Introduction

In Waddington Ltd v Securities and Futures Commission [2018] HKCFI 2544, Waddington Ltd (“Waddington”), a minority shareholder of Playmates Holdings Ltd (Stock Code: 635) (“Playmates”), applied for judicial review against the refusal by the Securities and Futures Commission (the “SFC”) to investigate its complaints lodged in 15 May 2015 (the “2015 Complaint”), under which Waddington requested the SFC to investigate into certain transactions to seek a disqualification order against Thomas Chan, a director of Playmates.

Background

Prior to the 2015 Complaint, Waddington lodged a complaint in 2001 (the “2001 Complaint”), under which the subject matter was substantially the same as the 2015 Complaint. Waddington alleged that Thomas Chan and Cheung Chung Kiu (“CCK”) had entered into a secret scheme to assist Yugang International Limited, in which CCK was the chairman, to acquire a controlling stake in Prestige Holdings Limited without triggering a general offer.

Having investigated the suspicious transactions (the “2001/2002 Investigation”), the SFC replied Waddington that there was no conclusive evidence indicating any breach of the then in force Code on Takeovers and Mergers, Securities (Disclosure of Interests) Ordinance and Securities (Insider Dealing) Ordinance.

In September 2003, Waddington instituted a derivative action against Thomas Chan alleging breach of fiduciaries duties owed to Playmates and its subsidiaries (the “Action”). As the Action progressed, Waddington made repeated requests to the SFC for further investigation but all of them were turned down by the SFC. Thomas‍ Chan applied to strike out the Statement of Claim of the Action, which was finally disposed of by the Court of Final Appeal in September ‍2008. Among various claims, the Action was allowed to proceed as a multiple derivative action on behalf of Profit Point Limited (an indirect wholly owned subsidiary of Playmates) in relation to one transaction only.

On 18 December 2013, the Court of First Instance handed down a judgment after trial and held that Thomas Chan breached his fiduciary duties towards Profit Point Limited (the “CFI Judgment”). The CFI Judgment was upheld by the Court of Appeal. Thomas Chan’s applications for leave to appeal to the Court of Final Appeal were dismissed by the Court of Appeal on 14 October 2016 and by the Court of Final Appeal on 14 February 2017.

After the handing down of the CFI Judgment, Waddington filed the 2015 Complaint to inform the SFC of the significant development in the Action. The SFC replied on 4 August 2015 that it had decided not to take the matter further (the “Decision”). Waddington was not satisfied with the SFC’s response and applied to judicially review the Decision.

Judicial review against the SFC

Whether the SFC applied the wrong legal threshold

Firstly, Waddington argued that the SFC misapplied the wrong and higher legal threshold. In terms of statutory investigation, the threshold for the SFC to require production and explanation of records and documents is whether “it appears to the SFC that there are circumstances suggesting” that relevant breaches have taken place; whereas the threshold for SFC to conduct an investigation whether the SFC has “reasonable cause to believe” that any breach, offence or market misconduct has been committed. However, in its replies and/or records, the SFC wrongly adopted the legal standard of balance of probabilities and/or the test on whether there is any conclusive evidence. This approach was tantamount to requiring the case to be proved before the SFC would act.

The Court held that the SFC did not apply the wrong legal threshold. The SFC had already exercised its investigation power and conducted statutory investigation upon receiving the 2001 Complaint and the investigations were extensive. Despite the reference to “balance of probabilities”, it was only after those investigations that the SFC concluded that there was no “conclusive evidence” of the alleged breaches. There is no question that the SFC had adopted the wrong threshold to decide whether or not to even commence an investigation. It is clear that the SFC did exercise its powers to investigate and they formed their view on the quality and sufficiency of evidence after the investigations. In response to the 2015 Complaint, the SFC replied that there was no conclusive evidence to show breaches in its 2001/2002 Investigation and that the CFI Judgment did not add anything to this conclusion. This does not amount to the SFC adopting a wrong threshold to decide whether or not to commence fresh investigation under the 2015 Complaint.

Whether the SFC’s reasons were Wednesbury unreasonable

Secondly, Waddington argued that the explanations given by the SFC are Wednesbury unreasonable and it had taken irrelevant consideration into account:-

• The SFC explained that Barma J (as he then was) in Thomas Chan’s striking out application under the Action once decided there was no prima facie case in relation to one of the allegedly suspicious transactions (“Reason 1”). Waddington submitted that SFC’s reference to Barma J’s judgment was irrational and irrelevant because part of the judgment was later reversed by the Court of Appeal and in any event, Waddington eventually dropped its claim in relation to that particular allegation.

• The SFC explained that the CFI Judgment did not obviate the need for it to conduct its own investigation and obtain admissible evidence, but given that the events took place some 15 years ago, a lot of evidence would no longer be available and the regulatory value diminished (“Reason 4”). Waddington submitted that before the final outcome of the Action, SFC stated that it was premature to investigate, and it was irrational for the SFC to now say that because of the wait it asked for previously, it would not investigate.

• The SFC explained that it was not an efficient use of the SFC’s resources in the aftermath of the dispute which was substantially a family matter (“Reason 6”). Waddington submitted that it was irrational for the SFC to consider that it was a family matter because the relevant transactions involved public shareholders of listed companies and various other parties.

The principles that the Court should adopt in considering Waddington’s challenges are that:-

• Irrationality or Wednesbury unreasonableness are used to describe a decision which is so outrageous in its defiance of logic or of accepted moral standards that no sensible person who had applied his mind to the question to be decided could have arrived at it.

• In the context of decisions of regulatory bodies like the SFC, the Court will not lightly interfere with their exercise of discretion.

• Instances of unreasonableness include taking into account of irrelevant considerations or failing to take relevant considerations into account.

• Although the question of what is a relevant or material consideration is a question of law, the question of what weight is to be given to it is a matter within the province of the decision maker.

• In proceedings for judicial review, the ground of failure to take into account a relevant consideration can only be made out if the decision-maker has failed to take into account a consideration which he is bound to take into account in making that decision.

• Ultimately, it is not for the courts to say how a decision should have been made. It is only where the administrator “has acted beyond the range of responses reasonably open to him under the statutory scheme” that the court’s power of intervention can be properly invoked.

In relation to Reason 1, the Court considered that what the SFC meant was that the relevant allegation was likely weak. It cannot be said to be Wednesbury unreasonable for the SFC to take into account the apparent merits of the allegations. This is so since even Waddington itself had dropped its claim and Barma J once concluded that the claim did not bear a prima facie case. It clearly cannot be said to be Wednesbury unreasonable for the SFC to take into account the apparent merits of the allegations.

In relation to Reason 4, it was held that a complaint relating to the alleged suspicious transactions committed some 15 ‍years ago must in any view be relevant to a public authority’s consideration as to whether or not to commence investigation. The fact that the SFC had in the past indicated to Waddington to the effect that it should return to the SFC for its further consideration with the outcome of the Action cannot be regarded as “a promise” by the SFC as to whether it would commence fresh investigations. Understood objectively, all it means is that the SFC would consider the matter again by that time. This cannot then make the SFC’s consideration of the factor of the lapse of time as irrational or irrelevant.

In relation to Reason 6, the Court held that if it was read and understood together with other reasons given by the SFC, the reference to the “substantially family matter” was made in relation to Waddington’s another request asking the SFC to seek appropriate directions from the Court concerning the dealing of the balance of the judgment sum paid into the Court pursuant to the CFI Judgment, instead of whether to commence fresh investigation.

Whether the SFC failed to consider a clearly relevant matter

Thirdly, Waddington argued that the SFC had failed to consider a clearly relevant matter, namely an assessment of the impact of the findings in the CFI Judgment on the result of the 2001/2002 Investigation. Under the 2015 Complaint, Waddington analysed the findings of the CFI Judgment and indicated to the SFC that the CFI Judgment should cast new light the 2001/2002 Investigation and thus warrant a fresh investigation. However, there was no evidence showing that the SFC engaged itself in Waddington’s analysis in considering the 2015 Complaint and the SFC failed to explain at all as to why it regarded Waddington’s reliance on the CFI Judgment and its analysis incorrect.

The Court agreed with Waddington. It was held that Waddington through its analysis had put forward to the SFC a distinct and relevant issue as to how the CFI Judgment had given an important support to its complaint. Thus, in considering whether or not to exercise its discretion to conduct the investigation, the SFC had a duty to engage those issues. There was no evidence that the SFC indeed did engage itself with Waddington’s analysis. The Court was satisfied that the SFC had failed to properly take into account this relevant factor in deciding not to commence fresh investigation. For this reason, the Court quashed the SFC’s decision not to commence investigations and remit the same to the SFC to reconsider.

Whether refusal to initiate disqualification proceedings was Wednesbury unreasonable

Waddington submitted that the SFC’s Decision for not seeking a disqualification order against Thomas Chan was Wednesbury unreasonable for the reason that the Court had already found Thomas Chan in breach of his fiduciary duty under the Action.

The Court held that it was not Wednesbury unreasonable for the SFC not to seek a disqualification order against Thomas Chan. Whether a disqualification order would be granted is subject to the Court’s discretion. Besides, there is nothing in the SFO which requires the SFC to seek a disqualification order whenever a civil court finds a director of a listed company liable for breach of fiduciary duty. The fact that Thomas‍ Chan was found to have acted in breach of his fiduciary duty does not necessarily mean that the Court will disqualify him if the SFC applies so some 15‍ years after the misconduct. The SFC thus had to engage in a balancing exercise to consider whether it is a proper and efficient use of its limited resources and time to seek to a disqualification order against Thomas ‍Chan.

Conclusion

This case demonstrates the legal threshold of Wednesbury unreasonableness and how the Court will approach a challenge against the SFC’s decision in relation to its exercise of statutory investigation power.

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Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.