Securities and Futures Commission v. Xu Lian Guo and Others

HCMP 283/2019

[2025] HKCFI 3116

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 283 OF 2019

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BETWEEN

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JUDGMENT

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1.Introduction

1.1This is the trial of the Petition dated 1 March 2019 against the 3^rd Respondent (“Zhang”). By orders dated 19 May 2020 and 30 April 2024, procedural directions were given by Linda Chan J to bring the Petition against Zhang to trial. Zhang has throughout not participated in these proceedings and did not attend the trial.

1.2By the Petition, the Petitioner (“SFC”) seeks disqualification orders against Zhang and the 1^st and 2^nd Respondents (respectively “Xu LG” and “Xu LK” and together (“Xu Brothers”) pursuant to section 214(2)(d) of the Securities and Futures Ordinance Cap 571 (“SFO”).

1.3As against Zhang, SFC relies on 3 specific complaints (respectively “1^st to 3^rd Complaints” and collectively “Complaints”). At the trial, SFC called 5 witnesses, primarily to verify certain records of interviews and to produce documentary evidence. The factual matters set out in this judgment are my factual findings premised on the evidence adduced.

2.The Complaints

(i) Background

2.1Zhongda International Holdings Limited (“Zhongda” or “Company”) was incorporated in Bermuda on 14 September 2000 and publicly listed on 1 November 2001 (Stock Code: 0909). Trading of the Company’s shares was suspended on 5 September 2011 and its listing status was eventually canceled with effect on 8 March 2019.

2.2At all material times, Zhongda was an investment company. The principal business of its subsidiaries (together with Zhongda referred to as “Group”) was the development, manufacture and sales of automobile equipment, buses and automobile spare parts primarily in the Mainland.

2.3At all material times, the Xu Brothers and Zhang were members of Zhongda’s board of directors (“Board”):

(1) Xu LG was appointed an executive director on 28 September 2000, and elected chairman on the same date;

(2) Xu LK was appointed an executive director and elected vice-chairman. He resigned from his directorship with effect from 29 December 2013;

(3) Zhang was appointed an executive director and elected vice-chairman prior to Zhongda being listed. He resigned from all positions on 7 September 2011.

2.4Other members of the Board and relevant officers of Zhongda were:

(1) Mr Kwok Ming Fai ("Kwok"), was appointed an executive director on 9 November 2006;

(2) Mr Leung Kwok Chun ("Leung"), was appointed a non-executive director on 25 March 2011. Leung resigned from the Board on 1 January 2017;

(3) Mr Gu Yao Tian ("Gu"), Mr Sun Ka Ziang Henry ("Sun") and Mr Li Xinzhong ("Li"), were independent non-executive directors. Gu, Sun and Li were appointed on 8 October 2001, 9 November 2006 and 15 March 2004 respectively. Both Gu and Li resigned from the Board on 30 September 2011;

(4) Mr Fu Yan Ming Raymond ("Fu"), was the chief financial officer and company secretary;

(5) Mr Hon Chuk Kay Eric was the project director, and later became an executive director on 3 October 2011.

2.5Zhongda’s subsidiaries/associated companies included Yancheng Zhongda Automobiles Equipment Co Ltd (“Zhongda Automobiles”), Yancheng Zhongwei Bus Co Ltd (“Zhongwei Bus”) and Yancheng Ausen Industrial Equipment Manufacturing Co., Ltd (“Ausen”).

2.6In respect of the subsidiaries/associated companies mentioned in the preceding paragraph:

(1) As regards Zhongda Automobiles: Since its incorporation, Xu LG was the chairman and legal representative until October 2010, Xu LK the deputy chairman and Zhang a director until October 2010;

(2) As regards Zhongwei Bus: Xu LK had been the director since 23 June 2000 and was its chairman and legal representative between 23 June 2000 and 6 April 2009, and a manager since 15 July 2011; Xu LG had been a director since 6 April 2009 and was also a deputy chairman between 6 April 2009 and 15 July 2011; Zhang was a director between 23 June 2000 and 15 July 2011 and also a deputy chairman between 23 June 2000 and 6 April 2009.

2.7As regards Zhang’s role generally, he was responsible for the Group's financial management and internal controls (including the approval of fund transfers in the Mainland and reviewing the monthly management accounts of the Group) and strategic planning in the Mainland. According to Kwok, whenever there was any major acquisition or disposal by the Group, Zhang would have been involved.

(ii) The 1^st Complaint: Unauthorized transfer of funds

2.8On 14 June 2011, the Board convened a meeting at which it was resolved (“Funds Transfer Resolution”) that a cash deposit in the sum of around RMB 150 million (“Funds”) held by Zhongda Automobiles at the First Sino Bank in Shenzhen be remitted by 30 June 2011 by way of repayment of shareholder's loan to Zhongda's bank accounts in Hong Kong for the purpose of repayment of intra-group loans and other bank debts.

2.9The Funds Transfer Resolution was signed by 6 directors, including Xu LG and Zhang. The Board further requested the Xu Brothers to implement and supervise the transfer pursuant to the Funds Transfer Resolution.

2.10However, the Xu Brothers failed to implement the Funds Transfer Resolution and no transfer of the Funds was made. In August 2011, the full Board only discovered that the Funds had gone missing after Zhongda received the audit confirmations dated 6 August 2011 and 15 August 2011 while preparing Zhongda's 2011 Interim Results.

2.11According to Zhang himself, prior to 1 September 2011, he already knew that the Xu Brothers had failed to carry out the Funds Transfer Resolution, and that this was a serious matter, but nonetheless he had not disclosed the failure to carry out the Funds Transfer Resolution to the other members of the Board:

(1) Zhang in fact learned of the failure at the latest sometime in July 2011 from private discussions with Xu LG during which he asked Xu LG to repay the Funds to Zhongda and to explain to the Board;

(2) Nonetheless, Zhang failed or neglected to report the failure immediately and directly to the Board;

(3) At the same time, Zhang himself had said in his email to Fu and Kwok sent on 1 September 2011 that the conduct of the Xu Brothers needed to be investigated.

2.12On 1 September 2011, the Board convened a meeting to enquire as to the status of the intended transfer and the whereabouts of the Funds. All directors, except Zhang and Li, attended the meeting (the Xu Brothers, Gu and Leung attended by telephone).

2.13At the meeting, the Board asked the Xu Brothers the whereabouts of the Funds and the status of the transfer:

(1) The Xu Brothers were reluctant to discuss this topic. Xu LG said that he was feeling unwell, while Xu LK said that he was not required to give any explanation;

(2) Eventually, the Xu Brothers admitted that no transfer had been made and stated rather that the Funds were used to pay certain unspecified account payables, and had become the general working capital of the Group;

(3) Kwok asked if there were any invoices or receipts to evidence the purported payments. The Xu Brothers were unable to answer this question or provide any proof;

(4) When Kwok insisted upon his enquiries, Xu LG rebuked Kwok with foul language;

(5) Xu LK maintained that he was the CEO and did not need to follow the direction of Kwok. He also maintained that he was not in breach of any law, and that the Funds had been used for the development of Zhongda. Kwok, Leung and Sun refused to accept the Xu Brothers' explanation. In the end, Xu LG terminated the meeting and the Xu Brothers cut the call off.

2.14The Board, acting by Kwok, Leung and Sun, resolved on 1 September 2011 to suspend the duties of the Xu Brothers until the resolution of the issue of the unauthorized transfers. The suspension and the suspected unauthorized use of the Funds were announced on 2 September 2011. Trading of Zhongda’s shares was suspended on the next business day, ie 5 September 2011.

2.15The evidence shows that in around late July or August 2011, the Xu Brothers caused and/or otherwise procured the Funds to be transferred from Zhongda Automobiles to Zhongda Industrial Group Corporation (“Zhongda Industrial”) and/or its wholly-owned subsidiary, Yancheng Zhongda Steel Structural Engineering Co., Ltd (“Zhongda Steel”), which were companies incorporated in the Mainland owned and/or controlled by the Xu Brothers. According to Fu, the investigation carried out by the Shenzhen police revealed that the Funds were transferred to Zhongda Industrial (RMB 100 million) and its subsidiary company, Zhongda Steel (RMB 50 million) (“Unauthorized Transfers”).

2.16The Xu Brothers failed to return or procure the return of the Funds to Zhongda and/or Zhongda Automobiles. Indeed, according to Zhang himself, during his private discussion with Xu LG, Xu LG indicated that he refused to return the RMB 150 million to Zhongda.

(iii) The 2^nd Complaint: Purported sale of Zhangda’s indirect 20% shareholding in an associated company

2.17At all material times prior to July 2011, Zhongda held a 20% indirect equity interest in Zhongwei Bus, a company incorporated in the Mainland. In mid-2013, Zhongda discovered from its legal advisers that Zhongda’s 20% shareholding in Zhongwei Bus had purportedly been sold and/or transferred (“Purported Sale”) pursuant to a purported share transfer agreement dated 15 July 2011 (“Purported Transfer Agreement”) for a purported consideration of RMB 18.46 million (“Purported Consideration”). Until the Purported Sale, Ausen was the registered holder of 20% of the share capital of Zhongwei Bus (“20% Shareholding”) and the remaining 80% shareholding was held by Zhongda Industrial:

(1) Xu LG signed the Purported Transfer Agreement on behalf of Zhongda Industrial in the capacity as its legal representative, and he also executed a Legal Representative Declaration of Zhongwei Bus in respect of the Purported Transfer Agreement as a director;

(2) According to Kwok, one Mr Cai Jun, Ausen's legal representative and a trusted associate of the Xu Brothers, purportedly executed the Purported Transfer Agreement on behalf of Ausen;

(3) Zhongwei Bus purportedly approved the transfer of its shares from Ausen to Zhongda Industrial by a purported shareholders' resolution dated 15 July 2011;

(4) The purported shareholders' meeting was chaired by Xu LG who also approved the transfer;

(5) On the same date, the Xu Brothers signed a directors’ resolution, appointing Xu LK to be a manager of Zhongwei Bus.

2.18The full Board, except Xu LG, Xu LK and Zhang, had no knowledge of the Purported Sale prior to mid-2013.

2.19The evidence shows that the Purported Sale was at a substantial undervalue:

(1) The net assets of Zhongwei Bus for the year ended 31 December 2010 was around RMB 53.8 million with net profit of around RMB 35.9 million;

(2) According to a valuation by Castores Magi Asia Limited (“Castores”) on 1 April 2011, Zhongwei Bus was valued at HK$331 million as at 31 December 2010;

(3) Further, according to Fu and Kwok, Zhongwei Bus's business was expanding from 2009 to 2011 as a result of a grant of permission by the Mainland Chinese government to manufacture a new bus model;

(4) For the purpose of preparing Zhongda's audited accounts for the year ended 31 December 2010, its auditors, having considered Castores’ valuation, valued Zhongwei Bus at RMB 515 million.

2.20The evidence further shows that, in fact, none of the Purported Consideration has been paid to Ausen.

(iv) The 3^rd Complaint: Non-disclosure in 2011 Interim Results and 2011 financial statements

2.21On 31 August 2011, the Board approved the 2011 Interim Results, which were then published by Zhongda on 31 August 2011.

2.22The 2011 Interim Results stated that the accounts were prepared:

“… in accordance with the applicable disclosure requirements of Appendix 16 to the Listing Rules and with the Hong Kong Accounting Standard 34 ("HKAS 34") "Interim Financial Reporting" issued by the [HKICPA]”.

2.23HKAS 34 in force at the time provided that interim results should disclose material events occurring between the period end date of the interim results and their date of publication.

2.24The 2011 Interim Results were false or at least misleading in that they did not reflect or give any indication as to the subject matters of the 1^st and 2^nd Complaints, namely the Unauthorized Transfers and/or the Purported Sale, notwithstanding that those events occurred prior to the publication of the said results.

2.25Moreover, in the "Management discussion and analysis" section of the 2011 Interim Results, it was expressly stated that “[Zhongwei Bus] is our associated company”. By reason of the Purported Sale, this statement was incorrect.

3.SFC’s case

3.1SFC’s case against Zhang as pleaded in the Petition is as follows:

3.2As regards the 1^st Complaint:

(1) Given the substantial amounts of the Unauthorized Transfers, had Zhang exercised proper skill, care and diligence in the performance of his duties as a director and vice chairman of the Company with responsibility for, inter alia, financial management and internal controls of the Group, he ought to have known or been aware and/or ought to have exercised proper and sufficient financial management and/or implemented proper and sufficient internal controls to enable him to know or be made aware of the Unauthorized Transfers before they were made, at the time they were made and/or immediately after they were made;

(2) In the circumstances, Zhang ought to have been able to prevent or block the Unauthorized Transfers, or alternatively, report the Unauthorized Transfers to the Board before or immediately after the fact, so that the Board could have stopped the Unauthorized Transfers and/or taken immediate steps to seek to recover the Funds; and/or made such public announcements as necessary and appropriate to alert the Company's public shareholders;

(3) Further or alternatively, Zhang in fact learned of the Unauthorized Transfers at the latest sometime in July 2011 from private discussions with Xu LG. Notwithstanding that Zhang well knew that the Unauthorized Transfers were made in disregard and contravention of the Funds Transfer Resolution, he failed or neglected to report the Unauthorized Transfers immediately and directly to the Board. If the Board had been informed about the Unauthorized Transfers it could have taken immediate steps to seek to recover the Funds and/or made such public announcements as necessary and appropriate to alert the Company's public shareholders;

(4) Zhang was negligent in failing to block or prevent the Unauthorized Transfers, or alternatively, to discover the same immediately after the fact; and/or in failing to implement sufficient financial management and/or internal controls to enable the blocking or prevention of the Unauthorized Transfers or the discovery of the same immediately after the fact;

(5) Further or alternatively, Zhang breached his duty to pass on all information relevant to the interests of the Company, namely, the Unauthorized Transfers, to the Board, in a timely manner.

(6) In the circumstances, Zhang acted in breach of the duty of due care, skill and diligence he conducted the business and affairs of the Company in a manner:

(a) involving misfeasance or misconduct towards the Company;

(b) 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/or

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

3.3As regards the 2^nd Complaint:

(1) Given the substantial value of the 20% Shareholding, had Zhang exercised proper skill, care and diligence in the performance of his duties as a director and vice chairman of the Company with responsibility for, inter alia, financial management and internal controls of the Group, he ought to have known or been aware; and/or ought to have exercised proper and sufficient financial management and/or implemented proper and sufficient internal controls to enable him to know or be made aware of the Purported Sale and the Purported Transfer Agreement before it was entered into, at the time it was entered into and/or immediately after it was entered into;

(2) In the circumstances, Zhang ought to have been able to prevent or block the Purported Sale, or alternatively, report the Purported Sale to the Board before or immediately after the fact, so that the Board could have stopped the Purported Sale and/or taken immediate steps to recover or procure the recovery of the 20% Shareholding and made such public announcements as necessary and appropriate to alert the Company’s public shareholders;

(3) Further or alternatively, Zhang, through his directorships of Zhongwei Bus and Zhongda Industrial[1], must have known or become aware of the Purported Sale at the latest on or around 15 July 2011. Notwithstanding that he must have known that the Board was unaware of the Purported Sale and that the matter had never been discussed by the Board, he failed or neglected to report the Purported Sale immediately and directly to the Board, so that the Board could have taken immediate steps to seek to recover the 20% Shareholding and/or made such public announcements as necessary and appropriate to alert the Company’s public shareholders;

(4) Zhang was negligent in failing to block or prevent the Purported Sale; and/or in failing to implement sufficient financial management and/or internal controls to enable the blocking or prevention of the Purported Sale;

(5) Further or alternatively, Zhang breached his duty to pass on all information relevant to the interests of the Company, namely, the Purported Sale, to the Company's authorized organs, including the Board, in a timely manner;

(6) In the circumstances, Zhang conducted the business and affairs of the Company in a manner:

(a) involving misfeasance or misconduct towards the Company;

(b) 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/or

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

3.4As regards the 3^rd Complaint, Zhang ought to have known that the 2011 Interim Results did not reflect the Unauthorized Transfers and the Purported Sale, and were false or at least misleading. Nevertheless, he proceeded to approve the 2011 Interim Results on 31 August 2011. In the circumstances, the business and/or affairs of the Company were conducted in a manner 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.

4.Analysis

(i) The applicable principles

4.1As may be seen from the preceding section, SFC’s application against Zhang relies on section 214(1)(b)-(d) of the SFO, namely that the business or affairs of Zhongda have been conducted in a manner:

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

(b) 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/or

(c) unfairly prejudicial to its members or any part of its members.

4.2The applicable principles are summarized in SFC v Zheng Dunmu [2024] 2 HKLRD 688:

“[18] The SFC has to satisfy 3 conditions for relief under s.214(1) of the SFO namely, (1) the corporation 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 subsections (a) to (d).

[19] The SFC relies on s.214(1)(b)-(d) of the SFO.

[20] In respect of s.214(1)(b):

(1) “Defalcation” is defined as “misapplication, including misappropriation, of any property”.

(2) “Misfeasance” is defined 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). It covers a director’s breach of his duties to exercise reasonable care and diligence in his management of the company, and to act in good faith in the best interests of the company (SFC v Kwok Wing, HCMP 3392/2013, 9 October 2014, §§7-11; SFC v Xu Jinpei [2023] HKCFI 2908, §10).

(3) 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 International (Holdings) Ltd [2021] HKCFI 624, §37).

[21] 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). The duty has been explained as follows:

(1) A duty to exercise reasonable care, skill and diligence as would be exercised by a reasonably diligent person with the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions as director in relation to the company (Re Long Success, §31; Re D'Jan of London Ltd [1993] BCC 646, at 648).

(2) Directors have a continuing duty to acquire and maintain a sufficient knowledge and understanding of the company’s business and affairs to enable them to properly discharge their duties. Whilst directors are entitled to delegate particular functions to those below them in the management chain, and to trust their competence and integrity to a reasonable extent, the exercise of the power of delegation does not absolve a director from the duty to supervise the discharge of the delegated functions. A proper degree of delegation and division of responsibility is permissible, and often necessary, but total abrogation of responsibility is not (Re Copyright Ltd [2004] 2 HKLRD 113, §§34-35; Re Long Success §33).

(3) In the context of a group of companies, the directors have to properly supervise the affairs of the company’s subsidiaries (Re Long Success §32).

[22] 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, §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 Petroleum Machinery Company Limited [2021] HKCFI 497, §19(2)).

[23] 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 [2009] 6 HKC 423, §22; Re Long Success §39).

(3) It covers the case where the listed company has (a) failed to comply with the disclosure requirements (SFC v Kwok Wing, HCMP 3392/2013, 9 October 2014, §12), (b) made misleading or false announcements, and (c) failed to publish 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 Sound Global Ltd [2022] HKCFI 3025, §96).”

4.3Further, Re Styland Holdings Ltd (No 2) [2012] 2 HKLRD 325 §105 is an authority for the proposition that a failure to disclose a connected transaction may trigger section 214(1)(c) of the SFO.

(ii) The 1^st and 2^nd conditions

4.4The 1^st and 2^nd conditions are satisfied. Zhongda was a listed corporation when the impugned matters took place, and the matters complained of by SFC are concerned with the propriety of the application of Zhongda’s assets and whether it complied with the disclosure and obligations.

4.5What follows is my analysis on whether the 3^rd condition has been satisfied by reference to the Complaints.

(iii) The 1^st Complaint

4.6Counsel for SFC has fairly drawn to my attention a number of explanations from Xu LK which may be gleaned from the materials. I agree with counsel for SFC that they do not avail Zhang:

(1) Xu LK asserted that Zhongwei Bus borrowed a bank loan of RMB 100 million which was said to be secured by the bank deposit of Zhongda Automobiles. He asserted that, out of the RMB 150 million deposit held by Zhongda Automobiles, at least RMB 100 million must be related to the loan Zhongwei Bus borrowed. He then argued that, as Zhongda Automobiles was obliged to provide security for the RMB 100 million loan, he questioned if Zhongda could “force” Zhongda Automobiles to apply the RMB 150 million as specified by the Funds Transfer Resolution.

(2) The foregoing cannot avail Zhang: once Zhang realized (in July 2011, if not earlier) that the Xu Brothers had not carried out the Funds Transfer Resolution, his duty was to disclose the same to the Board. The Funds Transfer Resolution was passed by the Board, and even if (assuming what Xu LK asserted was true) the Xu Brothers later encountered practical difficulties in giving effect to the Funds Transfer Resolution, Zhang would still be duty bound to disclose the Xu Brothers' failure or inability to implement the same to the Board, so the Board could have considered or re-considered what to do next if they had realized from Zhang that Xu LG indicated to Zhang that he refused to return the said Funds to Zhongda. This is particularly so when Zhang himself accepted that his duty was to implement the Funds Transfer Resolution.

(3) Xu LK also said that he did not direct Zhongda Automobiles to transfer RMB 150 million on 29 July 2011 to Zhongda Steel, and he was uncertain whether Zhongda Steel was still keeping the RMB 150 million it received from Zhongda Automobile. The foregoing matters do not detract from the fact that the Funds Transfer Resolution had not been carried out.

4.7Counsel, again fairly, pointed out that Zhang may contend that he himself had been deceived by the Xu Brothers and that he had already done all that he reasonably could to prevent their unlawful acts (eg Zhang himself had said in September 2011 that the conduct of the Xu Brothers needed to be investigated (§2.11 above)), the fact of the matter is that he knew well before September 2011 that the Xu Brothers had not carried out the Funds Transfer Resolution, and yet Zhang had failed to disclose this important piece of information to the Board.

4.8In my judgment, given the substantial amounts of the Unauthorized Transfers, had Zhang exercised proper skill, care and diligence, he ought to have known about the same. I therefore accept counsel’s submission that the following matters have been proved:

(1) In the circumstances, Zhang ought to have been able to prevent or block the Unauthorized Transfers, or alternatively, report the Unauthorized Transfers to the Board before or immediately after such transfers;

(2) Thus, Zhang breached his duty to pass on information relevant to the interests of Zhongda, namely, the Unauthorized Transfers, to the Board, in a timely manner;

(3) This is particularly so in view of Zhang’s duty to acquire and maintain a sufficient knowledge and understanding of the company’s business and affairs to enable them to properly discharge their duties and to properly supervise the affairs of the company’s subsidiaries.

4.9The above conduct of Zhang constituted a misconduct under section 214(1)(b) and (d) of the SFO.

(iv) The 2^nd Complaint

4.10The unauthorized disposal was made for the benefit of Zhongda Industrial (in which the Xu Brothers were interested) at the expense of Zhongda.

4.11Zhang was a director of Zhongwei Bus since 23 June 2000 until 15 July 2011 and was also a deputy chairman of Zhongwei Bus between 23 June 2000 and 6 April 2009.

4.12Although Zhang asserted in his answers that he was not aware of his directorship in Zhongwei Bus, he had in fact signed a number of board resolutions, such as the resolutions dated 1 January 2010 and 6 April 2009.

4.13Further, Kwok's evidence is that Zhang was responsible for the financial management function of Zhongwei Bus until its 20% Shareholding was transferred to Zhongda Industrial in July 2011.

4.14Zhang ought to have known about the change of shareholding structure of Zhongwei Bus in July 2011 as a result of the unauthorized disposal, since, according to Kwok, a director of a company must have been informed of such a shareholding change in the Mainland.

4.15Further according to Kwok, Zhang was the deputy managing director of Zhongda Industrial delegated by the governmental authority for the purpose of managing and monitoring the business of Zhongda Industrial. After Zhongda acquired the 20% interest in Zhongwei Bus, Zhang also became the director of Zhongwei Bus who was responsible for overseeing its finance function.

4.16I accept counsel’s submissions that:

(1) Given the substantial value of the 20% Shareholding, had Zhang exercised proper skill, care and diligence, Zhang ought to have known about the Purported Sale. Zhang ought to have been able to prevent or block the Purported Sale, or report the Purported Sale to the Board before or immediately after the Purported Sale. Indeed, Kwok's evidence is that whenever there was any major acquisition or disposal by the Group, Zhang would have been involved;

(2) Further, Zhang breached his duty to pass on all information relevant to the interests of Zhongda, namely, the Purported Sale, to Zhongda's Board, in a timely manner.

4.17The above conduct of Zhang constituted a misconduct under section 214(1)(b) and (d) of the SFO. The unauthorized disposition also amounted to a connected transaction within the meaning of the Listing Rules, given that the Xu Brothers were interested in Zhongda Industrial, making it a connected person. This was also the understanding of and was confirmed by Zhongda itself in its public announcement dated 19 June 2013. To this end, a failure to disclose the connected transaction to Zhongda’s public shareholders triggers section 214(1)(c) (§4.3 above).

(v) The 3^rd Complaint

4.18Zhang knew that the 2011 Interim Results did not reflect the Unauthorized Transfers and the Purported Sale, and were false or at least misleading: this is particularly so when Zhang himself acknowledged in the 31 August 2011 meeting that there was an issue (concerning the RMB 150 million) to be addressed. Nevertheless, Zhang proceeded to approve the 2011 Interim Results on 31 August 2011. Indeed, Zhang, while realizing that there was an issue concerning the RMB 150 million, nonetheless agreed that the board meeting on 31 August 2011 would only deal with the interim report and not the whereabouts of the RMB 150 million.

4.19I am satisfied that the above conduct of Zhang has triggered section 214(1)(c) of the SFO.

(vi) Relief

4.20The principles were summarized in SFC v Sound Global Ltd [2022] HKCFI 3025 §102:

"(1) The court takes into account the two-fold objectives of a disqualification order viz., to protect the public against the future conduct of the respondent and as a general deterrence (Re Shandong Molong §20).

(2) The court will have regard to a wide spectrum of factors, including the respondent'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‚…

(3) There are 8 criteria which govern the court's exercise of discretion namely (a) the character of the offenders, (b) the nature of breaches, (c) the structure of the companies and the nature of their business, (d) the interests of the shareholders, creditors and employees, (e) the risks to others from the continuation of the offenders as company directors, (f) the honesty and competence of the offenders, (g) the hardship to the offenders and their personal and commercial interests, and (h) the offenders' appreciation that future breaches should result in future proceedings…

(4) The court adopts a reasonably broad-brush approach, and will have regard to 3 brackets of disqualification periods:

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

(b) a minimum bracket of below 5 years’ disqualification for cases which are relatively less serious; and

(c) a middle bracket of 6 to 10 years’ disqualification for cases which although serious, are not so serious as to merit a period of disqualification in the top bracket…”

4.21Given the value of the Funds (RMB 150 million) and the 20% Interest (estimated at HK $6.2 million) but no allegation has been advanced that Zhang himself had benefited, I agree with SFC that the present case warrants a disqualification period at the lower end of the middle bracket, namely 6 years.

4.22I also agree with SFC that it is appropriate to make an order under both section 214(2)(d)(i) and section 214(2)(d)(ii): Re Riverhill Holdings Ltd [2007] 4 HKLRD 46 §§20-24.

5.Conclusion

5.1I will therefore make an order in terms of the draft order submitted by SFC (which includes provisions for costs to be paid by Zhang) save that §1 thereof be amended to include a reference to the 6-year disqualification period.

Mr Tom Ng, instructed by Securities and Futures Commission, for the Petitioner

The 3^rd Respondent, acting in person, being absent