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Contentious Commentary Hong Kong Defendant left holding the baby ...... 3

Assets frozen in fishy scheme ...... 3 s

We can work it out ...... 4 t

You win some, you lose some… ...... 4

n From Hong Kong to Japan ...... 4

They think it’s all over… ...... 5 e Sushi solution ...... 5 t “Thought crimes” and “favourable dispositions” ...... 6

Disclose? Or not disclose? That is the question ...... 6 n If you’re not with us, you’re against us ...... 6

The means, not the merits ...... 7 o Contacts ...... 8 c Contentious Commentary 3 Hong Kong September 2016

struck off the Register does not prevent In January 2016, Pedro was alerted to Defendant left any creditor making a claim against the apparent irregularities in the way Maria holding the baby company and pursuing the claim through was conducting the business, including to judgment or execution. allegations of fictitious transactions. When Plaintiff prevails in confronted, Maria denied any wrongdoing distributor dispute and immediately resigned. Following her The defendant in Hin Sang Hong Co Ltd v Assets frozen in resignation, Pedro uncovered a scheme in Kingdom Overseas Ltd [2016] 2 HKLRD which the second defendant would place 1321, a BVI distributor of infant formula, fishy scheme orders with the plaintiff which would then became the exclusive distributor for Court continues injunction as place the same orders with the first defendant. The plaintiff described this Hong Kong and Macau for five years from fictitious transactions alleged July 2011. The plaintiff was to order a as a clear case of fraud with no goods certain number of tins of the formula at the In Link Fish Import & Export SL v Multiply having being delivered and leading to supplier’s price which could be unilaterally Import & Export HK Ltd [2016] HKEC a loss of US$11.7 million. adjusted by the defendant with written 1464, Recorder Madam Linda Chan SC notice to the plaintiff. Although the gave judgment in an application for The Court found there were strong grounds distribution agreement referred to a continuation of a Mareva injunction in to believe the scheme was fraudulent. “recommended uniform retail price” favour of the plaintiff Spanish company It was well established that a risk of (the RURP), the plaintiff also had a engaged in the sale and purchase of dissipation of assets may be inferred where discretion to determine the wholesale price promotional items for the alcohol industry. the defendant demonstrates an at which to supply the products to retailers. “unacceptably low standard of commercial The company was formed by The defendant could terminate the morality” . The Court may more readily infer Pedro Manual Lopez Moreno and agreement only if the plaintiff supplied the a real risk of dissipation if a good arguable Ms Maria -Teresa Aguado Mateos. Maria products at low wholesale prices which case is established on a claim for fraud and was a director of the plaintiff and ran its caused the defendant to suffer losses. dishonesty. The Court ordered the Mareva business operations. She introduced the injunction be continued against the first The defendant failed to deliver all of the plaintiff to the first and second defendants defendant and granted costs to the plaintiff. formula as ordered and in February 2012, and the companies commenced trading. issued a notice terminating the agreement which the plaintiff accepted. The plaintiff brought proceedings against the defendant for breach of contract.

Godfrey Lam J sitting in the Court of First Instance gave judgment for the plaintiff. On a proper construction of the agreement, the plaintiff had not agreed to a condition that the retail price would always be the RURP. The defendant was in breach by purporting to terminate the agreement without justification.

The judgment is notable as the defendant played no part in the proceedings and enquiries revealed it had been struck off the BVI register of companies on 1 November 2014 for non-payment of annual fees. A company whose name has been struck off the BVI register is not dissolved immediately, but continues to exist for another 7 years before being automatically dissolved. BVI company law states that the fact that a company is

concerned since the March decision, understand and that were completely We can work it out thereby “purging….the contempt at an unsuitable for them. Defendants spared jail in exceptional speed”. In circumstances in dispute with liquidator which both defendants had apologised to Although the language of the contracts in the Court unreservedly, there was no Chang Pui Yin v Bank of Singapore Ltd In March 2016, the Court of First point in sending “two truly remorseful [2016] HKEC 1721 was not clear cut, Instance in Bruno Arboit v Koo Siu Ying persons to prison”. the Court found the bank had a HCMP [2016] HKEC 556 found two contractual duty to advise and that the defendants guilty of contempt of court in The decision reinforces the view that the relationship was not execution only. breaching court orders requiring the threat of committal proceedings can be The Court distinguished this case from disclosure of documents required by a an extremely useful weapon in the hands previous cases such as DBS Bank liquidator. In May, the Court passed of a liquidator when faced with (Hong Kong) v San-Hot HK Industrial Co sentence for the contempt, sparing the uncooperative respondents. Ltd [2013] HKEC 352 and Kwok Wai Hing defendants a term of imprisonment but Selina v HSBC Private Bank (Suisse) SA ordering that each of them be fined [2012] HKEC 903, which had resulted in HK$200,000. You win some, you wins for the banks. The Court said the starting-point was to lose some… With the SFC requiring a new clause to be acknowledge that contempt of civil court inserted into client agreements ensuring orders is a serious matter and that they Courts reach different that any financial product solicited for sale are meant to be obeyed. Here, there conclusions in misselling cases or recommended to a client is reasonably had been a “wholesale failure” to The Court of Appeal in DBS Bank suitable for the client, regardless of what produce books and records of the (Hong Kong) Ltd v Sit Pan Jit 2016 HKEC is stated elsewhere, it will be important for company and the defendants had been 1307 unanimously upheld the decision by banks to observe and carefully document “steadfastly uncooperative” with the the trial judge handed down in April 2015. their suitability obligations as a defence liquidator. Despite this, the actual effect against future mis-selling claims. of the breach on the liquidator’s work The appellant, Mr Sit, had entered into had not been substantial. a number of contracts with DBS and had suffered significant losses on those The defendants had also made concerted From Hong Kong products during the 2008 financial crisis. efforts to locate the documents He alleged that DBS had breached its to Japan fiduciary, tortious and contractual duties Applicants challenge SFC’s to him. DBS denied the allegations and relied on its standard non-reliance right to give documents to clauses in the underlying contracts, foreign regulators the effect of which was that DBS had no The applicants in AA & EA v Securities and duty to give investment advice to the Futures Commission [2016] HKCU 1057 customer and, even if it did give any won leave from Zervos J sitting in the Court investment advice, it was on an of First Instance to bring judicial review “execution only” basis on which the proceedings against the SFC in relation to customer was not entitled to rely. information the SFC had obtained during the course of an investigation and then In rejecting every ground of appeal raised disclosed to Japanese regulators. by the appellant, the Court found that the approach adopted by the judge at first The applicants claimed they had provided instance was “impeccable” and there was information and materials to the SFC nothing to indicate the trial judge’s under compulsion purportedly pursuant to decision should be overturned. its statutory powers. They said the SFC had then transmitted the information and A few weeks later, however, the Court of materials to the Japanese regulators First Instance found in favour of two which had led to “wanton leaking and elderly customers who claimed they had breaches of secrecy”. been sold complex products they did not

At the heart of the issue is section 181 Securities and Futures Ordinance which the applicants claim is unconstitutional. The section gives the SFC the power to require and compel disclosure of information about specified transactions, including client details and the instructions provided. The Court found it was reasonably arguable that the SFC had (i) acted unlawfully in supplying the contents of an interview without proper protection, and (ii) failed to properly ensure that secrecy would be observed by Japanese regulators. The Court also found it reasonably arguable that section 181 had a disproportionate impact upon the privilege against self-incrimination.

It will be interesting to see if the court finds the SFC is at fault in the way it responds to requests for assistance under the regime and whether it needs to build The Court reaffirmed the traditional test in greater safeguards in its processes. for determining whether a clause is a Sushi solution liquidated damages clause, ie. whether Court of Final Appeal rules on a clause that took effect on breach is a directors’ duties They think it’s “genuine pre -estimate of loss” or The CFA looked at the scope of a whether it was aimed at deterring a director’s duty of loyalty to act in the best all over… breach and is therefore an interests of the company and the rule Hong Kong follows traditional unenforceable penalty. The traditional providing that a fiduciary may not allow test derived from Dunlop Pneumatic Tyre “penalties” test his own interests to conflict with those of Co Ltd v New Garage & Motor Co Lt d In the first major Hong Kong decision the company. [1915] AC 847 is more restrictive than dealing with the law on penalties since last that espoused in Cavendish, which held November’s landmark Supreme Court case The dispute, which ran for more than ten that the question was whether a of Cavendish Square Holding BV v Talal El years, concerned a business venture contractual protection for an innocent Makdessi and Parking Eye Limited v Beavis between brother and sister Jason and party’s legitimate business interests was [2015] UKSC 67, the Court of Appeal held Daisy Poon and Ricky Cheng who “extravagant, exorbitant or in Brio Electronic Commerce Limited v together set up the first Itamae restaurant unconscionable” . Tradeline Electronic Commerce Limited through Smart Wave Limited, of which the [2016] 2 HKLRD 1449 that a contractual three were directors. Ricky Chen later Interestingly, Cavendish was not referred to clause specifying a sum of HK$5 million as then struck out on his own by expanding in the judgment and it remains to be seen liquidated damages was not a penalty and the Itamae chain and Itacho group of whether, when it comes to be formally was therefore enforceable. restaurants as sole shareholder. considered, Hong Kong will follow the broader test now adopted in England & The CFA held in Poon Ka Man Jason v Wales. Despite the apparent divergence, Cheng Wai Tao [2016] HKEC 759 that it appears that Hong Kong courts are now Ricky was in breach of his fiduciary duties more open to looking at the wider context towards Smart Wave because the first in interpreting commercial contracts. restaurant “was the first of what was to Those entering into contracts should become a chain of restaurants” and that satisfy themselves that, where a genuine the setting up of additional restaurants by pre-estimate of loss is not possible, that Ricky in competition with Smart Wave the amount stipulated can be had diverted business opportunities and commercially justified. profits away from the company.

professional disciplinary proceedings had been rejected or commented on “Thought crimes” against him. adversely by courts on previous and “favourable occasions?” . The Court ruled an expert The Applicants in a land dispute had has a duty to disclose voluntarily the dispositions” written to inform the Tribunal that their outcome of disciplinary proceedings if it Bribery and money laundering expert, who had given evidence the results in a sentence which curtails his previous month, had been found guilty by ability to practise as a member of that under the spotlight the Hong Kong Institute of Surveyors of a professional body. Other than that, the In two recent highly publicised criminal charge of giving opinions in his Court found there is no duty on the expert cases, the CFA continued the trend of professional capacity that were not, to the witness to give any voluntary disclosure of lessening the burden on prosecutors in best of his ability, objective, reliable and disciplinary matters. cases involving financial crimes such as honest. His membership was suspended money laundering and bribery. In the appeal for a year. The Tribunal had held that his from the money laundering conviction of evidence was admissible notwithstanding If you’re not with us, Carson Yeung, the former Birmingham City the outcome of the disciplinary Football Club chairman, the CFA confirmed proceedings. The Respondents you’re against us that a person can be sent to jail for handling challenged the finding. Conflicts of interest in money they “thought” or had reasonable grounds to believe derived from a crime, The Court of Appeal ruled that even expert evidence whether it did or not. assuming there had been a breach of The plaintiff in Capital Wealth Finance duty, this went to the issue of the Co Ltd v Lai Yueh Hsing [2016] HKEC The following day, the CFA gave leave to weight to be accorded to the evidence 1534 applied for leave to change its appeal to Rafael Hui, the former Chief rather than to any issue of admissibility . expert and to hold that the defence Secretary of Hong Kong, and Thomas The admission of evidence regarding expert report should be inadmissible in Kwok, the former chairman of Sun Hung disciplinary proceedings would evidence because of a conflict of Kai Properties (SHKP), against their 2014 “invariably lead the court down the interest. The defence expert, a Mr SC convictions for misconduct in public office. slippery slope of examining the merits of Leung, had initially been appointed as At issue is whether prosecutors only have the disciplinary charge ”. expert for the plaintiff before switching to show that Hui was “favourably disposed” sides. The plaintiff also applied for towards SHKP, without having to point to If a pending disciplinary charge “could be enforcement of an order that the any specific criminal act. relevant and should be disclosed, why not defence produce documents used by the fact that the evidence of an expert Mr Leung to compile his report. Taken together, these decisions point toward the criminalisation of motive and thought, without actual criminal conduct, making it much easier to obtain convictions for alleged financial crimes.

Disclose? Or not disclose? That is the question Should expert reveal details of disciplinary proceedings against him? The Court of Appeal in Harvest Treasure Ltd v Cheung Fat Enterprises Ltd [2016] HKEC 1550 considered the question of whether an expert has a duty to give voluntary disclosure regarding

The defence argued that the plaintiff had not previously complained about Mr Leung’s expertise and that to allow the plaintiff to change expert would be tantamount to expert shopping. Registrar KW Lung said that to order Mr Leung to be expert for the plaintiff would amount to the Court ordering a single joint expert for the parties despite the plaintiff’s objections and despite the fact the expert’s report would be adverse to the plaintiff’s interests.

The Court granted leave to the plaintiff to appoint a new expert, at the same time ordering production of the documents requested. The question of whether Mr Leung’s report should be admitted in evidence was left to the trial judge.

favour of the defendants in an ICC by the tribunal but rather by the fairness The means, not arbitration. The plaintiff claimed that the of the process. As long as the parties tribunal’s refusal to allow him to inspect were able to make representations in the merits documents and equipment meant he respect of any issue that might affect the Tronic International Pte Ltd was unable properly to present his case; decision, they would have been given and also that the tribunal had exceeded a fair hearing. (Singapore) v Topco Scientific its powers by itself raising an issue that Co Ltd (Taiwan) [2016] would affect the assessment of damages. The Court of Appeal agreed with the trial HKCU 1948 judge that the tribunal was permitted The Court reaffirmed that when under the ICC Rules to raise issues that The Court of Appeal dismissed an appeal considering an application to set aside an had not been raised by the parties. by the plaintiff against an October 2013 award, the court was not concerned with The Court ordered the plaintiff to pay the order refusing to set aside a final award in the correctness of the decisions reached defendants’ costs on an indemnity basis.

Elaine Chen Brian Gilchrist Cameron Hassall Ling Ho Partner, Hong Kong Partner, Hong Kong Partner, Hong Kong Partner, Hong Kong T: +852 2825 8956 T: +852 2825 8878 T: +852 2825 8902 T: +852 2826 3479 E: elaine.chen E: brian.gilchrist E: cameron.hassall E: ling.ho @cliffordchance.com @cliffordchance.com @cliffordchance.com @cliffordchance.com

Edward Johnson Matthew Newick Donna Wacker Wendy Wysong Partner, Hong Kong Partner, Hong Kong Partner, Hong Kong Partner, Hong Kong T: +852 2826 3427 T: +852 2826 3459 T: +852 2826 3478 T: +852 2826 3460 E: edward.johnson E: matthew.newick E: donna.wacker E: wendy.wysong @cliffordchance.com @cliffordchance.com @cliffordchance.com @cliffordchance.com

Romesh Weeramantry Richard Sharpe Lei Shi Foreign Legal Consultant, Consultant, Hong Kong Consultant, Hong Kong Hong Kong T: +852 2826 2427 T: +852 2826 3547 T: +852 2825 8938 E: richard.sharpe E: lei.shi E: romesh.weeramantry @cliffordchance.com @cliffordchance.com @cliffordchance.com

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