Introduction

 

From time to time, we assist clients in responding to notices issued by the Securities and Futures Commission ("SFC") under section 183 of the Securities and Futures Ordinance ("SFO"). Understandably, clients often have queries as to the scope of information that they should provide and efforts that they need to undertake. A recent judgment of the Hong Kong Court of First Instance[1] affirms the SFC's extensive investigative powers and the importance of treating SFC notices seriously, even in peculiar circumstances involving changes in management and loss of records.

 

Background

 

The SFC commenced an investigation into a licensed corporation ("Licensee") concerning its role in several initial public offerings. Between 2021 and 2023, the SFC issued various notices under section 183 of the SFO requiring the Licensee to produce documents and answer questions. The Licensee provided some responses, which the SFC considered to be inadequate. The SFC made an application to the Court under section 185 of the SFO to compel the Licensee to comply with the notices and to penalise the Licensee.

 

The Law

 

Section 185(1)(a) of the SFO gives the Court the power to compel a person under investigation to comply with a section 183 notice.  Procedurally, the SFC has to prove, on a balance of probabilities, that the person under investigation failed to comply with the notice. The person under investigation then has to prove, on a balance of probabilities, that it had a "reasonable excuse" for non-compliance. The Court would then assess whether the excuse is genuine and objectively reasonable, having regard to various factors such as public interest, oppression caused to the person under investigation, and whether the relevant records are in the possession or control of the person under investigation.

 

Section 185(1)(b) further gives the Court the power to impose penalties if it is satisfied, beyond reasonable doubt, that the failure to comply with a section 183 notice was without reasonable excuse.

 

The circumstances relied upon by the Licensee

 

In relation to notices issued by the SFC in 2021 and 2022 ("2021/22 Notices"), the Licensee cited the following circumstances as constituting a "reasonable excuse" for its non-compliance:

 

• There was a complete change in ownership and management in late 2022.

• A significant portion of the Licensee's books and records was lost after they were moved to and stored in Beijing.

• The SFC seized certain documents in 2024, thereby causing disruption to the Licensee in responding to the 2021/22 Notices.

 

The Court's Findings

 

Change of ownership and management did not amount to a reasonable excuse

The Court firmly rejected the argument that a complete change in the Licensee's shareholding and management per se constituted a reasonable excuse for failing to comply with the 2021/22 Notices. Notably, the secrecy provisions under section 378 of the SFO did not prevent the new management from seeking information from the former management - they could ask specific questions in the SFC notices without necessarily disclosing the fact of the investigation itself. In any event, the new management could have, but never, sought the SFC's consent for any necessary disclosure.

 

Alleged loss of books and records also did not amount to a reasonable excuse

The Court was also not satisfied that the alleged loss of records amounted to a reasonable excuse. While the Court accepted that some records were moved and lost, the Licensee failed to prove with sufficient particularities that the lost records included the specific documents requested by the SFC. Furthermore, such loss took place after the deadlines for responding to the 2021/22 Notices had lapsed. The alleged loss of records, even if established, was thus irrelevant to the failure to comply with the 2021/22 Notices. Further, the Court also noted that moving records to an unapproved location would contravene section 130 of the SFO.  Accordingly, what has been done contrary to the law cannot be regarded as a reasonable excuse.

 

Seizure of documents by the SFC only caused a temporary disruption and hence did not constitute a reasonable excuse

The Court found that the seizure by the SFC occurred long after the deadlines for the 2021/22 Notices had passed and therefore had no bearing on the Licensee's previous non-compliance. Critically, the SFC's subsequent return of documents to the Licensee would have cured any inability to comply with the 2021/22 Notices.

 

In view of the above, the Court granted an order to compel the Licensee to review the materials and fulfill its outstanding obligations under the 2021/22 Notices and to pay a fine to be determined.

 

Proper service by SFC

 

In respect of another notice issued by the SFC in January 2023 ("January 2023 Notice") and a letter issued by the SFC in July 2023 ("July 2023 Letter"), the Court considered that, in order to obtain an order for non-compliance under section 185(1)(a) and/or 185(1)(b) of the SFO, it would be necessary for the SFC to prove proper service, e.g. delivery to any officer of the Licensee by hand, delivery by leaving or by post to the last address of the Licensee by facsimile or last electronic mail address.

 

In this case, after an unsuccessful attempt of service by hand, the SFC only emailed the January 2023 Notice to a responsible officer and director of the Licensee. The Court observed that the responsible officer and director was subject to confidentiality obligation not to disclose the contents of the investigation to others (presumably including the Licensee) without the SFC's prior consent; and there was no record of the SFC ever receiving a request for or granting such consent. In addition, the Court was not satisfied on the affidavit evidence adduced by the SFC that the deponent had knowledge of whether the July 2023 Letter was in fact delivered by post to the Licensee. Accordingly, service of the January 2023 Notice and the July 2023 Letter was held to be improper; and the Court did not make an order for non-compliance under section 185(1)(a) and/or 185(1)(b) of the SFO in relation to the January 2023 Notice and the July 2023 Letter.

 

Conclusion

 

This decision reinforces the SFC's extensive investigative powers. Whilst circumstances may present hurdles to persons under investigation in complying with SFC notices, they should prudently consider and seek advice on whether those circumstances would relieve them from compliance. Licensed corporations should also review their internal protocols for handling regulatory requests and retaining documents. Lastly, where new management assumes control over a licensed corporation, the new management remains responsible for providing reasonable assistance to SFC's investigation into matters prior to their assumption of control.