COMPETITION COMMISSION v. KAM KWONG ENGINEERING COMPANY LTD AND OTHERS

CTEA 1/2018

[2022] HKCT 1

IN THE COMPETITION TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COMPETITION TRIBUNAL ENFORCEMENT ACTION NO 1 OF 2018

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DECISION ON PENALTIES

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Introduction

1.  On 3 June 2020 I heard an application by consent for declarations that the 1^st, 2^nd and 4^th Respondent (“Respondents”) had contravened the First Conduct Rule.  The procedure for disposing of the complaints against the Respondents mirrored what is known in the company law context as the Carecraft Procedure.  I handed down my decision on 17 July 2020 (“Contravention Decision”).  The issue of penalties was adjourned until 7 August 2020.  An issue that arose for determination was whether or not a discount should be given to the Respondents to reflect the fact that they had not directly participated in the impugned conduct.  This issue had arisen earlier in CTEA 2/2017.  The then President of the Competition Tribunal determined in his judgment dated 29 April 2020 that in principle a discount could be given on this ground and he so ordered in Competition Commission v W Hing Construction Co Ltd & Ors (No.3)[1](penalties) (“W Hing 3”).  The Commission appealed this decision.  I decided to await the outcome of the Appeal on this issue before determining penalties.  The Court of Appeal handed down its judgment on 2 June 2022[2].  It overturned the relevant decision in W Hing 3.  I have taken this into account in my decision, which I now explain.

2.  At the hearing before me on 3 June 2020 the 1^st and 4^th Respondents were represented by counsel.  They acted in person on 7 August 2020.  The 2^nd Respondent was represented by Mr Michael Lok.  The Respondents submitted further documents relevant specifically to the penalty issue.  Having considered this documentation the Commission proposes the following penalties:

(1)     The 1^st Respondent shall pay to the Government a pecuniary penalty of $398,000 within 28 days from the date of the order.

(2)     The 2^nd Respondent shall pay to the Government a pecuniary penalty of $1,687,000 within 28 days from the date of the order.

(3)     The 4^th Respondent shall be disqualified as a company director for a period of three years.

(4)     The 1^st, 2^nd and 4^th Respondents be restrained from entering into any agreement or concerted practice involving any anti-competitive conduct or from being involved in any anti-competitive conduct in respect of any projects under the Hong Kong Housing Authority (“HKHA”)’s Decoration Contractor System (“DCS”).

(5)     The hearing for penalties against the 4^th Respondent be adjourned sine die with liberty to restore.

(6)     The 1^st, 2^nd and 4^th Respondents shall each pay 1/5 of the Commission’s costs of this action up to and including the hearing on 3 June 2020, and 1/3 of the Commission’s costs of the present hearing (including the Commission’s summons for filing the 2^nd affidavit of Pang Wai Sum), to be taxed if not agreed, with certificate for two counsel for the 3 June and the present hearing.  Costs of the consent summons between the Applicant and the 2^nd Respondent shall be to the Commission.

3.  The 2^nd Respondent agreed with the Commission’s case on how the Tribunal should approach the assessment of the penalty and the proposed penalties in respect of the 2^nd Respondent subject to the following qualifications.

(1)     The 2^nd Respondent does not agree to the 25% uplift.

(2)     The 2^nd Respondent contends that the Commission has given insufficient weight to relevant mitigating factors, which should result, it suggests, in a discount of at least 10%.

(3)     The 2^nd Respondent’s cooperation with the Commission justifies a discount of at least 15% to 18%.

(4)     A permanent injunction is unnecessary as the 2^nd Respondent does not intend to undertake similar renovation work in future and will voluntarily remove itself from the HKHA’s Reference List.  The 2^nd Respondent does, however, offer an undertaking to address the Commission’s concern that there should be some permanent restraint imposed on the 2^nd Respondent from repeating what the Commission suggests is a pervasive malpractice by contractors undertaking renovation work at HKHA developments.

4.  The 1^st Respondent (the 4^th Respondent representing the 1^st Respondent, which is his company) does not object to the calculation of the penalty proposed by the Commission, although the 4^th Respondent emphasised the small size of the 1^st Respondent’s business and implied that paying the penalties would be challenging, although the 1^st and 4^th Respondents do not suggest that they could not be paid.  It will be noted that at this time the Commission does not seek a pecuniary penalty against the 4^th Respondents, it does, however, seek a costs order on a pari passu basis against him.

5.  The Commission proposes an adjournment of the hearing for penalty against the 4^th Respondent sine die. The Commission accepts that the 1^st Respondent is wholly owned by the 4^th Respondent.  Given the nature and apparent scale of the business, it appears that the 1^st Respondent is, economically speaking, an alter-ego of the 4^th Respondent.  As such, the penalty against the 1^st Respondent will likely have the same economic impact against the 4^th Respondent.  Having regard to considerations of proportionality in the sanctions to be imposed by the Tribunal, the Commission withholds any application for pecuniary penalty against the 4^th Respondent on the condition that the 1^st Respondent satisfies the pecuniary penalty to be imposed by the Tribunal.  The Commission submits that an adjournment sine die is appropriate, to cater for the scenario that the 1^st Respondent fails to discharge the pecuniary penalty for any reason (for example, if it is wound-up by the 4^th Respondent, rendering any penalty imposed against the 1^st Respondent nugatory).

6.  I shall divide the remainder of this decision into sections dealing with the principles that guide the Tribunal in assessing penalties and then how they apply to the Respondents in the present matter.  In the light of the Court of Appeal’s decision in my view the 2^nd Respondent’s arguments in respect of a discount of 1/3 reflecting the fact that it was not directly involved in the contravention of the First Conduct Rule falls away. It is not necessary for me to recite the facts except as they are relevant to particular arguments as they are comprehensively set-out in the Statements of Agreed Facts, which are appended to the Contravention Decision.  I shall adopt the definitions used in the Contravention Decision and the Statements of Agreed Facts.  Consistent with what I said in [4], the 4^th Respondent did not make any material submissions on the calculation of the penalties to be imposed on the 1^st Respondent.  Therefore, in the following sections dealing with penalties the only arguments to be considered are those advanced by Mr Lok on behalf of the 2^nd Respondent.

Principles guiding the Tribunal in assessing penalties

7.  The Tribunal in W Hing 3 held that, for the purpose of assessing penalties under section 93 of the Competition Ordinance (Cap 619) (the “Ordinance”), a structured methodological approach based on the European Union jurisprudence is preferable to the Australian “instinctive synthesis” approach: see [33]–[45].

8.  The Tribunal established four main steps for determining pecuniary penalties ([46]):

(1)     Step 1: determining the Base Amount.

(2)     Step 2: adjusting for aggravating, mitigating and other factors.

(3)     Step 3: applying the statutory cap.

(4)     Step 4: applying any cooperation reduction and any pleas of inability to pay.

9.  The Base Amount for Step 1 consists of three elements:

(1)     The starting point is the Value of Sales, being the value of the undertaking’s sales whether directly or indirectly related to the contravention in the relevant geographic area within Hong Kong in the financial year(s) in question.

(2)     Next is the Gravity Percentage, which is to be applied to the Value of Sales to reflect the seriousness of the conduct in question.  The percentage is not itself mathematically derived but involves a broad qualitative judgment to reflect the gravity and blameworthiness of the conduct.  For “serious anti-competitive conduct” (as defined in section 2 of the Ordinance), the range of 15% to 30% suggested by the Commission is broadly in line with international practice and, in the Tribunal’s view, appropriate for Hong Kong as well.

(3)     The final element is the Duration Multiplier, which is the number of years that the undertaking participated in the contravention.  The amount obtained by Value of Sales as applied with the Gravity Percentage will be multiplied by the Duration Multiplier to reflect the temporal extent of the conduct in question.

see [49]–[51] of W Hing 3.

10.  The principles enunciated by G Lam J (as he then was) in W Hing 3 were introduced to provide guidance for future cases.  I adopt them subject to the qualifications referred to in [20]–[21].

Step 1

11.  The Commission submits that the pecuniary penalties for the 1^st and 2^nd Respondents should be as follows:

	1st Respondent	2nd Respondent
Step 1: Base Amount	$1,062,337.2	$1,499,941.2
Step 2: Adjustment for aggravation/mitigation	+25% = $1,327,921.5	+25% = $1,874,926.5
Step 3: Statutory cap	$442,640.5	$26,485,939.8
Step 4: Adjustment for cooperation/inability to pay	-10%	-10%
Resultant penalty (rounded down to the nearest $1000)	$398,000	$1,687,000

12.  The respective Base Amounts for the 1^st and 2^nd Respondents are derived as follows:

	1st Respondent	2nd Respondent
Value of Sales	$4,426,405	$6,249,755
Gravity Percentage	24%	24%
Duration Multiplier	1	1
Base Amount	$1,062,337.2	$1,499,941.2

13.  The respective Values of Sales for the 1^st and 2^nd Respondents are calculated by summing up their respective work orders/invoices for the King Tai Court units: cf. [77] of W Hing 3.  The calculations of the Base Amounts are not disputed by the 1^st and 2^nd Respondents.

Step 2

14.  For the Gravity Percentage, the Commission submits that the 24% figure adopted in W Hing 3 is appropriate for this case, since the present contraventions arose from a factual matrix essentially identical to that in W Hing 3: see [88]–[93].  This is not disputed

(1)     Both cases involved stark abuses of the HKHA’s DCS by market-sharing and price-fixing agreements amongst the contractors selected under the system. Such abuses jeopardise the interests of the main intended beneficiaries of the HKHA’s policies—the residents of developments.  The present victims are beneficiaries under the HKHA’s schemes for the provision of subsidised housing (the GFS), coming from relatively low-income households.

(2)     The contraventions of the 1^st and 2^nd Respondents (together the Commission alleges with the 3^rd Respondent) were committed through the Allocation Arrangement and the Price Coordination Arrangement, which plainly involve “serious anti-competitive conduct” as defined in the Ordinance. These clear contraventions were committed in the face of the HKHA’s express warning to contracts against “pie-sharing”: see [12(e)] of the respective Statements of Agreed Facts between the Commission and (i) the 1^st and 4^th Respondents, and (ii) the 2^nd Respondent.

(3)     The 1^st, 2^nd and 3^rd Respondents were the only contractors assigned by the HKHA for King Tai Court.  They together decorated 178 out of 857 King Tai Court units, which constitutes a substantial proportion (about 21%) of all units.

(4)     The 1^st and 2^nd Respondents were primary contravenors and not mere ancillary participants in respect of the relevant breaches.

15.  For the Duration Multiplier, it is undisputed that the contraventions took place in the months after King Tai Court owners started to gain possession of their units, from 20 June 2017.  Since the Values of Sales are already confined to those sales in respect of the King Tai Court units over those few months, a Duration Multiplier of 1 is appropriate: cf. [95]–[96] of W Hing 3.  This is not disputed.

16.  Deterrence is a primary objective of the statutory regime: [36]–[37] of W Hing 3.  The Commission submits.  Given that the anti-competitive arrangements of the 1^st and 2^nd Respondents reflect long-running and widespread industry practice, the Commission argues an uplift of 25% is warranted to send a clear message against such conduct.  The 2^nd Respondent does not dispute the principle that the primary objective of the statutory regime is deterring businesses from anti-competitive practices and that in an appropriate case an uplift can be imposed to reflect the gravity of the conduct and in enhance the deterrent effect of the penalty the Tribunal imposes.  It does dispute that in the present case an uplift should be imposed.  It does so on three grounds.  First, that there is no evidence that the practice, which is commonly referred to as “pie-sharing” and is defined in the Statements of Agreed Facts as the Allocation Arrangement, is long running and wide-spread; it is not something that is agreed in the Statement of Agreed Facts.  Secondly, the proximity to the events of the matter and W Hing 3 in which no uplift was sought or imposed.  Thirdly, that no authority has been cited supporting imposing an uplift for the grounds advanced by the Commission.  Mr Lok referred me to The EU Law of Competition (3^rd ed.):

“8.582 According to point 27 of the 2006 Fining Guidelines, ‘in setting the fine, the Commission may take into account circumstances that result in an increase or decrease in the basic amount ... on the basis of an overall assessment which takes account of all the relevant circumstances’. The first type of such circumstances are the aggravating or mitigating factors which, in light of the undertaking’s behaviour, justify an upward or downward adjustment to the basic amount of the fine. As was already the case under the 1998 Guidelines, the fine is thereby individualized to take account of the subjective dimension of the responsibility of each cartel participant. The EU Courts have confirmed the Commission’s entitlement to take aggravating or attenuating circumstances into account.[3] Indeed, where an infringement has been committed by several undertakings, it is necessary, when setting the amounts of the fines to be imposed, to examine the relative gravity of each undertaking’s participation.[4] This implies, in particular, establishing the respective roles of each undertaking in the infringement during the period of their participation.[5] The 1998 Guidelines provided a non-exhaustive list of such circumstances.[6]

8.583     Initially, there was some confusion between the assessment of the gravity of the infringement as a whole and the application under the 1998 Guidelines of the mitigating circumstance of ‘non-implementation in practice of the offending agreements’.[7]  The General Court made it clear in Amino Acids, however, that no confusion should exist between the assessment of the gravity of the infringement as a whole (first paragraph of Section 1.A of the 1998 Guidelines) and that of the individual conduct of each undertaking, which it must carry out in order to assess any aggravating or mitigating circumstances (Sections 2 and 3 of the 1998 Guidelines). In the former, the Commission considered the effects resulting from the infringement as a whole rather than from the individual conduct of each undertaking. In the latter, in accordance with the principle of individuality of penalties and sanctions, the Commission examined the relative importance of the individual undertaking’s involvement in the infringement.[8]  This implies that aggravating and mitigating circumstances will refer to each undertaking’s individual behaviour, introducing a subjective element. However, this should not be taken to exclude that the objective characteristics of the infringement—especially those taken into account when setting the basic amount under the 2006 Fining Guidelines—may differ for each undertaking involved.”

17.  I can take this argument shortly.  There is no evidence of their being a wide spread practice of pie-sharing in HKHA’s renovation projects or similar constructions works.  At an anecdotal level there seems reason to think that there is, but this does not provide sufficient basis for the Tribunal to increase a penalty.  There must be evidence, which allows the Tribunal to make a finding of fact from which it can properly conclude that an uplift should be imposed on a particular Respondent in a particular case.  The Commission largely relies on the fact that the present proceedings arose out of essentially an identical factual matrix as W Hing 3 and highlights the following matters:

(1)     Altogether 13 contractors were involved in two contraventions, each involving different contractors. The HKHA selected the relevant contractors based on a ballot-generated priority list, meaning that the combination of contractors involved in each contravention was purely random: see [10(3)] of Competition Commission v W Hing Construction Co Ltd (No 2) (“W Hing 2”)[9] (liability).

(2)     The contraventions in both cases involved essentially identical arrangements, involving market sharing arrangements by divvying up units in the relevant estates between the Designated DCs and price-fixing arrangements where the packages offered by the Designated DCs were fixed and coordinated amongst themselves.

(3)     The respective contraventions took place in fairly close succession.  The contraventions took place between June and November 2016—a year before the start of contraventions in the present case: see [1] of W Hing 2.

18.  The Commission invites the Tribunal to find from these matters that the pie sharing practises in the decoration and redecoration works carried out as part of the HKHA’s DCS are well-known and pervasive.  I do not think that the Tribunal can properly make such a finding based on these matters.  The Commission has not explained by whom this is well-known (which if true invites the question of why the HKHA have been passive in addressing what the Commission suggests in an egregious practice harming the low-income beneficiaries of the GFS) or suggested, let alone proven, in what sense it is pervasive: for example the proportion of DCS renovation contracts effected by pie-sharing.

19.  It is also necessary in order for the Tribunal to develop the principles on which it acts when assessing penalties for it to have a sound factual foundation from which to work.  There is none in the present case.  Consideration needs to be given, for example, to the interaction of the adjustment for aggravating factors in at Step 2 and the proposed additional gravity percentage.  The danger of an overlap is obvious and care needs to be taken in elucidating the difference between the two.  There is nothing more that I helpfully say at this juncture about the circumstances in which the Tribunal may impose an uplift of the type suggested in the present case by the Commission.  I will not impose an uplift against either the 1^st or 2^nd Respondents.

20.  At the hearing the 2^nd Respondent sought to rely on the “sub-contractor” discount, i.e. the one-third discount given by the Tribunal in W Hing 3 ([103]) to those undertakings which had “sub-contracted” the business at the relevant estate to a third-party and therefore did not directly participate into the contravention.  Before addressing the Court of Appeal’s decision in W Hing 3 I would make the following general comments about this argument by way of introduction.  The sub-contracting that took place was in breach of an express undertaking given by the 2^nd Respondent (and other DCs) to the HKHA agreeing “not to sublet or subcontract any decoration works or any works or any part thereof under this Undertaking or any part of this Undertaking without the prior written approval of the Authority”.  I see little appeal in the argument that because the 2^nd Respondent flagrantly broke this undertaking by allowing the 1^st Respondent to contract in its stead and provided no supervision whatsoever of the 1^st Respondent’s work or tendering arrangements, the penalty to be imposed should be less than it would be if it had directly been involved in the contravention.  Neither do I see much force in the argument that a discount should be given because as it turned out the 2^nd Respondent did not receive any payments from the 1^st Respondent.  The converse of these types of matters may be relevant when considering aggravating factors, for example, a case in which it is demonstrated that a contravenor had profited significantly from joining a cartel arrangement in breach of the First Conduct Rule, which probably could properly be taken into account as an aggravating matter.  I have difficulty in seeing how conversely the adverse consequences of bad business decisions and practices can properly be characterised as matter, which ameliorates the severity of a contravention and justifies a discount.  As I have explained the principle that underpins the determination of penalties is the need for them to act as a deterrent to others contravening the Ordinance.  Generally, I would expect mitigating factors to be matters that do not conflict with achieving this purpose.  Treating indifference to contractual obligations and proper business practice, in my view does conflict with this purpose.

21.  The argument before the Court of Appeal was more technical, centring as I understand the parties’ submissions from the judgment, on whether the fact that, so the Respondents argued, they formed one modest part of the undertaking responsible for the contravention should be reflected in the penalty by discounting the amount that an assessment in accordance with the principles that I summarised earlier arrives at.  The Court of Appeal’s reasoning for rejecting this argument were as follows:

“48. We agree with the Commission that it would be wrong in principle to reduce the fine by a percentage to reflect the respondent’s role that it only formed part of an undertaking. Where an undertaking contravenes a competition rule, it is for the undertaking to answer for the infringement. Whilst the pecuniary penalty is ultimately to be paid by legal or natural persons, the penalty is imposed and remained determined with reference to the economic activities and conduct of the undertaking. There is no separate infringement by each of the entities within the undertaking. As submitted by Mr Segan, by reducing the penalty in this way, it would be inconsistent with the scope of the conduct for which each of the respondents is answerable as an entity within that particular undertaking.

49. We could discern no inconsistency in the above approach with the mandatory considerations that the Tribunal must have regard to under section 93(2). In the context of a primary contravener in section 92(1)(a), the conduct referred to in ‘the nature and extent of the conduct that constitutes the contravention’ (section 93(2)(a)) and ‘the circumstances in which the conduct took place’ (section 93(2)(c)) must be the conduct of the primary contravener, namely, the undertaking.

50. Thus, in the four-step approach laid down in Wing Hing No 3, the considerations taken into account at various stages pertain to the undertaking, not one or more of the entities within the undertaking. In Step 1, the Base Amount is calculated by reference to the Value of Sales of the undertaking, the duration multiplier is the number of years of the undertaking’s participation in the contravention. In Step 2, the non-exhaustive mandatory matters to be taken into account under section 93(2) relate to the conduct of the undertaking. Insofar as Au-Yeung J was of the view that Step 1 takes into account the things in common between respondents or a certain group of them and Step 2 focuses on the conduct of individual respondents (as opposed to the conduct of the undertaking)^[10], we think the judge is in error. The statutory cap in Step 3 is calculated by reference to the overall turnover of the undertaking. The co-operation reduction in Step 4 is made to the penalty imposed on an undertaking.

51. As emphasised in W Hing No 3 at §§36 and 59:

‘36. … As the primary sanction provided for in the Ordinance, the pecuniary penalty serves the principal purpose of deterring undertakings from anti-competitive conduct. It is through this sanction that undertakings are to be deterred from activities which might otherwise be highly profitable to them and competition norms are reinforced for all including the law-abiding. …’

‘59. Proportionality is relevant throughout the process of assessment but should in particular be considered here to give an overall sense check. It is important to stand back and look to see whether, subject to the subsequent steps, the amount arrived at would be a just and proportionate penalty for the contravention by the undertaking in the circumstances.’

(Emphasis supplied.)

52. Given the four-step approach devised in W Hing No 3 and the statements in the judgment that elaborated on the approach, we are inclined to agree with Mr Segan that §§103 and 104 (being the judge’s reasoning in making the reduction challenged in these appeals) leapt out as an anomaly.

53.     There is no injustice or procedural unfairness that an entity within an undertaking brought before the Tribunal should answer for the whole of the infringement by an undertaking.  In determining the pecuniary penalty specific to the undertaking, it is not relevant for the Tribunal to inquire into the internal relationship of those held jointly and severally liable for the payment of the penalty.  And where payment has been made by one or more of those held liable, the Commission would cease to have interest in the matter.  The apportionment of responsibility between entities within an undertaking for the payment of the penalty is not to be resolved in the enforcement proceedings but in subsequent proceedings for contribution or indemnity, in which the Commission would not have a role to play.”

22.  The 2^nd Respondent submits that a further discount of 5% should be given because its management had no knowledge of the anti-competitive practices and has received no payment from the 1^st Respondent.  I accept the 2^nd Respondent’s evidence that this is the factual position.  However, for reasons I have already given in [20] it does not seem to me that they materially mitigate the 2^nd Respondent’s responsibility.  The reason the 2^nd Respondent knew nothing about the contravention was because it took no interest in the way in which the 1^st Respondent undertook the work, which as I have explained was in breach of the 2^nd Respondent’s agreement with the HKHA.  The 2^nd Respondent was indifferent to its obligations or the purpose of the regulations imposed by the HKHA, namely, to ensure that renovation work was carried out by DCs it had approved.  The HKHA’s policies had been explained to the DCs.  This indifference to doing things properly created room for malpractice.  It does not in my view justify discounting the penalty.

23.  The 2^nd Respondent also points to its suspension from tendering for projects of the HKHA and its adverse consequences as a mitigating factor.  I agree with the Commission that this is a natural and proper consequence of the 2^nd Respondent’s wrongful circumvention of the DCS coupled with the lack of supervision over of 1^st and 4^th Respondents.  It does not seem to me to constitute a mitigating factor.  This is consistent with the view taken by G Lam J in W Hing 3 at [109].

24.  The next matter, which the 2^nd Respondent invites the Tribunal to treat as mitigating factor is that the 2^nd Respondent has undertaken a series of compliance and enhancement measures.  The Commission accepts, as it did in W Hing 3, that a relevant mitigating factor may be an undertaking taking steps to ensure genuine compliance with the Ordinance.  However the Commission submits that this will be relevant factor where the compliance measures were taken prior to the contravention and not after.

25.  The evidence of these measures is contained in the 2^nd affirmation of Chan Chun Leung.  The measures described, positive in themselves, were undertaken in the first half of 2020.  These proceedings were commenced in 2018 and the application for disposal of the proceedings by the consensual process, which lead to my Contravention Decision, was issued on 6 August 2019.

26.  The 2^nd Respondent drew my attention to the decision of the English Competition Appeal Tribunal in Kier Group Plc v Office of Fair Trading[11] in which post-infringement compliance measures were taken into account and held to justify a discount of 5%.  It is not clear from the decision when the post-infringement compliance measures were undertaken, although [62] suggests that it might have been “in the wake of the OFT’s investigation” rather than well after the proceedings had been commenced and the contravenor had decided to concede that it had contravened the Act.  I accept that compliance measures introduced after an investigation brings to a contravenor’s attention a contravention, may be relevant.  However, I do not consider that measures introduced as late in the day as in the present case do so.  The late timing of the steps taken by the 2^nd Respondent invite the suspicion that they have been introduced for the purpose of mitigation rather than because of recognition early in the process by the 2^nd Respondent that it had been at fault and that it should address the cause.  Giving a discount for the late measures introduced by the 2^nd Respondent is in my view inconsistent with the deterrent principle.  Giving weight to such late measures is an invitation to contravenors to game the penalty stage of process.

Step 3

27.  The cap is agreed and is well above the proposed penalties against the 1^st and 2^nd Respondents.  As I have mentioned no penalty is sought against the 4^th Respondent at present and will not be if the 1^st Respondent pays the penalty imposed on it.

Step 4

28.  The 1^st and 2^nd Respondents have elected to settle the proceedings with the Commission well before the trial of the present proceedings.  However, no offer to give evidence against the 3^rd and 5^th Respondents was made to the Commission.  In light of the timing and extent of their cooperation, the Commission submits that a reduction of 10% is appropriate in the circumstances.

29.  With a view to assisting the Tribunal to lay down some (non-binding) guidance for future cases, the 2^nd Respondent submitted that:

(1)     As mentioned at [72] of W Hing 3, the sum of the discount should be recommended by the Commission in accordance with the Commission’s Cooperation and Settlement Policy for Undertakings Engaged in Cartel Conduct (April 2019) (“Cooperation Policy”).

(2)     According to the Cooperation Policy, there is at its core a two-tier approach, namely (i) up to 50% reduction where willingness to cooperate with the Commission is expressed before the commencement of any Tribunal proceedings (“Pre-Commencement Cooperation”) ([3.3]); and (ii) up to 20% where the undertaking begins to cooperate only after the commencement of any enforcement proceedings (“Post-Commencement Cooperation”) ([3.7]).

(3)     So far as the Post-Commencement Cooperation reduction is concerned, this must be linked to the progress of the proceedings in question.  As a general rule of thumb:

(a)     By definition, if cooperation is provided at the outset, upon commencement, the full discount of 20% should be recommended.

(b)     If a trial date has been fixed, which means that all interlocutory steps (such as pleadings, witness statements, discovery, expert evidence etc.) have been completed, then the discount should be halved, i.e. 10%.

(c)     If the cooperation comes at the eve or even during the trial, then only a minimal discount should be provided.

(4)     The specific discount within each bracket would then depend on the specific procedural progress of any given case.  This would have a direct impact on the amount of costs and time saved by the willingness to cooperate.  Other relevant factors such as the extent of the cooperation (i.e. whether the respondent merely agrees to certain facts as opposed to where the respondent agrees to concede liability altogether) can be taken into account.

30.  Applying the above framework to the present case the 2^nd Respondent argued:

(1)     The 2^nd Respondent accepts that the maximum discount is not applicable, since the pleadings had closed by the time an agreement was reached with the Commission.

(2)     The Commission accepts, the 2^nd Respondent “elected to settle the proceedings with the Commission well before the trial of the present proceedings”: [30] of Commission’s Skeleton.

(3)     As at the date of the Consent Summons between the Commission and the 2^nd Respondent i.e. 6 August 2019, pleadings had closed.  Witness statements were filed on the same day, and (i) the Commission did not file any witness statements in respect of the 2^nd Respondent; and (ii) the 2^nd Respondent did not file any witness statements at all.  Consent had been reached before the second case management conference hearing fixed for 12 September 2019.  The proceedings were still at a very early stage and substantial costs and time were saved.

(4)     The extent of the 2^nd Respondent’s cooperation should also be taken into account.  Instead of merely putting the Commission to strict proof, or just admitting the facts themselves, the 2^nd Respondent has conceded liability to save costs and time with the use of the Agreed Facts.

(5)     The Commission’s argument that there is no offer to give evidence against the 3^rd and 5^th Respondents is correct as far as it goes.  However, the Commission accepts that the 2^nd Respondent in fact has no actual knowledge of the misconduct in question.  The Commission does not, and clearly cannot say, that it has obtained no benefit from the 2^nd Respondent’s early concession.  The Commission resisted the suggestion by the 3^rd and 5^th Respondents that the Agreed Facts not be used against them at the trial.

31.  The 2^nd Respondent submits that taking into account all of the circumstances of the 2^nd Respondent’s cooperation, a discount of 15% to 18% would be appropriate.

32.  The issues for decision are, first, whether the Commission’s Cooperation Policy should generally guide the Tribunal in determining what discount to apply for cooperation.  Secondly, if so, how the 20% scale should be applied.

33.  The Cooperation Policy reflects the Commission’s assessment of how the purpose of the Ordinance can be advanced by offering undertakings the Commission believes have contravened the First Conduct Rule significant discounts on the penalties that will be imposed if they cooperate with the Commission and accept early in the investigation, or any resulting proceedings before the Tribunal, that they have contravened a conduct rule.  The Commission is better placed than the Tribunal to make these types of policy decisions.  Unless the policy or components of it are inconsistent with the provisions of the Ordinance or the principles that the Tribunal believes emerge from its provisions, in my view the Tribunal should generally be guided by the Cooperation Policy in determining what discounts to give for cooperation.

34.  As I have already explained the Commission submits that a discount of 10% would be appropriate given the stage the proceedings had reached before the Respondents conceded contravention.  The 2^nd Respondent submits that given the relatively early stage at which the concession was made it should be closer to 20%, namely, 15% to 18%.

35.  In my view assuming, as I do, that once proceedings have been commenced the maximum discount would be 20%, consideration needs to be given to how that percentage reduces as the proceedings progress.  Is it linear?  Should the Tribunal proceed on the basis that once the first day of a trial commences the discount would be 0% and the 20% reduces in a linear regression over time?  If the proceedings are estimated to take 24 months to bring to trial and a respondent concedes after 12 months does it get a 10% discount?  In my view not.  The Commission’s suggested approach explained in the Cooperation Policy, Post-Commencement Cooperation, is to identify fixing trial dates as a key stage and that if proceedings are determined at this stage the discount will generally be 10%.  This seems to me to be broadly reasonable, although it does not address the issue I have just identified, namely, the character of the sliding scale of discount between this stage and trial.

36.  I do not think that application of a simple arithmetical formula is the best approach.  In my view the earlier the concession the greater the discount.  It is not linear.  In the present case the Respondents accepted that the Ordinance had been contravened after close of pleadings and no witness statements had been exchanged.  I am reluctant to formulate at this stage sign posts or an agenda of matters to be taken into account in determining where on the scale any particular case might be.  It is important that once proceedings have commenced respondents focus their minds promptly on whether or not they have a genuine defence to the Commission’s case.  The Tribunal will expect them to have begun to think about this once it is clear that proceedings will be commenced in order that, they are able to respond promptly when proceedings are commenced.  A full 20% discount would generally, I anticipate, only be appropriate in cases in which contravention was admitted before defences were served and probably very soon after the proceedings had commenced allowing the Commission to immediately reallocate resources that might otherwise be required for the furtherance of the proceedings.

37.  In the present case the Commission was required to deal with the Defence and as a consequence it seems to me that a reduction by the amount submitted by the 2^nd Respondent is too generous.  That having been said in my view the concession was made sufficiently early that something more than 10% is justified.  I will discount the penalty by 12% to reflect the 2^nd Respondent’s cooperation.

Need for an injunction

38.  The final matter that as between the Commission and the 2^nd Respondent is controversial is the need for an injunction. Section 1(b), Schedule 3 of the Ordinance expressly provides that the Tribunal may, with respect to a contravention of the Competition Rules (Cap 619D), make an order “restraining or prohibiting a person from engaging in any conduct that constitutes the contravention or the person’s involvement in the contravention”.

39.  Presently, the 1^st Respondent’s status as a designated contractor on the DCS has been temporarily suspended by the HKHA. As for the 2^nd Respondent, while it has written to the HKHA to voluntarily withdraw from the DCS, it is unclear whether this withdrawal is intended to be permanent or until the conclusion of these proceedings.

40.  The Commission submits that upon reinstatement, the 1^st and 2^nd Respondents may again be assigned as DCs for other public housing estates in circumstances where similar market sharing and price fixing arrangements may also be suggested by other decoration contractors.  The position, suggests the Commission, is similar for the 4^th Respondent who, in addition to being able to act as the 1^st Respondent’s director upon the expiration of his director disqualification order (which I deal with in a later section), could also become involved, whether as a subcontractor or otherwise, in the business of other DCs that are on the DCS.

41.  In the circumstances, submits the Commission unless, expressly restrained by the Tribunal, there is a real possibility that the 1^st, 2^nd and, in particular, 4^th Respondents may engage in the same type of anti-competitive practices as the Allocation Arrangement and Price Coordination Arrangement in respect of other projects under the HKHA’s DCS.

42.  The 2^nd Respondent says that an injunction is unnecessary largely because it has voluntarily withdrawn from the DCS.  It is, however, willing to give an undertaking to the Tribunal in the terms of the proposed injunction.  I will accept an undertaking in the following terms:  “The 2^nd Respondent shall not from the date of this Order enter into any agreement or concerted practise involving any anti-competitive conduct or from being involved in any anti-competitive conduct in respect of any projects under the Housing Authority’s Decoration Contract System”.  As the 1^st and 4^th Respondents have not offered undertakings and I shall make the orders sought in respect of them.

Disqualification of the 4^th Respondent

43.  The final substantive matter is the disqualification order sought by the Commission under section 101 of the Ordinance for the period of three years made against the 4^th Respondent in light of his involvement, as the 1^st Respondent’s director and person-in-charge at King Tai Court, in the 1^st Respondent’s contravention.  The 4^th Respondent does not contest this application.

44.  Section 102 of the Ordinance sets two conditions precedent for the Tribunal’s jurisdiction to impose a disqualification order:

(1)     The Tribunal has determined that a company of which the person is a director has contravened a competition rule: section 102(a).

(2)     The Tribunal considers that the person’s conduct as a director makes the person unfit to be concerned in the management of a company: section 102(b).

45.  For the purposes of deciding whether a person is unfit to be concerned in the management of a company under section 102(b):

(1)     Section 103(1)(a) provides that the Tribunal must have regard to whether the circumstances identified in section 103(2) apply—namely that, as a director of the company:

(a)     the person’s conduct contributed to the contravention of the competition rule;

(b)     the conduct of the person did not contribute to the contravention, but the person had reasonable grounds to suspect that the conduct of the company constituted the contravention and took no steps to prevent it; or

(c)     the person did not know but ought to have known that the conduct of the company constituted the contravention.

(2)     Further, section 103(1)(b) provides that the Tribunal may have regard to the conduct of the person as a director of a company in connection with any other contravention of a competition rule.

46.  The Commission submits that a primarily protective approach to the disqualification of directors as seen in the contexts of section 214 of the Securities and Futures Ordinance, Cap. 571 (“SFO”), section 168H of the Companies Ordinance, Cap. 32, and in the UK competition law context, is appropriate for the purposes of section 102.  In Koon Wing Yee v Insider Dealing Tribunal[12] a case concerning director disqualification in the context of the Securities (Insider Dealing) Ordinance, Cap. 395 (now repealed), the Court of Final Appeal held at [72]–[73] that the purpose of the power to disqualify persons from acting as directors is protective rather than punitive and, therefore, does not involve the determination of a criminal charge for the purpose of Articles 10 and 11 of the Hong Kong Bill of Rights.  As such, the criminal standard of proof does not apply.  The disqualification orders also serve the related purpose of general deterrence: see SFC v Fung Chiu & Ors[13].

47.  A protection-focused approach is also adopted in the UK for director disqualification in the context of competition law contraventions: see [13] of Aki John Pandelis Stamatis & Anor v The Competition and Markets Authority[14], which concerned an application for permission to act as directors after the applicants had given a statutory undertaking not to act as directors.

48.  The nature of the Tribunal’s jurisdiction under sections 101 to 103 of the Ordinance is akin to those of the Court under UK competition law, which is part of the EU jurisprudence that influenced the drafting of the Ordinance.  I agree that when exercising its power under sections 101 to 103 of the Ordinance, the Tribunal may have regard to the Hong Kong jurisprudence for director disqualification under the SFO and the Companies Ordinance, and for it to inform the Tribunal’s approach to applications by the Commission for penalties for a disqualification order to be made.  Various principles and practices, emerge from the jurisprudence in the field of securities and company regulation, which are relevant.

(1)     The three-band approach (as summarised in SFC v Tong Shek Lun & Ors[15]). As noted in SFC v Wang Jian Hua & Ors[16], the bands are “more signposts than straitjackets”, and a broadbrush approach is to be adopted.

(2)     The wide spectrum of matters considered relevant in the SFO and Companies Ordinance contexts, such as the gravity of the contravention and the character of the offenders: see Re Warderly International Holdings Ltd.[17], Re Styland Holdings Ltd[18].

(3)     Whether the Respondents have consented to the Carecraft procedure and has agreed to pay the Commission’s costs: see SFC v Li Hejun & Ors[19].

49.  In the present context, the three bands of length of disqualification in the SFO context and the Companies Ordinance context (as summarised in SFC v Tong Shek Lun & Ors[20]) provide a template for establishing a consistent and readily understood approach in the context of section 101 of the Ordinance, which provides for a maximum of five years of disqualification.  In my view appropriate bands are as follows:

(1)     Top tier of four to five years, for cases where:

(a)     the respondent knowingly contributed to a company’s contravention of the competition rules: cf. section 103(2)(a); and

(b)     the respondent was previously disqualified under section 101 of the Ordinance, or as a director of a company, was previously connected with any other contravention of a competition rule: cf. section 103(1)(b).

(2)     Middle band of two to four years, for cases where:

(a)     the respondent had, knowingly or otherwise, contributed to a company’s contravention of the competition rules: cf. section 103(2)(a); or

(b)     although the respondent’s conduct did not contribute to the contravention, he had reasonable grounds to suspect that the conduct of the company constituted the contravention and took no steps to prevent it: cf. section 103(2)(b).

(3)     Minimum tier: up to two years for cases where the respondent did not know, but ought to have known, that the conduct of the company constituted the contravention: cf. section 103(2)(c).

50.  The Commission submits that the circumstances in relation to the 4^th Respondent fall into the proposed middle tier, and a period of three years disqualification is appropriate.  They point to the following undisputed matters as supporting this submission:

(1)     The 4^th Respondent was the 1^st Respondent’s director and person-in-charge at King Tai Court.  He caused the 1^st Respondent to participate in the Allocation Arrangement and Price Coordination Arrangement.

(2)     In addition to entering into the Price Coordination Arrangement on behalf of the 1^st Respondent, the 4^th Respondent coordinated the printing of the Leaflets and, therefore, was the major perpetrator of the contravening arrangement.

(3)     The 4^th Respondent also directed the 1^st Respondent’s staff to give effect to the Allocation Arrangement and Price Coordination Arrangement.

(4)     Accordingly, the 4^th Respondent knowingly caused the 1^st Respondent to commit the contravention.

(5)     Both the Allocation Arrangement and Price Coordination Arrangement, whether individually or collectively, constituted “serious anticompetitive conduct” as defined in the Ordinance.

(6)     The 4^th Respondent’s conduct was also flagrantly contrary to the HKHA’s policy and warning against “pie-sharing”, which was expressly emphasised by the HKHA during the briefing for the designated DCs.

(7)     The 4^th Respondent testified in W Hing 3 as a witness of the 3^rd Respondent and was evidently involved in similar market-sharing and price-fixing arrangements in name of the 3^rd Respondent[21].

51.  The proposed three-year period takes into account the fact this is the first disqualification order to be imposed on the 4^th Respondent, and he has agreed to reach an early settlement with the Commission, and that also, the 4^th Respondent will most probably not be able to directly participate in the scheme operated by the HKHA in the near future.  I agree with the Commission that the 4^th Respondent’s conduct brings him within the middle band and that disqualification for three years is justified in the present case.

Costs

52.  By their respective consent summonses dated 6 August 2019 (“Consent Summonses”), the 1^st, 2^nd and 4^th Respondents all agreed to pay the Commission:

(1)     The costs of these proceedings, and

(2)     The costs of the application as set out in the Consent Summonses.

53.  The Commission seeks the following cost orders:

(1)     The 1^st, 2^nd and 4^th Respondents shall each pay 1/5 of the costs of the Commission incurred and occasioned in the present proceedings up to and including the hearing on 3 June 2020.

(2)     The 1^st, 2^nd and 4^th Respondents shall each pay 1/3 of the costs of the Commission incurred and occasioned in the present hearing, including the Applicant’s summons dated 29 June 2020.

(3)     Cost of the Consent Summons between the Applicant and the 2^nd Respondent be paid by the 2^nd Respondent to the Applicant.

(4)     There be certificate for two counsel for the hearing on 3 June 2020 and present hearing.

(5)     All costs are to be taxed if not agreed.

54.  This is uncontroversial except that the 2^nd Respondent submits, bizarrely in my view, that the despite it being represented by two counsel the Commission should not have a certificate for two counsel.  If I understand the 2^nd Respondent’s reasoning correctly it is that the Commission’s junior counsel is senior.  That may be relevant to the amount recoverable for junior counsel on a taxation, but it is irrelevant to whether or not the Commission was justified in instructing both senior and junior counsel.  In my view it clearly was.  I will, therefore, make an order for costs in the terms set out in the previous paragraph.

Disposition

55.  I will make an order in the terms set out in [2] subject to the following changes:

(1)     There be no uplift of 25%.

(2)     A reduction of 12% to reflect the 2^nd Respondent’s cooperation.

(3)     Acceptance of a suitable undertaking from the 2^nd Respondent as referred to in [42].