Securities and Futures Commission v. Cheung Keng Ching and Others

CACV 91/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 91 OF 2010

(ON APPEAL FROM HCMP NO. 1869 OF 2008)

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BETWEEN

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Before: Hon Tang Acting CJHC, Fok JA and Chu J in Court

Date of Hearing: 4 May 2011

Date of Handing Down Judgment: 16 May 2011

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J U D G M E N T

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Hon Tang Acting CJHC:

1.I have had the advantage of reading Fok JA’s judgment in draft. I am in complete agreement with his reasons and the orders he proposes.

Hon Fok JA:

Introduction

2.This appeal arises out of directors’ disqualification proceedings brought by the Securities and Futures Commission (“the SFC”) in relation to the affairs of Rontex International Holdings Limited (“the Company”).

3.Until the abandonment of certain issues at the commencement of the hearing before us, the 1st and 2nd appellants sought to challenge:

(1)   the Judge’s exercise of discretion, when directing the Company to commence civil proceedings against its former directors under section 214(2)(b) and/or (e) of the Securities and Futures Ordinance, Cap. 571 (“the Ordinance”), to require that any compromise of the civil proceedings so commenced be subject to the approval of the court;

(2)   the Judge’s jurisdiction to make orders (a) requiring reports concerning the prosecution of the proceedings in question to be submitted by the Company to the SFC, and (b) giving liberty to the SFC to apply to the court for further directions as to the conduct of those proceedings;

(3)   the length of the disqualification orders made against them; and

(4)   the Judge’s costs order.

4.At the commencement of the hearing, Mr Paul Shieh SC, leading counsel for the 1st and 2nd appellants, informed the court that his clients no longer pursued their appeals against the orders requiring reports concerning the prosecution of the proceedings directed to be pursued by the Company to be submitted to the SFC and giving liberty to the SFC to apply to the court for further directions as to the conduct of those proceedings, and the costs order (i.e. sub-paragraphs (2) and (4) above), and that the 1st appellant no longer sought to appeal against the length of the disqualification order made against him (i.e. sub-paragraph (3) above).

5.The hearing of the appeal was therefore limited to:

(1)   The appeal against the court’s exercise of discretion, when directing the Company to commence civil proceedings against its former directors, to require that any compromise of those proceedings so commenced be subject to the approval of the court; and

(2)   The appeal against the length of the disqualification order made against the 2nd appellant.

6.In addition to the abandonment of parts of the appeal, Mr Shieh also informed the court at the commencement of the hearing that the 1st and 2nd appellants did not oppose the SFC’s application by summons dated 18 April 2011 seeking to adduce further evidence on the appeal, the substance and relevance of which I shall refer to below.

Background facts

7.The proceedings below were brought by way of petition by the SFC under section 214 of the Securities and Futures Ordinance, Cap. 571 (“the Ordinance”) against three former directors of the Company and against the Company itself. The 1st respondent (1st appellant in this appeal) was the founder of the group of companies of which the Company was the holding company and the chairman of the Company, responsible for overall business strategy and merchandising functions of the group.  The 2nd respondent (2nd appellant in this appeal) is the wife of the 1st respondent and was the co-founder of the group, responsible for the procurement functions of the group.  The third respondent was responsible for the financial management and corporate finance matters of the group.  Since the 1st and 2nd appellants in this appeal have been referred to in the papers throughout as the 1st and 2nd respondents, I shall continue to refer to them as such.

8.The proceedings arose out of four questionable transactions:

(1)   The first transaction concerned the acquisition by the Company of shares in Grandtop International Holdings Limited (“Grandtop”).  These shares were acquired at a 45% premium over the then prevailing trading price. The SFC’s complaints, in summary, were that: there was no sensible commercial reason justifying the acquisition of the Grandtop shares at a substantial premium; the acquisition constituted a marked departure from the investment policy stated in the Company’s listing prospectus; and, false information about the price paid to the acquisition of the shares was given in the Company’s internal records.

(2)   The second transaction concerned the acquisition by the Company of an equity interest in Macau Asia Investments Limited (“MAIL”).  The SFC’s complaints, in summary, were that: there was no due diligence done before the acquisition; the management had no clue of the value of the investment or of the way to realise that investment; the management gave false estimations for its decision to invest in the MAIL share option; this acquisition also constituted a marked departure from the investment policy stated in the Company’s listing prospectus; and no disclosure was given in relation to such a position in breach of the Listing Rules.

(3)   The third transaction concerned the making of payments by the Company to a Mr Wan Lin, a PRC citizen. The SFC’s complaints, in summary, were that: the payments were made without proper approval by the board; no safeguards were imposed to ensure proper use of such payments; Mr Wan was permitted to use them without paying any interest to the Company; and no disclosure was given in relation to the making of such payments in breach of the Listing Rules.

(4)   The fourth transaction concerned an investment by the Company in Beijing Kut Ka Lok Fashion Apparels Limited (“KKL Fashion”).  The SFC’s complaints, in summary, were that: the advance of loans by the Company to KKL Fashion was made without proper approval by the board; there was no due diligence done before the investment; and there was failure to exercise due care in seeking full recovery when the Company decided to withdraw from the investment.

The proceedings below and the Judge’s order

9.In the court below, as recorded by the Judge, none of the respondents challenged or disputed any of the evidence adduced on behalf of the SFC.  None of them called any witnesses or evidence and none of the witnesses called by the SFC were questioned on behalf of any of the respondents.  None of the director respondents challenged the making of an order of disqualification from being a director and the Company did not challenge the order directing the commencement of proceedings by it against the three director respondents.

10.The 3rd respondent agreed to the action being disposed of against him summarily by way of the “Carecraft” procedure.  The agreed schedule containing an outline of the case against him, as amended in the course of the hearing, was incorporated by the Judge into his judgment.  Although that procedure was not adopted for the 1st and 2nd respondents, the schedule provided all the necessary background and factual details concerning the four transactions in issue which were also relevant to the SFC’s petition against the 1st and 2nd respondents and the Company and which were not challenged by them.

11.After setting out the Carecraft schedule, the Judge ordered that the 3rd respondent should not, for a period of four years from the date of the order, without 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, or (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.

12.In respect of the 1st and 2nd respondents, the Judge accepted the evidence brought in support of the petition against them and adopted the contents of the Carecraft schedule in respect of the background information and each of the four transactions in question.

13.Specifically in respect of the first transaction, the Judge held that the following complaints of the SFC against the 1st and 2nd respondents were made out, namely:

“(1) The acquisition of the Grandtop shares at a 45% premium over the prevailing trading price was against the Company’s interest and constituted ‘misfeasance’, ‘misconduct’, ‘defalcation’ and/or ‘unfair prejudice’ under section 213(1)(b) and (d).

(2) The signing of the relevant bought and sold notes by the 3rd Respondent and the relevant board minutes by the 1st and 2nd Respondents, both of which understated the actual purchase price paid for the acquisition, constituted ‘misfeasance’ and/or ‘misconduct’ under section 214(1)(b), and that in relation to the acquisition of a total of 3,620,000 Grandtop shares under the 1st and 2nd acquisitions, the failure to invest the Company’s funds in accordance with the statement contained in the Prospectus, the failure to support the Company’s investment with sound commercial reasons and the failure to review the Company’s investment policy constituted ‘misfeasance’, ‘misconduct’ and/or ‘unfair prejudice’ under section 214(1)(b) and (d).”[1]

14.Specifically in respect of the second transaction, the Judge held that the following complaints of the SFC against the 1st and 2nd respondents were made out, namely:

“First, the MAIL Acquisition constituted a ‘misfeasance’, ‘misconduct’ and ‘defalcation’ under section 214(1)(b) in that:

(1) The Respondents failed to carry out any due diligence exercise;

(2) The Respondents did not even know the percentage of the shareholding in MAIL represented by the 10,000,000 MAIL shares acquired by the Company (through Magic Ace);

(3) The Respondents had little idea as to how the MAIL shares could be sold in the market and they also did not keep track of the market value of the shares; and

(4) The Respondents failed to act honestly and candidly in relation to the MAIL Acquisition.

Second, the making of the MAIL Acquisition was contrary to the Company’s commitment contained in the Prospectus that its investment in listed equity securities would be confined to ‘balanced investment portfolio’ of ‘high-quality listed equity securities’. It, therefore, constituted ‘unfair prejudice’ under section 214(1)(d).

Third, the MAIL Acquisition was a disclosable transaction under Chapter 14 of the Listing Rules. The failure to make proper disclosure of the MAIL Acquisition resulted in its members ‘not being given full information’ under section 214(1)(C).”[2]

15.Specifically in respect of the third transaction, the Judge held that the following complaints of the SFC against the 1st and 2nd respondents were made out, namely:

“First, the Wan Payments constituted a ‘misfeasance’, ‘misconduct’ and ‘defalcation’ under section 214(1)(b) in that:

(1) No board resolution was adopted by the Company to approve the payment of additional sums of HK$3,000,000 and HK$6,520,000 to Wan;

(2) No safeguards were imposed by the Company to ensure the return of monies by Wan should the intended acquisition fall through;

(3) No requirement was imposed on Wan to pay interest or put the monies into interest-bearing account(s) and the Company was thereby deprived of income from interest deriving from those monies for a substantial period of time.

Second, the Wan Payments also constituted ‘an unfair prejudice’ under section 214(1)(d), in that Wan was given substantial sums of money without being required to pay interest to the Company or depositing the same into an interest-bearing account for the benefit of the Company.

Third, the initial payment of HK$18,200,000 to Wan was a disclosable transaction under Chapter 13 of the Listing Rules. The failure to make proper disclosure of such payment to Wan resulted in its members ‘not being given full information’ under section 214(1)(c).”[3]

16.Specifically in respect of the fourth transaction, the Judge held that the following complaints of the SFC against the 1st and 2nd respondents were made out, namely:

“First, in relation to the advancement of loans to KKL Fashion, this advance was not approved by any board resolution and it therefore constituted a ‘misfeasance’, ‘misconduct’ and/or ‘defalcation’ under section 214(1)(b).

Secondly, in relation to the decision to acquire an equity interest KKL Fashion, the Company’s management failed to exercise due and/or reasonable care in making this decision in that they failed to conduct any due diligence or to obtain proper advice from professional sources. It, therefore, constituted a ‘misfeasance’ and/or ‘misconduct’ under section 214(1)(b).

Thirdly, in relation to the Company’s withdrawal from its investment in KKL Fashion, the Company’s management failed to exercise due and/or reasonable care and/or best endeavours in seeking full recovery from KKL Fashion and its shareholders. It, therefore, constituted ‘misfeasance’ and/or ‘misconduct’ under section 214(1)(b).

Fourthly, the conduct on the part of the Company’s management in relation to the KKL Investment complained of constitutes ‘unfair prejudice’ under section 214(1)(d).”[4]

17.Having considered the submissions made on behalf of the SFC and the 1st and 2nd respondents, the Judge made an order that the 1st and 2nd respondents should not (save and except in the case of RC Apparels Limited) for a period of five years from the date of the order, without 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, or (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.

18.In respect of the proceedings which the SFC sought to have the Company institute against the 1st, 2nd and 3rd respondents, the Judge made the following orders:

“(3) The 4th Respondent do within 60 days from the date hereof commence civil proceedings in its own name and at its own expense by way of a High Court Action against the 1st, 2nd and 3rd Respondents to seek the recovery of compensation for the loss and damage as prayed for in the Amended Petition filed in these proceedings.

(4) The 4th Respondent shall have conduct of such civil proceedings commenced against the 1st, 2nd and 3rd Respondents and shall have authority to enter into mediation, compromise, settle and/or abandon such proceedings, subject to obtaining from the court approval so to do.

(5) The 4th Respondent and any party to such civil proceedings are for the purposes of such proceedings at liberty to rely on or refer to all or any affirmations, statements, records of interview and other documents filed and/or otherwise disclosed by the parties in these proceedings.

(6) Without prejudice to the generality of the foregoing, the 4th Respondent and any party to such civil proceedings shall for the purposes 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 his Schedule for Carecraft Procedure.

(7) For the avoidance of doubt, the directions in paragraphs 5 and 6 above are made on the basis that the court hearing the said civil proceedings retains the jurisdiction to determine the admissibility of and weight to be attached at trial to such affirmations, statements, records of interview and other documents filed and/or otherwise disclosed by the parties and the 3rd Respondent’s Carecraft Schedule in these proceedings.

(8) The 4th Respondent shall submit to the Petitioner herein a quarterly report commencing three months from the date of the issue of the writ 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.

(9) The Petitioner and the 4th Respondent 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.”

19.By a separate judgment following the receipt of written submissions from the parties on the issue of costs, the Judge made the following order as to costs:

“(1) As between the petitioner and the 4th respondent there shall be no order as to costs.

(2) 80% of the petitioner’s costs shall be paid by the 1st, 2nd and 3rd respondents.

(3) Of those costs the 1st and 2nd respondents shall be jointly and severally liable for 80% and the 3rd respondent 20%.

(4) The 4th respondent’s costs shall be paid by the 1st, 2nd and 3rd respondents in the same proportions as in (3) above.

(5) The petitioner’s application for a certificate for 2 counsel is granted.”

The issues in this appeal

20.As indicated in the introduction above, the issues in this appeal were limited to two issues, namely as to:

(1)   the Judge’s exercise of his discretion in ordering that the Company must obtain the sanction of the court to enter into mediation, compromise, settlement or abandonment of the civil proceedings; and

(2)   the length of the disqualification order imposed on the 2nd respondent.

The further evidence on appeal

21.Before addressing those issues, it is convenient to refer to the further evidence adduced by the SFC on this appeal.  As noted above, the 1st and 2nd respondents did not oppose the SFC’s summons to adduce this evidence and so an order in terms of the summons will follow.  The further evidence consisted of an affirmation from Ms Leung So Ching, an Associate Director of the Enforcement Division of the SFC, in which she set out up-to-date information about the progress of the civil proceedings which the Company was ordered to commence against the 1st, 2nd and 3rd respondents.

22.In summary, the up-to-date position in respect of those civil proceedings is as follows:

(1)   On 29 April 2010, following the issue by the Company of demand letters to the 1st, 2nd and 3rd respondents, the 1st and 2nd respondents asked for mediation.

(2)   On 15 May 2010, a writ was issued in HCA 706/2010 against the 1st, 2nd and 3rd respondents for loss and damages in the total sum of HK$18,980,000.

(3)   On 31 May 2010, a mediation meeting was held and, following further negotiations, the parties reached an agreement to settle the Company’s claim at HK$10,500,000, subject to the court’s approval.

(4)   A hearing of a consent summons for the approval of the settlement on 27 July 2010 was adjourned for counsel for the Company to supplement his advice regarding the settlement in respect of various matters.

(5)   On 14 August 2010, the Company’s solicitors provided the SFC with a first report on the proceedings, which contained the matters set out in sub-paragraphs (1) to (4) above.

(6)   The consent summons for the approval of the settlement was restored for hearing on 29 September 2010 but the court did not approve the settlement and the consent summons was again adjourned.

(7)   At the hearing on 29 September 2010, the Master refused to approve the settlement and adjourned the summons again pending the provision of information from counsel for the Company, as to the following concerns of the Master:

(a)   the relationship between the present management of the Company and the 1st, 2nd and 3rd respondents;

(b)   the reason why the court in the section 214 proceedings had directed the Company to issue proceedings against its former directors, rather than leaving the matter to the Company itself;

(c)   the risk that the claims in respect of the transactions for Grandtop shares and the MAIL share option would be regarded as being time-barred had not been substantiated; and

(d)   the risk of incurring further costs and the difficulty in recovering the same from the 1st, 2nd and 3rd respondents should the action proceed had not been substantiated.

(8)   On 15 November 2010, the Company’s solicitors provided the SFC with a further report on the proceedings, which included the matters set out in sub-paragraph (6) above.

(9)   On 14 February 2011, the Company’s solicitors provided the SFC with a further report on the proceedings stating that Senior Counsel had been instructed to advise on the approval of the proposed settlement by the court.

(10)   On 12 April 2011, the Company’s solicitors wrote to the SFC stating that the Company was advised by its Senior Counsel to conduct further investigations in order to consider restoring the application for approval of the proposed settlement.

The requirement of court approval of settlement of the civil proceedings

23.Section 214(2) of the Ordinance provides:

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

…

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

…

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

[Emphasis added]

24.At paragraph 36 of his Judgment, the Judge said:

“I am satisfied that the orders I make in paragraph 41 of this judgment are permissible under sections 214(2)(b) and (e), Cap. 571. I am satisfied that expressions such as ‘and on such terms as may be specified in the order’ and ‘may make any other order it considers appropriate’ are drafted in wide and flexible terms because they are intended to be construed in a wide and flexible way. Given that the SFC is a statutory regulatory body I do not agree that it is objectionable, in proceedings such as this one, that it may maintain a supervisory role in future proceedings. Modest reporting requirements are reasonable. A ‘liberty to apply’ direction is sensible and a request that the court approves any proposed settlement is, in light of the history of events, a desirable and common sense safety net.”

25.It was not disputed that the Judge had jurisdiction to impose the order requiring approval of a settlement of the civil proceedings the Company was directed to commence against the 1st, 2nd and 3rd respondents.  It was, however, the 1st and 2nd respondents’ case on this appeal that the Judge was wrong to exercise his discretion to make such an order.  As such, it is trite that the 1st and 2nd respondents must show that the Judge has gone clearly wrong or made some mistake as to the evidence or as to the law which would enable this court to set aside the order which has been made.

26.It was submitted on behalf of the 1st and 2nd respondents that there was no evidence to sustain the Judge’s exercise of discretion to order the requirement of court approval of any settlement of the civil proceedings.  Mr Shieh referred to the fact that, by 2 July 2008, the 1st and 2nd respondents had disposed of almost all of their shares in the Company to a third party, namely Plenty Holdings Limited (“Plenty”).  The petition, which was issued on 25 September 2008 disclosed that, on 3 September 2007, the 1st and 2nd respondents, through Star Master International Limited (“Star Master”), through which they held their shares in the Company,  sold 62 million shares in the Company in the market, thereby reducing Star Master’s shareholding in the Company to below 50%.  Then, on 15 October 2007, Star Master granted an option to Plenty Holdings Limited (“Plenty”) to purchase 820 million shares in the Company, which option was exercised and resulted in the transfer of those shares to Plenty on 2 July 2008.  After that transfer, Star Master only held 1.01% of the shares of the Company.

27.Mr Shieh submitted that prima facie the Company is sui juris and ought to be allowed to pursue the civil proceedings at the discretion of the current board.  There was no plea or evidence that the current board is in cahoots with the 1st and 2nd respondents, who resigned as directors on 12 November 2008, or under their influence.  On the contrary, he referred to a public announcement made by the Company which showed that the board resolved on 8 October 2008 to establish a Special Review Committee to review the transactions raised in the section 214 petition.

28.Whilst I agree with Mr Shieh’s submission that the mere making of an order directing a company to bring proceedings under section 214(2)(b) of the Ordinance cannot, as a matter of default, require directions as to court supervision of those proceedings, it is clear from the Judgment that the Judge did not take this approach.  At §38 of the Judgment he said:

“It should be emphasized however that such directions should be considered on a case by case basis. In each case the court must consider what is necessary, permissible and appropriate. Accordingly the directions I make later in this judgment are, in the judgment of this court, proper and necessary in the particular context of this case.”

29.Furthermore, I do not agree that there was a lack of evidential basis for the exercise of the Judge’s discretion to direct that any settlement of the civil proceedings the Company was ordered to commence be subject to court approval.

30.Given its timing, there was clearly a question over whether the sale of the 1st and 2nd respondents’ interest in the Company, through Star Master, to Plenty was an arms’ length transaction. If Plenty had conducted due diligence in respect of the Company, it is to be expected that the claims against the former directors would have come to light.  If so, one would expect them to be pursued by Plenty.  If due diligence was not conducted, it begs the question as to why this was not done.

31.Furthermore, notwithstanding the establishment of the Special Review Committee on 8 October 2008, the only further announcement by the Company was made on 13 August 2009 in which it was stated that the Special Review Committee was still in the course of reviewing the transactions and would make a further announcement “if and when appropriate”.  The evidence before the Judge was therefore that, apart from establishing the Special Review Committee, the Company had not done anything even to assert any claim against the 1st and 2nd respondents as at the time of the hearing of the petition.  Clearly, this was a case in which the Company was, at best, slow, if not actually reluctant, to seek compensation for its losses caused by the actions of its former directors.

32.The Company had to be ordered under section 214(2)(b) of the Ordinance to commence proceedings to seek such compensation from the 1st, 2nd and 3rd respondents and, in those circumstances, the proceedings cannot be regarded as ordinary litigation but, rather, was litigation directed by the court specifically for the protection of the shareholders of the Company.

33.All this was material on which, in my opinion, the Judge was entitled to, and did, exercise his discretion to make the order requiring court approval of any settlement of the proceedings ordered to be brought by the Company.  I do not therefore agree with Mr Shieh’s characterisation of the Judge’s reference to the history of events as being “nebulous”.  Nor do I agree with the submission that these matters were not sufficiently raised before the Judge at the time of the hearing of the petition or that the Company did not have a chance to deal with them by evidence in response.  It was clear from the pre-hearing correspondence between the parties regarding the Carecraft procedure that the SFC was seeking directions for any proceedings by the Company against its former directors to be subject to some form of independent oversight.  It was therefore open to any of the respondents to the petition to file evidence to explain why such directions were not required.

34.In my opinion, there is no basis for interfering with the Judge’s exercise of discretion to make the sanction order.  It is therefore not necessary to go on to consider whether, if this court had to exercise a fresh discretion, it would make the sanction order in any event. However, in this regard, it is relevant to note that the events disclosed by the further evidence since the hearing before the Judge below reinforce, in my opinion, the appropriateness of the order requiring sanction of any settlement since it now appears that the 1st and 2nd respondents are seeking to compromise the claim for $18.98 million, excluding interest, by a payment of $10.5 million, which is apparently inclusive of interest.

35.I would add in conclusion on this issue that the question of whether the proposed settlement, or indeed any other settlement that may be proposed by way of compromise of the Company’s proceedings against its former directors, is not before this court on this appeal.  That remains a matter for the Master and the questions raised by him at the hearing on 29 September 2011 do not go to the question of whether the sanction order should have been made but rather go to the different question of whether the proposed settlement should be approved.

The length of the disqualification orders

36.The Judge referred to Re Sevenoaks Stationers (Retail) Ltd [1990] BCC 765, in which the potential maximum 15 year period of disqualification under the section 6 of the Company Directors Disqualification Act 1986 was divided into three brackets (see per Dillon LJ at p. 174E-G) namely:

(1)   The top bracket of over 10 years, 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 bracket of 2 to 5 years (in Hong Kong, the statutory minimum is 1 year), applicable to cases where although disqualification is mandatory, they are, relatively, not very serious.

(3)   The middle bracket of 6 to 10 years, applicable to serious cases which do not merit the top bracket.

37.These “brackets” have been applied in a number of cases in Hong Kong (see e.g. SFC v Fung Chiu & ors [2009] 2 HKC 19 at §14 and Re Styland Holdings Ltd [2011] 1 HKLRD 96 at §13) and it is accepted on behalf of the 1st and 2nd respondents that these brackets are applicable to a disqualification order under section 214(2)(d) of the Ordinance.

38.In making a disqualification order against the 2nd respondent of 5 years, therefore, the Judge considered the 1st and 2nd respondents’ conduct to merit being placed at the top end of the minimum bracket.

39.The imposition of a period of disqualification under section 214(2)(d) of the Ordinance is an exercise of judicial discretion.  Accordingly, an appellate court will only interfere with the period of disqualification imposed in accordance with the usual, well-established principles concerning the circumstances in which the court will intervene in a judge’s exercise of discretion vested in him.  There is ample authority for this proposition in respect of the English statutory provisions governing disqualification orders (see Re Swift 736 Ltd [1993] BCLC 896 at 897d-e, Secretary of State for Trade and Industry v McTighe & anor (No. 2) [1996] 2 BCLC 477 at 485f-486a and Re Westmid Packing Services Ltd [1998] 2 BCLC 646 at 653g-654c) and the same approach should govern appeals in respect of disqualification orders under section 214(2)(d) of the Ordinance.

40.In the written submissions of the 1st and 2nd respondents, it was noted that there was no allegation of fraud or dishonesty against them raised by the SFC.  It is also said that there was no element of self-benefit, since one of the four transactions did not even result in any alleged loss to the Company.  In respect of the 2nd respondent, it was submitted that, in the light of her lesser and more passive role in the affairs of the Company, disqualification for a period of 2 years would be appropriate.

41.In view of the findings made by the Judge in respect of the four transactions in question (summarised above), I cannot see any basis to fault the Judge’s decision to impose a disqualification order of 5 years on the 2nd respondent, subject to the question of differentiation between the respondents (addressed below). Notwithstanding the fact that there was no allegation of fraud in the SFC’s amended petition, the facts found by the Judge clearly demonstrate a marked degree of incompetence, dereliction of duty and lack of corporate governance over a substantial period of time.  Four factors may be stressed:

(1)   This was not a case involving a single incident of the business or affairs of the Company being conducted in a manner described in section 214(1)(a), (b), (c) or (d) of the Ordinance; instead, there were four transactions giving rise to findings of such conduct.

(2)   The transactions resulted in losses to the Company of a substantial sum of money, namely $18.98 million.

(3)   The losses resulted from a deliberate departure from the Company’s Prospectus for its public offering dated 28 October 2002 in which the principal business of the group was stated to be “the sourcing, manufacture and sale of garments to countries in South America and the trading of a variety of items … to countries in South America and Canada” and in which the group’s future plans were stated to be “to expand its production facilities and to explore new markets for its garments such as Japan and European countries.”  The transactions giving rise to the losses were also inconsistent with the statement in the Prospectus 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.”

(4)   At the time of the questionable transactions, the 2nd respondent was an executive director of the Company, responsible for the procurement functions of the group, and she owned 50% of Star Master, which held the majority stake in the Company.  She contributed to the occurrence of those transactions by signing relevant board resolutions.

42.I would accept that the absence of illicit gain and dishonesty justify keeping the 2nd respondent’s case out of the middle bracket and, having regard to the periods of disqualification imposed in SFC v Fung Chiu & ors (see §§13-15) and Re Styland Holdings Ltd (see §14), I would consider that placing the 2nd respondent’s case (when viewed on its own) at the top end of the lower bracket was appropriate and that the imposition of a disqualification order of 5 years could not be faulted as an exercise of judicial discretion.  For my own part, I would consider a 5 year disqualification order to be appropriate and the suggested period of disqualification of 2 years would, in my view, be inadequate.

43.However, in considering the appropriateness of the period of the disqualification order made in respect of the 2nd respondent, it is relevant, albeit not decisive, to have regard to the periods of disqualification also imposed on the 1st and 3rd respondents in respect of the same transactions.  The roles of the three directors as pleaded in the petition were clearly different.  As noted above, the Judge imposed disqualification orders of 5 years and 4 years respectively on them.  He therefore equated the blameworthiness of the 2nd respondent with that of the 1st respondent and discounted the culpability of the 3rd respondent from that of both the 1st and 2nd respondents.  No cross-appeal has been made in respect of the 5 year period of disqualification imposed on the 1st respondent.

44.I would accept that there are grounds for discounting the culpability of the 3rd respondent from that of the 1st respondent in that, first, although a director of the Company, he was in effect a salaried employee and, secondly, he consented to the Carecraft procedure.  But it was plainly the SFC’s case that the 1st respondent husband was more culpable than his wife, the 2nd respondent, in respect of the four transactions in question.  In the light of that greater culpability on the part of the 1st respondent, the lack of any differentiation made by the Judge between the 1st respondent and the 2nd respondent is, in my opinion, an error which justifies this court in interfering with his exercise of discretion in respect of the disqualification order imposed on the 2nd respondent.

45.In my view, having regard to the disqualification order made in respect of the 1st respondent, against which, as noted, there is no cross-appeal, and in order fairly to reflect a differentiation of culpability between his case and that of the 2nd respondent, it would be appropriate to reduce the disqualification order imposed on the 2nd respondent to the same period of disqualification as that imposed on the 3rd respondent, namely 4 years and I would therefore allow the appeal of the 2nd respondent to that extent.

Conclusion and costs

46.For the reasons set out above, I would allow the 2nd respondent’s appeal to the extent of substituting the period of the disqualification order imposed on her by the Judge from 5 years to 4 years.  The 1st and 2nd repsondents’ appeal is otherwise dismissed.  There will be an order in terms of the SFC’s summons to adduce further evidence.

47.As to costs, in view of the outcome of the appeal and the late abandonment of issues by the 1st and 2nd respondents, I consider that the SFC should be entitled to an order of costs in its favour.  To reflect the limited success of the 2nd respondent on the appeal, in respect of the period of her disqualification order, I would make an order nisi that the 1st and 2nd respondents pay 75% of the costs of the SFC’s costs of the appeal, to be taxed if not agreed.

Hon Chu J:

48.I agree.

Mr John Scott SC and Mr Anson Wong, for the Petitioner/Respondent

Mr Paul Shieh SC and Mr Jin Pao, instructed by Messrs Cheung & Yip, for the 1st and 2nd Respondents/Appellants