Hong Kong CFA Confirms Streamlined Procedure for the SFC’s Prosecution of Overseas Defendants
December 21, 2023
Hong Kong’s Court of Final Appeal has confirmed that the SFC does not need prior leave to commence proceedings against overseas defendants for market misconduct
Introduction
On 30 October 2023, the Hong Kong Court of Final Appeal (“CFA”) handed down its reasons for dismissing the appeal in Securities and Futures Commission v Isidor Subotic and Others [2023] HKCFA 32. In its judgment, the CFA confirmed that the Securities and Futures Commission of Hong Kong (“SFC”) does not require the Court’s leave to serve initiating process out of the jurisdiction when bringing claims under certain statutory provisions of the Securities and Futures Ordinance (Cap. 571) (“SFO”). See the CFA’s judgment here and the SFC’s announcement here.
Background
In July 2019, the SFC commenced the present civil proceedings against 18 defendants under sections 213 and 274 of the SFO. The defendants were allegedly part of a syndicate operating a large-scale “ramp and dump” scheme to manipulate the shares of Ching Lee Holdings Limited, a company newly listed on The Stock Exchange of Hong Kong Limited (“Hong Kong Stock Exchange”). The SFC sought various relief, including restoration and damages orders.
As six of the defendants were located outside of Hong Kong (the “Overseas Defendants”), the SFC applied for and was granted the Court’s leave to serve the writ out of the jurisdiction under certain “jurisdictional gateways” set out in Order 11, rule 1(1) of the Rules of the High Court (Cap. 4A) (“RHC”). The Overseas Defendants applied to set aside this leave, but the Court of First Instance1 and the Court of Appeal2 both upheld the granting of leave. The Overseas Defendants then appealed to the CFA on the grounds that the relief sought by the SFC cannot be properly categorised as a “claim” and/or “founded in tort” for the purpose of invoking the relevant jurisdictional gateways.
However, prior to the CFA hearing, the CFA reframed the focus of the appeal and considered that the real issue in this case was whether the SFC required leave to serve out of the jurisdiction in the first place. The CFA’s request was based on RHC O. 11, r. 1(2), which provides that:
“Service of a writ out of the jurisdiction is permissible without the leave of the Court provided that each claim made by the writ is … (b) a claim which by virtue of any written law the Court of First Instance has power to hear and determine notwithstanding that the person against whom the claim is made is not within the jurisdiction of the Court or that the wrongful act, neglect or default giving rise to the claim did not take place within its jurisdiction.”
Upon hearing the parties’ submissions, the CFA dismissed the appeal unanimously and held that leave to serve out of the jurisdiction was not required in the present case.
CFA’s decision
Pursuant to RHC O. 11, r. 1(2), it is unnecessary to seek the Court’s leave for service of a writ out of Hong Kong where any legislative provision already confers the Court of First Instance with jurisdiction over a defendant outside Hong Kong or in respect of a wrongful act committed outside Hong Kong.
The CFA considered the effect of sections 213 and 274 of the SFO. Whilst section 274 of the SFO defines what constitutes false trading in the Hong Kong market, and expressly applies to persons who have engaged in such false trading “in Hong Kong or elsewhere”, section 213 of the SFO provides for the relief that may be claimed against a person contravening section 274. It was held that these two sections, when operating in combination and read together, allow proceedings to be initiated against a person outside Hong Kong, if such person does anything constituting false trading affecting the Hong Kong market. On this basis, the CFA concluded that RHC O. 11, r. 1(2) applied in the present case, and leave was not required to serve out of jurisdiction on the Overseas Defendants.
The CFA further remarked that the SFO’s policy of conferring exterritorial jurisdiction over persons outside Hong Kong who engage in false trading is “clear and unsurprising”. Since trading on the Hong Kong Stock Exchange is global, it is “obviously justified” to make sanctions legally available against overseas fraudulent parties who cause losses to investors or market participants. It was also highlighted that “the SFO’s intent is plainly to cater for the territorial dimensions of wrongful acts damaging to market participants”.
Notwithstanding the above, the CFA also clarified that the application of RHC O. 11, r. 1(2) of the RHC is limited to situations where the relevant statute “clearly contemplates” proceedings being brought against persons outside of the jurisdiction or where the wrongful act took place outside the jurisdiction. That is, the statutory provision should expressly provide that claims may be brought against a person outside of Hong Kong or in relation to conduct committed overseas in order to fall within the scope of RHC O. 11, r. 1(2).
Implications
The CFA’s decision confirms that the SFC does not need to seek leave to commence proceedings or seek relief under relevant provisions of the SFO against defendants based out of the jurisdiction. This will help to expedite the SFC’s enforcement of wrongful acts committed by overseas defendants.
Whilst this decision was made in the context of false trading, it is worth noting that the principle may well apply to future legal actions in relation to other types of wrongful conduct under the SFO that also have exterritorial application (including but not limited to price rigging3, disclosure of false or misleading information4, and stock market manipulation5).
1. David Subotic & Others v SFC [2021] HKCFI 2172.
2. David Subotic & Others v SFC [2022] HKCA 1909.
3. Sections 275 and 296 of the SFO.
4. Sections 277 and 298 of the SFO.
5. Sections 278 and 299 of the SFO.
This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Nima Amini, an O’Melveny partner licensed to practice law in Hong Kong, California, Minnesota, and District of Columbia, Denis Brock, an O’Melveny partner licensed to practice law in Hong Kong (Solicitor-Advocate), England & Wales (Solicitor-Advocate), Ireland, Australia, New Zealand, and New York, Edwin Kwok, an O’Melveny partner licensed to practice law in Hong Kong, Philip Monaghan, an O’Melveny partner licensed to practice law in Hong Kong (Solicitor), England and Wales (Solicitor), and Ireland (Solicitor), Ke Zhu, an O’Melveny partner licensed to practice law in Hong Kong and New York, Kieran Humphrey, an O’Melveny counsel licensed to practice law in Hong Kong, England & Wales, and Australia, and Cheryl Wong, an O’Melveny trainee solicitor in the firm’s Hong Kong office, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.
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