Court imposes a wide duty for disclosure on the SFC in disqualification proceedings

In the case of Securities and Futures Commission v Wong Yuen Yee and others [2017] HKCU 23, the Court of First Instance (CFI) ruled that the Securities and Futures Commission (SFC) should adopt a more generous standard than in ordinary court proceedings when disclosing documents obtained in its investigations in disqualification proceedings.  Lam J made this decision on the basis that he viewed the SFC as being “a statutory body established for public functions” and “analogous to criminal law enforcement agencies” and therefore had a duty to act fairly and make all materials available for potential use in the trial to ensure a just outcome.

Background

In early 2015, a petition was filed by the SFC under section 214 of the Securities and Futures Ordinance (Cap. 571) (the SFO) seeking a disqualification order against 4 former directors of InnoTech Holdings Limited (InnoTech). The SFC alleged that the directors had breached their duties as directors in failing to carry out due diligence prior to the acquisitions of interests in 3 hotels and a gold mine in the PRC that had resulted in substantial losses to InnoTech.

In their defence, the respondents argued that in making the relevant decisions they had honestly and reasonably relied on independent advice from third parties; that each of the acquisitions was executed in good faith; that they had carried out extensive due diligence, and that each of the decisions was unanimously approved by the board.

After filing its opposition to the SFC’s petition, the respondents issued a summons for discovery seeking production by the SFC of all authorisations, all directions and search warrants issued together with other related documents, including interview records.

Test for discovery

The CFI was asked to consider the appropriate standard of discovery to be applied in SFC disqualification proceedings i.e. whether it should follow the standard in criminal proceedings (i.e. including disclosure of unused material obtained during the investigation) or the narrower test applied in civil proceedings. The CFI eventually ruled that the SFC should adopt a duty of disclosure which is more akin to the duty imposed on the prosecution in criminal proceedings, for the following reasons:-

1. The CFI acknowledged that the SFC possesses a wide range of investigative powers in obtaining information, including the power to compel a person to attend an interview to answer questions under the SFO. Unlike criminal investigations, an interviewee’s privilege against self-incrimination is abrogated.
2. The CFI described the proper role of the SFC to be “not a prosecutor bent on securing the disqualification of a respondent, but a fair‑minded regulator willing if not anxious to make all materials available for potential use in the trial to ensure a just outcome”.
3. In view of the coercive investigative powers of the SFC, the CFI ruled that the SFC should take a generous view of relevance and should disclose all relevant documents to the respondents, including documents which may fairly lead a party to further inquiries.
4. The CFI ruled that the SFC’s disclosure “should ordinarily include information and documents it has obtained from the investigation of the transactions that are eventually relied upon and complained of in the disqualification proceedings, except those which are obviously irrelevant even on this generous test”.

Accordingly, the CFI ordered the SFC within 28 days to file a list of documents which are or have been in the SFC’s possession, custody or power relating to any matter in question in the proceedings.

Implications

The CFI’s decision shows the Court’s willingness to impose on the SFC a higher standard of disclosure in cases of a disciplinary or regulatory nature that involve grave consequences in order to ensure a fair trial and just outcome.

Whilst this decision provides some assurance to those under investigation by the SFC that the Court is willing to step in to ensure that justice is served, the decision may well be appealed by the SFC, especially when the present decision is likely to have negative practical implications for the SFC when carrying out its investigative powers in disciplinary proceedings.