A A

CACV 207/2017
B 2018 HKCA 370 B

C C
IN THE HIGH COURT OF THE
D HONG KONG SPECIAL ADMINISTRATIVE REGION D

COURT OF APPEAL
E E
CIVIL APPEAL NO 207 OF 2017
F (ON APPEAL FROM HIGH COURT ACTION NO 353 OF 2013) F

G G
_______________________
H H

BETWEEN
I I
SECURITIES AND FUTURES COMMISSION Plaintiff
J and J

MO SHAU WAH 1st Defendant

K K
nd
HUI FONG TING 2 Defendant
L NG SAU CHUN 3rd Defendant L

NG SIU YING 4th Defendant

M M
th
CHIU TIT MING 5 Defendant
N N
CHINA PACIFIC SECURITIES LIMITED Intervener

O
_______________________ O

P P
Before: Hon Cheung, Yuen and Kwan JJA in Court

Q
Date of Hearing and Judgment: 22 June 2018 Q
Date of Reasons for Judgment: 29 June 2018
R R
_____________________________________

S R EASONS F O R J UDGM ENT S

_____________________________________
T T

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A A

Hon Cheung JA:

B B

C 1. I agree with the Reasons for Judgment of Yuen JA. C

D Hon Yuen JA: D

E E
2. This is an appeal by the 1st Defendant (“D1”) against a
F Judgment of DHCJ Francis given on 25 July 2017 in HCA353/2013 (“the F

Judgment”) in which he dismissed D1’s summons filed on 12 June 2017

G G
(“the Summons”). The Summons contained three paragraphs 1 . On
H 6 September 2017 the learned deputy judge gave leave to D1 to appeal his H

order on paras. 2 and 3 only.

I I

J
3. At the conclusion of the hearing of the appeal, the appeal was J
dismissed. My reasons appear below.
K K

Background
L L

M 4. From 2004 to 2012, D1 and the 2nd Defendant (“D2”) were M

employees of China Pacific Securities Limited (“CPSL”) a securities

N N
company. D1 was an account executive and D2 was a settlement clerk.
O D3 is D1’s elderly mother-in-law. D4 is D3’s sister, who held a bank O

account jointly with D1. D5 is D1’s cousin who lives overseas. D3-D5
P P
had accounts with CPSL, as did D1 herself.
Q Q
5. In November 2012, the Securities and Futures Commission
R R
(“SFC”) undertook an inspection at the office of CPSL. The SFC says

S
that irregularities were found, in that it was falsely recorded that D1 and S
D3-5 had deposited physical shares with CPSL. When orders were given
T T

1
See para. 10.1 below.
U U

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A A

by or on behalf of D1, D3, D4 or D5 to sell their (non-existent) shares,

B B
CPSL duly sold those numbers of shares in its account with CCASS, the
C central clearing and settlement system of the Stock Exchange. What C

CPSL actually sold were shares belonging to its other clients, but the
D D
proceeds of sale were paid to D1, D3, D4 or D5. Substantial sums were
E allegedly paid into bank accounts of or controlled by D1. E

F F
The SFC action
G G
6.1. On 26 February 2013 the SFC, pursuant to its powers under
H H
the Securities and Futures Ordinance, Cap.571 (“SFO”) issued

I
proceedings against D1-5 in HCA353/2013 (“the SFC action”). CPSL I
was not a party in the SFC action.
J J

6.2. In the SFC action, the SFC alleged the following:

K K

(1) D1 and D2 had since about 2004, misappropriated securities

L L
belonging to CPSL’s clients and, in contravention of the SFO,
M produced false or misleading records to the SFC during M

inspections in 2006 and 2012;

N N

(2) after the misappropriation was discovered, on O

O
26 November 2012 CPSL’s shareholders and directors gave
P P
an undertaking to the SFC that CPSL, its shareholders and

Q
directors would fully compensate any clients affected by the Q
misappropriation of client securities;
R R
(3) on 29 November 2012, CPSL appointed JLA Asia Ltd to
S S
investigate into and identify the client securities that had been

T misappropriated; T

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A A

(4) on 4 December 2012, CPSL’s shareholders and directors (as

B B
settlors) executed a Trust Deed whereby they made available
C to JLA Asia (as trustees) securities and funds to be applied in C

replacing the misappropriated client securities and

D D
compensating clients affected by the misappropriation; and
E E
(5) CPSL, its shareholders and/or directors have replaced the
F F
misappropriated securities in order to restore affected clients
to the position they were in before the misappropriation, and G
G
in doing so, CPSL’s shareholders and directors have suffered
H H
loss of $156,417,704.62; further or alternatively CPSL has

I
suffered loss of $160,785,224. I

J 6.3. The following relief were sought in the SFC action: J

K (1) declaratory orders that D1 and D2 had contravened certain K

provisions of the SFO;

L L

(2) pursuant to s.213(2)(b) SFO, an order requiring the

M M
defendants to take such steps as the Court may direct,
N including payment of sums or transfer of securities to CPSL N

and/or its shareholders and directors and/or the trustees, so as O

O
to restore them to the position they were in before the
P P
misappropriation; and

Q Q
(3) further or alternatively, pursuant to s.213(8) SFO, an order

R
requiring D1 and D2 to pay damages to such persons as the R
Court may direct.
S S

T T

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A A

Mareva injunction
B B

C 7.1. The writ in the SFC action was issued on 26 February 2013. C

On the same day, Tong J granted an ex parte Mareva injunction restraining

D D
D1 from disposing of her assets up to the value of $156,471,705.
E E
7.2. On 1 March 2013, Poon J varied the Mareva order, but only
2

F F
to the extent that D1 was allowed to spend a necessary and reasonable sum
(not exceeding $100,000) for medical expenses. G
G

H 7.3. On 9 May 2017, Au-Yeung J further varied the Mareva order H

by consent between the SFC and D1 (“the consent order”), to the extent
I I
that D1 was allowed to withdraw $100,000 per week as legal costs from
J 9 May 2017 until the total sum withdrawn reaches $4,205,000 or until the J

completion of her criminal trial in HCCC12/2017, whichever is the sooner.

K K
The consent order did not specify the financial resource from which the
L funds could be withdrawn. L

M M
8. As mentioned earlier, D1 had a securities account with CPSL.
N The balance as at 31 December 2012 was given as $3,361,869.97. Since N

O then, there have been some dividends paid into the account. O

P P
D1’s attempt to withdraw funds from CPSL account

Q Q
9. In 2017, D1 sought to liquidate her CPSL account and to
R withdraw the proceeds. CPSL refused to comply with her request. R

S S

T T

2
Now Poon JA.
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A A

D1’s summons
B B

C 10.1. This led to D1’s Summons the final form of which read as C

follows:
D D

(1) CPSL be ordered to desist from obstructing and/or impeding

E E
the SFC and D1 from carrying out the order of Poon J as
F varied by the consent order; F

G (2) CPSL be ordered to sell all shares of D1 held in its account G

and hold all net proceeds until further order; and

H H

(3) the said net proceeds be placed in a bank account to be

I I
managed by D1’s solicitors subject to their undertaking to
J comply with certain provisions of Tong J’s order as varied by J

Poon J’s order and the consent order.

K K

L 10.2. The Summons was heard by DHCJ Francis on L

16 and 20 June 2017. The hearing was attended by legal representatives

M M
of D1, the SFC, and CPSL which had been served with the summons.
N Before the hearing, CPSL had not yet applied to be an intervener in the N

SFC action, nor had it commenced any proceedings of its own against the
O O
defendants.
P P
10.3. However it is recorded in DHCJ Francis’s Judgment that:
Q Q
“The subject of jurisdiction [of the court over and the standing
of CPSL as a non-party to the action] formed a not insignificant R
R
part of the written submissions of counsel for each of the
1st defendant and CPSL, however, I need not make any finding
S in this regard as in the event the matter was shortly resolved by, S
at the court’s invitation, CPSL agreeing that it to be made a
party to the 1st defendant’s application pursuant to Order 15,
T T
rule 6(2)(b)(ii). The joinder of CPSL was not opposed (on the

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A A

contrary it was welcomed) by the 1st defendant and I ordered

B accordingly (with costs reserved)”. (Emphasis added). B

C The deputy judge’s Judgment C

D D
11.1. On 25 July 2017 the judge gave judgment. He focused on

E
two issues: E

F (1) what was the test to be applied when the court considers a F

defendant’s application to release funds which have been

G G
made the subject of a Mareva injunction; and
H H
(2) in applying the test in the present case, what is the position of
I CPSL (which, at that time, was not a party to the SFC action, I

nor had commenced proceedings of its own against D1).

J J

11.2. In relation to issue (1), the judge applied principles set out in K
K
Hong Kong Life Insurance Ltd v Fung Siu Cheung Michael and others at 3

L L
§§33-34, where the court considered the question whether funds which are

M
the subject of an injunction should be released to a defendant to allow him M
to meet the costs of defending himself in related criminal proceedings. In
N N
that case, B Chu J held that:

O O
(1) where the injunction involves a proprietary claim by the

P plaintiff, the court in exercising its discretion would consider: P

Q (a) whether the defendant had demonstrated with full and Q

frank evidence that there were no other available assets

R R
that can be used to pay his legal expenses, and
S S

T T

3
HCA1164/2012, 21 February 2014.
U U

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A A

(b) if so, then the court must balance the potential injustice
B B
to the parties respectively, taking all relevant
C circumstances into account, in particular the strength of C

the parties’ respective cases (“the Proprietary Test”);

D D

(2) where the plaintiff is not asserting a proprietary claim to the

E E
assets in question, the court should consider whether the
F F
defendant has shown by sufficient evidence that:

G G
(a) he does not have other assets available to meet the legal

H
expenses, and H

I
(b) the purpose of the application is not to dissipate the I
asset so as to frustrate execution of the judgment by the
J J
plaintiff (“the Non-Proprietary Test”).

K K
DHCJ Francis took the view that D1 had failed even to pass the Non-

L Proprietary Test, for she: L

M (a) had a number of bank accounts (albeit in joint names) with M

sizeable cash balances;

N N

(b) had two properties (albeit jointly owned), in respect of which

O O
no evidence had been adduced as to any rental income or
P potential equity on a sale or mortgage; and P

Q (c) had failed to disclose the means by which she had acquired Q

the securities in her CPSL account.

R R

S
11.3. As for issue (2), ie whether CPSL had a “claim” against D1 S

so as to affect her application to liquidate the account and withdraw funds

T T
from it, CPSL submitted (among other things) that since it has compensated

U affected clients, it has by the process of subrogation stepped into the shoes U

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A A

of those affected clients, and thus became entitled to the relief of restoration
B B
and/or damages sought in the SFC action.
C C

11.4. DHCJ Francis held that CPSL had:

D D

(1) a potential claim against the D1which may well be of a

E E
proprietary or trust nature given that she was CPSL’s
F employee, and F

G (2) having regard to the compensatory arrangements described in G

the statement of claim in the SFC action, it was in any event

H H
highly likely that CPSL had a substantial claim in damages
I which was larger than the value of D1’s securities account. I

J J
11.5. The judge concluded that:

K K
“whether having regard to the claim as currently formulated and
being pursued by the SFC in the [SFC action] ... which seeks
L relief that might ‘restore’ or make CPSL whole, or the L
prospective claim, proprietary and/or in damages, that CPSL is
very likely to have based on the facts and matters alleged in the
M Statement of Claim of the SFC, it is appropriate that I deal with M
the 1st defendant’s application on the basis that there is a pending
N ‘claim’ such that the principles ... in [Hong Kong Life Insurance N
Ltd ] are applicable”. (Emphasis added).

O O
11.6. In the circumstances and for the reasons given in the

P Judgment, the judge dismissed the Summons with an order that D1 pay 50% P

of CPSL’s costs.
Q Q

Events after the Judgment –

R R

- CPSL action S
S

T 12.1. The judge was informed at the hearing that CPSL was T

preparing to bring a claim of its own against D1. Subsequently on

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A A

18 September 2017, CPSL issued proceedings in HCA2174/2017 (“the

B B
CPSL action”) against the same defendants as the SFC action. As far as
C D1 was concerned, CPSL claimed against her for breach of fiduciary duty C

and breach of trust, and sought orders for damages or equitable

D D
compensation for breach of fiduciary duty and breach of trust, and a
E declaration that it is entitled by way of subrogation to the rights of affected E

clients. F
F

G - Order for intervening G

H H
12.2. Further on 16 March 2018, CPSL obtained an order that it be

I
joined as intervener in the SFC action limited to receiving notices of I
subsequent applications for variation of the Mareva injunction.
J J

Appeal
K K

L 13. The judge granted leave for D1 to appeal the dismissal of L

paras 2 and 3 of the Summons. Mr Bernard Mak, counsel for CPSL, has
M M
helpfully formulated the submissions of Mr George Chu, counsel for D1,
N as follows: N

O (1) CPSL, not being a party to the SFC action, had no locus standi O

to intervene in the consent order which resulted from an

P P
agreement between the SFC and D1, and hence the judge had
Q no jurisdiction to determine the dispute (Ground 1); Q

R (2) Even assuming CPSL could intervene in the consent order, the R

judge applied the wrong test and adopted the wrong burden of
S S
proof in determining whether the assets covered by the
T Mareva injunction (as varied by the consent order) should be T

released (Ground 2);

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A A

(3) Even assuming that the judge had adopted the correct test, on
B B
the facts of the case, the judge erred in (a) finding that CPSL
C had a proprietary claim and (b) disregarding D1’s “clear C

evidence” that she had no other means to meet the legal costs
D D
of the criminal proceedings, and it was not open to the judge
E to prioritise which assets D1 should dispose of first E

(Ground 3). F
F

G Discussion G

H H
14. In relation to Ground 1, it is incorrect for D1 to characterize

I
the consent order as a private agreement between the SFC and herself, with I
CPSL merely a third party outwith the agreement who must comply with
J J
her instructions to liquidate the securities account.

K K
15.1. In the first place, the consent order sets out only the consent
L reached on the amount of money which D1 may withdraw for her legal L

expenses. The order did not include any consent on the financial resource
M M
for such withdrawal. The SFC has taken a neutral stand in the Summons,
N but it has not at any stage agreed that the securities account should be N

liquidated to fund the withdrawal. O

O

P 15.2. More importantly, the consent order cannot override the P

interests of a third party (ie CPSL) in D1’s securities account. Even

Q Q
before the commencement of the CPSL action, it is clear from the statement
R of claim in the SFC action that the acts D1 has allegedly done, whilst an R

employee of CPSL, result in her incurring liability to CPSL for substantial

S S
amounts, for which CPSL can look to her securities account for set-off,
T restitution or equitable compensation. As such, CPSL is an entity whose T

interests would be adversely affected if D1’s application were granted, and

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A A

therefore it was clearly entitled to intervene in her application to liquidate

B B
the account for her legal expenses . 4
In any event it is trite law that it
C would be contrary to the principles of natural justice that any judicial order C

adversely affecting a party’s interest should be made without the party

D D
being given a reasonable opportunity of being heard . The judge ordered 5

E pursuant to Order 15 rule 6(2)(b)(ii)6 Rules of the High Court that CPSL E

be made a party for the purpose of the Summons. As mentioned earlier, F

F
CPSL has since obtained an order that it be joined as intervener in the SFC
G G
action limited to receiving notices of subsequent applications for variation

H
of the Mareva injunction. D1 has not appealed that order, thereby H
acknowledging CPSL’s legitimate interests concerning the protected assets.
I I

16. I turn now to Ground 2. Mr Chu argues, without reference

J J
to any legal authority, that the test for determining whether a Mareva
K injunction should be varied does not apply where the opponent to the K

variation is an intervener, and not the plaintiff in the proceedings.

L L

M 17. It is correct that normally the plaintiff in an action is the party M

that has suffered loss, and in those cases, the court considers whether that
N N
party has a proprietary or non-proprietary claim to the assets covered by
O the Mareva injunction when considering whether the defendant should be O

allowed to vary the injunction. However it is clear from the statement of

P P
claim in the SFC action 7 , which is an action commenced by the SFC
Q Q

4
See Hong Kong Civil Procedure 2018 vol.1 para.15/6/8 at p.347.
R R
5
See eg Hong Kong Civil Procedure 2018, vol. 1 para.29/1/50.
6
“[A]t any stage of the proceedings in any cause or matter the Court may on such terms as it thinks
S just and … of its own motion … order … to be added as a party … any person between whom and S
any party to the cause or matter there may exist an … issue arising out of or relating to or connected
with any relief or remedy claimed in the cause or matter which in the opinion of the Court it would
T be just and convenient to determine as between him and that party as well as between the parties to T
the cause or matter”.
7
Para. 49.
U U

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A A

pursuant to rights given by statute, that the SFC has pleaded that it has not
B B
suffered loss itself, but that others have suffered loss whom the action is
C instituted to recompense: C

D “In order to restore the affected clients of CPSL to the position D

in which they were before the 1st and 2nd Defendants’
misappropriation of Client Securities:
E E
(1) the CPSL Shareholders and CPSL Directors have
F borne the affected clients’ loss (or part thereof). As a F
result, the CPSL Shareholders and CPSL Directors
have suffered loss of HK$156,417,704.62;
G G
(2) further or alternatively, CPSL has borne the affected
clients’ loss (or part thereof). As a result, CPSL has H
H
suffered loss of HK$160,785,224”. (Emphasis added).

I I
The relief sought therefore includes the following8:

J J
“Pursuant to section 213(2)(b) of the SFO, an order requiring the
1st … Defendants to take such steps as the Court may direct,
K including payment of such sum as the Court thinks fit or the K
transfer of any monies or securities to (i) the CPSL Shareholders
and CPSL Directors and/or (ii) the Trustees and/or (iii) CPSL for
L the purpose of restoring the CPSL Shareholders, CPSL Directors L
and/or CPSL to the position in which they were in before the
1st … Defendant’s misappropriation of the Client Securities …”. M
M
(Emphasis added).

N N
18. Therefore it is clear that the Mareva was obtained in the SFC

O
action in order to protect9 (amongst others) CPSL. O

P 19. Pausing here, D1 has sought to argue that CPSL itself has not P

suffered any loss, only its shareholders and/or directors who have, pursuant
Q Q
to the undertaking given to the SFC, set aside cash and/or securities which
R have been utilized to compensate clients. However there is prima facie R

evidence that these cash and/or securities have been provided by way to
S S

T T
8
Paras. (3) and (4).
9
Kanematsu-Gosho (HK) Ltd and Another v Lee Boon-chuen and Others [1986] HKLR 59, 64I
U U

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A A

loans to CPSL, and so the entity that has suffered loss is CPSL. I refer to
B B
the document dated 24 November 2017 issued by CPSL’s auditors for the
C years ended 31 December 2012 and 2013, which certified that in 2013, the C

clients’ lost securities were settled as follows:

D D

(i) (a) $50m was advanced as loans to CPSL and (b) CPSL itself
E E
paid out internal funds of $20m;
F F
(ii) (a) a further loan of $20m was made to CPSL and (b)
G G
approximately another $70m in securities (either sold or

H
transferred) was made by way of loan to CPSL. H

I 20.1. Mr Chu suggested that the shareholder loans were “not I

reflected on any of the balance sheets from 2013 onwards”10. I assume

J J
he is referring to the balance sheet as at 31 December 2013. However as
K a balance sheet is just a “snapshot” of the company’s financial position on K

the day in question, it would not reflect the individual loans which Mr Chu
L L
apparently had in mind.
M M

20.2. Moreover, the court is not concerned at this stage with

N N
individual shareholders’ allocation of loans to CPSL. The point is that in
O order to compensate its clients, CPSL had to borrow cash and/or securities O

which it will have to repay. It has therefore suffered loss and will be
P P
seeking set-off, restitution and/or compensation from the assets protected
Q by the Mareva. Q

R R
21. Consequently I cannot see why there should be a different test

S
in the present case. The issue is the same: ie should the protection from S

the Mareva injunction be reduced by the variation sought by the defendant?

T T

10
Reply Points of the Appellant/D1, para.6.
U U

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A A

22. This takes me to Ground 3. Generally speaking, a court

B B
would be sympathetic to a defendant’s application to vary a Mareva
C injunction so that he or she could pay for legal expenses in criminal C

proceedings, but it is well-established that an appellate court would not

D D
interfere with a judge’s exercise of discretion unless the appellant shows
E that there has been an error of law, or a misapprehension of material facts, E

or that a matter has been wrongly taken into account or not taken into F
F
account, or the exercise of discretion is plainly wrong.
G G

23. In the earlier parts of these Reasons for Judgment, I have

H H
rejected D1’s submissions challenging the judge’s jurisdiction and his
I application of the test in Hong Kong Life Insurance, and I will not repeat I

them here.
J J

K 24.1. There remains Mr Chu’s argument first, that the judge K

disregarded D1’s evidence that she has no other means to meet the legal
L L
costs in the criminal proceedings. However it is clear from the Judgment
M that the judge was well aware of D1’s evidence in this regard. He M

addressed this issue in paras. 40-44 of the Judgment which I will not repeat
N N
here.
O O
24.2. I do not see any ground to disagree with the exercise of his
P P
discretion. Since the purpose of a Mareva injunction is to protect assets,

Q
a judge is entitled to consider whether the variation sought complies with Q
that purpose. Unless there is clear evidence of a falling market, the judge
R R
was entitled to consider that liquid assets such as cash at bank should be

S
used up first, instead of liquidating a securities account. In this S

connection, there was evidence that D1 had quite substantial cash balances
T T
in bank accounts in Singapore, which accounts had not hitherto been
U U

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A A

disclosed. It does not assist her case that she claims she “cannot recall”
B B
the numbers of these bank accounts, and that the court has not been
C provided with updated evidence from the banks to which her solicitors had C

written for statements as long ago as April 2017.

D D

E 24.3. Quite apart from cash, the judge took into account the fact that E

D1 and her husband own two properties, one in Hong Kong and one in
F F
Shenzhen. It was disclosed that the Hong Kong property was subject to
G a legal charge, but it would appear that that is not the case for the Shenzhen G

property. D1 does not live at either property. As there is no evidence

H H
that she has been separated from her husband, presumably he does not
I occupy either property as well. As the judge noted, no evidence was I

presented as to whether these properties were occupied, and if so, what

J J
income is derived from such occupation, and where that income has been
K deposited over the past few years. K

L L
24.4. The judge was also entitled to take into account the fact that
M D1 did not disclose the source(s) of income from which (on her case) she M

derived funds to purchase securities worth more than $3m.

N N

24.5. Such information should have been supplied by way of D1’s O

O
affirmation in a properly-prepared application for variation of the Mareva,
P P
and it is noteable that no such evidence was made available even during

Q
the adjournment prior to the second hearing before the judge, when CPSL’s Q
opposition to the proposed variation was made clear to D1.
R R

25.1. Finally it was argued that the judge, in the exercise of his
S S
discretion, should have taken into account the fact that CPSL had not
T asserted a claim to the securities account for many years, and not even T

when D1’s solicitors wrote to it asking for an updated statement.

U U

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A A

25.2. That is factually correct, but the judge was entitled to give
B B
these matters relatively little weight. First, the securities account was
C covered by the Mareva injunction already, and as noted above, the SFC C

was not a rival claimant as against CPSL. Second, when D1’s solicitors
D D
asked CPSL for an updated statement of the account, it did not inform
E CPSL that she was intending to liquidate that account in her application for E

variation of the injunction. F

F

G Order G

H H
26. For the reasons set out above, the appeal was dismissed. The

I
SFC did not apply for costs. CPSL applied for a wasted costs order against I
D1’s legal representatives. The court gave directions for written
J J
submissions to be supplied. Upon receiving and considering those

K submissions, we will deal with costs as between D1 and CPSL in a separate K

decision to be handed down in due course.

L L

Hon Kwan JA:

M M

N 27. I agree with the Reasons for Judgment of Yuen JA. N

O O

P P

Q Q

R (Peter Cheung) (Maria Yuen) (Susan Kwan) R

Justice of Appeal Justice of Appeal Justice of Appeal
S S

T T

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A A

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

C Mr George Chu, instructed by Damien Shea & Co, for the 1st Defendant C

Mr Lau Ka Kin, instructed by the Plaintiff, Securities and Futures

D D
Commission

E E

F F

G G

H H

I I

J J

K K

L L

M M

N N

O O

P P

Q Q

R R

S S

T T

U U

V V