|Challenge to SFC’s Enforcement Power by Foreign Defendants|
As we see stricter and stricter enforcement actions of the Securities and Futures Commission (the “SFC”) this year, we also note that people are more prepared to challenge their enforcement actions and decisions. An example of a successful challenge is found in the case of SFC v C (HCMP 727/2008), in which the Court discharged an interim injunction obtained by the SFC to freeze assets in an insider dealing investigation. The Court affirmed that it had no jurisdiction to allow service of such proceedings on persons outside Hong Kong.
SFC v C (HCMP 727/2008)
The SFC investigated into a suspected insider dealing by two individuals (the 1st and 2nd Defendants) and two companies (the 3rd and 4th Defendants). The 1st Defendant is a resident outside Hong Kong, while the 3rd and 4th Defendants are companies incorporated in the British Virgin Islands. During the investigation, the SFC sought an interim freezing injunction (the “Injunction”) from the Court pursuant to section 213(6) of the Securities and Futures Ordinance (Cap. 571) (the “Ordinance”) on an ex parte basis against the Defendants. The Injunction was granted and the Defendants were restrained from disposing of or dealing with their assets in Hong Kong. As regard to the 4th Defendant, the Injunction was also extended to cover assets worldwide. Leave (the “Leave”) was also granted to the SFC to serve on the Defendants out of Hong Kong the originating summons to freeze assets and require the disclosure of the location of other assets.
Is the Relief Sought by the SFC within Rules of High Court Order 11?
It is trite law that to bring a defendant outside jurisdiction before the Hong Kong Court, the only valid means is to effect service of the originating process on him as authorized under Order 11 rule 1(1) of the Rules of High Court. In applying to serve out, the SFC relied on Order 11 rule 1(2)(b), which governs the case where “an injunction is sought ordering the defendant to do or refrain from doing anything within the jurisdiction”.
The Defendants challenged the Leave on the basis that the nature of the injunctive relief sought is to restrain the dealing or disposition of property, which is not to enforce any substantive right to the property but merely for the purpose of aiding in future execution.
S Kwan J in the Court of First Instance found herself being bound by the decision of the Privy Council on appeal from Hong Kong in Mercedes Benz AG v Leiduck  1 AC 284, which suggests that Order 11, rule 1(1) does not empower the Court to permit service of an originating process which does not seek the adjudication of substantive rights. Acknowledging that there was an apparent lacuna in the existing legislation to provide for a power to effect service out of jurisdiction of an originating process issued pursuant to section 213 of the Ordinance, S Kwan J reached the decision that the Court could not have properly given the Leave. The Leave was set aside and the Injunction against the Defendants was discharged.
Is a Foreign Resident Amenable to the Jurisdiction of Proceedings in the Market Misconduct Tribunal (the “MMT”)?
The Defendants also argued that a person residing outside Hong Kong could not be brought to the Court to answer any alleged misconduct in the MMT. Having reached the conclusion that the Court had no jurisdiction to allow service out, it was strictly unnecessary for the Court to decide on this issue. S Kwan J nevertheless clarified in obiter that so long as the notice and statement of the proceedings would have come to the notice of the foreign party, and he was given a reasonable opportunity to be heard, the proceedings could continue in his absence if he chooses not to participate. A foreign resident can therefore be subject to the MMT's jurisdiction.
Contravention of Article 105 of the Basic Law?
The Defendants also mounted a challenge to the constitutionality of a freezing injunction, relying on Article 105 of the Basic Law, which guarantees one’s right to property. S Kwan J, rejecting the contention, suggests in obiter that although section 213 of the Ordinance does interfere with the right to property, the interference is neither disproportionate nor legally uncertain.
Civil Justice Reform
Amendments have already been made to the High Court Ordinance (Cap. 4) and the Rules of High Court to reverse Mercedes Benz AG v Leiduckso as to arm the Court with power to provide interim relief in aid of foreign proceedings as a freestanding form of relief, without being ancillary or incidental to substantive proceedings commenced in Hong Kong; and to make it possible for a plaintiff who seeks such relief to obtain leave to serve a defendant out of the jurisdiction. However, these amendments have not yet been in operation.
The SFC has lodged an appeal against the decision in SFC v C to the Court of Appeal. In the meantime, it should be noted that this is the first time in which a jurisdictional challenge of this nature was raised in proceedings brought by the SFC seeking injunctive relief under section 213 of the Ordinance. If the decision remains unchallenged on appeal, it may adversely affect the SFC’s ability to tackle market misconduct and effectiveness of its enforcement actions.
Without knowledge of the background/facts of the individual matter, we do not intend for the above summary to deal with every important topic or to cover every aspect of the topics with which it deals. Such summary is for general information purposes only and is not intended to provide legal advice.
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Published by ONC Lawyers © 2009