As noted in an earlier update,(1) the Securities and Futures Commission (SFC) in Hong Kong has been very active in using civil proceedings pursuant to Section 213 of the Securities and Futures Ordinance to seek redress for investors. The recent judgment in Securities and Futures Commission v Qunxing Paper Holdings Co Ltd(2) confirms that the SFC can seek restorative orders not only against parties to impugned transactions, but also against individuals who aid or abet or who are involved. The High Court judgment is pragmatic and reasoned, and also deals with a novel issue affecting Section 213 restorative orders – namely, common law 'reliance' on misstatement and the proportionality of relief for individual investors.
The SFC brought an action against the defendants, the first of which was a company listed on the Main Board of the Stock Exchange of Hong Kong, for allegedly making false or misleading statements in its announced financial results, and thereby allegedly contravening various statutory provisions. The SFC sought various declarations and orders pursuant to Section 213, with a view to compensating some 27,000 investors who had acquired shares in the company.
The SFC's recovery attempts concerned the remainder of the first and second defendants' assets, amounting to approximately HK$112.2 million – a fraction of the total estimated losses of HK$1,419.58 million. The SFC may have little hope of recovering much from the third and fourth defendants, the chair and vice chair of the listed company respectively, neither of whom responded to the action or was represented.
The initial hurdle, that a party must have contravened a 'relevant provision' as per Section 213(1)(a), was addressed expediently.
The court found that the company had committed market misconduct-type activity contrary to Sections 277 and 298 of the ordinance. It had also breached Section 384 of the ordinance and Section 342F of the Companies (Winding Up and Miscellaneous Provisions) Ordinance concerning the provision of false or misleading information or misstatements in a prospectus, respectively. The other defendants had directly or indirectly been involved in the contraventions (whether knowingly or otherwise).
In light of these contraventions, the court turned to the more interesting question: that the basis of the claim was in alleged misstatement, in contrast to previous Section 213 cases. This led to some concern whether Section 213 should be seen as merely procedural in nature. In the court's opinion, Section 213 should not be viewed as "merely a machinery for enforcing rights already vested in the investors under the common law"(3) – rather Section 213 "creates a substantive statutory cause of action which is vested in the Commission".(4)
The distinction manifested in the fact that civil remedies are potentially available for investors who have suffered losses in reliance on false information, both at common law and under the ordinance. However, these provisions may only be used by the person who sustained the loss, unlike Section 213. Further, as Section 213 is "complementary" to these civil liabilities this begs the question: do the constituent elements of the common law causes of action (ie, reliance and inducement) have to be proved for each individual investor if the SFC is utilising Section 213 on their behalf? The court held that they did not.
This conclusion was based on numerous judgments, highlighted significantly by:
- Securities and Investments Board v Pantell SA (No 2)(5) and Judge Steyn that "if resort to civil remedies is impracticable for most individual investors the sanctions of the civil law cannot play their proper role";(6) and
- the seminal judgment in Securities and Futures Commission v Tiger Asia Management LLC(7) and Lord Hoffman stating that "In these proceedings the SFC acts not as a prosecutor in the general public interest but as protector of the collective interests of the persons dealing in the market who have been injured by market misconduct".(8)
The court in this case added its own pragmatic take, stating that the purpose of Section 213 is to "provide a statutory regime whereby the Commission, as regulator, can take action to obtain civil remedies for the benefit of investors, who may otherwise be deterred by cost and other considerations...".(9) The court also noted that in an "ideal world" where facts are ascertainable without cost, one would have regard to the usual principles of the law on misrepresentation (ie, reliance and inducement). In the "real world", however, insisting on "investigating the circumstances of every individual investor and investment might completely destroy the efficacy of the statutory scheme and defeat the legislative purpose".(10) Therefore, it was not necessary to bring into Section 213(2)(b) all the requirements of a private law cause of action. In any event, the false financial information published was on "a general level, likely to influence investors to purchase Qunxing shares...".(11)
SFC v Qunxing Paper Holdings Co Ltd is another example of the SFC's wide use of civil proceedings, pursuant to Section 213, to obtain recourse for investors – using Section 213 as a 'third way', without necessarily relying on a finding of contravention before the Market Misconduct Tribunal or a criminal court.
Further, it confirmed that Section 213(2)(b) should not be limited to counterparties, but allows for orders to be made against those knowingly involved in the contravention.
More important is its consideration of Section 213's utility when faced with misstatements to investors. Ultimately, the usual rules on common law misstatement were deemed subordinate to the legislative intention of Section 213 of the ordinance, which is becoming an ever more powerful tool in the SFC's armoury.
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For further information on this topic please contact David Smyth or Kingsley Krawczyk at RPC by telephone (+852 2216 7000) or email ([email protected] or k[email protected]). The RPC website can be accessed at www.rpc.co.uk.
Endnotes
(1) For further details please see "Regulator's use of Section 213 'combo' civil proceedings".
(2) [2018] HKCF1 271, February 6 2018. To date no appeal has been lodged.
(3) Supra note 2, at paragraph 49.
(4) Supra note 2, at paragraph 50.
(6) Supra note 5, at paragraph 282 B-C.
(8) Supra note 7, at paragraph 16.
(9) Supra note 2, at paragraph 50.
