SECURITIES AND FUTURES COMMISSION v. LI WING SANG (A BANKRUPT) AND OTHERS

HCMP 2068/2020

[2025] HKCFI 466

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 2068 OF 2020

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JUDGMENT

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Introduction

1.  The Securities and Futures Commission (“SFC”) commenced these proceedings by a Petition dated 16 November 2020 (“Petition”) under s 214 of the Securities and Futures Ordinance (Cap. 571) (“SFO”). The SFC seeks disqualification orders against all 3 respondents for their conduct of the business and affairs of Tech Pro Technology Development Limited (“Company”). This judgment concerns only the trial of the Petition against the 1^st Respondent.[1]

2.  The 1^st Respondent has not filed any pleadings or witness statements in these proceedings. By reason of an “unless order” made by Linda Chan J on 31 October 2023, he is debarred from doing so. He has also failed to attend the hearing of the trial.

3.  On the other hand, the SFC has called 1 witness at the hearing viz Ms Chiu Yu Kei, Senior Manager of the Enforcement Division of the SFC, who was responsible for conducting the investigation into the suspected contraventions of the SFO in relation to the business and affairs of the Company. In court, Ms Chiu confirmed the contents of her affidavit verifying the Petition and her witness statement as true and accurate and adopted them as her evidence. This court has no reason to doubt the accuracy of her testimony. In addition, SFC has adduced a large number of documentary evidence including in particular its record of interview with the 1^st Respondent in support of its case.

4.  In summary, it is the SFC’s case the 1^st Respondent was in breach of his duties as director of the Company in:

(a)  Failing to take reasonable steps to recover “Fan’s Debt” (defined below).

(b)  Failing to take any or any reasonable steps to obtain sufficient control and oversight in respect of the daily operation of Fuchao (defined below).

(c)  Failing to cause the Company to make impairment provisions to the Group’s (as defined below) interest in Fuchao.

(d)  Allowing or failing to prevent the publication of false and misleading statements and representations, as a result of which the shareholders of the Company had not been given all the information with respect to the Company’s business and affairs that the shareholders might reasonably expect.

(e)  Being ignorant about the “Lawsuit”, “Judgment” and “Final Judgment” (all defined below) before receiving the SFC’s letter on 7 November 2017.

5.  Accordingly and for reasons to be further explained later in this Judgment, the SFC seeks a disqualification order of 7 years against the 1^st Respondent as per the draft provided ie the 1^st Respondent shall not, for a period of 7 years with effect from the date of the Order, 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 any listed or unlisted corporation in Hong Kong including the Company or any of its subsidiaries and affiliates; and

(b)  in any way, whether directly or indirectly, be concerned, or take part, in the management of any listed or unlisted corporation in Hong Kong including the Company or any of its subsidiaries and affiliates.

6.  The SFC also seeks costs against the 1^st Respondent ie he shall pay the Petitioner’s costs in these proceedings, to be taxed if not agreed, with:

(a)  certificate for two counsel for the period up to and including 14 December 2021; and

(b)  certificate for one counsel thereafter up to and including the date of this Order.

SFC’s case

7.  The Company was incorporated in the Cayman Islands in November 2006. Its shares were listed on the Main Board of the Stock Exchange of Hong Kong Limited on 6 September 2007 and were delisted on 2 March 2020. At all material times, the Company was an investment holding company and, together with its subsidiaries (“Group”), principally engaged in the business of manufacturing and selling of Light Emitting Diode (“LED”) lighting products and accessories.

8.  The 1^st Respondent was inter alia :

(a)  an Executive Director of the Company from 11 December 2009 to 1 April 2019;

(b)  Chairman of the Board of Directors of the Company from 1 March 2011 to 1 April 2019.

9.  As director of the Company, the 1^st Respondent owed the following duties to the Company:

(a)  duty to act in good faith, in the best interests of the Company and for proper purposes, including a duty to disclose all relevant material information to the Company and the shareholders;

(b)  duty to exercise reasonable care, skill and diligence in the performance of his duties as director of the Company;

(c)  duty to exercise independent judgment in the performance of his duties as director of the Company;

(d)  duty to continuously acquire and maintain a sufficient knowledge and understanding of the Company’s business to enable him to properly discharge his duties as director.

The 1^st Acquisition

10.  Champion Miracle Limited (“Champion Miracle”) was a wholly-owned subsidiary of the Company. On 27 November 2013, Champion Miracle entered into an agreement with Mr Fan Lin (“Fan”) to purchase 50% of the shareholding in Shanghai Fuchao Investment Company Limited (“Fuchao”) from Fan (“1^st Acquisition”) for HK$450 million.

11.  Fuchao was a limited company incorporated in the PRC which was wholly owned by Fan prior to the 1^st Acquisition. The principal business of Fuchao at all material times until 16 June 2017 was sub-leasing 1/F-10/F, Block B, Huanqiu Shijie Building, No. 1-5 Wanhangdulu, Jing’an Shanghai (“Property”). The Property was owned by the Logistics Department of the Chinese People’s Armed Police Force, Corps of Shanghai (“Owner”).

12.  Fuchao and the Owner entered into a leasing agreement dated 10 May 2007 (“Leasing Agreement”) and two supplemental agreements dated 10 May 2007 and 22 January 2013 respectively, whereby Fuchao acquired the sub-leasing right of the Property from the Owner for a term of 35 years from 1 July 2007 to 30 June 2042 at an annual rent of RMB 12,000,000 (“Lease”). Pursuant to the Lease Agreement, the rent was to be paid by Fuchao annually in advance by 20 June each year.

13.  Shanghai Laiken Industrial Company Limited (“Laiken”) was another wholly-owned subsidiary of the Company. On 24 March 2014, the 1^st Acquisition was completed. By then, Laiken had replaced Champion Miracle as the vehicle holding the Company’s 50% interest in Fuchao.

14.  On 3 January 2015, the shareholders of Fuchao passed a resolution appointing the 1^st Respondent as its director and Fan as its legal representative and chairman.

15.  At all material times, Fuchao constituted a very significant part of the Group’s business. For example, as at 30 June 2016, the value of the Group’s interest in Fuchao ie RMB 374,753,000 represented about 33% and 40% of the Group’s total assets ie RMB 1,119,529,000 and net assets ie RMB 937,664,000. As at 30 June 2017, the value of the Group’s interest in Fuchao ie RMB 374,278,000 represented about 32% and 45% of the Group’s total assets ie RMB 1,174,008,000 and net assets ie RMB 832,322,000.

The failed 2^nd Acquisition

16.  On 3 June 2016, Champion Miracle and Fan executed an agreement for Champion Miracle to purchase and Fan to sell the remaining 50% of the shareholding in Fuchao for a total consideration of RMB 387,450,000 (“2^nd Acquisition”), to be satisfied by:

(a)  The debt owed by Fan to Fuchao (“Fan’s Debt”), amounting to approximately RMB 301,140,000 as at 30 April 2016, which would be used to set off against the purchase price.

(b)  Allotment of the Company’s shares to Fan at the issue price of HK$2.50 per share.

17.  On 29 July 2016, Fan signed a repayment agreement with Fuchao (“Repayment Agreement”) whereby he agreed to repay RMB 190,000,000 to Fuchao by 4 quarterly instalments starting on 31 December 2016 and ending on 30 September 2017. Fan defaulted on the 1^st instalment of RMB 50,000,000 on 31 December 2016.

18.  On 31 July 2016, the Board of Fuchao passed a resolution recommending the distribution of interim dividends of RMB 222,000,000 for the period ending on 30 June 2016 (“Interim Dividends”) to be distributed in the following manner:

(a)  RMB 111,000,000 payable to Fan would be used to partially set off Fan’s Debt; and

(b)  RMB 111,000,000 payable to Laiken would be withheld until 2018 to enable Fuchao to upgrade the facilities in the Property.

19.  The shareholders of Fuchao unanimously passed a resolution to approve the recommendation of the Board of Fuchao regarding the Interim Dividends.

20.  The 2^nd Acquisition fell through and never proceeded to completion.

21.  On 26 October 2016, the Company published an announcement which for the first time disclosed the amount of money owed by Fan to Fuchao consisting of:

(a)  rental income and tenants’ deposits payable to Fuchao, totaling around RMB 205,000,000; and

(b)  decoration and maintenance deposits which Fuchao had paid for Fan, totaling around RMB 96,000,000.

22.  On 7 February 2017, the Board of Fuchao passed a resolution recommending the distribution of final dividends of RMB 15,600,000 for the period ending on 31 December 2016 (“Final Dividends”) to be distributed in the following manner, which was approved by the shareholders of Fuchao:

(a)  RMB 7,800,000 payable to Fan would be used to partially set off Fan’s Debt; and

(b)  RMB 7,800,000 payable to Laiken would be withheld until 2018 to enable Fuchao to upgrade the facilities in the Property.

23.  On 8 February 2017, the Owner commenced legal proceedings against Fuchao in Shanghai to recover inter alia the outstanding rent for the period from March 2016 to June 2017, in the sum of RMB 16,000,000 (“Lawsuit”).

24.  Upon Fan’s default even on the 1^st instalment of RMB 50,000,000 by 31 December 2016 in breach of the Repayment Agreement and upon chasers from the Company’s representatives, on around 27 March 2017, Fan procured a copy of a 1-page document entitled “租金預收證明” (“Purported Receipt”) and sent it to the Company. The Purported Receipt was dated 4 January 2017 and stated that Fan had on behalf of Fuchao paid RMB 108,000,000 to the Owner, being the rent for the 9-year period from January 2016 to December 2024.

25.  The Department of Defense Quartermasters, the Chinese People’s Armed Police Force, Corps of Shanghai, an authority equivalent to the Owner, later confirmed in August 2018 that it had never issued the Purported Receipt or received the alleged sum of RMB 108,000,000 from Fan.

26.  On 15 May 2017, the Lawsuit was heard by the Shanghai Jing’an People’s Court. On 16 June 2017, the Shanghai Jing’an People’s Court allowed the Owner’s claim and ordered the Lease to be rescinded, Fuchao to return the Property to the Owner within 5 days, and Fuchao to pay the Owner the outstanding rent in the sum of RMB 16,000,000 (“Judgment”). On 18 July 2017, the Shanghai No.2 Intermediate People’s Court dismissed Fuchao’s appeal against the Judgment (“Final Judgment”).

27.  Neither the Judgment nor the Final Judgment contained any reference to :

(a)  the Purported Receipt; or

(b)  any assertion by Fuchao that it had already paid the rent for the 9-year period from January 2016 to December 2024.

28.  On 7 November 2017, the SFC issued a letter (“SFC Letter”) to the Company stating, inter alia, that the Group’s consolidated interim results for the 6 months ended 30 June 2017 (“2017 Interim Results”) and the Group’s interim report for the 6 months ended 30 June 2017 (“2017 Interim Report”) appeared to contain materially false or misleading information in that they did not disclose the fact that Fuchao had lost its sub-leasing right of the Property as a result of the Lawsuit.

29.  On 8 November 2017, the Company, through its solicitors, replied that (i) it had entrusted the daily operations of Fuchao to Fan and did not have knowledge of the Lawsuit prior to receiving the SFC Letter; (ii) in light of the Purported Receipt, the Company truly believed that Fan had already paid the rent in respect of the Property for the 9-year period from January 2016 to December 2024 in the aggregate amount of RMB 108,000,000.

The 1^st Respondent’s breaches of duties

30.  It is SFC’s case against the 1^st Respondent that he has acted in breach of his duties to the Company.

31.  Firstly, the 1^st Respondent has failed to take reasonable steps to recover Fan’s Debt in that, by January 2017, he should have procured, but failed to procure, the commencement of legal proceedings against Fan and/or his associated company to recover Fan’s Debt. SFC relies on the following matters stated in para 47 of the Petition:

(a)  The 1^st Respondent had known about the practice of Fan, either by himself or through his associated company viz Shanghai Wanyu Rongfeng Investment Management Co. Ltd. (上海萬裕榕豐投資管理有限公司) (“Wanyu”), pocketing the rental income payable to Fuchao (“Practice”) since before the completion of the 1^st Acquisition.

(b)  There was no justification for the Practice. There was no legitimate reason for Fan or Wanyu to receive the rental income payable to Fuchao.

(c)  Fan continued the Practice despite repeated demands by the Company and/or the 1^st Respondent to cease the Practice.

(d)  The Company has failed repeatedly to recover Fan’s Debt, the latest attempt being the Repayment Agreement, in respect of which Fan did not even settle the 1^st Instalment due on 31 December 2016. As soon as the default occurred, the 1^st Respondent knew or should have known that he had no alternatives but to procure the commencement of legal proceedings to recover Fan’s Debt.

(e)  The 1^st Respondent should have known that the Purported Receipt was a forgery and/or should not have accepted it at face value, given that:

i.  There was no explanation as to how Fan suddenly had so much cash ie RMB 108,000,000 to pay rent in respect of the Property in January 2017 for the 9-year period from January 2016 to December 2024. In this regard, it should be noted that Fan had defaulted even on the 1^st instalment of RMB50,000,000 by 31 December 2016 in breach of the Repayment Agreement.

ii.  There was no reason for Fan to use his own money to pay the rent in question to the Owner directly, since it was Fuchao, not him, who had the obligation to pay rent under the Lease Agreement.

iii.  There was no reason to pay the rent for the 9 years in one go up to December 2024 given that, according to the Leasing Agreement, rent was only payable in advance annually.

iv.  The 1^st Respondent had made no attempt to verify the authenticity of the Purported Receipt by e.g. making enquiries with the Owner.

32.  Secondly, the 1^st Respondent has failed to take any or any reasonable steps to obtain sufficient control and oversight in respect of the daily operations of Fuchao in that:

(a)  Apart from sending an accountant from the Company’s Shanghai office to obtain Fuchao’s monthly financial information for the purpose of preparing consolidated financial statements of the Group, there was no mechanism or arrangement to ensure that the Company was kept apprised of Fuchao’s operation, financial affairs or litigations.

(b)  Fuchao had never held any shareholders’ meeting and had only held board meetings about once or twice a year.

(c)  The 1^st Respondent had not met or talked to the Owner.

(d)  The 1^st Respondent had not raised the issue of the Group’s lack of control and supervision over Fuchao at the board meetings of the Company.

33.  Thirdly, the 1^st Respondent should have caused, but has failed to cause, the Company to make impairment provisions to the Group’s interest in Fuchao in the Group’s various interim results and annual results from 2014 to 2017, especially in the 2017 interim results, in light of :

(a)  The difficulty in recovering Fan’s Debt.

(b)  The loss of Fuchao’s principal asset and source of income ie the Lease, and hence there was practically no reasonable prospect for Laiken to receive its share of the Interim Dividends or Final Dividends.

34.  As a result of such failures, the Group’s financial statements were inaccurate, incomplete, misleading and did not provide a true and fair view of the state of affairs and operations of the Company and the Group.

35.  Fourthly, the 1^st Respondent allowed false and misleading statements or representations to be published in the announced 2017 Interim Results and 2017 Interim Report for the 6 months ended 30 June 2017 in that both had considerably overstated the value of the Group’s interest in Fuchao, the Groups’ total non-current assets and other consequential items; and the 2017 Interim Report falsely or misleadingly stated that the Group would receive its share of the Interim Dividends or Final Dividends in the second quarter of 2018 and Fan had made repayment in accordance with the Repayment Agreement when he had not.

36.  Fifthly, the 1^st Respondent was negligent by not being aware of the Lawsuit, Judgment and Final Judgment before receiving the SFC Letter which were critical to the Company’s business. They should have been known to the 1^st Respondent at the time of or shortly after their occurrence and disclosed to the shareholders in the 2017 Interim Results and 2017 Interim Report.

Applicable principles

37.  Section 214(1) of the SFO provides:

“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) oppressive to its members or any part of its members;

(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.”

38.  In the present case, SFC accepts it must satisfy 3 conditions for relief under s 214(1) of the SFO viz (1) the corporation must be or had previously been a listed corporation; (2) the business or affairs complained of must be that of the corporation; and (3) the conduct complained of must fall within one or more heads mentioned in sub-sections (a) to (d).

39.  It is reasonably clear to this court the 1^st and 2^nd conditions are not controversial and have been met in the present case.

40.  As for the 3^rd condition, SFC contends that the requirements of s 214(1)(b)-(d) of the SFO are met. This court agrees.

41.  In respect of s 214(1)(b):

(a)  “Defalcation” is defined as “misapplication, including misappropriation, of any property”. Misapplication means the disposition of the company’s property which the company or the board is forbidden, incompetent or unauthorized to make, or which is carried out by the directors in breach of their duties in good faith to promote the success of the company and for proper purposes: Re First Natural Foods Holdings Limited unrep, HCMP 205 of 2013, 17 February 2017, DHCJ Hunsworth.

(b)  “Misfeasance” is defined as “the performance of an otherwise lawful act in a wrongful manner”. The notion of misfeasance overlaps with that of breach of fiduciary duty and seemingly covers a wide range of conduct. In particular, it covers a director’s breach of his duties to exercise reasonable care and diligence in his management of the company, and to act in good faith in the best interests of the company: SFC v Zheng Dunmu [2024] 2 HKLRD 688 at [20(2)] per Linda Chan J.

(c)  The words “other misconduct” connote improper or wrong behaviour or mismanagement, or culpable neglect of duties. This term is something of a “belt and braces exercise”, and is intended to cover the “widest range of possible misconduct” including a director’s breach of the duty to exercise reasonable skill care and diligence in the management of a company: SFC v Zheng Dunmu at [20(3) - 21] per Linda Chan J.

42.  As for s 214(1)(c) ie members not having been given all the information with respect to its business or affairs that they might reasonably expect, it can be complementary to the other subsections and covers situations such as (1) the making of misleading or false announcements; and (2) situations requiring publication of periodic financial statements and announcements, as members are entitled to expect the listed company to provide complete and accurate information in respect of such matters: SFC v Zheng Dunmu at [22].

43.  With respect to s 214(1)(d), the following observations were made in SFC v Zheng Dunmu at [23].

(a)  The conduct in question does not have to be wrongful per se.

(b)  “Unfairly prejudicial” conduct covers a range of conduct, from fraud at the one end to neglect or inaction on the part of those to whom the affairs of a company are entrusted on the other end. The question to be asked in such circumstances is whether the conduct concerned is that which can be expected from the managers of the company to whom those affairs have been entrusted.

(c)  It covers the case where the listed company has (a) failed to comply with the disclosure requirements (SFC v Kwok Wing, HCMP 3392/2013, 9 October 2014, at [12]), (b) made misleading or false announcements, and (c) failed to publish periodic financial statements and announcements, as members are entitled to expect the listed company to provide complete and accurate information in respect of such matters : SFC v Sound Global Ltd [2022] HKCFI 3025, at [96].

44.  On the basis of the evidence in support of SFC’s case, this court is satisfied that the business and affairs of the Company have been conducted in a manner as described in s 214(1)(b)-(d) of the SFO and the conditions for granting relief under s 214 of SFO are met.

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

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

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

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

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

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

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

46.  By putting forward a proposed Disqualification Order of 7 years to this court, the SFC had accepted that the 1^st Respondent’s conduct fell within the middle bracket and a disqualification period of 7 years would be appropriate.

47.  This court is obviously not bound by the proposal of the SFC. It must be satisfied on the basis of the evidence that the business or affairs of the Company have been conducted in a manner described in s 214(1) of the SFO and decide on the scope and duration of the Order. However, this court recognizes that the SFC is a responsible regulator and shall pay due regard to its proposal on the appropriate sanction to be imposed.

48.  Having regard to SFC’s case as duly proved and the failure of the 1^st Respondent to contest the proceedings, as well as all other circumstances of the case, this court is satisfied that the 1^st Respondent’s conduct is sufficiently serious to fall within the middle bracket and a disqualification period of 7 years is appropriate.

Relief

49.  I hereby make the Order sought in the draft produced before this court:

(a)  Pursuant to section 214(2)(d) of the Securities and Futures Ordinance (Cap. 571), the 1^st Respondent shall not for a period of 7 years from the date of this Order, without leave of the Court:

i.  be, or continue to be, a director, liquidator, or receiver or manager of the property or business of any listed or unlisted corporation in Hong Kong including Tech Pro Technology Development Limited or any of its subsidiaries and affiliates; and

ii.  in any way, whether directly or indirectly, be concerned, or take part, in the management of any listed or unlisted corporation in Hong Kong including Tech Pro Technology Development Limited or any of its subsidiaries and affiliates.

(b)  The 1^st Respondent shall pay the Petitioner’s costs in these proceedings, to be taxed if not agreed, with:

i.  certificate for two counsel for the period up to and including 14 December 2021; and

ii.  certificate for one counsel thereafter up to and including the date of the Order herein.