Securities and Futures Commission v. Xu Jinpei and Others

HCMP 572/2022

[2023] HKCFI 2908

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 572 OF 2022

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REASONS FOR DECISION

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Introduction

1.On 15 May 2022, the SFC presented the petition herein (“Petition”) against (i) the 1^st to 3^rd Respondents and (ii) the 4^th to 8^th Respondents, being respectively the senior officers (the “Senior Officers”) and other senior officers (the “Other Senior Officers”) of China Candy Holdings Limited (the “Company”) at all material times, on the grounds that, by reason of overstatement of the Company’s cash and bank balances (caused by the overstatement of the bank balances of its indirect wholly-owned subsidiaries) as at 30 June 2016 in its 2016 Interim Report (published on 11 August 2016) (“2016 IR”) and as at 31 December 2016 in its 2016 Annual Report (published on 17 March 2017) (“2016 AR”), the business or affairs of the Company have been conducted in a manner:

(1)  involving defalcation, misfeasance or misconduct towards the Company, its members or any part of its members;

(2)  resulting in its members not having been given all the information with respect to the Company’s business or affairs that they might reasonably expect; and/or

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

within the meaning of sections 214(1)(b), (c) and (d) of the Securities and Futures Ordinance (Cap. 571) (the “SFO”).

2.By the Petition, the SFC seeks the following relief:

(1)  disqualification orders pursuant to section 214(2)(a) or (d) of the SFO that without leave of the Court, the 1^st to 8^th Respondents shall not, for such period as the Court considers appropriate:

(a)  be, or continue to be, a director, liquidator, or receiver or manager of the property or business, of any listed or unlisted corporation in Hong Kong including the Company or any of its subsidiaries and affiliates; and

(b)  in any way directly or indirectly be concerned, or take part, in the management of any listed or unlisted corporation in Hong Kong including the Company or any of its subsidiaries and affiliates; and

(2)  that the 1^st to 8^th Respondents be ordered to pay the costs of the Petitioner.

3.The SFC and the 6^th Respondent have reached agreement with a view to dispose of the proceedings against the 6^th Respondent by way of the Carecraft procedure. The SFC and the 6^th Respondent executed a Schedule on 9 January 2023 containing a summary of the agreed facts, the SFC’s case against the 6^th Respondent and the agreed proposed orders (“Carecraft Schedule”). I have appended the Statement of Agreed Facts to this Reasons for Decision.

4.In gist, the following key facts are admitted by the 6^th Respondent:

(1)  The Company had been listed on the Growth Enterprise Market of the Stock Exchange of Hong Kong Limited since 11 November 2015 until 31 December 2019 when its listing status was cancelled.

(2)  The Company was an investment holding company. Its subsidiaries included Jinjiang Holeywood Trading Co., Ltd (“HW Trading”) and Fujian Holeywood Food Industrial Co., Ltd (“HW Food”) (together “Group”). The Group was principally engaged in the manufacturing of candies products in the PRC.

(3)  As of 31 December 2016, HW Trading and HW Food accounted for 89% of the Group’s assets. Their business and affairs were regarded as the business and affairs of the Company.

(4)  The 1^st to 8^th Respondents were the senior management officers of the Company. In relation to the 6^th Respondent, he was an independent non-executive director (“INED”) and a member of the Audit Committee of the Company since 26 October 2015, and also the chairperson of the Company’s independent investigation committee (“IIC”) since 14 December 2017.

(5)  At all material times, HLB Hodgson Impey Cheng Limited (“HLB”) was the Company’s auditors until HLB’s resignation on 14 February 2018.

(6)  In both the 2016 IR and the 2016 AR published by the Company, there were significant overstatements in the cash and bank balances as at 30 June 2016 and 31 December 2016, caused by the overstatement of the bank balances of HW Food and HW Trading (“Overstatements”).

(7)  By comparing (i) the genuine bank statements (“Genuine Bank Statements”) against (ii) the bank ledgers provided by the Company to SFC (“Bank Ledgers”) and HLB’s working papers (“HLB WP”), there were significant overstatements in the bank balances of HW Food and HW Trading as follows (“Overstatements”):

Account	Per Bank Ledgers & HLB WP (RMB)	Per Genuine Bank Statements (RMB)	Overstatements (RMB)
As at 30 June 2016
HW Food’s account with the China Construction Bank in the PRC (“CCB”) with account number 35001656247052500648 (“HW Food Account”)	41,201,641	3,601,641	37,600,000
HW Trading’s CCB account with account number 35001656247052506680 (“HW Trading Account”)	503,125	3,125	500,000
Total	41,704,766	3,604,766	38,100,000
As at 31 December 2016
HW Food Account	44,325,674	845,674	43,480,000

(8)  The Overstatements were caused by the omission of non-recorded transactions and the booking of non-existent transactions in the Company’s Bank Ledgers. To inflate the cash and bank balances, non-existent deposits would generally be booked near month-end, and would be cancelled out or “rectified” later by omitting to book non-recorded transactions and/or booking non-existent withdrawals in the Bank Ledgers (the “Offset”). In the case of the 2016 IR and the 2016 AR, the Offset only took place after the financial period cut-off point (i.e. after 30 June 2016 and 31 December 2016). This had the effect of inflating cash and bank balances and making the financial position of the Company/Group appearing healthier.

(9)  Such scheme for overstatement of the Company’s bank balances (“Inflation Scheme”) was perpetrated and/or concealed by a scheme for fabricating records relating to the financial position of the Company/ Group (“Falsification Scheme”).

(10)  The Overstatements portrayed in the 2016 IR and the 2016 AR are substantial:

	As at 30 June 2016	As at 31 December 2016
Cash and bank balances	RMB 43,789,000	RMB 44,889,000
Net assets	RMB 86,105,000	RMB 83,621,000
Total assets	RMB 166,616,000	RMB 160,071,000
Percentage of cash and bank balances to net assets	51%	54%
Percentage of cash and bank balances to total assets	26%	28%
Overstatement of bank balances	RMB 37,600,000 + RMB 500,000 i.e. RMB 38,100,000 in total	RMB 43,480,000
Percentage of overstatement	•  87% of the purported cash & bank balances •  44% of the purported net assets •  23% of the purported total assets	•  97% of the purported cash & bank balances •  52% of the purported net assets •  27% of the purported total assets

5.The 6^th Respondent further accepts the following:

(1)  As a director of the Company, the 6^th Respondent owed duties to the Company including inter alia:

(a)  a duty to exercise reasonable care, skill and diligence that would be exercised by a person with (i) 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 (ii) the general knowledge, skill and experience that the director has;

(b)  a continuing duty to acquire and maintain a sufficient knowledge and understanding of the Company’s business to enable them properly to discharge his duties as a director of the Company; and

(c)  where he has delegated some of the managerial or financial responsibilities to his subordinates or other fellow officers, a duty to supervise the discharge of the delegated functions.

(2)  The 6^th Respondent should have discovered the Overstatements had he exercised reasonable care, skill and diligence, having regard in particular to the following:

(a)  The Overstatements were of very substantial scale and was not a one-off incident;

(b)  The false or fictitious entries could (and should) have been revealed upon proper review of the accounts, ledgers, bank statements and supporting documents of the Company and the Group and the making of reasonable inquiries arising from the same;

(c)  The 6^th Respondent was a member of the Company’s Audit Committee and ought to review and monitor the assets and financial position of the Company and the Group;

(d)  Given his position, the 6^th Respondent had or ought to have an understanding as to the overall finances, business and financial performance of the Company/ Group as a whole, and should have been in a position to verify (or cause or procure others to verify) whether the cash and bank balances as represented in the 2016 IR and the 2016 AR were genuine and accurate;

(e)  Had the 6^th Respondent exercised due care and diligence in overseeing the operations and finances of the Company and the Group, he should have been in a position to have a rough estimate of the Company’s and the Group’s cash and bank balances, and therefore be able to ascertain whether the amount or level of cash and bank balances reported in the 2016 IR and the 2016 AR were (at least) within the expected or reasonable range (or otherwise out of range thus warranting verification or investigation);

(f)  The 6^th Respondent ought to have (but had not) ensured that the Company had proper and adequate internal control measures in place to ensure the accuracy of the Company’s and the Group’s key financial data relating to cash and bank balances.

(3)  In the circumstances, (i) the 6^th Respondent failed to properly, adequately and competently assess and present a fair picture of the financial position of the Company to its shareholders; (ii) the 6^th Respondent failed to supervise and exercise proper control over his fellow directors of the Company’s board of directors and the other senior officers of the Company and/or their subordinates in charge of the operations and financial affairs of the Company; (iii) the 6^th Respondent acted negligently and in breach of his duties to the Company in failing to do so; and (iv) the 6^th Respondent acted negligently and was in breach of his duty of care, skill and diligence owed to the Company by failing to uncover the Overstatements.

(4)  Even though the 6^th Respondent was not, as an INED, involved in running the day-to-day business of the Company, he should nonetheless acquaint himself with adequate knowledge of such business so as to perform his duties as the Audit Committee of the Company. At the very least, he is responsible for monitoring and scrutinising the Company’s corporate governance, especially its financial position, as well as reviewing the Company’s internal controls. Yet, the 6^th Respondent failed to pay attention to the potential red flags identified in the internal control review reports prepared by CT Partners Consultants Limited (“CT Partners”). He acted negligently by failing to monitor and exercise proper control over his fellow directors and other senior officers and also failing to exercise reasonable skill and care to implement the internal controls of the Company, thereby failing to uncover the Overstatements. By relying completely on HLB and CT Partners to identify and report issues regarding audit or internal controls, the 6^th Respondent abdicated his duties to independently identify and assess such issues.

(5)  By reason of the above breaches of duties by the 6^th Respondent, the business or affairs of the Company have been conducted in a manner within the meaning of sections 214(1)(b), (c) and (d) of the SFO.

Relevant Principles

6.Sections 214(1) and (2) of the SFO provide relevantly as follows:

“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—

…

(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—

(a) make an order restraining the carrying out, or requiring the carrying out, of any act or acts;

…

(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 …”

7.The SFC has to satisfy the three conditions stipulated in section 214 of the SFO namely, (1) the corporation in question is or was a listed corporation; (2) the business or affairs complained of is that of the corporation; and (3) the conduct complained of falls within one or more heads of misconduct specified in section 214(1)(a)-(d): SFC v Sound Global Ltd & Ors[1]; SFC v Chen Li-Jun & Ors[2].

8.As regards the second condition, the conduct complained of can be that of the listed company and the subsidiaries directed by or under the control of such listed company, and the Court will take a “realistic approach” in determining whether the affairs of the subsidiary are the affairs of the holding corporation (SFC v Fung Chiu[3]; SFC v Sound Global Ltd[4]; SFC v Chen Li-Jun & Ors[5]).

9.With respect to the third condition, section 214(1) of the SFO covers a wide range of business or affairs of a listed corporation. For present purposes, the SFC relies on section 214(1)(b)-(d). The scope of such section has recently been summarised by Linda Chan J in SFC v Sound Global Ltd[6], as follows:

“94. Section 214(b), (c) and (d) of the SFO prescribes the various heads of misconduct and may be summarised as follows.

95. With respect of s.214(1)(b):

(1) ‘Misfeasance’ is defined in Part 1 of Schedule 1 to the SFO as ‘the performance of an otherwise lawful act in a wrongful manner’. The notion of ‘misfeasance’ overlaps with that of breach of fiduciary duty and seemingly covers a wide range of conduct (SFC v Yeung Chung Lung, HCMP 205/2013, 17 February 2017, §81).

(2) The words ‘other misconduct’ connote improper or wrong behaviour or mismanagement, or culpable neglect of duties. This term is something of a ‘belt and braces exercise’, and is intended to cover the ‘widest range of possible misconduct’ (Re DBA Telecommunication (Asia) Holdings Limited [2022] HKCFI 653, §10; Re Long Success, §37).

(3) A breach of the duty to exercise reasonable care and diligence in the management of company may constitute both ‘misfeasance’ and ‘other misconduct’ (Re DBA Telecommunication, §10; Re Long Success, §37).

96. As for s.214(1)(c) (i.e. members not having been given all the information with respect to its business or affairs that they might reasonably expect), it can be complementary to the other subsections (SFC v Yeung Chung Lung, HCMP 205/2013, 17 February 2017, §84; Re Long Success §38), and covers situations such as (1) the making of misleading or false announcements; and (2) situations requiring publication of periodic financial statements and announcements, as members are entitled to expect the listed company to provide complete and accurate information in respect of such matters (SFC v Li Wo Hing, HCMP 1023/2011, 26 September 2012, §§10(1)(b), 10(2)(a); Re Shandong Molong, §19(2)).

97. With respect to s.214(1)(d):

(1) The conduct in question does not have to be wrongful per se (Re Shandong Molong,§19(3)).

(2) ‘Unfairly prejudicial’ conduct covers a range of conduct, from fraud at the one end to neglect or inaction on the part of those to whom the affairs of a company are entrusted on the other end. The question to be asked in such circumstances is whether the conduct concerned is that which can be expected from the managers of the company to whom those affairs have been entrusted (SFC v Fung Chiu §22; Re Long Success §39).”

10.It is worth noting that the terms “misfeasance or other misconduct” and “unfairly prejudicial [conduct]” under sections 214(1)(b) and (d) cover a wide spectrum of conduct, including negligence and/or breach of common law duties owed to a corporation. In particular, the words “other misconduct” in section 214(1)(b) connote improper or wrong behaviour or mismanagement constituting, culpable neglect of duties. The words included in section 214(1)(b) cover the widest range of possible misconduct. An example is a director’s failure to exercise the degree of skill and care that may reasonably be expected of a person of his knowledge and experience and holding his office and functions within the company: Re DBA Telecommunication (Asia) Holdings Limited[7].

11.By way of illustration, in Re Styland Holdings Ltd (No 2)[8], the SFC commenced section 214 proceedings against the respondents’ (a) for breach of their fiduciary duties to the listed corporation and (b) breach of their duties to act with reasonable care, skill and diligence in relation to the affairs of the listed corporation. The Court held that their failures to exercise due skill and care constitute misconduct or misfeasance under section 214(1)(b) (at [104]); their mismanagement in these respects amounts to unfairly prejudicial conduct under section 214(1)(d) (at [104]); and their repeated non-compliance with the Listing Rules triggers section 214(1)(c) (at [105]).

12.The Carecraft procedure refers to the summary procedure sanctioned in the case of Re Carecraft Construction Co Ltd[9] and adopted by the Hong Kong courts in various instances in respect of proceedings under section 214 of the SFO. Under the Carecraft procedure, the Court is not entitled to make findings upon materials other than the agreed facts: SFC v Ho Yik Kin Norman[10]. The Court must be satisfied, based on the agreed facts, that the business or affairs of the company have in fact been conducted in a manner that contravened one of the limbs in section 214(1) of the SFO and if so, determine the order to be made: Re Riverhill Holdings Ltd[11].

13.Further, whilst the agreed facts and orders reached between the parties do not oblige the court to make the orders sought, the court is likely in practice to be guided by the agreement that the SFC, as the responsible regulator, has reached as to the appropriate sanction to be imposed: see Re Warderly International Holdings Limited[12]; SFC v Li Wo Hing & Ors[13]; SFC v Ho Yik Kin Norman[14].

14.The principles on disqualification orders are explained in SFC v Chen Li-Jun & Ors[15]:

“96. The following principles on disqualification orders under section 214(2)(d) are well established: see Re First China Financial Network Holdings Ltd [2015] 5 HKLRD 530, [3]–[9].

(1) The power to determine the appropriate period of disqualification is a discretionary power. 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.

(2) The purpose of imposing a disqualification order is twofold: (i) protection of the public; and (ii) general deterrence. The former is recognised to be the primary purpose. It is of the greatest importance that any individual who undertakes the statutory and fiduciary obligations of being a company director should realise that these are personal responsibilities.

(3) In determining the period of disqualification the Court will adopt a broad-brush approach. Earlier decided cases are of limited assistance to the exercise of the Court’s discretion.

(4) The period of disqualification must reflect the gravity of the offence. The period of disqualification may be fixed by starting with an assessment of the correct period to fit the gravity of the conduct, and a discount is then given for mitigating factors.

(5) As a starting point the Court will have reference to the following brackets, although these are signposts and not straightjackets:

(a) disqualification of over 10 years for particularly serious cases;

(b) disqualification of below 5 years for relatively less serious cases; and

(c) disqualification between 6 to 10 years for cases in between.

(6) The Court will have regard to a wide range of considerations including the age, state of health and character of the offender, the nature of the breaches, the honesty and competence of the offender, the length of time he has been in jeopardy, whether he appreciates and/or admits the breaches, his general conduct before and after the offence, the periods of disqualification of his co-directors that may have been ordered by other courts, and the interests of shareholders, creditors and employees.”

15.Re Styland Holdings Ltd[16], contains the following given guidance on the proper approach and the factors which may be taken into account:

“6. In considering what is an appropriate period of disqualification, the court takes into account a broad spectrum of considerations with the dual objective of protecting the public and deterrence: Re Peregrine Investments Holdings Ltd (unrep, HCMP 112/2002, [2004] HKEC 1214), para 27.

7. In Re Warderly International Holdings Ltd, para 9, Harris J summarised the useful guidance given by Woolf MR in Re Westmid Packing Services Ltd [1998] 2 All ER 124, 131–135, as to the relevant factors for determining the length of the disqualification period under the Company Directors Disqualification Act 1986 as follows:

(1) It is of the greatest importance that any individual who undertakes the statutory and fiduciary obligations of being a company director should realise that these are personal responsibilities.

(2) The primary purpose of disqualification is to protect the public against the future conduct of companies by persons whose past records as directors of insolvent companies showed them to be a danger to creditors and others. Other factors also come into play in the wider interests of protecting the public, ie a deterrent element in relation to the director himself and a deterrent element as far as other directors are concerned.

(3) The period of disqualification must reflect the gravity of the offence.

(4) The period of disqualification may be fixed by starting with an assessment of the correct period to fit the gravity of the conduct, and a discount is then given for mitigating factors.

(5) A wide variety of factors, including the former director’s age and state of health, the length of time he has been in jeopardy, whether he has admitted the offence, his general conduct before and after the offence, and the periods of disqualification of his co-directors that may have been ordered by other courts, may be relevant and admissible in determining the appropriate period of disqualification.

8. There are also eight criteria which govern the court’s exercise of the power of disqualification, namely:

(1) Character of the offenders;

(2) Nature of breaches;

(3) Structure of the companies and the nature of their business;

(4) Interests of shareholders, creditors and employees;

(5) Risks to others from the continuation of offenders as company directors;

(6) Honesty and competence of offenders;

(7) Hardship to offenders and their personal and commercial interests;

(8) Offenders’ appreciation that future breaches could result in future proceedings.

See Re Warderly International Holdings Ltd, para.10.”

Application

16.In the present case, I am satisfied all three conditions stipulated in section 214 of the SFO are satisfied.

17.The first condition is satisfied, given that the Company was a listed corporation (until 31 December 2019 when its listing status was cancelled).

18.The second condition is satisfied, as HW Trading and HW Food were the wholly-owned subsidiaries of the Company, directed by or under the control of the Company. In particular, the accounts of HW Trading and HW Food are incorporated into the Company’s consolidated accounts.

19.As regards the third condition, on the basis of the agreed facts set out in the Statement of Agreed Facts I am satisfied that:

(1)  The overstatement of key financial information of the Company plainly falls within the business and affairs of the Company within the meaning of section 214(1) of the SFO.

(2)  The business or affairs of the Company were conducted by the 6^th Respondent in a manner within the meaning of section 214(1)(b), (c) and (d) of the SFO, in that:

(a)  Negligence in ensuring the truthfulness of accounts constitute “misfeasance or other misconduct” under section 214(1)(b).

(b)  As a result of the Overstatements, members of the Company were plainly not given all the information with respect to its business or affairs that they might reasonably expect, namely, the true position of its cash and bank balances, hence falling within section 214(1)(c).

(c)  Such Overstatements and the negligence in uncovering the same would plainly be unfairly prejudicial to the members of the Company because they were provided with false accounting information and denied access to the true financial position of their Company, which results in harm and prejudice to the members, hence triggering section 214(1)(d).

20.Accordingly, I am satisfied 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”, and the jurisdiction of the Court to grant the remedies set out under section 214(2) of the SFO is engaged.

Order

21.In the present case, the relief sought against the 6^th Respondent has been agreed namely (i) disqualification order under section 214(2)(a) and (d) of the SFO for a period of three years and (ii) an order that the 6^th Respondent do pay the costs of the Petitioner in these proceedings, in the sum agreed with the Petitioner.

22.While the Court is not bound by the agreement between the SFC and the 6^th Respondent in deciding the order to be made, in practice, it is likely to be guided by their agreement: see Re Warderly International Holdings Ltd[17]. This is based on the Court’s recognition that the SFC, as the responsible regulator, is likely to have reached an appropriate agreement as to the appropriate sanction to be imposed: see [21] above citing SFC v Li Wo Hing & Ors[18] and SFC v Ho Yik Kin Norman[19].

23.The SFC submits that the Court should take into account the following:

(1)  The misconduct as admitted by the 6^th Respondent is essentially one of negligence, which is relatively less serious case falling within the minimum bracket of disqualification of up to five years.

(2)  Although the misconduct is relatively less serious, it caused substantial harm and prejudice to the Company’s members and denied their access to information as to the true position of the Company’s assets and financial positions.

(3)  Disqualification period for a duration of at least three years is appropriate to protect the public against the future conduct of the 6^th Respondent.

(4)  The period of disqualification must reflect the gravity of the 6^th Respondent’s misconduct.

(5)  Although the 6^th Respondent is an INED, he occupied a relatively senior position and was a member of the Audit Committee. In view of such position and his supposed control and knowledge of the Company’s finance, business and management, a disqualification of at least three years is warranted.

24.The SFC drew to my attention the following mitigating factors:

(1)  The 6^th Respondent has been cooperative in relation to these proceedings with the SFC and accepts liability.

(2)  The 6^th Respondent has adopted a reasonable course of action in agreeing to conclude these proceedings by way of the Carecraft Procedure which would save the time and costs of the SFC and the Court, and in agreeing to pay his share of the costs of the SFC in these proceedings in the sum agreed with the SFC.

(3)  The 6^th Respondent was an INED not involved in the daily operation of the Company.

(4)  Although the 6^th Respondent’s conduct fell short of the standards to be expected of an INED, there is no suggestion that it involved any dishonesty or lack of integrity. It is not the SFC’s case that the 6^th Respondent took part knowingly in the Inflation Scheme or the Falsification Scheme.

25.I accept that the proposed duration of three years is commensurate with the gravity of the 6^th Respondent’s conduct, gives appropriate regard to the mitigating circumstances in relation to the 6^th Respondent, and meets the principles set out above.

26.The SFC seeks an order that the 6^th Respondent do pay the costs of the Petitioner. I will make an order that the 6^th Respondent be disqualified from acting as a director of a company for a period of three years and pay the costs agreed by him and the SFC.

Mr Douglas Lam SC and Mr Jonathan Chan, instructed by Securities and Futures Commission, the petitioner

The 6^th respondent appeared in person

STATEMENT FOR CARECRAFT PROCEDURE IN RESPECT OF

THE 6^TH RESPONDENT

 

PART I – INTRODUCTION

1.  On 12 May 2022, the Securities and Futures Commission (“Petitioner”) presented a petition pursuant to section 214(1)(b), (c) and (d) of the Securities and Futures Ordinance (Cap. 571) (“SFO”) seeking, among other things:

(1)  an order pursuant to section 214(2)(a) or (d) of the SFO that without leave of the Court, the 1^st to 8^th Respondents shall not, for such period as the Court considers appropriate:

(a)  be, or continue to be, a director, liquidator, or receiver or manager of the property or business, of any listed or unlisted corporation in Hong Kong including China Candy Holdings Limited (“Company”) or any of its subsidiaries and affiliates; and

(b)  in any way directly or indirectly be concerned, or take part, in the management of any listed or unlisted corporation in Hong Kong including the Company or any of its subsidiaries and affiliates; and

(2)  that the 1^st to 8^th Respondents be ordered to pay the costs of the Petitioner.

A.  PURPOSE

2.  Subject to the approval of this Court, the Petitioner and the 6^th Respondent have agreed to dispose of these proceedings against the 6^th Respondent by way of the summary procedure sanctioned in the case of Re Carecraft Construction Co. Ltd. [1994] 1 WLR 172 and as adopted by this Court in a number of cases in respect of proceedings under section 214 of the SFO (“Carecraft Procedure”).

3.  This Schedule is produced in order to provide this Court, for the purpose of disposing of these proceedings against the 6^th Respondent by way of the Carecraft Procedure, with the facts that are agreed as between the Petitioner and the 6^th Respondent.

4.  The facts set out in this Schedule are agreed as between the Petitioner and the 6^th Respondent on the premise that the case against him is to be dealt with by the Court by way of the Carecraft Procedure. If the Court for any reason is of the view that these proceedings shall not be dealt with by the Carecraft Procedure or that a full hearing is appropriate, no admission or concession by either the Petitioner or the 6^th Respondent and none of the proposed orders referred to below or liability to pay costs shall be referred to or relied on by any of the parties at any subsequent hearing without the prior written consent of the Petitioner and the 6^th Respondent.

5.  For the purpose of resolving these proceedings against the 6^th Respondent by way of the Carecraft Procedure, and by reference to the agreed facts set out in Part II of this Schedule, the Petitioner contends and the 6^th Respondent accepts that, during the relevant period, the business and affairs of the Company have been conducted in a manner within the scope of section 214(1)(b) to (d) of the SFO, namely:

(1)  involving defalcation, misfeasance or misconduct towards the Company, its subsidiaries and its members;

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

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

B.  UNOPPOSED ORDERS

6.  On the basis of the agreed facts set out in Part II of this Schedule, the Petitioner and the 6^th Respondent agree, and the 6^th Respondent accepts, that it would be appropriate for the orders set out in paragraph 41 below (in Part III of this Schedule) to be made against him.

7.  If pursuant to this Schedule, this Court disposes of these proceedings summarily against the 6^th Respondent, the 6^th Respondent agrees that there should additionally be an order that he shall pay the costs of the Petitioner in these proceedings, in the sum agreed with the Petitioner (as set out in paragraph 42 below in Part III of this Schedule).

8.  In the event that this Court makes any order sought against the 6^th Respondent by reference to this Schedule, the Petitioner and the 6^th Respondent agree that this Schedule be annexed to this Court’s judgement and will jointly seek a direction to that effect.

9.  Furthermore, without prejudice to all of the Petitioner’s rights, the Petitioner specifically reserves the right to (a) disclose this Schedule to third parties where it appears proper to do so in the public interest, including, but not limited to, making use of the Schedule for the purpose of any press release issued in respect of these proceedings, and (b) refer to this Schedule for purposes ancillary to, connected with and/or arising out of these proceedings.

10.  The 6^th Respondent has adopted a reasonable course of action to conclude these proceedings by way of the Carecraft Procedure which saves the time and costs of the Petitioner and the Court. The 6^th Respondent has also agreed to assist the Petitioner by agreeing to give evidence in these proceedings against the 1^st to 5^th, 7^th and 8^th Respondents, if so required.

PART II – STATEMENT OF AGREED FACTS

A.  THE COMPANY AND ITS MANAGEMENT

11.  The Company was incorporated in Cayman Islands on 14 March 2014. It had been listed on the Growth Enterprise Market (“GEM”) of The Stock Exchange of Hong Kong Limited (“HK Exchange”) (stock code: 8182) since 11 November 2015 until 31 December 2019 when its listing status was cancelled.

12.  The Company was an investment holding company and carried on business through its subsidiaries (together the “Group”). The Company/ Group were principally engaged in the manufacturing of candies products in the People’s Republic of China (“PRC” or “Mainland”).

13.  At all material times, both Jinjiang Holeywood Trading Co., Ltd (晉江好來屋商貿有限公司) (“HW Trading”, formerly known as Jinjiang Holeywood Enterprise Consulting Co., Ltd), a PRC company principally engaged in the trading of raw materials for candy production, and Fujian Holeywood Food Industrial Co., Ltd (福建好來屋食品工業有限公司) (“HW Food”), another PRC company principally engaged in the production of candy products, were the Company’s subsidiaries.

14.  As the Company was (and still is) an investment holding company, the business and affairs of the Company’s subsidiaries were regarded as the business and affairs of the Company.

15.  As of 31 December 2016, HW Trading and HW Food collectively accounted for 89% of the Group’s total assets.

16.  Mr Xu Jinpei (許金培) (“Xu”) and his (then) spouse Ms Hong Yinzhi (洪蔭治) (“Hong”) were the founders and the former controlling shareholders of the Company.

17.  At all material times, the senior management of the Company comprised (amongst others):

(1)  Xu, the Company’s executive director (“ED”) since 8 January 2015 and the Company’s chairman since 26 October 2015. He resigned from those positions with effect from 31 July 2017.

(2)  Hong, an ED of the Company since 8 January 2015. Hong was also the compliance officer cum chairperson of the Company’s Compliance Committee (since 3 July 2015) and the Company’s chief executive officer (“CEO”) (since 26 October 2015). Hong resigned from all those positions with effect from 19 September 2019.

(3)  Mr Wang Zhihong (王志洪) (“Wang”), the compliance officer of the Company’s Compliance Committee since 3 July 2015 and the Company’s chief financial controller (“CFO”) since 26 October 2015. Wang’s work responsibilities and powers as the CFO were suspended from 18 December 2017. He eventually resigned as the CFO with effect from 19 September 2019.

(4)  Ms Li Yuna (李宇娜) (also known as Joyce Li), an ED of the Company since 30 December 2016. She became the Company’s chairman from 31 July 2017. Li resigned from those positions with effect from 30 November 2017.

(5)  Ms Hung Yvonne (洪綺婉), an ED of the Company since 2 February 2017 and the chairman of the Company since 30 November 2017.

(6)  The 6^th Respondent himself, an independent non-executive director (“INED”) and a member of the Audit Committee of the Company since 26 October 2015. The 6^th Respondent was also the chairperson of the Company’s independent investigation committee (“IIC”) since 14 December 2017.

(7)  Mr Chu Wai Wa Fangus (朱偉華), an INED and a member of the Audit Committee of the Company since 26 October 2015. Chu resigned from those positions with effect from 24 July 2017.

(8)  Mr Ong King Keung (王競強), an INED and the chairperson of the Audit Committee of the Company since 29 February 2016. He resigned from those positions with effect from 14 September 2017.

B.  OVERSTATEMENT OF THE COMPANY’S ASSETS AND FINANCIAL POSITION

18.  The Company published its 2016 Interim Report on 11 August 2016 (“2016 IR”) and its 2016 Annual Report on 17 March 2017 (“2016 AR”). In both the 2016 IR and the 2016 AR, there were significant overstatements in the cash and bank balances as at 30 June 2016 and 31 December 2016 respectively. Such overstatements were caused by the overstatement of the bank balances of HW Food and HW Trading.

19.  At all material times, HLB Hodgson Impey Cheng Limited (“HLB”) was the Company’s auditors until HLB’s resignation on 14 February 2018.

20.  In around October 2017, the Petitioner suspected that the Company might have falsified its accounts, including the sales figures as disclosed in its Prospectus and the financial statements published for the 2016 financial year. A series of investigations then ensued:-

(1)  On 10 October 2017, the Petitioner issued a notice pursuant to section 183 of the SFO to the Company requesting information relating to its top 5 customers, the trial balances and ledgers of the Company’s subsidiaries.

(2)  On 24 November 2017, the Company informed the Petitioner via its solicitors that “… our client has already gathered the relevant information. However, according to our instruction, as of the date hereof, our client has not received from its PRC staff the necessary confirmations”.

(3)  On 8 December 2017, the Company further informed the Petitioner that “… in spite of our numerous requests made to accounting personnel of the Company in the PRC to confirm the authenticity of the information, we are yet to receive any reply from them”.

(4)  On 12 December 2017, at the request of the Company, the trading of its shares on the HK Exchange was suspended.

(5)  On 14 December 2017, the Company announced that pursuant to a regulatory enquiry, it was required to provide information relating to the bank accounts, trial balances and bank ledgers of the Group. The accounting personnel of the Company in the Mainland were however unable to confirm the authenticity of the requested information.

(6)  Pursuant to the same announcement, the IIC comprising the Company’s INEDs (the 6^th Respondent, Mr Law Yiu Sing and Ms Tsui Suk Man) was established for the purpose of conducting an independent investigation on the authenticity of the requested information. According to the Company, it was Wang who refused to confirm the authenticity of the requested information.

(7)  On 1 February 2018, the IIC engaged Mazars Corporate Recovery & Forensic Services Limited (“Mazars”) to perform an independent investigation, in particular regarding the authenticity of the information of the Group’s bank accounts, trial balances and bank ledgers.

21.  Mazars had in the course of their investigation obtained bank statements of the Group’s subsidiaries from the relevant banks in the PRC (“Mazars Bank Statements”), including China Construction Bank in the PRC (“CCB”). At around 13 August 2018, Mazars issued a draft preliminary investigation report setting out their interim findings, which revealed a number of issues during the period from 1 June 2015 to 31 December 2017 (the “Relevant Period”).

22.  On 31 January 2019, Mazars issued an investigation report concluding that, without being exhaustive, there were:

(1)  Unverifiable outflow of the Company’s fund to directors/staff of the Group:

(a)  There were withdrawals of funds from the bank accounts of HW Trading and HW Food (totalling RMB 178 million) to a number of personal bank accounts belonging to the key personnel and/or staff of the Company (mainly Hong).

(b)  There were deposits of funds (totalling approximately RMB 135.5 million) from a number of personal bank accounts belonging to the key personnel and/or staff of the Company (mainly Hong) into the bank accounts of HW Trading and HW Food.

(c)  As to the shortfall of about RMB 42.5 million, the Company explained that the funds were used for operational expenses, such as payment of salaries to the Company’s staff. As there were insufficient information and/or supporting documents, Mazars was unable to verify the explanation given.

(d)  When being interviewed by Mazars, senior officers of the Company claimed that the funds flowing into and out of the bank accounts of HW Trading and HW Food were for loans made to third parties. Mazars noted that such assertion did not tally and could not be reconciled with the Group’s purported loan drawdowns and/or loan repayments by third parties.

(2)  Abnormal accounting records: there were transactions in the bank accounts of HW Food which did not exist but were booked in the Group’s ledger. The corresponding bank slips of those transactions could not be verified against record on CCB’s official website. For instance, the position of the chops, QR code and words on those bank slips were different from the other normal bank slips which were verifiable.

23.  The Petitioner has also in the course of its investigation obtained the bank statements of the Company’s PRC subsidiaries from two sources, i.e. the Mazars Bank Statements and those obtained by the Company from the respective banks pursuant to a notice dated 23 August 2018 and issued by the Petitioner pursuant to section 183 of the SFO (“SFC Notice”). These two sets of bank statements were obtained separately by Mazars and the Company. They are identical in content and are considered to be genuine (collectively referred to as “Genuine Bank Statements”).

24.  In response to the SFC Notice, the Company also provided the Petitioner with the Group’s ledgers covering the period from 1 January 2013 to 31 December 2017, including the cash and bank ledgers (“Bank Ledgers”). The cash and bank balances of each subsidiary as at 30 June 2016 and 31 December 2016 and as recorded in the Bank Ledgers tallied with those shown in HLB’s working papers for the Company’s annual audit and/or interim review (“HLB WP”). This suggested that at the material time, the Company had provided the Bank Ledgers to HLB for interim review and annual audit.

25.  By comparing the Genuine Bank Statements against the Bank Ledgers and HLB WP, there were significant overstatements in the bank balances of HW Food’s CCB account (with account number 35001656247052500648) (“HW Food Account”) and HW Trading’s CCB account (with account number 35001656247052506680) (“HW Trading Account”) as particularised below:

26.  The 6^th Respondent admits, accepts and agrees that:

(a)  The Overstatements were caused by:

(i)  omission of non-recorded transactions, i.e. transactions which were recorded in the Genuine Bank Statements but not shown in the Bank Ledgers (“Non-recorded Transactions”); and

(ii)  booking of non-existent transactions, i.e. transactions which were recorded in the Bank Ledgers but were not shown in the Genuine Bank Statements (“Non-existent Transactions”).

(b)  The Non-recorded Transactions and Non-existent Transactions together (i.e. the recurring pattern of omitting Non-recorded Transactions from and booking Non-existent Transactions in the Bank Ledgers) had the effect of inflating the cash and bank balances in the HW Food Account and HW Trading Account (hence the Company’s consolidated account). The assets and financial position of the Company/ Group appeared healthier and of greater value than they were in fact and/or were otherwise misstated.

(c)  To inflate the cash and bank balances, non-existent deposits would generally be booked near month-end (“Inflating Entries”). The Inflating Entries would then be cancelled out or “rectified” in the following month (for HW Food) or a few months later (for HW Trading) by omitting to book Non-recorded Transactions and/or booking Non-existent withdrawals in the Bank Ledgers (“Offset”).

(d)  In the case of the 2016 IR and the 2016 AR, the Overstatements were uncovered as the Offset only took place after the financial period cut-off point (i.e. after 30 June 2016 and 31 December 2016), thus inflating the cash and bank balances in the HW Food Account and the HW Trading Account (hence the Group’s published consolidated cash and bank balances) as of 30 June 2016 and 31 December 2016.

(e)  To conceal the Overstatements, the Company had provided falsified documents (such as bank statements, vouchers, and bank slips) to HLB when the auditors conducted interim review for the half year ended 30 June 2016 and annual audit for the years ended 31 December 2015 and 2016. In particular:

(i)  According to Mr Woo Lik Hang (“Woo”), HLB’s manager-in-charge for the Company’s interim reviews and annual audits between 2015 and 2017, during the audits, HLB had selected bank transactions from the Company’s bank ledgers and/or cash book, and matched them against the bank statements and supporting documents (e.g. voucher and bank slips) provided by the Company to see if the transactions in the bank statements were properly recorded and vice versa.

(ii)  Out of the 57 Non-existent Transactions identified by the Petitioner, 36 Non-existent Transactions had been selected by HLB as sample test and at the material time, HLB did not detect irregularity in relation to these 36 transactions. This suggested that the 36 Non-existent Transactions could be found in the bank statements and/or bank slips provided by the Company to HLB. Those bank statements and/or bank slips were falsified documents as they could not be matched with the entries in the Genuine Bank Statements.

(iii)  By comparing the vouchers provided by the Company to Mazars against the Genuine Bank Statements, there were discrepancies in 21 bank slips (relating to Non-existent Transactions) contained in 11 sets of vouchers. Since the Non-existent Transactions were not recorded in the Genuine Bank Statements, those vouchers and bank slips could not be genuine and they were thus falsified documents. The falsified bank slips/ vouchers were recorded and prepared by Wang and/or finance staff of the Company, namely 陳梅雙 or 陳玲玲.

27.  In the circumstances, the scheme for the overstatement and inflation of the Company’s assets and financial positions by overstating the bank balances in the bank accounts of HW Food and HW Trading for the half year ended 30 June 2016 and the financial year ended 31 December 2016 (the “Inflation Scheme”) was perpetrated and/or concealed by way of a scheme for fabricating records relating to the financial position of the Company/ Group which commenced as early as the financial year ended 31 December 2015 (the “Falsification Scheme”).

28.  The 6^th Respondent admits, accepts and agrees that the discrepancies in the false financial positions of the Company/ Group portrayed in the 2016 IR and the 2016 AR are substantial. The material misstatement of key financial information relating to the Company/ Group is not an one-off incident. The substantial misstatements occurred on at least 2 occasions in the 2016 IR and the 2016 AR. The purported cash and bank balances, net assets and total assets of the Group as disclosed in the 2016 IR and the 2016 AR, and the corresponding percentage attributable to the Overstatements, were as follows:

C.  ROLE OF THE 6TH RESPONDENT AND LIABILITY

C1.  Duties of the 6^th Respondent

29.  The 6^th Respondent admits, accepts and agrees that as a director of the Company, he owed, inter alia, the following duties to the Company:

(1)  To act honestly and in good faith and to act in the best interests of the Company, including but not limited to:

(a)  Not directing, approving, allowing or acquiescing the Company to make:

(i)  statements or announcements to its public shareholders or the public generally which he knows to be (or turns a blind eye to the fact that they are) misleading or false;

(ii)  statements or declarations to the Company’s auditors and regulatory authorities including the HK Exchange that he knows to be (or turns a blind eye to the fact that they are) misleading or false.

(b)  Not acting for any improper purpose in the exercise of his powers and the discharge of his duties.

(2)  Not to act in conflict or to make secret profits.

(3)  To comply with the Company’s bye-laws and the relevant laws and regulations concerning the management of the Company.

(4)  Pursuant to section 465 of the Companies Ordinance (Cap. 622), a duty 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.

(5)  As the Company was listed on the GEM of the HK Exchange, and as a director of the Company, the 6^th Respondent had given an undertaking to comply with and be bound by the Rules Governing the Listing of Securities on GEM of the HK Exchange (“GEM Listing Rules”), including Rule 5.01, which provides that every director must, in the performance of his duties as a director, inter alia:

(a)  Act honestly and in good faith in the interests of the company as a whole;

(b)  Act for proper purpose;

(c)  Avoid actual and potential conflicts of interest and duty; and

(d)  Follow up anything untoward that comes to his attention.

(6)  A duty to act with care, skill and diligence reasonably expected of a person of his knowledge and experience in the performance of their functions and his management of the Company’s affairs.

(7)  A continuing duty to acquire and maintain a sufficient knowledge and understanding of the Company’s business to enable them properly to discharge his duties as a director of the Company.

(8)  Where he has delegated some of the managerial or financial responsibilities to his subordinates or other fellow officers, a duty to supervise the discharge of the delegated functions.

(9)  A duty of care to the Company, which was (and still is) an investment holding company, to manage and/or supervise the affairs of the Company’s subsidiaries properly.

C2.  The 6^th Respondent’s breach and failure to discharge his duties

30.  The 6^th Respondent admits, accepts and agrees that he acted negligently and in breach of his duty of care, skill and diligence owed to the Company by failing to uncover the Overstatements thereby failing to disclose the true financial position of the Company to its shareholders. He also admits, accepts and agrees that he breached his duties as director of the Company in failing to act bona fide in its best interests and/or to exercise reasonable care, skill and diligence in the performance of his functions and management of the Company’s affairs.

31.  The 6^th Respondent admits, accepts and agrees that he should have discovered the Overstatements (which, as the 6^th Respondent accepts, are material) had he exercised reasonable care, skill and diligence, having regard in particular to the following:

(a)  The Overstatements were of very substantial scale and the material misstatement of key financial information (i.e. the Company’s and the Group’s cash and bank balances) was not a one-off incident.

(b)  The false or fictitious entries of cash and bank balances could (and should) have been revealed upon proper review of the accounts, ledgers, bank statements and supporting documents of the Company and the Group and the making of reasonable inquiries arising from the same.

(c)  The 6^th Respondent himself was a member of the Company’s Audit Committee. The terms of reference of the Audit Committee provides that the primary duties of the Audit Committee include reviewing the Company’s financial information and monitoring the Company’s financial reporting system and internal control procedures. In such position, the 6^th Respondent ought to review and monitor the assets and financial position of the Company and the Group.

(d)  Given his position, the 6^th Respondent had or ought to have an understanding as to the overall finances, business and financial performance of the Company/ Group as a whole. Further, he should have been in a position to verify (or cause or procure others to verify) whether the cash and bank balances as represented in the 2016 IR and the 2016 AR were genuine and accurate.

(e)  Had the 6^th Respondent exercised due care and diligence in overseeing the operations and finances of the Company and the Group, he should have been in a position to have a rough estimate of the Company’s and the Group’s cash and bank balances, and therefore be able to ascertain whether the amount or level of cash and bank balances reported in the 2016 IR and the 2016 AR were (at least) within the expected or reasonable range (or otherwise out of range thus warranting verification or investigation).

(f)  Further, the 6^th Respondent ought to have (but had not) ensured that the Company had proper and adequate internal control measures in place to ensure the accuracy of the Company’s and the Group’s key financial data relating to cash and bank balances.

32.  The 6^th Respondent admits, accepts and agrees that insofar as he had delegated some of his managerial and financial responsibilities to the rest of the Company’s board of directors (“Board”) and/or subordinates, this did not absolve him from his duty to supervise the discharge of the delegated functions. He ought to have kept himself abreast of the financial position and cash and bank balances of the Company and the Group instead of simply entrusting and relying on the rest of the Board and/or their subordinates without carrying out any independent check, supervision and/or assessment of the financial position and cash and bank balances of the Company and the Group.

33.  In the circumstances, the 6^th Respondent admits, accepts and agrees that (i) he failed to properly, adequately and competently assess and present a fair picture of the financial position of the Company to its shareholders; (ii) he failed to supervise and exercise proper control over his fellow directors of the Board and the other senior officers of the Company and/or their subordinates in charge of the operations and financial affairs of the Company; (iii) he acted negligently and in breach of his duties to the Company in failing to do so; and (iv) he also acted negligently and was in breach of his duty of care, skill and diligence owed to the Company by failing to uncover the Overstatements, thereby failing to disclose the true financial position of the Company to its shareholders.

34.  The 6^th Respondent admits, accepts and agrees that even though he was not, as an INED, involved in running the day-to-day business of the Company, he should nonetheless acquaint himself with adequate knowledge of such business so as to perform his duties as the Audit Committee of the Company. At the very least, he is responsible for monitoring and scrutinising the Company’s corporate governance, especially its financial position, as well as reviewing the Company’s internal controls.

35.  At the material time, CT Partners Consultants Limited (“CT Partners”) had prepared internal control review reports and identified issues in the Company’s treasury / cash management / financial reporting functions (“Potential Red Flags”). In relation to those internal control review reports, the 6^th Respondent failed to pay attention to the Potential Red Flags identified by CT Partners. For the following reasons, the 6^th Respondent admits, accepts and agrees that he acted negligently by failing to monitor and exercise proper control over his fellow directors of the Board and the other senior officers of the Company and/or their subordinates in charge of the operations and financial affairs of the Company, and also failing to exercise reasonable skill and care to implement the internal controls of the Company, thereby failing to uncover the Overstatements.

36.  The material Overstatements and fabrication of supporting documents showed that the 6^th Respondent had simply failed to monitor the senior officers of the Company and left them to run the business without monitoring them properly or at all:

(1)  The 6^th Respondent has failed to ensure that he would receive and approve the monthly management accounts of the Company in accordance with the procedure stipulated in CT Partners’ internal control review report. In fact, no monthly management accounts were ever sent to the Board.

(2)  Had the 6^th Respondent exercised due care, skill and diligence in overseeing the operations and finance of the Company and the Group, and understanding the nature of major cash inflows and outflows of the Company and the Group, including by reviewing the monthly management accounts of the Company, he ought to be in a position to monitor, inquire into and/or verify the financial position (particularly as regards bank balances) of the Company and the Group.

37.  The 6^th Respondent has also failed to ensure that the measures stated in the CT Partners’ internal control review reports were implemented and enforced as he:

(1)  was unfamiliar with the contents of the internal review control reports;

(2)  was unaware that the enforcement of the measures stated in the internal control review reports should have been the duties of the Audit Committee and the Compliance Committee; and

(3)  had no knowledge of the existence or the function of the Compliance Committee.

38.  Had the 6^th Respondent acted reasonably to ensure that the Audit Committee and the Compliance Committee performed their duties, the following measures stated in CT Partners’ internal control review reports would have been enforced and the perpetration of the Inflation Scheme and/or the Falsification Scheme would likely have been discovered:

(1)  the Company’s accountant would have prepared and circulated monthly management accounts to the Board for consideration and review;

(2)  bank book balances would have been cross-checked against bank statements on a daily basis to identify any discrepancy due to unrecorded items. Cash balances and cash in hand would have been reconciled on a daily basis and deposited into the Company’s designated bank account when the cash balance was over RMB 30,000. This stands in contrast to the Non-existent Transactions of over millions of RMB marked as “存現” (cash deposits) in the falsified Bank Ledgers.

39.  As the 6^th Respondent had relied completely on HLB and CT Partners to identify and report issues regarding audit or internal controls, he has abdicated his duties to independently identify and assess such issues.

40.  By reason of the above breaches of duties by the 6^th Respondent, the business or affairs of the Company have been conducted in a manner:

(1)  involving defalcation, misfeasance or other misconduct towards the Company, its members or any part of its members by the fraudulent misrepresentation of the Company’s key financial information;

(2)  resulting in its members not having been given all the information with respect to its business or affairs that they might reasonably expect, such as the true position of the Company’s cash and bank balances and assets position; and

(3)  unfairly prejudicial to its members or part of its members, who were induced to buy shares or otherwise maintain their shareholding in the Company in reliance of false accounting information.

PART III – AGREED PROPOSED ORDERS

41.  On the basis of the agreed facts set out in Part II above, the Petitioner and the 6^th Respondent agree and jointly submit that it would be appropriate for an order to be made against the 6^th Respondent under section 214(2)(a) and (d) of the SFO, under which the 6^th Respondent shall not, for a period of 3 years, without leave of the Court:

(1)  be, or continue to be, a director, liquidator, or receiver or manager of the property or business, of any listed or unlisted corporation in Hong Kong including the Company or any of its subsidiaries and affiliates; and

(2)  in any way directly or indirectly be concerned, or take part, in the management of any listed or unlisted corporation in Hong Kong including the Company or any of its subsidiaries and affiliates.

42.  If, pursuant to this Schedule, this Court disposes of these proceedings summarily, the 6^th Respondent agrees that there should additionally be an order that the 6^th Respondent do pay the costs of the Petitioner in these proceedings, in the sum agreed with the Petitioner.

Dated this 9^th day of January 2023