Articles Business Crime & Financial Services 24th Jan 2017

Judgment of the High Court clarifies the extent of the SFC’s duty of disclosure

       In proceedings brought by the Hong Kong Securities and Futures Commission (‘SFC’) under s.214 of the Securities and Futures Ordinance (‘the Ordinance’) for the disqualification of four former directors from holding positions of management, Mr Justice Lam ordered the regulator to serve a list of documents which have been or are in their possession relating to any matter in question in the proceedings[1]. The judgment at the court of first instance is seen by some as a set-back for the SFC, which only recently set out its vision of renewed focus on enforcement action in a speech by its new Executive Director of Enforcement – Thomas Atkinson.

       The case concerns allegations that the former directors of Inno-Tech Holdings acted in breach of their duty to exercise reasonable care, skill and diligence in relation to the company, specifically in respect of the acquisition of interests in a number of properties. This breach is said to have involved misfeasance or other misconduct towards the company or its members, as per s.214 of the Ordinance. Following the SFC’s refusal to provide the respondent former directors with a list of materials it had obtained pursuant to its powers under the Ordinance, the respondents issued a summons for discovery in respect of these materials.

      The SFC’s contention was, in short, that the disqualification proceedings before the court were civil proceedings, and that, therefore, the test for discovery to be applied was the narrower test applied in civil cases, rather than that which applies in the criminal setting, the latter requiring the serving of the list of materials which can be considered:

‘(1) to be relevant or possibly relevant to an issue in the case; (2) to raise or possibly raise a new issue whose existence is not apparent from the evidence the prosecution proposes to use; (3) to hold out a real (as opposed to a fanciful) prospect of providing a lead on evidence which goes to (1) and (2).’[2]

       His Lordship did not accede to the SFC’s submissions, holding instead that the regulatory proceedings under the Ordinance were plainly more akin to criminal proceedings. They were brought by a governmental regulator, which controlled the investigatory process, and was possessed of powers under the Ordinance that rank high in a hierarchy of coercive powers for obtaining information and investigating suspected wrongdoing. The disqualification sought, although not a ‘penalty’ in the strict sense, nevertheless would have a severe impact on the individuals subjected to it. Furthermore, an examination of the overseas jurisprudence, and in particular that of the UK, Canada and New Zealand, suggested that a higher standard of disclosure should be applied than that which applies in civil litigation.

      The principle to be adopted by the courts in considering such issues was made clear:

‘[…] to minimize the risk of making a disqualification order against an innocent director while at the same time not impeding effective law enforcement […]’

     And what the application of that principle meant in practice was made equally clear:

‘[…]the test of relevance should be applied as broadly as is consistent with the requirements of justice […]Thus approached, the Commission’s disclosure should ordinarily include the information and documents it has obtained from the investigation of the transactions that are eventually relied upon and complained of in the disqualification proceedings, except those which are obviously irrelevant even on this generous test.’

       In what will perhaps inevitably be interpreted as a shot across the bow of the SFC, His Lordship also opined that the proper role of the SFC is not that of ‘a prosecutor bent on securing the disqualification of a respondent, but [that of] a fair-minded regulator willing if not anxious to make all materials available for potential use in the trial to ensure a just outcome’.

       The decision, which may yet be appealed by the SFC, is certainly an early indication that those that find themselves on the receiving end of enforcement action by the regulator can expect a generous approach to disclosure of material that might assist in the marshaling of their defence.


[1] SFC v. Wong Yuen Yee HCMP 241/2015

[2] HKSAR v. Lee Ming Tee (2003) 6 HKCFAR 336

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