SECURITIES AND FUTURES COMMISSION v. HONTEX INTERNATIONAL HOLDINGS CO LTD AND OTHERS

HCMP 630/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 630 OF 2010

____________

____________

BETWEEN

____________

________________________

REASONS FOR DECISION

________________________

1.  I have before me an Amended Summons issued by the Plaintiff, the Securities and Futures Commission (“Commission”), for the determination pursuant to RHC O 14A1 of a question of law, which I describe in detail later in this judgment.

2.  The proceedings in which the application arises commenced on 30 March 2010 when the Commission issued an Originating Summons against the 5 Defendants.  The 1^st Defendant is a company incorporated in the Cayman Islands, registered under Part XI of the Companies Ordinance and was listed in December 2009 on the Stock Exchange of Hong Kong in circumstances which give rise to the present proceedings.  The 2^nd to 5^th Defendants are subsidiaries of the 1^st Defendant.

3.  The Originating Summons contained only the relief that was sought and was in the following terms:

“1. An Injunction prohibiting disposal of assets in Hong Kong by the Defendants in the terms of the draft Order attached as Appendix 1 to this summons;

2. An order that:-

(a) A proper person be appointed to recover, receive and administer up to the amount of HK$997,400,000, being equal to the sum of the proceeds (“the Proceeds”) of the initial public offer of the 1^st Defendant (“the Offer”), or such other sum as appears to the court to be just, and interest thereon and for that purpose all necessary and proper directions may be given.

(b) The Defendants do pay to the receiver appointed under paragraph 2(a) above the Proceeds together with interest thereon calculated at Hongkong and Shanghai Banking Corporation's prime rate plus one per cent from the date of receipt until the date of payment, or at such other rate and for such other period as the court sees fit.

(c) Any amount recovered from a person by the receiver appointed under paragraph 2(a) above shall be distributed among such persons as the court may direct, being persons appearing to the court to be subscribers of the shares of the 1^st Defendant offered in the Offer and persons who have traded in the shares of the 1^st Defendant since its listing on the Stock Exchange of Hong Kong.

3. A declaration that the 1^st Defendant has contravened section 277(1) and/or section 298(1) and (2) and/or section 300(1) and (2) and/or section 384(1) and (3) of the Securities and Futures Ordinance (“the SFO”), and the 1^st Defendant is a person within sections 213(1)(a)(i)(A) and (2)(b) of the SFO;

4. A declaration that each of the 2^nd to 5^th Defendants is a person within section 213(1)(a)(iv) and (2)(b) of the SFO.”

4.  An injunction freezing the proceeds of the initial public offering referred to in paragraph 2 of the Originating Summons was granted by Deputy High Court Judge P. Li on 29 March 2010 and amended on the following day.

5.  In the evidence filed by the Commission in support of the Originating Summons it is alleged that much of the financial information contained in the prospectus for the initial public offering was false and misleading.  The purpose of the Originating Summons is to unravel the initial public offering and return to subscribers the price paid for shares allotted to them and to return to shareholders, who bought shares in the market after trading in the shares commenced, the price paid for the shares.  I am told that fortuitously the closing price at the time the Commission took action to freeze the proceeds of the initial public offering was close to the price at which the shares were offered during the initial public offering thus, so the Commission suggests, making what they seek to achieve practical whereas it would have been problematic if the share price at the time trading ceased had been materially different to the price at which shares were offered during the initial public offering.  However, nothing turns on this for the purposes of the present application, which, as presented by the Commission, is not fact sensitive.

6.  Until the Originating Summons was amended on 27 June 2011 the case against the Defendants was only apparent from reading the evidence filed by the Commission.  In my view this was inappropriate and unhelpful.  As I explained in paragraphs 9 and 10 of my decision in Securities and Futures Commission v Tiger Asia Management LLC & others HCMP 1502/2009 (unrep. 21 June 2011) it is inappropriate in cases in which serious allegations of wrong-doing are made and there is the prospect of factual dispute to use the originating summons procedure.  Further, and as was the case in Tiger Asia, the Originating Summons did not comply with RHC O 7 r 3.  Even after amendment certain paragraphs are obviously lacking in necessary particulars: see, for example, paragraph 3.

7.  In the Amended Originating Summons declarations are sought that the 1^st Defendant has breached sections 298(1), 300(1) and 384(1) of the Securities and Futures Ordinance, Cap. 571 (“Ordinance”), and section 342F(1) of the Companies Ordinance, Cap. 32, and that the 1^st Defendant is a person within sections 213(1)(a)(i)(A) and 2(b) of the Ordinance.  Various orders are sought which are intended to put shareholders who acquired shares in the 1^st Defendant during its initial public offering, or who subsequently purchased them in the market, back in the position that they would have been in if they had not acquired the shares.

8.  The Commission accepts that as a result of my decision in Tiger Asia the court does not have jurisdiction to determine whether or not there has been a contravention of section 298(1) of the Ordinance because substantially the same provision (section 277) is included in Part XIII of the Ordinance and I found in Tiger Asia that in such circumstances a contravention has to be determined either by a criminal court or by the Market Misconduct Tribunal.  My decision in Tiger Asia expressly did not decide whether or not the court had jurisdiction to determine if a contravention had taken place of a provision in Part XIV of the Ordinance, which is not repeated in Part XIII: see paragraph 23 of the judgment.  I did, however, state during a brief consideration of authorities concerning the circumstances, if any, in which a civil court could properly grant a declaration that past or proposed future conduct involved criminality, that “I accept that there is no absolute prohibition against the Court making a declaration of criminality”: see paragraph 34.

9.  As I understand the position, following the handing down of my judgment in Tiger Asia the Commission became concerned that there might be an issue as to jurisdiction in the present case. On 6 July 2011 the Commission issued a summons under RHC O 14A, which I gave leave to amend at the hearing on 22 July 2011, for the determination by the court of the following question of law:

“Absent:

(1) A prior determination by a Market Misconduct Tribunal that the 1^st Defendant has engaged in market misconduct as defined by section 277(1) of Part XIII of the Securities and Futures Ordinance, Cap 571 (“the SFO”); or

(2) A prior conviction by a criminal court finding the 1^st Defendant guilty of one or more of the offences listed in paragraph (a) below,

does this court, on a true construction of section 213 of the SFO, have jurisdiction to make final substantive orders under section 213 of the SFO (subject only to section 213(9) of the SFO or any appeal) on the basis that this court is required, on the application of the Securities and Futures Commission, to make its own findings under section 213(1)(a)(i)(A) as to whether or not:

(a) pursuant to section 213(1)(a)(i)(A) of the SFO, the 1^st Defendant has contravened any of the relevant provisions, as defined in Part 1 of Schedule 1 of the SFO, being (in this case):

(i) Section 298(1) of the SFO; and/or

(ii) Section 300 of the SFO; and/or

(iii) Section 342F(1) of the Companies Ordinance Cap. 32; and/or

(iv) Section 384(1) of the SFO; or

(b) the 2nd to 5th Defendants (or any of them):

(i) pursuant to section 213(1)(a)(iv) of the SFO, have directly or indirectly been in any way knowingly involved in, or a party to, any such contravention; or

(ii) pursuant to section 213(2)(b) of the SFO, have been involved in any such contravention, whether knowingly or otherwise,

such contravention of the relevant provisions being one or more of those referred to in paragraph (a) above.”

10.  The summons does not track the Amended Originating Summons, which asks for declarations of contravention of the Ordinance.  It asks if the court can, absent a determination by the Market Misconduct Tribunal or a criminal court, make its own finding of a contravention of the Ordinance or, in the case of the 2^nd to 5^th Defendants, a finding that they have been involved in a contravention.  As I have already noted there is no dispute that in the case of section 298(1) of the Ordinance, as a result of my decision in Tiger Asia, the answer is in the negative.

11.  Although the Amended Originating Summons and the Summons use different language it is clear that what the court is being asked to consider and determine in the present application is whether or not sections 300(1) and 384(1) of the Ordinance and section 342F(1) of the Companies Ordinance have been breached.  These sections create offences.  Thus the court is asked to determine and state whether or not criminal acts have been committed by the 1^st Defendant.  Mr. Simon Westbrook SC, who appeared for the Commission, made it clear that what I am not being asked to determine at this stage is whether such jurisdiction as the Court has to make such findings and declarations should, if the substantive complaints are made out at trial, be exercised on the facts of this case.

12.  I declined, after hearing preliminary argument about the suitability of the issue for determination under RHC O 14A, to determine the questions posed in the Summons.  My reasons for reaching this conclusion are as follows.  First, it is not clear how the issue arises in the case.  As a result of the absence of pleadings there is nothing filed by the Defendants that raises jurisdiction as an issue; although after the summons had been issued the Defendant took the position that they disputed jurisdiction.  Secondly, the question has been framed without reference to any facts.  I am not satisfied at this stage that it is safe to assume that an examination of the question of jurisdiction in the present case can be undertaken entirely independently of a consideration of the facts or the particular relief that is sought.  It follows that in my view this issue is not suitable for determination without a trial.  This approach is in my view consistent with the reluctance of the courts recorded in the commentary at paragraph 14A/2/4 of the Hong Kong Civil Procedure, 2011 edition, and the cases referred to in it, to determine questions of law if the court is not seized of all the relevant facts.

13.  At the hearing on 22 July I made no order on the Commission’s summons save that costs of the application be costs in the cause.