Hong Kong’s highest court confirms that its financial markets regulator may serve proceedings on foreign defendants for restoration orders as of right.
The Hong Kong Court of Final Appeal (CFA) held in a recent judgment that the Securities and Futures Commission (SFC) does not need to seek leave of the Hong Kong court to serve false trading proceedings against defendants out of the jurisdictions for restoration orders.
The SFC alleged that a syndicate falsely pushed up the price of shares of a newly listed company and cashed in by borrowing sums using the shares as collaterals. The syndicate allegedly caused huge loss to lenders and investors by subsequently defaulting on the loans and dumping the shares. The SFC commenced proceedings against the syndicate, seeking restoration and damages orders under Sections 213 and 274 of the Securities and Futures Ordinance (Cap. 571) (SFO), requiring the syndicate to restore the market participants and lenders to their position prior to the relevant transactions.
The syndicate includes six defendants (appellants in the appeal) who are resident in the United States, Cayman Islands, and the Seychelles, and therefore are outside the Hong Kong jurisdiction. Usually, a claimant would need to obtain the leave of the Hong Kong court to serve proceedings on foreign defendants out of the jurisdiction. The SFC did so by obtaining leave for service out of jurisdiction under certain jurisdictional gateways. The appellants applied to set aside the order granting leave and sought a declaration that the Hong Kong court lacks jurisdiction over them. The application was dismissed in the first instance and on appeal to the Court of Appeal. The appellants further appealed to the CFA.
The appellants initially obtained leave to appeal to the CFA to argue that the SFC was not entitled to rely on the relevant jurisdictional gateway to obtain leave to serve out of the jurisdiction. The appeal was made on the ground that a restoration claim is not a “claim” at all, and even if it is a “claim”, it is not “founded on a tort” as required under the relevant gateway. That was also the subject of the argument at all levels of courts prior to the case reaching the CFA.
However, prior to the hearing, the CFA directed the parties to make submissions on whether the SFC in fact required leave to serve out of the jurisdiction in the first place. After hearing the submissions, the CFA dismissed the appeal unanimously on the basis that leave to serve out of jurisdiction was not required in the present case.
Leave of Court Not Required
According to Order 11 Rule 1(2) of the Rules of the High Court, service out of jurisdiction is permissible without leave if the claim is one which the Hong Kong court has power to hear and determine, by virtue of any written legislative provision, even though a defendant is not within the jurisdiction. Under such circumstances, the party is not required to establish that the claim falls within any of the jurisdictional gateways under Order 11 Rule 1(1).
Upon construction of the relevant provisions of the SFO, the CFA ruled that the wordings “in Hong Kong or elsewhere” in the relevant market misconduct provisions confer power on the Hong Kong court to hear the claims against persons who are not within the jurisdiction, if such person does anything constituting false trading affecting the Hong Kong market. The CFA noted that the SFO intends to “cater for the territorial dimensions of wrongful acts damaging to market participants”. The CFA therefore held that Order 11 Rule 1(2) applies in the present case, and leave to serve out of the jurisdiction is not required.
The CFA further remarked in its judgment that “the SFO’s policy of conferring jurisdiction over persons who engage in false trading “elsewhere” affecting the Hong Kong market is clear and unsurprising. Trading on the HKEX is global and making sanctions legally available against offshore fraudulent parties who cause losses to investors or other participants in the local market is obviously justified”.
The CFA confirmed that the Hong Kong court has wide-reaching jurisdiction over market misconduct activities, which extends to granting restoration and damages orders against persons out of the jurisdiction. The SFC does not need to seek leave to commence proceedings against foreign persons engaging in false trading for such relief, removing the traditional jurisdictional barriers in favour of the SFC. Interestingly, this position was never contended in previous cases, and even the SFC itself did not go as far as running this contention in the present case — it initially also assumed that obtaining leave to serve the foreign appellants out of the jurisdiction was necessary.
This case serves as a useful reminder for foreign market participants that the Hong Kong court will not hesitate to exercise jurisdiction in granting relief against persons who engage in market misconduct activities in Hong Kong, even if they are situated overseas. This confirms Hong Kong’s determination to ensure that the global financial centre operates a fair and orderly market, and is a further illustration of efforts to protect investors from market misconduct. Whilst this decision only expressly dealt with false trading, it may well be applied in future cases to cover other types of market misconduct in which the relevant provision covers activities “in Hong Kong or elsewhere”. With the benefit of this decision, the SFC is now more equipped, and hence more likely, to pursue against foreign participants who are involved in market misconduct activities affecting the Hong Kong market.