SHEK LAI SAN v. SECURITIES AND FUTURES COMMISSION AND ANOTHER

HCAL 115/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTITUTIONAL AND ADMINISTRATIVE LAW LIST

NO 115 OF 2009

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J U D G M E N T

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Facts

1.  This is an application for leave to apply for judicial review.

2.  The background to the application is the retail selling of minibonds issued by the now defunct US investment bank, Lehman Brothers Holdings Incorporated, by banks in Hong Kong.  Following the collapse of Lehman Brothers in September of 2008, the minibonds have become virtually worthless.  Many thousands of purchasers of minibonds have been affected.  Many of them were inexperienced and unsophisticated retail customers of banks who were simply looking for a stable and more attractive return for their savings.  There have been widespread complaints that the sale of the minibonds by the banks was tainted with misrepresentations, negligent advices and breaches of relevant regulatory rules and procedures on the part of the banks.

3.  The applicant is an unemployed divorcee who has purchased HK$40,000 worth of Lehman Brothers’ Minibond Series 35B from the Bank of China.  It is her case that her purchase of the minibonds was likewise affected by misrepresentations and breaches of regulatory rules.

4.  Briefly stated, the Securities and Futures Commission (“SFC”) and the Hong Kong Monetary Authority (“HKMA”) have commenced investigations into the sale and distribution of Lehman Brothers-related minibonds and investigations of complaints in relation to the sale of these minibonds by banks to retail investors respectively.  On 22 July 2009, the SFC acting (purportedly) pursuant to section 201(3) of the Securities and Futures Ordinance (Cap 571) (“the Ordinance”), the HKMA and the 16 banks involved in the sale and distribution of the relevant minibonds, entered into an agreement, the purpose of which was:

“(i)    to fully and finally settle and conclude reviews, investigations, disciplinary and enforcement proceedings between the Commission and Distributing Banks in relation to the sale or distribution of Minibonds; and

(ii)     to mitigate the grounds on which any further reviews, investigations, disciplinary or enforcement proceedings might be commenced by the Commission and the MA in the future in relation to the conduct, action or omission by any of the Distributing Banks or its directors, officers, employees or agents (as the case may be) relating to the provision of investment advice or other services or the sale or distribution of any investment product other than Minibonds”

(“the settlement agreement”).

5.  Paragraph 3 of the settlement agreement expressly provided:

“3.     In consideration of the terms, covenants and conditions herein contained, the Commission hereby agrees, without any admission of liability on the part of the Distributing Banks, that this Agreement constitutes full and final settlement and conclusion of all reviews, investigations, disciplinary or enforcement proceedings (whether administrative, civil or criminal) commenced, conducted or intimated by the Commission relating to the distribution of Minibonds by the Distributing Banks.”

6.  As part of the settlement, the 16 banks involved agreed, amongst other things, to make an offer to repurchase from each eligible customer all outstanding minibonds at a price equal to 60% of the nominal value of the original investment if the customer was below the age of 65 as at 1 July 2009, or at a price equal to 70% of the nominal value of the original investment if he or she was aged 65 or above.  The Bank of China was one of the 16 banks.

7.  Clauses 14 to 17 of the settlement agreement provided:

“14.   Without prejudice to the generality of the foregoing provisions, as an immediate step upon the execution of this Agreement, each Distributing Bank shall take the following minimum and interim actions to review and enhance its customers complaints handling procedures in relation to the purchase and sale of Investment Products (for the avoidance of doubt, these procedures will have no application in relation to: (i) complaints made by customers in respect of Minibonds who accept the repurchase offer made pursuant to this Agreement; or (ii) complaints made in relation to a previous settlement agreement with a Distributing Bank in respect of Minibonds):

(a)     the appointment of appropriately qualified members of senior management to oversee the complaints handling process;

(b)     the implementation of appropriate controls and procedures to ensure that:

         …

         (vii)    if any complaint cannot be resolved to the customer’s satisfaction, it should duly advise the customer that he/she has the right to report his/her complaint to the regulatory authorities and to seek independent legal advice on any further action he/she may pursue.

15.    Subject to paragraph 16 below, the Commission agrees that it will not take any disciplinary or enforcement action against any of the Distributing Banks, and any past or present director, officer or employee of the Distributing Banks, in respect of any conduct relating to the distribution of Minibonds.  Complaints of Eligible Customers who do not accept the repurchase offer shall be handled by the relevant Distributing Bank in accordance with paragraph 14.

16.    Each Distributing Bank further acknowledges and agrees that, notwithstanding anything to the contrary contained in this Agreement:

(a)     this Agreement in no way derogates from the rights and remedies available to any customer (other than Eligible Customers who accept the repurchase offer) or any other person or entity (excluding the Commission) arising from the conduct, actions or omissions by the Distributing Banks or their directors, officers, employees or agents;

(b)     the terms contained in this Agreement do not in any manner prejudice or affect the powers of the Commission or the MA to commence or conduct reviews, investigations, disciplinary or enforcement actions (whether administrative, civil or criminal) against the Distributing Banks or their directors, officers, employees or agents:

         …

         (ii)     in respect of any conduct, action or omission by it or its directors, officers, employees or agents (as the case may be) that involves dishonesty, fraud or deceit, or any conduct, action or omission that may constitute a criminal offence under the laws of Hong Kong; and

         …

17.    In determining whether to commence any disciplinary or other legal proceedings as a consequence of the exercise of powers pursuant to paragraph 16(b) above, the Commission and the MA shall have regard to the measures taken by each of the Distributing Banks pursuant to paragraph 14, any enhancements made by the Distributing Banks pursuant to the Reviews or otherwise and the fact that the Distributing Banks have entered into this Agreement.”

8.  Clause 6 of the settlement agreement provided that the SFC, the HKMA and the 16 banks shall jointly issue a press release pursuant to a draft attached to the settlement agreement as appendix IV, to inform the public of the settlement agreement between the parties and the repurchase schemes to be implemented by the banks.

9.  The settlement agreement was executed by all relevant parties on 22 July 2009.  On the same day, the press release, in terms of the draft attached as appendix IV to the settlement agreement, was made.  Importantly, the press release stated:

“In consideration of the agreement, the SFC will discontinue its investigations into the sale and distribution of Minibonds by the Banks.  The HKMA has also informed the Banks that as the agreement contains detailed arrangements for the settlement of claims and the implementation of robust systems for selling unlisted structured products and dealing with related customer complaints in future, it is not its intention to take any enforcement action against the Banks in relation to Minibond cases that involve eligible customers who accept the offer.

The SFC considers that this agreement meets the SFC’s criteria for resolution under section 201 of the Securities and Futures Ordinance for the following reasons:

·      The repurchase scheme should ensure that eligible customers who accept the repurchase offer will, subject to the recovery and distribution of the underlying collateral, receive a total amount that is equal to or greater than what they would otherwise recover if they were simply paid the current market value of the collateral.

·      The agreement takes into account that the recoverable value of the collateral is not certain. Even if the recoverable value of the collateral is below the values estimated by experts engaged by the Hong Kong Association of Banks in late 2008, the proposal will still deliver a return for the eligible customers that is equal to or exceeds 60% of their investment (or 70% for customers aged 65 or above).

·      The agreement includes a commitment by the Banks, as noteholders, to take reasonable steps to expedite the return of the collateral. It is important that any claim on the collateral that might reduce its recoverable value is negotiated robustly.

·      The agreement represents an opportunity to resolve outstanding investigations involving 16 banks in a way that will bring benefits to nearly all holders of outstanding Minibonds.

·      The agreement includes special measures in which the Banks will investigate and resolve in a fair and reasonable manner all complaints involving the sale and distribution of other structured products.

·      The agreement also remediates the Banks’ systems and processes to meet the highest standards that will provide enhanced protection to the investing public in the future and give the investing public an assurance that the parties are determined to ensure these events are not repeated.

·      The SFC and the HKMA believe that the repurchase offer by the Banks is a reasonable one and is in the public interest.”

10.  Pursuant to the settlement agreement, the banks have since made repurchase offers to the eligible minibonds purchasers.  According to the SFC, there were about 25,000 eligible customers.  According to the latest figures supplied by the SFC, up to 27 February 2010, 24,744 eligible customers had responded to repurchase offers made by the banks pursuant to the settlement agreement.  Amongst them, 24,482 or 98.9% had accepted the offers.  As at 27 February 2010, 99.99% of customers who had accepted an offer had already received payments from the banks concerned.  The total amount involved, according to counsel, was over HK$5.2 billion.  Moreover, pursuant to the terms of the settlement agreement, the banks have disgorged commissions in the region of HK$290 million earned by them as distributors of the minibonds to the trustee appointed under an express funding agreement to seek enforcement of the underlying collateral for each outstanding series of minibonds (which, if and when successful, would lead to the making of further payments in favour of the eligible customers).

11.  As an eligible customer, the applicant received a repurchase offer from the Bank of China by a letter dated 7 August 2009.  She sought an extension of time from the bank to accept the offer, which was granted.  According to Mr Philip Dykes SC (Mr Hectar Pun and Mr Earl Deng with him) for the applicant, the extended offer has been allowed to lapse.

Application for leave to apply for judicial review

12.  Instead of accepting the repurchase offer, the applicant took out an application for leave to apply for judicial review to challenge the relevant decisions made by the SFC and HKMA on 22 October 2009, immediately before the expiry of the 3-month time limit for applying for leave to apply for judicial review.

13.  Three decisions were identified in the Form 86, as decisions under challenge[1]:

“(1)   The decision of the SFC contained in a press release dated 22 July 2009 to discontinue its investigations into the sale and distribution of Lehman Brothers-related Minibonds (“the Minibonds”) by sixteen licensed banks in Hong Kong (“the Banks”) pursuant to section 201 of the Securities and Futures Ordinance, Cap. 571 (“SFO”) [(“the first decision”)];

(2)     The decision of the HKMA contained in a press release dated 22 July 2009 not to take any enforcement action against the Banks in relation to complaints of miss-selling Minibonds in cases that involve eligible customers who accept settlement offers by the Banks [(“the second decision”)]; and

(3)     The decision of the HKMA contained in a press release dated 22 July 2009 to defer its investigation of outstanding complaints in relation to the sale of Minibonds by the Banks to retail investors [(“the third decision”)].”

14.  The Form 86 also set out the substantive relief sought[2]:

“1.     An order of certiorari to bring up and quash the decision of the SFC contained in a press release dated 22 July 2009 to discontinue its investigations into the sale and distribution of the Minibonds by the Banks; and

2.      An order of certiorari to bring up and quash the decision of the HKMA contained in a press release dated 22 July 2009 not to take any enforcement action against the Banks in relation to the Minibonds cases that involve eligible customers who accept settlement offers by the Banks; and

3.      An order of certiorari to bring up and quash the decision of the HKMA contained in a press release dated 22 July 2009 to defer its investigation of outstanding complaints in relation to the Minibonds to the Banks.

…”

15.  According to the Form 86, there were essentially four grounds of review.

16.  First, the first, second and third decisions were unlawful in that both the SFC and the HKMA, in reaching the settlement agreement purportedly pursuant to section 201(3) of the Ordinance, had misdirected themselves in law.  That subsection, according to the applicant, contemplates the SFC coming to an agreement with regulated bodies about the imposition of sanctions after a full investigation of complaints and not before.  The applicant’s case is that the SFC had not completed its investigation of the complaints when it entered into the settlement agreement with the banks.

17.  Secondly, the applicant contends that the first decision was an unlawful delegation and/or abdication of powers to the HKMA in that the HKMA does not have the same and/or equivalent powers of enforcement as the SFC has.

18.  Thirdly, the first, second and third decisions were irrational in that the SFC and the HKMA had failed to take into account relevant considerations, but had taken into account irrelevant considerations instead.

19.  Fourthly, the applicant argues that the first, second and third decisions were a breach of the applicant’s legitimate expectation that the SFC and the HKMA would thoroughly investigate all complaints of regulatory misconduct and/or criminal offences arising from breaches of the Ordinance.

20.  The application for leave is supported by the Alliance of Lehman Brothers Victims, an interested party served with the papers.  The Alliance was established on 13 October 2008 under the Societies Ordinance (Cap 151) and is said to have a current membership of several thousands.  The aim of the Alliance is to strike for the recognition of the lawful rights of the “victims” of the Lehman Brothers “incident”.  It is highly critical of the SFC’s and the HKMA’s handling of the whole matter.  In particular, it complains about the alleged lack of progress and inadequate disclosure of information.  It also has grievances over the allegedly unconscionable terms of settlement offered by the banks under the settlement agreement.  The applicant is a member of the Alliance. 

21.  On the other hand, the application for leave is strenuously opposed by the two putative respondents, the SFC and HKMA.

22.  After the oral hearing on 22 March 2010, pursuant to the Court’s directions, further evidence was filed.  The applicant also filed a notice of amendment, which sought to challenge a fourth decision.  It was accompanied by further written submissions.  The fourth decision in question was the decision of the SFC contained in the press release of 22 July 2009 not to prosecute and/or discipline the Bank of China over the sale and distribution of the minibonds even though, the applicant contends, the SFC had, on its own evidence, found in the course of investigations sufficient evidence of misconduct on the part of the bank.  The applicant argues that the decision was made because of an unlawful policy or of the SFC’s disregard of its own prosecution policy.  She also contends that the decision was unreasonable in the public law sense.

3^rd decision – was it ever made?

23.  It is well established that the test for granting leave to apply for judicial review is that of reasonable arguability.  An applicant has to demonstrate by adequate and sufficient materials that he or she has a reasonably arguable case with realistic prospects of success.  Po Fun Chan v Winnie Cheung [2008] 1 HKLRD 319.

24.  In the peculiar circumstances of the present case, I take the view that it is helpful to start with the decisions under challenge and the relief sought.

25.  I will quickly dispose of the third decision first, namely, “the decision of the HKMA contained in a press release dated 22 July 2009 to defer its investigation of outstanding complaints in relation to the sale of Minibonds by the Banks to retail investors”.

26.  It is plain from the settlement agreement itself and from the clarification by Mr Johnny Mok SC for the HKMA at the oral hearing that the HKMA has made no such decision.

27.  In gist, the applicant’s case is that by virtue of the “enhanced complaints handling procedure” mandated in clause 14 of the settlement agreement, the HKMA has in effect required a complainant to go through the procedure put in place by the relevant bank pursuant to clause 14 first, before his or her complaint to the HKMA will be dealt with by the latter.  The point is that the enhanced complaints handling procedures are administered by the banks themselves, whereas complainants, like the applicant, have the right to require the HKMA itself to conduct investigations.

28.  However, this is a complete misunderstanding of the position.  It is plain from the extract of the relevant clauses in the settlement agreement that the enhanced complaints handling procedure is an “optional extra”. 

29.  The enhanced complaints handling procedure is not applicable to eligible customers who have chosen to accept the repurchase offers made to them pursuant to the settlement agreement, or customers who have already settled their complaints with the banks concerned.  On the other hand, for an eligible customer like the applicant who has refused to accept the repurchase offer, the enhanced complaints handling procedure is applicable to him or her.

30.  If such a customer is willing to make use of the procedure, his or her complaint will be handled internally by the bank in question according to the procedure.  If the matter can then be resolved in a manner that is satisfactory to both sides, the matter will be dealt with accordingly.  However, clause 14(b)(vii) specifically provides that if any complaint cannot be resolved to the customer’s satisfaction, the customer retains the right to report the matter to the regulatory authorities.

31.  Importantly for our present purposes, section 16(a) of the settlement agreement specifically provides that “notwithstanding anything to the contrary contained in [the settlement agreement]”, the agreement in no way “derogates from the rights and remedies available to any customer (other than Eligible Customers who accept the repurchase offer)”, arising from the conduct, actions or omissions by the banks or their directors, officers, employees or agents.

32.  That being the case, the entire enhanced complaints handling procedure laid down in sections 14 to 16 is subject to section 16(a).  In other words, an eligible customer who has not accepted the repurchase offer is not bound to go through the procedure.  It is only an “optional extra” to him or her.

33.  That being the case, the challenge against the third decision must fail.

1^st, 2^nd and 4^th decisions – effect of challenge on others

34.  Putting aside the fourth decision relating specifically to the Bank of China for the time being, that leaves the first and second decisions, relating respectively to the SFC’s discontinuance of its investigations into the sale and distribution of the minibonds and the HKMA’s decision not to take any enforcement action against the banks.  In the Form 86, the applicant seeks orders of certiorari to quash the two decisions.

35.  However, not carrying on with the investigations and not taking any enforcement action against the banks (in relation to complaints by eligible customers who have chosen to accept the repurchase offers by the banks) are precisely the matters required on the part of the SFC and the HKMA to do under the settlement agreement.  They are the major considerations for the banks’ contractual promises made under the settlement agreement in the first place.  The settlement agreement specifically states in clause 2(a)(i) that the purpose of the agreement is “to fully and finally settle and conclude reviews, investigations, disciplinary and enforcement proceedings” between the SFC and the banks in relation to the sale or distribution of minibonds. 

36.  Indeed, it is plain from the Form 86 and counsel’s arguments that the applicant’s primary position is that the SFC had no authority under section 201 of the Ordinance to enter into the settlement agreement with the banks.

37.  In those circumstances, challenging the decisions not to carry on with the investigations or to take enforcement actions is tantamount to challenging the settlement agreement itself.  The orders of certiorari, quashing the relevant decisions, would have the practical effect of forcing the SFC and the HKMA to act in blatant disregard of their obligations under the settlement agreement with the banks.

38.  Although the Form 86 has not specified the settlement agreement itself as something under challenge, there is no escape that the proposed challenge questions the very validity of the agreement itself, something which Mr Dykes for the applicant does not shy away from admitting.  Indeed in paragraph 35 of the applicant’s skeleton, it is specifically submitted that the result of accepting the applicant’s contentions is that “the agreement would [be] void as between the parties to their agreement, namely the 16 banks and the SFC/HKMA”.

39.  That, however, raises the extremely serious question of the validity of the repurchase agreements reached by the banks with those 24,482 eligible customers who have chosen to accept the repurchase offers made pursuant to the settlement agreement, an overwhelming majority of whom have actually received payments.  A huge amount of money (said to be over HK$5.2 billion by counsel) is involved in these repurchase agreements.

40.  Mr Dykes recognises the potential impact on third parties and seeks to avoid it by arguing that the validity of the settlement agreement is not a condition stipulated in the standard repurchase offers made to the eligible customers.  However, very fairly, he accepts that there is more than one legal way to tie the two together.  After all, all repurchase offers were made by the banks pursuant to their obligations under the settlement agreement.  Someone seeking to unravel a repurchase agreement by reason that the settlement agreement has failed to prevent the SFC and HKMA from resuming investigations or taking enforcement actions could easily base his or her case on mistake, frustration, failure of condition subsequent, just to name a few possible ways of putting forward such a case.

41.  In other words, the unravelling of the settlement agreement would potentially lead to the unravelling of the repurchase agreements.  The relief sought in the Form 86 would have serious repercussions on the interests of third parties.  The potential magnitude of the monetary impact is, as mentioned, enormous.  In fact, the very existence of these proceedings would have a potential impact on these third parties.  Until the conclusion of these proceedings, no eligible customer can safely assume that the payment he or she has received under a repurchase agreement from the bank involved may be used without the risk of being required to repay the same to the bank in the event that the repurchase agreement is subsequently disturbed, following a successful challenge to the decisions in issue.

42.  The Court is entitled to take into account the potential impact of the relief sought on third parties.  After all, relief in judicial review proceedings is discretionary.  Very often, considerations of this type will only be taken into account at the substantive hearing.  See, for instance, R v Monopolies and Mergers Commission, ex p Argyll Group Plc [1986] 1 WLR 763, 774 to 775; R v Brent London Borough Council, ex p O’Malley, 31 July 1997 (CA); Lewis, Judicial Remedies in Public Law (4^th ed), paras 11-033 to 11-037.

43.  One specific exception is where leave to apply for judicial review is sought out of time, in which event, section 21K(6)(a) of the High Court Ordinance (Cap 4) expressly provides that the court may refuse leave on account of potential hardship or prejudice to third parties or their interests.  But even then, in case of doubt, the better practice is still to grant leave and leave the matter to the substantive hearing: R v Dairy Tribunal, ex p Caswell [1990] 2 AC 738, 747B-E/F.

44.  However, as a matter of principle, there can be no objection to the court examining the question, if it can, at the leave stage, irrespective of whether the application for leave has been made within time.  Indeed there is no rule of law, or of practice, that would prevent a court, in an appropriate case, from saying, even at the leave stage, that because of the potential impact on third parties which the relief sought in the proposed challenge, if granted, would have, there is no realistic prospect of the grant of such relief at the substantive hearing, and from dealing with the leave application accordingly.  After all, an applicant has to demonstrate a reasonably arguable case, which enjoys realistic prospects of success, “for granting the relief sought” (my emphasis) (R v Legal Aid Board, ex p Hughes 24 HLR 698, 702-703, cited with approval in Po Fun Chan, supra, para 6).  The “case” that the applicant has to show relates not only to the substantive complaints, but also to the relief sought[3]. 

45.  In my view, as regards the first and second decisions, the potential impact of the relief sought in the present case is profound.  There is no realistic chance of the relief sought being granted at a substantive hearing.  I conclude that the applicant has not shown a reasonably arguable case for the relief sought in the Form 86.

46.  At the oral hearing, the Court explored with Mr Dykes for the applicant the possibility of the applicant asking for some other form of relief that would have lesser or no potential impact on third parties.  In particular, the possibility of the applicant asking only for declaratory relief was raised with counsel.  However, Mr Dykes only came up with alternative declaratory reliefmodelled on the orders of certiorari.  Instead of asking the Court to quash the relevant decisions, the applicant would, alternatively[4], ask the Court to declare that the relevant decisions were unlawful ones.

47.  On the facts of the present case, this just would not do.  The SFC and the HKMA both have statutory responsibilities to carry out investigations and to take enforcement actions where appropriate.  If the decisions to discontinue investigations and not to take enforcement actions were declared to be unlawful, they could no longer be acted upon by the SFC and the HKMA.  The net result would be that the two authorities would have to continue with the investigations and to take or actively consider taking enforcement actions, which would be directly contrary to their contractual obligations under the settlement agreement.  Third parties’ interests would likewise be potentially affected in that event.

48.  For these reasons, as regards the first and second decisions, the applicant has no realistic prospects of obtaining the relief sought, be it the relief set out in the Form 86, or the (alternative) relief orally mentioned by Mr Dykes at the hearing and now set out in the notice of amendment.

49.  The above analysis applies, with necessary modifications, to the proposed challenge against the fourth decision, relating specifically to the Bank of China.  Subject to the built-in reservations contained in the settlement agreement itself, taking prosecution or disciplinary actions against the Bank of China is precisely something that the SFC has contractually promised the bank under the agreement that it will not do.  That promise has been given in consideration for, amongst other things, the contractual promise on the part of the bank to make repurchase offers to its (eligible) customers.  The Bank of China has done its part of the bargain and many eligible customers have taken advantage of the offers so made and settled their disputes or potential disputes with the bank.  Quite obviously, a lot of money and many customers are involved.  The applicant seeks an order of certiorari in her notice of amendment.  Granting such an order would have the net effect of compelling the SFC to act in breach of the settlement agreement vis-à-vis the Bank of China.  This would potentially have a knock-on effect on the interests of many third parties who have settled their claims or potential claims with the bank on the strength of the settlement agreement.

50.  For reasons similar to those given in relation to the first and second decisions, I take the view that there is no realistic prospect of the Court’s granting the relief sought, namely, the order of certiorari, to bring up and quash the fourth decision.

51.  The burden is on the applicant to show a reasonably arguable case with realistic prospects of success for the relief she seeks.  For the reasons explained, she fails to do so.  Her application for judicial review, if permitted to proceed to a substantive hearing, is bound to be dismissed on that basis.

52.  Approaching the matter from that perspective, the application for leave should be dismissed.  In other words, that is sufficient to dispose of the application for leave entirely.

“Academic” challenge – a matter of discretion

53.  However, I am prepared to consider whether the applicant would stand in a better position if the matter is approached from a slightly different standpoint.   

54.  In this regard, I am prepared to proceed on the footing that provided that there are reasonably arguable substantive grounds, the fact that the court is bound to withhold remedy at the end of the day would only turn the proposed challenge into an “academic” one, and that this may not necessarily be fatal to the application for leave. 

55.  A challenge may be or may become an academic one for various reasons.  One example is the situation faced by the Court of Appeal in Leung v Secretary for Justice [2006] 4 HKLRD 211.  Another example involving a different type of “academic” challenge can be found in the earlier Court of Appeal case of Chit Fai Motors Co Ltd v Commissioner for Transport [2004] 1 HKC 465.  In the former case, no prosecution had been made against the applicant there when he challenged the constitutionality of a piece of criminal legislation.  In the latter case, the decision under challenge had been overtaken by subsequent events completely (after the grant of leave) when it reached the substantive hearing stage.  Indeed by the time Po Fun Chan reached the Court of Appeal, the original dispute had become an academic one due to subsequent events, but the Court of Final Appeal nonetheless entertained the challenge given the great public interest in having the point of law involved there resolved (para 18).

56.  In the present case, the “academic” aspect of the case lies in the fact that even assuming that the applicant has a reasonably arguable case on the substantive merits, she has no realistic chance of getting the relief that she seeks.  Should the Court nonetheless entertain the substantive grounds of challenge raised by her (by giving her leave to do so)?  The Court has a discretion in the matter, and the relevant principles for exercising the discretion, which should only be exercised in exceptional circumstances, have been discussed in some detail by the Court of Appeal in Leung (although that case was, as explained, concerned with a different type of “academic” question).

Applicant’s interest to raise the issues as a discretionary consideration

57.  In my view, it is very important, to properly answer this question, to look at another issue, namely, the interest that the applicant has to raise the substantive issues.  The question of sufficient interest or standing is, of course, of significance in itself, in the sense that, if the applicant does not have sufficient interest or standing to bring the present proceedings, then on that ground alone, leave should be refused.  Under the more liberal or open approach, the requirement of standing or sufficient interest is primarily there to filter out busybodies and troublemakers.  See the general discussion on this whole topic in de Smith’s Judicial Review (6^th ed) Chap 2.  However, in the present context, the purpose of inquiring into the interest that the applicant has to raise the substantive issues goes beyond determining whether she is a busybody or troublemaker.  Put another way, the greater the interest she has to raise the issues, the stronger the reason for the Court to deal exceptionally with the “academic” questions notwithstanding that there is no realistic chance of her obtaining the relief sought.  In that sense, the mere fact that the applicant is not a busybody or trouble-maker may well not be sufficient to tip the scales in her favour and persuade the Court to take the exceptional step of entertaining the substantive issues raised by her.  The following discussion should be understood in that light.

58.  I am prepared to proceed on the basis that as the applicant was one of the eligible customers referred to in the settlement agreement to whom the banks were bound to make repurchase offers, to that extent, she was affected by and interested in the settlement agreement and the relevant decisions embodied in it.  To that extent, she is not a troublemaker or busybody.  However, as explained, that is not the main focus of this part of the judgment.

59.  It is plain that events have moved on since the making of the agreement.  A repurchase offer has been made to the applicant, which the applicant has allowed to lapse despite an extension granted by the Bank of China.  She is therefore one of those eligible customers who have refused to accept the repurchase offers.  Her position is now covered by clause 16(a) of the settlement agreement.  In other words, “notwithstanding anything to the contrary” contained in the settlement agreement, the agreement in no way “derogates from the rights and remedies available” to her.  Viewed in that light, she is quite unaffected by the decisions under challenge.  The decisions under challenge really affect those eligible customers who have chosen to accept the repurchase offers.

60.  Moreover, in relation to the decision not to investigate further, which is under challenge, there is direct evidence from the SFC that the SFC’s relevant investigations regarding the Bank of China have been completed prior to the execution of the settlement agreement on 22 July 2009.

61.  The applicant is the purchaser of HK$40,000 worth of minibonds from the Bank of China.  However, her proposed challenge concerns not only investigations or possible enforcement actions in relation to her dealing with the Bank of China, but also to dealings involving other customers.  Moreover, it is not limited to customers of the Bank of China; rather it also covers customers and transactions involving 15 other banks.  Although the Alliance has made submissions at the oral hearing and filed evidence in support of the application, the fact remains that within the 3-month time limit for making applications for leave to apply for judicial review in relation to the relevant decisions, no-one other than the applicant has made such an application.  No customers, involving the other 15 banks, have come forward to make a legal challenge against the decisions.  Nor have any other customers of the Bank of China done so.  All this must be borne in mind in examining the interest that the applicant has to raise the issues in question.

62.  It is apparent that the applicant simply has very little interest in the decisions sought to be challenged and the substantive issues raised.  This is so regardless of whether as a matter of standing, she should be classified as a busybody or troublemaker.  It is quite true that the question of sufficient interest is not infrequently left to the substantive hearing, and any doubt regarding standing is often resolved in favour of granting leave.  However, in the present context of considering whether the Court should exercise its discretion to entertain exceptionally the “academic” questions raised, the interest that the applicant actually has to raise the issues and to challenge the decisions is a highly material consideration to take into account.

Merits as a discretionary consideration

63.  Likewise, in the present context, it is important to look at the merits of the substantive issues sought to be raised.  Again, here, a distinction has to be made.  The merits of the substantive issues are of course relevant in themselves.  Unless a reasonably arguable case with realistic prospects of success can be established, leave should be refused.  However, in the present context of deciding how the Court’s discretion to entertain, exceptionally, the “academic” questions raised should be exercised, merits are taken into account for this reason: the stronger the merits, the more reason for the Court to entertain the questions.  The converse is also true: the more marginal the case of the applicant (even though it is a reasonably arguable one), the less likely the Court would exercise its discretion to entertain the “academic” questions, assuming everything else is equal.

64.  Of course, like the consideration of interest, merits by itself is not a conclusive factor.

65.  In my view, the argument based on section 201(3) of the Ordinance is either not reasonably arguable or just marginally arguable.  The argument is based on the factual premise that the SFC had not completed all investigations before entering into the settlement agreement.  This is denied by the SFC.

66.  The assertion of the SFC is not inherently incredible.  In the Form 86 and at the oral hearing, the only matter relied on by the applicant to contradict the SFC’s claim was the wording of the press release.  However, the SFC has in its supplementary evidence explained the discrepancy.  The explanation is not inherently incredible.  The Alliance has since filed some evidence (including some “internal minutes”) to suggest that the SFC may have been hiding the truth or the whole truth from the Court.  The Court, of course, does not normally decide disputes of fact on paper.  But it does not mean that the Court cannot or should not form a provisional view even at this stage.

67.  Significantly, there is no suggestion that the SFC is not aware of its duty of candour to the court: Chu Woan-chyi v Director of Immigration CACV 119/2007 (4 September 2009).  The criticism that the SFC has not produced internal records and documents to back its factual assertions is misplaced.  At this stage, the SFC is only required to summarise its case sufficiently to enable the Court to decide whether there is or is not an arguable case: R v Legal Aid Board, ex p Hughes, supra, at p 703; cited with approval in Po Fun Chan, supra, at para 6.

68.  The applicant also says that if leave is granted, the SFC will have to file further evidence, including internal records and contemporaneous documents, in opposition to the application for judicial review, in which event, the applicant would be in a better position to assess whether the SFC’s factual assertions are true or false.

69.  However, in my view, this suggested approach is not very much different from a fishing expedition.  Under the test for granting leave, it is for the applicant to demonstrate a reasonably arguable case with realistic prospects of success.  It is for the applicant to supply materials to support her case.  Potential arguability is not sufficient – an applicant cannot plead potential arguability to justify the grant of leave on a speculative basis which it is hoped the interlocutory processes of the court may strengthen: Po Fun Chan, at para 7.

70.  For those reasons, as I said, I take the primary view that the applicant has not shown a reasonably arguable case, which enjoys realistic prospects of success.  However, to give the applicant the benefit of the doubt, for the purposes of my present discussion, I am prepared to assume that the applicant has just marginally managed to put forward a reasonably arguable case on the merits.

71.  Likewise, as regards the second ground of complaint, namely, that the first decision was an unlawful delegation or abdication of powers to the HKMA, it is premised on the factual assumption that the investigations have not been completed.  However, the evidence from the SFC is that by the time of the execution of the agreement, the SFC has substantially or wholly completed all its investigations.  Furthermore, the SFC has never requested the HKMA to exercise the SFC’s investigative powers under section 182 of the Ordinance.

72.  In those circumstances, the applicant has either not shown a reasonably arguable case, or alternatively, has only managed to put forward a very marginal case.  Again, I am prepared to give the applicant the benefit of the doubt here and proceed on the latter alternative.

73.  Thirdly, as regards the suggestion that the decisions were irrational in that the SFC and the HKMA failed to take into account relevant considerations, but took into account irrelevant considerations instead, again on the evidence, both the SFC and the HKMA claim that they have taken into account all the considerations that the applicant says they have failed to take into account (insofar as they are relevant).  They also deny that they have taken into account any irrelevant considerations.

74.  This is essentially a question of fact within the peculiar knowledge of the SFC and HKMA.  The assertions of the SFC and HKMA are not inherently incredible.  Of course, if leave is granted, both bodies will have to file evidence and disclose internal records and contemporaneous documents to back their claims.  But at this stage, there is simply nothing concrete to back any suggestion that the SFC and the HKMA have deliberately made false factual assertions (which would be very serious allegations), or are unaware of their duty of candour to the court.   Indeed in paragraph 32 of the applicant’s skeleton lodged for the purposes of the oral hearing, it is specifically stated that in the present case, the applicant does not seek to impinge the SFC’s or the HKMA’s good faith and honesty. 

75.  Insofar as it is suggested that the decisions in question were irrational, it must be borne in mind that in a case of the present type, the Court will not lightly interfere with the exercise of discretion by the regulatory bodies.  The complaints of irrationality focus on the definition of eligible customers.  I do not think the complaints can hold water.  In situations of the present type, certainly lines have to be drawn to determine questions such as eligibility and entitlement, and there are bound to be fringe cases on either side of the lines so drawn.  That is not a reason for criticism.  See R (Carson) v Secretary of State for Work and Pensions [2006] 1 AC, 173, 188 (para 41).

76.  On the whole, I would conclude that at most, the applicant has shown a very marginal case.

77.  On the issue of legitimate expectation that the SFC and HKMA will thoroughly investigate into the complaints, so far as the SFC is concerned, it is met by the answer that it has already substantially or wholly completed the investigations.  As regards the HKMA, this is a non-starter, because so far as investigation is concerned, the first decision only concerns the SFC, and the so-called third decision does not exist as such.  The enhanced complaints handling procedure is, as explained, only an “optional extra”.  There is no decision not to investigate by the HKMA.

78.  Again, the applicant has either failed to put forward a reasonably arguable case, or alternatively, she has only managed to come up with a very marginal one.  For present purposes, I am prepared to proceed on the latter alternative.

79.  Finally, as regards the decision not to prosecute or take disciplinary steps against the Bank of China, the SFC has explained in evidence the considerations and in particular public interests that it has taken into account.  The authorities speak with one voice that the courts would only interfere with prosecutorial decisions in exceptional circumstances: for instance, R v Commissioner of Police of the Metropolis, ex parte Blackburn [1968] QB 118; Mohit v Director of Public Prosecutions of Mauritius [2006] 1 WLR 3343; Kwan Sun Chu Pearl v Department of Justice [2006] 3 HKC 207; Ma Pui Tung v Department of Justice CACV 64/2008 (23 September 2008); R(B) v Director of Public Prosecutions [2009] 1 WLR 2072.

80.  Likewise, in my view, the applicant has either failed to put forward a reasonably arguable case, or alternatively, she has only managed to come up with a very marginal one.  For present purposes, I am prepared to proceed on the latter alternative.

81.  In the present context of deciding whether the academic questions raised should be entertained, I bear in mind the merits of the issues raised.

Legal importance of issues raised and general public interest

82.  The Court bears in mind the legal importance of the issues raised.  As described, the dispute over section 201(3) of the Ordinance is primarily a factual one.  The other issues raised involve standard administrative law grounds.  They are fact-sensitive and do not concern any new or exceptional point of law. 

83.  The Court also bears in mind the general public interest (used loosely here) in the entire Lehman Brothersminibond affair.  The Court gives it the weight it desires in the deliberation process.  In the present type of financial matters, there is a need for speedy decision making, finality and decisiveness.  That explains why the remedy sought stands no realistic chance of being granted.  The making of the settlement agreement by the SFC and by the HKMA is a matter for which the two regulatory bodies are answerable to the Government and the legislature, which can certainly go into the wisdom of the making of the agreement.  Indeed the Legislative Council has formed a sub-committee to study issues arising from Lehman Brothers related minibonds and structured financial products.  Its work is still ongoing.  That is an additional consideration the Court has taken into account in deciding whether to exercise its discretion to entertain the academic questions exceptionally.

Other considerations

84.  The Court has also borne in mind the submissions made on behalf of the Alliance at the hearing, including those based on grievances, fairness and a strong desire to find out the “truth”, and the evidence that it has subsequently filed.

85.  There are miscellaneous considerations which it is unnecessary to set out here.  Suffice it to say the Court has borne all of them in mind.

Conclusion

86.  Having considered all relevant circumstances, the Court takes the view that there are insufficient exceptional circumstances to justify entertaining the issues raised by the applicant, even if the matter is approached from the perspective of “academic” questions.

Outcome

87.  For all these reasons, I have come to the conclusion that leave should be refused.  I so order.

88.  I also make a costs order nisi that there be no order as to costs. 

89.  The Court bears in mind the principles on costs discussed by the Court of Appeal in Sky Wide Development Ltd v Building Authority CACV 321/2008 (2 March 2009) paras 24-32.  The oral hearing was an ex parte hearing on notice to the SFC and the HKMA, who asked the Court for an opportunity to be heard before granting leave.  The two bodies also filed evidence on their own motion to assist the Court.  The Court has been greatly assisted by the evidence so filed and the submissions made at the oral hearing.  However, as a preliminary view, on balance, the Court does not think that the costs of rendering such assistance to the Court should be visited on the applicant personally.  The Alliance, as an interested party, should of course bear its own costs.  Insofar as any party may require a certificate for counsel, I grant a certificate for two counsel generally.

90.  Any application to vary the costs order nisi must be made within 14 days after this judgment is handed down, and it shall be dealt with on written submissions.  The application to vary shall be accompanied by written submissions, and any party opposing the application shall lodge and serve written submissions within 14 days thereafter.  The applying party shall be entitled to lodge and serve written submissions in reply within 14 days thereafter.  For such purposes, the parties shall have liberty to apply.

91.  I thank counsel, as well as Mr Chan of the Alliance, for their assistance.

[1]    A fourth decision was subsequently added: see below.

[2]    Amendments were subsequently made: see below.

[3]    Indeed under the former “potential arguability” test, the applicant also had to present the court with material which, on a quick perusal, would disclose what might on further consideration turn out to be “an arguable case in favour of granting to the applicant the relief claimed” (emphasis added): R v Inland Revenue Commissioners, ex p Federation of Self-Employed [1982] AC 617, 644A/B.

[4]     That was how the matter was put at the oral hearing.  However, according to the notice of amendment filed on 19 April 2010, apparently only declaratory relief is now sought.