SECURITIES AND FUTURES COMMISSION v. ANDREW LIU AND OTHERS

HCMP 2653/2016

[2022] HKCFI 697

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 2653 OF 2016

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D E C I S I O N

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A.  Introduction

1.  The Petitioner in this action is the Securities and Futures Commission (“SFC”).  The action concerns the operation of the 11^th respondent company (“Company”)  by the other respondents, who will be referred to as, for example, “R1” and “R2”.

2.  By summons dated 18 February 2022 (“Summons”), R2 applies to re-amend his Amended Points of Defence in this action.  The application is not supported by any affidavit or affirmation evidence, on the stated basis that no such evidence is necessary.

3.  The application is opposed by the SFC.

4.  Though originally listed for oral hearing on 8 March 2022, I directed the application to be dealt with on paper.  For that purpose, I have had the benefit of the original written skeleton arguments filed by the SFC and R2 for the hearing, as well as the written reply submissions for R2 as were permitted by me.

5.  The SFC is represented by Mr Ambrose Ho SC and Mr Norman Nip SC.  R2 is represented by Mr Paul Shieh SC leading Mr James Man of Counsel (though only Mr Man filed the original skeleton, and Mr Shieh came in on the reply submissions).

6.  This is my Decision.

B.  Background

7.  The proceedings were commenced by the SFC by Petition dated 5 October 2016 against various directors or former directors of the Company, pursuant to section 214 of the Securities and Futures Ordinance Cap 571.

8.  The current state of the pleadings material for present purposes is to be found in the SFC’s Amended Points of Claim dated 14 February 2019 (“APoC”)  and R2’s Amended Points of Defence dated 23 May 2019 (“APoD”).

9.  The SFC’s case focuses on two transactions entered into by the Company (through its subsidiary, “Ambition”), being the Share Purchase Agreement (“SPA”)  dated 8 December 2010 and the Disposal Agreement dated 17 May 2011.  Those two transactions resulted in a loss to the Company of over HK$76 million.

10.  The SFC seeks disqualification orders against the respondents under section 214(2)(d)  of the SFO.  The SFC also seeks compensation orders against R1 and R2 under section 214(2)(e)  of the SFO. The claim to compensation is to be found in §§105-106 of the APoC.  Those paragraphs state as follows:

105.  Further, by reason of the matters set out above, [R1] and [R2] have as a result caused the Company to suffer loss and damage of HK$76,812,543.58 being the difference between the purchase and disposal consideration of the Sale Shares pursuant to the SPA and the Disposal Agreement respectively wrongfully entered into by the Company/Ambition.

106.  In the premises, the Petitioner prays for an order under section 214(2)(e)  of the SFO that [R1] and [R2] do pay the sum of HK$76,812,543.58 or such other sum of damages to be assessed to the Company.

11.  R2’s response to that claim is to be found in §§88-89 of the APoD.  Those paragraphs state as follows:

88.  Paragraph 105 is denied.  By reason of the aforesaid, R2 did not wrongfully cause the Company to enter into the SPA and the Disposal Agreement, or to suffer loss and damage of HK$76,812,543.58.

89.  Paragraph 106 is denied.

12.  Unsurprisingly, the SFC’s Reply to the APoD does not directly address those paragraphs.

13.  A 2^nd CMC was held before Harris J on 15 January 2021.  On that occasion, Harris J granted R2’s application – taken out on 23 December 2020, only shortly before the 2^nd CMC – for leave to adduce expert evidence on the valuation of shares, and gave certain consequential directions.  Harris J also gave leave to set down the trial of the Petition, and gave directions for the preparation of the trial, including as to trial bundles, electronic bundles, list of issues, and the parties’ opening submissions and list of authorities.

14.  Shortly thereafter, on 23 February 2021, the PTR was scheduled to be heard on 12 December 2022, and the trial of the Petition was fixed to commence from 1 March 2023 (with 25 days reserved).  (It is presumably on the basis that the trial has been fixed to be heard by me that I am tasked with dealing with the current application.)  I assume that the trial dates were fixed so far away arises simply from the fact that the trial dates were directed to be fixed in consultation with Counsel’s diaries, and the ensuing difficulties in matching the availabilities of Counsel and the Court.

15.  Now, by the Summons, R2 seeks leave to re-amend the APoD as per the draft annexed to the Summons.  The proposed amendment is to add the following plea:

89A.  In further reply to paragraphs 105 and 106, it is averred that:

(1)  The Company is a company incorporated in the Cayman Island. Article 177(a)  of its Articles of Association (which is valid under the laws of Cayman Islands being the applicable law)  provides that:

“Save and except so far as the provisions of this Article shall be avoided by any provisions of applicable law:-

(a)  Every Director or other officer of the Company shall be entitled to be indemnified out of the assets of the Company against all losses or liabilities which he may sustain or incur in or about the execution of the duties of his office or otherwise in relation thereto other than any such loss sustained solely through the fraud or wilful default of the relevant director, and no Director or other officer shall be liable for any loss, damages or misfortune which may happen to or be incurred by the Company in the execution of the duties of his office or in relation thereto, provided that this article shall only have effect in so far as its provisions are not avoided by applicable law;”

(2)  Article 177(a)  of the Articles of Association of the Company formed part of and/or had been incorporated into and/or was an implied term of appointment of [R2] as director of the Company.  Further, [R2] reviewed and was aware of Article 177(a)  when he accepted appointment to become a director of the Company.

(3)  In the premises, even if (which is denied)  [R2] has otherwise been in breach of duty as alleged, [R2] shall not be liable for any loss and damage incurred by the Company and no compensation order shall be made under section 214(2)(e)  of the SFO against [R2].

(4)  Further or alternatively, as the Company shall indemnify out of its assets against [R2]’s liabilities, the Company is precluded from claiming against [R2].  Accordingly, the Petitioner shall not be entitled to seek a compensation order against [R2] under section 214(2)(e)  of the SFO for the benefit of the Company.

16.  By solicitors’ letter dated 23 February 2022, R2 invited the parties to deal with the application by way of consent.  By letter in reply dated 25 February 2022, the SFC suggested that because the Summons was not supported by an affidavit it would not be in a position to consent to the application.  By further letter on the same date, R2 pointed out that, as a rule, an affidavit is not required for an amendment application, the proposed amendments are self-explanatory, and the burden is on the SFC to show why they are not arguable.

17.  That letter also suggested that if the SFC insisted on opposing the application, a consent summons could be filed to vacate the hearing fixed for 8 March 2022, with directions to be given as to the further conduct of the Summons.  No response having been received from the SFC, Mr Man filed his skeleton argument – setting out for the first time the grounds in support of the proposed amendment.

18.  Mr Ho (and Mr Nip)  filed a skeleton argument on 4 March 2022.  As already indicated, not least by reason of the interruption to Court business announced only after close of business on 4 March 2022, I directed the application to be dealt with on paper, and permitted R2 a short opportunity to file written submissions in reply (as R2 would have had the last word on his application at an oral hearing).

19.  Mr Shieh (and Mr Man)  filed reply submissions on 9 March 2022.

C.  Applicable Principles

20.  The principles applicable on an application to amend a pleading are trite.  Broadly, the guiding principle is that, generally speaking, all amendments ought to be made for the purpose of determining the real question in controversy between the parties to any proceedings and of correcting any defect or error in the proceedings.

21.  Nevertheless, RHC Order 20 rule 8(1A)  adds the limitation that the Court should not order a pleading to be amended unless it is of the opinion that the order is necessary either for disposing fairly of the cause or matter or for saving costs.

22.  It is also settled that late applications for amendment can be dismissed on the basis of lateness alone.  Hence, there is no longer room for the notion that delay, even though inordinate and unexplained, will be forgiven as long as there is no prejudice and costs are paid: see Chu Hsiao Chiu v Ma Jinrui [2020] HKCFI 942 at §§18-20.

23.  As I put it in that case, first the Court expects that an applicant will provide a full account of the lateness of the application, and full justification as to why the application should be entertained at that time.  Secondly, whilst the ultimate concern of the Court is to achieve a just resolution of the case, it does not mean that a party should be permitted to raise any arguable case at any point in the proceedings, simply on payment of costs.  If a party has been afforded a reasonable opportunity to advance its case, the just resolution of the case does not require that he should be allowed a further opportunity in spite of his own inordinate and inexcusable delay.

D.  Merits of Application

D.1  Delay and Prejudice

24.  I think it is helpful first to consider the submission made on behalf of R2 that, because the trial is one year away, no prejudice can be caused to the SFC by allowing the amendments.

25.  I do not think that submission fully addresses the relevant point.  As already stated above, in the modern approach to case management, the mere absence of prejudice does not of itself entitle an amendment to be made.

26.  Further, I do not accept that there is no prejudice when – presumably but for the congested Court diary or the diaries of Counsel, or combination of the two – the trial of the Petition would probably already have taken place.  Certainly, at the time of the 2^nd CMC in January 2021 (13 months before the Summons was issued), all parties and the Judge managing the case gave every appearance they thought that the matter was fully ready for a trial if it were to begin a couple of months later.

27.  Indeed, the procedural chronology of the proceedings is relevant.  The SFC’s claim was raised by Petition dated 5 October 2016.  Prior to the Summons, which was issued 5 years and 4 months later (64 months), no suggested line of defence on Article 177(a)  was raised by R2: (1) not in his Points of Defence filed on 16 June 2017; (2) not in his APoD filed on 23 May 2019; (3) not when he disclosed the Company’s Articles in a List of Documents dated 4 October 2017; (4) not when he made his witness statement, or even when he made his supplemental witness statement on 10 March 2020; (5) not when he made a late application for expert evidence on 23 December 2020; (6) not at the PTR on 15 January 2021; and (7) not for almost exactly another year after the trial dates were fixed on 23 February 2021.

28.  This is so, notwithstanding that R2 has throughout been represented by the same solicitors and leading and junior Counsel.  The proposed Re-Amended Points of Defence (“RAPoD”)  is signed by that legal team.  It is impossible for R2 to argue, in the circumstances, that he has not been afforded a reasonable opportunity to advance his case.

29.  Against that chronology, I reject Mr Shieh’s submission that the principles about late or last-minute applications are simply inapplicable because the trial is not due to commence until 1 March 2023, more than a year after the Summons was issued.  Though obviously not exactly “last-minute”, the Summons can only be described as “late” when it was issued more than one year after leave was granted to set down for trial, and almost exactly one year after the date of trial were fixed – and by the time, diaries permitting, the trial might well have been completed.

30.  It can also be noted that there is no attempt at explanation for the delay in seeking to put forward this line of defence – even in the face of the DFC’s criticism of the lack of explanation for delay.  With respect, where (1) the case appeared – and was, in effect, presented to the Court at the 2^nd CMC as being – ready for trial, and (2) the trial dates were fixed in February 2021, surely R2 should have anticipated some likely ‘pushback’ against a later proposal to make any form of amendment to his defence, let alone to raise an entirely new line of defence.  But, R2 has chosen not to put forward any explanation whatsoever.

31.  It seems to me that that failure is particularly telling in circumstances where the proposed amendment would require not just expert evidence but further factual witness statement(s), when R2 filed his witness statements years ago.  Those witness statements were (of course)  intended to contain, and were to be taken to contain, all of the factual matters on which R2 wished to place reliance in the context of the claim against him.

32.  I would also point out that the absence of any affidavit in support of the Summons means that R2 has also not deposed to the truth of the necessary new factual averments – nor is there a draft witness statement, nor is the statement of truth signed on the draft RAPoD (as it perhaps might have been, notwithstanding being a draft).

33.  To my mind, these failures in the context of what is undoubtedly a late application for amendment count strongly against the grant of leave.

D.2  Article 177(a)

34.  As identified from the proposed additional plea, R2 now seeks to place reliance on Article 177(a)  of the Company’s Articles.

35.  Mr Man submits that the effect of Article 177(a)  is that:

(1)  R2 shall not be liable for any loss, damages or misfortune which may be incurred by the Company (Mr Man’s emphasis)  in the execution of his duties as director or in relation thereto (“First Limb”).

(2)  Further, R2 shall be indemnified by the Company against all his liabilities which he may sustain (Mr Man’s emphasis)  in or about the execution of his duties as director or otherwise in relation thereto other than any such loss sustained solely through the fraud or wilful default of the relevant director (“Second Limb”).

36.  On the basis that the SFC is seeking a compensation order against R2 for losses incurred by the Company, Mr Man submits that:

(1)  The First Limb applies because the SFC is effectively asking R2 to compensate losses suffered by the Company in the execution of his duties as director.

(2)  The Second Limb also applies, because the compensation would be R2’s liabilities in the execution of his duties as director.  As the Company shall indemnify out of its assets against R2’s liabilities, the Company is precluded from claiming against R2.  In those circumstances, it is difficult to see why the SFC can seek a compensation order against R2 on the Company’s behalf.

37.  Mr Man acknowledges that Article 177(a)  is subject to the proviso that it is not “avoidable by applicable law”.  But, although section 468 of the (Hong Kong)  Companies Ordinance Cap 622 nullifies an indemnity provision of that sort, that section has no application to an overseas company registered in Hong Kong.  The question is, therefore, whether Article 177(a)  is valid under the laws of the Cayman Islands, and this is a factual issue (questions of foreign law being questions of fact).  Mr Man suggests that it would only be if the SFC does not admit or denies that Article 177(a)  is valid under the laws of the Cayman Islands that R2 would need to seek directions for filing of expert evidence at the later stage.

38.  As to that point, at least in the circumstances of this case, I disagree.  I agree with Mr Ho that the correct analysis is to be found in the recent judgment of Lord Leggatt JSC in Brownlie v FS Cairo (Nile Plaza)  LLC [2021] 3 WLR 1011 at §§116-117.  The burden is on the party who is making or defending a claim, as the case may be, to prove that it has a legally valid claim or defence.  Where the law applicable to the claim or defence is a foreign system of law, this will require the party to show that it has a good claim or defence under that law.

39.  Given that it is R2 who wishes to assert that Cayman Islands law is the applicable law and that Article 177(a)  is valid under Cayman Islands law, the burden is on him to adduce expert evidence on Cayman Islands law to make good that assertion.  I also agree with Mr Ho that the necessity to obtain expert opinion on Cayman Islands law is reinforced by the fact that Article 177(a)  contains the proviso that it is applicable only if it is not “avoided” by the applicable law.

40.  Hence, I agree with Mr Ho that, if the amendment application were to be allowed, necessary directions would have to be given by the Court for the filing of expert reports on Cayman Islands law.

41.  But I also consider that there is a point more fundamental than that.  The position is that R2 is advancing a proposed late amendment by way of the Summons, but must be taken to have chosen not to adduce any evidence in support of the Summons.  On that basis, subject to a point to which I shall return below, R2 had not even tried to show that the proposed amendment is arguable, and not liable to immediate dismissal (there being simply no scope for applying Hong Kong law in the alternative).

42.  In his reply submissions, Mr Shieh submits that it is extremely difficult to understand why, if the SFC chooses to admit that Article 177(a)  is valid under the laws of the Cayman Islands, directions for filing of expert evidence would still be necessary.  He says that the passage from Brownlie does not support any proposition that parties are precluded from proceeding on an admitted or agreed basis of what the relevant foreign law is, and that it is only if foreign law is pleaded and disputed that the Court would have to apply specific rules and principles relating to the ascertainment of foreign law.  In this case, he says, the SFC has not indicated whether it accepts or disputes that Article 177(a)  is valid under Cayman Islands law.

43.  However, I consider that submission puts the cart before the horse.  The submission might have had considerably more force if the relevant plea had been raised in the original version, or first amended version, of the defence – or even if the re-amendment had been proposed prior to the 2^nd CMC (when, it is to be recalled, there was already a late application by R2 to adduce some expert evidence)  and the setting down for trial and fixing of trial dates.  But that is not what happened.

44.  Instead, what has happened is that, long after the matter was set down for trial and trial dates were fixed, R2 has sought to raise an entirely new line of defence.  In those circumstances at least, I consider that it was incumbent on R2 to demonstrate that the proposed amendment is necessary to dispose fairly of the cause or matter (it being obvious the amendment is not put forward for saving costs).  That required R2 to demonstrate that the proposed amendment had real merit – and to do so irrespective of the stance which might potentially be taken by the SFC.  I do not think it was appropriate or sufficient for R2 simply to say that because the SFC had not yet denied, and might not deny, the new line of defence, that would entitle R2 to leave to amend without adducing any evidence as to foreign law.

45.  Perhaps in recognition of this point, R2 has belatedly provided, as an appendix to Mr Shieh’s reply submissions, a Legal Opinion issued by Mr Alan Steinfeld QC dated 4 March 2022, addressing the validity and enforceability of Article 177(a)  under Cayman Islands law.  From the covering letter, it is clear that the Opinion was obtained only after, and directly in response to, the SFC’s skeleton argument also dated 4 March 2022.  The thrust of the Opinion is that Article 177(a)  of the Company’s Articles of Association is valid and enforceable under Cayman law.

46.  Though not formally adduced as evidence in support of the Summons, there is at least now some material capable of supporting the proposed amendment.

47.  R2’s argument is that, even if he has been in breach of duty (short of fraud or wilful default), the operation of Article 177(a)  means that no compensation order can be made under section 214(2)(e)  of the SFO.  Mr Ho submits that that the argument is fundamentally flawed.  I agree it at least faces difficulties.

48.  In these proceedings, and in seeking the compensation orders, the SFC does not act in the capacity of, or stand in the shoes of, the Company or the liquidators of the Company.  First, the Company is actually a respondent to the petition (though it must be recognised that the Company was probably joined in part to be bound by the result and to be able to take the benefit of any compensation order made).  Secondly, the SFC is plainly bringing the proceedings in its role as a regulator, protecting the integrity of the market and public investors.

49.  Mr Ho submits that the private contractual arrangement between the Company and R2 in Article 177(a)  is concerned only with the allocation of loss suffered by the Company and the exclusion of R2’s liability vis-a-vis the Company.  The SFC is not privy to such a private arrangement, and (he says)  it simply does not follow that the SFC is somehow to be disentitled to seek a compensation order against R2 – irrespective of the facts which may be found by the Court at trial – simply because there might be a private contractual arrangement providing immunity to R2.

50.  Mr Ho also submits that R2’s argument is inconsistent with the width of, and the legislative intent behind, section 214(2)(e).  Those matters have been considered and stated in, for example, SFC v Yeung Chung Lung (unreported, HCMP 205/2013, 17 February 2017)  at §109, and SFC v Wong Wai Kwong David [2020] 3 HKLRD 606 at §23 (in a statement cited without disapproval on appeal).

51.  Mr Ho goes further and submits that it is inconceivable that the legislature would have intended that the power to grant relief under section 214(2)(e)  could be severely, if not wholly, curtailed by a private contractual arrangement between a director and a listed company.  That would defeat the purpose of enabling the SFC to seek orders for the purpose of protecting the investors and the shareholders of the Company.  On a provisional basis, I tend to agree.  Further, the fact that any compensation payable under any compensation order made is sought to be payable, and would be paid, to the Company may not change the analysis.

52.  Some support for the proposition is to be found in the Court of Appeal decision in SFC v Wong Wai Kwong David [2021] 5 HKC 601, where it was held that the inability of the liquidators of the company in that case to commence proceedings against the former directors because the cause of action may be time-barred is not a ground for refusing the SFC’s claim for a compensation order, even if the limitation defence is otherwise available to the directors by operation of law.

53.  But, in his reply submissions, Mr Shieh puts the point in what seems to me to be a different and slightly more nuanced fashion.  First, he makes the point that Article 177(a)  is more than a private contractual arrangement between R2 and the Company, because it is the statutory contract between all shareholders (including members of the investing public)  and the Company, and it formed part of the terms of appointment of R2 as director.  But, Mr Shieh also submits that a compensation order under section 214(2)(e)  is a discretionary remedy, and it would be relevant to the exercise of discretion whether the Company (a) is effectively barred from pursuing liability against R2 under the First Limb of Article 177(a), or (b) might face a claim to an indemnity brought by R2 under the Second Limb.  Mr Shieh also puts that in the context that for any compensation order to be made, the Court would first have to be satisfied of one of the matters set out in section 214(1)(a), (b), (c)  or (d).

54.  Hence, I accept that the effect of Article 177(a)  is at least potentially relevant to the ‘discretionary mix’ in any decision whether or not to make a compensation order.  Further, in light of the Legal Opinion now made available, I do not think it possible to say that the effect of Article 177(a)  on which R2 would wish to place reliance has no real prospect of success.

D.3  Application Overall

55.  I suppose it is also correct that it ought not to take long, or be a great expense, for the SFC to consider the Legal Opinion of Mr Steinfeld, including by seeking another opinion for itself.  Further, even if conflicting views as to the effect and validity of Article 177(a)  arise, resolving that conflict ought not to add significantly to the length of the trial.

56.  Further, whilst it might be anticipated that R2’s apparently intended factual evidence on the point would be subject to rigorous testing by cross-examination – where the cynical view might be that the factual assertions are put forward to support a lately-spotted forensic point, rather than the other way round – that also ought not to add significantly to the length of the trial.

57.  Of course, I take into account the matters which I have set out above in relation to lateness.  But, overall, on balance I am persuaded – just – that leave to make the proposed amendment should be granted.  To put it another way, I am satisfied – just – that R2 has demonstrated that the proposed amendment is necessary to dispose fairly of the cause or matter.

E.  Conclusion and Costs

58.  R2’s application made by the Summons is allowed.

59.  As to costs, there can be (and ears)  no argument that the costs of and occasioned by the amendment should be payable by R2 to the SFC in any event.

60.  There is, however, an argument relating to the costs of the Summons itself.  In light of my views above, I see no reason why the costs should follow merely the event of the grant of leave.  Rather, it seems to me that R2 needed to persuade the Court that the proposed amendment was appropriate in the present circumstances, and that R2 was in effect seeking a significant indulgence.  Further, part of the reason why I have been persuaded to grant leave to amend is through the late provision (even after, and in response to, the SFC’s skeleton submissions)  of the Legal Opinion.

61.  In the exercise of my broad discretion on costs, I order R2 to pay the SFC’s costs, and I see no reason why they should not be subject to summary assessment and be payable forthwith.  Further, to mark the Court’s concern at and disapproval of the timing of the application, and the lack of proper explanation for that timing, I shall order costs to be assessed on the indemnity basis.

62.  Therefore, R2 shall pay the SFC’s costs of and occasioned by the Summons, to be summarily assessed on paper and on the indemnity basis, and payable forthwith upon the assessment.

63.  The SFC should provide its Statement of Costs for summary assessment within seven days, and R2 may provide his List of Objections (if any)  within seven days thereafter.  I will then proceed to the summary assessment.