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On 20 January 2022, the Securities and Futures Commission (SFC) reprimanded and fined Zhonghui International Futures Company Limited (ZIFC) HK$5 million for breaching know-your-client, anti-money laundering and counter-terrorist financing requirements (AML/CFT) between May 2017 and July 2018. ZIFC is licensed to carry on Type 2 (dealing in futures contracts) regulated activity.
The SFC found that ZIFC had permitted clients to use their designated customer supplied systems (CSSs) to place orders, yet failed to conduct adequate due diligence on the CSSs such that it could not properly assess the associated AML/CFT risks. Also, ZIFC did not implement two-factor authentication for clients to log in to their trading accounts via CSSs.
Furthermore, the SFC identified eight of ZIFC’s clients who authorised third parties to place orders for their accounts via CSSs, but ZIFC took no reasonable steps to establish those clients’ and their ultimate beneficial owners’ true and full identities and did not make proper enquiries. There was also a failure to establish an effective monitoring system that detects unusual money movements.
This enforcement action reflects that compliance with AML/CFT requirements is one of SFC’s areas of focus, in line with SFC’s consultation conclusions on its AML/CFT guidelines published in September 2021.
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On 29 December 2021, the Court of First Instance (“CFI“) handed down its decision in the case of 廣東順德展煒商貿有限公司v Sun Fung Timber Company Limited [2021] HKCFI 3823, setting aside an enforcement order granting leave to the Applicant 廣東順德展煒商貿有限公司 (“GD“) to enforce an arbitral award made by Zhanjiang Arbitration Commission against the Respondent Sun Fung Timber Company Limited (“Company“). The order was set aside on three grounds, namely (i) the arbitration agreement was invalid; (ii) the Company was not given proper notice of arbitration and was unable to present its case; and (iii) enforcement of the award would be contrary to public policy – a ground which rarely succeeds.
The Company was a business operation carrying on timber retail business owned equally by two families (represented by DL and ST). The relationship between the families went sour and in the course of winding down the Company, ST entered into a suspicious transaction with GD on behalf of the Company. The “unusual features” of the contract (“Contract“) were found by the Court to include the following:
On delivery, GD complained that cracks were detected in the marble and rejected the goods. Arbitration commenced one month after the dispute arose and an award was handed down 4 days after the commencement of the proceedings. During the proceedings, ST accepted liability on behalf of the Company and agreed to pay damages in the sum of RMB 59 million to GD (the “Award“). GD subsequently sought to wind up the Company on the basis of the Award and to enforce the Award in Hong Kong.
What appears surprising is that DL had no knowledge of the Contract, the arbitration or the Award at all until he was served by the Official Receiver as a contributory of the Company during the winding-up petition. What is more surprising is that the notice to arbitrate, the winding-up petition, and the order granting leave to enforce the Award were all served to the Company at the Company’s outdated registered office which has already been sold during the winding-down exercise.
Based on the above facts, the Court concluded that GD and ST carried out an orchestrated plan to make the Company indebted under the Award. This exercise would enable GD and ST to receive valuable assets and to avoid the need for ST to share the remaining assets of the Company with DL after the winding up. In ruling that ST “acting entirely in furtherance of his own personal interest”, the Court concluded ST had no authority to enter into the Contract (and consequently the arbitration agreement) on behalf of the Company. The Company was unable to present its case given its lack of proper notice. Notably, the Court also set aside the enforcement order on the ground of public policy, commenting that the arbitral process and the Award was “misused by ST with the assistance of GD” and it would be “shocking to the conscience of the Court” if enforcement of the Award is allowed.
Although the Hong Kong courts have all along adopted a pro-arbitration stance, this case demonstrates that Hong Kong courts are always ready to step in at the right moment to prevent Hong Kong from becoming a haven for impropriety, thereby maintaining Hong Kong’s integrity as a dispute resolution centre.
On 14 January 2022, the Hong Kong Court of Appeal dismissed the appeal by China Merchants Port Holdings Company Limited (the “Defendant“) against the decision of Mimmie Chan J, by which the judge dismissed the Defendant’s application to stay the action in Hong Kong on grounds of forum non conveniens in favour of the Civil Chamber of the Court of First Instance in the Republic of Djibouti. The action in Hong Kong was brought by companies associated with DP World Limited (the “Plaintiffs“) against the Defendant on 20 August 2018, alleging the latter intended to, and did, induce or procure the Djibouti Government to breach its agreements with the Plaintiffs which grant the Plaintiffs exclusive right to develop and operate the Djibouti Doraleh Port.
Despite having obtained an indemnity from the Djibouti Government whereby the Government warrants that its partnership agreement with the Defendant, pursuant to which the Defendant participated in the development of the Doraleh Multipurpose Port, was not in breach of the Government’s agreements with the Plaintiffs, the Defendant nonetheless found itself in legal troubles 10 years after signing the partnership agreement. China Merchants Port will now face a legal battle in Hong Kong that is likely to be prolonged, expensive and fiercely fought.
It is advised that Chinese companies considering to invest in overseas infrastructure to partner with Hong Kong law firms with expertise in construction law and dispute resolution to avoid finding themselves in the unfortunate situation that China Merchants Port is now in.
On 4 January 2022 the Stock Exchange of Hong Kong Limited (“Exchange“) issued a Statement of Disciplinary Action against China Properties Investment Holdings Limited (the “Company“) and five of its current and former directors (the “Directors“).
The Company’s wholly owned subsidiary made two disposals of listed shares on the Company’s behalf in 2019 (the “Two Disposals“). Each of the Two Disposals constituted a disclosable transaction, but the Company failed to announce the Two Disposals within the required time. Thus, the Listing Committee found that the Company had breached Listing Rule 14.34. This was, in fact, a repeated breach – in 2018, the Company had already been warned by the Exchange after a similar incident. The Listing Committee also found that the Directors had failed to discharge their duties to ensure that the Company had adequate and effective internal controls for the purpose of complying with the notifiable transaction requirements. As a result, the Exchange directed the Company to conduct an internal control review for procuring compliance with Chapter 14 of the Listing Rules and each of the Directors to undergo training on regulatory and legal topics and Listing Rule compliance.
The Exchange is more likely to take disciplinary actions and impose public sanctions on those responsible where the breach is a repeated one after a warning or guidance has been given by the Exchange, as in this case. To avoid disciplinary actions of this nature, directors should provide timely responses when breaches or deficiencies have been discovered.
The Insurance Authority (IA) appointed managers to take full control of the affairs and property of Target Insurance Company Limited (Target) on 7 January 2022. Pursuant to the IA’s press release, the IA took this action to maintain market stability and protect policy holders’ interests, on the grounds of (1) Target’s potential breaches of statutory requirements relating to its investment activities and asset allocation and (2) potential deficiencies in Target’s corporate governance. The management of Target denies these allegations, according to news reports.
The IA’s power to appoint managers is provided under section 35(2)(b) of the Insurance Ordinance (Cap.41) (IO). Under the IO, the IA may only invoke such powers when, among others:
The IA’s regulatory powers over insurers under the IO also include:
It is the first time that the IA exercises its power to appoint managers since its establishment in 2015. Insurers should pay close attention to developments in this case as this may set a precedent for IA’s approach to exercise such powers in future.
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