In Securities And Futures Commission v Mo Shau Wah And Others  3 HKLRD 356, the Court of Appeal (“CA”) dismissed an appeal brought by Mo Shau Wah (“Mo”) in relation to a Mareva injunction obtained against her in proceedings brought by the Securities and Futures Commission (“SFC”), against the dismissal of her application for an order that a securities company should comply with a court order to vary the Mareva injunction by allowing her to dispose of her assets to pay her legal expenses.
A Mareva injunction is a form of interlocutory court order prohibiting a party from disposing of or otherwise dealing with assets which are the subject of the injunction.
In 2013, the SFC brought proceedings (“SFC Proceedings”) against, inter alia, Mo, who was an employee of China Pacific Securities Limited (“CPSL”), a securities company, alleging that Mo had misappropriated securities belonging to CPSL’s clients using false records in contravention of the Securities and Futures Ordinance (Cap.571). As a result of Mo’s misappropriation, CPSL had to replace the misappropriated securities and compensated the affected clients, thereby suffering losses. The SFC sought, inter alia, an order requiring Mo to make payment or transfer of securities to CPSL to compensate CPSL’s losses, or alternatively, an order requiring Mo to pay damages. The SFC successfully obtained a Mareva injunction (“Injunction”) restraining Mo from disposing of her assets, including $3,361,869.97 of shares held in the securities account Mo maintained with CPSL (“CPSL Account”).
Subsequently, by consent between the SFC and Mo, the Injunction was varied to allow Mo to withdraw $100,000 per week as legal costs of her criminal trial (“Order”). The Order did not mention the financial sources for such withdrawal.
Pursuant to the Order, Mo attempted to sell the shares in the CPSL Account but her request was refused by CPSL. Mo applied to the court for an order that CPSL shall desist from obstructing Mo from, inter alia, selling the shares held in the CPSL Account pursuant to the Order so that she could pay her legal expenses (“Mo’s Application”).
The Deputy Judge’s Decision
In considering Mo’s Application, the Deputy Judge applied the relevant test for allowing variation of a Mareva injunction in Hong Kong Life Insurance Ltd v Fung Siu Cheung Michael  HKEC 298, where the court considered the issue of whether funds which are the subject of an injunction should be released to the defendant to allow him to meet the legal costs of defending himself in criminal proceedings, as follows:
- where the plaintiff is asserting a proprietary claim to the assets which are the subject of an injunction, the court will consider the following when exercising its discretion:
- whether the defendant had adduced full and frank evidence that he does not have other assets available to pay for his legal expenses; and
- if so, the court must consider all relevant circumstances, especially the strength of the parties’ cases, and balance the potential injustice caused to the parties involved (the Proprietary Test);
- where the injunction merely involves a non-proprietary claim to the assets in question, the court will consider whether there is sufficient evidence adduced by the defendant that:
- the defendant has no other assets available to meet the costs of defending himself in the related criminal proceedings; and
- the aim of the defendant’s application is not to dissipate his assets so that execution of the judgment by the plaintiff will be frustrated (the Non-Proprietary Test).
Applying the above test, the Deputy Judge took the view that on the evidence, Mo had failed even to satisfy the Non-Proprietary Test. The Deputy Judge further held that CPSL had a potential proprietary claim against Mo, as Mo was its employee and CPSL had to compensate its affected clients, and that the damages arising from CPSL’s potential claim was substantial and larger than the value of securities in the CPSL Account. The Deputy Judge dismissed Mo’s Application.
Subsequent to the Deputy Judge’s decision, CPSL brought its own claim against, inter alia, Mo for breach of trust and fiduciary duty, and was joined as an intervener in the SFC Proceedings.
Mo appealed on three grounds:
- CPSL, being a non-party to the SFC Proceedings, had no locus standi to intervene in the Order which arose from a private agreement between the SFC and Mo;
- Even assuming CPSL could intervene in the Order, the aforementioned test for allowing the variation does not apply where the opponent to the variation is an intervener.
- Even assuming that the Deputy Judge had adopted the correct test, CPSL did not have any proprietary claim, and the Deputy Judge (i) should have taken into account that Mo had no other means to meet her legal expenses in the criminal proceedings, and (ii) should not prioritise which assets Mo should deal with first.
The CA’s decision
The CA dismissed Mo’s appeal and discussed the following issues:
Nature of the Order
The CA considered that it was wrong for Mo to characterise the Order as a private agreement between the SFC and herself, with CPSL merely a third party which had to follow Mo’s instructions in relation to the CPSL Account. The Order only contained the agreed amount of money which Mo may withdraw for her legal expenses, and did not set out the financial sources for such withdrawal. As such, it cannot be said that the SFC agreed that Mo might liquidate the securities in the CPSL Account to fund her legal expenses.
More importantly, the Order may not override the interests of a third party (that is, CPSL) in the CPSL Account. It is clear that Mo incurred liability to CPSL for substantial amounts as a result of her misappropriation of clients’ securities. As Mo’s intended disposal of shares in the CPSL Account would adversely affect CPSL’s interest, CPSL clearly had standing to intervene in the Order and should be given a reasonable opportunity of being heard.
The test to determine whether the Injunction should be varied
The CA held that the Deputy Judge applied the correct test in determining whether the assets covered by the Injunction (as varied by the Order) should be released. The test for allowing the variation is the same where an intervener instead of the plaintiff opposes the variation sought by the defendant. Although CPSL was a non-party in the SFC Proceedings, the objective of the SFC Proceedings, as reflected in the statement of claim, was to recompense and protect parties who suffered losses as a result of Mo’s misappropriation, which clearly included CPSL who had to compensate its clients. The SFC Proceedings was of a statutory nature and did not relate to any loss suffered by SFC itself. On this basis, the principal issue before the court is not different, i.e. whether the protection from the Injunction should be reduced by the variation sought by Mo.
While the court is generally sympathetic to a defendant’s application for variation of a Mareva injunction for the purpose of funding legal expenses incurred in criminal proceedings, the CA found no reason in the present case to interfere with the exercise of discretion of the Deputy Judge. The Deputy Judge was entitled to prioritise which assets Mo should dispose of first, and may take into account Mo’s failure to reveal the sources of funds for purchasing the securities in the CPSL Account and the evidence that she had substantial cash in undisclosed bank accounts.
The CA’s ruling clarifies that the test for allowing the variation of a Mareva injunction is not affected by whether the opponent is an intervener or a plaintiff, and that the defendant will need to satisfy the court that the protection from the injunction will not be reduced by the variation. Even where the defendant is allowed under a court order to dispose of assets to fund his legal expenses for the purpose of defending himself in criminal proceedings, in the absence of express provision in such court order regarding the financial sources for such funding, the order may not override legitimate interests of a third party in respect of the protected assets which would be adversely affected by the intended disposal.
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