SFC’s enforcement of non-compliance with section 183 notice: a refresher on applications for sanctions under section 185(1), SFO

Synopsis

Hong Kong’s Court of First Instance (Deputy High Court Judge MK Liu) considered an application made by the Securities and Futures Commission (“SFC”), pursuant to section 185 of the Securities and Futures Ordinance (Cap.571) (“SFO”), for an order that a licensed corporation (i) comply with notices issued by the SFC pursuant to section 183, SFO, and (ii) be penalised for failure to comply with such notices.    

Having considered the licensed corporation’s reasonable excuse defence together with the standards of proof required under sections 185(1)(a) and 185(1)(b), SFO, the Court held partly for the SFC, allowing its claims relating to some, but not all, of the notices issued.  Insofar as those notices are concerned, the Court ordered the licensed corporation to comply with all outstanding requests and directed a hearing be fixed for determining the quantum of the fine to be imposed.

Background

Between 2020 and 2023, the SFC commenced investigations in respect of the initial public offers of multiple companies (“Relevant Companies”), including a “Company C”.  oOo Securities (HK) Group Limited (“OSGL”), was the securities broker to the Relevant Companies, and was also the investment manager to some of the Relevant Companies.

The SFC issued four notices to OSGL in (i) July 2021, August 2021 and June 2022 (collectively, the “2021/22 Notices”), and (ii) January 2023 (“2023 Notice”) under section 183, SFO, requiring production of records and documents and answers to enquiries. 

The SFC alleged that OSGL’s responses to the 2021/22 Notices were incomplete. 

In the meantime, the SFC concluded its investigation on matters relating to Company C.  The SFC notified OSGL on 13 October 2022 by way of letter, stating that “[the SFC] does not propose to take any further action against you about [matters relating to Company C]”.

As to the 2023 Notice, OSGL did not respond to it at all. 

On the basis of OSGL’s failure to comply with the Notices, in November 2023, the SFC commenced proceedings for orders pursuant to section 185, SFO (i) to compel OSGL to comply with the outstanding requests under the 2021/22 Notices and the 2023 Notice (pursuant to section 185(1)(a), SFO[1]); and (ii) that OSGL be penalised for its failure to comply with the Notices within time (pursuant to section 185(1)(b), SFO [2]).

OSGL raised a reasonable excuse defence, arguing that it had practical difficulties in complying with the Notices because (i) it underwent a complete change of ownership / management in late 2022 and early 2023, (ii) a significant portion of its books and records were relocated to Beijing and then lost due to the fault of a third-party service provider, and (iii) relevant documents were seized by the SFC. 

In respect of the 2023 Notice, OSGL argued that it was not validly served. 

Court’s decision and reasoning

The SFC’s applications were successful only in relation to the 2021/22 Notices.  The Court held for OSGL in respect of any matters concerning Company C and the 2023 Notice. 

Different burden of proof for applications pursuant to sections 185(1)(a) and 185(1)(b), SFO

In considering the SFC’s application, the Court confirmed different considerations would apply to sub-sections 185(1)(a) and 185(1)(b), SFO. 

To succeed on an application pursuant to section 185(1)(a), SFO, the SFC bears the legal burden to prove that, on a balance of probabilities, the defendant failed to do something required of it pursuant to section 183, SFO. The defendant bears the burden to show that, on a balance of probabilities, there is a reasonable excuse.  Physical or practical difficulties in producing documents may constitute reasonable excuse. 

Whereas to succeed on an application pursuant to section 185(1)(b), SFO, the SFC bears the burden in proving beyond all reasonable doubt that the defendant failed to do something required under a notice issued under section 183, SFO.  In this case, it would be necessary for the SFC to prove that the documents required existed, were in the OSGL’s possession at the time of the Notices, and that the defendant had no reasonable excuse for non-compliance. 

Why OSGL failed to establish reasonable excuses to not comply with the 2021/22 Notices

Having considered the facts and applying the principles, in respect of the 2021/22 Notices, the Court ordered OSGL to comply with all outstanding requests pursuant to section 185(1)(a), SFO and directed a hearing be fixed for determining the quantum of the fine against OSGL pursuant to section 185(1)(b), SFO for contempt of court.

Specifically, the Court rejected OSGL’s defence on the following grounds and held that those excuses could not be used to circumvent liability under sections 185(1)(a) and 185(1)(b): 

• Even after change of ownership / management, OSGL is the same legal entity.
• The moving of OSGL’s books and records took place in 2023, meaning those books and records were in OSGL’s possession at the times of the 2021/22 Notices, and was contrary to the law (section 130, SFO). In any event, OSGL failed to prove the relocated books and records included at least some of the documents sought by the SFC in the outstanding requests under the 2021/22 Notices.
• The SFC only seized OSGL’s books and records after the 2021/22 Notices.  

SFC’s duty to act fairly 

In respect of the SFC’s investigation into matters relating to Company C, the Court held that the letter dated 13 October 2022 used clear and unambiguous wording to the effect that the SFC would no longer take any action in relation to any matters relating to Company C. 

By seeking orders pursuant to s185(1), SFO in the absence of fresh evidence / circumstances, the SFC was effectively resiling from this position. The Court stressed that the SFC has a duty to act fairly as a public body. 

As such, the Court exercised its discretion and dismissed the SFC’s application to the extent it relates to Company C. 

Why the SFC failed in respect of the 2023 Notice 

The Court dismissed that SFC’s application in respect of the 2023 Notice on the basis that the notice was not validly served on OSGL. The fact that OSGL had knowledge of the 2023 Notice could not by itself give rise to liability under section 185, SFO. 

There were various attempts to serve the 2023 Notice:

1. by hand to OSGL’s registered office, which was refused for the reason that it was not addressed to a specific recipient;
2. by hand to OSGL’s registered office addressing to one of OSGL’s responsible officers (“the RO”) and by email to the RO’s email address. The copy delivered to OSGL’s registered office was refused, but the email did not bounce back; and
3. by ordinary post to OSGL’s new registered office. 

The SFC said the 2023 Notice was validly served by electronic service to the RO’s email and ordinary post to OSGL’s new registered address, but the Court disagreed: 

• The email to the RO containing the 2023 Notice included a warning of the secrecy obligations under section 378, SFO. The Court held that the RO would be “the person who that information is so disclosed” under section 378(7)(a) as such the secrecy obligation would effectively prevent the RO from sharing the 2023 Notice to OSGL.
• The affirmation of service deposing service by ordinary post to OSGL was not sufficient as the deponent was not the person who personally posted the letter and would not have known if the post had been sent. 

Observations 

This case is a refresher on the different standards of proof required in an application made under sections 185(1)(a) and 185(1)(b), SFO, which should be applicable to other regulators such as the Accounting and Financial Reporting Council (e.g., section 45, Cap. 588 mirrors section 185, SFO) and the Insurance Authority (e.g., section 41F, Cap. 41 mirrors section 185, SFO).   

The Court also highlighted, in disallowing the SFC’s claims for the non-compliance of the requests relating to Company C, the duty of the SFC to act fairly, specifically the SFC should not resile from the position that it would no longer take action against OSGL about matters relating to Company C.  This serves as a reminder that the Court will look at the overall conduct of the SFC and arguably other regulators in determining whether, as a matter of fairness, an order under section 185(1), SFO (or an equivalent provision) should be made.

This case also highlights several important points and reminders on service of notices issued by regulators. In particular, affirmations of service should be made by the individual who personally posted / served the subject document, and service by email on a director of a corporation under investigation may not suffice.  In respect of the latter, the Court held in this case that there is no evidence showing that the director had sought to obtain or been granted SFC’s waiver of secrecy to share the 2023 Notice with OSGL and as such, there is no basis to say that the director would have passed the notice to OSGL.     
 
The Court did not address (nor is it clear whether it was argued) that such waiver or consent should be implied in the SFC sending the 2023 Notice directly to the RO by email.  Going forward, regulators may be more mindful to expressly grant consent in similar situations upfront.  It remains to be seen whether this point will be clarified on an appeal or in similar proceedings subsequently commenced by the SFC or other regulators. 

---