Securities and Futures Commission v. Yick Chong San
Read the full judgment text of HCMP 2797/2005 on BabelCite. This High Court CFI judgment was delivered on 30 May 2007.
1. This is a petition presented by the Securities and Futures Commission (“the SFC”) against Yick Chong San, pursuant to section 214(1) of the Securities and Futures Ordinance, Cap. 571.
Cited by 28 cases · Cites 1 case
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HCMP 2797/2005 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE MISCELLANEOUS PROCEEDINGS NO. 2797 OF 2005 ____________
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____________ Before: Hon Kwan J in Court Date of Hearing: 30 May 2007 Date of Judgment: 30 May 2007 _______________ J U D G M E N T _______________ 1.This is a petition presented by the Securities and Futures Commission (“the SFC”) against Yick Chong San, pursuant to section 214(1) of the Securities and Futures Ordinance, Cap. 571. 2.The company concerned in this petition is Riverhill Holdings Limited (“the Company”). Its shares were listed on the Growth Enterprise Market (“GEM”) of The Stock Exchange of Hong Kong Limited on 1 June 2001. Trading was suspended on 24 July 2003 and the listing of the Company on GEM was cancelled with effect from 18 October 2005. 3.Under section 571(1), where it appears to the SFC that at any relevant time, the business or affairs of a corporation which is or was listed have been conducted in a manner involving misfeasance or other misconduct towards it or its members or any part of its members, or 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, the SFC may, after consulting the Financial Secretary, by petition apply to court for an appropriate order under section 214(2). The relevant time for present purpose is any time since the formation of the Company but before it ceased to remain listed. 4.By this petition, the SFC seeks an order against the respondent under section 214(2)(d) that:
5.The SFC and the respondent have made a joint application that this petition is to be dealt with summarily under what has become known as the Carecraft procedure, on the basis of facts which are agreed or not disputed as set out in a schedule placed before the court. 6.I understand this is the first time that the Carecraft procedure is invoked in the present context. Although the Carecraft procedure has been adopted in proceedings for disqualification orders under section 168H of the Companies Ordinance, Cap. 32, I see no objection in terms of jurisdiction in applying this procedure to a petition for an order under section 214(2)(d) of Cap. 571 and dispense with a full trial. An application for an order under section 214(2)(d) is very similar to disqualification proceedings in Cap. 32. This is a civil proceeding. And as was said by Ferris J in Re Carecraft Construction Company Limited [1994] 1 WLR 172 at 183E, there was no example of a jurisdiction in which any court has held that there must be a full trial of all relevant issues, regardless of any agreement or admission of material facts. I refer also to my observations in The Official Receiver v. Tose & Others, HCMP No. 112 of 2002, 8 October 2004, paragraph 6. 7.In adopting the Carecraft procedure in this petition, it is well established that the court is not asked simply to make a consent order (The Official Receiver v. Tose & Others, paragraphs 7 to 12). In this instance, the court would need to be satisfied, on the agreed facts, that the business or affairs of the listed corporation have been conducted in a manner described in section 214(1)(a), (b), or (c) or (d), whether through conduct consisting of an isolated act or a series of acts or any failure to act. If the court is so satisfied and decides to make an order under section 214(2)(d) against a person who was wholly or partly responsible for the business or affairs of the corporation, the court must decide on the scope and the duration of that order. The Carecraft procedure cannot bind the court as to the scope and length of the order to be imposed. 8.The SFC and the respondent have not been able to come to an agreement on the scope and length of the order, even though they have agreed on the facts. This does not render the Carecraft procedure inappropriate. 9.I have considered the facts in the schedule, which is annexed to this judgment, and decided to adopt the Carecraft procedure for this petition, as I did not envisage the length of disqualification that is to be imposed would have taken the period to an entirely different bracket that the respondent is prepared to accept. 10.The basis for the petition is that the respondent was primarily responsible for the business and affairs of the Company, by virtue of his various positions set out in paragraphs 23 and 24 of the schedule. This is not a case of fraud, but one involving a marked degree of incompetence or negligence and in one instance, dishonesty, as I shall come to. 11.The specific allegations against the respondent and the facts in support of each as set out in the schedule are as follows:
12.It is pertinent to note the following matters:
13.Under Rule 5.01 of the GEM Rules, every director of a company listed on GEM is required to fulfil fiduciary duties and duties of skill, care and diligence to a standard at least commensurate with the standard established by Hong Kong law. In the performance of his duties as a director, the respondent must “apply such degree of skill, care and diligence as may reasonably be expected of a person of his knowledge and experience and holding his office within the issuer” (see also Re D’ Jan of London Limited [1994] 1 BCLC 561 at 563d to f). 14.Here, the respondent was an executive director as well as the chief financial officer of the Company. Under the implied terms of his contract of employment, he would be taken to have promised the Company that he had the skills of a reasonably competent person in his category of appointment, namely, the skills of a chief financial officer (Company Directors by Austin, Ford and Ramsay, 2005 edition, pages 247 to 248). 15.I am satisfied on the facts in the schedule that the respondent has failed to exercise that degree of skill and care as may reasonably be expected of a person of his knowledge and experience and holding his office and functions within the Company. Further, as admitted by him (in paragraph 75 of the schedule), by his repeated failure to ensure the Company’s full compliance with the GEM Rules, the shareholders of the Company have not been given all the information with respect to its business and affairs that they might reasonably expect. The business or affairs of the Company have been conducted in a manner as provided in sections 214(1)(b) and (c). Hence, the basis for making an order under sections 214(2)(d) is established. 16.I turn to consider the scope of the order I should make and its duration. 17.The respondent is prepared to accept a disqualification order against him under which he shall not, for 2 years and without leave of the court:
The agreed definitions of “subsidiaries” and “affiliates” are set out in appendix 1 to the schedule. 18.The SFC’s position is that the nature of the respondent’s acts and omission would justify a disqualification order under which he shall not, for a period between 4 to 6 years and without leave of the court, be a director of, or in any way, whether directly or indirectly, be concerned, or take part, in the management of any corporation. However, taking into account the respondent’s co-operation in having the application disposed of by way of a summary procedure, the SFC would not object to an order under which he shall not without leave of the court, for a period between 4 to 6 years, be a director of, or in any way, whether directly or indirectly, be concerned, or take part, in the management of any listed corporation, its subsidiaries and affiliates. 19.It is not in dispute that in making an order under section 214(2)(d), the court has power to extend the disqualification order to all or such companies as it considers appropriate, as a response to misconduct or misfeasance by a director of a listed corporation. Mr Bleach, SC submitted on behalf of the SFC that it is necessary and appropriate to include subsidiaries and affiliates in the order, as in Hong Kong, a listed company is often only a holding company. An order that disqualifies a respondent from acting as director or being involved in the management of any listed company may easily be subverted, if subsidiaries and affiliates of listed companies were not included. The aim of such an order, he reminded the court, is to prevent the individual from being in a position that might affect the financial standing or conduct of a listed company. 20.Mr Bleach submitted further that the provision for disqualification from management in section 214(2)(d)(ii) is an anti-avoidance measure which prevents a person from circumventing a disqualification order in respect of acting as a director under the provision in section 214(2)(d)(i). Unless the scope of the order for both provisions is the same, it will be possible for a person to act as shadow director or take management positions in which he is part of the “directing mind” of the company and make operational decisions in circumstances in which he has been disqualified from acting as a director. 21.Mr Edwin Choy for the respondent argued to the contrary. He submitted that if an order is made that a person is disqualified from acting as director and from being concerned or take part in the management of a listed company, it would not be necessary to extend the order to subsidiaries and affiliates of a listed company. This is because the concept of management is sufficiently wide in scope so that a person would effectively be barred from being involved in any policy or decision making which could have a significant bearing on the financial standing or conduct of the affairs of a listed company, citing the dicta of Ormiston J in Commissioner for Corporate Affairs v Bracht [1989] VR 821 at 830. 22.I do not agree with Mr Choy that an order which disqualifies a respondent from acting as director or being concerned in the management of any listed company may not be easily subverted if subsidiaries and affiliates were excluded. I am inclined to agree with Mr Bleach. Besides, the scope of the order should be clear. If Mr Choy’s approach is to be adopted, a respondent would need to ascertain in each and every situation if his management of a subsidiary or affiliate would or would not have a significant bearing on the financial standing or conduct of the affairs of a listed company, before he could tell whether he is prohibited under the order from taking part in the management of a subsidiary or an affiliate. I think that would be most undesirable. 23.Mr Choy submitted that if the order were to include a ban against the respondent from taking part in the management of a subsidiary or an affiliate of a listed company, the respondent would effectively be prevented from managing even minor operating units of listed companies. He gave as an example the position of the manager of a neighbourhood branch store of a large chain of supermarkets, which constituted a subsidiary of a big listed company. I fail to see why that should be the case. Being the manager in a branch store does not mean that the individual is engaged in activities which involve policy and decision making which affects the subsidiary as a whole or a substantial part of the subsidiary. I think it would be stretching the concept of management to say that the store manager is concerned in the management of the subsidiary. As stated in Bracht, supra. at 829, “the lower levels of administration comprehended by management must have some decision-making powers, but it cannot be thought that every branch or division manager has the relevant power of management.” 24.Further, to paraphrase the words of Ormiston J in Bracht at 828, in extending the scope of an order under section 214(2)(d)(ii) to subsidiaries and affiliates of a listed company, it is not intended to deny a person in the prescribed categories the right to earn a living. The section is directed to the “management” of a corporation, it is not directed to taking part or being concerned in the “business” of a company. 25.I understand from Mr Choy that the respondent is currently employed as an accounting manager by a company which is the subsidiary of a large knitted fabric manufacturer, and the shares of the holding company are listed on the Main Board of the Stock Exchange. The respondent’s role in the subsidiary, according to his counsel, is to look after the accounting, financial reporting, payment processing and internal control review operations of the subsidiary. It was submitted that he is not involved in any senior level decision making, nor does he participate in any matter relating to the listing status of any company. I note the position of the SFC that internal control review operations might be regarded as a management matter, so it may be that the present activity of the respondent would fall within the ambit of the order sought by the SFC. 26.In that situation, the respondent may seek leave from the court to act or continue to act as a director or be involved in the management of the subsidiary of a listed company, by putting all relevant facts and circumstances before the court. I understand the SFC has already made some enquiries in that regard, but this is not the appropriate occasion to deal with the question of leave. 27.I see no good reason to make a different provision in the scope of the order under sections 214(2)(d)(i) and (ii). So the order I make against the respondent is to apply to any listed corporation, its subsidiaries and affiliates. 28.On the appropriate length of the order, I take into consideration all that was submitted on the respondent’s behalf. I note the respondent’s age, his personal background and circumstances. The order I make may have an impact on his career and professional advancement in future. 29.There is a marked degree of incompetence and negligence. I am mindful that although the respondent was a professionally qualified accountant, before his involvement with the Company, he had no experience in running a listed company or acting as the chief financial officer of one. I note also that he said he was under a mistaken belief that the Pledge was not a discloseable transaction under the GEM Rules. I do not regard the respondent’s lack of experience or mistaken belief as strong mitigating factors. His failures were serious. He was obliged under the GEM Rules to familiarise himself with the Rules, to seek advice and guidance from the sponsor of the Company on the Company’s obligation to comply with the Rules, and to take such advice and guidance into account. 30.I have taken into consideration the gravity of the allegations against the respondent. I also bear in mind that the sentence must contain a deterrent element. Before making allowance for his admission and remorse, I would have disqualified him for five years. In the present circumstances, I come to the view that an appropriate term is four years. 31.I make an order that for a period of four years, the respondent shall not, without leave of the court:
32.The term of the order would begin from the day on which the order is pronounced, but I will stay the order for a short period for the respondent to make such provisions as may be needed so that he will be in a position to comply with it. I will provide that this order is to take effect at the beginning of the 21st day after the day on which this order is made. 33.The respondent accepts that he should pay the costs of the SFC, to be taxed if not agreed. So there will be an order accordingly.
Mr. John Bleach, SC, instructed by Messrs Freshfield, Bruckhaus Deringer, for the Petitioner Mr Edwin Choy, instructed by Messrs Michael Li & Co., for the Respondent SCHEDULE FOR CARECRAFT PROCEDURE Part A - Introduction 1. On 23 December 2005, the Securities and Futures Commission (the Petitioner) issued proceedings under Section 214 of the Securities and Futures Ordinance (the Ordinance) seeking a disqualification order against Mr Yick Chong San (the Respondent). 2. Subject to the approval of this Honourable Court, the Petitioner and the Respondent consent to the disposal of these proceedings against the Respondent by way of the summary procedure sanctioned by the High Court in England and Wales in In re Carecraft Construction Co. Limited [1994] 1 W.L.R. 172, as clarified by the English Court of Appeal in Secretary of State for Trade and Industry v Rogers [1996] 1 W.L.R. 1569 and as adopted by this Honourable Court in The Official Receiver v Tose and Others, HCMP 112/2002. 3. This Schedule is produced in order to provide the Court, for the purpose of disposing of the proceedings by way of a summary procedure, with the core facts that are not disputed in relation to allegations relied upon by the Petitioner. 4. The facts set out in this Schedule are not disputed between the Petitioner and the Respondent on the basis that the case against the Respondent will be dealt with by the Court by way of a summary procedure. If the Court is of the view that a full hearing is appropriate, no admission or concessions by either the Petitioner or the Respondent nor any proposal for disqualification, a period of disqualification or liability to pay costs shall be referred to or relied on by either party at any subsequent hearing without the prior written consent of both parties. 5. Solely for the purpose of resolving these proceedings by way of a summary procedure, and by reference to the Schedule of Facts Not in Dispute in Part B of this Schedule, the Respondent accepts (and does not contend to the contrary) that during the relevant period, the business and affairs of Riverhill Holdings Limited (Riverhill or theCompany), for which the Respondent, as a former director of the Company, was primarily responsible, have been conducted in a manner described in section 214(1)(b) and (c) of the Ordinance, namely
6. Also by reference to the Schedule of Facts Not in Dispute in Part B of this Schedule, the Respondent is prepared to accept a disqualification order being made against him under section 214(2)(d) of theOrdinanceunder which he shall not, for a period of 2 years and without the leave of the Court:
7. The Petitioner and the Respondent however cannot reach agreement on whether, in the event of a disqualification order being made against the Respondent, the scope and period of disqualification shall extend beyond what the Respondent is prepared to accept in paragraph 6 above. See Part C below for the Petitioner’s proposal for disqualification. 8. All admissions made herein are made solely for the purpose of the present disqualification proceedings. The Petitioner and the Respondent further agree that if, for any reason, the Court is unwilling to dispose of these proceedings by way of summary procedure, no further reference may be made by any party to this Schedule (or to any admission or concession made by the Petitioner or the Respondent herein) during the course of these proceedings and any other proceedings (insofar as they relate to any facts or matters presently known to the Petitioner). 9. In the event of a disqualification order being made against the Respondent by reference to this Schedule, the Petitioner and the Respondent agree that they will jointly apply for a direction that this Schedule be annexed to the Court’s judgment. In the event of a disqualification order being made against the Respondent by reference to this Schedule, the Petitioner further reserves the right to disclose this Schedule to third parties where it appears proper to do so in the public interest, including, but not limited to making use of the Schedule for the purpose of any press release issued in respect of these proceedings and referring to the Schedule for purposes connected with or ancillary to these proceedings and any other proceedings against the Respondent under the Ordinance. 10. The structure of this Schedule is as follows:
Part B - Schedule of Facts Not in Dispute Background The Company and Company structure 12. The Company (at the relevant time) was principally engaged in the provision of integrated applications and solutions to clients, on a contract basis, using “3S”technology (Remote Sensing, Geographic Information System and Global Positioning System), virtual reality, internet and networking technology and was also engaged in the development and research of “3S” technology. The Company further developed its own software products and was an authorised dealer and re-seller for hardware and software suppliers. 13. The Company’s stated business objective was to become a leading application and solution provider in “3S”technology, internet-related services and virtual reality in Mainland China. The Company also stated that it intended to offer a comprehensive range of high technology solutions to customers and that in order to enhance technology know-how, the Company had established co-operative arrangements with various institutions in Mainland China, including Peking University and Tsinghua University. 14. The corporate structure of Riverhill and its subsidiaries (collectively referred to as the Group) immediately after Riverhill’s listing and exercise of the Over-Allotment Option is depicted at Appendix 2 to this Schedule. 15. Of particular relevance to the matters herein are the following Riverhill subsidiaries:
16. Also of relevance to the allegations are the following companies:
17. The Company carried out an Initial Public Offer (IPO) and listing of its shares on the Growth Enterprise Market (GEM ) on 1 June 2001. Management 18. The executive directors of the Company immediately before the Company’s IPO were the Respondent, Mr Wang Guo Wei (Mr Wang G), Mr Liu Hao (Mr Liu) and Professor He Xiao Feng (Professor He), who was Chairman of the Board. The Respondent, Mr Wang G and Mr Liu resigned as executive directors of, and from their management positions in, the Company on 23 July 2003. Professor He resigned as Chairman of the Board on 24 June 2002. 19. The independent non-executive directors were Professors Zhou Qi Ming and Hong Jun Yan. Professor Zhou Qi Ming and Hong Jun Yan resigned from their positions on 1 and 3 November 2003, respectively. The Respondent 20. The Respondent was born on 29 December 1968. 21. The Respondent obtained a bachelor’s degree in accounting from the City University of Hong Kong in 1992 and became a member of the Association of Chartered Certified Accountants in 2000. 22. At the time of the IPO, the Respondent had accumulated more than 8 years’ experience in accounting and auditing. Between October 1995 to about January 1999, he worked in the audit departments of Whirlpool Asia Appliance and subsequently at Ernst & Young. 23. The Respondent was one of the founders of the Company and prior to the IPO, held the position of Financial Controller.
25. The trading aspects of the Company’s business were carried out in China and were largely overseen by Mr Wang G and Mr Liu who were based in Beijing, China. Professor He (Chairman of the Board until 24 June 2002 and Honorary Chairman thereafter) was also based in Beijing, China. The Listing 26. In respect of the IPO:
27. The Company’s auditors and reporting accountants were Ernst & Young, Certified Public Accountants, now of 18/F, Two International Finance Centre, 8 Finance Street, Central, Hong Kong. Ernst & Young retired from office on 8 November 2002 and did not offer themselves for reappointment for the year ended 30 June 2003. 28. According to the Company’s listing prospectus dated 18 May 2001 (the Prospectus), it was estimated that the net proceeds (after deduction of fees and expenses in relation to the share offer) would be approximately HK$34 million (based on a price of HK$0.45 per offer share and an assumption that the Over-Allotment Option would not be exercised) or HK$40.5 million (based on a price of HK$0.45 per offer share and an assumption that the Over-Allotment Option would be exercised in full). 29. As stated in the Prospectus, the net proceeds were intended to be used for (i) geographical expansion and marketing; (ii) research and development; (iii) setting up joint ventures for the supply and installation of GPS automatic vehicle locators and for the provision of virtual reality and digital community management services; (iv) investment in research and data centres; (v) hardware for navigation systems used in vehicle GPS; and (vi) general working capital. 30. As also stated in the Prospectus, where the net proceeds were not to be immediately applied for the intended purposes as stated in the Prospectus, they were intended to be placed in interest bearing deposits with financial institutions. Further, in the event there were to be any material modification to the use of the net proceeds as anticipated in the Prospectus, the Prospectus stated that the Company would issue an announcement of such a material modification. 31. Through the IPO, the Company raised HK$69 million in additional share capital by offering 115 million shares (including the exercise of 15 million shares from the Over-Allotment Option) at HK$0.60 per share. The additional proceeds from the Over-Allotment of approximately HK$8.7 million was intended to be applied as additional general working capital of the Group. 32. The net proceeds (after deductions of approximately HK$12 million for listing fees and expenses) amounted to HK$57 million (the Net Proceeds). Summary of the case against the Respondent
35. As set out above, the Respondent was a director, the Financial Controller and the Authorised Representative of the Company. In summary, and in the circumstances as set out in paragraph 24(g) above, the specific allegations against the Respondent are that:-
Failure to use reasonable skill and care in relation to the pledge 37. In about January 2002, some six months after the Company’s listing, the Respondent was involved in discussions with the directors of Well Pacific, Ms Yin Ling (Ms Yin), Mr Wang Yan (Mr Wang Y) and Mr Chen Nian Zhong (Mr Chen), in relation to a proposal for the Company (or a Group company) to assist Well Pacific in setting up a GPS truck monitoring system (the GPS Project) and establish a long term business partnership with Well Pacific to become the sole technological service provider for Well Pacific’s intelligent transportation logistic platform. The Respondent contends that the other directors of the Company were also involved in these discussions. The GPS Project was part of a larger business plan for Well Pacific to establish a transportation network in China, which it intended to operate through its subsidiary, Siping Weida. 38. During the course of such discussions:
39. On the recommendation of the Respondent, a Pledge was given on 29 January 2002 by way of documents which were signed by the Respondent on behalf of Cyber World (a wholly owned subsidiary of the Company of which the Respondent was also director) (the Pledge Documents), namely:
40. On the same day that the Pledge was given, BEA agreed to provide a one-year loan facility of up to HK$10,000,000 to Well Pacific which was secured by the Pledge and which was stated to be provided for the purpose of financing the general working capital requirements of Well Pacific and its subsidiaries. 41. On the same day, the Company transferred the sum of HK$10,000,000 into Cyber World’s BEA Account 015-514-30-37087-4. 42. The Pledge was funded from the Net Proceeds and the amount pledged exceeded 15% of the Company’s net tangible assets at the time. 43. The Respondent admits that he was responsible for the decision to give the Pledge. He contends, however, that two other executive directors of the Company (namely Messrs Wang G and Liu) gave their consent to the Pledge, but the Respondent accepts that they did so on his recommendation. 44. The Respondent admits that he made the decision to give the Pledge without giving sufficient regard to the risks of doing so, and in circumstances where he failed to put in place proper safeguards to ensure recoverability of the Pledge, and that he should, at a minimum, have taken steps to ensure that:
45. The Respondent also failed to take steps to verify any of the assurances or information given to him by Well Pacific. In particular:
(d) the Respondent had understood that in the event Well Pacific was successful in being listed, Well Pacific could provide the Company with vehicle equipping business which would bring about HK$50 million in profit to the Company, but Well Pacific has never been listed on any stock exchange. Although Cyber World did secure some business in March 2002 from Well Pacific in respect of the GPS Project, according to its accounts it sustained a loss of about RMB200,000 in relation to this business. No other business or project was secured by the Company or Cyber World from Well Pacific or Siping Weida; (e) the Respondent admits that he did not take external professional advice as to the feasibility of and projected profits from any work which the Company could potentially derive from Well Pacific or Siping Weida in the event that Well Pacific successfully listed. The Respondent contends that he sought the advice of other directors of the Company, who had expertise and experience in technical matters relating to the GPS Project. During the course of 2002, the Company pressed Well Pacific to release the Pledge. Well Pacific failed to do so. 46. By late January 2003, Well Pacific had still not repaid its loan and/or caused the Pledge to be released. The Respondent requested one of the directors of Well Pacific, Mr Wang Y, to provide a personal guarantee. 47. On 29 January 2003, a year after the giving of the Pledge, the Respondent secured a personal guarantee from Mr Wang Y to Cyber World to indemnify Cyber World for all losses suffered as a result of Well Pacific’s default under the Facility. Although the Respondent contends that he was shown some documentation by Mr Wang Y which indicated to the Respondent that Mr Wang Y may be able to meet the repayment arising from any personal guarantee, he admits that he did not take sufficient steps to ensure that Mr Wang Y was able to meet the repayment arising from any personal guarantee. No funds were ever recovered pursuant to the personal guarantee from Mr Wang Y. 48. Following Well Pacific’s failure to repay the Facility on Final Maturity, BEA forfeited a sum of HK$10,068,780.40 from the accounts of Cyber World on 28 February 2003 pursuant to the terms of the Pledge Documents. On 18 March 2003, formal demand letters were sent by Cyber World’s solicitors to each of Well Pacific and Mr Wang Y demanding the repayment of part of the sum pledged by the Company. Despite the formal demand letters of 18 March 2003, no repayment was ever made at all, whether by Well Pacific or Mr. Wang Y. 49. On 14 May 2003, Cyber World issued formal legal proceedings against Mr Wang Y for the recovery of its losses arising from BEA’s forfeiture pursuant to the terms of the Pledge. However, the Respondent did not cause these proceedings to be served on Mr Wang Y because Mr Wang Y was not in Hong Kong. The pledged sum had not been repaid by either Well Pacific or Mr Wang Y. The failure to repay the Pledge has resulted in a substantial loss to the Company, reducing its net asset value in excess of 20%. Disclosure in respect of the Pledge 52. As a director of the Company, and as an Authorised Representative, he had collective and individual responsibility to ensure that the Company complied with its disclosure obligations under the GEM Rules. 53. Under Rule 17.03 of the GEM Rules, the Respondent was required to ensure there was full compliance with the GEM Rules by the Company. 54. Under Rule 17.04 of the GEM Rules, the Respondent was required to seek advice and guidance from the Company’s sponsor regarding its obligation to comply with the GEM Rules and the manner and extent of such compliance and to take such advice and guidance into account. 55. Prior to the IPO, the Respondent received legal advice in his capacity as a director of the Company regarding the responsibilities of a director of a GEM listed company. The advice was received by way of:
56. Notwithstanding his admitted limited experience and notwithstanding having received the above advice, the Respondent failed to seek advice and guidance from the Company’s sponsor regarding its obligation to comply with the disclosure requirements under the GEM Rules when making the Pledge. 57. The Respondent’s failure to seek advice and guidance from the Company’s sponsor regarding its obligation to comply with the disclosure requirements under the GEM Rules when making the Pledge was a breach of Rule 17.04 of the GEM Rules. 58. As the value of the Pledge exceeded 15% of the net tangible assets of the Company at the time it was made, it constituted a discloseable transaction, for which Rules 19.33 and 19.36 of the GEM Rules required the Company to make proper and timely disclosure. At the time of giving of the Pledge, the Respondent mistakenly believed that the Pledge was only subject to the disclosure requirements under Rule 17.15 of the GEM Listing Rules but not under Chapter 19 of the GEM Listing Rules; as such, no disclosure was required from the Company as the Pledge constituted less than 25% of the net tangible assets of the Company at the time of the transaction. At that time, the Respondent mistakenly believed that Chapter 19 of the GEM Listing Rules was intended to deal with acquisition and disposal of assets as described in Rule 19.01 and the extended definition under Rule 19.04 was aiming to include all de facto acquisitions and disposals. An announcement was only finally made by the Company on 4 March 2003 (more than 13 months after the Pledge was given), and then only at the urging of the HKEx. The Company explained in the announcement that:
59. The Respondent failed to take any steps to ensure that the Company made proper disclosure in respect of the Pledge. In particular:
60. As stated above, the Respondent (a) was the only executive director based in Hong Kong and had the prime responsibility for overseeing and directing the Company’s affairs in Hong Kong; (b) was responsible for accounting matters, liaison with the Company’s lawyers and regulatory authorities; and (c) in any event was collectively and individually responsible under Rule 17.03 of the GEM Rules for ensuring the Company complied fully with the GEM Rules. The Respondent admits that the Company’s failure to make proper disclosure in respect of the Pledge occurred because of the failure of the directors (particularly the Respondent, given the circumstances set out above) to discharge such responsibilities for the business and affairs of the Company. Loans to Staff Borrowers and Third Party Borrowers 62. These unsecured loans were funded from the Net Proceeds of the Company. In this regard, page 8 of the Company’s announcement dated 4 March 2003 states:
63. The Respondent was responsible for the making of each of the unsecured loans to the Staff Borrowers and Third Party Borrowers. The Respondent contends that such loans were consented to by Messrs Wang G and Liu, but he accepts that they did so upon the Respondent’s recommendation. 64. Notwithstanding that each of these loans involved substantial amounts, no collateral or indemnity or any other security arrangement was put in place in respect of the loans to the Staff Borrowers or to the Third Party Borrowers to ensure the recoverability of the respective unsecured loans. Further, the Respondent failed to conduct any formal background check on the Staff Borrowers or Third Party Borrowers and their respective financial status or ability to repay. 65. In particular, in relation to the Staff Borrowers, the Respondent admits that even though he knew that each of Mr Sin (an accountant who earned HK$20,000 per month), Ms Ting (an administrative officer who earned HK$10,000 per month) and Mr Shum (the assistant to the Chairman who earned HK$40,000 per month) were borrowing multiples of their respective annual salaries, he made no formal background check as to what assets they had to repay the loans. 66. The Respondent admits that the loans were approved because the Respondent trusted the Staff Borrowers and that it was inappropriate for him to have approved the loans. The Respondent had instructed each of the Staff Borrowers to deposit the loans advanced to them on 19 November 2001 into various securities accounts opened with brokers designated by the Respondent. The Respondent then used the deposited funds to carry out securities trading. The Staff Borrowers were later told by the Respondent that money had been deposited back into their accounts and were instructed to repay the unsecured loans with the money to the Company, which they did. The Petitioner and the Respondent agree that there is no suggestion that such trading was not carried out for the benefit of the Company. 67. By reason of making the unsecured loans to the Staff Borrowers and Third Party Borrowers, the Respondent conducted the business and affairs of the Company in a manner involving misfeasance and misconduct to the Company or its members. The Respondent was in breach of his duty of care and skill as a director and/or a breach of Rule 5.01(6) of the GEM Rules, to “apply such degree of skill, care and diligence as may reasonably be expected of a person of his knowledge and experience and holding his office within the issuer”. 68. In approving the unsecured loans to the Staff Borrowers to be made from the Net Proceeds, the Respondent failed to use reasonable care and skill as a director. 69. Eventually the unsecured loans were all repaid together with interest thereon. Disclosure in respect of loans to Staff Borrowers and Third Party Borrowers 70. The Respondent’s responsibility under Rule 5.11 of the GEM Rules includes as a minimum “advising on and assisting the board of directors of the issuer in developing and implementing financial reporting, internal control and other procedures to provide the board with a reasonable basis for making proper judgments as to the financial position and prospects of the group…” . 71. Notwithstanding that the use of the Net Proceeds to advance the unsecured loans to the Staff Borrowers and the Third Party Borrowers amounted to a material change of use of the proceeds, no steps were taken by the Company to inform the Company’s shareholders at the time of the loans that the Net Proceeds were to be used to advance the loans.
74. The Respondent is also in breach of Rule 17.03 of the GEM Rules in that he failed to ensure that the Company complied with the requirements set out in the GEM Rules that applied as a consequence of the Company giving loans to the Staff Borrowers and Third Party Borrowers. Members not given all the information with respect to its business or affairs that they might reasonably expect 75. The Respondent admits that by reason of the failure to:
members of the Company have not been given all the information with respect to its business and affairs that they might reasonably expect. Part C - Proposal for Disqualification 76. On the basis of the facts not in dispute set out above:-
APPENDIX 1 “Subsidiary” means, with respect to its holding company, a company: (i) the composition of the board of directors of which is directly or indirectly controlled by the holding company; or (ii) more than half of the issued share capital of which is directly or indirectly controlled by the holding company; or (iii) which is a subsidiary of a company which is a subsidiary of the holding company; or (iv) which is accounted for and consolidated in the holding company’s consolidated financial statements. “Affiliate” in respect of a company, means any subsidiaries or holding companies of such company or any subsidiaries of any of the holding companies of such company. SIGNED ON THIS 28DAY OF MAY 2007
FRESHFIELDS BRUCKHAUS DERINGER ……………………………………………………
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