Securities and Futures Commission v. Li Hejun and Others

HCMP 166/2017

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 166 OF 2017

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J U D G M E M T

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INTRODUCTION

1.By the Petition herein dated 23 January 2017, the Securities and Futures Commission (“the SFC”) applies for relief against the 1^st to 5^th respondents, being directions or former directors of Hanergy Thin Film Power Group Limited (“Hanergy”), under Section 214 of the Securities and Futures Ordinance, Cap 571 (“the SFO”).

2.The parties have agreed to dispose of this Petition by way of what is commonly called the Carecraft procedure.  For this purpose, the SFC and each of the 1^st to 5^th respondents have signed a Statement of Agreed Facts dated 23 January 2017 which shall form the basis of the court’s determination of the orders to be made against the respondents.  The parties are also agreed on the orders to be made by the court, save in relation to the length of the disqualification orders.

Background facts

3.The basic facts are set out in the 5 relevant Statements of Agreed Facts, which the parties agree shall be annexed to this judgment.  I shall not therefore set them out again here.  The following brief summary should suffice for the present purpose.

4.Hanergy, a company incorporated in Bermuda, has been a company listed on the Main Board of the Stock Exchange of Hong Kong since 29 January 1996.

5.Hanergy Holdings Group Limited (“Holding”) has been the ultimate holding company of Hanergy since 23 February 2013.

6.The 1^st respondent is the founder of Holding, and was at all material times and still is the ultimate controller of Holding.  Between 15 May 2014 to 20 May 2016, the 1^st respondent was also the Chairman and an executor director of Hanergy.

7.The 2^nd, 3^rd, 4^th and 5^th respondents have since 23 August 2011 12 December 2011, 15 May 2014 and 13 August 2014 respectively been, and currently still are, independent non-executor directors of Hanergy.

8.The 2^nd respondent has since 23 August 2011 been the Chairperson of Hanergy’s Audit Committee, and each of the 3^rd, 4^th and 5^th respondents has, since his appointment as independent non-executor director of Hanergy, been a member of the Audit Committee of Hanergy.

9.At all material times, Hanergy, through its subsidiaries including Apollo Precision (Fujian) Ltd, was involved in “upstream” and “downstream” solar energy businesses with Holding and various subsidiaries or affiliated companies of Holding (“Affiliates”).  In brief terms, the upstream business involved the sale of new turnkey equipment, tools and machinery of solar modules production system, whereas the downstream business involved the production/supply of electricity.

10.The SFC’s complaints against the respondents concern various transactions or dealings between Hanergy and Holding/Affiliates, in particular (i) the performance of two sales contracts entered into in 2010 and 2011 (“the 2010 and 2011 Sales Contracts”) in relation to Hanergy’s upstream business, (ii) purchase orders for solar energy panels in relation to Hanergy’s downstream business, and (iii) a loan of RMB900 million to Holding “mis-stated” in Hanergy’s books or records as a loan to a supplier.  In summary, the SFC’s complaints are as follows:-

In relation to Hanergy’s transactions or dealings with Holding and Affiliates in the upstream business

(1) The respondents failed to take proper steps to recover outstanding receivables due from Holding and Affiliates in respect of goods sold and/or services supplied under the 2010 and 2011 Sales Contract.  The outstanding receivables were very substantial.  The total gross amount due for the year ended 31 December 2014 was approximately HK$3,279 million, and for the year ended 31 December 2015 was approximately HK$2,032 million.

(2) The respondents failed to give Hanergy’s shareholders necessary information relating to its business and the outstanding receivables, including the sustainability of the 2010 and 2011 Sales Contracts and the viability of Hanergy and its subsidiaries’ business model.

(3) The 1^st respondent, as a director of both Holding and Hanergy, put himself in a position of conflict of interests, and preferred the interests of Holding to that of Hanergy by failing to take proper steps to recover the outstanding receivables.

(4) The 2^nd to 5^th defendants, as independent non-executor directors of Hanergy entrusted by the board to perform annual due diligence to ascertain the respective financial positions of Hanergy and Holding/Affiliates, failed to carry out proper due diligence or properly report to Hanergy’s board in relation to the true financial position of Holding/Affiliates, and whether they were able to pay the outstanding receivables to Hanergy.

(5) The 1^st respondent deliberately withheld financial information concerning Holding and Affiliates from the independent non-executor directors, which render their due diligence reports defective.

(6) The respondents made statements in the financial reports of Hanergy affirming the sustainability of Hanergy’s financial situation without proper basis.

In relation to Hanergy’s dealings with Holding and Affiliates in the downstream business

(7) The respondents failed to act as a reasonable board would have done, by continuing to order solar panels from Holding and Affiliates and making substantial prepayments to them, notwithstanding the persistent failure of Holding and Affiliates to meet Hanergy’s orders.

In relation to the loan of RMB900 million to Holding

(8) The 1^st respondent approved of or consented to one of Hanergy’s subsidiaries, Apollo Precision (Kunming) Yuantong Ltd, making a RMB900 million loan to Holding on 28 March 2014, which loan was “mis-stated” in Hanergy’s books or records as a loan to a supplier.  Pausing here, it is not in dispute that Holding repaid the RMB900 million loan on or before 4 June 2014.

11.Each of the respondents accepts that by reason of his or her position, he or she was wholly or partly responsible for the business or affairs of Hanergy, and that the business or affairs as summarised above were conducted in a manner:-

(1) oppressive to Hanergy’s members or part of its members;

(2) involving misfeasance or other misconduct towards it or its members or part of its members;

(3) resulting in its members or part of its members not having been given all the information with respect to its business or affairs that they might reasonably expect; and

(4) unfairly prejudicial to its members or part of its members.

relief

12.On the basis of the Statements of Agreed Facts, I am satisfied that the conditions for granting relief under Section 214(2) of the SFO are met, and that the orders which the parties have agreed should be made are, in principle, appropriate.

13.The 1^st respondent has agreed to procure Hanergy and/or Affiliates to pay all outstanding receivables due to Hanergy within 2 years from the date of the order: see paragraph 6.1 of the Statement of Agreed Facts signed by him.

14.In addition, each of the respondents has agreed that the court should make a disqualification order against him or her: see paragraph 6.3 (in the case of the 1^st respondent) and paragraph 6.1 (in the case of the 2^nd to 5^th respondents) of the relevant Statements of Agreed Facts.  As earlier mentioned, the only issue arising for determining by the court concerns the appropriate length of the disqualification.

15.The court’s approach for determining the length of disqualification in Section 214 applications are well settled.  The objectives of a disqualification order are two-fold: (i) to protect the public against the future conduct of the respondent, and (ii) as a general deterrence: see SFC v Fung Chiu [2009] 2 HKC 19, at paragraph 12 per Kwan J (as she then was).

16.Generally speaking, the court has divided the maximum period of disqualification of 15 years into three brackets:-

(1) the top bracket, of disqualification for over 10 years, for particularly serious cases;

(2) the middle bracket, of disqualification for between 6 to 10 years, for cases which, although serious, are not so serious as to merit a period of disqualification in the top bracket; and

(3) the minimum bracket, of disqualification for up to 5 years, for relatively less serious cases.

17.The court takes into account all relevant circumstances, including the nature and seriousness of the conduct complained of, the structure and nature of the business of the company, the training, experience, skill and competence of the respondent, the conduct of the respondent (including any relevant admission), and other mitigating factors put forward on his or her behalf, when determining the appropriate period of disqualification.  For this purpose, a reasonably broad-brush approach should be adopted (see Re First China Financial Network Holdings Ltd [2015] 5 HKLRD 530, at paragraph 9 per Anthony Chan J).

18.In relation to the 1^st respondent, the breaches of duty committed by him are, in my view, of a very serious nature, having regard to (i) his position as the Chairman and an executor director of Hanergy, (ii) his position as the ultimate controller of both Hanergy and Holding giving rise to a patent and serious conflict of interests, (iii) the very substantial amounts involved in the transactions complained of by the SFC, and (vi) the period over which the breaches took place.

19.In response, Ms Linda Chan SC has raised a number of points on behalf of the 1^st respondent.  First, it is said that the SFC’s case against the 1^st respondent is largely in incompetence or negligence.  I do not accept that the respondent’s breaches were the result of incompetence or negligence only.  The 1^st respondent was in a clear conflict situation, and he plainly preferred the interests of Holding and Affiliates to that of Hanergy.

20.Second, Ms Chan points out that there is no suggestion in the Statement of Agreed Facts signed by the 1^st respondent that he was guilty of dishonesty or that he had made any illicit gain.  Mr Victor Dawes SC (for the SFC) accepts that “fraud” has not been expressly alleged against the 1^st respondent.  He also accepts that there is no allegation that the 1^st respondent has made any direct personal gain out of the transactions complained of by the SFC.  It is, however, necessary to look at those transactions in the proper context and the reality of the situation, namely, that the 1^st respondent was the controller of the counter-parties, ie Holding and Affiliates.  It is clear, in my view, that the 1^st respondent stood to derive benefits at least indirectly from the transactions complained of.

21.Third, Ms Chan says that Hanergy did not suffer any loss but, on the contrary, made very substantial profits from the transactions complained of.  Whether Hanergy will eventually make any profit or suffer any loss will depend on whether it shall be able to recover the outstanding receivables from Holding and Affiliates. This having been said, I accept that Hanergy’s position is somewhat protected by the 1^st respondent’s agreement to give a personal guarantee and to charge 1,367 million shares in Hanergy owned or controlled by him as security for the outstanding receivables.

22.Fourth, Ms Chan says that the 1^st respondent only became a director in May 2014 after Apollo had already entered into the 2010 and 2011 Sales Contracts with Holding, and further that those contracts had been approved by Hanergy’s independent shareholders at general meetings.  It is important to appreciate, however, that the SFC’s complaint lies, not in the propriety of the making of the contracts, but how they were performed (including the failure of the 1^st respondent to take proper steps on behalf of Hanergy to recover the outstanding receivables from Holding and Affiliates, being companies owned or controlled by him).

23.I consider the 1^st respondent’s case to come within the top end of the middle bracket.  On the other hand, the 1^st respondent’s agreement to give a personal guarantee and to charge 1,367 million shares in Hanergy owned or controlled by him as security for the outstanding receivables, his co-operation with the SFC, his agreement to dispose of the petition against him by the Carecraft procedure, and his agreement to pay the SFC’s costs of these proceedings, are mitigating factors which I shall take into account. Overall, I consider that a period of disqualification for 8 years would be appropriate for the 1^st respondent.

24.In relation to the 2^nd to 4^th respondents, they were independent non-executive directors, and their responsibility for the manner in which the business and affairs of Hanergy were conducted would be lower than the 1^st respondent or other executive directors.  Nevertheless, they were under a duty to exercise reasonable skill and care and independent judgment, oversee the conduct of the management and protect the interests of all the shareholders of Hanergy.  The SFC’s case against them is incompetence, and a marked indifference to or disinterest in their responsibilities as directors and the interests of the public shareholders of Hanergy, which I consider to be fair criticisms of their conduct.  I consider their cases to fall within the middle to top end of the minimum bracket.  As in the case of the 1^st respondent, their co-operation with the SFC, their agreement to dispose of the petition against them by the Carecraft procedure, and their agreement to pay the SFC’s costs of these proceedings, are mitigating factors which I shall take into account.  Overall, I consider a period of disqualification for 4 years for the 2^nd and 3^rd respondents, and 3 years for the 4^th and 5^th respondents (taking into account the longer period of default by the 2^nd and 3^rd respondents) would be appropriate.

disposition

25.In relation to the 1^st respondent, I make an order in terms of paragraphs 6.1 and 6.3 of the relevant Statement of Agreed Facts, and the period of disqualification shall be 8 years.

26.In relation to the 2^nd to 5^th respondents, I make an order in terms of paragraph 6.1 of the relevant Statements of Agreed Facts, and the period of disqualification shall be 4, 4, 3 and 3 years respectively.

27.The respondents shall pay the SFC’s costs of these proceedings, to be taxed if not agreed with certificate for 2 counsel.

28.Lastly, it remains for me to thank counsel for the assistance rendered to the court.

Mr Victor Dawes, SC and Mr Julian Lam, instructed by Securities and Futures Commission, for the petitioner

Ms Linda Chan, SC and Mr Danny Tang, instructed by Troutman Sanders, Solicitors and International Lawyers, for the 1^st to 5^th respondents

Statement of Agreed Facts