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Securities And Futures Commission v "A"

Judgment Cited authorities 8 Cited in Precedent Map Related
Vincent
Judgment Date29 November 2007
Year2007
Judgement NumberHCMP1407/2007
Subject MatterMiscellaneous Proceedings
CourtHigh Court (Hong Kong)
HCMP001407/2007 SECURITIES AND FUTURES COMMISSION v. "A"
Edited as directed by the Honourable Madam Justice Kwan on 12 December 2007

HCMP 1407/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1407 OF 2007

______________________

IN THE MATTER of “A”
and
IN THE MATTER of the Securities and Futures Ordinance (Cap. 571)

______________________

BETWEEN

SECURITIES AND FUTURES COMMISSION Plaintiff
and
“A” Defendant

______________________

Before : Hon Kwan J in Chambers

Date of Hearing : 28 November 2007

Date of Decision : 29 November 2007

______________________

D E C I S I O N

______________________

The applications

1. There are two summonses before me. The summons first in time is that issued on 30 July 2007 by the Securities and Futures Commission (“the SFC”), seeking an order that the interim injunction granted on an ex parte application by Hartmann J on 27 July 2007 be continued. The other summons was issued by the defendant in these proceedings on 2 August 2007, for an order that the injunction be reversed, varied or discharged.

2. In the order of Hartmann J, it was provided that the defendant’s name is to appear as “A” in these proceedings and except with the leave of the court, all further proceedings are to be held in chambers and not open to the public. This was designed to preserve the anonymity of the defendant so that there would be no disproportionate damage to reputation as the investigation of the SFC into a case of suspected insider dealing has not been completed. I will refer to the defendant in this decision as the defendant, and the defendant’s former employer as “the Bank”.

3. The present summonses were heard in chambers open to the public as the defendant issued a summons on 23 November 2007 asking for the hearing to be held in the open court. I directed that the hearing be held in chambers open to the public.

4. The SFC’s application for an interim injunction was made pursuant to section 213(6) of the Securities and Futures Ordinance, Cap. 571 and/or Order 29 rule 1 of the Rules of High Court and/or the inherent jurisdiction of the court. The substantive proceedings, which were brought by originating summons, were made pursuant to sections 213(1)(b) and (2)(c) of Cap. 571. I will look at these provisions in detail, as challenge was mounted by Mr McCoy, SC on behalf of the defendant that there is no jurisdiction under these provisions to grant the injunction sought. I understand this is the first occasion the SFC has invoked the statutory power under section 213 for an order to restrain disposition of property in a case of suspected insider dealing.

5. By the injunction granted on 27 July 2007, the defendant was prohibited, until the return date of summons on 3 August 2007, from disposing of, encumbering or transferring out of the jurisdiction his assets up to a value of HK$46,595,033. In particular, the defendant was prohibited from instructing the Bank, its affiliates or any other intermediaries, to transfer the proceeds of sale of any shares in CITIC Resources Holdings Ltd (“CITIC Resources”) held by the Bank on behalf of the defendant without written agreement of the SFC or the consent of the court.

6. On 3 August 2007, the injunction was continued until the determination of the present summonses. The amount of HK$46,595,033 was calculated on the basis that in the event a financial penalty is imposed in relation to a disciplinary action under section 194, the likely penalty would be two times the notional profit of HK$23,297,516 in respect of the defendant’s 26.7 million CITIC Resources shares and the profit of HK$1,031,706 which was made by the defendant when he sold his 7 million shares in Chinatrust Financial Holdings Co Ltd (“Chinatrust”).

The issues

7. The broad issues I am concerned with in the present summonses may be stated as follows:

(1) if the application for an interim injunction was authorised by the board of directors of the SFC;
(2) is there jurisdiction to grant an injunction under section 213 to restrain disposition of property in relation to a prospective financial penalty that may be imposed under section 194;
(3) whether the terms of the interim injunction granted are inconsistent or contradictory;
(4) whether it appears to the SFC that the defendant has engaged in insider dealing;
(5) whether there is risk of dissipation of assets which would prevent enforcement of any order to disgorge profits or to pay a penalty;
(6) was there material non-disclosure at the ex parte application;
(7) if there was material non-disclosure, does it justify setting aside or continuing the injunction or should a new injunction be granted; and
(8) if the injunction is continued or a new injunction granted, should the SFC be required to give an undertaking in damages.

8. I will consider the issues in the order set out above.

If the application for interim injunction was authorised by the board of directors of the SFC

9. Mr McCoy submitted that the court had no jurisdiction to entertain the application as it was made ultra vires, in that the board of directors of the SFC had failed to authorise the institution of the application heard on 27 July 2007. Section 10(2)(b) of Cap. 571 provides that no delegation shall be made by the SFC in respect of a function specified in Part 2 of Schedule 2 to the Ordinance. Among these non-delegable functions is the decision to apply to the Court of First Instance pursuant to section 213(1), see paragraph (74) in that schedule.

10. The board resolution of 23 July 2007 read as follows:

“ Resolved that the Directors approve the following:
(1) that the Commission apply to Court under sections 213(1)(b) and 213(2)(c) of the Securities and Futures Ordinance for the appointment of an order restraining or prohibiting [the defendant] from disposing of or otherwise dealing in the amount of any profit gained from the sale of his CITIC Resources and Chinatrust shares; and
(2) that all matters ancillary to or consequential upon such application and such appointment be delegated to the Executive Director of Enforcement, and, in his absence, to the Senior Directors of Investigation and Discipline.”

11. Mr McCoy submitted that on the face of the resolution, this limited the scope of the application to be made to “the amount of any profit gained from the sale of [the defendant’s] CITIC Resources and Chinatrust shares” from the alleged insider dealing, which the SFC assessed at HK$23 million odd. The board did not authorise an application to restrain a further and prospective penalty component in relation to disciplinary action under section 194.

12. Leaving aside the question whether there is jurisdiction at all under section 213 to restrain disposal of property to cover prospective penalty in relation to a disciplinary action, which is the next issue to be considered, I do not think the argument on lack of authority by the board resolution is valid.

13. In the first place, even if the application for an injunction in respect of the prospective penalty were not authorised by the board of the SFC, I fail to see how this would render invalid the application made in respect of the profit from insider dealing.

14. Secondly, the board of the SFC has on 19 November 2007 passed a fresh board resolution stating that for avoidance of doubt, it ratifies the application before Hartmann J, it approves the application for the continuation of the injunction and approves the making of a further application under sections 213(1)(b) and 213(2)(c).

15. The SFC is a body corporate by virtue of section 3 of Cap. 571, and can ratify its actions as in the case of any other body corporate. The board of a corporation, whether statutory or otherwise, can ratify its acts by subsequent resolutions and the ratification would have retrospective effect (Pennington’s Company Law, 8th ed, pages 153-4; Poon Yee Kan Andrea Eleanor v New Paradigm E-Technology Ltd, HCMP No 3682 of 2003, Reyes J, 14 September 2004, paragraph 84; Fong Poh Yoke & Ors v The Central Construction Co (Malaysia) Sdn Bhd [1998] MLJU 478 at pages [*70] to [*73]).

16. Mr McCoy’s contention that the board of the SFC cannot retrospectively ratify its action by a subsequent resolution is incorrect. I am not concerned with a statutory instrument which purports to have retrospective effect, counsel’s reliance on authorities in a very different area of the law is misplaced.

If there is jurisdiction to grant an injunction to restrain disposition of property in relation to a prospective financial penalty

17. The next issue is whether the SFC has power under section 213 to apply for an injunction to enjoin disposal of an additional HK$23 million by way of a prospective financial penalty that may be imposed under section 194(2). Under section 194(2), in a disciplinary action, the SFC may order the regulated person guilty of misconduct to pay a pecuniary penalty not exceeding the amount which is the greater of HK$10 million or 3 times the amount of the profit gained or loss avoided by that person as a result of his misconduct. The defendant is a “regulated person” within the meaning of section 194.

18. Section 213(2) sets out the type of orders which may be obtained under sub-section (1) and section 213(2)(c) provides for “an order restraining or prohibiting a person from acquiring, disposing of, or otherwise dealing in, any property specified in the order”.

19. Mr McCoy contended that section 213(2) does not contemplate any restraining order as to a prospective financial penalty. The order granted under section 213(2)(c) must be referable to the specific misconduct alleged to...

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