Securities and Futures Commission v. Kenneth Cheung Chi Shing and Others

HCMP1702/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1702 OF 2008

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BETWEEN

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Before: Hon Au J in Court

Date of Hearing: 23 November 2010

Date of Decision: 23 November 2010

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DECISION

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A. INTRODUCTION

1.By way of the present proceedings, the Securities and Futures Commission (“SFC”) seeks, inter alia, disqualification orders under s. 214 of the Securities and Futures Ordinance (Cap 571) (“SFO”) against the Respondents regarding the affairs of the listed company Styland Holdings Ltd (“Styland”). 

2.The 3^rd Respondent, Mr Steven Li, was an executive director of Styland from 1991 to July 2003.  He now accepts that during this period of time, the business or affairs of Styland had been conducted in a manner:

(1)   involving misfeasance or other misconduct towards it or its members or a part of its members as described under s. 214(1)(b) of the SFO;

(2)   resulting in its members or any part of its members or not having been given all the information with respect to its business or affairs as they might reasonably expect as described under s. 214(c) of the SFO; and

(3)   which was unfairly prejudicial to its members or part of its members as described under s. 214(1)(d) of the SFO.

3.The SFC and Mr Steven Li have further agreed to dispose of the application against him summarily by way of the Carecraft procedure.  This procedure, sanctioned in Re Carecraft Construction Ltd [1994] 1 WLR 172 and clarified by the English Court of Appeal in Secretary of State for Trade and Inudstry v Rogers [1996] 1 WLR 1569, has been repeatedly adopted in Hong Kong as appropriate for s. 214 proceedings under the SFO.  See recently: SFC v Yeung Kui Wong (unrep., HCMP1742/2009, Harris J, 9 April 2010), para 2.

4.The Carecraft procedure involves the submission by the parties to the court of an agreed statement of facts upon which the court is invited to assess what order should be made.  In the present case, a proposed period of 6 years disqualification has been agreed.

5.It is however trite that the Court in deciding whether to make a disqualification order is not bound by the agreement reached by the parties.  It must be independently satisfied, based on the agreed facts, that the business or affairs of the company (in the present case, Styland) have been conducted in a manner described in s. 214(a), (b), (c) or (d) and, if so satisfied, determined the scope and duration of the qualification order.  In practice, however, the Court is likely to be guided by the agreement that the SFC has reached: Yeung Kui Wong, para 5.

B.      THE PRESENT APPLICATION

B.1    Relevant considerations

6.In considering what is an appropriate period of disqualification, the court takes into account a broad spectrum of considerations with the dual objective of protecting the public and deterrence: In The Official Receiver v Tose & Others, HCMP112/2002, Kwan J, para 27.

7.In Yeung Kui Wong, at para 9, Harris J summarized the useful guidance given by Woolf  R in Re Westmid Packing Services Ltd [1998] BCLC 646, at 654f-658f as to the relevant factors for determining the length of the disqualification period under the Companies Directors Disqualification Act 1986 as follows:

(1)   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.

(2)   The primary purpose of disqualification is to protect the public against the future conduct of companies by persons whose past records as directors of insolvent companies showed them to be a danger to creditors and others. Other factors also come into play in the wider interests of protecting the public, i.e. a deterrent element in relation to the director himself and a deterrent element as far as other directors are concerned.

(3)   The period of disqualification must reflect the gravity of the offence.

(4)   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.

(5)   A wide variety of factors, including the former director’s age and state of health, the length of time he has been in jeopardy, whether he has admitted the offence, his general conduct before and after the offence, and the periods of disqualification of his co-directors that may have been ordered by other courts, may be relevant and admissible in determining the appropriate period of disqualification.

8.There are also 8 criteria which govern the court’s exercise of the power of disqualification, namely:

(1)   Character of the offenders.

(2)   Nature of breaches.

(3)   Structure of the companies and the nature of their business.

(4)   Interests of shareholders, creditors and employees.

(5)   Risks to others from the continuation of offenders as company directors.

(6)   Honesty and competence of offenders.

(7)   Hardship to offenders and their personal and commercial interests.

(8)   Offenders’ appreciation that future breaches could result in future proceedings.

See: Yeung Kui Wong, para 10.

9.Applying these principles, I will turn to deal with the present application as follows.

B2.    Agreed facts

10.The agreed relevant facts have been set out in the Schedule filed in support of this application.  The parties agree that they should be appended to this Decision.  It is therefore not necessary for me to recite them in full.

11.It may however be helpful for me to summarize the nature of the complaints regarding the management of the affairs of Styland arising from the agreed facts which were in the manner described in s. 214(1)(b), (c) and/or (d) of the SFO.  These are taken from SFC’s helpful skeleton.  In summary, Styland:

(1)   entered into transactions at prices which could not be justified by any commercially sensible reason, and meanwhile without obtaining any professional or reliable valuation of the investments, which resulted in substantial and unjustified losses;

(2)   entered into transactions without any safeguard or attempt to ensure that the value of its investments would be preserved or at least not be devalued for no valid commercial reason, when it was obvious at the time of investment that the risk of devaluation was real and would be out of its control;

(3)   advanced shareholder’s loans without any attempt to obtain security for the loans; and

(4)   entered into connected or disclosable transactions as defined under the Listing Rules but acted in breach of the same by failing to obtain the prior approval of its shareholders and make proper notification and disclosure.

12.Further, Mr Steven Li accepts that he was at least partly responsible for these breaches:

(1)   as regards the transactions in §§11(1)-11(3) above, he was responsible in part for the lack of a system of procedures and controls to ensure prior independent professional advice was taken; failing to ensure that the transactions were in the best interests of Styland and the Group, and the interests of Styland were adequately protected;

(2)   he had responsibility for Styland’s breaches of the Listing Rules;

(3)   he failed to equip himself with the necessary understanding of the Listing Rules, and failed to understand the Listing Rules at the time when the relevant transactions were being negotiated;

(4)   he failed to ensure that Styland obtained independent professional advice on its obligations before entering into the relevant transactions;

(5)   he failed to apply such degree of skill, care and diligence and competence as may reasonably be expected of a person with his knowledge and experience and holding his position within Styland (and thus acted in breach of Rules 3.08(f) and 3.09 of the Listing Rules, as concluded by the Listing Committee of the Stock Exchange in disciplinary proceedings in April 2008);

(6)   he failed to satisfy the Stock Exchange, in accordance with Rule 3.09 of the Listing Rules, that he had the character, experience and integrity and could demonstrate a standard of competence commensurate with his position as a director.

B3.    Discussion

13.In Re Sevenoaks Stationers Ltd [1991] Ch 164, 174E-G, Dillon LJ endorsed the division of disqualification period into three brackets as follows:

(1)   The top bracket of disqualification for periods of over 10 years should be reserved for particularly serious cases.  These may include cases where a director who has already had one period of disqualification imposed on him falls to be disqualified again.

(2)   The minimum period of 2 to 5 years’ disqualification should be applied where, though disqualification is mandatory, the case is, relatively not very serious.

(3)   The middle bracket of disqualification for from 6 to 10 years should apply for serious cases which do not merit the top bracket.

14.In light of the agreed facts, I accept Mr Jat SC’s submissions that Mr Steven Li’s mismanagement and neglect of duties in the management of Styland (a) related to a series of transactions involving substantial amounts, (b) extended over a long period of time from 1999 to 2001, and (b) resulted in substantial losses to Styland which were directly detrimental to its shareholders.  Although not amounting to fraudulent conduct, these are serious breaches of duties of a director of a listed company and the present case falls into the middle bracket in Sevenoaks for consideration of the period of disqualification.

15.At the same time, the Court accepts that there are certain mitigation factors which the Court is entitled to take into account in favour of Mr Li:

(1)   He has been co-operative in relation to these proceedings with the SFC and accepts liability.

(2)   He agrees to pay the SFC’s costs of these proceedings should the court dispose of it summarily.

(3)   He is currently employed as a director of a non-listed company and depends on this position for his livelihood.

Cf: SFC v Fung Chiu (unrep., HCMP2524/2006, Kwan J, 20 January 2009), para 11-12.

16.Mr Wong, counsel for Mr Li, also submits that there are three further mitigating matters that the Court could take into account. 

17.The first two are that (a) Mr Li’s experience was in garment production and trading, and it was the 1^st and 2^nd Respondents who had played the dominant roles on the board and in the decision-making process, and (b) the complained transactions were entered into during the IT boom, and most people were then crazy about IT related investments, and those were thus considered to be the right directions of the company.  I accept Mr Jat’s submissions (for SFC) that these matters, even if factually correct (which the SFC does not accept), do not and could not have reduced Mr Li’s personal responsibility as a director.  I would not take them into account as mitigating factors.

18.The third factor which Mr Wong submits is that Mr Li’s breaches of the Listing Rules on disclosure of connected transactions are mainly related to the relationship between the 2^nd Respondent and her nephew.  Such disclosure obligation was only advised to Mr Li by the company auditor in 2003, and after being so advised, Mr Li took the initiative to make announcements on all the connected transactions involving Kevin Ngai (the nephew), which had led to the investigation by the SFC.  Again, I accept Mr Jat’s submissions these allegations are not included in the agreed facts and are to certain extent inconsistent with them.  I would also not take these into account for mitigation.

19.Applying the principles set out above and taking into account of the nature of breaches and the mitigation factors I have accepted above, I agree with SFC’s submissions that (a) the agreed period of 6 years disqualification is appropriate, and (b) the disqualification order to be made should be restricted only to listed corporations and their subsidiaries or affiliates.

C.      CONCLUSION

20.I therefore make the following order against Mr Steven Li:

(1)   For a period of 6 years, Mr Steven Li shall not, without the leave of the Court:

(a) be, or continue to be, a director, liquidator, or receiver or manager of the property or business of Styland or any listed corporation or their subsidiaries or affiliates; and

(b) in any way, whether directly or indirectly, be concerned or take part in the management of Styland or any listed corporation or their subsidiaries or affiliates.

(2)   Mr Steve Li shall pay one-fourth of SFC’s costs up to 18 June 2010 and the costs of this hearing to be taxed if not agreed.

21.Lastly, I thank counsel for their assistance.

Mr Jat Sew Tong, SC, instructed by Securities and Futures Commission, for the Petitioner

Mr William M.F. Wong, instructed by Messrs Fairbairn Catley Low & Kong, for the 3^rd Respondent

Appendix

Agree Statement of Facts

The Company

1.    The Company, the 5^th Respondent herein, is an exempted company with limited liability incorporated in Bermuda on 31 July 1991 and was registered under Part XI of the Companies Ordinance (Cap. 32) as an overseas company on 8 November 1991.  Its shares were listed on the Main Board of the Stock Exchange of Hong Kong Limited (“the Stock Exchange”) on 5 December 1991 and remain so listed as at the date of this Petition.

2.    After the revelation of undisclosed connected transactions entered into by or on behalf of the Company from 1999 to 2001, of which announcements were subsequently made, trading in the shares of the Company was suspended on 23 December 2002 at the direction of the Petitioner and later resumed in June 2003.  On or about 21 April 2004, trading in its shares was again suspended at the Company’s request pending an announcement relating to a possible rights issue, and the suspension remains effective as at the date of this Petition.

3.    The registered office of the Company is situate at Canon’s Court, 22 Victoria Street, Hamilton HM12, Bermuda.  Its principal place of business is situate at 28^th Floor, Aitken Vanson Centre, 61 Hoi Yuen Road, Kwun Tong, Kowloon.

4.    As at the date of the Petition, the authorised share capital of the Company was $2,000,000,000, divided into shares of $0.01 each and the amount of the capital paid up or credited as paid up was approximately $18,712,000.

5.    The objects of the Company are to carry on the business of a holding company and to coordinate the policy and administration of its subsidiaries, to act as an investment holding company and for that purpose to acquire and hold for investment shares, stocks, debentures, debenture stock, bonds, obligations and securities and to enter into any guarantee, contract of indemnity or suretyship. 

The Management of the Company

6.    Save for Angelina Swee Yan Goh and Henry Bing Kwong Chan who resigned on 2^nd October 1999 and 4 May 2000 respectively, at all material times for the purposes of the Petition, the executive directors of the Company were Kenneth Cheung Chi Shing (“Kenneth Cheung”), the 1^st Respondent herein, Yvonne Yeung Han Yi (“Yvonne Yeung”), the 2^nd Respondent herein, the 3^rd Repondent and Miranda Chan Chi Mei (“Miranda Chan”), the 4^th Respondent herein. Some of the executive directors, including the 3^rd Respondent, were at the same time directors of the subsidiaries involved in the transactions referred to below.

7.    The Styland Group (comprising the Company and its subsidiaries) was founded by Kenneth Cheung. The Company is the ultimate holding company.  He was the Chairman and an executive director of the Company from the date of its incorporation to 18 June 2002.  According to the Company’s Annual Reports for the period from 1999 to 2002, he had over 27 years of experience in corporate management and trading business and was responsible for the Styland Group’s policy and management.

8.    Kenneth Cheung is and was at all material times also a shareholder of the Company.  According to the directors’ reports attached to the Company’s Annual Reports referred to above, he was the beneficial owner of 590,562,734 (28.4%), 5,048,690,246 (17.30%), 64,580,225 (17.97%) and 257,520,895 (17.2%) of the Company’s issued shares as at 31 March 1999, 31 March 2000, 31 March 2001 and 31 March 2002 respectively.  He has remained a beneficial shareholder of the Company notwithstanding his resignation and had an interest in 399,995,967 (21.38%) of the issued shares of the Company as at the date of the Petition.

9.    Yvonne Yeung is the wife of Kenneth Cheung.  She has been an executive director since 1991 and at all material times was the Managing Director of the Company. She remains an executive director.  According to the Company’s Annual Reports referred to above, she has extensive experience in trading business and business management and is responsible for the Styland Group’s policy, administration, personnel, management and oversees its investment activities.

10.    Yvonne Yeung is and was at all material times a shareholder of the Company.  According to the directors’ reports attached to the Company’s Annual Reports referred to above, she held 19,600,000 (0.94%), 492,985,497 (1.69%), 6,162,318 (1.71%) and 24,649,272 (1.65%) of the Company’s issued shares as at 31March 1999, 31 March 2000, 31 March 2001 and 31 March 2002 respectively.  She had an interest in 399,995,967 (21.38%) of the issued shares of the Company as at the date of the Petition.

11.    The 3^rd Respondent was an executive director of the Company from 1991 to 1 July 2003.  The Company’s Annual Reports stated that he had extensive experience in garment and textile industries. According to the Annual Reports, he was responsible for the Styland Group’s trading business during the period when the Company and/or its subsidiaries entered into the transactions referred to in paragraphs 29 to 78 below.

12.    The 3^rd Respondent is and was at all material times a shareholder of the Company.  According to the directors’ reports attached to the Company’s Annual Reports referred to above, he held 2,986,666 (0.14%), 10,326,666  (0.04%), 129,083 (0.04%) and 516,330 (0.03%) of the Company’s issued shares as at 31March 1999, 31 March 2000, 31 March 2001 and 31 March 2002 respectively.  He had an interest in 516,330 (0.03%) of the issued shares of the Company as at the date of the Petition.

13.    Miranda Chan has been an executive director of the Company since 1993and remains so.  According to the Company’s Annual Reports referred to above, she has extensive experience in trading and security business and is responsible for the Styland Group’s credit and risk control.

14.    Miranda Chan is and was at all material times a shareholder of the Company.  According to the directors’ reports attached to the Company’s Annual Reports referred to above, she held 7,041,330 (0.34%), 34,682,994 (0.19%), 433,537 (0.12%) and 39,288 (0.003%) of the Company’s issued shares as at 31March 1999, 31 March 2000, 31 March 2001 and 31 March 2002 respectively.  She held 39,288 (0.002%) of the Company’s issued shares and 785 of the issued shares in Riverhill Holdings Limited (“Riverhill”), an associated corporation of the Company, as at the date of the Petition.

The 3^rd Respondent’s Duties and Obligations

15.    By reason of the position he held in the Company and the Group, the 3^rd Respondent owed to the Company and the Group a fiduciary duty to act in good faith and in the best interests of the Company and the Group.

16.    Further, the 3^rd 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.

17.    The 3^rd Respondent gave and signed a declaration, undertaking and acknowledgement in the form set out in the Listing Rules whereby he undertook with the Stock Exchange to comply to the best of his ability with the Listing Rules.

18.    Under Rule 3.12 of the Listing Rules then in force, the 3^rd Respondent accepted full responsibility, collectively and individually, for the Company’s compliance with the Listing Rules.

19.    Further, under Rule 3.08 of the Listing Rules, the 3^rd Respondent had individual and collective responsibility for the management and operations of the Company. Under the Listing Rules, the 3^rd Respondent was expected to fulfill fiduciary duties and duties of skill, care and diligence to a standard at least commensurate with the standard established by Hong Kong law and, inter alia, to act honestly and in good faith in the interests of the Company as a whole, be answerable to the Company for the application or misapplication of its assets and 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 Company.

The Company’s business and affairs

20.    During the period from 1999 to 2001, the Company and/or its subsidiaries entered into a number of transactions with the following parties:-

20.1   Inworld Holdings Limited (“Inworld Holdings”) and Kevin Ngai Kwok Kin (“Kevin Ngai”) (Section D of the Petition).

20.2   Cyber World Technology Limited (“Cyber World”) (Section E of the Petition).

20.3   Kippton Limited (“Kippton”) and Sheng Da Investment Holding (Hong Kong) Limited (“Sheng Da”) (Section F of the Petition).

20.4   Gold Cloud Agents Limited (“Gold Cloud”) (Section G of the Petition).

20.5   West Marton Group Limited (West Marton”) (Section H of the Petition).

20.6   Well Pacific Investments Limited (“Well Pacific”) (Section I of the Petition).

D.          Inworld Holdings and Kevin Ngai

D(1).     Subscription for 36 newly issued shares in Inworld Holdings on 5 July 1999

21.    By an agreement dated 5 July 1999 (“the Subscription Agreement”), Iwana Company Limited (“Iwana”), an indirect wholly owned subsidiary of the Company, subscribed for 36 newly issued shares in Inworld Holdings (known as Eastern United Services Limited prior to 7 October 1999) at a consideration of $20,000,000 or $555,555.56 per share.  Under the Subscription Agreement, the purchase price was payable upon completion which was scheduled to take place on or before 15 May 2000.

22.    Notwithstanding such contractual stipulation and prior to the allotment of the subscription shares, $15,495,500 (approximately 80% of the consideration) was paid to Inworld Holdings by Styland (Hong Kong) Limited (“Styland HK”) and Styland Finance Company Limited (“Styland Finance”), both of which were wholly owned subsidiaries of the Company, on behalf of Iwana before the completion on 15 May 2000.  At all material times, the 3rd Respondent together with Yvonne Yeung and Miranda Chan were directors of Styland Finance and all the Directors were directors of both Iwana and Styland HK.

23.    Inworld Holdings was incorporated in the British Virgin Islands (“BVI”) on 11 July 1997.  As at the date of the Subscription Agreement, Kevin Ngai and Joyview International Limited (“Joyview”, a company owned by Alan Chan Wai Lun (“Alan Chan”)) were the shareholders of Inworld Holdings and its directors were Kevin Ngai and Yick Chong San (“Yick”).  When the Subscription Agreement was entered into, however, Inworld Holdings had no major assets and liabilities and had in fact not commenced business.

24.    Kevin Ngai is the nephew of Yvonne Yeung.  On or about 18 August 2000, he was appointed as a director of Oriental Max Investment Limited (renamed Styland Datareach Computer Technology Limited (“Styland Datareach”) on 15 September 2000), a subsidiary of the Company. Kevin Ngai was at all material times a connected person of the Company under Rule 14.03(2)(a)(ii) of the Rules Governing the Listing of Securities on the Stock Exchange applicable at the time (“Listing Rules”), and additionally according to the definition of “connected person” in Chapter One of the Listing Rules after 18 August 2000.  The 3rd Respondent together with Yvonne Yeung and Miranda Chan were directors of Styland Datareach which resolved in favour of appointing Kevin Ngai as an additional director.

25.    Prior to the Subscription Agreement, no independent professional advisers were engaged to assess the value of Inworld Holdings or the viability of its profit forecasts. The investment in Inworld Holdings was made in reliance on a business plan and discounted cash flow projections provided by Kevin Ngai and Alan Chan both of which were completely speculative on the profitability of Inworld Holdings.

26.    Five days before the Subscription Agreement was executed, Inworld Holdings granted Kevin Ngai and Joyview options to subscribe for 51 and 23 shares at par value, i.e. US$1.00 each.  Notwithstanding that the options would have the effect of diluting Iwana’s interest in Inworld Holdings and were granted only at par value, the terms of the Subscription Agreement were approved by Iwana.

27.    In or about June 2000, Kevin Ngai and Joyview exercised their share options and were allotted 50 and 14 shares respectively.  As a result, the shareholding of Iwana in Inworld Holdings was reduced from 26% to 15.9%.

28.    The subscription by Iwana for the shares in Inworld Holdings was a connected transaction under the Listing Rules.  In failing to obtain the prior approval of its shareholders and make proper notification and disclosure after the terms of the subscription were agreed, the Company breached Rules 14.26(2), 14.29(1) and 14.29(2) of the Listing Rules.  It was not until 3 June 2003, upon request by the Stock Exchange, that the subscription was duly disclosed.

D(2).     Loan facility of $105,000,000 granted by Iwana to Kevin Ngai on 3 May 2000

29.    On 3 May 2000, less than two weeks before completion under the Subscription Agreement, Iwana granted to Kevin Ngai a loan facility of up to $105,000,000.  The entire sum was drawn down in three tranches on 9 May 2000 ($30,000,000), 25 May 2000 ($20,000,000) and 29 June 2000 ($55,000,000).

30.    As security for the loan, Iwana accepted Kevin Ngai’s 101 shares in Inworld Holdings (which included those shares he would be allotted upon exercise of the share options granted on 30 June 1999 referred to above). However, before approving and granting the loan facility, no independent professional advice was taken as to whether Kevin Ngai’s 101 shares in Inworld Holdings constituted adequate security. 

31.    Accepting such collateral implied that each share in Inworld Holdings was worth about $1,039,604 in May 2000. This was almost double the share price Iwana had agreed to pay for the subscription ten months earlier. However, Inworld Holdings had incurred a net loss of approximately $4,216,000 for the period from 30 August 1999 to 30 June 2000.

32.    Kevin Ngai warranted that the value of Inworld Holdings was not less than $600,000,000 and that he would obtain a valuation to that effect within 3 months of executing the loan facility agreement.

33.    After the loan facility had been executed and drawn down, Kevin Ngai produced to the Directors around 13 July 2000 a report prepared by Chesterton Petty, which concluded that the value of Inworld.com was between $635,000,000 and $741,000,000. In arriving at this conclusion, Chesterton Petty had applied a discounted cash flow method of valuation. The financial information and forecasts, on which Chesterton Petty’s valuation was based, were not compiled independently but were furnished by Inworld Holdings. Chesterton Petty did not express any opinion in the report on the viability of the business of Inworld Holdings or the reasonableness or attainability of the assumptions underlying the financial forecasts.

34.    The loan facility was a connected transaction under the Listing Rules.  In failing to obtain the prior approval of its shareholders and make proper notification and disclosure after the terms of the loan facility were agreed, the Company breached Rules 14.26(6)(a), 14.29(1) and 14.29(2) of the Listing Rules.  It was not until 3 June 2003, and upon request by the Stock Exchange, that the loan facility was duly disclosed.

D(3).     Sale of 10 Inworld Holdings shares back to Kevin Ngai and Alan Chan on 15 May 2000

35.    On 15 May 2000, Iwana sold one share and nine shares in Inworld Holdings back to Kevin Ngai and Joyview respectively. Iwana agreed to sell the shares for $555,555 per share.  Yet less than two weeks earlier, Iwana had accepted Kevin Ngai’s 101 shares in Inworld Holdings as collateral for the loan facility of $105,000,000, which had implied a valuation of $1,039,604 per share.

36.    This sale to Kevin Ngai was a connected transaction under the Listing Rules.  In failing to obtain the prior approval of its shareholders and make proper notification and disclosure after the terms of the sale were agreed, the Company breached Rules 14.26(2), 14.29(1) and 14.29(2) of the Listing Rules.  It was not until 3 June 2003, and upon request by the Stock Exchange, that the sale was duly disclosed.

D(4).     Further acquisition of 45 Inworld Holdings shares by Iwana from Kevin Ngai on 31 August 2000

37.    By an agreement dated 31 August 2000, Iwana purchased 45 ordinary shares in Inworld Holdings from Kevin Ngai. The consideration was satisfied by Iwana setting off the sum of $107,781,438.36 which was then owed by Kevin Ngai to Iwana under the loan facility.

38.    This implies each Inworld Holdings share had a value of about $2,400,000 as at 31 August 2000. Three months earlier, however, Iwana had sold shares to Kevin Ngai and Joyview at $555,555 per share. Subsequently, in its accounts for the year ended 31 March 2002, the Company wrote off $93,882,949 as an impairment loss in respect of its investment in Inworld Holdings.

39.    This acquisition of 45 shares was a connected transaction under the Listing Rules.  In failing to obtain the prior approval of its shareholders and make notification and disclosure after the terms of the acquisition were agreed, the Company breached Rules 14.26(2), 14.29(1) and 14.29(2) of the Listing Rules.  It was not until 3 June 2003 and upon request by the Stock Exchange that the purchase was duly disclosed.

40.    Having paid approximately $120,000,000 in this series of transactions to acquire 71 shares in Inworld Holdings (the business of which was listed on the Stock Exchange in December 2001), the book value of the investment fell to just $16,120,345 as at 31 March 2002. 

D(5).     Shareholder’s loans from Iwana to Inworld Holdings

41.    The Company expressly acknowledged in its audited accounts for the year ended 31 March 2001 the “prevailing unfavourable economic environment in the high technology sector”.  Nevertheless, Iwana, with funding from Styland HK, advanced a total of $13,558,847 to Inworld Holdings in the period from 13 November 2000 to 10 September 2001.  Iwana did not put in place a written loan agreement or request the provision of any guarantee or security from Inworld Holdings.

42.    In seeking to justify such injection of capital despite the adverse circumstances, the Company announced that the advances had been made as a result of an agreement amongst the shareholders of Inworld Holdings to inject working capital into the latter proportionate to their respective shareholding.  However, the other shareholders of Inworld Holdings did not inject any capital.

43.    Iwana eventually wrote off approximately $5,280,000 of its shareholder’s loans to Inworld Holdings as a result of the reorganisation of the Inworld Group prior to listing.

44.    The grant of such shareholder’s loans to Inworld Holdings was a connected transaction under the Listing Rules.  In failing to obtain the prior approval of its shareholders and make notification and disclosure after Iwana agreed to grant the shareholder’s loans to Inworld Holdings, the Company breached Rules 14.26(6)(a), 14.29(1) and 14.29(2) of the Listing Rules.  It was not until 3 June 2003 and upon request by the Stock Exchange that such loans to Inworld Holdings were duly disclosed.

E.          Cyber World

45.    By an agreement dated 13 January 2000, Global Eagle Investments Limited (“Global Eagle”), an indirect wholly owned subsidiary of the Company, acquired 40 shares (40% of the issued share capital) in Cyber World from Zelma’s Company Limited (“Zelma”) at a consideration of $148,000,000.  At that time, Kevin Ngai was a director of Cyber World whereas Yick was both a director and shareholder of Zelma.

46.    Cyber World was incorporated in May 1999. The consideration for the purchase of 40% of the issued share capital of Cyber World was determined with reference to its net asset value as shown in its unaudited pro forma management accounts. Cyber World’s principal asset was Beijing Spatial Port Network Technology Limited (“Beijing Spatial”), a start-up firm incorporated in July 1999. In Cyber World’s pro forma accounts, Beijing Spatial was given a preliminary valuation of $370,000,000 as at 30 November 1999. By letter dated 2 February 2000, LCH (Asia Pacific) Surveyor Limited (“LCH”) opined that the fair market value of Beijing Spatial as at 30 November 1999 was reasonably stated as $370,000,000. The appraisal was made on the basis of the discounted cash flow method. LCH acknowledged that for the purposes of the appraisal, it had been furnished with unaudited financial statements and pro forma projections of revenue and expenses, all of which were utilized, without further verification, as correctly representing the results and prospects of Beijing Spatial. LCH also acknowledged it had relied heavily on Beijing Spatial’s business plan and its projected long-term growth, which had been estimated by the management of Beijing Spatial.

47.    It was noted in the Company’s financial statements for the year ended 31 March 2001 that the Group exchanged its interest in Cyber World for an interest in Riverhill Holdings Limited (“Riverhill”), which had become the holding company of Cyber World. The shares of Riverhill were listed on 1 June 2001, following which the Group’s interest was diluted to 28%. As regards its investment in Cyber World/Riverhill, the Company eventually wrote off $91,762,611 as an impairment loss in its accounts for the year ended 31 March 2002. 

F.           Kippton and Sheng Da

48.    The Company through a wholly owned subsidiary Wealth Fine Limited (whose name was changed to Styland Infrastructure Limited (“Styland Infrastructure”) in 1998/1999) acquired 4,000 shares (40% of the issued share capital) in Kippton in November 1997 and increased its shareholding therein to 49% some time in 1998.  Kippton was a 51% beneficial owner of Sheng Da, which cooperated with a sino-foreign joint venture in the development and operation of a toll expressway in the People’s Republic of China.

49.    By an agreement dated 31 August 2000 and a supplemental deed dated 25 September 2000, Styland Infrastructure acquired 3,100 shares (31% of the issued share capital) in Kippton at an aggregate consideration of $46,581,430.60.  At the same time, by an assignment agreement dated 31 August 2000, Simplex Inc. (another wholly owned subsidiary of the Company) purchased the debt of $15,835,008.40 owed by Kippton to one of its shareholders.

50.    By another agreement dated 28 September 2000, Styland Infrastructure acquired 9,551 shares (4.68% of the issued share capital) in Sheng Da at an aggregate consideration of $18,608,092.

51.    Such acquisitions by Styland Infrastructure of Kippton and Sheng Da in 2000 were disclosable transactions under the Listing Rules.  In failing to make any or any proper disclosure of them, the Company breached Rules 14.13(1) and 14.13(2) of the Listing Rules.  It was not until 3 June 2003, and upon request by the Stock Exchange, that the acquisitions were disclosed.

G.          Gold Cloud

52.    By an agreement dated 30 October 2000, Iwana sold 15 shares in Gold Cloud to Companion Marble (BVI) Limited (“Companion Marble”) at a consideration of $38,000,000 in cash.

53.    Companion Marble was a connected person of the Company, and thus the sale was a connected transaction, under Rule 14.26 of the Listing Rules.  In failing to obtain the prior approval of its shareholders and make proper notification and disclosure after the terms of the sale were agreed, the Company breached Rules 14.26(2), 14.29(1) and 14.29(2) of the Listing Rules.  It was not until 3 June 2003, and upon request by the Stock Exchange, that the sale was duly disclosed.

54.    Furthermore, on or about 22 August 2002, Iwana paid $3,000,000 to Kenneth Cheung allegedly as commission for his introduction of Companion Marble as the purchaser in the above sale and his assistance in the negotiation of the deal.  There was no written agreement relating to this payment.

55.    Such payment of commission to Kenneth Cheung was a connected transaction under the Listing Rules.  In failing to disclose it until one year later on 20 August 2003, the Company breached Rule 14.25(1) of the Listing Rules.

H.         West Marton

H(1).     Acquisition of a 90% interest in West Marton on 10 October 2000

56.    By a letter of intent dated 5 August 2000, Data Store Investments Limited (“Data Store”), an indirect wholly owned subsidiary of the Company, agreed to acquire 54 shares (90% of the issued share capital) in West Marton from Fu Tsin Man (“Raymond Fu”) at a consideration of $120,000,000 or $2,222,222 per share.  Raymond Fu was a high school classmate of Kevin Ngai and Alan Chan and once an employee of Inworld Holdings.

57.    On 10 October 2000, Raymond Fu and Data Store entered into a formal sale and purchase agreement in respect of the West Marton shares.

58.    At the time of the acquisition, West Marton had three wholly owned subsidiaries: New Great China Technology Holdings Limited (“New Great China”), Stylish Vogue Incorporated and e-Union Information Science & Technology (Shenzhen) Co Limited.

59.    Raymond Fu estimated the net worth of New Great China to be $323,748,562.  However, at the time of the acquisition, West Marton’s only commercial activity was the provision of internet portal services through a worldwide website (known as “chineseyes.com” and held by New Great China) and the design of various websites.  In fact, West Marton had been trading at a loss at the time when the decision to acquire it was made: at 31 July 2000, the unaudited net liabilities of West Marton were approximately $500,000 and for the period from 1 April 2000 to 31 July 2000, West Marton reported an unaudited net loss of approximately $200,000.

60.    No independent professional advisers were engaged to assess the value of West Marton’s shares or the viability of its profit forecasts. The investment of $120,000,000 in West Marton was made in reliance on a business plan and profit forecasts prepared and provided by Raymond Fu. 

H(2).     Sale of 30% interest in West Marton to Joyview and Kevin Ngai on 10 August 2001

61.    The Company then disposed of 30% of its interest in West Marton within just ten months of its acquisition and to connected persons at a much lower price.

62.    By two separate agreements dated 10 August 2001, Data Store sold:-

62.1   6 shares (10% of the issued share capital) in West Marton to Kevin Ngai at a consideration of $7,000,000; and

62.2   12 shares (20% of the issued share capital) in West Marton to Joyview at a consideration of $14,000,000.

63.    The aggregate consideration accepted by the Company in these transactions with Kevin Ngai and Joyview implies a valuation of approximately $1,166,667 per share of West Marton. When the Company had acquired the shares ten months earlier, it had paid Raymond Fu $2,222,222 per share.

64.    In its Announcement on 8 August 2002, the Company explained that the consideration for the disposals to Kevin Ngai and Joyview were negotiated and determined with reference to the net value of West Marton at the material time of approximately $70,000,000 arrived at by a discounted cash flow approach based on a five-year profit forecast of the West Marton Group from 1 July 2001 to 30 June 2006.  This was considerably less than Raymond Fu’s valuation of $323,748,562 which he had given only 10 months earlier and on which the Company had relied.

65.    The Company incurred significant losses in the West Marton investment:-

65.1   By August 2001, only 10 months after the Company had acquired a 90% interest in West Marton for $120,000,000, it wrote down the carrying value of its investment in West Marton to only $24,000,000. 

65.2   As at 31 March 2002, the carrying value of the Company’s remaining 60% interest in West Marton had been written down to $8,000,000, with the Company booking $72,000,000 as provision for impairment loss.

65.3   The West Marton Group had incurred unaudited consolidated net losses of about $886,000 and $2,079,000 for the two years ended 31 March 2001 and 31 March 2002; and had unaudited consolidated net liabilities of about $1,169,000 and $3,247,000 as at 31 March 2001 and 31 March 2002 respectively.

66.    The disposals to Kevin Ngai and Joyview were connected transactions under the Listing Rules.  In failing to obtain the prior approval of its shareholders and make proper notification and disclosure after the terms were agreed, the Company breached Rules 14.26(2), 14.29(1) and 14.29(2) of the Listing Rules.  It was not until 8 August 2002 that the Company duly disclosed the transactions.

I.           Well Pacific

67.    In or around 7 September 2001, Ever-Long Investments Holdings Limited (“Ever-Long”) and Iwana, both of which were wholly owned subsidiaries of the Company, acquired a total of 17,500 shares in Well Pacific at an aggregate consideration of $61,500,000.

68.    No independent professional advisers were engaged by the Company beforehand to assess the value of Well Pacific. While the Company later announced that the consideration had been determined on an arm’s length basis with reference to a limited review report drafted by an independent accounting firm, the said report (prepared by Grant Thornton) was undated and furnished to the Company by the vendors.  The report did not express any view on the value of Well Pacific.

69.    The acquisition of Well Pacific was a failure. Seven months after the acquisition, as at 31 March 2002, the Company booked $21,500,000 as provision for impairment loss in Well Pacific.  For the next financial year ended 31 March 2003, the Company booked $14,400,000 as provision for impairment loss in the same investment.