SECURITIES AND FUTURES COMMISSION v XU JINPEI AND OTHERS

HCMP 572/2022

[2026] HKCFI 4134

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 572 OF 2022

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BETWEEN

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D E C I S I O N

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Introduction

1.This is the trial of the petition (“Petition”)  presented by the Securities and Futures Commission (“SFC”)  on 12 May 2022 pursuant to section 214 of the Securities and Futures Ordinance, Cap. 571 (“SFO”)  seeking, inter alia, disqualification orders against the 1^st to 8^th Respondents[1] in respect of the business or affairs of China Candy Holdings Limited (“Company”).

2.In the Petition, the SFC complains that the Company’s cash and bank balances in the 2016 Interim Report as published on 11 August 2016 (“2016 IR”)  and the 2016 Annual Report as published on 17 March 2017 (“2016 AR”)  had been overstated (“Overstatements”).  As a consequence, the business or affairs of the Company had been conducted in a manner (1)  involving defalcation, misfeasance or misconduct towards the Company, its members or any part of its members, (2)  resulting in its members not having been given all the information with respect to the Company’s business or affairs that they might reasonably expect, and/or (3)  unfairly prejudicial to its members or any part of its members, within the meaning of sections 214(1)(b), (c) and (d) of the SFO.

3.It is the SFC’s case that the 1^st to 3^rd Respondents (collectively, “Respondents”)  were involved in the inflation of the Company’s cash and bank balances (“Inflation Scheme”)  through falsifying records relating to the financial position of the Company (“Falsification Scheme”).  As such, the SFC is seeking disqualification orders against the Respondents and an order that the Respondents pay its costs in the present proceedings.

Preliminary Observations

4.At trial, the SFC called as its only witness Ms Li Wing Ki (“Ms Li”), who was one of the officers responsible for the SFC’s investigation into the conduct of the Respondents and the business or affairs of the Company.  In support of the Petition, Ms Li filed one affidavit on 12 May 2022 (“Affidavit”)  and one witness statement on 2 October 2024[2]. Whilst Ms Li has not been cross-examined on her affidavit evidence, it seems to me that there is nothing inherently incredible about Ms Li’s evidence and I am prepared to accept her evidence and the contents of the contemporaneous documents adduced therein.

5.None of the Respondents attended the trial, despite having been properly served with the Petition and all further documents pursuant to the Order of Master Matthew Leung dated 11 July 2022 and my Order dated 15 February 2023.  In fact, I was informed by Mr Jenkin Suen SC, acting for the SFC, that the Respondents had not responded to the SFC’s inquiry or participated in the present proceedings at all.

6.Notwithstanding the Respondents’ non-participation, Mr Suen rightly submitted that the SFC still bears the burden of proof to make out its case against the Respondents.  Pertinently, the SFC has an obligation of fair presentation which is less extensive than the duty of full and frank disclosure on a without notice application[3]. I am satisfied that the SFC has fulfilled its obligation of fair presentation in the present proceedings.

Factual Background

7.Since the SFC’s case against the Respondents is ultimately a case of fraud, cogent evidence is required before the SFC can be said to have discharged its burden of proof on balance of probabilities[4]. I am satisfied that the following facts have been proven to such standard.

8.The Company was incorporated in the Cayman Islands on 14 March 2014.  It was listed on the Growth Enterprise Market (“GEM”)  of The Stock Exchange of Hong Kong Limited (“SEHK”)  (stock code: 8182)  between 11 November 2015 and 31 December 2019 when its listing status was cancelled[5].

9.The Company was an investment holding company carrying on business through its subsidiaries, including Fujian Holeywood Food Industrial Company Limited (“HW Food”)  and Jinjiang Holeywood Trading Company Limited (“HW Trading”)  (collectively, “Group”). The Group was principally involved in the manufacturing of candy products in the PRC[6]. As of 31 December 2016, HW Food and HW Trading accounted for 89% of the Group’s assets.  Their business and affairs were regarded as the business and affairs of the Company[7].

Roles of the Respondents

10.At all material times, the Respondents were senior management officers of the Company[8]:

(1)  The 1^st and 2^nd Respondents, then spouses, were the founders and the former controlling shareholders of the Company.  They owned a 100% interest in Jia Qing Developments Limited, which is a company incorporated in the British Virgin Islands, owning 51.99% of the Company upon its listing on the GEM.

(2)  The 1^st Respondent was the Company’s executive director (“ED”)  between 8 January 2015 and 31 July 2017, and its chairman (“Chairman”)  between 26 October 2015 and 31 July 2017. He was also a director of HW Food and HW Trading.  At the material time, the 1^st Respondent was responsible for the formulation of the Group’s business strategy and the overall management of the Group.

(3)  The 2^nd Respondent was the Company’s ED between 8 January 2015 and 19 September 2019, the Company’s chief executive officer (“CEO”)  between 26 October 2015 and 19 September 2019 and the chairperson and compliance officer of the Company’s compliance committee (“Compliance Committee”)  between 3 July 2015 and 19 September 2019.  She has been a director of HW Food since 2000.  At the material time, the 2^nd Respondent was responsible for the daily operation and management of the Group.

(4)  The 3^rd Respondent first joined HW Food as an accountant in November 2007 and left the Group in August 2012. He joined the Group again in May 2013.  Later, he became a compliance officer of the Compliance Committee on 3 July 2015 and the Company’s chief financial controller (“CFO”)  on 26 October 2015.  His responsibilities were suspended on 18 December 2017, and he resigned on 19 September 2019.  At the material time, the 3^rd Respondent was responsible for the financial and accounting management of the Group.

11.At all material times, HLB Hodgson Impey Cheng Limited (“HLB”)  was the Company’s auditor until its resignation on 14 February 2018[9].

Investigations by the SFC and Mazars

12.In around October 2017, the SFC suspected that the Company might have falsified its figures as disclosed in its prospectus (which was prepared for the purpose of listing the Company by way of placing)  dated 30 October 2015 (“Prospectus”)  and the financial statements published for the 2016 financial year.  As a result, a series of investigations were conducted by the SFC and Mazars Corporate Recovery & Forensic Services Limited (“Mazars”)[10].

13.In the course of its investigation, Mazars obtained bank statements of the Group’s subsidiaries (“Mazars Bank Statements”)  from the relevant banks in the PRC, including China Construction Bank (“CCB”).  Accordingly, Mazars concluded in its investigation report dated 31 January 2019 that[11]:

(1)  There were unverified outflows of the Company’s funds to directors or personnel of the Group, namely, (a)  withdrawals of funds (totalling RMB 178 million)  from the bank accounts of HW Food and HW Trading to the personal bank accounts of the Company’s key personnel (mainly the 2^nd Respondent), and (b)  transfers of funds (totalling approximately RMB 135.5 million)  from the personal bank accounts of the Company’s key personnel (mainly the 2^nd Respondent)  to the bank accounts of HW Food and HW Trading.  As to the shortfall of approximately RMB 42.5 million, Mazars was unable to verify the Company’s explanation that the funds were used for operational expenses, such as payment of salaries to the Company’s staff, due to insufficient supporting documents.  During interviews with Mazars, the Respondents explained that the funds flowing into and out of the bank accounts of HW Food and HW Trading were related to loans made to third parties. However, Mazars noted that this explanation did not reconcile with the Group’s records of loan drawdowns and/or loan repayments by third parties; and

(2)  There were abnormal accounting records, which seem to suggest that the transactions booked in the Group’s ledgers for the bank accounts of HW Food did not actually happen.  The corresponding bank slips of these transactions could not be verified against records on the CCB’s official website because, for instance, the QR codes or wording on these bank slips were different from those on bank slips which were authentic and verifiable.

14.At the same time, the SFC conducted its own investigation.  In so doing, the SFC obtained Mazars Bank Statements as well as bank statements requested by the Company from the relevant banks in the PRC in compliance with a notice issued by the SFC on 23 August 2018 pursuant to section 183 of the SFO (“s.183 Notice”). These two sets of bank statements are identical in content and are considered genuine bank statements (“Genuine Bank Statements”).

15.In compliance with the s.183 Notice, the Company also provided the SFC with the Group’s ledgers covering the period from 1 January 2013 to 31 December 2017 (“Bank Ledgers”), including the cash and bank balances of its subsidiaries.  The cash and bank balances of such subsidiaries as at 30 June 2016 and 31 December 2016 tallied with those shown in (1)  HLB’s audit working papers (“HLB WP”)  and (2)  the figures disclosed in the 2016 IR and the 2016 AR.  This suggests that the Company had provided the Bank Ledgers to HLB for interim review and annual audit, which formed the basis of the 2016 IR and the 2016 AR respectively.

Inflation Scheme

16.The Overstatements in the 2016 IR and the 2016 AR were caused by the overstatements in the cash and bank balances of HW Food and HW Trading as at 30 June 2016 and 31 December 2016, which were consolidated to form the Group’s cash and bank balances of that financial year[12].

17.The overstatements in the cash and bank balances of HW Food and HW Trading can be illustrated by comparing the Genuine Bank Statements against the Bank Ledgers and the HLB WP[13]:

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

18.It seems to me that the evidence proving the existence of the Inflation Scheme is overwhelming.  To inflate the cash and bank balances of HW Food Account or HW Trading Account, non-existent deposits would typically be booked near month-end, and would be cancelled out later by booking non-existent withdrawals in the Bank Ledgers and/or omitting to book non-recorded transactions in the Genuine Bank Statements (“Offset”). In the case of the 2016 IR and the 2016 AR, the Offset took place only after the financial period cut-off point, i.e. after 30 June 2016 and 31 December 2016. This had the effect of inflating cash and bank balances, thereby making the financial position of the Company/Group appeared healthier[14].

19.The Overstatements contained in the 2016 IR and the 2016 AR are substantial, i.e. in the region of RMB 38,100,000 to RMB 43,480,000[15]:

	As at 30 June 2016 (RMB)	As at 31 December 2016 (RMB)
Cash and Bank Balances	43,789,000	44,889,000
Net Assets	86,105,000	83,621,000
Total Assets	166,616,000	160,071,000
Percentage of Cash and Bank Balances to Net Assets	51%	54%
Percentage of Cash and Bank Balances to Total Assets	26%	28%
Overstatements of Bank Balances	38,100,000	43,480,000
Percentage of Overstatements	•  87% of the purported cash and bank balances •  44% of the purported net assets •  23% of the purported total assets	•  97% of the purported cash and bank balances •  52% of the purported net assets •  27% of the purported total assets

Falsification Scheme

20.The Inflation Scheme was perpetrated and/or concealed by the Falsification Scheme whereby records relating to the financial position of the Company/Group (such as vouchers, bank slips and bank statements)  were falsified[16].

21.To prove the existence of the Falsification Scheme, the SFC relies on the following evidence:

(1)  Record of interview of Mr Woo Lik Hang (“Mr Woo”)  with the SFC on 30 October 2018;

(2)  36 non-existent transactions which were sampled by HLB and which did not tally with the Genuine Bank Statements;

(3)  Certain pages of HLB WP which set out HLB’s sampling of bank payments and bank receipts in respect of HW Food and HW Trading for the annual audits in 2015 and 2016;

(4)  Copies of bank statements for HW Food Account and HW Trading Account which were obtained by HLB from the Company (for the purpose of preparing the interim review in 2016)  and which did not tally with the Genuine Bank Statements;

(5)  Copies of 4 bank slips (concerning one of the non-existent transactions)  which were obtained by HLB from the Company (for the purpose of preparing the annual audit in 2016)  and which did not tally with the Genuine Bank Statements; and

(6)  Copies of 21 bank slips (concerning some of the non-existent transactions)  which were contained in the 11 sets of vouchers obtained by Mazars from the Company and which did not tally with the Genuine Bank Statements or the 2^nd Respondent’s bank statements with the CCB.

22.The Falsification Scheme came to light as the SFC compared different documents produced by the Company against the Genuine Bank Statements.

(1)  According to Mr Woo, who was a manager at HLB in charge of the Company’s interim reviews and annual audits between 2015 and 2017, HLB had compared certain transactions from the Company’s bank ledgers and/or cash book against the supporting documents (such as vouchers, bank slips and bank statements)  provided by the Company to verify whether the transactions had been properly recorded in the bank ledgers and/or cash book.  Of the 57 non-existent transactions that the SFC had identified, 36 were selected by HLB for sampling.  At the material time, HLB did not detect any irregularities in these 36 transactions.  This seems to suggest that such non-existent transactions did appear in the supporting documents provided by the Company to HLB.  Given that these documents did not match the entries in the Genuine Bank Statements, it follows that they must have been falsified.

(2)  Separately, the SFC had compared the vouchers and the bank slips provided by the Company to Mazars against the Genuine Bank Statements.  Given that the non-existent transactions were not recorded in the Genuine Bank Statements, it follows that the related vouchers and bank slips must have been falsified.  Such impugned vouchers and bank slips were recorded by the 3^rd Respondent and/or the staff working under his supervision.

Legal Principles

Duties owed by the Respondents

23.The 1^st and 2^nd Respondents, as directors, owed, inter alia, the following fiduciary, statutory and common law duties to the Company[17]:

(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 its shareholders;

(2)  A duty to exercise reasonable care, skill and diligence in the performance of their duties as directors of the Company;

(3)  A duty to exercise independent judgment in the performance of the duties as a director of the Company;

(4)  Fiduciary duties to act honestly, in good faith and in the interests of the Company, to act for proper purposes, to avoid situations where the director’s interests may conflict with those of the Company; and not to obtain any undisclosed profit through his position;

(5)  A common law duty to exercise due and reasonable care, skill and diligence that 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 same functions as carried out by the director in relation to the Company, and with the general knowledge, skill and experience that the particular director has;

(6)  A duty to ensure full compliance with the Rules Governing the Listing of Securities on GEM of the SEHK, particularly Rule 5.01 which provides that every director must, in the performance of his duties as a director, inter alia:

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

(b)  Act for proper purpose;

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

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

(7)  A duty to supervise the affairs of the Company’s subsidiaries properly; and

(8)  Pursuant to section 465 of the Companies Ordinance, Cap. 622, a duty to exercise reasonable care, skill and diligence that would be exercised by a reasonably diligent person with (a)  the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the Company, and (b)  the general knowledge, skill and experience that the director has.

24.The 3^rd Respondent, as the Company’s CFO and a member of the Compliance Committee, owed to the Company, inter alia:[18]

(1)  A duty to exercise reasonable care, skill and diligence in the course of acting as the CFO of the Company;

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

(3)  A duty to supervise and oversee the accounting and financial functions of the Company, including preparation of the Company’s accounts and financial reports, to advise and assist the board of directors of the Company, to take such steps as may be necessary to implement internal controls and to maintain the compliance system of the Company/Group.

Section 214 of the SFO

25.Before remedies under section 214(2) of the SFO can be granted, the following three conditions must be satisfied, namely, (1)  the corporation in question is or was a listed corporation, (2)  the business or affairs complained of are those of the corporation, and (3)  the conduct complained of falls within one or more heads of misconduct specified in sections 214(1)(a) to (d) of the SFO[19].

26.I have recently summarised the scopes of sections 214(1)(a) to (d) of the SFO in SFC v Li Hui & Ors[20]:

“19. Regarding the first condition, ‘listed’ means ‘listed on a recognised stock market’.

20. Regarding the second condition, the conduct complained of can be that of the listed company and/or the subsidiaries directed by or under the control of such listed company. The Court will take a realistic approach in determining whether the affairs of the subsidiary are the affairs of the holding company.

21. In respect of the third condition:

(1)  ‘Oppressive’ under section 214(1)(a) of the SFO has been described as tyrannical conduct, abuse of power or a visible departure from the standards of fair dealing. It typically involves an abuse of one’s rights or powers as a majority to procure the occurrence or non-occurrence of events unfair or prejudicial to the complainants who, by reason of their minority status, can only submit;

(2)  As regards section 214(1)(b) of the SFO:

(a)  ‘Defalcation’ is defined as ‘misapplication, including misappropriation, of any property’. Misapplication means the disposition of the company’s property which the company or the board is forbidden, incompetent or unauthorised to make, or which is carried out by the directors in breach of their duties in good faith to promote the success of the company and for proper purposes;

(b)  ‘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. In particular, 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;

(c)  The words ‘other misconduct’ connote improper or wrong behaviour of 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’ including a director’s breach of the duty to exercise reasonable skill, care and diligence in the management of a company;

(3)  Regarding section 214(1)(c) of the SFO, it can be complementary to the other subsections and covers situations such as (a)  the making of misleading or false announcements and (b)  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; and

(4)  As regards section 214(1)(d) of the SFO, the conduct in question does not have to be wrong per se.  ‘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.  It covers the case where the listed company has (a)  failed to comply with the disclosure requirements, (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.”

Disqualification Orders

27.In granting a disqualification order, the Court will be guided by the following principles[21]:

“(1)  The power to determine the appropriate period of disqualification is a discretionary power. It will be necessary for the Court to be satisfied that the director’s involvement in the relevant matter involves a sufficiently serious failure to satisfy his duties that some period of disqualification is justified and fair;

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

(3)  In deciding whether to make a disqualification order, the Court adopts a broad-brush approach. Earlier decided cases are of limited assistance to the exercise of the Court’s discretion;

(4)  The Court must be independently satisfied, based on the agreed facts, that the business or affairs of the Company have been conducted in a manner described in section 214(1)(a), (b), (c)  or (d)  of the SFO and, if so satisfied, determine the scope and duration of the disqualification order;

(5)  The Court is not bound by the agreement reached between the parties. However, in practice, the Court is likely to be guided by the agreement that the SFC, as a responsible regulator, has reached;

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

(7)  Generally speaking, the Court has divided the maximum period of disqualification of 15 years into three brackets, though these are only guides and not straitjackets:

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

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

(c)  The minimum bracket, of disqualification for up to 5 years, for relatively less serious cases; and

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

Analysis

Breach of Duties by the Respondents

28.Based on Ms Li’s affidavit evidence and the contents of the contemporaneous documents adduced therein, the SFC submitted, which I accept, that the Respondents had breached their respective duties by:

(1)  Having knowingly overstated the Company/Group’s cash and bank balances by way of the non-recorded and non-existent transactions as part of the Inflation Scheme;

(2)  Having caused, permitted or acquiesced in the falsification of accounting documents as part of the Falsification Scheme; and

(3)  Being the instigators and/or masterminds of, or at least knowingly permitted, acquiesced in or turned a blind eye to, the Inflation Scheme and the Falsification Scheme.

29.Further, I accept the SFC’s submission that the Respondents were involved in the Inflation Scheme and/or the Falsification Scheme in the following manner:

(1)  First, the Respondents occupied important roles at the Company which placed them in a position to instigate and/or permit misstatements of key financial information of the Company.

(2)  Second, the 2^nd and 3^rd Respondents were all along HLB’s main contacts.  Since they were in charge of the Company/Group’s finances, including those of HW Food and HW Trading, they would be in a position to implement and/or procure the implementation of the Falsification Scheme by passing on falsified accounting documents to HLB without any interception by the Company’s audit committee.

(3)  Third, the 2^nd and 3^rd Respondents were directly connected to the Falsification Scheme:

   (a)   The 2^nd Respondent was the purported payer or recipient in 85 out of the 116 non-recorded transactions;

   (b)   The 2^nd Respondent was the purported payer or recipient in 30 out of the 57 non-existent transactions;

   (c)   The 2^nd Respondent’s approval and/or personal chop was required for payments to be made from HW Food Account or HW Trading Account;

   (d)   The 3^rd Respondent was responsible for recording the falsified vouchers and/or bank slips, which were arranged by him and/or the staff working under his supervision; and

   (e)  The 3^rd Respondent adopted abnormal accounting practice, which led to the non-recorded transactions and the non-existent transactions.

(4)  Fourth, the following features of the Inflation Scheme and the Falsification Scheme tend to suggest that the Overstatements were not mere accounting errors, but were done deliberately by the Respondents:

   (a)   The sheer magnitude of the Overstatements as illustrated in the table at [19] above;

   (b)   The recurrence of the Overstatements in the 2016 IR and the 2016 AR;

   (c)   The fact that the Overstatements were made possible by the precise timing of the Offset;

   (d)   The fabrication of various supporting documents (such as vouchers, bank slips and bank statements)  and the provision of falsified accounting documents to HLB;

   (e)   The apparent benefits that the Respondents (as shareholders and/or senior management officers with remuneration)  might derive from the inflated financial position of the Company; and

   (f)   The apparent benefits that the 1^st and 2^nd Respondents might derive from the subsequent disposal[22] of their substantial stakes in the Company.

(5)  Fifth and finally, I note that the Respondents had previously explained to Mazars that the reason why the Company’s funds were deposited into and withdrawn from the personal bank accounts of the 2^nd and 3^rd Respondents between 2015 and 2017 was that the Group had granted loans to third parties.  However, such explanation seems incredible when the particulars of the loans (as provided by each of the Respondents)  do not tally with each other, or with the Genuine Bank Statements.  The SFC invited this Court to infer that the Respondents had given incredible accounts to Mazars in order to cover up their involvement in the Inflation Scheme and/or the Falsification Scheme.  I agree.

Adverse Inferences against the Respondents

30.Relatedly, the SFC invited this Court to draw adverse inferences against the Respondents in favour of the SFC’s case that the Respondents had, through the Inflation Scheme and the Falsification Scheme, breached their respective duties.  It is trite[23] that adverse inferences may be drawn from the absence of a witness who might be expected to give material evidence on an issue, provided that there is no satisfactory reason for the absence of the witness and that there is a case to answer on that issue or that some evidence has been adduced by the opposing party on the matter.

31.As noted at [5] above, none of the Respondents has participated in the present proceedings.  The 1^st Respondent, for instance, failed to attend an interview with the SFC as required by an interview notice issued by the SFC pursuant to section 183 of the SFO.

32.In my view, the SFC has established a prima facie case against the Respondents and the Respondents plainly could have participated in the present proceedings and provided the SFC and/or the Court with material evidence.  Based on their non-participation, I am prepared to draw adverse inferences against the Respondents that the Inflation Scheme (as perpetrated and/or concealed by the Falsification Scheme)  was carried out by the Respondents in breach of their respective duties, although I do not think that this is necessary as there is overwhelming evidence proving the existence of these two Schemes.

Negligence by the Respondents

33.The SFC submitted in the alternative that the Respondents had acted negligently and/or in breach of their duty of care, skill and diligence owed to the Company by failing to uncover the Overstatements, thereby failing to disclose the true financial position of the Company to its shareholders.

34.Since I have already accepted the SFC’s primary case against the Respondents that they had acted in breach of their respective duties as specified in [23]-[24] above, it is no longer necessary to consider the SFC’s alternative case of negligence against the Respondents.

Application of Section 214 of the SFO

35.In this case, I am satisfied that the conditions for granting relief under section 214(2) of the SFO have been met.

36.The first condition is satisfied. The Company was listed on GEM of the SEHK between 11 November 2015 and 31 December 2019.

37.The second condition is also satisfied.  HW Food and HW Trading were wholly-owned subsidiaries of the Company.  At all material times, their accounts were directly incorporated into the Company’s consolidated accounts.  The affairs of HW Food and HW Trading were, therefore, the affairs of the Company.

38.As to the third condition, I am satisfied that the conduct of the Respondents falls within one or more heads of misconduct specified in sections 214(1)(a) to (d) of the SFO:

(1)  The Respondents’ conduct in carrying out the Inflation Scheme and the Falsification Scheme constitutes “fraud, misfeasance or other misconduct” under section 214(1)(b) or “unfairly prejudicial” conduct under section 214(1)(d); and

(2)  As a result of the Overstatements, shareholders of the Company were not given all the information with respect to its business or affairs that they might reasonably expect, namely, the true position of its cash and bank balances, thereby triggering section 214(1)(c).

39.Accordingly, I am satisfied that “the business or affairs of a corporation have been conducted in a manner described in subsection 1(a), (b), (c)  or (d), whether through conduct consisting of an isolated act or a series of acts or any failure to act”, and the jurisdiction of this Court to grant remedies under section 214(2) of the SFO is, therefore, engaged.

Disqualification Orders

40.As regards each of the Respondents, the SFC seeks a disqualification order for a period of at least 10 years.  In so doing, Mr Suen drew to my attention the following:

(1)  The Respondents’ conduct in carrying out the Inflation Scheme and the Falsification Scheme constitutes fraud and dishonesty, which would qualify for a disqualification for a period of over 10 years;

(2)  The Respondents occupied senior management roles at the Company and, therefore, had control and knowledge of the Company’s business, finances and management;

(3)  The Respondents’ conduct had caused substantial harm and prejudice to the Company’s shareholders by depriving them of information with respect to the true position of the Company’s cash and bank balances; and

(4)  The Respondents had not been cooperative in the present proceedings.  Indeed, they had refused to participate in the proceedings.  As noted at [31] above, the 1^st Respondent failed to attend an interview with the SFC.

41.What we are concerned with in this case is a scheme which was designed to circumvent ordinary oversight of auditing.  Ordinarily, external auditors act as gatekeepers by independently evaluating and ensuring the accuracy of a company’s financial information.  In this case, however, the Overstatements were not identified by HLB precisely because it, too, was provided with falsified financial information by the Respondents on at least two occasions[24]. In my view, this is an aggravating factor.  No mitigation was advanced, as the Respondents did not participate in the proceedings.  To properly account for the gravity of the Respondents’ conduct, I will order that each of the Respondents be disqualified for a period of 13 years.

42.At the hearing, I was informed by Mr Suen that the SFC is seeking disqualification orders in respect of corporations incorporated in Hong Kong only, although the wording will be sufficiently wide to cover non-Hong Kong corporations insofar as they are subsidiaries or affiliates of a Hong Kong corporation.  I accept Mr Suen’s submission that there is little utility in making a disqualification order in respect of foreign companies that are not subsidiaries of a Hong Kong incorporated company as the order is unlikely to be enforceable in the jurisdiction of the place of incorporation.  As a disqualification order is an order in personam it will result in contempt if a Respondent is found to be in breach by becoming a director of a foreign subsidiary of a Hong Kong company and is subject to the jurisdiction of Hong Kong.

Disposition

43.For the foregoing reasons, I will order that:

(1)  Pursuant to sections 214(2)(a) and (d) of the SFO, the 1^st, 2^nd and 3^rd Respondents shall not, without leave of the Court, for a period of 13 years with effect from the date of this order:

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

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

(2)  The 1^st, 2^nd and 3^rd Respondents do pay the costs of the SFC in these proceedings, such costs to be taxed if not agreed.

Mr Jenkin Suen SC, instructed by the Securities and Futures Commission, for the Petitioner

The 1^st Respondent was not represented and did not appear

The 2^nd Respondent was not represented and did not appear

The 3^rd Respondent was not represented and did not appear