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Securities And Futures Commission v Li Han Chun And Another

Judgment Cited authorities 7 Cited in Precedent Map Related
Vincent
Judgment Date30 July 2019
Neutral Citation[2019] HKCFI 1966
Year2019
Judgement NumberHCMP176/2011
Subject MatterMiscellaneous Proceedings
CourtCourt of First Instance (Hong Kong)
HCMP176/2011 SECURITIES AND FUTURES COMMISSION v. LI HAN CHUN AND ANOTHER

HCMP 176/2011

[2019] HKCFI 1966

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 176 OF 2011

____________

IN THE MATTER of section 213 of the Securities and Futures Ordinance (Cap 571)

____________

BETWEEN
SECURITIES AND FUTURES COMMISSION Plaintiff
and
LI HAN CHUN 1st Defendant
TOP WISDOM OVERSEAS HOLDINGS LIMITED 2nd Defendant
and
CHINA FORESTRY HOLDINGS COMPANY LIMITED
(in official liquidation)		 Interveners

____________

Before: Deputy High Court Judge Maurellet SC in Chambers

Date of Hearing: 30 July 2019

Date of Judgment: 30 July 2019

____________

JUDGMENT

____________


1. There are two summonses before me:

(1) the summons by China Forestry Holdings Company Limited (in official liquidation) (the “Company”), to be joined to these proceedings; and

(2) the summons by the 1st and 2nd defendants (“the Defendants”) to amend the re-re-re-amended injunction order dated 24 September 2018 (the “Injunction Order”) by increasing the Defendants’ spending limit on legal advice and representation under paragraph 6 of the Injunction Order by HK$37,493,570 toa reasonable sum not exceeding HK$47,593,570, and providing for such sum to be withdrawn from the 2nd defendant’s account.

2. For reasons I explain below, there is some urgency in the matter, and the parties need to be able to proceed with a level of certainty. After hearing the parties, I indicated I would give my decision and brief reasons today, and I do so now.

3. On 2 February 2011, the Securities and Futures Commission (the “SFC”) obtained an injunction restraining the disposal of assets of the Defendants up to HK$398 million.

4. The wording of that order obtained before Wright J reflects those commonly used in Mareva injunction orders. This is different in some respect with those used in proprietary claim cases. As is well known, the applicable test is different, whether one seeks a Mareva injunction order or a proprietary injunction order. This also has an impact on, for example, the ability of the defendants to be able to use the frozen funds for the purpose of either personal spending or legal expenses.

5. The underlying proceedings in the present action rely on section 213 of the Securities and Futures Ordinance, Cap 571. It was envisaged from the beginning, as is apparent from the order made by Wright J that the Defendants would be, in principle, allowed to use some of the frozen funds for the purpose of legal advice and representation. The original paragraphs 6 and 7 of that order read as follows:

“ 6. This order does not prohibit the defendants from spending a reasonable sum (not exceeding $100,000) on legal advice and representation.

7. The defendants may agree with the plaintiff that the above spending limit should be increased, or that the order should be varied in any other respect, but any such agreement must be in writing.”

6. The order was later varied, first, by an order made by consent by Chung J on 17 October 2017, whereby it was agreed that the Defendants would be able to use a reasonable sum not exceeding HK$1,100,000 and it was further revised, also by consent on 16 January 2018, by another order of Chung J such that the amount was revised to HK$4,100,000.

Winding-up proceedings and High Court Action 1089/2016

7. On 18 June 2015, the Company was wound up in the Cayman Islands and liquidators were appointed.

8. On 25 April 2016, the Company issued a writ of summons in HCA 1089/2016 (the “High Court Action”) against the Defendants.

9. On 30 April 2018, a Statement of Claim was filed in the same High Court Action against the Defendants. It is of significance that it appears from the way the Statement of Claim is pleaded that the Company claims it has a proprietary claim against the Defendants.

10. It is unnecessary for present purposes to delve into the substance of the said claims, in particular when there may be extant applications which I refer to below.

11. In the words of the liquidators, the Company alleges that:

“ (1) Li Han-chun orchestrated a pervasive and substantial false accounting scheme, such as the false accounting scheme in breach of his fiduciary and other duties owed to China Forestry for his own personal gain and to the detriment of China Forestry; and

(2) The defendants hold the illicit gains (‘the illicit gains’) obtained from the artificial inflation of the price of China Forestry shares on a constructive trust for China Forestry. Other than the illicit gains, China Forestry also seeks equitable compensation for various losses suffered by ChinaForestry as a result of the false accounting scheme, including misappropriation by Li Han Chun, dividends paid out on the basis of the misleading accounts and various costs which would not have been incurred had Li Han Chun not breached his fiduciary and other duties.”

12. On 3 May 2018, the SFC instituted Market Misconduct Tribunal proceedings (the “MMT Proceedings”) against the parties, including the Defendants. These will be heard starting on 25 November this year, with a time estimate of 20 days.

13. On 9 July 2018, the Defendants applied to strike out the Statement of Claim in the High Court Action and to stay those proceedings pending the determination of the MMT Proceedings.

14. On 13 July 2018, the Defendants and the Company agreed to adjourn sine die the striking-out summons pending the hearing of the stay summons. The application for stay was heard before a judge in January 2019 and judgment is pending.

15. The significance of this is that the viability of the claims, and in particular the proprietary nature of claims in the High Corut Action is still in question. In the course of oral submissions and in an exchange between bar and bench, I made it clear that I was anxious to ensure that in determining the present applications before me, I would not be in any way predetermining or seeking to influence the outcome of such extant application.

16. This was so for a number of reasons, not least because it is quite clear from the way the parties had prepared the evidence for the purpose of the joinder application that, the ultimate question of merits of the High Court Action, and in particular the viability of a proprietary claim, would not be something which would be at the heart of the present hearing. The Court is at present dealing with a rather urgent and discrete application and it is therefore not desirable that the question of the merits of the High Court Action, and in particular, the viability of the proprietary claim be dealt with here.

17. In August 2018, the Defendants wrote to the SFC again seeking to revise upwards the amount of spending for the purpose of legal advice and representation.

18. In September of 2018, the SFC notified the Company. On 24 September 2018, and by consent, the amount was revised upwards. This is of some relevance as this is, at least on record, the first time after the institution of the High Court Action, that the Company was officially notified of a variation of its allowance for the purpose of legal representation and advice.

19. One question which the Defendants seek to raise is why, in the circumstances, the Company did not seek to intervene at an earlier stage, or perhaps even take out an application for an injunction. This is explained in the affirmation of Mr Borrelli, where he explains, understandably and reasonably, that:

“ Given the relatively modest sum sought, China Forestry did not seek to intervene.It also took comfort from the fact that the SFC indicated that it would keep the liquidator’s solicitors updated of any further amendments to the injunction order.”

20. At the hearing, Mr Norman Nip and Mr Jeff Chan represented the Defendants, whereas the SFC was represented by Mr Julian Lam and the Company by Mr Justin Ho.

21. In his supplemental skeleton, Mr Nip indicated that in the light of the need to resolve the present applications expeditiously, given the imminent MMT Proceedings, that the Defendants were prepared to consent to the Company being joined in these proceedings on the basis that the joinder was entirely without prejudice to the Defendants’ position in the striking-out application in the High Court Action. I consider...

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