The Banking Litigation Law Review: Hong Kong
Hong Kong is well known for being a gateway between the world and Mainland China, and it has remained a leading global and regional financial centre to a large extent by virtue of its competitive banking industry. While the world is hit by covid-19, the banking sector has been working diligently in order to overcome the challenges posed by the pandemic, as well as the more general regulatory and contentious issues.
Significant recent cases
Fraud has been a major theme in significant recent cases as banks and financial institutions remain at the forefront of the battle against fraud and money laundering. Banks are exposed to fraudsters and are expected to stay increasingly alert to fraud risks; however, they also face applications by victims of fraud for interim relief measures, such as Mareva injunctions and Norwich Pharmacal orders.
There has also been a surge in arbitration-related cases in Hong Kong. Courts in Hong Kong have adopted an arbitration-friendly approach; for instance, by granting anti-suit injunctions to restrain the pursuit of foreign proceedings in breach of arbitration clauses and ensuring that the losing party honours the terms of an arbitral award by making available a full range of remedies in a common law action. Further, a finding of fact by an arbitrator is generally conclusive and it is hard to convince a court to set aside an arbitral award on grounds such as the lack of an arbitration agreement.
Hong Kong courts have also, on various occasions, determined issues concerning cross-border insolvency, such as the approach to dismissing winding-up petitions and banks' duty of care towards client assets.
Recent legislative developments
The Banking Ordinance (Cap 155) (BO), which provides the legal framework for banking regulation, was updated by the Banking (Amendment) Ordinance 2018 (BAO) to implement the latest international standards on banking regulation promulgated by the Basel Committee on Banking Supervision (BCBS). While the BAO has come into full operation on 1 July 2019,2 the subsidiary legislations under the BO require amendments. The amended Banking (Liquidity) Rules (Cap 155Q) took effect from 1 January 2020. The main changes were as follows:
- to expand the scope of 'level 2B assets' and 'liquefiable assets' under the Liquidity Coverage Ratio and the Liquidity Maintenance Ratio respectively; and
- to implement a required funding requirement on total derivative liabilities under the Net Stable Funding Ratio and the Core Funding Ratio.
The Banking (Capital) (Amendment) Rules 2020 will come into operation on 30 June 2021, whereby certain capital standards issued by the BCBS will be implemented, a new method for measuring the amount of counterparty credit risk incurred by banks from derivative contracts will be introduced, and the capital treatment for banks' exposures to central counterparties and clearing intermediaries will be revised. These amendments are intended to update the regulatory regime in Hong Kong and bring it in line with international standards.
Since the full implementation of the Insurance Companies (Amendment) Ordinance on 23 September 2019, the Insurance Authority (IA) has assumed direct regulatory function vis-a-vis all insurance intermediaries in Hong Kong with powers to grant licences, conduct inspections to ensure compliance with the Insurance Ordinance (Cap 41) (IO) by licensed insurance intermediaries, and impose disciplinary sanctions where necessary. Under the current regulatory regime for insurance intermediaries, any person carrying on a regulated activity under the IO is required to be licensed by the IA. On 22 October 2019, the IA issued the Explanatory Note on Licensing Requirements for Banking Sector under Regulatory Regime for Insurance Intermediaries to provide guidance on how far certain bank-client interactions or ancillary banking activities related to insurance would be regarded as 'regulated activities', thus requiring the relevant banks and bank staff to be licensed.
The Hong Kong government is currently looking to introduce further amendments to the insurance legislation. The Financial Services and the Treasury Bureau have introduced two bills,3 both of which were gazetted on 20 March 2020. These proposed amendments seek to provide for a new regulatory regime for the insurance-linked securities business, expand the scope of insurable risks of captive insurers set up in Hong Kong, and enhance the regulatory framework for the regulation and supervision of insurance groups where a holding company is incorporated in Hong Kong. These amendments will reinforce and further strengthen Hong Kong's standing as a regional asset management centre and insurance hub.
Changes to court procedure
Civil procedural rules under the High Court Ordinance (Cap 4) were subject to major reform back in 2009. The Civil Justice Reform (CJR), which came into effect on 2 April 2009, aimed to give the courts more powers to manage the progress of court cases in giving effect to the underlying objectives as set out in the Rules of the High Court (Cap 4A) (High Court Rules), namely to increase cost-effectiveness, to deal with cases as expeditiously as is reasonably practicable, to promote procedural economy, to ensure fairness between the parties, to facilitate settlement, and to ensure fair distribution of court resources.
Another major reform that will have a profound impact on court procedure and bring Hong Kong in line with other common law jurisdictions is underway. On 17 July 2020, the Hong Kong Legislature passed the Court Proceedings (Electronic Technology) Bill. The bill symbolises a step towards a 'paperless' judiciary by introducing e-filing and service of court-related documents, the use of electronic signatures and electronic payments, which will hopefully reduce unnecessary costs and court visits by court users and increase efficiency of the court process. It is not yet known as to when this new law will come into force. In the meantime, the courts have been using technology on an individual case basis, bearing in mind the underlying objectives under CJR. For example, in Hwang Joon Sang & Anor v. Golden Electronics Inc & Ors,4 the Court of First Instance (CFI) approved the use of a data room for ordinary service of documents under the High Court Rules, noting that the underlying objectives of case management pointed strongly towards the use of available technology, including the use of data room as a means of service.
The covid-19 pandemic has in fact acted as a catalyst for more immediate changes to court procedures in Hong Kong. While the courts and tribunals suspended services for over 13 weeks at the onset of the pandemic, the judiciary had to adopt alternative modes to hear submissions by means of technology, including video-conferencing facilities (VCF) and telephone for suitable civil cases. In Au Yeung Pui Chun v. Cheng Wing Sang,5 the CFI allowed the parties to give evidence in a civil trial in relation to the ownership of a residential property via VCF.6 To this end, the judiciary has issued guidance notes to set out the practice for remote hearings by electronic means in civil cases.7
Another much-awaited change is the Arrangement for Mutual Service of Judicial Documents in Civil and Commercial Cases between the Hong Kong Special Administrative Region (HKSAR) and the Macao Special Administrative Region which came into force on 1 August 2020,8 by virtue of the Rules of the High Court (Amendment) Rules 2020 and the Rules of the District Court (Amendment) Rules 2020. There is now an official channel for service of judicial documents in civil and commercial proceedings between the two special administrative regions. This arrangement substantively mirrors the one between Hong Kong and the Mainland.9
In addition to regular court procedures, since June 2012, the Financial Dispute Resolution Centre (FDRC) has been operating as a forum for mis-selling related disputes between banks and other financial intermediaries on the one hand and retail customers (including individuals, sole proprietors and small enterprises) on the other hand.10 In the spirit of 'mediation first, arbitration next', the FDRC is tasked to help resolve claims of up to HK$1 million.11 The FDRC provides an alternative (and in principle more economic and expeditious) means of resolving low-value disputes for claimants who would otherwise have no choice but to bring legal proceedings in either the Small Claims Tribunal or the District Court. According to the FDRC's latest annual report dated 30 June 2020, it has achieved a mediation success rate of over 90 per cent for the year ended 31 December 2019.12 The FDRC has also issued Guideline No. 5,13 outlining the prescribed procedure that the FDRC will adopt in handling an accepted case in which one of the parties concerned is uncontactable and thus causing delay to the progress of mediation.
Privilege and professional secrecy
The principle of legal professional privilege is considered fundamental in the judicial system in Hong Kong. It protects from disclosure confidential communications between a client and its lawyer for the dominant purpose of giving or receiving legal advice (legal advice privilege), and communications between parties and their lawyers and third parties for the purpose of obtaining information or advice in connection with existing or contemplated litigation (litigation privilege).
Under Hong Kong law, legal advice privilege does not extend to cover legal advice given by professionals other than practising lawyers in light of the Court of Appeal's (CA) decision in Super Worth International Ltd v. Commissioner of Independent Commission Against Corruption,14 which followed an English Supreme Court's decision.15
Legal advice privilege only protects confidential client-attorney communications. In CITIC Pacific Ltd v. Secretary for Justice (No. 2),16 the CA interpreted 'client' broadly so as to cover the client's employees and not only employees specifically authorised to seek and receive legal advice on behalf of the client. In other words, communications sent by an employee within the client organisation are protected by legal advice privilege, provided that those communications have been produced for the dominant purpose of obtaining legal advice. This represents a significant departure from the definition of 'client' adopted by the English Court of Appeal in Three Rivers v. Governor and Company of the Bank of England (No. 5).17 In a subsequent case,18 the English Court of Appeal considered the authorities in Hong Kong (including CITIC Pacific) and acknowledged concerns with the narrow definition of 'client' adopted in Three Rivers. The issue, however, was left open and as such, the interpretation of 'client' in Three Rivers remains valid. The difference in the approach between English courts and Hong Kong courts remains.
Sources of litigation
i Banks' obligation in respect of anti-money laundering, counter-terrorism financing obligations and fraud
Banks remain at the forefront of the battle of anti-money laundering and counter-terrorism financing. Where the authorities are investigating alleged money laundering or receipt of proceeds of crime in circumstances in which customers find that, without explanation, their accounts are suddenly frozen, banks are placed in a difficult position because its response to customers' demand for reasons may constitute prospective tipping off.29 The CFI has clarified that, at the very least, a bank is entitled to unconditional leave to defend in a summary judgment action for release of the frozen assets.30
Where a fraudster successfully elicits funds from a victim, genuine victims may apply for interim measures against banks to protect their position. In cases of forged instructions to direct banks to transfer funds out of the victim's bank account, an injunction to freeze funds in the hands of third party recipients is not uncommon.31 In addition, where a victim is unaware of the identity of recipients, a Norwich Pharmacal order is particularly helpful to trace the movement of misappropriated funds.32
A restitutionary claim against the third party recipient is not unusual, even if the recipient is innocent. Recipient(s) of misappropriated funds sometimes raise the defence(s) that either (1) he is a bona fide purchaser for value or (2) he has changed his position by acting to his detriment in good faith after the receipt of such funds, thus warranting protection under equity (or both). The CFI has rejected these defences on the basis of illegality (e.g., where the recipient used 'underground banking' in violation of PRC laws) because equity does not assist a wrongdoer.33 In Akbank TAS v. Mainford Ltd & Ors,34 the third party recipient sought to argue that it was merely a conduit as the funds were deposited into its account and were subsequently withdrawn without its authority. The CFI rejected the 'conduit defence' because such defence is only available to banks or similar agents that are instructed to handle the mechanical receipt and transmission of funds.
Banks have become even more exposed to fraud and its repercussions in light of the recent UK Supreme Court's decision to uphold the first successful claim in negligence for breach of the Quincecare duty of care owed by financial institutions to their customers.35 The Quincecare duty refers to a bank's duty to exercise reasonable skill and care in executing the customer's orders. While banks are not expected to question every payment instruction from their clients, they cannot turn a blind eye to signs that would be obvious and glaring to any reasonable banker that their clients' trusted agents are perpetrating a fraud. The Quincecare duty has been recognised by Hong Kong courts. In PT Tugu Pratama Indonesia v. Citibannk NA,36 the CFI found that the bank had breached the Quincecare duty to the customer because it had been put on enquiry in the light of the pattern of payments together with the lack of apparent business connection between the disputed payments and the customer, as well as the fact that the payment instructions were signed by those who would benefit from them. The CFI therefore held that the bank was negligent in failing to make any enquiry, although the action failed because it was time-barred. In HSBC v. SMI Holdings Group Ltd,37 the CFI reaffirmed that the Quincecare duty applies in Hong Kong, though the required threshold to put banks on inquiry is high.
ii Debt-enforcement and insolvency
It is common for banks as creditors to commence winding-up proceedings against their debtors. Traditionally, the court should not dismiss a winding-up petition unless it is satisfied on the evidence that the debt is genuinely disputed on substantial grounds.38 While an injunction to prevent the presentation of a winding-up petition is based on the court's inherent jurisdiction to prevent the abuse of its own process, great circumspection is to be exercised before granting such an injunction as the right to petition for winding-up in appropriate circumstances is a right conferred by statute that should not be restricted except on clear and persuasive grounds.39
In Lasmos Ltd v. Southwest Pacific Bauxite (HK) Ltd,40 the CFI held that a statutory demand should be set aside or winding-up petition should generally be dismissed if:
- the company debtor has a genuine dispute over the debt relied on by the petition;
- the contract under which the debt is alleged to arise contains an arbitration clause that covers any dispute relating to the debt; and
- the company has complied with the contractually agreed dispute resolution process by commencing action and files an affirmation for this purpose.
The Lasmos approach is a departure from the traditional approach above and has been queried in obiter dicta by the CA, which is of the view that public policy mandates that the statutory right of winding up a company should not be fettered or precluded.41 In another case, the CA has also expressly discouraged debtors from making opportunistic attempts to invoke the Lasmos approach in the future.42 More recently, the CFI has held that where there is no real intention to resolve the dispute by arbitration, the Lasmos approach may not be available to the company debtor.43
In winding-up cases concerning banks or asset holding entities, significant care should be taken towards clients' assets. In Re the Joint and Several Liquidators of Bankamerica Nominees (Hong Kong) Ltd (In Members' Voluntary Liquidation),44 which concerns the winding-up of a broker company set up by a bank to hold collateral posted by clients, there remained assets of unidentified clients in the broker company's bank account at the time of winding-up. The CFI reiterated the well-established principle that a client-broker relationship is one of principal and agent, and thus cash held by a broker company is held on trust for clients who have a proprietary interest in those assets. As such, the unidentified assets do not form part of the broker company's assets.
iii Performance bond
Recently, the CA examined the on-demand payment feature of a performance bond, which is a guarantee over delivery of goods or performance of services, failure of which triggers the payment obligation on the guarantor thereunder. In West Kowloon Cultural District Authority v. AIG Insurance Hong Kong Ltd,45 the guarantor attempted to resist payment by claiming that the payment conditions had not materialised and thus no payment obligations arose. The CA reiterated that the commercial efficacy of this instrument dictates that the threshold to resist payment is high because it is widely used and 'treated as cash' given its high certainty of payment obligation.
1 Wynne Mok is a disputes and investigations partner at Slaughter and May.
2 Certain provisions of the BAO were brought into operation on 13 July 2018 and the remaining provisions came into force on 1 July 2019.
3 The Insurance (Amendment) Bill 2020 and the Insurance (Amendment) (No. 2) Bill 2020.
4  HKCFI 1084.
5  HKCFI 2101.
6 See also Taishin International Bank Co Ltd v. QFI Ltd  HKCU 1212.
7 'Remote Hearings for Civil Business in Civil Courts' (Judiciary, 20 July 2020) http://www.judiciary.hk/en/court_services_facilities/gap_remote_hearing.html>.
8 'Arrangement for Mutual Service of Judicial Documents in Civil and Commercial Proceedings between the Hong Kong Special Administrative Region and the Macao Special Administrative Region' (Department of Justice, 1 August 2020) http://www.doj.gov.hk/eng/topical/pdf/mainlandmutual1e.pdf .
9 'Arrangement for Mutual Service of Judicial Documents in Civil and Commercial Proceedings between the Mainland and Hong Kong Courts' (Department of Justice, 4 January 1999) http://www.doj.gov.hk/eng/topical/pdf/mainlandmutual1e.pdf .
10 According to the Terms of Reference which set out the FDRC's rules and processes, a small enterprise means a limited company or a partnership that has an annual turnover not exceeding HK$50 million, gross assets not exceeding HK$50 million, and not more than 50 employees in Hong Kong.
11 The maximum claim was originally set at HK$500,000 but was increased to HK$1 million in January 2018.
13 'Guideline No. 5: Procedure on terminating a case with an un-contactable party at the mediation stage' (FDRC, 1 June 2020) http://www.fdrc.org.hk/en/doc/FDRC_Guideline_No.5_en.pdf>.
14  1 HKLRD 281.
15 R (on the application of Prudential plc & Anor) v. Special Commissioner of Income Tax & Anor  UKSC 1.
16  4 HKLRD 20.
17  QB 1556.
18 Director of the Serious Fraud Office v. Eurasian Natural Resources Corporation  EWCA Civ 2006.
19  HKCFI 2269.
20 Atkins China Ltd v. China State Construction Engineering (Hong Kong) Ltd  HKCFI 2092.
21  HKCU 2374.
22  HKCFI 322.
23 It is defined under the Reciprocal Enforcement Ordinance to mean an agreement concluded by the parties in Hong Kong or any of them as the court to determine a dispute that has arisen or may arise in connection with the specified contract to the exclusion of courts of other jurisdictions.
24 P v. C  HKCFI 2625.
25 X v. Jemmy Chien  HKCFI 286.
26 Eton Properties Ltd & Anor v. Xiamen Xinjingdi Group Co Ltd  HKCFA 32.
27  HKEC 2008.
28 SC v. OE1  HKCFI 2065.
29 Crown Aim Ltd v. Uco Bank  HKCFI 212.
31 Cheung Hon Kuen v. Hang Seng Bank Ltd  HKCFI 2874.
32 Malayan Banking Berhad, Singapore Branch v. Legend Six Holdings Ltd & Anor  HKCFI 990; Cinatic Technology Ltd v. Hongkong and Shanghai Banking Corp Ltd  HKDC 278.
33 DBS (Hong Kong) Ltd v. Pan Jing  HKCFI 268.
34  HKCFI 396.
35 Singularis Holdings Ltd (In Official Liquidation) (A Company Incorporated in the Cayman Islands) v. Daiwa Capital Markets Europe Ltd  UKSC 50.
36  HKCFI 2233.
37  HKCFI 1948.
38 Hollmet AG v. Meridian Success Metal Supplies Ltd  4 HKC 343.
39 Synergy Lighting Limited v. HSBC  HKCFI 2490.
40  HKCFI 426.
41 But Ka Chan v. Interactive Brokers LLC  HKCA 873.
42 Sit Kwong Lam v. Petrolimex Singapore Pte Ltd  HKCA 1220.
43 Dayang (HK) Marine Shipping Co, Ltd v. Asia Master Logistic Ltd  HKCFI 311.
44  HKCFI 399.
45  HKCA 778.
46  HKCFA 45.
47 ibid .
48 'Coronavirus disease (COVID-19) and Anti-Money Laundering and Counter-Financing of Terrorism (AML/CFT) measures' (HKMA, 7 April 2020) http://www.hkma.gov.hk/media/eng/doc/key-information/guidelines-and-circular/2020/20200407e1.pdf>.
49 'Coronavirus disease (COVID-19) and Anti-Money Laundering and Counter-Financing of Terrorism (AML/CFT) measures An Update' (HKMA, 30 July 2020) http://www.hkma.gov.hk/media/eng/doc/key-information/guidelines-and-circular/2020/20200730e1.pdf>.
50 'Feedback from recent thematic reviews of Anti-Money Laundering and Counter-Financing of Terrorism (AML/CFT) control measures for remote customer on-boarding initiatives' (HKMA, 3 June 2020) http://www.hkma.gov.hk/media/eng/doc/key-information/guidelines-and-circular/2020/20200603e1.pdf>.
51 'Statements issued by the Financial Action Task Force' (HKMA, 8 August 2020) http://www.hkma.gov.hk/media/eng/doc/key-information/guidelines-and-circular/2020/20200717e1.pdf>.
52 'LCQ11: Cancellation of dividend payments already announced' (HKSAR Government, 13 May 2020) http://www.info.gov.hk/gia/general/202005/13/P2020051200565.htm>.
53 'LCQ21: Cancellation of dividend payments already announced' (HKSAR Government, 27 May 2020) http://www.info.gov.hk/gia/general/202005/27/P2020052700289.htm>.
54 'Financial Sanctions' (HKMA, 8 August 2020) http://www.hkma.gov.hk/media/eng/doc/key-information/guidelines-and-circular/2020/20200808e1.pdf>.