SECURITIES AND FUTURES COMMISSION v. DESCARTES INVESTMENT MANAGEMENT LTD AND OTHERS

HCMP 796/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 796 OF 2009

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R U L I N G

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Introduction

1.  This is a summons by the 5^th Defendant and the Intervener.  They are the subject of a Mareva injunction as are all the other Defendants, although this part of the case only relates to the 5^th, 7^th to 11^th Defendants and indirectly the Intervener.  The 5^th Defendant is enjoined from removing from Hong Kong assets up to the value of HK$160.89 million.  The Mareva injunction was granted to the Plaintiff, the SFC, which I will from now on refer to by its name, ex parte by Kwan J on 27 April 2009.  It is said on the 5^th Defendant’s and the Intervener’s behalf by Mr Barlow SC that this order was improperly obtained and that on a number of grounds an application will be made to the judge to have it set aside.  The current application, although of great importance to these two parties, is of limited scope.

2.  The injunction is at Bundle 1/141-166.  The relevant part of this order is at paragraphs 1(a) and (b).  Included in the injunction are money and securities listed in Schedule 2 [page 148] which in the 5^th Defendant’s case total HK$166,596,690 and in Schedule 3 [page 150] bank accounts with balances totalling HK$96,391,275.  As a result, the present order restrains HK$262.98 million, well in excess of the Mareva-cap imposed by the injunction.  I will return to this aspect shortly.

3.  From this I turn to the summons which is at Bundle 3/896-898.  I am only concerned with the first three paragraphs.  I take paragraph 3 of the summons first which relates to the new paragraph 12A of the injunction [Bundle 2/666].  What had happened was that in its original form the injunction had not provided for the usual security provision for a Mareva injunction by which a Defendant is able to lift the restriction on its assets either by paying the money into court or by providing security.  This was added by paragraph 12A which says that;

“This order shall cease to have effect if the 5^th Defendant or [the Intervener] provides security by paying the sum of $160.89 million into court or makes provision for security in that sum by some other method agreed with [the SFC] or approved by the court.”

4.  I should make specific reference to the Intervener’s position.  Its assets are tied up in the frozen accounts of the 5^th Defendant.  It says that it has nothing to do with the irregularities alleged by the SFC against the Defendants and that its assets should be released to it.  The SFC says otherwise which, inevitably, is a matter that can only be resolved at the trial.  Because of the involvement of its assets in the 5^th Defendant’s accounts, it has been given leave by Kwan J to intervene.

5.  The other aspect which causes very great concern to both the 5^th Defendant and the Intervener is that the 5^th Defendant wishes to sell many of the securities, including those of the Intervener, that are presently held by the injunction.  With the injunction in place it cannot do so.  These are securities which it manages and there are reliable and well-informed predictions that the securities market will suffer a severe fall following the recent rallies of the past few months in the wake of the previous catastrophic collapse in world markets.  Wishing to sell securities as a matter of the utmost urgency, the applicants want to avail themselves of paragraph 12A by offering suitable security to free the various accounts that are now the subject of the injunction.

6.  The 5^th Defendant has offered a banker’s guarantee by the Chong Hing Bank Limited.  The SFC and the Joint Administrators of the first four Defendants would much rather have HK$168.89 million paid into court which, of course, is perfectly understandable from their point of view.  The 5^th Defendant does not wish to or, more probably, is unable to readily find HK$168.89 million to do so, but it has been able to obtain a guarantee from the Chong Hing Bank.  The position is that the SFC has no choice in the matter because of paragraph 12A of the order which allows for “provision of security [for $168.89 million] by some other method” supra.  Nevertheless, the order goes on to say that this “other method” of security needs to be agreed by the SFC or, failing which, it must be approved by the court.

7.  And so this is what the present dispute is all about.  I have before me a form of guarantee vetted by the bank’s solicitors, Deacons, who suggest the insertion of some provisions into the guarantee which do not seem to present an insurmountable problem but the SFC and the Joint Administrators, who continue to strongly favour a payment into court, will not agree the present form of the guarantee. 

8.  This apart, there is also a procedural issue which I need to deal with before I look to the terms of the proffered guarantee, which I will consider now.

Should I deal with this application or restore it before Kwan J?

9.  Mr Wong, who appears for the SFC, submits that in the circumstances, which I must describe in a moment, I should not entertain this application and oblige the applicants to go back before Kwan J, who is the judge who is already seised of this matter.  Currently she is not sitting but will return early next week.

10.  Kwan J last had this matter before her on 18 June when these two applicants wished to obtain the court’s approval of a bank guarantee.  A draft guarantee was by then available.  Being loyal to the order that she had made on 19 May, when she allowed the insertion of paragraph 12A into the Mareva injunction, the judge indicated that she would be willing to consider the application but only if there was evidence from the bank before her confirming that it was willing to provide a guarantee which, no doubt, would need to be suitably worded in order to protect the Plaintiff’s position.  On 18 June, the SFC was still saying that it preferred cash, as it were, by means of a payment into court.  Kwan J had made it clear that she was not minded to allow the matter to proceed on the basis of the then draft guarantee but that she would hear the matter out based on proper evidence from the bank which would need to be placed before her with a suitable guarantee, sometime in early July given that she was shortly to go on leave.  In those circumstances, Mr Barlow applied to her to withdraw the applicant’s summons for which she gave her permission. 

11.  What happened next was that the applicants then sought to have this summons, a fresh summons, listed before the summons judge (as it happened, myself) which was on the next day, 19 June.  This Kwan J was not minded to allow and, in the event, the listing officer could not accommodate the application on 19 June as a summons judge matter due to an already crowded list.  As it has happened, I was available to take this myself on the following Thursday, 25 June and as a result, I have now heard the argument on both sides.

12.  Mr Wong says that this amounts to forum shopping.  Kwan J had refused to let this go to the summons judge and had indicated that she would hear this in early July.  It is her intention to deal with this herself.  The applicants have deliberately tried to look for another judge and fortuitously my list could accommodate them on 25 June. 

13.  Mr Barlow’s response is that this has always been a matter of great urgency and concern for these two parties.  They wish to avail themselves of paragraph 12A, which should have appeared in the injunction as originally granted [it is the usual practice of the court to have such a provision in all Mareva orders] and they have sought and fortunately have obtained the earliest possible date which is before a date in early July which is the earliest that they could have got back before Kwan J. 

14.  In my view, there is nothing wrong in the approach taken by the two applicants’ solicitors.  An injunction of this sort, with very serious financial implications potentially resulting from a delay should be considered by the court as soon as the application can be listed.  I have been able to hear this at least 10 days before Kwan J would have been able to and in such circumstances, this could well prove important for the applicants.  Accordingly, I will hear and decide this on its present merits.

The merits

15.  It should be remembered that as matters presently stand, the injunction that is in place has been regularly obtained and the judge who granted it had a substantial amount of evidence before her.  She has decided that this amount should be frozen for the protection of a number of investors in whose interests the SFC has brought this action, quite apart from the wider public interest that the Commission safeguards.  It is against this background that the security that is proffered by the applicants needs to be considered.  It is therefore of paramount importance that the party in possession of the injunction is adequately protected.

16.  Approaching the matter in this way, I have considered the draft guarantee, this being the latest version put forward, together with the outstanding matters that Deacons have drawn attention to.  I have also read the Bank’s letter of 23 June 2009 in relation to its willingness to issue a bank guarantee [see Bundle 3/958-962].  At present the matter is not sufficiently refined and finalised as between the Bank and the applicants.  The guarantee needs to be re-drafted so that Deacons’ comments, on behalf of the Bank, are addressed and the guarantee will need to be widened in its reach to cover any other proceedings that may be brought by the SFC or the Joint Administrators.  Once that is done, the Bank will need to be approached again to say conclusively that it is willing to issue such a re-drafted guarantee.  Only then could the court contemplate approving it.

17.  Having said what I just have, which is addressed to the two applicants, I should also make plain that the SFC and the Joint Administrators will need to move away from what appears to be something of a mindset about money into court being the only way forward so far as they are concerned.  The fact is that paragraph 12A allows for other security and the bank guarantee, suitably drafted, is capable of offering perfectly good security.

The Orders

18.  I have said enough to indicate why I am not prepared to approve the current draft on this occasion.  I have also said enough to make clear, I hope, that a suitably drafted guarantee will do perfectly well provided it covers the outstanding issues which I have just identified.  What I am going to do therefore is to allow time for the shortcomings in the present draft, as I see them, to be addressed.  I propose to adjourn this summons to 9.30 a.m. on 6 July before me when I trust I will be in a position to approve the security.  In the event the applicants have not, on this occasion, been able to do better than early July, which is what Kwan J had been in a position to offer them, because I am not sitting from tomorrow until 6 July and so I will not be available on an earlier date.

19.  I very much hope, now that I have indicated the court’s position on the guarantee, that once re-drafted, the parties can agree and that I will be presented with a consent summons on 6 July, failing which I will have to decide this myself with likely costs consequences for the losing party.  And so I adjourn the summons to 6 July at 9.30 a.m. and reserve the costs to that occasion.

20.  As to the excess of the amounts held over and above the HK$160.89 million ordered by the court, it seems to me that this can be resolved simply by the parties talking to each other.  Plainly, the SFC is not entitled to hold more than the capped amount and there must be a way of identifying what accounts or securities can be unfrozen leaving over the amount ordered under the Mareva.  If this cannot be agreed, I will re-consider it on 6 July.  If I approve the security, then this point will, of course, fall away.  I will also leave over giving further directions to 6 July when I will have a clearer picture as to whether the security that is being put forward will be approved or not.