ZHI CHARLES v. THE STOCK EXCHANGE OF HONG KONG LTD AND OTHERS

HCA 1618/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1618 OF 2016

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J U D G M E N T

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Introduction

1.  This is an application by the 1^st defendant to strike out the present claim against it.  The 1^st defendant contends that the plaintiff’s claim against it in this action is manifestly misconceived and must be struck out.

2.  Originally, there were a total of 16 defendants in this action.  It can be seen from the Statement of Claim that the 2^nd to 9^th defendants are various listed companies who had engaged one Herman Tso to issue expert reports on their mining assets.  The 10^th to 16^th defendants are auditors of the 2^nd to 9^th defendants.

3.  The 1^st defendant is the Stock Exchange of Hong Kong Limited (“SEHK”).

4.  The plaintiff alleges that Herman Tso was plainly an unsuitable mining expert.  He was expelled from membership of the Australasian Institute of Mining and Metallurgy on 12 April 2016.  The plaintiff says that Herman Tso “has never been a Competent Person or mining expert”.

5.  The plaintiff then says that under Chapter 18 of the Listing Rules, a technical report by a mining expert is very important.  He then says in paragraph 19 of the Statement of Claim that: “any securities issued on the strength of Herman Tso’s technical or valuation report must be declared ab initio void and must be rescinded or totally recalled since the major condition precedent has never been satisfied in these issues.  Likewise, any initial recognition of the intangible assets consequent to Herman Tso’s technical or valuation report must be voided and be restated with proper technical or valuation reports”.

6.  As regards the SEHK, the plaintiff says that it has failed in its duty under section 21 of the Securities and Futures Ordinance, Cap 571 (“SFO”) to ensure, so far as reasonably practicable, an orderly, informed and fair market.  The plaintiff then seeks: –

(1)   A declaration that SEHK is not entitled to claim immunity under section 22 of the SFO.

(2)   A mandatory injunction that the SEHK do send letters to the 2^nd to 9^th defendants to the effect that they be required to conduct investigations on their mining assets to address whether they have been properly reported in the financial statements and “whether the issue of securities was valid”.

(3)   An injunction to restrain the SEHK from allowing the trading of shares in the 2^nd to 9^th defendants. 

7.  In the striking out application, SEHK contends that the plaintiff’s claim against it is unsustainable and an abuse of process of the court.  In short,

(1)   The plaintiff’s claim is a civil claim against the SEHK.  Quite apart from SEHK’s statutory immunity (discussed below), there is no viable private law claim against the SEHK to compel it to direct investigations and/or suspend trading of shares.

(2)   The SEHK has a statutory immunity (subject to an exception of bad faith) under section 22 of the SFO, which is another complete answer to the plaintiff’s claim.

(3)   Section 22 of the SFO is plainly constitutional.

(4)   There is plainly no viable claim that the SEHK is guilty of bad faith.

No viable private law claim

8.  In contrast to the judicial review proceedings the plaintiff had issued against SEHK and the Securities and Futures Commission (“SFC”) in HCAL 169/2016 seeking certiorari, mandamus and declaration concerning resumption of trading in the 2^nd defendant’s shares, the present claim is a private law claim.

9.  Quite apart from the statutory immunity, I agree it is impossible to see how the plaintiff could have a private law claim against SEHK which could entitle him to mandatory orders to require investigations and suspension of trading.

Section 22 of the SFO

10.  Further, I agree that any civil claim by the plaintiff must be barred by SEHK’s statutory immunity.  Section 22(1) of the SFO relevantly provides that: –

“… no civil liability, whether arising in contract, tort, defamation, equity or otherwise, shall be incurred by … a recognized exchange company … in respect of anything done or omitted to be done in good faith in the discharge or purported discharge of the duties of the company under section 21 or in the performance or purported performance of its functions under its rules.” (Emphasis supplied)

11.  SEHK is a “recognized exchange company” for these purposes.

Section 22 of the SFO is plainly constitutional

12.  The plaintiff claims that section 22 of the SFO is unconstitutional.  In particular, the plaintiff challenges the constitutionality of section 22 on the basis that it violates his right to access to courts enshrined under Article 35 of the Basic Law.

13.  I agree that this challenge is wholly misconceived and has no chance of success.  The right to access to courts under Article 35 of the Basic Law is simply not engaged: –

(1)   In Matthews v Ministry of Defence [2003] 1 AC 1163 (HL), which concerned a statutory immunity exempting the Crown from liability in tort in certain cases, Lord Hope spoke of the right to access to courts under Article 6 of the European Convention of Human Rights in these terms:

“51. … in order to invoke [the right to access to courts] one must first be able to say that the individual has a claim for the infringement of a civil right. The European Court of Human Rights has made it clear that this is a matter for the domestic law. Article 6(1) does not have anything to say about the content of the individual’s civil rights, nor does it impose an obligation on the state party to confer any particular rights in substantive law on the individual … Article 6(1) extends only to “contestations” over civil rights and obligations which can be said, at least on arguable grounds, to be recognised in domestic law. Where limitations on a person’s right of action are in issue, therefore, there is a dividing line which must be identified between those which are the product of rules of procedure and those which are the product of substantive law.

…

53. … One can at least say that there is a plain and obvious difference in principle between a procedural bar which impairs or restricts the enjoyment or enforcement of a right on the one hand and a substantive bar which prevents an alleged right from ever coming into existence at all.  What Article 6(1) seeks to do is to protect the individual against anything which restricts or impairs his access to the courts for the determination of a civil right whose existence is at least arguable.  But the precise scope and content of the individual’s civil rights is a matter for each state party to determine…”

(Emphasis supplied)

(2)   Similarly, in a case concerning the same statutory immunity as Matthews, the European Court of Human Rights held in Roche v United Kingdom (2006) 42 EHRR 30 that the right to access to courts is procedural (not substantive) in nature:

“116. … Art.6(1) secures to everyone the right to have a claim relating to his civil rights and obligations brought before a court.

117. Article 6(1) does not, however, guarantee any particular content for those (civil) “rights” in the substantive law of the Contracting States: the Court may not create through the interpretation of Art.6(1) a substantive right which has no legal basis in the state concerned. Its guarantees extend only to rights which can be said, at least on arguable grounds, to be recognised under domestic law.

…

119. [The Court] does not find any inconsistency between the autonomous notion of “civil” and the requirement that domestic law recognises, at least on arguable grounds, the existence of a “right”. … [The Court has affirmed] the necessity to maintain that procedural/substantive distinction: fine as it may be in a particular case, this distinction remains determinative of the applicability and, as appropriate, the scope of the guarantees of Art.6 of the Convention. In both these respects, the Court would reiterate the fundamental principle that Art.6 does not itself guarantee any particular content of substantive law of the Contracting Parties.

…

121. Finally, in carrying out this assessment, it is necessary to look beyond the appearances and the language used and to concentrate on the realities of the situation. The Court must not be unduly influenced by, for example, the legislative techniques used or by the labels put on the relevant restriction in domestic law: as the Government noted, the oft-used word “immunity” can mean an “immunity from liability” (in principle a substantive limitation) or an “immunity from suit” (suggestive of a procedural limitation).”

(Emphasis supplied)

(3) In this case, it is clear that the restriction imposed by section 22 of the SFO on a person’s rights to sue is substantive (and not procedural) in nature. Section 22 provides that “no civil liability … shall be incurred” by the SEHK. Thus, I agree that the effect of section 22 is to extinguish the existence of liability, rather than precluding the enforcement of such liability. Applying the principles above, Article 35 of the Basic law is not engaged.

14.  In any event, it is well established that the right under Article 35 of the Basic Law is not absolute, but may be subject to limitations.  Such limitations are valid if they pursue a legitimate aim, are proportionate to that aim and are not such as to impair the very essence of the right [see: Ng Yat Chi v Max Share Ltd (2005) 8 HKCFAR 1, at paragraph 73 per Ribeiro PJ].

15.  In this case, the purpose of section 22 of the SFO is to ensure that the SEHK’s exercise of power in relation to listing matters would not be hindered by the threat of legal action.  On the question of immunity, it is essential that the SEHK should be able to act firmly and without the fear of liability in relation to listing matters.  This is clearly a legitimate aim.

16.  I agree that the restriction imposed by section 22 is proportionate to this aim.  First, although the SEHK may not be sued directly, the SFC may impose various sanctions against the SEHK under section 28 of the SFO in relation to any breach of duties under section 21 of the SFO.

17.  Secondly, section 22 of the SFO will not avail a defendant if he did not act in good faith.  Where the SEHK (or any of its employees or officers) acted dishonestly or maliciously, or where they deliberately abused their powers, those who have suffered loss may claim the appropriate civil remedies.

18.  For the above reasons, I agree that section 22 of the SFO is plainly constitutional.  Section 22 does not engage the right of access to court, and in any event the section clearly pursues a legitimate aim and is a proportionate restriction on the right of access to court.

19.  In this regard, I note that Chung J has come to the same conclusion in his Decision in Zhi Charles v Roma Group Limited et al, HCA 584/2016 (Decision dated 26/01/17).

No viable claim of bad faith

20.  If the statutory immunity stands (which as I have held above it must), it is plain that there can be no viable claim that SEHK acted in bad faith.  As explained in Practice Note 18/12/11 of the Hong Kong Civil Procedure 2017 at page 432:

“Anallegation that a party has been guilty of bad faith or lack of good faith is the equivalent of an allegation of dishonesty, though not necessarily for a financial motive, and proper particulars of such an allegation must be pleaded, otherwise the allegation will be struck out…” (Emphasis supplied)

21.  I agree that there is plainly no proper plea of bad faith.  It is wholly unclear why the plaintiff feels able to contend that SEHK failed to act in good faith.

Conclusion

22.  For the reasons set out above, I order that the Statement of Claim herein as against the 1^st defendant be struck out, and consequently the action against the 1^st defendant be dismissed.

23.  Further, I order that the costs of and occasioned by this application and the costs of this action be paid by the plaintiff to the 1^st defendant, such costs are to be taxed if not agreed.

24.  The above order as to costs is nisi and shall become absolute in the absence of any application within 14 days to vary the same.

HCA 1618/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1618 OF 2016

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D E C I S I O N

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1.  This is the 2^nd application for interlocutory injunction by the plaintiff (Zhi) in this action. In June 2016, he made an application for similar relief against all 16 defendants in this action. That application was heard and dismissed by Mr Justice G Lam with indemnity costs to those defendants who appeared at the hearing, including the 2^nd defendant (SMG) and the 10^th defendant (JH) which is the auditor of SMG (see Decision dated 30 June 2016).

2.  In September 2016, there was another similar interlocutory injunction application by Zhi against all 12 defendants in another action, HCA 2397/2016.  JH is the 10^th defendant in that action.  That application was also dismissed by Mr Justice G Lam with costs (see Decision dated 23 September 2016).

3.  The present application concerns only SMG and JH.  The injunctive relief relates to the use of a technical report referred to as the “HASS Reports”.

4.  Zhi is a small shareholder of SMG, a company listed in Hong Kong, holding less than 1% of its shares.  He has a long battle with SMG and its management over the acquisition of a coal mine in Russia which took place in 2008.  The HASS Reports were used in support of certain contingent payment of part of the purchase price of the acquisition by way of a 3^rd Convertible Note (CN3) issued in April 2013. 

5.  A good summary of the acquisition can be found in a Decision of Deputy High Court Judge Le Pichon dated 4 October 2016 (Decision) in yet another action arising from the acquisition, HCA 2694/2015. Although that action was initiated by 2 other shareholders of SMG, who had acquired their shares 2 months before the action, there are good reasons to believe that there was connection between those plaintiffs and Zhi (see paras 61 and 62 of the Decision).  Pursuant to the Decision, the action was struck out with indemnity costs to most of the defendants. 

6.  As noted in para 62 of the Decision, Zhi has issued no less than 14 actions against SMG seeking to undermine the Convertible Notes issued in the acquisition.  A Restricted Proceedings Order was made against Zhi by Mr Justice G Lam on 20 June 2016 (see Siberian Mining Group Co Ltd v Zhi Charles [2016] 4 HKLRD 88).  However, this action is not covered by the Order.  The likely reason is that these proceedings had not been served when the Order was made (see §14 at p 92). 

7.  The abuse by Zhi of the resources of the court is breathtaking, and cannot be allowed to continue.  For this reason alone, this application must be rejected.

8.  Further, CN3 was issued more than 3½ years ago. The staleness of the subject matters of complaint is another good reason to reject this application.

9.  Furthermore, I have great difficulty understanding the cause of action which Zhi may have against SMG and JH in this action. There is a strike out application on foot by the defendants against Zhi’s claims.  I shall therefore refrain from commenting further on Zhi’s cause(s) of action. 

10.  However, even if there is a viable cause of action, I am unable to see any irreparable harm for which Zhi cannot be compensated by damages, which may justify the grant of an interlocutory injunction.

11.  Accordingly, this application is dismissed, and I shall hear the parties on costs.

The plaintiff appeared in person

Ms Roberta Chan of Baker & McKenzie, for the 2^nd defendant

Mr Edward T C Chan, instructed by C K Chan & Co, for the 10^th defendant

HCA 1618/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1618 OF 2016

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D E C I S I O N

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1.  I dismissed the plaintiff’s summons for an interlocutory injunction on 30 June 2016 as against all the defendants except the 3^rd, 8^th and 16^th defendants with indemnity costs. As against those three defendants, the summons was withdrawn with leave with costs on the party and party basis.

2.  The plaintiff now, by a summons dated 14 July 2016, seeks leave to appeal against my decision.  The plaintiff has meanwhile discontinued the action as against the 4^th and the 14^th defendants, so that these two defendants are no longer part of the proceedings, and have not appeared before me this morning.

3.  As for the other defendants, I have received skeleton submissions from the 1^st defendant, the 2^nd defendant, the 3^rd and 9^th defendants, the 5^th defendant, the 6^th defendant, the 7^th defendant and the 13^th defendant. 

4.  The 8^th, 10^th, 11^th and 16^th defendants did not appear this morning, but the other defendants have appeared either by solicitor or counsel. 

5.  The present application must, in my view, fail.

(1)  The grant or refusal of an injunction involves in large part an exercise of the court’s discretion.  The Court of Appeal does not interfere unless there is something plainly wrong in my decision.  In my view, the plaintiff has failed to point out anything of that nature.  It is fanciful to suggest, as the plaintiff does in his affirmation and skeleton submission, that his right of access to the court under Article 35 of the Basic Law has been, in any way, impeded by my decision. 

(2)  The plaintiff’s final position on 30 June 2016, after some vacillation, was to ask to withdraw his summons.  As against the 3^rd, 8^th and 16^th defendants, that was exactly what I ordered.  As against the other defendants, I dismissed the summons, but the result was in substance the same as what the plaintiff asked for.  So I am at a loss to understand what complaint the plaintiff could have.

(3)  The plaintiff’s affirmation filed for the present application seems to suggest that there is some significant difference of opinion between Deputy Judge Seagroatt, as expressed in his reasons for decision dated 28 June 2016, and myself.  But all that I dealt with on 30 June 2016 was the plaintiff’s application for interlocutory injunction.  Having regard to Deputy Judge Seagroatt’s reasons for decision, in particular, paragraph 16 of that decision, I do not think his Lordship would have come to any different decision from mine. 

(4)  Finally, the order for indemnity costs against the plaintiff in relation to the defendants other than the 3^rd, 8^th and 16^th defendants was in my view justified. They were dragged to court at much expense for nothing.  I see no prospect of success in an appeal against that order since costs is very much a matter of discretion for this court, with which the Court of Appeal is unlikely to interfere. 

6.  So the application for leave to appeal is dismissed. 

HCA 1618/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1618 OF 2016

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D E C I S I O N

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1. I have before me an application by summons dated 20 June 2016 by the plaintiff for interlocutory injunction. The action was begun by writ two days before the summons, that is, on 18 June 2016. The writ names 16 defendants, who may be divided into three categories. The first is the 1^st defendant who is The Stock Exchange of Hong Kong Limited. The second category is the 2^nd to 9^th defendants who are listed companies in Hong Kong. The third category is the 10^th to 16^th defendants who are firms of accountants who are the auditors of the 2^nd to 9^th defendants.

2. The injunctions that are sought by the plaintiff by the summons are in terms:

“1. The 1^st Defendant be restrained from allowing the shares of 2^nd to 9^th Defendant trade on the Stock Exchange of Hong Kong until their Audit Reports are restated to reflect the ab initio disqualification of their expert, Herman Tso.

2. The 2^nd to 9^th Defendants be restrained from using the reports or opinions of Herman Tso, or any secondary opinions on Herman Tso’s reports, for any purposes.

3.  The 10^th to 16^th Defendants be restrained from using the reports or opinions of Herman Tso, or any secondary opinions on Herman Tso’s reports, for any audit purposes.”

3. The ground for the application is that, as set out in the plaintiff’s affirmation dated 20 June 2016, numerous technical reports and valuation reports on mining assets have been authored and signed off by one Herman Tso for listed companies in Hong Kong.  It is said that the reports related to very substantial or major acquisitions, or audit purposes of the listed companies in question.  However, the plaintiff says, Herman Tso, who has held himself out as a mining expert, has been disqualified from membership of the Australian Institute of Minerals and Metallurgy on 12 April 2016, which was announced publicly on 6 June 2016 on the basis that Mr Tso’s alleged qualifications had not been substantiated. 

4. The disqualification has been dated back to the beginning with the Institute stating that Mr Tso should be regarded as never having been a member.  On that basis, the plaintiff alleges that the shares of the listed companies in question must be suspended from trading and that they, as well as their auditors, must be restrained from relying on or using, in any way, any of Herman Tso’s reports or opinions, particularly in relation to the audit of their financial statements. 

5. The application first went before Deputy Judge Seagroatt on 24 June, who decided to recuse himself because of a possible connection with the 12^th defendant. His Lordship also referred the matter to me because I had on 20 June 2016, by consent, made an order under Section 27 of the High Court Ordinance against the plaintiff here, Mr Charles Zhi, in another set of proceedings, HCMP 443/2015, restraining him from bringing any fresh claims against Siberian Mining Group Company Ltd, who was the plaintiff in HCMP 443/2015 and the 2^nd defendant in the present action.

6. Both the plaintiff and the 1^st defendant have written to the court subsequently agreeing for the matter to be dealt with with some urgency. I have accommodated the parties by fixing the application before me today. 

7. In his letter sent to the court on 27 June 2016 (misdated 17 June), however, the plaintiff indicated that he wished to withdraw his application for injunction, except as against the 10^th defendant who is the auditors of the 2^nd defendant.  But at the hearing this morning, the plaintiff retracted from that position and asked for an adjournment of the hearing of the summons instead.  I saw no grounds for the adjournment sought and refused it accordingly, whereupon the plaintiff stated that he would withdraw his application for interlocutory injunction. 

8. In any event, I have serious doubt whether the plaintiff has any cause of action as against the 1^st defendant.  Section 21 of the Securities and Futures Ordinance, Cap 571 of the Laws of Hong Kong, enacts the Stock Exchange’s statutory duty to ensure an orderly, informed and fair market for the trading of futures and securities.  But there is grave doubt whether this can afford a private law cause of action on the part of someone like the plaintiff who, in the words of Deputy Judge Seagroatt, seems to be conducting “a roving commission” to ensure that publicly listed companies and their regulatory body, the Stock Exchange, take heed of the development concerning the qualifications of Herman Tso.  In addition, section 22 of that Ordinance confers immunity from civil liability on the Stock Exchange. 

9. As against the companies who are the 2^nd to 9^th defendants, the plaintiff is not a shareholder, excepting the 2^nd defendant whose auditor is the 10^th defendant. 

10. As against the auditors, who are the 10^th to 16^th defendants, it seems to me no cause of action has been shown as existing on the part of the plaintiff.  Even if he is a shareholder of the listed companies in question, there is generally no cause of action for an injunction by a shareholder against the auditors to dictate to them how to do their job.

11. Having regard, moreover, to the nature of the orders sought, there is no doubt in my mind that refusing them will involve the least risk of injustice when the matter arises for determination in future.

12. As regards the 7^th defendant, specific evidence has been filed to the effect that it had only instructed Herman Tso on one occasion which resulted in a report dated 9 February 2011, but no shares or other financial instruments have ever been issued on the basis of that report because the relevant transactions failed to materialise.  This is relevant also to the 14^th defendant who is the 7^th defendant’s auditors.

13. It also seems to me that there is no evidence of any immediate harm which has to be prevented by the injunction of the court sought by the plaintiff.  The public release of the Australian Institute that I have referred to is accessible to the public.  The attention of investors and traders in shares can be drawn, if necessary, to the relevant information. That does not require an injunction of the court in terms sought by the plaintiff. 

14. It may be that the matters raised by the plaintiff may, as Deputy Judge Seagroattsaid, be the proper subject of internal investigation by the companies and consideration by the Stock Exchange, but that, in my view, does not justify a blanket injunction in the sweeping terms sought now. 

15. Further, Herman Tso’s reports were done, in many cases, quite some time ago, for example, in the case of the 2^nd defendant and the 7^th defendant.  News about his disqualification only emerged recently: see the media release by the Australian Institute on 6 June 2016.  There is, it seems to me, no justification for making a sweeping order as sought by the plaintiff in these circumstances. 

16. For these reasons, as against all the defendants who have appeared, the plaintiff’s summons will be dismissed.  As against the 3^rd, 8^th and 16^th defendants who have so far not appeared, I give leave for the plaintiff to withdraw the summons.

(Submissions on costs)

17. For all the defendants against whom the summons has been dismissed, I will order costs to be paid by the plaintiff on an indemnity basis.  For the other defendants, costs are to be paid by the plaintiff on a party and party basis.