CHINA WOOD OPTIMIZATION (HOLDING) LTD v. THE STOCK EXCHANGE OF HONG KONG LTD

HCAL 290/2023

[2023] HKCFI 1000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTITUTIONAL AND ADMINISTRATIVE LAW LIST NO 290 OF 2023

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D  E  C  I  S  I  O  N

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A.  Introduction

1.  The applicant (“Company”) is a company listed on the Hong Kong Stock Exchange maintained by the putative respondent (“Exchange”). By a Form 86 filed on 24 February 2023, the Company sought leave to apply for judicial review, to challenge the decision dated 30 January 2023 (“LRC Decision”) of the Listing Review Committee (“LRC”) of the Exchange.

2.  The LRC Decision in turn upheld the decision dated 14 October 2022 (“LC Decision) of the Listing Committee (“LC”) of the Exchange, which decided to cancel the listing of the Company under Rule 6.01A of the Rules Governing the Listing of Securities on the Exchange (“Listing Rules”).

3.  I gave directions to bring the matter to a leave hearing fixed for 13 April 2023. At the hearing, the Company was represented by Mr Norman Nip SC leading Mr Adrian TY Wong of Counsel. The Exchange was represented by Mr Joshua Chan of Counsel.

4.  At the end of the hearing, I reserved the decision to be handed down later. This is my Decision.

B.  The Delisting Regime

5.  Both the LC Decision and the LRC Decision were made under the new delisting regime implemented by the Exchange since August 2018.

6.  The delisting regime implemented has been explored by the Courts in numerous decisions in recent years: see for example Cai Zhenrong v Stock Exchange of Hong Kong Ltd [2021] HKCFI 899, China Trends Holdings Ltd v Stock Exchange of Hong Kong Ltd [2021] 3 HKLRD 554, and Sino Energy International Group Holdings Ltd v the Stock Exchange of Hong Kong Ltd [2022] HKCFI 3409.

7.  The Company does not raise a systemic challenge to the new delisting regime in this application, but focuses solely on the content of the LRC Decision. Therefore, I shall be economical in setting out the essential features of the regime.

8.  The new regime was implemented with a view to resolving the problem which was seen to be produced by old delisting regime. The prior delisting procedures were thought to have failed to facilitate prompt action to delist long suspended issuers, with the consequence that there had built up a very large number of issuers whose shares had been suspended for years, with no certainty as to when the suspension would be lifted or the issuer delisted.

9.  The new regime essentially enables the Exchange to delist an issuer after it has been continuously suspended for a prescribed remedial period. In other words, an issuer has to remedy the issues leading to the suspension and to resume trading before the expiration of the prescribed period, or it may be delisted. The prescribed remedial period for those listed in the Main Board is 18 months.

10.  The new regime was brought into effect by amending or supplementing the relevant Listing Rules and Guidance Letters, both of which inform how the Exchange should exercise its powers to delist issuers. The Listing Rules are made by the Exchange pursuant to powers granted to it by section 23 of the Securities and Futures Ordinance Cap 571. The Guidance Letters are published by the Exchange to reflect its own interpretation of the Listing Rules.

11.  The key to the new regime is Rule 6.01A, which was promulgated on 1 August 2018. It states as follows:

Without prejudice to its power under rule 6.01, the Exchange may cancel the listing of any securities that have been suspended from trading for a continuous period of 18 months.

12.  More detail on the operation of the new regime is provided in Guidance Letter HKEX-GL95-18 (“GL95-18”) the subject of which is “Guidance on long suspension and delisting”. The approach as set out in GL95-18 is as follows:

(1)  The Exchange will generally cancel the listing of a long suspended issuer upon expiry of a remedial period if the issuer has not remedied the issues leading to the suspension. The remedial period sets a deadline for resolution of the relevant issues and resumption of trading, as opposed to the submission of a resumption proposal.

(2)  The issuer bears the responsibility to devise a resumption plan accompanied with a clear timeframe to ensure that the relevant issues can be remedied and trading can be resumed before the end of the remedial period.

(3)  During the remedial period, the Exchange will issue resumption conditions/guidance to set out the requirements that the issuer must have fulfilled before trading can resume. The resumption conditions/guidance are set out based on information provided by the issuer about the matters giving rise to the suspension, and is meant to guide the issuer towards re-compliance with the Listing Rules. In any event, the issuer must comply with all the Listing Rules before trading can resume.

(4)  The issuer may consult the Exchange at any stage, and in particular when it considers it has remedied the issues and re-complied with the Rules. In such circumstances, the Exchange will swiftly respond to a request for consultation or confirmation that the remedy has been achieved.

(5)  A failure by the issuer to fulfil the resumption conditions/guidance before the remedial period ends will result in a recommendation to the LC to delist the issuer.

(6)  If the LC has decided to delist the issuer, the issuer will be entitled to apply for a review of the decision by the LRC. The review is a de novo review on the merits.

13.  Particularly relevant to present application is the practice that an extension of the remedial period might be granted under “exceptional circumstances”. The main provision is to be found at §22 of GL 95-18. It states:

22.  To ensure the effectiveness and credibility of the delisting framework and prevent undue delay of the delisting process, the listing committee may only extend the remedial period in exceptional circumstances. You may do so where:

(a)  an issuer has substantially implemented the steps that, it has shown with sufficient certainty, will lead to resumption of trading; but

(b)  due to factors outside its control, it becomes unable to meet its planned timeframe and requires a short extension of time to finalise the matters. The factors outside the issuer’s control are generally expected to be procedural in nature only.

This may happen where, for example, an A1 application has been approved by the Exchange but, due to a delay in the court hearing for approving a scheme of arrangement, the issuer requires additional time to implement the relevant transactions. The Exchange envisages that if an extension of time is given on the expiry of the remedial period, the Listing Committee will not normally extend the remedial period for a second time.

14.  Since the outbreak of the Covid-19 pandemic, GL95-18 was amended to reflect the Exchange’s understanding that in some situations it might be fair and reasonable to extend resumption deadline if the failure to meet the resumption guidance within the remedial period is directly caused by disruptions arising from the Covid-19 outbreak. §§24-25 provide:

24.  Therefore, the Exchange would also consider a request for extending the remedial period if an issuer demonstrates that its inability to meet the resumption conditions/guidance and re-comply with the Rules within the remedial period is caused by disruptions arising directly from the COVID-19 outbreak, and not from other substantive issues. This takes into account the need to uphold the stated objectives of the delisting Rules and to ensure the effectiveness and credibility of the Rules and prevent undue delay of the delisting process.

25.  For this purpose, the guiding approach is below:

(a)  Requests are to be considered case by case basis upon specific facts and circumstances.

(b)  For an extension of time to be granted, an issuer must establish that its failure to meet the resumption deadline is caused by COVID-19.

(c)  For the avoidance of doubt, the issuer is not regarded to have established the case under the preceding subparagraph if the issuer’s failure to meet all the resumption conditions/guidance by the resumption deadline is at least partly attributable to a reason unrelated to COVID-19.

(d)  The issuer must request a specific extension and provide a concrete action plan with a detailed timetable showing the expected time for resumption of trading, with an explanation of the factors in arriving at the timetable.

(e)  To be consistent with the Exchange’s policy to discourage shell activities an extension would not be given to an issuer which, in the Exchange’s opinion, is not operating a business which is of substance, viable and sustainable. An extension also would not be given to facilitate, for example (i) a reverse takeover, or (ii) a development of a new business unrelated to its current business after failure of the current business.

(f)  An extension that may be given for each request is normally not more than six months. On expiry, the Listing Committee may further extend the deadline as it considers appropriate having regard to whether the issuer is able to meet the progress of forecast previously projected and, if not the reason for that, among others.

C.  Background Facts

15.  The Company is incorporated in the Cayman Islands. Its shares were first listed on the GEM Board in 2014 and then were transferred to the Main Board in 2016.

16.  The Company is principally engaged in the processing, manufacturing and sale of processed wood products. The Company mainly operates through its two subsidiary companies, which are located in the Hebei province and the Jiangsu province in the mainland respectively. The parties have referred to them as “Hebei AMS” and “Jiangsu AMS”.

17.  The suspension of trading of the Company’s shares arose from its failure to publish its audited annual results for the financial year ended on 31 December 2020 (“2020 Audited Annual Results”) which was due on 31 March 2021, as required by the Listing Rules.

18.  As a result, trading in the Company’s shares was suspended from 1 April 2021. Under Rule 6.01A, the prescribed remedial period is 18 months, which brought the deadline for the Company to resume trading to 30 September 2022 (“Resumption Deadline”).

19.  The 2020 Audited Annual Results remained unpublished even to the time of the LRC Decision. But the Company did publish the unaudited version (“2020 Unaudited Annual Results”) on 30 April 2021. The unaudited results disclosed substantial deterioration in the financial position and business operations of the Company in 2020. I will return in more detail to these results below.

20.  On 15 June 2021, the Listing Division (“LD”) of the Exchange set the following resumption guidance (“Resumption Guidance”) for the Company:

(1)  publish all outstanding financial results required under the Listing Rules and address any audit modifications (“RG1”);

(2)  demonstrate compliance with Rule 13.24 of the Listing Rules (“RG2”); and

(3)  announce all material information for the Company’s shareholders and investors to appraise the Company’s position (“RG4”).

21.  The numbering of RG1, RG2 and RG4 is because a third requirement – i.e. “RG3” – was subsequently met and so can be ignored for present purposes.

22.  The “outstanding results” referred to in RG1 would move with time. Listed companies are required by the Listing Rules to publish financial results from time to time. By the time of the hearing before the LRC, the outstanding financial results which were required to be published under RG1 included not only the 2020 Audited Annual Results, but also the audited annual results for 2021, and the audited interim results for 2021 and 2022 (“Outstanding Results”).

23.  Rule 13.24 – referred to in RG2 – provides that:

An issuer shall carry out, directly or indirectly, a business with a sufficient level of operations and assets of sufficient value to support its operations to warrant continued listing of the issuer’s securities.

24.  As to RG4, it is undisputed that the Outstanding Results were amongst “all [the] material information” that the Company was required to announce.

D.  The LC Decision

25.  By letter dated 14 October 2022, the LC of the Exchange informed the Company that the LC had decided to cancel the Company’s listing under Rule 6.01A. Brief reasons were given:

(1)  On RG1, to date, the Company had not published the audited financial results for the year ended 31 December 2020 and subsequent periods.

(2)  On RG2, given the non-publication of the Company’s outstanding financial results and the absence of a submission to demonstrate compliance with Rule 13.24, this resumption guidance was not fulfilled.

(3)  On RG4, fulfilment of this resumption guidance was to be assessed after the Company had met all the other resumption guidance. For the reasons mentioned about, this resumption guidance had not been fulfilled.

E.  Argument and Evidence before the LRC

26.  The Company then requested a review by the LRC. The review was conducted by way of an oral hearing heard on 17 January 2023. Written submissions were also exchanged before the hearing. The Company filed two rounds of written submissions, on 2 December 2022 and 16 December 2022 respectively. The LD filed one round on 9 December 2022.

27.  It might be pointed out that one of the submissions made by the LD was that the Company (in making its first round of submissions) had not requested any specific extension of the remedial period. That seems to have prompted the specific request for the extension until 30 April 2023.

E1.  RG1

28.  The Company did not dispute that the resumption guidance RG1 had not yet been met, since the Outstanding Results had not yet been published. The real dispute was whether the Company should be given an extra six months, that is until the 30 April 2023, to publish the Outstanding Results.

29.  The thrust of the Company’s submissions was that it had fallen victim to matters outside of its control. The delay in the auditing work was primarily caused by an investigation (“Investigation”) carried out by the Economic Crime Investigation Brigade, Qiaoxi Branch of Shijiazhuang, Hebei Province, Public Security Bureau (“PRC Authority”). The Company said that neither itself nor its connected persons are subject of the Investigation. The subject of the Investigation was a former shareholder and a former supplier of the Company, but the Company was requested to assist in the Investigation. Two offices (“Locked-down Offices”) of the Company in the Hebei province were subject to on-site investigation and access to the offices was restricted. The Company said that documents that were requested by its auditor to complete the auditing work were either stored in the Locked-down Offices or had been seized by the PRC Authority. It was pointed out that this was made clear in the Company’s public announcements.

30.  The Company also said that the auditing work was impeded by the outbreak of Covid-19, as the PRC government implemented movement control measures.

31.  The Company said it had been liaising with the PRC Authority for the purpose of gaining access to the necessary documents for auditing. The PRC Authority had agreed to allow access for auditing purpose since 2 November 2022. Afterwards, the Company had engaged a new auditor, known as “Zhonghui Anda CPA Limited” (“Zhonghui”) which estimated it would be able to complete audit work for the Outstanding Results by 30 April 2023.

32.  The LD was not convinced that the company would be able to comply with RG1, even if the deadline was to be extended to 30 April 2023.

33.  The LD was not convinced that the Investigation was the real cause of the delay in publishing the financial results. It was pointed out that very little information was given about the Investigation. Besides assertions from the Company, there was no verifiable evidence in support of the alleged investigation. Nor did the Company identify the specific documents that were said to be kept in the Locked-down Offices or that had been seized by the PRC Authority.

34.  The Company’s version also did not seem to be entirely consistent with the resignation of its former auditor KPMG. On 30 April 2021, KPMG issued a letter to the Board of the Company, referring to missing the deadline for submitting the 2020 Audited Annual Results. KPMG said that due to the impact of factors such as the outbreak of the epidemic in the PRC, they had not been able to start audit fieldwork “as requested” by the Company since 1 January 2021. KPMG then referred to numerous previous occasions where it had sent lists of outstanding information and items to the Company, and then it set out a list of “important outstanding matters” which it urged the Company to provide in order for the auditing work for 2020 to continue.

35.  In a letter dated 17 November 2023 issued to the Board of the Company, KPMG stated that it had not received the “material outstanding matters” and as a result it had not commenced the auditing work. The Company was reminded that the Company had to resolve the matters in the “approved method” and the “other matters that they might find out when audit work restarted” – without further elaborating what that might be – or they would not be able to complete the audit work for 2020. By letter dated 28 November 2023, KPMG resigned, citing the Company’s failure to provide the requested information, explanations and/or related supporting documents.

36.  At the oral hearing before the LRC, Mr Li Li, the Executive Director of the company was asked by members of the LRC as to why KPMG would resign if the Company had already been allowed access since early November 2022. Mr Li Li said it was because the Company would need the auditing work to complete urgently but there was a clash of timetable on KPMG’s side.

37.  The Company emphasized that KPMG did not allege any fraud or irregularities in the internal management and control of the Company.

38.  The LD also pointed out that (a) in any event, the Company did not confirm that it had provided all the documents or information requested by KPMG to Zhonghui; (b) Zhonghui was newly hired and might not be able to finish the audit work in the span of a few months; (c) Zhonghui was unable to provide any assurance that the Outstanding Results when published would not be subject to any audit modifications – which was also required by RG1 – and this concern was exacerbated by the previous two factors; (d) not only did the Company fail to publish the Outstanding Results, in fact it had failed to publish any results, unaudited or audited, after the 2020 Unaudited Annual Results (notwithstanding that in the circumstances publishing unaudited results was required by the Listing Rules).

39.  The Company replied that given Zhonghui had just started the audit work at that time, it was understandable that it would not be able to provide an assurance on audit modifications or disclaimers. It further said that the failure to publish unaudited results was because it would be “misleading” to do so in the circumstances. It was never clarified why it would be misleading either at the time or now.

E2.  RG2

40.  Unlike as regards RG1, the Company denied that it had failed to meet RG2.

41.  The LD submitted that without having any financial results, audited or unaudited, beyond the 2020 Unaudited Annual Results, there was insufficient reliable information to assess whether the Company was carrying a business with a sufficient level of operations and assets of sufficient value warranting continued listing.

42.  In terms of operations, the LD said, as reflected in the 2020 Unaudited Annual Results, that the Company’s financial position and business operations had drastically deteriorated from 2019 to 2020. The Company’s number of employees had already reduced from 186 in December 2020 to 43 by June 2022.

43.  In terms of assets, the Company’s unaudited revenue decreased from RMB412 million in 2019 to RMB44 million in 2022. Unaudited cash and cash equivalents decreased from RMB203.5 million to RMB37.9 million. The Company was chased by KPMG for the outstanding audit fees of about RMB1.5 million. As announced by the Company in December 2021, Jiangsu AMS, its subsidiary, had also defaulted in repaying bank loans in the sum of RMB30 million and RMB17.48 million respectively to two banks in the PRC.

44.  The Company did not (and could not) argue with the figures (or the lack of them), but it said Rule 13.24 is a qualitative rather than quantity assessment. It said the downturn was caused by the Sino-US trade war and the outbreak of Covid-19 which factors were both temporary in nature. The Company expected to resume operations by about April 2023. It also set out various plans to diversify its business by expanding to the domestic market – the Company’s products used to be mainly for export under the original business model – and to develop numerous new types of wood panel. Promising business cooperation was said to have been formed. Projections about sales or profits in the years ending on 31 December 2023 and 31 December 2024 were provided.

45.  The Company did not deny that the outstanding audit fees or the bank loans had remained unpaid. But it said the audit fees were unpaid because KPMG had not finished the audit work as engaged. As for the bank loans, the Company said that it had communicated with the banks, and the banks were supportive of the resumption of operations and would not take enforcement action.

46.  The LD said that, even if the Company were to publish the Outstanding Results by 30 April 2023, it is still uncertain whether the Company would be able to comply with Rule 13.24. The LD also said that the diversified businesses were different from the Company’s original business and thus past track record could not be relied upon, and it was uncertain when the Company could meet its projected figures.

E3.  RG4

47.  Not much argument was made on RG4. The Company’s submissions seemed to assume that if extra time were given for it to publish the Outstanding Results, then this condition would also be met.

48.  The LD seemed to have taken the position that it would only assess this requirement when the other two requirements had been met.

F.  LRC Decision

49.  The framework of the LRC’s analysis can be summarized as thus:

(1)  The Company’s shares had not resumed trading by 30 September 2022. Thus, the Exchange was entitled to cancel the Company’s listing under Rule 6.01A.

(2)  The only remaining question was whether the LRC should exercise its discretion to grant an extension of time for the Company to comply with the Resumption Guidance and to resume trading.

(3)  That would turn on whether the Company could benefit from §22 or §25 of GL 95-18. §22 might allow an extension if the Company was able to show exceptional circumstances by demonstrating that the Company has substantially implemented all steps required for resumption of trading and only required a short extension of time due to factors out of its control. §25 might apply if the inability to meet the Resumption Guidance within the remedial period was caused by disruptions arising directly from the Covid-19 outbreak, but not from other matters.

(4)  The LRC concluded that the Company would not be able to benefit from §22. It was not persuaded that the Company had substantially implemented steps that would lead to compliance with RG1 by 30 April 2023. Nor was it satisfied that the Company had substantially implemented steps that would lead to compliance with Rule 13.24.

(5)  The LRC also concluded that the Company would not be able to benefit from the provisions in §25. It said that the Company’s repeated references to the impact of Covid-19 were generic, and it had not demonstrated how the Company’s business could have materially improved but for the impact of Covid-19. The Company also admitted that the downturn was caused by other factors, including the Sino-US trade war.

(6)  Overall, the LRC considered that the circumstances outlined by the Company regarding its failure to meet the Resumption Guidance, and its intended plans to meet the Resumption Guidance, did not fall within exceptional circumstances as contemplated by §22 of GL95-18, and did not justify the extension of the remedial period otherwise pursuant to GL95-18.

50.  The main analysis or more detailed discussion of the LRC is to be found in §§50-57 of the LRC Decision.

51.  The reasoning for rejecting the argument that the Company had substantially implemented steps leading to compliance with RG1, RG2 and RG4 is set out at §§52-54:

52.  For RG1 (Outstanding Results), the Listing Review Committee noted that (1) the Company had failed to publish any financial figures (audited or unaudited) since 2020, (2) the Outstanding Results remained outstanding and it was not clear whether the Company’s new auditor would succeed to prepare them by the end of April 2023 as suggested by the Company, and (3) the Company had not been able to give any assurance that the Outstanding Results, once published, would not be subject to any disclaimers. The Company therefore had not established that it had substantially implemented steps there would allow it to comply with RG1 and that any remaining steps would only be procedural in nature.

53.  For RG2 (Rule 13.24), the Listing Review Committee noted that (1) the Company’s failure to publish any financial results meant that there was no basis on which the Listing Review Committee could ascertain the Company’s current financial position and status of its operations, (2) based on the limited updates the Company had provided on its current operations, it appeared that for 2021 and 2022 the Company’s operations had mostly come to a stop and would require substantial steps for a restart including hiring of new employees which the Company had not yet undertaken and submitted it would commence after April 2023, (3) while the Company had made progress in attracting new business (based on its submission at the Hearing), this new business appeared to be different from its previous business which meant the Company could not rely on its previous track record, (4) based on the current status of the Company’s operations and the absence of concrete business plans and supporting documents such as signed contracts etc., it was unclear whether the Company would be able to achieve the forecasts it had presented in the short time or at all, and (5) the Company had not demonstrated that it had enough assets to support its operations as there was no reliable information on the Company’s cash position and it was unclear whether the amount the Company retained in cash (RMB20 million as per the Company’s submission at the Hearing) would be sufficient to cover the amount needed to restart the Company’s operations and pay the Company’s outstanding loans. The Company therefore had not established that it had substantially implemented steps that would allow it to comply with RG2 and the remaining steps would only be procedural in nature.

54.  The Listing Review Committee noted that the absence of audited financial information meant the company was not meeting its obligations with respect to RG4 (to announce all material information) and given the Company had failed to publish any financial information since 2020, it could also not demonstrate it had substantially taken all steps necessary to demonstrate compliance with RG4.

52.  The reasoning for not granting an extension based on Covid-19 is at §56:

The Listing Review Committee further concluded that the Company had not demonstrated that its failure to comply with the Resumption Guidance arose directly from Covid-19 and not from other substantive issues. The Company’s repeated references to the impact of Covid-19 were generic and did not demonstrate how the Company’s business could have materially improved but for the impact of Covid-19. The Listing Review Committee noted, in particular, that the Company had also relied on among others, the disruptions caused by the investigation and the Sino-US trade war, when arguing that its failure to comply with the Resumption Guidance was caused by factors outside of its control. In addition, as the Company had not demonstrated that its business was otherwise compliant with rule 13.24 the Company’s case did not in any event fall within the scope of paragraph 25 of GL 95-18.

53.  The following might be noted from the arguments before the LRC and the LRC Decision.

54.  It is indisputable that the Resumption Guidance had not been met and trading not been resumed by 30 September 2022. Compliance would require fulfilling all the Resumption Guidance, and RG1 was indisputably unfulfilled. Thus, the Exchange could delist the Company under Rule 6.01A(1). Therefore, the Company’s only way to resist delisting was to seek an extension of the Resumption Deadline under GL95-18. This approach was highlighted at the very beginning of the LRC’s analysis and, as will be seen below, was implicitly recognized by Mr Nip in his argument.

55.  However, it was not so clear that, before the LRC, the Company was focusing on seeking to extend the Resumption Deadline. What the Company indicated was that it would need an extra six months from the Resumption Deadline to publish the Outstanding Results – which in and of itself is only half of RG1. RG1 also requires all the audit modifications (if any) to have been addressed and the Company did not provide the assurance that the Outstanding Results if and when published on 30 April 2023 would be free from audit modifications. 30 April 2023 is thus not really even the proposed timeframe for fully meeting RG1.

56.  No extension was sought for RG2. That was unsurprising given that the Company’s argument before the LRC was that RG2 was fulfilled at the time and thus the question of extension naturally did not arise. Whilst certain timeframes were referred to, such as the restart of operations in April 2023 and the expected sales or profits to be made by December 2023 and December 2024, those were clearly not the proposed extension needed for the Company to comply with Rule 13.24.

57.  There was no express plea as to what matters emphasized by the Company would amount to “exceptional circumstances” warranting an extension under §22 of GL95-18.

58.  Whilst Covid-19 was relied upon for the downturn in operations and profit, the Company did not specifically put it as a reason for seeking the extension and no direct reference were made to the matters set out in §25 of GL95-18.

59.  The Company might also have seen that RG4 would be automatically fulfilled when RG1 had been met and thus no separate request was made.

60.  However, the LRC was plainly of the view that all of RG1, RG2 and RG4 were not fulfilled, albeit it did not expressly say so except as to RG1. The LRC proceeded to consider the extension of each RG separately at §§52-54, even though, as said, the Company did not expressly seek the extension in that form. Only RG1 was considered with reference to a specific period of extension – i.e. by 30 April 2023 – since no specific extension period was proposed for the other two RGs. That did not prevent the LRC from reaching the conclusion that, for RG2 and RG4, the Company had not shown that, by the time of the LRC hearing, that it had substantially implemented steps which would lead to resumption.

G.  Proposed Ground of Review

61.  Mr Nip advanced four grounds on behalf of the Company:

(1)  Ground 1: The LRC took into account the irrelevant consideration that the delay in the audit process was not caused by the Investigation. This concerns RG1.

(2)  Ground 2: The approach of the LRC in considering whether “exceptional circumstances” existed within the spirit of §22 of GL95-18 was irrational. This also concerns RG1.

(3)  Ground 3: The LRC failed to take into account relevant factors and/or took into account irrelevant matters regarding RG2.

(4)  Ground 4: Because of Ground 1 to Ground 3, the LRC’s reasoning concerning RG4 is also unreasonable.

62.  Before turning to each ground, the following points may first be noted.

63.  Subtly threading through Mr Nip’s argument was the emphasis that the Exchange’s key concern was RG1. What he seemed to have suggested is that, if RG1 has been met, then RG2 and RG4 would somehow also be resolved. Of course, this is implicit recognition that all parts of the Resumption Guidance must be fulfilled (or at least that an extension of time is warranted for compliance with them all) if delisting is to be avoided.

64.  Mr Nip perhaps saw RG1 as an easier target of attack and therefore sought to reinforce his argument by pinning his approach to RG2 and RG4 on to RG1. But, whilst the lack of financial results might be fatal to showing that an issuer has a viable and subsistent business and that all material information has been disclosed – an argument relied upon by the LRC in reaching its conclusion – the argument does not work the other way around. Meeting RG1 is no “silver bullet” – in Mr Chan’s words – in meeting the other two, RG2 and RG4. Even after the Outstanding Results have been published, likely more assessment would have to be done in deciding whether the Company would meet Rule 13.24. Financial results are only the starting point, and not the end point, in assessing if an issuer has a viable and substantive business. To succeed, Mr Nip has to persuade this Court that the LRC was wrong in not granting an extension of time for compliance for each and every one of RG1, RG2 and RG4.

65.  Relating to the previous point, Mr Nip also seemed to have taken six months from the Resumption Deadline as the extension required for compliance with the entirety of the Resumption Guidance, rather than merely for publishing the Outstanding Results or RG1. This is perhaps driven by necessity. A plea for an extension of time must start with a specific length of extension sought. This is actually spelt out in §25(d) of GL95-18 in the context of Covid-19. Without a concrete projected endpoint by which the entirety of the Resumption Guidance could be fulfilled, it would be hard to persuade any decision maker to grant an extension. Thus, it appears to me that Mr Nip had no choice but to take the six months’ extension as covering all the Resumption Guidance. This in turn has driven the need to pin RG2 and RG4 to RG1.

66.  I also specifically note Mr Nip’s submission that the question of an appropriate extension of time for compliance with the Resumption Guidance needed to be viewed in its proper context, namely as to what led to the original delay and the suspension of trading, as well as the inability to have complied with the Resumption Guidance within the initial remedial period.

67.  In part, he tied this to the Exchange’s letter giving the Resumption Guidance on 15 June 2021, which referred specifically to the facts that (1) trading in the Company’s shares had been suspended since 1 April 2021 pending the release of an announcement in relation to the 2020 Audited Annual Results, which remained unpublished, and (2) without the audited results, the Exchange had been unable to monitor the Company’s business activities, operation status and financial performance to assess whether it complied with continuing listing obligations under Rule 13.24.

68.  But I agree with the submission, made by Mr Chan, that the only critical issue is whether the Applicant has shown a real prospect of establishing that the LRC erred in refusing to grant the particular extension of time in the particular circumstances of this case – of course, including as appropriate the broader context of the circumstances.

H.  Ground 1: Taking into Account Irrelevant Consideration that Delay in Auditing Process was not caused by the Investigation

69.  This argument relies upon §33 of the LRC Decision, which is the LRC’s recap of the submissions made by the LD:

The Listing Division did not accept that the Company had been unable to provide the Requested Information due to the limitations of the Investigation as according to the Listing Division some parts of the Requested Information should not have been affected by the Investigation’s restrictions placed on two of the Company’s offices. The Listing Division also highlighted that once the Investigation to restrictions were lifted in November 2022, the Company had still failed to make the Requested Information available on a timely basis to its former auditors.

70.  As I understand it, Ground 1 runs as follows:

(1)  The LD’s rejection of the Investigation as an explanation for the delay in the auditing process was based on an erroneous assumption. The erroneous assumption being that the Company’s argument on the impact of the Investigation was only that it restricted access to the two Locked-down Offices. Then the LD went on, wrongly, to reject the Investigation as a cause for delay on the basis that some parts of the requested information should not have been affected by the restriction placed on the two Locked-down Offices.

(2)  But, in fact, the Company’s case is that the documents requested by KPMG where either kept in the Locked-down Offices or seized by the PRC Authority. Thus, the fact that some parts of the requested information were not affected by the restriction to the Locked-down Offices was already recognized by the Company and should not be a reason to reject the Investigation as a cause for the delay in the auditing process.

(3)  There is no evidence to doubt that the audit process was delayed by the Investigation.

(4)  However, other than in §49 and §56, where the LRC noted that the Company had relied on the disruptions caused by the Investigation as a cause for failure to comply with RG1, such argument did not otherwise feature in the LRC’s substantive analysis at §§46-57 of the LRC Decision.

(5)  Thus, the LRC must have accepted the LD’s rejection of the Investigation as a cause for the delay in the auditing process, together with the erroneous reasoning or assumption relied upon by the LD.

(6)  In as much as the LRC proceeded on the basis that the Investigation only entailed restrictions placed on access to the Locked-down Offices, it took into account a mistaken material fact. It follows that if the LRC took into account an irrelevant consideration, or failed to take into account the relevant consideration that material accounting records have been seized by the PRC Authority.

71.  The main plank to Mr Nip’s argument is that the LRC must have accepted both (a) the Listing Division’s rejection of the Investigation as a cause to the delay, and (b) and the erroneous assumption giving rise to the rejection.

72.  But this has no proper foundation. As admitted by Mr Nip, §33 is but the LRC’s summary of what it understood to be the LD’s submissions. It does not form part of the LRC’s analysis. Simply because the LRC did not see fit to engage with this particular point does not mean that the LRC must have accepted this point.

73.  The LRC’s analysis on whether extension of time should be granted for compliance with the RG1 is in §52. To recap, the LRC concluded that the Company had not substantially implemented steps that will lead to compliance with RG1 because (1) the Company had failed to publish any financial figures (whether audited or unaudited) since 2020, (2) it was not clear whether the Company’s new auditor would succeed to prepare the Outstanding Results by the end of April 2023, (3) and the Company had not been able to give any assurance that the Outstanding Results, once published, would not be subject to any disclaimers.

74.  In the LRC Decision, the LRC did not focus on the cause of the delay in the past. Its approach was forward looking. It looked into whether, based on the facts and evidence before it, RG1 would or would not likely be complied with by the deadline proposed by the Company. The LRC did not see the need to look into what had caused the delay in the past. Thus, whether the delay was caused by the Investigation or not was not discussed, because analysis on this point was not necessary in reaching the LRC’s conclusion.

75.  The reasons provided in §52 are sufficient for reaching the LRC’s conclusion. It cannot be said the LRC must have accepted the LD’s argument on this point. So the intended challenge must fail.

76.  At the oral hearing, Mr Nip retreated to the position that the LRC, nonetheless, had failed to provide adequate or intelligible reasons in this regard. As Mr Nip put it elsewhere in his submissions, the lack of access to the Company’s documents is at the heart of what the Company says amounts to the “exceptional circumstances”. Therefore, it ought to have been expressly dealt with in the LRC Decision, but was not – or, at least, was not dealt with clearly.

77.  But I disagree with that suggestion. First, it harks back to the suggestion that the LRC could not have reached a conclusion as it did without expressly engaging with the cause of the delay or the role of the Investigation in it (which I have already rejected). Secondly, it is trite that a decision maker does not have to cover each and every point raised in argument. The LRC only had to engage with this argument if it was material in resolving the question before it, namely whether extension of time should be given for compliance with RG1. The LRC was plainly of the view that the cause of delay in the past was immaterial to its analysis. That was a reasonable view to take. In any event, as touched on above, the LRC did identify the doubtful matters about whether the Company could comply with the Resumption Guidance by 30 April 2023, and did so in a way which provided adequate reasoning and explanation to the Company.

78.  In passing, I would mention that both Mr Nip and Mr Chan referred me to materials created after the date of the LRC Decision. Whilst I have considered those materials de bene esse, I do not think they should really be taken into account when assessing the alleged public law errors on the part of the LRC, nor in any event do they seem to be particularly helpful to either side of the argument.

79.  Ground 1 is not reasonably arguable.

I.  Ground 2: Irrational Approach in Considering “Exceptional Circumstances”

80.  This ground also concerns the LRC’s rejection in granting a time extension for compliance with RG1.

81.  In the context of whether exceptional circumstances as required by §22 of GL95-15 have been shown, it would be fair to say that the only exceptional circumstance considered by the LRC is whether the Company had substantially implemented all steps required for a resumption of trading so that it only required a short extension of time due to factors out of its control (see §49).

82.  Mr Nip said this approach is irrational. Because the example given for “exceptional circumstances” – i.e. when the issuer has “substantially implemented remedial steps” – is neither prescriptive nor exhaustive. There are other situations which could amount to exceptional circumstances warranting extension under §22 of GL95-18. In the circumstances where the issuer’s ability to implement those very steps had itself been inhibited by factors beyond its control during the prescribed remedial period, Mr Nip submitted, it would be irrational for the LRC not to consider whether these could amount to exceptional circumstances within the spirit of §22 of GL95-18.

83.  Mr Nip made this point by posing the rhetorical question: How can it be a prerequisite to say that the Company must have substantially implemented all the Resumption Guidance when it could not have done so – not least, where the Exchange makes no particular criticism as to lack of efforts on the part of the Company?

84.  Mr Nip also sought to rely on the “Consultation Conclusions: Delisting and Other Rule Amendments” (“DORA Conclusions”) published by the Exchange, to suggest that issuers should be given reasonable opportunities to take steps to remedy the matters causing suspension. He made references to the fact that the prescribed 18-month period was designed to balance the interests of (a) providing reasonable time for suspended issuers to remedy the issues and resume trading, on the one hand; and (b) incentivising suspended issuers to act diligently and promptly and to deter issuers from breaching the Listing Rules, on the other hand. He seemed to suggest that if the reason why an issuer has not yet substantially implemented steps is because of matters out of its control, then an extension should be given.

85.  In response, Mr Chan submitted that Mr Nip’s contentions fail to recognise that the current delisting regime was not designed to ensure that only issuers who failed to act promptly would be delisted. Rather, the current regime was designed to ensure that long suspended issuers would be delisted in a timely manner irrespective of whether the issuer has taken reasonable steps to achieve resumption of trading.

86.  In Cai Zhenrong at §40, referring to the DORA Conclusions, I said that it was also considered appropriate that there may be cases when the issuer may be delisted, even though the issuer is taking steps to facilitate resumption. In any event, in the reply written submissions filed on behalf of the Company, Mr Nip clarified that his position is not that extension must be granted whenever the matters causing non-compliance are out of the issuer’s control.

87.  If Mr Nip’s real position is simply that “exceptional circumstances” are not solely restricted to the situation expressly provided in §22 of GL95-18, and the circumstances in which the Company was – namely that its failing substantially to implement remedial steps was caused by matters out of its control – might also be capable of amounting to exceptional circumstances, I think he must be right. But that would not take the Company’s argument very far.

88.  Whilst the LRC, in assessing whether exceptional circumstances exist, is not restricted to the description expressly provided in §22 of GL95-18, it is not obliged to consider a situation exceptional on the basis that the issuer’s ability substantially to implement remedial steps is inhibited by factors outside of its control.

89.  As recognized by this Court in §43 of Sino Energy, what amounts to exceptional circumstances is a matter for the Exchange, and not for the Court to decide. The Court’s role is restricted to see if the Exchange’s decision is impugnable on the ground of irrationality.

90.  Irrationality is a high hurdle. I am not persuaded that the LRC can be criticised as irrational for not considering the Company’s situation as giving rise to an exceptional circumstance warranting extension of time for complying with RG1. Indeed, the LRC was plainly reasonable in declining to extend the Resumption Deadline to 30 April 2023 when, amongst other factors, the Company itself made no promise that RG1 would be met by that date (as there was no assurance that the Outstanding Results when published would be free from audit disclaimers), and where even compliance with RG1 might not demonstrate compliance with RG2.

91.  For the sake of completeness, I think at one point Mr Nip said in the oral hearing that the LRC “misconstrued” the meaning of exceptional circumstances. If he meant that the issuer’s ability to take remedial steps is inhibited by matters out of its control, it must amount to exceptional circumstances, that must be wrong and in any event he had expressly abandoned that position. If he meant that the LRC thought that not having substantially implemented remedial steps must be fatal to bringing an issuer within the meaning of “exceptional circumstances”, I did not think the LRC has taken such a position, either expressly or implicitly.

92.  Ground 2 is not reasonably arguable.

J.  Ground 3: Failure to Take into Account Relevant Matters and/or taking into Account Irrelevant Matters regarding RG2

93.  Mr Nip did not pursue this ground with any great vigour at the oral hearing.

94.  The argument trailed in the papers could be summarized as follows:

(1)  The LRC failed to consider that the significant downturn of the Company’s business from 2020 to 2022 was only temporary in nature and caused by the Covid-19 pandemic and the Sino-US trade war, both being extraneous events outside the Company’s control.

(2)  Second, the LRC took into account an irrelevant factor by considering that the measures for diversifying its businesses amounted to “new” and “different” business divorced from the Company’s established businesses, citing §§26 and 53(3) of the LRC Decision.

(3)  Third, the LRC failed to consider whether, despite the relative weaknesses in the Company’s performance between 2020 and 2022, its diminished revenue and assets are enough to cover the Company’s corporate expense and support a viable and sustainable operation.

95.  Whilst framed in terms of what relevant factors the LRC had failed to consider (or what irrelevant factors it had considered), the so-called “relevant factors” are in truth factual conclusions favourable to the Company that the LRC had refused to accept; and the so-called “irrelevant factors” are factual conclusions unfavourable to the Company that the LRC had accepted. Ground 3 is in reality an attack on the merits of the LRC’s analysis in respect of RG2. The matters raised had indeed been broadly considered by the LRC, albeit it had reached a view unfavourable to the Company:

(1)  The impact of the Covid-19 pandemic and the Sino-US trade war were expressly referred to and considered in the LRC’s Decision: see §§26, 53, and 56. The fact that the LRC did not agree that the downturn was temporary or the Company’s business would soon pick up as it had projected does not mean the LRC had not considered these matters.

(2)  The fact that the Company was able to quote from §53 of the LRC Decision the reference to “new” or “different” businesses is a testimonial to the fact that the LRC had considered the Company’s diversification measures. Whether such diversification would amount to an expansion into a new or different business is a matter for the Exchange, and I do not think the Exchange’s view could be challenged as irrational.

(3)  At §53(5), the LRC expressly said that the Company had not demonstrated that it had enough assets to support its operations as there was no reliable information on the Company’s cash position and it was unclear whether the amount the Company retained in cash (RMB20 million as per the Company’s submission at the hearing) would be sufficient to cover the amounts needed to restart the Company’s operations and pay the Company’s outstanding loans. The assertion that the LRC failed to consider whether the revenue and assets of the Company could cover its expenses and maintain a viable and sustainable operation does not get off the ground.

96.  Ground 3 is not reasonably arguable.

K.  Ground 4

97.  On Mr Nip’s case, Ground 4 – which challenges the reasonableness in respect of the decision on RG4 – stands or falls with Grounds 1 to 3. Ground 4 is also rejected as not reasonably arguable.

L.  Conclusion

98.  The Applicant’s application for leave to apply for judicial review is dismissed.

99.  In the exercise of my broad discretion, I see no reason why costs should not follow the event. Though the application was originally mounted, as is usual, on an ex parte basis, I invited and have benefited from the input on behalf of the Exchange. Therefore, the Applicant shall pay the Exchange’s costs, to be taxed if not agreed. However, I shall make that order on a nisi basis, to become absolute after 14 days, if neither party makes a variation application within that period.