Case Detail

HCA 353/2013

[2018] HKCFI 596

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 353 OF 2013

_________________________

BETWEEN
	SECURITIES AND FUTURES COMMISSION	Plaintiff
	and
	MO SHAU WAH	1^st Defendant
	HUI FONG TING	2^nd Defendant
	NG SAU CHUN	3^rd Defendant
	NG SIU YING	4^th Defendant
	CHIU TIT MING	5^th Defendant

_________________________

Before: Master M Lam in Chambers (Open to Public)

Date of Hearing: 31 January 2018

Date of Decision: 16 March 2018

_____________________

D E C I S I O N

_____________________

THE APPLICATION

1. By Summons dated 7 September 2017, China Pacific Securities Limited (“Company”) seeks to be joined as an intervener in these proceedings.

2. The Summons, the notice of hearing and the relevant documents have been served on all the parties to these proceedings^{^[1]}. The 2^nd and 5^th defendants do not take part in this application. The plaintiff and the 4^th defendant take a neutral stance. The 1^st and 3^rd defendants (“Defendants”) oppose the present application.

THE ACTION

3. The action herein was commenced by the Securities and Futures Commission (“SFC”) pursuant to section 213 of the Securities and Futures Ordinance (Cap. 571) (“SFO”) on 26 February 2013 following discovery of a suspected fraudulent scheme of misappropriation of the securities held by the Company for its clients by its then employees, the 1^st and 2^nd defendants herein. All the defendants are suspected to be the recipients of the proceeds of the misappropriation.

4. On the same day, an ex parte injunction (“Injunction Order”) was granted by the Honourable Mr Justice Tong against the defendants. It was continued with variation on an inter parte basis by an order made by the Honourable Mr Justice Poon on 1 March 2013. The defendants were restrained from removing from Hong Kong or in any way disposing of or dealing with any assets within or outside Hong Kong to the value of HK$156,471,705. The subject matter of the Injunction Order consists of securities (“Securities”) of substantial value^{^[2]} in the securities accounts maintained by the defendants (except the 2^nd defendant) with the Company as well as funds in several bank accounts maintained by the defendants with local and overseas banks (“Frozen Assets”).

5. A statement of claim was filed by SFC on 6 April 2017. Its contents which are relevant to the present application are as follows : -

(a)   the 1^st and 2^nd defendants, being the employees of the Company, in breach of their fiduciary duties and/ or duties as trustees owed to the Company, fraudulently procured the securities belonged to the Company’s clients held by the Company to be sold purportedly as the 1^st, 4^th and 5^th defendants’ securities between 2005 to 2012 (“Alleged Scheme”) and by doing so, defrauded the Company;
(b)   a substantial amount of the proceeds of sale from the misappropriation were used to settle the purchase of securities through the defendants’ securities accounts with the Company;
(c)   after discovery of the alleged wrongful acts, the Company, its shareholders and/or directors compensated the clients who were affected by the Alleged Scheme by replacing the misappropriated shares and the Company has borne the affected clients’ loss (or part thereof) and the related expenses and therefore suffered a loss of HK$160,785,224;
(d)   SFC seeks, inter alia, declarations that the defendants are persons within s. 213(2)(b) of the SFO and an order that the defendants take such steps as the Court may direct, by transfers of securities or payments, to restore the Company’s position in the same position it was in before the defendants’ misappropriation (“Restorative Relief”).

6. No defence has been filed by the defendants except the 1^st defendant.

7. On 9 May 2017, the Injunction Order was varied by consent between SFC and the 1^st defendant allowing the latter to withdraw HK$100,000 per week as legal costs until the total withdrawal reaches HK$4,205,000 or until completion of the criminal trial relating to the Alleged Scheme against her (“Consent Order”). The Consent Order does not specify from which assets could withdrawals be made. It was granted without the knowledge of the Company.

8. The 1^st defendant, through a letter of her solicitors, instructed the Company to liquidate the 1^st defendant’s securities held with the Company (part of the Frozen Assets) for the purpose of financing her legal expenses in the present action (which was not provided for in the Consent Order) and the criminal trial.

9. The non-compliance of the Company led to a summons being issued by the 1^st defendant on 12 June 2017 seeking an order that the Company be desisted from obstructing her and SFC from carrying out the Consent Order and be compelled to sell her securities which were frozen under the Injunction Order (“the 1^st Defendant’s Summons”).

10. At the hearing before the Honourable Deputy High Court Judge N. Francis, the Company was joined, at the Court’s invitation and without opposition, as a party in that application pursuant to O.15 r.6(2)(b)(ii) Rules of the High Court (“RHC”) for the purpose of opposing the 1^st Defendant’s Summons. By judgment (“Judgment”) dated 25 July 2017 (see [2017] 4 HKLRD 347), the 1^st Defendant’s Summons was dismissed. On 6 September 2017, His Lordship granted leave to appeal to the 1^st defendant.

11. It is against such background the present application was taken out. Subsequently, on 18 September 2017, the Company commenced an action against the same defendants herein under action no. HCA2174/2017 (“Company’s Private Action”) seeking, inter alia, proprietary remedies on the basis of their breaches of fiduciary duties, breaches of trust and/ or subrogation. The action is based substantially on the same set of facts of the present action.

12. On 19 December 2017, the 3^rd defendant took out a Summons for variation of the Injunction Order for payment of her legal expenses (“the 3^rd Defendant’s Summons”). On 21 December 2017 the Company applied to join in that application by a Summons (“Company’s Joinder Summons”). Both Summonses have been adjourned for substantive argument before Judge with one day reserved.

THE COMPANY’S POSITION

13. At the hearing of the present Summons, Mr Mak, Senior Counsel for the Company, agrees that, at present, the Company indeed has no active role to play in the present proceedings. It does not apply to be joined as a plaintiff or a defendant for it has no cause of action against SFC and its claim against the defendants herein has been covered by the Company’s Private Action. Likewise, neither SFC nor the defendants have any claim against it.

14. It has no intention to file any pleadings or take part as a party to the action in discovery of documents, exchange of witness statements or case management hearings, not until there is change of circumstances.

15. It has once been suggested for the Company that it might think of seeking an order for it to be notified of the progress of the proceedings and be at liberty to participate at any stage as it finds fit. Mr Mak nevertheless acknowledges the fact that the extent of the Company’s participation will depend heavily on how SFC and the defendants conduct their respective case as the proceedings go along. He also agrees that this Court should not be invited to make an order target for some unidentified and unrestricted situations that might or might not happen, bringing uncertainties to the proceedings and causing unnecessary costs and time, nor should this court make an order that put the other parties into an embarrassing situation not knowing what role the Company would play and what case they would have to meet at every stage of the proceedings.

16. Finally, Mr Mak explains what concerns the Company, at the moment, is to protect its interest in the Securities. It is keen to obtain a right to be notified of any applications for variation of the Injunction Order so as to secure a chance to oppose them whenever the situation warrants.

17. He limits the scope of the order sought in this application to:-

“without prejudice to the right of the Company to apply for further order, the Company be joined as an intervener of the present proceedings limited to receiving notices of all subsequent applications for variation of the Injunction Order, with liberty to oppose to those applications as it finds fit.” (“Order Sought”)

18. He seeks to rely on O.15 r.6(2)(b) RHC and submits that the Order Sought is necessary to protect the Company’s legal and proprietary interest in the subject matter of this litigation, as recognized by His Lordship in the Judgment.

19. Mr Chu and Mr Lai, Counsel for the 1^st and 3^rd defendants respectively, agree this Court has the jurisdiction and power to make the Order Sought. They however argue that such order should not be made because the Company has mere commercial interest in the outcome divorced from the subject matter of the present action.

LEGAL PRINCIPLES

20. Under O.15 r.6(2)(b) RHC, a person may be joined if:-

(i) his presence is necessary to ensure that all matters in the dispute in the cause or matter may be effectually and completely determined and adjudicated upon (O.15 r.6(2)(b)(i) RHC) (“First Limb”); or
(ii) there may exist a question or issue arising out of or relating to or connected with any relief or remedy claimed in the matter which in the opinion of the Court it would be just and convenient to determine as between him and that party, as well as between the parties to the matter (O.15 r.6(2)(b)(ii) RHC) (“Second Limb”)

21. There is no disagreement on the legal principles governing joinder application under O.15 r.6(2)(b) RHC:-

(a)   a liberal approach should be given to this rule so as to ensure that, as far as possible, all matters in dispute between the parties are completely and finally determined, and all multiplicity of legal proceedings with respect to any of those matters is avoided.
   Lin Man Yuan v Kin Ming Holdings Ltd [2012] 3 HKLRD 550 DHCJ M Chan (as she then was) at §15.
(b)   The Second Limb requires : -
a.    the intervener to possess some interest which in some way directly related to the subject matter of the action;
b.    the existence of a cause of action between the intervener and one of the parties is not a necessary prerequisite for this purpose;
c.    there must exist between the intervener and any party to the cause or matter a question or issue arising out of or relating to or connected with any relief or remedy claimed in the cause of matter which the court considers it would be just and convenient to determine as between the intervener and that party as well as between the parties to the cause of matter.
d.    even where the interest in the subject matter alleged by the intervener is doubtful, the court is nevertheless prepared to exercise its discretion to allow the joinder so that the alleged interest could be properly tested at trial.
   Man Whi Chung v Man Ping Nam [2003] 1 HKC 549
(c)   there is no legal requirement for an applicant to show merit of his case.
Shek O Development Co Ltd v Chan Kwok Tung [2017] 2 HKLRD 374

THE ARGUMENTS

22. With these principles in mind, I turn to consider the arguments of the parties.

23. Mr Mak says that for the First Limb, the matter in dispute between the Company and the parties to this action is “whether the Company be in any way be responsible for the activities in the defendants’ securities accounts held with the Company as alleged by the 1^st defendant in paragraph 9 of the 1^st defendant’s Defence, i.e. the allegation that the Company at all material times had exerted complete and effective control of the defendants’ securities accounts.”

24. That said, in agreement with the observation that the 1^st defendant’s defence is so vague, without slightest particulars or evidence in support, that it cannot give rise to any identifiable matter in dispute between the Company and any party to this action, Mr Mak does not pursue this argument any further.

25. In my view, this Court has no jurisdiction to add the Company under the First Limb as the present action is a regulatory action against the defendants for breach of SFO. It is a statutory claim by a public body with statutory duties to discharge and there can be no personal disputes between the Company and the defendants be resolved. The issue to be adjudicated upon is whether there is any breach of SFO and if so, the remedial actions to be taken. For the factual disputes involved in this action, the Company can be listed as a witness for SFC.

26. For the Second Limb, the position is less clear. Mr Mak says that the requirements for the second limb are satisfied for under the Restorative Relief, the defendants may be ordered to transfer the Securities or make payments to the Company. The question relating to or connected with the relief or remedy claimed in this matter to be determined is “the amount of restoration and from what assets those restorations should be made to the Company”.

27. He contends that such question should not be considered solely from the aspect of the Company being the beneficiary under the Restorative Relief but also in light of the Company’s legal and proprietary claim for the Securities in the present action as well as the Company’s Private Action (collectively as the “Two Actions”). The facts giving rise to the alleged Company’s legal and proprietary interests as pleaded in the respective statements of claim of the Two Actions include:-

(a) the Company has incurred substantial loss in making good its clients’ loss (caused by the Alleged Scheme) by causing replacement shares borrowed from or purchased in the market utilizing funds from the Company’s directors and/ or shareholders.
(b) the proceeds of sale from the misappropriation were used by the defendants to purchase the Securities.

28. It is accordingly suggested that a question of whether the Securities, forming a majority part of the subject of an injunction which was obtained in support of a proprietary claim by SFC for the victims of the alleged fraud including the Company, should be released to the defendants for their own purposes, including defending the criminal actions relating to the Alleged Scheme against them, is a matter between not only SFC and the defendants but the Company as well.

29. Contrary to this, the Defendants argue that the Company’s interest lies solely in the outcome of the present action and a potential beneficiary of the action merely has commercial interest that does not justify the Order Sought.

30. At the hearing, the bulk of the Defendants’ arguments rest on whether the Company has any loss to claim. They contend that the compensations were made to the affected clients by its directors and/ or shareholders and there is no evidence showing it has actually repaid them. They say that:-

(a) under the deed of undertaking between the Company’s directors and shareholders and SFC dated 26 November 2012 (“Deed”), it was the Company’s directors and shareholders who undertook to compensate the Company’s clients of their loss caused by the Alleged Scheme but not the Company. The Company was not a party to it. Accordingly, the Deed has not imposed any obligation or liability on the Company.
(b) in each of the Company’s audited reports for the year of 2012, 2013 and its interim audit report for year of 2013 (collectively as the “Audited Reports”), there was only a provision for liabilities and charges booked as “for making good the loss of client securities misappropriated and related expenses” in the sum of HK$160,785,224. Therefore, the Company only has a liability on its books for an uncertain amount in the indefinite future. Further, as repayment was remarked as not to be demanded if such payment would jeopardize the going concern of the Company therein, the Company needs not make any repayments because of financial difficulties.

ANALYSIS

31. Given a necessary party should be joined irrespective of the apparent strength of his case shown at the stage of joinder application, it is neither necessary nor appropriate for this Court to make a finding on the limited evidence presently before me other than those germane to the present application. The test is satisfied if there exists a claim of a proprietary nature and not necessary that the proprietary claim is proved. In particular, the Two Actions are still at an early stage and the parties’ respective case will be subject to further development.

32. On the question of whether the Company ultimately bearing the loss for which its clients were compensated, the respective statement of claim of the Two Actions contains a plea that the Company is a party suffering the loss for which its clients were compensated and on the evidence produced so far, it is not right to say that the Company does not have an arguable case that such loss rests finally with it, even if initially the funds and the replacement shares were provided to the affected clients by its shareholders and/ or director.

33. First, the Defendants’ attacks are based heavily on the face value of the Deed and the Audited Reports. Apart from those attacks, there is indeed no solid evidence to challenge the evidence given by Ms Ng Yick Yee Belinda who deposed that the loss was ultimately borne by the Company. Given she is a director and shareholder of the Company, a party to the Deed who was liable to compensate the Company’s clients, her evidence should not be lightly disbelieved in the absence of solid contradictory evidence at this stage.

34. Second, her evidence is supported with an audit confirmation (“Audit Confirmation”) given by the Company’s former auditors dated 24 November 2017 confirming the Company had suffered a loss of HK$159,626,091.05 in compensating its clients^{^[3]}.

35. Third, the evidence shows that the Company has taken active steps in the process of compensating its clients. It has entered into an agreement with JLA Asia Limited to engage the latter to investigate and identify the securities misappropriated for the purpose of compensating the affected clients. The fees for such services form part of the loss claimed by the Company in the Two Actions.

36. I also accept that the Company has an arguable proprietary claim against the defendants as regards the Securities basing on the facts and/ or allegations that the Company is:-

(a)   the owner of the business and the former employer of the 1^st and 2^nd defendants throughout the period of the alleged fraudulent acts. The latter made use of their position and/ or the funds and assets of the Company as part of the alleged fraud. The relationship gave rise to trust and fiduciary duties;
(b)   the holder of the Securities. The Company claims they were acquired with the sale proceeds of the fraud on it;
(c)   a victim of the Alleged Scheme
(d)   one of the beneficiary seeking to be compensated by transfer of the Securities or payments under the Restorative Relief;
(e)   the plaintiff of the Company’s Private Action claiming in its own right with regard to the Securities by reason that the sale proceeds from the misappropriation were used to purchase the Securities and that it has compensated those affected clients, it argues that it is entitled to step into the Securities for a proprietary claim becomes available to it.

37. Absent any explanation from the defendants as to how the Securities were acquired, it is difficult to deny the Company, alleged to be the victim of the Alleged Scheme, and who has since suffered loss from the alleged fraud and its compensation to its affected clients, has an arguable claim for legal and proprietary interest in the Securities separately from SFC, a question relating to or connected with the relief claimed in the matter in the present action, not only because it is expressly named as a party in respect of whom, the Restorative Relief is sought but also of its claim as regards the Securities, both in damages and of a proprietary nature.

38. Considering the intended intervention is limited to be notified of any application for variation of the Injunction Order, the Company has sufficient interest to be joined for such purpose irrespective of the strength of its case at the stage of joinder application.

JUST AND CONVENIENCE

39. I also accept that it is just and convenient to join the Company for such limited purpose.

40. Undoubtedly, to allow the defendants accessing the Securities would reduce or extinguish the Securities available to be transferred to satisfy the Company’s proprietary claim and claim for damages, bearing in mind the Company’s claim far exceeds the value of the Securities. There is no reason the Company should not be notified of such applications and to consider whether to oppose them.

41. The Company says that it has never been notified of any application for variation of the Injunction Order and its request to SFC for such notices upon SFC’s receipt of them met with no success. By the Consent Order and the 3^rd Defendant’s Summons, the 1^st and 3^rd defendants respectively sought to withdraw almost all of their respective assets being frozen under the Injunction Order without notifying the Company.

42. The delay of the service of the 1^st defendant’s Summons on the Company has caused unnecessary delay and cost as elaborated in the Judgment. Prior to the 1^st Defendant’s Summons, the Company had been made aware of neither the terms of the Consent Order, nor the 1^st Defendant’s plan of compelling it to liquidate part of the Securities for her use. The embarrassment to the Company is obvious.

43. Having considered all the circumstances and on a just and convenience balancing exercise, it is clear to me that the Company has a genuine need to be notified of any variation application. Such exercises will neither incur much costs or time nor give an undue advantage to the Company. The complaint that the Company’s present application carries an ulterior motive to sabotage the Defendants’ defence in criminal proceedings has not been made out.

44. In view of the limited intervention as sought by the Company, there is no room for any persuasive argument that the joinder would unnecessarily expand the scope of the present action, confuse or complicate the clear issue to be determined.

45. Likewise, I find no solid basis for any suggestion that the defendants will be subject to double jeopardy under the Two Actions. A notice of application for variation of the Injunction Order will, at most, lead to an opposition to that application. Similar applications will not be made in the Company’s Private Action for the chance of obtaining a fresh injunction order over the Securities under that action is flimsy. I am also alive to the fact that the remedies under s.213 of SFO are complementary to but not substitute for civil rights.

46. In my view, a refusal of the present application will shut the Company out from properly arguing his claim for interest in the Securities when they subsequently arise for consideration upon variation application relating to the Securities. It defies fairness and justice.

47. On the other hand, I should be slow to give liberty to the Company to oppose to whatever applications for variation as it finds fit. The Company gives no valid explanation as to why it has not applied for direction for such purpose under the Injunction Order.

48. Apart from the Securities, the Frozen Assets consist of funds in local and overseas bank accounts, solely or jointly owned by some of the defendants with someone not being parties to this action. The Company has made no specific reference to nor substantiated any solid claim against such funds or persons in the present application. The origin of such funds and the relationship between the parties involved have not been elaborated in any details.

49. In consideration of the coverage, nature and purpose of variation applications would vary in scope and impact, it is not just and convenient to give an unlimited liberty as sought by the Company with the limited evidence before me at this stage. This is without prejudice to the Company to make proper application for such purpose when the situations subsequently require.

50. For the moment, the Company’s interest has not been prejudiced for the Company’s Joinder Summons has been fixed to be heard together with the 3^rd defendant’s Summons in a substantive hearing before Judge. The Company’s concern at this stage will be addressed in a fuller picture for both parties have already filed detailed affirmations for the purpose of those two summonses.

CONCLUSION

51. Having considered all the submissions and evidence of the Company and the Defendants, I am satisfied that the Company has a question relating to the relief sought in this action with regard to the Securities between the Company, SFC and the defendants which warrants an order that notices of variation applications be given to the Company.

52. I order that : -

Without prejudice to the right of the Company to apply for further order, the Company be joined as an intervener of the present proceedings limited to receiving notices of all subsequent applications for variation of the Injunction Order from the parties making such applications.

COSTS

53. As regards costs of the present Summons, I have been given to understand that SFC and the 4^th defendant do not apply for costs. The 2^nd and 5^th defendants take no part in this application. I therefore make no order as to costs for them.

54. With regard to the question of costs as between the Company and the 1^st and 3^rd defendants, costs should follow the event. I make an order nisi that costs of and occasioned by the present Summons, including all costs reserved, with certificate for counsel, be paid by the 1^st and 3^rd defendants to the Company, to be summarily assessed by the court.

55. The above costs order nisi shall become absolute 14 days from the date hereof if no application has been made to vary it.

56. For the purpose of summary assessment, the Company do lodge into Court and serve on the 1^st and 3^rd Defendants its statement of costs within 7 days. The 1^st and 3^rd Defendants do lodge and serve their respective reply within 7 days thereafter.

57. Lastly, I thank all counsel for their assistance in this matter.

	(M. Lam)
	Master of the High Court

Mr Bernard Mak, instructed by Y T Chan & Co, for the Proposed Intervener, China Pacific Securities Limited

Attendance of the plaintiff was excused

Mr George Chu, instructed by Damien Shea & Co, for the 1^st defendant

Mr Lai Ping Tak Peter, instructed by Dundons, for the 3^rd defendant

Mr Tsang of Leung & Lien, for the 4^th Defendant

The 2^nd and 5^th defendants in person absent

[1] Affidavit of Eve Atkinson filed on 24 October 2017, 2^nd Affirmation of Lee Kam Wing filed on 24 October 2017, 3^rd Affirmation of Lee Kam Wing filed on 29 January 2018, 2^nd Affidavit of Eve Atkinson filed on 29 January 2018

[2] HK$3,361,869.97 for the 1^st Defendant; HK$1,473,450 for the 3^rd Defendant; HK$4,217,029.62 for the 4^th Defendant; HK$9,633,564.75 for the 5^th Defendant;

[3] The difference of HK$1,159,132.95 between HK$160,785.224 and HK$159,626,091.05 was due to a discount on certain professional fees.

HCA 353/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 353 OF 2013

________________________

BETWEEN
	SECURITIES AND FUTURES COMMISSION	Plaintiff
	and
	MO SHAU WAH	1st Defendant
	HUI FONG TING	2nd Defendant
	NG SAU CHUN	3rd Defendant
	NG SIU YING	4th Defendant
	CHIU TIT MING	5th Defendant

________________________

Before: Deputy High Court Judge N Francis in Chambers

Dates of Hearing: 16 and 20 June 2017

Date of Judgment: 25 July 2017

________________________

JUDGMENT

________________________

1. The 1^st defendant in this action applied by summons dated 12 June 2017 as follows:

“1. China Pacific Securities Limited (‘CPSL’) herein be ordered to desist from obstructing and/or impeding the Plaintiff and the 1^st Defendant from carrying out the Order of Mr. Justice Poon dated on 1^st March 2013 which was varied by consent by the Order of Madam Justice Au Yeung dated 9^th May 2017.
2. That CPSL to sell all shares of the 1^st Defendant held in its account and pay all proceeds including all dividends received since 2013 therefrom after deducting brokerage fees, stamp duties and levy as per Annex 1 attached herein to the 1^st Defendant’s solicitors within 7 days thereafter;
3. Costs be to the 1^st Defendant and payable forthwith.”

2. The 1^st defendant’s summons was filed and served upon the other parties to the action, including the Securities and Futures Commission (the “SFC”) the plaintiff, with the notation “for information only attendance not required”. I observe, as it may be relevant to the issue of costs, that in the event the SFC appeared on the summons, both the first and the adjourned hearing, and the notation is at best an invitation on the part of the 1^st defendant. It has no more effect than this and a party served with a summons is entitled to form their own (and take a different) view as regards the need for their attendance.

3. In addition to the parties to the action, the 1^st defendant’s solicitors served the summons on a non-party to the action, China Pacific Securities Limited (“CPSL”) who in the list of parties given notice appears second after the Registrar of the High Court and, in particular, before any of the other then parties including the SFC (they, as I have said, along with all of the other existing parties to the action, having been ‘invited’ by the 1^st defendant not to appear on the summons). It appears that the plaintiff was of the view that only CPSL was a necessary party to the application.

4. The reason for the 1^st defendant serving CPSL is apparent when one has regard to the relief sought by paragraphs 1 and 2 of the summons, which is in the nature of an injunction, requiring first, compliance (‘by desisting’) and second, mandatory action on the part of CPSL. This is confirmed by the marginal note to the plaintiff’s summons which refers to Order 29, rules 1 and 2. Therefore I approach the application on this basis.

5. It is to be noted that prior to the application the 1^st defendant, whether through inter solicitor correspondence or by way of a formal application for joinder, did not invite CPSL to consent or apply for it to be made a party to the 1^st defendant’s application. This is despite the fact that in my view it ought to have been readily apparent to the 1^st defendant that CPSL was a potentially interested party in the underlying subject matter of the application, not simply because of the direct relief sought by the application, but having regard to all the circumstances of the background to the action. The 1^st defendant’s approach of simply serving CPSL with the application once made has likely contributed to the time and costs later taken up on the matter.

6. Similarly, the 1^st defendant did not, and this is despite prior correspondence and agreement with the SFC in respect of the original variation of the injunction, invite the SFC to consent to the 1^st defendant’s application, at least as regards paragraph 2 of the summons, for example, by seeking to agree the terms of a consent order with the SFC. Had the 1^st defendant, as it did in respect of the previous variation of the injunction, obtained the SFC’s agreement to and then an order in the terms of paragraph 2, the position as regards paragraph 1 of the summons also might well have been very different and time and costs saved.

7. The background to this action appears from the Statement of Claim of the SFC dated 6 April 2017. The action concerns the exercise by the SFC of statutory powers as regards the affairs of CPSL, it being alleged in the proceedings that the 1^st and 2^nd defendants, both of whom, importantly, were the employees of CPSL, committed a number of contraventions of the Securities and Futures Ordinance (“SFO”) and by doing so defrauded various people, including customers or clients of CPSL as well potentially as CPSL itself. In particular, the SFC seeks a declaration that the defendants (all of them) are persons within the terms of section 213(2)(b) of the SFO and pursuant thereto may be ordered by the court to restore a person a party to any transaction to the position they would otherwise have been in but for the defendants’ actions.

8. The action was commenced with the issue by the SFC of a writ of summons on 26 February 2013 and on the same day the obtaining of an ex parte injunction against the defendants issued by the Honourable Mr Justice Tong. The injunction order was later continued (with variation) on an inter partes basis by the order of the Honourable Mr Justice Poon dated 1 March 2013. The injunction is in the standard form in respect of such matters and as such I do not need to refer to it in detail save to observe that:

(a) each of the 1^st and 2^nd defendants were restrained from removing from Hong Kong or in any way disposing of or dealing with any assets whether within or outside Hong Kong to the value of HK$156,471,705, which on any basis is a very substantial sum; and
(b) in respect of the 1^st defendant, in a list of known assets appended to the order, described as Schedule 3, there appears, in Section C headed “Securities Assets”, at item 9, reference to an account number C090018, in the name of the 1^st defendant held with CPSL, the last known balance of which as at 31 December 2012 is given as HK$3,361,869.97. It is this account and the securities still held within it today (the account having been frozen since then through to the present day) that is the subject of the present application.

9. Before I deal with the issues I consider relevant to the 1^st defendant’s application, I would first deal with a point made a number of times by the 1^st defendant’s counsel, both in written submissions and before the court, to the effect that the SFC has delayed the progress of the action to the detriment of the 1^st defendant (and, presumably, it would also be said, the other defendants).

10. While clearly there is a long time gap between the commencement of the action in February 2013 and the filing and service of the Statement of Claim in April 2017, the explanation for the delay largely appears self-evident:

(a) the alleged actions of the 1^st defendant, in addition to any potential liability that may result from civil action by the SFC or any other claimant, ultimately have led to criminal proceedings the trial of which I understand is now due to take place in January 2018. Of course, the 1^st defendant may succeed with her defence of the criminal proceedings and with this in mind I assume that the SFC’s claim has not been progressed further in the meantime for fear of prejudicing the criminal process or putting the 1^st defendant in a position where she risked incriminating herself;
(b) further, as appears from the Statement of Claim, in the immediate aftermath of the discovery of the alleged wrongful acts of the 1^st defendant and others, a scheme was developed and agreed whereby parties variously described in the pleading as “the CPSL Shareholders, the CPSL Directors, the Trustees and/or CPSL” entered into a series of transactions the effect of which was intended to restore all of the third party customers and clients of CPSL to the position they would otherwise have been in but for the alleged wrongful acts of the 1^stdefendant and others i.e. in effect, to compensate the apparent victims. To this extent at least, a substantial part of the SFC’s role, which includes protecting the interests of the investing public, might be said to have already been performed. I note however, that the ‘loss’ would still have to have been borne by someone, presumably the CPSL Shareholders and/or CPSL itself;
(c) as was noted by counsel for the SFC, at no point in all of the intervening four years did the 1^st defendant herself seek to cause the SFC to progress the action whether by requiring the service of a Statement of Claim so that she might defend the action or by way of applying for the action to be struck out. According to the evidence before the court, at the date the SFC filed and served the Statement of Claim, namely 6 April 2017, still no acknowledgement of service or notice of intention to defend had been filed on behalf of the 1^st defendant. Therefore, it appears that the 1^st defendant herself, until only very recently, has shown no desire to see the action progress.

11. I do not consider that the 1^st defendant’s allegation of delay on the part of the SFC in the substantive action has any bearing on or is relevant to the issues that I am required to decide on the present application; albeit clearly I should have regard to the history of the matter by way of background. Of course, a party obtaining a Mareva injunction is under an obligation to progress the substantive proceedings in a timely fashion and if they fail to do so, the injunction may be discharged and costs awarded. In this matter there is only very limited evidence before me regarding what has transpired since February 2013. Having regard to such evidence, as I have said, there may well be reasonable explanations as to why the action has not progressed substantively. Therefore, I do not consider that any allegation by the 1^st defendant as regards delay on the part of the SFC should cause me to depart from the normal principles that would otherwise apply to the 1^st defendant’s application.

12. In effect, the matters with which the court is currently concerned only commenced in January 2017 when solicitors acting on behalf of the 1^st defendant (the same solicitors who since April 2017 have been on the record for the 1^st defendant in these proceedings) first wrote to the SFC seeking the further variation of the injunction. In the solicitor’s letter to the SFC dated 24 January 2017, the solicitors referred to the pending criminal proceedings faced by their client and sought the variation of the injunction to allow their client to spend HK$100,000 per week on legal costs in order to mount her defence of the proceedings.

13. Thereafter, following negotiation, on an application made by consent between the SFC and the 1^st defendant, the injunction order as varied made by the Honourable Mr Justice Poon on 1 March 2013 was further varied by the order of the Honourable Madam Justice Au-Yeung dated 9 May 2017 to provide additionally as follows:

“14B. Notwithstanding paragraph 14, the 1^st defendant be allowed to withdraw HK$100,000 per week as legal costs for the 1^st defendant from the 9^th of May 2017 onward until the total withdrawal by the 1^st defendant under this paragraph reaches HK$4,205,000 or until the completion of trial of HCCC 12 of 2017, whichever is the sooner.”

14. As it bears on the later application of the 1^st defendant, I would observe that Her Ladyship’s order, as is normal, refers only to the amount, first weekly and then in total, that the 1^st defendant may spend on legal costs related to her defence of the criminal proceedings. The order does not identify the source of the funds nor does it provide for the “withdrawal” of more than HK$100,000 per week. Seemingly, the potential need to address such issues was not considered by the 1^st defendant nor was this a matter raised by the SFC.

15. As I observed at the outset of the hearing on 16 June 2017, an order worded in these terms can present practical difficulties unless the funds restrained from which money is sought to be withdrawn are in the control of the plaintiff itself. If not, the beneficiary, in this case the 1^st defendant, faces having to demonstrate to a third party that as they seek to withdraw up to HK$100,000 from one source of funds, they are not separately and simultaneously seeking to withdraw up to HK$100,000 from another source of funds. Understandably, a third party may be reluctant to act solely on the instructions of the beneficiary, even if given through solicitors, and typically they will seek written confirmation from the plaintiff that it has no objection (in effect relying on the plaintiff to ‘police’ overall compliance with the terms of the injunction) or they will ask that the parties obtain a court order making specific reference to the source of funds.

16. In the event, it was only by way of the 1^st defendant solicitors letter to the SFC dated 16 May 2017 that the suggestion of liquidating the shares in securities account C090018 in the name of the 1^st defendant with by CPSL was first made. The SFC’s response was that while it had no objection in principle it wished to hear whether the 1^st defendant intended to first utilise the various cash deposits that she held in Hong Kong and other overseas accounts before selling the securities. The SFC also indicated that it would require a proper record be kept as to the actual amounts withdrawn together with the legal costs incurred and that periodically it be kept updated in this regard.

17. At the same time as corresponding with the SFC, the 1^st defendant solicitors also commenced correspondence with the solicitors for CPSL on this aspect of the matter. Earlier in 2017 there had been initial correspondence direct between the 1^st defendant’s solicitors and CPSL seeking information as to the current balance of the securities account. However, that earlier correspondence, though it referred to there being urgency having regard to a pending application to vary the injunction order imposed upon the 1^st defendant by the SFC, did not give any further background or explanation of the purpose behind the request for information as to the account balance. As I have already observed, if the 1^st defendant solicitors had been more open, indeed direct, with CPSL quite possibly the issues that were only substantively developed in argument before the court would have been identified earlier, and possibly resolved by agreement.

18. In the event, prior to the consent application by the SFC and the 1^st defendant to vary the terms of the injunction order, CPSL was not made aware of the terms of the intended variation or that later it would be directly drawn into the matter by way of the application now made by the 1^st defendant. I have already observed that the terms of the varied order make no reference to the source of funds to be utilised by the 1^st defendant to withdraw up to HK$100,000 per week to meet their legal costs of defending the criminal proceedings, let alone reference to the source of funds being the securities account in the name of the 1^st defendant held with CPSL.

19. Notwithstanding the absence of any such reference, the 1^st defendant solicitors letter to the solicitors acting for CPSL dated 19 May 2017, enclosing a copy of the further varied injunction order and stated and/or sought to require CPSL proceed as follows:

(a) “our client intends to sell all the shares in her account under your clients control, to cope with her legal expenses in this action and the criminal action HCCC 12 2017;”
I observe that the words “in this action” which I have underlined are arguably inconsistent with the terms of the order which appears (certainly when one has regard to the correspondence prior to it) intended to relate only to the legal costs of the criminal proceedings, not the civil action;
(b) “we enclose herewith our client’s authorisation .... Upon selling please send the cheques to our firm, which we undertake to keep in our client account which will entirely be spent on meeting legal costs, medical and living expenses, provided in paragraphs 14 to 14B of the said orders of His Lordship Poon on and her ladyship Madam Au-Yeung J.”
(c) “Please inform your client accordingly and expeditiously disposed of all the shares held by your client and turning them to cash.”

20. As can be seen, the letter suffers from the potential defect that I have already anticipated in that an order that the 1^st defendant be permitted to spend up to HK$100,000 per week up to a total figure of HK$4,205,000 on her legal costs in relation to the defence of criminal proceedings is sought to be relied upon to justify an instruction to deal with and dispose of specific securities with a value in excess of HK$3 million. The letter goes on to instruct that CPSL are to make payment of the proceeds to the 1^st defendant’s solicitors. It is the refusal or more correctly the failure of CPSL to act as instructed by the 1^st defendant’s solicitors that gives rise to the present application, in particular paragraph 1 of the summons.

21. However, for the reasons that I have already explained, I agree with the submission of counsel for CPSL that the order does not go nearly as far as the 1^st defendant’s solicitors letter sought to require of CPSL and therefore I view the actions of CPSL, at least in this regard, as entirely understandable. This disposes of paragraph 1 of the summons.

22. There then followed limited further correspondence between the solicitors for CPSL and the solicitors for 1^st defendant, correspondence which I have to observe shows no real attempt, and I must note this includes on the part of CPSL, to identify and then address the relevant issues as later developed before the court. The last letter in the series is dated 12 June 2017 but this was immediately overtaken by the present application by the 1^st defendant which was issued and served the very same day (and listed for hearing only four days later on 16 June 2017).

23. Importantly, the solicitors for the 1^st defendant did not inform the solicitors for CPSL that the SFC, the plaintiff in the proceedings, had indicated (albeit with some significant qualifications, which counsel for the SFC later expanded upon before the court) that in principle it had no objection to the 1^st defendant selling the shares in the securities account in her name with CPSL, and making use of their proceeds to pay legal costs in accordance with the terms of the injunction order as varied.

24. Equally, the solicitors for CPSL, perhaps understandably given the very short time frame (there was only some 23 days between their first being put on notice by letter and the issue of the present application), made no attempt to anticipate the arguments now put before the court by CPSL’s counsel as to why the securities account should not be liquidated and paid over to the 1^st defendant solicitors or in any event used to fund the 1^st defendant’s defence of criminal proceedings. While, given the short time period, I do not think that CPSL can be said to have been “stalling”, as is alleged by the 1^st defendant’s solicitors, had CPSL responded substantively, setting out the position it has adopted before the court, again time and costs might have been avoided.

25. Overall, I consider that it would have been preferable if CPSL had been given earlier and more specific notice of the 1^st defendant’s intention to seek to make use of the securities account held by CPSL to provide the necessary funds.

26. On 16 June 2017, shortly prior to the hearing of the 1^st defendant’s application the following day, the 1^st defendant applied to amend her summons by adding a new paragraph 3 as follows:

“3. alternatively, the said proceeds to be placed into a joint bank account to be jointly managed by the 1^st Defendant’s solicitors and the Plaintiff”

27. The proposed amendment was seemingly to address the concern that paragraph 2 of the summons as then worded sought an order that after the sale of the subject securities by CPSL, all of the net proceeds, amounting to several million dollars, be paid to and held by the 1^st defendant’s solicitors. This would put the 1^st defendant solicitors in control of a substantial sum, notwithstanding that the relevant order only permits the expenditure of HK$100,000 per week towards the costs of the 1^st defendant’s defence of the criminal proceedings.

28. At the hearing before me this issue seemed to be of particular concern to counsel for the SFC. He submitted that it would not be appropriate for the 1^st defendant’s solicitors to have under their unilateral control a lump sum from which they could then withdraw amounts as permitted by the terms of the varied injunction order. Counsel’s preference was that any such funds be held by a third-party, he referred to an independent bank or indeed CPSL itself. At the same time, and apparently largely for practical reasons, he said the SFC itself was not willing to act in this capacity, even though it is the plaintiff and the present claimant in the action. He referred to the difficulties that he said might be caused were there to be a change in representation or if the proceedings did not progress to trial for any reason or alternatively were delayed.

29. As I indicated during the course of the hearing, I struggle to identify a substantial basis for the SFC’s concern. Wherever monies are held in Hong Kong, they will be the subject of the injunction order restraining removal, dealing or disposal of them other than as provided for in the order. This would be the case whether they are held in the client account of the 1^st defendant solicitors or by a bank or by CPSL itself. Indeed, in the 1^st defendant’s solicitors original letter to CPSL, to the 1^st defendant’s solicitors’ credit, they offered an express undertaking that the monies would only be used for the purposes provided for in the varied injunction order. If this were the arrangement agreed between the parties, I very much doubt that the court would be overly concerned.

30. During the course of the first hearing on 16 June 2017, I indicated to the parties that this sort of practical issue is the sort of thing that parties should be able to resolve by agreement without needing to involve the court. At the time of the adjournment of the hearing on 16 June 2017, there appeared some prospect that agreement, at least in this regard, could be reached between the 1^st defendant and the SFC so as to avoid the need for the SFC to be represented when the hearing resumed on 20 June 2017. Unfortunately, this proved not to be the case.

31. At the first hearing before the court on 16 June 2017 the 1^st defendant applied to further amend paragraph 2 of the summons to provide that instead of paying over the proceeds after realisation of the securities account to the 1^st defendant solicitors within seven days the monies should continue to be held by CPSL until further order. This was in the alternative to the proposed new paragraph 3 which provided that the proceeds should be placed into a joint bank account to be managed by the 1^st defendant solicitors and the plaintiff. I gave leave accordingly (with costs reserved).

32. Finally, at the adjourned hearing before the court on 20 June 2017 the 1^st defendant applied, and I gave leave (with costs reserved), to further amend the new paragraph 3, counsel for the SFC having indicated during the hearing on 16 June 2017 and in subsequent correspondence exchanged between the 1^st defendant and the SFC that it did not wish to be a party to a joint bank account. Therefore, the final form of paragraph 3 of the 1^st defendant’s application was as follows:

“The said proceeds to be placed in a bank account to be managed by the 1^st Defendant’s solicitors subject to their undertaking in strict compliance of paragraphs 14, 14A and 14B of Mr Justice Tong’s Order dated 26 February 2013, Mr Justice Poon’s Order dated 1 March 2013 and Madam Justice Au-Yeung’s Order dated 9 May 2017 mentioned hereinabove.”

33. Before addressing the substantive matters raised by the 1^st defendant’s application, the first issue I was required to deal with was the jurisdiction of the court over and the standing of CPSL as a non-party to the action. I have already referred to the background circumstances, the relief sought by the 1^st defendant and how it potentially impacted on CPSL and also how CPSL came to be listed on the summons and was given notice of the application.

34. The subject of jurisdiction formed a not insignificant part of the written submissions of counsel for each of the 1^st defendant and CPSL however, I need not make any finding in this regard as in the event the matter was shortly resolved by, at the court’s invitation, CPSL agreeing that it to be made a party to the 1^st defendant’s application pursuant to Order 15, rule 6(2)(b)(ii). The joinder of CPSL was not opposed (on the contrary it was welcomed) by the 1^st defendant and I ordered accordingly (with costs reserved).

35. The matters I have referred to above in this judgment took up much of the first hearing on 16 June 2017 (which I observe lasted some 70 minutes, this notwithstanding the time estimate of 15 minutes shown on the face of the 1^st defendant’s summons). However, with the joinder of CPSL as a party dealt with, the parties respective counsel was then able to agree directions for the adjournment of the 1^st defendant’s application to a further hearing on 20 June 2017 with two hours reserved.

36. The adjournment was fortuitous in that prior to the hearing commencing on 16 June 2017, it did not appear that any of the parties had had any or at least any substantial regard to a clear line of authorities wherein the court has considered the question of whether monies the subject of an injunction, in particular an injunction obtained in support of a proprietary claim, should be released to a defendant to allow them to meet the costs of defending themselves adequately in related criminal proceedings. Immediately prior to the commencement of the hearing on 16 June 2017, the court provided counsel for the parties with copies of the judgement of the Honourable Mr Justice Thomas Au in Wharf Ltd v Lau Yuen How [2010] 1 HKLRD 783 by way of illustration. In the event, at the resumed hearing on 20 June 2017 the majority of the argument was directed to the principles set out in that and other decisions on the same issue.

37. The appropriate principles are clearly set out in the judgment of Deputy High Court Judge B Chu (as she then was) in Hong Kong Life Insurance Limited v Fung Siu Cheung Michael and others HCA 1164/2012, 21 February 2014, paragraphs 33 and 34, as follows:

“33. ... where the injunction involves a proprietary claim by the plaintiff, the court has a discretion to enable a defendant to use assets subject to the injunction to pay legal expenses. In deciding whether to exercise that discretion, the court will adopt a two-stage process:
a. The defendant applying for the release of assets has to demonstrate with full and frank evidence that there are no other available assets that can be used to pay his legal expenses. If the defendant fails at this hurdle, then that is the end of the application and it will be dismissed.
b. If the defendant succeeds in demonstrating the lack of other available assets, the court must balance the potential injustice to the plaintiff of releasing the assets against the potential injustice to the defendant of depriving him of legal assistance to advance what may ultimately be a successful defence. The process is a ‘careful and anxious judgment’, and the court is entitled to look at all relevant circumstances, and in particular, to weigh the relative strengths of the plaintiff’s proprietary claim to the assets and the defendant’s defence to that claim.
(‘Proprietary Test’)
34. In the second situation, where the plaintiff is not asserting a proprietary claim to the assets in question, the court should consider whether the defendant has shown by sufficient evidence (a) that he does not have other assets available to meet the legal fees or other expenses and (b) the purpose of the application is not an attempt to dissipate the asset (which prima facie are the defendant’s) to frustrate the execution of judgment by the plaintiff. In other words, the defendant must show an arguable case for his having recourse to the funds in question (‘Non-Proprietary Test’).”

38. In this judgment I will gratefully adopt Her Ladyship’s analysis and definitions as highlighted above.

39. Later in this judgment, I will address the question of the “claim” in this matter, both as regards the position of the SFC, which is the only plaintiff in the present proceedings and is pursuing a statutory remedy, and also the position of CPSL in respect of which I observe that it is:

(a) the former employer of the 1^st defendant;
(b) the owner of the business in which the 1^st defendant is alleged to committed serious acts of fraud;
(c) one of the prospective parties sought to be compensated through relief claimed by the SFC in the present proceedings;
(d) the holder of the assets (the origins of which are undetermined) to which the 1^st defendant seeks to have recourse; and
(e) the party to the present application seeking most directly to resist the relief sought by the 1^st defendant.

However, first, I will address the sufficiency of the evidence of the 1^st defendant regarding her available assets as in my judgment paragraphs 2 and 3 of the 1^st defendant’s application can be disposed of on this basis alone.

40. The 1^st defendant has made a number of affidavits over the course of these proceedings setting out details of her assets (and in support of this application). There are a total of four affidavits. Most recently the 1^st defendant has made three affidavits dated respectively 31 March 2017, 28 April 2017 and 12 June 2017. After carefully reviewing all of the 1^st defendant’s evidence, in my judgment the 1^st defendant has not satisfied even the Non-Proprietary Test as set out above. The evidence shows that:

(a) even if they are jointly held, the 1^st defendant has a number of bank accounts with sizable cash balances which she could utilise first before liquidating and making use of the cash proceeds of the securities account C090018 held in her name with CPSL;
(b) again even if they are jointly owned, the 1^st defendant owns two properties the financial circumstances of which are completely unexplained, including whether they generate any rental income or the potential equity available through sale or mortgage;
(c) the origins of the HK$3 million worth of securities currently held in the said account are also entirely unexplained by the 1^st defendant.

41. I have also had regard to the allegations against the 1^st defendant contained in the Statement of Claim filed and served by the SFC in the present proceedings on 6 April 2017. As I have previously referred to, the claims against the 1^st defendant are to the value of HK$156,471,705. This sum is very many times larger than the HK$3 million worth of securities with which this application is concerned. However, the defence of the 1^st defendant filed and served in response dated 4 May 2017 does not make any attempt to descend to particulars to explain how she might have legitimately accumulated the securities in question.

42. In response to the court’s questions, the best that counsel for the 1^st defendant was able to say was that the time of preparation of her evidence the focus had not been on whether it was sufficient for the purposes of satisfying either the Proprietary Test or Non-Proprietary Test. He referred to the fact that the evidence had largely been prepared and presented in pursuant of her obligation of disclosure in the original injunction order and subsequently in response to the requests and to satisfy the requirements of the SFC.

43. However, with respect, I view this as no answer at all, certainly when the principles in respect of what in effect is the real application being made by the 1^st defendant are so well-established. When regard is had to the background leading up to the present application, the manner in which the application was framed and the submissions of counsel for the 1^st defendant submitted in advance of the hearing on 16 June 2017, it seems clear that when preparing the 1^st defendant’s recent evidence no regard was had to the relevant principles.

44. In supplemental submissions filed for the adjourned hearing on 20 June 2017, counsel for CPSL submitted that whether the appropriate test be the Proprietary Test or the Non-Proprietary Test, the 1^st defendant’s applications in paragraphs 2 and 3 of the summons should fail for the lack of the evidential proof necessary to meet even the lower threshold and I agree. In my judgment the 1^st defendant’s application as regards paragraph 2 of the summons and the consequential provision in paragraph 3 of the summons should be dismissed (and I so order) on the basis of the inadequacy of the 1^st defendant’s evidence as to her available assets.

45. As I have already observed, in any event I also do not consider that the 1^st defendant’s application by paragraph 1 of the summons was well founded. For the reasons I have set out previously, I find that the terms of the varied injunction order did not require that CPSL act as instructed by the terms of the 1^st defendant solicitors letter of 19 May 2017 and therefore it cannot be said that (by not acting as instructed) they were “obstructing and/or impeding” the carrying out of the order. Therefore, the 1^st defendant’s application in this regard is also dismissed.

46. There remains the question of the ‘claim’ that the court should have regard to when considering the 1^st defendant’s application. Currently, the only action ongoing is that of the SFC, commenced by the Amended Writ of Summons issued on 26 February 2013 and set out in the Statement of Claim filed on 6 April 2017. For that claim and the relief sought the SFC relies upon statutory powers that are not available to other parties. In particular, the relief claimed includes the following:

“ Pursuant to section 213(2)(b) of the SFO [Securities and Futures Ordinance], an order requiring the 1^st, 2^nd, 3^rd, 4^th and 5^th defendants to take such steps as the court may direct, including payment of such sums as the court thinks fit or the transfer of any monies or securities to (i) the CPS Shareholders and CPSL Directors and/or (ii) the Trustees and/or (iii) CPSL for the purpose of restoring the CPS Shareholders, CPS Directors and/or CPSL to the position they were in before the 1^st and 2^nd defendants misappropriation of the Client Securities together with any ancillary orders or directions to affect restoration.” [underlining added]

47. Section 213(2)(b) of the SFO reads as follows:

“213 Injunctions and other orders
...
(2) The orders specified for the purposes of subsection (1) are–
...
(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;”

48. As appears, CPSL is expressly named as a party in respect of whom such an order is sought. In response to the court’s questions, counsel for the SFC stated that:

(a) it is the SFC’s intention to maintain the claim as set out above through the proceedings;
(b) it is the SFC’s position that Section 213(2)(b) of the SFO gives the court power to order restoration in favour of “the parties to any transaction”, which I understand to mean includes those parties who as I described in paragraph 10(b) of this judgment ultimately bore the ‘loss’.

49. As I have noted in this judgment, it appears from the Statement of Claim that following discovery of the alleged wrongful acts of the 1^st defendant’s and others, a series of transactions took place the effect of which was intended to restore all the customers and clients of CPSL to the position they would otherwise have been in but for the alleged wrongful acts of the 1^st defendant’s and others i.e. in effect to compensate the apparent victims of the alleged fraud. The court has no further information before it other than as contained in the Statement of Claim regarding what such transactions involved and where, today, the burden of them lies i.e. which party or parties ended up ultimately bearing the loss for which the customers and clients were compensated. However, it is a not unreasonable assumption that such loss rests with CPSL, even if the necessary funds and/or replacement HCA353/2013 SECURITIES AND FUTURES COMMISSION v. MO SHAU WAH AND OTHERS

HCA 353/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 353 OF 2013

________________________

BETWEEN
	SECURITIES AND FUTURES COMMISSION	Plaintiff
	and
	MO SHAU WAH	1st Defendant
	HUI FONG TING	2nd Defendant
	NG SAU CHUN	3rd Defendant
	NG SIU YING	4th Defendant
	CHIU TIT MING	5th Defendant

________________________

Before: Deputy High Court Judge N Francis in Chambers

Dates of Hearing: 16 and 20 June 2017

Date of Judgment: 25 July 2017

________________________

JUDGMENT

________________________

1. The 1^st defendant in this action applied by summons dated 12 June 2017 as follows:

“1. China Pacific Securities Limited (‘CPSL’) herein be ordered to desist from obstructing and/or impeding the Plaintiff and the 1^st Defendant from carrying out the Order of Mr. Justice Poon dated on 1^st March 2013 which was varied by consent by the Order of Madam Justice Au Yeung dated 9^th May 2017.
2. That CPSL to sell all shares of the 1^st Defendant held in its account and pay all proceeds including all dividends received since 2013 therefrom after deducting brokerage fees, stamp duties and levy as per Annex 1 attached herein to the 1^st Defendant’s solicitors within 7 days thereafter;
3. Costs be to the 1^st Defendant and payable forthwith.”

(a) each of the 1^st and 2^nd defendants were restrained from removing from Hong Kong or in any way disposing of or dealing with any assets whether within or outside Hong Kong to the value of HK$156,471,705, which on any basis is a very substantial sum; and
(b) in respect of the 1^st defendant, in a list of known assets appended to the order, described as Schedule 3, there appears, in Section C headed “Securities Assets”, at item 9, reference to an account number C090018, in the name of the 1^st defendant held with CPSL, the last known balance of which as at 31 December 2012 is given as HK$3,361,869.97. It is this account and the securities still held within it today (the account having been frozen since then through to the present day) that is the subject of the present application.

(a) the alleged actions of the 1^st defendant, in addition to any potential liability that may result from civil action by the SFC or any other claimant, ultimately have led to criminal proceedings the trial of which I understand is now due to take place in January 2018. Of course, the 1^st defendant may succeed with her defence of the criminal proceedings and with this in mind I assume that the SFC’s claim has not been progressed further in the meantime for fear of prejudicing the criminal process or putting the 1^st defendant in a position where she risked incriminating herself;
(b) further, as appears from the Statement of Claim, in the immediate aftermath of the discovery of the alleged wrongful acts of the 1^st defendant and others, a scheme was developed and agreed whereby parties variously described in the pleading as “the CPSL Shareholders, the CPSL Directors, the Trustees and/or CPSL” entered into a series of transactions the effect of which was intended to restore all of the third party customers and clients of CPSL to the position they would otherwise have been in but for the alleged wrongful acts of the 1^stdefendant and others i.e. in effect, to compensate the apparent victims. To this extent at least, a substantial part of the SFC’s role, which includes protecting the interests of the investing public, might be said to have already been performed. I note however, that the ‘loss’ would still have to have been borne by someone, presumably the CPSL Shareholders and/or CPSL itself;
(c) as was noted by counsel for the SFC, at no point in all of the intervening four years did the 1^st defendant herself seek to cause the SFC to progress the action whether by requiring the service of a Statement of Claim so that she might defend the action or by way of applying for the action to be struck out. According to the evidence before the court, at the date the SFC filed and served the Statement of Claim, namely 6 April 2017, still no acknowledgement of service or notice of intention to defend had been filed on behalf of the 1^st defendant. Therefore, it appears that the 1^st defendant herself, until only very recently, has shown no desire to see the action progress.

“14B. Notwithstanding paragraph 14, the 1^st defendant be allowed to withdraw HK$100,000 per week as legal costs for the 1^st defendant from the 9^th of May 2017 onward until the total withdrawal by the 1^st defendant under this paragraph reaches HK$4,205,000 or until the completion of trial of HCCC 12 of 2017, whichever is the sooner.”

(a) “our client intends to sell all the shares in her account under your clients control, to cope with her legal expenses in this action and the criminal action HCCC 12 2017;”
I observe that the words “in this action” which I have underlined are arguably inconsistent with the terms of the order which appears (certainly when one has regard to the correspondence prior to it) intended to relate only to the legal costs of the criminal proceedings, not the civil action;
(b) “we enclose herewith our client’s authorisation .... Upon selling please send the cheques to our firm, which we undertake to keep in our client account which will entirely be spent on meeting legal costs, medical and living expenses, provided in paragraphs 14 to 14B of the said orders of His Lordship Poon on and her ladyship Madam Au-Yeung J.”
(c) “Please inform your client accordingly and expeditiously disposed of all the shares held by your client and turning them to cash.”

26. On 16 June 2017, shortly prior to the hearing of the 1^st defendant’s application the following day, the 1^st defendant applied to amend her summons by adding a new paragraph 3 as follows:

“3. alternatively, the said proceeds to be placed into a joint bank account to be jointly managed by the 1^st Defendant’s solicitors and the Plaintiff”

“The said proceeds to be placed in a bank account to be managed by the 1^st Defendant’s solicitors subject to their undertaking in strict compliance of paragraphs 14, 14A and 14B of Mr Justice Tong’s Order dated 26 February 2013, Mr Justice Poon’s Order dated 1 March 2013 and Madam Justice Au-Yeung’s Order dated 9 May 2017 mentioned hereinabove.”

“33. ... where the injunction involves a proprietary claim by the plaintiff, the court has a discretion to enable a defendant to use assets subject to the injunction to pay legal expenses. In deciding whether to exercise that discretion, the court will adopt a two-stage process:
a. The defendant applying for the release of assets has to demonstrate with full and frank evidence that there are no other available assets that can be used to pay his legal expenses. If the defendant fails at this hurdle, then that is the end of the application and it will be dismissed.
b. If the defendant succeeds in demonstrating the lack of other available assets, the court must balance the potential injustice to the plaintiff of releasing the assets against the potential injustice to the defendant of depriving him of legal assistance to advance what may ultimately be a successful defence. The process is a ‘careful and anxious judgment’, and the court is entitled to look at all relevant circumstances, and in particular, to weigh the relative strengths of the plaintiff’s proprietary claim to the assets and the defendant’s defence to that claim.
(‘Proprietary Test’)
34. In the second situation, where the plaintiff is not asserting a proprietary claim to the assets in question, the court should consider whether the defendant has shown by sufficient evidence (a) that he does not have other assets available to meet the legal fees or other expenses and (b) the purpose of the application is not an attempt to dissipate the asset (which prima facie are the defendant’s) to frustrate the execution of judgment by the plaintiff. In other words, the defendant must show an arguable case for his having recourse to the funds in question (‘Non-Proprietary Test’).”

38. In this judgment I will gratefully adopt Her Ladyship’s analysis and definitions as highlighted above.

(a) the former employer of the 1^st defendant;
(b) the owner of the business in which the 1^st defendant is alleged to committed serious acts of fraud;
(c) one of the prospective parties sought to be compensated through relief claimed by the SFC in the present proceedings;
(d) the holder of the assets (the origins of which are undetermined) to which the 1^st defendant seeks to have recourse; and
(e) the party to the present application seeking most directly to resist the relief sought by the 1^st defendant.

(a) even if they are jointly held, the 1^st defendant has a number of bank accounts with sizable cash balances which she could utilise first before liquidating and making use of the cash proceeds of the securities account C090018 held in her name with CPSL;
(b) again even if they are jointly owned, the 1^st defendant owns two properties the financial circumstances of which are completely unexplained, including whether they generate any rental income or the potential equity available through sale or mortgage;
(c) the origins of the HK$3 million worth of securities currently held in the said account are also entirely unexplained by the 1^st defendant.

“ Pursuant to section 213(2)(b) of the SFO [Securities and Futures Ordinance], an order requiring the 1^st, 2^nd, 3^rd, 4^th and 5^th defendants to take such steps as the court may direct, including payment of such sums as the court thinks fit or the transfer of any monies or securities to (i) the CPS Shareholders and CPSL Directors and/or (ii) the Trustees and/or (iii) CPSL for the purpose of restoring the CPS Shareholders, CPS Directors and/or CPSL to the position they were in before the 1^st and 2^nd defendants misappropriation of the Client Securities together with any ancillary orders or directions to affect restoration.” [underlining added]

47. Section 213(2)(b) of the SFO reads as follows:

“213 Injunctions and other orders
...
(2) The orders specified for the purposes of subsection (1) are–
...
(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;”

48. As appears, CPSL is expressly named as a party in respect of whom such an order is sought. In response to the court’s questions, counsel for the SFC stated that:

(a) it is the SFC’s intention to maintain the claim as set out above through the proceedings;
(b) it is the SFC’s position that Section 213(2)(b) of the SFO gives the court power to order restoration in favour of “the parties to any transaction”, which I understand to mean includes those parties who as I described in paragraph 10(b) of this judgment ultimately bore the ‘loss’.

49. As I have noted in this judgment, it appears from the Statement of Claim that following discovery of the alleged wrongful acts of the 1^st defendant’s and others, a series of transactions took place the effect of which was intended to restore all the customers and clients of CPSL to the position they would otherwise have been in but for the alleged wrongful acts of the 1^st defendant’s and others i.e. in effect to compensate the apparent victims of the alleged fraud. The court has no further information before it other than as contained in the Statement of Claim regarding what such transactions involved and where, today, the burden of them lies i.e. which party or parties ended up ultimately bearing the loss for which the customers and clients were compensated. However, it is a not unreasonable assumption that such loss rests with CPSL, even if the necessary funds and/or replacement shares were provided by its shareholders or third parties. One can again assume that those who provided the necessary funds and/or replacement shares continue to look to be reimbursed in the event that recoveries are obtained from anyone found liable i.e. there is a debt owed to them by CPSL.

50. Counsel for CPSL submitted that for the purposes of the application before the court, and for the appropriate test to be the higher Proprietary Test, it was sufficient that there be in existence a claim of a proprietary nature and not necessary that there be a finding that a proprietary claim is proved. This must be correct. However, he appeared to accept that the claim of the SFC does not on its face appear to be of a proprietary nature. This also must be correct for the claim is pursuant to statute and is not seeking to compensate the SFC itself for a loss that it had suffered (even if by statute the SFC has the power to seek relief whereby others can be compensated for their loss).

51. However, Counsel for CPSL submitted that it was clear that CPSL itself has a proprietary interest and/or claim in its own right as regards the securities account in question by reason of the fact that:

“9(1) at least HK$38,916,614.87 representing the proceeds of sale from the misappropriation of the shares of CPSL’s clients were used to purchase the Shares (Statement of Claim dated 6 April 2017 [4/18–63] (‘SOC’) §§13–19, 27–28.
(2) given that CPSL has compensated the affected clients to the fullest extent (SOC §§47–49 [4/32]), it must, by a process of subrogation, step into the shares of these affected clients so that a proprietary claim becomes available to it: see 1^st Skel §16(3). That D1 has not heard of such a claim ‘in the context of regulatory proceedings’ is of little assistance to this Court (§2 of D1’s Further Submissions.)”

52. That CPSL has a potential claim against the 1^st defendant and others, appears clear from the facts as alleged in the Statement of Claim and all the circumstances. That claim also may very well be of a proprietary nature given that the 1^st and 2^nd defendants were employees of CPSL throughout the period of the alleged fraudulent acts and apparently made use of their positions and/or the funds and assets of CPSL as part of the alleged fraud. I have already referred to the fact that no explanation has been forthcoming from the 1^st defendant as to how the HK$3 million worth of securities remaining in the account with CPSL were acquired. It is readily conceivable that some form of proprietary or trust claim might be made in respect of the securities.

53. In any event, having regard to the compensatory arrangements as described in the Statement of Claim, it must be highly likely that CPSL has a substantial claim in damages against the 1^st defendant and others and that it might be to a value many times larger than HK$3 million.

54. In all the circumstances, I am satisfied that whether having regard to the claim as currently formulated and being pursued by the SFC in the present action pursuant to statute, which seeks relief that might ‘restore’ or make CPSL whole, or the prospective claim, proprietary and/or in damages, that CPSL is very likely to have based on the facts and matters alleged in the Statement of Claim of the SFC, it is appropriate that I deal with the 1^st defendant’s application on the basis that there is a pending ‘claim’ such that the principles that I have referred to as set forth in Her Ladyship’s judgment are applicable.

55. During the course of the later stages of the adjourned hearing, I asked counsel for CPSL as to whether it intends to formulate and bring forth a formal claim against the 1^st defendant. I pointed out that in the event that for whatever reason the SFC’s claim fell away the existing injunction would cease and then be no bar to the 1^st defendant pursuing ownership and receipt of any assets held in her name including those held by CPSL. Further, even while the SFC’s claim remained pending, if the SFC (perhaps after the 1^st defendant had clearly demonstrated that she has had exhausted all other funds available to her) were later to agree to a consent order entitling the 1^st defendant to sell the securities held by CPSL and draw upon the proceeds, and at that point CPSL had not commenced a properly formulated claim of its own, it would be on risk of orders being in terms of paragraphs 2 and 3 of the 1^st defendant’s present application. In response, counsel for CPSL indicated that it recognised that it had to give further consideration to this issue, and stated that CPSL is prepared to bring a claim of its own against the 1^st defendant. If this is the case, I consider that it should do so and without delay.

56. I therefore find that the 1^st defendant has not shown a good basis for the court to make the orders sought by paragraphs 1, 2 and 3 of the 1^st defendant summons filed on 12 June 2017 (as later amended) and accordingly the summons is dismissed.

57. As is now very well established, ultimately costs are a matter entirely in the court’s discretion in the exercise of which the court may have regard to many factors including the conduct of the parties.

58. As will be apparent from my observations and findings as set out in this judgment, in my view the conduct of all of the parties before me added unnecessarily, to a greater or lesser extent, to the time and costs expended.

59. Dealing first with the position of the SFC, even as it agreed to the variation of the injunction order, I believe that it might well have anticipated or at least have enquired, as to how the 1^st defendant intended to utilise the order. Otherwise, the variations to the order served only a limited purpose. Further, and while, as I have said, for the purposes of the substantive matters before me I have not had regard to the issue of delay as complained of by the 1^st defendant, on the evidence before the court it does appear that prior to the present application the SFC (and also CPSL) had not given any or at least any sufficient thought to how the substantive claim in the action is to be progressed. Finally, as I have also observed, I find the SFC’s position that it would be content for a third party but not the 1^st defendant’s solicitors to hold the proceeds of sale of the subject securities (even though in either case they would remain subject to the injunction and its terms), difficult to understand. The latter point largely appeared to be the only reason for the SFC to be represented at the adjourned hearing.

60. As regards CPSL, it can at least say that prior to 19 May 2017 it had no direct knowledge of what was in the mind of the 1^st defendant. However, for several years it had been aware of the alleged actions and wrongdoing of the 1^st and 2^nd defendants, yet it does not appear that it had given any or any significant consideration to whether it should formulate and bring forth a claim of its own, proprietary or otherwise. Seemingly, it had been content to obtain the indirect benefit of the injunction obtained by the SFC and allowed it to take the lead, perhaps because this saved it both the time and cost of pursuing a claim. However, as I made clear to counsel for CPSL at the adjourned hearing, unless it now addresses these issues it may find itself facing a different outcome if the application of the 1^st defendant is later renewed based on changed circumstances.

61. Finally, in my view the 1^st defendant has also not pursued this application as it might. The failure on her part to be more direct and/or engage with both the SFC and CPSL as regards her intentions right at the outset led to all parties not adequately focusing on the relevant issues as early as they might. She being the person seeking the variation of a long-standing order it was incumbent upon her to take the lead in this regard. The 1^st defendant’s solicitors also appear to have placed far too much store by the varied order without truly considering whether it served the intended purpose. Had they done so they might have anticipated the position of CPSL, both as regards the terms of the order itself and what it directly allowed and required, and also the substantive issue as to the evidence the 1^st defendant would need to bring forth in support of an application that she have access to the proceeds of the securities account to pay legal costs related to her defence of the criminal proceedings.

62. The 1^st defendant’s solicitors written demand and the later application by way of paragraph 1 of the summons that CPSL “desist from obstructing and/or impeding” I find was misconceived. The terms of the order did not require that CPSL do as demanded. And as regards paragraph 2 and 3 of the summons, the 1^st defendant’s affidavit evidence in relation to her lack of means fell far short of the full and frank disclosure that is required.

63. At the same time, I also have regard to the understandable concerns of a defendant facing criminal proceedings that they should be able to obtain the legal advice and assistance necessary to defend themselves.

64. After weighing the above factors in mind, I make a costs order nisi (including all costs previously reserved) as follows:

(a) there be no order for costs in respect of the SFC; and
(b) the 1^st defendant do pay 50% of the costs of CPSL, to be taxed if not agreed.

65. The costs order nisi shall become absolute 14 days after the date of judgment if no application has been made to vary it. I further direct that any party seeking to vary the costs order nisi shall file and serve their written reasons for seeking variation and proposed order within 14 days of the handing down of this judgment.

	(David N Francis)
	Deputy High Court Judge

Mr Lau Ka Kin, instructed by Securities and Futures Commission, for the plaintiff

Mr George Chu, instructed by Damien Shea & Co, for the 1^st defendant

Mr Bernard Mak, instructed by Y T Chan & Co, for China Pacific Securities Limited

Dundons solicitors, for the 3^rd defendant, absent from hearing

The 2^nd, 4^th, and 5^th defendants were not represented and did not appear

SECURITIES AND FUTURES COMMISSION v. MO SHAU WAH AND OTHERS

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