SECURITIES AND FUTURES COMMISSION v. CHIN JONG HWA AND OTHERS

HCMP 891/2014

[2019] HKCFI 2735

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 891 OF 2014

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J U D G M E N T

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I.  Introduction

1.  By an amended Petition filed herein on 31 August 2016, the Petitioner (“SFC”) applies for relief against the 1^st to 4^th Respondents under section 214 of the Securities and Futures Ordinance, Cap 571 (“SFO”). The relief sought consists of inter alia disqualification orders against the 1^st Respondent (“Mr Chin”), the 2^nd Respondent (“Mr Shi”), the 3^rd Respondent (“Mr Mu”) and the 4^th Respondent (“Mr Zhao”) as well as a compensation order against Mr Chin. The 5^th Respondent (“Company”) and the 6^th Respondent (“Decade”) are nominal parties to these proceedings.

2.  SFC and the 1^st to 4^th Respondents have agreed to dispose of the amended Petition by way of what is commonly known as the Carecraft procedure.  For this purpose, the SFC and each of the 1^st to 4^th Respondents have signed a “Statement of Agreed Facts” / “Statement of Facts Not in Dispute for the Purposes of a Carecraft Settlement” (collectively “Statements”) which shall form the basis of this court’s determination of the amended Petition. The parties have also agreed on the orders to be made by the court against the Respondents:

(1) as against Mr Chin:

(a) a disqualification order for a period of 6 years;

(b) a compensation order of RMB 12,000,000, together with interest thereon; and

(2) as against the 2^nd to 4^th Respondents, a disqualification order for a period of 3 years.

II.  The facts

3.  The material facts are set out in the relevant Statements which the parties agree shall be annexed to this judgment.  It is not necessary to set them out here.  Suffice it for this court to give a brief summary for ease of comprehension of this judgment. 

4.  The Company was at the relevant time and is listed on the Main Board of the Stock Exchange of Hong Kong Limited (“SEHK”).  It acts as an investment holding company whilst its subsidiaries are engaged in the design, manufacturing, processing, developing and sales of exterior automobile body parts and moulds of passenger cars. 

5.  Decade, a company incorporated in Hong Kong on 18 September 2007, is one of the wholly-owned subsidiaries of the Company.  At all material times, Mr Chin was and is the sole director of Decade. 

6.  Mr Chin was the chairman and executive director of the Company at the relevant time.  As at 31 December 2018, he held approximately 39.26% of the Company’s shares through Minth Holdings Limited, a company wholly owned by him.  Mr Shi, Mr Mu and Mr Zhao were executive directors of the Company at the relevant time.  In addition,

a. Mr Shi was the Chief Executive Officer, 

b. Mr Mu was the Chief Operating Officer, and  

c. Mr Zhao was the Vice President

of the Company.

7.  Mr Chin and Mr Zhao still are executive directors of the Company.

8.  The complaints in the amended Petition concern the acquisition in April 2008 (“Acquisition”) by the Company, through Decade, of the entire issued share capital of Magic Figure Investments Limited (“Magic Figure”) and Talentlink Development Limited (“Talentlink HK”) from Mr Hsu Chun Wei (“Mr Hsu”) and Talentlink Development Limited BVI (“Talentlink BVI”) respectively.  At the relevant time, Ms Hsu Hsiao Ling (“Ms Hsu”) was on record the sole director and shareholder of Talentlink BVI.  Mr Hsu and Ms Hsu (“Hsus”) are the nephew and niece of Mr Chin. 

9.  The Acquisition was a connected transaction as defined in the Listing Rules of the SEHK by reason of the relationship between Mr Chin and the Hsus, and required a public announcement and prior approval from the Company’s independent shareholders.  The Company however did not make any public announcement at the time of the Acquisition.  Nor had the Company obtained prior approval from the independent shareholders for the Acquisition.

10.  It was only in 2009, after queries were raised by SEHK and the SFC, that the Company disclosed the relationship between Mr Chin and the Hsus to the public by an announcement issued on 12 June 2009 and ratified the Acquisition on 27 July 2009.  However, the public announcement still failed to disclose certain material information to the public. 

11.  Mr Chin accepted that given the family relationship and the Hsus’ respect for him, he had at all material times, through the Hsus, significant control over Magic Figure and Talentlink HK, as well as two wholly-owned PRC subsidiaries of Magic Figure viz Jiaxing Guowei Automotive Parts Co Ltd (嘉興國威汽車零部件有限公司) (“Jiaxing Guowei”) and Jiaxing Situ Automotive Parts Co Ltd (嘉興思途汽車零部件有限公司) (“Jiaxing Situ”).  Jiaxing Guowei and Jiaxing Situ each held land (“Jiaxing Guowei Land” and “Jiaxing Situ Land”; collectively “Lands”) which formed part of Plot L211 of Jiachuang Road Eastside, Canada Jiaxing Science and Industrial Park, Jiaxing City, PRC (“Plot L211”).  The Lands were assigned to them in 2007 by 安統(嘉興)汽車電氣系統有限公司 (“Antong”) at a consideration of ~RMB 147 per m².

12.  In 2006, Antong had also assigned parts of Plot L211 to three companies viz Jiaxing El Triumph Automotive Parts Co Ltd (嘉興敏勝汽車零部件有限公司) (“EL Triumph”), Jiaxing Shinyou Mould Tech Co Ltd (嘉興信元精密模具科技有限公司) (“Shinyou”), Jiaxing Minth Hashimoto Automotive Parts Co Ltd (嘉興敏橋汽車零部件有限公司) (“Hashimoto”).  The price was agreed at ~RMB 105 per m².

13.  At all material times prior to 31 December 2006, Antong was a wholly owned subsidiary of Manlead Holdings Limited (“Manlead”) which was in turn indirectly and wholly owned by Mr Chin. On 31 December 2006, the 1 issued share in Manlead (and hence Antong) was transferred to Ms Hsu at nil consideration.  Mr Chin accepted that notwithstanding the transfer of the 1 issued share of Manlead to Ms Hsu, he retained significant control over Manlead and Antong, and in turn the Lands.

14.  On 29 April 2008, Decade entered into agreements to acquire the shares in Magic Figure and Talentlink HK for the cash consideration of US$3,186,639 and US$525,400 respectively (“Agreements”). The Magic Figure Agreement took into account the price of the Lands, which was valued by a valuer, Joinhouse Property Valuation Co Ltd (“Joinhouse”) at RMB 375 per m² immediately before the Acquisition.  Joinhouse performed the valuation pursuant to Jiaxing Guowei’s and Jiaxing Situ’s instructions.

15.  Under the Agreements, Decade was required to discharge the liabilities of Magic Figure and Talentlink HK.  As at 31 March 2008, the creditor of Magic Figure was State Star Holdings Limited (“State Star”), a company owned by Mr Chin. 

16.  Decade’s payments in connection with the Acquisition consisted of the following:

a. Cash consideration of US$3,186,639 for the purchase of Magic Figure.

b. Cash consideration of US$525,000 for the purchase of Talentlink HK. 

c. Discharge of liabilities of Magic Figure totalling US$8,957,000.

d. Discharge of liabilities of Talentlink HK totalling HK$19,300. 

17.  After Decade has paid the cash consideration and discharged the liabilities, the funds went through bank accounts of multiple companies owned and/or controlled by Mr Chin, until the same eventually ended up in the joint account of him and his wife, and the bank account of Rich Advance Holdings Limited, a company owned and/or controlled by Mr Chin.  The use of these bank accounts and companies concealed Mr Chin’s connection with the Acquisition.

18.  The liabilities discharged by Decade also included the construction costs of a factory and ancillary facilities on the Lands, including the estimated construction costs of RMB29,380,000 as agreed under a construction contract between Jiaxing Guowei, Jiaxing Situ and Zhejiang Yi Da Construction Co Ltd (“Yi Da Contract”).  Each of the 4 Respondents accepts that they did not consider or adequately consider the liabilities of Jiaxing Guowei and Jiaxing Situ including liabilities for the construction costs, the impact of such liabilities and costs on the Acquisition, and whether it was in the interest or best interests of Decade or the Company to acquire Magic Figure.

19.  Although the Company had conducted a due diligence investigation and the executive directors Mr Shi, Mr Mu and Mr Zhao, but not Mr Chin, discussed in a meeting held on 20 April 2008 and resolved to proceed with the Acquisition, the Company had failed to ascertain Mr Chin’s true connection or role in the Acquisition. 

20.  It is agreed that (i) the Company’s Interim Report 2008, (ii) its response to the SEHK dated 12 December 2008, (iii) its letter to the SFC dated 23 January 2009, (iv) its letter to the SEHK dated 22 April 2009, (v) its announcement on 12 June 2009 (“Announcement”), and (vi) its circular to shareholders on 10 July 2009 (“Circular”)[1], contained false or misleading representations and/or material non-disclosure, and that the Company had committed breaches of the Listing Rules:

a. the disclosed consideration for the Acquisition failed to take into account the settlement of other outstanding payables prior to the Acquisition in the sum of RMB 62,608,000, thereby resulting in a net cash outflow rather than a net cash inflow;

b. the Group did not acquire Magic Future and Talentlink HK and their subsidiaries from third parties but from connected persons;

c. there was a failure to disclose:

 i. Mr Chin’s relationship with the Hsus;

 ii. the Hsus were not independent third parties but were connected persons;

 iii. Mr Chin’s interest in the Lands through his significant control of the Hsus;

 iv. the Acquisition was a connected transaction;

 v. various plots of land adjacent to the Lands were acquired by other indirect subsidiaries of the Company at a much lower unit price before the Acquisition;

 vi. the extent to which the consideration paid by Decade in relation to the Acquisition ultimately ended up in bank accounts belonging to or controlled by Mr Chin; and

 vii. the contractual obligations of Magic Figure’s two wholly-owned PRC subsidiaries to pay certain construction costs estimated at RMB 29,380,000.

21.  As a result of the Company’s failure to disclose the matters summarized above in the Circular and the Announcement, independent shareholders of the Company were not given all the information they should have been given before considering and ratifying the Acquisition. 

22.  Mr Chin admits that he ought to have but failed to make full disclosure of the matters summarized above to the Board of Directors and shareholders of the Company which resulted in the Company making false or misleading representations and/or material non-disclosure and committing breaches of the Listing Rules. 

23.  Mr Chin also accepts that he had acted in breach of his fiduciary duties owed to the Company and Decade, and caused Decade to suffer loss, in that he failed to use his best endeavours to secure the lowest possible price for the Lands.  He agrees to pay a global sum of RMB 12,000,000 (together with interest thereon) to Decade in full and final settlement of the monetary claim against him. 

24.  Each of the 2^nd to 4^th Respondents admits that they ought to have but failed to make further inquiries in respect of the matters summarised above which may have prevented the Company from making false or misleading representations and/or material non-disclosure and committing breaches of the Listing Rules. 

25.  On the above basis, the parties agreed that the business or affairs of the Company have been conducted by each of the 1^st to 4^th Respondents in a manner involving misfeasance or other misconduct towards the Company or its members, resulting in its members not having been given all the information with respect to its business or affairs that they might reasonably expect, and/or unfairly prejudicial to its members within the meaning of section 214(1)(b) to (d) of the SFO.  The jurisdiction of the Court to grant the remedies set out under section 214(2) of the SFO is engaged.

III.  Relief

26.  On the basis of the Statements, this court is satisfied that the conditions for granting relief under section 214(2) of the SFO are met and that the orders which the parties have agreed are, in principle, appropriate.  

27.  The court’s approach to disqualification orders is well established and has been recently summarized by Chow J in Securities and Futures Commission v Li Hejun[2017] 4 HKLRD 785 at [15]-[17] as follows:

“15. The court’s approach for determining the length of disqualification in Section 214 applications are well settled. The objectives of a disqualification order are two-fold: (i) to protect the public against the future conduct of the respondent, and (ii) as a general deterrence: see SFC v Fung Chiu [2009] 2 HKC 19, at [12] per Kwan J (as she then was).

16. Generally speaking, the court has divided the maximum period of disqualification of 15 years into three brackets:

(1) the top bracket, of disqualification for over 10 years, for particularly serious cases;

(2) the middle bracket, of disqualification for between 6 to 10 years, for cases which, although serious, are not so serious as to merit a period of disqualification in the top bracket; and

(3) the minimum bracket, of disqualification for up to 5 years, for relatively less serious cases.

17. The court takes into account all relevant circumstances, including the nature and seriousness of the conduct complained of, the structure and nature of the business of the company, the training, experience, skill and competence of the respondent, the conduct of the respondent (including any relevant admission), and other mitigating factors put forward on his or her behalf, when determining the appropriate period of disqualification.  For this purpose, a reasonably broad-brush approach should be adopted (see Re First China Financial Network Holdings Ltd [2015] 5 HKLRD 530, at [9] per Anthony Chan J).”

28.  As for Mr Chin, SFC’s complaint again him consists of inter alia his:

(1) failure to disclose to the Company, his fellow directors, the SEHK and the Company’s shareholders his relationship with the Hsus, his control over Manlead, Antong, Magic Figure, Talentlink BVI, Talentlink HK, Jiaxing Guowei Land and Jiaxing Situ Land or to disclose the manner in which the consideration paid by Decade under the Acquisition was eventually dealt with;

(2) failure to raise any query as to why the valuation by Joinhouse (RMB 375 per m²) was much higher than the price paid by EL Triumph, Shinyou and Hashimoto in 2006, to cause further valuation to be obtained by the Company or Decade or to disclose the price paid by El Triumph, Shinyou, Hashimoto, Jiaxing Guowei and Jiaxing Situ in 2006 and 2007;

(3) failure to adequately consider the liabilities of Jiaxing Guowei and Jiaxing Situ and/or their impacts on the interests of the Company or Decade, including their obligations under the Yi Da Contract or to disclose Jiaxing Guowei's and Jiaxing Situ's obligations under the Yi Da Contract;

(4) failure to use his best endeavours to procure the lowest possible price for the Lands.

29.  It is however important to note that there is no allegation of dishonesty against Mr Chin and there are a number of “mitigating” factors, including his agreement to pay RMB 12 million compensation and the bulk of SFC’s costs.  The SFC accepts that his conduct would fall within the lower end of the middle bracket and a disqualification period of 6 years would be appropriate.  This court agrees.

30.  As for the 2^nd to 4^th Respondents, their conduct and degree of culpability are similar.  The SFC accepts that they had no actual knowledge of Mr Chin’s relationship with the Hsus, his significant control over Manlead (and Antong), Magic Figure, Talentlink BVI, Talentlink HK, Jiaxing Situ, Jiaxing Guowei, and in turn over the Lands, the fact that the Acquisition was not a transaction with an independent third party, and the manner in which the consideration paid by Decade under the Acquisition was eventually dealt with.  As such, their culpability primarily rests in their failure to make the necessary inquiries or take the necessary steps to ascertain the matters which Mr Chin failed to disclose which—if they had been made—would have prevented the Company from making false or misleading representations and/or material non-disclosure and committing breaches of the Listing Rules.

31.  SFC accepts that their conduct would all fall within the lowest bracket and a disqualification period of 3 years would be appropriate.  This court also agrees. 

32.  While the Court is not bound by the agreement between the SFC and the Respondents in deciding what order to be made, in practice, it is likely to be guided by their agreement: Re Warderly International Holdings Ltd unrep, HCMP 1742/2009, 9 April 2010, Harris J.  This is based on the Court’s recognition that the SFC, as the responsible regulator, would have reached an agreement as to the appropriate sanction to be imposed: SFC v Li Wo Hing & Ors unrep, HCMP 1023/2011, 26 September 2012, Barma J (as he then was).

33.  Lastly, the Court has jurisdiction to make a compensation order against Mr Chin under section 214(2)(e) of the SFO to compensate a company for losses that are readily ascertainable: Re Styland Holdings Ltd (No 2) [2012] 2 HKLRD 325 at [138] per Barma J (as he then was).  In this regard, the SFC and Mr Chin have agreed that a compensation order should be made that he shall pay Decade a global sum of RMB 12,000,000, together with interest thereon.

34.  At the request of this court, the parties have agreed a draft of the precise terms of the Disqualification Order, Compensation Order as well as the Costs Order to be made by this court.  Subject to 1 minor amendment to paragraph 5(b), this court is prepared to make an Order as agreed.  A copy of the Order is also annexed hereto.

35.  Lastly, this court thanks the parties for their very helpful assistance.

Annex 1

Annex 2

Annex 3

Annex 4

Annex 5