1. On 25th September 2009, 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. Cheung Keng Ching (the ‘1st Respondent’), Madam Chou Mei (the ‘2nd Respondent’) and Mr. Lau Ka Man, Kevin (the 3rd Respondent’) (collectively referred to as the ‘Respondents’).
2. Subject to the approval of this Honourable Court, the Petitioner and the 3rd Respondent consent to the disposal of these proceedings against the 3rd Respondent by way of the summary procedure sanctioned by the High Court in England and Wales 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 Securities and Futures Commission v. Yick Chong San [2007] 4 HKLRD 46, Securities and Futures Commission v. Fung Chiu and Others [2009] 2 HKC 19 (2nd Respondent) and Securities and Futures Commission v Shum Ka Sang Charlie and Shen Yi (HCMP1014/2008, unrep., 22.05.2009) in respect of proceedings under Section 214 of the Ordinance.
3. This Schedule is produced, for the purpose of disposing of the proceedings by way of a summary procedure, in order to provide the Court with the core facts that are not disputed in relation to allegations relied upon by the Petitioner.
4. The facts set out in Part B of this Schedule are not disputed between the Petitioner and the 3rd Respondent on the basis that the case against the 3rd Respondent will be dealt with by the Court by way of its 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 3rd Respondent, nor any proposal for disqualification, the period of disqualification nor 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. On this basis and solely for the purpose of resolving these proceedings by way of summary procedure, and by reference to the Schedule of Facts Not in Dispute in Part B of this Schedule, the 3rd Respondent accepts (and does not contend to the contrary) that during the relevant period, the business and affairs of Rontex International Holdings Limited (the ‘Company’) have been conducted in a manner described in Section 214(1)(a), (b), (c) and (d) of the Ordinance, namely:-
(1) Oppressive to its members or a part of its members;
(2) Involving defalcation, fraud, misfeasance or other misconduct towards it or its members or a part of its members;
(3) Resulting in its members or any part of its members not having been given all the information with respect to the Company’s business or affairs as they might reasonably expect;
(4) Unfairly prejudicial to its members or a part of its members;
and that he was at the material times partly responsible for the conduct of the business and affairs of the Company in the aforesaid manner.
6. Further, by reference to the Schedule of Facts Not in Dispute in Part B of this Schedule, the 3rd Respondent is prepared to accept a disqualification order being made against him under section 214(2)(d) of the Ordinance under which he shall not, for a period of 5 years and without the leave of the Court,
(1) be or continue to be a director, liquidator, receiver or manager of the property or business of the Company or any other corporation or their subsidiaries or affiliates; and
(2) in any way, whether directly or indirectly, be concerned or take part in the management of the Company or any other corporation or their subsidiaries or affiliates.
The definitions of subsidiaries and affiliates are set out in Appendix 1 to this Schedule.
7. Yet, further, by reference to the Schedule of Facts Not in Dispute in Part B of this Schedule the 3rd Respondent is prepared to accept an order being made under section 214(2)(b) of the Ordinance directing the Company to bring civil proceedings in its name against him to seek recovery of such loss and damage suffered by the Company as a result of such wrongful transactions complained of in these proceedings. The Petitioner’s proposal for the directions to be given to the Company in relation to the commencement and prosecution of its claims against the 3rd Respondent is set out in Part C of this Schedule.
8. The 3rd Respondent agrees that in the event that an order is made by the Court under section 214(2)(b) of the Ordinance directing the Company to bring civil proceedings in its name against the 3rd Respondent, the Company and any party to such civil proceedings may for the purpose of such proceedings rely on and refer to the admissions or concessions made by the 3rd Respondent and the underlying documents referred to in the Schedule of Facts Not in Dispute in Part B of this Schedule.
9. The Petitioner and the 3rd 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 3rd 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).
10. In the event of any order being made against the 3rd Respondent by reference to this Schedule, the Petitioner and the 3rd Respondent agree that they will jointly apply for a direction that Part B of this Schedule be annexed to the Court’s judgment. In the event of any order being made against the 3rd Respondent by reference to this Schedule, the Petitioner further reserves the right to disclose Part B of this Schedule to third parties where it appears proper to do so in the public interest, including, but not limited to making use of Part B of the Schedule for the purpose of any press release issued in respect of these proceedings and referring to Part B of the Schedule for purposes connected with or ancillary to these proceedings and any other proceedings against the 3rd Respondent under the Ordinance.
11. The structure of Part B of this Schedule is as follows:-
(1) Paragraphs 12 to 28 set out the background information relating to:-
(i) The incorporation of the Company;
(ii) The listing and the business of the Company;
(iii) The management of the Company; and
(iv) The Respondents’ duties and obligations.
(2) Paragraphs 29 to 85 set out the facts relied on by the Petitioner in support of its case that the business and affairs of the Company have been conducted in such manner described in Section 214(a), (b), (c) and (d) of the Ordinance.
(3) Paragraph 86 sets out the facts relied on by the Petitioner in support of its case that the 3rd Respondent was partly responsible for the aforesaid business and affairs of the Company.
PART B: SCHEDULE OF FACTS NOT IN DISPUTE
Background Information
The Incorporation of the Company
12. The Company was incorporated as an exempted company with limited liability in the Cayman Islands on 7th June 2002 with its registered office at Century Yard, Cricket Square, Hutchins Drive, P.O. Box 2681 GT, George Town, Grand Cayman, British West Indies.
13. The Company has since its incorporation established a place of business in Hong Kong at 23rd Floor, Chun Wo Commercial Centre, 23-29 Wing Wo Street, Central, Hong Kong and was registered as an oversea company under Part XI of the Companies Ordinance (Cap. 32) on 27th August 2002.
The Listing of the Company and the Proposed Use of Proceeds
14. On 19th October 2002, the Company became the holding company of a group of companies (the ‘Group’) after a corporate restructuring in preparation for the list of the Company’s shares on the Stock Exchange of Hong Kong Limited (‘SEHK’).
15. As stated in the Company’s Prospectus for Placing, Public Offer and Offer for Sale dated 28th October 2002 (the ‘Prospectus’), the principal business of the Group at that time was the sourcing, manufacture and sale of garments to countries in South America and the trading of a variety of items including baby items, party items and leather belts to countries in South America and Canada. Further, according to the Prospectus, the future plans for the Group’s business were to expand its production facilities and to explore new markets for its garments such as Japan and European countries.
16. The Company was listed on the SEHK on 8th November 2002 whereby funds in the sum of about HK$28.8 million were raised by the Company by way of a placement and subscription for its shares. According to the Prospectus, the net proceeds of about HK$28.8 derived from the listing exercise would be utilized by (a) spending approximately HK$8m to acquire additional machinery and equipment for the expansion of the manufacturing capacity of the Group, (b) spending approximately HK$15m to expand the production plants of the Group, and (c) reserving the balance of approximately HK$5.8m as additional working capital of the Group.
17. It was also stated in the Prospectus that to the extent that the net proceeds from the listing exercise were not immediately required for the above purposes, the Company’s intention was to place them on short-term deposit with financial institutions and/or licensed banks in Hong Kong. It was also stated in the Prospectus that the Directors considered that in the long term, a balanced investment portfolio of the Group’s surplus funds should include investments in high-quality listed equity securities from the worldwide stock markets.
The Control and Management of the Company
18. At all material times:-
(1) Star Master International Limited (‘Star Master’), a company incorporated in the British Virgin Islands on 10th April 2002, was a registered shareholder of the Company holding a majority stake in the Company;
(2) The entire issued share capital of Star Master was and is still legally and beneficially owned by the 1st Respondent and the 2nd Respondent, (who is the wife of the 1st Respondent) on 50:50 basis; and
(3) The 1st Respondent and the 2nd Respondent are deemed to be interested in all the shares of the Company registered in the name of Star Master under the relevant provisions of the repealed Securities (Disclosure of Interest) Ordinance (Cap. 396) and the Ordinance currently in force.
19. According to the Prospectus, at the time the Company was listed on SEHK on 8th November 2002, the 1st and 2nd Respondents through Star Master held 123,600,000 shares of the Company representing about 61.8% of the entire issued share capital of the Company.
20. According to the Company’s Annual Report 2006 dated 25th July 2006, as at 31st March 2006, the 1st and 2nd Respondents (whether through Star Master or otherwise) held 993,800,000 shares of the Company representing about 60.99% of the entire issued share capital of the Company.
21. On 4th September 2007 the Company issued an announcement that on 3rd September 2007 Star Master had disposed of 62 million of the Company’s shares (3.17% of the issued share capital) on the market. After the disposal, the share holdings of Star Master reduced from about 50.22% to 47.05% of the share issued capital of the Company.
22. On 15th October 2007 Star Master entered into an option deed with Plenty Holdings Limited (‘Plenty’) (wholly and beneficially owned by Mr. Ho Yung, Pedder) under which Star Master agreed to grant Plenty an option to purchase 820 million shares in the Company at the price of HK$45 million during the option period (from 15th October 2007 to 7th April 2008, which was extended to 6th July 2008). The said option has been exercised and 820 million shares of the Company were eventually transferred from Star Master to Plenty on 2nd July 2008. After the exercise of the said option, Star Master held only 1.01% of the issued share capital of the Company.
23. So far as the management of the Company is concerned, the 1st, 2nd and 3rd Respondents were at all material times the only executive directors of the Company since the listing of the Company on SEHK on 8th November 2002.
24. The 3rd Respondent resigned from his position as an executive director of the Company on 2nd November 2005. The 1st and 2nd Respondents remained as executive directors of the Company as of the date when the Petition in these proceedings was presented and they subsequently resigned from their position as executive directors of the Company with effect from 12th November 2008.
25. According to the Prospectus and the Company’s Annual Reports 2003, 2004 and 2005, the division of responsibility between these three executive directors at all material times was as follows:-
(1) The 1st Respondent, the founder of the Group and the Chairman of the Company, was responsible for overall business strategy and merchandising functions of the Group;
(2) The 2nd Respondent, the wife of the 1st Respondent and co-founder of the Group, was responsible for the procurement functions of the Group; and
(3) The 3rd Respondent was responsible for the financial management and corporate finance matters of the Group.
Duties Owed by the 3rd Respondent to the Company
26. At all material times, the 3rd Respondent owed to the Company and the Group the fiduciary duty to act in good faith and in the best interest of the Company and the Group. Further, the 3rd Respondent also owed to the Company and the Group the duty of care at common law to exercise due and reasonable skill, care and diligence in the course of acting as an executive director of the Company.
27. In order to act as a director of the Company, the 3rd Respondent was required to and did sign a formal declaration, undertaking and acknowledgement as per Form B of Appendix 5 to the Rules Governing the Listing of Securities on the SEHK (the ‘Listing Rules’) whereby he undertook with the SEHK that he would in the exercise of his powers and duties as a director of the Company comply and procure the Company to comply with, inter alia, the Listing Rules form time to time in force.
28. Under Rule 3.08 of the Listing Rules, each of the directors of the Company, both collectively and individually, is expected to fufil fiduciary duties and duties of skill, care and diligence to a standard at least commensurate with the standard established by Hong Kong law and must, inter alia, (i) act honestly and in good faith in the interest of the Company as a whole, (ii) act for proper purpose, (iii) be answerable to the Company for the application or misapplication of its assets, and (iv) apply such degree of skill, care and diligence as may be reasonably be expected of a person of his knowledge and experience and holding his office within the Company.
Summary of the Wrongful Transactions Carried Out by the Company
29. There were a number of transactions entered into by the Company and/or the Company’s subsidiaries within the Group which constituted (i) breaches of fiduciary duty and/or common law duty of care owed by the 3rd Respondent to the Company, (ii) conduct unfairly prejudicial to the interest of the members of the Company and/or (ii) breaches of the Company’s disclosure obligations under the Listing Rules. These wrongful transactions took place between November 2002 and November 2005 when the 3rd Respondent acted as an executive director of the Company.
30. There were four wrongful transactions in question and they are summarised as follows:-
(1) Transaction 1: The acquisition of a total of 3.62 million shares of Grandtop International Holdings Limited (‘Grandtop’), a company listed on SEHK, for a total consideration of HK$9,263,121 between December 2003 and January 2004;
(2) Transaction 2: The acquisition of a HK$15 million option for shares in Macau Asia Investments Limited (‘MAIL’), a US incorporated company quoted as Pink Sheet stock in about January 2004;
(3) Transaction 3: Payments to a PRC citizen called Wan Lin (‘Wan’) in the sum of HK$18.2 million in late 2002 and in the sums of HK$3 million and HK$6.52 million in early 2005; and
(4) Transaction 4: Investment in the sum of HK$8.454 million in Beijing Kut Ka Lok Fashion Apparels Limited (‘KKL Fashion’) in about August 2004.
Transaction 1 : Acquisition of Grandtop Shares
31. At all material times, Grandtop was a company listed on the SEHK. Between December 2003 and January 2004, the Company acquitted a total of 3,620,000 shares of Grandtop (‘Granstop Shares’) in three lots: (a) the first lot of 2,200,000 Grandtop Shares were acquitted on or about 22nd December 2003, (b) the second lot of 1,170,000 Grandtop Shares were acquired on or about 27th January 2004, and (c) the third lot of 250,000 Grandtop Shares were acquired on or about 28th January 2004.
32. Regarding the acquisition of the first lot of 2,200,000 Grandtop Shares, the Company acquired the shares directly from two individuals and thereafter deposited the shares in an account (the ‘Securities Account’) maintained with Ever-Long Securities Company Limited (‘Ever-Long’) in the name of Keen Choice Technology Limited (‘Keen Choice’), which was at all material times one of the wholly owned subsidiaries of the Company within the Group.
33. According to two sets of bought and sold notes both dated 22nd December 2003, Keen Choice purchased 1,400,000 Grandtop Shares from Madam Chan Jenny Chun Nei (‘Chan’) and 800,000 Grandtop Shares from Mr. Lau Pak Lun at a price of HK$2.00 per share. For this purpose, a board minute dated 22nd December 2003 was signed by 1st and 2nd Respondents approving the acquisition of 2,200,000 Grandtop Shares at the total consideration of HK$4,400,000 (i.e. HK$2.00 per share).
34. Notwithstanding that the purchase price for the 2,200,000 Grandtop Shares set out in these bought and sold notes and the board minute was HK$2.00 per share, the internal accounting records of the Company prepared by the 3rd Respondent (the ‘Internal Records’) reveals that the said 2,200,000 Grandtop Shares were in fact purchased at a consideration of HK$2.90 per share at a total cost of $6,380,000 (before transaction costs).
35. The purchase price of HK$2.90 per share for the 2,200,000 Grandtop shares set out in the Internal Records of the Company was the actual price paid since it was entirely consistent with the information contained in the Company’s Annual Reports for 2004 and 2005. In the Company’s Annual Reports for 2004 and 2005, the Company’s investment in listed equity securities in Hong Kong (at cost) was shown to be in the total sum of HK$9,346,000. The said total sum shown in the Company’s Annual Reports for 2004 and 2005 was about the same as the grand total of the entries contained in the Internal Records regarding the value (at cost) of the listed equity securities in Hong Kong acquired by the Company.
36. Regarding the discrepancy in the purchase price for the acquisition of the first lot of 2,200,000 Grandtop Shares shown in the Company’s documents, the officers of the Petitioner conducted various interviews with the 1st, 2nd and 3rd Respondents seeking explanation from each of them.
37. So far as the 3rd Respondent is concerned, in his second interview held on 18th October 2005, he confirmed that the 2,200,000 Grandtop Shares were purchased at HK$2.90 per share and the payment in the sum of HK$6,386,380 (i.e. 2,200,000 Grandtop Shares x HK$2.90 per share plus transaction costs) was paid by way of cash in the mainland through a PRC subsidiary of the Company to Chan and Mr. Lau Pak Lun.
38. The Petitioner contends and the 3rd Respondent accepts that the acquisition of 2,200,000 Grandtop Shares by the Company on or about 22nd December 2003 at a price of HK$2.90 per share was not justified by any commercial reason and was not in the interest of the Company and its shareholders since the purchase price of HK$2.90 per share paid for the acquisition of 2,200,000 Grandtop Shares from Chan and Mr. Lau Pak Lun represented at approximately 45% premium to their prevailing market price at the time of the acquisition.
39. In the premises, the Petitioner contends and the 3rd Respondent accepts that:-
(1) The acquisition of 2,200,000 Grandtop Shares by the Company through Keen Choice constituted a misfeasance, misconduct and/or defalcation in relation to the business and affairs of the Company within the meaning of Section 214(1)(b) of the Ordinance;
(2) Further, the acquisition was also unfairly prejudicial to the interests of the members of the Company (or a part thereof) within the meaning of Section 214(1)(d) of the Ordinance.
(3) Regarding the signing of the relevant bought and sold notes dated 22nd December 2003 by the 3rd Respondent and the signing of the Company’s board minutes dated 22nd December 2003 by the 1st and 2nd Respondents, such acts also constituted misfeasance and/or misconduct in relation to the business and affairs of the Company within the meaning of Section 214(1)(b) of the Ordinance in that the purchase price of the 2,200,000 Grandtop Shares set out in these documents understated the actual Grandtop Shares set out in these documents understated the actual purchase price paid by the Company for the shares by HK$0.9 per share.
40. After the initial acquisition of 2,200,000 Grandtop Shares in December 2003, a total of 1,420,000 additional Grandtop Shares were acquired by the Company on 27th and 28th January 2004 in the open market.
41. In connection with these subsequent acquisitions, two board minutes respectively dated 27th and 28th January 2004 were adopted by the Company which showed the board of directors’ approval of these acquisitions. The total amount of the consideration paid by the Company for this acquisition as set out in the said two board minutes was more or less the same as that set out in the Internal Records.
42. As a result of the subsequent acquisitions of an additional 1,420,000 Grandtop Shares in January 2004, the Company (through the Securities Account maintained by Keen Choice) held a total of 3,620,000 Grandtop Shares as its investment in listed equity securities, which shares were worth HK$9,262,121 at cost.
43. In the ‘Risk Factor’ Section of the Prospectus, the board of directors of the Company stated that they would use the surplus funds of the Group to invest in ‘balanced investment portfolio’ including investment in ‘high quality listed equity securities’.
44. However, contrary to the said statement contained in the Prospectus, the Company’s investment in Grandtop shares represented approximately 99% of its investment portfolio in listed equity securities up to 31st March 2006. As shown in the Company’s Annual Reports for 2004, 2005 and 2006, the total investment made by the Company in listed equity securities at cost was only in the sum of HK$9,346,000. Out of the said sum of HK$9,346,000, the sum of about HK$9,263,121 related to the acquisition of the said 3,620,000 Grandtop Shares in December 2003 and January 2004.
45. Not only did the Company’s management fail to diversify its investment in listed equity securities as the Company represented it would in the Prospectus, the Company also over-invested in listed equity securities, in particular, Grandtop Shares. As shown in the Company’s Annual Report 2004, the net assets of the Group as at 31st March 2004 were in the sum of HK$97,402,000 only. The Company’s investment in the said 3,620,000 Grandtop Shares, therefore, represented 9.5% of the Group’s net assets as at 31st March 2004.
46. The Company’s investment in Grandtop Shares was very substantial. In the discharge of their duties owed to the Company, the Respondents should have carefully studied the business and financial status of Grandtop and prudently weighed other investment options before deciding to invest in Grandtop Shares.
47. However, when the 3rd Respondent was questioned about the reason(s) for the acquisition of the said 3,620,000 Grandtop Shares in his interviews with the officers of the Petitioner, the 3rd Respondent was unable to offer any rational explanation to justify the Company’s decision to acquire such a large quantity of Grandtop Shares.
48. When the 3rd Respondent was questioned in his interview held on 1st August 2005, he claimed that he had checked Grandtop’s annual report, its assets and liabilities and calculated its profit/expenses ration, but did not take any professional advice regarding purchasing the shares before giving his verbal analysis to the 1st Respondent. The 3rd Respondent claimed that he talked to the 1st Respondent about diversifying the Company’s assets holdings, but the 1st Respondent simply instructed him to continue to purchase Grandtop Shares. The 3rd Respondent thereafter merely acted according to the 1st Respondent’s instructions.
49. The trading price of Grandtop Sahres was at all material times on a downward trend. Its share price dropped gradually from around HK$3.00 per share in June 2003 to around HK$2.00 per share in December 2003 and further to HK$0.16 per share in December 2005. Furthermore, no dividends were declared by Grandtop between March 2003 and March 2005.
50. In the premises, the Petitioner contends and the 3rd Respondent accepts that the company’s acquisition of a total of 3,620,000 Grandtop Shares in December 2003 and January 2004 constituted misfeasance and/or misconduct in relation to the business and affairs of the Company within the meaning of Section 214(1)(b) of the Ordinance and/or conduct unfairly prejudical to the interest of the members of the Company (or part thereof) within the meaning of Section 214(1)(d) of the Ordinance in that:-
(1) The Company’s management failed to maintain a ‘balanced investment portfolio’ in respect of its investment in listed equity securities as stated in the Prospectus;
(2) The Company’s management failed to support or justify its decision to acquire the said 3,620,000 Grandtop Shares as its investment with any justifiable commercial rationale; and
(3) The Company’s management failed to review its investment policy and continued to hold the said 3,620,000 Grandtop Shares despite the very substantial decrease in its share price since the acqusitions in December 2003 and January 2004.
Transaction 2: Acquisition of MAIL’s Share Option
51. By a board minute dated 2nd April 2003, the board of the Company resolved to approve the acquisition of an option to acquire an equity interest in a company to be listed on the American Stock Exchange (the ‘Proposed Listed Company’) at a consideration of HK$15 million. By the same board minute, Madam Shu Oi Yung (‘Shu’) was approved as the authorised person to represent the Company to sign the agreement with Emerging Growth Partners Inc. (‘EGP’) or its representative, for the acquisition.
52. On 2nd Jaqnuary 2004, a letter of appointment was signed by 1st Respondent on behalf of the Company to appoint Shu to represent the Company to sign an agreement with EGP in relation to the acquisition of a share option of the Proposed Listed Company for the sum of HK$15 million.
53. On 7th January 2004, an agreement was signed between Shu and one Mr. Wong Tak Chi (‘Wong’) whereby Wong would arrange delivery of an equity interest in the Proposed Listed Company of a value equal to HK$15 million to Shu and Shu would pay the said HK$15 million within 90 days of the signing of the agreement. In the event that the Proposed Listed Company could not obtain listing status in the US, Wong would refund the said HK$15 million to Shu. Wong also guaranteed to Shu that the Proposed Listed Company would have a profit of not less than HK$5 million per annum or equivalent.
54. By a receipt dated 21st March 2004, Wong acknowledged that he had received from the Company the sum of RMB 15,900,000 in cash for the purpose of purchasing an equity interest in the Proposed Listed Company pursuant to the agreement dated 7th January 2004.
55. On or about 5th April 2005, the Company decided to exercise this option and acquired the equity interest in the Proposed Listed Company. Subsequently, in or around September 2005, the Company received a share certificate representing 10 million shares in MAIL (the ‘Share Certificate’) issued in the name of Magic Ace Enterprises Limited (‘Magic Ace’), which was at all material times a wholly owned subsidiary of the Company within the Group.
56. Shortly after the exercise of the said share option on or about 5th April 2005, the value of the said 10 million shares issued by MAIL was completely written off from the Company’s assets shown in its 2005 Interim Report for the period of 6 months ended on 30th September 2005 on the basis that these shares had no market value.
57. On or about 19th May 2007, officers of the Petitioner again examined the website for Pink Sheet Stocks and discovered that the corporate information relating to MAIL could no longer be found on that website. This raises the inference that MAIL had by no later than 19th May 2007, ceased trading as a Pink Sheet Stock.
58. In relation to the Company’s decision to invest HK$15 million in the acquisition of MAIL’s share option, the Petitioner contends and the 3rd Respondent accepts that he acted in breach of duties owed to the Company, failed to exercise due and reasonable care and failed to act in the best interest of the Company in that:-
(1) The 3rd Respondent failed to study the nature of MAIL’s business, or to carry out any adequate due diligence exercise to assess or verify the market value of MAIL’s share option before their making the decision to invest HK$15 million in the acquisition; and
(2) The 3rd Respondent failed to study the mechanism by which the Company might sell or realise the value of the shares acquired by the exercise of MAIL’s share option, or to keep track of the market value of such shares, or to explore the possibility of selling or realizing the value of such shares.
59. Further, the Petitioner contends and the 3rd Respondent accepts that the Company was required to make disclosure under Chapter 14 of the Listing Rules in respect of the exercise of its option to acquire 10 million shares in MAIL on or about 5th April 2005. Wrongfully and in breach of the provisions in Chapter 14 of the Listing Rules, the Company failed to make any such disclosure, whether properly or at all, concerning its decision to exercise the share option to acquire 10 million shares issued by MAIL.
60. In the premises, the Petitioner contends and the 3rd Respondent accepts that:-
(1) The Company’s acquisition and exercise of MAIL’s share option (through Magic Ace) in the aforesaid manner constituted a misfeasance, misconduct and/or defalcation in relation to the business and affairs of the Company within the meaning of Section 214(1)(b) of the Ordinance;
(2) Further, given that the Company in the Prospectus represented to its members that the Company’s principal business was the manufacture and trading of garments and that its investment in listed equity securities would be confined to a ‘balanced investment portfolio’ of high-quality listed equity securities, the Company’s acquisition and exercise of MAIL’s share option in the aforesaid manner was also unfairly prejudicial to the interests of the members of the Company (or a part thereof) within the meaning of Section 214(1)(d) of the Ordinance and inconsistent with such statement in the Prospectus; and
(3) Further, the failure on the part of the Company to make proper disclosure under the Listing Rules in respect of the exercise of its option to acquire 10 million shares in MAIL on or about 5th April 2005 resulted in the Company’s members not having been provided with all the necessary information with respect to its business or affairs that they might reasonably expect within the meaning of Section 214(1)(c) of the Ordinance.
Transaction 3: Payments to Wan
61. Pursuant to a board resolution dated 10th January 2003, the Company approved the appointment of Wan, a PRC resident, as the agent of the Company to arrange for the establishment or acquisition of a company to engage in the manufacturing and sale of garment products in the PRC. The board also approved the transfer of funds of HK$18.2 million to Wan for the purpose of establishing or acquiring a company.
62. Wan executed a memorandum dated 1st June 2003 acknowledging that, up to 31st March 2003 he had received a total sum of HK$18.2 million from the Company to be used for the aforesaid purpose. The memorandum also stated that Wan would return the sum of HK$18.2 million to the Company in the event that he failed to set up the new subsidiary.
63. As disclosed in the Company’s Annual Report 2003, the sum of HK$18.2 million was paid as a prepayment to an independent third party in the PRC to pursue and arrange for the establishment of a new subsidiary to engage in the manufacture and sale of garment production in the PRC. The prepayment was in respect of the acquisition costs of land use rights, building construction, leasehold improvements and plant and machinery.
64. Subsequently, as disclosed in the Company’s Annual Report 2004, the Company’s management had during the financial year ended 31st March 2004 identified an appropriate investment target and the negotiations of the terms of the investment were in progress. It appears from the Company’s Annual Report 2004 that the said prepayment of HK$18.2 million still remained outstanding as at 31st March 2004.
65. As evidence by a written confirmation dated 28th February 2005 signed between the 1st Respondent on behalf of the Company and Wan, Wan further received additional sums of HK$3,000,000 and HK$6,520,000 in January and February 2005 respectively. This written confirmation also states that these additional sums, together with the initial prepayment of HK$18.2 million, were transferred to Wan for the purpose of appointing Wan to establish a company that engages in the manufacture and sale of garments and would be returned to the Company in the event that Wan could not arrange for the setting up of the new company.
66. The Company failed to provide the Petitioner with any board resolution(s) approving the transfer of the additional sums of HK$3,000,000 and HK$6,520,000 to Wan in January and February 2005 respectively.
67. By a board resolution dated 31st August 2005, the Company’s board of directors resolved to approve the acquisition of the entire issued share capital of Wisefull International Limited (‘Wisefull’), which held a 30% equity interest in a joint venture company in the PRC known as Beijing Langkun Garments Company Limit (‘Langkun’), for a consideration of HK$27,720,000.
68. On the same day (i.e. 31st August 2005), a public announcement was issued by the Company in relation to its acquisition of the entire share capital of Wisefull. In this public announcement, it was stated that the consideration of HK$27,720,000 was to be partially settled by the prepayment of approximately HK$18 million previously made by the Company to Wan. However this public announcement made no reference to the use of the additional sums of HK$3,000,000 and HK$6,520,000 paid by the Company to Wen in January and February 2005.
69. However, according to the Company’s Annual Report 2005, as at 31st March 2005, deposits and prepayments of approximately HK$27.721 million were paid to Wan for the purpose of settling the acquisition of the entire share capital of Wiseful.
70. The Company’s Annual Report 2006 stated that the prepayments made by the Company to Wan in the total sum of HK$27.72 million (i.e. the initial prepayment of HK$18.2 million + additional prepayments of HK$3 million and HK$6.52 million) were used to pay off the consideration for the acquisition of Wisefull and Langkun.
71. The Petitioner contends and the 3rd respondent accepts that the payments made to Wan in the aforesaid manner constituted misfeasance, misconduct and/or defalcation in relation to the business and affairs of the Company within the meaning of Section 214(1)(b) of the Ordinance in that:-
(1) No board resolution was ever adopted by the Company’sboard of directors to approve the payment of additional sums of HK$3,000,000 and HK$6,250,000 to Wan in January and February 2005 respectively.
(2) The Company’s management failed to exercise due and/or reasonable care in making these prepayments in that it failed to impose any safeguards, whether adequate or at all, to ensure the return of all the prepayments from Wan to the Company;
(3) The Company’s management failed to act in the best interest of the Company in making these prepayments in that it failed to require Wan to deposit such prepayments in interest-bearing account(s) and/or failed to require Wan to pay interest to the Company in respect of such prepayments. As a result, the Company has suffered loss in terms of the loss of interest in respect of such prepayments during such period when the same were held by Wan but were not being used for the purpose of the Company’s business.
72. Further, the Petitioner contends and the 3rd Respondent accepts that, by reason of the matters aforesaid, the making of prepayments to Wan without requiring him to pay any interest or deposit such prepayments into an interest-bearing account constituted conduct unfairly prejudicial to the members of the Company (or a part thereof) within the meaning of Section 214(1)(d) of the Ordinance.
73. Wrongfully and in breach of the provisions in Chapters 13 and 14 of the Listing Rules in effect at that time, the Company failed to make any timely or proper disclosure in respect of the making of such prepayment to Wan. The failure on the part of the Company to make timely and proper disclosure of the prepayment of HK$18,200,000 by the Company to Wan resulted in the Company’s members not having been given all the relevant information with respect to its business or affairs that they might reasonably expect within the meaning of Section 214(1)(c) of the Ordinance.
Transaction 4: Investment in KKL Fashion
74. During the period between mid 2004 and early 2005, the Company invested a total sum of about HK$8.5 million in KKL Fashion.
75. This transaction was approved by a board resolution dated 13th October 2004 signed by 1st and 2nd Respondents whereby the Company’s board of directors approved the formation of KKL Fashion and authorised one Zhou Ying Chun (‘Zhou’) to hold the Company’s equity interest in KKL Fashion on behalf of the Company.
76. In his interview held on 27th September 2005, the 3rd Respondent asserted that (i) Zhou invested RMB 1.25 million in KKL Fashion on behalf of the Company to acquire 62.5% equity interest in KKL Fashion, and (ii) the sum in excess of RMB 1.25 million paid by or on behalf of the Company in connection with this project was regarded as loan advanced by the Company to KKL Fashion. The loans were made in around August/September 2004 and the Company has produced a document dated 22nd December 2004 from Zhou Xiaoying acknowledging receipt of RMB7,747,832 as a temporary loan to KKL Fashion.
77. As to the making of loans by the Company to KKL Fashion in the sum of about HK$7.3 million (i.e. total investment of HK$8.5 million - investment of RMB 1.25 million for the acquisition of 62.5% equity interest in KKL Fashion), no board resolution was passed showing the consideration or approval given by the Company’s board of directors for the making of such loans.
78. The Company’s decision to invest in KKL Fashion was made by 1st Respondent after he had studied and observed the setup, facilities and locations of other similar companies. The decision of the 1st Respondent, however, was simply based on his own personal judgment and experience. The Company’s management did not engage any professionals to appraise the value of KKL Fashion, nor did it conduct any due diligence exercise before investing in KKL Fashion in the aforesaid manner.
79. In about early 2005, because of a disagreement between the shareholders of KKL Fashion, the Company decided to terminate its investment in KKL Fashion.
80. When in early 2005 the Company indicated its intention not to invest further in KKL Fashion, the Company agreed with KKL Fashion and its shareholders that it would take back some of the stock to recover its investment in KKL Fashion. The Company thereafter sold the stocks recovered from KKL Fashion for about RMB 6,912,000 (i.e. about HK$6.5 million). The only asset recovered by the Company from KKL Fashion for its investment (including the loans) in KKL Fashion was this stock and the Company has ceased to own any equity interest in KKL Fashion.
81. As a result, the Company suffered a net loss of about HK$2 million in connection with its investment in KKL Fashion in that the Company invested a total sum of HK$8.5 million and was only able to recover about HK$6.5 million from the sale of stock recovered from KKL Fashion.
82. The Petitioner contends and the 3rd Respondent accepts that the provision of loans by the Company to KKL Fashion in the absence of any proper board resolution authorizing or approving such advancement constituted misfeasance, misconduct and/or defalcation in relation to the business and affairs of the Company within the meaning of Section 214(1)(b) of the Ordinance.
83. Further, the Petitioner contends and the 3rd Respondent accepts that the Company’s management failed to exercise due and/or reasonable care in making its decision to invest in KKL Fashion in that they failed to conduct any due diligence or proper appraisal and/or failed to seek proper advice from any professionals before making such decision. The Petitioner contends that such failure on the part of the Company’s management constituted misfeasance and/or misconduct in relation to the business and affairs of the Company within the meaning of Section 214(1)(b) of the Ordinance.
84. Further still, the Petitioner contends and the 3rd Respondent accepts that the Company’s management failed to exercise due and/or reasonable care and/or best endeavors in seeking full recovery from KKL Fashion or its shareholders in respect of the investment made by the Company in KKL Fashion. Such failure on the part of the Company’s management constituted misfeasance and/or misconduct in relation to the business and affairs of the Company within the meaning of Section 214(1)(b) of the Ordinance.
85. Furthermore, the Petitioner contends and the 3rd Respondent accepts that by reason of the matters aforesaid, the Company’s decision to acquire part of the equity interest in KKL Fashion and to advance loans to KKL Fashion constitute conduct unfairly prejudicial to the interest of the members of the Company (or a part thereof) within the meaning of Section 214(1)(d) of the Ordinance.
The 3rd Respondent’s Responsibilities for the Wrongful Transactions
86. The 3rd Respondent accepts that he was at all material times responsible for financial matters and compliance issues of the Company and the Group. Regarding each of the above wrongful transactions carried on by the Company and/or the Company’s subsidiaries within the Group, the 3rd Respondent was the person responsible for the implementation of and the making of all financial arrangements in relation to each of the above wrongful transactions. The Petitioner contends and the 3rd Respondent accepts that the 3rd Respondent acted in breach of his duties and obligations stated in paragraphs 26 to 28 above and was wholly or partly responsible for all the above wrongful transactions carried out by the Company and/or the Company’s subsidiaries within the Group.
PART C: PROPOSAL FOR ORDER DIRECTING THE COMPANY TO BRING CIVIL PROCEEDINGS
87. On the basis of the undisputed facts set out in Part B of this Schedule:
(1) The Petitioner submits that it would be appropriate for an order to be made under section 214(2)(b) of the Ordinance directing the Company to bring civil proceedings in its name against the 3rd Respondent to seek recovery of such loss and damage suffered by the Company as a result of such wrongful transactions complained of in these proceedings;
(2) The 3rd Respondent accepts that it would be appropriate for the Court to make an order directing the Company to bring civil proceedings in its name against him to seek recovery of such loss and damage suffered by the Company (if any) as a result of such wrongful transactions complained of in these proceedings;
(3) The 3rd Respondent further agrees that the Company and any party to the civil proceedings may for the purposes of such proceedings rely on and refer to the admissions or concessions made by the 3rd Respondent and the underlying documents referred to in the Schedule of Facts Not in Dispute in Part B of this Schedule.
88. The Petitioner proposes and the 3rd Respondent agrees that the Court should give such appropriate directions in relation to the prosecution of the civil proceedings by the Company against him after considering this Schedule and after hearing the submissions of the parties.
89. Subject to the discretion of the Court, the following directions are jointly proposed by the Petitioner and the 3rd Respondent in connection with the civil proceedings to be brought by the Company:
(1) The Company do commence legal proceedings in its own name and at its own expense by way of a High Court Action against the 3rd Respondent to seek the recovery of compensation for the loss and damage as prayed for the Amended Petition filed in these proceedings;
(2) The company shall have conduct of the proceedings commenced by the Company against the 3rd Respondent and shall have authority to compromise, settle and/or abandon such proceedings, subject to obtaining from the Court approval so to do;
(3) The Company and any party to the civil proceedings is for the purposes of such proceedings at liberty to rely on and refer to all or any affirmations, statements, records of interview and other documents filed and/or otherwise disclosed by the parties in these proceedings;
(4) Without prejudice to the generality of the foregoing, the Company and any party to the civil proceedings shall for the purpose of such proceedings be entitled to rely on and refer to the admissions or concessions made by the 3rd Respondent and the underlying documents referred to in the Schedule of Facts Not in Dispute in Part B of this Schedule;
(5) The Company shall submit to the Petitioner herein a quarterly report as to the steps it has taken, and the steps it intends to take in pursuance of the legal proceedings and with a view to obtaining a judgment in such proceedings as expeditiously as is reasonably possible;
(6) The Petitioner and the Company shall have liberty to apply to the Court for the purposes of seeking further directions as to the conduct of the legal proceedings hereby ordered to be commenced with reasonable notice to the other parties.
PART D: COSTS
90. In the event that the Court disposes of these proceedings summarily on the basis of the matters stated in this Schedule, the Petitioner proposes that there be an order that the 3rd Respondent do pay the Petitioner’s costs of these proceedings, to be taxed if not agreed.
APPENDIX 1
Definition of ‘Subsidiary’ and ‘Affiliate’
‘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 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.”
are made out.
are made out.
are made out.
are made out.
(iii) A requirement to make quarterly reports to the SFC and granting the SFC “liberty to apply in the proceedings”
(v) The use of evidence and findings in these proceedings in the intended civil action against the directors
be entitled to their reasonable expenses, to be taxed if not agreed, and the sums deposited in the Registry pursuant to Order 38 rule 14(5) of the Rules of the High Court be paid to the said witnesses.
Mr John Scott, SC and Mr Anson Wong, instructed by Securities and Futures Commission, for the Petitioner
Mr H.Y. Wong, instructed by Messrs Johnny K.K. Leung & Co., for the 3rd Respondent
Appeal by the 1st and 2nd respondents to Court of Appeal dismissed by Court of Appeal. 2nd respondent's appeal to extent of substituting the period of disqualification order from 5 to 4 years allowed. Please refer to CACV91/2010 dated 16 May 2011