In the recent Hong Kong Court of Appeal case of SFC v. C & Others CACV 319 of 2008, the Court overruled the Court of First Instance’s decision and confirmed SFC’s power to freeze local and overseas assets of foreign defendants in suspected insider dealing cases.

Background

On 16 April 2008, the SFC obtained an order ex parte (i.e., an application made without hearing the defendants) for service out of the jurisdiction on the 1^st, 3^rd and 4^th defendants and an interim injunction pursuant to section 213(6) of the Securities and Futures Ordinance (Cap. 571)(the “SFO”) restraining all defendants from dealing with their assets to the value of up to $43 million.  As against the 1^st, 2^nd and 3^rd defendants, the restraining order related to assets within Hong Kong.  As against the 4^th defendant, the restraining order was worldwide.  On 22 October 2008, the Court of First Instance discharged the interim injunctions and the orders for service out of the jurisdiction on the 1^st, 3^rd and 4^th defendants.  Please refer to our December 2008 Newsletter for a summary of the Court of First Instance decision

https://www.onc.hk/en_US/publication/challenge-to-sfc-s-enforcement-power-by-foreign-defendants

CACV 319/2008 (the “Appeal”)

The main issues in the Appeal were (1) whether section 213(2)(c) of the SFO empowers the Court to grant a Mareva type injunction, and (2) whether relief sought under section 213(1)(b) and (2)(c) of the SFO falls within Order 11 rule 1(1)(b) of the Rules of the High Court (the “RHC”) for service out of jurisdiction.

Section 213(2)(c) of the SFO

Section 213(2)(c) of the SFO empowers the SFC to bring proceedings for an order restraining a person from acquiring, disposing of, or otherwise dealing in, any property specified in the order.  The Defendants argued that the use of the words “dealing in” (as opposed to the words “dealing with” used under the usual form of a Mareva injunction) must necessarily involve some kind of commercial transaction. The Court of Appeal rejected the Defendants’ argument and confirmed that the power conferred under section 213(2)(c) is sufficiently wide to cover the grant of a Mareva type injunction, i.e. restraining all dealings of specified assets, and not confined to granting an injunction restraining commercial transactions.

Order 11 rule 1(1)(b) of the RHC

The next issue the Court considered was whether relief sought under section 213(1)(b) and (2)(c) of the SFO falls within Order 11 rule 1(1)(b) of the RHC.   S Kwan J in the Court of First Instance held that she was bound by the Privy Council decision of Mercedes Benz v. Leiduck [1996] 1 AC 284, which suggests that Order 11 was confined to service of an originating process seeking adjudication of substantive rights.  S Kwan J considered that proceedings for an order pursuant to section 213(2)(c) of the SFO do not decide substantive rights and that substantive rights between the parties would only be decided in proceedings in the Market Misconduct Tribunal.

The Court of Appeal considered that the juristic nature of an order made under section 213(2)(c) of the SFO is intrinsically different from that of a Mareva injunction although the form of the order may be similar.  The remedies contained in section 213(2) of the SFO were created by statute with the intention to provide substantive relief to address specific types of wrongdoing the SFC may encounter.   As such, the Mercedes Benz case is distinguishable and its reasoning does not apply to free-standing injunctions specifically created by statute. 

The Court of Appeal did note that although an order granting injunction under section 213 does not require an underlying claim, the wrongdoing which founds the relief must have taken place in Hong Kong and it is in respect of such wrongdoing within the jurisdiction that the relief would be sought.

Conclusion

The Court of Appeal’s decision is significant as it confirms the extent of remedies available to the SFC in tackling misconduct, even in cases where parties or their assets are outside of Hong Kong.  It also extends SFC’s enforcement powers over overseas companies who take illegal profits from Hong Kong’s markets.