Trending commercial disputes and insurance issues in Hong Kong

As one of the world’s leading financial centres, Hong Kong is home to many financial institutions and international companies. With a common law legal system, Hong Kong’s commercial law and financial regulatory system shares a historical connection to the United Kingdom. However, there are important differences and, in some respects, particularly when it comes to the law of insurance contracts, Hong Kong has maintained a more conservative approach.

In this article Clyde & Co’s Hong Kong partners examine some of the key trending issues in commercial disputes and insurance risk in Hong Kong. In the first part we look to some of the key trends in securities disputes, financial regulatory exposures, audit risk and data protection. The second part of the article examines key differences between the law of insurance contracts in Hong Kong and the UK. Insurance remains a key risk mitigation tool for managing risk in the financial services industry. All the issues we examine are underpinned and protected by a variety of insurance policies. Hong Kong’s insurance law largely retains the traditional common law approach and there is little appetite to adopt the reform agenda encapsulated in the UK’s Insurance Act 2015. There are now significant differences in issues such as non-disclosure/misrepresentation and damages for late payment of insurance claims.

Securities disputes and class actions

A securities class action regime does not exist in Hong Kong. It was considered in 2008 but is not currently on the agenda. Rather, the companies and securities regulator – the Securities and Futures Commission – has the power to seek redress for shareholders, a statutory power which it does utilise in substantial matters. This statutory power may become more relevant as the Chinese and US capital markets continue to ‘decouple’, with US-listed Chinese companies expected to continue ‘homecoming’ direct and secondary listings in Hong Kong, with the former giving access to mainland capital via the Stock Connect regime.

Pursuing damages for market misconduct, including misstatements to the market, therefore falls to the SFC. The best-known example was the role the SFC (with the HK Monetary Authority) took to broker a resolution between 16 Hong Kong distributing banks to repurchase from investors Lehman equity linked notes – ‘minibonds’. There have been a number of successful actions by the SFC to obtain remedies for investors who have suffered loss as a result of misconduct of one type or another, such as misleading financial disclosure by listed companies. The SFC has many times conducted what are, sometimes known as ‘surrogate’ actions on behalf of investors using its powers under ss212-214 of the Securities and Futures Ordinance (SFO). The SFC’s ability to obtain remedies for investors addresses some of the problems created by Hong Kong’s lack of a class action regime and contingency fees.

The SFC commenced proceedings in both the Hong Kong High Court and Market Misconduct Tribunal against CITIC Ltd and five of its former executive directors in September 2014 based on market misconduct involving disclosure of false or misleading information on CITIC’s financial position following large losses incurred as a result of its investment in leveraged foreign exchange contracts in 2008. The SFC sought restoration or compensation orders to compensate up to 4,500 investors who purchased CITIC shares between the date on which the false or misleading information was allegedly announced and the date the true financial position was disclosed. The SFC ultimately failed in its action. That does not, however, affect the core principle that the SFC is able to sue listed companies and their directors for market misconduct, including related to financial statements or releases to the market (or failure to update the market).

By contrast, in 2018, the SFC was successful in the High Court and the company and directors were ordered to pay HK$1.42bn (approximately US$180m) to shareholders. In doing so, the Court applied a purposive construction to s213, holding that it essentially provided a statutory regime whereby the SFC as regulator could take action to obtain civil remedies for the benefit of investors, who might otherwise be deterred by cost and other considerations from instituting legal proceedings individually to obtain redress for their relatively small losses.

While the legislature has not provided for a class action mechanism for investors to seek redress, a potential implication of the 2018 Qunxing decision is that the SFC may make use of the statutory regime under s213 to seek remedies for the benefit of investors, with a view to protecting the investing public and maintaining confidence in the market.

Financial regulatory exposures

The SFC’s proactive and ‘front-end loaded’ approach in pursuing corporate misfeasance, led to 204 investigations in 2021. This included a Court of Appeal decision granting a compensation order of HK$622m (US$80m) against former directors of EganaGoldpfeil (Holdings) Ltd (for failure to carry out due diligence on transactions and large-scale misapplication of Company funds). The close co-operation between the SFC and the PRC regulatory authorities (China Securities Regulatory Commission) has resulted in successful high-profile prosecutions against directors of companies listed in both Hong Kong and the PRC (for example, Shandong Molong Petroleum Machinery Company Ltd).

The risk exposure for directors and officers (and their companies) will continue to increase particularly considering recent legal developments:

The Stock Exchange of Hong Kong (SEHK) revised the Listing Rules (with effect from 3 July 2021) to impose secondary liability on ‘Relevant Parties’ (including senior management), who ‘caused by action or omission or knowingly participated in a contravention of the Listing Rules’. The definition of ‘senior management’ now extends to any person who performs managerial functions under the directors’ immediate authority.

The SEHK’s new Corporate Governance Code on ESG and gender diversity, came into effect in January 2022. Directors of issuers and of IPO applicants are obligated to take these into account as part of their risk management and governance. ESG reporting is now required at the same time as publication of the annual report. Single gender boards are being phased out and will be banned by the end of 2024. Mandatory disclosure requirements include at Board level, measurable targets, and timelines for achieving gender diversity. Issuers must now annually review their Board diversity policy.

Audit and accountant’s disputes

To support businesses operating in Hong Kong, there is a wide range of accountancy firms present, from local sole trader practices to the Big Four.

The Hong Kong Courts are no strangers to large-scale litigation involving accountancy firms. With a benign tax environment, there is less of a need for the creation of potentially complicated schemes to minimise tax, which can embroil accountants in disputes, as has occurred in other jurisdictions. As a result, the focus of claims against accountants in Hong Kong tends to concern allegedly negligent audit practices.

We predict that there is likely to be an increase in the number of such claims. The Covid pandemic has put financial stress on a number of companies, and insolvencies (and the change of management that brings) are often a trigger for claims against the company’s prior auditors. The pandemic may also have exacerbated the risk of an audit failing to detect financial misstatements due to the difficulties in auditing companies during a lockdown. As audits of large Hong Kong listed companies frequently involve audits of their assets in mainland China, this could be a particular concern, as the PRC (along with Hong Kong) has been the subject of several Covid prevention measures, which are continuing.

Regulatory interventions are likely to be the other developing concern for accountants in Hong Kong. The accountancy profession here has undergone an overhaul of its regulatory and disciplinary system, with the Financial Reporting Council, an independent statutory body, assuming the role as regulator of auditors of listed entities in Hong Kong since the commencement of the Financial Reporting Council (Amendment) Ordinance on 1 October 2019. A consultation process is currently underway to expand the powers and reach of this body (which will be renamed along the way). We are already seeing an increase in the number of investigations carried out by the FRC and the new proposals, if enacted, would undoubtedly lead to this trend continuing.

Data protection and cyber insurance

Cyber risks are considered by most Hong Kong boardrooms as one of the main threats to their business. They range from accidental data mishandling by staff to malicious attacks by threat actors. Working from home has heightened the reliance on technology and tested the resilience of cybersecurity at work. Unsurprisingly, malicious attacks and ransomware are on the rise. They result in data breaches, wire frauds, regulatory actions, business interruption, third party liability and loss of reputation. Hong Kong boardrooms look to manage these risks through cyber risk solutions provided by the insurance market.

The insurance market has responded with innovative products. Many insurers now offer coverage not only for the liability of the corporate and its directors, but also for specific cyber exposures such as incident response services, forensic services, public relations, regulatory investigations, and ransom payments.

Another trend is the prevalence of wire frauds which involve company funds being wired internationally to banks in Hong Kong at the instigation of a fictitious email from a fraudster impersonating the CEO. Many of these fraud emails have involved significant sums. Insurance products for this type of risk are in demand. Insurers will seek subrogated recovery from the banks in Hong Kong and enlist police assistance in the process.

Hong Kong has proposed a reform of the personal data protection law to introduce tighter protection for personal data and render stronger enforcement power to the Privacy Commissioner. The proposals include mandatory data breach notification obligation and administrative fines for breach on a scale corresponding with the global annual turnover of the business. We will see an increase in the number of regulatory investigations and higher fines. We anticipate a surge in demand for cyber insurance solutions.

Insurance law of Hong Kong


The duty of utmost good faith continues to apply in Hong Kong, and governs the pre-contractual duties owed by an insured and its broker. This means there is a duty to avoid making misrepresentations and to disclose all material facts which the insured knows or ought to know at the time of placement. The issue of materiality is an objective one that is, what would influence a prudent underwriter in underwriting the risk and fixing the premium. The actual underwriter must also have been induced to accept the risk. The sole remedy for breach (irrespective of whether it is innocent, negligent or deliberate) is avoidance of the policy; in effect it is an ‘all or nothing’ remedy.

By contrast, in England, the Insurance Act 2015 introduced the duty of fair presentation of risk, replacing the duty of utmost good faith. This duty is owed solely by the insured (not broker) and the legislation provides for proportionate remedies in the event of a breach. Furthermore, the knowledge of senior management is attributable to the insured; that is, ‘those… who play significant roles in the making of decisions about how the insured’s activities are to be managed or organised’. The insured must also present the information in a clear and accessible manner (no ‘data dumping’). If such information puts the insurer on sufficient notice to make further enquiries, the burden to investigate the matter shifts to the insurer. The duty to volunteer information remains.

Late payment damages

In Hong Kong, there is no implied term in contracts of insurance that claims must be paid by an insurer within a reasonable time. While failure to pay a claim within a reasonable time may be considered a breach of utmost good faith, an insured will not have a right to damages caused by unreasonable delay in paying an insurance claim. In contrast, the Insurance Act 2015, provides for such an implied term into every contract of insurance. Reasonable time includes time to investigate and assess the claim. Failure to do so renders the insurer liable to pay damages.


English commercial law and English courts are an important part of corporate and commercial law in Hong Kong. In the 25 years since the handover the differences between the UK and Hong Kong’s commercial law have become more pronounced and in-house counsel in the UK should no longer assume that common principles will arise when managing Hong Kong commercial risks. Change has not been in a single direction. Insurance contract law and class actions are both examples of Hong Kong continuing to maintain traditional principles and approaches while the UK has adopted a more consumer friendly law reform agenda.