Securities and Futures Commission v. Zhu Yu Guo and Others

HCMP 1439/2019

[2026] HKCFI 2562

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1439 OF 2019

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BETWEEN

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REASONS FOR DECISION

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A.  APPLICATIONS BEFORE THE COURT

1.By Petition presented on 9 September 2019, the Petitioner (“the SFC”) seeks disqualification orders against the Respondents in respect of their conduct of the business or affairs of Qunxing Paper Holdings Company Limited (“the Company”) as offending various paragraphs under s.214(1) of the Security and Futures Ordinance (“the SFO”).

2.The Petitioner and the 3^rd Respondent consented to the disposal of these proceedings against the 3^rd Respondent by way of the summary procedure sanctioned in Re Carecraft Construction Co Limited[1] (“Carecraft Procedure”), and the Court so ordered.[2]

3.For the purpose of the Carecraft Procedure, the SFC and the 3^rd Respondent have on 9 May 2025 signed a Statement of Facts Not in Dispute (“the Statement, as annexed hereto as Appendix A”), with the SFC and the 3^rd Respondent agreeing to the following sanctions to dispose of the proceedings -

(1)  based on the matters set out in the Statement, the 3^rd Respondent has misconducted the business or affairs of the Company and should be disqualified from acting as a director, liquidator, receiver or manager or being concerned in the Management of any company, whether listed or unlisted, in Hong Kong for a period of 2 years; and

(2)  to pay costs of the SFC in the agreed sum of HK$1,200,000 in full and final settlement of the 3^rd Respondent’s share of the SFC’s costs in these proceedings within 14 days from the date of the Order to be made.

(“the Agreed Sanctions”).

4.On 20 May 2025, the 3^rd Respondent took out a Summons, supported by the 2^nd Affirmation of the 3^rd Respondent, to apply for three specific companies to be exempted from the disqualification order to be made (“the Carve-Out Application”). On 13 August 2025, the 3^rd Respondent filed his 3^rd Affirmation to supplement his 2^nd Affirmation. The SFC took no objection at the hearing to the Court taking into account the 3rd Affirmation.

5.Both the SFC and the 3rd Respondent consider the Agreed Sanctions to be fair and appropriate. In respect of the Carve-Out Application, the SFC confirms that having considered the facts of this case, including the second and third affirmations of the 3^rd Respondent, it is agreeable to exempt the three companies from the disqualification order to be granted, on an exceptional basis. It, however, remains for this Court to be satisfied independently that on the facts of this case, the terms of the disqualification order to be granted accord with established principles, as will be discussed below.

6.The Respondents have all been served with the Petition but have not entered an appearance. The SFC applies for leave to discontinue the proceedings against them (“the Discontinuation Application”).

7.As per the directions of DHCJ Alan Kwong dated 8 May 2025, the hearing took place before me on 18 August 2025. After hearing counsel for the petitioner and counsel for the 3^rd Respondent, I made an order in terms of the draft order presented with the petitioner‘s skeleton argument, subject to an amendment to insert reference to the affirmations put before this court in support of the subject applications.

8.I now give my reasons for the decision.

B.  BACKGROUND

9.The material facts have been agreed as shown in§§9-82 of the Statement, which are not repeated here. I shall give an overview to put the ensuing discussion in context.

10.At all material times, the Company was an investment holding company with 100% indirect shareholding in its sole operational arm, a Mainland entity called Shandong Qunxing Paper Ltd (“Shandong Qunxing”). Of the corporate entities through which the Company held its interest in Shandong Qunxing was Best Known Group Ltd (“Best Known”). The company and its subsidiaries (“the Group”) were engaged in the business of manufacture and sale of decorative base paper products and printing paper products in Mainland China. The 1^st, 2^nd and 5^th Respondents are members of the same family who beneficially owned a corporate entity, Boom Instant Ltd, the majority shareholder of the Company.

11.The 3^rd Respondent held the position of Senior Financial Manager of the Company from 10 December 2007. From 8 May 2009, he became the Company’s Financial Controller, and its Company Secretary from 8 January 2014, until he resigned from both positions on 1 April 2014.

12.On 17 September 2007, the Company issued a prospectus (“IPO Prospectus”) for the public offering of shares of the company. The Company received proceeds of about HK$1.846 billion in the public offer.

13.On 17 December 2010, the company issued a prospectus for an open offer of new shares (“Open Offer Prospectus“). For this exercise, the Company raised about HK$112 million from public investors.

14.On 12 December 2013, the SFC commenced a civil action in HCA 2428/2013 (“the Action”) under s. 213 of the SFO with the Company, Best Known, and the 1^st and 2^nd Respondents herein as Defendants. After the trial of the Action, G Lam J (as he then was) found the misconduct proved, and made various declarations and orders for payment to shareholders of the Company for amounts exceeding HK$1.4 billion. The principle findings of the Court against the Defendants in the Action are set out in paragraph 25 of the Statement.

15.In the Action, misconduct was alleged against the Defendants in three particular aspects:-

(a)  That the Company had been exaggerating its turnover both before and after its initial public offering in 2007 by significantly overstating its sales through Shandong Qunxing with two of its customers, namely Shanghai On Hing Paper Company Ltd (“Shanghai On Hing”) and Changzhou Cuiqiao Chengguang Paper Company Ltd (“Cuiqiao”) in its IPO prospectus, annual reports and annual results and announcements (“Relevant Reports and Announcements”) for the years 2006 to 2011 filed with the SEHK in 2007 to 2012 (“the Overstatements”).

(b)  That Company had failed to disclose to public investors in its annual reports and annual results announcements for the years 2009 to 2012 that Shandong Qunxing had taken out substantial bank loans in Mainland China (the “Undisclosed Bank Loans”).

(c)  The Company had failed to disclose to the public in a timely manner that Shangdong Qunxing’s restructuring application under PRC bankruptcy laws was accepted on 24 February 2014, which implied a sudden deterioration of the financial position of Shangdong Qunxing (the “Undisclosed Restructuring Application”).

16.In respect of the Overstatements relating to Shanghai On Hing, a customer of Shandong Qunxing between 2006 to 2011, the 3^rd Respondent does not dispute that the profit figures as tabulated in paragraph 26 of the Statement and shown below were, separately or together, likely to induce other persons to subscribe for or purchase shares or other securities in relation to the Company in Hong Kong.

17.The Company had disclosed to the public a rosy picture of its turnover and profits in respect of Shanghai On Hing by providing false or misleading information, as detailed in paragraphs 29-33 of the Statement, in amounts as set out in paragraph 34 of the Statement. The 3^rd Respondent does not dispute the findings made by G Lam J on the overstatement of the sales from Shandong Qunxing to Cuiqiao, as stated in paragraphs 35-38, section B4.1 of the Statement. The undisputed overall overstatement of turnover figures are as follows in paragraph 39 of the Statement –

18.There were also audit issues and irregularities relating to verification of sales figures with Shangdong Qunxing’s customers. These facts as set out in paragraph 41 of the Statement were identified by KMPG and are not disputed by the 3^rd Respondent.

19.In November 2011, JLA Asia Ltd (“JLA”) was commissioned by the SEHK to conduct a further independent review of the internal audit review conducted by Zhonglei Risk Advisory Services Limited (“Zhonglei”), a company engaged by the Company. JLA identified a number of issues and irregularities. The Company made 3 public announcements on 22 April 2013, 17 July 2013 and 9 August 2013 and stated that that the Audit Committee and the Board concluded that the Audit Issues had been clarified and addressed through independent investigations conducted by Zhonglei and JLA, and that they found no evidence of manipulation of revenue, profit and cash position, falsification of books and records or misappropriation of assets. Not all the irregularities identified by JLA were fully and accurately disclosed in three subsequent public announcements made by the Company. JLA disagreed with the Audit Committee that the Audit Issues had been adequately clarified and addressed and the Board’s conclusion in their three announcements that the Company was free from manipulation, falsification and misappropriation concerns. JLA were, however, unable to point to any concrete evidence otherwise, nor to confirm that the Audit Issues had been adequately clarified due to the limited scope of its work and other constraints placed on the investigation. The above facts are detailed in section B4.1.5 of the Statement.

20.Other miscellaneous matters under the Overstatement category of misconduct are set out in sections B4.1.6 – B4.1.8 of the Statement. They relate to a fictitious Company chop of Shanghai On Hing, fictitious payments to or purchases from Shandong Qunxing, and three persons held out as members of staff of Shanghai On Hing or Huidong at site visits made by KPMG, Zhonglei and JLA at Shanghai On Hing who were in fact not employees of either company.

21.The Petitioner considers, and the 3^rd Respondent does not dispute that the matters set out in paragraphs 41 to 57 of the Statement corroborates the Petitioner’s case that the Company had knowingly overstated the Group’s turnover figures from 2006 to 2011 in the way set out in the table in paragraph 17 above.

22.As to the Company’s undisclosed Restructuring Application, the Petitioner relies on the notice issued by the Intermediate People’s Court of Binzhou City in the PRC on 24 February 2014 stating its acceptance of the Restructuring Application of Shandong Qunxing under the Enterprise Bankruptcy Law of the PRC. With Shandong Qunxing being the Company’s sole operational arm at all material times, the severe deterioration of its financial position and the Restructuring Application constituted inside information which ought to have been disclosed to the public in a timely manner. As matters transpired, it was only after the appointment of interim receivers and managers by the Hon. Mr Justice To on 28 March 2014 in HCA 2428 of 2013 that the interim receivers and managers made an announcement about the Restructuring Application on 17 September 2014.

23.It is the SFC’s case against the 3^rd Respondent that the business or affairs of the Company have been conducted in a manner -

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

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

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

within the meaning of s 214(1)(b), (c) and (d) of the SFO.

24.In respect of unfair prejudice, the SFC relies on the fact that in subscribing for the Company’s shares, and in purchasing the shares of the Company until trading was suspended on 30 March 2011, the investing public were likely to have been induced by the false or misleading Profit Figures contained in the Company’s IPO and Open Offer Prospectus and in the Relevant Annual Reports and Announcements from 2007 to 2011, as well as the false or misleading information about nil bank loan of the Group as stated in the Company’s annual reports for 2009 to 2012 and the corresponding results announcements. Such information was also likely to have induced the public investors to trade in the shares of the Company on the Main Board of SEHK until such trading was suspended on 30 March 2011.

25.In respect of sub-paragraph 23(3) above, the SFC relies on the following undisputed facts:-

(1)  Since 30 March 2011, trading of the Company’s shares has been suspended and the listing of the Company was cancelled on 30 November 2017. The value of the Company shares is or is close to zero. The Public Shareholders are clearly prejudiced for having subscribed for and/or bought the Company’s shares at prices above their true value in reliance of the false and/or misleading information stated above.

(2)  As the prejudice to the Public Shareholders was attributable to the misfeasance or other misconduct of those in the management of the Company, and the prejudice could have been avoided had the Company honestly and properly reported its financial position, such prejudice is clearly unfair to the Public Shareholders.

26.I now turn to the 3^rd Respondent’s role in the Company and the duties he owed in his role. It is not disputed that at all material times between May 2009 to March 2014 as the Financial Controller of the Company, he owed -

(1)  a duty to act in good faith and in the best interests of the Company, including a duty to procure disclosure of all relevant material information to the Company to the best of his knowledge;

(2)  a duty to exercise reasonable care, skill and diligence in the performance of his duties as the Financial Controller and Company Secretary of the Company; and

(3)  as an implied term of his employment, a duty to exercise the skills of a reasonably competent financial controller.

27.It is not in dispute that as Financial Controller, the 3^rd Respondent was responsible for the consolidation of accounts and preparation of consolidated financial statements of the Group, the Group’s overall financial management, accounting and investor relations from May 2009 to March 2014. For the period from May 2009 to March 2014 the 3^rd Respondent assumed the most senior finance position within the Group and his responsibilities were expected to include overseeing both the accounting and finance functions and the internal controls for all the entities and/or subsidiaries within the Group.

28.In preparing the consolidated accounts of the Group, the 3^rd Respondent had the duty to ensure that –

(1)  All reporting for the Group, including that of its subsidiaries, from the management accounts to the final published statements, were prepared in an accurate and timely manner; and

(2)  All the relevant accounting policies to be adopted for the purpose of fair presentation of the financial statements were in line with the applicable and prevailing local accounting principles and financial rules and regulations.

29.To discharge the above duties the 3^rd Respondent was expected to - 

(a)  obtain access to the financial information of the Group’s subsidiaries including Shandong Qunxing;

(b)  acquire detailed knowledge of Shandong Qunxing’s internal controls and accounts;

(c)  check information provided by Shandong Qunxing to confirm that all financial data was recorded accurately; and

(d)  oversee the financial reporting systems, to ensure the reconciliation and consolidation of financial records between the Company and its subsidiaries;

and to ensure that the Company was in compliance with listing and reporting requirements in Hong Kong, and that the information and documents presented were true to the best of his knowledge and belief.

30.The SFC considers that due to the three aspects of misconduct identified under paragraph 15 above, the 3^rd Respondent had failed to discharge his duties and responsibilities as Financial Controller of the Company during the financial years ended 2009-2012 in the way set out in paragraph 76 of the Statement, including failing to identify the issues through verification of the local audited reports of Shandong Qunxing, to supervise or review its accounts and to oversee the implementation of an effective reporting internal system to ensure accuracy of the consolidated financial records of the Company and its subsidiaries.

31.The SFC considers that the 3^rd Respondent was responsible for the above failures despite his assertion that the Overstatements, the Undisclosed Bank Loans and Undisclosed Restructuring Application were deliberately concealed from him by the 1^st Respondent, the 2^nd Respondent and the PRC Finance Team. The SFC considers he would have likely discovered the Undisclosed Bank Loans between 2009 to 2012, and/or the Undisclosed Restructuring Application earlier had he fulfilled his duties.

32.On the basis of the failures of the 3^rd Respondent in fulfilling his duties owed as Financial Controller and Company Secretary, the SFC considers that the affairs of the Company has been conducted in the manner within the meaning of section 214(1)(b), (c) and (d) of the SFO.

33.The SFC accepted as mitigating factors the fact that the 3^rd Respondent has been cooperative in relation to these proceedings and has accepted liability, and in so doing, has taken a reasonable course of action to adopt the Carecraft Procedure to save time and costs.

C.  DISCUSSION

C1.  The Carecraft Procedure

34.The Carecraft Procedure as clarified by the English Court of Appeal in Secretary of State for Trade and Industry v Rogers has been adopted by this Court a number of times in respect of proceedings under section 214(1) and (2) of the SFO[3].

35.It is a well-settled principle from the cases cited above that in deciding whether to make a disqualification order under the Carecraft Procedure, the court is not bound by any agreement reached between the parties, but would be under a duty to be independently satisfied, based on the agreed facts, that the business or affairs of the Company have been conducted in a manner described under section 214(1) of the SFO, and if so, determine the scope and duration of the disqualification that would reflect the gravity of the offence: SFC v Tse On Kin[4] at [5] and [26].

Further, while the Court will be guided by the agreement that the SFC as the responsible regulator has reached as to the appropriate sanction to be imposed, it is by no means bound by the agreement: SFC v Superb Summit International Group Ltd[5] at [28(5)].

C2.  Applicable Principles to Section 214(1) SFO Disqualification under

36.Section 214(1) and (2) of the SFO provide as follows:

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

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

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

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

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

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

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

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

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

b) order that the corporation shall bring in its name such proceedings as the Court considers appropriate against such persons, and on such terms, as may be specified in the order;

c) unless the corporation is an authorized financial institution, appoint a receiver or manager of the whole or any part of the property or business of the corporation and may specify the powers and duties of the receiver or manager and fix his remuneration;

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

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

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

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

e) make any other order it considers appropriate, whether for regulating the conduct of the business or affairs of the corporation in future, or for the purchase of the shares of any members of the corporation by other members of the corporation or by the corporation (and, in the case of a purchase by the corporation, for the reduction accordingly of the corporation’s capital), or otherwise.”

37.Under s 214 of the SFO, the conduct complained of must be in respect of the business or affairs of the listed company and those of the subsidiaries insofar as they were directed by or under the control of the listed company (Securities and Futures Commission v Fung Chiu [2009] 6 HKC 423, §§19- 20, per Chu J (as she then was)).

38.The Court must be satisfied, based on the agreed facts, that the business or affairs of the company have in fact been conducted in a manner that contravened one of the limbs in s 214(1) of the SFO and, if so, determine the order to be made (Re Riverhill Holdings Ltd [2007] 4 HKLRD 46, §7, per Kwan J (as she then was)).  

39.The SFC relies on s 214(1)(b), (c) and (d) of the SFO. I consider these limbs in turn:

(a)  Section 214(1)(b) is concerned with “defalcation, fraud, misfeasance or other misconduct” towards the listed company or its members. “Defalcation” and “misfeasance” are both defined in s1, Part 1 of Schedule to the SFO, with the former being defined as “misapplication, including misappropriation, of any property”, while the latter as “the performance of an otherwise lawful act in a wrongful manner”. It is well established that breach of these duties by directors and officers in such capacities constitute misfeasance.

(b)  Section 214(1)(c) concerns “members not having been given all the information with respect to its business or affairs that they might reasonably expect”. This covers situations where the listed company is required to publish periodic financial statements and announcements under the listing rules, the SFO or the Companies Ordinance (Cap 622), as members are entitled to expect the listed company to provide complete and accurate information in respect of such matters.

(c)  Section 214(1)(d) looks at the effect of the conduct complained of by the SFC, which has to be “unfairly prejudicial to its members or any part of its members”. Under this limb, the conduct in question does not have to be wrongful per se. It is sufficient if the conduct is shown to be unfairly prejudicial to the listed company’s members or part of its members.

40.In respect of duties owed by a Financial Controller, the Court finds the observations of the Market Misconduct Tribunal chaired by Mr. Michael Hartmann GBS in respect of Greencool Technology Holdings Ltd dated 24 January 2018[6] to provide helpful guidance:-

(1)  The true nature and extent of the Financial Controller’s duties included, inter alia, supervising the preparation of management reports, budgets, financial reports and statutory accounts; ensuring the proper implementation of an appropriate internal control system; and ensuring proper corporate governance. These duties required detailed knowledge of the accounts of the constituent companies. The Financial Controller had responsibilities not only to the listed company but to all the subsidiaries within the Group, including each of the Mainland subsidiaries (Greencool Report §§378, 380-381);

(2)  Whilst a limited delegation of responsibilities was acceptable and often necessary, the Financial Controller’s acceptance of a material reduction in the nature and extent of his powers and responsibilities as the Financial Controller of the Group such that the internal financial affairs of each subsidiary became for him a “no go” area without any formal public notice, even if not intended, was a deceit on the Stock Market authorities and on the market (Greencool Report §389);

(3)  Whether or not the Financial Controller could have uncovered any fraud if he had discharged his duties properly was irrelevant when considering whether the Financial Controller was negligent in discharging his duties (Greencool Report §§393, 400).

41.The SFC relies on the Expert Report of John Robert Lees adduced in the proceedings, wherein the expert highlights at paragraph 5.2.2 the following –

“ The Financial Controller is the head of the accounting and finance functions and acts as the link between the finance department and the management by managing financial reporting. The Financial Controller’s involvement in the internal auditing function is to ensure regulatory compliance and to communicate the financial results to the board of directors at meetings through the publication of periodic reports and the formulation and monitoring compliance with financial policies and procedures.”

42.The Court’s attention is also drawn to paragraph 5.2.17 of Mr. Lees’ Report, where he summarises the duties required under the Main Board Listing Rules for the management to fulfil –

(1)  Oversight of financial reporting procedures and internal controls;

(2)  Compliance with the Listing Rules in relation to financial reporting and other accounting-related issues;

(3)  Advising on and assisting the Board in developing and implementing financial reporting, internal control and other procedures; and

(4)  Liaising with the audit committee.

The Court accepts the above expert evidence of Mr. Lees, which is not disputed.

43.As regards the period of disqualification, the Court takes into account the two-fold objectives served by a disqualification order: to protect the public against the future conduct of the respondent, and as a general deterrence (SFC v Fung Chiu, §55). Generally, the Court adopts the 3 brackets of disqualification period laid down by the English Court of Appeal in Re Sevenoaks Stationers Ltd [1991] Ch 1644:

(a)  the top bracket of over 10 years for particularly serious cases (i.e. 11 to 15 years, being the maximum period of disqualification);

(b)  the middle bracket of 6 to 10 years for serious cases which do not merit the top bracket; and

(c)  the minimum bracket of 2 to 5 years for less serious cases

44.Further, the Court will have regard to all the relevant circumstances including the nature and seriousness of the conduct complained of, the structure and nature of the business of the company, the interests of the shareholders, creditors and employees, the risks to others from the continuation of the respondents as company directors, the training, experience, skill and competence of the respondents, the honesty and competence of respondents, the hardship to respondents and their personal and commercial interests, their appreciation that future breaches could result in future proceedings and other mitigating factors (Re First China Financial Network Holdings Ltd [2015] 5 HKLRD 530, §9, per Anthony Chan J; Hanergy Thin Film Power Group Limited, §17, per Anderson Chow J; Re Styland Holdings Ltd [2011] 1 HKLRD 96, §§6-8, per Thomas Au J (as he then was) ; SFC v Yeung Kui Wong & ors, HCMP 1742/2009, 1 March 2011, per Reyes J).

C3.  Contravention of s 214(1)(b), (c) and (d)

45.On the basis of the undisputed facts in the Statement, this Court is satisfied that the business or affairs of the Company were conducted by the 3^rd Respondent in a manner:

(a)  involving misfeasance and other misconduct towards the Company and its members within the meaning of s 214(1)(b) of the SFO;

(b)  resulting in the members not having been given the true and complete information with respect to its business and affairs of the Company in particular, its revenue, expenses and operating results which they might reasonably expect within the meaning of s 214(1)(c) of the SFO, as subscribers to, investors and purchasers of the Company’s Shares were likely to have been induced by the false or misleading Profit Figures contained in the Company’s IPO and Open Offer Prospectus and in the Relevant Annual Reports and Announcements from 2007 to 2011, as mentioned in paragraphs 26, 39 and 58 above, as well as the false or misleading information about nil bank loan of the Group as stated in the Company’s annual reports for 2009 to 2012 and the corresponding results announcements, as mentioned in paragraphs 59 to 61 above. Such information was also likely to have induced the public investors to trade in the shares of the Company on the Main Board of the SEHK until such trading was suspended on 30 March 2011; and

(c)  unfairly prejudicial to its members or any part of its members other than Boom Instant Limited (i.e. the public shareholders) as they were entitled to be provided with true and complete financial information with respect to the Company’s business and operating results, within the meaning of s 214(1)(d) of the SFO.

C4.  Whether Agreed Sanctions Fair and Appropriate

46.The SFC requests an order in these terms, which are agreed by the 3^rd Respondent subject to the Carve-Out Application he makes –

(1)  A disqualification order to be made against R3 under s.214(2)(d) of the SFO that for a period of 2 years, R3 shall not, without 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; 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.

(2)  R3 do pay the costs of the SFC in the sum of HK$1.2 m in full and final settlement of R3’s share of the SFC’s costs in these proceedings.

47.I have carefully considered all the submissions made on behalf of the 3^rd Respondent in mitigation, including but not limited to matters demonstrating how the 3^rd Respondent has been cooperative in these proceedings and accepts liability, and the time that it has taken for these proceedings to be brought. I also accept that there is no allegation of dishonesty or fraud against the 3^rd Respondent. Counsel for the 3^rd Respondent has gone one step further in seeking reliance on the findings of G Lam J in the Action, that “the [1^st Respondent] with the assistance of the [2^nd Respondent] made all the management decisions for Shandong Qunxing and they together were the decision-makers intimately involved in managing the affairs of [the Company].”  While that may be relied on to exonerate the 3^rd Respondent of any possible suggestion (and none was made by the Petitioner) that he was one of the masterminds behind any misfeasance, none of that would relieve the 3^rd Respondents of his duties outlined above as a Financial Controller.

48.Taking into account the agreed mitigating factors and all the relevant circumstances of the case, I am satisfied that subject to the Carve-Out Application, the sanction of 2 years for the period of disqualification, being in the minimum bracket in terms of seriousness, is fair and appropriate.

D.  CARVE-OUT APPLICATION

49.By the Carve-Out Application, R3 seeks to “carve out” from the disqualification order 3 non-listed private companies, namely –

(1)  CT Consultants Ltd (“CTCL”);

(2)  Sino Saga Corporation Services Ltd (“Sino Saga”);

(3)  Wicks Medical Consulting Co Ltd (“Wicks Medical”).

D1  Applicable principles

50.It is not disputed that the primary purpose of a disqualification order is not to punish the individual concerned, but to protect the public and for general deterrence: SFC v Superb Summit International Group Ltd [2005] HKCFI 2682.

51.As observed in SFC v Chin Jong Hwa [2020] HKCFI 1457 §§14, 16:

(1)  The power to order disqualification in the present context is primarily protective rather than punitive in character. The fact that misfeasance has been committed in relation to a listed company does not mean that only listed companies and their shareholders need protection from the person concerned. The impugned conduct may be such as to show that the Respondent is unfit to be a director of the companies with the attendant duties and responsibilities generally.

(2)  For any carve-out application, the Applicant bears the onus of establishing that the Court should make an exception to the legislative policy underlying the prohibition.

(3)  In this regard, the legislative policy is one of protecting the public, not one of punishing the offender.

(4)  Another objective is to deter others from engaging in conduct of the particular kind in question.

(5)  A further objective is the more general one of deterring others from abusing the corporate structure to the disadvantage of investors, shareholders and others dealing with a company.

(6)  The prohibition itself contemplates that there will be hardship to the offender. Therefore hardship to the offender alone is not a persuasive ground for the granting of leave.

(7)  The Court in exercising its discretion will have regard to the nature of the offence of which the Applicant has been convicted, the nature of his involvement, and the general character of the Applicant, including his conduct in the intervening period since he was removed from the board and from management. Where, as here, the Applicant seeks leave to become a director and to take part in the management of particular companies, the Court will consider the structure of those companies, the nature of their businesses and the interests of their shareholders, creditors and employees. One matter to be considered will be the assessment of any risks to those persons or to the public which may appear to be involved in the Applicant’s assuming positions on the board or in management.

52.On the facts of SFC v Chin Jong Hwa (supra), it was observed that:

(1)  While the companies in question (i.e. subject to the carve-out application) may be wholly owned by the Respondent, it does not necessarily follow that protection of those who may deal with them in the future, e.g. creditors or investors, is thereby rendered otiose – these potential future creditors or investors also need protection.

(2)  The need for sending a clear message to members of the business community, i.e. the need for general deterrence, is still valid, irrespective of whether the subject companies are wholly-owned by the offender or not.

(3)  Accordingly, the fact that there will be hardship to the offender is not in itself a reason to accede to a carve- out application.

53.It is submitted on behalf of the 3^rd Respondent that the following points are apposite –

(1)  A director (or in this case, a senior management of a company) falling short of the standard of competence is not necessarily unfit to be concerned in the management of a private company: SFC v Chin Jong Hwa [2020] HKCFI 1457 at§13, SFC v Yu Longrui [2022] HKCFI 653 at§41(2).

(2)  While hardship alone is not sufficient for a carving out, it is not entirely irrelevant. SFC v Shum Ka Sang Charlie (unrep., HCMP 1014/2008, 22 May 2009) at §§22-23 is an example of the Court taking into account the fact that the Applicant relied on the income or remuneration obtained from the private companies concerned for his living.

(3)  SFC’s consent is a factor which the Court would take into account : SFC v Wong Kam Leong [2020] HKCFI 606 at§§57-58; SFC v Chiu Duncan [2021] HKCFI 302 at§17.

54.When assessing whether each of the companies ought to be “carved out”, the Court is invited to bear in mind the following special features of the present case:

(1)  In assessing the risk to the general public in this case, it is relevant to take into account the general character of the 3^rd Respondent, including his conduct in the intervening period since he was removed from the board and from management: see Chin Jong Hwa at§16(6).

(2)  To this end, there is no suggestion of dishonesty or lack of commercial probity on the part of the 3^rd Respondent. Moreover, since the 3^rd Respondent left the Company there is no suggestion of his re-offending or having been involved in any questionable conduct that imposes a risk to the public interest: Cf SFC v Yu Longrui (supra) at§41(5).

D2  Discussion

55.The SFC accepts that the Carve-Out Application for private, non-listed companies ought to be allowed, given the nature and business of these companies do not concern or affect the general investing public.

56.I hold that the Carve-Out Application should be allowed. Each of the three companies the subject of the Carve-Out Application is a private company, with no public investor’s interest involved.

57.CTCL is a company to which the 3^rd Respondent provides services limited to accounting and/or consultancy services. It has no liability. The 3^rd Respondent pleads that the paid services provided by him to this company represented his primary source of income as the sole breadwinner of a family with two teen-aged daughters and an ailing wife. Sino Saga is a non-profit-making company providing secretarial services to the 3^rd Respondent and his close family members. Wicks Medical is a company owned by the 3^rd Respondent as a passive investor and two others, providing consultancy services, with only one client.

58.The SFC’s stance is that personal hardship is not by itself a reason to accede to the Carve-Out Application. The agreement to the Application was made on an exceptional basis for the specific facts of the case. That said, I am reminded that while hardship alone is not sufficient to support a carve-out order, it is not entirely irrelevant, and could properly be taken into account in appropriate cases: SFC v Yu Longrui (supra) at§29.

59.It is well accepted that the power to order disqualification is a protective order made in the interest of the public, not punitive to the offender. On the facts of this case, I do not find it necessary to pray in aid any hardship factor to justify the granting of the application. An order on the basis of the Agreed Sanctions subject to the three companies being carved out from the disqualification order would be appropriate in the circumstances.

E.  DISCONTINUATION AGAINST THE 1^st, 2^nd, 4^th AND 5^th RESPONDENTS

60.In these proceedings, all the Respondents apart from the 3^rd Respondent are resident in Mainland China (the “Mainland Respondents”). They have not entered an appearance in these proceedings despite having been duly served with the Petition.

61.The SFC takes the view that it would not be the best use of public resources to further pursue these proceedings against the Mainland Respondents. The effort to be spent in disqualifying them as directors for a period of time would be disproportionate to the amount of costs that the SFC would incur.

62.By summons dated 5^th June 2025, the SFC formally seeks leave to discontinue these proceedings as against the Mainland Respondents under Order 21 rule 3 RHC, (the “Discontinuance Summons”). Pursuant to Order 65 rule 9 RHC, in these circumstances where the Mainland Respondents are in default as to acknowledgement of service, there was no need to serve the Order 21 rule 3 summons on them.

63.I see no reason not to accede to the SFC's application for discontinuance.

F.  CONCLUSION

64.I grant an order in the terms of the Draft Order annexed as Appendix B hereto, with an amendment to additionally refer to the 3^rd Affirmation of Poon Tsz Hang.

65.I make an Order in terms of the Discontinuance Summons as amended:

(1)  Leave be granted to the Petitioner to discontinue these proceedings against the 1^st, 2^nd, 4^th and 5^th Respondents;

(2)  There be no order as to costs as between the Petitioner and the 1^st, 2^nd, 4^th and 5^th Respondents.

66.It remains for me to thank counsel for the parties for their able assistance.

Mr Martin Ho, instructed by Securities and Futures Commission, for the Petitioner

Mr Raphael Leung, instructed by Ince & Co., for the 3^rd Respondent

Appendix A

Appendix B