Australian Securities and Investments Commission v Xiao & Ors [2011] NSWSC 1067

Supreme Court New South Wales

Medium Neutral Citation: Australian Securities and Investments Commission v Xiao & Ors [2011] NSWSC 1067 Hearing dates: 9 September 2011 Decision date: 12 September 2011 Jurisdiction: Equity Division - Corporations List Before: Barrett J Decision: Upon the following undertakings given to the court by the first defendant and the fifth defendant through their counsel, namely (a) the undertaking of the first defendant that if he leaves Australia on 13 September 2011 to travel to Hong Kong for the purposes of attending to visa requirements in Hong Kong, he will return to Australia on 14 September 2011; and (b) the undertaking of the fifth defendant that before the first defendant leaves Australia on 13 September 2011 she will surrender to the solicitor acting for the first and fifth defendants her passport and that she will not request its return to her until after the first defendant returns to Australia from Hong Kong, the court extends until 5pm on 22 September 2011 order 3 made on 9 September 2011 in respect of the first defendant but on the footing that that order as so extended does not prevent the first defendant from leaving Australia on 13 September 2011 to travel to Hong Kong for the purposes of attending to visa requirements. Catchwords: CORPORATIONS - securities - dealing in securities - ASIC suspects insider trading and has commenced investigation - certain persons submit to short term restraints including freezing and travel orders - one such person wishes to have exception to travel order to permit specific travel - nature of task before the court - balancing of interests Legislation Cited: Corporations Act 2001 (Cth), s 1323, Division 3 of Part 7.10 Cases Cited: Australian Securities and Investments Commission v Australian Investors Forum Pty Ltd [2001] NSWSC 1180 Australian Securities and Investments Commission v Carey (No 3) [2006] FCA 433; (2006) 57 ACSR 307 Australian Securities and Investsments Commission v Mauer-Swisse Securities Ltd [2002] NSWSC 684; (2002) 20 ACLC 1530 Australian Securities and Investments Commission v Secured Bond Ltd [2009] NSWSC 1261 Category: Interlocutory applications Parties: Australian Securities and Investments Commission - Plaintiff Steven Hui Xiao - First Defendant Calvin Bo Shi Zhu - Second Defendant Fan Zhang - Third Defendant Wingatta Pty Ltd - Fourth Defendant Xike Hu - Fifth Defendant FanFan Chen - Sixth Defendant Representation: Mr D R Stack - Plaintiff Mr M A Jones - First and Fifth Defendants Mr A S McGrath - Third Defendant Conrad Gray, Solicitor for Australian Securities and Investments Commission Arnold Bloch Leibler - First and Fifth Defendants Thompson Eslick - Third Defendant File Number(s): 2011/00285688

Judgment 1In this proceeding commenced last week by Australian Securities and Investments Commission ("ASIC") under s 1323 of the Corporations Act 2001 (Cth), certain interim orders of short duration are in place. 2They were made in a context where ASIC is carrying out an investigation in relation to conduct of certain persons, including the first defendant, that it suspects may entail a contravention of the "insider trading" provisions in Division 3 of Part 7.10 of the Corporations Act . 3Among the interim orders are freezing orders and, relevantly for present purposes, an order that the first defendant be restrained from leaving Australia or attempting to do so. 4The last-mentioned order will expire at 5pm today unless renewed or extended. The first defendant does not oppose extension up to 22 September 2011 (when the matter will return to court), provided that there is a modification allowing him to travel to Hong Kong tomorrow, 13 September. Given to the court, in that connection, is an undertaking of the first defendant that, if the order is in terms allowing him to leave Australia as he wishes, he will return on 14 September and an undertaking of the wife of the first defendant that she will surrender her passport to her solicitors before the first defendant departs and not require it to be given back to her until the first defendant returns. 5The first defendant has not given evidence but an affidavit of his solicitor has been read without objection. It explains the first defendant's reason for wanting to make a short visit to Hong Kong, namely, that he has, over a period of years, pursued a deliberate course of conduct calculated to result in his obtaining permanent resident status in Hong Kong and the proposed short visit to Hong Kong is required in that connection. 6Two broad areas of context must be mentioned. The first goes to the matters that have prompted ASIC to seek in respect of the first defendant not only a travel restraint order but also orders freezing assets (the first defendant, I might say, is not the only person in respect of whom such orders have been sought in this case). I do not need to say too much about that matter. It is sufficient to note that ASIC has adduced evidence of transactions in certain securities by the first defendant - purchases followed by sales - with the purchases occurring before and the sales occurring after market announcements about matters of which the first defendant's position might reasonably be expected to have made him aware. The evidence also raises a distinct possibility that the first defendant profited from the series of transactions in a way that involved damage to other parties. 7In short, ASIC has shown a solid basis for investigating whether the first defendant may have contravened the Corporations Act's "insider trading" provisions and thereby exposed himself to possible liability to compensate other persons. It is much too early to say what the outcome of any such investigation might be. 8The basis for investigation - coupled with ASIC's expressed desire that the first defendant be available with a view to deployment of its examination processes against him - leads to the second broad area of context, namely, the first defendant's personal situation and the reason for his stated desire to make a short visit to Hong Kong. The facts that follow come from the solicitor's affidavit sworn on information and belief to which certain documents are annexed. 9The first defendant is a citizen of the People's Republic of China ("PRC"). He holds a PRC passport, as do his wife and their five year old child. A second child, less than a year old, was born in Australia and is an Australian citizen holding an Australian passport. The first defendant, his wife and the older child have permission to remain in Australia indefinitely. The family thus appears to have the ability to make their home in either Australia or the PRC. 10The first defendant owns a house in a Sydney suburb. He and his family live in the house. The first defendant and his wife jointly own two investment properties in Sydney. All three properties are mortgaged to a bank. There is evidence of debit balances totalling more than $2.2 million on three home loan accounts with the bank, together with credit balances in other accounts of the order of $140,000. There is no evidence of the value of any of the real estate. 11The first defendant is the managing director of a company that has its main office and activities in Sydney. This is a full time employment position. He and his family have friends in Sydney. 12The first defendant has been, as it were, working his way towards the ability to apply for permanent resident status in Hong Kong. He has had for some five years an employment visa issued by the Hong Kong Immigration Department. Information in a letter from solicitors in Hong Kong is that, in order to obtain permanent resident status, the first defendant will need to have had "residence status" continuously for seven years (the suggestion seems to be that an employment visa amounts to this "residence status"). 13The position thus outlined in the Hong Kong solicitors' letter is supplemented by the deponent solicitor's evidence of things he was told by the Hong Kong lawyers: "(a) they have spoken to the Immigration Department in Hong Kong and have been informed that there is no procedure available to apply to the Hong Kong Immigration Department for an extension of the 15 September 2011 date prior to 15 September 2011; (b) after 15 September 2011, it may be possible for Mr Xiao to travel to Hong Kong and apply to the Hong Kong Immigration Department for rectification to cure Mr Xiao's failure to visit Hong Kong before 15 September 2011; (c) there is no guarantee that an application for rectification would be successful; (d) the longer the delay in making such an application the less likely any application for rectification would be successful; and (e) an application for rectification would require disclosure of the reasons why Mr Xiao failed to visit Hong Kong prior to 15 September 2011 which in turn might prejudice Mr Xiao's prospects of obtaining Hong Kong permanent residence status." 14The evidence thus suggests that failure of the first defendant to attend personally in Hong Kong in the next few days will seriously jeopardise his chances of obtaining the Hong Kong permanent resident status he wishes to achieve. 15As case law makes clear (see, for example, Australian Securities and Investrments Commission v Australian Investors Forum Pty Ltd [2001] NSWSC 1180 ; Australian Securities and Investments Commission v Mauer-Swisse Securities Ltd [2002] NSWSC 684; (2002) 20 ACLC 1530 ; Australian Securities and Investments Commission v Carey (No 3) [2006] FCA 433; (2006) 57 ACSR 307), the court's task in a case like this is to engage in a balancing exercise, weighing the benefits and detriments to the particular defendant against those to the "aggrieved persons" with whom s 1323 is concerned - in this case, the persons who may be entitled to compensation from the first defendant if and when any contravention of the insider trading provisions is proved against him. 16The process of analysis is suggested by the following passage in the judgment of White J in Australian Securities and Investments Commission v Secured Bond Ltd [2009] NSWSC 1261 at [27] - [32]: "As Perram J said in ASIC v Hawley [2008] FCA 1423; (2008) 68 ACSR 79 at 138, the function to be performed under s 1323(1) involves balancing the interests, on the one hand, of the aggrieved persons referred to in s 1323(1) and, on the other hand, the interests of the respondent in avoiding undue interference in his or her affairs. An order which interferes with a person's freedom of movement is not to be made lightly. Once it is accepted that there is a very low prospect of Mr Collard's remaining out of the jurisdiction in the long-term, then I think the risk of his not returning in the short to medium term to provide any necessary assistance to a liquidator, to attend on any further examinations of ASIC, and to defend any proceedings that might be brought against him, should also be assessed as low. The reason for that is that he proffers undertakings to the court to provide ASIC with his contact details when he travels overseas and to return within 14 days of ASIC giving notice in accordance with the details so provided to attend for examination. He also offers an undertaking to the court not to travel overseas for more than three weeks at a time. A breach of those undertakings could well have serious consequences. They could result in fine or imprisonment or both. Whilst I accept that the lack of specificity in Mr Collard's evidence as to why he needs to travel overseas in order to earn income means that he has not provided compelling reasons of a need to travel, I do not think that that is the right question. Interference with his personal liberty at a time when no proceedings have been brought against him and no particular charges are laid against him which he has the opportunity to answer, is a serious matter. Doubtless, if there were a significant risk that he would abscond so as to avoid the claims that companies or the investors might have against him, that would provide strong grounds for the making of an order restraining him from travelling. (See, for example, ASIC v Mauer-Swisse Securities Ltd (2002) 20 ACLC 1530 at [39].) If that were the case, I would not expect the present application to be for an order restraining his leaving or attempting to leave Australia only until 30 November 2009. The evidence establishes only the possibility that Mr Collard might be required to provide assistance to ASIC in that period. I do not think that that possibility is a sufficient justification for the orders sought in the light of the undertakings Mr Collard has proffered." 17The circumstances of that case bear similarities to those of the present case. The ASIC investigation is at an early stage. No ground of apprehension of likely absconding is shown - indeed, the first defendant, as in the Secured Bond case, has given to the court an undertaking to return and that undertaking is supported by his wife's undertaking the effect of which is that she will be unable to join him overseas - as, in a practical sense, will his two young children. 18It is true that the first defendant has not shown a particularly compelling reason for wishing to travel. In saying this, I do not suggest that he has not made clear his wish to continue on the course of obtaining permanent resident status in Hong Kong. Rather, he has shown no reason for wishing to achieve that status. He is in full time employment in Australia. He owns a house here and has made his home here. The need to obtain the ability to live in Hong Kong is not explained. But, as White J said, it is not for a person in the first defendant's position to justify his wish to travel. Rather, it is for ASIC to justify the curtailment of the person's freedom. 19A point not so far mentioned should now be noted. Before these proceedings were commenced last week, the first defendant had arranged an overseas business trip of longer duration and involving other places in addition to Hong Kong. After learning of ASIC's desire to obtain information from him, he cancelled that more extensive trip and confined his plan to the very short visit to Hong Kong. This is indicative of a wish not to interfere unduly with ASIC's investigation. 20In this case, the first defendant's connections with Australia, both personally and in his employment and business affairs, coupled with the undertaking he has given, the regime calculated to ensure that his wife and children do not join him, his action in canceling a longer planned absence and the early point reached by ASIC in the investigation, persuade me that the proper course at this stage is to extend the travel restraint up to 22 September 2011 but with the requested exception allowing the first defendant to make the very short visit to Hong Kong he wishes to make. 21Therefore, upon the following undertakings given to the court by the first defendant and the fifth defendant through their counsel, namely (a) the undertaking of the first defendant that if he leaves Australia on 13 September 2011 to travel to Hong Kong for the purposes of attending to visa requirements in Hong Kong, he will return to Australia on 14 September 2011; and (b) the undertaking of the fifth defendant that before the first defendant leaves Australia on 13 September 2011 she will surrender to the solicitor acting for the first and fifth defendants her passport and that she will not request its return to her until after the first defendant returns to Australia from Hong Kong, the court extends until 5pm on 22 September 2011 order 3 made on 9 September 2011 in respect of the first defendant but on the footing that that order as so extended does not prevent the first defendant from leaving Australia on 13 September 2011 to travel to Hong Kong for the purposes of attending to visa requirements.

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