Securities and Futures Commission v. Andrew Liu and Others

HCMP 2653/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 2653 OF 2016

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Before:  Hon Harris J in Chambers

Date of Hearing:  9 November 2017

Date of Decision: 10 November 2017

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D E C I S I O N

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1.On 5 October 2016, the Securities and Futures Commission (“SFC”) issued a Petition against various directors of Freeman FinTech Corporation Limited (“Company”), which is incorporated in the Cayman Islands and listed on the Main Board of the Stock Exchange of Hong Kong Limited (“HKSE”). Amongst its subsidiaries in 2010 was Ambition Union Limited (“Ambition”).

2.On 8 December 2010, the board of the Company approved the execution of a share purchase agreement (“SPA”), pursuant to which Ambition was to acquire an interest in 23.43% of the shares (“Sale Shares”) of Liu’s Holdings Limited (“Liu’s Holdings”).  Liu’s Holdings was a family holding company.  It held 45.33% of the shares of Liu Chong Hing Investment Limited (“LCH Investment”), which in turn held 48.57% of Chong Hing Bank Limited (“Chong Hing Bank”); both of which are listed on the Main Board of the HKSE.

3.On 10 December 2010, the Company published an announcement about the proposed acquisition.  On 30 December 2010, it published a circular containing information and recommendations in respect of the acquisition (“Circular”) for shareholders who were required to consider and approve it at an extraordinary general meeting on 18 January 2011 (“EGM”), which they did. 

4.The SFC alleges in para 103 of the Petition that:

“103. By reason of the matters set out above, the business or affairs of the Company have been conducted by Andrew Liu, Hui, Lo, Au, Suen, Phillips, Que, Best, Douglas and Whitelam or any part of them in a manner:

103.1. oppressive to its members or any part of its members within the meaning of section 214(l)(a) of the SFO;

103.2. involving defalcation, misfeasance or other misconduct towards the Company or its members or any part of its members within the meaning of section 214(l)(b) of the SFO;

103.3. resulting in its members or any part of its members not having been given all the information with respect to its business or affairs that they might reasonably expect within the meaning of section s214(l)(c) of the SFO; and/or

103.4. unfairly prejudicial to its members or any part of its members within the meaning of section 214(l)(d) of the SFO.”

5.The SFC seeks various orders against the directors who approved the acquisition and recommended it to shareholders, including disqualification orders, pursuant to section 214(2)(d) of the Securities and Futures Ordinance, Cap 571.  By a summons dated 8 May 2017, the 8^th respondent, Roger Best, applies to strike out the Petition against him, on the grounds that it discloses no reasonable cause of action and is frivolous.

The Transaction and its Approval by the Board and Shareholders

6.Andrew Liu was at the material time the majority shareholder and a non-executive director of the Company and also LCH Investment and Chong Hing Bank. 

7.In November or December 2010, Andrew Liu approached Quincy Hui, the managing director of both the Company and Ambition, proposing the purchase of the Sale Shares by the Company.  It was known to Liu that a deed executed in 1972 by the shareholders of Liu’s Holdings (“Deed”) contains a complex set of pre-emption rights that place significant restrictions on sale of shares in Liu’s Holdings to third parties.  His motive in proposing the sale was the realisation of the shares in Liu’s Holdings held by his parents which would, amongst other things, allow his father to repay a substantial debt owed to the Bank of Bangkok.  The proposed sale price was $502,542,037.50, which it was suggested by Andrew Liu and his parents represented a 29% discount to the then current value of the Sale Shares.

8.Mr Best attended the board meeting on 8 December 2010 and voted in favour of the acquisition and the execution of the SPA. Paras 4.4, 4.5 and 4.9 of the minutes record the following:

“4.4 Guarantee and Indemnity Provided by the Guarantor

The Guarantor, as primary obligor, has agreed to grant an unconditional, continuing and irrevocable guarantee and a full indemnity for all losses and damages in favour of the Purchaser in respect of all the obligations to be observed and complied with by the First Seller and the Second Sellers under the Share Purchase Agreement, but excluding (i) consequential, punitive or other indirect losses and damages and (ii) any losses or damages resulting from fraud, negligence or willful misconduct of any indemnified party.

4.5 Undertakings by the First Seller, the Second Sellers and the Guarantor

(a) The Directors understand that Liu’s Holdings and the shareholders of Liu’s Holdings executed a deed in 1972. The deed and the Memorandum and Articles of Association of Liu’s Holdings (‘M&A’) set out certain limitations and procedures in relation to the transfer of ordinary share(s) of HK$0.10 each in the share capital of the Company (‘shares’) in Liu’s Holdings. As a result, the First Seller and the Second Sellers have agreed to hold on trust the legal titles of the First Seller’s Shares and the Second Sellers’ Shares for the Purchaser pending resolution of transferability issues in the deed and the ultimate registration of the Purchaser or its nominee as shareholder of the First Seller’s Shares and the Second Sellers’ Shares in the register of members of Liu's Holdings. Prior to such registration, the Purchaser shall exercise its rights with respect to the Sale Shares through the First Seller and the Second Sellers.

(b) In this regard, the Guarantor has undertaken to take all measures and efforts within his control and power to prevent the First Seller and either of the Second Sellers to divest and bequeath any of their interests in the First Seller’s Shares and the Second Sellers’ Shares after Completion. The First Seller and the Second Sellers have also agreed to provide certain reasonable assistance, in order to effect the terms of the Share Purchase Agreement and the full and complete transfer of legal title in the Sale Shares to the Purchaser after Completion.

...

4.9 INFORMATION ON GUARANTOR

The Guarantor is the lawful son of the Second Sellers. He is a nonexecutive Director and substantial Shareholder of the Company. As of today, the Guarantor holds 614,845,453 Shares (approximately 24.29 per cent of total issued share capital). The Guarantor is also interested in 181,818,182 Shares (approximately 7.18 per cent of total issued share capital) which represent Shares underlying optional bonds which the Guarantor can subscribe for under the terms of the convertible bond subscription agreement between the Company and the Guarantor dated 9 August 2010. Consequently, as of today, according to the register of Shareholders maintained by the Company pursuant to Section 336 of the Securities and Futures Ordinance, the Guarantor is interested in 796,663,635 Shares and underlying Shares of the Company, representing approximately 31.47 per cent of the total issued share capital of the Company.”

9.As at this time, the value of Andrew Liu’s shares held by him, which total 614,845,453, would have been approximately $920 million.

10.Recital (10) to the SPA refers to the Deed and the fact that it places limitations on the transfer of shares.  Clauses 3 and 4 deal with the transfer of equitable title; clauses 5, 6 and 7 say this in respect of legal title:

“EQUITABLE INTERESTS IN THE SHARES

3.

At completion, the First Seller and the Second Sellers shall sell and transfer all their respective equitable rights, interests, entitlements, claims and undeclared dividends in the First Seller’s Shares and the Second Sellers’ Shares absolutely.

4.

The transfer of the equitable titles of the First Seller’s Shares and the Second Sellers’ Shares shall be evidenced by the delivery of the duly executed instruments of transfer and bought and sold notes by the First Seller and the Second Sellers in respect of the First Seller’s Shares and the Second Sellers’ Shares to the Purchaser, its nominee, together with the original share certificates thereof.

LEGAL INTERESTS IN THE SHARES

5.

At completion, the First Seller and the Second Sellers shall sell all their respective legal rights, interests, entitlements, claims and undeclared dividends in the First Seller’s Shares and the Second Sellers Shares and shall hold on trust of the legal titles of the First Seller’s Shares and the Second Sellers’ Shares for the Purchaser, its successor, assign or nominee pending the registration of the Purchaser, or its nominee, as shareholder of the First Seller’s Shares and the Second Sellers’ Shares in the Company’s register of members.

PARTIES’ VIEW ABOUT TRANSFERABILITY

6.

The parties have doubt about the enforceability of certain provisions in the Articles of the M&A and the Deed regarding transferability of the legal interests in the First Seller’s Shares and the Second Sellers [Sellers’] Shares in that it maybe void under the law against perpetuity.

7.

After completion, shall the Purchaser, or its nominee, decide to commence legal action seeking a declaration from competent court that such provisions in the Articles of the M&A and the Deed are void, the First Seller and the Second Sellers, their respective successors, shall assist in all respects as shall be reasonably required of them, including but not limited to lending his, their or his, her or their estates’ names to the action. The costs of the legal action shall be borne by the Purchaser.”

Clauses 8 to 9 require the sellers to pay all dividends received by them in respect of the Sale Shares.  Presumably this was in anticipation of delay in the sellers conveying legal title.  Clause 16 contains conditions precedent including shareholder approval at an EGM. Clause 20 contains Andrew Liu’s guarantee:

“20. In the event of any breach of the obligations as herein required to be observed and complied with in this Agreement by either of the First Seller or the Second Sellers, the Guarantor as primary obligator agrees, warrants, guarantees and covenants to fully indemnify the Purchaser, or its nominee, for all the losses and damages it may suffer, including reasonable legal costs and expenses but excluding any consequential, punitive or other indirect losses and damages and excluding further any losses or damages found by a final non‑appealable ruling of any court of competent jurisdiction to have resulted from fraud, negligence or willful misconduct of any indemnified party.”

11.On 10 December 2010, the Company published an announcement.  It describes the acquisition, the need for shareholder approval, the conditions precedent to the sale, and that the sellers’ obligations are guaranteed by Andrew Liu.  It also states: 

“INFORMATION ON THE GROUP AND REASONS FOR AND BENEFITS OF THE SHARE PURCHASE

The Group is principally engaged in the trading of securities, provision of finance, property holding and investment, insurance brokerage business, securities brokerage, investment advisory and investment holding.

The Board considers that the purchase of shares in a bank holding company will further expand and strengthen the financial services business of the Group. In view of the future prospects of the banking industry in Hong Kong as well as the Consideration being at a discount to the attributable interests of Liu’s Holdings in the latest published audited net asset value of LCH Investment, the Directors (excluding the independent non-executive Directors whose views will be included in the Circular after they receive advice from the independent financial adviser) consider that the terms of the Share Purchase Agreement are on normal commercial terms, are fair and reasonable and in the interests of the Company and its Shareholders as a whole.” [1]

12.The Petition asserts in paras 68.1 and 97:

“ 68.1. The representation in the 10.12.2010 Announcement that the SPA was on ‘normal commercial terms’ and was ‘fair and reasonable and in the interests of the Company and its Shareholders as a whole’.

...

Allowing or causing false or misleading information to be published

97.       Suen and Best have improperly allowed or caused false or misleading statements or representations to be published. Paragraphs 68.1, 68.2, 69.1 and 69.2 above are repeated.”

The SFC contend that Mr Best was at fault in allowing the announcement to be published although, as can be seen from the paragraphs that I have quoted, the independent non-executive directors are expressly excluded from the view expressed on the commercial value of the acquisition. 

13.On 20 December 2010, Deacons wrote on behalf of various shareholders of Liu’s Holdings having seen an announcement (it is not clear from the letter whether it was an announcement of the Company or LCH Investment or Chong Hing Bank) to the sellers pointing out that the proposed sale conflicted with the terms of the Deed. 

14.The letter came to Andrew Liu’s attention shortly thereafter, but Mr Best, and it would appear the majority of the board, were not informed of it.  It would appear it also came to the attention of the HKSE and Mr Hui.  As a result of enquiries from the HKSE, the Company sought from Lam & Co an opinion which suggests that Lam & Co had seen Liu’s Holdings’ Articles of Association and the Deed.  They opined that the Deed does not prevent the SPA being enforceable, but noted that, subject to the terms of the Deed being successfully challenged, Ambition has no right to compel the transfer of the legal title in the Sale Shares to it.  The SFC does not allege in the Petition that the advice was wrong.

15.On 30 December 2010, the Circular was published. Citigroup Global Markets Asia Limited were the advisors to the Company.  Grand Vinco Capital Limited (“Vinco”) were the advisors to the Independent Board Committee.  The Circular contains a letter from the board, containing a recommendation from the directors other than the Independent Board Committee, of which Mr Best was a member, recommending the acquisition.

16.The letter from the board refers to the Deed and the restriction on the transfer of title to the shares (pp 10–12) in particular:

“ As the Purchaser will only have beneficial interest but not legal title upon Completion, the Purchaser will not be able to exercise its rights with respect to the Sale Shares on its own. Instead, the Purchaser will be exercising such rights through the First Seller and the Second Sellers. In particular:–

(i) Dividends declared by Liu’s Holdings will be received by the First Seller and the Second Sellers, who will need to deliver and pay to the Purchaser such dividends without deduction forthwith after receipt.

(ii) The Purchaser will not have immediate right to vote on the Sale Shares. However, given the beneficial interests of the Sale Shares will have been transferred to the Purchaser upon Completion, in respect of matters put forward for a vote by Liu’s Holdings’ shareholders (including the appointment of directors), the First Seller and the Second Sellers will be seeking voting instructions from the Purchaser, and the Purchaser (having become beneficial owner of the Sale Shares) will not be precluded from compelling the First Seller and the Second Sellers to exercise their voting rights in accordance with the Purchaser’s instructions.

...

The Company is of the view that acquisition of beneficial interests in the Sale Shares only at this point in time does not have any material impact on the rights and obligations of the Company’s investment in Liu’s Holdings. The Company’s view is further supported by the legal opinion mentioned hereinafter as well as the guarantee and full indemnity provided by the Guarantor. The Company has obtained a legal opinion to the effect that:

(i) The transaction contemplated in the Share Purchase Agreement is legally binding on the parties thereto;

(ii) There are no restrictions for the parties to enter into the Share Purchase Agreement, and the transaction contemplated in the Share Purchase Agreement is legal and enforceable;

(iii) Upon fulfillment of the Conditions, the Purchaser is entitled to have acquired the beneficial interests in the Sale Shares;

(iv) The Purchaser can enforce the Share Purchase Agreement and its rights thereunder against the First Seller, the Second Sellers and the Guarantor;

(v) As beneficial owner of the Sale Shares, the Purchaser does not have immediate right to vote on the Sale Shares, or to appoint itself or its nominee as director of Liu’s Holdings. In addition, the Purchaser does not have a right to compel Liu’s Holdings to declare dividends or to enforce its rights in the Sale Shares against Liu’s Holdings on its own. Nonetheless, nothing precludes the Purchaser from compelling the First Seller and the Second Sellers to exercise their voting rights in respect of the Sale Shares;

(vi) However, the Purchaser has no legal right to compel Liu’s Holdings to register its name as legal holder of the Sale Shares.

If the Purchaser so wishes, it can seek to take various courses of actions (including, without limitation, discussions with Liu’s Holdings’ other shareholders) in order to have its name registered in Liu’s Holdings’ register of members. The Directors expect this process to take a very long time, and currently it is not practicable to provide any meaningful and/or definitive expectations on the amount of time it would require for the Purchaser to obtain legal title to the Sale Shares. There is also no guarantee that the Purchaser will eventually be registered as the legal owner of the Sale Shares.

Risk factors associated with the Share Purchase Agreement

There are certain risks involved in acquiring only the beneficial interests in the Sale Shares upon Completion and having the legal title thereto held on trust by the First Seller and the Second Sellers for the Purchaser. These risks include:

– Impact on any subsequent sale of the Sale Shares mentioned above;

– Potential breach of their obligations contained in the Share Purchase Agreement by the First Seller, the Second Sellers and/or the Guarantor; and

– The Company not having received any form of security in relation to the guarantee and full indemnity provided by the Guarantor.

The Company intends to hold the Sale Shares as a long-term investment. The Share Purchase Agreement specifically provides that the obligations of the First Seller and the Second Sellers shall bind their respective estates, assigns or successors. The Guarantor is a substantial shareholder of the Company. He is also the managing partner and CEO of a private equity fund (Unitas Capital Pte. Ltd.) which currently manages approximately US$4 billion of capital. The Directors are therefore satisfied with the credibility of the Guarantor in satisfying the guarantee and full indemnity provided by him under the Share Purchase Agreement. The obligations of the First Seller, the Second Sellers and the Guarantor in the Share Purchase Agreement are enforceable by the Purchaser in a court of law. Furthermore, nothing precludes the Purchaser from seeking an injunctive relief for specific performance in the event of any breach by the First Seller, the Second Sellers and/or the Guarantor. Based on the above, despite the risks outlined in the foregoing paragraph, the Directors are of the view that the Company’s interests and Shareholders’ interests are adequately protected.”

17.There is a short letter from the Independent Board Committee expressing the view that, having taken the advice from Vinco, the acquisition is in the interest of the Company and they recommend independent shareholders accept it.

18.Vinco’s letter of advice to the board is, as one would expect, also included in the Circular.  It is comprehensive and runs to 16 pages.  The following passages from the letter are relevant:

“ As stated in the Letter from the Board, the Purchaser only have beneficial interest but not legal title upon Completion, the Purchaser will not be able to exercise its rights with respect to the Sale Shares on its own. Instead, the Purchaser will be exercising such rights through the First Seller and the Second Sellers. In particular:–

(i) dividends declared by Liu’s Holdings will be received by the First Seller and the Second Sellers, who will need to deliver and pay to the Purchaser such dividends without deduction forthwith after receipt;

(ii) the Purchaser will not have immediate right to vote on the Sale Shares. However, given the beneficial interests of the Sale Shares will have been transferred to the Purchaser upon Completion, in respect of matters put forward for a vote by Liu’s Holdings’ shareholders (including the appointment of directors), the First Seller and the Second Sellers will be seeking voting instructions from the Purchaser, and the Purchaser will not be precluded from compelling the First Seller and the Second Sellers to exercise their voting rights in accordance with the Purchaser’s instructions;

...

As confirmed by the Director, the Company intends to hold the Sale Shares as a long‑term investment. The Share Purchase Agreement specifically provides that the obligations of the First Seller and the Second Sellers shall bind their respective estates, assigns or successors. The Guarantor is a substantial shareholder of the Company. He is also the managing partner and CEO of a private equity fund (Unitas Capital Pte. Ltd.) which currently manages approximately US$4 billion of capital. As such, we noted that the Directors are therefore satisfied with the credibility of the Guarantor in satisfying the guarantee and full indemnity provided by him under the Share Purchase Agreement. The obligations of the First Seller, the Second Sellers and the Guarantor in the Share Purchase Agreement are enforceable by the Purchaser in a court of law. Furthermore, nothing precludes the Purchaser from seeking an injunctive relief for specific performance in the event of any breach by the First Seller, the Second Sellers and/or the Guarantor.

As stated in the risk factor above, should the Purchaser decide to sell the Sale Shares, it may not be able to find a buyer. The price that any potential buyer is willing to pay may also be negatively impacted upon. After reviewing the benefits obtained from the acquisition as discussed in above against the risk factor, we are of the view that the risk factor is acceptable given that it may not have material effect on the Company as the Company intends to hold the Sale Shares as a long-term investment.” [2]

Vinco conclude by recommending the independent shareholders vote in favour of the share purchase.

19.The day before the EGM, 17 January 2011, Deacons wrote a letter to the board on behalf of six shareholders in Liu’s Holdings, stating that the proposed sale conflicts with the Deed, objecting to the proposed sale, and reserving “all of their respective rights in this matter, and will take such further action(s) as may be necessary to protect their respective rights and interests without further notice.”

20.Deacons’ letter was discussed at a meeting of the board held shortly before the EGM on 18 January 2011.  The minutes record, amongst other things, the following:

“5. THE MEETING

The Directors present carefully considered, discussed and agreed on the followings:

(A) Letter from Deacons

...

c. The Company has received legal opinions from Andrew Lam & Co. to the effect that the Share Purchase Agreement is legal, valid, binding, and enforceable. The Company also has the benefit of the guarantee and full indemnity issued by Andrew Liu as Guarantor to the transaction. The Company’s interests are therefore adequately protected.

d. Deacons has not expressed their own point of view in the Letter. There is also no legal basis supporting the points raised in the Letter. Consequently, the Letter is at most some opinion expressed by certain people purported to be clients of Deacons.

e. A simple expression of opinion by certain individuals does not constitute price sensitive information. Any person is entitled to their own opinion. The Company should not be reacting every time it hears certain comments or opinions which are completely without basis and justification. If the Company reacts to such expression of opinion, it will actually mislead its shareholders and the general market and guide them on the wrong path.

f. Andrew Lam, legal adviser to the Company on the transaction, also joined the meeting, and advised the Board the following:-

(i) The Letter is simply a ‘complaint letter’.

(ii) No action should be taken by the Company. If the Company takes action, it may mislead and cause more confusion in the market about the validity of the complaint.

(iii) The Company is not party to the deed. Therefore, no legal action can be brought against the Company on issues arising out of the deed.

(iv) The Share Purchase Agreement regarding the acquisition of beneficial interest in Liu’s Holdings is legal, valid, binding and enforceable and not in breach of the deed.”

21.It is not pleaded in the Petition that Andrew Lam’s advice was wrong, and that this should have been apparent to the directors and Mr Best.

22.The EGM proceeded without reference to Deacons’ letter, and the board’s recommendation remained unchanged.

23.Mr Best resigned from the board on 15 March 2011, approximately six months after he was appointed on 22 September 2010.

24.Subsequent to Mr Best’s resignation, matters occurred which led to the sellers offering to repurchase the Sale Shares. They are not of themselves relevant to the case against Mr Best.  The offer was, however, accepted, resulting in a loss to the Company of approximately $77 million.  This is the subject of a claim by the SFC in the Petition against Andrew Liu and Mr Hui, and I assume it is what brought this matter to the attention of the SFC.

Principles Applicable to Strike Out Applications

25.The principles by reference to which the court determines an application to strike out part of a petition or pleading are familiar and not an issue.  It is convenient to summarise them by reference to the SFC’s skeleton:

“7. The general principles in relation to a strike out application are well-known and are summarised in Hong Kong Civil Procedure 2018, Vol 1, §§18/19/4-9.

7.1. It is only in plain and obvious cases that the court should exercise its summary powers to strike out any pleading.

7.2. There should be no trial upon affidavits. Disputed facts are to be taken in favour of the party sought to be struck out.

7.3. The claim must be obviously unsustainable, and the jurisdiction to strike out should not be exercised if it requires a minute and protracted examination of the documents and facts of the case.

7.4. The court is loath to strike out a case that involves an area of the law which is in the process of developing – summary dismissal would deprive the court of hearing full argument on the subject.

7.5. It is for the party seeking to strike out a pleading to demonstrate that the case is a plain and obvious one in which the other party’s claim is bound to fail.

8. In a strike-out application on the ground of no reasonable cause of action, the court must assume that the facts alleged by the plaintiff are true, and the court will assess whether a cause of action has been established by reference to those alleged facts (see Chinabase Holdings Ltd v Robert Chun Chung Ip [2016] 4 HKLRD 304 at §20 per DHCJ Manzoni SC).

9. A proceeding is ‘frivolous’ when it is ‘not capable of reasoned argument, without foundation or where it cannot possibly succeed’. A proceeding is ‘vexatious’ when it is ‘oppressive and/or lacks bona fides’ (see Hong Kong Civil Procedure 2018, Vol 1, §18/19/7).”

The SFC’s Case against Mr Best

26.Most of the Petition is taken up describing the restrictions on the sale of the Sale Shares, Andrew Liu’s purpose in promoting their sale, the transaction, and the events after Mr Best resigned which caused loss to the Company.

27.The case against Mr Best is pleaded in paras 94–102 of the Petition, which read as follows:

“94. Best became a non-executive director of the Company in around September 2010 and ceased to be a director in around March 2011. He had extensive work experience in accounting and had been a member of the various listing committees of the HKSE and a panel member of the Securities and Futures Appeals Tribunal.

95. Both Suen and Best took part in the Board meetings of the Company on 8 December 2010 and 18 January 2011 but not on 17 May 2011.

Non-disclosure of Material Information

96. Paragraphs 30 to 32 above are repeated. Suen and Best have improperly withheld the Deacons’ 2^nd Letter from the shareholders of the Company or the EGM held on 18 January 2011.

Allowing or causing false or misleading information to be published

97. Suen and Best have improperly allowed or caused false or misleading statements or representations to be published. Paragraphs 68.1, 68.2, 69.1 and 69.2 above are repeated.

98. Suen and Best improperly allowed or caused the above false or misleading statements to be published by:

98.1. approving the 10.12.10 Announcement;

98.2. authorising Hui to issue the ‘Letter from the Board’ in the SPA Circular on behalf of the Board;

98.3. providing input and comments on, or otherwise approving or vetting, the contents of the SPA Circular; and/or

98.4. allowing or not otherwise preventing the false or misleading statements from being published.

99. Suen and Best were reckless or negligent as to whether the above statements were false or misleading. The SFC will rely on the following:

99.1. Suen and Best had not ascertained from Andrew Liu, the Sellers or the Remaining Shareholders or had otherwise investigated at the time of the SPA or beforehand the stance taken by the Remaining Shareholders towards the SPA.

99.2. By the latest on 17 January 2011 when the Company had received the Deacons’ 2^nd Letter, Suen and Best knew or ought to have realised that the Remaining Shareholders were firmly in opposition to the SPA.

Not acting in good faith, in the best interests of the Company and/or with reasonable care, skill and diligence

100. By withholding material information, Suen and Best have acted otherwise than in good faith, in the best interests of the Company and/or with reasonable care, skill and diligence.

101. In addition, the SFC will further refer to the following acts, or conduct on the part of Suen and Best, and contend that they were acts or conduct not undertaken in good faith, in the best interests of the Company and/or with reasonable care, skill and diligence:

101.1. Procuring or allowing Ambition to enter into the SPA:

(a) without any analysis or clear idea as to the likelihood of obtaining the legal title to the Sale Shares and the timing for doing so;

(b) which provided for the sale and purchase of not only the equitable but also the legal interests in the Sale Shares when there was great uncertainty as to the timing and feasibility of obtaining the legal title;

(c) without sufficient due diligence on Andrew Liu’s ability and resources to honour his guarantee in the SPA; and

(d) without giving due consideration to the alternative option of holding on to the beneficial interests of the Sale Shares as a long term investment when considering the proposals in the Offer for Re‑Purchase.

101.2. Procuring and/or allowing the shareholders at the EGM to approve the SPA in circumstances set out in paragraphs 30 to 32 above.

102.  For the foregoing reasons referred to in paragraph 101 above, Suen and Best have failed to act with due care, skill and diligence in the performance of his/her duties as a director of the Company.”

28.I note that paras 69.1, 69.2 and 101.1.(d) are not now pursued by the SFC.  I will deal with the other paragraphs in turn.

29.Paragraph 96:  The implication of this paragraph is that Mr Best should have appreciated, after reading the letter from Deacons, that whatever he had assumed to be the position previously, there was considerable uncertainty about the viability of the share sale.  It seems to me that the suggestion that he “improperly withheld the Deacons’ 2^nd Letter from the shareholders” is difficult to understand.  On the assumption that the Deacons’ letter should have caused Mr Best to reconsider recommending the share sale at this time to the shareholders, I would have expected him to recommend the adjournment of the EGM until the issues raised by Deacons had been thoroughly explored and the board able to reach a more considered opinion. 

30.This illustrates a general problem, in my view, with understanding the SFC’s case.  It does not identify what should have been done.  It focuses on what the SFC contend should not have been done.

31.Paragraph 97 of the Petition refers back to paras 68.1 and 68.2 which read as follows:

“68.1. The representation in the 10.12.2010 Announcement that the SPA was on ‘normal commercial terms’ and was ‘fair and reasonable and in the interests of the Company and its Shareholders as a whole’.

68.2. The representation in the SPA Circular that the consideration for the purchase was reached upon ‘arm’s length negotiation’ between the Company and the Sellers.”

As I have noted, the Independent Committee of the board were excluded from the recommendation quoted in para 68.1.  Paragraph 68.2 asserts that the Circular was false and misleading in asserting at p 7 that the consideration was negotiated at arm’s length. 

32.It is not stated in the Petition why Mr Best should have assumed, as I take it para 17 of the Petition is intended to plead, that there was no meaningful negotiation of the price by Mr Hui.  I note it is not asserted that if the transaction had been completed satisfactorily, the price was excessive.

33.Paragraph 98 seems largely to be a repetition of the complaint in para 97.  It is not apparent that Mr Best was at fault in not objecting to the announcement being issued.

34.Paragraph 99:  It seems to be the SFC’s case that Mr Best, who is a highly experienced accountant, should have recognised that the restrictions on the transfer of shares he had seen referred to in the SPA and subsequent documents called into question the viability of the share sale and its commercial value, and that, if not before, when he saw the letter from Deacons dated 17 January 2011, he should have spoken against proceeding to put the matter to shareholders until a thorough opinion had been obtained on the legal issues and the clarification of the other shareholders of Liu’s Holdings’ position, and whether they might be able and inclined to prevent completion of the SPA.

35.Paragraph 101 is directed to the SPA and pleads Mr Best should not have approved the resolution approving execution of the SPA without clarifying the legal position in respect of transfer of title in the shares and Mr Andrew Liu’s ability to honour the guarantee.

Legal Principles

36.Section 214 of the Securities and Futures Ordinance, Cap 571 (“SFO”), provides:

“214. Remedies in cases of unfair prejudice, etc. to interests of members of listed corporations, etc.

(1) Where, in relation to a corporation which is or was listed, it appears to the Commission that at any relevant time the business or affairs of the corporation have been conducted in a manner—

(a) oppressive to its members or any part of its members;

(b) involving defalcation, fraud, misfeasance or other misconduct towards it or its members or any part of its members;

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

(d) unfairly prejudicial to its members or any part of its members,

the Commission may, subject to subsection (3), by petition apply to the Court of First Instance for an order under this section.

(2) If, on an application under this section, the Court of First Instance is of the opinion that the business or affairs of a corporation have been conducted in a manner described in subsection (1)(a), (b), (c) or (d), whether through conduct consisting of an isolated act or a series of acts or any failure to act, the Court may—

...

(d) order that a person wholly or partly responsible for the business or affairs of the corporation having been so conducted shall not, without the leave of the Court—

(i) be, or continue to be, a director, liquidator, or receiver or manager of the property or business, of the corporation or any other corporation; or

(ii) in any way, whether directly or indirectly, be concerned, or take part, in the management of the corporation or any other corporation,

for such period (not exceeding 15 years) as may be specified in the order;

...”

It is engaged if sub-section (1) is satisfied.  The court then has a discretion to make orders including disqualification if it considers it justified.

37.There was a debate before me about what kind of conduct by a director was capable of engaging section 214.  Mr Whitehead SC argued that it would be similar misconduct to that which in the context of section 168H of the Companies (Winding Up and Miscellaneous Provisions) Ordinance, Cap 32, has been found by the court to justify disqualification.

38.Section 168H of the Companies (Winding Up and Miscellaneous Provisions) Ordinance, Cap 32, provides:

“168H. Duty of court to disqualify unfit directors of insolvent companies

(1) The court shall make a disqualification order against a person in any case where, on an application under this section, it is satisfied—

(a) that he is or has been a director of a company which has at any time become insolvent whether while he was a director or subsequently; and

(b) that his conduct as a director of that company, either taken alone or taken together with his conduct as a director of any other company or companies, makes him unfit to be concerned in the management of a company.”

39.In Re Copyright Ltd [2004] 2 HKLRD 113, the Official Receiver sought a disqualification order against a practising barrister who acted as a non-executive director of a company.  In dismissing the application, Kwan J (as she then was) said:

“30. To reach a finding of unfitness, the court must be satisfied that the established misconduct of the director is sufficiently serious (Re Bath Glass Ltd (1988) 4 BCC 130 at p.133). Where the case for a disqualification order is based solely on allegations of incompetence, the Official Receiver would need to satisfy the court that the conduct complained of demonstrates incompetence of a high degree. Various expressions have been used by the courts to emphasise this high burden in establishing unfitness based on incompetence, such as ‘total incompetence’, incompetence ‘in a very marked degree’, ‘some really gross incompetence’ (Secretary of State for Trade and Industry v Baker (No 6) [1999] 1 BCLC 433 at pp.483I–484B).

31. The reasons for the above approach would appear to be as follows. Firstly, the consequence of a disqualification order is serious; the order will prevent the respondent being concerned in the management of any company and involves a ‘substantial interference with the freedom of the individual’ (Secretary of State for Trade and Industry v Baker (No 6) [1999] 1 BCLC 433 at p.484B; Re Lo-Line Electric Motors Ltd [1988] Ch 477 at p.486A–C). Secondly, the primary purpose of the jurisdiction for a disqualification order is to protect the public against the future conduct of companies by persons whose past records as directors of insolvent companies have shown them to be a danger to creditors and others (Re Lo-Line Electric Motors Ltd at p.486A–C; Secretary of State for Trade and Industry v Baker (No 6) at p.482H–I; Re Dawson Print Group Ltd (1987) 3 BCC 322 at p.324).

32. The standard of proof for this kind of application is proof on the balance of probabilities, as these are civil proceedings. However, the court must bear in mind that ‘the more serious the allegation, the more the court will need the assistance of cogent evidence’ and ‘the harder it will be to satisfy the court of the truth of that allegation on the balance of probabilities’. Hence, the serious nature of an allegation of unfitness must be borne in mind in considering whether that allegation is made out (Re Living Images Ltd [1996] 1 BCLC 348 at p.355F–H; Re Verby Print for Advertising Ltd [1998] 2 BCLC 23 at p.31E–G).’

In Re Lo-Line Ltd to which Kwan J refers in para 31, the Officer Receiver applied for a disqualification order under section 300 of the Companies Act 1985.  Sir Nicolas Browne-Wilkinson VC says this at 485–486:

“What is the proper approach to deciding whether someone is unfit to be a director? The approach adopted in all the cases to which I have been referred is broadly the same. The primary purpose of the section is not to punish the individual but to protect the public against the future conduct of companies by persons whose past records as directors of insolvent companies have shown them to be a danger to creditors and others. Therefore, the power is not fundamentally penal. But if the power to disqualify is exercised, disqualification does involve a substantial interference with the freedom of the individual. It follows that the rights of the individual must be fully protected. Ordinary commercial misjudgment is in itself not sufficient to justify disqualification. In the normal case, the conduct complained of must display a lack of commercial probity, although I have no doubt that in an extreme case of gross negligence or total incompetencedisqualification could be appropriate.”

40.In Re Dawson Print Group Ltd [1987] BCLC 601 Hoffmann J (as he then was) dismissed the Official Receiver’s application for a disqualification order against a director of two failed companies under section 300 of the Companies Act 1985 on the ground that the conduct of the director made him unfit to be concerned in the management of a company:

“One knows that some companies are compulsorily wound up and come to the attention of the Official Receiver, that others go into creditors’ voluntary winding up and in respect of them much less information is available. In most of these cases, the failure of the company is likely to be due to mismanagement in one form or another on the part of the directors. Some, of course, are struck by unavoidable misfortune, but mismanagement is a very common occurrence. It seems to me that if that sort of mismanagement in itself were a ground for making a disqualification order under s 300 the effect of the section would be quite arbitrary. It would strike according to, first of all, whether the Official Receiver happened to have sufficient information about the company to commence proceedings, and second, whether as a matter of discretion the Official Receiver decided to commence such proceedings. The 1985 Act offers no guidelines to the Official Receiver, he has to do the best he can, and I was told, and I am sure this must be right, that the Official Receiver tries to deal with each case on its merits. Nevertheless, looking at it from the point of view of the director on the receiving end of such an application, I think that justice requires that he should have some grounds for feeling that he has not simply been picked on. There must, I think, be something about the case, some conduct which if not dishonest is at any rate in breach of standards of commercial morality, or some really gross incompetence which persuades the court that it would be a danger to the public if he were to be allowed to continue to be involved in the management of companies, before a disqualification order is made.” [3]

41.Mr Ho SC argued that the approach in the case of liquidation is not applicable to cases brought under section 214 of the SFO.  Section 214 is engaged if there is a breach of duty.  A director’s duty is to be assessed by the test succinctly described by Hoffmann LJ in Re D’Jan of London Ltd [1993] BCC 646:

“In my view, the duty of care owed by a director at common law is accurately stated in sec. 214(4) of the Insolvency Act 1986. It is the conduct of:

‘... a reasonably diligent person having both—

(a) the general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as are carried out by that director in relation to the company, and

(b) the general knowledge, skill and experience that that director has.’

Both on the objective test and, having seen Mr D’Jan, on the subjective test, I think that he did not show reasonable diligence when he signed the form. He was therefore in breach of his duty to the company.

...

It follows that Mr D’Jan is in principle liable to compensate the company for his breach of duty. But sec. 727 of the Companies Act 1985 gives the court a discretionary power to relieve a director wholly or in part from liability for breaches of duty, including negligence, if the court considers that he acted honestly and reasonably and ought fairly to be excused. It may seem odd that a person found to have been guilty of negligence, which involves failing to take reasonable care, can ever satisfy a court that he acted reasonably. Nevertheless, the section clearly contemplates that he may do so and it follows that conduct may be reasonable for the purposes of sec. 727 despite amounting to lack of reasonable care at common law.”

42.Mr Justice Anthony Chan explains director’s duties in similar terms in Securities and Futures Commission v Yin Yingneng Richard and others [4] at paras 45 to 47:

“45. In addition, the SFC submitted that each of the Respondents in their capacities as directors of the Company owed at common law a duty to the Company to exercise reasonable care, skill and diligence that would be exercised by a person with (a) the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company and (b) the general knowledge, skill and experience that the director has: see Re D’Jan of London Ltd [1993] BCC 646 at 648 per Hoffmann LJ (as he then was); Daniels v Anderson (1995) 16 ACSR 607 at 668 per Clarke and Sheller JJA; the new s 465 of the Companies Ordinance, Cap 622 which has codified the common law position; and the commentary on s 465 in the Butterworths Hong Kong Company Law Handbook, 16th edn.

46. Mr Manzoni also submitted that executive and non‑executive directors have the same responsibility in law as to the management of the company’s business: Re Boldwin Construction Co Ltd [2001] 3 HKLRD 430 at 433J-434E per Rogers VP.

47. These principles of law are not in dispute.”

43.I would agree that it is unlikely (and Mr Ho SC did not suggest otherwise) that the court would disqualify a director unless he had been found to have breached his duties as a director, and that those duties are as I have described them in the previous paragraphs.  It does not, however, seem to me that either approach advanced by the parties is entirely apposite. As Mr Ho SC argued, section 214 is worded materially differently to section 168H and applies in a different context, namely listed companies, as opposed to insolvency.  Neither section refers to breach of duty.  They are worded more generally and framed for the context in which they are to apply. 

44.Section 214(2) is engaged in my view where it has been shown, as the language of sub-section (1) suggests, that the affairs of a limited company have been conducted in a way which comes within one of the four categories specified in sub-sections (1)(a)–(d).  If they have been then the court can be petitioned to determine whether a director is sufficiently culpable in respect of the relevant matter to justify disqualifying him. 

45.In the context of section 168H, section 168I makes clear that this will be assessed primarily by reference to the public interest, which in the context of insolvency primarily involves the interests of creditors; section 214 is directed to identifying and sanctioning misconduct in the management of companies with a view primarily to protecting the investing public and institutions.

46.It does not follow, however, that the court will impose disqualification orders materially more readily when dealing with petitions under section 214 than applications under section 168H.  It will be necessary for the court to be satisfied that the director’s involvement in the relevant matter involves a sufficiently serious failure to satisfy his duties that disqualification is justified and fair.

“Plain and Obvious”

47.At this stage, I am required to determine whether it is plain and obvious that the court could never be satisfied that Mr Best’s conduct justifies disqualification.  In order for the court to be satisfied that Mr Best should be disqualified the court will have to be satisfied of the following matters:

(1) that the affairs of the Company have been conducted in a manner which comes within one of the four categories specified in section 214(1);

(2) that Mr Best has breached his duties in respect of that matter; and

(3) Mr Best’s breach was sufficiently serious to justify disqualification.

48.It seems to me that it is clearly arguable that the first of these three requirements may be satisfied and that the contrary has not been argued on behalf of Mr Best. 

49.It also seems to me arguable that an independent non‑executive director of Mr Best’s experience should have raised concerns about proceeding with the transaction without obtaining both thorough written legal advice on 8 December 2010 and some more information about the attitude of other shareholders in Liu’s Holdings about the proposed transaction.  It seems to me also arguable that the Deacons’ letter of 17 January 2011 should have brought home to him that the restrictions on transfer of the Sale Shares were not mere technicalities, but suggested a more serious problem might exist which went to the commercial viability of the transaction.  It seems to me that it is in this regard, rather more than by approving the announcement in the Circular, that it is arguable that Mr Best was in breach of duty.  Or to put it in language more relevant, given the relevant criteria: it does not seem to me that it is plain and obvious that Mr Best had not, at least in some regards, failed in his duties as a director of the Company.

50.Can it be said at this stage that it is plain and obvious that even if the court found Mr Best had breached his duties in the manner I have referred to, the breaches are plainly and obviously not capable of justifying the serious sanction of disqualification?  In my view, it cannot.  I, of course, express no view on the strength of the case against Mr Best, but I am not satisfied at this stage that it is plain and obvious that after a trial of the Petition, it will not be possible, when Mr Best’s conduct comes to be considered in the overall context of this case, to justify the imposition of disqualification for some period.

Conclusion

51.I therefore dismiss the summons and I will make a costs order nisi that Mr Best pays the SFC’s costs of the summons, with a certificate for two counsel.

Mr Ambrose Ho SC and Mr Norman Nip, instructed by the Securities and Futures Commission, the petitioner

Mr Robert Whitehead SC and Mr Steven Kwan, instructed by Norton Rose Fulbright Hong Kong, for the 8^th respondent