SECURITIES AND FUTURES COMMISSION v. YU LONGRUI AND OTHERS

HCMP 1112/2019

[2022] HKCFI 653

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1112 OF 2019

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R E A S O N S   F O R   D E C I S I O N

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Introduction

1.  I have before me:

(1)  The Petition taken out by the Securities and Futures Commission (“Commission”) on 31 July 2019 against the 2^nd Respondent (“R2”) and the 7^th Respondent (“R7”).

(2)  The summons of Chan Wai Chuen (“R2”) dated 9 September 2021 for leave to exempt a private company namely, EM Management (Hong Kong) Limited (“EM Management”) from any disqualification order to be made against R2 (“R2’s Summons”).

(3)  The summons of Yun Lok Ming (“R7”) dated 27 August 2021 for leave to exempt a private company namely, Fan, Chan & Co. Limited (“FCC”) from any disqualification order to be made against R7 (“R7’s Summons”).

2.  Each of R2 and R7 has signed a Statement of Facts Not in Dispute for the Purpose of a Carecraft Settlement (“Agreed Facts”) agreeing to dispose of these proceedings against them by way of the summary procedure sanctioned in Re Carecraft Construction Co. Ltd[1].

3.  The Commission submits, and R2 and R7 have agreed, that based on the matters set out in R2’s Agreed Facts and R7’s Agreed Facts^[2], each of R2 and R7 has misconducted the business or affairs of DBA Telecommunication (Asia) Holdings Ltd (Stock Code: 3335) (“Company”) and should be disqualified under section 214(2)(d) of the Securities and Futures Ordinance (Cap 571) (“SFO”):

(1)  In the case of R2, for a period to be determined by the Court; and

(2)  In the case of R7, for a period of 1.5 years.

4.  The Commission has further considered R2’s Summons and R7’s Summons together with the affirmations filed in support.  It is the Commission’s position that it does not object to those applications.

Background

5.  The Petition was taken out pursuant to section 214 of the SFO on the basis that it appears to the Commission that the business or affairs of the Company have been conducted in a manner described in section 214(1)(b), (c) and (d) of the SFO, namely:

(1)  involving misfeasance or misconduct towards the Company, its members or part of its members;

(2)  resulting in its members or part of its members not having been given all the information with respect to its business or affairs that they might reasonably expect; and/or

(3)  unfairly prejudicial to its members or any part of its members

and that the 1^st to 8^th Respondents, individually or collectively, were wholly or partly responsible for the business or affairs of the Company having been so conducted.

6.  The Petition is supported by the Affirmation of Yu Suk Kwan Elmond dated 31 July 2019. However, by reason of R2’s Agreed Facts and R7’s Agreed Facts, all relevant facts giving rise to the Petition in relation to R2 and R7 are agreed and referred to in those two sets of Agreed Facts.  The Agreed Facts are appended to this decision.  I shall use the abbreviations used in the Agreed Facts.

Applicable Principles

7.  Section 214(1) of the SFO provides that:

“Where, in relation to a corporation which is or was listed, it appears to the Commission that at any relevant time the business or affairs of the corporation have been conducted in a manner—

(a) …;

(b) involving defalcation, fraud, misfeasance or other misconduct towards it or its members or any part of its members;

(c) resulting in its members or any part of its members not having been given all the information with respect to its business or affairs that they might reasonably expect; or

(d) unfairly prejudicial to its members or any part of its members, the Commission may, subject to subsection (3), by petition apply to the Court of First Instance for an order under this section.”

8.  Section 214(2) provides that:

“If, on an application under this section, the Court of First Instance is of the opinion that the business or affairs of a corporation have 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:

(a) …;

(b) …;

(c) …;

(d) order that a person wholly or partly responsible for the business or affairs of the corporation having been so conducted shall not, without the leave of the Court—

(i) be, or continue to be, a director, liquidator, or receiver or manager of the property or business, of the corporation or any other corporation; or

(ii) in any way, whether directly or indirectly, be concerned, or take part, in the management of the corporation or any other corporation,

for such period (not exceeding 15 years) as may be specified in the order;

(e) … .”

9.  As Chu J (as she then was) held in Securities and Futures Commission v Fung Chiu & Ors[3], three conditions have to be satisfied under section 214(1) of the SFO:

(1)  the corporation in question is or was a listed corporation;

(2)  the business or affairs complained of is that of the corporation; and

(3)  the conduct complained of falls within one or more heads of “misconduct” specified in subsections (a) to (d).

10.  The words “other misconduct” in section 214(1)(b) connote “improper or wrong behaviour or mismanagement, culpable neglect of duties”: Fung Chiu at[21].  These words are included in section 214(1)(b) to cover the widest range of possible misconduct: Securities and Futures Commission v Yeung Chung Lung[4].  An example is a director’s failure to exercise the degree of skill and care that may reasonably be expected of a person of his knowledge and experience and holding his office and functions within the company: Re Riverhill Holdings Limited[5].

11.  The Court is not bound by the agreement reached between the Commission and R2 and R7.  It must be satisfied, based on the Agreed Facts, that the business or affairs of the Company have been conducted in a manner described in section 214(1)(a), (b), (c) or (d) and, if so satisfied, determine the scope and duration of the disqualification orders against R2 and R7.  However, the Court is likely in practice to be guided by the agreement that the Commission has reached on the sanctions to be imposed: Re Warderly International Holdings Limited[6].

Application of Section 214 of The SFO

12.  Regarding the three conditions mentioned in Fung Chiu that need to be satisfied before section 214(1) of the SFO could be invoked:

(1)  Condition 1 is undoubtedly satisfied since the Company had been listed on the Main Board of the Hong Kong Exchange since 11 May 2006 and was only put in the third and final delisting stage on 9 March 2016^[7].  Accordingly, the Company was a listed corporation at all material times.

(2)  Condition 2 is satisfied because the business or affairs complained of are in relation to the financial statements of the Company for the financial years ended 31 December 2010 to 31 December 2012 as announced by the Company by way of the Published Figures and the actual performance of the Company.

(3)  As for the third condition, I agree with the Commission that the following conduct complained of falls within section 214(1)(b), (c) and (d) of the SFO:

(a)   Misstatements in the Published Figures which falsely and misleadingly represented to the members of the public and members of the Company that the Company was in much better shape and condition than it actually was.

(b)   Misrepresentations by way of the AR Misrepresentation which falsely and misleadingly represented that the consolidated financial statements published in the AR Announcement had been agreed by the auditors of the Company when no such agreement existed; and by way of the Clarification Misrepresentation which falsely and misleadingly represented that the AR Misrepresentation was made due to the Alleged Misunderstanding when there was never such misunderstanding.

13.  The key facts proving the above to which the Respondents have agreed I explain in the following sections.

Misstatements

14.  By way of various announcements, annual reports and interim reports, the Company published consolidated financial statements of itself and its Group in relation to three financial years, i.e. those ended 31 December 2010 to 31 December 2012 (i.e. the Published Figures).^[8]

15.  The investigation of the Commission revealed that the Published Figures were false and misleading.  In particular:

(1)  According to the bank account statements of the Company obtained by the Commission, the actual cash and bank balances of the Group (i.e. the Company and its subsidiaries) had been grossly overstated by at least RMB379 to 563 million in the manner as follows:^[9]

(a)   For the year 2012, the consolidated figure of the Group’s cash and bank balances was overstated by at least RMB562,957,017.25 in that:

 (i)    The cash and bank balance of Wozhong was overstated by at least RMB198,389,933.97; and

 (ii)   The cash and bank balance of Skyban was overstated by at least RMB364,567,083.28.

(b)   For the year 2011, the consolidated figure of the Group’s cash and bank balances was overstated by at least RMB379,945,177.50 in that:

 (i)    The cash and bank balance of Wozhong was overstated by at least RMB211,721,672.02; and

 (ii)   The cash and bank balance of Skyban was overstated by at least RMB168,223,505.48.

(c)   For the year 2010, the consolidated figure of the Group’s cash and bank balances was overstated by at least RMB471,793,766.78 in that:

 (i)    The cash and bank balance of Wozhong was overstated by at least RMB136,197,156.52; and

 (ii)   The cash and bank balance of Skyban was overstated by at least RMB335,596,610.26.

(2)  In addition, evidence obtained by the Commission from the three Telecom Companies (whose operating subsidiaries in the Mainland were purported to be the major customers and/or suppliers of the subsidiaries of the Company, namely, Fujian Create State, Skyban and Wozhong) revealed that the figures of Sales, Costs of Sales, Purchases balances and Trade Receivable balances due to the Company contained in the Published Figures had been grossly overstated as follows^[10]:

 (a)   The consolidated Sales (or Turnover) figures of the Group were significantly overstated by at least RMB7,038,969,816 for the year 2012; by RMB5,276,770,298 for the year 2011; and by RMB3,406,008,740 for the year 2010^[11].

 (b)   The consolidated Costs of Sales figures of the Group were significantly overstated by at least RMB6,004,740,509.57 for the year 2012; RMB4,429,904,865.41 for the year 2011; and by RMB2,790,988,944.35 for the year 2010^[12].

 (c)   The consolidated Trade Receivables figures of the Group were significantly overstated by at least RMB338,393,923 for the year 2012; RMB319,361,055 for the year 2011; and RMB188,139,108 for the year 2010^[13].

16.  The Commission’s investigation further revealed that the bank confirmations provided by the Company to its auditor (CH) were false and were fabrications and that the figures for the Sales to, the amount of Purchases from, and the Trade Receivable balances due from the three Telecom companies provided to CH in its audit working papers were false and incorrect^[14].

17.  These overstatements are self-evidently material, substantial and serious.  The sheer size of the overstatements ^[15] speak for themselves.  Moreover, the overstatements resulted in further false and misleading information being provided to the public regarding the financial position of the Company, in that these overstatements led to misstatements of other items in the Published Figures as follows^[16]:

(1)  Contrary to the Published Figures, the actual profits for the years 2010 to 2012 in the Statement of Income were in fact significantly negative, and losses had been increasing at a significant pace;

(2)  Contrary to the Published Figures, the actual Equity Attributable to Owners of the Company was in significant deficit in the years of 2011 and 2021.  In other words, the Company had been insolvent since 2011 at the latest; and

(3)  Contrary to the Published Figures, the Cash and Cash equivalents for Cash Flow was significantly negative throughout the years of 2010 to 2012.

The Misstatements depicted the financial position of the Company as much better than it actually was^[17].

Misrepresentations

18.  On 28 March 2013, by way of the AR Announcement, the Company published its consolidated financial statements for the year ended 31 December 2012 with the express statement that “These financial statements also comply with the applicable disclosure provisions of the” Listing Rules^[18].Read in the light of Rule 13.49 and [45] Appendix 16 of the Listing Rules, the announcement impliedly represented (i.e. the AR Representation) that the financial statements disclosed had been “agreed with the auditors” of the Company, CH^[19].  Subsequently, on 19 June 2013, the Company made a further Clarification Announcement admitting that the AR Representation was false and confirming that “the consolidated financial statement set out in the AR Announcement have not been audited or otherwise agreed to by the Auditors”.  The Company further went on to explain such falsity by representing that the same arose out of a “misunderstanding”on the part of the Company (i.e. the Alleged Misunderstanding) who “had not appreciated at the time of publication of the AR Announcement that the Auditors had not in fact agreed with the AR Announcement…”. ^[20]

19.  Both the AR Representation and the Alleged Misunderstanding are false and misleading in that:

(1)  The consolidated financial statements had never been agreed to by CH^[21]; and

(2)  Such absence of agreement was well known to the Board of the Company at all material times, in particular at the time when the AR Announcement and the Clarification Announcement were made.^[22]

(3)  In numerous meetings, correspondence and communications between CH and the Company between December 2012 and August 2013, CH had made  its position clear that the financial statements purportedly disclosed under the AR Announcement was not agreed to by CH and that further audit procedures had to be carried out before it could complete its audit work.^[23]

(4)  Accordingly, there was never any valid basis for the Alleged Misunderstanding.^[24]

20.  By reasons of the above:

(1)  The AR Representation had falsely and misleadingly represented that the consolidated financial statements published under the AR Announcement complied with the Listing Rules, thereby impliedly representing that they were financial statements agreed to by the auditors of the Company (i.e. the AR Misrepresentation);

(2)  The Clarification Announcement had falsely and misleadingly misrepresented that the AR Representation was due to the Alleged Misunderstanding (i.e. the Clarification Misrepresentation).

21.  As noted above, the AR Misrepresentation was only purportedly corrected by way of the Clarification Announcement, which was made almost three months after the AR Announcement.  The Clarification Misrepresentation has never been corrected.^[25]

Business or Affairs of the Company conducted in a manner falling within section 214(1) of the SFO

22.  I agree with the Commission that by reason of the aforesaid Misstatements and Misrepresentations, the business or affairs of the Company have been conducted in a manner as described in subsections (b)-(d) of section 214(1) of the SFO in that:

(1)  The making of such misstatements and misrepresentations – even negligently—amount to misfeasance or misconduct within the meaning of section 214(1)(b) (see, Yeung Chung Lung[92]).

(2)  The presentation of false and misleading financial information of the Company and the making of the false and misleading representations (as regards the Company’s auditor’s purported agreement with the disclosed financial statements and the Company’s alleged misunderstanding of the position) had resulted in its members not having been given all the information with respect to the Company’s business or affairs that they might reasonably expect, within the meaning of section 214(1)(c) of the SFO (see: Re Warderley [55]–[60]; Re Riverhill[11], [15]; Re Styland Holdings[26] and Yeung Chung Lung[96]).

(3)  By the Misstatements, false and misleading financial information of the Company was presented to members of the Company, which were “unfairly prejudicial” to them (in the sense that the harm that would result to members is harm which could have been avoided or ameliorated without harming the legitimate interests of others who are parties to any particular transaction) within the meaning of section 214(1)(d) of the SFO: see Fung Chiu [22], Yeung Chung Lung [96].

Liability of R2

23.  R2 was one of the EDs of the Company.  He was also its Chief Financial Officer, and Company Secretary responsible for the overall financial planning and financial management of the Group.  He was a fellow of the Hong Kong Institute of Certified Public Accountants.  By 2013, he had around 20 years’ experience of financial control, capital markets, corporate finance, and mergers and acquisitions^[27].

24.  R2 was responsible for the Misrepresentations in that:

(1)  R2 as the CFO and an ED of the Company responsible for the financial management of the Group was fully aware of the various problems discovered, and the concerns raised, by CH in the course of their auditing work, including in particular the concerns arising from the 2^nd Inspection and 3^rd Inspection.^[28]

(2)  R2 was fully aware that CH had not yet completed its audit work, and had not expressed its audit opinion on the unaudited financial statements purportedly disclosed under the AR Announcement^[29].  Indeed he objected to the resolution of the Board to make the AR Announcement for that reason.

(3)  Although R2 objected to the Board resolution to make the AR Announcement, after such resolution was passed by the majority of the Board, R2 went on to approve the draft AR Announcement to be sent to the printer for publication.  Accordingly, R2 played an instrumental role in the publication of the AR Announcement.^[30]

(4)  R2 allowed the AR Misrepresentation to continue for almost three months, and failed to cause the Company to correct the same between 28 March 2013 and 18 June 2013 (despite the Company having made three more public announcements during that period).^[31]

(5)  Moreover, R2 allowed and permitted the Company to make the Clarification Announcement (and hence the Clarification Misrepresentation) on 19 June 2013 which misrepresentation was never corrected.^[32]

25.  R2 is also responsible for the Misstatements in that:

(1)  All the Published Figures were made with the authorisation of the Board including that of R2.^[33]

(2)  Given his position and duties as the CFO and ED responsible for all financial management of the Group and the magnitude of the false accounting discovered, R2 is clearly responsible for the Misstatements in the Published Figures and the underlying false accounting, in that he had failed to exercise reasonable skill and care in carrying out his duties as the principal officer of the Company in charge of its financial control and management, and had failed to discharge his office and functions competently.

(3)     Even though R2 initially objected to the AR Announcement during the Board meeting, he subsequently approved and authorised the final draft of the AR Announcement to be published in the evening of 28 March 2013 as discussed above.

26.  By reason of the matters aforesaid, R2 had acted in a grossly incompetent or negligent manner; had failed to exercise the degree of skill and care as may reasonably be expected of a person of his knowledge and experience and holding his office or functions within the Company (see, Re Riverhill at [11] and [15]), in breach of his Fiduciary Duties owed to the Company; and had also acted in breach of his various duties under the Listing Rules (including Rule 2.13(2), 3.08(a)(b)(f), 3.16 and 13.04).^[34]

27.  Accordingly, in relation to both the Misstatements and Misrepresentations, R2 is responsible for the business or affairs of the Company having been conducted in the manner as described under section 214(b)–(d) of the SFO.

Liability of R7

28.  R7 is one of the INEDs and a member of the Audit Committee of the Company^[35]. At the material times in the first half of 2013 when the Misrepresentations were made through the AR Announcement and the Clarification Announcement:

(1)  R7 as a member of the Audit Committee was fully aware of the various problems discovered, and the concerns raised, by CH in the course of their auditing work, including in particular the concerns arising from the 2^nd Inspection and 3^rd Inspection.^[36]

(2)  R7 was fully aware that CH had not yet completed its audit work, and had not expressed its audit opinion on the unaudited financial statements purportedly disclosed under the AR Announcement.  Indeed he objected to the resolution of the Audit Committee to recommend to the Board to accept the unaudited financial statements, the year-end financial results and the Company’s annual report for the year ended 31 December 2012^[37]; and also objected to the resolution of the Board to make the AR Announcement for that reason.^[38]

(3)  Although, R7 was not responsible for the publication of the AR Announcement, he permitted or allowed the Company to continue to perpetrate the AR Misrepresentation for almost three months, and had failed to cause the Company to timely correct or clarify the same between 28 March 2013 and 18 June 2013 (despite the Company having made three more public announcement during that period).^[39]

(4)  Moreover, R7 allowed and permitted the Company to make the Clarification Announcement (and hence the Clarification Misrepresentation) on 19 June 2013, which misrepresentation was never corrected.^[40]

29.  By reason of the matters aforesaid, R7 had failed to exercise the degree of skill and care that may reasonably be expected of a person with his knowledge and experience and holding his office or functions within the Company (see, Re Riverhill at [11] and [15]), in breach of his Fiduciary Duties owed to the Company; and had acted in breach of his various duties under the Listing Rules including Rules 2.13(2), 3.08(a)(b)(f), 3.16 and 13.04^[41]. I accept the Commission’s case that in relation to the Misrepresentations, R7 is responsible for the business or affairs of the Company having been conducted in the manner as described under section 214(b)–(d) of the SFO.

Court’s Approach to Disqualification

30.  The Commission seeks a disqualification order against R2 and R7 in the following terms:

“1. Pursuant to section 214(2)(d) of the Securities and Futures Ordinance (Cap. 571) (‘SFO’), save and except fbr EM Management (Hong Kong) Limited, the 2^nd Respondent shall not, without leave of the Court, for a period of 6 years:

(a) be, or continue to be, a director, liquidator, receiver or manager of the property or business of DBA Telecommunication (Asia) Holdings Limited and any corporation in Hong Kong; and

(b) in any way directly or indirectly be concerned, or take part in the management of DBA Telecommunication (Asia) Holdings Limited and any corporation in Hong Kong.

2. Pursuant to section 214(2)(d) of the SFO, save and except for Fan, Chan & Co. Limited, the 7^th Respondent shall not, without leave of the Court, for a period of 1.5 years

(a) be, or continue to be, a director, liquidator, receiver or manager of the property or business of DBA Telecommunication (Asia) Holdings Limited and any corporation in Hong Kong; and

(b) in any way directly or indirectly be concerned, or take part in the management of DBA Telecommunication (Asia) Holdings Limited and any corporation in Hong Kong.

3. The 2^nd Respondent shall within 90 days from the date of this order pay to the Petitioner the agreed sum of HK$478,000 in full and final settlement of the 2^nd Respondent's share of the Petitioner’s costs in these proceedings and the Petitioner’s costs in respect of the R2’s Exemption Application.

4. The 7^th Respondent shall within 30 days from the date of this order pay to the Petitioner the agreed sum of HK$488,000 in full and final settlement of the 7^th Respondent’s share of the Petitioner’s costs in these proceedings and the Petitioner’s costs in respect of R7’s Exemption Application.”

31.  The principles governing the Court’s determination of the appropriate disqualification period under section 214(2)(d) of the SFO are well-settled:

(1)  The Court takes into account a broad spectrum of considerations, bearing in mind the twin purposes of protecting the public and general deterrence: Securities and Futures Commission v Fung Chiu & Ors[42]; Re Warderly at [7].

(2)  As a general approach, the Court has laid down a broad division of the disqualification period into three brackets.  In Re First China Financial Network Holdings Ltd[43], the Court set out the three brackets and their applicability as follows (at [5]–[6]):

(a)   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 is disqualified again;

(b)   The lower bracket of below 5 years, applicable to cases where the case is “relatively not very serious”; and

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

 (3)  In the determination of a disqualification period, the court adopts a “reasonably broad brush approach”: Re First China at [9].  These brackets are therefore “more signposts than straitjackets”: Re China Best Group Holding Ltd[44].

 (4)  Eight criteria which govern the Court’s exercise of the power of disqualification have been referred to in Re Warderly at [10], namely:

 (a)   Character of the offenders;

 (b)   Nature of breaches;

 (c)   Structure of the companies and the nature of their business;

 (d)   Interests of shareholders, creditors and employees;

 (e)   Risks to others from the continuation of offenders as company directors;

 (f)    Honesty and competence of offenders;

 (g)   Hardship to offenders and their personal and commercial interests; and

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

 (5)     Procedurally, “[t]he period of disqualification may be fixed by starting with an assessment of the correct period to fit the gravity of the conduct, and a discount is then given for mitigating factors”: Re Warderly at [9].

R2’s Disqualification

32.  The Commission’s case against R2 is on the basis of both the Misstatements and the Misrepresentations.  In the view of the Commission, the gravity of the conduct is such that R2 falls within the middle bracket:

(1)  The financial position of the Company for the years 2010 to 2012 had been seriously misrepresented in the Published Figures announced by the Company.

(2)  These Misstatements, by their very nature, would result in significant prejudice to members of the Company and the investing public, in that they would not be able to properly assess the financial performance of the Company (which was in bad financial shape with significant loss suffered, in contrast to the much rosier picture painted by the financial statements), thereby having a serious misleading effect on the market.

(3)  It is apparent that fraud was involved in the process—as pointed out above, the bank confirmations provided by the Company to CH were found to be fabrications and the financial figures relating to the three Telecom Companies shown to CH were false.^[45] That said, there is no evidence that R2 had participated in the fraud and no evidence of any personal gain from the misconduct.

(4)  Although there is no evidence that R2 had actively participated in the fraudulent scheme, given the size of the Misstatements, at the very least there must have been gross incompetence/negligence on his part in overseeing the affairs of the Company.  This is particularly so given the fact that R2 was specifically responsible for the financial affairs of the whole Group.

(5)  The Misstatements lasted for at least three years (2010 to 2012), during which time the Company was under the financial control and management of R2.

(6)  Although R2 raised objection at the Board meeting against the publication of the AR Announcement, he subsequently approved the submission of the draft AR Announcement (which included a statement that the “financial statements also comply with the applicable disclosure provisions of the [Listing] Rules”^[46]) for publication, ignoring the recommendation of CH that the Company should seek professional advice on “the risks associated with the intended publication of the annual results” ^[47]. As pointed out above, for almost three months no steps had been taken by the Company to clarify the AR Misrepresentation, and the market was led to believe that the financial statements published thereunder were agreed to by the Company’s auditor.

33.  The Commission has referred me to two cases that involved false accounting: Securities and Futures Commission v. Shum Ka Sang Charlie and Anor[48]and Yeung Chung Lung.  Although no dishonesty was established in the former (see [18], [19] Shum Ka Sang), fraud was found by inference in the latter (see [37], [96] Yeung Chung Lung).  As a result, the misconduct in Shum Ka Sang was held to fall within the Middle Bracket (for which the 1^st and 2^nd Respondents in that case were disqualified for six years), whilst the conduct of the main culprit in Yeung Chung Lung was held to fall within the Top Bracket (for which he was disqualified for 12 years), with the two less culpable associates disqualified for eight years (Middle Bracket).

34.  In terms of mitigating factors, R2 has agreed to dispose of the Petition against him by the Carecraft procedure and agreed to pay his share of the Commission’s costs of these proceedings ^[49]: these matters were considered relevant mitigating factors in Securities and Futures Commission v Li Hejun. [50]

35.  In the circumstances, the Commission submits that a disqualification period of six years is appropriate.  There is no agreement in this regard between the Commission and R2 but before me disqualification for this period was not opposed by R2. ^[51]

R7’s Disqualification

36.  The Commission’s case against R7 is based on the Misrepresentations only, i.e. the continued perpetration of the AR Misrepresentation and the making and continuation of the Clarification Misrepresentation.  The Commission does not advance any case against R7 based on the Misstatements.

37.  It is the Commission’s case that the gravity of the conduct is such that R7 falls within the lower bracket:

(1)  The Misrepresentations in themselves would have been relatively minor without the underlying false accounting and the Misstatements.

(2)  At the Board meeting (held on 28 March 2013^[52]), R7 voted against and was not responsible for the initial publication of the AR Announcement.

(3)  As an INED without being involved in the day to day management of the Company, R7’s involvement in the Company’s business and affairs was necessarily secondary.

(4)  There is no evidence of any personal gain or other improper purpose for the misconduct.

(5)  There is also evidence of R7 taking actions to press the Company to complete the auditing procedure as soon as possible in order to issue the annual report, and to face the consequences of the failure to do so.^[53]

38.  In view of his agreement to dispose of the Petition against him by the Carecraft procedure and his agreement to pay his share of the Commission’s costs of these proceedings, it is submitted that a disqualification period of 1.5 years is appropriate.  This is agreed to by R7^[54].

Carve Out Applications

39.  The general approach of the Court in dealing with carve out applications has been recently reviewed by Ng J in Securities and Futures Commission v Chin Jong Hwa[55].

(1)  The Court has power to grant disqualification orders that apply to all or such companies as it considers appropriate, including unlisted companies. ([12])

(2)  “In the context of disqualification under the English insolvency regime^[56] the court has recognised that, so long as the conduct in question is honest and not lacking in commercial integrity, even if the director falls short of the standard of competence which might be expected of a director of a publicly listed company, it does not necessarily follow that the director is unfit to be concerned in the management of any company, however small, private and simple its affairs may be: Re Barings plc (No 5)[57] (citing Re Atlantic Computers plc[58])”.([13])

(3)  “The fact that misfeasance has been committed in relation to a listed company does not mean that only listed companies and their shareholders need protection from the person concerned.  The impugned conduct may be such as to show that the respondent is unfit to be a director of companies with the attendant duties and responsibilities generally”. ([14])

(4)  The following principles borrowed from the Australian Court in deciding cases under section 206G(1) Corporation Act 2001 are equally applicable ([16]):

(a)   The applicant bears the onus of establishing that the court should make an exception to the legislative policy underlying the prohibition.

(b)   That legislative policy is one of protecting the public, not one of punishing the offender.

(c)   Another objective is to deter others from engaging in conduct of the particular kind in question.

(d)   A further objective is the more general one of deterring others from abusing the corporate structure to the disadvantage of investors, shareholders and others dealing with a company.

(e)   The prohibition itself contemplates that there will be hardship to the offender. Therefore hardship to the offender alone is not a persuasive ground for the granting of leave.

(f)    The court in exercising its discretion will have regard to the nature of the offence of which the applicant has been convicted, the nature of his involvement, and the general character of the applicant, including his conduct in the intervening period since he was removed from the board and from management.  Where, as here, the applicant seeks leave to become a director and to take part in the management of particular companies, the court will consider the structure of those companies, the nature of their businesses and the interests of their shareholders, creditors and employees.  One matter to be considered will be the assessment of any risks to those persons or to the public which may appearto be involved in the applicant’s assuming positions on the board or in management.

40.  Subsequently, in Securities and Futures Commission v. Chiu Duncan and others[59], G Lam J referred to Chin Jong Hwa and pointed out that in the exercise of its discretionary power, the Court will consider, among other things at [14]:

“… the structure of the companies to be “carved out” from the disqualification order, the nature of their businesses and the interests of their shareholders, creditors and employees, and the risks to those persons or to the public involved in the applicant’s assuming positions on the board or in management.”

R2’s Summons

41.  The Commission submits that having regard to these principles, the key considerations include:

(1)  R2’s liability is relatively serious and falls within the Middle Bracket.  Whilst the impact of the Misrepresentations is relatively limited in itself, they seek to cover the Misstatements which effectively disguised the worthless Company as a prosperous and profit earning listed company, and had the effect of substantially misleading not only the investors, but also the creditors of the Company for a number of years.

(2)  The Commission accepts that the case against R2 is solely based on negligence and breach of duty of care.  There is no evidence of any fraudulent intent, knowledge, recklessness or motivation for personal gain.  This is also the first time R2 has ever been subject to any criminal or disciplinary actions in his career that started in 1993.  There is no evidence of any dishonesty on the part of R2.  Accordingly, as Ng J remarked in [13] of his judgment in Chin Jong Hwa, citing Re Barings pic (No 5) and Re Atlantic Computers plc,a director falling short of the standard of competence is not necessarily unfit to be concerned in the management of a private company.

(3)  The Commission notes, however, that although EM Management is a private company with a small number of employees, it is apparently responsible for the management of a large group of companies (consisting of no less than 11 companies) which owns and operates a fleet of ships, containers, tankers and dry bulk.  EM Management provides shipping management services and advice to the Group.

(4)  R2 is an employee of EM Management.  From the description of his duties, it appears that although titled “Financial Controller”, R2 is effectively the general manager responsible for the day to day running of the company (including approving the sale and purchase of vessels, overseeing cash management and treasury operations and approving all financial arrangements including derivatives of the Group).  His responsibilities would therefore appear to be no less extensive than those expected of an executive director and financial controller.  There are hence reasons to believe that in carrying out his duties, R2 may interact or deal with a significant number of other companies (listed or unlisted) and members of the general public, including creditors, suppliers and customers.  There is hence a question of risk to the general public by permitting R2’s involvement in the management of EM Management.

(5)  In assessing the risk to the general public in this case, it is relevant to take into account “the general character of R2, including his conduct in the intervening period since he was removed from the board and from management”: see Chin Jong Hwa cited above.  There is no suggestion of dishonesty or lack of commercial probity on the part of R2.  Moreover, since R2 left the Company there is no suggestion of R2     re-offending or having been involved in any questionable conduct that imposes a risk to the public interest.

(6)  The admission of R2 and his cooperation with the Commission in these proceedings also speaks well of his appreciation of the seriousness of his misconduct, his remorse and the low likelihood of reoffending.

(7)  While hardship alone is not sufficient for a carving out, it is not entirely irrelevant. Shum Ka Sang Charlie [22]–[23] is an example of the Court taking into account the fact that the applicant relied on the income or remuneration obtained from the private companies concerned for his living. In this case, R2 has referred to the hardship arising from his unemployment for about 15 months, his being the sole breadwinner of his family and having to raise three young children.  His wife is apparently a housewife and he has a father of old age.  The Commission submits that these are matters which the Court could properly take into account.

42.  The Commission considers R2’s case for carving out to be a borderline case but does not object to such application in light of the above considerations.  Having regard to the above considerations I will grant the qualification R2 seeks.  I take into account that EM Management Group is owned by a sophisticated investor, who must be taken to consider R2 reliable.

R7’s Summons

43.  The Commission accepts that R7’s position is more straightforward:

(1)  R7’s misconduct is towards the lower end of the spectrum—he is only responsible for the perpetration of the Misrepresentations in a secondary manner.

(2)  As an INED, R7’s involvement and responsibility was much more limited.

(3)  The current application concerns one single small/medium-sized accounting firm with limited clientele and no connection with the Company or its associate companies.

(4)  R7 has been cooperative with the investigations of the Commission and has reached full agreement with the Commission on liability, quantum and costs.

(5)  There may further be hardship without a carve out as R7 is the breadwinner of his family with elderly parents and two young children.

44.  The Commission, therefore, agrees that R7’s Summons should be allowed.

Conclusion

45.  I will make an order in the terms of Appendix 1.

Appendix 1

ORDER

In the matter of the Petition filed on 31 July 2019

     UPON the application of the 2^nd Respondent by way of the Summons filed herein on 9 September 2021 (“R2’s Exemption Application”)

AND UPON the application of the 7^th Respondent by way of the Summons filed herein on 6 September 2021 (“R7’s Exemption Application”)

AND UPON reading the Statement of facts not in dispute for the purposes of a Carecraft settlement between the Petitioner and the 7^th Respondent dated 26 February 2021, the Statement of facts not in dispute for the purposes of a Carecraft settlement between the Petitioner and the 2^nd Respondent dated 12 April 2021

AND UPON reading the Affirmation of Yun Lok Ming filed herein on 6 September 2021 together with the exhibits referred to therein, the Affirmation of Chan Wai Chuen filed herein on 9 September 2021 together with the exhibits referred to therein

AND UPON hearing Leading Counsel for the Petitioner, Counsel for the 7^th Respondent, Counsel for the 2^nd Respondent limited to R2’s Exemption Application and the 2^nd Respondent being absent

IT IS ORDERED that:

1.     Pursuant to section 214(2)(d) of the Securities and Futures Ordinance (Cap. 571) (“SFO”), save and except for EM Management (Hong Kong) Limited, the 2^nd Respondent shall not, without leave of the Court, for a period of 6 years with effect from the date of this Order:

(a)     be, or continue to be, a director, liquidator, receiver or manager of the property or business of DBA Telecommunication (Asia) Holdings Limited and any corporation in Hong Kong; and

(b)     in any way directly or indirectly be concerned, or take part in the management of DBA Telecommunication (Asia) Holdings Limited and any corporation in Hong Kong.

2.     Pursuant to section 214(2)(d) of the SFO, save and except for Fan, Chan & Co. Limited, the 7^th Respondent shall not, without leave of the Court, for a period of 1.5 years with effect from the date of this Order:

(a)     be, or continue to be, a director, liquidator, receiver or manager of the property or business of DBA Telecommunication (Asia) Holdings Limited and any corporation in Hong Kong; and

(b)     in any way directly or indirectly be concerned, or take part in the management of DBA Telecommunication (Asia) Holdings Limited and any corporation in Hong Kong.

3.     The 2^nd Respondent shall within 90 days from the date of this order pay to the Petitioner the agreed sum of HK$478,000 in full and final settlement of the 2^nd Respondent’s share of the Petitioner’s costs in these proceedings and the Petitioner’s costs in respect of the R2’s Exemption Application.

4.     The 7^th Respondent shall within 30 days from the date of this order pay to the Petitioner the agreed sum of HK$488,000 in full and final settlement of the 7^th Respondent’s share of the Petitioner’s costs in these proceedings and the Petitioner’s costs in respect of R7’s Exemption Application.

Appendix 2

TABLE OF COMPARISON[60]

Between Published Figures and Overstatements (RMB)

Appendix 3a

 _____________________________________________________________________

STATEMENT OF FACTS NOT IN DISPUTE FOR

THE PURPOSES OF A CARECRAFT SETTLEMENT BETWEEN

THE PETITIONER AND THE 2^nd RESPONDENT

_____________________________________________________________________

A.     INTRODUCTION

1.     On 31 July 2019, the Securities and Futures Commission (“the Petitioner”) issued these proceedings under section 214 of the Securities and Futures Ordinance (Cap, 571) (“the Ordinance”) seeking, inter alia, disqualification orders against Mr CHAN Wai Chuen (“the 2^nd Respondent”) and others in respect of their conduct of the business and affairs of DBA Telecommunication. (Asia) Holdings Limited (“the Company”).

2.     Subject to the approval of this Court, the Petitioner and the 2^nd Respondent consent to the disposal of these proceedings against the 2^nd Respondent by way of the summary procedure (“the Carecraft Procedure”) sanctioned in Re Carecraft Construction Co Limited [1994] 1 WLR 172, as clarified by the English Court of Appeal in Secretary of State for Trade and Industry v Rogers [1996] 1 WLR 1569 and as adopted by this Court in a number of cases including but not limited to Securities and Futures Commission v Yick Chong San [2007] 4 HKLRD 46, Securities and Futures Commission v Fung Chiu and Others [2009] 2 HKC 19, Securities and Futures Commission v Shum Ka Sang Charlie and Shen Yi (HCMP 1014/2008, unrep, 22.05.2015), Securities and Futures Commission v Cheung Chi Shing and Others [2011] 1 HKLRD 96, Securities and Futures Commission v Cheung Keng Ching and Others (HCMP 1869/2008, unrep, 18.03.2010) and Securities and Futures Commission v Kwok Wing & Others (HCMP 3392/2013, unrep, 27.03.2015) in respect of proceedings under section 214 of the Ordinance.

3.     This Statement is produced in order to identify the material facts relied upon by the Petitioner in these proceedings that are not disputed by the 2^nd Respondent, for the disposal of these proceedings on the basis that the case against the 2^nd Respondent will be dealt with by this Court by way of the Carecraft Procedure.

4.     Solely for the purpose of resolving these proceedings by way of the Carecraft Procedure, and by reference to the facts set out in Section B below (which the 2^nd Respondent admits and accepts), the 2^nd Respondent accepts that during the relevant period, the business and affairs of the Company, for which the 2^nd Respondent as its Chief Financial Officer, the Company Secretary and one of the Executive Directors was responsible, have been conducted in a manner described in section 214(l)(b), (c) and (d) of the Ordinance, namely:

4.1     involving misfeasance or misconduct towards the Company, its members or part of its member;

4.2     resulting in its members or any part of its members not having been given all the information with respect to its business or affairs that they might reasonably expect; and/or

4.3     unfairly prejudicial to its members or any part of its members.

5.     On the basis of the facts set out in Section B below:-

5.1     the 2^nd Respondent does not object to a disqualification order being made against him under section 214(2)(d) of the Ordinance under which he shall not, without the leave of the Court:-

(a)     be, or continue to be, a director, liquidator, or receiver or manager of the property or business of DBA Telecommunication (Asia) Holdings Limited and any corporation in Hong Kong; and

(b)     in any way directly or indirectly be concerned, or take part, in the management of DBA Telecommunication (Asia) Holdings Limited and any corporation in Hong Kong.

5.2     There is no agreement on the appropriate period of disqualification, and the 2^nd Respondent agrees that the appropriate period of disqualification shall be determined by the Court.

6.     The Petitioner and the 2^nd Respondent have reached an agreement on the Petitioner’s costs of these proceedings.  The 2^nd Respondent agrees to pay and the Petitioner accepts the sum of HK$398,000 in full and final settlement of the 2^nd Respondent’s share of the Petitioner’s costs in these proceedings.

7.     In the event of a disqualification order made against the 2^nd Respondent by reference to this Statement: (1) the Petitioner and the 2^nd Respondent agree that they will jointly apply to this Court for a direction that this Statement be annexed to a judgment of this Court; and (2) the Petitioner reserves the right to refer to this Statement for all purposes connected with or ancillary to these proceedings including, but not limited to, the continuation of these proceedings against other Respondents.

8.     The Petitioner and the 2^nd Respondent agree that in the event this Court for whatever reason is of the view that these proceedings shall not be dealt with by the Court by way of the Carecraft Procedure or that a full hearing is appropriate, no admission or concession by either the Petitioner or the 2^nd Respondent nor any proposal for disqualification or the period of disqualification herein referred to or liability to pay costs shall be referred to or relied upon by either party at any subsequent hearing in these proceedings without the prior written consent of both parties.

B.     FACTS NOT IN DISPUTE

9.     The structure of Section B of this Statement is as follows:-

9.1     Section B1 sets out the background information relating to the Group, the Company and its management.

9.2     Sections B2 and B3 set out the facts relied upon by the Petitioner in support of its case that the business and affairs of the Company have been conducted in such manner described in sections 214(1)(b), (c) and (d) of the Ordinance.

9.3     Section B4 sets out the facts relied upon by the Petitioner in support of its case that the 2^nd Respondent was responsible for the aforesaid conduct of business and affairs of the Company.

B1.     Background and Management of the Group and the Company

The Company

10.     The Company was incorporated in the Cayman Islands on 15 June 2004 as an exempted company with limited liability under the Companies Law, Cap. 22 with its registered office at P.O. Box 309 GT, Ugland House, South Church Street, George Town, Grand Cayman, KY1-1104, Cayman Islands.  At all material times, the Company’s principal place of business in Hong Kong was situated at Unit 2307, 23^rd Floor, Great Eagle Center, 23 Harbour Road, Wan Chai, Hong Kong.

11.     The Company’s shares have been listed on the Main Board of The Stock Exchange of Hong Kong Limited (“HKEX”) (Stock code: 3335) since 11 May 2006.

The Group

12.     At all material times, the group comprising of the Company and its subsidiaries (“the Group”) were principally engaged in:-

(1)     Information technology business: the design, manufacture and sales of telecommunications equipment and related product;

(2)     Intelligent self-services business: engaging in payment service in public utility including pre-paid phone cards, water, electricity and gas through sales of pre-paid cards, recharging and other services requiring self-service payments utilizing intelligent self-service equipment such as smart card vending machines, recharging machines and payment machines; display of advertisement on intelligent self-service terminals; and provision of electronic payment and settlement services; display of advertisement on intelligent self-service terminals and provision of electronic payment and settlement services; and

(3)     Agency business: trading for telecommunication products.

13.     At all material times, the Company had five PRC subsidiaries, which included the following three wholly-owned key subsidiaries:-

(1)     Skyban Telecommunication (Fujian) Limited was established in the PRC on 26 September 2006 (“Skyban”) having its principal activity in the design, manufacture and sales of telecommunication equipment and related products, and trading of telecommunication equipment;

(2)     Fujian Create State Industry Co., Ltd. was established in the PRC on 5 April 1997 (“Fujian Create State”) having its principal activity in the design, manufacture and sales of telecommunication equipment and related products, and trading of telecommunication equipment; and

(3)     Wozhong Intelligent System Service (China) Co., Ltd. was established in the PRC on 30 November 2006 (“Wozhong”), having its principal activity in the sales of telecommunication value-added cards, insurance prepaid cards and online game value-added cards through intelligent self-service terminals (“ISS Terminals”).

The Management of the Company

14.     At all material times:-

(1)     The Company had five Executive Directors (“EDs”) and three Independent Non-Executive Directors (“INEDs”) on its board of directors (“the Board”).

(2)     The EDs of the Company were (i) Mr YU Longrui the 1^st Respondent; (ii) the 2^nd Respondent; (iii) Mr YU Longhui the 3^rd Respondent; (iv) Mr ZHENG Feng the 4^th Respondent; and (v) Mr YEUNG Shing the 5^th Respondent.

(3)     The INEDs of the Company were (i) Mr YU Lun the 6^th Respondent; (ii) Mr YUN Lok Ming the 7^th Respondent; (iii) Mr ZHENG Qingchang (until 31 December 2012) and Mr JIANG Weiliang the 8^th Respondent (since 31 December 2012).

(4)     The senior management of the Company comprised of all five EDs and their respective responsibilities were as follows:-

(a)     The 1^st Respondent was the Chairman, the Chief Executive Officer of the Company, and a co-founder of the Group.  He was responsible for the overall strategic planning and formulation of corporate policies for the Group and in overall charge of the Group’s operation.  He had more than 16 years of corporate management experience in the PRC telecommunication industry. From 2003 to 2008, he was appointed as the executive director of the Seventh Board of Directors of the China Enterprise Confederation/China Enterprisers Association.  In 2006, he was appointed as the Vice-Chairman of the Fujian Entrepreneur Association.  He had further been a member of the senior management of the key subsidiaries of the Group as follows:-

(i)     Legal representative and chairman of Skyban between 23 May 2013 and 22 July 2013;

(ii)     Legal representative, general manager and chairman of Fujian Create State since its incorporation until about 2009; and

(iii)    Director of Wozhong since 11 May 2010.

(b)     The 2^nd Respondent was the Chief Financial Officer and the Company Secretary of the Company, and was responsible for overall financial planning and financial management of the Group.  He joined the Group in August 2004.  He was a fellow of the Hong Kong Institute of Certified Public Accountants.  By 2013, he had around 20 years’ experience in financial control capital market, corporate finance, and mergers and acquisitions.

 (c)     The 3^rd Respondent was also a co-founder of the Company and the Group.  He had further been a member of the senior management of the key subsidiaries of the Group as follows:-

 (i)     Chief executive director and legal representative of Skyban, and responsible for the project planning and implementation of industry plans in Skyban between June 2006 and May 2013; and

 (ii)     General Manager of Fujian Create State since about 2009.

 (d)    The 4^th Respondent joined the Group in July 2003 and was responsible for the research and development of the Group’s technology and products.  He had over 23 years’ experience in the electronics and telecommunication product industries.  He had also taken up various senior management positions of Wozhong, being its legal representative and chairman from 30 November 2006 to 11 April 2008, and its director since 11 April 2008.

 (e)     The 5^th Respondent is a co-founder of the Group and at all material times was responsible for business development of the Group including liaison with its main customers and business partners.  Particularly, he had very close dealings with, and also close working relationship with China Telecom Corporation Limited, a major customer of the Group.  He had over 18 years of corporate management experience in the PRC telecommunication industry.  He had been a member of the senior management of the key subsidiaries of the Group as follows:-

 (i)     Director of Fujian Create State between 5 November 2002 and about 2009; and

 (ii)     Legal representative and chairman of Fujian Create State in about 2009.

 (5)     The Audit Committee comprised of the INEDs.

 (6)     The 1^st Respondent, through himself and Daba International Investments Limited (“Daba”), a company incorporated in the British Virgin Islands of which the 1^st Respondent had control, was the controlling shareholder of the Company, being the beneficial owner of 51% or more of the entire issued share capital of the Company, as follows:-

 (a)     personally owning about 3% of the entire issued share capital of the Company; and

 (b)     beneficially owning about 48% of the entire issued share capital of the Company through Daba (as the registered holder of 500,680,000 shares of the Company).

 (7)     The 3^rd Respondent is a brother of the 1^st Respondent.  While he personally did not hold any shares in the Company, he has beneficial interests in the Company through his 6.86% shareholding in Daba.

The 1^st to 8^th Respondents’ Duties to the Company

15.     At all material times, each of the 1^st, 2^nd, 3^rd, 4^th, 5^th, 6^th, 7^th, and 8^th Respondents owed, inter alia, the following fiduciary duties to the Company:

 (1)     a duty to act in good faith and in the best interest of the Company;

 (2)     a duty to exercise their powers for proper purposes; and

 (3)     a duty not to allow any conflict between their duties as directors and their personal interests (collectively, “the Fiduciary Duties”).

16.     Further, each of them also owed to the Company a duty of care at common law to exercise due and reasonable skill, care and diligence in the course of acting as the executive and non-executive directors of the Company.

17.     In order to act as the directors of the Company, each of the 1^st, 2^nd, 3^rd, 4^th, 5^th, 6^th, 7^th, and 8^th Respondents were required to and did sign a formal declaration, undertaking and acknowledgement as per Form B of Appendix 5 to the Rules Governing the Listing of Securities on the HKEX (“the Listing Rules”), whereby each of them undertook to the HKEX that they would, in the exercise of their powers and duties as directors of the Company, comply and procure the Company to comply with, inter alia, the Listing Rules from time to time in force.

Current Status of the Company

18.     On 3 June 2015, the Company announced that joint liquidators had been appointed to wind up the Company’s PRC subsidiaries, including Skyban, Fujian Create State and Wozhong.  Further, the Company was placed in the third and final delisting stage on 9 March 2016 as it had failed to satisfy certain resumption conditions, including publishing all outstanding financial results, addressing audit qualifications and completing the independent board committee’s review on, inter alia, the relevant audit issues set out in the Company’s announcement of 19 June 2013, the circumstances that led to the publication of the unaudited 2012 annual results, and the delay in despatch of its 2012 annual report.

19.     On 12 and 13 October 2016, the Company published its annual results for the years ended 31 December 2012 to 2015.  On 3 April 2017, the Company published its unaudited interim results for the six months ended 30 June 2013 to 2016.  Trading in the shares of the Company, which was suspended on 6 June 2013, remains suspended until further notice.

20.     As part of a resumption proposal, the Company entered into a conditional agreement in June 2015 to acquire a target group principally engaged in the business and development of dairy products at a consideration of HK$600 million.  As the acquisition constituted a very substantial acquisition and a reverse takeover, the Company was treated as a new listing applicant and the acquisition would be subject to the approval of the Listing Committee of the HKEX.  Approval has not yet been given.

21.     The Company has submitted three new listing applications to the HKEX in relation to the acquisition, which have all since lapsed.  On 25 September 2018, the Company announced, inter alia, that it intended to renew the new listing application and resubmit it to the HKEX in the first quarter of 2019.  On 8 May 2019, the Company further announced, inter alia, that the intended resubmission time of the new listing application will have to be postponed to end of September 2019 due to the resignation of the sponsor.

B2.     MISSTATEMENTS

22.     The Petitioner’s investigation revealed substantial misstatements in the financial statements published by the Company for the financial years ended 31 December 2010 to 31 December 2012 (collectively “the Published Figures”) in its Annual Report 2010, Annual Report 2011, Interim Report 2012, their corresponding results announcements (being the results announcements of the Company dated 22 March 2011 and 15 March 2012 respectively), and also the announcement of its annual results for the year ended 31 December 2012 dated 28 March 2013 (“the AR Announcement”) which were published with the authorisation of and by order of the Board.

The Published Figures

23.     On 22 and 28 March 2011, the Board announced the Group’s audited consolidated results for the year ended 31 December 2010.  The results purportedly showed a strong financial position of the Group, with a high level of cash and cash equivalents as follows:

24.     Most of the Group’s cash and cash equivalents were at all material times held by the subsidiaries in the PRC.  As indicated in the Company’s 2010 Annual Report, the allocation of cash and cash equivalents between the Company and its subsidiaries as at 31 December 2010 and 31 December 2009 were as follows:-

25.     On 15 and 27 March 2012, the Board announced the Group’s audited consolidated results for the year ended 31 December 2011.  The results purportedly showed that the Group’s financial position continued to be strong, with a high level of cash and cash equivalents as follows:-

26.     As in the previous years, most of the Group’s cash and cash equivalents were held by the subsidiaries in the PRC.  As indicated in the Company’s 2011 Annual Report, the allocation of cash and cash equivalents between the Company and its subsidiaries as at 31 December 2011 and 31 December 2010 were as follows:-

27.     According to the Annual Report 2010 and the Annual Report 2011, the majority of the Group’s funds were deposited in banks in the PRC and banks in Hong Kong, and the Group possessed sufficient cash and bank balances to meet its commitment and working capital requirements.

28.     On 28 March 2013, the Board announced the Group’s consolidated results for the year ended 31 December 2012.  The results purportedly showed that the Group's financial position continued to be strong, with a high level of cash and cash equivalents as follows:-

29.     At the material times, Crowe Horwath (HK) CPA Limited (“CH”) was the auditors of the Company.  According to CH, since the Company was listed, most of the Group’s cash was deposited in bank accounts in the PRC held by Wozhong and Skyban.  In the course of their audit of the Group’s accounts for the financial years 2010 to 2012, CH verified the year end balances for each bank account with the relevant banks by requesting for bank confirmations and conducted cash count and transaction testing, with satisfactory results.

30.     According to CH, the consolidated results of the Group for the years ended 31 December 2010 to 31 December 2011 were audited based on the documentations and bank confirmations provided to them, and that they did not at the time have reason to question the authenticity of the documentations provided by the Company and/or the banks.  Clean audit opinions were issued by CH in respect of the financial results for these two years.  For reasons elaborated in more detail below, CH did not issue auditor’s report for the year ended 31 December 2012 as it was unable to complete the audit procedures.

The Discrepancies

31.     In the course of its investigation, the Petitioner has through the China Securities Regulatory Commission (“CSRC”), obtained copies of statements of the Company’s relevant bank accounts covering the relevant period (“CSRC Copies of bank statements”).

32.     In these proceedings the Petitioner will rely on the CSRC Copies of bank statements as representing truthfully and accurately the total cash and bank balances of Wozhong and Skyban as at 31 December 2010, 31 December 2011 and 31 December 2012 respectively.  The Petitioner will further rely upon the following:-

(1)     The CSRC was set up in October 1992 as a government agency at the ministry-level under the direction of and authorised by the State Council to regulate and supervise the securities and futures markets in the PRC in accordance with all applicable legislations and regulations for the purpose of maintaining fair, efficient and transparent operation of the securities and futures markets.

(2)     Pursuant to Article 180(6) of the Law of the People’s Republic of China on Securities (“Securities Law”), which came into effect on 1 January 2006 and remained applicable when the CSRC Copies of bank statements were obtained, the CSRC has the power to inquire about the accounts of funds and securities and bank accounts of the parties concerned and of the units and individuals related to events under investigation.

(3)     Article 183 of the Securities Law stipulates that, when the CSRC performs its duties pursuant to law, the units and individuals under inspection or investigation shall cooperate, provide truthful documents and materials required.

(4)     Pursuant to Article 60(2) of the Law of the People’s Republic of China on Penalties for Administration of Public Security, which came into effect on 1 March 2006 and remained applicable when the CSRC Copies of bank statements were obtained, a person shall become punishable by detention and financial penalty if he forges, conceals or destroys evidence, or provides false testimony or giving false information about a case, which affects the administrative law enforcement organ in dealing with the case according to law.

33.     The CSRC Copies of bank statements demonstrate that the actual total cash and bank balances (including pledged deposit) of Wozhong and Skyban for the years ended 31 December 2010 to 31 December 2012 were drastically different from the balances shown in the CH’s audit working papers, and that the Published Figures had been overstated as follows:

(1)     For the year 2012, the consolidated figure of the Group was overstated by at least RMB562,957,017.25 in the Published Figures as follows:-

(a)     Cash and bank balance of Wozhong was overstated by at least RMB198,389,933.97; and

(b)     Cash and bank balance of Skyban was overstated by at least RMB364,567,083.28.

(2)     For the year 2011, the consolidated figure of the Group was overstated by at least RMB379,945,177.50 in the Published Figures as follows:-

(a)     Cash and bank balance of Wozhong was overstated by at least RMB211,721,672.02; and

(b)     Cash and bank balance of Skyban was overstated by at least RMB168,223,505.48.

(3)     For the year 2010, the consolidated figure of the Group was overstated by at least RMB471,793,766.78 in the Published Figures as follow:-

(a)     Cash and bank balance of Wozhong was overstated by at least RMB136,197,156.52; and

(b)     Cash and bank balance of Skyban was overstated by at least RMB335,596,610.26.

34.     In addition, in the course of its investigation, the Petitioner has obtained written, confirmations (“Replies to the Petitioner”) from China Telecom Corporation Limited, China Unicom Hong Kong Limited and China Mobile Limited (“the 3 Telecom Companies”), whose operating subsidiaries in the PRC were purported to be the major customers and/or suppliers of Fujian Create State, Skyban and Wozhong, with regards to the Sales to, the Costs of Sales and Purchases balances of, as well as the Trade Receivable balances due to the Company.

35.     Although the Sales to the 3 Telecom Companies recorded in CH’s audit working papers on the Company matched with the corresponding sales figures purportedly recorded in the Company’s Management Accounts – Sales Schedules, they do not match with the Sales confirmed by the 3 Telecom Companies in their Replies to the Petitioner.  Moreover, by reason of the overstatement of the Costs of Sales and Purchases figures in the Published Figures as elaborated in paragraph 36 below, it is to be inferred that the corresponding Sales figures based on these overstated Purchases were also overstated.  In the premises, the Sales (or Turnover) figures of the Company in the Published Figures were significantly overstated as follows:-

(1)     For the year 2012, the consolidated figure of the Group was overstated by at least RMB7,038,969,816 in the Published Figure as follows:-

(a)     Sales of Wozhong was overstated by around RMB6,333,602,604; and

(b)     Sales of Skyban was overstated by at least RMB705,367,212.

(2)     For the year 2011, the consolidated figure of the Group was overstated by at least RMB5,276,770,298 in the Published Figure as follows:-

 (a)     Sales of Wozhong was overstated by around RMB4,616,471,305; and

 (b)     Sales of Skyban was overstated by at least RMB660,298,993.

(3)     For the year 2010, the consolidated figure of the Group was overstated by at least RMB3,406,008,740 in the Published Figure as follows:-

 (a)     Sales of Wozhong was overstated by around RMB2,805,479,350;

 (b)     Sales of Fujian Create State was overstated by at least RMB240,851,571; and

 (c)     Sales of Skyban was overstated by at least RMB359,677,819.

36.     Further, although the Costs of Sales balances recorded in CH’s audit working papers on the Company matched with the corresponding Costs of Sales balances purportedly recorded in Wozhong’s Management accounts – profit and loss statement, the amount of Purchases from the 3 Telecom Companies recorded in CH’s audit working papers do not match with the respective Purchases confirmed by the 3 Telecom Companies in their Replies to the Petitioner.  As a result, the Cost of Sales and Purchases figures in the Published Figures were significantly overstated as follow:

(1)     For the year 2012, the consolidated figure of the Group was overstated by at least RMB6,004,740,509.57 by reason of the corresponding overstatement of the Purchases of Wozhong;

(2)     For the year 2011 the consolidated figure of the Group was overstated by at least RMB4,429,904,865.41 by reason of the corresponding overstatement of the Purchases of Wozhong; and

(3)     For the year 2010 the consolidated figure of the Group was overstated by at least RMB2,790,988,944.35 by reason of the corresponding overstatement of the Purchases of Wozhong.

37.     Further, although the Trade Receivables balances recorded in CH’s audit working papers on the Company matched with the corresponding balances purportedly recorded in the Company’s Management Accounts – Trade Receivables Schedules, they do not match with the respective Trade Receivable balances due from the 3 Telecom Companies confirmed by them in their Replies to the Petitioner.  As a result, the Trade Receivables figures in the Published Figures were significantly overstated as follows:

(1)     For the year 2012, the consolidated figure of the Group was overstated by at least RMB338,393,923 in the Published Figures by reason of the corresponding overstatement of the Trade Receivables of Skyban.

(2)     For the year 2011, the consolidated figure of the Group was overstated by at least RMB319,361,055 in the Published Figures as follows:-

(a)     Trade Receivables of Fujian Create State was understated by RMB536,030; and

(b)     Trade Receivables of Skyban was overstated by at least RMB319,897,085.

(3)     For the year 2010, the consolidated figure of the Group was overstated by at least RMB188,139,108 in the Published Figures as follows:-

 (a)     Trade Receivables of Fujian Create State was understated by at least RMB3,281,151; and

 (b)     Trade Receivables of Skyban was overstated by at least RMB191,420,259.

38.     It is the case of the Petitioner that:-

(1)     the bank confirmations provided to CH in the course of its audit of the Company’s accounts were false or were fabrications;

(2)     the figures for the Sales to, the amount of Purchases from, and the Trade Receivable balances due from the 3 Telecom Companies shown in CH’s audit working papers (from which the relevant Published Figures such as Turnover, Costs of Sales and Trade Receivables were calculated) were false and incorrect; and

(3)     given their position and control of the Group’s management and its day-to-day operations (including the operations of its subsidiaries), and/or their dealings and relationship with the customers, at all material times the 1^st Respondent, 2^nd Respondent, 3^rd Respondent, 4^th Respondent and the 5^th Respondent acted negligently/in breach of their duty of care by failing to uncover the misstatements and failing to disclose the Company’s true financial position as pleaded in paragraph 33-37 hereinabove and subparagraphs (1) and (2) of this paragraph.

39.     The abovementioned misstatements are material, substantial and serious.  They provided false and misleading information to the public regarding the financial position of the Company.  The misstatements identified above further led to misstatements of other items in the Published Figures as follows:-

(1)     Contrary to the Published Figures, the actual Gross profits and Profits for the years 2010 to 2012 in the Statement of Income were significantly negative, and that loss had been increasing at a significant pace year by year;

(2)     Contrary to the Published Figures, the actual Equity Attributable to Owners of the Company was either much smaller (for the year 2010) or already in significant deficit (for years 2011 and 2012).  In other words, the Company had been insolvent since 2011 the latest; and

(3)     Contrary to the Published Figures, the actual Cash and Cash Equivalents for Cash Flow was significantly negative throughout the years of 2010 to 2012.

40.     The overall effect of these misstatements (“the Misstatements”) was that the business and financial position of the Company had been falsely and misleadingly represented to members of the public (in particular, members of the Company) as being in a much better shape and condition than it actually was.

B3.     MISREPRESENTATIONS

Publication of the AR Announcement

41.     On 28 March 2013, the Company published an announcement of its annual results for the year ended 31 December 2012 (i.e. the AR Announcement) shortly before the deadline imposed by Rule 13.49(1) of the Listing Rules.  The AR Announcement was published in the HKEX news website at or shortly before 10:24 p.m. on 28 March 2013.  Unlike the announcements made by the Company of its annual results in previous years, the AR Announcement did not refer to the consolidated financial statements contained therein as having been “audited by the Company’s external auditor and reviewed by the Company’s audit committee”.  However, in Section 2 (entitled “Statement of Compliance”), the AR Announcement included the following statement or representation (“the AR Representation”):

     “…These financial statement also comply with the applicable disclosure provisions of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited.”

42.     Rule 13.49(2) of the Listing Rules provides as follows:-

     “The preliminary announcement shall be based on the issuer’s financial statements for the financial year which shall have been agreed with the auditors.”

43.     This requirement is repeated in §45 Appendix 16 of the Listing Rules.

44.     Rule 13.49(3) of the Listing Rules further provides that if Rule 13.49(2) could not be complied with, an announcement must be made, before the same deadline as that provided under Rule 13.49(1), with the following information:-

“(a) a full explanation for its inability to make an announcement based on financial statements which have been agreed with the auditors. Where there are uncertainties arising from the lack of supporting evidence or relating to the valuation of assets or liabilities, sufficient information to allow investors to determine the significance of the assets or liabilities; 

(b)     The expected date of announcement of the financial results for the financial year which shall have been agreed with the auditors; and

(c)     so far as the information is available, results for the financial year based on financial results which have yet to be agreed with the auditors.  Where possible, those results must have been reviewed by the issuer’s audit committee.  In the event that the audit committee disagreed with an accounting treatment which had been adopted or the particulars published in accordance with rule 13.49(3)(i)(a), full details of such disagreement.”

45.     By reason of the matters aforesaid, the AR Representation, inasmuch as it purported to state – without any qualification or any other explanation – that the “disclosure provisions” under the Listing Rules (which included Rule 13.49) had been “complied with”, impliedly represented that the consolidated financial statements disclosed therein had been “agreed with the auditors”.

46.     On 30 April 2013, pursuant to the unanimous resolution of the entire Board (i.e. the 1^st to 8^th Respondents) of the same date, the Company made an announcement (“the 30 April 2013 Announcement”) that the publication of the financial results of the Company and its subsidiaries for the year ended 31 December 2012 would be delayed.  The 30 April 2013 Announcement mentioned nothing about any lack of agreement by the Company’s auditors to the financial statements contained in the AR Announcement. In relation to the auditors, it stated that:-

     “The Board wishes to inform the shareholders and potential investors of the Company that, as additional time is required for the Company to prepare for the additional information requested by the auditors (the ‘Auditors’) of the Company, Crowe Horwath (HK) CPA Limited, for it to perform and complete the audit of the Group for the financial year ended 31 December 2012, the dispatch date of the annual report of the Company for the year ended 31 December 2012 (the ‘2012 Annual Report’) will be postponed to be on or before 28 June 2013”.

47.     On 5 June 2013, the Company made a further announcement relating to the substantial decrease in the price and increase in the trading volume of the shares of the Company on that day stating, inter alia that it was “not aware of any reasons for these price and volume movements or of any information which must be announced”.  Again, this announcement mentioned nothing about any lack of agreement by the Company’s auditors to the financial statements contained in the AR Announcement.

48.     On 6 June 2013 at 9:00 a.m., at the request of the Company, trading of its shares was halted and the Company issued a public announcement on the same date for that purpose.  Similarly, this announcement mentioned nothing about any lack of agreement by the Company’s auditors to the consolidated financial statements contained in the AR Announcement.

The Lack of Agreement with the Auditors

49.     At all material times, CH were the auditors of the Company.  The consolidated financial statements for the year 2012 published in the AR Announcement were never agreed with by CH.  Despite the fact that three announcements (as referred to above) were made by the Company subsequent to the AR Announcement, the Company made no attempt to correct or clarify the matter until 19 June 2013 when the Company made a further announcement purporting to clarify that there had actually been no agreement with the Company’s auditors regarding the consolidated financial statements announced in the AR Announcement (“the Clarification Announcement”), as follows:-

     “The Board refers to the announcement of the Company dated 28 March 2013 in relation to the results of the Company for the year ended 31 December 2012.  The Board wishes to clarify that the consolidated financial statements set out in the AR Announcement have not been audited or otherwise agreed to by the Auditors.”

The Clarification Announcement further sought to explain the misrepresentation in the AR Announcement by alleging a misunderstanding (“the Alleged Misunderstanding”) as follows:-

“As a result of a misunderstanding, the Company had not appreciated at the time of publication of the AR Announcement that the Auditors had not in fact agreed with the AR Announcement as the audit of the consolidated financial statements of the Company for the year ended 31 December 2012 had not been completed as at the publication date of the AR Announcement.”

50.     The Alleged Misunderstanding is false and misleading.  The fact that CH did not agree to the consolidated financial statements had been repeatedly stressed by CH in various correspondence between CH and the Company, including email correspondence dated 26 March 2013, 28 March 2013, 11 April 2013 and 5 June 2013.

51.     By reason of the matters aforesaid, contrary to the AR Representation, the consolidated financial statements disclosed in the AR Announcement did not in fact comply with the applicable disclosure provisions of the Listing Rules.  Insofar as the AR Representation purported to represent otherwise, the same is false and misleading.

52.     As mentioned above, despite the making of three subsequent announcements (dated 30 April 2013, 5 June 2013 and 6 June 2013 respectively), the Company did not – and made no attempt to – correct or clarify the false or misleading representation made in the AR Representation until the Clarification Announcement on 19 June 2013.

Knowledge of the Board

The Auditing Progress before the AR Announcement

53.     The following personnel of CH was involved in the auditing works of the Company for the year 2012:-

(1)     CHAN Wai Dune, Charles (“Charles Chan”): he was and still is the Chairman and Chief Executive Officer of CH;

(2)     TSE Po Chu, Betty (“Betty Tse”): she was a director of CH and the engagement audit director responsible for auditing the annual accounts of the Company for the financial years ended 31 December 2010, 2011 and 2012.  Both Patrick Poon and Daniel Lee (referred to below) reported to her;

(3)     POON Cheuk Ngai, Patrick (“Patrick Poon”): he was the audit manager of CH responsible for auditing the financial statements of the Company for the years ended 31 December 2010, 2011 and 2012; and

(4)     LEE Suen Ho, Daniel (“Daniel Lee”): he was an audit staff of CH who assisted in the carrying out of the 2010 to 2012 audit procedures for the Company.

54.     In around the end of 2012, CH conducted certain auditing measures including an inspection of the ISS Terminals purportedly operated by the Company through its subsidiary Wozhong in six cities in the PRC (“the 1^st Inspection”).  The results of the 1^st Inspection were satisfactory.

55.     ISS Terminals were key assets of the Company as they were the core profit generating assets of the Company’s Intelligent Self-Service business, which was the most important part of the businesses of the Company and contributed to the majority of the revenue and profit of the Group.  According to the AR Announcement, the Intelligent Self-Service business accounted for over 80% of the turnover of the Group for the years 2012 (RMB 6,388,879,000 out of RMB 7,555,909,000) and 2011 (RMB 4,656,037,000 out of RMB 5,647,554,000).

56.     Since 12 December 2012, CH repeatedly requested for various further auditing measures to be conducted, including further inspections of the ISS Terminals at various locations in the PRC.  In making those requests, CH emphasised the importance of the inspection of ISS Terminals and that the audit procedures could not be completed without the requested inspection having been carried out.

57.     However, despite repeated requests, CH’s audit procedures could not be carried out and/or completed by reason of the lack of cooperation from the Company in providing an updated and detailed register of the ISS Terminals.  On 23 March 2013, a meeting was held between the Audit Committee of the Company and CH, attended by Betty Tse and Patrick Poon on behalf of CH and all three members of the Audit Committee, including the 6^th, 7^th and 8^th Respondents. During the meeting, Betty Tse raised concerns/complaints about the dilatory conduct of the Company in responding to the requests of CH to conduct further audit procedures, and requested the cooperation of the Company regarding these audit procedures, including in particular, the further inspection of ISS Terminals.  Betty Tse made it clear at the meeting that further audit procedures were necessary before CH could complete its audit of the financial results, and that any announcement of the financial results before the completion of the audit, would be problematic.  The 7^th Respondent expressed the view that according the Listing Rules, the Company may be required to suspend trading in these circumstances.

58.     Between 24 and 25 March 2013, in the absence of cooperation of the Company, CH conducted further audit procedures by itself including the inspection of 68 ISS Terminals in Fuzhou, the PRC according to the addresses provided by the Company (“the 2^nd Inspection”).  The result of this inspection exercise was unsatisfactory in that out of the 68 inspection targets:-

 (1)     4 target addresses did not exist;

 (2)     19 target addresses were unclear;

 (3)     18 target addresses could not be accessed; and

 (4)     no ISS Terminal was found at the remaining 27 addresses that could be located.

59.     As a result, on 26 March 2013 at 8:01 p.m., Patrick Poon (writing on behalf of Betty Tse) sent an email to the directors of the Company (including the 1^st and 2^nd Respondents) highlighting the unsatisfactory results of the 2^nd Inspection and requesting for the provision of a detailed register of the ISS Terminals and further inspections.  In particular, the email warned that as the audit work and procedures had not yet been completed, if the Company insisted on announcing its financial results on 28 March 2013, CH would have to expressly state the same in its audit report (“由於尚有審計資料及程序未完成，若貴司堅持於3月28日公告業績, 按香港審計準則指示,本所必須在審計報告言明”).

60.     On 27 March 2013 between 6:30 p.m. and 7:00 p.m., a meeting was held between CH and the Audit Committee of the Company.  According to the Company’s record of the meeting, in addition to the 6^th, 7^th and 8^th Respondents (who were members of the Audit Committee), all the other directors of the Company were also present (CH’s record of the meeting however only mentioned that the meeting was attended by 1^st, 2^nd, 6^th, 7^th and 8^th Respondents).  Betty Tse and Patrick Poon of CH attended the meeting.  During the meeting, Betty Tse reiterated the unsatisfactory auditing results of the 2^nd Inspection and requested for further audit procedures to be carried out, including in particular the further inspection of the ISS Terminals.  Betty Tse made it clear that CH would not agree to the Company announcing its annual results on the basis of the unaudited financial statements and for that reason CH would not attend the relevant meeting of the Audit Committee to be held on 28 March 2013.

Publication of the AR Announcement     

61.     On 28 March 2013 various events occurred leading to the publication of the AR Announcement as follows:-

(1)     In the morning before 10:00 a.m.，a meeting of the Audit Committee of the Company, attended by all three members of the Committee (i.e. the 6^th, 7^th and 8^th Respondents), was held to approve the consolidated financial statements of the Company for the year 2012 to be announced.  It was resolved by majority (with the 7^th Respondent objecting) that the Audit Committee would recommend the Board to accept the unaudited financial statements, the year-end financial results and the Company’s annual report for the year ended 31 December 2012 (“向董事会建议釆纳截至2012 年12月31日止全年之未经审核终期财务报表、终期业绩公告及年报”).  The 7^th Respondent objected to this resolution on the ground that CH had not yet completed its audit work and had not expressed its clear audit opinion (“基于国富浩华(香港)会计师事务所有限公司因未完成所有2012年度核数工作而未能发表清晰的核数意见”).  Unlike previous years, CH did not attend this meeting of the Audit Committee.

(2)     At 10:00 a.m., a meeting of the Board attended by all directors of the Company (i.e. the 1^st to 8^th Respondents) was held.  It was resolved by majority (with the 2^nd Respondent and the 7^th Respondent objecting) that:-

“决议批准上述(1)截至2012年12月31日止全年之未经审核终期财务报表; (2)终期业绩之初步公告; (3)截至2012年12月31日止全年之年报草稿。

另决议授权任何一位董事负责有关终期业绩之公告于2013年3月28日根据上市规则刊登于香港联合交易所有限公司及公司网站上。

…

大比数通过将截至2012年12月31日止全年之未经审核终期财务报表及终期业绩公告刊登于香港交易所网站及公司网站。”

(Translation: “It is resolved that the following documents be approved: (1) unaudited year-end financial statements of the year ended 31 December 2012; (2) preliminary announcement of the year-end results; (3) draft annual report of the year ended 31 December 2012.

It is further resolved that any one of the directors be authorised for publishing the year-end results on the website of The Stock Exchange of Hong Kong Limited and the website of the Company on 28 March 2013 in accordance with the Listing Rules.

…

By majority it is resolved that the unaudited year-end financial statements and year-end financial results of the year ended 31 December 2012 be published on the website of The Hong Kong Stock Exchange and the website of the Company.”)

These resolutions to approve and publish the Company’s annual results based on the said unaudited financial statements on 28 March 2013 were objected to by the 2^nd Respondent and the 7^th Respondent on the ground that CH had not yet completed its audit work and had not expressed a clear audit opinion (“基于国富浩华(香港)会计师事务所有限公司因未完成所有2012年度核数工作而未能发表清晰的核数意见”).  The 7^th Respondent also reminded all directors during the meeting that the annual report was different from the previous years, as the financial results were unaudited (“这份业绩报告与去年不一样,这是一份未经审核完的财务报告。”).

(3)     At 5:08 p.m., Betty Tse sent out an email (entitled “DBA 一 業績公告之事宜” (Translation: “DBA – Matters about the Results Announcement”)) to various persons and personnel of the Company (including, inter alia, the 1^st Respondent, the 2^nd Respondent and the 7^th Respondent) with two attachments, one of which was a letter from CH signed by Betty Tse dated 28 March 2013 addressing the Audit Committee and the Board of the Company.  The letter (“the 3-28 Letter”) stated, inter alia, that:-

“我們知道貴司將會公告截至2012年12月31日止年度業績,公吿內容則以本所尚未完成審核工作的財務報表為基礎。按照上市規則第13.49(2), 貴司發表的業績公告必須‘以有關會計年度經與核數師協定同意的財務報表’為基準,由於審核工作包括視察終端機及重新打印銀行月結單等等尚未完成,因此現時仍沒有上述的 ‘協定同意的財務報表’, 現階段本所亦不會對貴司該年度公吿內容任何部份作任何確認。

由於董事需就財務報表承擔責任,我們建議貴司應當向貴司的 ‘合規主任’ 即‘Compliance Officer’ 及熟識相關法律的專業人士及公司律師尋求指引和意見,了解這個作法的風險。同時由於這個公告並非 ‘以協定同意的財務報表’ 为基準, 為免引起誤會,公告內不應說明財務資料已經被審核。”

(Translation: “We understand that your company will publish the annual results of the year ended 31 December 2012 based on the financial statements that have not been fully audited by our firm.  According to rule 13.49(2) of the Listing Rules, the preliminary announcement published by your company shall be based on ‘financial statements for the financial year which shall have been agreed with the auditors’.  Since the audit work is not completed yet (pending inspection of the ISS Terminals and the bank statements), our firm will not confirm any part of the annual results at this stage.

Since directors are liable for the financial statements, we suggest that your company shall seek guidance and advice from the company’s Compliance Officer, lawyers and other professionals, who are familiar with the relevant law, on the risks associated with the intended publication of the annual results.  Furthermore, for the avoidance of doubt, the announcement should not state that the financial information has been audited because it is not based on financial statements which are agreed between the auditors and the company.”)

The second attachment to the email is the draft AR Announcement containing CH’s comments.  In particular, CH deleted certain wordings in the draft (“CH Deletion”), as follows (the crossed words are CH Deletion):-

“The financial information has been reviewed by the audit committee of the Company (the “Audit Committee”) and has been agreed by the Group’s external auditors, Crowe-Horwath (HK) CPA Limited to the group’s consolidated financial statements.  The work-performed-by Crowe Horwath (HK) CPA Limited this respect did not constitute on assurance engagement in accordance with Hong Kong Standards on Auditing, Hong Kong Standards on Review Engagements or Hong Kong Standards on Assurance Engagements issued by the Hong Kong Institute of Certified Public Accountants consequently no assurance has been expressed by Crowe Horwath CPA Limited in this announcement.”

(4)     At 7:58 p.m. WONG Yap, Ellen (“Ellen Wong”), a secretary of the Company and assistant to the 2^nd Respondent, sent an email to Daniel Lee attaching the latest draft of the AR Announcement.  The email simply stated that the same was sent “FYI” (i.e. “for your information”).  This email was copied to Patrick Poon shortly thereafter at around 8:00 p.m.

(5)     At 8:18 p.m., upon the instruction of the 2^nd Respondent, Ellen Wong forwarded the email of Betty Tse of the same date at 5:08 p.m. (referred to in (3) above) with the 3-28 Letter attached thereto, together with a Chinese version of the draft AR Announcement, to the personal email account of the 1^st Respondent (which email was also copied to the 2^nd Respondent).

(6)     Between 3:50 p.m. and 8:24 p.m., Daniel Lee sent four emails attaching various revised audit documents to Ellen Wong and the 2^nd Respondent. The emails expressly stated that “[CH’s] audit is still in progress”; that the documents are “for discussion purpose only”, “for reference only”; that “figures may have substantial change” and were “subject to amendment, approval by CHHK’s directors and clearance of outstanding matters by the Company”.  In this regard, the said emails were in line with the two emails that Daniel Lee sent to Ellen Wong on the previous day (i.e. on 27 March 2013) at 5:05 p.m. and 8:45 p.m. respectively, in which Daniel Lee similarly stated that “since [CH’s] audit is still on progress”, the documents sent thereunder were “for discussion purpose only”, or were “for reference only”.

(7)     At 9:55 p.m., after confirming with the 2^nd Respondent, Ellen Wong sent out an email to CSR-HeterMedia, the printer, confirming that there would be no more change to the draft AR Announcement to be published as follows:-

“We have no further comment on the English and Chinese Announcement of DBA.  Please let us have HKEX’s version of e-submission right away”

(8)     At 10:24 p.m., the HKEX confirmed by email that the AR Announcement had, upon submission by the Company, been published on the HKEX news website.

Events after the AR Announcement

62.     After the AR Announcement, until about the end of April 2013, CH continued to repeatedly demand, to no avail, the Company’s cooperation on the conduct of further audit procedures, including in particular the inspection of the ISS Terminals.

63.     CH further reminded the Company repeatedly that the AR Announcement was irregular and needed to be clarified. On 11 April 2013 at 12:27 p.m., Patrick Poon on behalf of Betty Tse sent out an email (entitled “DBA –關於3 月28 日業績公告之事宜” (Translation: “DBA – About the Results Announcement on 28 March”)) to various persons and personnel of the Company including, inter alia, the 1^st Respondent, the 2^nd Respondent and the 7^th Respondent.  Attached to the email was a letter of the same title (“the 4-11 Letter”).  In the 4-11 Letter, which was directed to the Audit Committee and the Board of the Company, CH stated, inter alia, that:

“雖然至今該 ‘協定同意的財務報表’ 仍未出現, 但在3月28日當天,貴司選擇將未完成審核工作,亦沒有審計報告的財務資料公告股東。因此就缺少 ‘協定同意的財務報表’ 而言,貴司未符合上市規則。”

(Translation: “Although there has not been any (‘agreed financial statements’, your company proceeded to announce, on 28 March, to the shareholders unaudited financial information without an auditing report.  Insofar as the lack of ‘agreed financial statements’ is concerned, your company has failed to comply with the Listing Rules.”)

64.     Similar letters were further sent by CH to the Company on 19 and 27 April 2013, reminding the Company of the lack of agreement of CH regarding the financial statements purportedly published in the AR Announcement.

65.     Between 27 and 29 April 2013, further audit procedures including inspection of ISS Terminals were conducted by CH.  A total of 1,092 ISS Terminals in Beijing, Tianjin and Jinan cities in the PRC were physically inspected by CH (“the 3^rd Inspection”). Serious issues were discovered during the 3^rd Inspection including:-

(1)     90% of the ISS Terminals inspected were not functioning;

(2)     In relation to ISS Terminal Model CC208, there were serious discrepancies in the figures provided by the Company relating to the number of terminals on different occasions (on 31 December 2012, and on 24 and 26 April 2013), and also the number of terminals hand-counted during the inspection in Beijing, Tianjin and Jinan; and

(3)     There were various suspicious issues regarding 90% of the ISS Terminals inspected, including but not limited to the lack of power supply, lack of conspicuity and lack of cover.

Given these issues, CH requested that further audit procedures be carried out by conducting a full inspection of all 9,900 ISS Terminals in nine PRC cities, in order to confirm their actual existence and operational status.

66.     The problems revealed during the 3^rd Inspection were specifically brought to the attention of the Audit Committee and the Board by CH by way of email dated 8 May 2013 at 5:36 p.m. and during a meeting of the Audit Committee of the Company attended by the entire Board (i.e. the 1^st to 8^th Respondents) dated 16 May 2013.

67.     On 5 June 2013 at 5:30 p.m., Betty Tse sent out an email to various staff of the Company, including, inter alia, the 1^st Respondent, the 2^nd Respondent and the 7^th Respondent with a letter entitled “關於2012年年度審計進度、終端機明細表及實地終端機視察事宜” (Translation: “Regarding Auditing progress for the year 2012, List of ISS Terminals, and Site Inspection of ISS Terminals”) attached (“the 6-5 Letter”).  CH addressed the 6-5 Letter to the 1^st Respondent, the Audit Committee and the Board of the Company and stated, inter alia:-

“本所亦於3月28日同日回覆貴司,按香港上市規則第13.49(2)規定,年度業績公告須以公司與核數師共同接受的財務報表即「協定同意的財務報表」為基準,所以必須在公告業績公告前,要先取得本所同意。可是,至今,該 ‘協定同意的財務報表’ 并不存在。

最終,貴司亦堅持於3月28日作岀業績公告,唯該公告內容沒有列明是否經己審核,即沒有清楚列明 ‘unaudited’,或清楚列明是以管理帳目之財務資料作業績公告。本所亦於4月11日再表達了於2013年3月28日時的同樣立場。”

(Translation: “In our firm’s reply to your company dated 28 March, we stated that, according to rule 13.49(2) of the Listing Rides, the preliminary announcement published by your company shall be based on ‘financial statements for the financial year which shall have been agreed with the auditors’.  Therefore, our firm’s consent ought to be sought before the announcement of results.  Nevertheless, up till now no such agreement on the financial statements has been reached.

In the end, your company proceeded with the publication of the results on 28 March without stating clearly – whether the results were audited or not.  Neither did the announcement state clearly that the results were ‘unaudited’, or that they were compiled based on the management accounts.  Our stance, as expressed on 28 March 2013 and recited above, was reiterated on 11 April.”)

68.     The audit procedures required by CH could not be 一 and were never – completed despite repeated demands from CH and multiple meetings between the 7^th Respondent as the director of the Company and representatives from CH including Charles Chan, Betty Tse and Patrick Poon.  CH eventually resigned as the auditors of the Company on 5 August 2013.

The Alleged Misunderstanding

69.     By reason of the matters aforesaid, the Petitioner says that there is no valid basis for the Alleged Misunderstanding.  In particular, at the time when the AR Announcement was made, it was clear to the Company and all members of the Board that CH had not completed its audit work, that it was demanding that further audit procedures be carried out, and that the financial statements purportedly disclosed under the AR Announcement was not agreed to by CH.  In the numerous meetings, correspondence and communications between CH and the Company in the period between December 2012 and August 2013 (including in particular CH’s email dated 26 March 2013, the 3-28 Letter, the 4-11 Letter and the 6-5 Letter), CH had made its position clear.

70.     Indeed, in the two meetings held in the morning of 28 March 2013 referred to above (being the meetings of the Audit Committee and the Board respectively), both the 2^nd Respondent and the 7^th Respondent expressly objected to the publication of the AR Announcement on the ground that CH had not completed the audit work and had not expressed its audit opinion on the financial statements intended to be disclosed under the AR Announcement.  Accordingly, CH’s position must have been clear to the Audit Committee and the Board prior to the publication of the AR Announcement.

71.     In the premises, inasmuch as the Clarification Announcement purported to represent that the AR Representation was published as a result of the Alleged Misunderstanding, the same is false and misleading.  The Company and its directors were fully aware of the lack of agreement on the part of CH with the consolidated financial statements published in the AR Announcement and there was never any misunderstanding at all on the part of the Company and/or any of the 1^st to 8^th Respondents regarding CH’s agreement (or lack thereof) with the said consolidated financial statements.

The Misrepresentations and the failure or delay in correcting the same

72.     By reason of the above matters, the 1^st to 8^th Respondents have caused, permitted and/or allowed the Company to make the following representations which are false or misleading:-

(1)     The AR Representation which falsely and/or misleadingly represented that the consolidated financial statements published therein complied with the applicable disclosure provisions of the Listing Rules, thereby impliedly representing that they were financial statements that had been agreed to by the auditors of the Company (“the AR Misrepresentation”); and

(2)     The Clarification Announcement which falsely and/or misleadingly represented that the AR Representation was due to the Alleged Misunderstanding (“the Clarification Misrepresentation”).

73.     On 28 June 2018, the Company pleaded guilty to, and was convicted of, the offence of providing to the Petitioner via the HKEX, in purported compliance with a requirement under section 7(1) and pursuant to section 7(3) of the Securities and Futures (Stock Market Listing) Rules, a copy of the AR Announcement containing information which was false and misleading in a material particular (the false and misleading information being a reference to the AR Misrepresentation), contrary to sections 384(1) and (6) of the Ordinance.  On the 11 April 2019, the 2^nd Respondent was found guilty and convicted of the same offence, pursuant to sections 384 and 390 of the Ordinance.

74.     The Petitioner repeats paragraphs 46-48 hereinabove.  In the premises, the Company had failed to timely disclose to the shareholders that the consolidated financial statements published in the AR Announcement had not been agreed to by the Company’s auditors.  Until the Clarification Announcement on 19 June 2013, members of the Company were being misled by the AR Representation that the consolidated financial results in the AR Announcement were agreed to by the Company’s auditors.  By leaving the investing public to trade in shares of the Company on a false premise that the consolidated financial statements published in the AR Announcement had been agreed to by the Company’s auditors, the Company had damaged the integrity of the securities and futures market, which depends on there being a transparent system of disclosure of significant and accurate information. In the premises, the Company and its directors continued to perpetrate the AR Misrepresentation and had failed or delayed in correcting/clarifying the same for more than 2 and a half months after the AR Announcement was made.

75.     The Clarification Misrepresentation was never corrected by the Company or its directors.

B4     Liability of the 2^nd Respondent

76.     By reason of the matters aforesaid, the 2^nd Respondent has, in the manner more particularly set out in paragraph 77 below:-

(1)     acted in a grossly incompetent or negligent manner;

(2)     acted in breach of his Fiduciary Duties and his common law duty of care owed to the Company;

(3)     acted in breach of Rule 2.13(2), 3.08(a), (b) and (f), 3.16 and 13.04 of the Listing Rules in failing to act (i) honestly and in good faith in the interests of the Company as a whole; (ii) act for proper purpose; and (iii) apply such degree of skill, care and diligence as may reasonably be expected of a person of his knowledge and experience and holding his office within the Company;

(4)     conducted the business or affairs of the Company in a manner:-

(a)     involving misfeasance or misconduct towards the Company, its members or part of its members;

(b)     resulting in its members or part of its members not having been given all the information with respect to its business or affairs that they might reasonably expect; or

(c)     unfairly prejudicial to its members or any part of its members.

77.     The 2^nd Respondent was responsible for conducting the affairs and business of the Company in the aforesaid manner as follows:-

(1)     The 2^nd Respondent (as the Chief Financial Officer, Company Secretary, an Executive Director of the Company and the person responsible for the overall financial planning and financial management of the Group) caused, permitted and/or allowed the Company to make the AR Representation in the AR Announcements by falsely and/or misleadingly representing that the financial statements contained in the AR Announcement complied with the disclosure provisions under the Listing Rules in representing that the financial statements were agreed to by CH, auditors of the Company;

(2)     The 2^nd Respondent caused, permitted and/or allowed the Company to continue to perpetrate the AR Misrepresentation after the publication of the AR Announcement, and failed to timely correct or clarify the same between Announcement, and failed to timely correct or clarify the same between 28 March 2013 and 18 June 2013, despite having made 3 public announcements on 30 April 2013, 5 June 2013 and 6 June 2013;

(3)     The 2^nd Respondent caused, permitted or allowed the Company to falsely and misleadingly represent in the Clarification Announcement that the AR Misrepresentation was due to the Alleged Misunderstanding and failed to correct the Clarification Misrepresentation;

(4)     At all material times, the 2^nd Respondent was an Executive Director of the Company. He was also a member of the senior management of the Company in charge of the business operations of the Company and/or its subsidiaries.  Paragraph 14(4) hereinabove is repeated.  In breach of his duties to the Company, the 2^nd Respondent failed to exercise reasonable degree of skill and care to prevent the Company from engaging in false accounting which resulted in the Misstatements.  The Petitioner further says that in light of the magnitude of the Misstatements, and the 2^nd Respondent’s position in the Company and the fact that the 2^nd Respondent was in close control and charge of the management of the daily operations of the Company and/or its subsidiaries, he has failed to exercise reasonable care and diligence in failing to discover the Misstatements and/or to prevent the same from being made; and

(5)     In breach of his duties to the Company, the 2^nd Respondent further failed to exercise reasonable care and skill to prevent the Company from publishing, the Misstatements in the financial statements of the Company for the years 2010 to 2012 m its Annual Report 2010, Annual Report 2011, Interim Report 2012, and the relevant results announcements more particularly mentioned above.

C.     AGREED MITIGATING FACTORS

78.     The 2^nd Respondent has been cooperative in relation to these proceedings with the Petitioner and accepts liability.

79.     The 2^nd Respondent has adopted a reasonable course of action in agreeing to conclude these proceedings by way of the Carecraft Procedure which would save the time and costs of the Petitioner and the Court, and in agreeing to pay his share of the costs of the Petitioner in these proceedings.

D.     PROPOSAL FOR DISQUALIFICATION

80.     On the basis of the facts not in dispute as set out in Section B above:-

80.1     the 2^nd Respondent does not object to a disqualification order being made against him under section 214(2)(d) of the Ordinance under which, he shall not, without the leave of the Court:-

 (a)     be, or continue to be, a director, liquidator, receiver or manager of the property or business of DBA Telecommunication (Asia) Holdings Limited and any corporation in Hong Kong; and

 (b)     in any way directly or indirectly be concerned, or take part, in the management of DBA Telecommunication (Asia) Holdings Limited and any corporation in Hong Kong.

80.2     There is no agreement on the appropriate period of disqualification, and the 2^nd Respondent agrees that the appropriate period of disqualification shall be determined by the Court.

81.     The Petitioner and the 2^nd Respondent have reached an agreement on the Petitioner’s costs of these proceedings.  The 2^nd Respondent agrees to pay and the Petitioner accepts the sum of HK$398,000 in full and final settlement of the 2^nd Respondent’s share of the Petitioner’s costs in these proceeding.

Appendix 3b

 ____________________________________________________________________

STATEMENT OF FACTS NOT IN DISPUTE FOR

THE PURPOSES OF A CARECRAFT SETTLEMENT BETWEEN

THE PETITIONER AND THE 7^th RESPONDENT

_____________________________________________________________________

A.     INTRODUCTION

1.     On 31 July 2019, the Securities and Futures Commission (“the Petitioner”) issued these proceedings under section 214 of the Securities and Futures Ordinance (Cap, 571) (“the Ordinance”) seeking, inter alia, disqualification orders against Mr YUN Lok Ming (“the 7^th Respondent”) and others in respect of their conduct of the business and affairs of DBA Telecommunication. (Asia) Holdings Limited (“the Company”).

2.     Subject to the approval of this Court, the Petitioner and the 7^th Respondent consent to the disposal of these proceedings against the 7^th Respondent by way of the summary procedure (“the Carecraft Procedure”) sanctioned in Re Carecraft Construction Co Limited [1994] 1 WLR 172, as clarified by the English Court of Appeal in Secretary of State for Trade and Industry v Rogers [1996] 1 WLR 1569 and as adopted by this Court in a number of cases including but not limited to Securities and Futures Commission v Yick Chong San [2007] 4 HKLRD 46, Securities and Futures Commission v Fung Chiu and Others [2009] 2 HKC 19, Securities and Futures Commission v Shum Ka Sang Charlie and Shen Yi (HCMP 1014/2008, unrep, 22.05.2015), Securities and Futures Commission v Cheung Chi Shing and Others [2011] 1 HKLRD 96, Securities and Futures Commission v Cheung Keng Ching and Others (HCMP 1869/2008, unrep, 18.03.2010) and Securities and Futures Commission v Kwok Wing & Others (HCMP 3392/2013, unrep, 27.03.2015) in respect of proceedings under section 214 of the Ordinance.

3.     This Statement is produced in order to identify the material facts relied upon by the Petitioner in these proceedings that are not disputed by the 7^th Respondent, for the disposal of these proceedings on the basis that the case against the 7^th Respondent will be dealt with by this Court by way of the Carecraft Procedure.

4.     Solely for the purpose of resolving these proceedings by way of the Carecraft Procedure, and by reference to the facts set out in Section B below (which the 7^th Respondent admits and accepts), the 7^th Respondent accepts that during the relevant period, the business and affairs of the Company, for which the 7^th Respondent as an Independent Non-Executive Director (“INED”) and member of the Audit Committee was responsible, have been conducted in a manner described in section 214(l)(b), (c) and (d) of the Ordinance, namely:

4.1     involving misfeasance or misconduct towards the Company, its members or part of its member;

4.2     resulting in its members or any part of its members not having been given all the information with respect to its business or affairs that they might reasonably expect; and/or

4.3     unfairly prejudicial to its members or any part of its members.

5.     On the basis of the facts set out in Section B below and the agreed mitigating factors set out in Section C below, the Petitioner and the 7^th Respondent agree, and the 7^th Respondent is prepared to accept, that it would be appropriate for a disqualification order to be made against the 7^th Respondent under section 214(2)(d) of the Ordinance under which he shall not for a period of 1.5 years, without the leave of the Court:-

5.1     be, or continue to be, a director, liquidator, or receiver or manager of the property or business of DBA Telecommunication (Asia) Holdings Limited and any corporation in Hong Kong; and

5.2     in any way directly or indirectly be concerned, or take part, in the management of DBA Telecommunication (Asia) Holdings Limited and any corporation in Hong Kong.

6.     The Petitioner and the 7^th Respondent have reached an agreement on the Petitioner’s costs of these proceedings.  The 7^th Respondent agrees to pay and the Petitioner accepts the sum of HK$488,000.00 in full and final settlement of the 7^th Respondent’s share of the Petitioner’s costs in these proceedings.

7.     In the event of a disqualification order made against the 7^th Respondent by reference to this Statement: (1) the Petitioner and the 7^th Respondent agree that they will jointly apply to this Court for a direction that this Statement be annexed to a judgment of this Court; and (2) the Petitioner reserves the right to refer to this Statement for all purposes connected with or ancillary to these proceedings including, but not limited to, the continuation of these proceedings against other Respondents.

8.     The Petitioner and the 7^th Respondent agree that in the event this Court for whatever reason is of the view that these proceedings shall not be dealt with by the Court by way of the Carecraft Procedure or that a full hearing is appropriate, no admission or concession by either the Petitioner or the 7^th Respondent nor any proposal for disqualification or the period of disqualification herein referred to or liability to pay costs shall be referred to or relied upon by either party at any subsequent hearing in these proceedings without the prior written consent of both parties.

B.     FACTS NOT IN DISPUTE

9.     The structure of Section B of this Statement is as follows:-

9.1     Section B1 sets out the background information relating to the Group, the Company and its management.

9.2     Sections B2 and B3 set out the facts relied upon by the Petitioner in support of its case that the business and affairs of the Company have been conducted in such manner described in sections 214(1)(b), (c) and (d) of the Ordinance.

9.3     Section B4 sets out the facts relied upon by the Petitioner in support of its case that the 7^th Respondent was responsible for the aforesaid conduct of business and affairs of the Company.

B1.     Background and Management of the Group and the Company

The Company

10.     The Company was incorporated in the Cayman Islands on 15 June 2004 as an exempted company with limited liability under the Companies Law, Cap. 22 with its registered office at P.O. Box 309 GT, Ugland House, South Church Street, George Town, Grand Cayman, KY1-1104, Cayman Islands.  At all material times, the Company’s principal place of business in Hong Kong was situated at Unit 2307, 23^rd Floor, Great Eagle Center, 23 Harbour Road, Wan Chai, Hong Kong.

11.     The Company’s shares have been listed on the Main Board of The Stock Exchange of Hong Kong Limited (“HKEX”) (Stock code: 3335) since 11 May 2006.

The Group

12.     At all material times, the group comprising of the Company and its subsidiaries (“the Group”) were principally engaged in:-

(1)     Information technology business: the design, manufacture and sales of telecommunications equipment and related product;

(2)     Intelligent self-services business: engaging in payment service in public utility including pre-paid phone cards, water, electricity and gas through sales of pre-paid cards, recharging and other services requiring self-service payments utilizing intelligent self-service equipment such as smart card vending machines, recharging machines and payment machines; display of advertisement on intelligent self-service terminals; and provision of electronic payment and settlement services; display of advertisement on intelligent self-service terminals and provision of electronic payment and settlement services; and

(3)     Agency business: trading for telecommunication products.

13.     At all material times, the Company had five PRC subsidiaries, which included the following three wholly-owned key subsidiaries:-

(1)     Skyban Telecommunication (Fujian) Limited was established in the PRC on 26 September 2006 (“Skyban”) having its principal activity in the design, manufacture and sales of telecommunication equipment and related products, and trading of telecommunication equipment;

(2)     Fujian Create State Industry Co., Ltd. was established in the PRC on 5 April 1997 (“Fujian Create State”) having its principal activity in the design, manufacture and sales of telecommunication equipment and related products, and trading of telecommunication equipment; and

(3)     Wozhong Intelligent System Service (China) Co., Ltd. was established in the PRC on 30 November 2006 (“Wozhong”), having its principal activity in the sales of telecommunication value-added cards, insurance prepaid cards and online game value-added cards through intelligent self-service terminals (“ISS Terminals”).

The Management of the Company

14.     At all material times:-

(1)     The Company had five Executive Directors (“EDs”) and three INEDs on its board of directors (“the Board”).

(2)     The EDs of the Company were (i) Mr YU Longrui the 1^st Respondent; (ii) Mr CHAN Wai Chuen the 2^nd Respondent; (iii) Mr YU Longhui the 3^rd Respondent; (iv) Mr ZHENG Feng the 4^th Respondent; and (v) Mr YEUNG Shing the 5^th Respondent.

(3)     The INEDs of the Company were (i) Mr YU Lun the 6^th Respondent; (ii) the 7^th Respondent; (iii) Mr ZHENG Qingchang (until 31 December 2012) and Mr JIANG Weiliang the 8^th Respondent (since 31 December 2012).

(4)     The senior management of the Company comprised of all five EDs and their respective responsibilities were as follows:-

(a)     The 1^st Respondent was the Chairman, the Chief Executive Officer of the Company, and a co-founder of the Group.  He was responsible for the overall strategic planning and formulation of corporate policies for the Group and in overall charge of the Group’s operation.  He had more than 16 years of corporate management experience in the PRC telecommunication industry. From 2003 to 2008, he was appointed as the executive director of the Seventh Board of Directors of the China Enterprise Confederation/China Enterprisers Association.  In 2006, he was appointed as the Vice-Chairman of the Fujian Entrepreneur Association.  He had further been a member of the senior management of the key subsidiaries of the Group as follows:-

(i)     Legal representative and chairman of Skyban between 23 May 2013 and 22 July 2013;

(ii)     Legal representative, general manager and chairman of Fujian Create State since its incorporation until about 2009; and

(iii)    Director of Wozhong since 11 May 2010.

(b)     The 2^nd Respondent was the Chief Financial Officer and the Company Secretary of the Company, and was responsible for overall financial planning and financial management of the Group.  He joined the Group in August 2004.  He was a fellow of the Hong Kong Institute of Certified Public Accountants.  By 2013, he had around 20 years’ experience in financial control capital market, corporate finance, and mergers and acquisitions.

 (c)     The 3^rd Respondent was also a co-founder of the Company and the Group.  He had further been a member of the senior management of the key subsidiaries of the Group as follows:-

 (i)     Chief executive director and legal representative of Skyban, and responsible for the project planning and implementation of industry plans in Skyban between June 2006 and May 2013; and

 (ii)     General Manager of Fujian Create State since about 2009.

 (d)    The 4^th Respondent joined the Group in July 2003 and was responsible for the research and development of the Group’s technology and products.  He had over 23 years’ experience in the electronics and telecommunication product industries.  He had also taken up various senior management positions of Wozhong, being its legal representative and chairman from 30 November 2006 to 11 April 2008, and its director since 11 April 2008.

 (e)     The 5^th Respondent is a co-founder of the Group and at all material times was responsible for business development of the Group including liaison with its main customers and business partners.  Particularly, he had very close dealings with, and also close working relationship with China Telecom Corporation Limited, a major customer of the Group.  He had over 18 years of corporate management experience in the PRC telecommunication industry.  He had been a member of the senior management of the key subsidiaries of the Group as follows:-

 (i)     Director of Fujian Create State between 5 November 2002 and about 2009; and

 (ii)     Legal representative and chairman of Fujian Create State in about 2009.

 (5)     The Audit Committee comprised of the INEDs.

 (6)     The 1^st Respondent, through himself and Daba International Investments Limited (“Daba”), a company incorporated in the British Virgin Islands of which the 1^st Respondent had control, was the controlling shareholder of the Company, being the beneficial owner of 51% or more of the entire issued share capital of the Company, as follows:-

 (a)     personally owning about 3% of the entire issued share capital of the Company; and

 (b)     beneficially owning about 48% of the entire issued share capital of the Company through Daba (as the registered holder of 500,680,000 shares of the Company).

 (7)     The 3^rd Respondent is a brother of the 1^st Respondent.  While he personally did not hold any shares in the Company, he has beneficial interests in the Company through his 6.86% shareholding in Daba.

The 1^st to 8^th Respondents’ Duties to the Company

15.     At all material times, each of the 1^st, 2^nd, 3^rd, 4^th, 5^th, 6^th, 7^th, and 8^th Respondents owed, inter alia, the following fiduciary duties to the Company:

 (1)     a duty to act in good faith and in the best interest of the Company;

 (2)     a duty to exercise their powers for proper purposes; and

 (3)     a duty not to allow any conflict between their duties as directors and their personal interests (collectively, “the Fiduciary Duties”).

16.     Further, each of them also owed to the Company a duty of care at common law to exercise due and reasonable skill, care and diligence in the course of acting as the executive and non-executive directors of the Company.

17.     In order to act as the directors of the Company, each of the 1^st, 2^nd, 3^rd, 4^th, 5^th, 6^th, 7^th, and 8^th Respondents were required to and did sign a formal declaration, undertaking and acknowledgement as per Form B of Appendix 5 to the Rules Governing the Listing of Securities on the HKEX (“the Listing Rules”), whereby each of them undertook to the HKEX that they would, in the exercise of their powers and duties as directors of the Company, comply and procure the Company to comply with, inter alia, the Listing Rules from time to time in force.

Current Status of the Company

18.     On 3 June 2015, the Company announced that joint liquidators had been appointed to wind up the Company’s PRC subsidiaries, including Skyban, Fujian Create State and Wozhong.  Further, the Company was placed in the third and final delisting stage on 9 March 2016 as it had failed to satisfy certain resumption conditions, including publishing all outstanding financial results, addressing audit qualifications and completing the independent board committee’s review on, inter alia, the relevant audit issues set out in the Company’s announcement of 19 June 2013, the circumstances that led to the publication of the unaudited 2012 annual results, and the delay in despatch of its 2012 annual report.

19.     On 12 and 13 October 2016, the Company published its annual results for the years ended 31 December 2012 to 2015.  On 3 April 2017, the Company published its unaudited interim results for the six months ended 30 June 2013 to 2016.  Trading in the shares of the Company, which was suspended on 6 June 2013, remains suspended until further notice.

20.     As part of a resumption proposal, the Company entered into a conditional agreement in June 2015 to acquire a target group principally engaged in the business and development of dairy products at a consideration of HK$600 million.  As the acquisition constituted a very substantial acquisition and a reverse takeover, the Company was treated as a new listing applicant and the acquisition would be subject to the approval of the Listing Committee of the HKEX.  Approval has not yet been given.

21.     The Company has submitted three new listing applications to the HKEX in relation to the acquisition, which have all since lapsed.  On 25 September 2018, the Company announced, inter alia, that it intended to renew the new listing application and resubmit it to the HKEX in the first quarter of 2019.  On 8 May 2019, the Company further announced, inter alia, that the intended resubmission time of the new listing application will have to be postponed to end of September 2019 due to the resignation of the sponsor.

B2.     MISSTATEMENTS

22.     The 7^th Respondent acknowledges that it is the Petitioner’s case that its investigation revealed substantial misstatements in the financial statements published by the Company for the financial years ended 31 December 2010 to 31 December 2012 (collectively “the Published Figures”) in its Annual Report 2010, Annual Report 2011, Interim Report 2012, their corresponding results announcements (being the results announcements of the Company dated 22 March 2011 and 15 March 2012 respectively), and also the announcement of its annual results for the year ended 31 December 2012 dated 28 March 2013 (“the AR Announcement”) which were published with the authorisation of and by order of the Board.  The 7^th Respondent did not have knowledge of the Misstatements, defined below.

The Published Figures

23.     On 22 and 28 March 2011, the Board announced the Group’s audited consolidated results for the year ended 31 December 2010.  The results purportedly showed a strong financial position of the Group, with a high level of cash and cash equivalents as follows:

24.     Most of the Group’s cash and cash equivalents were at all material times held by the subsidiaries in the PRC.  As indicated in the Company’s 2010 Annual Report, the allocation of cash and cash equivalents between the Company and its subsidiaries as at 31 December 2010 and 31 December 2009 were as follows:-

25.     On 15 and 27 March 2012, the Board announced the Group’s audited consolidated results for the year ended 31 December 2011.  The results purportedly showed that the Group’s financial position continued to be strong, with a high level of cash and cash equivalents as follows:-

26.     As in the previous years, most of the Group’s cash and cash equivalents were held by the subsidiaries in the PRC.  As indicated in the Company’s 2011 Annual Report, the allocation of cash and cash equivalents between the Company and its subsidiaries as at 31 December 2011 and 31 December 2010 were as follows:-

27.     According to the Annual Report 2010 and the Annual Report 2011, the majority of the Group’s funds were deposited in banks in the PRC and banks in Hong Kong, and the Group possessed sufficient cash and bank balances to meet its commitment and working capital requirements.

28.     On 28 March 2013, the Board announced the Group’s consolidated results for the year ended 31 December 2012.  The results purportedly showed that the Group's financial position continued to be strong, with a high level of cash and cash equivalents as follows:-

29.     At the material times, Crowe Horwath (HK) CPA Limited (“CH”) was the auditors of the Company.  According to CH, since the Company was listed, most of the Group’s cash was deposited in bank accounts in the PRC held by Wozhong and Skyban.  In the course of their audit of the Group’s accounts for the financial years 2010 to 2012, CH verified the year end balances for each bank account with the relevant banks by requesting for bank confirmations and conducted cash count and transaction testing, with satisfactory results.

30.     According to CH, the consolidated results of the Group for the years ended 31 December 2010 to 31 December 2011 were audited based on the documentations and bank confirmations provided to them, and that they did not at the time have reason to question the authenticity of the documentations provided by the Company and/or the banks.  Clean audit opinions were issued by CH in respect of the financial results for these two years.  For reasons elaborated in more detail below, CH did not issue auditor’s report for the year ended 31 December 2012 as it was unable to complete the audit procedures.

The Discrepancies

31.     In the course of its investigation, the Petitioner has through the China Securities Regulatory Commission (“CSRC”), obtained copies of statements of the Company’s relevant bank accounts covering the relevant period (“CSRC Copies of bank statements”).

32.     In these proceedings the Petitioner will rely on the CSRC Copies of bank statements as representing truthfully and accurately the total cash and bank balances of Wozhong and Skyban as at 31 December 2010, 31 December 2011 and 31 December 2012 respectively.  The Petitioner will further rely upon the following:-

(1)     The CSRC was set up in October 1992 as a government agency at the ministry-level under the direction of and authorised by the State Council to regulate and supervise the securities and futures markets in the PRC in accordance with all applicable legislations and regulations for the purpose of maintaining fair, efficient and transparent operation of the securities and futures markets.

(2)     Pursuant to Article 180(6) of the Law of the People’s Republic of China on Securities (“Securities Law”), which came into effect on 1 January 2006 and remained applicable when the CSRC Copies of bank statements were obtained, the CSRC has the power to inquire about the accounts of funds and securities and bank accounts of the parties concerned and of the units and individuals related to events under investigation.

(3)     Article 183 of the Securities Law stipulates that, when the CSRC performs its duties pursuant to law, the units and individuals under inspection or investigation shall cooperate, provide truthful documents and materials required.

(4)     Pursuant to Article 60(2) of the Law of the People’s Republic of China on Penalties for Administration of Public Security, which came into effect on 1 March 2006 and remained applicable when the CSRC Copies of bank statements were obtained, a person shall become punishable by detention and financial penalty if he forges, conceals or destroys evidence, or provides false testimony or giving false information about a case, which affects the administrative law enforcement organ in dealing with the case according to law.

33.     The CSRC Copies of bank statements demonstrate that the actual total cash and bank balances (including pledged deposit) of Wozhong and Skyban for the years ended 31 December 2010 to 31 December 2012 were drastically different from the balances shown in the CH’s audit working papers, and that the Published Figures had been overstated as follows:

(1)     For the year 2012, the consolidated figure of the Group was overstated by at least RMB562,957,017.25 in the Published Figures as follows:-

(a)     Cash and bank balance of Wozhong was overstated by at least RMB198,389,933.97; and

(b)     Cash and bank balance of Skyban was overstated by at least RMB364,567,083.28.

(2)     For the year 2011, the consolidated figure of the Group was overstated by at least RMB379,945,177.50 in the Published Figures as follows:-

(a)     Cash and bank balance of Wozhong was overstated by at least RMB211,721,672.02; and

(b)     Cash and bank balance of Skyban was overstated by at least RMB168,223,505.48.

(3)     For the year 2010, the consolidated figure of the Group was overstated by at least RMB471,793,766.78 in the Published Figures as follow:-

(a)     Cash and bank balance of Wozhong was overstated by at least RMB136,197,156.52; and

(b)     Cash and bank balance of Skyban was overstated by at least RMB335,596,610.26.

34.     In addition, in the course of its investigation, the Petitioner has obtained written, confirmations (“Replies to the Petitioner”) from China Telecom Corporation Limited, China Unicom Hong Kong Limited and China Mobile Limited (“the 3 Telecom Companies”), whose operating subsidiaries in the PRC were purported to be the major customers and/or suppliers of Fujian Create State, Skyban and Wozhong, with regards to the Sales to, the Costs of Sales and Purchases balances of, as well as the Trade Receivable balances due to the Company.

35.     Although the Sales to the 3 Telecom Companies recorded in CH’s audit working papers on the Company matched with the corresponding sales figures purportedly recorded in the Company’s Management Accounts – Sales Schedules, they do not match with the Sales confirmed by the 3 Telecom Companies in their Replies to the Petitioner.  Moreover, by reason of the overstatement of the Costs of Sales and Purchases figures in the Published Figures as elaborated in paragraph 36 below, it is to be inferred that the corresponding Sales figures based on these overstated Purchases were also overstated.  In the premises, the Sales (or Turnover) figures of the Company in the Published Figures were significantly overstated as follows:-

(1)     For the year 2012, the consolidated figure of the Group was overstated by at least RMB7,038,969,816 in the Published Figure as follows:-

 (a)     Sales of Wozhong was overstated by around RMB6,333,602,604; and

 (b)     Sales of Skyban was overstated by at least RMB705,367,212.

(2)     For the year 2011, the consolidated figure of the Group was overstated by at least RMB5,276,770,298 in the Published Figure as follows:-

 (a)     Sales of Wozhong was overstated by around RMB4,616,471,305; and

 (b)     Sales of Skyban was overstated by at least RMB660,298,993.

(3)     For the year 2010, the consolidated figure of the Group was overstated by at least RMB3,406,008,740 in the Published Figure as follows:-

 (a)     Sales of Wozhong was overstated by around RMB2,805,479,350;

 (b)     Sales of Fujian Create State was overstated by at least RMB240,851,571; and

 (c)     Sales of Skyban was overstated by at least RMB359,677,819.

36.     Further, although the Costs of Sales balances recorded in CH’s audit working papers on the Company matched with the corresponding Costs of Sales balances purportedly recorded in Wozhong’s Management accounts – profit and loss statement, the amount of Purchases from the 3 Telecom Companies recorded in CH’s audit working papers do not match with the respective Purchases confirmed by the 3 Telecom Companies in their Replies to the Petitioner.  As a result, the Cost of Sales and Purchases figures in the Published Figures were significantly overstated as follow:

(1)     For the year 2012, the consolidated figure of the Group was overstated by at least RMB6,004,740,509.57 by reason of the corresponding overstatement of the Purchases of Wozhong;

(2)     For the year 2011 the consolidated figure of the Group was overstated by at least RMB4,429,904,865.41 by reason of the corresponding overstatement of the Purchases of Wozhong; and

(3)     For the year 2010 the consolidated figure of the Group was overstated by at least RMB2,790,988,944.35 by reason of the corresponding overstatement of the Purchases of Wozhong.

37.     Further, although the Trade Receivables balances recorded in CH’s audit working papers on the Company matched with the corresponding balances purportedly recorded in the Company’s Management Accounts – Trade Receivables Schedules, they do not match with the respective Trade Receivable balances due from the 3 Telecom Companies confirmed by them in their Replies to the Petitioner.  As a result, the Trade Receivables figures in the Published Figures were significantly overstated as follows:

(1)     For the year 2012, the consolidated figure of the Group was overstated by at least RMB338,393,923 in the Published Figures by reason of the corresponding overstatement of the Trade Receivables of Skyban.

(2)     For the year 2011, the consolidated figure of the Group was overstated by at least RMB319,361,055 in the Published Figures as follows:-

 (a)     Trade Receivables of Fujian Create State was understated by RMB536,030; and

 (b)     Trade Receivables of Skyban was overstated by at least RMB319,897,085.

(3)     For the year 2010, the consolidated figure of the Group was overstated by at least RMB188,139,108 in the Published Figures as follows:-

 (a)     Trade Receivables of Fujian Create State was understated by at least RMB3,281,151; and

 (b)     Trade Receivables of Skyban was overstated by at least RMB191,420,259.

38.     It is the case of the Petitioner that:-

(1)     the bank confirmations provided to CH in the course of its audit of the Company’s accounts were false or were fabrications;

(2)     the figures for the Sales to, the amount of Purchases from, and the Trade Receivable balances due from the 3 Telecom Companies shown in CH’s audit working papers (from which the relevant Published Figures such as Turnover, Costs of Sales and Trade Receivables were calculated) were false and incorrect; and

(3)     given their position and control of the Group’s management and its day-to-day operations (including the operations of its subsidiaries), and/or their dealings and relationship with the customers, at all material times the 1^st Respondent, 2^nd Respondent, 3^rd Respondent, 4^th Respondent and the 5^th Respondent acted negligently/in breach of their duty of care by failing to uncover the misstatements and failing to disclose the Company’s true financial position as pleaded in paragraph 33-37 hereinabove and subparagraphs (1) and (2) of this paragraph.

39.     The abovementioned misstatements are material, substantial and serious.  They provided false and misleading information to the public regarding the financial position of the Company.  The misstatements identified above further led to misstatements of other items in the Published Figures as follows:-

(1)     Contrary to the Published Figures, the actual Gross profits and Profits for the years 2010 to 2012 in the Statement of Income were significantly negative, and that loss had been increasing at a significant pace year by year;

(2)     Contrary to the Published Figures, the actual Equity Attributable to Owners of the Company was either much smaller (for the year 2010) or already in significant deficit (for years 2011 and 2012).  In other words, the Company had been insolvent since 2011 the latest; and

(3)     Contrary to the Published Figures, the actual Cash and Cash Equivalents for Cash Flow was significantly negative throughout the years of 2010 to 2012.

40.     The overall effect of these misstatements (“the Misstatements”) was that the business and financial position of the Company had been falsely and misleadingly represented to members of the public (in particular, members of the Company) as being in a much better shape and condition than it actually was.

B3.     MISREPRESENTATIONS

Publication of the AR Announcement

41.     On 28 March 2013, the Company published an announcement of its annual results for the year ended 31 December 2012 (i.e. the AR Announcement) shortly before the deadline imposed by Rule 13.49(1) of the Listing Rules.  The AR Announcement was published in the HKEX news website at or shortly before 10:24 p.m. on 28 March 2013.  Unlike the announcements made by the Company of its annual results in previous years, the AR Announcement did not refer to the consolidated financial statements contained therein as having been “audited by the Company’s external auditor and reviewed by the Company’s audit committee”. However, in Section 2 (entitled “Statement of Compliance”), the AR Announcement included the following statement or representation (“the AR Representation”):

“…These financial statement also comply with the applicable disclosure provisions of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited.”

42.     Rule 13.49(2) of the Listing Rules provides as follows:-

“The preliminary announcement shall be based on the issuer’s financial statements for the financial year which shall have been agreed with the auditors.”

43.     This requirement is repeated in §45 Appendix 16 of the Listing Rules.

44.     Rule 13.49(3) of the Listing Rules further provides that if Rule 13.49(2) could not be complied with, an announcement must be made, before the same deadline as that provided under Rule 13.49(1), with the following information:-

“(a) a full explanation for its inability to make an announcement based on financial statements which have been agreed with the auditors.  Where there are uncertainties arising from the lack of supporting evidence or relating to the valuation of assets or liabilities, sufficient information to allow investors to determine the significance of the assets or liabilities; 

(b)     The expected date of announcement of the financial results for the financial year which shall have been agreed with the auditors; and

(c)     so far as the information is available, results for the financial year based on financial results which have yet to be agreed with the auditors.  Where possible, those results must have been reviewed by the issuer’s audit committee.  In the event that the audit committee disagreed with an accounting treatment which had been adopted or the particulars published in accordance with rule 13.49(3)(i)(a), full details of such disagreement.”

45.     By reason of the matters aforesaid, the AR Representation, inasmuch as it purported to state – without any qualification or any other explanation – that the “disclosure provisions” under the Listing Rules (which included Rule 13.49) had been “complied with”, impliedly represented that the consolidated financial statements disclosed therein had been “agreed with the auditors”.

46.     On 30 April 2013, pursuant to the unanimous resolution of the entire Board (i.e. the 1^st to 8^th Respondents) of the same date, the Company made an announcement (“the 30 April 2013 Announcement”) that the publication of the financial results of the Company and its subsidiaries for the year ended 31 December 2012 would be delayed.  The 30 April 2013 Announcement mentioned nothing about any lack of agreement by the Company’s auditors to the financial statements contained in the AR Announcement. In relation to the auditors, it stated that:-

     “The Board wishes to inform the shareholders and potential investors of the Company that, as additional time is required for the Company to prepare for the additional information requested by the auditors (the ‘Auditors’) of the Company, Crowe Horwath (HK) CPA Limited, for it to perform and complete the audit of the Group for the financial year ended 31 December 2012, the dispatch date of the annual report of the Company for the year ended 31 December 2012 (the ‘2012 Annual Report’) will be postponed to be on or before 28 June 2013”.

47.     On 5 June 2013, the Company made a further announcement relating to the substantial decrease in the price and increase in the trading volume of the shares of the Company on that day stating, inter alia that it was “not aware of any reasons for these price and volume movements or of any information which must be announced”.  Again, this announcement mentioned nothing about any lack of agreement by the Company’s auditors to the financial statements contained in the AR Announcement.

48.     On 6 June 2013 at 9:00 a.m., at the request of the Company, trading of its shares was halted and the Company issued a public announcement on the same date for that purpose.  Similarly, this announcement mentioned nothing about any lack of agreement by the Company’s auditors to the consolidated financial statements contained in the AR Announcement.

The Lack of Agreement with the Auditors

49.     At all material times, Crowe Horwath (HK) CPA Limited (“CH”) were the auditors of the Company.  The consolidated financial statements for the year 2012 published in the AR Announcement were never agreed with by CH.  Despite the fact that three announcements (as referred to above) were made by the Company subsequent to the AR Announcement, the Company made no attempt to correct or clarify the matter until 19 June 2013 when the Company made a further announcement purporting to clarify that there had actually been no agreement with the Company’s auditors regarding the consolidated financial statements announced in the AR Announcement (“the Clarification Announcement”), as follows:-

     “The Board refers to the announcement of the Company dated 28 March 2013 in relation to the results of the Company for the year ended 31 December 2012.  The Board wishes to clarify that the consolidated financial statements set out in the AR Announcement have not been audited or otherwise agreed to by the Auditors.”

The Clarification Announcement further sought to explain the misrepresentation in the AR Announcement by alleging a misunderstanding (“the Alleged Misunderstanding”) as follows:-

“As a result of a misunderstanding, the Company had not appreciated at the time of publication of the AR Announcement that the Auditors had not in fact agreed with the AR Announcement as the audit of the consolidated financial statements of the Company for the year ended 31 December 2012 had not been completed as at the publication date of the AR Announcement.”

50.     The Alleged Misunderstanding is false and misleading.  The fact that CH did not agree to the consolidated financial statements had been repeatedly stressed by CH in various correspondence between CH and the Company, including email correspondence dated 26 March 2013, 28 March 2013, 11 April 2013 and 5 June 2013.

51.     By reason of the matters aforesaid, contrary to the AR Representation, the consolidated financial statements disclosed in the AR Announcement did not in fact comply with the applicable disclosure provisions of the Listing Rules.  Insofar as the AR Representation purported to represent otherwise, the same is false and misleading.

52.     As mentioned above, despite the making of three subsequent announcements (dated 30 April 2013, 5 June 2013 and 6 June 2013 respectively), the Company did not – and made no attempt to – correct or clarify the false or misleading representation made in the AR Representation until the Clarification Announcement on 19 June 2013.

Knowledge of the Board

The Auditing Progress before the AR Announcement

53.     The following personnel of CH was involved in the auditing works of the Company for the year 2012:-

(1)     CHAN Wai Dune, Charles (“Charles Chan”): he was and still is the Chairman and Chief Executive Officer of CH;

(2)     TSE Po Chu, Betty (“Betty Tse”): she was a director of CH and the engagement audit director responsible for auditing the annual accounts of the Company for the financial years ended 31 December 2010, 2011 and 2012.  Both Patrick Poon and Daniel Lee (referred to below) reported to her;

(3)     POON Cheuk Ngai, Patrick (“Patrick Poon”): he was the audit manager of CH responsible for auditing the financial statements of the Company for the years ended 31 December 2010, 2011 and 2012; and

(4)     LEE Suen Ho, Daniel (“Daniel Lee”): he was an audit staff of CH who assisted in the carrying out of the 2010 to 2012 audit procedures for the Company.

54.     In around the end of 2012, CH conducted certain auditing measures including an inspection of the ISS Terminals purportedly operated by the Company through its subsidiary Wozhong in six cities in the PRC (“the 1^st Inspection”).  The results of the 1^st Inspection were satisfactory.

55.     ISS Terminals were key assets of the Company as they were the core profit generating assets of the Company’s Intelligent Self-Service business, which was the most important part of the businesses of the Company and contributed to the majority of the revenue and profit of the Group.  According to the AR Announcement, the Intelligent Self-Service business accounted for over 80% of the turnover of the Group for the years 2012 (RMB 6,388,879,000 out of RMB 7,555,909,000) and 2011 (RMB 4,656,037,000 out of RMB 5,647,554,000).

56.     Since 12 December 2012, CH repeatedly requested for various further auditing measures to be conducted, including further inspections of the ISS Terminals at various locations in the PRC.  In making those requests, CH emphasised the importance of the inspection of ISS Terminals and that the audit procedures could not be completed without the requested inspection having been carried out.

57.     However, despite repeated requests, CH’s audit procedures could not be carried out and/or completed by reason of the lack of cooperation from the Company in providing an updated and detailed register of the ISS Terminals.  On 23 March 2013, a meeting was held between the Audit Committee of the Company and CH, attended by Betty Tse and Patrick Poon on behalf of CH and all three members of the Audit Committee, including the 6^th, 7^th and 8^th Respondents. During the meeting, Betty Tse raised concerns/complaints about the dilatory conduct of the Company in responding to the requests of CH to conduct further audit procedures, and requested the cooperation of the Company regarding these audit procedures, including in particular, the further inspection of ISS Terminals. Betty Tse made it clear at the meeting that further audit procedures were necessary before CH could complete its audit of the financial results, and that any announcement of the financial results before the completion of the audit, would be problematic.  The 7^th Respondent expressed the view that according the Listing Rules, the Company may be required to suspend trading in these circumstances.

58.     Between 24 and 25 March 2013, in the absence of cooperation of the Company, CH conducted further audit procedures by itself including the inspection of 68 ISS Terminals in Fuzhou, the PRC according to the addresses provided by the Company (“the 2^nd Inspection”).  The result of this inspection exercise was unsatisfactory in that out of the 68 inspection targets:-

 (1)     4 target addresses did not exist;

 (2)     19 target addresses were unclear;

 (3)     18 target addresses could not be accessed; and

 (4)     no ISS Terminal was found at the remaining 27 addresses that could be located.

59.     As a result, on 26 March 2013 at 8:01 p.m., Patrick Poon (writing on behalf of Betty Tse) sent an email to the directors of the Company (including the 1^st and 2^nd Respondents) highlighting the unsatisfactory results of the 2^nd Inspection and requesting for the provision of a detailed register of the ISS Terminals and further inspections.  In particular, the email warned that as the audit work and procedures had not yet been completed, if the Company insisted on announcing its financial results on 28 March 2013, CH would have to expressly state the same in its audit report (“由於尚有審計資料及程序未完成，若貴司堅持於3月28日公告業績, 按香港審計準則指示,本所必須在審計報告言明”).

60.     On 27 March 2013 between 6:30 p.m. and 7:00 p.m., a meeting was held between CH and the Audit Committee of the Company.  According to the Company’s record of the meeting, in addition to the 6^th, 7^th and 8^th Respondents (who were members of the Audit Committee), all the other directors of the Company were also present (CH’s record of the meeting however only mentioned that the meeting was attended by 1^st, 2^nd, 6^th, 7^th and 8^th Respondents).  Betty Tse and Patrick Poon of CH attended the meeting.  During the meeting, Betty Tse reiterated the unsatisfactory auditing results of the 2^nd Inspection and requested for further audit procedures to be carried out, including in particular the further inspection of the ISS Terminals.  Betty Tse made it clear that CH would not agree to the Company announcing its annual results on the basis of the unaudited financial statements and for that reason CH would not attend the relevant meeting of the Audit Committee to be held on 28 March 2013.

Publication of the AR Announcement     

61.     On 28 March 2013 various events occurred leading to the publication of the AR Announcement as follows:-

(1)     In the morning before 10:00 a.m., a meeting of the Audit Committee of the Company, attended by all three members of the Committee (i.e. the 6^th, 7^th and 8^th Respondents), was held to approve the consolidated financial statements of the Company for the year 2012 to be announced.  It was resolved by majority (with the 7^th Respondent objecting) that the Audit Committee would recommend the Board to accept the unaudited financial statements, the year-end financial results and the Company’s annual report for the year ended 31 December 2012 (“向董事会建议釆纳截至2012 年12月31日止全年之未经审核终期财务报表、终期业绩公告及年报”).  The 7^th Respondent objected to this resolution on the ground that CH had not yet completed its audit work and had not expressed its clear audit opinion (“基于国富浩华(香港)会计师事务所有限公司因未完成所有2012年度核数工作而未能发表清晰的核数意见”).  Unlike previous years, CH did not attend this meeting of the Audit Committee.

(2)     At 10:00 a.m., a meeting of the Board attended by all directors of the Company (i.e. the 1^st to 8^th Respondents) was held.  It was resolved by majority (with the 2^nd Respondent and the 7^th Respondent objecting) that:-

“决议批准上述(1)截至2012年12月31日止全年之未经审核终期财务报表; (2)终期业绩之初步公告; (3)截至2012年12月31日止全年之年报草稿。

另决议授权任何一位董事负责有关终期业绩之公告于2013年3月28日根据上市规则刊登于香港联合交易所有限公司及公司网站上。

…

大比数通过将截至2012年12月31日止全年之未经审核终期财务报表及终期业绩公告刊登于香港交易所网站及公司网站。”

(Translation: “It is resolved that the following documents be approved: (1) unaudited year-end financial statements of the year ended 31 December 2012; (2) preliminary announcement of the year-end results; (3) draft annual report of the year ended 31 December 2012.

It is further resolved that any one of the directors be authorised for publishing the year-end results on the website of The Stock Exchange of Hong Kong Limited and the website of the Company on 28 March 2013 in accordance with the Listing Rules.

…

By majority it is resolved that the unaudited year-end financial statements and year-end financial results of the year ended 31 December 2012 be published on the website of The Hong Kong Stock Exchange and the website of the Company.”)

These resolutions to approve and publish the Company’s annual results based on the said unaudited financial statements on 28 March 2013 were objected to by the 2^nd Respondent and the 7^th Respondent on the ground that CH had not yet completed its audit work and had not expressed a clear audit opinion (“基于国富浩华(香港)会计师事务所有限公司因未完成所有2012年度核数工作而未能发表清晰的核数意见”).  The 7^th Respondent also reminded all directors during the meeting that the annual report was different from the previous years, as the financial results were unaudited (“这份业绩报告与去年不一样,这是一份未经审核完的财务报告。”).

(3)     At 5:08 p.m., Betty Tse sent out an email (entitled “DBA 一 業績公告之事宜” (Translation: “DBA – Matters about the Results Announcement”)) to various persons and personnel of the Company (including, inter alia, the 1^st Respondent, the 2^nd Respondent and the 7^th Respondent) with two attachments, one of which was a letter from CH signed by Betty Tse dated 28 March 2013 addressing the Audit Committee and the Board of the Company.  The letter (“the 3-28 Letter”) stated, inter alia, that:-

“我們知道貴司將會公告截至2012年12月31日止年度業績,公吿內容則以本所尚未完成審核工作的財務報表為基礎。按照上市規則第13.49(2), 貴司發表的業績公告必須 ‘以有關會計年度經與核數師協定同意的財務報表’為基準, 由於審核工作包括視察終端機及重新打印銀行月結單等等尚未完成,因此現時仍沒有上述的‘協定同意的財務報表’，現階段本所亦不會對貴司該年度公吿內容任何部份作任何確認。

由於董事需就財務報表承擔責任,我們建議貴司應當向貴司的 ‘合規主任’ 即‘Compliance Officer’及熟識相關法律的專業人士及公司律師尋求指引和意見,了解這個作法的風險。同時由於這個公告並非‘以協定同意的財務報表’为基準, 為免引起誤會,公告內不應說明財務資料已經被審核。”

(Translation: “We understand that your company will publish the annual results of the year ended 31 December 2012 based on the financial statements that have not been fully audited by our firm.  According to rule 13.49(2) of the Listing Rules, the preliminary announcement published by your company shall be based on “financial statements for the financial year which shall have been agreed with the auditors”.  Since the audit work is not completed yet (pending inspection of the ISS Terminals and the bank statements), our firm will not confirm any part of the annual results at this stage.

Since directors are liable for the financial statements, we suggest that your company shall seek guidance and advice from the company’s Compliance Officer, lawyers and other professionals, who are familiar with the relevant law, on the risks associated with the intended publication of the annual results.  Furthermore, for the avoidance of doubt, the announcement should not state that the financial information has been audited because it is not based on financial statements which are agreed between the auditors and the company.”)

The second attachment to the email is the draft AR Announcement containing CH’s comments.  In particular, CH deleted certain wordings in the draft (“CH Deletion”), as follows (the crossed words are CH Deletion):-

“The financial information has been reviewed by the audit committee of the Company (the ‘Audit Committee’) and has been agreed by the Group’s external auditors, Crowe-Horwath (HK) CPA Limited to the group’s consolidated financial statements.  The work-performed-by Crowe Horwath (HK) CPA Limited this respect did not constitute on assurance engagement in accordance with Hong Kong Standards on Auditing, Hong Kong Standards on Review Engagements or Hong Kong Standards on Assurance Engagements issued by the Hong Kong Institute of Certified Public Accountants consequently no assurance has been expressed by Crowe Horwath CPA Limited in this announcement.”

(4)     At 7:58 p.m. WONG Yap, Ellen (“Ellen Wong”), a secretary of the Company and assistant to the 2^nd Respondent, sent an email to Daniel Lee attaching the latest draft of the AR Announcement.  The email simply stated that the same was sent “FYI” (i.e. “for your information”).  This email was copied to Patrick Poon shortly thereafter at around 8:00 p.m.

(5)     At 8:18 p.m., upon the instruction of the 2^nd Respondent, Ellen Wong forwarded the email of Betty Tse of the same date at 5:08 p.m. (referred to in (3) above) with the 3-28 Letter attached thereto, together with a Chinese version of the draft AR Announcement, to the personal email account of the 1^st Respondent (which email was also copied to the 2^nd Respondent).

(6)     Between 3:50 p.m. and 8:24 p.m., Daniel Lee sent four emails attaching various revised audit documents to Ellen Wong and the 2^nd Respondent. The emails expressly stated that “[CH’s] audit is still in progress”; that the documents are “for discussion purpose only”, “for reference only”; that “figures may have substantial change” and were “subject to amendment, approval by CHHK’s directors and clearance of outstanding matters by the Company”.  In this regard, the said emails were in line with the two emails that Daniel Lee sent to Ellen Wong on the previous day (i.e. on 27 March 2013) at 5:05 p.m. and 8:45 p.m. respectively, in which Daniel Lee similarly stated that “since [CH’s] audit is still on progress”, the documents sent thereunder were “for discussion purpose only”, or were “for reference only”.

(7)     At 9:55 p.m., after confirming with the 2^nd Respondent, Ellen Wong sent out an email to CSR-HeterMedia, the printer, confirming that there would be no more change to the draft AR Announcement to be published as follows:-

“We have no further comment on the English and Chinese Announcement of DBA.  Please let us have HKEX’s version of e-submission right away”

(8)     At 10:24 p.m., the HKEX confirmed by email that the AR Announcement had, upon submission by the Company, been published on the HKEX news website.

Events after the AR Announcement

62.     After the AR Announcement, until about the end of April 2013, CH continued to repeatedly demand, to no avail, the Company’s cooperation on the conduct of further audit procedures, including in particular the inspection of the ISS Terminals.

63.     CH further reminded the Company repeatedly that the AR Announcement was irregular and needed to be clarified.  On 11 April 2013 at 12:27 p.m., Patrick Poon on behalf of Betty Tse sent out an email (entitled “DBA – 關於 3月 28日業績公告之事宜” (Translation: “DBA – About the Results Announcement on 28 March”)) to various persons and personnel of the Company including, inter alia, the 1^st Respondent, the 2^nd Respondent and the 7^th Respondent.  Attached to the email was a letter of the same title (“the 4-11 Letter”).  In the 4-11 Letter, which was directed to the Audit Committee and the Board of the Company, CH stated, inter alia, that:

“雖然至今該 ‘協定同意的財務報表’ 仍未出現, 但在3月28日當天,貴司選擇將未完成審核工作,亦沒有審計報告的財務資料公告股東。因此就缺少 ‘協定同意的財務報表’ 而言,貴司未符合上市規則。”

(Translation: “Although there has not been any (‘agreed financial statements’, your company proceeded to announce, on 28 March, to the shareholders unaudited financial information without an auditing report.  Insofar as the lack of ‘agreed financial statements’ is concerned, your company has failed to comply with the Listing Rules.”)

64.     Similar letters were further sent by CH to the Company on 19 and 27 April 2013, reminding the Company of the lack of agreement of CH regarding the financial statements purportedly published in the AR Announcement.

65.     Between 27 and 29 April 2013, further audit procedures including inspection of ISS Terminals were conducted by CH.  A total of 1,092 ISS Terminals in Beijing, Tianjin and Jinan cities in the PRC were physically inspected by CH (“the 3^rd Inspection”). Serious issues were discovered during the 3^rd Inspection including:-

(1)     90% of the ISS Terminals inspected were not functioning;

(2)     In relation to ISS Terminal Model CC208, there were serious discrepancies in the figures provided by the Company relating to the number of terminals on different occasions (on 31 December 2012, and on 24 and 26 April 2013), and also the number of terminals hand-counted during the inspection in Beijing, Tianjin and Jinan; and

(3)     There were various suspicious issues regarding 90% of the ISS Terminals inspected, including but not limited to the lack of power supply, lack of conspicuity and lack of cover.

Given these issues, CH requested that further audit procedures be carried out by conducting a full inspection of all 9,900 ISS Terminals in nine PRC cities, in order to confirm their actual existence and operational status.

66.     The problems revealed during the 3^rd Inspection were specifically brought to the attention of the Audit Committee and the Board by CH by way of email dated 8 May 2013 at 5:36 p.m. and during a meeting of the Audit Committee of the Company attended by the entire Board (i.e. the 1^st to 8^th Respondents) dated 16 May 2013.

67.     On 5 June 2013 at 5:30 p.m., Betty Tse sent out an email to various staff of the Company, including, inter alia, the 1^st Respondent, the 2^nd Respondent and the 7^th Respondent with a letter entitled “關於2012年年度審計進度、終端機明細表及實地終端機視察事宜” (Translation: “Regarding Auditing progress for the year 2012, List of ISS Terminals, and Site Inspection of ISS Terminals”) attached (“the 6-5 Letter”).  CH addressed the 6-5 Letter to the 1^st Respondent, the Audit Committee and the Board of the Company and stated, inter alia:-

“本所亦於3月28日同日回覆貴司,按香港上市規則第13.49(2)規定,年度業績公告須以公司與核數師共同接受的財務報表即「協定同意的財務報表」為基準,所以必須在公告業績公告前,要先取得本所同意。可是,至今,該 ‘協定同意的財務報表’ 并不存在。

最終,貴司亦堅持於3月28日作岀業績公告,唯該公告內容沒有列明是否經己審核,即沒有清楚列明 ‘unaudited’,或清楚列明是以管理帳目之財務資料作業績公告。本所亦於4月11日再表達了於2013年3月28日時的同樣立場。”

(Translation: “In our firm’s reply to your company dated 28 March, we stated that, according to rule 13.49(2) of the Listing Rides, the preliminary announcement published by your company shall be based on ‘financial statements for the financial year which shall have been agreed with the auditors’.  Therefore, our firm’s consent ought to be sought before the announcement of results.  Nevertheless, up till now no such agreement on the financial statements has been reached.

In the end, your company proceeded with the publication of the results on 28 March without stating clearly – whether the results were audited or not.  Neither did the announcement state clearly that the results were ‘unaudited’, or that they were compiled based on the management accounts.  Our stance, as expressed on 28 March 2013 and recited above, was reiterated on 11 April.”)

68.     The audit procedures required by CH could not be 一 and were never – completed despite repeated demands from CH and multiple meetings between the 7^th Respondent as the director of the Company and representatives from CH including Charles Chan, Betty Tse and Patrick Poon.  CH eventually resigned as the auditors of the Company on 5 August 2013.

The Alleged Misunderstanding

69.     By reason of the matters aforesaid, the Petitioner says that there is no valid basis for the Alleged Misunderstanding.  In particular, at the time when the AR Announcement was made, it was clear to the Company and all members of the Board that CH had not completed its audit work, that it was demanding that further audit procedures be carried out, and that the financial statements purportedly disclosed under the AR Announcement was not agreed to by CH.  In the numerous meetings, correspondence and communications between CH and the Company in the period between December 2012 and August 2013 (including in particular CH’s email dated 26 March 2013, the 3-28 Letter, the 4-11 Letter and the 6-5 Letter), CH had made its position clear.

70.     Indeed, in the two meetings held in the morning of 28 March 2013 referred to above (being the meetings of the Audit Committee and the Board respectively), both the 2^nd Respondent and the 7^th Respondent expressly objected to the publication of the AR Announcement on the ground that CH had not completed the audit work and had not expressed its audit opinion on the financial statements intended to be disclosed under the AR Announcement.  Accordingly, CH’s position must have been clear to the Audit Committee and the Board prior to the publication of the AR Announcement.

71.     In the premises, inasmuch as the Clarification Announcement purported to represent that the AR Representation was published as a result of the Alleged Misunderstanding, the same is false and misleading.  The Company and its directors were fully aware of the lack of agreement on the part of CH with the consolidated financial statements published in the AR Announcement and there was never any misunderstanding at all on the part of the Company and/or any of the 1^st to 8^th Respondents regarding CH’s agreement (or lack thereof) with the said consolidated financial statements.

The Misrepresentations and the failure or delay in correcting the same

72.     By reason of the above matters, the 1^st to 8^th Respondents have caused, permitted and/or allowed the Company to make the following representations which are false or misleading:-

(1)     The AR Representation which falsely and/or misleadingly represented that the consolidated financial statements published therein complied with the applicable disclosure provisions of the Listing Rules, thereby impliedly representing that they were financial statements that had been agreed to by the auditors of the Company (“the AR Misrepresentation”); and

(2)     The Clarification Announcement which falsely and/or misleadingly represented that the AR Representation was due to the Alleged Misunderstanding (“the Clarification Misrepresentation”).

73.     On 28 June 2018, the Company pleaded guilty to, and was convicted of, the offence of providing to the Petitioner via the HKEX, in purported compliance with a requirement under section 7(1) and pursuant to section 7(3) of the Securities and Futures (Stock Market Listing) Rules, a copy of the AR Announcement containing information which was false and misleading in a material particular (the false and misleading information being a reference to the AR Misrepresentation), contrary to sections 384(1) and (6) of the Ordinance.  On the 11 April 2019, the 2^nd Respondent was found guilty and convicted of the same offence, pursuant to sections 384 and 390 of the Ordinance.

74.     The Petitioner repeats paragraphs 46-48 hereinabove.  In the premises, the Company had failed to timely disclose to the shareholders that the consolidated financial statements published in the AR Announcement had not been agreed to by the Company’s auditors.  Until the Clarification Announcement on 19 June 2013, members of the Company were being misled by the AR Representation that the consolidated financial results in the AR Announcement were agreed to by the Company’s auditors.  By leaving the investing public to trade in shares of the Company on a false premise that the consolidated financial statements published in the AR Announcement had been agreed to by the Company’s auditors, the Company had damaged the integrity of the securities and futures market, which depends on there being a transparent system of disclosure of significant and accurate information. In the premises, the Company and its directors continued to perpetrate the AR Misrepresentation and had failed or delayed in correcting/clarifying the same for more than 2 and a half months after the AR Announcement was made.

75.     The Clarification Misrepresentation was never corrected by the Company or its directors.

B4     Liability of the 7^th Respondent

76.     At all material times, as a director of the Company, the 7^th Respondent owed to the Company duties outlined in paragraphs 15 to 17 above.  In relation to the facts and matters set out in Part B3 above, the 7^th Respondent had acted in breach of his Fiduciary Duties and common law duty of care owed to the Company and breached Rules 2.13(2), 3.08(a), (b) and (f), 3.16 and 13.04 of the Listing Rules and as such, is partly responsible for the business or affairs of the Company being conducted in the manners complained of, namely:-

(a)     involving misfeasance or misconduct towards it or its members or part of its members;

(b)     resulting in its members or part of its members not having been given all the information with respect to the Company's business or affairs that they might reasonably expect; or

(c)     unfairly prejudicial to its members or any part of its members.

77.     The 7^th Respondent was responsible for conducting the affairs and business of the Company in the aforesaid manner as follows:-

(1)     The 7^th Respondent permitted or allowed the Company to continue to perpetrate the AR Misrepresentation after the publication of the AR Announcement, and failed to timely correct or clarify the same between 28 March 2013 and 18 June 2013, despite having made 3 public announcements on 30 April 2013, 5 June 2013 and 6 June 2013; and

(2)     The 7^th Respondent permitted or allowed the Company to falsely and misleadingly represent in the Clarification Announcement that the AR Misrepresentation was due to the Alleged Misunderstanding and failed to correct the Clarification Misrepresentation.

C.     AGREED MITIGATING FACTORS

78.     The 7^th Respondent has been cooperative in relation to these proceedings with the Petitioner and accepts liability.

79.     The 7^th Respondent has adopted a reasonable course of action in agreeing to conclude these proceedings by way of the Carecraft Procedure which would save the time and costs of the Petitioner and the Court, and in agreeing to pay his share of the costs of the Petitioner in these proceedings.

80.     After the publication of the AR Announcement, the 7^th Respondent pressed for the Board and Audit Committee meetings to deal with various matters including (a) the annual report; (b) the suspension of trading; (c) the outstanding auditing issues; and (d) the various letters from CH including the 3-28 Letter; the 4-11 Letter and the 6-5 Letter.  Although these actions are not equivalent to requesting the Company to clarify the AR Announcement, the 7^th Respondent did press the Company to complete the audit procedure in order to issue the annual report, and to face the consequences of the failure to do so.

D.     PROPOSAL FOR DISQUALIFICATION

81.     On the basis of the facts not in dispute as set out in Section B above and the agreed mitigating factors set out in Section C above, the Petitioner and the 7^th Respondent agree that it would be appropriate for a disqualification order to be made against the 7^th Respondent under section 214(2)(d) of the Ordinance that, for a period of 1.5 years, he shall not, without the leave of the Court:-

81.1     be, or continue to be, a director, liquidator, receiver or manager of the property or business of DBA Telecommunication (Asia) Holdings Limited and any corporation in Hong Kong; and

81.2     in any way directly or indirectly be concerned, or take part, in the management of DBA Telecommunication (Asia) Holdings Limited and any corporation in Hong Kong.

82.     The Petitioner and the 7^th Respondent have reached an agreement on the Petitioner’s costs of these proceedings.  The 7^th Respondent agrees to pay and the Petitioner accepts the sum of HK$488,000.00 in full and final settlement of the 7^th Respondent’s share of the Petitioner’s costs in these proceeding.