CHINA FORESTRY HOLDINGS CO LTD (IN OFFICIAL LIQUIDATION) v. TOP WISDOM OVERSEAS HOLDINGS LTD AND ANOTHER

HCA 1089/2016

[2020] HKCFI 526

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1089 OF 2016

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DECISION

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1.  This is the substantive hearing of the application under §2 of the Summons dated 9 July 2018 (the “Summons”) taken out by the 1^st and 2^nd defendants (“D1” and “D2” respectively) for an order that:

“ All further proceedings in this action be stayed until 28 days after the issuance of the written report by the Market Misconduct Tribunal (‘MMT’) in the proceedings relating to the listed securities of the Plaintiff regarding whether the persons specified in the notice to the MMT by the Securities and Futures Commission have engaged in market misconduct.”

The background facts

2.  The plaintiff (“China Forestry”) was incorporated in the Cayman Islands in December 2007.  It was the holding company of the China Forestry group (the “Group”).

3.  In December 2009, China Forestry was listed on the Hong Kong Stock Exchange pursuant to an initial public offering (the “IPO”). At that stage, D2 was its CEO, and until February 2011, one of the directors.  Through D1 which was D2’s wholly‑owned company, D2 held 6.34% of the shares of China Forestry.

4.  At all material times, Li Kwok Cheong (“KC Li”) was P’s majority shareholder and Chairman.

5.  On 12 January 2011, D2 procured D1 to enter into a placing agreement (the “D1 Post‑IPO Placing”) with Standard Chartered Securities (Hong Kong) Limited and disposed of an aggregate of 119 million shares of China Forestry for consideration of about HK$398 million (the “D1 Post‑IPO Placement Proceeds”).

6.  During the course of the audit of the Group’s financial statements for the year ended 31 December 2010, China Forestry’s auditor, KPMG, identified a number of irregularities which raised serious questions about the Group’s accounting records, KPMG reported those irregularities to the board of China Forestry on 25 January 2011.

7.  On 2 February 2011, the Securities and Futures Commission (the “SFC”) commenced HCMP 176 of 2011 (“HCMP 176”) against D1 and D2.  According to the Originating Summons as subsequently amended on 4 March 2011, the SFC alleges knowledge by D1 and D2 of KPMG’s detection of irregularities in the course of the 2010 audit, so that the D1 Post‑IPO Placing constituted insider dealing, contrary to the relevant provisions of the Securities and Futures Ordinance (the “SFO”).   

8.  At the same time when the Originating Summons was taken out, SFC obtained an ex parte interim injunction (the “Injunction”) freezing assets up to HK$398,219,458.00, including the sum of HK$394 million held by D1 in a UBS bank account (representing approximately the D1 Post‑IPO Placement Proceeds).  The Injunction remains in force.  HCMP 176 has otherwise been stayed (by consent on 4 January 2018). 

9.  In June 2015, China Forestry was wound up by an order of the Grand Court of the Cayman Islands.  Liquidators were appointed (the “Liquidators”). 

10.  On 25 April 2016, the writ herein was filed.  As summarized by Mr Manzoni, leading counsel for China Forestry:

“ 11.  The writ ... sought compensation from the Defendants for breach of duty or on an accessorial basis, including in respect of the [D1 Post‑IPO Placement Proceeds][1].

...

17. ... In short, China Forestry alleges that [D2] orchestrated a pervasive and substantial false accounting scheme (the ‘False Accounting Scheme’) in breach of his fiduciary and other duties owed to China Forestry for his own personal gain and to the detriment of China Forestry. China Forestry submits in these proceedings that the Defendants hold illicit gains (the ‘Illicit Gains’) obtained from the artificial inflation of the price of China Forestry’s shares on a constructive trust for China Forestry.

18.     Other than the Illicit Gains, China Forestry also seeks equitable compensation for various losses suffered by China Forestry as a result of the False Accounting Scheme, including misappropriations by [D2], dividends paid out on the basis of the misleading accounts and various costs which would not have been incurred had [D2] not breached his fiduciary and other duties.”

11.  On 16 January 2017, the SFC commenced HCA 117 of 2017 (“HCA 117”) against inter alios China Forestry, KC Li and D2.  The SFC alleges that the defendants engaged in market misconduct in respect of the Prospectus, the 2009 financial report and 2010 interim report. 

12.  The writ in HCA 117 has never been served upon the Liquidators.  China Forestry has subsequently been removed as a party.

13.  HCA 117 was stayed by consent on 14 November 2017.

14.  On 3 May 2018, the SFC issued the Notice referred to in §2 of the Summons (the “SFC Notice”).  The SFC Notice:

(a)  recites the SFC’s view that market misconduct within the meaning of ss 277 and 270 of the SFO has or may have taken place in relation to the securities of China Forestry;

(b)  names the persons suspected to have perpetrated market misconduct (collectively the “Specified Persons”) as being:

(i)  KC Li;

(ii)  D2; and

(iii)  D1;

(c)  requires the MMT to conduct proceedings (the “MMT Proceedings”) and determine:

(i)  whether any market misconduct in the nature of false or misleading information inducing transactions, insider dealing or otherwise has taken place;

(ii)  the identity of any person who has engaged in the market misconduct found to have been perpetrated; and

(iii)  the amount of profit gained or loss avoided, if any, as a result of the market misconduct found to have been perpetrated. 

15.  Specifically in respect of the suspected market misconduct within the meaning of s 277 of the SFO:

(a)  277 of the SFO concerns disclosure of false or misleading information inducing transactions;

(b)  the relevant paragraphs of the SFC Notice read that:

“ 23. Various types of information relating to China Forestry’s business operations and financial information ( ... referred to herein as the ‘Disclosed Information’) were disclosed, circulated or disseminated to the public in the Prospectus, the 2009 Annual Results and the 2010 Interim Results.

24. [KC Li] and [D2] disclosed, circulated or disseminated, alternatively authorised or were concerned in the disclosure, circulation or dissemination of the Disclosed Information in the Prospectus, the 2009 Annual Results and the 2010 Interim Results, respectively.

...

48. The Disclosed Information was materially false or misleading in respect of:

48.1. The Group’s revenue, profit and turnover generating activities ...

48.2. The value, existence and nature of the Group’s assets ...

48.3. China Forestry’s suitability to be listed and/or the quality of the Group’s management.

...

   51.    Both [KC Li] and [D2] knew, alternatively were reckless or negligent as to whether the Disclosed Information, or any part of it, was false or misleading as to a material fact or was false or misleading through the omission of a material fact.”

16.  Specifically in respect of the suspected market misconduct within the meaning of s 270 of the SFO:

(a)  270 of the SFO concerns insider dealing;

(b)  the relevant paragraphs of the SFC Notice read that:

“ 53. KPMG’s identification of the 2010 Audit Issues and/or the fact that the Disclosed Information, or a substantial part of it, was materially false or misleading were specific information about China Forestry or the Shares, and were not generally known ...

54. [D2] knew in December 2010 that KPMG had identified some of the 2010 Audit Issues and could or would in due course reveal other false and misleading disclosures that had been made by China Forestry. He also knew that the Disclosed Information, or a substantial part of it, was materially false or misleading. [D2] knew that these two pieces of information (individually or collectively) amounted to relevant information in relation to China Forestry.

55. [D2’s] knowledge was imputable to [D1].

56. On 12 January 2011, after trading hours, [D2] procured [D1] to enter into [the D1 Post‑IPO Placing] with [Standard Chartered Securities (Hong Kong) Limited] for placing an aggregate of 119,000,000 shares at HK$3.35 per share ...

57. On 13 January 2011, [D2] procured [D1] to execute the [the D1 Post‑IPO Placing] and the settlement sum of HK$398,219,458.00 (net of fees and expenses) was paid to [D1].”

Parties’ submissions

17.  In summary, Mr Chan, counsel for the defendants, submits that the present proceedings should be stayed as requested given that (1) all factual issues in the MMT Proceedings and the present action are “essentially identical”, (2) that the Liquidators and the SFC are effectively making rival claims against the D1 Post‑IPO Placement Proceeds, (3) that the findings in the MMT report as to whether any market misconduct has taken place “should be” admissible as proof of liability in the present action under ss 281(7) and (8) of the SFO; (4) that practically it is unrealistic to expect the Liquidators to seek to further pursue the present action for the purpose of achieving a result different from that reached by the MMT; and (5) that all evidence adduced before the MMT will be admissible herein and will significantly facilitate the disposal of the present proceedings.

18.  Mr Manzoni resists the application.  His main grounds are that (1) the MMT proceedings and the present action involve different parties and cannot be determinative of the present action, (2) the MMT report will not be admissible in these proceedings; (3) the MMT Proceedings are not Court Proceedings, and (4) a stay will prejudice China Forestry.

The law on stay

19.  The Court has the discretion under s 16(3) of the High Court Ordinance and Order 1B rule 1(2)(e) to order a stay of proceedings.

20.  When deciding how the discretion is to be exercised, the basic principle is what would serve the ends of justice between the parties and as far as the administration of justice is concerned.  Whether there is identity of parties is also an important consideration.  As observed by Ma J (as he then was) in Linfield Ltd v Taoho Design Architects Ltd [2002] 2 HKC 204:

“ 14. One starts with the basic principle: what would serve the ends of justice between the parties to the litigation and as far as the administration of justice is concerned? This recurrent theme can be found in all cases involving stays on the basis of lis alibi pendens: see The Abidin Daver at 412B‑D (noting in particular the well known words of Lord Diplock, ‘It is a recipe for confusion and injustice’). I have also found helpful a statement of principle contained in the judgment of Sellers LJ in Compagnie Nouvelle France Navigation SA v Compagnie Navale Afrique du Nord (The ‘Oranie’ and The ‘Tunisie’) [1966] 1 Lloyd’s Rep 477, where at 487(1), he said:

The guiding principles are:

(1) that the stay must not cause injustice to the claimant in the arbitration, and

(2) that the applicant for a stay must satisfy the Court that the continuance of the arbitration would be oppressive or vexatious to him or an abuse of the process of the Court: in short, that it would be unjust.

I would add that where a plaintiff institutes proceedings as of right (and not in breach of an arbitration agreement or exclusive jurisdiction clause) he is not to be deprived of carrying on those proceedings unless very good reasons exist to the contrary.

...

16. ... Even if there are multiple sets of proceedings involving similar or even the same issues, if there is no identity of parties, I fail to see how it is desirable or even possible for one or more of such proceedings involving different parties to be stayed pending the resolution of any other set or sets of proceedings.  The determination of any issues in proceedings between different parties would not be binding on any other party in another set of proceedings.  I recognize immediately that this may give rise to a risk of inconsistent findings, but where findings made in earlier proceedings (even on the same issues) are not binding in later proceedings, the risk is inevitable.  However desirable it may be to have consistency, findings made in different proceedings between different parties cannot be made binding on other persons.”

21.  Linfield was applied by Deputy Judge Lisa Wong SC (as she then was) in Eastman Chemical Ltd v Heyro Chemical Co Ltd [2012] 2 HKLRD 135 at [29].

22.  Recently, the relevant considerations when deciding whether to grant a stay were summarized by Au‑Yeung J in Poon Ka Man Jason v Cheng Wai To & Ors [2018] HKCF1 771, that:

“ 36. The court has discretion, as a matter of case management, to grant a stay of proceedings generally or until a specified date or event: High Court Ordinance, Section 16(3); Order 1B, rule 1(2)(e) of the Rules of the High Court (‘RHC’).

37. Where, as here, the action was commenced as of right, the court should only grant a stay when there are ‘very good reasons’ and in ‘rare and compelling circumstances’. The stay must not cause injustice to the Plaintiff, and the Defendants must show that continuing the proceedings would be unjust to them. See: Zhang Xiuhong v Liu Wenchen & ors (HCA 2118/2012, 20 July 2017), §34, per Au‑Yeung J, citing Ng J’s judgment in AIG Europe Ltd & ors v Fast‑Link Express Ltd & ors (HCAJ 114/2014, 10 January 2017), §§9‑13. The ultimate question is what would serve the ends of justice.

38. Exercise of discretion would involve balancing between (1) possible wastage of Court’s time and resources and also parties’ time and costs (if there is no stay) on the one hand and (2) possible delay of the proceedings for a short period of time (if there is a stay) on the other hand: see The Al Dhabiyyah [1999] 4 HKC 414, at p 420A‑F.

39. The court must bear in mind that the underlying objectives of the court is to increase cost‑effectiveness of court proceedings; ensure that a case is dealt with as expeditiously as is reasonably practicable; promote reasonable proportion and procedural economy in the conduct of proceedings; and to facilitate settlement of disputes: Order lA, rule 1(a), (b), (c) and (e) of the RHC.”

23.  I will apply the above principles and considerations when considering how the discretion should be exercised.

The admissibility of the MMT report

24.  One plank of Mr Chan’s submissions[2] is that the findings in the MMT report as to whether any market misconduct has taken place “should be” admissible under ss 281(7) and (8) of the SFO as proof of liability in the present action.

25.  The relevant parts of s 281 of the SFO are:

“ (1) Subject to subsection (2), a person who has committed a relevant act in relation to market misconduct shall, whether or not he also incurs any other liability (whether under this Part or otherwise), be liable to pay compensation by way of damages to any other person for any pecuniary loss sustained by the other person as a result of the market misconduct, whether or not the loss arises from the other person having entered into a transaction or dealing at a price affected by the market misconduct.

(2) No person shall be liable to pay compensation under subsection (1) unless it is fair, just and reasonable in the circumstances of the case that he should be so liable.

...

(7) Without prejudice to section 62 of the Evidence Ordinance (Cap. 8), in an action brought under subsection (1)—

(a) the fact that there is a determination by the Tribunal pursuant to section 252(3)(a) that market misconduct has taken place;

(b) the fact that there is a determination by the Tribunal pursuant to section 252(3)(b) identifying a person (whether or not a party to the action) as having engaged in market misconduct,

shall, in so far the determination is still subsisting, be admissible in evidence for the purpose of proving, where to do so is relevant to any issue in the action—

(i)   in the case of a determination referred to in paragraph (a), that the market misconduct has taken place; or

(ii)  in the case of a determination referred to in paragraph (b), that the person has engaged in market misconduct.

(8) In an action brought under subsection (1), where the fact that there is a determination referred to in subsection (7)(a) or (b) is admissible in evidence under subsection (7)—

(a) then—

(i)   in the case of a determination referred to in subsection (7)(a), the market misconduct that is the subject of the determination shall, unless the contrary is proved, be taken to have taken place; or

(ii)  in the case of a determination referred to in subsection (7)(b), the person that is the subject of the determination shall, unless the contrary is proved, be taken to have engaged in market misconduct; and

(b)  without prejudice to the reception of any other admissible evidence as evidence of the determination or for the purpose of identifying the facts on which the determination was based, the contents of a report of the Tribunal containing the determination and published under section 262(2)(b)(i), or the contents of a copy of a report of the Tribunal containing the determination and made available under subsection (9), shall also be admissible in evidence for such purpose.”

26.  In my view, the meaning of s 281 of the SFO is clear.  S 281(1) creates a statutory cause of action enabling “any other person” who has sustained pecuniary loss to claim compensation by way of damages against a person who has committed market misconduct.  The concept of “fair, just and reasonable in the circumstances of the case”, to which that statutory cause of action is subject, is introduced in s 281(2). Ss 281(7) and (8) permits the admission of the relevant MMT report in the proof of certain issues.  But the operation of those 2 sub‑sections is confined to “an action brought under subsection (1)” of s 281.  They have no application to an action not brought under s 281(1) (eg based on tort or for breach of contract).

27.  Mr Chan submits that the legislative intent that can be gleaned from ss 281(7) and (8) is to facilitate proof of market misconduct for the purpose of seeking compensation, and that there is no reason why similar facilitation should not also be afforded to actions otherwise than those brought under s 281(1).

28.  I do not accept that submissions.  No authority has been cited in support.  Nor has any Hansard or similar documents placed before me.  I will not speculate as to why ss 281(7) and (8) have been worded as they are.  But their operation is clearly confined to “an action brought under subsection (1)”.  Had the legislature intended to expand the admission of a determination by the MMT to other or all civil proceedings, it could easily have said so — see for example s 62 of the Evidence Ordinance, which renders a conviction admissible for certain specific purposes “in any civil proceedings”.

29.  In the present case, China Forestry (or the Liquidators) is not relying on the statutory cause of action under s 281(1). I agree with Mr Manzoni’s submissions that ss 281(8) and (9) have no broader application to proceedings such as the present, which is not brought under s 281 and where no pecuniary loss as a result of market misconduct is claimed.

Discussion

30.  On the facts of the present case, applying the aforesaid legal principles, and for the following reasons, I refuse the defendants’ application for a stay:

(a)  There is no identity of parties between the MMT Proceedings and the present action.  China Forestry is not a party to those proceedings.  The results of the MMT Proceedings will not be binding on China Forestry or the Liquidators.  They have no right to test the evidence, no right to attempt to establish any case which it may want to establish, or to make any submission to the MMT;

(b)  There is a lot of force in Mr Manzoni’s submissions, which I accept, that it would be highly prejudicial to require the resolution of China Forestry’s claim against the defendants to await the outcome of a set of proceedings which is not binding on it and over which it can have no influence;

(c)  The prejudice is particularly acute when, as accepted by Mr Chan[3], the Liquidators and the SFC are effectively making rival claims against the defendants’ only substantial, namely the D1 Post‑IPO Placement Proceeds frozen by the Injunction; 

(d)  Not only are the MMT Proceedings not determinative of the present action, even the issues do not all overlap. Whilst the factual background relevant to the MMT Proceedings and the present action is primarily the same, both the issues, and hence what the parties set off to establish, are very different.  In the MMT Proceedings, the issues, as framed by the SFC Notice, are whether there was any market misconduct within the meaning of ss 277 and 270 of the SFO, whether the Specified Persons were involved, and the amount of any profit gained or loss avoided.  For the present action, the main issue is whether there has been any breach of fiduciary duties on the part of D2 using D1 as the vehicle, and whether there is consequentially any constructive trust.  The mental elements entailed are also very different;

(e)  The nature of the MMT Proceedings is also different from a High Court civil action.  MMT Proceedings are inquisitorial in nature.  It is not bound by the strict rules of evidence.  It may receive and consider any material even if the material would not be admissible in evidence in civil proceedings in a court of law[4];

 (f)  Whilst the Liquidators will no doubt consider the impact of any MMT report when available on the further conduct of this case, given that they are not parties to the MMT Proceedings, the different issues involved, and the different applicable rules of evidence, it is speculative at best at this stage to say what the Liquidators will make of the report, and far too much a straitjacket to at this stage force them to wait pending the result of those proceedings;

(g)  Another important consideration is this.  Even assuming that the MMT is going to rule that market misconduct has been committed, whether the SFC can lay claim on the frozen D1 Post‑IPO Placement Proceeds will still be dependent upon whether China Forestry can establish its proprietary claim over those same proceeds on the basis of constructive trust. Such rival claim of priority amongst the SFC and China Forestry will have to be resolved by the Court.  The matters raised in the present action will have to be considered and resolved at some stage;

(h)  Mr Chan submits that as all the evidence served upon the defendants for the purpose of the MMT Proceedings and adduced before the MMT will have to be disclosed for the purpose of this action, the related discovery exercise will be laborious and costly.  My view is that the difficulty of the exercise has been exaggerated.  When preparing the MMT Proceedings, D2 would be expected to go through all the used and unused materials served upon him by the SFC.  The discovery exercise for the purpose of this action should not be too much of an added burden;

(i)  Based on counsel’s estimate, there may still be sometime before the MMT report will become available.  Mr Chan’s estimate is summer of 2020;

(j)  In all the circumstances, my view is that it would not serve the ends of justice for the present action to be stayed.  The proprietary claim and interest of China Forestry over the frozen D1 Post‑IPO Placement Proceeds will need to be determined any way.  Little costs will be saved by staying the present action.

Disposal

31.  For the above reasons, I dismiss the defendants’ application under §2 of the Summons.

32.  I make a cost order nisi that the defendants should bear the cost of the application, to be taxed if not agreed. Any party seeking variation or summary assessment should file their submissions within 14 days from the date hereof, submissions in response within 7 days of receipt, and submissions in reply within another 7 days.