On 30 June 2023, The Stock Exchange of Hong Kong Limited (the “Exchange“) published conclusions to its consultation on Proposals to Expand the Paperless Listing Regime and other Rule Amendments. The Exchange will adopt all the proposals outlined in the consultation paper with minor modifications. The key changes are outlined below:

(i). Reducing documents submission requirements and removing unnecessary signature or certification requirements

The changes include the removal of over 50 documents submission requirements, codification of obligations in various undertakings, confirmations and declarations into the Listing Rules and Guidance Materials, consolidation of submission requirements for personal particulars of directors / supervisors, and the inclusion of overarching obligations in Form A1 for new applicants and sponsors. The signature and certification requirements for certain submission documents have been removed.

(ii). Mandatory electronic only submission

The Exchange now mandates electronic means as the only mode of submission, unless otherwise specified in the Listing Rules or required by the Exchange.

The requirement for submission of multiple copies of certain documents in hard copy has been replaced with a requirement for submission of only one electronic copy.

The Exchange will explore with the Companies Registry the digitalisation of the prospectus authorisation and registration processes and will issue guidance to inform the market of the final arrangements.

(iii). Electronic dissemination of corporate communications by listed issuers

Listed issuers are obliged to disseminate corporate communications electronically to their securities holders if this is permitted by applicable laws and regulations and their constitutional documents, but shall provide hard copies upon holders’ request. If the issuers implement any new arrangements, they must send a one-time notification to their holders individually in hard copy or electronically to inform them of the new arrangements (before implementation) and solicit the email addresses of securities holders.

Listed issuers must send Actionable Corporate Communications, which are “any corporate communication that seeks instructions from issuer’s securities holders on how they wish to exercise their rights or make an election as the issuer’s securities holders” to securities holders individually, either in electronic form if functional electronic contact details have been provided, or in hard copy if not.

The securities holders are responsible for providing functional electronic contact details when solicited by the issuer. If the issuer has made reasonable efforts to contact the securities holders using the electronic contact details provided, the Exchange will consider the issuer to have complied with their requirements.

Implementation dates – minor and housekeeping amendments to the Listing Rules have already come into effect on 8 July 2023, while most of the amended Listing Rules will take effect on 31 December 2023.

Transitional arrangements for electronic dissemination – existing listed issuers and listing applicants need to review their constitutional documents for any provisions that might prevent electronic dissemination of corporate communications to their securities holders in compliance with the Listing Rules before the effective date.

If such provisions are present, issuers must amend their constitutional documents, provided that it is allowed by the applicable laws and regulations. Issuers have until their first Annual General Meeting (“AGM”) after 31 December 2023, to implement the necessary amendments. However, if the restriction is due to a requirement under applicable laws and regulations, they have until their first AGM following the removal of the relevant restriction to implement the necessary amendments.

Listing applicants that are to be listed on the Exchange on or 31 December 2023 must comply with the amended Listing Rules upon listing, as long as they are permitted under their applicable laws and regulations.

A brokerage firm (the “Firm”) has recently been reprimanded and fined $3.4 million by the Securities and Futures Commission (the “SFC“) for various regulatory breaches and internal control failures relating to segregation of client money and provision of statements of accounts to clients.

From May 2015 to August 2017, the Firm:-

(i). under-segregated client money amounting to HK$300 to HK$1.05 million by withdrawing client money held in its segregated client accounts to meet the settlement obligations of five clients when there were negative or insufficient account balances for each of the clients in the segregated client accounts to cover the settlement amounts, in violation of the Firm’s internal policies and the Securities and Futures (Client Money) Rules (the “Client Money Rules”);

(ii). delayed transferring client money from its house account to segregated client accounts, thus breaching section 4(4) of the Client Money Rules which requires client money to be paid into segregated client accounts within one business day of receipt;

(iii).  issued inaccurate statements of accounts to three clients, which the Firm explained was the result of the negligence or inadvertence of the officers who prepared those statements manually; and

(iv). failed to provide statements of accounts to several clients within the prescribed time limit under section 11(4)(b) of the Securities and Futures (Contract Notes, Statements of Account and Receipts) Rules (the “Contract Notes Rules”).

A failure to ensure that client money is protected adequately in accordance with the regulatory requirements is a serious matter. It can be seen from disciplinary actions, including the abovementioned case, relating to segregation of client money and provision of statements of accounts, that the SFC has made it a high priority to ensure that licensed corporations are complying with the Client Money Rules and the Contract Notes Rules. In this regard, it would be prudent for licensed corporations to perform regular reviews on the adequacy of controls to protect client money, identify any deficiencies and put in place measures to ensure full compliance.

Further to our recent news update on the Court of Final Appeal judgment in Re Guy Kwok-Hung Lam [2023] HKCFA 9 (“Guy Lam“), on 30 May 2023, in Re Simplicity & Vogue Retailing (HK) Co., Limited [2023] HKCFI 1443, the Court of First Instance considered the effect of Guy Lam in the context of arbitration clauses in winding up proceedings, and remarked that the ratio in Guy Lam only applies to exclusive jurisdiction clauses, but not to arbitration clauses.

In Re Simplicity & Vogue Retailing (HK) Co., Limited, the subject company acted as the guarantor to discharge obligations of an issuer of certain convertible bonds under a bond instrument. Upon the issuer’s default, the company failed to satisfy a statutory demand within time limit and a petition was presented to wind up the company. The decision by Linda Chan J concerned the application by the company to, among other things, file an affirmation in opposition to the petition out of time and adjourn the petition hearing.

The court held that, as the company failed to demonstrate any good reasons to justify the extension of time or the adjournment sought, there was no proper basis for the court to grant the company’s application, and accordingly, granted a winding-up order. In course of her decision, Linda Chan J also dealt with the grounds raised in the proposed affirmation in opposition, namely:

1. there was a bona fide dispute as to whether the guarantee had been discharged by reason of a variation of the principal contract between the petitioner and the issuer (Discharge Ground); and
2. there were arbitration clauses in both the bond instrument and in the guarantee such that the dispute should be referred to arbitration (Arbitration Ground).

In respect of the Discharge Ground, the court found that it was wholly without merit and consequently there was no proper basis to require the parties to refer the “dispute” to arbitration, even if the approach in Guy Lam were to be applied.

In respect of the Arbitration Ground, the court remarked that the ratio in Guy Lam (namely that in an ordinary case of an exclusive jurisdiction clause, absent countervailing factors such as the risk of insolvency affecting third parties and a dispute that borders on the frivolous or abuse of process, the petitioner and the debtor ought to be held to their contract) only applies to exclusive jurisdiction clauses, but not to arbitration clauses.  As far as arbitration clauses are concerned, the principles set out in the But Ka Chon v Interactive Brokers LLC [2019] 4 HKLRD 85 and Sit Kwong Lam v Petrolimex Singapore Pte Ltd [2019] 5 HKLRD 646 should be followed, namely whether or not there is a bona fide dispute on substantial ground, and in that context, the court will also consider whether the 3 requirements in Lasmos are satisfied. The Court does not read Guy Lam as laying down any general rule that if the agreement which gave rise to the petitioning debt contains an arbitration clause and there are no supporting creditors to the petition, the court must dismiss or stay the winding-up petition. To invariably refuse to consider the merit of the “defence” and require to parties to litigate their dispute in arbitration is to adopt a mechanistic approach and fetter the exercise of the court’s discretion. Absence any genuine “dispute” in respect of the debt, as in this case, there is no proper basis to require the parties to refer their “dispute” to arbitration.

It should be noted that the observations re Guy Lam are, strictly speaking, obiter, as the court has already concluded that there is no proper basis to grant the company’s application to adjourn the petition hearing and the Discharge Ground is without merit. Nevertheless, the arguments on Guy Lam were considered “in view of the importance of the point which arises in many cases coming to the Companies Court.” Given the state of flux in this area of law, it may be expected that more cases concerning the effectiveness of arbitration clauses in winding up proceedings will come to be decided by the courts. Until further deliberation by the appellate courts, it appears that a distinction is drawn in respect of the treatment of exclusive jurisdiction clauses and arbitration clauses in a bankruptcy / winding up context.

For further details, the full judgment can be found here.

On 6 February 2023, the Court of Final Appeal (the “CFA“) handed down its judgment on the long running dispute between Citibank N.A. (“Citibank“) and its corporate customer, PT Asuransi Tugu Pratama Indonesia TBK (“Tugu“), in PT Asuransi Tugu Pratama Indonesia Tbk v Citibank N.A. [2023] HKCFA 3 concerning “one of the oldest and most litigated questions in commercial law”, namely “the rights of a corporate customer against a banker who has paid money out of its account on the dishonest instructions of an authorised signatory”.

The dispute concerned 26 dishonestly authorised transfers made out of Tugu’s bank account with Citibank by Tugu’s authorised signatories between 1994 and 1998.  After all funds in the account were paid out, Citibank closed the account as instructed by Tugu’s authorised signatories in 1998.  Tugu demanded payment from Citibank in 2006 and subsequently commenced Court proceedings in 2007.

The CFA allowed Tugu’s appeal.  It held that Tugu’s claim in debt was not time-barred as the debt, undiminished by the unauthorised withdrawals, still subsisted in 2006 when Tugu demanded payment from Citibank, and time did not begin to run for limitation purposes until then.  On the face of the information in Citibank’s hands by 1998, the whole operation of the account was unauthorised, including its closure.  The CFA provided guidance in its judgment (with Lord Sumption giving the leading judgment) on what constitutes notice so as to require a bank to make inquiries before paying out in accordance with its mandate.

The CFA decision reminds banks of their duty to customers and provides guidance on when it puts them “on inquiry” before debiting customers’ accounts.  Although there is no general obligation to inquire into the authority of their customers’ agents, in order to allow banks to comply with their mandate with customers, they should be vigilant in assessing whether the information in hand calls for inquiry.  As such, banks should put in place policies and systems enabling them to flag impropriety and potential fraudulent transactions.

Victims who are out of pocket should consider the availability of a straightforward debt claim against the relevant bank.  The CFA has clarified that time to bring a debt claim does not begin to run for limitation purposes until a demand for the balance in the account has been made.  For such debt claims, the banks cannot run a defence of contributory negligence.

For a more detailed summary of the CFA judgment, please refer to our article

In the recent case of Re Guangdong Overseas Construction Corporation [2023] HKCFI 1340, the Court of First Instance (the “CFI“) offered useful guidance on the consensus for mutual recognition of and assistance to insolvency proceedings between the courts of the Mainland and Hong Kong (the “Cooperation Mechanism“).  Since the Cooperation Mechanism came into place in 2021, the Hong Kong court had only recognised and provided assistance to the administrators appointed by the courts in the Mainland in two instances in Re HNA Group Co., Ltd [2021] HKCFI 2897 and Re Peking University Founder Group Company Limited [2021] HKCFI 3817.

In the present case, the administrator appointed by the Guangzhou Intermediate People’s Court of Guangdong Province (the “Guangzhou Court“) over Guangdong Overseas Construction Corporation (the “Company“), a company established in the Mainland, applied for recognition and assistance from the Hong Kong court.  The CFI considered whether the Guangzhou Court, which is a court outside the 3 Pilot Areas designated by the Supreme People’s Court ^[1], may initiate a request for assistance to the Hong Kong court in light of the terms of the Cooperation Mechanism.

The CFI first reiterated that the jurisdiction to recognise and assist foreign office-holders appointed by a court of another jurisdiction derives from common law.  The Cooperation Mechanism and the “Procedures for a Mainland Administrator’s Application to the Hong Kong SAR Court for Recognition and Assistance – Practical Guide” (the “Practical Guide“) only serve the purpose of prescribing the procedure and the manner in which an application is to be made.  As such, even though the Cooperation Mechanism does not extend to a Mainland court outside the Pilot Areas (such as the Guangzhou Court in the present case), this would not be a factor taken into account by the court since reciprocity is not a requirement for recognition and assistance under common law, and it would be for the Supreme People’s Court to decide whether it is appropriate for courts outside the Pilot Areas to apply for recognition and assistance from the Hong Kong court.  With that said, the CFI noted that, as a matter of practice and to ensure consistency, applicants seeking recognition and assistance should follow the Practical Guide when a letter of request is issued by a court outside the Pilot Areas in the future.

Having considered the above principles, the CFI granted an order to recognise the liquidation of the Company and the appointment of the administrator, and to provide the necessary assistance to the administrator, being satisfied that:

1. The insolvency proceeding of the Company is a collective insolvency proceeding under the supervision of the Guangzhou Court;
2. The insolvency proceeding is conducted in the Mainland, which is both the place of incorporation of the Company and its centre of main interest;
3. The Company has valuable asset in Hong Kong which necessitated assistance for the administrator to carry out his duties; and
4. The order made is consistent with the substantive law and public policy of the court.

To conclude, the fact that a request for recognition and assistance is initiated by a Mainland court outside the Pilot Areas does not prevent the Hong Kong court from exercising its common law jurisdiction to provide assistance.  After all, the test adopted by the court is to assess whether the criteria for recognition and assistance are satisfied on a case-by-case basis.

^[1] Namely, the People’s Courts in Shanghai Municipality, Xiamen Municipality in Fujian Province and Shenzhen Municipality in Guangdong Province.