Read the full judgment text of HCMP 2502/2012 on BabelCite. This Court of First Instance judgment was delivered on 16 January 2015 before Anthony Chan J.
Securities and futures regulation – s 214 of the Securities and Futures Ordinance (Cap 571) – disqualification of directors and compensation – whether Mutual Understanding & Agreement (MUA) existed regarding distribution of excess net assets – acquisition of financial information services company via wholly-owned BVI subsidiary – Letter of Confirmation and Clarification Announcement – whether directors acted dishonestly – directors' duties of skill, care and diligence under common law, Companies Ordinance (Cap 622) s 465, and Rules 5.01 and 5.03 of the GEM Listing Rules – credibility of witnesses – contemporaneous documents – adverse inference – alleged Indemnity from Company to two Respondents – SFC's case proven against all three Respondents. The acquisition was of the entire shareholding of GoHi Holdings Ltd, the owner of First China Investment Services Ltd, from Fame Treasure Ltd owned by Wang, through a wholly-owned BVI subsidiary Aceview, with a fixed amount of dividends (RMB34,743,349.13) to be paid pre-completion and a net asset guarantee of not less than RMB8 million – the net assets of First China Investment substantially exceeded RMB8 million by early 2008 – a Letter of Confirmation and Clarification Announcement were signed and published in late 2008 purporting to record a pre-existing MUA under which the excess net assets of approximately RMB18,692,000 belonged to the seller. The first issue was whether the MUA existed – the court held it did not exist, as the express terms of the Sale and Purchase Agreement (including the complete agreement clause and the defined amount of dividends) were irreconcilable with the alleged MUA, the MUA was vague and left no trace in any contemporaneous documents, the critical events from August 2008 showed the company scrambling to deal with the excess net assets, and Wang (who bore the evidential burden) failed to provide credible evidence. The second issue was whether Yin and Lee acted dishonestly in respect of the non-existing MUA – applying the combined objective and subjective test from Twinsectra Ltd v Yardley, the court held both acted dishonestly; Yin's leadership role in the negotiations, his status as first signatory of the LC, his preparation of a Letter of Indemnity, and his active efforts to find methods to pay the ENA to Wang, together with Lee's failure to verify the MUA and his inconsistent explanations, led the court to conclude they had struck an agreement to distribute the ENA using the non-existing MUA as a pretext or at best deliberately turned a blind eye. The third issue was whether s 214(1)(a) to (d) was engaged – the court held it was, with the conduct falling within all four limbs (oppression, defalcation/misfeasance/misconduct, lack of information, and unfair prejudice). The fourth issue concerned appropriate orders – compensation ordered with Wang bearing primary responsibility as the sole beneficiary, the Indemnity granted by the Company to Wang and Lee was held inappropriate, an announcement order was made, disqualification was deferred to a further half-day hearing, and a costs order nisi was made with the Company's recoverable costs reduced by half. Both Yin and Lee have not gained from the matter but were found to have had reasons to accede to Wang's request, including retaining good relations with the substantial seller.
Legal issues: Existence of the alleged Mutual Understanding & Agreement (MUA) · Whether Yin and Lee acted dishonestly in respect of the non-existing MUA · Whether s 214 of the Securities and Futures Ordinance is engaged · Appropriate orders under s 214 of the Ordinance
Outcome: SFC's case proven against all three Respondents. Liability established under s 214 of the Securities and Futures Ordinance. Disqualification hearing to be fixed separately.
Cited by 2 cases · Cites 2 cases