by Hon Lok J in the May 2017 Decision). These factual allegations were also maintained for the purposes of opposing the Joinder Application.

23.  China United also filed a 4^th Affirmation of Chu specifically in opposition to the Joinder Application. In that affirmation, it reiterated the position that the Subject Shares sold were those belonging to Mainland employees.

24.  Crucially, however, it was accepted in that 4^th Affirmation that there was at least one, if not two, issues of fact between the SFC and China United which were disputed and would have to be adjudicated. These were expressed as follows:

“5. The issue being whether the Mainland employees who sold the Subject Shares were as SFC alleges the nominees of the 1^st Defendant [Lu] which enables the SFC to invoke the Chabra jurisdiction against China United without, yet, joining China United as a party to these proceedings.

6. There may also be a potential issue whether the other 675.95 million shares (not the Subject Shares) now represented by the money paid into Court are the 1^st Defendant’s assets.

7. China United disputes both but accepts those issue or issues need to be resolved, but not necessarily at the trial of these proceedings.”

25.  Whilst accepting that there were the above-mentioned factual issues that needed to be resolved, China United opposed the joinder on the basis that by the Joinder Application (and the Proposed Amendments in the Draft RRRAOS and the Draft RASOC), what the SFC actually sought to achieve was “to pursue China United on an alternative basis that China United is in any event liable in its own right, … even if the Subject Shares were / are not owned by the 1^st Defendant”. The cited basis of the opposition to this new claim was that (i) the new claim was statute-barred; and (ii) given the replenishments, there would be no factual basis to so pursue China United (§§8-9 of Chu’s 4^th Affirmation).

F.  THE ISSUES

26.  As set out in the SFC’s skeleton submissions, it seeks to join China United pursuant to O.15, r.6(2)(b), RHC, which provides inter alia:

“(2) Subject to the provision of this rule, at any stage of the proceedings in any cause or matter the Court may on such terms as it thinks just and either of its own motion or on application –

…

(b) order any of the following persons to be added as a party, namely-

(i) any person who ought to have joined as a party or whose presence before the Court is necessary to ensure that all matters in dispute in the cause or matter may be effectually and completely determined and adjudicated upon, or

(ii) any person between whom and any party to the cause or matter there may exist a question or issue arising out of or relating to or connected with any relief or remedy claimed in the cause or matter which in the opinion of the Court it would be just and convenient to determine as between them and that party as well as between the parties to the cause or matter.” (emphasis added)

27.  It is trite that the Court will wish to ensure that all disputes in an action can be effectively adjudicated upon and that all relevant parties are before it. For such purposes, all persons who have a legal or financial interest in the outcome of the matter are relevant parties. In this regard, the well-settled approach is to consider whether there is a bona fide claim and/or a proper question to be tried as between the plaintiff and the intended defendant that is necessary or just and convenient for resolution between them and/or between the plaintiff and the defendant(s) in the existing proceedings (Wing Mou Construction Co. Ltd v Cosmic Insurance Corp Ltd, HCCT 40/2001, unreported judgment dated 20 June 2002, at §15 per Ma J (as he then was); Advanced Connection Ltd v Able Technology (Hong Kong) Ltd & Ors [2019] HKCA 1092, at §20 per Chu JA).

28.  In further development of the argument, there are two distinct grounds relied upon by the SFC in support of the Joinder Application:

(1)  First, citing the evidence that Lu had ownership or control over the Frozen Shares and recognizing that there are factual disputes that needed to be adjudicated upon in relation to this issue, it relies upon what is commonly referred to as the Court’s Chabra jurisdiction (per the case of TSB Private Bank International SA v Chabra [1992] 1 WLR 231) to bring in China United as a party to the proceedings.

(2)  Secondly, it relies upon the fact that it has an arguable case that China United was “involved in” the matters referred to in the currently pleaded case (summarized in Section C above), and that accordingly, China United is a “person” who is liable to have reliefs ordered against it pursuant to S.213(2)(b), SFO.

29.  In its skeleton submissions dated 14 July 2020, China United indicated that it was already subject to the Chabra jurisdiction in these proceedings by virtue of the Injunction Order, but set out a stance that it objected to the joinder on the basis that any claim sought to be asserted against it under S.213(2)(b), SFO was statute-barred (“the Limitation Point”).

30.  At the hearing, I made a number of inquiries seeking to clarify whether the Limitation Point was being deployed to oppose joinder altogether, whether on the basis of the Chabra jurisdiction or the S.213(2)(b), SFO claim. Mr Chain clarified that:

(1)  Insofar as any proposed joinder on the basis of the Chabra jurisdiction was concerned, China United did not dispute that the Court had the jurisdiction to do so, but took the stance that it was not necessary in all the circumstances, since the Fund was in court anyway and China United, as a third party, would continue to be subject to the Chabra jurisdiction. The Limitation Point did not apply in relation to this ground for joinder.

(2)  Insofar as the joinder and amendment of pleadings bringing in the S.213(2)(b), SFO cause of action were concerned, China United was strongly opposed to this by virtue of the Limitation Point.

31.  Having regard to the above background and summary of the parties’ respective positions, and for the reasons further elaborated below, the issues for determination are as follows:

(1)  Whether China United may be joined as a Defendant on the basis of the Chabra jurisdiction.

(2)  Whether China United may be joined as a Defendant on the basis of the S.213(2)(b), SFO cause of action, and connected therewith, whether the material amendments referred to at paragraph 19 above ought to be allowed. In this regard, the following sub-issues arise:

(a)  What is the applicable limitation period for a claim brought under S.213(2)(b), SFO? (For reasons elaborated below, the point to be decided is between 12 years or 6 years).

(b)  In the context of deciding what the applicable limitation period is, what is the substance or essential nature of the relief to be granted pursuant to S.213(2)(b), SFO in the circumstances of this case.

G.  THE CHABRA JURISDICTION

32.  This point may be dealt with relatively swiftly. The parties are ad idem on the applicable principles insofar as the Chabra jurisdiction are concerned.

33.  In essence, in relation to a third party holding assets which may be amenable to enforcement, the Court may order the joinder of such party as a defendant in the proceedings even if no cause of action is asserted against it (TSB Private Bank International SA v Chabra (supra) at 238C-H, 241H-242G per Mummery J (as he then was); T v T (Joinder of Third Parties) [1996] 2 FLR 357 at 365-366).

34.  The Chabra jurisdiction has been regularly exercised and applied in Hong Kong in the context of Mareva relief. See e.g. XY, LLC v Jesse Zhu [2017] 5 HKC 479 at §§24-26 per Kwan JA; Company A & Ors v Company D & Ors [2019] HKCFI 367 at §§71, 83 & 86 per Recorder Eugene Fung SC.

35.  In this regard, I do not understand Mr Chain to be strongly disputing the proposition that the Court may, relying on such jurisdiction and if it deems his client a necessary party, exercise its discretion to join China United as the 6^th Defendant.

36.  I take the view that China United is plainly a necessary and relevant party (per the principles summarized at paragraphs 26 to 27 above), and would exercise my discretion to join them accordingly. In so doing, I have had particular regard to the following matters.

37.  First, there is clearly evidence suggesting Lu had ownership or effective control over the Frozen Shares:

(1)  He was the sole director of China United at all material times until 26 January 2012.

(2)  He was the only person authorized to operate the Securities Account.

(3)  Of the sales proceeds from the sale of the Subject Shares, HK$23.1 million was deposited into his personal account.

38.  Second and more importantly, China United itself has accepted that there are key issues of fact that need to be determined between itself and the SFC. These issues are (1) whether the sale of the Subject Shares was for the Mainland employees or by Lu himself as beneficial owner; and (2) whether the Frozen Shares belonged to Lu as opposed to China United itself (paragraph 24 above).

39.  The determination of these issues will have a direct impact on what kind of relief may be ordered at the conclusion of the trial of these proceedings, including but not limited to how the Fund is to be dealt with. It is necessary that the factual disputes be properly ventilated and, notwithstanding no cause of action is asserted against China United insofar as the assertion of the Chabra jurisdiction is concerned, that it nevertheless be bound by the findings and orders to be made.

40.  The joinder on the basis of the Chabra jurisdiction does not, however, address the entirety of the Joinder Application. In order for the SFC to be able to make the amendments in the Draft RRRAOS and Draft RASOC which seek to assert a case against China United pursuant to S.213(2)(b), SFO, this is an altogether distinct matter, and the subject of the discussion below.

H.  THE S.213(2)(b), SFO CLAIM AND THE LIMITATION POINT

H1.  S.213 Relief

41.  S.213,  SFO provides as follows:

“213. Injunctions and other orders

(1) Where —

(a) a person has —

(i) contravened —

(A) any of the relevant provisions;

(B) any notice or requirement given or made under or pursuant to any of the relevant provisions;

(C) any of the terms and conditions of any licence or registration under this Ordinance; or

(D) any other condition imposed under or pursuant to any provision of this Ordinance;

(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, whether or not during the course or as a result of the exercise of any power under Part VIII, 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, structured product, futures contract, leveraged foreign exchange contract, or an interest in any securities, structured product, 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).

……

(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.

  ……”

42.  S.291(1) and (8), SFO provides as follows:

“291. Offence of insider dealing

(1) A person connected with a listed corporation and having information which he knows is relevant information in relation to the corporation shall not—

(a) deal in the listed securities of the corporation or their derivatives, or in the listed securities of a related corporation of the corporation or their derivatives; or

(b) counsel or procure another person to deal in such listed securities or derivatives, knowing or having reasonable cause to believe that the other person will deal in them.

…

(8) Subject to sections 292, 293 and 294, a person who contravenes subsection (1), (2), (3), (4), (5), (6) or (7) commits an offence.”

43.  In the case of Securities and Futures Commission v Qunxing Paper Holdings Co Ltd (No 2) [2018] 1 HKLRD 1060, Hon G Lam J explored at length the nature of the relief and remedies available under S.213, SFO. The case stands for inter alia the following propositions:

(1)  On the nature of relief under S.213: Relief under S.213, SFO is not merely procedural in nature, but creates a substantive statutory cause of action which vests in the SFC. The purpose of S.213, SFO is to provide a statutory regime whereby the SFC could take action to obtain civil remedies for the benefit of investors, who might otherwise be deterred by cost and other considerations from instituting proceedings individually to obtain redress for their relatively small losses. See §§45-50:

“45. S 213, in contrast, confers a right of action on the Commission as plaintiff. As s 213(1) provides, the orders under subsection (2) may be made “on the application of the Commission”, not of any other person. S 213 is “complementary” to the civil liabilities created by ss 281 and 305, and the orders under s 213(2) are:

“by their nature designed to ensure that the relevant provisions are complied with (section 5(1)(d)), maintain and promote confidence in the industry (section 5(1)(g)), protect investors (section 5(1)(l)) and suppress illegal practices (section 5(1)(n))” (Securities and Futures Commission v Tiger Asia Management LLC [2012] 2 HKLRD 281 at §35 per Tang VP (as he then was)).

46. Insofar as financial awards are provided for, the purpose of s 213 is of course to provide remedies for the benefit of investors, not for the benefit of the Commission. In Securities and Futures Commission v Tiger Asia Management LLC (2013) 16 HKCFAR 324, at §16, Lord Hoffmann NPJ, distinguishing s 213 from criminal proceedings or proceedings in the Market Misconduct Tribunal, said:

“Section 213, on the other hand, provides remedies for the benefit of parties involved in the impugned transactions. They include injunctions and the appointment of receivers to secure property with a view to recovery by the victims of market misconduct, orders that particular transactions be unwound, orders declaring particular transactions to be void or voidable.  In these proceedings the SFC acts not as a prosecutor in the general public interest but as protector of the collective interests of the persons dealing in the market who have been injured by market misconduct. Proceedings under s 213 are the public law analogue of actions for damages by individuals under s 305 rather than a substitute for a criminal prosecution or proceedings before the MMT.”

47. This does not mean that s 213 is merely procedural in the provision of financial relief, limited to providing a representative mechanism for enforcing existing individual rights. …

It can be seen, for example, that the statutory remedy in s 213(2)(b) is available against a third party involved in any matter in s 213(1)(a)(i)-(v) albeit there is no contractual cause of action at common law against such a person for rescission of the transaction.

48. Indeed, as pointed out in Gray, Regulatory Restitution under Financial Services Legislation [2004] RLR 52 at 53 in relation to UK legislation:

“It is the shortcomings of private law as an efficacious means of ensuring redress and compensation that provide justification for the existence of financial regulators’ powers to apply to the courts, in certain circumstances, to seek restitutionary orders against firms and individuals who are in contravention of the substance of financial regulatory legislation and rules.  The fruits of such restitutionary orders may then be applied by the regulators to the benefit of not just one investor who has suffered loss as a result of the contravention but, if need be, a whole class or range of such investors.”

…

50. … s 213 creates a substantive statutory cause of action which is vested in the Commission. The purpose is to provide a statutory regime whereby the Commission, as regulator, can take action to obtain civil remedies for the benefit of investors, who may otherwise be deterred by cost and other considerations from instituting legal proceedings individually to obtain redress for their relatively small losses: see the Court of Appeal’s decision in Securities and Futures Commission v Tiger Asia Management LLC [2012] 2 HKLRD 281 at §24 per Tang VP. There is a wider public interest in this because, as Steyn LJ put it in Pantell at p 282B-C:

“The civil law provides a framework for the redress of individual grievances. But it also fulfils a wider social purpose in setting standards for the markets and in discouraging aberrant behaviour. But if resort to civil remedies is impracticable for most individual investors the sanctions of the civil law cannot play their proper role.” (emphasis added)

(2) On who may be made subject to a S.213 order: The terms of S.213(2)(b) are very wide indeed, and encompass the making of orders for restoration or relief against parties who were not necessarily themselves parties to the offending transactions in question. See §§52-55:

“52. The terms of s 213(2)(b) are very wide indeed. It confers power on 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” (emphasis added).

The latter words referring to the restoration of the parties’ position are of course “classic features of a rescission in equity”: Pantell, p 264B. In Securities and Futures Commission v C at §36, Le Pichon JA said:

“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.”

53. While the provision is not in terms so limited, it appears that the orders made in previous cases under s 213(2)(b) were all restorative orders (ie orders to restore the parties to a transaction to their pre-transaction position) where the defendant was a party to the transaction affected by the contravention in question.

…

54. This does not necessarily mean that an order for restoration under s 213(2)(b) can only be made against a party to the transaction to be undone in effect. The section does not contain any such express restriction, but is “open-textured”[2]. The width of the section and of the powers it confers on the court are “characterised by their extreme flexibility” and “should not be judicially cut down” (Securities and Investments Board v Scandex Capital Management A/S [1998] 1 WLR 712, 723B, 726B). Its terms permit an order to be made against a person if he has been involved in any of the matters referred to in s 213(1)(a)(i) to (v) — these categories of persons are not necessarily themselves parties to the transactions in question. They may be persons who have aided or abetted a contravention or simply a person who has been involved in it.

55. In the present case, of the 4 defendants, only Qunxing was a counterparty to the transactions in question, and then only in relation to the IPO and open offer of shares and the issue of warrants to Victory Asset. Can the type of order sought by the Commission be granted against the 2^nd to 4^th defendants, and against Qunxing in relation to purchases of shares on the market? It is ultimately a matter of statutory construction. There seems to me no a priori reason to limit the persons against whom an order may be made under s 213(2)(b) to those who are counterparties to the transactions in question. The similar section in the (UK) Financial Services Act 1986 expressly enabled a restorative order to be made, not only against a person who has entered into a transaction in contravention of the law, but also against any other person who has been knowingly concerned in the contravention: see Pantell, p 264C-D. I consider that the type of order sought can in principle be made against all four of the defendants.” (emphasis added)

(3)  On the width of the cause of action: The cause of action created under S.213(2) is discretionary, and the jurisdiction arises once the Court finds that the matters set out in S.213(1) have occurred. The order to be made thereunder may be made if the Court considers (i) it is desirable, and (ii) it will not unfairly prejudice any person. The Court will adopt a fairly broadbrush approach where necessary. See §§56-57:

“56. Not only is s 213(2) striking in its width, it is also remarkable in that the cause of action it creates appears to be discretionary. S 213(1) confers a discretion on the court by providing that it “may”, on the application of the Commission, make one or more of the orders specified in subsection (2). The jurisdiction arises once the court finds that the matters set out in s 213(1)(a) have occurred. The only express fetter on this discretion is subsection (4), which requires the court to satisfy itself on two matters, “so far as it can reasonably do so”, before making an order, namely, (i) that it is desirable that the order be made, and (ii) that the order will not unfairly prejudice any person.

57.  Desirability and fairness are highly general concepts which do not lend themselves to definition or precise exposition.  A fairly broadbrush approach has to adopted where necessary. …”

44.  In Qunxing itself, the Court adopted a robust approach in ordering the implementation of a scheme proposed by the SFC which sought to compensate tens of thousands of public investors who had acquired shares or warrants of Qunxing following the publication of false or misleading information on its financial results. The operation of the scheme sought to restore the investors to the positions in which they were before their subscription or purchase of the shares or warrants. The mechanics and operation of the scheme are set out in §§40-42 of the decision. Commenting on the broadbrush nature of the scheme, the learned Judge further noted at §§59-68 that it was a practical impossibility to ascertain with precision every single transaction that was sought to be compensated. Instead, the scheme proposed by the SFC sought to achieve rough-and-ready justice for the investing public:

“60. But in the real world these facts are either not all ascertainable or are so only at the end of a vastly complex, lengthy and costly process. To insist on investigating the circumstances of every individual investor and investment might completely destroy the efficacy of the statutory scheme and defeat the legislative purpose. It is not surprising therefore that there has been no attempt in this case to establish reliance and inducement on an individual basis in the case of each investor. …

62. The primary purpose of the kind of order sought must be protection of the investing public. …

63. To the extent that the proposed scheme extends to an investor, it does seek to restore him to the position in which he was before he acquired the shares in question (following the latter part of s 213(2)(b)), provided that he is also required in principle to make counter-restitution such as by delivering up the share certificate or signing an appropriate document or transfer form for that purpose or giving credit for the residual value, if any, of the shares in his possession (see Pantell, pp 280E, 281B-D, 283E, 286B-C; Scandex, p 724F-H). …

64. Qunxing obtained a very large amount of funds through the IPO, the open offer and the issue of warrants to Victory Asset. Best Known had also received from Qunxing a substantial part (HK$429.8m) of the proceeds of subscription for shares (though HK$382.36m was transferred back to Qunxing). Through their company Boom Instant, the 3^rd and 4^th respondents had received dividends of approximately RMB 329m from Qunxing between 2008 and 2013. Moreover, they were involved in knowingly disseminating materially false and misleading financial information which they must have known would induce investors to acquire shares in Qunxing or retain shares already acquired. There is a high degree of culpability in the contravention: see Financial Services Authority v Shepherd [2009] EWHC 1167 (Ch), §36. Requiring them to compensate investors for the false and misleading information published by Qunxing is in my view not unfair to them. Nor has any defendant appeared in these proceedings to contend that the proposed orders would unfairly prejudice him.

…

67. In the ultimate analysis, where one is concerned, as here, with innumerable sale and purchase transactions in relation to Qunxing shares and finite and limited resources for the payment of compensation, a robust approach has to be adopted. As Deputy Judge Halpern QC of the English High Court said in Financial Conduct Authority v Anderson [2014] EWHC 3630 (Ch) at §13:

“… One of the most striking features of this case is the enormous gap between the losses suffered by depositors and the sums available for distribution. This makes it imperative that any method of distribution is as simple as is possible, consistent with it being fair in a rough-and-ready way. There is a real risk that any attempt to achieve perfect justice would itself become a source of unfairness, firstly because it is likely to involve spending disproportionate costs in attempting to fine-tune the scheme, secondly because it is impossible to understand fully the divergent interests of each class of depositors when they are not separately represented, and thirdly because a complex scheme is likely to be disproportionately expensive to administer.” (emphasis added)

45.  In connection with the above, reference may also be made to the case of Securities and Investments Board v Pantell SA (No 2) [1993] Ch 256, which is cited at numerous junctures in the Qunxing decision (supra) [3], and discusses s 6(2) of the (UK) Financial Services Act 1986 [4], the foreign legislation closest in form to S.213(2), SFO.

46.  Of note are the observations by Sir Nicolas Browne-Wilkinson V.-C. (as he then was) on the nature and width of the statutory remedy:

(1)  At 264A-D:

“In my judgment, sections 6(2) and 61(1) provide for a statutory rescission of unlawful transactions. The sections authorise the court to order steps to be taken “for restoring the parties to the position in which they were before the transaction was entered into” (section 6(2)) or “to remedy [the contravention]:” section 61(1). These are the classic features of a rescission in equity: restitutio in integrum or the putting back of the parties into the position they were formerly in. I can see no reason why, as against the contravener himself, the court should not order repayment by the contravener of the sums paid to him under the unlawful transaction, whether or not the actual sums paid are capable of being identified as a separate fund of money. There is nothing in the words of the section which justify such a restriction nor is it a prerequisite of an order for repayment of the price by the vendor when a contract is rescinded in equity. If, as I think clear, the court can order the contravener to repay the price out of his own pocket, the section appears to provide that the same order can be made against the third party “knowingly concerned.” The words of the section are general: the court can make the same order either against the contravener or against the third party “knowingly concerned.” (emphasis added)

(The above dicta formed the basis of G Lam J’s observations in §55 of Qunxing, supra).

(2) At 264F-265D:

“The basic problem is to discover why the court is given jurisdiction only under sections 6(2) and 61(1) to make orders against third parties who are “knowingly concerned.” Mr. Sumption suggested that the purpose was to enable orders to be made against such third parties where they are holding property transferred by the investor. He gave the example of a third party bank holding, and asserting a lien against, share certificates relating to shares transferred under the unlawful transaction. He suggests that no order could be made against the bank if it had acted innocently but that Parliament wished to ensure that if the bank was not innocent it could be forced to disgorge. This may well have been part of the Parliamentary intention, but there is nothing in the words or context of the section so to limit its effect. …” (emphasis added)

47.  Similar observations as to the width and flexibility of the relief that could be ordered were made in Pantell by Scott LJ in the English Court of Appeal (which affirmed the first instance decision), who stated as follows (at 277D-278D):

“The purpose of an order under section 6(2) must be to restore the parties to the transaction to the position in which they were before the transaction was entered into. So an order ought not, in my opinion, to require a contravener to repay to an investor the purchase price of shares sold to the investor unless there is also provision for the return of the shares by the investor. Rescission under section 6(2), as under the general law, must go both ways. Otherwise only one of the parties is being restored to his former position.

In my judgment, provided the specified precondition is met, the only limitations on the type of order that can be made under section 6(2) that are justified by the statutory language are that the order must be intended to restore all the parties to the transaction to their respective former positions and that the steps directed by the order to be taken must be reasonably capable of doing so. An order requiring the contravener to repay the purchase price of the shares would not be capable of restoring the parties to their respective former positions unless the obligation to repay were made conditional on the tender of the share certificates. So an order confined to directing the repayment of the price would not, in my judgment, be a proper order for the S.I.B. to seek or for the court to make under section 6(2).

Subject, however, to the limitations to which I have referred I do not see why any restriction should be placed on the type of order that could be made under section 6(2). The width of the statutory language, “such steps as the court may direct,” is striking and there is, in my opinion, no good reason why it should be restricted. Nor, in my opinion, does the statutory language warrant any distinction between the type of order that can be made against the contravener and the type of order that can be made against a person “knowingly concerned” in the contravention. The circumstances of a particular case may, as a matter of discretion, justify a more stringent order against a contravener than would be justified against a person “knowingly concerned,” but that is not the point.

In particular, the fact that a person “knowingly concerned” has not himself received anything under the transaction in question does not, in my judgment, restrict the power of the court to make a section 6(2) order against that person. It may be that the contravener himself has not received anything under the transaction in question. It is not hard to construct a case in which a contravener induces an investor to enter into a share purchase transaction with a third party associate under which the price for the shares is paid to the third party. The court has power under section 6(2) to order the contravener to “take such steps as the court may direct” to restore the parties to the transaction to their former position. Mr. Sumption’s argument would, if right, be as applicable to the contravener as to a person “knowingly concerned.” The contravener could not be made liable under section 6(2) except to the extent of the money or property he had himself received from the investor. I am unable to accept this argument, whether it is applied to the contravener himself or to persons “knowingly concerned.” “ (emphasis added)

H2.  The Limitation Ordinance

48.  The relevant provision of the Limitation Ordinance (Cap 347, “LO”) is S.4, which provides as follows:

“(1) The following actions shall not be brought after the expiration of 6 years from the date on which the cause of action accrued, that is to say –

…

(d) actions to recover any sum recoverable by virtue of any Ordinance or imperial enactment, other than a penalty or forfeiture or sum by way of penalty or forfeiture…

…

(3) An action upon a specialty shall not be brought after the expiration of 12 years from the date on which the cause of action accrued:

Provided that this subsection shall not affect any action for which a shorter period of limitation is prescribed by any other provision of this Ordinance.”

49.  In relation to the joinder of a party after the expiration of a limitation period, S.35, LO provides as follows:

“35. New claims in pending actions; rules of court

“(1) For the purposes of this Ordinance, any new claim made in the course of any action shall be deemed to be a separate action and to have been commenced—

(a) in the case of a new claim made in or by way of third party proceedings, on the date on which those proceedings were commenced; and

(b) in the case of any other new claim, on the same date as the original action.

(2) In this section a new claim means any claim by way of set-off or counterclaim, and any claim involving either—

(a) the addition or substitution of a new cause of action; or

(b) the addition or substitution of a new party,

…

(3) Except as provided by section 30 or by rules of court, the court shall not allow a new claim within subsection (1)(b), other than an original set-off or counterclaim, to be made in the course of any action after the expiry of any time limit under this Ordinance which would affect a new action to enforce that claim.

…

(5) Rules of court may provide for allowing a new claim to which subsection (3) applies to be made as there mentioned, but only if the conditions specified in subsection (6) are satisfied, and subject to any further restrictions the rules may impose.

…

(6) The conditions referred to in subsection (5) are—

(a) in the case of a claim involving a new cause of action, if the new cause of action arises out of the same facts or substantially the same facts as a cause of action in respect of which relief has already been claimed in the action by the party applying for leave to make the amendment; and

(b)in the case of a claim involving a new party, if the addition or substitution of the new party is necessary for the determination of the original action.

(7) The addition or substitution of a new party shall not be regarded for the purposes of subsection (6)(b) as necessary for the determination of the original action unless either—

…

(a) the new party is substituted for a party whose name was given in any claim made in the original action in mistake for the new party’s name; or

(b) any claim already made in the original action cannot be maintained by or against an existing party unless the new party is joined or substituted as plaintiff or defendant in that action. …”

H3.  The Issue arising as to the applicable limitation period

50.  By the Proposed Amendments, the SFC seeks to advance a case against China United pursuant to S.213(2)(b), SFO as follows:

(1)  Lu, as a person connected with ATML and having relevant information in relation thereto, counselled or procured inter alia China United to deal in the shares of ATML.

(2)  China United has been involved in Lu’s aforementioned contravention, whether knowingly or otherwise, and as such is a person falling within S.213(2)(b), SFO.

(3)  Consequently, the Court of First Instance may make order(s) directing China United to take such steps as it sees fit, including steps to restore the parties to any transaction to the position in which they were before the transactions were entered into.

(4)  In particular, the following are orders are sought by way of the Proposed Amendments, as seen within the context of the existing pleadings:

(a)  Declaratory relief that China United has been involved in the contravention set out in §1A(2) of the Draft RRRAOS.

(b)  Orders that China United be required to take such steps as the Court may direct including to restore the parties to the transactions in the dealings referred to in §1A of the Draft RRRAOS to the position in which they were before the transactions were entered into, alternatively to order 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 in §1A of the Draft RRRAOS.

(c)  Further or alternatively, China United do account for the profit gained or loss avoided by it or by any persons on their behalf as trustee or agent as a result of the dealings pleaded in §§1A(1), (2)(a) and (2)(b) of the Draft RRRAOS or any part thereof.

(d)  China United do pay to the receiver appointed the amount of profits or loss that it is found that they have gained or avoided respectively upon taking such account together with interest thereon at Hong Kong and Shanghai Banking Corporation’s prime rate plus 1% from the date of receipt until the date of payment, or at such rate and for such period as the Court seems fit.

51.  As recognized in Qunxing (supra), the S.213, SFO relief is a standalone statutory cause of action. The main issue which therefore arises for consideration in relation to the relief sought is what the applicable period of limitation is in the circumstances of the present case. This issue arises in the context of the following key dates and events:

(1)  27 April 2007: Earliest date on which the China United transactions took place.

(2)  18 April 2008: The Originating Summons filed by the SFC.

(3)  26 August 2016: Joinder Summons filed by the SFC.

52.  The parties are agreed that:

(1)  The relevant starting point is that the SFO is an instrument under legislative seal and is therefore a specialty within the meaning of S.4(3), LO (Collin v. Duke of Westminster [1985] QB 581 at 601H & 602E; Wing Ming Garment Factory Ltd v The Incorporated Owners of Wing Ming Industrial Centre and Anor, HCA 8805/1993, unreported judgment dated 22 April 2005 at §64 per A Cheung J (as he then was)).

(2)  Insofar as the Proposed Amendments seek to add a substantive claim under S.213(2)(b), SFO against China United, this constitutes a new claim as defined in S.35(2)(b), LO, which must comply with the requirements set out in S.35(6)(b) and (7), LO, since the proposal is to join China United as a new party, and the amendments are not necessary for the determination of the original action (per the sub-section (7) criteria).

(3)  A new claim is not time-barred if the application is taken out within the relevant limitation period (Beijing Tong Gang Da Sheng Trade Co Ltd v Allen & Overy (a firm) [2014] 3 HKLRD 292 at §24 per Deputy High Court Judge Le Pichon) [5].

(4)  Thus, if the 12 year limitation period applies, then the SFC’s Joinder Application was within time [6]. However, if the 6 year limitation period applies, then the SFC was out of time as at the date of filing of the said application [7].

53.  The SFC’s position is that the action pursuant to S.213(2)(b), SFO is a specialty, and that the 12 year limitation period applies (per S.4(3), LO).

54.  It is China United’s position that the applicable limitation period is 6 years rather than 12 years, because the claim against China United is in substance and reality an “action to recover any sum recoverable by virtue of any Ordinance” (per S.4(1), LO). It is said that this takes it out of the 12 year period which is prima facie applicable under S.4(3), LO.

55.  The determinative point, therefore, comes down to whether the S.213(2)(b), SFO relief sought against China United is in substance and essential nature “an action to recover any sum”. This was the focus of Mr Chain’s oral submissions at the hearing, the central contention being that the only real relief which may be ordered against China United at the end of the day is an order for the payment of money.

H4.  Relevant Authorities

56.  There is no case law that directly decides this issue in the context of S.213, SFO or, indeed, its closest foreign equivalent (S.6(2) of the (UK) Financial Services Act 1986 as discussed in Pantell (supra)).

57.  At the hearing, the parties referred to four cases from the insolvency sphere which they invited the Court to apply by way of analogy. I will first discuss these cases in turn, and will then apply the relevant principles to the facts of the present case.

58.  The first case is that of Re Priory Garage (Walthamstow) Limited [2001] BPIR 144. The case concerned a claim issued by a liquidator pursuant to SS.238-241 of the Insolvency Act 1986, against a former director of the company, seeking to set aside as transactions at an undervalue or alternatively as unlawful preferences certain transfers which had been made by the Company to the director of leases of two flats. An additional claim was also made under the same provisions for monetary relief. There was no dispute that the proceedings were issued more than 6 years after the accrual of the causes of action. The director raised a limitation defence, which was directed to be tried as a preliminary issue.

59.  On consideration of the nature of the relief sought, the Court held that:

(1)  Applications to set aside transactions under SS.238-241, IA 1986 are generally actions on a specialty within the meaning of the Limitation Act 1980, S.8(1) [8] and thus subject to a 12-year limitation period.

(2)  Where, in certain applications under those sections, the substance of the claim is not to set aside a transaction but to recover a sum recoverable by virtue thereof, such applications would be governed by the Limitation Act 1980, S.9(1) [9] and hence subject to a 6-year limitation period.

(3)  In the context of the relief sought in that particular case, the first and primary head of relief sought was the setting aside of the two transactions, with the monetary claims being ancillary thereto. In consequence, the 12-year limitation period was applicable to the whole claim.

60.  The following dicta at 159H-161B is particularly instructive, and both parties’ Counsel referenced it at the hearing:

“In the light of the foregoing, the legal position is, in my judgment, as follows:

(1) An application to the court under s.238 to 241 IA86 to set aside one or more transactions is an action on a speciality within s.8(1) Limitation Act 1980 and hence prima facie subject to a twelve year limitation period.

(2) There may however be examples of applications under ss.238 to 241 which are taken outside the scope of s.8(1) of the Limitation Act by the combined operation of ss.9(1) and 8(2) of that Act with the effect that the limitation period is reduced from 12 years to 6.

(3) An application under ss.238 to 241 will come into the latter category if it can fairly be said that the substance or the essential nature of the application is “to recover a sum recoverable by virtue of” those sections. The applicant accepts that some cases under ss.238 and 239 will be caught by s.9(1). Which category will prove to be the more frequent has been the subject of extended debate, and I do not propose to offer any prediction of my own. One example of a case caught by ss.9(1) and 8(2) might be where the transaction to be set aside is a simple payment of a sum of money. …

(4) Where there is doubt as to whether a claim falls into the first (that is, 12 year) category, or the second (that is, 6 year) category, the “look and see” approach adopted by Lord Goddard CJ in the West Riding case and approved by Peter Gibson LJ in the Farmizer Products case at 599F should be applied, and the court should look to see what the substance or essential nature of the relief truly sought by the applicant in the particular case before it is. The court is not limited just to the words of the pleading. The court may look at the substance behind the pleading. However, provided the pleaded claim to set aside is a bona fide claim, which is neither a sham nor bound to fail, the applicant is entitled to pursue it, …” (emphasis added)

61.  In the context of the relief sought under SS.238-241, IA 1986 in that particular case, the Court found (at 161C-G) that this was not, in substance, a claim for a sum of money, but rather was for the setting aside of the two transfers of leases. In consequence, the 12 year limitation period applied.

62.  The next case is that of The Joint and Several Liquidators of Faith Dee Ltd v Yip Shu Chee & Ors, HCCW 237/2005, unreported judgment dated 5 February 2013. In that case, liquidators applied to the Court to challenge: (i) disposals of two properties by the company to its sole director, a Mr Yip; and (ii) payments made by the company to Mr Yip, as being unfair preference transactions and void under S.266B of the old Companies Ordinance, and an order that the director do repay the total sum of HK$1,931,000 (being the consideration for the purported sale of the properties alleged to be unfair preferences). It was the liquidators’ case that the two sets of transactions challenged were part and parcel of a scheme whereby the net effect was that Mr Yip essentially obtained the properties for free. Mr Yip and related respondents argued that the claim was time-barred.

63.  Citing and relying on Re Priory Garage (supra), Deputy High Court Judge M Ng (as she then was) applied the “look and see” approach, and held at §§79-80 of the decision that the main purpose of the relief sought by the liquidator was to unwind the transfers and payments in question. In the circumstances, the monetary reliefs sought were a consequence of the unwinding of the transactions. As such, a 12 year limitation period applied.

64.  The third case is JSC BTA Bank v Mukhtar Ablyazov and Madiyar Ablyazov [2016] EWHC 3071 (Comm). This case concerned a claim whereby the claimant bank sought to set aside a payment made by a customer, Mr Ablyazov senior, from his account with the bank to his son’s account (the defendant, Mr Madiyar Ablyazov) on the basis that it was a transaction defrauding creditors (contrary to S.423, IA 1986). It was common ground that the payment was made for no consideration.

65.  Deputy High Court Judge Rabinowitz QC ultimately held (at §142 of the decision) inter alia that the payment had not been made for the purpose of putting assets out of the senior Mr Ablyazov’s creditors’ reach, and it was this point that constituted the ratio decidendi insofar as the S.423, IA 1986 claim was concerned.

66.  However, the Court went on to make obiter comments on a limitation point argument which parties had also addressed the Court on. Citing and relying on Re Priory Garage (supra) (at §152), the Deputy Judge had the following to say (at §155) insofar as the “substance and essential nature” of the claim in that particular case was concerned:

“Standing back and seeking to identify the “substance or essential nature” of the Section 423 Claim, it is in my view important to keep in mind that the transaction BTA seeks to impeach is the Transfer, a transaction that in essence involved the payment of a sum of money by Mr Ablyazov to Madiyar, albeit that the payment was made from one bank account (Mr Ablyazov’s) into another (Madiyar’s). Thus, what BTA in substance seeks in this action is the recovery from Madiyar of that sum of money; in other words, that Madiyar should be required to repay the money paid to him by Mr Ablyazov. Viewed in this way, I regard it as clear that the Section 423 Claim is in substance and essence one for the recovery of a sum of money and thus a claim within the meaning of section 9(1).” (emphasis added)

67.  The fourth and final case is that of Burnden Holdings (UK) Ltd & Anor v Fielding & Anor (Ch D) [2020] BPIR 1. The case concerned a claim by a liquidator against two directors and majority shareholders (the defendants) challenging two transactions which had been entered into two years prior to the liquidation. The subject transaction which was drawn to my attention was the execution of a fixed and floating charge by the insolvent company in favour of the defendants as security for loans which had been granted in the past. The claim in this respect was a S.423(1)(a), IA 1986 claim asserting that this was a transaction entered into for no consideration or at an undervalue.

68.  The essence of the holding by Zacaroli J, and the reason why the claim failed, was that: (i) it was not a transaction for no consideration since there had been some consideration given, as there was some commercial benefit to the company arising out of the transaction (at §502); and (ii) it was not a transaction at an undervalue since the grant of security did not in fact involve any transfer of value from the company (at §504), these two factors being dispositive of the claim. The judge also noted that had it been necessary to so decide, he also decided that the transaction was not, in any event, entered into with the intent of putting the assets beyond the reach of creditors.

69.  By reason of the above, the comments on the limitation issue in the judgment in this case are similarly obiter. The judge cited Re Priory Garage (supra), but then noted (at §512) that the claimant liquidators:

“… accept, however, that the only substantive relief claimed is the payment of a sum of money. The assets that were subject to the charge have long gone so that the only relief available is the payment of a sum of money. In those circumstances, had it been necessary to determine the point, I would have concluded that the claim is statute barred.”

It is apparent from the above that the point had, in effect, been conceded by the claimant liquidators.

70.  Drawing the strands together as regards the four cases discussed above:

(1)  The parties are agreed that the apposite test is that the Court should “look and see” what the “substance or essential nature” of the relief truly sought by the applicant in a particular case is.

(2)  Where, as in Re Priory Garage (supra), the primary claim is one to set aside a transaction, and the monetary claims are ancillary thereto, then it is the 12 year limitation period that applies (per S.4(3), LO or S.8(1), IA 1986).

(3)  The Court in the Faith Dee decision applied the “substance or essential nature” test and found that the primary claim was to unwind the transaction in question, and accordingly, any order for repayment of money was consequential thereto. I note that Mr Chain invites me to disregard this decision and submits that it was wrongly decided.

(4)  Where the claim is, in substance and essential nature, a claim for recovery of money, then it is the 6 year limitation period that applies (per S.4(1), LO or S.9(1) and 8(2), IA 1986). In this regard, the Ablyazov case appears to fall within one of the examples cited in Re Priory Garage at 160F-G where the transaction concerned is to “set aside … a simple payment of money” and which would consequently fall within the 6 year limitation period.

(5)  I consider the Burnden Holdings decision (supra) to be of limited (or no) assistance, since the point was not fully argued nor, indeed, fully reasoned.

H5.  Application to the circumstances of the present case

71.  The ultimate question is whether the “substance and essential nature” of the SFC’s claim against China United is “an action to recover any sum”.

72.  The SFC’s argument may be summarized as follows:

(1)  The orders which may be made under S.213(2)(b), SFO are extremely wide, as discussed at length in the Qunxing decision (§§43-44, supra). The nature of the restorative orders that may be made are “restitutionary”, bearing “classic features of a rescission in equity.”

(2)  Any monetary remedies intended to be sought by the SFC are consequential upon the unwinding of the insider dealing transactions (if such case is established).

(3)  The reliefs sought in the Draft RRRAOS and the RASOC envisages of a set of steps that the Defendants (including China United, if it is joined) would be obliged to comply with. These steps would include inter alia participation in any scheme to be proposed in order to restore counterparties to the former position prior to the insider dealing transactions, cooperating with the receiver to be appointed, and in consequence of the scheme or orders to be made, payment of sums as eventually determined as a result thereof.

(4)  It was impossible to predict, at the present juncture, what precise order or orders would be sought or made at the end of the trial, not least because factual findings needed to be made in relation to inter alia:

(a)  The ownership of the Subject Shares (Mainland employees vs Lu);

(b)  The ownership of the Frozen Shares (China United vs Lu); and

(c)  The degree of culpability of China United as a person “involved in” Lu’s insider dealing;

all of which would, together with the other factual findings to be made, have an impact on the nature and extent of the orders to be made against China United.

73.  For China United, Mr Chain made the following points:

(1)  It was important to distinguish between the Subject Shares, which were the subject of the insider dealing allegations, and the Frozen Shares, which were altogether separate.

(2)  Insofar as there could be any “unwinding” sought at the end of the day in relation to the Subject Shares, the only proper counterparty was Lu, and China United should have no involvement at all in this unwinding exercise.

(3)  Insofar as the Frozen Shares were concerned, these were not tainted by any allegations of insider dealing, and thus would not be the subject of any claim as to unwinding or restoration orders.

(4)  Furthermore, the Frozen Shares had, in any event, been disposed of, and the Fund was already in Court. In reality, the only order that could be made insofar as China United was concerned was an order for a payment out of the Fund.

(5)  Applying the “substance and essential nature” test, regardless of whatever restorative orders were to be made against the other Defendants, the only obligation that China United could be made the subject of was an order for payment of money. It did not matter that the exact sum was to be arrived at by reason of any scheme the SFC would propose at the end of the trial. It was the end result of the payment obligation on China United that was the key consideration. This payment obligation was not ancillary to any other order, but was an end in itself.

(6)  Insofar as the Faith Dee case was concerned, Mr Chain invited me not to follow it, as he submitted it had been wrongly decided.

(7)  In the circumstances, the 6 year limitation period applies.

74.  Having considered the parties’ submissions, I consider that the substance and essential nature of the relief sought against China United by way of the Proposed Amendments is not for recovery of a sum, but rather, involves substantive orders to be made that China United participate in the restitutionary exercise that seeks to unwind any insider dealing transactions (if such allegations of insider dealing are made out). The order for payment of money would be consequential on this restitutionary exercise. In so finding, I have had regard to the following particular points.

75.  First, it is apparent from the reliefs as pleaded in the Draft RRRAOS and Draft ASOC that the orders sought are for a comprehensive scheme to unwind the insider dealing transactions. This involves a broad spectrum of steps and orders against the Defendants which have as their ultimate objective the protection of the investing public. This goes beyond a mere order for payment of money, even insofar as China United is concerned, since there is a distinct possibility that China United may be ordered to take steps to facilitate this exercise (such as complying and cooperating with the receiver).

76.  The case law supports this understanding of the nature of the relief to be ordered. See the observations in Qunxing at §§§§43-44 above, and Pantell at §47 above.

77.  Second, it would seem to be common ground that any order for the payment of money by China United or otherwise would be made at the end of any assessment exercise to be carried out. This factor in itself supports the contention that “the action” (being the wording used in S.4(3), LO) is not one to “recover any sum”. This is distinguishable from, for example, the situation in the Ablyazov case (supra). The scenario in the present case is rather more complex than the simple reversal of a transfer of money.

78.  Third, the point made (summarized in paragraph 73(2) above) that the unwinding in relation to the Subject Shares should only concern Lu and not China United seems to be founded upon an overly narrow view of the orders that may be made against a person “involved in” the transactions in question:

(1)  In this regard, Mr Chain accepted at the hearing that there was a spectrum of factual findings that could be made against China United in terms of its knowledge and culpability insofar as the insider dealing transactions were concerned. This was particularly so given a key aspect of the SFC’s case was that Lu was the sole director, in control of the Securities Account, and hence the directing will and mind of China United at the material time.

(2)  The case law is clear that the eventual findings on the degree of culpability will factor into the ultimate order which the Court may seek to make insofar as the S.213(2)(b) “person” is concerned. Reference may be made to the passages from Qunxing cited at §§43-44 above, and Pantell at §§46-47 above.

(3)  Similarly, the dicta cited in those passages is also clear that the statutory language is not to be restricted in terms of its operation, and any order to be made against the person involved in the transactions is not dependent on the said person: (i) holding any property or assets in question which arose out of the impugned transactions, or (ii) necessarily being the counterparty to the impugned transactions. The question is ultimately one of desirability and fairness (as opined by Hon G Lam J at §57 of Qunxing, supra).

(4)  Thus, one cannot assume that China United would not be made subject to any restitutionary or restorative orders to be made in relation to the Subject Shares and the transactions associated therewith. This is particularly so where China United accepts, at the very least, that the trades in question took place through the Securities Account in its name. The ultimate order will depend upon the degree of culpability to be found, and the Court’s broadbrush application of the criteria of desirability and fairness taking into account all the relevant circumstances.

79.  Fourth, the aforementioned observations apply with equal force to the submission regarding the Frozen Shares and the Fund (summarized in paragraph 73(3) above):

(1)  One must bear in mind the breadth of the orders that can be made against a person involved in the impugned transactions.

(2)  I would accept that the factual findings as to who owned the Frozen Shares (and, in consequence, the Fund) would, of course, factor into the Court’s consideration of the ultimate order to be made against China United.

(3)  However, it would wrong to assume that just because the Court found that the Frozen Shares (and hence, the Funds) belonged to China United, then it would necessarily follow that no order would be made against China United.

(4)  One can envisage, for example, a scenario where the Court finds that: (i) China United was a person knowingly involved in the impugned transactions insofar as the Subject Shares are concerned, but that (ii) the Frozen Shares belonged to China United itself. Even in those circumstances, it would be open to the Court to order that China United be required to take part in the restitutionary or restorative exercise, and consequential on this, to make payments (whether out of the Fund or otherwise) in satisfaction of any scheme to be implemented. Again, the question is ultimately one of desirability and fairness.

(5)  Thus, even if one recognizes the fact that the Frozen Shares are separate and distinct from the Subject Shares, and could belong to China United rather than Lu (a matter that needs to be determined at trial), this does not take China United’s argument any further.

80.  Fifth, as to the invitation to disregard Faith Dee, I have the following observations:

(1)  The situation in Faith Dee was analogous to the S.213(2)(b), SFO relief insofar as it involved an unwinding of the queried transactions and consequential repayment of money. I decline to find that it was wrongly decided.

(2)  Further and in any event, I consider that the S.213(2)(b), SFO relief and the scheme which the Defendants in the present case are to be made subject to (in the event of the SFC’s case being established at trial) are, in fact, somewhat more complex. The S.213(2) relief involves the robust, rough-and-ready approach to setting aside or unwinding potentially a large number of transactions (as discussed in Qunxing, §44 above). The scheme in question is not simply a rescission or restoration in respect of a single transaction. As such, I consider that even if the Faith Dee decision could be criticized (which I do not agree), this does not automatically mean that the SFC’s arguments in the present case would fail. In essence, the nature of the S.213(2)(b), SFO relief is further from “an action to recover a sum” than a case which seeks to effect an unwinding of a single, known transfer (with the corresponding payment clearly identified).

81.  For the above reasons, I consider that the action against China United as arising as a result of the Proposed Amendments is not “an action for the recovery of any sum” (per S.4(1), LO). In the circumstances, the 12 year limitation period applies.

I.  CONCLUSION

82.  I would thus allow the Joinder Application in the terms as sought (as well as allowing the SFC to amend its address on the pleadings, as orally sought at the hearing).

83.  As to costs, I make a costs order nisi that China United shall pay the SFC the costs of and occasioned by the Joinder Summons, including any costs which have been reserved, with certificate for two counsel. In so doing, I have taken into account China United’s change of stance.

84.  I thank Counsel for their assistance.