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Article on risk management published in the Hong Kong Lawyer Journal

In collaboration with Essar Insurance Services Limited, Managers of the Professional Indemnity Scheme (“PIS”), we have recently published an article on “Solicitor’s Undertaking” in the Hong Kong Lawyer Journal to highlight risk management issues learnt from the handling of PIS claims.  It can be accessed here .

This article delves into common scenarios in which solicitor’s undertakings are given, emphasises the importance of honouring these undertakings, and sheds light on the potential consequences of breaching them.

An RME bulletin on the same topic has also been published, which can be accessed here.

Should you have any enquiries or require assistance regarding this topic or professional negligence / indemnity generally, please do not hesitate to contact us.

 

Date:
16 May 2024

The Court of Final Appeal upheld the lawfulness of the Letter of No Consent Regime

Further to our previous articles[1] on the lower court decisions’ on the validity and constitutionality of the Letter of No Consent (“LNC“) Regime (“Regime“), the highest court of Hong Kong, the Court of Final Appeal (“CFA“), has put the uncertainty of the Regime to rest and confirmed its lawfulness.

The Appellants in Tam Sze Leung & Ors v Commission of Police [2024] HKCFA 8 lodged a final appeal to the CFA based on four questions of law. To begin with, it is helpful to understand the Appellants’ characterisation of the Regime which is common-themed across the four questions.

The Appellants’ Mischaracterisation of the Regime

At the outset, the CFA noted that the Appellants did not challenge the constitutionality of the related legislation, i.e. sections 25 and 25A of the Organised and Serious Crimes Ordinance (Cap 455) (“OSCO“).  Rather, they challenged the Regime as operated by the police, e.g. as “an informal asset freezing mechanism developed by the police” and that when issued, “LNCs invariably cause the recipient to refuse to deal with that property for fear of committing an offence under OSCO section 25(1)” ([14]).

The CFA noted that the police have developed a set of operational policies and procedures which are set out in the Force Procedures Manual (“FPM“), and that in giving effect to the FPM and the OSCO, a specific sequence of events would likely take place when the police receive information of possible money laundering, which includes the issuance of LNCs followed by constant reviews and endeavours to obtain a restraint order. Under Section 25A(2)(a) of OSCO, the issuance of LNCs amounts to withholding of a grant of immunity to the banks against criminal liability in dealing with the relevant funds ([51]), and if the banks decide to deal with the funds in question, it runs the risk of incurring criminal liability given that the information provided by the police is likely to constitute reasonable grounds for banks to believe that those funds represent the proceeds of an indicatable offence ([48]).

However, the CFA clarified that no property belonging to the suspect is ever held or seized by the police. It is the banks who maintain the accounts for the customers, and in accordance with the anti-money laundering requirements, decide whether or not the customers should be allowed to draw on the suspect funds ([47]).  Although the banks’ desire to avoid criminal liability when LNCs are issued (i.e. no immunity being granted by the police) might have motivated them to freeze the accounts, the freeze remains to be the bank’s act ([48]).

As such, the CFA held that the Appellants mischaracterised the freezing of the accounts as the actions of the police.

The Four Appeal Questions

With the analysis of the common-themed flaw among the four questions, we briefly summarise the CFA’s findings on the four appeal questions as follows.

Question 1A: Ultra Vires Ground

The major flaw found by the CFA in this question is that according to the Appellants, in order for the issuance of LNCs to be intra vires (i.e. within the legal power or authority granted to the police), they had to be authorised by OSCO and that in the absence of such authorisation in the ordinance, those actions were ultra vires ([59]). The CFA noted that the Appellants mischaracterised the authorisation to come from OSCO, rather than the Police Force Ordinance (Cap 232) (“PFO“). While Sections 25A of OSCO is primarily concerned with the granting of immunity to banks at a stage after the police investigation ([62]), it is Section 10 of PFO which confers authority to the police in taking lawful measures for preventing and detecting crimes and offences, and which lays down the duties and powers of police officers to issue LNCs in order to prevent the dissipation of proceeds of money laundering ([64]-[65]).

The second flaw found by the CFA is the Appellant’s mischaracterisation of the freezing as the police’s act as mentioned above ([67]-[69]).  As for the third flaw, the CFA clarified that (contrary to the Appellant’s contention) a restraint order from the Court is not the only lawful means of immobilising a bank account, and the PFO empowers the police to instigate disablement by the banks.

Question 1B: Improper Purpose Ground

As with the Ultra Vires ground, the Improper Purpose ground was similarly misdirected. This ground involved the contention that, having been given a statutory power, the police misused it for an improper purpose.  Similarly, the CFA held that the Appellants’ argument was flawed as they again relied on OSCO instead of PFO as the source of the police’s powers to deal with the bank, and that the Appellants mischaracterised the actions of the police as freezing of the accounts. Further, the CFA commented that even if the freezing of the accounts were properly attributed to the actions of the police, such is only a temporary measure which is aimed at preventing dissipation of the suspect’s assets pending further investigation and any potential restraint order from the Court, and is not a misuse of the powers conferred by the PFO.

Question 2: Constitutionality Ground

The Appellants sought to challenge the constitutionality of the Regime by alleging that, among others, it infringed:

  1. the rights to use of property under the Basic Law (Articles 6 and 105);
  2. the rights to private and family life under the Bill of Rights (BOR 14); and
  3. the rights of access to court and to legal advice under both the Basic Law (Article 35) and Bill of Rights (BOR 10).

First, for the rights to use of property, as mentioned above, the freezing of the accounts remained the banks’ doing ([81]). Thus, the CFA found that the police’s actions did not prevent the Appellants from using the property, and on this ground alone, the constitutional challenge based on property rights could not be sustained.  Nonetheless, the CFA went further and examined the “prescribed by law” and “proportionality” tests, and concluded that the Regime is prescribed by law (as the PFO and FPM offer a clear and accessible sets of provisions conferring the power) ([83]), the Regime has a legitimate aim (to facilitate investigation and detection of crime, and prevent dissipation of criminal proceeds), and the temporary and provisional nature of LNCs reflected a reasonable balance between the anti-money laundering aims of society and protection of individual rights ([84]-[87]).

Second, for the rights to private and family life, the CFA agreed with the Court of First Instance and the Court of Appeal that the Appellants did not adduce evidence of hardship they experienced, and their hypothetical infringement of such right should not be entertained ([90]).

Third, for the rights of access to court and to legal advice, the same objection in respect of the rights to private and family life applied to the Appellants’ suggestion that the freezing of accounts was “well capable” of impairing their ability to retain a lawyer for advice or take legal action to contest the freeze ([93]). As the Appellants managed to instruct solicitors and three counsels to present and argue their case, the CFA would not address this constitutional challenge ([90]).

Question 3: Fair Hearing Ground

On this front, the Appellants alleged that since LNCs effectively achieved an indefinite freeze of assets without the formalities of a restraint order, this involved a “determination of rights and obligations in a suit at law”, and as such under BOR 10 and common law, the Appellants should be afforded adequate opportunity to make representations, a hearing before an independent and impartial tribunal, and adequate reasons should be handed down for the decision to issue the LNCs.  In rejecting this argument, the CFA stated that the police did not determine the Appellants’ rights to the relevant funds and the investigations conducted by the police are incomparable to a “suit at law”.  Moreover, the police were fully entitled to keep sensitive aspects of their investigations confidential ([99]), and it had in any event been open to the Appellants to seek relief against the banks in a “suit at law” or to bring a judicial review against the police as in this case.  As such, these rights were not engaged ([100]-[101]).

Question 4: A Revisit of the Interush Decision

The Court of Appeal previously held that the Regime was a necessary and proportionate restriction on the right to enjoyment of private property ([9(d)].  With the above analysis in mind, the CFA noted that the Court of Appeal adopted a different analytical basis, and proceeded to hold that it was not easy to see how the rights to use of property had been infringed ([109]).

Takeaways

With the Regime finally confirmed, victims of fraud would be more assured that bank accounts suspected of holding crime proceeds would most probably be temporarily frozen upon the issuance of LNCs by the police, potentially before civil action begins. This will assist victims to recover their stolen funds, before the funds dissipate, making the recovery more difficult.

On the other hand, banks should be reminded to keep proper document trail as to the grounds and supporting evidence of their decisions to freeze accounts in mitigating their potential liabilities owed to affected customers.

We have assisted many of such victims to recover their stolen funds, including cases where there had been a full recovery, and also in circumstances where the stolen funds had gone through several levels necessitating further tracing. It is essential that victims react speedily and decisively and seek legal assistance as soon as they are alerted to being defrauded.  Speed is of the essence, in light of technology in this day and age.

See full judgement here.

[1] Articles on 4 September 2023, 14 April 2022 and 11 February 2022.

Date:
9 May 2024

The Hong Kong Court Refused to Enforce an Arbitral Award for the Arbitrator Failing to Give Reasons

On 13 March 2024, the Court of First Instance of the High Court (“Court“) in A v B and others [2024] HKCFI 751 refused to enforce an arbitral award on the ground that the arbitrator had failed to give reasons.

Background

On 25 August 2022, the sole arbitrator (“Arbitrator“) granted an arbitral award (“Award“) in favour of the Applicant (“A“) at the International Center for Dispute Resolution under the Rules for International Commercial Arbitration of the American Arbitration Association (“Arbitration“).

Under the Award, the Respondents were held to be jointly and severally liable to pay to A royalty fees and other charges under the licence agreements entered into between A and the 1st Respondent. The licensee, and the 2nd and 3rd Respondents, were prohibited from engaging in any educational business in Hong Kong.

On 12 May 2023, the Court granted leave to A to enforce the Award (“Leave“).

Ground to set aside the Leave – Failing to give reasons

On 23 June 2023, the Respondents applied to set aside the above leave on the ground that the Arbitrator had failed to give any reasons for her decisions. The Award simply made findings and conclusions, without any analysis of the decisions.

Mimmie Chan J in her judgment noted the principles set out in R v F [2012] 5 HKLRD 278, Z v Y [2019] 1 HKC 244, and LY v HW [2022] HKCFI 2267, that awards are to be read generously, in a reasonable and commercial way, expecting, as is usually the case, that there will be no substantial fault that can be found with it. Mimmie Chan J also noted the policy of minimal curial intervention as highlighted in AI & ors v LG II [2023] 4 HKC 135. Any inference that a tribunal has failed to consider an important issue is to be made only if it is clear and virtually inescapable.

However, Mimmie Chan J concluded that, however generously the Award in the case was read, objectively read and in the context of the issues raised and submissions and arguments made before the tribunal, the arbitrator failed to adequately explain in the Award the reasons for her conclusions on the key issues raised in the Arbitration, of the applicable governing law of the Agreements, on the effective date of termination of the Agreements, and on the enforceability or the reasonableness of the non-compete covenant, all of which were disputed by the parties.

Analysis

In the course of reaching the above conclusions, Mimmie Chan J held that the Respondents, as parties who had submitted their disputes to the tribunal for arbitration and determination, were legitimately entitled to expect key issues which affected their rights and liabilities to be dealt with and explained with sufficient reasons in the Award.

Likewise, the procedural law governing the Arbitration required the Arbitrator to give reasons of her decisions. Under Article 33 of the International Arbitration Rules, the tribunal “shall” state the reasons upon which an award is based, unless the parties have agreed that no reasons need be given. Paragraph 5 of the Supplementary Procedures for International Commercial Arbitration of the American Arbitration Association contains an identical provision. There was no suggestion that the parties had waived the need for reasons. Thus, the Award did not comply with the aforementioned rules as no reasons were given, and had not been made in accordance with the procedure of the Arbitration to which the parties had agreed.

In line with R v F [2012] 5 HKLRD 278 and A v B HCCT 40/2014, 15 June 2015, Mimmie Chan J emphasised that the Respondents were entitled to query whether the key issues in the Arbitration had been considered by the Arbitrator, and if considered, why the issues were determined against them. It would be contrary to public policy to enforce and recognise the Award when those important issues, which the parties were entitled to expect to be addressed in the Award, were not in fact addressed or explained.

Hence, Mimmie Chan J was satisfied that failing to give reasons was sufficiently serious to affect the structural integrity of the arbitral process, and to have undermined due process and then set aside the Leave accordingly.

Takeaways

It is observed that although the Hong Kong courts hold a pro-arbitration approach in enforcing arbitral awards, the courts do uphold the structural integrity of the arbitral process.

The same requirement of stating the reasons in the arbitral award is stated under section 67 of the Arbitration Ordinance (Cap. 609) (Article 31 of the UNCITRAL Model Law) that “the award shall state the reasons upon which it is based, unless the parties have agreed that no reasons are to be given or the award is an award on the agreed terms under article 30“. Article 35.4 of the Hong Kong International Arbitration Centre (HKIAC) Administered Arbitration Rules (2018) contains the same requirement.

Please see full judgment here.

Date:
3 May 2024
Key Contact(s):

The Exchange Published Consultation Conclusions on Enhancement of Climate-related Disclosures under the Environmental, Social and Governance Framework

On 19 April 2024, The Stock Exchange of Hong Kong Limited (the “Exchange“), published conclusions to its Consultation Paper on Enhancement of Climate-related Disclosures under the Environmental, Social and Governance (“ESG“) framework. As a result of receiving broad-based support from the market, the Exchange will adopt its proposals to introduce new climate-related disclosure requirements (the “New Climate Requirements”), and amend the Environmental, Social and Governance Reporting Guide (to be renamed as the Environmental, Social and Governance Reporting Code) (the “ESG Code“) set out in Appendix C2 to the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited and Rules Governing the Listing of Securities on GEM (collectively, the “Listing Rules“).

Some key features of the New Climate Requirements are as follows:

  1. Enhanced climate-related disclosures in the ESG reports

The existing climate reporting requirements are modelled on a “comply or explain” regime. Under the amended Listing Rules, a new Part D will be introduced to the ESG Code to comprehensively set out all climate-related disclosures (i.e. the New Climate Requirements), which will include both mandatory disclosures and disclosures under the “comply or explain” regime.

The New Climate Requirements will substantially adopt the latest international standards on climate-related disclosures developed by the International Sustainability Standards Board established by the International Financial Reporting Standards Foundation (the “ISSB Climate Standard“). In line with the ISSB Climate Standard, the New Climate Requirements will focus on climate reporting on the following four areas:

(1) Governance – the governance process, controls and procedures an issuer uses to monitor, manage and oversee climate-related risks and opportunities;

(2) Strategy – an issuer’s strategy for managing climate-related risks and opportunities;

(3) Risk management – the process an issuer uses to identify, assess, prioritise and monitor climate-related risks and opportunities; and

(4) Metrics and target – the metrics and targets an issuer uses to understand its performance in relation to climate-related risks and opportunities, including progress towards any climate-related targets that it has set, and any targets that it is required to meet by law or regulation.

Some of the relatively more challenging disclosures under the New Climate Requirements include disclosure of Scope 1, Scope 2 and Scope 3 greenhouse gas (“GHG“) emissions (the disclosure of Scope 3 GHG emissions being newly added in the amended ESG Code), quantification of climate-related financial effects, and the setting of climate targets.

The Exchange has also issued an Implementation Guidance to assist issuers in understanding and interpreting the New Climate Requirements, and to provide issuers with practical guidance for preparation of climate-disclosures in accordance with the amended ESG Code.

  1. Implementation by phases

The amended Listing Rules will become effective on 1 January 2025. The Exchange will adopt a phased approach in implementing the New Climate Requirements as summarised below:

(1) all Main Board and GEM listed issuers will be required to make mandatory disclosures of Scope 1 and Scope 2 GHG emissions for the financial years commencing on or after 1 January 2025;

(2) all Main Board issuers are required to comply with the New Climate Requirements (other than those relating to Scope 1 and Scope 2 GHG emissions which are mandatory) on a “comply or explain” basis for the financial years commencing on or after 1 January 2025;

(3) LargeCap Issuers (i.e. issuers that are Hang Seng Composite LargeCap Index constituents throughout the year immediately prior to the relevant reporting year) are required to comply with the New Climate Requirements on a mandatory basis for the financial years commencing on or after 1 January 2026; and

(4) all GEM listed issuers are encouraged to comply with the New Climate Requirements (other than those relating to Scope 1 and Scope 2 GHG emissions which are mandatory) for the financial years commencing on or after 1 January 2025 on a voluntary basis.

Issuers are advised to review the New Climate Requirements in detail and seek legal advice when preparing disclosures under these new requirements.

Date:
2 May 2024
Key Contact(s):

Conclusions on Proposed Amendments to Listing Rules Relating to Treasury Shares

On 12 April 2024, The Stock Exchange of Hong Kong Limited (the “Exchange“) published the consultation conclusions on Proposed Amendments to Listing Rules Relating to Treasury Shares (“Consultation Paper“). Receiving support from the market, the proposals set out in the Consultation Paper will be implemented with only minor modifications. Please see below for a summary of the major changes to The Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “Listing Rules“).

  1. Removal of the requirement to cancel repurchased shares

The requirement to cancel repurchased shares will be removed and issuers may hold these shares in treasury, subject to the laws of their places of incorporation and their constitutional documents.

The Exchange further clarifies that whether treasury shares may be held by an issuer’s subsidiary or an agent or nominee on behalf of the issuer or its subsidiary would also be subject to the laws of the issuer’s place of incorporation and its constitutional documents. For example, shares repurchased by an issuer incorporated in Bermuda and the Cayman Islands have to be held in its own name to be classified as treasury shares under the relevant laws, while there is no similar requirement in the PRC laws for treasury H shares.

  1. Application of the current requirements for issue of new shares to resale of treasury shares

The Listing Rules will be amended such that certain requirements that currently apply to issue of new shares will apply to resale of treasury shares as well, for example:-

(i). similar pre-emption requirement under Rule 13.36, where a resale of treasury shares shall be offered to all shareholders on a pro-rata basis, or alternatively, approved by shareholders under a specific mandate or a general mandate;

(ii). requirements under Chapter 17 in relation to share schemes funded by treasury shares to be treated as the same funded by new shares;

(iii). connected transaction requirements under Chapter 14A;

(iv). disclosure requirements for resale of treasury shares and movement in the number of treasury shares under Chapters 11 and 13 and Appendix D2; and

(v). documentary requirements under Chapter 9.

  1. Imposition of moratorium period

A 30-day moratorium period will be imposed on:-

(i). a resale of treasury shares (whether on-market or off-market) after a share repurchase; and

(ii). any share repurchase on the Exchange subsequent to a resale of treasury shares on the Exchange.

Note, however, that in relation to (i) above, the moratorium period does not apply to (a) capitalisation issues and (b) grants of share awards or options under a share scheme that complies with Chapter 17 or a new issue of shares or a transfer of treasury shares upon vesting or exercise of share awards or options under the share scheme.

  1. Dealing restrictions for resale of treasury shares on the Exchange

Resale of treasury shares on the Exchange is prohibited in the following circumstances:-

(i) where there exists undisclosed inside information;

(ii) during the 30-day period preceding any results announcement; and

(iii) where it is knowingly made with a core connected person (but note that on-market resale of treasury shares to a connected person without knowledge is fully exempt).

The amendments to the Listing Rules will come into effect on 11 June 2024. Issuers are advised to review these amendments in detail, seek legal advice and amend their constitutional documents where necessary.

Date:
19 April 2024
Key Contact(s):
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