最新消息
News //
Submitted by // K Bowers, Partner / Solicitor Advocate
24 July 2017


Court of Appeal rules against Moody's in regulatory appeal

Note: This is an update to our October 2016 Regulatory Law Alert. Please see the Alert for more information.

Introduction

In a recent judgement dated 8 June 2017, the Court of Appeal dismissed an appeal brought by Moody's Investors Service Hong Kong Limited ("Moody's") against a decision by the Securities and Futures Appeals Tribunal ("SFAT"). The judgement upheld the decision of the SFAT and confirmed the underlying decision of the Securities and Futures Commission ("SFC") in fining and reprimanding Moody's.

Background

On 11 July 2011, Moody's published a document entitled "Red Flags for Emerging-Market Companies: A Focus on China" ("Report"), which was distributed to its subscribers and available for sale to the general public. The main part of the Report concerned a system of "Red Flags" ("Red Flags") which rated 49 non-financial Mainland Chinese companies against 20 warning signs, identifying possible corporate governance or accounting risks in the companies.

The Report was published at a time when there were ongoing market concerns about the credit risks of a number of Mainland Chinese companies, arising from rumours about their accounting and corporate governance standards. Shortly after the Report was published, the share price of a number of companies mentioned in the Report dropped significantly, including the share price of four Hong Kong listed companies.

The SFC's investigation into the background of the Report identified a number of problems. The SFC found that the Report failed to provide sufficient explanations for the Red Flags assigned by Moody's, which painted a misleading picture of the companies referred to in the Report. Further, the SFC stated that the Report specifically highlighted six companies as "negative outliers" despite there being no significant correlation between the number of Red Flags and the credit risks of those highlighted companies. As a result, the SFC found Moody's to be in breach of the SFC's Code of Conduct and imposed a fine and a public reprimand.

Moody's Challenge in the SFAT

One of Moody's key arguments was that the publication of the Report did not constitute a regulated activity under the Securities and Futures Ordinance ("SFO"), and that the SFC did not have jurisdiction to regulate the content of the Report. However, the SFAT concluded that the publication of the Report did constitute a regulated activity and that consequently, the SFC has jurisdiction. The SFAT arrived at this conclusion by holding that the Report either:-

• itself constituted a form of credit rating; or

• was intended to be read as amplifying and supplementing Moody's ratings, and thus became part and parcel of Moody's ratings themselves.

On this basis, the SFAT concluded that the preparation and publication of the Report constituted the carrying on of a Type 10 regulated activity, and therefore fell within the SFC's jurisdiction. Moody's subsequently appealed from the SFAT's decision to the Court of Appeal.

Court of Appeal's decision

In the Court of Appeal, Moody's argued that the SFAT was wrong in concluding that the Report constituted a form of credit rating, or that it had the effect of amplifying or supplementing its credit ratings.

First, Moody's argued that the Report was not a form of credit rating, as the Report was not primarily about the creditworthiness of the companies referred to in the Report, and added that the Report only identified two elements of credit risks when a full credit review would involve many different elements. Secondly, Moody's argued that the Report could not have had the effect of amplifying or supplementing its existing ratings, as the Red Flags framework in the Report was not part of Moody's process or methodology in making its usual credit ratings.

The Court of Appeal accepted Moody's first argument that the Report did not by itself constitute credit rating, but disagreed with Moody's second argument. The Court of Appeal held that although the Red Flags framework was not part of Moody's methodology in making its usual credit ratings, this did not preclude the Report from supplementing its credit ratings. The Court of Appeal also confirmed that on a purposive reading of s. 193(1) of the SFO, clarifying or adding to an existing credit rating is a "related" regulated activity. Since the Report by Moody's fell within the definition of a "related" regulated activity, the SFC had jurisdiction, and Moody's appeal was dismissed.

Comment

The Court of Appeal in this case partially confirmed the approach taken by both the SFC and the SFAT. It clarified that materials published by credit rating agencies can come under the scrutiny of the SFC, even if the materials are not official credit ratings.

The SFC, by enforcing against Moody's in this case, has demonstrated its concern towards the impact of credit rating reports on the quality of the market. It is also sending a message to those preparing credit rating reports that they should exercise due care when making price-sensitive statements. Credit rating agencies should therefore carefully review materials intending to be distributed to subscribers and to the general public before publication.


About Us

Howse Williams Bowers is an independent law firm which combines the in-depth experience of its lawyers with a forward thinking approach.

Our key practice areas are corporate/commercial and corporate finance; commercial and maritime dispute resolution; clinical negligence and healthcare; insurance, personal injury and professional indemnity insurance; employment; family and matrimonial; property and building management; banking; financial services/corporate regulatory and compliance.

As an independent law firm we are able to minimise legal and commercial conflicts of interest and act for clients in every industry sector. The partners have spent the majority of their careers in Hong Kong and have a detailed understanding of international business and business in Asia.

Disclaimer: The information contained in this article is intended to be a general guide only and is not intended to provide legal advice.  Please contact pr@hwbhk.com if you have any questions about the article.

› 詳情
› 縮小
News //
Submitted by // K Bowers, Partner / Solicitor Advocate
21 July 2017


…AND YOU'RE OUT OF TIME!

Limitation Period and the "Analogy Exception"

Summary

The recent case of Liu Hsiao Cheng v Wong Shiu Wai (No. 2) [2017] HKEC 541 involves disputes between the Plaintiff and the 1st Defendant, who were shareholders and directors of a Hong Kong company in the tobacco business in Zimbabwe ("Company"). In essence, the Plaintiff brought an action against the 1st Defendant for breach of fiduciary duty resulting from various wrongful acts. The 1st Defendant counter-claimed against the Plaintiff that he had breached his own fiduciary duty as a director / de facto director of the Company, by refusing and / or failing to provide an account of funds remitted to Zimbabwe ("Remittances") despite repeated requests by the 1st Defendant.

Seeing as some of the alleged Remittances were made prior to 12 July 2007 (more than 6 years before the date of the start of the action), the Plaintiff made an application to strike out the 1st Defendant's claim in relation to those Remittances on the ground that they were brought out of time by virtue of s.4(2) of the Limitation Ordinance (Cap. 347) ("Ordinance"). Pursuant to s.4(2) of the Ordinance, "an action for an account shall not be brought in respect of any matter which arose more than 6 years before the commencement of the action." In other words, all parties concerned would be time-barred from bringing an action once the 6 year limitation period had expired. [1]

On the other hand, the 1st Defendant argued that s.4(2) of the Ordinance did not apply since his claim for an account against the Plaintiff was a claim for equitable relief under s.4(7) of the Ordinance in circumstances where the duty to account arose from a violation of an underlying right which was equitable in nature, based upon the Plaintiff's fiduciary duty. Pursuant to s.4(7) of the Ordinance, "[the] section shall not apply to any claim for specific performance of a contract or for an injunction or for other equitable relief, except in so far as any provision thereof may be applied by the court by analogy in like manner as the corresponding enactment contained in the Limitation Act 1980 (1980 c 58 UK) is applied in the English Courts." ("Analogy Exception").

Alternatively, the 1st Defendant also argued that his claim could be regarded as a claim to recover trust property or the proceeds thereof within the meaning of s.20(1)(b) of the Ordinance, for which there is no prevailing limitation period.

Decision

The Court decided that the 1st Defendant's claim for an account was for equitable relief, based on the Plaintiff's fiduciary duty as a director / de facto director of the Company, to account to the Company for monies belonging to the Company which were remitted to Zimbabwe. Accordingly, s.4(2) had no direct application to the 1st Defendant's claim.

Nonetheless, under s.4(7) of the Ordinance, s.4(2) might still apply by virtue of the Analogy Exception. Under the Limitation Act 1939 and the Limitation Act 1980, the English Courts have adopted the approach that in determining whether the statute of limitations could apply by 'analogy' to an action for an account in equity, one had to ask whether the underlying cause of action giving rise to the duty to account was itself subject to any prevailing time limit as prescribed by the statute of limitations. In summary, where the equitable claim for an account is ancillary to another equitable claim, the same limitation period would also apply to the claim for an account. In this case, the 1st Defendant's claim against the Plaintiff for an account was based on (i) the Plaintiff being a fiduciary of the Company, and (ii) assets belonging to the Company had (allegedly) coming under the Plaintiff's control. On the other hand, if there is no limitation period applicable to the other equitable claim, the claim for an account would likewise not be subject to any limitation period.

Ultimately, the Court held that the 1st Defendant's claim for an account in relation to Remittances made on or before 12 July 2007 was time-barred (upon expiry of the 6 year limitation period) and granted the Plaintiff's strike-out application. As a matter of principle, the Court held that the prevailing 6 year limitation period could be applied by analogy to the claim for an account by the 1st Defendant against the Plaintiff.

Moreover, the Court disposed of the 1st Defendant's alternative argument based on s.20(1)(b) of the Ordinance, as its claim could not be regarded as an action to recover trust property belonging to the Company, or the proceeds thereof in the Plaintiff's possession.

Comment

This recent judgment illustrates the approach taken by the Court when determining whether any exceptions to the Ordinance would apply to actions brought after the prescribed limitation period. Parties should be mindful of the applicable limitation periods and are encouraged to seek legal advice, where necessary.

Parties should always avoid waiting until the last minute to commence any Court action.

___________________________________________________
[1] Note: Limitation periods vary depending on the nature of the claim.

 

About Us

Howse Williams Bowers is an independent law firm which combines the in-depth experience of its lawyers with a forward thinking approach.

Our key practice areas are corporate/commercial and corporate finance; commercial and maritime dispute resolution; clinical negligence and healthcare; insurance, personal injury and professional indemnity insurance; employment; family and matrimonial; property and building management; banking; financial services/corporate regulatory and compliance.

As an independent law firm we are able to minimise legal and commercial conflicts of interest and act for clients in every industry sector. The partners have spent the majority of their careers in Hong Kong and have a detailed understanding of international business and business in Asia.

Disclaimer: The information contained in this article is intended to be a general guide only and is not intended to provide legal advice.  Please contact pr@hwbhk.com if you have any questions about the article.

› 詳情
› 縮小
News //
Submitted by // A Scott, Partner
21 July 2017


Apology Bill

1. On 13 July 2017, the Legislative Council passed the much-anticipated Apology Bill, first introduced by the Working Group on Mediation of the Department of Justice in 2010. This is a landmark for Hong Kong as the first Asian jurisdiction to enact a law of this kind.

2. The spirit of the apology legislation is to allow an apology to be made without fear that it will be used as evidence of admission of fault or liability in civil proceedings. Since the Civil Justice Reform in 2009, the increasing use of mediation has rendered apology legislation all the more necessary. Particularly in medical negligence cases, an apology (or lack thereof) can 'make or break' successful resolution.

3. The Apology Bill is a relatively short document, containing 13 Clauses and one Schedule. It is similar to apology legislation in other common law jurisdictions.

4. By virtue of Clause 6, the Bill applies to civil judicial, arbitral, administrative, disciplinary and regulatory proceedings. It does not apply to criminal proceedings and proceedings conducted under the Commissions of Inquiry Ordinance (Cap. 86), Control of Obscene and Indecent Articles Ordinance (Cap. 390) and Coroners Ordinance (Cap. 504).

5. The Bill applies to apologies made after the commencement date of the Ordinance.

6. The Bill does not apply to apologies made by a person in a document filed or submitted; testimony, submission or similar oral statement; or adduced as evidence with the consent of the apology-maker in the applicable proceedings.

7. Clause 4 defines "apology" as "an expression of the person's regret, sympathy or benevolence in connection with the matter, and includes, for example, an expression that the person is sorry about the matter". The expression may be oral, written or by conduct. The definition encompasses an expression that amounts to express or implied admission of fault or liability and also statements of fact.

8. By virtue of Clause 7, an apology is generally not admissible for determining fault, liability or any other issue to the prejudice of the apology-maker in certain proceedings.

9. By Clause 8, the arbiter of any proceedings has the discretion in exceptional circumstances to admit statements of facts contained in an apology as evidence if it is just and equitable to do so. An example is where there is no other evidence available for determining an issue.

10. An apology does not amount to an "acknowledgment" for the purpose of section 23 of the Limitation Ordinance (Cap. 347) (Clause 9).

11. Under Clause 10, an apology does not void or affect any insurance cover, compensation or other form of benefit for any person under a contract of insurance or indemnity.

12. Clause 11 provides that the Bill does not affect discovery or a similar procedure in applicable proceedings; certain provisions in the Defamation Ordinance (Cap. 21) in which an apology is relevant as defence or for mitigating damages; or the operation of the Mediation Ordinance (Cap. 620).


About Us

Howse Williams Bowers is an independent law firm which combines the in-depth experience of its lawyers with a forward thinking approach.

Our key practice areas are corporate/commercial and corporate finance; commercial and maritime dispute resolution; clinical negligence and healthcare; insurance, personal injury and professional indemnity insurance; employment; family and matrimonial; property and building management; and financial services/corporate regulatory and compliance.

As an independent law firm we are able to minimise legal and commercial conflicts of interest and act for clients in every industry sector. The partners have spent the majority of their careers in Hong Kong and have a detailed understanding of international business and business in Asia.

Disclaimer: The information contained in this article is intended to be a general guide only and is not intended to provide legal advice.  Please contact pr@hwbhk.com if you have any questions about the article.

› 詳情
› 縮小
News //
Submitted by // K Bowers, Partner / Solicitor Advocate; P Yeung, Senior Associate
20 July 2017

 

Proposed Changes to Hong Kong's Employment Scene

Employment (Amendment) Bill 2017

On 17 May 2017, the Employment (Amendment) Bill 2017 ("Bill") was introduced in Hong Kong's Legislative Council ("LegCo"). The Bill is largely the same as the Employment (Amendment) Bill 2016 which lapsed at the end of 2016. Our alert on the 2016 Bill can be found here.

In summary, the Bill intends to empower the Labour Tribunal to make an order compelling employers to reinstate or re-engage employees who have been unreasonably and unlawfully dismissed, without the employer's prior consent. Under current Hong Kong law, an employer is required to agree to reinstatement or re-engagement before a Court can make such an order.

The main difference between the 2017 Bill and the 2016 Bill is that the proposed penalty for an employer who fails to comply with an order for reinstatement under the 2017 Bill is set at three times the employee's average monthly wages, subject to a maximum of HK$72,500 to be paid to the employee. This is an increase to the maximum penalty of HK$50,000 under the 2016 Bill. Failure to pay the penalty wilfully and without reasonable excuse is made a criminal offence.

Reinstatement / Re-engagement

An order for reinstatement/re-engagement is rarely asked for or made. This is because by the time the employer and employee have litigated the matter in the Labour Tribunal or High Court, the relationship between the parties has significantly deteriorated. Therefore, whether the proposed new law will in reality be an additional recourse of action available to the employee is yet to be seen.

Although the proposed amendment removes the need to obtain an employer's agreement, the Court is still required to hear both parties' views and consider all the circumstances of the case. If there is evidence that, for example, the relationship between the employer and the employee has completely broken down and it would be impracticable to re-employ the employee, then it is unlikely that the Court will order a reinstatement/re-engagement.

Proposed changes to the MPF offset mechanism

Meanwhile, a proposal in LegCo calls to scrap a controversial arrangement where employers dip into their workers' pension funds in order to pay their employees' severance and long-service payments. With strong opposition from the business sector, it remains to be seen if the proposal will come into effect.

Current MPF offset mechanism

Under current Hong Kong law, an employer who is liable to pay an employee severance payment or long service payment can offset these payments with the accrued benefits derived from the employer's contributions to an MPF scheme for the employee. In other words, employers can use the employees' pension funds to offset the severance or long service payments.

An employer, after paying an employee his/her severance or long service payment, can apply to the MPF trustee for re-payment from the employee's MPF fund. An employee, if not paid the entire amount, can also apply to withdraw such sum from his/her MPF account.

As a result of the MPF offset mechanism, billions of dollars are withdrawn yearly from employees' MPF accounts. HK$3.85 billion was withdrawn last year, which represents a 70% increase from 2012.

Proposed change

A recent proposal in LegCo calls for an abolishment of this offset mechanism, which means that employers will have to dig into their own pockets to pay severance or long service payments to eligible employees, thereby increasing business and overhead costs.

Although employers will no longer be repaid these payments from their employees' MPF accounts, the proposal calls for a reduction in the amount of severance and long service payments in order to reduce the burden upon employers. The amount payable, if the proposal comes into effect, will be adjusted downwards from the existing entitlements of two-thirds of the last month's wages to half, for each year of service.

The proposal comes after months of consultations with both employer and employee groups, but is still vigorously opposed by the business sector which could try to block the implementation of the proposal.

If the proposed change comes into effect, it would not apply retroactively. Further, employers would also have a 10-year period from the date of implementation during which the Government would bear part of the costs involved in such payments, thereby allowing business and other employers to prepare and making arrangements in light of the change.

Although it would be a welcome development for employees, the proposal is predicted to hit small and medium sized businesses hard. 


About Us

Howse Williams Bowers is an independent law firm which combines the in-depth experience of its lawyers with a forward thinking approach.

Our key practice areas are corporate/commercial and corporate finance; commercial and maritime dispute resolution; clinical negligence and healthcare; insurance, personal injury and professional indemnity insurance; employment; family and matrimonial; property and building management; and financial services/corporate regulatory and compliance.

As an independent law firm we are able to minimise legal and commercial conflicts of interest and act for clients in every industry sector. The partners have spent the majority of their careers in Hong Kong and have a detailed understanding of international business and business in Asia.

Disclaimer: The information contained in this article is intended to be a general guide only and is not intended to provide legal advice.  Please contact pr@hwbhk.com if you have any questions about the article.

› 詳情
› 縮小