On 21 May 2021, the Hong Kong government published the Consultation Conclusions[1] on legislative proposals to enhance anti-money laundering and counter-terrorist financing (“AML/CTF”) regulations in Hong Kong, including a proposal to introduce a licensing regime for virtual asset services providers (“VASPs”). This client alert discusses the proposed scope of the licensing regime, the proposed regulatory requirements for licence holders, implications for cryptocurrency trading platforms, and opportunities for the future development of such trading platforms in Hong Kong.

Note that the discussions in this alert are based on the Consultation Conclusions. While unlikely, there could still be further changes in the drafting of the legislation before the laws are passed. Importantly there will be further public consultation before the detailed regulatory regime for licence holders, including applicable guidelines, are published, as discussed below.

I. Why introduce a licensing regime for VASPs?

In recent years, the world has seen tremendous growth in the trading of virtual assets (“VAs”) including cryptocurrencies like bitcoin. This drew the attention of the Financial Action Task Force (“FATF”), which expressed concern about the perceived money laundering and terrorist financing (“ML/TF”) risks arising from the growing use of VAs. To address these ML/TF risks, the FATF updated the FATF Standards in February 2019[2] to require jurisdictions to subject VASPs to the same range of AML/CTF obligations as financial institutions. To fulfil its obligations as a member of FATF, the Hong Kong government launched a public consultation on 3 November 2020.[3] Amongst other things, the consultation proposed amendments to the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (“AMLO”) to introduce a licensing regime for VASPs. The public consultation period ended on 31 January 2021, and the Consultation Conclusions were published on 21 May 2021.

II. Scope of proposed licensing regime for VASPs

The proposed licensing regime for VASPs would designate the business of operating a VA exchange as a “regulated VA activity”. As such, any person seeking to operate a VA exchange in Hong Kong would be required to apply for a licence[4] from the Hong Kong Securities and Futures Commission (“SFC”) to become a licensed VASP under the AMLO. The granting of the licence would be subject to meeting the SFC’s fit-and-proper test and other regulatory requirements, which we discuss further below.

The proposed definition of a “VA exchange” is any trading platform which:

  • Is operated for the purpose of allowing an invitation to be made to buy or sell any VA in exchange for any money or any VA; and
  • Comes into custody, control, power or possession of, or over, any money or any VA at any time during the course of its business.

Accordingly, a peer-to-peer trading platform would not fall within the definition of a VA exchange provided that the actual transactions in VAs are conducted outside the platform and the platform is not involved in the underlying transaction by coming into possession of any money or any VA at any point in time (i.e. platforms that only provide a forum for buyers and sellers to post their bids and offers, where the parties themselves transact outside the platform). As such, on the basis of the current drafting, it is possible that decentralised exchanges (“DEXs”) that operate on the basis of non-custodial storage (as opposed to centralised exchanges where users give up custody of their assets to the exchange) and without a centralised entity in charge of the order book, may not ultimately be caught by the definition of a VA exchange.

The proposed definition of “VA” means a digital representation of value that:

  • Is expressed as a unit of account or a store of economic value;
  • Functions (or is intended to function) as a medium of exchange accepted by the public as payment for goods or services or for the discharge of debt, or for investment purposes; and
  • Can be transferred, stored or traded electronically.

The definition of “VA” is therefore likely to include cryptocurrencies such as bitcoin and VAs backed by another asset for the purpose of stabilising its value (i.e. stablecoins). On the other hand, the definition of VA would not cover:

  • Digital representations of fiat currencies (such as digital currencies issued by central banks);
  • Financial products already regulated under the Securities and Futures Ordinance (“SFO”);
  • Closed-loop, limited purpose items that are non-transferable, non-exchangeable and non-fungible (e.g. air miles, credit card rewards, gift cards, customer loyalty points, gaming coins, etc.); and
  • Stored value facilities which are regulated under the Payment Systems and Stored Value Facilities Ordinance.

Depending on the final drafting of the legislative amendment to introduce the licensing regime for VASPs, it appears that non-fungible tokens (“NFTs”) may fall outside the definition of “VA”. In that scenario NFT trading platforms would also fall outside the scope of the licensing regime

III. Implications for non-Hong Kong cryptocurrency exchanges

The proposed licensing regime for VASPs would also extend to VA exchanges which operate outside of Hong Kong, but which actively market to the public of Hong Kong. This means that a cryptocurrency exchange that is based outside of Hong Kong will be prohibited from ‘actively marketing’ regulated VA activity (i.e. operating a VA exchange) to the public of Hong Kong unless they are a licensed VASP. This would be similar to existing prohibitions under the SFO[5] on actively marketing regulated activities to the public of Hong Kong (see below). In the context of the SFO, the meaning of actively markets is potentially broad, with some guidance available from the SFC[6] and in case law on its interpretation.

IV. Crypto assets which are securities or futures contracts are already regulated under the SFO

It is important to note that financial products which are already regulated under the SFO would not fall within the definition of “VA”, and therefore trading platforms which enable trading in such products would not fall within the licensing regime for VASPs.  An example of such financial products is bitcoin futures which, depending on its terms and features, would likely either fall within the definition of “securities” or “futures contracts” under the SFO (and therefore would not be considered VAs).[7]

However, such trading platforms may already fall within the SFO regulatory regime for providing automated trading services, if it operates in or from Hong Kong, or actively markets to the public in Hong Kong (even if the platforms are based outside of Hong Kong). In this respect, in November 2019, the SFC published a position paper[8] which outlined the regulatory standards for the licensing of trading platforms that enable trading of crypto assets which have “securities” features.

V. Proposed licensing requirements for licensed VASPs

  • Eligibility: applicants must either be incorporated in Hong Kong, or non-Hong Kong incorporated companies which are registered in Hong Kong under the Companies Ordinance.
  • Fit-and-proper test: in considering whether or not an applicant is fit-and-proper to be granted a VASP licence, the SFC will take into account, among other matters, whether or not the applicant has been convicted of an ML/TF offence or other offence involving fraud, corruption or dishonesty, their experience and qualifications, their good standing and financial integrity, etc. This fit-and-proper test is likely to be very similar to, if not derived from, the well-established fit-and-proper test which applicants are required to satisfy to be granted a regulated activity licence under the SFO.
  • Two responsible officers: as with any firm currently licensed by the SFC, applicants will need to appoint at least two responsible officers to assume the responsibility of ensuring compliance with AML/CTF and other regulatory requirements, who may be held personally accountable in case of non-compliance.

VI. Regulatory requirements for licensed VASPs

Licensed VASPs will be subject to the AML/CTF requirements stipulated in Schedule 2 of the AMLO (i.e. the same as financial institutions), including customer due diligence and record-keeping requirements.

In addition to AML/CTF requirements, licensed VASPs will also be subject to regulatory requirements designed to protect market integrity and investor interests. These requirements will be set out in codes and guidelines to be published by the SFC. Licensed VASPs would be required to comply with these requirements under licensing conditions imposed by the SFC. These requirements are likely to be wide-ranging in scope, with prescribed requirements covering, among other things, financial resources, risk management, segregation and management of client assets, financial reporting, prevention of market manipulative and abusive activities, prevention of conflicts of interest, etc.

Notably, licensed VASPs will only be able to provide services to professional investors, i.e. high net worth and institutional investors. This means that after the commencement of the licensing regime for VASPs, licensed VASPs cannot provide services to retail investors.

VII. Supervisory powers of the SFC over licensed VASPs

The SFC will be given broad powers to supervise the AML/CTF and regulatory compliance of licensed VASPs. This will include powers to enter business premises, to request the production of documents and records, to investigate non-compliance and to impose sanctions (including orders for remedial actions, civil penalties and suspension or revocation licence) for non-compliances. The SFC will also have intervention powers to impose restrictions and prohibitions against the operations of licensed VASPs and their associated entities where the circumstances warrant, such as to prohibit further transactions or restrict the disposal of property. These powers enable the SFC to protect client assets in the event of emergency and to prevent the dissipation of client assets in the case of misconduct by a licensed VASP.

VIII. Timing

The Hong Kong government aims to introduce the AMLO amendment bill into the Legislative Council in the 2021-22 legislative session, which is due to commence in October 2021. The SFC will also prepare and publish for consultation the regulatory requirements for licensed VASPs, before commencement of the licensing regime for VASPs. Considering the above, the licensing regime is unlikely to commence before 2022. In any event there will be a 180-day transitional period from the commencement of the licensing regime to facilitate licence applications by interested parties.

IX. Conclusion

While the primary motivation for introducing the licensing regime for VASPs is to ensure that Hong Kong meets the latest FATF Standards, the Hong Kong authorities are also focused on promoting the protection of market integrity and investor interests, and the regulatory requirements for licensed VASPs extend beyond AML/CTF requirements by seeking to regulate matters including customer type (i.e. professional investors only), prevention of market manipulative and abusive activities, and prevention of conflicts of interest.

As Mr. Christopher Hui, Secretary for Financial Services and the Treasury, recently said in his remarks at a fintech forum,[9] the introduction of the licensing regime for VASPs is intended to facilitate the development of such an industry by providing a clear regulatory framework for the industry to operate within. Notably, the original proposal for the licensing regime has now been amended to allow non-Hong Kong companies to apply for a VASP licence[10] which may help to attract overseas crypto asset trading platforms that wish to develop their business within the Hong Kong regulatory framework.

For current VASPs contemplating applying for a VA licence when the licensing regime commences, we would recommend starting by reviewing their existing AML/CTF policies and systems and controls to identify gaps with the requirements under Schedule 2 of the AMLO. This is because these requirements are unlikely to be significantly modified during the legislative process, and it may take time and resources to design and implement. VASPs should also be alert to future consultations by the SFC on the codes and guidelines for licensed VASPs in order to identify the detailed regulatory requirements which licensed VASPs would need to comply with. Implementing these requirements will likely require preparing written policies and procedures, upgrading systems and controls, and potentially restructuring aspects of their business and operations to address potential conflicts of interest.

__________________________

   [1]   Consultation Conclusions on Public Consultation on Legislative Proposal to Enhance Anti-Money Laundering and Counter-Terrorist Financing Regulation in Hong Kong (May 2021), published by the Financial Services and the Treasury Bureau, available at: https://www.fstb.gov.hk/fsb/en/publication/consult/doc/consult_conclu_amlo_e.pdf

   [2]   Public Statement – Mitigating Risks from Virtual Assets (22 February 2019), published by FATF, available at: https://www.fatf-gafi.org/publications/fatfrecommendations/documents/regulation-virtual-assets-interpretive-note.html

   [3]   Government launches consultation on legislative proposal to enhance anti-money laundering and counter-terrorist financing regulation (3 November 2020), Hong Kong government press release, available at: https://www.info.gov.hk/gia/general/202011/03/P2020110300338.htm

   [4]   There will be an exception for a VA exchange that is already regulated as a licensed corporation in the voluntary opt-in regime supervised by the SFC pursuant to the SFO.

   [5]   Section 115 of the SFO.

   [6]   “Actively markets” under section 115 of the SFO (last updated 17 March 2003), published by the SFC, available at: https://www.sfc.hk/en/faqs/intermediaries/licensing/Actively-markets-under-section-115-of-the-SFO#9CAC2C2643CF41458CEDA9882E56E25B

   [7]   Circular to Licensed Corporations and Registered Institutions on Bitcoin futures contracts and cryptocurrency-related investment products (11 December 2017), published by the SFC, available at: https://apps.sfc.hk/edistributionWeb/gateway/EN/circular/doc?refNo=17EC79

   [8]   Position paper: Regulation of virtual asset trading platforms (6 November 2019), published by the SFC, available at: https://www.sfc.hk/-/media/EN/files/ER/PDF/20191106-Position-Paper-and-Appendix-1-to-Position-Paper-Eng.pdf

   [9]   Secretary for Financial Services and the Treasury, Mr. Christopher Hui, remarks at StartmeupHK Festival – Virtual FinTech Forum on 27 May 2021, available at: https://www.news.gov.hk/eng/2021/05/20210527/20210527_131949_094.html

  [10]   The non-Hong Kong incorporated company would need to be registered in Hong Kong under the Companies Ordinance.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. If you would like to discuss further, please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Financial Institutions practice group, or the following authors:

Connell O’Neill – Hong Kong (+852 2214 3812, coneill@gibsondunn.com)
Sébastien Evrard – Hong Kong (+852 2214 3798, sevrard@gibsondunn.com)
Arnold Pun – Hong Kong (+852 2214 3838, apun@gibsondunn.com)

Please also feel free to contact any of the following practice leaders and members:

Matthew L. Biben – New York (+1 212-351-6300, mbiben@gibsondunn.com)
Michael D. Bopp – Washington, D.C. (+1 202-955-8256, mbopp@gibsondunn.com)
Stephanie Brooker – Washington, D.C. (+1 202-887-3502, sbrooker@gibsondunn.com)
M. Kendall Day – Washington, D.C. (+1 202-955-8220, kday@gibsondunn.com)
Mylan L. Denerstein – New York (+1 212-351- 3850, mdenerstein@gibsondunn.com)
Michelle M. Kirschner – London (+44 (0) 20 7071 4212, mkirschner@gibsondunn.com)
Arthur S. Long – New York (+1 212-351-2426, along@gibsondunn.com)
Matthew Nunan – London (+44 (0) 20 7071 4201, mnunan@gibsondunn.com)
Jeffrey L. Steiner – Washington, D.C. (+1 202-887-3632, jsteiner@gibsondunn.com)

© 2021 Gibson, Dunn & Crutcher LLP

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

The Hong Kong Court of Appeal (Court of Appeal) recently reaffirmed[1], in the context of an application for an examination order of individuals (Respondents) residing in Hong Kong to obtain information which may enable partial satisfaction of a judgment debt under a judgment in proceedings in a foreign court to which neither the Respondents nor the companies of which they are officers were parties, that pre-trial discovery against non-party witness is not permitted, save within the limited scope of Norwich Pharmacal discovery.

1. Background Leading to the Application in Hong Kong

The applicants for the Hong Kong examination order (Applicants) obtained a judgment for US$100,738,980 (Judgment Debt) in the United States District Court, Western District of Washington at Seattle (Federal Court) against a number of judgment debtors.

The Applicants’ case was that based on the unaudited balance sheet of one of the judgment debtors (Judgment Debtor), there were receivables owed by some third parties to the Judgment Debtor, being US$18.9 million by an exempted limited partnership registered in Cayman Islands, and US$4 million by a company incorporated in the British Virgin Islands (respectively, the Two Sums and the Third Parties).

The Applicants were appointed by the King County Superior Court, State of Washington (State Court) as collecting agent to collect the receivables of the Judgment Debtor, including the Two Sums. Such receivables were to be applied to satisfy the Judgment Debt. The State Court subsequently clarified that it did not have jurisdiction over the Third Parties (as they had no place of business in the State of Washington) and it did not adjudicate on the issue of whether the Two Sums were owed by them to the Judgment Debtor, and held that the collection orders only placed the Applicants in the shoes of the Judgment Debtor for collection purposes and such orders could be made even though the State Court had no jurisdiction over the Third Parties.

Of importance to note is that the collection orders were not garnishee orders, and there is no evidence to suggest that the Federal Court and the State Court had the requisite personal jurisdiction over the Third Parties for garnishee proceedings. Further, the relevant transaction agreements between the Judgment Debtor and the Third Parties respectively had an exclusive jurisdiction clause, which provided that the agreements were governed by the laws in Hong Kong and subject to resolution solely in the Hong Kong Courts.

The Two Sums were disputed by the Third Parties, and their case was that it was the Judgment Debtor which owed them monies instead.

The Respondents, being the subjects of the examination order, are officers of the Third Parties, who reside in Hong Kong.

2. Procedural History in the Hong Kong Courts

The Federal Court issued two Letters of Request for an examination of the Respondents, the purpose of which was to allow the Applicants to obtain information regarding the Two Sums that may enable them to collect the monies owed to the Judgment Debtor which could be utilised to satisfy the Judgment Debt.

An ex parte application by way of an Originating Summons supported by the two Letters of Request to examine the Respondents were made by the Applicants and Master Lai of the Court of First Instance (CFI) granted an examination order (Examination Order).

The Respondents applied to set aside the Examination Order and/or to strike out the Applicants’ ex parte Originating Summons. Both applications were allowed by Recorder Yvonne Cheng SC (Judge) of the CFI.

The Applicants appealed against the decision of the Judge, which decision was upheld by the Court of Appeal.

3. Requirements under the Evidence Ordinance (Cap. 8) (Ordinance) in the Context of Evidence for Civil Proceedings in Other Jurisdictions

Whilst both sections 75(b) and 76(3) of the Ordinance are relevant in the circumstances[2], the Court of Appeal upheld the Judge’s decision based on section 76(3) alone. The analysis under paragraph 3.2 below on section 75(b) is included for completeness.

3.1 Section 76(3) – Pre-Trial Discovery Against Non-Party Witness Prohibited

Section 76 provides for the power of the Court of First Instance to give effect to an application for assistance in obtaining evidence for civil proceedings in foreign courts. Section 76(3) states that:

An order under this section shall not require any particular steps to be taken unless they are steps which can be required to be taken by way of obtaining evidence for the purposes of civil proceedings in the court making the order (whether or not proceedings of the same description as those to which the application for the order relates)…” (emphasis added)

The Judge held that the proposed examination was for pre-trial discovery against non-party witnesses, which is not permitted under Hong Kong law and prohibited by section 76(3), since the allegations of fact relied upon by the Applicants (in short, the Third Parties owed monies to the Judgment Debtor) were not live issues before and to be resolved by the Federal Court where the main action was concluded, and enforcement proceedings (i.e. garnishee proceedings) in which such allegations could be raised had not been instituted. As to the Applicants’ alternative case that after the examination of the Respondents they would “plot a course for collection depending on the evidence so obtained”, the judge held that the proposed examination was a fishing exercise.

The Court of Appeal agreed with the Judge’s decision, and made, inter alia, the following remarks:

  • Hong Kong has adopted the common law position that there is no pre-trial discovery against non-party witnesses other than those falling within the limited scope of Norwich Pharmacal discovery (i.e. discovery against third parties who got innocently mixed up in the wrongdoings of others);
  • whether the assistance request falls foul of section 76(3) on account of fishing must be a matter for the judge in Hong Kong by reference to Hong Kong laws rather than US laws under which the permissible scope of discovery is wider. Whilst examination which is investigatory in nature (in contrast to eliciting admissible evidence) is allowed under US laws, it is not permitted under Hong Kong laws; and
  • obtaining information from a non-party witness by way of post-judgment discovery in aid of execution, whilst permissible under US laws, is not a permissible procedure in Hong Kong, noting that if a judgment creditor has sufficient ground to support the application for a garnishee order in respect of a debt due to a judgment debtor, the judgment creditor has to commence garnishee proceedings first before he can obtain directions for determination of the liability of the garnishee (including directions for discovery as necessary)[3].

3.2 Section 75(b) – Obtaining Evidence for the Purposes of Civil Proceedings

Section 75 provides for the requirements to be fulfilled in an application for assistance. Section 75(b) provides that:

“Where an application is made to the Court of First Instance for an order for evidence to be obtained in Hong Kong and the court is satisfied that the evidence to which the application relates is to be obtained for the purposes of civil proceedings which either have been instituted before the requesting court or whose institution before that court is contemplated, the Court of First Instance shall have the powers conferred on it by this part.” (emphasis added)

The central issue under this section is therefore whether evidence is to be obtained for the purposes of civil proceedings, instituted or contemplated, before the requesting court.

The Judge, without the benefit of expert evidence on US law from the Applicants which was set out in an affirmation[4], ruled that the requirement was not satisfied because the evidence was not obtained for the purposes of civil proceedings which either have been instituted before the Federal Court or whose institution was contemplated.

The Judge rejected that the very application for discovery leading to the Federal Court’s request for evidence could constitute civil proceedings within the meaning of section 75(b) as a matter of construction, since it would render the section redundant. Further, since there was no evidence that the Applicants could establish the Federal Court’s jurisdiction over the Third Parties, it could not be said that proceedings against the Third Parties in the said court for enforcement of the judgment were contemplated.

The Court of Appeal, however, left the issue open, since it disagreed with the Judge on the admissibility of the Applicants’ expert evidence on US law.[5]

Notwithstanding such disagreement and that it was prepared to assume that under US law, the obtaining of information to facilitate the “plotting of the next course of action” would be regarded as obtaining evidence for use in the Federal Court proceedings, the Court of Appeal took the view that it also had to be established that the relevant proceedings were proceedings in a civil or commercial manner in the requested jurisdiction, i.e. Hong Kong court, in addition to the requesting jurisdiction.

In this regard, the Court of Appeal considered that the mere facilitation of the Applicants to act as collection agent did not qualify as civil proceedings in Hong Kong. Whilst discovery procedure is a form of civil proceedings in Hong Kong, such discovery would not be permitted against non-party witnesses, other than the limited form of Norwich Pharmacal discovery.

4. Conclusion

It is clear from the decisions of the Judge and the Court of Appeal that to obtain an order for assistance in obtaining evidence for civil proceedings in a foreign court, such obtaining of evidence must be permissible under the laws of Hong Kong. It is not sufficient that it is only permissible under the laws of the requesting jurisdiction (which may be implied by the Letter of Request issued by the foreign court). On this note, pre-action discovery against non-party witness is not permitted in Hong Kong save for Norwich Pharmacal discovery.

_______________________

   [1]   Re a civil matter now pending in United States District Court for the Western District of Washington at Seattle under No 2:13-CV-1034 MJP ([2020] HKCA 766). The presiding judges were Hon Lam VP, Chu JA and G Lam J. A copy of the judgement of the Court of Appeal is available here. The judgment of the Court of First Instance ([2019] HKCFI 1738) is available here.

   [2]   The Respondents also argued that (1) there were material non-disclosures on the Applicants’ part when they took out the ex parte application for the Examination Order and (2) the Examination Order contravened section 6 of the Protection of Trading Interests Ordinance (Cap. 471). However, these were not the focus of the Judge or the Court of Appeal and accordingly, are not the focus of this alert.

   [3]   The Applicants did not commence garnishee proceedings against the Third Parties since the Federal Court did not appear to have personal jurisdiction over the Third Parties and they were also unable to say that the Two Sums were actually due from these entities to the Judgment Debtor. Further, the Applicants also faced the difficulty of the exclusive choice of forum clauses in the agreements governing the transactions between the Judgment Debtor and the Third Parties. However, these issues were not put before the Federal Court in the application for the Letters of Request and accordingly, the Federal Court had no opportunity to address it. The Court of Appeal remarked that if the Applicants wished to rely on the use of evidence of the Respondents in garnishee proceedings against the Third Parties, they should have at least alluded to such basis in their motion for application for the Letters of Request.

   [4]   The Judge ruled that such evidence was not admissible on the basis that there was no expert declaration in accordance with Order 38 Rule 37C of the Rules of the High Court (RHC). The expert for the Applicants, being the general counsel of the Applicants (who was heavily engaged in the present dispute), felt that he was unable to give an expert declaration.

   [5]   The Court of Appeal was inclined to take the view that the prohibition against admissibility for lack of expert declaration under Order 38 Rule 37C of the RHC does not apply automatically to expert evidence set out in affidavits or affirmations adduced under Order 38 Rule 2(3) (as opposed to expert reports filed for trial pursuant to directions given under Order 38 Rule 6 regarding proceedings commenced by, inter alia, Originating Summons), being an exception under Order 38 Rule 36(2) .

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments.  Please contact the Gibson Dunn lawyer with whom you usually work, or the authors and the following lawyers in the Litigation Practice Group of the firm in Hong Kong:

Brian Gilchrist (+852 2214 3820, bgilchrist@gibsondunn.com)

Elaine Chen (+852 2214 3821, echen@gibsondunn.com)

Emily Chan (+852 2214 3825, echan@gibsondunn.com)

© 2020 Gibson, Dunn & Crutcher LLP

Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

Exclusion of Spouses in Same-Sex Marriages from Certain Legal Entitlements and Benefits Relating to Intestacy and Inheritance Held Unconstitutional

On 18 September 2020, the Court of First Instance (CFI) of the High Court of Hong Kong ruled in Ng Hon Lam Edgar v Secretary for Justice [2020] HKCFI 2412 (Ng case) that the exclusion of spouses in same-sex marriages from the legal entitlements and benefits that are accorded to spouses in opposite-sex marriages under the Intestates’ Estates Ordinance (Cap 73) (IEO) and the Inheritance (Provision for Family and Dependants) Ordinance (Cap 481) (IPO) constitutes unlawful discrimination on the ground of sexual orientation.

The precise form of relief – being a declaration and remedial interpretation of the expressions “valid marriage”, “husband” and “wife” in the IEO and the IPO – remains to be seen.[1]

This CFI judgment (Judgment) may have potentially profound implications and ramifications on the inheritance, estate and succession planning for members of the LGBT community residing in Hong Kong. However, same-sex marriage remains not recognized under Hong Kong law and it appears that the Court is only prepared to consider granting appropriate relief (including an updated interpretation of any relevant legislation) upon consideration of the specific subject matter and in the relevant context. In this connection, please see our Client Alert “Hong Kong Case Update: Sham Tsz Kit v Secretary for Justice” concerning the CFI judgment also handed down on 18 September 2020 rejecting a judicial review application which sought, inter alia, a declaration that, in so far as the laws of Hong Kong do not recognize foreign same-sex marriage, they are unconstitutional.

BACKGROUND

The Judgment was handed down in respect of the judicial review brought by Mr Edgar Ng challenging the definitions of “valid marriage”, “husband” and “wife” under ss 2 and 3 of the IEO and s 2 of the IPO (Marriage Provisions).

Mr Ng is a male Hong Kong permanent resident, who married another male Hong Kong permanent resident “H” in London in January 2017. Following their marriage in London, the couple had a blessing service at a church in Hong Kong.[2]

In April 2018, Mr Ng purchased a flat under the Home Ownership Scheme (HOS) to be used as the matrimonial home with H. However, since the same-sex marriage of Mr Ng and H is not recognised in Hong Kong, H is unable to become a joint owner of the HOS flat with Mr Ng under the relevant HOS policy of the Housing Authority. Mr Ng is concerned that his properties, including the HOS flat, would not be passed to H under the IEO if he dies intestate.[3]

In June 2019, Mr Ng, through his solicitors, sought clarification from the Secretary for Justice as to whether same-sex marriages performed in accordance with the laws of foreign jurisdictions would be recognized by the Hong Kong government as marriages for the purpose of probate, inheritance and intestacy. The Secretary for Justice rejected the request on the basis that it was not a role of the Department of Justice to provide legal advice to private individuals or their solicitors.[4]

TWO-STAGE APPROACH – IS THERE UNLAWFUL DISCRIMINATION?

In the Ng case, the CFI followed the decisions of the Court of Final Appeal (CFA) in Leung Chun Kwong v Secretary for Civil Service (2019) 22 HKCFAR 127 (Leung case) and QT v Director of Immigration (2018) 21 HKCFAR 324 (QT case) and adopted the following two-stage approach in determining whether there is unlawful discrimination.

  • First, to determine whether there is differential treatment on a prohibited ground.
  • Second, and only if differential treatment can be demonstrated, to examine whether differential treatment can be justified: it is not unlawful discrimination if the differential treatment can be justified; but if it cannot be justified, it constitutes unlawful discrimination.[5]

First stage – any differential treatment on a prohibited ground?

To establish there is differential treatment, the complainant must show that:

  •  He or she has been treated less favourably than a person in a relevant comparator group.
  •  The reason for differential treatment is based on a prohibited ground, such as sexual orientation, race or religion.[6]

Second stage- is the differential treatment justified?

Where differential treatment is established, the court then examines whether such differential treatment is justified by applying the “four-step justification test”,[7] which asks the following questions. If any of these questions is answered in the negative, the differential treatment cannot be justified.

  • Does the differential treatment pursue a legitimate aim?
  • Is the differential treatment rationally connected to that legitimate aim?
  • Is the differential treatment no more than necessary to accomplish the legitimate aim?
  • Has a reasonable balance been struck between the societal benefits arising from the application of differential treatment and the interference with the individual’s equality rights?

THE DECISION

“Yes” to the first question: is there differential treatment on a prohibited ground?

Having undertaken the above analysis, the CFI held that it is clear that differential treatment is being accorded to parties to a same-sex marriage and parties to an opposite-sex marriage for the purposes of the IEO and the IPO on the prohibited ground of sexual orientation.[8]

The CFI has identified the differential treatment in three main aspects:

Under the IEO

  • The surviving spouse in a same-sex marriage are not accorded any legal entitlements and benefits that are enjoyed by the surviving spouse in an opposite-sex marriage under the IEO,[9] because the definition of “valid marriage” under s 3 of the IEO only covers an opposite-sex marriage (but not a same-sex marriage) and hence the surviving spouse to a same-sex marriage is not qualified as a “husband” or ‘wife” of the deceased under the IEO to enjoy the legal entitlements and benefits provided for in it.[10]

Under the IPO

  • The surviving “husband” or “wife” in an opposite-sex marriage is entitled without more to apply for an order under s 4 of the IPO for financial provision; whilst the surviving spouse in a same-sex marriage may only make such application if he or she was being maintained, either wholly or substantially, by his or her spouse immediately before the death of the deceased.[11]
  • Under the IPO, the surviving “husband” or “wife” in an opposite-sex marriage is entitled under the IPO to “such financial provision as it would be reasonable in all the circumstances of the case for such a person to receive, whether or not that provision is required for his or her maintenance” (emphases added). However, the surviving spouse in a same-sex marriage is only entitled to “such financial provision as it would be reasonable in all the circumstances of the case for the applicant to receive for his maintenance” (emphases added).[12]

“Yes” to the 1st step of the second question: the Marriage Provisions serve legitimate aims

The CFI is satisfied that the Marriage Provisions serve the three broad legitimate aims as identified by the Secretary for Justice, namely:

  • The Marriage Aim – “To support and uphold the integrity of the traditional institution of marriage in Hong Kong.”
  • The Family Aim – To encourage opposite-sex unmarried couples to marry with a view to ensuring their spouses will be accorded spousal status or priority under inheritance law.
  • The Coherence Aim (which the CFI considers to be simply a variation of the Marriage aim) – “To maintain and optimize the overall coherence, consistency and workability of the extensive and interlocking schemes of Hong Kong legislation that rest upon or otherwise involve the institution of marriage as recognised under domestic law and [article 37 of the Basic Law]”.[13]

“No” to the 2nd step of the second question: no rational connection

However, the CFI is not satisfied that the differential treatment is rationally connected to the legitimate aims identified by the Secretary of Justice. The CFI points out that the relevant question to ask is whether the denial of benefits under the IEO or IPO to same-sex couples would promote the three legitimate aims, which the CFI answers in the negative.[14]

“No” to the 3rd step and “debatable” re the 4th step of the second question

Having answered the 2nd step of the justification test in the negative, it is unnecessary to consider the third and fourth steps of the justification test. However, the CFI offers its view that, if it had become necessary for it to do so, it would have found that the differential treatment cannot pass the 3rd step of the justification test, which asks whether the differential treatment is no more than necessary to accomplish the legitimate aim; whilst it is debatable as to whether it can pass the 4th step.[15]

Conclusion

In light of the above, the CFI allowed the judicial review sought by Mr Ng and ordered that a declaration and remedial interpretation of the expressions “valid marriage”, “husband” and “wife” in the IEO and IPO be granted as the remedy. The form of such declaration and remedial interpretation remains to be seen as they are to be formulated by the parties for the court’s approval.[16]

COMMENT

The Judgment may have important ramifications and implications on the inheritance, estate and succession planning for members of the LGBT community residing in Hong Kong, and will need to be taken into account in any dispute concerning the probate and inheritance of a deceased individual who was in a same-sex marriage immediately before his or her passing.

Alongside recent decisions of the Hong Kong court concerning rights of same-sex married couples, including the recent CFA decisions in the Leung case (9 June 2019) and the QT case (4 July 2018), and the CFI decision in Infinger, Nick v The Hong Kong Housing Authority [2020] 1 HKLRD 1188 (4 March 2020), the Judgment made in the Ng case is no doubt a significant decision in Hong Kong in advancing equality of rights for couples in same-sex marriages. However, it is apparent that the Hong Kong court is not prepared to grant a wholesale declaration that non-recognition of same-sex marriages is unconstitutional, and prefers to limit its analysis to the specific context that is before it. Please see our Client Alert “Hong Kong Case Update: Sham Tsz Kit v Secretary for Justice”.

The Judgment also provides important takeaway for prospective judicial review applicants – that one should consider carefully his/her standing and limit any declaratory relief sought accordingly. Mr Ng suffered costs consequences as he has sought as part of his declaratory relief to cover also persons in civil partnership or civil union, which he has no standing to do so as he has not entered into any such civil partnership or union.[17] Mr Ng is awarded only 90% of his costs to reflect the fact that he has failed to challenge the Marriage Provisions in so far as they concern civil partnerships and civil unions.[18]

The Honourable Mr Justice Chow also remarks that, in future judicial review applications, legal advisers to applicants should carefully consider and concentrate on the real grounds of judicial review, rather than putting in as many grounds of review that simply do not add any substance, with a view to avoiding unnecessary time and costs being spent.[19]

__________________

   [1]   The CFI directed the parties to submit an agreed form of order for the court’s approval within 21 days from the date of judgment, failing which a combined draft order with differences between the parties clearly indicated shall be submitted within 28 days of the Judgment (see § 53, the Judgment). The Judgment may also be subject to appeal.

   [2]   §§ 3 and 4, the Judgment

   [3]   §§ 6 and 7, the Judgment

   [4]   § 8, the Judgment.

   [5]   § 32, the Judgment.

   [6]   §§ 34 and 35, the Judgment.

   [7]   § 39 of the Judgment, which cites the explanation of the four-step justification test given by the CFA in the Leung case.

   [8]   §§ 15, 25, 33 and 38, the Judgment. The CFI also rejected the arguments put forward on behalf of the Secretary for Justice that same-sex married couples and opposite-sex married couples are not in a comparable position for the purposes of IEO and the IPO (see §37 of the Judgment).

   [9]   These include the right of a surviving spouse in an opposite-sex marriage to acquire the premises in which he or she was residing at the time of the intestate’s death (see § 13 of the Judgment), and to take the deceased’s “personal chattels” (as defined in the IEO) and the whole or part of the residuary estate of the deceased depending on the circumstances (see § 12 of the Judgment).

[10]   §§ 12 to 15, the Judgment.

[11]   § 24(1), the Judgment.

[12]   § 24(2), the Judgment.

[13]   §§ 40 and 41, the Judgment.

[14]   §§ 42 to 44, the Judgment.

[15]   §§ 46 and 47, the Judgment.

[16]   §§ 52 and 53, the Judgment.

[17]   §§ 51 and 53, the Judgment.

[18]   §§ 51 and 54, the Judgment.

[19]   § 50, the Judgment.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work, or the authors and the following lawyers in the Litigation Practice Group of the firm in Hong Kong:

Brian Gilchrist (+852 2214 3820, bgilchrist@gibsondunn.com)

Elaine Chen (+852 2214 3821, echen@gibsondunn.com)

Alex Wong (+852 2214 3822, awong@gibsondunn.com)

Celine Leung (+852 2214 3823, cleung@gibsondunn.com)

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