Litigation & Dispute Resolution Newsletter
4 of 2012: August
SUMMARY OF CONTENTS
Hong Kong's New Competition Ordinance
by Karen Dicks (firstname.lastname@example.org)
In our December 2011 newsletter we reported on Hong Kong's Competition Bill. Subsequent to that newsletter, further revisions were made to the original Bill and we outline below the provisions now to be enacted. The Bill was passed on 14 June 2012 and will come into effect on a day to be appointed by the Secretary for Commerce and Economic Development. It will probably be a year or so before that happens, given that the new Competition Commission and Competition Tribunal have to be set up.
Who will the Competition Ordinance apply to?
It will apply to any entity (regardless of its legal status or the way in which it is financed) engaged in economic activity, including individuals.
Exemptions and Exclusions
Statutory bodies are to be largely exempt, but scope is provided for the Chief Executive, in certain circumstances, to apply the provisions to a specified statutory body or a statutory body engaged in a specified activity.
The Chief Executive will also have wide powers to exempt:-
i. a specified agreement (or class of agreements) from the First Conduct Rule; or
ii. specified conduct (or a specified class of conduct) from the Second Conduct Rule,
- if satisfied that there are exceptional and compelling public policy reasons for doing so; or
- to avoid a conflict between the Competition Ordinance and an international obligation relating to Hong Kong;
The following are also exempt:-
i. from the First Conduct Rule, agreements which contribute to improving production or distribution or promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit;
ii. from the First and Second Conduct Rules, undertakings entrusted by the Government with the operation of services of general economic interest in so far as the conduct rule would obstruct the performance, in law or fact, of the particular tasks assigned to it.
iii. from the First and Second Conduct Rules, agreements made for or conduct engaged in for the purpose of complying with a legal requirement (any enactment in force in Hong Kong or imposed by a national law applying in Hong Kong).
The Competition Commission will be able to issue a block exemption order in respect of particular categories of agreement either of its own volition or upon application by an undertaking. An undertaking will be able to apply to the Competition Commission for a decision as to whether a particular agreement qualifies for an exemption under the Ordinance.
De Minimis Arrangements
Competition laws in other jurisdictions, commonly provide de minimis arrangements so that agreements below certain thresholds are not subject to any enforcement action by the competition authorities. The Ordinance excludes from the First Conduct Rule an agreement between undertakings with a combined worldwide turnover not exceeding HK$200 million in the preceding financial year. This exclusion does not apply to agreements involving the four types of serious anti-competitive conduct i.e. price fixing, bid rigging, market allocation and output control, since such activities almost always have an appreciable adverse effect on competition. Undertakings with annual worldwide turnover of HK$40 million will be excluded from the Second Conduct Rule.
What is prohibited?
First Conduct Rule
The "First Conduct Rule" prohibits anti-competitive agreements and concerted practices and decisions, having the object or effect of preventing, restricting or distorting competition in Hong Kong. A distinction is made between "serious anti-competitive conduct" and other types of conduct which may, depending on the facts and circumstances of that particular case, amount to anti-competitive conduct.
"Serious anti-competitive conduct" includes price fixing, bid-rigging, market allocation and output control.
Second Conduct Rule
The "Second Conduct Rule" prohibits an undertaking that has a "substantial degree of market power" in the market from abusing that power by engaging in conduct with the object or effect of preventing, restricting or distorting competition in Hong Kong. Conduct may in particular constitute such an abuse if it involves predatory behaviour towards competitors or limiting production, markets or technical development to the prejudice of consumers. There is no definition of what constitutes a "substantial degree of market power" in the Ordinance, although it does contain a list of factors that may be considered in determining whether an undertaking has a substantial degree of market power in the market, namely:-
the market share of the undertaking;
- the undertaking's power to make pricing and other decisions;
- any barriers to entry to competitors into the relevant market; and
- any other relevant matters specified in guidelines issued.
Territorial Application of the Rules
The First Conduct Rule applies to an agreement, concerted practice or decision that has the object or effect of preventing, restricting or distorting competition in Hong Kong, even if:-
- the agreement or decision is made or given effect to outside Hong Kong;
- the concerted practice is engaged in outside Hong Kong;
- any party to the agreement or concerted practice is outside Hong Kong; or
- any undertaking or association of undertakings giving effect to a decision is outside Hong Kong.
The Second Conduct Rule is to apply to conduct having the object or effect of preventing, restricting or distorting competition in Hong Kong, even if:-
- the undertaking engaging in the conduct is outside Hong Kong; or
- the conduct is engaged in outside Hong Kong.
A Competition Commission ("the Commission") will investigate conduct that may contravene the Ordinance and enforce its provisions. The Commission will consist of 5 to 16 members, appointed by the Chief Executive. Such members are expected to have expertise or experience in industry, commerce, economics, law, small or medium enterprise or public policy. The Commission may initiate proceedings in a Competition Tribunal ("the Tribunal"), which will consist of judges of the Court of First Instance. Decisions of the Commission will be reviewable by the Tribunal. Decisions of the Tribunal (with a few limited exceptions) will be appealable to the Court of Appeal.
Investigative Powers of the Commission
The Commission may conduct an investigation of its own volition, where it has received a complaint or where the Court of First Instance, Tribunal or Government has referred any conduct to it for investigation. It may only conduct such investigation if it has reasonable cause to suspect that contravention of competition rule has taken place, is taking place or is about to take place.
The Ordinance gives the Commission extensive investigative powers, including requiring a person to produce documents or information, or attend before the Commission to answer questions. It also has the power (upon obtaining a warrant from the court) to enter and search premises and seize documents, computers and or any other things on the premises, reasonably believed to be evidence of contravention of a competition rule.
If the Commission has reasonable cause to believe that there has been a contravention of the First Conduct Rule, but that the contravention does not involve "serious anti-competitive conduct", before bringing proceedings in the Tribunal against the undertaking concerned, it must issue a warning notice. The warning notice will describe the contravening conduct (and evidence of it) and request that it stop within a specified period, failing which the Commission may institute proceedings in the Tribunal.
Where the Commission has reasonable cause to believe that the First Conduct Rule has been contravened and the contravention involves "serious anti-competitive conduct" or the Second Conduct Rule has been contravened, it may issue an infringement notice, rather than initially bringing proceedings in the Tribunal. The infringement notice will contain an offer not to initiate proceedings in the Tribunal if the undertaking in question agrees to comply with requirements specified in the notice, such as refraining from the conduct in question and admitting contravention of the relevant conduct rule.
In exchange for a person's co-operation in an investigation or proceedings under the Ordinance, the Commission may make a leniency agreement with them, that it will not bring or continue proceedings before the Tribunal for a pecuniary penalty in respect of an alleged contravention of a conduct rule.
The Commission may accept a commitment from a person to take any action or refrain from taking any action that the Commission considers appropriate to address its concerns about a possible contravention of a competition rule. If the Commission accepts a commitment, it may agree not to commence or continue an investigation or not to bring or continue proceedings in the Tribunal.
If after carrying out its investigations, the Commission considers it appropriate, it may apply to the Tribunal for a pecuniary penalty to be imposed on any person it has reason to believe has contravened or been involved in the contravention of a competition rule. If the Tribunal is satisfied that a person has contravened a competition rule, it may order that person to pay the Government a pecuniary penalty, of an amount it considers appropriate. In deciding the amount, the Tribunal may have regard to the nature and extent of the conduct in question, the loss or damage caused by the conduct, the circumstances in which the conduct took place and whether the person has previously been found by the Tribunal to have contravened the Ordinance.
The amount of the pecuniary penalty in relation to conduct which constitutes a single contravention cannot exceed 10% of the turnover (gross revenues obtained in Hong Kong) of the undertaking concerned for each year in which the contravention occurred or, if the contravention occurred in more than 3 years, 10% of the turnover of the undertaking concerned, for the 3 years in which the contravention occurred that saw the highest, second highest and third highest turnover.
The Tribunal may also order any person who has contravened a competition rule to pay to the Government an amount equal to the costs incurred by the Commission in investigating and bringing proceedings for the contravention.
In addition to pecuniary penalties, the Tribunal can make numerous other types of orders, including for example, awarding damages to any aggrieved person, granting injunctions, prohibiting a person from making or giving effect to an agreement, modifying, terminating or declaring an agreement to be void or voidable and making disqualification orders against directors for up to five years.
A person who has suffered loss or damage as a result of any act that has been determined by the Tribunal (or Court of First Instance in proceedings transferred to it by the Tribunal or Court of Appeal on an appeal from a decision of the Tribunal) as being a contravention of a conduct rule can bring a follow on action against any person who has contravened or been involved in the contravention. The original Competition Bill contained provisions allowing private, stand alone actions (i.e. not following on from a determination of contravention by the Tribunal). These provisions have now been removed, but the Government intends to review the need to introduce such in a few years' time.
The "Merger Rule" prohibits mergers that have or are likely to have the effect of substantially lessening competition in Hong Kong. The "Merger Rule" will initially only apply to undertakings holding (or controlling an undertaking that holds) a carrier licence issued under the Telecommunications Ordinance. Mergers are specifically excluded from the First and Second Conduct Rules, although the merged undertakings would still be subject to such.
What should businesses be doing now?
1. Familiarize themselves with the provisions of the Competition Ordinance and identify any potential areas of risk in respect of their current activities;
2. Promote in-house awareness and training to ensure that key decision-makers know what:-
- types of agreements and practices may breach the Ordinance;
- types of agreements and practices are exempt from the Ordinance, or could be exempt, upon application to the Commission;
- the extra-territorial reach of the Ordinance and implications of such;
3. Devise and implement internal policies and procedures to ensure compliance with the Ordinance.
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A reminder that sanctions for non-compliance with an Unless Order are automatic
by Richard Hudson (email@example.com)
The recent case of Daimler AG v Leiduck Herbert Heinz Horst & Anor,  3 HKLRD 119 serves as a reminder that since implementation of the Civil Justice Reforms in Hong Kong on 2 April 2009 and by virtue of the new Order 2, rule 4 of the Rules of High Court ("RHC"), brought in by those reforms, where a party fails to comply with an Unless Order, the sanction for such failure takes effect automatically, unless the defaulting party applies to court for (and obtains) relief from the sanction, within 14 days of the failure.
In the Daimler case, the Unless Order in question provided that unless the Plaintiff answered interrogatories by 4 pm on 4 January 2011, the Plaintiff's Points of Defence regarding fraud be struck out and there be an inquiry as to damages, as sought by the Defendants. The Plaintiff's affirmation answering the interrogatories was filed an hour late and served on the Defendants' solicitors almost two hours late.
On 25 January 2011, the Plaintiff issued a summons seeking a time extension to file and serve the answers to interrogatories. The Defendants issued a summons on 27 January 2011, seeking orders that the Plaintiff's Points of Defence regarding fraud be struck out and there be an inquiry as to damages. The Plaintiff then issued a further summons seeking an extension of time in which to make its application for relief from the sanction flowing from its failure to comply with the Unless Order. The Court of First Instance held that the Plaintiff should (in the circumstances of this case) be granted a time extension to apply for relief from sanction. However, it held that the Plaintiff should not be granted relief from sanction because (i) it was not permissible to claim (as the Plaintiff had) legal professional privilege as a reason for not answering an interrogatory; and (ii) the answers given were grossly insufficient and evasive. The court therefore ordered that the Plaintiff's Points of Defence regarding fraud be struck out and there be an inquiry as to damages.
The Plaintiff appealed to the Court of Appeal. The Court of Appeal pointed out that under the new procedural regime, it was not for the party seeking to take advantage of a default (in this case the Defendants) to apply to court in order to render a sanction for that default effective. Instead, the sanction took effect immediately and it was for the party in default to apply for relief from the sanction. The Plaintiff had overlooked the requirement in RHC O.2 r.4 to apply for relief from sanction within 14 days of failing to comply with the Unless Order. Further, the Plaintiff's summons had been drafted as if the automatic sanction under the Unless Order had not in fact taken effect, whereas the position was that upon the Plaintiff failing to file and serve the answers to interrogatories by 4 pm on 4 January 2011, the Plaintiff's Points of Defence regarding fraud were automatically struck out. The Plaintiff's summons should therefore have in addition sought an order for reinstatement of the Points of Defence regarding Fraud.
Notwithstanding the above, the Court of Appeal found that the Court of First Instance had erred in holding that answers to certain interrogatories claiming legal professional privilege were "no answers at all" and it was therefore entitled to exercise afresh the discretion whether or not to grant relief from the sanction flowing from failure to comply with the Unless Order.
The Court of Appeal allowed the Plaintiff's appeal, granting it relief from the sanction, conditional upon it providing further answers to a number of the interrogatories (without invoking legal professional privilege, which the Court of Appeal found not to be engaged). The answers to interrogatories had been filed and served out of time by only a matter of hours and there was no basis for assuming that the claim to legal professional privilege had been advanced in bad faith. This was not, the Court of Appeal said, a case of intentional and contumelious disregard of a court's peremptory order. Further, an allegation of fraud was one which, pre-eminently, should be the subject of a trial and it was not in the interests of the administration of justice that serious findings go by way of default against a party.
After weighing up the effect on the Defendants of the Plaintiff's failure to comply with the Unless Order (delay and having to argue the insufficiency of answers, which could be remedied by the court requiring the Plaintiff to provide further answers and compensating the Defendants in costs) against the effect on the Plaintiff if relief was not granted, the Court of Appeal allowed the appeal. The Court of Appeal said that this was in keeping with the spirit of Civil Justice Reforms under which the court will generally use striking out as a remedy of last resort and is encouraged to consider other measures that may be more appropriate. The Plaintiff was ordered to pay the Defendants' costs in the Court below and of the appeal.
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Examination Order under section 29 of the Bankruptcy Ordinance (Cap. 6)
by Richard Hudson (firstname.lastname@example.org) and
Cathy Wu (email@example.com)
Most people familiar with the corporate insolvency process will be aware of the existence of Section 221 of the Companies Ordinance (Cap 32), which gives liquidators power to apply for orders to examine and obtain documents from parties connected with a company in liquidation. Section 221 has been considered by the Hong Kong courts many times over the last decade and there are a number of decisions examining the uses and limits of the powers contained in the section. Less well known, and less frequently used, is the equivalent power appearing in Section 29 of the Bankruptcy Ordinance (Cap. 6) ("BO"), which allows Trustees in Bankruptcy to make similar applications.
The recent decision of Mr Recorder Anderson Chow SC in Re Lee Priscilla Hwang & Re Lee Raymond Cho Min  HKCU 1536 is the first decision concerning Section 29 of the BO in over four years, since the Court of Appeal in Re Hau Po Man Stanley (In Bankruptcy)  1 HKC 256 gave detailed guidance as to the factors to consider when a Section 29 order is sought. This recent decision is therefore not only an example of how that guidance is to be applied, but was also an opportunity for the court to consider whether recent developments in Section 221 cases should also be applied to Section 29 applications.
The bankrupts, RL and PL, are husband and wife. The Trustees issued summonses in both sets of bankruptcy proceedings for the following relief:
- an order for discovery of documents by O, a Hong Kong company of which RL and PL were formerly directors and with which they had various dealings both pre and post bankruptcy;
- an order for discovery of documents against C, a partner of a law firm who had acted for RL and other members of his extended family in relation to certain litigation and probate matters; and
- an order for the discovery of documents and the examination of R, the former general manager of O who had assisted RL and PL with their personal affairs and represented them in their dealings with the Trustees.
The Trustees had obtained certain information from RL and PL, but argued that there were gaps in this information which could be filled by these three parties, and that this information was required in order to administer the estates of RL and PL.
In response to the summonses, O, R and C had all confirmed that certain categories of documents sought by the Trustees did not exist, and O had agreed to disclose some documentation, but O and C opposed discovery of other categories of documents and R resisted the application for his examination, having declined to answer questions on the basis that the questions put to him related to matters which might have come to him in his capacity as an employee of O and were confidential.
Section 29(1) of BO provides that:
"The court may, on the application of the Official Receiver or trustee, at any time after a bankruptcy order has been made against a bankrupt summon before it the bankrupt or his spouse, or any person known or suspected to have in his possession any of the estate or effects belonging to the bankrupt or supposed to be indebted to the bankrupt, or any person whom the court may deem capable of giving information respecting the bankrupt, his dealings or property, and the court may require any such person to produce any documents in his custody or power relating to the bankrupt, his dealings or property."
In determining the Trustees' applications, the Recorder relied heavily upon the dicta in the Stanley Hau case, noting that the Court of Appeal had held that the purpose of section 29 is to enable the Court to help a trustee discover the truth and circumstances connected with, and to gather information about, the bankrupt's property, affairs and dealings, so that the trustees can effectively and with as little expense as possible complete their function, and that before the Court exercises its discretion in deciding a Section 29 application the applicant must (a) satisfy the court of the essential condition that the provision of information or documents is reasonably required for him to carry out his functions and (b) also establish a prima facie case that the respondent is able to provide such information or documents. If these two conditions are met, the court must carefully strike a balance between the applicant's reasonable requirements and the need to avoid making an order which is wholly unreasonable, unnecessary or oppressive to the person concerned. The burden is on the applicant to satisfy the court, after balancing all the relevant factors, that there is a proper case for such an order to be made.
The Recorder also noted that the Court of Appeal in the Stanley Hau case considered that an application under section 29 of the BO may not be made for the purpose of a mere "fishing expedition" irrespective of costs or proportionality. He also considered, however, the Court of Final Appeal's decision in Joint and Several Liquidators of Kong Wah Holdings Ltd v Grande Holdings Ltd (2006) 9 HKCFAR 766, relating to examination orders made under section 221 of the Companies Ordinance, where Lord Millet NPJ suggested that liquidators must necessarily engage in fishing expeditions and the purpose of section 221 is to enable such expeditions to be carried out effectively. The Recorder rationalised this apparent conflict by noting that the Court of Appeal in Stanley Hau referred to a "fishing expedition" as one made irrespective of costs or proportionality, and held that whatever may be the true position, there was no dispute that the Tustees were required to show that the documents or information sought were reasonably required for them to carry out their functions and that this was the test he proposed to apply.
Decision regarding disclosure of documents
In ordering discovery of all but one category of documents sought by the Trustees, the Recorder held that the Trustees had managed to satisfy him that such documents were reasonably required, and also commented as follows:
- The fact that RL and PL had co-operated with the Trustees was irrelevant. Generally, speaking, a trustee in bankruptcy is entitled to seek information from different sources in order to thoroughly carry out his investigations, and is not confined to obtaining information from the bankrupt himself.
- In ordering disclosure of documents relating to past loans made by RL and PL to O and documents relating to any repayments made in respect of these loans and their status or purpose, the Court did not accept evidence that the level of indebtedness had been admitted, as it was clear that the Trustees did not accept that this was necessarily the true amount owed, and that where there is doubt as to the true amount of indebtedness owed to the bankrupt it was reasonable for the Trustees to request such documentation explaining the position of the loans in order for the trustees to carry out their investigations and functions.
- Similarly, in ordering disclosure of O's management or audited accounts and documents evidencing O's sources of income, the Recorder considered that these documents would enable the Trustees to determine the recoverability of the debts owing by O to RL and PL, and that an application can be properly made to decide whether it is worth pursuing those debts against O.
- In ordering disclosure by C of an agreement to which RL was a party, the Recorder noted that RL was prima facie entitled to receive a copy of the document. Therefore, no question of confidentiality could arise and the Trustees, by virtue of their appointment, had stepped into RL's shoes and were also entitled to receive a copy of the agreement and determine for themselves what RL's entitlements were under it.
- The Recorder also ordered the disclosure of a non-redacted and complete copy of the Grant of Probate relating to the Estate of RL's late grandmother, ruling that since RL was a specific legatee under the will and a beneficiary of a discretionary trust of the residuary estate, the Trustees were entitled to consider the full and complete version of the will in order to determine what rights or benefits RL was entitled to.
Decision requiring Oral examination of R
In considering the application for the examination of R, the Recorder held that by virtue of his previous roles it was apparent that R was able to provide answers to the questions which the Trustees wished to put to him and that such questions were relevant to the Trustees' exercise of their functions. He also held that it was irrelevant that RL and PL themselves might not be entitled to seek information from O, and reaffirmed that an application could properly be made for examination to determine whether it is worth pursuing O for the debts it owed to RL and PL. Accordingly, an Order was made for the oral examination of R.
The Recorder's decision provides useful guidance to trustees as to how the Court will exercise its discretion when it considers a section 29 application, and acts as reminder to third parties that they may be susceptible to such an application if the Court finds them capable of giving information relating to a bankrupt's affairs and that such information is reasonably required for the trustees to carry out their functions.
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