XCHRX SECRETARY FOR JUSTICE v. TAN LAM CHUAN AND OTHERS

HCMP 6503/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 6503 OF 2000

____________

_______________

J U D G M E N T

_______________

1. This is an application, by way of summons, made by the Secretary for Justice that a Restraint Order ("the Order") made by Deputy High Court Judge Toh dated 19 December 2000 be continued until further order.

2. "The Order" was, in fact, varied by order of Chung J on 2 January 2001 with the effect that the 5th Respondent was then at liberty to withdraw certain sums of money from one of its restrained bank accounts to meet rental, salary, legal and management expenses and I treat the application before me as being an application to continue "the Order" as varied by the Order of the 2 January.

3. At the outset of the hearing before me Mr Ip, solicitor for the 3rd Respondent, sought the discharge of the Order, as varied, in respect of his client. Mr Blanchflower, for the Applicant, having concurred with that application I duly did so. Suffice it to say, and for completeness, the 3rd Respondent was a shareholder of the 5th Respondent who disposed of his shareholding a considerable time before the events which led to the making of the Order.

4. The Order went further than merely restraining property which included money in bank accounts in the names of the Respondents. It conditionally charged real property of the 3rd Respondent and ordered disclosure of information by way of affidavit or affirmation by each Respondent on or before 9 January 2001.

Background to the making of the Order

5. The Order was made ex parte based upon an affirmation of a Senior Inspector of Police. In that affirmation he stated, inter alia, that a covert investigation (which started following the receipt of an unspecified complaint in August 2000) had revealed that the 5th Respondent was operating a business selling what were described as 'rebate schemes'.

6. The nature of these schemes, as described in detail by the Senior Inspector, can perhaps best be described in very general terms as schemes of 'pyramid selling' but I hasten to add that that is my description of them and it is not a term applied to them by the Police or by the Department of Justice.

7. Suffice it to say that according to the affirmation of the Senior Inspector the suggestion appears to be that representations were made to participants or investors in the rebate schemes to the effect that they would gain very substantial returns on their investment which returns, if they materialised, would be financed by subsequent investors or participants who had themselves been persuaded to become such at the behest of those already involved.

8. In the course of his affirmation the Senior Inspector stated, inter alia, that legal advice was to the effect that there was prima facie evidence of fraud contrary to Section 16A(1) of the Theft Ordinance Cap. 210; that proceedings would be instituted against all 5 Respondents for the offence of fraud, and that in the event of their conviction confiscation orders might be made against them.

The application before me

9. Mr Dykes for the 5th Respondent objects to the application to continue the Order (as varied) against his client upon the following grounds which I shall return to in some detail later in this judgment.

1. The Order should not have been made because

(a) there was non compliance with some of the mandatory requirements of O.117 r.4(2);

(b) there was misuse of the restraint power for purposes not authorized by the Organised and Serious Crimes Ordinance, Cap. 455 ('the Ordinance');

(c) that even if a confiscation order was made under Section 8 of the Ordinance the monies held in the bank accounts of the 5th Respondent could not be realized to satisfy it because, on the evidence, a large portion of the monies restrained belongs to those persons (the investors) who are alleged to be 'the victims'; and

(d) there was no, or no sufficient, evidence that the 5th Respondent had benefited from the statutory offence of fraud under Section 16A(1) of the Theft Ordinance.

10. Mr King for the 1st, 2nd and 4th Respondents adopts, with some relish, the arguments of Mr Dykes and, in addition and in relation to the disclosure sections of the Order, argues that such find no basis in statutory provision; do not flow from the inherent power of the High Court and were thus (although he did not use the word) unlawful.

11. Before setting out in more detail the arguments put forward by Counsel, I would just state here that there has been no argument before me to contradict the following pertinent statements of law put forward by Mr Dykes and which I respectfully accept as being correct.

(a) The Order could only be made under the Ordinance and not otherwise. It could only be made in respect of "realisable property" as defined in s.12(1). The only purpose of restraining realisable property is to satisfy a confiscation order if one is made later under s.8: see s.12(3) and s.17.

(b) A confiscation order may be made only in the circumstances contemplated by s.8. A pre-condition to the making of an order is that a court must be satisfied that a person convicted of a relevant offence must have benefited from the offence: see s.8(4)-(7).

(c) An order under s.15 can only be made if certain conditions are satisfied. For present purposes these are those at s.14(2), namely;

(1) That the court is satisfied that a person is to be charged with a specified offence; and

(2) That there is reasonable cause to believe that he has benefited from that specified offence.

(d) Where an order is made under s.15(2) the court must discharge the order if proceedings in respect of the specified offence are not instituted within such time as the court considers reasonable s.14(4).

(e) The jurisdiction of the court is only engaged in respect of certain offences. See s.2 definition of "specified offence" and Schedule 1. The offence of "fraud" under s.16A(1) Theft Ordinance, Cap. 210 is included in the schedule.

(f) The essence of the statutory offence of fraud is that a person by any deceit and with an intention to defraud induces another person to commit an act (or make an omission) which results in either a benefit to any other person or prejudice (or a substantial risk of prejudice) to any other person.

The relevant legislative provisions

12. The Ordinance (Cap. 455) describes itself as:-

"An ordinance to create new powers of investigation into organised crimes and certain other offences and into the proceeds of crime of certain offenders; provide for the confiscation of the proceeds of crime; ....... and for ancillary and connected matters".

13. Section 2 defines 'property' as including a chose in action.

14. Section 2(8) defines a person who has benefited from an offence and Section 2(15) defines the moment when proceedings for an offence are instituted.

15. Section 3 in part II (which deals with powers of investigation) covers, inter alia, the power to order disclosure or to produce material.

16. Part III of the Ordinance deals with the confiscation of the proceeds of crime and Section 8 in that Part deals specifically with confiscation orders.

17. Section 12(1)(a) and (b) define 'realizable property' as being property held by a defendant or property that is subject to the effective control of a defendant.

18. The heading to Part IV reads:-

"Enforcement, ETC. of Confiscation Orders".

19. Section 14 of the Ordinance (which falls within Part IV) deals with the cases in which restraint orders and charging orders may be made and Section 15 (which also falls within Part IV) deals with restraint orders themselves.

20. Section 14(2) reads as follows:-

".... powers are also exercisable where the Court of First Instance is satisfied -

(a) that ..... a person is to be charged with a specified offence; and

(b) that there is reasonable cause to believe that he has benefited from that specified offence".

21. Section 14(4) reads:

"Where the Court of First Instance has made an order ..... (it) shall discharge the order if proceedings in respect of the offence are not instituted within such time as the Court of First Instance considers reasonable".

22. Section 15 of the ordinance provides (in subsection 5) that a restraint order may be discharged or varied and (in subsection 6) that an application for the discharge or variation of a restraint order may be made by any person affected by it.

23. Order 117 of the Rules of the High Court is expressed as dealing with Part IV of the ordinance - the "Enforcement, etc. of Confiscation Orders".

24. Order 117 Rule 4 sets out the requirements for an application for a restraint order under Section 15 of the ordinance and, in particular, at Rule 4(2)(d) the Applicant is required to:-

"Where proceedings have not been instituted verify that the [Secretary for Justice] is to have the conduct of the proposed proceedings".

and at Rule 4(2)(e) -

"Where proceedings have not been instituted, indicate when it is intended that they should be instituted".

The position as at the date of hearing of this application

25. During the course of this hearing I was told by Mr Blanchflower that it was the intention of the prosecuting authorities on January 12 (the day when the 1st, 2nd and 4th Respondents answer their bail) to charge each of them with an offence of fraud and not with an offence under the Pyramid Selling Prohibition Ordinance (Cap. 355). In qualifying that statement (to the extent that such charge would be a 'holding charge'), Mr Blanchflower also told me that prior to the application for the Order active consideration had been given to charging the Respondents under Cap. 355 (which offence is not an offence scheduled under the Ordinance) but that it had been decided that such a charge would not be appropriate.

The issues for my determination

26. There are four such issues:-

1. Was there non-compliance with Order 117 Rule 4 and, if so, was it fatal to the Order?

27. Mr Dykes complains that in the Senior Inspector's affirmation in support of the application no mention was made of the fact that the Secretary for Justice would have the conduct of the proceedings as required by Rule 4(2)(d) and no indication was given as to when it was intended that proceedings would be instituted as required by Rule 4(2)(e).

28. Although Mr Dykes does not say as much in respect of the former rule, he says that the non-compliance with the latter is fatal because time is of the essence and, without a timetable, property rights would be placed 'in limbo' by the imposition of a restraint order. Mr Dykes seeks to draw support for this proposition from the wording of Section 14(4) of the Ordinance which provides that a judge of the Court of First Instance shall discharge an order if he considers that proceedings have not been instituted within a reasonable time.

29. He also cited to me a passage from the judgment of Viscount Simonds in East Riding C.C. v. Park Estate (Bridlington) Ltd. [1957] A.C. 223 (which was a case concerning compliance with statutory procedures governing an enforcement notice) as follows:-

"It was, in the first place, contended that the Act was highly technical and, as it encroached on private rights, the court must insist on strict and rigid adherence to formalities. This, as a general proposition, commands assent, and not the less because disregard of an enforcement notice is an offence involving sufficiently serious penal consequences."

30. Mr Dykes argues that strict compliance with the Rules under the Ordinance is no less essential or mandatory in the case of an application for a restraint order because failure to observe such an order involves serious penal consequences. He says that in the present case the proper procedures were not followed with precision as they should have been.

31. For the Secretary for Justice Mr Blanchflower argues that strict compliance with the particular 2 rules in question is not mandatory; that it would be obvious that the Secretary for Justice would have control of the proceedings; that it was not possible at the time of the application for the Order to indicate with any precision when the proceedings would be instituted, and that no complaint was made about any such non-compliance at the time when the Order was varied.

32. For my part I respectfully agree with Mr Blanchflower to the extent that the non-compliance complained of in the present case was not fatal to the application. The affirmation of the Senior Inspector stated that the Respondents were going to be charged with the offence of fraud but he did not specify precisely when, presumably because at that stage of the investigation he did not know. Mr Blanchflower then says that if the Respondents were going to be charged with an offence of fraud, then nobody other than the Secretary for Justice would or could have control of those proceedings. Quite apart from any other consideration it is always open to the Respondents to apply for a discharge of the Order upon the basis that proceedings have not been instituted within a reasonable time by virtue of Section 15(4) and there has, thus far been no such application.

2. Is there any evidence of benefit?

33. Given that a restraint order cannot be made without the court being satisfied that a person has benefited from a specified offence, Mr Dykes argues that because the present evidence is that the 5th Respondent is doing business at a loss it simply cannot be said that it has benefited at this stage from the schemes which it operates.

34. It seems to me, with respect, that that argument cannot be right given the definition in the Ordinance of 'benefit' which is

"a payment or other reward received in connection with the commission of an offence or an organised crime."

35. On the evidence contained in the affirmation of the Senior Inspector the 1st, 2nd, 4th and 5th Respondents each received payments in connection with the schemes which were, at least arguably, prima facie fraudulent; and the fact, if it be a fact, that at the time that the application for the Order was made the income generated from the schemes was insufficient to meet overheads is neither here nor there in terms of what is, or is not, a benefit.

3. Does a judge of the Court of First Instance have inherent power to include an order for disclosure in a restraint order?

36. On behalf of the 1st, 2nd and 4th Respondents Mr King submits that as Section 3 under Part II of the ordinance specifically provides the power for the making an order regarding disclosure of information (or production of material) for the purposes of an investigation and that as there is no similar legislative provision in respect of Part III then there exists no power to make such an order as part of a restraint order.

37. I confess that, initially, I found that argument attractive and I find it difficult to comprehend why Part III does not incorporate such a provision so that the matter would be put completely beyond a peradventure.

38. That said, in his response to Mr King's submission Mr Blanchflower has referred me to the case of Secretary for Justice v CKS & Anor [2000] 2 HKC 592 in which the same question arose after a disclosure order was made simultaneously with and, as it were, part and parcel with a charging order.

39. Mr Blanchflower argues, in addition, that the inherent power to make a disclosure order as part of a restraint order must exist, if for no other reason than that without the former the latter cannot be made wholly effective. Putting it another way, as indeed did Mr Blanchflower, without the disclosure order the court could not 'police' the restraint order which (certainly in the present case) was not limited to particular assets or bank accounts of the Respondents but to all assets of the Respondents within Hong Kong.

40. I conclude in relation to this question that I am satisfied that the power to require disclosure of the Respondents (in addition to restraint) does exist without specific statutory provision and I am reinforced in that view by the content of the second footnote to Order 117 Rule 5 on page 1218 of Hong Kong Civil Procedure 2001.

4. Was the application for the Order a misuse of the power and an unwarranted interference with the rights of third parties?

41. In respect of this question Mr Dykes suggests that the Secretary of Justice appears to have sought the order for a purpose not authorised by the Ordinance i.e. the purpose was simply to protect the assets or the investment of those persons who had put money into the schemes operated by the Respondents; rather than to freeze suspected ill gotten gains of the Respondents in real anticipation of an application for an order for confiscation at some later stage.

42. In support of this argument Mr Dykes submits as follows:-

(a) The prosecution's case appears to be that the 5th Respondent operates a pyramid scheme that is open ended and so that some subscribers are doomed to inevitable financial disappointment at some future date. The Secretary for Justice does not allege that the 5th Respondent has in fact defaulted on making payments due to subscribers.

(b) The complaint appears to be one of pyramid selling but the Applicant has never suggested that the 5th Respondent operates an illegal pyramid scheme prohibited by Pyramid Selling Prohibition Ordinance, Cap. 355. Given that that ordinance exists the present scheme, said to be a statutory fraud, should have been explained by reference to that ordinance in order to show that it does not apply and that the activities of the Respondents amount to a fraud.

(c) If the scheme described in the Senior Inspector's affirmation is, at best, a pyramid scheme then the court should have been told that offences under Cap. 355 are not included in the Schedules to the Ordinance and the Order could not thus have been made.

(d) On the evidence of the Senior Inspector the monies in the restrained bank accounts must represent monies belonging to subscribers who have a right to its return if obtained from them fraudulently, or if the 5th Respondent is not able to provide the service which it has agreed to provide to subscribers.

(e) In these circumstances there can be no question of such monies being made the subject of a confiscation order, for no court could realise assets belonging to identifiable third parties who are innocent of any wrongdoing.

and (f) If restraining assets, so as to protect third parties, is the objective of the Applicant, that can only be achieved in some other way and not by way of an order under s.15. This is because the court has no jurisdiction to order compensation or make restitution under the Ordinance. That being the case, the court has no jurisdiction under the Ordinance to preserve assets for the purpose of compensation or restitution. [See the second footnote to Order 117 Rule 5 at pages 1217-8 of Hong Kong Civil Procedure 2001].

43. I have found this question to be particularly difficult to determine, not least because of the apparent uncertainties regarding the precise nature of the proceedings contemplated, but also because of the difficulty in determining at this stage what form of confiscation order may properly be sought; and because I am conscious of the fact that in relation to the 5th Respondent (a company) the total amount of monies restrained is approximately HK$70 million. It seems to me that if - which is apparently not the case - there was a known number of subscribers to the schemes of the Respondents, and that each of those subscribers had contributed a known sum of money to the bank accounts of the Respondents (who held that money on behalf of, or as trustees of, the subscribers) then, even if they had done so by reason of the fraud of the Respondents, none of that clearly ascertainable money could be the subject of a confiscation order in favour of the Government of the Hong Kong SAR and thus could not be restrained at the behest of that Government albeit that it could of course be restrained at the behest of the subscribers.

44. If I am right about that, I then must ask myself what property of the Respondents might the Secretary for Justice, conceivably and properly, seek to have confiscated from the Respondents in the event of their conviction?

45. If I have understood him correctly Mr Blanchflower says, as he apparently said in argument in HKSAR V Lung Wai Hung [1998] 4 HKC (upon which case he places great reliance in responding to the submissions of Mr Dykes on this question) that the application which led to the Order was wholly justified and appropriate. He would no doubt also say "that it had the effect of immediately preventing the Respondents from distributing their criminal gains at a time when there was no other court order in existence which could have prevented this from occurring." Again, if I understood him correctly, he at least implied that it is not possible at the present stage to envisage the precise nature of any confiscation order which may be sought and that if such an order is indeed sought (as is expected) that will not prevent third parties from subsequently intervening by the somewhat circuitous route of Section 17(8) of the Ordinance.

46. All of this, of course, begs the question of whether the property in question (most of which apparently comprises choses in action with the banks and is - in that form - arguably neither the property of the Respondents nor the investors) is amenable to confiscation. The only answer that Mr Blanchflower can fairly give to me in respect of that question is, I think, that it is too early to say, and that the position may become clearer when, inter alia, the Respondents have acted in accordance with the order for disclosure, and further investigation of the very substantial amount of seized material relevant to the sums received is completed.

47. Having taken time to consider this and the other questions for my determination (and reminding myself, as urged by Mr Dykes, not to lose sight of the fact that this is an application by the Secretary for Justice for a continuation of the Order, and not an application by the Respondents for a discharge) I conclude, not without some misgivings, that as matters stand at the moment (and indeed as they stood at the time of the Order) proceedings are to be instituted against the Respondents and that it is likely (depending upon the results of the disclosure order and possibly upon further evidence coming to light in consequence of those results) that there will be an application for confiscation of some property in the hands of, or under the control, of the Respondents in the event of their conviction. Beyond that I cannot go on the information presently available. It will be for the trial judge in due course to determine whether to make a confiscation order and, if so, in what amount.

48. It goes, I hope without saying, that in the light of all that I have been told I would likely take a wholly different view of the matter were the Respondents to be tried not for an offence of fraud or a related conspiracy but solely upon an offence or offences which do not fall within the schedules to the Ordinance.

49. For what it is worth I would just add this: the Order cannot be allowed to continue indefinitely. Whilst I appreciate that it will inevitably take time to sift through and investigate nearly 2500 exhibits which have apparently been seized in this case, there must come a time when the Respondents are entitled to seek a discharge of the Order, and that time will of course be when any delay becomes unreasonable.

50. One thing that I can envisage is that whilst the 'investors' might have thus far refrained from complaint (because thus far they have no complaint), that situation cannot be expected to continue if the 5th Respondent's business grinds to a halt as a consequence of the Order. In the event that ensuing complaints manifest themselves in the form of applications for Mareva injunctions the courts will doubtless be in the same dilemma as that which led to HKSAR v Lung Wai Hung (see above). Whilst I am not suggesting for one moment that the Department of Justice should inform the 'investors' (when ascertained) of the present position regarding their 'investment' and thus, perhaps, invite civil proceedings, I am conscious of that part of the judgment in Lung Wai Hung's case which reads as follows:

"It may also be that, in view of the difficulties which have arisen ..... and mindful that similar situations are likely to recur, that the Secretary for Justice may wish to bring to the attention of the legislators the absence of a provision reflecting the terms of S71(1C) of the Criminal Justice Act 1988 ...... It seems to us that the absence of a discretion in making an order for confiscation could lead to injustice arising from the same causes that have led to so much difficulty in this case."

51. So far as I am aware that has not been done.

Conclusion

52. For all of these reasons I conclude that the Order was properly made and, having reached that conclusion and having then read a further affirmation of the Senior Inspector of Police, I find for the Applicant and order as follows:-

1. Subject to 2 below the Order of Deputy High Court Judge Toh dated 19 December 2000 as varied by the order of Chung J dated 2 January 2001 and after deletion of all reference to the 3rd Respondent be continued until further order.

2. The order for disclosure made against the Respondents as part of the Order is varied to the extent that the date for compliance set out in paragraph 5 be varied from 9 January 2001 to 23 January 2001.