A brokerage firm (the “Firm“) has recently been publicly reprimanded and fined HK$2.8 million by the Securities and Futures Commission (“SFC“) for (i) repledging clients’ securities collateral with a bank as collateral for financial accommodation provided to the Firm without a valid standing authority and (ii) providing monthly statements with incomplete and incorrect information to its clients.

From January to early March 2021, the Firm repledged the securities collateral belonging to 1009 clients with a market value of over HK$200 million with a bank as collateral for financial accommodation provided to the Firm, relying on standing authority which had already expired in 2020. This was caused by a technical bug in the Firm’s operating system, which omitted to automatically generate and send notices to clients for renewal of standing authority which expired on 31 December 2020.

Further, between May and November 2020, the Firm provided monthly statements with incomplete and incorrect information to a total of 930 clients, failing to include details of the contracts entered into on the last trading day of the month. This was caused by another technical bug in the office system which was upgraded in May 2020, which had not been identified in the user acceptance test conducted earlier on.

In light of the above, the Firm has breached:

• sections 7 and 10 of the Securities and Futures (Client Securities) Rules;
• section 11(3) of the Securities and Futures (Contract Notes, Statements of Account and Receipts) Rules; and
• General Principles 7 (Compliance) and 8 (Client assets) and paragraphs 11.1 (a) (Handling of client assets) and 12.1 (Compliance: in general) of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission.

This case serves as a good reminder to all licensed firms that it is important to establish a comprehensive information technology risk management policy which includes good practices and effective controls over software adoption and upgrade. Comprehensive testing, with test cases covering all critical functions, must be conducted before production deployment to ensure reliability of the system and to avoid breaching regulatory requirements due to technical failures.

A person carrying on business as a money lender in Hong Kong must obtain a money lender licence and operate in compliance with the licensing conditions and the Money Lenders Ordinance (Cap. 163) (“MLO“). The number of licensed money lenders has grown quickly in recent years, and there are more than two thousand licensed money lenders in Hong Kong.

Following a recommendation by the Consumer Council and having studied practice and development of money lending business, the Hong Kong government decided to amend the MLO to lower the statutory interest rate cap and the extortionate rate, which have not been revised since 1980. In October 2022, the Legislative Council passed the amendments to sections 24(1) and 25(3) of the MLO.

Effective from 30 December 2022, the statutory interest rate cap for lending has been lowered from 60% to 48% per annum, and the extortionate rate has been lowered from 48% to 36% per annum.

A person commits an offence if the person lends or offers to lend money at an effective rate of interest which exceeds the interest rate cap (which is now 48% per annum). Further, an agreement for the repayment of a loan or for the payment of interest on a loan in respect of which the effective rate of interest exceeds the extortionate rate (which is now 36% per annum) shall be presumed to be an extortionate transaction. Where the court is satisfied that the transaction is extortionate, the court may reopen the transaction so as to do justice between the parties having regard to all the circumstances.

It is to note that the reduced rates apply to loan agreements or lending arrangements subject to the MLO which are entered into on or after 30 December 2022.

Many contracts provide that before a dispute is to be resolved by arbitration, certain conditions are to be first fulfilled, such as a requirement to mediate before commencing arbitration.  The Hong Kong Court of Appeal in the recent decision in C and D (Arbitration) [2022] 3 HKLRD 116 held that where the parties have agreed for a dispute to be referred to arbitration, the court will presume that the parties also agreed that the arbitral tribunal, and not the court, is to determine whether pre-arbitration conditions have been fulfilled, unless the arbitration agreement provided otherwise.

C and D (Arbitration)

The decision concerned an arbitration agreement which stated that prior to any reference to arbitration, there should be a request in writing for negotiation between the parties (the condition precedent to arbitration).

The parties agreed that the relevant dispute fell within the scope of the arbitration agreement, but disagreed on whether the condition precedent was satisfied in the circumstances, and on whether the court or the arbitral tribunal should determine whether the pre-arbitration conditions were fulfilled (the procedural issue).

The Court of First Instance of the High Court decided that the procedural issue was an issue of admissibility of claim, rather than an issue of jurisdiction of the arbitral tribunal.  Overseas case law has defined an issue of admissibility to be whether a claim is admissible before the arbitral tribunal and is to be decided by it, and an issue of jurisdiction to be whether the arbitral tribunal has jurisdiction at all to hear the claim, such that the claim is to be decided instead by the court.

The main ground of appeal was that the learned Judge erred in two respects.  First, the court ought not adopt the distinction between ‘admissibility’ and ‘jurisdiction’, because such distinction is not found in Article 34(2)(a)(iii) of the UNCITRAL Model Law (adopted in Hong Kong by Section 81 of the Arbitration Ordinance).  The argument was the statute only provided that an arbitral award may be set aside if ‘the award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration’.  Second, even if such a distinction existed, the pre-arbitration conditions in question were jurisdictional in nature, because in contract law, where an agreement is subject to a condition precedent, before the occurrence of such condition, there is no duty on either party to perform as agreed.

The Court of Appeal held that, although the distinction between ‘admissibility’ and ‘jurisdiction’ is not found in Article 34(2)(a)(iii), it is a concept rooted in the nature of arbitration itself and may properly be relied upon for the interpretation and application of Section 81.  The distinction can be given proper recognition through statutory construction, namely, that a dispute which goes to the admissibility of a claim rather than the jurisdiction of the tribunal should be regarded as a dispute ‘falling within the terms of the submissions to arbitration’ under Article 34(2)(a)(iii).  Ultimately, the test is whether or not the parties intended the question of fulfilment of the condition precedent is to be determined by the arbitral tribunal.

The Court of Appeal further held that whether the pre-arbitration procedural requirement has been fulfilled is usually to be decided by an arbitral tribunal, to give effect to the parties’ presumed intention to have any dispute arising out of their relationship to be decided by the same tribunal, and to achieve a quick, efficient and private determination of their dispute by arbitration.  Such presumed intention is only rebutted if the language makes it clear that certain questions were intended to be excluded from the arbitrator’s jurisdiction.

The full judgment can be found here.

Takeaway

Whether an issue went to the ‘admissibility of claim’ or ‘jurisdiction of the arbitral tribunal’ is to be decided by whether the parties intended for the issue to be determined by the arbitral tribunal.  If the parties intend to restrict the scope of disputes to be referred to arbitration, that needs to be written clearly in the dispute resolution provision.

Our trainee solicitor Adrian Luk assisted in preparing this article.

On 4 November 2022, our Senior Associate Iris Cheng presented a webinar for the members of The Hong Kong Federation of Insurers on “The Insurance Authority’s Power of Inspection and Investigation”.  The session was attended by nearly 80 participants including Board members, C-suite executives and legal and compliance functions from various insurers.

We are pleased to have received feedback that the webinar has provided practical tips, was very useful and that the speaker is very well-prepared and knows the subject well.

Further to our news article published on 28 June 2022, the Honourable Madam Justice Linda Chan revisited the second requirement under Section 327 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap.32) (“Second Requirement“) in Re NewOcean Energy Holdings Limited [2022] HKCFI 2501 on 8 August 2022. In granting the winding up order against the Bermuda-incorporated and Hong Kong-listed NewOcean Energy Holdings Ltd (“Company“), the Court indicated that it will readily make a winding up order against Hong Kong-listed foreign companies with substantial assets in Hong Kong.

The Second Requirement

The issue in this case was whether the assets of the sub-subsidiaries of the Company (“Hong Kong Subsidiaries“) in Hong Kong could be considered as a “benefit” in satisfying the Second Requirement. In this regard, the Honourable Madam Justice Linda Chan observed that,

• First, the recognition of foreign liquidators is a question of fact.
• Since the Company had already been wound up in its country of incorporation by the Court of Appeal in Bermuda, there was no basis to suggest that Bermuda-appointed liquidators would not be recognised in BVI, the country of incorporation of the immediate holding company of the Hong Kong Subsidiaries (“BVI Company“).
• Secondly, the assets and directors of the Hong Kong Subsidiaries were subject to the jurisdiction of Hong Kong courts. Therefore, even if the Hong Kong directors were unwilling to cooperate, liquidators appointed by Hong Kong courts under Cap.32 would be able to bring proceedings against the Hong Kong Subsidiaries and tap into their underlying assets. The making of a winding-up order would thus serve some “useful purpose” to the creditors and was considered as a “benefit” in satisfying the Second Requirement.

Reconciliation with Re China Huiyuan

Earlier, in Re China Huiyuan Juice Group Limited [2020] HKCFI 2940, the Honourable Mr Justice Harris decided that the common law default position was that the court will recognise only the authority of a liquidator appointed under the law of the country of incorporation of the company. The limited exception to the default position related to the recognition for the purpose only for a foreign liquidator introducing a scheme of arrangement (see Re China Huiyuan at [37-38]).

Against this backdrop, one of the creditors in Re NewOcean Energy relied on Re China Huiyuan to assert that Hong Kong-appointed liquidators would not be recognised in BVI and thus would not be able to get control of the BVI Company. However, the context of Re NewOcean Energy distinguishes from Re China Huiyuan in that the present proceedings concerned an ancillary liquidation where the Company had already been wound up in its country of incorporation. Thus, the two cases are not in conflict as the recognition of foreign liquidators is, as mentioned above, ultimately a question of fact.

In fact, the Honourable Madam Justice Linda Chan’s approach can be seen from her decision earlier this year in Re Up Energy Development Group Limited [2022] HKCFI 1329 where she held that in a Hong Kong ancillary liquidation, it would be “unreal or artificial to suggest that the Hong Kong Companies Court should ignore all the affairs carried out by the company in Hong Kong … and leave the control and supervision over the winding up to the court of the place of incorporation. This is particularly so where the company was incorporated in offshore jurisdictions like the BVI, Cayman Island and Bermuda which do not require the company to carry on any business or meaningful activity in the place of incorporation …” (see Re Up Energy at [48]).

As more and more overseas companies with similar corporate structure come before the Hong Kong Companies Court, the judgment in Re NewOcean Energy consolidates the reasoning in Re Up Energy and seemingly so, has reduced Hong Kong courts’ deference to the courts of the country of incorporation when considering whether to wind up a foreign company. This judgment is of importance as it demonstrates that the Hong Kong courts will readily wind up foreign companies with directors and assets located in Hong Kong, particularly when liquidators are likely to benefit from the exercise of their powers under Hong Kong legislation.