“Second Attempt, Same Outcome”: Hong Kong Courts Uphold the Constitutionality of Hong Kong’s Restriction Notices Regime

(A) Introduction

In Chen Wencan and another v Secretary for Justice and another (“Chen Wencan”),[1] CACV 101/2023, date of judgment: 4 July 2025, the Court of Appeal (“CA”) dismissed the Applicants’ appeal against the refusal of leave to apply for judicial review. The Applicant challenged the constitutionality of Section 207(e) of the Securities and Futures Ordinance (Cap. 571) (“SFO”) which empowers the Securities and Futures Commission (“SFC”) to issue restriction notices (“RNs”) freezing assets held by licensed corporations during investigations into suspected market misconduct, including “ramp and dump” schemes.

Notably, this ruling reaffirmed an earlier decision in Tam Sze Leung and others v Secretary for Justice and another (“Tam Sze Leung”),[2] HCAL 177/2022, date of judgment: 26 September 2022, the Court of First Instance (“CFI”) similarly upheld the SFC’s authority to issue RNs freezing trading accounts during market misconduct investigations, specifically in relation to “ramp and dump” schemes.

This article examines the above judgments, highlighting the consistent judicial endorsement of the SFC’s powers under the RN regime and the significant legal barriers faced by parties attempting to overturn RNs.

(B) Statutory Framework of RNs

Under the SFO, the SFC may impose RNs through three key powers:

1. Section 204: Restriction of business: The SFC may prohibit a licensed corporation from entering into specific transactions, soliciting specific clients or carrying on business in specific ways.

2. Section 205: Restriction on dealing with property: the SFC may prohibit a licensed corporation from disposing of any relevant property, dealing with any relevant property in a specified manner or not in a specified manner, assisting, counselling or procuring another person to dispose of any relevant property or deal with any relevant property in a specified manner or not in a specified manner, or require a licensed corporation to deal with any relevant property only in, a specified manner.

3. Section 206: Maintenance of property: The SFC may require a licensed corporation to maintain property in or outside Hong Kong such that— (a) the property maintained is of the value and of the description that appear to the SFC to be desirable with a view to ensuring that the licensed corporation will meet its liabilities related to its licensed regulated activity; and (b) the property is maintained to enable the licensed corporation at any time freely to transfer or otherwise dispose of the property.

Section 207 of the SFO authorizes the SFC to exercise these powers against licensed corporations. Section 207(e) was the main issue in both Chen Wencan and Tam Sze Leung.

(C) Tam Sze Leung and others v Secretary for Justice and another

Facts

The case arose from the SFC’s investigation into various persons suspected of engaging in a “Ramp and Dump” market manipulation scheme involving shares of WMCH Global Investment Ltd (stock code: 8208). The SFC issued RNs to 15 licensed corporations in relation to 32 trading accounts held by 26 individuals, including the three Applicants.

The Applicants made a constitutional challenge against the use of RNs issued by the SFC to freeze assets held in their trading accounts with licensed corporations on the ground that the regime for issuing RNs was (1) not “prescribed by law” and (2) a disproportionate interference with property rights.

They argued that the powers under Section 204(1)(a) and 205(1) of the SFO interfere with their property rights guaranteed by Article 6 and Article 105 of the Basic Law (“BL6” and “BL105”). Further, the powers invoked on the basis of Section 207(e) were unconstitutional on two grounds:

(1)   Ground 1 (“Prescribed by Law Ground”)[3]

The relevant provisions fail to meet the ‘prescribed by law’ requirement. The provisions are extremely broad. They can be deployed whenever it “appears” to the SFC that it is merely “desirable” (not even “necessary”) in pursuit of highly vague and undefined objectives such as the broad and open-ended concept of “the public interest”. There is no guidance as to the factors which would be taken into consideration in the SFC’s decision making process. The scope of powers and the manner of their exercise lack sufficient clarity and the regime lacks proper safeguards against abuses and misuses

(2)   Ground 2 (“Proportionality Ground”)[4]

Even if the provisions are thought to be sufficiently certain, the interference with an individual’s property rights guaranteed by BL6 and BL105 goes further than is reasonably necessary and fails step 3 and step 4 of the proportionality test. The required evidential threshold is too low, “in the public interest” as a basis for intervention is too broad, and there is an absence of sufficient safeguards.

Decisions

The Court dismissed both challenges.

(1)   Ground 1 (“Prescribed by Law Ground”):

There are two requirements flowing from the concept of "prescribed by law":[5]

(1)   the law must be adequately accessible, meaning the citizen must be able to have an indication that is adequate in the circumstances of the legal rules applicable to a given case; and

(2)   a norm cannot be regarded as a ‘law’ unless it is formulated with sufficient precision to enable the citizen to regulate his conduct.

The RN regime must be examined against its statutory context under the SFO.

Section 207(e) Interpretation

The phrase “It appears to the Commission that the imposition of the prohibition or requirement is desirable” requires the SFC to form a view based on available materials, balancing:[6]

(1) the stage of the investigation;

(2) the potentiality of the unfavourable outcome (which might include both its degree of likelihood and its possible gravity of effect) which has been identified by the materials generated by the investigation;

(3) the apparent need to safeguard the rights of others or protect the public interest; and

(4) what the impact will be from the prohibition or requirement in mind – that balancing makes it seem right to do so, namely that it appears to be desirable.

The safeguards against abuses of Section 207(e) come from the involvement of and oversight by the Securities and Futures Appeal Tribunal (“SFAT”).[7] The SFAT’s review is a de novo full merits review. SFAT must exercise its own independent judgment. It has broad powers to confirm, vary or set aside the SFC’s decision, and substitute the decision with any other decision as it considers appropriate.

In light of the above, the Court held that Sections 204 and 205 when invoked on the basis of Section 207(e) satisfy the “prescribed by law” requirement.

(2)   Ground 2 (“Proportionality Ground”):

The proportionality analysis, established in Hysan Development Co Ltd v Town Planning Board (2016) 19 HKCFAR, involves the following four steps:[8]

(1) whether the intrusive measure pursues a legitimate aim;

(2) if so, whether it is rationally connected with advancing that aim;

(3) whether the measure is no more than necessary for that purpose; and if the encroaching measure passes the first three steps;

(4) whether a reasonable balance has been struck between the societal benefits of the encroachment and the inroads made into the constitutionally protected rights of the individuals, asking in particular whether pursuit of the societal interest results in an unacceptably harsh burden on the individual.

The legitimate aim of Part X of the SFO is the protection of investors, creditors of the licensed corporation and the public interest.[9] In respect of the public interest, one aspect is the preservation of monies that might otherwise be dissipated, pending the results being known of an investigation into misconduct within the securities and futures industry. The Court found that the restriction/ limitation that is the consequence of the SFC’s interpretation of Sections 204, 205 and 207(e) pursues a legitimate aim. It is rationally connected to that legitimate aim and strikes a reasonable balance between the societal benefits of the encroachment and inroads made with the constitutionally protected rights of the individual, and does not result in an unacceptably harsh burden on the individual.[10]

In light of the above, the Court held that the RN regime satisfied the proportionality test.

(D) Chen Wencan and another v Secretary for Justice and another

The facts of Chen Wencan are similar to those in Tam Sze Leung. The CA reaffirmed and mainly adopted the reasoning in Tam Sze Leung.

Facts

The Applicants appealed against the refusal of the CFI to grant leave for judicial review of 2 RNs issued by the SFC under Sections 204 and 205, on the basis of Section 207(e) of the SFO.

The SFC investigated suspected ramp and dump schemes involving the shares of Skymission Group Holdings Limited and Wei Yuan Holdings Limited conducted by a syndicate, whose suspected members included the Applicants. The SFC issued 2 RNs pursuant to Section 204(1) and 205(1) on the basis of Section 207(e) to freeze the Applicants’ trading accounts.[11]

The Applicants applied for leave for judicial review of (i) Sections 204, 205 and 207(e), and (ii) the RNs, contending that they prohibited the Applicants from dealing with or disposing of their private properties, and constituted a clear restriction on their fundamental right to use their properties under BL6 and BL105.[12]

The Honourable Mr Justice Coleman dismissed their applications and held that the RN regime satisfied both the “prescribed by law” and “proportionality” requirements.[13]

Grounds of Appeal

(1)  Ground 1: The RN Regime does not satisfy the “prescribed by law” requirement and is incompatible with BL6 and BL105.[14]

(2)  Ground 2: The RN Regime amounts to a disproportionate interference with the Applicants’ right to property.[15]

Decisions

The CA held that the RN Regime satisfies both the prescribed by law and proportionality requirements and is constitutionally compliant.

(1)   Ground 1 (“Prescribed by Law Ground”):

The CA upheld the CFI’s rulings on the following grounds:

(1)   While “public interest” under Section 207(e) is broad, its scope is contextually constrained by: (i) the SFC’s statutory functions (SFO Section 5(1) and objectives (SFO Section 4); and (ii) its application only to licensed corporations;[16]

(2)   There are adequate safeguards against abuse of power, including: (i) non-delegable decision-making by the SFC’s independent board; (ii) requirements for reasoned decisions and Gazette publication (SFO Section 209); (iii) rights to seek withdrawal/variation of RNs (SFO Section 208) and merits-based review by the SFAT (SFO Section 217); (iv) judicial review availability.[17]

(3)   The threshold for issuing RNs (“appears desirable”) is not deficient.[18]

(2)   Ground 2 (“Proportionality Ground”):

The CA held that the RN Regime strikes a proportionate balance on the following grounds:

(1)   The measures adopted by the legislature under Sections 204 and 205 are no more than necessary to achieve the legitimate aims of Part X of the SFO, namely, the protection of investors, creditors of the licensed corporation and the public interest (the “Protective Aims”), applying a standard “closer to the ‘manifestly without reasonable foundation’ end of the spectrum. The CA added that it would reach the same conclusion even under a stricter standard of review closer to the other end of the reasonableness spectrum.[19]

(2)   The extent of interference with a person’s right to use property under the RN Regime is proportionate to the Protective Aims.[20]

In light of the above, the CA held that the Applicants’ intended challenge to the RN Regime on constitutional grounds was not reasonably arguable, and had no realistic prospects of success.[21] The CFI was correct to refuse to grant leave to apply for judicial review.

(E)  Key Takeaways

In conclusion, Chen Wencan reinforces the Courts’ consistent stance in upholding the constitutionality of RN regime under the SFO. Despite the broad scope of “public interest”, the Courts affirmed that the statutory framework provides adequate safeguards, satisfying the requirements of being “prescribed by law” and proportionate to legitimate public interests. Any future attempts to contest the RN’s constitutionality are likely to face substantial legal hurdles.

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[1] https://legalref.judiciary.hk/lrs/common/search/search_result_detail_frame.jsp?DIS=170172&QS=%28%7BChen+Wencan%7D+%25parties%29&TP=JU

[2] https://legalref.judiciary.hk/lrs/common/search/search_result_detail_frame.jsp?DIS=147488&QS=%28%7BTam+Sze+Leung%7D+%25parties%29&TP=JU

[3] Tam Sze Leung, §53

[4] Ibid, §53

[5] Ibid, §59

[6] Ibid, §103

[7] Ibid, §145

[8] Ibid, §175

[9] Ibid, §185

[10] Ibid, §187

[11] Chen Wencan, §7

[12] Ibid, §24

[13] Ibid, §27

[14] Ibid, §28

[15] Ibid, §28

[16] Ibid, §55

[17] Ibid, §62-63

[18] Ibid, §71

[19] Ibid, §87

[20] Ibid, §88

[21] Ibid, §89