INNOVISIONS LTD v. CHAN SING CHUK CHARLES AND OTHERS

HCA004517A/1990

HEADNOTE

Practice and Procedure - Discovery - Distinction between listing and production - meaning of "power".

1990 No. A 4517

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

--------------------------------

BETWEEN

	INNOVISIONS LIMITED	Plaintiff
	AND
	CHAN SING CHUK, CHARLES	1st Defendant
	TAMAR INVESTMENTS LIMITED	2nd Defendant
	WINBURG LIMITED	3rd Defendant

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Coram: The Hon. Mr. Justice Kaplan in Chambers

Date of Hearing: 21 January 1992

Date of Handing Down Judgment: 6 March 1992

 

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J U D G M E N T

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1. I have before me the Plaintiffs summons dated 29th November 1991 which seeks an order that the Defendants do file an affidavit stating whether any documents described in the schedule to the summons is or has been in their possession, custody or power and further that such documents should be produced. The marginal note to the summons shows that it is made under the provisions of 0.24, R.7.

2. Practitioners seem to have some difficulty in distinguishing between disclosure of documents and their production. Different rules apply to each stage. The rules set out different considerations for the Court to take into account. In the circumstances it may be helpful, yet again, to set out the relevant rules to indicate the differences.

0.24, R.3 of the Rules of Supreme Court provides:

"(1)     Subject to the provisions of this rule and Rules 4 and 8, the Court may order any party to a cause or matter .... to make and serve on any other party, a list of the documents which are or have been in his possession, custody, or power relating to any matter in question in the cause or matter, and may at the same time or subsequently also order him to make and file an affidavit verifying such a list and to serve a copy thereof on the other party."

0.24, R.7 of the Rules of Supreme Court provides as follows:

"(1)     Subject to Rule 8, the Court may, at any time, on the application of any party to a cause or matter, make an order requiring any other party to make an affidavit stating whether any documents specified or described in the application or any class of document so specified or described is or has at any time been, in his possession, custody or power, and if not then in his possession, custody or power when he parted with it and what has become of it.

(2)     An order may be made against a party under this rule notwithstanding that he may have already made or been required to make a list of documents or affidavits under Rule 2 or Rule 3.

(3)    An application for an order under this rule must be supported by an affidavit stating the belief of the deponent that the party from whom discovery is sought under this rule has, or at some time had, in his possession, custody or power of the document, or class of document, specified or described in the application and that it relates to one or more of the matters in question in the cause or matter."

0.24, R.8 provides as follows:

"On the hearing of an application for an order under Rule 3, 7 or 7A the Court, if satisfied that discovery is not necessary, or not necessary at that stage of the cause or matter, may dismiss, or as the case may be, adjourn the application and shall in any case refuse to make such an order if and so far as it is of opinion that discovery is not necessary either for disposing fairly of the cause or matter or for saving costs."

0.24, R.13 of the Rules of Supreme Court provides:

"(1)    No order for the production of any documents for inspection or to the Court, or for the supply of a copy of any document, shall be made under any of the foregoing rules unless the Court is of opinion that the Order is necessary either for disposing fairly of the cause or matter or for saving costs." (my emphasis]

3. It must be noted that unlike under Rule 8 the party applying for an order under R.13 has the burden of satisfying the Court that the order for production is necessary for the purposes mentioned in the rule. In Dolling-Baker v. Merrett (1990) 1 WLR 1205 Parker L.J. explained the importance of the distinction etween listing documents and producing documents. He said at p.1209;

"It is to be noted that in contrast with Rule 8, which provides that the order is not to be made if and in so far as the Court is of opinion that it is not necessary either for disposing fairly of the cause or matter or for saving costs, under Rule 13(1) the provision is that no order is to be made unless the Court is of opinion that the order is necessary either for disposing fairly of the cause or matter or for saving costs.

It is submitted on behalf of the 1st Defendant that the effect of Rule 13(1) is that the burden of satisfying the Court that production and inspection is necessary is squarely upon the party applying whereas under Rule 8 it is for the party who is objecting to any such order to satisfy the Court that discovery by list or affidavit is not necessary. It appears to me that that approach and submission are correct, and there is a perfectly sensible reason for it. If one is merely at the stage of discovery, it does no harm in most cases for the party against whom discovery is sought merely to list his documents.

That discloses that he has them or has power over them. But he can object to produce them on the ground of privilege or, indeed, on any other grounds. At that stage not very much has occurred except that the applying party will be enabled to know what document the objecting party has, and it is right that the burden should be upon the objector in such a case. When, however, one gets to the stage of production and the document is to be produced to the Court or the other side, the position is different, and it should be, and the rules appear to me to state with complete clarity that it is for the party seeking production to satisfy the Court that such production is necessary for the purposes specified in Rule 13(1), namely, for disposing fairly of the cause or matter or for saving costs."

4. I was not prepared to treat this application as .one under 0.24 R.13 despite the reference to production in the summons and therefore the question of production was not considered by me at this stage. If an application is made for production at a later stage, I will consider it on its merits.

5. So I am left with an application for an order that an affidavit be filed covering the documents scheduled. What does the Plaintiffs have to establish before I can make such an order?

6. Firstly he must satisfy me that the documents claimed are relevant to the matters in question and by that I mean relevant in the Peruvian Guano Case sense (see (1882) 11 QBD 55). Secondly, the application has to be supported by an affidavit stating that in the belief of the deponent the other party has or has had certain documents which relate to the matter in question. He has to make out the case on relevance and as to possession, custody or power. As the note to 0.24 R.7 in the White Book makes clear, "This case may be based merely on the probability arising from the surrounding circumstances or in part on specific facts deposed to".

7. It, of course, by no means follows that an order under 0.24 R.13 will be made in respect of documents disclosed in the list under 0.24, R.7.

8. This matter came before me in May and June 1991 when I refused the Defendants leave to amend their defence to plead illegality based upon insider dealings. That decision was affirmed by the Court of Appeal. I refer to my judgment dated 7th June 1991 which sets out the facts which the Plaintiffs seek to establish in this action.

9. A lot of the submissions made to me extended to the issue of production with which I am not at present dealing.

10. The first set of documents sought are from Tamar and Winburg. They are the 2nd and 3rd Defendants respectively. During the course of the hearing Mr. Robert Tang Q.C. sought and was granted leave to amend the terms of the summons because I pointed out to him that certain of the documents sought were far too wide. This judgment is based upon the amended summons.

11. Items 1 to 6 against Tamar & Winburg are clearly relevant documents in the Peruvian Guano sense. It is no answer to a request for an affidavit that the Plaintiffs have pleaded their case and thus do not need the documents. That may be relevant to the question of production but it cannot, in my judgment, be relevant to this application under 0.24, R.7. I am satisfied that Mr. Stokes' affidavit on behalf of the Plaintiffs is sufficient to justify an order under all 6 categories and I so order.

The next 14 categories of documents are sought from Mr. Chan.

Item 1 is as follows:

"All correspondence with Continental regarding the financial performance of Continental during the period between 1st July 1988 and 30th June 1990".

12. Mr. Barlow for the Defendants castigates this category as fishing. I disagree. This is clearly a most relevant category of documents and I am entitled to and do base the existence of this category of documents on the probability arising from the circumstances of the case. I make an order in relation to Item 1 against Mr. Chan.

The original Item 2 has been abandoned.

The new Item 2 relates to:

"All documents relating to share transactions involving shares in
Continental purchased or sold by Mr. Chan or on his behalf from 1st July 1988 to 30th June 1990."

13. Again this category is clearly relevant and I make an order in respect of it.

14. Items 3 to 13 (which during the hearing were referred to as 4 to 14 before 2 was deleted) are strongly contested. The best way of describing all of these categories is that they relate to the order books of all customers of Continental, correspondence files of the customers of Continental, internal filenotes on the customers of Continental, sales budgets for Continental prepared in November and December 1988 for the calendar year 1989 plus revisions, sales records of Continental from July 1988 to June 1990, copies of all overhead and/or profit and loss account budgets during the relevant period, working papers connected with the last item, copies of all profit and loss account forecasts in working papers, monthly management accounts and working papers associated with the 1989 to 1990 annual reports. It is quite clear to me that these are most relevant documents. Clearly what the Plaintiffs are hoping to find are some documents which show that Mr. Chan must have known that what he was telling Mr. Poon at the relevant meeting, if indeed he did say these things, was not true. If documents in these categories show that Continental could not conceivably have achieved profit for the year end of 30th June 1989 of not less than $83m and would not achieve profit of a $100m in the year 1st July 1989 to 30th June 1990, the Plaintiffs case will be greatly strengthened.

15. In relation to these Items 3 to 13 Mr. Barlow says that I have no jurisdiction to make the order, because the documents which are being sought are those of Continental and Continental is not the party to these proceedings, and evidence have been placed before me that Continental objects to the production of these documents and fears they will be used by Mr. Poon, who is considered to be a trade competitor, to its disadvantage. Mr. Robert Tang Q.C. for the Plaintiffs submits that these documents are vital. A lot of the arguments centred around whether or not, in relation to production, these documents were within Mr. Chan's power. As I have already said I am not dealing with that aspect of the case at the moment. All I have to decide is whether or not Mr. Chan should make an affidavit stating whether any of these documents is or has been at any time in his possession, custody or power and if not when he parted with them and what has become of them.

16. Insofar as these documents or any of them are or have been in the physical possession of Mr. Chan, it seems clear to me that he ought to file an affidavit as requested. Again, I emphasize that production is not being dealt with at this stage.

17. The more difficult question is whether Mr. Chan should be required to file this affidavit on the additional basis that if the documents are not in his physical custody nor ever have been in his physical custody nevertheless they are in his "power" by virtue of his shareholding in Continental. As re Tecnion Investments Limited [1985] B.C.L.R. 434 shows dominance in the running of a company's, business does not prove the requisite degree of control; it has to be shown that the company is under the unfettered control of the shareholder. Mr. Barlow denies that control has been made out. The Plaintiffs own 20% of the shares in Continental. Some 30% are held by the public and it is suggested that Mr. Chan, whether through his wife or companies controlled by him, owns another 50%. Mr. Barlow takes issue with the fact that Mr. Tang treats Mrs. Chan and the discretionary trusts and companies as if they were Mr. Chan. He submits that it has not been shown that Continental is the alter ego of Mr. Chan and he does not accept Mr. Stokes' evidence in relation to 50%. Mr. Barlow submits that Mr. Chan is not a one man company. He referred me to certain passages in the speech of Lord Diplock in Lonrho Ltd. v. Shell Petroleum [19181 1 WLR 627. The following two passages were relied upon by Mr. Barlow. At p.634 Lord Diplock said this:

"The articles of association of all these subsidiaries vest the management of the company in its board of directors. It is the board that has control of the company's documents on its behalf; the shareholders as such have no legal right to inspect or to take copies of them. If requested to allow inspection of the company's documents, whether by a shareholder or by a third party, it is the duty of the board to consider whether to accede to the request would be in the best interest of the company. These are not exclusively those of its shareholders but may include those of its creditors."

18. At p.635 in relation to the word "power" in the phrase "the documents which are or have been in his possession, custody or power" Lord Diplock said this:

"The phrase, as the Court of Appeal pointed out, looks to the present and the past not to the future. As a first stage in discovery, which is the stage with which the subsidiaries appeal is concerned, it requires a party to provide a list, identifying documents relating to any matter in question in the cause of (sic) matter in which discovery is ordered. Identification of documents requires that they must be or have at one time been available to be looked at by the person upon whom the duty lies to provide the list. Such is the case when they are or have been in the possession or custody of that person; and in the context of the phrase "possession, custody or power" the expression "power" must, in my view, mean a presently enforceable legal. right to obtain from whoever actually holds the documents inspection of it without the need to obtain the consent of anyone else. Provided that the right is presently enforceable, the fact that for physical reasons it may not be possible for the person entitled to it to obtain immediate inspection would not prevent the document from being within his power; but in the absence of a presently enforceable right there is, in my view, nothing in Order 24 to compel a party to a cause or matter to take steps that would enable him to acquire one in the future."

19. I agree with Mr. Barlow's contention that Continental is not the alter ego of Mr. Chan. I find that it is impossible to say that Continental is under the unfettered control of Mr. Chan. Mr. Tang relied upon a decision of the British Columbia Court of Appeal in Dallas v. Dallas 24 DLR 746. But that was clearly a one man company and the Court there held that he was in effective control of the company which was his alter ego and there were no minority shareholders in whose interests the company might assert control over the documents and thus they had to be produced. Mr. Tang also relied upon B v. B (1978] FAM. 1.8. In that case the board of an "operating company" consisted of the husband who was chairman and managing director and six directors. A holding company owned 75% and a public company owned the remaining 25% of the operating company's issued shares. The husband owned 51% of the holding company shares, and the majority of the remaining shares in that company were held by members of his family. In ancillary proceedings the wife applied for discovery. The Registrar made an order under 0.24 and the husband appealed and his appeal was successful in part. At p.193 Dunn J. (as he then was) said:

"I will conclude this part of my judgment by summarising my conclusion as to the law. (1) a party to a suit must disclose all. the documents in his possession, custody or power which are relevant to the matter in issue. The Court has a discretion whether or not to order him to make such disclosure, and also has a discretion whether or not to order him to produce the document for inspection by the other party or the Court. (2) the documents of a company are in the legal possession of the company. If they are or have been in the actual physical possession of a director who is a party to litigation they must be disclosed by that director, if relevant to the litigation, even though he holds them as servant or agent of the company in his capacity as an officer of the company. (3) whether or not documents of a company are in the power of a director who is a party to the litigation is a question of fact in each case. "Power" in this context means "the enforceable right to inspect or obtain possession or control of the document". If the company is the alter ego of such a director so that he has unfettered control of the company's affairs he must disclose and produce all relevant documents in the possession of the company. (4) where relevant documents in the possession of a company are disclosed by a director as being in his custody or power, the Court has a discretion whether or not to order production of them. (5) the discretion is a judicial discretion, and in exercising it the Court would have regard to all the circumstances. The Court will balance the relative importance of the documents and the hardship likely to be caused to the wife by non production against prejudice to the husband and third parties likely to be caused by production. It has not hitherto been a practice of the Court to order production of company documents to which the board of directors object on affidavit, provided that the Court is satisfied that the objection is not contrived for the purpose of frustrating the powers of the Court. The Court will not in the exercise of its discretion order parties to do that which they had no power to do. The Court will not order production unless it is satisfied that production is necessary either for disposing fairly of the issue between the parties or for saving costs."

20. During the course of the argument reference was also made to some observations of Shaw L.J. in Lonrho v. Shell Petroleum [1980] Q.B. 3.58 at 376. This was in the Court of Appeal and I have already referred to certain observations of Lord Diplock when the matter went to the House of Lord. But at p.376 Shaw L.J. said this:

"There are no doubt situations, such as existed in B v. B ... where on the established facts a company is so utterly subservient or subordinated to the will and the wishes of some other person (whether an individual or parent company) that compliance with that other person's demand can be regarded as assured. Each case must depend upon its own facts and also upon the nature, degree and context of the control it is sought to exercise."

21. I do not propose to go through the voluminous evidence in this case. I am not prepared to hold on the evidence placed before the Court that Continental is the alter ego of Mr. Chan or that it is under his unfettered control. Clearly, he has an important role to play and has had an important role to play in the affairs of Continental but to equate this case with the frequently found case of a sole trader who turns himself into a limited company which can justifiably be called his alter ego, is stretching the matter too far. I am confident that a Board Meeting of Continental would resolve not to make these documents available for the purposes of this litigation. In my judgment, therefore, these categories of documents are not in Mr. Chan's power. It follows therefore that when Mr. Chan makes and files the affidavit which I order him to do he has to specify whether the documents described in the application are or have been at any time in his possession, custody or power and if not in his possession, custody or power when he parted with them and what has become of them. As I am satisfied that the documents (3-13) are not within his power he only has to list those documents which are or have been in his actual possession or custody. If none of these documents have ever been in his custody or possession then all he needs to do is to say so. If they have been, he must say accordingly.

22. It follows therefore that the order I make is the order sought by the Plaintiffs save that I delete all reference to production of documents and Mr. Chan will make his affidavit in the light of my ruling on the question of "power".

23. As to the question of costs, I propose to make a costs order nisi being costs in cause. I come to that conclusion provisionally because although I have made the order sought in relation to the filing of an affidavit I have not dealt with production because that would have been premature and I also concluded that some of the documents are not in Mr. Chan's "power". It seems to me that a just view of the matter is that costs should be in cause and I make that order nisi.

	(Neil Kaplan)
	Judge of the High Court

Representation:

Appearances

Robert Tang Q.C. and John Scott inst'd by Richard Butlers for the Plaintiffs.

Barrie Barlow inst'd by Hampton Winter & Glynn for the Defendants.

HCA004517/1990

H E A D N O T E

Contract - misrepresentation - whether amendment to defence should be allowed - whether alleged insider dealing can afford a defence of illegality - Securities Ordinances Cap. 333, Part XIIA - whether issue should be heard separately from main trial.

 

1990 NO. A4517

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

_____________

BETWEEN

	INNOVISIONS LIMITED	Plaintiff
	and
	CHARLES CHAN SING CHUK	1st Defendant
	TAMAR INVESTMENTS LIMITED	2nd Defendant
	WINBURG LIMITED	3rd Defendant

______________

Coram: Kaplan, J. in Chambers

Dates of Hearing: 14 May 1991

Date of handing down Judgment: 7 June 1991

 

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J U D G M E N T

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1. The defendants seek leave to amend their defence in order to plead that the plaintiff's claim for misrepresentation is defeated by illegality namely insider dealing said to be contrary to section 141B(1) of the Securities Ordinance, Cap. 333.

2. If successful in that application, the defendants then seek to have the issue of illegality tried as a separate issue in advance of the main trial. Clearly, the main trial will not be necessary if the plea of illegality is a good one and the claim defeated by reason of the ex turpi causa rule.

3. The plaintiff is a Hong Kong company whose guiding light is Mr. Dickson Poon.

4. The 1st defendant is a director and chairman of Continental Holdings Ltd. (Continental) the Holding company in a group of companies involved in the jewelry business in Hong Kong.

5. The 2nd and 3rd defendants were at all material times the registered shareholders of 200,000,125 and 124,999,375 shares in the capital of Continental respectively.

6. As at 30th June 1989, the 1st defendant (Mr. Chan) was the beneficial shareholder of 11,907,025 shares in the capital of Continental. Mr. Chan and his wife were the beneficiaries of several discretionary trusts who together through the 2nd and 3rd defendants were the beneficial owners of approximately 325m, shares in the capital of Continental. As at 30th June 1989. Mr. Chan together with his wife beneficially owned 72% of the issued share capital of Continental.

7. In April 1989, Mr. Poon and Mr. Chan met at a social occasion and commercial collaboration was discussed between them. Paragraphs 8 and 9 of the Statement of Claim set out the misrepresentations relied upon and I set them out in full.

"8. On or about 9th May 1989 in a meeting between the First Defendant and Mr. Dickson Poon the First Defendant stated and represented as follows:

(i)     Continental would positively and certainly achieve the profit for the year ended 30th June 1989 of not less than HK$88,000,000 recorded in a prospectus issued by Continental as part of an issue of 125,000,000 dated 17th October 1988 (hereinafter referred to as "the Prospectus").

(ii)     For the financial year 1st July 1989 to 30th June 1990 Continental would achieve a profit of not less than HK$100,000,000.

9. Further, on or about 7th July 1989 in a meeting between the First Defendant and Mr. Dickson Poon, the First Defendant stated and represented as follows:

(i)     The orders in hand for Continental in the coming year were so much that Continental could not cope with them all.

(ii)     On the basis of orders already received Continental would achieve a profit of not less than HK$100,000,000 for the year 1st July 1989 to 30th June 1990."

8. At the meeting of 7th July 1989. Mr. Poon agreed on behalf of the plaintiffs with Mr. Chan for himself and the other defendants that Mr. Chan would sell 70m shares to the plaintiff provided that the plaintiff would purchase a further 30m on the open market. It was further agreed that the plaintiff would be entitled to nominate a director to sit on the board of Continental in order that the plaintiff could have access to all necessary financial information.

9. On 8th August 1989, a price of $1.14 for each of the 70m shares was agreed. The plaintiffs allege that they so agreed "acting on the basis of the representations and induced thereby". As for the 30m shares they were purchased by the plaintiffs on the open market on the 10th August 1989.

10. The plaintiffs complain that the representations were untrue and made fraudulently, alternatively negligently. The plaintiffs claim rescission of the share purchase agreement and the return of some $118m. There is a further and alternative claim under section 141 of the Securities Ordinance.

11. The writ was dated 9th July 1990. The defence which denied liability was dated 27th October 1990.

12. The three new paragraphs which the defendants seek to add to their defence are as follows:-

  "     AMENDMENT TO THE DEFENCE

21A.   Further or in the alternative if which is denied the 1st Defendant made the representations as alleged by paragraphs 8 and 9 of the Statement of Claim, such representations were or comprised relevant information regarding Continental within the meaning of Section 141D(1) of the Securities Ordinance.

21B.    If which is not admitted the Plaintiff was induced by the said alleged representations or either of them to enter into the agreement complained of in Paragraph 13 of the Statement of Claim, by reason of the matters referred to in the preceding paragraph hereof the said agreement constituted insider dealing within the meaning of Section 141B(1) of the Securities Ordinance and was and is thereby rendered unlawful.

21C. In the premises the Plaintiff cannot maintain this action and/or recover the damages claimed herein in that the same would be contrary to public policy alternatively by virtue of the principle embodied in the maxim ex turpi cause non pritur action."

In order to consider whether this is a defence available to the defendants, it is necessary to consider Part XIIA of the Securities Ordinance Cap 333. This Part contains sections 141A-L.

13. There is no doubt that this Part of the Ordinance applies to Continental.

Section 141A(2) is important because it states;

"    No transaction shall be void or voidable by reason only that it is an insider dealing within the meaning of this Part."

14. Section 141B tells as when insider dealing takes place,

"141B. When insider dealing takes place

(1)     Insider dealing in relation to the securities of a corporation takes place and pursuant to section 141C may be culpable for the purposes of this Part -

(a)     when a dealing in the securities is made, procured or occasioned by a person connected with that corporation who is in possession of relevant information concerning the securities;

(b)     when relevant information concerning the securities is disclosed by a person connected with that corporation, directly or indirectly, to another person and the first- mentioned person knows or has reasonable grounds for believing that the other person will make use of the information for the purpose of dealing, or procuring another to deal, in those securities.

    (2)    A dealing in the securities of a corporation is occasioned by a person connected with that corporation for the purposes of subsection (1)(a) when a person who has obtained relevant information in the circumstances described in subsection (1)(b) actually makes use of that information for the purpose of dealing or procuring another to deal in those securities."

15. Section 141C sets out when a person who enters into a transaction when is in insider dealing within section 141B is not culpable. I do not feel it necessary to set out this section in full. However, reference must be made to sub-section (6) of section 141C which provides as follows:-

"    Subject to this section the culpability of any person in relation to an insider dealing within section 141B is a matter for the Tribunal to determine under section 141H(3)."

16. Section 141D contains a definition of 'relevant information':-

"    Relevant information in relation to securities means information which is not generally available but if it were, would be likely to bring about a material change in the price of those securities."

17. Section 141E gives a definition of persons connected with corporations.

18. Section 141G establishes the Insider Dealing Tribunal (the Tribunal). It is chaired by a Supreme Court judge and he sits with two members who shall not be public officers. It is very obvious that the Governor would appoint two non-public officers who have experience within the securities industries.

19. Section 141H provides that only the Financial Secretary can require the Tribunal to inquire into a matter.

20. Sub section (3) of section 141H provides that:

" The object of an inquiry shall be to determine within the Tribunal's terms of reference -

(a)     whether culpable insider dealing in relation to the securities of a corporation was taken place; and

(b)     the identity of the persons involved therein and the extent of their culpability."

Sub section (4) provides:

" In making a determination under sub-section (3)(b), the Tribunal shall not be limited to the identity and culpability of an immediate party to an insider dealing; subject to section 141C

(a)     include any other person connected with the dealing;

(b)     in the case of a body corporate include the individuals no exercise control in the management thereof."

21. By section 141I the Tribunal issues its report to the Financial Secretary and thereafter in the circumstances set out in Sub-section (5) can cause the report to be published. Sub section (5) gives protection to persons found not to be culpable who are entitled to object to publication.

22. Sub-section (3) makes it a criminal offence to publish any material received by the Tribunal for the purposes of an enquity.

23. Sections 141J and K deal with the powers of the Tribunal and section 141L deals with privilege.

24. I think the following principles can be extracted from Part XIIA.

(1)     Not all insider dealing is culpable.

(2)     The legislature was only concerned with culpable insider dealing.

(3)     The only person who can institute such an inquiry is the Financial Secretary.

(4)     Once initiated by the Financial Secretary the only body who can declare whether culpable insider dealing has taken place is the Tribunal.

(5)     Insider dealing is not a criminal offence.

(6)     The only sanction against insider dealing is public obloquy.

25. These provisions have been considered by Kempster, J.A. sitting as an additional judge of the High Court in Re Chow Chin & Others [1987] HKLR 73. In that case a Tribunal had made certain findings which were published. Kempster J.A. held that the Tribunal was amenable to judicial review but dismissed the applications. In the course of so doing he said this at p. 74:-

"No disqualification, penalty or other consequences criminal or civil result from such determinations. Indeed section 141A(2) expressly provides that No transaction shall be void or voidable by reason only that it is an insider dealing within the meaning of this part. Public obloquy is the only sanction: presumably on the footing that the purest treasure mortal times afford is spotless reputation (Richard III)."

26. It is true that Kempster, J.A. was not dealing with the same point as before me but nevertheless, it is clear that he considered the scheme of Part XIIA and was able to express his conclusions on their effect as stated above.

27. Mr. Griffiths Q.C. who appeared for the defendants relied heavily on the analysis of the law of illegality made by Kerr L.J. in Euro Diam v Bathurst (1988) 1 Lloyd's Rep 228. At 233 he said:

"The law: Illegality

    The relevant principles and authorities are reviewed in detail at pp. 187-194 and 1370 to 1388 of the reports of the judgment under the heading "Tainted with illegality". A similar discussion is to be found in Chitty on Contracts 25th ed. vol. 1 at p 626 et seq under the heading "The maxim ex turpi causa non oritur actio and related rules". I do not think that it is necessary to repeat the Judge's helpful analysis of the cases. Subsequent to his decision in the present case this Court had to deal with a somewhat similar problem in Saunders v. Edwards [1987] 1 W.L.R. 1118 (Court of Appeal). In the same way as in that case. I propose to refer to the submissions raised on behalf of the defendant in this case compendiously as the "ex turpi causa defence". In my view the relevant principles can then be summarised as follows

    (1)     The ex turpi causa defence ultimately rests on a principle of public policy that the Courts will not assist a plaintiff who has been guilty of illegal (or immoral) conduct of which the Courts should take notice. It applies if in all the circumstances it would be an affront to the public conscience to grant the plaintiff the relief which he seeks because the Court would thereby appear to assist or encourage the plaintiff in his illegal conduct or to encourage others in similar acts: see (2)(iii) below.

    The problem is not only to apply this principle but also to respect its limits, in relation to the facts of particular cases in the light of the authorities."

28. At p 234 he added that "the ex turpi causa defence must be approached pragmatically and with caution depending on the circumstances. See e.g. per Mr Justice Bingham in Saunders v Edwards (Sup) at 1134".

29. Mr Griffiths farther referred me to Kirknam v. Chief Constable of Manchester [1990] 2 WLR 987. In that case a remand prisoner with suicidal tendencies committed suicide in prison and his estate sued the Chief Constable for damages in negligence. One of the defences was the ex turpi causa defence. At p. 993 Lloyd L.J. dealt with the point in the following way,

"Ex turpi causa non oritur actio

    This is the most difficult part of the case. Prior to 1961 suicide was a crime. Although there appears to be no reported case directly in point. I do not doubt that a claim based on the failure of the authorities to prevent a suicide would have failed. The courts would have declined to lend their aid to enforce such a claim. But by section 1 of the Suicide Act 1961 the rule of law whereby it was a crime for a person to commit suicide was abrogated. The question is whether the Suicide Act 1961, by abrogating the criminal nature of suicide has taken away the defence of ex turpi causa. The judge took the straightforward line that the defence depends on some causally related criminal activity. He referred to Hardy v. Motor Insurers Bureau [1964] 2 Q.B. 745 and Murphy v Culhane [1977] Q.B. 94 and considered that since suicide is no longer a crime the defence ex turpi causa is no longer available Unfortunately the judge was not referred to three recent cases in which ...(illegible) It would be superfluous to summarise the pnnciples here. It is sufficient to quote two sentences from Kerr L.J. S Judgment in the Euro Diam case at p. 35:

"The ex turpi causa defence ultimately rests on a principle of public policy that the courts will not assist a plaintiff who has been guilty of illegal (or immoral) conduct of which the courts should take notice. It applies if in all the circumstances it would be an affront to the public conscience to grant the plaintiff the relief which he seeks because the court would thereby appear to assist or encourage the plaintiff in his illegal conduct or to encourage others in similar acts..."

It is apparent from these authorities that the ex turpi causa defence is not confined to criminal conduct. So we cannot adopt the simple approach favoured by the judge. We have to ask ourselves the much more difficult question whether to afford relief in such a case as this, arising as it does directly but of a man's suicide, would affront the public conscience, or, as I would prefer to say shock the ordinary citizen. I have come to the conclusion that the answer should be in the negative."

30. Relying upon these authorities Mr. Griffiths also referred me to passages in the Hay Davidson report which said that insider dealing undermines the fairness of the system. He referred to the moral climate and suggested that there was a role for the courts to play in refusing to allow parties to benefit from transactions, the subject matter of insider dealing. As to section 141A(2) which says no transaction is rendered void or voidable by reason of insider dealing he asked whether it was a relevant consideration on the facts of this case. He submitted that it obviously prevents the unravelling of transactions. But he asked whether it covers a person in Mr Poon s position and whether he can, in all the circumstances be allowed to sue on such a contract. Mr. Griffiths relied very heavily upon the immoral aspect of the ex turpi rule acknowledging as he must that insider dealing is not a criminal offence in Hong Kong.

31. Mr. Robert Tang Q.C. submitted that leave to defend should not be granted because the ex turpi causa defence will fail for three reasons.

(1)     Part XIIA is not intended to have civil consequences;

(2)     As a matter of construction there is no culpable insider dealing because misrepresentations can not be information within the meaning of the Ordinance;

(3)     On the facts such culpable insider dealing as might be found by any court would not persuade any reasonable court to deny a plaintiff relief.

32. Basically he is submitting that the issue as to whether or not there has been insider dealing, is not justiciable in these proceedings and he relies heavily upon what Kempster J.A. said in the above guoted case.

33. In response to these submissions. Mr. Griffiths asked "why shouldn't the ordinary principles of illegality in contracts apply?" He then posed the question whether the conscience of the court is affronted by these allegations. He said that the ordinary criminal law should be applied. He said that the Financial Secretary might have had special reasons for not ordering an investigation. He further added that if it was intended that an examination into insider dealing should be restricted to the Tribunal then the legislature would have said so in terms.

34. Applying the Euro Diam test together with the observations of Lloyd L.J. in Kirknam. I have to ask myself the following questions. Firstly is the conduct in question illegal or immoral? If it is would the affording of relief to the plaintiff on the facts of this case affront the public conscience or shock the ordinary citizen.

35. Insider dealing is not illegal in Hong Kong. No criminal offence is provided for it. The only sanction is publicity. No transaction is rendered void or voidable by reason of it. In England it is a criminal offence with a maximum sentence of 7 years imprisonment (see s 8 Company Securities (insider dealing) Act 1985). There is in England nevertheless the same section preventing transactions being rendered void or voidable. Palmer's Company Law 24th Eu page 479 puts the matter this way after stating that proceedings day only be instituted by the secretary of state or the D P.P.

"No civil remedies are created by the Act and section 8(3) specifically provides that no transaction shall be void or voldable by reason only of having been entered into in breach of the prohibitions. No specific provision for disgorement of profits made out of insider dealing is contained in the Act but ... a court by whom a person is convicted may make a compensation order ....."

36. Is it immoral? It was argued that because the legislature thought it necessary to legislate in respect of insider dealing it must follow that at the very least it is immoral. It is said to be immoral because it involves someone stealing a March on others. It goes against the level playing field concept of securities legislation and regulation. That insider dealing was thought to be undesirable is fairly clear. If it was not undesirable there would have been no point in Part XIIA.

37. However it is necessary to have regard to the scheme and structure of Part XIIA. In the present case the Financial Secretary has not ordered any enquiry and it follows therefore the Tribunal has not considered whether the matters complained of constituted culpable insider dealing. Given this situation. I do not see now the proposed amendments assist the defendants. The legislature was very careful to limit the ambit of Part XIIA. The Tribunal is intended to be composed of persons with experience in the ways of the market. I do not think that it was ever intended nor in my judgment does it follow from the sections themselves that the investigation into insider dealing should be carried out by anyone other than the special Tribunal appointed for that purpose.

38. Section 141C(6) makes it clear that the culpability of any person in relation to insider dealing is a matter for the Tribunal to determine. It could be said that civil courts frequently have to make decisions as to whether something is illegal for this purpose whereas the actual decision on whether an offence has been committed is the province of another court. That may well be the position where one is dealing with a situation where the legislature has made it clear that a particular act or course of conduct is a criminal offence. But in this case the legislature has fallen well short of creating any criminal offence and have in my judgment made it clear that there should be no civil consequences in a finding of culpable insider dealing. Section 141A(2) is the strongest possible indication that to quote Kempster J.A. again "no ....... penalty or other consequence civil or criminal results from such determination". It is to be noted that he was there considering a situation where culpable insider dealing had been found by the Tribunal. In the present case the matter has not even been referred to the Tribunal.

39. It could be said that Part XIIA is a compromise between those who would like to see insider dealing rendered unlawful and those who would like to see it continue unaffected by legislation as it was prior to the coming into effect of Part XIIA. Given that this legislation is a compromise, I find it is possible to conclude that the matters sought to be raised by the amendments would shock the ordinary citizen or affect the public conscience. One must have regard to the pragmatic approach of the illegality defence.

40. I therefore conclude that these proposed amendments would be bound to fail. Only the Tribunal can determine whether culpable insider dealing has taken place, and then only when the Financial Secretary asks it to consider such a question. It was not intended that other courts unaided by two lay persons appointed by the Governor should delve into these matters.

41. Even if I were held to be wrong about the effect of the scheme in Part XIIA. I would also have concluded that insider dealing not being illegal would not affect the public conscience and could not give effect to an illegality defence. As a matter of law. I do not see now this defence can possibly succeed and thus there can be no point in giving leave to make a hopeless amendment.

42. I should have added that I was not convinced by Mr Griffiths attempt to circumvent the effect of section 141A(2).

43. Mr. Tang also submitted that it was somewhat unreasonable to rely on this insider dealing as the essence of the claim made by the plaintiff was that what the defendant had said was untrue. It what the defendant said was true then insider dealing or not the plaintiff's claim would fail. The plaintiff would only succeed if what the defendant said was untrue and therefore the whole question of insider dealing is totally irrelevant. I think there is a lot of force in this submission but in view of my primary finding it is not really necessary for me to go into that aspect of the case. I think it might be helpful if I say that were this the only point in the case. I would have allowed the amendment so that Mr. Griffiths submission to the contrary could be examined in some detail.

44. Mr. Tang further submitted that disclosure had been made by an annoucement in the South China Morning Post the day after the transaction had been concluded and thus section 141C(5) came into play. There may or may not be force in this submission but again if this were the only ground upon which the amendment were opposed. I would have allowed the amendment because this is a matter which cannot be dealt with on an application for leave to amend.

45. I should make it clear that I accept entirely Mr Griffiths submission that unless the amendments which he seeks to make are totally unarguable leave should be given. In my judgment the plaintiffs have satisfied me that these amendments give rise to a claim which is totally unarguable and therefore leave to amend is not granted.

46. Having come to this conclusion it is unnecessary for me to make a decision on whether or not I would have granted the application for a separate issue. But in case this matter should go further, it may be helpful if I very briefly state what my conclusions would have been had I granted leave to amend.

In Tin Shui Wai Development Limited v The Attorney General CL987 No. 5 Godfrey J on 17th October 1989 had before him an application to deal with some issues in a long trial before other issues. In considering the approach of the court. He said this at p 7 of his judgment:

"In my judgment the modern approach must be this. The policy of the court in line with the reforms introduced by the Judicature Acts is that all matters in dispute between the plaintiff and the defendant should be tried together at one hearing; but if either of them can satisfy the court that the just and convenient course would be to have separate trials of different issues the court should not be innibited by authority from exercising the power in that behalf conferred on it by the rules."

47. So the issue is whether the defendants have satisfied me that the balance of justice and convenience comes down demonstrably in their favour.

48. Mr Griffiths conceded that if this issue were tried first there would necessarily have to be some evidence. He emphasised that it would not be all the evidence in the trial but clearly there would be some and he made a rough calculation showing a difference between the time taken for the preliminary issue and the likely period for trial. He said the difference of approximately two weeks was substantial enough to justify the court taking the course of ordering the insider dealing point being decided first.

49. Mr. Tang for his part submitted that there were in fact many more areas of evidence which would be necessary and that it would be somewhat unfair to the plaintiff to have to start off by dealing with an allegation of illegality in the full glare of publicity without the rest of the case being gone into at the same time.

50. Having considered the rival contentions. I do not consider that the defendants have satisfied me that the balance of justice and convenience comes down clearly in their favour. Had I not refused leave to amend I would nevertheless have in the exercise of my discretion, refused to order the insider dealing point tried in advance of the main trial. Given the sensitivity of the allegations I think justice clearly requires that the whole matter be gone into at one time and I believe that this is the only fair and sensible course to take. There is always the problem of now to deal with appeals from preliminary issues and the possible delay that that might cause to the ultimate resolution of this unfortunate dispute.

51. As the defendants have failed in their applications for leave to amend. I propose to make an order nisi for costs against the defendants.

	(Neil kaplan)
	Judge of the High Court

Representation:

Mr. Robert Tang Q.C. and Mr. John Scott instructed by Messrs Richards Bulter for the Plaintiff

Mr. John Griffiths Q.C. and Mr. Barrie Barlow instructed by Messrs Hampton Winter & Glynn for the Defendants.