In July 2021, the Court of First Instance (“CFI”) handed down its decision in Securities and Futures Commission v Isidor Subotic and Others[1] (“Subotic”).
The Subotic decision contains useful discussions on whether the Hong Kong Court has jurisdiction and may exercise it over overseas defendants of statutory claims commenced by the Securities and Futures Commission (“SFC”) in respect of breaches of the Securities and Futures Ordinance (“SFO”).
Without making a general observation that the SFC can enforce the SFO against overseas offenders, the Subotic decision was, on its specific factual matrix and in respect of the jurisdiction issue, in favour of the SFC.
Given that market participants (and offenders) often operate from out of Hong Kong, the Subotic decision is important to the SFC’s effectiveness as a Hong Kong regulator.
An appeal against the Subotic decision (the jurisdiction issue in particular) is pending the determination of the Court of Appeal.
Meanwhile, however, the Subotic decision remains an integral part of the SFC’s arsenal. On 14 February 2022, the reasonings in Subotic were adopted in SFC v Yik Fong Fong and Others[2], which decision was in favour of the SFC.
Background
In February 2016, an extensive network of traders orchestrated by 6 of the Defendants, including Eastmore Global, Ltd. (“the Eastmore Defendants”), executed manipulative trading orders to pump up the share price of Ching Lee Holdings Limited (stock code: 3728.hk) to 700% above its placing price.
The inflated price was maintained for 7 months, whereupon the shares were dumped onto the market abruptly, causing the share price to plummet by 90%.
The pump-and-dump scheme generated illicit profits of around HK$124.88 million for the Eastmore Defendants and the proceeds of sale was remitted overseas.
An estimate of some 896 market participants suffered an aggregate loss of over HK$101.28 million.
The SFC’s Action against the Eastmore Defendants
The SFC commenced an action in the CFI against, amongst others, the Eastmore Defendants for breach of various sections of the SFO, including conspiracy to do “false trading” (i.e. by creating a false or misleading appearance of “active trading”, and creating and maintaining an artificially inflated price).
Pursuant to section 213 of the SFO, the SFC sought various reliefs against the Eastmore Defendants, including a restoration order (i.e. to restore the market participants to the status quo ante), injunctive reliefs, and damages.
The SFC successfully obtained leave to serve the originating processes out of jurisdiction on the Eastmore Defendants.
Subsequently, the Eastmore Defendants sought to set aside the leave for service out in order to nullify the action against them.
Under Order 11 rule 1(1) of the Rules of High Court, for leave for service out to be granted, the Court must be satisfied that the following requirements are met:-
(1) There is a good arguable case that the plaintiff’s case falls within one of the “gateways”;
(2) There is a serious issue to be tried on the merits of the plaintiff’s case;
(3) Hong Kong is the appropriate forum for the trial.
The 2nd and 3rd requirements were not in serious dispute in this case. The main argument for the Eastmore Defendants was that the SFC’s case did not fall within any of the gateways.
The Gateways
The SFC sought reliance on the following three gateways: –
(i) Tort – “the claim is founded on a tort and the damage was sustained, or resulted from an act committed, within the jurisdiction”
(ii) Injunction – “an injunction is sought ordering the defendant to do or refrain from doing anything within the jurisdiction”
(iii) Necessary or proper party – “the claim is brought against a person duly served within or out of the jurisdiction and a person out of the jurisdiction is a necessary or proper party thereto”
(i) Tort
Having considered authorities from different jurisdictions, the Court distilled the following principles for deciding whether a claim is a tort:-
(1) There is no universal definition of tort;
(2) A claim in tort can be created by common law or statute. For those created by statute, it is not necessary for the statutory cause of action to be analogous to a pre-existing common law cause of action in tort;
(3) Within the same statute, some claims may be in the nature of tort whilst others may not;
(4) The presence of a “duty” towards person generally or a class of persons is an element of tort;
(5) If the statute prohibits certain conduct, a breach may result in liability in tort;
(6) If the statute merely provides that damages are recoverable without regard to the defendant’s intention, negligence or default, it may not be a tort, as the statute does not impose a duty on anyone to act in a particular way;
(7) A claim in tort is redressible by unliquidated damages but not every statute which creates a liability to pay damages creates a tort; and
(8) The mere fact that other discretionary remedies (e.g. injunction or declaration) may be available should not alter the characterization of a cause of action as a tort.
The Court considered that the above principles should apply notwithstanding the caveat that the authorities from which they were distilled concerned private plaintiffs who have suffered personal loss (contra. the SFC, which had not personally suffered any loss).
In finding that there was a good arguable case that the SFC’s statutory claim falls within the tort gateway, the Court considered the following factors:-
(1) Proof of intent on the part of the wrongdoer is required to establish the statutory claim of “false trading”;
(2) Those who had suffered loss plainly belong to a class of the public that the SFO intends to protect;
(3) Although civil remedies are available to individual investors, there are circumstances when it would be eminently reasonable for proceedings to be taken by the SFC for the investors’ benefit. The fact that the SFC might bring the action in its own name as the protector of individual market participants (many of whom with relatively small losses) did not undermine the tortious nature of such a claim;
(4) The fact that section 213 of the SFO also fulfilled public purposes and conferred upon the SFC rights that went further than the purpose of tort and ordinary enforceable civil law rights did not undermine the fact that the conduct sued upon was tortious in nature;
(5) While the remedies under section 213 were restorative in nature, where the Court has power to make a restorative order, it may, in addition or in substitution, make an order for damages against the defendants; and there was a good arguable case that the measure of damages for tort would apply;
(6) The fact that the SFO afforded more reliefs than damages was immaterial as a statutory tort did not require a parallel tort with parallel reliefs at common law;
(7) There were sound policy reasons that a claim under section 213 of the SFO should be regarded as a tort for the purpose of this gateway. A pragmatic and realistic approach should be adopted; and
(8) The “double actionability rule” required the plaintiff to satisfy the Court that its claim was actionable in tort both in Hong Kong and the place abroad, but if the Court found that the tort had in substance been committed in Hong Kong, the fact that some of the relevant events have happened abroad and the law of the foreign country where such events may have happened were irrelevant, and the Court could wholly disregard the double actionability rule. In this connection, the Court found that although the Eastmore Defendants were resident outside Hong Kong, there was a good arguable case that the conspiracy was in substance committed in Hong Kong. Therefore, the double actionability rule did not apply.
(ii) Injunction
The SFC sought injunctions against the Eastmore Defendants to (1) freeze their assets; and (2) restrain them from contravening the provisions against false trading. The injunctions sought are wide in scope to restrain the Eastmore Defendants from contravening section 213 of the SFO in any way, anywhere and anytime.
An injunction may be granted if there is an appreciable risk that the defendant would in the future interfere with the plaintiff’s rights. On the other hand, the court would not grant injunctions that are hopelessly wide and ill-defined, and it has no power to restrain conduct outside the jurisdiction.
The Court found that there was a good arguable case that an injunction would be granted against the Eastmore Defendants restraining them from committing further false trading activities in Hong Kong given that the Eastmore Defendant had maintained sufficient connections in Hong Kong and remained capable of conducting further acts in Hong Kong.
The injunction as sought by the SFC may be too wide in geographical scope, as the Hong Kong courts may not grant an injunction to restrain acts not only in Hong Kong but also unspecified “elsewhere”, and the injunction gateway specified that the writ should be one that seeks an injunction to restrain the defendant from doing anything “within the jurisdiction”.
That said, the Court commented further that the SFC did not need to rely on the injunction gateway if the tort gateway was passed. The scope of the injunction can be debated at the trial, and should the SFC need to rely solely on the injunction gateway, leave to serve the Eastmore Defendants out of jurisdiction should still be granted as if the injunction to restrain would be limited to acts within Hong Kong.
(iii) Necessary or proper parties
The SFC had not relied on this gateway initially when it applied for leave for service out.
Upon the Eastmore Defendants applying to set aside the leave for service, and in case they were successful vis-à-vis the tort and injunction gateways, the SFC additionally referred to the “necessary or proper parties” gateway and asked the Court to grant leave for service out afresh.
The Court noted that the validity of the Writ of Summons had already expired at the time of the decision, and it would be futile to regrant leave for service out without also extending the validity of the writ.
In any event, the Court found that the tort gateway was passed, the original leave for service out was valid, and it was unnecessary to grant leave for service out afresh.
Appeal
In November 2021, the Court granted the Defendants leave to appeal regarding these questions: (1) whether the SFC’s claim is in the nature of torts, and (2) the applicability of authorities on private tort claims to regulatory enforcement actions.
Leave was granted on the basis that the grounds of appeal involved points of general public importance:
(1) There was an apparent lacuna in the rules regarding service of a writ out of jurisdiction in regulatory enforcement action under section 213 of the SFO; and
(2) The SFO has extra-territorial effect, such that a decision on appeal will have impact beyond the present case as the SFC may have to serve writs for similar claims out of jurisdiction in future.
Conclusion
Hong Kong is an international financial centre. In this age of globalization and electronic communications, there are policy reasons to facilitate enforcement of the SFO against overseas offenders. The Subotic decision may indicate the Court’s readiness to support this.
On the other hand, the Court traditionally exercises its long-arm jurisdiction with caution. It is noteworthy that English decisions maintain the view that any doubt as to the correct construction of the gateways should be resolved in favour of the foreign defendant. There may also be cases where the policy reasons are less compelling, e.g. the public investors suffered no apparent loss.
Further, it is noted that the Court was not required to apply the “double enforceability rule” in the Subotic case upon finding that the tort had in substance been committed in Hong Kong. It remains theoretically possible for overseas offenders to devise a scheme such that no tort is committed in Hong Kong.
We await the determination of the Court of Appeal and hopefully a comprehensive guideline on when and how SFC may enforce the SFO against overseas offenders.
Please contact our Partners Mr. Osbert Hui or Mr. Dominic Lau for any enquiries or further information.
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[1] [2021] HKCFI 2172.
[2] [2022] HKCFI 450.