Case Detail

HCA 2428/2013

[2018] HKCFI 271

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2428 OF 2013

____________

BETWEEN
	SECURITIES AND FUTURES COMMISSION	Plaintiff
and
	QUNXING PAPER HOLDINGS COMPANY LIMITED	1st Defendant
	BEST KNOWN GROUP LIMITED	2nd Defendant
	ZHU YU GUO (朱玉國)	3rd Defendant
	ZHU MO QUN (朱墨群)	4th Defendant
____________

Before: Hon G Lam J in Court

Date of Hearing: 16 and 17 May and 28 August 2017

Date of Judgment: 6 February 2018

_________________

J U D G M E N T

_________________

I. Introduction

1. This is an action brought by the Securities and Futures Commission, alleging that Qunxing Paper Holdings Co Ltd (“Qunxing”), a company listed on the Main Board of the Stock Exchange of Hong Kong, had made false or misleading statements in its announced financial results and thereby contravened various statutory provisions. It is alleged that a subsidiary, Best Known Group Ltd (“Best Known”), as well as the Chairman, Mr Zhu Yuguo (the 3^rd defendant), and his son the Vice‑Chairman, Mr Zhu Moqun (the 4^th defendant), were persons involved in those contraventions. The Commission seeks various declarations and, more importantly, orders under s 213 of the Securities and Futures Ordinance (Cap 571) (“SFO”) with a view to compensating public investors who had acquired shares or warrants in Qunxing.

2. Qunxing’s and Best Known’s defence had been struck out and the 3^rd and 4^th defendants have not responded to the action. The question for me is therefore whether the Commission has proved its case by the admissible evidence it has adduced and, if so, what orders should be made by way of relief.

II. Facts

3. In my judgment, the Commission’s factual case is made out on the evidence. The facts that I find proved to the requisite standard are as follows.

Fund raising and shareholding structure

4. Founded by the 3^rd defendant, his wife Sun Rui Fang and their son the 4^th defendant (together the “Zhus”), the underlying business of the group headed by Qunxing was in the manufacture and sale of decorative base paper products and printing paper products in the Mainland.

5. On 17 September 2007, Qunxing, a company incorporated in the Cayman Islands, issued a prospectus (“IPO Prospectus”) for the placing and public offer of its shares inviting applications from the public to subscribe for its shares. The offer price was HK$5.35 per share (with a nominal value of HK$0.10 each). Both the international placing and the Hong Kong public offer were very significantly over‑subscribed. Eventually 150m shares were issued under the public offer, and 195m shares were placed to international placees. Gross proceeds raised amounted to approximately HK$1,846m (345m x HK$5.35).

6. On 2 October 2007, Qunxing’s shares began to be listed on the Main Board of the Stock Exchange of Hong Kong (stock code 3868). At that time, the total number of issued shares was 1,045m, with the Zhus holding 67% via their own BVI company named Boom Instant Ltd (“Boom Instant”).

7. On 17 December 2010, Qunxing made an open offer of new shares at HK$0.66 per share (on the basis of 1 new share for every 2 existing shares), which was slightly under‑subscribed by public shareholders, and raised about HK$112.46m from public shareholders who were allotted 170,394,744 new shares.

8. Shortly afterwards further funds were raised, through a subscription agreement dated 14 January 2011 with an investor named Victory Asset Management Ltd (“Victory Asset”) which subscribed for 206.56m unlisted warrants of Qunxing at HK$0.05 per warrant. The exercise price was HK$2.95 per share. Victory Asset did not exercise its right to subscribe for any shares; the exercise period of 12 months had long expired.

9. On 30 March 2011, as a result of a disclaimer of opinion by Qunxing’s then auditors, KPMG, regarding its 2010 annual results, trading of the shares on the Stock Exchange was suspended. The last trading price before suspension was HK$2.18 per share. The 2010 results were published the next day. KPMG resigned as auditors on 8 June 2011.

10. Between March 2011 and the present, there were 1,586,391,450 shares in issue, of which 1,075,207,718 shares (67.78%) were held by Boom Instant and 511,184,232 shares (32.22%) by public shareholders.

11. Between 2008 and 2013, Qunxing paid cash dividends to its shareholders totalling RMB 471m, of which the Zhus, as majority shareholders via Boom Instant, would have received about RMB 329m.

The 3^rd and 4^th defendants

12. The 3^rd and 4^th defendants were at all material times the executive directors and decision‑makers of Qunxing (being its Chairman and Vice‑Chairman respectively) until their resignation on 21 March 2014. The 3^rd defendant was also the chairman and legal representative of Shandong Qunxing and the 4^th defendant a director. They resided in Shandong and attended to the daily operations of the business operations. There is consistent evidence from the financial controller, an independent director, and the company secretary of Qunxing that the 3^rd defendant with the assistance of the 4^th defendant made all the management decisions for Shandong Qunxing and they together were the decision‑makers intimately involved in managing the affairs of Qunxing.

Publication of financial results

13. In the IPO Prospectus and in the annual reports and results announcements between 2007 and 2011, Qunxing published its financial results including the following (denominated in RMB):

IPO Prospectus
Annual Reports and Results Announcements
(RMB)

Results for the year
2006
2007
2008
2009
2010
2011

Publication date
17.9.2007
17.3.2008
18.3.2009
17.3.2010
30.3.2011
14.3.2012

Turnover
950,844,000
1,125,524,000
1,496,360,000
1,530,321,000
2,058,916,000
2,003,651,000

Gross profit
184,117,000
283,469,000
405,516,000
424,804,000
519,785,000
326,910,000

Profit from operations
163,317,000
371,637,000
396,681,000
375,862,000
455,973,000
--

Profit before taxation
142,692,000
350,572,000
383,361,000
371,694,000
455,973,000
256,183,000

Profit for the year/ period
93,937,000
350,572,000
383,361,000
324,087,000
397,506,000
221,968,000

Earnings per share
0.13
0.42
0.37
0.31
0.38
0.14

Falsity in published financial results

14. The Commission initiated an investigation into Qunxing in April 2011. At around the same time, Qunxing itself appointed an independent professional adviser, Zhonglei Risk Advisory Services Ltd, to perform an internal control review and investigation of the audit issues highlighted by KPMG. The Stock Exchange was not satisfied with the review and Qunxing decided to commission a further review by JLA Asia Ltd in November 2011.

15. Having found irregularities in the financial results published by Qunxing, the Commission commenced the action herein on 12 December 2013 and obtained interim orders, inter alia, to freeze the assets of Qunxing and Best Known up to the value of HK$1,968m.

16. The Commission’s case is that a false and misleading picture was given in relation to Qunxing’s financial position both before and after the IPO.

Overstated sales

17. In particular, the sales to Shanghai On Hing Paper Co Ltd (“Shanghai On Hing”) and Changzhou Cuiqiao Cheunguang Paper Co Ltd (“Cuiqiao”) were materially overstated.

18. Shanghai On Hing was held out by Qunxing to be a top customer of Shandong Qunxing Paper Ltd (“Shandong Qunxing”), which was a wholly owned subsidiary of Qunxing held via Best Known and the sole operational arm of the group. In fact, Shanghai On Hing was not a customer of Shandong Qunxing from 2006 onwards, and had ceased business operations in early 2008. Certain records and documents provided by Qunxing to its auditors KPMG pertaining to the purported purchases and payments by Shanghai On Hing had later transpired to be fictitious. The purported employees of Shanghai On Hing made available to the auditors and external reporting accountants also turned out not to be employees of Shanghai On Hing or its group.

19. Shanghai On Hing (until early 2008) and a sister company called Huidong (after 2007) did place orders with a supplier called Kangmu, which was not part of the Qunxing group but a company owned by the 3^rd defendant personally. However, since Kangmu occasionally received sales invoices from Shandong Qunxing and made payment accordingly, I would accept these were arguably Shandong Qunxing’s sales and therefore take the lower end of the overstated amounts pleaded by the Commission.

20. Cuiqiao was held out to be one of the top 10 customers of Shandong Qunxing from 2007 to 2010 and the top customer in 2011. In fact, its purchases from Shandong Qunxing were only about half of what was included in the reported results. Further, certain bank payment records provided by Qunxing during the investigation were later found to be fictitious. The purported employee of Cuiqiao made available to the auditors and external reporting accountants turned out to someone who had already left Cuiqiao before the meetings.

21. I find that the scale of the overstatement of turnover was as follows:

Year
Turnover as reported in IPO Prospectus or Annul Reports or Results Announcements (RMB)
Amount of sales overstated in relation to Shanghai On Hing (RMB)
Amount of sales overstated in relation to Cuiqiao (RMB)
Percentage of turnover overstated

2006
950,844,000
107,868,158
11.34%

2007
1,125,524,000
217,610,958
19.33%

2008
1,496,360,000
217,042,845
14.50%

2009
1,530,321,000
170,091,413
13,685,750
12.01%

2010
2,058,916,000
204,612,960
35,289,427
11.65%

2011
2,003,651,000
51,336,920
2.56%

22. As a result, the gross profit, profit from operations, profit before taxation, profit for the year/period and earnings per share as published in the IPO Prospectus, annual reports and results announcements (as set out in the table in §13 above) were also overstated.

Bank borrowings

23. In addition, the annual reports and results announcements for the years 2009 to 2012 failed to disclose the bank borrowings of the group.

Year
Bank borrowings reported in annual reports and results announcements
Number of undisclosed bank loans
Total amount of undisclosed bank loans outstanding at the end of year (RMB)

2009
Nil
7
389.2m

2010
Nil
12
849.2m

2011
Nil
28
1,519.2m

2012
Nil
22
1,594.2m

24. These loans were between 4 times and over 14 times of the recorded liabilities at the end of the relevant periods and were clearly material to the current liabilities and total liabilities of the group. The amount of bank loans was also used to calculate a number of key financial ratios discussed in the “Management Discussion and Analysis” section in Qunxing’s annual reports.

Restructuring of Shandong Qunxing

25. Shandong Qunxing applied in the Mainland for restructuring under the Enterprise Bankruptcy Law on 21 February 2014, which was premised on its inability to pay its debts or a predominant likelihood that it would lose the capacity to pay off its debts. This implied a sudden deterioration of the financial position of Shandong Qunxing between the date of its interim report as at 30 June 2013 (published on 27 September 2013), showing cash and cash equivalents of RMB 655.3m, and February 2014. The application, approved and submitted by the 3^rd and 4^th defendants on behalf of Shandong Qunxing, was accepted by the Intermediate People’s Court of Binzhou City on 24 February 2014. None of this was disclosed to the investing public in Hong Kong. It has since transpired that Shandong Qunxing was grossly insolvent. At the creditors’ meetings held in November 2014, the auditors of Shandong Qunxing reported that its assets and liabilities were RMB 530m and RMB 5.37 billion respectively.

26. When the Commission made enquiries with it about the restructuring application, Qunxing suddenly announced on 21 March 2014 the resignation of all its directors, including the 3^rd and 4^th defendants. In those circumstances, interim receivers and managers were appointed for Qunxing by the Court of First Instance on 28 March 2014 on the application of the Commission.

27. A restructuring proposal for Shandong Qunxing was approved by the relevant Mainland court in December 2014. The prospects of Qunxing and Best Known being able to receive any value for its equity in Shandong Qunxing (or for a small inter‑company balance due from Shandong Qunxing) are, in all probabilities, negligible.

28. The present available assets of Qunxing and Best Known are cash in Hong Kong, in the sums of approximately HK$81.94m and HK$30.24m respectively, totalling HK$112.2m. Apart from the investors proposed to be compensated by the orders sought herein, there are no other known creditors. Qunxing no longer has any office, staff or business.

III. Relevant statutory provisions

29. S 213 of the SFO provides as follows:

“(1) Where —
(a) a person has —
(i) contravened —
(A) any of the relevant provisions;
(B) any notice or requirement given or made under or pursuant to any of the relevant provisions;
(C) any of the terms and conditions of any licence or registration under this Ordinance; or
(D) any other condition imposed under or pursuant to any provision of this Ordinance;
(ii) aided, abetted, or otherwise assisted, counselled or procured a person to commit any such contravention;
(iii) induced, whether by threats, promises or otherwise, a person to commit any such contravention;
(iv) directly or indirectly been in any way knowingly involved in, or a party to, any such contravention; or
(v) attempted, or conspired with others, to commit any such contravention; or
(b) it appears, whether or not during the course or as a result of the exercise of any power under Part VIII, to the Commission that any of the matters referred to in paragraph (a)(i) to (v) has occurred, is occurring or may occur,
the Court of First Instance, on the application of the Commission, may, subject to subsection (4), make one or more of the orders specified in subsection (2).
(2) The orders specified for the purposes of subsection (1) are—
(a) an order restraining or prohibiting the occurrence or the continued occurrence of any of the matters referred to in subsection (1)(a)(i) to (v);
(b) where a person has been, or it appears that a person has been, is or may become, involved in any of the matters referred to in subsection (1)(a)(i) to (v), whether knowingly or otherwise, an order requiring the person to take such steps as the Court of First Instance may direct, including steps to restore the parties to any transaction to the position in which they were before the transaction was entered into;
(c) an order restraining or prohibiting a person from acquiring, disposing of, or otherwise dealing in, any property specified in the order;
(d) an order appointing a person to administer the property of another person;
(e) an order declaring a contract relating to any securities, structured product, futures contract, leveraged foreign exchange contract, or an interest in any securities, structured product, futures contract, leveraged foreign exchange contract or collective investment scheme to be void or voidable to the extent specified in the order;
(f) for the purpose of securing compliance with any other order made under this section, an order directing a person to do or refrain from doing any act specified in the order;
(g) any ancillary order which the Court of First Instance considers necessary in consequence of the making of any of the orders referred to in paragraphs (a) to (f).
……
(4) The Court of First Instance shall, before making an order under subsection (1), satisfy itself, so far as it can reasonably do so, that it is desirable that the order be made, and that the order will not unfairly prejudice any person.
……
(8) Where the Court of First Instance has power to make an order against a person under subsection (1), it may, in addition to or in substitution for such order, make an order requiring the person to pay damages to any other person.
……”

30. S 277 of the SFO provides:

“277. Disclosure of false or misleading information inducing transactions
(1) Disclosure of false or misleading information inducing transactions takes place when, in Hong Kong or elsewhere, a person discloses, circulates or disseminates, or authorizes or is concerned in the disclosure, circulation or dissemination of, information that is likely —
(a) to induce another person to subscribe for securities, or deal in futures contracts, in Hong Kong;
(b) to induce the sale or purchase in Hong Kong of securities by another person; or
(c) to maintain, increase, reduce or stabilize the price of securities, or the price for dealings in futures contracts, in Hong Kong,
if —
(i) the information is false or misleading as to a material fact, or is false or misleading through the omission of a material fact; and
(ii) the person knows that, or is reckless or negligent as to whether, the information is false or misleading as to a material fact, or is false or misleading through the omission of a material fact.”

31. S 298 of the SFO provides:

“298. Offence of disclosure of false or misleading information inducing transactions
(1) A person shall not, in Hong Kong or elsewhere, disclose, circulate or disseminate, or authorize or be concerned in the disclosure, circulation or dissemination of, information that is likely —
(a) to induce another person to subscribe for securities, or deal in futures contracts, in Hong Kong;
(b) to induce the sale or purchase in Hong Kong of securities by another person; or
(c) to maintain, increase, reduce or stabilize the price of securities, or the price for dealings in futures contracts, in Hong Kong,
if —
(i) the information is false or misleading as to a material fact, or is false or misleading through the omission of a material fact; and
(ii) the person knows that, or is reckless as to whether, the information is false or misleading as to a material fact, or is false or misleading through the omission of a material fact.
(2) Subject to subsections (3) to (5), a person who contravenes subsection (1) commits an offence.”

32. S 384(1) of the SFO provides:

“384. Provision of false or misleading information
(1) Subject to subsection (2), a person commits an offence if —
(a) he, in purported compliance with a requirement to provide information imposed by or under any of the relevant provisions, provides to a specified recipient any information which is false or misleading in a material particular; and
(b) he knows that, or is reckless as to whether, the information is false or misleading in a material particular.”

33. S 342F of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32) provides:

“342F. Criminal liability for misstatements in prospectus
(1) Where a prospectus relating to shares in or debentures of a company incorporated outside Hong Kong (whether the company has or has not established a place of business in Hong Kong) which is issued, circulated or distributed in Hong Kong after the commencementof the Companies (Amendment) Ordinance 1992 (86 of 1992) includes any untrue statements, any person who authorized the issue, circulation or distribution of the prospectus in Hong Kong shall be liable to imprisonment and a fine, unless he proves either that the statement was immaterial or that he had reasonable grounds to believe and did up to the time of the issue, circulation or distribution of the prospectus in Hong Kong believe that the statement was true.”

IV. Contraventions of statutory provisions

34. Based on the above findings, I am satisfied that Qunxing had committed market misconduct in the context of s 277 of the SFO:

(1) As shown by the expert evidence of Ms Winnie Pao, the false information about the financial results of Qunxing was likely (a) to induce investors to subscribe for shares in Qunxing and the buying and selling of such shares, and (b) to maintain, increase, or stabilize the price of Qunxing shares.
(2) The information was false or misleading as to a material fact, or is false or misleading through the omission of a material fact. The expert evidence of Mr Cheung Yuk Lam established the materiality of the relevant misstatements.
(3) Qunxing disclosed, circulated or disseminated, or authorized or was concerned in the disclosure, circulation or dissemination of, such information.
(4) As was demonstrated by the evidence, Qunxing was in the close control of the 3^rd and 4^th defendants who, I infer, knew that the information was materially false or misleading. This knowledge is to be attributed to Qunxing for the purpose of s 277, applying the principles summarised in Moulin Global Eyecare Trading Ltd v Commissioner of Inland Revenue (2014) 17 HKCFAR 218 at §106.
(5) Accordingly, Qunxing had engaged in disclosure of false or misleading information inducing transactions within the meaning of s 277(1).

35. On the same basis, I also find that Qunxing had committed an offence under s 298 of the SFO.

36. In the context of s 384 of the SFO, I find that Qunxing had committed an offence in that:

(1) Qunxing provided the IPO Prospectus, annual reports and results announcements to the Commission (a “specified recipient” under s 384(8)(a)) in purported compliance with the requirements under the Securities and Futures (Stock Market Listing) Rules (Cap 571V).
(2) The information provided was false or misleading in a material particular.
(3) Based on the knowledge of the 3^rd and 4^th defendants attributed to it, Qunxing knew that the information was false or misleading in a material particular.

37. I also find that Qunxing breached s 342F of the Companies (Winding Up and Miscellaneous Provisions) Ordinance in that:

(1) The IPO Prospectus was a prospectus relating to shares in a company incorporated outside Hong Kong and was issued, circulated or distributed in Hong Kong.
(2) The IPO Prospectus included untrue statements.
(3) Qunxing was a person who authorized the issue, circulation and distribution of the IPO Prospectus in Hong Kong.
(4) The statements were not shown to be immaterial; nor was it proved that Qunxing had reasonable grounds to believe and did believe that they were true.

38. It follows that for the purposes of s 213 of the SFO, Qunxing has contravened “relevant provisions”, as defined in Schedule 1 to the SFO to include the provisions of the SFO and of Parts II and XII of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32), so far as those Parts relate, directly or indirectly, to the performance of functions relating to prospectuses. Accordingly, Qunxing is a person that falls within the ambit of s 213(1)(a)(i)(A) and s 213(2)(b) of the SFO. Declarations will follow, the precise terms of which I leave to the Commission to work out and submit to the court for approval.

V. Position of the 2^nd, 3^rd and 4^th defendants

39. On the evidence, I am also satisfied that the 2^nd, 3^rd and 4^th defendants had directly or indirectly been knowingly involved in, or a party to, the contraventions by Qunxing (s 213(1)(a)(iv)), or had been involved in the contraventions whether knowingly or otherwise (s 213(2)(b)). They are therefore persons falling within the ambit of s 213(1)(a)(iv) and s 213(2)(b) of the SFO. There will also be declarations accordingly.

VI. Relief for the benefit of investors

The orders sought

40. I turn to the question of financial relief, which seems to me to be more complicated. The Commission seeks primarily an order under s 213(2)(b) requiring the defendants to make payments to the public shareholders and to Victory Asset, with a view to restoring them to the positions in which they were before their subscription or purchase of Qunxing’s shares or warrants. Broadly described, the proposed scheme involves the following:

(1) Only Victory Asset and the shareholders of Qunxing as at 26 August 2013[1] would be encompassed within the scheme. There were in total 26,906 such shareholders[2] including those holding shares in their own name or beneficially, ascertained after enquiries made to Qunxing’s share registrar Tricor, CCASS and 361 market intermediaries (banks or brokerage firms).
(2) For each investor, the actual cost incurred in acquiring the securities would as far as possible be calculated as follows. Where the shares were acquired in the IPO in September 2007 or the open offer in December 2010, the subscription price of HK$5.35 or HK$0.66 per share respectively would be used. Where shares were purchased on the market in cash, the price paid would be treated as the cost. Where shares were transmitted or transferred not for cash, the daily market closing price as at the date of transmittance or transfer would be adopted. Where there is insufficient trading information to ascertain the actual acquisition cost (which is the case in relation to 2,051 shareholders), the last trading price of HK$2.18 per share would be adopted. Dividends received by the investors would be deducted from the cost, and incidental expenses would be added.
(3) For Victory Asset, the actual cost of HK$10.328m would be taken as the cost incurred in acquiring the warrants.
(4) The defendants would be ordered to pay these amounts in order to restore the investors to their original position. The estimated total sum payable thus to the shareholders and Victory Asset is approximately HK$1,419.58m, although the assets available in Qunxing and Best Known only amounted to about HK$112.2m.

41. Alternatively, the Commission seeks an order under s 213(8) requiring the defendants to pay damages to the public shareholders and Victory Asset.

42. Ancillary orders are sought to appoint Mr Bruno Arboit, who had already done a substantial amount of analysis and given evidence herein on the losses suffered by the investors, to receive the assets of Qunxing and Best Known and to make payments therefrom pro rata to the investors. His function would include calculating the precise amount payable to each shareholder, notifying them, receiving the funds to be distributed, preparing cheques for payment to the shareholders and dealing with any relevant queries and disputes raised by them.

43. I am grateful to counsel for the Commission and their team for their research and submissions, made partly in answer to the questions I raised. Conscious of the fact that I have heard no opposing submissions and that the contentions advanced involve the application of s 213 in a novel manner, I shall seek to explain my decision as follows.

Nature of s 213 remedy

44. Civil remedies both at common law and under the SFO and the Companies (Winding Up and Miscellaneous Provisions) Ordinance are potentially available to investors for losses suffered in reliance on false information. Thus, in connection with the provisions which were contravened in this case, ss 281 and 305 of the SFO provide for liability to pay compensation to an investor by way of damages for any pecuniary loss sustained as a result of market misconduct, which includes the disclosure of false or misleading information contravening ss 277 and 298 respectively. Ss 40 and 342E of the Companies (Winding Up and Miscellaneous Provisions) Ordinance provide for liability to pay compensation to subscribers for loss sustained by reason of untrue statements contained in a prospectus that contravenes s 342F. There are also general provisions in s 108 of the SFO for liability to pay compensation by way of damages for pecuniary loss sustained as a result of reliance on a fraudulent, reckless or negligent misrepresentation, and in s 391 of the SFO for liability to pay damages for pecuniary loss sustained by a person as a result of acting in reliance on a false or misleading communication concerning securities or futures contracts.

45. Unlike s 213, however, these provisions may only be invoked by the persons themselves who have sustained the loss in question, not by the Commission. S 213, in contrast, confers a right of action on the Commission as plaintiff. As s 213(1) provides, the orders under subsection (2) may be made “on the application of the Commission”, not of any other person. S 213 is “complementary” to the civil liabilities created by ss 281 and 305, and the orders under s 213(2) are:

“by their nature designed to ensure that the relevant provisions are complied with (section 5(1)(d)), maintain and promote confidence in the industry (section 5(1)(g)), protect investors (section 5(1)(l)) and suppress illegal practices (section 5(1)(n))” (Securities and Futures Commission v Tiger Asia Management LLC [2012] 2 HKLRD 281 at §35 per Tang VP (as he then was)).

46. Insofar as financial awards are provided for, the purpose of s 213 is of course to provide remedies for the benefit of investors, not for the benefit of the Commission. In Securities and Futures Commission v Tiger Asia Management LLC (2013) 16 HKCFAR 324, at §16, Lord Hoffmann NPJ, distinguishing s 213 from criminal proceedings or proceedings in the Market Misconduct Tribunal, said:

“Section 213, on the other hand, provides remedies for the benefit of parties involved in the impugned transactions. They include injunctions and the appointment of receivers to secure property with a view to recovery by the victims of market misconduct, orders that particular transactions be unwound, orders declaring particular transactions to be void or voidable. In these proceedings the SFC acts not as a prosecutor in the general public interest but as protector of the collective interests of the persons dealing in the market who have been injured by market misconduct. Proceedings under s 213 are the public law analogue of actions for damages by individuals under s 305 rather than a substitute for a criminal prosecution or proceedings before the MMT.”

47. This does not mean that s 213 is merely procedural in the provision of financial relief, limited to providing a representative mechanism for enforcing existing individual rights. In Securities and Futures Commission v C [2009] 4 HKLRD 315, at §35, Le Pichon JA said that the range of remedies contained in s 213(2)

“were created by statute and are intended or designed to provide substantive relief to address specific types of wrongdoing …”

It can be seen, for example, that the statutory remedy in s 213(2)(b) is available against a third party involved in any matter in s 213(1)(a)(i)‑(v) albeit there is no contractual cause of action at common law against such a person for rescission of the transaction. It has also been held in the UK that similar provisions in ss 6 and 61 of the Financial Services Act 1986 were not mere machinery to enable the Securities and Investments Board to enforce the investors’ substantive rights conferred by other provisions on their behalf: Securities and Investments Board v Pantell SA (No 2) [1993] Ch 256, 263F‑H, 277B‑C.

48. Indeed, as pointed out in Gray, Regulatory Restitution under Financial Services Legislation [2004] RLR 52 at 53 in relation to UK legislation:

“It is the shortcomings of private law as an efficacious means of ensuring redress and compensation that provide justification for the existence of financial regulators’ powers to apply to the courts, in certain circumstances, to seek restitutionary orders against firms and individuals who are in contravention of the substance of financial regulatory legislation and rules. The fruits of such restitutionary orders may then be applied by the regulators to the benefit of not just one investor who has suffered loss as a result of the contravention but, if need be, a whole class or range of such investors.”

49. There is a very real risk that the purpose of the legislature in enacting s 213(2) would be defeated if it was regarded as providing merely a machinery for enforcing rights already vested in the investors under the common law or other provisions and that each and every constituent element of these causes of action (such as reliance and inducement) was required to be separately proved for each investor. Accordingly I accept the submission of counsel on behalf of the Commission, that in making provision for remedies for the benefit of investors, s 213 is not merely procedural.

50. Instead, s 213 creates a substantive statutory cause of action which is vested in the Commission. The purpose is to provide a statutory regime whereby the Commission, as regulator, can take action to obtain civil remedies for the benefit of investors, who may otherwise be deterred by cost and other considerations from instituting legal proceedings individually to obtain redress for their relatively small losses: see the Court of Appeal’s decision in Securities and Futures Commission v Tiger Asia Management LLC [2012] 2 HKLRD 281 at §24 per Tang VP. There is a wider public interest in this because, as Steyn LJ put it in Pantell at p 282B‑C:

“The civil law provides a framework for the redress of individual grievances. But it also fulfils a wider social purpose in setting standards for the markets and in discouraging aberrant behaviour. But if resort to civil remedies is impracticable for most individual investors the sanctions of the civil law cannot play their proper role.”

Persons against whom order under s 213(2)(b) may be made

51. S 213(2)(b) was a new provision in the SFO[3] although s 213 itself can trace its origin to the Securities Ordinance of 1974: Securities and Futures Commission v Tiger Asia Management LLC (2013) 16 HKCFAR 324, §19. There appears to be no similar provision in Australia, New Zealand or Canada. The foreign legislation closest to it in form is s 6(2) of the (UK) Financial Services Act 1986 (considered in Pantell), which was later replaced by ss 380‑382 of the (UK) Financial Services and Markets Act 2000.

52. The terms of s 213(2)(b) are very wide indeed. It confers power on the court to make an order

“requiring the person to take such steps as the Court of First Instance may direct, including steps to restore the parties to any transaction to the position in which they were before the transaction was entered into” (emphasis added).

The latter words referring to the restoration of the parties’ position are of course “classic features of a rescission in equity”: Pantell, p 264B. In Securities and Futures Commission v C at §36, Le Pichon JA said:

“Section 213(2)(b) enables an order to be made that would restore all the parties to the transaction to their respective former positions. In other words, it is restitutionary in nature and, in conjunction with an order under section 213(2)(c), would provide compensation to those who have sustained losses through the wrongdoing in question, in the present case, insider dealing.”

53. While the provision is not in terms so limited, it appears that the orders made in previous cases under s 213(2)(b) were all restorative orders (ie orders to restore the parties to a transaction to their pre‑transaction position) where the defendant was a party to the transaction affected by the contravention in question. In Securities and Futures Commission v Tsoi Bun [2014] 2 HKLRD 1, the defendant had been found guilty of price‑rigging, which had enabled him to buy futures contracts at a depressed price or sell them at an inflated price to the detriment of his counterparties. He was ordered to pay money to compensate his counterparties in the trades in question. In Securities and Futures Commission v Young Bik Fung [2016] 1 HKLRD 1249[4], Anthony Chan J made orders under s 213(2)(b) against the defendants who had engaged in insider dealing by acquiring shares, so as to compensate the counterparties who sold them the shares in question. Securities and Futures Commission v Sun Min [2017] 4 HKLRD 211 was another insider dealing case. There Harris J made an order under s 213(2)(b), by consent following certain findings made by the Market Misconduct Tribunal, for the defendant to make payment to 51 counterparties in the trades in question, ie those who had sold her their shares before the inside information was published that lifted the share price. All these are, therefore, cases in which the defendant subjected to a restorative order was himself a party to the transaction which was carried out in contravention of the relevant provisions. The restorative order was made for the benefit of investors dealing on the market as counterparties to the defendants.

54. This does not necessarily mean that an order for restoration under s 213(2)(b) can only be made against a party to the transaction to be undone in effect. The section does not contain any such express restriction, but is “open‑textured”[5]. The width of the section and of the powers it confers on the court are “characterised by their extreme flexibility” and “should not be judicially cut down” (Securities and Investments Board v Scandex Capital Management A/S [1998] 1 WLR 712, 723B, 726B). Its terms permit an order to be made against a person if he has been involved in any of the matters referred to in s 213(1)(a)(i) to (v) — these categories of persons are not necessarily themselves parties to the transactions in question. They may be persons who have aided or abetted a contravention or simply a person who has been involved in it.

55. In the present case, of the 4 defendants, only Qunxing was a counterparty to the transactions in question, and then only in relation to the IPO and open offer of shares and the issue of warrants to Victory Asset. Can the type of order sought by the Commission be granted against the 2^nd to 4^th defendants, and against Qunxing in relation to purchases of shares on the market? It is ultimately a matter of statutory construction. There seems to me no a priori reason to limit the persons against whom an order may be made under s 213(2)(b) to those who are counterparties to the transactions in question. The similar section in the (UK) Financial Services Act 1986 expressly enabled a restorative order to be made, not only against a person who has entered into a transaction in contravention of the law, but also against any other person who has been knowingly concerned in the contravention: see Pantell, p 264C‑D. I consider that the type of order sought can in principle be made against all four of the defendants.

Should the order be made?

56. Not only is s 213(2) striking in its width, it is also remarkable in that the cause of action it creates appears to be discretionary. S 213(1) confers a discretion on the court by providing that it “may”, on the application of the Commission, make one or more of the orders specified in subsection (2). The jurisdiction arises once the court finds that the matters set out in s 213(1)(a) have occurred. The only express fetter on this discretion is subsection (4), which requires the court to satisfy itself on two matters, “so far as it can reasonably do so”, before making an order, namely, (i) that it is desirable that the order be made, and (ii) that the order will not unfairly prejudice any person.

57. Desirability and fairness are highly general concepts which do not lend themselves to definition or precise exposition. A fairly broadbrush approach has to adopted where necessary. In the present case an order along the lines proposed by the Commission should in my view be made having regard to the following.

58. In contrast to the previous cases involving s 213, this case is about misstatement. The crux of the complaint is that Qunxing (with the involvement of the 2^nd to 4^th defendants) had published materially false or misleading information concerning its financial results and condition which was likely to have induced investors to subscribe for or purchase its shares when they would otherwise not have done so, and that they have suffered loss as a result.

59. In an ideal world, where every fact is known or is ascertainable without cost and time, a fair and just scheme for compensating them, having regard to the usual principles of the law on misrepresentation, might be: (i) identify each investor who had acquired securities of Qunxing between the IPO and the suspension of trading; (ii) determine in each case in respect of each acquisition whether the investor relied on and was induced by the false information in making the acquisition; (iii) determine in respect of each investor whether he relied on and was induced by the false information in not disposing of the securities acquired at all or until a particular date; (iv) assess the loss suffered by each investor by reference to the acquisition price and the subsequent lower sale price or, if the securities are not yet sold, their true value or price as at an appropriate date; and (v) make appropriate adjustments for dividends, expenses and interest.

60. But in the real world these facts are either not all ascertainable or are so only at the end of a vastly complex, lengthy and costly process. To insist on investigating the circumstances of every individual investor and investment might completely destroy the efficacy of the statutory scheme and defeat the legislative purpose. It is not surprising therefore that there has been no attempt in this case to establish reliance and inducement on an individual basis in the case of each investor. Despite that proceedings under s 213 are “the public law analogue of actions for damages by individuals under s 305”[6], it is in my view not necessary to bring into s 213(2)(b) all the requirements of a private law cause of action of deceit in the case of each investor, especially where to do so would render the statutory remedy ineffective. In any event, the expert evidence received by this court was that the false financial information about Qunxing published between the IPO in 2007 and suspension of trading in 2011 (which included the annual results up to 2009) was, on a general level, likely to influence investors to purchase Qunxing shares or at least not to sell them, and to affect the share price accordingly. Even if an investor did not himself read the IPO Prospectus, annual reports and results announcement, the relevant information would have found its way into market commentaries and would have been reflected in market sentiments about Qunxing’s shares and ultimately in the prevailing share price.

61. A prominent omission in the proposed scheme, because it seeks only to compensate holders of shares or securities of Qunxing as at 26 August 2013, is that investors who had already sold or disposed of all their shares by that date would not be compensated, nor would shareholders as at 26 August 2013 be compensated in relation to any shares they had earlier disposed of, however great the loss might have been. That said, it is relevant to note that no separate proceedings have been brought by any investor against any of the defendants to recover such losses. Likewise, no attempt had been made to credit any of the shareholders with any profit from an intermediate sale. Given the substantial average daily turnover in the trading of shares[7], to ascertain all past sales would involve a hideously complicated exercise which is in my view not warranted. At least in this sense s 213(2)(b) may be said to be a very “blunt instrument”[8] for achieving redress in a case like this.

62. The primary purpose of the kind of order sought must be protection of the investing public. Such protection, where investors have been induced by false or misleading information disseminated in contravention of the provisions referred to above (ss 277, 298 and 384 of the SFO and s 342F of Cap 32) to subscribe for or purchase shares or warrants, should take the form of rescission of the transaction or payment of compensation.

63. To the extent that the proposed scheme extends to an investor, it does seek to restore him to the position in which he was before he acquired the shares in question (following the latter part of s 213(2)(b)), provided that he is also required in principle to make counter‑restitution such as by delivering up the share certificate or signing an appropriate document or transfer form for that purpose or giving credit for the residual value, if any, of the shares in his possession (see Pantell, pp 280E, 281B‑D, 283E, 286B‑C; Scandex, p 724F‑H). Such counter‑restitution is probably merely of theoretical interest in this case because the shares in Qunxing are likely to be valueless after the payments ordered are made. The fact that the scheme does not seek to affect the position of the sellers of Qunxing shares on the market to these investors does not remove the proposed order out of the scope of s 213(2)(b).

64. Qunxing obtained a very large amount of funds through the IPO, the open offer and the issue of warrants to Victory Asset. Best Known had also received from Qunxing a substantial part (HK$429.8m) of the proceeds of subscription for shares (though HK$382.36m was transferred back to Qunxing). Through their company Boom Instant, the 3^rd and 4^th respondents had received dividends of approximately RMB 329m from Qunxing between 2008 and 2013. Moreover, they were involved in knowingly disseminating materially false and misleading financial information which they must have known would induce investors to acquire shares in Qunxing or retain shares already acquired. There is a high degree of culpability in the contravention: see Financial Services Authority v Shepherd[2009] EWHC 1167 (Ch), §36. Requiring them to compensate investors for the false and misleading information published by Qunxing is in my view not unfair to them. Nor has any defendant appeared in these proceedings to contend that the proposed orders would unfairly prejudice him.

65. Although s 213(2)(b) does not enforce private law rights, I note that at common law, in a case of fraudulent misrepresentation, the defendant is generally taken to be responsible for all losses suffered as a direct consequence of the tort without any need to prove foreseeability of the loss. Moreover, the loss is not necessarily measured by reference to the true value of the shares as at the date of acquisition (as opposed to an even lower value at a later date) where the purchaser became locked into the transaction by reason of the fraud perpetrated on him: Smith New Court Securities Ltd v Scrimgeour Vickers [1997] AC 254, 266‑267, 285.

66. In reality, the focus of these proceedings is the assets still held by Qunxing and Best Known in the total sum of approximately HK$112.2m. There is no other known asset to pay the investors anything more, and one suspects the Commission is not confident it will be able to recover anything personally from the Zhus. Under the proposed scheme, the shareholders and Victory Asset would have to share pro rata the available assets (ie HK$112.2m less costs of the Commission, the receiver, and the proposed administrator, and miscellaneous expenses) which are sufficient only to meet a fraction of their total losses (an estimated HK$1,419.58m). But the order would at least have the effect of preventing the assets of Qunxing and Best Known from becoming a surplus on a winding up to be distributed (as to 67.78%) to Boom Instant.

67. In the ultimate analysis, where one is concerned, as here, with innumerable sale and purchase transactions in relation to Qunxing shares and finite and limited resources for the payment of compensation, a robust approach has to be adopted. As Deputy Judge Halpern QC of the English High Court said in Financial Conduct Authority v Anderson [2014] EWHC 3630 (Ch) at §13:

“… One of the most striking features of this case is the enormous gap between the losses suffered by depositors and the sums available for distribution. This makes it imperative that any method of distribution is as simple as is possible, consistent with it being fair in a rough‑and‑ready way. There is a real risk that any attempt to achieve perfect justice would itself become a source of unfairness, firstly because it is likely to involve spending disproportionate costs in attempting to fine‑tune the scheme, secondly because it is impossible to understand fully the divergent interests of each class of depositors when they are not separately represented, and thirdly because a complex scheme is likely to be disproportionately expensive to administer.”

68. In all the circumstances, I consider that it is desirable, and would not cause unfair prejudice to any person, for the proposed order to be made under s 213(2)(b). It is unnecessary to deal with the alternative claim for an order for damages under s 213(8). There will accordingly be an order along the lines sought by the Commission as discussed above. I give liberty to apply in relation to the precise terms of the order to be made.

VIII. Conclusions and orders

69. For these reasons, there will be declarations and orders as stated above, with an order nisi that the Commission do have the costs of the action, with a certificate for two counsel, to be taxed if not agreed.

(Godfrey Lam)
Judge of the Court of First Instance
High Court

r Ambrose Ho SC and Mr Victor Dawes SC, instructed by Securities and Futures Commission, for the Plaintiff

Stephenson Harwood, for the 1^st and 2^nd Defendants/the Joint and Several Interim Receivers and Managers of the 1^st and 2^nd Defendants, was excused from attendance

The 3^rd Defendant was not represented and did not appear

The 4^th Defendant was not represented and did not appear

[1] Being the date of announcement of interim results of Qunxing for the 6 months ended 30 June 2013. It was adopted as a practical date close to the date of the Writ of Summons herein.

[2] 4,272 individual shareholders registered with Tricor (except Boom Instant), 153 individual shareholders registered with CCASS and 22,481 shareholders who held shares through 361 intermediaries.

[3] See Paper No 9/01 for discussion on 20 April 2001, Bills Committee on Securities and Futures Bill and Banking (Amendment) Bill 2000, Annex 1.

[4] An appeal to the Court of Appeal was dismissed (CACV 33/2016; 9 November 2017).

[5]Kayden Ltd v Securities and Futures Commission (2010) 13 HKCFASR 696, §41.

[6]Securities and Futures Commission v Tiger Asia Management LLC, supra, at §16.

[7] 4.8m up to March 2008, 0.73m for the year up to March 2009, 1.19m for the year up to March 2010 and 2.1m up to March 2011.

[8]Financial Services Authority v Shepherd[2009] EWHC 1167 (Ch), §43.

HCA 2428/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2428 OF 2013

____________

BETWEEN
	SECURITIES AND FUTURES COMMISSION	Plaintiff
and
	QUNXING PAPER HOLDINGS COMPANY LIMITED	1st Defendant
	BEST KNOWN GROUP LIMITED	2nd Defendant
	ZHU YU GUO (朱玉國)	3rd Defendant
	ZHU MO QUN (朱墨群)	4th defendant
____________

Before: Deputy High Court Judge Leung in Chambers

Date of Hearing and Decision: 6 June 2014

Date of Reasons for Decision: 9 June 2014

________________________________

R E A S O N S F O R D E C I S I O N

________________________________

1. On 12 December 2013, the plaintiff (“SFC”) obtained a mareva injunction restraining the 1^st defendant (“Qunxing”) and its wholly owned subsidiary, the 2^nd defendant (“Best Known”), from disposing of their assets up to the value of HK$1,968,000,000. The injunction has since been varied several times. The 3^rd defendant (“Zhu YG”) and the 4^th defendant (“Zhu MQ”), the former Chairman and Vice Chairman of Qunxing respectively, were joined in April 2014.

2. 3 summonses were before me:

(1) By the summons dated 3 June 2014, Qunxing and Best Known applied for further variation of the injunction to allow them to make use of the funds in Hong Kong frozen by the injunction to defray their legal expenses incurred and to be incurred (so called “the Allowance Application”)[1].
(2) By the summonses dated 3 June 2014 and 5 June 2014, Qunxing and Best Known applied to join their banker (“ICBC”) for the purpose of an order obliging ICBC as a party to release the money from their bank accounts to their solicitors for the settlement of legal expenses pursuant to the previous orders of the court (so called “the Banker Application”)[2].

3. At the end of the hearing, I allowed the Banker Application; but dismissed the Allowance Application. I now give my reasons.

BACKGROUND

4. Briefly, as a result of investigation into the affairs of Qunxing, a company listed on the Main Board of the Hong Kong Stock Exchange, the SFC commenced this action against Qunxing and Best Known. The claim is essentially that the Qunxing has misled the public by exaggerating its turnover by gross overstatement of sales through its operational arm, Shandong Qunxing (“the Shandong Subsidiary”), before and after its offer for public subscription.

5. Since the mareva injunction was granted, it has been varied several times upon the applications by Qunxing and Best Known. The last variation was granted by Mr Recorder Houghton SC on 23 January 2014. In the learned Recorder’s written decision of that date, the background of this case was set out, which I would not repeat herein. Suffice it to say that substantial sums have been allowed to be paid out of the frozen assets to fund the ordinary business expenses of the companies.

6. In respect of legal expenses, the injunction was varied:

(1) by the order of DHCJ Ng on 20 December 2013 allowing a lump sum of HK$500,000 for both companies;
(2) by the order of Chung J on 3 January 2014 allowing a further sum of HK$1 million for both companies; and
(3) by the order of Mr Recorder Houghton SC on 23 January 2014 allowing a further sum of HK$1 million for both companies plus HK$1.5 million per month for Qunxing and HK$150,000 per months for Best Known from 1 January 2014 to 30 April 2014.

7. Now the companies sought the following further variations allowing payment out of the frozen assets:

(1) A further sum of HK$2.346 million for legal expenses allegedly incurred by Qunxing from 10 May 2014 to today;
(2) A further sum of HK$212,900 for legal expenses allegedly incurred by Best Known from 10 May 2014 to today;
(3) A monthly sum of HK$2.363 million towards legal expenses to be incurred by Qunxing from June 2014 to February 2015; and
(4) A monthly sum of HK$227,000 towards legal expenses to be incurred by Best Known from June 2014 to February 2015.

8. The SFC opposed the application. So did the Joint and Several Interim Receivers and Managers of the 2 companies (“IR”)[3].

THE PRINCIPLES

9. The principles have been rehearsed in the written decisions of DHCJ Ng dated 20 December 2013 and Mr Recorder Houghton SC dated 23 January 2014. I reiterate what Gee, Commercial Injunctions (5^th ed), says (at §§20.054-20.055):

“ The correct test is to consider objectively the overall justice of allowing the payment to be made including the likely consequences of permitting it on the prospects of a future judgment being left unsatisfied, and bearing in mind that the assets belong to the defendant and that the injunction is not intended to provide the claimant with security for his claim or to create an untouchable pot which will be available to satisfy an eventual judgment.
Therefore, the principle is that a defendant can use its own money which is frozen under a Mareva injunction to fund the defence provided that it is apparent that there are no other funds or source of payment which should as a matter of objective fairness be used to pay for the defence rather than the frozen funds. This may require the defendant to adduce ‘credible evidence’ about his other assets before the court can be satisfied that it is just that he should be able to use the particular frozen assets.
Because a real risk of dissipation has already been established by the evidence, judges are entitled to have a “very healthy scepticism” about assertions made by the party against whom the Mareva injunction has been granted, and this should be borne in mind in deciding whether further evidence should be required. If in addition the defendant has been less than frank in his dealings with the court or the claimant over legal or living expenses, this would tend to reinforce the case for putting in place a regime requiring the defendant to adduce evidence showing a complete picture each time he requires further funds, thus enabling the court to police the payments.”

Hong Kong Civil Procedure 2014 Vol.1 at §29/1/79 reads:

“……In considering whether the defendant has other assets available to meet expenses, the court is not limited to the funds to which the defendant has a strict legal right if there are reasonable grounds for believing that the defendant can obtain money elsewhere, including in appropriate cases, by lifting the corporate veil to take into account the resources of the defendant’s parent company.
……
……Where the defendant has hidden away substantial assets overseas, it would be unjust to permit the defendant to use the assets subject to a Mareva injunction to pay expenses……The court must seek to balance the risk of deliberate dissipation of frozen assets by the defendant against abuse of the freezing order to pressurize the defendant illegitimately……”

DISCUSSION

10. In line with the above principles, the SFC asked me to have a healthy skepticism about the assertions and evidence in support of the companies’ present application. I did no less than that.

11. Qunxing and Best Known described the present application as one of continuation or extension of the order last made by Mr Recorder Houghton SC. I would hence start with the decision of the learned Recorder.

12. Mr Wong SC (appearing with Mr Dawes) for the SFC has succinctly summarized in his submissions the significant parts of that decision which explained why the learned Recorder last allowed the variation in those terms. In this respect, the learned Recorder referred to the fact that there were substantial assets available in the Shandong Subsidiary which, as mentioned, was the wholly owned operation arm of Qunxing. Through the Shandong Subsidiary, Qunxing is interested in the majority of the group’s cash in the sum of RMB 655 million and undistributed profits in the sum of RMB1.3 billion.

13. Mr Li for the companies somehow suggested that the Recorder rejected the SFC’s argument by reference to such substantial assets of the Shandong Subsidiary. That in my view was inaccurate reading of the decision. What the Recorder did was indeed taking the substantial assets of the Shandong Subsidiary in account together with the business practice of Qunxing as well as the practical consideration in respect of sourcing the necessary funds from the Shandong Subsidiary to the companies in Hong Kong. The consideration of these factors prevailing at the time led the Recorder to conclude that the overall justice lied in favour of granting the variation (see §§37 to 40 of the decision).

14. It is important to note the concluding observation of the learned Recorder. He acknowledged that whilst it was feasible to transfer the funds from the Shandong Subsidiary to the companies here, it would have had to take at least a couple of months before the money could in fact be made available to the companies. Therefore the substantial assets of Shandong Subsidiary could have little bearing on a short term application. However, had he been asked to consider a longer period time, the position in regard to Shandong Subsidiary would have weighed more heavily in his deliberation.

15. By the present application, the companies were suggesting that the amounts so far allowed up to the end of April 2014 had been spent and the account was in deficit. They asked for variation to cover a long term, namely from May 2014 up to 2/2015.

16. In support, the companies argued that the development since the order of the Recorder left them with no alternative but resort to the frozen assets to defray their legal expenses. Yet such development was exactly what the SFC and the IR asked me to examine with scepticism. And it was not difficult to see why.

17. In view of the learned Recorder’s observations mentioned above, Qunxing and Best Known would have reasonably been expected to seek from the Shandong Subsidiary further funding of legal expenses in this action in the long run, albeit having to take months as observed by Mr Recorder Houghton SC. There was no suggestion or evidence of such attempt at all since January 2014.

18. On the contrary, unannounced to the SFC or the public, an application in the Mainland for the liquidation/restructuring of the Shandong Subsidiary had been made so that it became under receivership on 24 February 2014, just a month after the order of Mr Recorder Houghton SC. Further, after the SFC’s letter dated 18 March 2014 to Qunxing to inquire into the situation, Zhu YG and Zhu MQ resigned from Qunxing on 21 March 2014.

19. The SFC then applied ex parte (on notice) for interim receivership and managership of the companies in Hong Kong. This was granted by To J on 28 March 2014; and continued inter partes by Anthony Chan J on 4 April 2014. On the same day, Anthony Chan J also dismissed the companies’ application to discharge the injunction.

20. According to the Mainland legal advice obtained by the SFC, the receivership of the Shandong Subsidiary connotes either insolvency or a predominant likelihood of inability to pay its debts. The immediate question was, and still is, how the Shandong Subsidiary turned itself from possessing RMB655 million cash and RMB 1.3 billion of undistributed profits into a situation warranting receivership in just a month. Mr Ng for the IR raised the same question; and expected explanation by the companies in order to come clean of suspected hiding away or dissipating of the assets of the Shandong Subsidiary.

21. Mr Li referred to his clients’ evidence that the employees were concerned about the group’s future; and made complaint to the Mainland authorities, which led to the receivership. I found that difficult to understand, in view of the fact that up the time of the order of Mr Recorder Houghton SC, the Shandong Subsidiary still had substantial assets and the injunction was never extended to those assets.

22. One must also note that this was not a case of application for liquidation or restructuring by the employees or creditors of the Shandong Subsidiary. According to the documents, it was the Shandong Subsidiary which applied for voluntary liquidation and hence the receivership/ restructuring.

23. In the circumstances, the companies are effectively relying on the development which was their own making as the basis for their present application. For this, and against the above background, Qunxing and Best Known had much to explain in discharge of their evidential burden as the applying parties.

24. Qunxing and Best Known relied on the evidence of their current Chairman and director, Guo Guang Quan (“Quo”), in support of the present application; but he was actually unable to explain the state of affairs surrounding the Shandong Subsidiary. Until their resignation in March 2014, Zhu YG was the Chairman of Qunxing and the Shandong Subsidiary, while his son, Zhu MQ, was the Vice Chairman of Qunxing and director or the Shandong Subsidiary. They were in control of the group at the material time; yet were completely silent in respect of what happened.

25. Quo deposed to the effect that the new directors had made enquiries with the receiver of the Shandong Subsidiary but to no avail. But there was no evidence that attempt had actually been made to seek the receiver’s consent for allowing the Shandong Subsidiary to fund the legal expenses of its parent company in the present action. Mr Li did not argue otherwise; but questioned the meaning of such attempt in view of the stance of the receiver there.

26. Mr Li argued that so long as the current directors of the companies had done all they could, the companies without other financial means should not be prevented from using its own assets to fund its legal expenses for the defence of this action.

27. I could not agree in the circumstances of this case. As mentioned, Qunxing and Best Known could only expect their evidence to be subject to healthy scepticism every time when they sought variation of the injunction to allow them to use the frozen assets. This was not to facilitate abuse or illegitimate pressure on them but to ensure that injunction would remain as meaningful as when it was granted. If the companies could not provide actual and satisfactory explanation for what has happened to the substantial assets of the Shandong Subsidiary and what appeared to be a self-generated state of inability to source funds from the Shandong Subsidiary to Hong Kong, they could only expect the court to hold that against them in balancing where the overall justice lied.

28. Mr Wong and Mr Ng also asked me to assess the situation of Qunxing and Best Known in the light of the substantial amounts already allowed out of the frozen assets to be spent by the companies on legal expenses up to the end of April. In particular, Mr Wong submitted that whilst it was suggested that the balance of the companies with their solicitors was “in the red”, it was an assertion without details.

29. In my view, Qunxing and Best Known have failed to discharge their burden in significant respects in the present application. Overall justice did not lie in favour of granting the variation in the circumstances.

QUANTUM

30. Millions out of the frozen assets have so far been allowed for Qunxing and Best Known respectively towards their legal expenses in this action. This case has just reached the stage of close of pleadings. The companies now sought substantially more; and produced their solicitors’ skeleton bill of costs in support.

31. Mr Wong criticised the number of fee earners involved and highlighted items which had engaged or would engage excessive number of hours of work. He also questioned what appeared to be internal inconsistency between items. Some of them, in my view, were glaring. He submitted that the quantum projected was patently excessive and utterly unjustifiable. In the event that variation was allowed, he submitted that the amount allowed should in no way exceed the limit set by Mr Recorder Houghton in January.

32. Likewise, Mr Ng for the IR asked me to be sceptical about the quantum projected. He also observed that whilst the skeleton bill presented the alleged legal expenses incurred and to be incurred for the defence of this action, the correspondence with those acting for Qunxing and Best Known suggested that some of the expenses were spent on dealing with the inquiry and investigation by the SFC in exercise of its statutory power. Mr Ng questioned whether such expenses fell within the ambit of the orders of the court in granting the variations, which were for legal expenses for the conduct of defence in this action.

33. Mr Li explained that the substantial legal expenses had to be incurred in order to “catch up” with the years of investigation conducted by the SFC. Neither the SFC nor the IR sought to understate the complexity of the case. Nevertheless, whilst the SFC might have spent years on investigating into the affairs of Qunxing (and the Shandong Subsidiary) previously unknown to it, it sounds odd that Qunxing and Best Known were unable to answer the SFC’s contentions without having to spend like amount of effort on “catching up” with the SFC’s investigation.

34. I see merits in the arguments advanced by the SFC and the IR in respect of quantum. But in view of the above conclusion, I need go no further on this.

THE BANKER APPLICATION

35. As to the Banker Application, that the companies sought to achieve their purpose by way of all 3 summonses was unnecessary and confusing[4]. In any event, ICBC by letter dated 5 June 2014 confirmed no objection to that and would not attend the hearing.

ORDER

36. I therefore made the following order:

(1) The Allowance Application is dismissed; Qunxing and Best Known shall pay the costs of the SFC and the IR in any event[5]. Costs shall be taxed, if not agreed; and in the case of the SFC, with certificate for 2 counsel.
(2) ICBC is joined as a respondent to the Banker Application; and as such, ICBC shall comply with paragraphs 3 and 4 of the Order made by Anthony Chan J dated April 2014 (as per copies of that Order and (as referred to therein) the Order of Mr Recorder Houghton SC dated 23 January 2014 to be attached to the order made herein). No order as to costs of this application.

	(Simon Leung)
	Deputy High Court Judge

Mr Horace WONG SC and Mr Victor DAWES, instructed by the Securities and Futures Commission, for the plaintiff

Mr Laurence LI, instructed by Stevenson Wong & Co, for the 1^st and 2^nddefendants

Mr Ivan NG of Evershed, for the Joint and Several Interim Receivers and Manager

[1] §1 of the summons. §2 of the summons effectively asked the court to make an order confirming the order of Mr Recorder Houghton SC dated 23 January 2014 for the purpose of the Banker Application (below), which was unnecessary.

[2] §1 of the summons dated 3 June 2014; §§1-2 of the summons dated 5 June 2014 (§2 of this summons was actually identical to §2 of the other summons dated 3 June 2014 referred to above.

[3] The IR first requested to adjourn the matter, whilst both the SFC and the defendants were prepared to proceed. The IR eventually withdrew the request.

[4] See footnotes 1 and 2 above.

[5] At the hearing, the IR expressed concern about their exposure to costs liability as a result of the application initiated by the former directors of Qunxing and Best Known; and suggested that the former directors should be made personally liable for such costs. I refrained from doing so. Pursuant to the order of To J appointing the IR, the former directors of the companies were specifically allowed to conduct the defence in the present action on behalf of the companies. It will be for the IR at the appropriate stage to consider whether and, if yes, what recourse they have against the former directors for personal liability for such costs. The request of the IR also could not be entertained without first making the former directors parties in their personal capacities.

HCA 2428/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2428 OF 2013

________________________

BETWEEN
	SECURITIES AND FUTURES COMMISSION	Plaintiff
and
	QUNXING PAPER HOLDINGS COMPANY LIMITED	1st Defendant
	BEST KNOWN GROUP LIMITED	2nd Defendant
_______________________

Before: Hon Anthony Chan J in Chambers

Date of Hearing: 4 April 2014

Date of Decision: 4 April 2014

________________

D E C I S I O N

________________

1. There are 3 Summonses before this court. The first in time concerns the defendants’ application to discharge the injunction order grant by Mr Justice Chung on 12 December 2013 (“Injunction”), which has subsequently been varied.

2. There is agreement by counsel that I should deal with this Summons first.

3. The contest here concerns whether the plaintiff (“SFC”) has made out a serious issue to be tried in support of the Injunction. The defendants have filed and are relying upon the affirmation of Mr Zhou dated 24 March 2014 in support of their application.

4. To encapsulate the arguments succinctly, SFC’s case is premised upon an extensive investigation into the financial affairs of the 1^st defendant and its subsidiaries. By such investigation, evidence was uncovered which suggests that various financial information published by the 1^st defendant are seriously misleading. In particular, such information was inflated by the non-existing sales to Shangdong On Hing (“On Hing”) by Shangdong Qunxing (“Shangdong”).

5. It is the evidence of Mr Zhou that those sales between On Hing and Shangdong are genuine and that the SFC has been misled in its investigation because it is common for Mainland commercial entities to understate their business volume when the same is put under scrutiny.

6. I have also been reminded by Mr Li, who appears for the defendants, that the books of the 1^st defendant have been subjected to the scrutiny of no less than 4 firms of accountants, and no deficiency of the sort alleged by the SFC has been identified.

7. With respect to the arguments of Mr Li, I am unable to see how the evidence marshalled by the defendants before the court can undermine the evidence of the SFC. No doubt the contested evidence will have to be tried, but for the purpose of demonstrating a serious issue to be tried clearly that threshold has been satisfied. For completeness, I should say that I am not impressed by Mr Zhou’s evidence given the complete lack of documentary support. Neither am I convinced by his explanation as to why he is not in a position to produce any such document.

8. In the premises, this Summons is dismissed. Costs of this Summons be to the SFC with a certificate for 2 counsel. For taxation purpose, the hearing of the Summons has taken 1 hour.

(Anthony Chan)
Judge of the Court of First Instance
High Court

Mr Horace Wong SC and Mr Jonathan Chang, instructed by Securities and Futures Commission, for the plaintiff

Mr Laurence Li, instructed by Stevenson Wong & Co, for the 1^st and 2^nd defendants

HCA 2428/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2428 OF 2013

________________

BETWEEN
	SECURITIES AND FUTURES COMMISSION	Plaintiff
and
	QUNXING PAPER HOLDINGS COMPANY LIMITED	1st Defendant
	BEST KNOWN GROUP LIMITED	2nd Defendant
____________________

Before: Mr Recorder Houghton, SC in Chambers

Date of Hearing: 17 January 2014

Date of Judgment: 23 January 2014

________________________

J U D G M E N T

________________________

A. The Application

1. The 1^st and 2^nd defendants apply by summons for the variation of an injunction order first made by Chung J on 12December 2013. The summons, which was partially heard by Deputy Judge Marlene Ng on 3January 2014, is now in the following form:

“1. The Injunction Prohibiting Disposal of Assets made by the Honourable Mr. Justice Chung on 12 December 2013 as varied by the Order made by Deputy High Court Judge Marlene Ng on 20 December 2013 and the Order made by the Honourable Mr. Justice Chung on 3 January 2014 (‘the Varied Injunction Order’) be varied to read as follows:
Under paragraph 7 thereof:
‘This Order does not prohibit:
(a) The 1^st Defendant from withdrawing a lump sum of HK$798,143 on account of its ordinary business expenses (as more particularly set out in Schedule 5 annexed to this Order);
(b) The 1^st and 2^nd Defendants jointly from (in addition to the lump sum of HK$500,000 for payment of legal costs as varied by the order made by Deputy High Court Judge Marlene Ng on 20 December 2013) withdrawing a lump sum of HK$1,000,000 for payment of their legal costs and such payment be made out of the first account listed in Schedule 3 of the Injunction Order (Account No. 861-502-02039-0) to Messrs. Stevenson, Wong & Co.;
(c) The 1^st Defendant from:
(i) withdrawing from its account no. 861-502-02039-0 (the ‘ICBC Current Account’) at the Industrial and Commercial Bank of China (Asia) Limited (‘ICBC’) a lump sum of HK$2,729,521.20 for payments of its ordinary business expenses due and payable immediately or by 31 January 2014;
(ii) spending HK$560,000 per month from February 2014 onwards on its ordinary business expenses; such payments be drawn from the ICBC Current Account;
(iii) spending HK$2,125,000 per month until 30 April 2014 on legal advice and representation; such payments be drawn from the ICBC Current Account and made to Messrs. Stevenson, Wong & Co.;
(d) The 2^nd Defendant from spending HK$300,000 per month until 30 April 2014 on legal advice and representation; such payments be drawn from its account no. 861-600-01303-4 with ICBC and made to Messrs Stevenson, Wong & Co.’;
2. The 1^st Defendant's accounts nos. 861-502-03541-1 and 861-502-03540-8 both at ICBC be excluded from the Injunction Order for the purpose of settlement of dividend cheques paying declared but unclaimed dividends to shareholders. The 1st Defendant shall not by itself or through any other person operate either account or apply any of the funds therein for any other purpose;
3. Paragraph 1 of the Order of Deputy High Court Judge Marlene Ng on 20 December 2013 be amended by substituting the reference to account no. 861-60001783-6 at ICBC with a reference to the ICBC Current Account;
4. Time for service of this Summons be abridged; and
5. Costs reserved.”

2. I was informed by counsel for the defendants at the hearing, and I accept, that the need for funds to pay business expenses is a matter of some urgency. Accordingly these reasons address only briefly the detailed arguments and submissions that were addressed to me.

B. Background

3. This is summarized in the skeleton submissions of the parties and was expanded upon orally at the hearing on 17January 2014. In brief, the 1^st defendant is a company incorporated on 5 September 2006 in the Cayman Islands. It is now listed on the Hong Kong Stock Exchange, that listing having taken place on 2 October 2007 pursuant to a public offer and international placing. It seems to be common ground that approximately 345 million shares were issued to the public at that time, and that the 1^st defendant received in return gross proceeds of approximately HK$1,846 million.

4. Further shares were offered in December 2010, and shares were then issued totalling approximately HK$112 million in value.

5. The 1^st defendant is, primarily a holding company which owns 100% of its operational arm in the PRC, Shandong Qunxing Paper Ltd (“Shandong Qunxing”), through two wholly owned subsidiaries, one of which is the 2^nd defendant, and the other is Double Nation Ltd. These four companies together form what has been referred to as the Qunxing Group.

6. On 31 March 2011, the 1^st defendant issued a public announcement relating to the annual results of the Qunxing Group for 2010 referring to part of a KPMG auditor’s report which had resulted in KPMG making a disclaimer in regard to the financial statements of Qunxing Group.

7. Thereafter, in April 2011 the SFC opened an investigation into possible offences under the Securities and Futures Ordinance (regarding possible disclosure of false or misleading information inducing transactions) and the Companies Ordinance (regarding possible misstatements in the prospectus).

8. The 1^st defendant has filed evidence showing that it has appointed two independent firms of forensic accountants to look into the concerns raised by KPMG, and to review and investigate the audit issues. Those investigations are said to have found no evidence of manipulation of revenue, profit and cash position, falsification of books and records or misappropriation of assets. According to the SFC however, it is of the view that these investigations were unsatisfactory and insufficient. As it is described in the plaintiff’s skeleton submission:

“In the circumstances, the SFC issued a Writ of Summons against Ds on 12 December 2013 seeking injunctive and other orders pursuant to s213 SFO for the purpose of protecting the investors who subscribed D1’s shares and warrants.”

9. No statement of claim has yet been served, and by a separate summons the plaintiff seeks an enlargement of time of a further 14 days for service of that pleading. That application was opposed, but at the conclusion of the oral hearing on 17 January 2014 I made an order allowing that additional time for service of the statement of claim, with consequential extension of time to the defendants for their defences. Costs were ordered to be to the defendants.

10. The 1^st defendant’s assets have been disclosed through the exchange of evidence and are:

(1) a credit balance in bank accounts of about HK$150 million;
(2) securities valued at about HK$2 million;
(3) cost on account held by third parties (around HK$2 million); and
(4) the shareholding in Double Nature, which in turn holds the 2^nd defendant, which in turn holds Shandong Qunxing Paper Limited.

11. In the context of the issues on the application it is relevant to have regard to what are said to be the “unfrozen” assets that are said to be available to the 1^st and 2^nd defendant for the purpose of funding expenses and legal fees. This is because the plaintiff submits that the court can pay regard to the assets and financial resources of the group companies of the defendant.

12. It is common ground that the Qunxing Group has available cash resources in the region of RMB655,000,000, the largest part of which comprises of the cash position of Shandong Qunxing. Moreover the owners of Shandong Qunxing, ultimately the 1^st defendant, has (or will have as and when a distribution is made) an entitlement to currently undistributed profits of Shandong Qunxing which accrued between 2007 to 2010 in the region of RMB1,300,000,000.

13. Counsel for the parties, Mr Benjamin Yu SC for the defendants and Mr Ambrose Ho SC (leading Mr Norman Nip) helpfully and carefully analysed the authorities on this area. It is a shortage of time alone that prevents me from setting out those submissions in more detail.

C. Procedural history

14. The injunction order was issued by Chung J, inter alia, to restrain the removal or disposition of assets within Hong Kong up to the value of HK$1,968,000,000. The matter has been rather active in the five weeks or so since the injunction was issued on 12 December 2013. On 20 December 2013 an application for a variation of the order was made, and this was heard before Deputy Judge Marlene Ng who was able to deliver an oral judgment on the same day. The judge held that the 1^st defendant was entitled to draw upon the funds which were the subject of the injunction order for the provision of funds to cover reasonable legal expenses. The amount in the order was increased to HK$500,000. The defendants say that this was to enable the 1^st defendant to comply with disclosure orders in the injunction order, and to prepare further affidavit evidence for a renewed application for allowance of expenses. This latter was necessary because the deputy judge was of the view that the 1^st defendant had not provided sufficient evidence that its usual business expenses are, in the usual course of its business, drawn from the bank accounts which have been frozen.

15. The defendants contend that the deputy judge also held that a contention advanced by the plaintiff, that the claims made were in the nature of proprietary claims, was wrong, and that the legal principles on allowance for expenses out of assets under proprietary claims therefore do not apply. This matter having been decided by the deputy judge against the plaintiff, the defendants contend that the plaintiff is now bound by an issue estoppel on this point.

16. On 3 January 2014, Chung J allowed certain variations and gave directions for the filing of further evidence. Subsequently the defendants have adduced evidence to show that the 1^st defendant’s expenses are habitually paid by way of drawings from its bank accounts, with ICBC Asia and Hang Seng Bank.

17. The hearing before me was therefore the continuation of the adjourned hearing, subject to the additional matters raised formally by the defendants’ summons of 16 January 2014. The defendants deny the allegations made by the plaintiff, and inform me that it is intended to apply to set aside the injunction as soon as practicable. The variation of the Injunction Order is needed urgently however to enable usual business expenses and imminent legal expenses to be met.

D. Law and practice

18. It is, I think, common ground that a distinction is to be drawn between injunctions ordered in respect of assets over which the plaintiff asserts a proprietary claim, and cases where the injunction is made in a claim seeking damages. In the former situation the assets “frozen” are putatively those of the plaintiff while in the latter case the injunction is granted so as to prevent the dissipation of assets and removing the assets from the reach of the plaintiff.

19. Where there is a proprietary claim the court will ordinarily expect the injuncted party to establish that recourse to the frozen assets is necessary because there are no other assets available to be used.

20. If the claim is not a proprietary claim, then the principles applied are, according to the plaintiff, summarized at paragraph 20.054 of Gee “Commercial Injunctions”, 5^th ed:

“In exercising this discretion whether or not to grant an application to vary an injunction the court acts in accordance with what is ‘just and convenient’. This is the test laid down in s.37(1) of the Supreme Court Act 1981. On an application for a variation, the claimant has already established a real risk of dissipation and a good arguable case. The principles which apply in considering whether to grant a variation are the same as those which apply when considering whether or not to grant Mareva relief so the fact that the defendant’s purpose in applying for the variation is not deliberately to frustrate enforcement of a judgment does not mean that the variation is to be permitted Later authorities, including a judgment of Lord Donaldson MR. (as he had become), show that the test for risk of dissipation is not one depending on the subjective intent of the defendant or his ‘design’, but depends on evidence establishing objectively a real risk of dissipation of assets. Motive for making the proposed payment is not to be equated with the risk of unfair dissipation of assets.
The correct test is to consider objectively the overall justice of allowing the payment to be made including the likely consequences of permitting it on the prospects of a future judgment being left unsatisfied, and bearing in mind that the assets belong to the defendant and that the injunction is not intended to provide the claimant with security for his claim or to create an untouchable pot which will be available to satisfy an eventual judgment.
Therefore, the principle is that a defendant can use his own money which is frozen under a Mareva injunction to fund the defence provided that it is apparent that there are no other funds or source of payment which should as a matter of objective fairness be used to pay for the defence rather than the frozen funds. This may require the defendant to adduce ‘credible evidence’ about his other assets before the court can be satisfied that it is just that he should be able to use the particular frozen assets.”

21. The task of the court therefore is, according to the plaintiff, to consider objectively the overall justice of allowing the payment to be made. In so doing, it will need to consider whether the defendant has shown by sufficient evidence that he does not have other assets available to meet the payment.

22. As far as the defendants are concerned, the emphasis is to be placed on the fact that a Mareva injunction is not intended to improve the position of the plaintiff but instead is to prevent further injustice by a defendant removing assets to frustrate a future judgment. The defendant should not be prevented from using his assets to pay his debts as they fall due or from using those assets for disbursing proper legal expenses for the conduct of the defence.

23. For the defendants, the task of the court is to consider the motive for the payment, and specifically, “… whether there is an ulterior motive involved in removal of assets from the jurisdiction to defeat any judgment that may be obtained.” See Campbell Mussels v Thompson (1984) Law Society’s Gazette 2140, and Avant Petroleum Inc v Gatoil Overseas Inc [1986] 2 Lloyd’s Rep 236, at 242.

E. A quasi proprietary claim?

24. The plaintiff submits that its claims in these proceedings are akin to a proprietary claim, and that therefore the approach to the application for the variation of the injunction order should follow the two stage process referred to in (for example) Ostrich Farming Corporation Limited v Ketchum [1997] EWCA Civ 2953.

25. The defendants do not accept that to be correct, submitting that a review of the relief sought in the writ makes it clear that although acting on behalf of the shareholders, and in the public interest, the relevant claims made are nevertheless primarily claims for monetary damages.

26. Based on a perusal of the writ it seems to me that the defendants are correct in this submission, and I do not agree that the fact that the claim is founded on alleged breaches of the Securities and Futures Ordinance (Cap 571) or the authorities relied on by the plaintiff (these being FSA v De Dietrich [2011] NI Ch 11 and Director of the Assets Recovery Agency v Creaven [2006] 1 WLR 622) alter that position. In De Dietrich,for example, the court referred to proceedings involving “… joint provisional liquidators whom I appointed at their request to protect the assets of the persons unfortunate enough to have invested in these schemes…” In Creaven, the court was concerned with an Act intended to “…deprive defendants of property obtained through unlawful conduct …, and for that property to be transferred for the benefit of the community.” The plaintiff’s claims here are, so far as relevant to an injunction, primarily for monetary compensation.

27. Accordingly, I do not agree that the approach to be adopted is any different in the present case than it would be in the case of an “ordinary” Mareva injunction.

F. Issue estoppel?

28. In the light of my conclusion in regard to the nature of the claim it is not necessary for me to reach any conclusion as to the defendants’ contentions regarding the alleged issue estoppel arising out of the deputy judge’s extempore judgment.

G. Availability of funds from PRC

29. This is a matter on which the evidence is clear. Considerable funds exist in the hands of Shandong Qunxing. These funds amount to many multiples of the amount of the legal costs and other business expenses sought to be released by the defendants. The plaintiff submits, and I agree, that there is credible evidence to suggest that transfer of funds from the PRC to Hong Kong is both administratively possible and, at the least, not impracticable. I do not think that it is necessary to dwell on the detail further; having come to the conclusion which I have, that “ordinary” principles are to apply to any consideration of a variation of the injunction, it seems to me that the approach summarised in the extract from Gee quoted above fairly represents the correct approach, and is the approach I adopt, namely:

“… to consider objectively the overall justice of allowing the payment to be made including the likely consequences of permitting it on the prospects of a future judgment being left unsatisfied, and bearing in mind that the assets belong to the defendant and that the injunction is not intended to provide the claimant with security for his claim or to create an untouchable pot which will be available to satisfy an eventual judgment.”

30. The factors, in brief are these therefore. The defendants have a requirement for funds (I turn to the amount of funds below) to enable the payment of “ordinary” business expenses and for the payment of (extra-ordinary) legal expenses. Those funds are sought on a continuing basis as far as the business expenses are concerned, and on an interim basis, covering the period until end April 2014 as far as legal expenses are concerned.

31. The evidence shows that the usual modus operandi of the defendants is for business expenses to be met from the defendants’ own funds, not from remittances or dividend payments from the subsidiaries. Not surprisingly, the evidence does not address legal expenses, of the present sort at least.

32. The monetary “value” of the plaintiff ‘s claim is many times larger than the amount in fact secured by the injunction and the amount sought by the summons would, in the period to end April 2014, amount (by my calculation) to approximately HK$11.6 million or (approximately) 7.5% of the “frozen assets”. Permitting the variation as presently sought would not, on the face of things, significantly affect the prospects of a future judgment being left unsatisfied.

33. The defendants submit that Avant Petroleum v Gatoil [1986] 2 Lloyd’s Rep 236 demonstrates that it would be wrong to take into account the fact that the defendants might be able to instigate a new arrangement with their subsidiary (or bankers as in Avant Petroleum). The injunction order should not be used to bring to an end a bona fide and established method of financing within the group structure.

34. Set against that in considering the “overall justice” of any variation however is the acknowledged existence of very substantial funds in the subsidiary. The existence of those funds has to be considered in the context of the evidence which shows no “practice” of distributing dividends to the holding companies, and the evidence which shows that there would be a number of administrative steps to be taken by Shandong Qunxing in China, including obtaining audited accounts and tax clearances before any remission of a dividend out of the PRC could be made. The State Administration of Foreign Exchange would need to review and approve any proposed remission of funds.

35. The defendants also submit, in reliance on authority, that the court should not act so as to interfere in decisions of Shandong Qunxing’s management as to how the affairs of that company are to be conducted.

36. The defendants also contend, wholly unrealistically it seems to me on the present evidence, that the funds are “required” to be maintained for the running of that business.

37. It seems to me that it would be wrong, as a matter of principle to wholly disregard the assets available in Shandong Qunxing which company itself is an asset of the 1^st defendant as counsel acknowledged. The fact that the funds are those of a separate company must be considered in the knowledge that the company in question is a wholly owned subsidiary, and the funds are very substantial.

38. Also to be factored in is the evidence before me as to the usual business practice of the 1^st defendant, in not sourcing funding from Shandong Qunxing, and the procedural and administrative steps, as well as management decisions needed before any such funds could (in practical terms) be made available to the 1^st defendant.

39. Balancing all of the above I have come to the conclusion that, in principle, the present application should be allowed subject to the variations I make below. I would add to that conclusion an observation that were I being asked to consider a longer period of time than I am considering, then the position in regard to Shandong Qunxing would have weighed more heavily with me.

40. As the evidence stands however it seems clear that a period of at least a couple of months would be needed before that money from that source could in fact be made available to the defendants. Accordingly, it has relatively little bearing on a short term application.

H. The quantum

41. The first sum sought by the 1^st defendant is approximately $2.7 million in respect of ordinary business expenses, either now due, or due by the end of January 2014. Mr Yu SC provided a table setting out a breakdown of the sums claimed from which it can be seen that the bulk of that item relates to “annual” costs such as audit services, listing fees and so on. I am satisfied that this variation should properly be made.

42. Similarly I am satisfied that the amount of the monthly expenditure (HK$560,000) represents a proper variation to the injunction order. However in light of my observations above, and the fact that the summons itself envisages that a further application may be necessary as at end April 2014, I limit this variation in time also to end April 2014.

43. The third variation relates to legal costs and expenses, and is expressed as a monthly sum running to end April 2014. Mr Yu SC explained that this head has been derived by averaging the anticipated total cost over a four month period.

44. Both parties are agreed that this will be a complex piece of litigation, and given the amount of the claim this is not a circumstance in which the allowance of funds to the defence should be “stingy”.

45. Set against that is the fact that the statement of claim has not yet been served and accordingly the defendants’ expenditure on legal fees is, to some extent, postponed. Balancing those factors it seems to me that a variation so as to provide for $1,500,000.00 per month for the 1^st defendant’s legal expenses for the period up to end April 2014 (ie four months) should be made.

46. Correspondingly, a variation to the injunction order should be made in respect of the legal costs of the 2^nd defendant (where some discrete issues may arise) at $150,000 per month for the same period.

47. I make orders in terms of paragraphs 2, 3 and 4 of the summons dated 16January 2014.

48. I also make an order, as requested at paragraph 5 of that summons, reserving costs.

	(Anthony Houghton, SC) Recorder of the Court of First Instance
	High Court

Mr Ambrose Ho, SC leading Mr Norman Nip, instructed by Securities and Futures Commission for the plaintiff

Mr Benjamin Yu, SC, instructed by Stevenson, Wong & Co. for the 1^st and 2^nd defendants

HCA 2428/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2428 OF 2013

____________

BETWEEN
	SECURITIES AND FUTURES COMMISSION	Plaintiff
and
	QUNXING PAPER HOLDINGS COMPANY LIMITED	1st Defendant
	BEST KNOWN GROUP LIMITED	2nd Defendant
____________

Coram: Deputy High Court Judge Marlene Ng in Chambers

Date of Hearing: 20 December 2013

Date of Ruling: 20 December 2013

__________

R U L I N G

__________

1. On 12 December 2013, the plaintiff (“SFC”) obtained an ex parte injunction against the defendants restraining them from disposing of their assets in Hong Kong up to the threshold of almost HK$2 billion and other ancillary reliefs.

2. The application is made under section 213 of the Securities and Futures Ordinance Cap 571 (“SFO”) to restrain the disposal of assets of a listed company, the 1^st defendant, and its subsidiary, the 2^nd defendant, in an amount equal to funds raised by the 1^st defendant from the investing public as a result of false and misleading information.

3. According to the SFC, investigation reveals that the 1^st defendant exaggerated the turnover both before and after the Initial Public Offering (“IPO”) in 2007, and as a result, substantial funds were raised by the 1^st defendant in 2007 by the IPO and later in 2011 by the open offer of new shares and warrants. It is the SFC’s case that the investing public was misled by information contained in the public documents and, prima facie, there were breaches of various provisions in the SFO.

4. The ex parte injunction has been served and the 1^st and 2^nd defendants appear by counsel, Mr Li, before me today.

5. Whilst the 1^st and 2^nd defendants deny the SFC’s allegations and say that an application will be made shortly to discharge the ex parte injunction, they are prepared, without prejudice to their opposition to the ex parte injunction, not to oppose the continuation of the injunction today, subject to the 1^st defendant’s application by summons dated 18 December 2013 to seek terms as to payment of incurred and prospective ordinary trading expenses and legal expenses for the continuation of the injunction, and to extend time for compliance with the order for filing and serving the disclosure affidavit.

6. Mr Li puts forward the 1^st defendant’s case on a simple and straightforward basis. He says the value of the assets covered by the injunction is huge, ie, close to HK$2 billion, such that the injunction covers all liquid assets that the 1^st defendant has. Indeed, the threshold is much more than the 1^st defendant’s known assets in the bank accounts of HK$130 million and estimated value of stock of HK$80 million now known to the SFC through inquiries with the various banks.

7. This means, Mr Li says, that the 1^st defendant has no moneys to keep its business ongoing and to prepare for its legal response. In short, the company will, in Mr Li’s words, “keel over” as a result of the oppressive conduct of the SFC.

8. It is said that this is not the purpose of a Mareva-type injunction, which is not to prevent ordinary trading and business, not to prevent the defendant from putting forward a defence, and not to seek security. Mr Li says the oppression here is exacerbated by the seizure of documents by the SFC shortly after the ex parteinjunction, which leaves the defendants with a paucity of documents to prepare their defence and to prepare the disclosure affidavit.

9. However, as Mr Ho SC, counsel for the SFC, points out, this is not how Mr Poon Tsz Hang, financial controller of the 1^st defendant, puts it in his affirmation filed on behalf of the 1^st defendant for their summons. Whilst Mr Poon complains that some documents have been seized by the SFC, the 1^st defendant is said to be in the process of retrieving records for the purpose of complying with the order to make the disclosure affidavit, and Mr Poon further says the defendant merely needs time to do so. In fact, according to the 1^st defendant’s summons, it is expected they will be able to do so by 9 January 2014.

10. Mr Li refers to the case of Avant PetroleumInc vGatoil Overseas Inc[1986] 2 Lloyd’s Rep 236 to say that a Mareva injunction should not interfere with normal trading and the defendant should be able to use funds for ordinary business expenses. He refers to particulars of the amounts of incurred and prospective expenses set out in Mr Poon’s affirmation, and says that the past incurred expenses are supported by invoices and documents and come under the parameters of ordinary expenses of running a listed company. Legal expenses, he says, comes within the reasonable range.

11. Mr Ho SC complains that Mr Poon’s affirmation has been carefully crafted to merely say the 1^st defendant maintains several bank accounts as set out in schedule 3 of the ex parte injunction order, which are now frozen, and the 1^st defendant cannot withdraw funds from and make payment for ordinary business expenses from those accounts. Mr Ho SC says the evidence also shows that – and I do not think there is any dispute – the major operations of the 1^st defendant are in the PRC. Mr Ho SC further says it is unclear whether the 1^st defendant has other assets not yet known in Hong Kong and further assets in the PRC.

12. Given that the major operations of the 1^st defendant are in the PRC, it is only reasonable or logical to expect there may be assets as well as, presumably, liabilities, both receivables and payables, in the PRC. It may be argued that more likely than not there may be assets in the PRC. Those assets, if any, are not frozen. It is only assets in Hong Kong within the HK$2 billion threshold that will be caught by the ex parteinjunction.

13. Mr Ho SC asks me to consider the interim report of 2013 and points out that in the first half-year of 2013, the recorded cash and cash equivalent at about RMB 655 million appear to be much more than the known assets that are frozen in Hong Kong.

14. Mr Li points out that these consolidated accounts cover not just the 1^st defendant’s assets. Whilst that may be the case, it must be remembered that it is the consolidated accounts of the 1^st defendant. Further, the evidence from both sides makes clear that the major operations of the 1^st defendant are in the PRC, so it may be argued that it is likely there will be either receivables or other assets of the company in the PRC.

15. Against such background, Mr Ho SC asks me to consider FSA vForsythe De Dietrich[2011] NICH 11 (13 June 2011). In that Irish case, which referred to UK authorities, the respondents sought to vary the injunction obtained by the FSA, the regulatory authority which is equivalent to the SFC, for recovering legal costs from funds retained by the FSA or from bank accounts frozen by the injunction. The FSA had shown on strong prima facie evidence that the defendants had substantial lawful deposits and banked some of them, but they operated a dishonest scheme to encourage further investments but without, in truth, investing those funds.

16. In that case, the defendant failed to provide information about assets and the court held that the defendant, in order to persuade the court to utilise the assets which had been frozen for legal expenses, had to satisfy a two-stage test as drawn from the UK authorities, at least one of which was from the UK Court of Appeal.[1]

17. In those UK authorities, it has been said that a defendant may not draw from a fund which may belong to the plaintiff until it is shown that there are no funds of his own from which he can draw. Without disclosure of his assets, it is unclear whether he may or may not be able to use the other assets to conduct his defence and he must have access to the frozen assets.

18. Although FSA was arguably not seeking a proprietary claim as such, their position as a regulatory authority was to protect the assets of the persons who had invested in the scheme and their case was therefore synonymous with a proprietary claim. The funds therefore should not be disbursed in costs unless the two-stage test was satisfied.

19. In other words, the defendant had to show there were no other funds from which he could pay his lawyers and he himself had an arguable claim to the funds derived from the plaintiff either as moneys properly obtained from the plaintiff, by way of remuneration or for valuable consideration, or by showing that he had an arguable case for denying the plaintiff’s claim, which was akin to proprietary claim.

20. Mr Li submits that this case is distinguishable because here the SFC is only claiming for compensation, which is not a proprietary claim. He says the IPO happened six years ago, so investors would have onsold their shares, perhaps many times over, and moneys from the fund-raising would have been disbursed as the working capital of the 1^st defendant.

21. Having considered both parties’ submissions and having considered the writ of summons as well as the authorities, I am not persuaded that the SFC’s claim is a proprietary claim or akin to a proprietary claim. Here, the SFC asks for freezing of assets to a level of about HK$2 billion being the sum equal to the total amount of funds raised by the 1^st defendant from the public and for an administration of those funds. Also the SFC will ultimately seek an order for the funds so administered to be distributed to the current shareholders and holders of unlisted warrants of the 1^st defendant.

22. The claim therefore appears to be compensatory and not proprietary in nature. It is different from the FSA vForsythe De Dietrichcase in that there was an attempt in that case to trace the investments which the defendant had encouraged the investors to provide to him but which he had not invested, so there was a proprietary and tracing claim in that case.

23. That being the case, the underlying basis for (a) the English Court of Appeal authorities cited in FSA vForsythe De Dietrich, which was premised on a proprietary claim and on the use of funds which might belong to the plaintiff but were frozen or (b) as in the FSA vForsythe De Dietrich case, the FSA’s role of protecting investors in such situation, is quite different.

24. Here, the SFC is seeking to seize assets of the 1^st and 2^nd defendants for the purpose of a just distribution to the current public shareholders and unlisted warrant holders.

25. But that is not the end of the matter. Coming back to the Avant Garde Petroleum case, whilst O’Connor J said that the right test to apply is whether the defendant can show that the purpose for which he wishes to use the frozen assets, which is an ordinary business expense, is a proper use for which those or similar assets have been used by him in the ordinary course of trading.

26. In short, the defendant has to show that the business trading expenses were ordinarily defrayed and obtained from those frozen accounts in the ordinary course of trading. O’Connor J said that if that could be shown, such a purpose could then be regarded as a bona fide purpose “for the use of those assets”, ie, the frozen assets.

27. It was on such basis that O’Connor J said further evidence of other assets that are available to the defendant need not be shown and it is a misuse of the Mareva injunction to require the party concerned to change his method of usual trading and to use other assets which are for different purposes to pay for ordinary trading. It was on that basis that the disclosure of other assets was not required.

28. But then, here, there is no evidence before me that the known frozen assets are the only accounts of the 1^st defendant in Hong Kong or, more significantly, that ordinary business expenses were usually defrayed from these frozen accounts. The only evidence is that the 1^st defendant cannot withdraw funds from these known frozen accounts to make payment of ordinary business expenses, but there is no evidence that these expenses are, in O’Connor J’s words, a purpose for which those or similar assets have been used by the 1^st defendant in the course of their ordinary trading.

29. Indeed, I have no idea whether any or some of these expenses were paid out of these frozen accounts or whether there are other assets in Hong Kong, in PRC and elsewhere, in particular the PRC where the main operations are located. The burden is on the 1^st defendant to demonstrate that the moneys should be so paid out of the known frozen accounts, and Mr Ho SC says that the evidence so far gives an incomplete picture, and therefore the application is premature.

30. On the above analysis, I agree with Mr Ho SC’s submissions in respect of the ongoing and recurring trading expenses, there is not enough information before the court to dictate an order be made that they should come out from those frozen accounts and from no other assets when the main operations from the 1^st defendant are in Mainland China.

31. For this, I need to refer to, perhaps, very briefly, the summary in the Hong Kong Civil Procedure 2014 Vol 1, para 29/1/79 at p 662. It says that, in relation to a Mareva injunction:

“ Assets are only released or accepted from a Mareva injunction (in so far as they are not in excess of the plaintiff’s claim) for a proper purpose. …… Where the defendant seeks the release of funds subject to a Mareva injunction to meet certain expenses, the court should consider whether the defendant has shown by sufficient evidence that (a) he does not have other assets available to meet those expenses; and (b) the purpose of the application is not an attempt to dissipate the assets to frustrate the plaintiff’s enforcement of the judgment. …… In considering whether the defendant has other assets available to meet expenses, the court is not limited to the funds to which the defendant has a strict legal right if there are reasonable grounds for believing that the defendant can obtain money elsewhere, including in appropriate cases, by lifting the corporate veil to take into account the resources of the defendant’s parent company.
……
…… Where the defendant has hidden away substantial assets overseas, it would be unjust to permit the defendant to use assets subject to a Mareva injunction to pay expenses. …… The court must seek to balance the risk of deliberate dissipation of frozen assets by the defendant against abuse of the freezing order to pressurise the defendant illegitimately. ……”

32. Here, there is simply not enough information before the court as to the payment of incurred and recurring expenses, where they are sourced and whether there are other available assets, whether in Hong Kong or overseas, to defray those expenses. However, in coming to this conclusion, it of course does not prevent the 1^st defendant at any time to put in adequate evidence to defeat Mr Ho SC’s suggestion that it is premature to make any proper application.

33. Whilst the same principles ordinarily apply also to other legitimate expenses including legal expenses, and particularly expenses on a retainer or recurring basis, I need to consider whether, on balance, any interim measure is required in relation to legal expenses which are to be incurred essentially for dealing with this litigation and particularly the injunction and compliance with the disclosure order.

34. I bear in mind that this is not a recurring ordinary expense to be considered as I have discussed, but this concerns a matter which has suddenly befallen the 1^st defendant.

35. In all the circumstances, I am persuaded that the 1^st defendant should be allowed, as an interim measure, quick access to reasonable funds to deal with the matters on an interim basis, pending sufficient disclosure of the assets or particularisation of how funds are going to be available to be used by the company for the purpose of ordinary trading or general legal expenses on, perhaps, a medium-term consideration.

36. I bear in mind that this approach is what has been adopted at the ex parte stage when HK$100,000 was allowed for legal expenses. However, I have to re-consider such interim measure as more matters have come to light, and I have heard submissions from both parties, but noting that the disclosure of the 1^st defendant’s assets is still pending.

37. I also bear in mind that there is urgency in compiling an affidavit over the next few weeks for the purpose of making proper disclosure in compliance with the court order, and the 1^st defendant may well need to mount suitable application on sufficient evidence to deal with ordinary trading expenses, if they see fit.

38. In those circumstances, in dealing with such interim matters, I think quick access to funds is, on balance, reasonable. I am told that legal expenses incurred to date is HK$485,850, which includes expenses in dealing with the SFC’s seizure of documents, and that recurring expenses on a monthly basis are about HK$700,000.

39. Bearing in mind that I am dealing with this as an interim measure, particularly more for the purpose of compliance with the court order and to enable the 1^st defendant to mount an application for payment of ordinary trading expenses, if they see fit, and if they do have sufficient evidence for such purpose, I believe that viewed from such perspective, I am going to allow HK$500,000 for that purpose.

40. It may well be that, in due course, further application will be made and there may be a basis for granting more but, at this stage, I do not see sufficient basis for the reasons that I have given.

	(Marlene Ng)
	Deputy High Court Judge

Mr Ambrose Ho, SC, instructed by Securities and Futures Commission, for the plaintiff

Mr Laurence Li, instructed by Stevenson, Wong & Co, for the 1^st and 2^nd defendants

[1]Fitzgerald v Williams [1996] 2 AH ER 171 and Ostrich Farming Corporation Limited v Ketchum [1997] EWCA Civ 2953

SECURITIES AND FUTURES COMMISSION v. QUNXING PAPER HOLDINGS COMPANY LTD AND ANOTHER

Related cases with same parties

Files (5)

	IPO Prospectus	Annual Reports and Results Announcements (RMB)
Results for the year	2006	2007	2008	2009	2010	2011
Publication date	17.9.2007	17.3.2008	18.3.2009	17.3.2010	30.3.2011	14.3.2012
Turnover	950,844,000	1,125,524,000	1,496,360,000	1,530,321,000	2,058,916,000	2,003,651,000
Gross profit	184,117,000	283,469,000	405,516,000	424,804,000	519,785,000	326,910,000
Profit from operations	163,317,000	371,637,000	396,681,000	375,862,000	455,973,000	--
Profit before taxation	142,692,000	350,572,000	383,361,000	371,694,000	455,973,000	256,183,000
Profit for the year/ period	93,937,000	350,572,000	383,361,000	324,087,000	397,506,000	221,968,000
Earnings per share	0.13	0.42	0.37	0.31	0.38	0.14

Year	Turnover as reported in IPO Prospectus or Annul Reports or Results Announcements (RMB)	Amount of sales overstated in relation to Shanghai On Hing (RMB)	Amount of sales overstated in relation to Cuiqiao (RMB)	Percentage of turnover overstated
2006	950,844,000	107,868,158		11.34%
2007	1,125,524,000	217,610,958		19.33%
2008	1,496,360,000	217,042,845		14.50%
2009	1,530,321,000	170,091,413	13,685,750	12.01%
2010	2,058,916,000	204,612,960	35,289,427	11.65%
2011	2,003,651,000	51,336,920		2.56%

Year	Bank borrowings reported in annual reports and results announcements	Number of undisclosed bank loans	Total amount of undisclosed bank loans outstanding at the end of year (RMB)
2009	Nil	7	389.2m
2010	Nil	12	849.2m
2011	Nil	28	1,519.2m
2012	Nil	22	1,594.2m

	(Anthony Chan)
	Judge of the Court of First Instance
	High Court