Securities and Futures Commission v. Li Wing Sang and Others

HCMP 2068/2020

[2025] HKCFI 369

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 2068 OF 2020

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_________________

BETWEEN

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JUDGMENT

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Introduction

1.The Securities and Futures Commission (“SFC”) commenced these proceedings by a Petition dated 16 November 2020 under s.214 of the Securities and Futures Ordinance (Cap. 571) (“SFO”). The SFC seeks disqualification orders against all 3 respondents for their conduct of the business and affairs of Tech Pro Technology Development Limited (“Company”). This judgment concerns only the 3^rd Respondent.

2.The SFC and the 3rd Respondent have by consent summons dated 2 December 2024 (“Consent Summons”) agreed to dispose of the proceedings against the 3rd Respondent summarily by way of what is commonly known as Carecraft procedure. They have also signed a Schedule for Carecraft Procedure setting out the agreed facts and matters for this purpose which is annexed to this judgment (“Carecraft Schedule”). In summary, it is agreed that the 3rd Respondent was in breach of his duties as director of the Company in:

(a) Failing to take reasonable steps to recover “Fan’s Debt” (defined below).

(b) Failing to take any or any reasonable steps to obtain sufficient control and oversight in respect of the daily operation of Fuchao (defined below).

(c) Failing to cause the Company to make impairment provisions to the Group’s (as defined below) interest in Fuchao.

(d) Allowing or failing to prevent the publication of false and misleading statements and representations, as a result of which the shareholders of the Company had not been given all the information with respect to the Company’s business and affairs that the shareholders might reasonably expect.

(e) Being ignorant about the “Lawsuit”, “Judgment” and “Final Judgment” (all defined below) before receiving the SFC’s letter in November 2017.

3.Further, the Carecraft Schedule sets out the proposal for disqualification pursuant to s.214(2)(d) of the SFO ie the 3rd Respondent shall not, for a period of 4 years with effect from the date of the Order, without the leave of the Court:

(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, whether 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.

4.Lastly, the 3rd Respondent has agreed that he shall pay the Petitioner’s costs in these proceedings, to be taxed if not agreed, with:

(a) certificate for two counsel for the period up to and including 14 December 2021; and

(b) certificate for one counsel thereafter up to and including the date of the Carecraft hearing.

Agreed Facts

5.The material facts have been set out in full in the Carecraft Schedule. It is therefore only necessary for this court to give an overview of them here.

6.The Company was incorporated in the Cayman Islands in November 2006. Its shares were listed on the Main Board of the Stock Exchange of Hong Kong Limited on 6 September 2007 and were delisted on 2 March 2020. At all material times, the Company was an investment holding company and, together with its subsidiaries (“Group”), principally engaged in the business of manufacturing and selling of Light Emitting Diode (“LED”) lighting products and accessories.

7.The 3rd Respondent was an Executive Director of the Company from 11 July 2011 to 13 October 2019 and an Authorised Representative of the Company under the Listing Rules and the Companies Ordinance (Cap 622) from 5 January 2019 to 13 October 2019.

The 1^st Acquisition

8.Champion Miracle Limited (“Champion Miracle”) was a wholly-owned subsidiary of the Company. On 27 November 2013, Champion Miracle entered into an agreement with Mr Fan Lin (“Fan”) to purchase 50% of the shareholding in Shanghai Fuchao Investment Company Limited (“Fuchao”) from Fan (“1^st Acquisition”) for HK$450 million.

9.Fuchao was a limited company incorporated in the PRC which was wholly owned by Fan prior to the 1^st Acquisition. The principal business of Fuchao at all material times until 16 June 2017 was sub-leasing 1/F-10/F, Block B, Huanqiu Shijie Building, No. 1-5 Wanhangdulu, Jing’an Shanghai (“Property”). The Property was owned by the Logistics Department of the Chinese People’s Armed Police Force, Corps of Shanghai (“Owner”).

10.Fuchao and the Owner entered into a leasing agreement dated 10 May 2007 (“Leasing Agreement”) and two supplemental agreements dated 10 May 2007 and 22 January 2013 respectively, whereby Fuchao acquired the sub-leasing right of the Property from the Owner for a term of 35 years from 1 July 2007 to 30 June 2042 at an annual rent of RMB 12,000,000 (“Lease”). Pursuant to the Lease Agreement, the rent was to be paid by Fuchao annually in advance by 20 June each year.

11.Shanghai Laiken Industrial Company Limited (“Laiken”) was another wholly-owned subsidiary of the Company. On 24 March 2014, the 1^st Acquisition was completed. By then, Laiken had replaced Champion Miracle as the vehicle holding the Company’s 50% interest in Fuchao.

12.At all material times, Fuchao constituted a very significant part of the Group’s business. For example, as at 30 June 2016, the value of the Group’s interest in Fuchao ie RMB 374,753,000 represented about 33% and 40% of the Group’s total assets ie RMB 1,119,529,000 and net assets ie RMB 937,664,000.

The failed 2^nd Acquisition

13.On 3 June 2016, Champion Miracle and Fan executed an agreement for Champion Miracle to purchase and Fan to sell the remaining 50% of the shareholding in Fuchao for a total consideration of RMB 387,450,000 (“2^nd Acquisition”), to be satisfied by:

(a) The debt owed by Fan to Fuchao (“Fan’s Debt”), amounting to approximately RMB 301,140,000 as at 30 April 2016, which would be used to set off against the consideration.

(b) Allotment of the Company’s shares to Fan at the issue price of HK$2.50 per share.

14.On 29 July 2016, Fan signed a repayment agreement with Fuchao (“Repayment Agreement”) whereby he agreed to repay RMB 190,000,000 to Fuchao by 4 quarterly instalments between 31 December 2016 and 30 September 2017. Fan defaulted on the 1^st instalment of RMB50,000,000.

15.On 31 July 2016, the Board of Fuchao passed a resolution recommending the distribution of Interim Dividends of RMB 222,000,000 for the period ending on 30 June 2016 (“Interim Dividends”) in the following manner:

(a) RMB 111,000,000 payable to Fan would be used to partially set off Fan’s Debt; and

(b) RMB 111,000,000 payable to Laiken would be withheld until 2018 so as to enable Fuchao to upgrade the facilities in the Property.

16.The shareholders of Fuchao unanimously passed a resolution to approve the recommendation of the Board of Fuchao on Interim Dividends.

17.The 2nd Acquisition fell through and never proceeded to completion.

18.On 26 October 2016, the Company published an announcement which for the first time disclosed the amount of money owed by Fan to Fuchao consisting of:

(a) rental income and tenants’ deposits payable to Fuchao, totaling around RMB 205,000,000; and

(b) decoration and maintenance deposits which Fuchao had paid for Fan, totaling around RMB 96,000,000.

19.On 7 February 2017, the Board of Fuchao passed a resolution recommending the distribution of final dividends of RMB 15,600,000 for the period ending on 31 December 2016 (“Final Dividends”) in the following manner, which was then approved by the shareholders of Fuchao:

(a) RMB 7,800,000 payable to Fan would be used to partially set off Fan’s Debt; and

(b) RMB 7,800,000 payable to Laiken would be withheld until 2018 to upgrade the facilities in the Property.

20.On 8 February 2017, the Owner commenced legal proceedings against Fuchao in Shanghai to recover inter alia the outstanding rent for the period from March 2016 to June 2017, in the sum of RMB 16,000,000 (“Lawsuit”).

21.Upon Fan’s default even on the 1^st instalment of RMB50,000,000 by 31 December 2016, and upon chasers from the Company’s representatives, on around 27 March 2017, Fan procured a copy of a 1-page document entitled “租金預收證明” (“Purported Receipt”) and sent it to the Company. The Purported Receipt was dated 4 January 2017 and stated that Fan had on behalf of Fuchao paid RMB 108,000,000 to the Owner, being the rent for the 9-year period from January 2016 to December 2024.

22.The Department of Defense Quartermasters, the Chinese People’s Armed Police Force, Corps of Shanghai, an authority equivalent to the Owner, later confirmed in August 2018 that it had never issued the Purported Receipt or received the alleged sum of RMB 108,000,000 from Fan.

23.On 15 May 2017, the Lawsuit was heard by the Shanghai Jing’an People’s Court. On 16 June 2017, the Shanghai Jing’an People’s Court allowed the Owner’s claim and ordered the Lease to be rescinded, Fuchao to return the Property to the Owner within 5 days, and Fuchao to pay the Owner the outstanding rent in the sum of RMB 16,000,000 (“Judgment”). On 18 July 2017, the Shanghai No.2 Intermediate People’s Court dismissed Fuchao’s appeal (“Final Judgment”).

24.On 7 November 2017, the SFC issued a letter (“SFC Letter”) to the Company stating, inter alia, that the Group’s consolidated interim results for the 6 months ended 30 June 2017 (“2017 Interim Results”) and the Group’s interim report for the 6 months ended 30 June 2017 (“2017 Interim Report”) appeared to contain materially false or misleading information in that they did not disclose the fact that Fuchao had lost its sub-leasing right of the Property as a result of the Lawsuit.

25.On 8 November 2017, the Company, through its solicitors, replied that (i) it had entrusted the daily operations of Fuchao to Fan and did not have knowledge of the Lawsuit prior to receiving the SFC Letter; and (ii) in light of the Purported Receipt, the Company truly believed that Fan had already paid the rent in respect of the Property for the 9-year period from January 2016 to December 2024 in the aggregate amount of RMB 108,000,000.

The 3rd Respondent’s duties and his breaches

26.As director of the Company, the 3rd Respondent agreed that he owed the following duties to the Company:

(a) duty to act in good faith, in the best interests of the Company and for proper purposes, including a duty to disclose all relevant material information to the Company and the shareholders;

(b) duty to exercise reasonable care, skill and diligence in the performance of his duties as director of the Company;

(c) duty to exercise independent judgment in the performance of his duties as director of the Company;

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

(e) (by way of a formal declaration with an undertaking to the Stock Exchange) duty to comply and procure the Company to comply with the Listing Rules from time to time.

27.It is agreed between the SFC and the 3rd Respondent that he has acted in breach of his duties set out above in that:

(a) The 3rd Respondent has failed to take reasonable steps to recover Fan’s Debt. By January 2017 the latest, he should have procured or at least recommended the board of the Company to procure, the commencement of legal proceedings against Fan and his associated company to recover Fan’s Debt.

(b) The 3rd Respondent has failed to take any or any reasonable steps to obtain sufficient control and oversight in respect of the daily operations of Fuchao.

(c) The 3rd Respondent should have but has failed to cause the Company to make impairment provisions to the Group’s interest in Fuchao in the Group’s various interim results and annual results from 2014 to 2017, particularly in the 2017 interim results set out in the 2017 interim report. As a result of such failures, the Group’s financial statements were inaccurate, incomplete, misleading and did not provide a true and fair view of the state of affairs and operations of the Company and the Group.

(d) The 3rd Respondent allowed or failed to prevent the publication of false and misleading statements and representations in the 2017 Interim Results and 2017 Interim Report. As a result of the aforesaid, the shareholders of the Company had not been given all the information with respect to the Company’s business and affairs that they might reasonably expect.

(e) The 3rd Respondent was negligent by not being aware of the Lawsuit, Judgment and Final Judgment before receiving the SFC Letter in November 2017 which were critical to the Company’s business.

Applicable principles

28.Section 214(1) of the SFO provides:

“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.”

29.On the basis of the agreed facts set out in Carecraft Schedule annexed hereto, this court is satisfied that the business and affairs of the Company have been conducted in a manner as described in s 214(1)(b)-(d) of the SFO and the conditions for granting relief under s 214 of SFO are met.

30.The court’s approach to disqualification orders is well established and has been summarized by Chow J (as he then was) in Securities and Futures Commission v Li Hejun [2017] 4 HKLRD 785 at [15]-[17] as follows:

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

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

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

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

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

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

31.By agreeing to and putting forward the Draft Order to this court, the SFC had accepted that the 3rd Respondent’s conduct fell within the minimum bracket and a disqualification period of 4 years would be appropriate.

32.This court is not bound by the agreement between the SFC and the 3rd Respondent in deciding what Order to be made. It must be satisfied on the basis of the agreed facts that the business or affairs of the Company have been conducted in a manner described in s 214(1) of the SFO and decide on the scope and duration of the Order. However, in practice, it is likely to be guided by their agreement: Securities and Futures Commission v Yeung Kui Wong unrep., HCMP 1742/2009, 27 October 2010, Harris J at [5]. This is based on the Court’s recognition that the SFC, as a responsible regulator, would have reached an agreement on the appropriate sanction to be imposed: SFC v Li Wo Hing & Ors unrep, HCMP 1023/2011, 26 September 2012, Barma J (as he then was).

33.On the basis of the agreed facts set out in Carecraft Schedule annexed hereto, this court agrees that this is a case of negligence but there is no element of dishonesty or fraud on the part of the 3rd Respondent. This court also agrees that his ineptitude is such that he can fairly be described as borderline reckless. However, unlike the 1st Respondent who was a director of Fuchao and the 2nd Respondent who was the Supervisor of Fuchao, the 3rd Respondent did not hold any position in Fuchao. Thus, his responsibilities and powers were not as extensive as those of the other two and his culpability is slightly less than theirs.

34.Having regard to all the circumstances of the case and the 3rd Respondent’s belatedly cooperative attitude in agreeing to dispose of the proceedings by way of Carecraft procedure, hence to some extent saving the Court’s and SFC’s time and costs, and agreeing to pay SFC’s costs in these proceedings, this court agrees that the 3rd Respondent’s conduct fell within the high end of the minimum bracket and a disqualification period of 4 years is appropriate.

Relief

35.I hereby make the Order sought in the draft produced before this court:

(a) Leave be granted to dispose of the Petition against the 3^rd Respondent herein by way of the Carecraft procedure.

(b) There be no order as to costs in respect of the Consent Summons.

(c) Pursuant to section 214(2)(d) of the Securities and Futures Ordinance (Cap. 571), the 3^rd Respondent shall not for a period of 4 years from the date of this Order, without leave of the Court:

i. 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 Tech Pro Technology Development Limited or any of its subsidiaries and affiliates; and

ii. in any way, whether directly or indirectly, be concerned, or take part, in the management of any listed or unlisted corporation in Hong Kong including Tech Pro Technology Development Limited or any of its subsidiaries and affiliates.

(d) Subject to sub-paragraph (b) above, the 3^rd Respondent shall pay the Petitioner’s costs in these proceedings, to be taxed if not agreed, with:

i. certificate for two counsel for the period up to and including 14 December 2021; and

ii. certificate for one counsel thereafter up to and including the date of the Carecraft hearing.

Mr Thomas Wong, instructed by Securities and Futures Commission, for the Petitioner

The 1st Respondent was not represented and did not appear

The 2nd Respondent was not represented and did not appear

The 3rd Respondent was not represented and did not appear

ANNEX

HCMP 2068 / 2020

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 2068 OF 2020

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_________________

BETWEEN

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SCHEDULE FOR CARECRAFT PROCEDURE

CONCERNING THE 3^rd RESPONDENT

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A INTRODUCTION

1. On 16 November 2020, the Securities and Futures Commission (Petitioner) commenced these proceedings under section 214 of the Securities and Futures Ordinance (Cap 571) (Ordinance) seeking, inter alia, a disqualification order against Mr CHIU CHI HONG (招自康) (3^rd Respondent) and others in respect of their conduct of the business and affairs of Tech Pro Technology Development Limited (德普科技發展有限公司) (Company).

2. Subject to the approval of this Court, the Petitioner and the 3^rd Respondent consent to the disposal of these proceedings against the 3^rd Respondent by way of the summary procedure (Carecraft Procedure) sanctioned in Re Carecraft Construction Co Limited [1994] 1 WLR 172, as clarified by the English Court of Appeal in Secretary of State for Trade and Industry v Rogers [1996] 1 WLR 1569 and as adopted by this Court in a number of cases in respect of proceedings under section 214 of the Ordinance.

3. The 3^rd Respondent accepts that during the relevant period, the business and affairs of the Company, for which the 3^rd Respondent as one of the Executive Directors was responsible, have been conducted in a manner described in sections 214(1)(b), (c) and (d) of the Ordinance, namely:

3.1. involving defalcation, misfeasance or other misconduct towards the Company, its members or any part of its members;

3.2. 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; and

3.3. unfairly prejudicial to its members or any part of its members.

4. On the basis of the facts set out in Section B below and the agreed mitigating factor set out in Section C below, the Petitioner and the 3^rd Respondent agree, and the 3^rd Respondent accepts, that it would be appropriate for a disqualification order to be made against the 3^rd Respondent under section 214(2)(d) of the Ordinance under which he shall not for a period of 4 years, without the leave of the Court:

4.1. 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

4.2. in any way, whether 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.

5. The definitions of “corporation”, “subsidiary” and “affiliate” are set out in Appendix A to this Statement.

6. The Petitioner and the 3^rd Respondent have reached an agreement that the 3^rd Respondent shall pay the Petitioner’s costs in these proceedings, to be taxed if not agreed, with:

6.1. certificate for two counsel for the period up to and including 14 December 2021; and

6.2. certificate for one counsel thereafter up to and including the date of the Carecraft hearing.

7. In the event of a disqualification order made against the 3^rd Respondent by reference to this Statement:

7.1. the Petitioner and the 3^rd Respondent agree for this Statement to be annexed to a judgment of this Court; and

7.2. the Petitioner reserves the right to refer to this Statement for all purposes connected with or ancillary to these proceedings including, but not limited to, the continuation of these proceedings against other Respondent(s).

8. The Petitioner and the 3^rd Respondent agree that in the event this Court for whatever reason is of the view that these proceedings shall not be dealt with by the Court by way of the Carecraft Procedure or that a full hearing is appropriate, no admission or concession by either the Petitioner or the 3^rd Respondent in this Statement, including any proposal for the period of disqualification herein referred to and the liability to pay costs, shall be referred to or relied upon by either party at any subsequent hearing in these proceedings without the prior written consent of both parties.

B FACTS NOT IN DISPUTE

B1 THE COMPANY

9. The Company:

9.1. was incorporated in the Cayman Islands with limited liability on 20 November 2006;

9.2. has been registered as a non-Hong Kong company in Hong Kong under Part XI of the former Companies Ordinance (Cap 32) since 7 February 2007;

9.3. was at all material times an investment holding company and, together with its subsidiaries (Group), principally engaged in the manufacture and sale of Light Emitting Diode (LED) lighting products and accessories; and

9.4. was listed on the Main Board of The Stock Exchange of Hong Kong Limited (Stock Exchange) on 6 September 2007 (stock code: 3823). On 26 February 2020, the Stock Exchange announced that the listing of the Company’s shares would be cancelled with effect from 2 March 2020. The listing of the Company’s shares was accordingly cancelled with effect from 9am on 2 March 2020.

10. As at the date of the Petition:

10.1. The registered office of the Company in Cayman Islands (i.e. place of incorporation) was at Cricket Square, Hutchins Drive, P.O. Box 2681, Grand Cayman, KY1-1111, Cayman Islands; and

10.2. The principal place of business of the Company in Hong Kong was at Room 901, 9/F, Wings Building, 110-116 Queen’s Road Central, Hong Kong.

B2 THE 1^ST TO 3^RD RESPONDENTS

11. Mr Li Wing Sang (Amos Li), the 1^st Respondent, was:

11.1. an Executive Director of the Company from 11 December 2009 to 1 April 2019;

11.2. the Chairman of the Board of Directors of the Company from 1 March 2011 to 1 April 2019;

11.3. the Chairman of the Nomination Committee of the Company from 1 March 2011 to 1 April 2019;

11.4. the Chairman of the Remuneration Committee of the Company from 1 September 2012 to 4 September 2012; and

11.5. adjudged bankrupt by the Court of First Instance on 2 April 2019, and the bankruptcy order was subsequently discharged on 2 April 2023.

12. Mr Liu Xinsheng (Liu X), the 2^nd Respondent, was an Executive Director of the Company from 25 July 2007 to 30 October 2019.

13. The 3^rd Respondent, was:

13.1. an Executive Director of the Company from 11 July 2011 to 13 October 2019;

13.2. an Authorised Representative of the Company under the Listing Rules and the Companies Ordinance (Cap 622) from 5 January 2019 to 13 October 2019; and

13.3. adjudged bankrupt by the Court of First Instance on 16 June 2020, and his bankruptcy order was subsequently discharged on 16 June 2024.

14. According to the Company’s prospectus and its various announcements:

14.1. Amos Li:

14.1.1. holds a bachelor degree from Kobe University of Commerce, Japan; and

14.1.2. has extensive marketing and management experience in the fields of household appliance through holding senior management positions in various companies.

14.2. Liu X:

14.2.1. graduated from Nanjing Audit College (南京審計學院) specializing in accounting in 1991; and

14.2.2. at the time of the Company’s listing in 2007, was a registered international internal auditor, a registered tax agent of the People’s Republic of China (PRC) and an accounting professional with over 10 years’ experience in the field of accounting and auditing.

14.3. the 3^rd Respondent:

14.3.1. holds a Bachelor of Business degree from Griffith University, Australia; and

14.3.2. has experience in business development, corporate management, finance and accounting fields.

B3 ACQUISITION OF 50% OF SHANGHAI FUCHAO INVESTMENT COMPANY LIMITED (上海富朝投資有限公司) (FUCHAO, CURRENTLY KNOWN AS SHANGHAI FUCHAO PROPERTY MANAGEMENT COMPANY LIMITED)

15. On 27 November 2013, a wholly-owned subsidiary of the Company, Champion Miracle Limited (Champion Miracle), entered into an agreement with Mr Fan Lin (范林) (Fan), whereby Champion Miracle would purchase from Fan 50% of the shareholding in Fuchao for HK$450,000,000 (1^st Acquisition).

16. Fuchao:

16.1. was a limited liability company incorporated in the PRC on 6 December 2006;

16.2. was, prior to the 1^st Acquisition, wholly owned by Fan;

16.3. at all material times until 16 June 2017, engaged principally in the business of sub-leasing 1/F-10/F, Block B, Huanqiu Shijie Building, No 1-5 Wanhuangdulu, Jing’an, Shanghai (中國上海市靜安區萬航渡路1號至5號環球世界大廈B座1－10樓) (Property), which was owned by the Logistics Department of the Chinese People’s Armed Police Force, Corps of Shanghai (中國人民武裝警察部隊上海市總隊後勤部) (Owner); and

16.4. pursuant to a leasing agreement dated 10 May 2007 (Leasing Agreement) and two supplemental agreements dated 10 May 2007 and 22 January 2013, acquired the sub-leasing right of the Property from the Owner for a term of 35 years from 1 July 2007 to 30 June 2042 at an annual rent of RMB 12,000,000 (Lease).

17. Pursuant to clauses 3 and 4 of the Leasing Agreement, rent was to be paid by Fuchao annually in advance by 20 June of each year.

18. On 28 November 2013, the Company published an announcement seeking to justify the 1^st Acquisition on the grounds that:

18.1. it would provide a very stable income stream to and diversify the business risks of the Company;

18.2. the Company could set up a PRC headquarter office at the Property;

18.3. the Company could utilise the outer wall of the Property to decorate with its LED lights for promotion and marketing purposes;

18.4. the Company would renovate the Property’s existing lighting system from traditional lighting to LED lighting; and

18.5. the Company could change the name of the Property to “LEDUS”.

19. On 24 March 2014, the 1^st Acquisition was completed. By then, Shanghai Laiken Industrial Company Limited (上海萊懇實業有限公司)(Laiken), another wholly-owned subsidiary of the Company, had replaced Champion Miracle as the vehicle holding the Company’s 50% interest in Fuchao. On the same day, a shareholders’ agreement was executed amongst Laiken, Fan and Fuchao (Fuchao Shareholders Agreement).

20. On 3 January 2015, the shareholders of Fuchao passed a resolution:

20.1. appointing the following individuals as the directors of Fuchao:

20.1.1. Fan;

20.1.2. Amos Li;

20.1.3. Song Wenning (宋文寧), who was an employee of the Group; and

20.1.4. Liu Hairong (劉海榮), who was a co-worker of Fan;

20.2. appointing Fan as Fuchao’s legal representative and chairman; and

20.3. appointing Liu X as Fuchao’s supervisor (監事).

21. On 27 March 2016, the Central Military Commission of the PRC issued a notice (CMC Notice) stating that the People’s Liberation Army and Chinese People’s Armed Police Force were set to cease providing all paid services within 3 years. According to the Company’s 2016 Annual Report published on 28 April 2017, there was “no adverse impact” arising from the CMC Notice on the Lease, which remained “effective and legally enforceable until its expiry in accordance with the relevant PRC law”.

22. On 3 June 2016, Champion Miracle and Fan executed an agreement for the purchase of the remaining 50% of the shareholding in Fuchao for a total consideration of RMB 387,450,000 (2^nd Acquisition), which was to be satisfied in the following manner:

22.1. The debt owed by Fan to Fuchao (Fan’s Debt), which as at 30 April 2016 amounted to approximately RMB 301,140,000, would be used to set off against the consideration.

22.2. The balance of the consideration would be settled by allotting the Company’s shares to Fan at the issue price of HK$2.50 per share.

23. On 3 June 2016, the Company published an announcement seeking to justify the 2^nd Acquisition on the basis that the Property “has been generating a stable income and cashflow for the Group” and that it would allow the Company to gain “full control” of Fuchao.

B4 FAILURE TO RECOVER FAN’S DEBT AND LOSING THE LEASE

24. On 28 July 2016, the Glaucus Research Group California LLC (an American research firm that specialises in short selling of stocks) published a report (Glaucus Report) claiming, among other things, that the Company has “massively overstated its reported profits and inflated the reported purchase price of its acquisitions” and that “Tech Pro is an obvious fraud, that its equity is worth HKD 0.00 and trading of its stock should be halted to protect future investors from further losses”.

25. As a result of the publication of the Glaucus Report, the Company’s share price quickly plummeted. Eventually, the 2^nd Acquisition fell through on 31 August 2016.

26. On 29 July 2016, Fan signed a repayment agreement with Fuchao (Repayment Agreement) whereby he agreed to repay RMB 190,000,000 to Fuchao by 4 instalments as follows:

26.1. RMB 50,000,000 by 31 December 2016 (1^st Instalment);

26.2. RMB 50,000,000 by 31 March 2017;

26.3. RMB 50,000,000 by 30 June 2017; and

26.4. RMB 40,000,000 by 30 September 2017.

27. On 29 July 2016, the Board of Fuchao passed a resolution recommending to distribute interim dividends of RMB 222,000,000 (Interim Dividends) for the period ending on 30 June 2016.

28. On 31 July 2016:

28.1. The Board of Fuchao passed a resolution recommending to distribute the Interim Dividends for the period ending on 30 June 2016 in the following manner:

28.1.1. The RMB 111,000,000 payable to Fan would be used to partially set off Fan’s Debt.

28.1.2. The RMB 111,000,000 payable to Laiken would be withheld from Laiken until 2018, so that Fuchao would have sufficient funds to upgrade the facilities in the Property in the following year.

28.2. The shareholders of Fuchao unanimously passed a resolution to approve the Board’s recommendation.

29. On 26 October 2016, the Company published an announcement to refute the Glaucus Report. In the same announcement, the Company disclosed for the first time that the debt owed by Fan to Fuchao consisted of:

29.1. rental income and tenants’ deposits payable to Fuchao, totalling around RMB 205,000,000; and

29.2. decoration and maintenance deposits which Fuchao had paid for Fan, totalling around RMB 96,000,000.

30. On 7 February 2017:

30.1. The Board of Fuchao passed a resolution recommending to distribute final dividends of RMB 15,600,000 (Final Dividends) for the period ending on 31 December 2016 in the following manner:

30.1.1. The RMB 7,800,000 payable to Fan would be used to partially set off Fan’s Debt.

30.1.2. The RMB 7,800,000 payable to Laiken would be withheld from Laiken until 2018, so that Fuchao would have sufficient funds to upgrade the facilities in the Property in the following year.

30.2. The shareholders of Fuchao unanimously passed a resolution to approve the Board’s recommendation.

31. On 8 February 2017, the Owner commenced legal proceedings against Fuchao in Shanghai to (among other things) recover the sum of RMB 16,000,000, being the outstanding rent for the period from March 2016 to June 2017 (Lawsuit).

32. In breach of the Repayment Agreement, Fan failed to pay the 1^st Instalment on or before 31 December 2016. Upon chasers from the Company’s representatives, on around 27 March 2017, Fan procured a copy of a one-page document entitled “租金預收證明” which was sent to the Company (Purported Receipt). The Purported Receipt was dated 4 January 2017 and stated that Fan had on behalf of Fuchao already paid RMB 108,000,000 to the Owner as the rent for the 9-year period from January 2016 to December 2024.

33. On 15 May 2017, the Lawsuit was heard by the Shanghai Jing’an People’s Court which, on 16 June 2017, allowed the Owner’s claim (Judgment) and ordered (among other things):

33.1. the Lease be rescinded (解除);

33.2. Fuchao to return the Property to the Owner within 5 days; and

33.3. Fuchao to pay the Owner the outstanding rent in the sum of RMB 16,000,000.

34. On 18 July 2017, the Shanghai No 2 Intermediate People’s Court dismissed Fuchao’s appeal (Final Judgment).

35. Neither the Judgment nor the Final Judgment contained any reference to:

35.1. the Purported Receipt; or

35.2. any assertion by Fuchao that it had already paid the rent for the 9-year period from January 2016 to December 2024.

36. On 25 August 2017, the Company announced the Group’s consolidated interim results for the six months ended 30 June 2017 (2017 Interim Results), which failed to disclose or make any reference to the Lawsuit, the Judgment or the Final Judgment.

37. On 20 September 2017, the Company published the Group’s interim report for the six months ended 30 June 2017 (2017 Interim Report), which again failed to disclose or make any reference to the Lawsuit, the Judgment or the Final Judgment.

B5 SUSPENSION OF TRADING AND INVESTIGATION

38. On 7 November 2017, the Petitioner issued a letter to the Company:

38.1. stating that the 2017 Interim Results and 2017 Interim Report appeared to contain materially false or misleading information in that they did not disclose the fact that Fuchao had lost its sub-leasing right of the Property as a result of the Lawsuit; and

38.2. requiring the Company to show cause as to why trading of its shares should not be suspended under section 8(1) of the Securities and Futures (Stock Market Listing) Rules (Cap 571V).

39. On 8 November 2017, the Company (through its solicitors) replied that:

39.1. it had entrusted the daily operations of Fuchao to Fan and did not have knowledge of the Lawsuit prior to receiving the Petitioner’s letter; and

39.2. in light of the Purported Receipt, the Company truly believed that Fan had already paid the rent in respect of the Property for the 9-year period from January 2016 to December 2024 in the aggregate amount of RMB 108,000,000.

40. On 9 November 2017, trading of the Company’s shares was suspended. On the same day, the Company published an announcement disclosing for the first time the Lawsuit, the Judgment and the Final Judgment.

41. On 6 December 2017, the Company established a Special Investigation Committee to:

41.1. investigate and report on various matters and events leading to or relating to the Lawsuit; and

41.2. recommend actions to be taken by the Company to address the concerns of the Petitioner.

Later in the same month, the Special Investigation Committee engaged Grant Thornton Advisory Services Ltd (Grant Thornton) to conduct an independent investigation to this end.

42. On 25 July 2018, the Stock Exchange imposed the following conditions for the resumption of trading in the shares of the Company:

42.1. publish all outstanding financial results in accordance with the Listing Rules and address any audit modifications; and

42.2. announce all material information for the Company’s shareholders and other investors to appraise the Company’s position.

43. On 23 August 2018, the Department of Defense Quartermasters, the Chinese People’s Armed Police Force, Corps of Shanghai (中國人民武裝警察部隊上海市總隊保障部軍需營房處) – the authority equivalent to the Owner under the current political hierarchy in the PRC – confirmed that it had never issued the Purported Receipt or received the sum of RMB 108,000,000 from Fan.

44. On 28 September 2018, Grant Thornton issued its investigation report (Investigation Report) which stated, among other things, that:

44.1. The Company has assigned personnel to act as directors and supervisor of Fuchao. It has also sent staff to collect Fuchao’s financial information every month.

44.2. Amos Li had repeatedly asked Fan to jointly manage Fuchao and to stop pocketing the rental income payable to Fuchao. However, Fan refused to cooperate.

44.3. It was crucial to the operation of Fuchao that it should maintain a good relationship with the Owner, because Fuchao obtained the Lease owing to the good relationship between Fan and the Owner. Accordingly, the Company could only try to obtain management power by communicating and negotiating with Fan, rather than to take other more forceful measures.

44.4. There was no evidence to suggest that the Company knew about the Lawsuit before it received the Petitioner’s letter on 7 November 2017.

45. On 11 February 2020, the Company received a letter from the Stock Exchange stating that given the Company’s failure to fulfil the resumption conditions and resume trading by 31 January 2020, the Stock Exchange would on 13 February 2020 recommend the Listing Committee to cancel the listing of the Company. The listing of the Company’s shares was eventually cancelled by the Stock Exchange with effect from 9am on 2 March 2020.

46. As at 18 August 2020:

46.1. Fan has not repaid any of the instalments under the Repayment Agreement; and

46.2. Laiken has not received its share of the Interim Dividends or Final Dividends.

B6 DUTIES OWED BY THE 1^ST TO 3^RD RESPONDENTS

47. At all material times, each of Amos Li, Liu X and the 3^rd Respondent owed (as directors of the Company), among other things, the following duties to the Company:

47.1. A duty to act in good faith, in the best interests of the Company and for proper purposes, including a duty to disclose all relevant material information to the Company and the shareholders.

47.2. A duty to exercise reasonable care, skill and diligence in the performance of their duties as directors of the Company.

47.3. A duty to exercise independent judgment in the performance of their duties as directors of the Company.

47.4. A duty to continuously acquire and maintain a sufficient knowledge and understanding of the Company’s business to enable them to properly discharge their duties as directors.

48. Further, in order to act as the directors of the Company, each of Amos Li, Liu X and the 3^rd Respondent had signed a formal declaration, undertaking to the Stock Exchange that they would, in the exercise of their powers and duties as directors of the Company, comply and procure the Company to comply with, among other things, the Listing Rules from time to time.

49. The Listing Rules contained, among other things, the following provisions:

49.1. According to rule 2.13, the information contained in any announcement or corporate communication must be accurate and complete in all material respects and not be misleading or deceptive.

49.2. According to rules 13.47 and 13.48(2), annual reports and interim reports must comply with the provisions set out in Appendix 16. According to paragraph 2 of Appendix 16, each set of financial statements presented in an annual report, listing document or circular shall provide a true and fair view of the state of affairs of the listed issuer and of the results of its operations and its cashflows.

49.3. According to rule 3.08, the board of directors of a listed issuer is collectively responsible for the management and operation of the listed issuer. The Stock Exchange expected the directors, both collectively and individually, to fulfil fiduciary duties and duties and skill, care and diligence to a standard at least commensurate with the standard established by Hong Kong law.

49.4. According to rule 13.04, an issuer’s directors are collectively and individually responsible for ensuring the issuer’s full compliance with the Listing Rules.

B7 LIABILITY OF THE 3^rd RESPONDENT

50. For the reasons set out hereinbelow:

50.1. the 3^rd Respondent was in breach of the duties set out in paragraphs 47 to 49 above;

50.2. the business or affairs of the Company have been conducted in a manner:

50.2.1. involving defalcation, misfeasance or other misconduct towards the Company or its members or any part of its members;

50.2.2. 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; and

50.2.3. unfairly prejudicial to its members or any part of its members; and

50.3. the 3^rd Respondent was wholly or partly responsible for the business or affairs of the Company having been so conducted.

B7.1 Failure to Recover Fan’s Debt

51. The 3^rd Respondent has failed to take reasonable steps to recover Fan’s Debt. By January 2017 the latest, he should have procured (whether by himself, the Company, Laiken, Fuchao or otherwise), or at least recommended the board of the Company to procure, the commencement of legal proceedings against Fan and his associated company to recover Fan’s Debt.

52. In this connection, the Petitioner will rely on the following matters:

52.1. Amos Li and the 3^rd Respondent have known about the practice of Fan, either by himself or through his associated company called 上海萬裕榕豐投資管理有限公司 (Shanghai Wanyu Rongfeng Investment Management Co. Ltd.) (Wanyu), pocketing the rental income payable to Fuchao (Practice) since before the completion of the 1^st Acquisition.

52.2. There was no justification for the Practice. There was no legitimate reason for Fan or Wanyu to receive the rental income payable to Fuchao.

52.3. Fan continued the Practice despite repeated demands by the Company, Amos Li and the 3^rd Respondent to cease the Practice. In particular:

52.3.1. according to the Investigation Report, while Fan and Wanyu had misappropriated 51% of the rental income payable to Fuchao in 2015, the figure rose to 75% in 2016; and

52.3.2. the amount of Fan’s Debt kept increasing, rising from RMB 180,324,000 (as at 24 March 2014, the date of the completion of the 1^st Acquisition) to RMB 325,160,000 (as at 31 October 2017, shortly before the Petitioner sent the “show cause” letter to the Company).

52.4. The Company has failed repeatedly to recover Fan’s Debt:

52.4.1. After Fan told Amos Li that he had spent the rental income that he had pocketed on buying antiques for himself, Amos Li asked Fan to auction the antiques and use the proceeds to pay back Fuchao. However, Fan refused.

52.4.2. Fan’s Debt was to be set off against the consideration payable under the 2^nd Acquisition. However, the 2^nd Acquisition eventually fell through.

52.4.3. Fan’s Debt was to be set off against Fan’s share of the Interim Dividends and Final Dividends. However, the 3^rd Respondent knew or should have known that this could not be an adequate or permanent solution given that:

(a) the amount of Fan’s Debt was considerable, standing at RMB 301,140,000 as at 30 April 2016;

(b) at all material times Fuchao only maintained a minimal amount of cash, in the sum of RMB 1,871,144.03 as at 30 June 2015 and RMB 66,482.76 as at 30 June 2016; and

(c) Fan never ceased the Practice, which meant the amount of Fan’s Debt was constantly growing.

52.4.4. Although Fan signed the Repayment Agreement, he failed to settle even the 1^st Instalment, which was due on 31 December 2016. As soon as the default occurred, the 3^rd Respondent knew or should have known that they had no alternatives but to procure the commencement of legal proceedings to recover Fan’s Debt.

52.5. The 3^rd Respondent should have known that the Purported Receipt was a forgery and should not have accepted the Purported Receipt at face value given that:

52.5.1. There was no explanation as to how Fan suddenly had so much cash, given that he had been reluctant to settle Fan’s Debt for years.

52.5.2. It was unusual and dubious for Fan to pay the Owner directly. Fan should have paid Fuchao and let Fuchao pay rent to the Owner.

52.5.3. There was no reason for Fan to use his own money to pay rent since it was Fuchao, not Fan, who had the obligation to pay rent under the Lease.

52.5.4. There was no reason to pay the rent for 9 years in one-go when, according to clause 4 of the Leasing Agreement, rent only needed to be paid annually.

52.5.5. Fan only provided the Purported Receipt to the Company on 27 March 2017 even though the Purported Receipt was, on its face, created on 4 January 2017 and Fan was obliged to pay the 1^st Instalment by 31 December 2016.

52.5.6. The Purported Receipt, even on its face, was only a copy, not the original. There was no attempt by the 3^rd Respondent to ascertain or verify the authenticity of the Purported Receipt, such as by making enquiries with the Owner.

52.6. Contrary to the Investigation Report:

52.6.1. The relationship between Fuchao and the Owner would not have been strained if the Company had taken more forceful measures to recover Fan’s Debt. The existence of the Lawsuit shows that the interests of Fan and the Owner were not necessarily aligned.

52.6.2. In any event, Fuchao could have operated effectively and profitably without maintaining a good relationship with the Owner. Since the Owner had signed a legally-binding contract to lease the Property to Fuchao for 35 years, so long as Fuchao fulfilled its obligations under the Leasing Agreement, there was no reason or basis for the Owner to deliberately disrupt the operation of Fuchao.

52.7. As evidenced by the 2^nd Acquisition (which, if completed, would have seen Fan ceasing to have any interest or involvement in Fuchao), Fan’s involvement or cooperation was not indispensable to the business or operation of Fuchao.

52.8. Fan would occasionally procure Wanyu to receive the rental income payable to Fuchao.

B7.2 Failure to Obtain Control and Supervision over Fuchao

53. The 3^rd Respondent has failed to take any or any reasonable steps to obtain sufficient control and oversight in respect of the daily operation of Fuchao. In particular:

53.1. Apart from sending an accountant from the Company’s Shanghai office to obtain Fuchao’s monthly financial information for the purpose of preparing consolidated financial statements of the Group, there was no mechanism or arrangement to ensure that the Company was kept apprised of Fuchao’s operation, financial affairs or litigations involving Fuchao.

53.2. In breach of the Fuchao’s articles of association and the Fuchao Shareholders’ Agreement, Fuchao has never held any shareholders’ meeting and only held board meetings about once or twice a year, usually by way of teleconference.

53.3. The 3^rd Respondent had never met with or talked to the Owner.

53.4. The 3^rd Respondent had never raised the issue of the Group’s lack of sufficient control and supervision over Fuchao at the board meetings of the Company.

54. At all material times, Fuchao constituted a very significant part of the Group’s business:

54.1. As at 30 June 2014, the value of the Group’s interest in Fuchao (RMB 338,732,000) represented about 24% and 32% of the Group’s total assets (RMB 1,434,447,000) and net assets (RMB 1,050,174,000).

54.2. As at 30 June 2015, the value of the Group’s interest in Fuchao (RMB 358,015,000) represented about 27% and 31% of the Group’s total assets (RMB 1,326,422,000) and net assets (RMB 1,139,078,000).

54.3. As at 30 June 2016, the value of the Group’s interest in Fuchao (RMB 374,753,000) represented about 33% and 40% of the Group’s total assets (RMB 1,119,529,000) and net assets (RMB 937,664,000).

54.4. As at 30 June 2017, the value of the Group’s interest in Fuchao (RMB 374,278,000) represented about 32% and 45% of the Group’s total assets (RMB 1,174,008,000) and net assets (RMB 832,322,000).

55. Further:

55.1. According to clauses 9 and 10 of Fuchao’s articles of association, apart from regular shareholders’ meetings (定期會議) which should be held every 6 months, Laiken (as a member holding more than 10% of the shares in Fuchao) and Liu X (as Fuchao’s supervisor) were each entitled to convene and chair an interim shareholders’ meeting (臨時會議) anytime.

55.2. According to clauses 16 and 17 of the Fuchao Shareholders’ Agreement, a shareholders’ meeting shall be the supreme authority (最高權力機關) of Fuchao and it shall be held at least once a year.

55.3. According to clause 20 of Fuchao’s articles of association, Liu X (as Fuchao’s supervisor) had the power to, among other things, monitor Fuchao’s finances, supervise and admonish the directors and senior officers of Fuchao and propose resolutions at shareholders’ meetings.

55.4. According to clause 21 of Fuchao’s articles of association, Liu X (as Fuchao’s supervisor) had the power to investigate suspicious matters relating to Fuchao’s operation and hire accountants to assist him.

56. In light of the foregoing matters, after the completion of the 1^st Acquisition, the 3^rd Respondent should have at least taken the following steps:

56.1. convening shareholders’ meetings at Fuchao, so as to put pressure on Fan with a view to gaining more control, supervision and visibility over the operation and affairs of Fuchao;

56.2. utilising Liu X’s position and powers as Fuchao’s supervisor, including those set out in clauses 20 and 21 of Fuchao’s articles of association;

56.3. raising the issue of the Company’s lack of control and visibility over Fuchao at the Company’s board meetings, so that the other directors would be alerted to the problem and could consider the solution together; and

56.4. attempting to verify the authenticity of the Purported Receipt upon receiving it in late March 2017, including by making enquiries with the Owner.

B7.3 Failure to Make Impairment Provisions

57. Since there was substantial difficulty in recovering Fan’s Debt, the 3^rd Respondent should have caused the Company to make impairment provisions to the Group’s interest in Fuchao in the following documents:

57.1. the Group’s consolidated interim results for the 6 months ended 30 June 2014, which were announced by the Company on 20 August 2014 (2014 Interim Results) and set out in the Company’s 2014 Interim Report published on 5 September 2014 (2014 Interim Report);

57.2. the Group’s consolidated results for the year ended 31 December 2014, which were announced by the Company on 25 March 2015 (2014 Annual Results) and set out in the Company’s 2014 Annual Report published on 22 April 2015 (2014 Annual Report);

57.3. the Group’s consolidated interim results for the 6 months ended 30 June 2015, which were announced by the Company on 19 August 2015 (2015 Interim Results) and set out in the Company’s 2015 Interim Report published on 15 September 2015 (2015 Interim Report);

57.4. the Group’s consolidated results for the year ended 31 December 2015, which were announced by the Company on 24 March 2016 (2015 Annual Results) and set out in the Company’s 2015 Annual Report published on 13 April 2016 (2015 Annual Report);

57.5. the Group’s consolidated interim results for the 6 months ended 30 June 2016, which were announced by the Company on 19 August 2016 (2016 Interim Results) and set out in the Company’s 2016 Interim Report published on 15 September 2016 (2016 Interim Report);

57.6. the Group’s consolidated results for the year ended 31 December 2016, which were announced by the Company on 30 March 2017 (2016 Annual Results) and set out in the Company’s 2016 Annual Report published on 28 April 2017 (2016 Annual Report); and

57.7. the 2017 Interim Results, which were also set out in the 2017 Interim Report.

58. Further, in light of the Lawsuit, Judgment and Final Judgment, Fuchao had lost its principal asset and source of income (i.e. the Lease). There was practically no or no reasonable prospect for Laiken to receive its share of the Interim Dividends or Final Dividends. In the premises, the 3^rd Respondent should have caused the Company to make impairment provisions to the Group’s interest in Fuchao in the 2017 Interim Results, which were also set out in the 2017 Interim Report.

59. As a result of the 3^rd Respondent’s failure, the aforesaid financial statements were inaccurate, incomplete, misleading and did not provide a true and fair view of the state of affairs and operation of the Company and the Group. The shareholders of the Company had not been given all the information with respect to the Company’s business or affairs that the shareholders might reasonably expect.

B7.4 Publication of False and Misleading Information

60. The 2017 Interim Results and 2017 Interim Report contained the following false and misleading statements or representations:

60.1. According to page 3 of the 2017 Interim Results and page 18 of the 2017 Interim Report, as at 30 June 2017, the Group’s interest in Fuchao was valued at RMB 255,478,000, the Group’s non-current assets amounted to RMB 605,636,000, the Group’s total assets less current liabilities amounted to RMB 1,004,604,000, and the Group’s net assets and total equity amounted to RMB 832,322,000.

60.2. It was stated on page 9 of the 2017 Interim Report that:

“At 30 June 2017, there was an amount due from a joint venture of approximately RMB 118.8 million (31 December 2016: approximately RMB 118.8 million) included in other current financial assets which represented the dividend declared and payable by the joint venture in Shanghai, PRC to the Group…Such dividend payments will be made as long as it will not affect the daily operations of the joint venture as there may be potential expenses on repair and maintenance by the joint venture, it is expected the payment will take more than a year from 31 December 2016. The expected dividend repayment from joint venture is to be made in the second quarter of 2018.”

60.3. It was further stated on page 9 of the 2017 Interim Report that:

“At 30 June 2017, the amount due to a joint venture from a joint venture partner has been repaid in accordance with the repayment schedule, and the amount due to a joint venture by the joint venture partner amounted to approximately RMB 99.5 million (31 December 2016: approximately RMB 100.9 million).”

61. The above statements or representations were false and misleading in the following respects:

61.1. The representations in paragraph 60.1 above were false and misleading in that the valuations set out therein were in fact considerably lower given that, as a result of the Lawsuit, Judgment and Final Judgment, Fuchao had lost its principal asset and source of income.

61.2. The statements in paragraph 60.2 above were misleading in that, as a result of the Lawsuit, Judgment and Final Judgment, there was practically no or no reasonable prospect for the Group to receive its share of the Interim Dividends or Final Dividends in the second quarter of 2018.

61.3. The statement in paragraph 60.3 above was false and misleading in that Fan did not make any repayment in accordance with the Repayment Agreement and the amount of Fan’s Debt, as at 30 June 2017, in fact exceeded RMB 200,000,000.

62. The 3^rd Respondent allowed the publishing of the above false and misleading statements and representations or otherwise did not prevent the same from being published, as a result of which the shareholders of the Company had not been given all the information with respect to the Company’s business or affairs that the shareholders might reasonably expect.

B7.5 Ignorance of the Lawsuit, Judgment and Final Judgment

63. The 3^rd Respondent was negligent by not being aware of the Lawsuit, Judgment and Final Judgment before receiving the Petitioner’s letter dated 7 November 2017. These matters are critical to the business of the Company and should have been known to the 3^rd Respondent at the time of (or shortly after) their occurrence.

64. But for the 3^rd Respondent’s negligence and ignorance:

64.1. the Lawsuit, Judgment and Final Judgment should and would have been disclosed to the shareholders via the 2017 Interim Results and 2017 Interim Report; and

64.2. no false or misleading information should or would have been published, as pleaded in paragraphs 60.1, 60.2, 61.1 and 61.2 above.

65. In the premises, the business or affairs of the Company have been conducted in a manner:

65.1. involving defalcation, misfeasance or other misconduct towards the Company or its members or any part of its members;

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

65.3. unfairly prejudicial to its members or any part of its members.

C AGREED MITIGATING FACTOR

66. In September 2024, shortly before the trial of these proceedings which are scheduled to commence on 3 December 2024, the 3^rd Respondent has belatedly adopted a reasonable course of action in agreeing to conclude these proceedings by way of the Carecraft Procedure which may help to save the time and costs of the Court and the Petitioner, and in agreeing to pay the costs of the Petitioner of these proceedings.

D PROPOSAL FOR DISQUALIFICATION

67. On the basis of the facts not in dispute as set out in Section B above and the agreed mitigating factor set out in Section C above, the Petitioner and the 3^rd Respondent agree that it would be appropriate for a disqualification order to be made against the 3^rd Respondent under section 214(2)(d) of the Ordinance that, for a period of 4 years, he shall not, without the leave of the Court:

67.1. 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

67.2. in any way, whether 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.

E COSTS

68. The Petitioner and the 3^rd Respondent have reached an agreement that the 3^rd Respondent shall pay the Petitioner’s costs in these proceedings, to be taxed if not agreed, with:

68.1. certificate for two counsel for the period up to and including 14 December 2021; and

68.2. certificate for one counsel thereafter up to and including the date of the Carecraft hearing.

Dated this 2^nd day of December 2024.

Appendix A

“Corporation” means a company or other body corporate incorporated either in Hong Kong or elsewhere.

“Company” means a company as defined in section 2(1) of the Companies Ordinance (Cap 622).

“Subsidiary” means with respect to its holding company, a corporation:-

(a) the composition of the board of directors of which is directly or indirectly controlled by the holding company; or

(b) more than half of the issued share capital of which is directly or indirectly controlled by the holding company; or

(c) which is a subsidiary of a corporation which is a subsidiary of the holding company; or

(d) which is accounted for and consolidated in the holding company’s consolidated financial statements.

“Holding company” means, in relation to a corporation, any other corporation of which it is a subsidiary.

“Affiliate” in respect of a corporation, means any subsidiaries or holding companies of such corporation or any subsidiaries of any of the holding companies of such corporation.

HCMP 2068 / 2020

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 2068 OF 2020

_________________

_________________

BETWEEN

___________________________

SCHEDULE FOR CARECRAFT PROCEDURE

CONCERNING THE 3^rd RESPONDENT

___________________________

Dated the 2^nd day of December 2024.

Securities and Futures Commission

The Petitioner

54^th Floor, One Island East

18 Westlands Road, Quarry Bay Hong Kong

Ref: 122/LG/1400/0137

Tel: 2231 1222

Fax: 2521 7884