In Securities and Futures Commission v Wong Yuen Yee and others (30/12/2016, HCMP241/2015), the Court of First Instance of the Hong Kong High Court (CFI) ordered the Securities and Futures Commission (SFC) to produce relevant documents obtained in its investigations to respondents of disqualification proceedings. In view of the SFC's extensive investigative powers, the CFI ruled that the SFC should disclose all materials available for potential use in trial, including documents which may undermine its case. Our alert discusses this important development and its implications.

Implications for respondents of disqualification proceedings

The SFC possesses a wide range of investigative powers in obtaining information and compelling a person to attend an interview to answer questions under the Securities and Futures Ordinance (the Ordinance). Unlike criminal investigations, an interviewee does not have the right to remain silent in SFC investigations. Non-compliance is a criminal offence punishable by imprisonment and fines.

In this case, the documents sought to be disclosed are materials gathered by the SFC through the exercise of such powers. Most of the information obtained by the SFC was not available to the respondents of disqualification proceedings. As in some cases, the respondents resigned before the disqualification proceedings were commenced and lost access to the relevant documents in their capacity as directors.

The CFI’s decision reinforces the SFC’s duty to act fairly and confirms the right to a fair trial for respondents of disqualification proceedings. It is significant in a number of aspects:

  1. Although disqualification proceedings are civil and protective in nature (as opposed to criminal and punitive), the Court imposed a duty of disclosure on the SFC that approached the duty of the prosecution in criminal proceedings.
  2. In view of the coercive investigative powers of the SFC and the severe consequences following a disqualification order, the Court required the SFC to take a generous view on disclosing all relevant documents to the respondents - documents which may fairly lead a party to further inquiries.
  3. The Court said the SFC should ensure a just outcome and be fair-minded in making available all potentially useful materials. By analogy, the heightened disclosure obligations may be extended to other regulators with similar investigative powers.
  4. A potential implication is that the SFC may adopt a more cautious approach when exercising its investigative powers to obtain information which may later be disclosed to respondents in future court proceedings.
  5. From a respondent's perspective, increased access to information may prove to be pivotal in identifying key evidence for defending his or her case.

Background of the case

The case is concerned with a petition by the SFC under s. 214 of the Ordinance for a disqualification order against four former directors of InnoTech Holding Limited ("Inno-Tech") whose shares are listed on the Growth Enterprise Market of the Hong Kong Stock Exchange. The SFC alleged that the directors were negligent and their conduct amounted to misfeasance or misconduct, resulting in unfair prejudice to the shareholders of Inno-Tech.

In the early days, Inno-Tech was principally engaged in the business of home intelligent automated systems. Between 2007 and 2008, Inno-Tech decided to expand into the hotel sector and purchased three hotels in China for a total consideration of RMB47.5 million. In 2009, Inno-Tech further broadened its business and acquired the interests in a gold mine at HK$99.5 million. However, both the hotel and the gold mine businesses ended up in failure. In 2009, the acquisition of one of the hotels was not completed, and the other two were eventually sold at substantially discounted prices. Likewise, in 2010, the interests in the gold mine were sold at a substantially discounted price. Inno-Tech suffered an aggregate loss of more than HKD 120 million.

The SFC petitioned under s.214 to disqualify the respondents on the grounds that they as directors had failed to carry out adequate due diligence, obtain independent assessments on the acquisition targets, or negotiate the purchase price prior to the acquisitions. In defence, the respondents argued that they had honestly and reasonably relied on the advice of independent third parties; that the sales and purchases were executed in good faith; that extensive due diligence work was conducted; and that the decisions were unanimously approved by the board.

On 20 October 2015, after filing its opposition to the SFC's petition, the respondents issued a summons for discovery seeking, among other things, all directions under s. 179 and all notices issued under s. 183 under the Ordinance, together with related documents, including interview records. The SFC resisted the application.

It is useful to note the court's view that in order to properly consider whether certain inferences should be drawn (in particular, those inferring negligent failure on the part of the respondents), it was pertinent to see at least in broad terms what the scope of the SFC investigation was and what information the SFC was actually able to obtain. In the end, the CFI held that the SFC should disclose documents relating to "matters in question" and ordered the SFC to file a list of all materials that are relevant to the disqualification proceedings.

Actions to consider and Conclusion

The CFI's decision illustrates the Court's willingness in imposing a wider duty of disclosure on the SFC (and potentially other regulators) to ensure that respondents of disqualification proceedings are treated fairly in court. Nevertheless, we believe the position is far from settled. In view of its broad implications on the SFC's investigative powers and disqualification proceedings commenced or to be commenced by the SFC, the decision is likely to be appealed. We will monitor developments and provide updates in due course. Meanwhile, we recommend that all potential and current respondents of investigations and disqualification proceedings seek legal advice so that they can devise appropriate strategies to protect their position.