SECURITIES AND FUTURES COMMISSION v. YIN YINGNENG RICHARD AND OTHERS

HCMP 2502/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 2502 OF 2012

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DECISION
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1.  By the judgment of this court dated 16 January 2015 (“Judgment”), each of the 1^st to 3^rd respondents (for convenience, they are collectively referred to as “Respondents”) was found liable for, in simple terms, having wronged the Company[1] by making a false claim in respect of the MUA.  As a consequence, assets belonging to the Company, in the sum of RMB18,692,000 (“Sum”), were wrongly paid to Fame Treasure, a company owned by Wang. 

2.  This hearing deals with the issue of disqualification of the Respondents pursuant to s 214(2)(d) of the Ordinance. 

Applicable principles

3.  The legal principles regarding the granting of disqualification order are well-established.

4.  The purpose of imposing disqualification order is two-fold.  In SFC v Fung Chiu & Ors [2009] 2 HKC 19, Kwan J (as she then was) held at 23A-C as follows:

“I bear in mind two important objectives in the exercise of this jurisdiction to make disqualification orders: firstly, protection of the public against the future conduct of persons whose past records as directors of listed companies have shown them to be a danger to those who have dealt with the companies, including creditors, shareholders, investors and consumers; and secondly, general deterrence in that the sentence must reflect the gravity of the conduct complained of so that members of the business community are given a clear message that if they break the trust reposed in them they will receive proper punishment.”

5.  As to the length of the disqualification order, the court will approach the question by, firstly, determining which of the 3 brackets the case falls under.  This was explained by Fok JA (as he then was) in SFC v Cheung Keng Ching & Ors [2011] 4 HKC 453 at 466F-I as follows:

“36. The Judge referred to Re Sevenoaks Stationers (Retail) Ltd [1990] BCC 765, in which the potential maximum 15 year period of disqualification under the section 6 of the Company Directors Disqualification Act 1986 was divided into three brackets (see per Dillon LJ at p. 174E-G) namely:

(1) 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 falls to be disqualified again.

(2) The minimum bracket of 2 to 5 years (in Hong Kong, the statutory minimum is 1 year), applicable to cases where although disqualification is mandatory, they are, relatively, not very serious.

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

37. These “brackets” have been applied in a number of cases in Hong Kong (see e.g. SFC v Fung Chiu & ors [2009] 2 HKC 19 at §14 and Re Styland Holdings Ltd [2011] 1 HKLRD 96 at §13) and it is accepted on behalf of the 1st and 2nd respondents that these brackets are applicable to a disqualification order under section 214(2)(d) of the Ordinance.”

6.  It has been pointed out by Mr Scott SC, appearing with Mr Hui for Yin, that there appears to be an error in the above dicta in that there is no statutory minimum period of disqualification in Hong Kong (see s 214(2)(d) of the Ordinance).  Mr Manzoni SC, appearing with Mr Nip for SFC, agrees with the observation.  With great respect, I also agree.  I further agree with Mr Scott that it would be appropriate to define the minimum bracket as “below 5 years” instead of “2 to 5 years”.

7.  It should also be pointed out that the Hong Kong statutory provisions for disqualification are different to those of England in that, in Hong Kong, disqualification is not mandatory but entirely within the discretion of the court.

8.  The period of disqualification is determined with reference to a wide spectrum of considerations.  In Re Styland Holdings Ltd [2011] 1 HKLRD 96, Au J held at §§6-8 as follows:

“6. In considering what is an appropriate period of disqualification, the court takes into account a broad spectrum of considerations with the dual objective of protecting the public and deterrence: Re Peregrine Investments Holdings Ltd (unrep, HCMP 112/2002, [2004] HKEC 1214), para 27.

7. In Re Warderly International Holdings Ltd, para 9, Harris J summarised the useful guidance given by Woolf MR in Re Westmid Packing Services Ltd [1998] 2 All ER 124, 131–135, as to the relevant factors for determining the length of the disqualification period under the Company Directors Disqualification Act 1986 as follows:

(1) It is of the greatest importance that any individual who undertakes the statutory and fiduciary obligations of being a company director should realise that these are personal responsibilities.

(2) The primary purpose of disqualification is to protect the public against the future conduct of companies by persons whose past records as directors of insolvent companies showed them to be a danger to creditors and others. Other factors also come into play in the wider interests of protecting the public, ie a deterrent element in relation to the director himself and a deterrent element as far as other directors are concerned.

(3) The period of disqualification must reflect the gravity of the offence.

(4) The 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.

(5) A wide variety of factors, including the former director’s age and state of health, the length of time he has been in jeopardy, whether he has admitted the offence, his general conduct before and after the offence, and the periods of disqualification of his co-directors that may have been ordered by other courts, may be relevant and admissible in determining the appropriate period of disqualification.

8. There are also eight criteria which govern the court’s exercise of the power of disqualification, namely:

(1) Character of the offenders;

(2) Nature of breaches;

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

(4) Interests of shareholders, creditors and employees;

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

(6) Honesty and competence of offenders;

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

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

See Re Warderly International Holdings Ltd, para.10.”

9.  Finally, in the determination of a disqualification period, the court adopts a reasonably broad brush approach. Earlier decided cases are of limited assistance to the court : see Re Westmid Packing Services Ltd [1998] 2 BCLC 646, per Lord Woolf MR at 657h-658f:

“(8) This court was referred to the decision of Nourse J in Re Civica Investments Ltd [1983] BCLC 456, in which he said at 457 – 458 :

‘It might be thought that [the appropriate period of disqualification] is something which, like the passing of sentence in a criminal case, ought to be dealt with comparatively briefly and without elaborate reasoning. In general I think that that must be the correct approach. More important, as more of these cases come before the court, it is obviously undesirable for the judge to be taken through the facts of previous cases in order to guide him as to the course he should take in the particular case before him. No doubt in this, as in other areas, it is possible that there will emerge a broad and undefined system of tariffs for defaults of varying degrees of blame, but there must come a point when it is no longer either necessary or desirable to go through the facts of previous cases. For my part I think that that point has now been reached.’

That was one of the earliest cases under s 28 of the Companies Act 1976, under which disqualification was not mandatory and there was no minimum period. However Nourse J’s approach should be adopted in all cases involving disqualification. Nourse J’s expectation of ‘a broad and undefined system of tariffs’ has been fulfilled by the decision of this court in Sevenoaks. Nourse J may not have foreseen how (with the advent of new and specialised law reports) large numbers of disqualification cases would continue to be the subject of detailed reports, but their existence makes his remarks all the more important. The principles applicable to the court’s jurisdiction under the Act are now reasonably clear. The application of those principles to the facts of the particular case is a matter for the trial judge. The citation of cases as to the period of disqualification will, in the great majority of cases, be unnecessary and inappropriate.

(9)            We are concerned at the delay in the hearing of these cases.  Sometimes delay is unavoidable because of pending criminal proceedings.  Sometimes respondents obtain over-indulgent extensions of time for putting in their evidence.  All such delays are deplorable, especially as there is no power to suspend a director on an interim basis, even in proceedings alleging serious misconduct.  We feel that over-elaboration in the preparation and hearing of these cases and a technical approach as to what evidence is and is not admissible is contributing to delay.  What is required, and what the court should confine the parties to, is sufficient evidence to enable the court to adopt a broad brush approach.  This should be regarded, especially in relation to the period of disqualification, as a jurisdiction which the court should exercise in a summary manner and the court should confine the parties to placing before it the material which is needed to enable it to exercise the jurisdiction in that way.”

Delay in bringing this hearing

10.  The observations of Lord Woolf MR at 658d-f of Re Westmid Packing Services Ltd are particularly apposite in this case.  Para 214 of the Judgment contained a direction that the issue of disqualification be dealt with in a half day hearing to take place as soon as possible.  It is indeed regrettable that this hearing takes place over 8 months after the Judgment was handed down, and during that period of time Lee and Wang had continued to manage the Company (they only resigned from their positions in the Company on 22 September 2015). 

11.  This kind of delay is unacceptable and I hope that it will not be repeated.

Disqualification

12.  Firstly, there is no dispute that the conduct in question merits a period of disqualification in respect of each of the Respondents.  This is firmly the view of the court.

13.  In line with the guidance of Re Westmid Packing Services Ltd, I shall state the reasons for my decision briefly.

14.  In respect of the gravity of the conduct in question, this court has found that the Respondents had acted dishonestly in putting forward a non-existing MUA.  Breach of trust by a fiduciary is a very serious matter.  A large sum of money was involved, notwithstanding that the money may be seen to be a windfall to the Company because it was normal commercial practice for the vendor of a business to extract the net asset value over an agreed sum prior to completion (see para 77 of the Judgment). 

15.  This court has found that Wang was the instigator of this dishonest enterprise because he was under pressure to clear the outstanding receivables owed to the Company (Judgment, §122). 

16.  On his part, Lee yielded to the pressure exerted on him by Wang (Judgment, §§196-198).  However, it must be said that the evidence suggested that Lee, probably influenced by the fact that the ENA was a windfall, had failed to consider the matter carefully with due regard to the interest of the Company.  He was content to go along with Wang’s wish if Yin was agreeable.

17.  Yin is the least culpable party because he did try to resist Wang’s pressure and had tried to find a legitimate way to return the windfall to him (Judgment, §§139 and 154). 

18.  It should be said that neither Yin nor Lee had derived any financial benefit from the dishonest enterprise (Judgment, §196). 

19.  In my view, the proper starting point for the disqualification is the middle bracket of 6 to 10 years.

20.  As regards mitigation, the Sum has been repaid to Company with interest by Wang.  However, I am unable to give credit to Lee or Wang for their very late expression of remorse.  This Petition was contested. 

21.  Although Yin had tried to resolve the Petition by way of the Carecraft procedure, I am unable to give him significant credit for that (see SFC v Cheung Keng Ching, 468H) because he refused to accept that he had acted dishonestly.  That disagreement, together with the unwillingness of Lee and Wang to adopt the Carecraft procedure, ultimately defeated Yin’s attempt to put an end to these proceedings. 

22.  On personal circumstances, I have no reason not to accept that the conduct in question was out of character for any of the Respondents.  It is always sad to see professional people (Yin and Lee) disgraced at the end of a long and successful career.  In the case of Wang, he must have worked very hard to achieve what he has managed, and it is equally sad to see him in disgrace. 

23.  Wang is in poor health, having had a partial hepatectomy in June this year due to liver cancer. 

24.  I have no reason to believe that there is a real risk that any of the Respondents will commit similar misconduct should they become in charge of a company again.  Further, it may well be the case that a period of disqualification of some years would be the end of any active participation in company management by Yin or Lee in light of their age (respectively 63 and 58).

25.  In the case of Wang, although he is not very much younger, it appears from the evidence that he is a man of ambition and he would like to continue to work on his goals after the disqualification. 

26.  Taking all relevant matters into the weighing exercise, I shall err on the side of leniency in favour of the Respondents. The periods of disqualification should be 7 years, 5 years and 4 years for respectively Wang, Lee and Yin.

27.  Finally, I have been asked by Mr Wong SC, appearing with Mr Lo for Wang, to make an exception in the disqualification order to enable Wang to, eg, work as a manager in a Mainland company which holds shares in a Hong Kong company.  I am unable to agree.  Such an exception will allow Wang to do indirectly what he is prohibited from doing as a consequence of a disqualification order.  To allow him to do so would defeat the two-fold purpose of a disqualification order identified in SFC v Fung Chiu. 

28.  I make an order in terms of paras 1 to 3 of the draft Order accordingly[2]. Before I hear counsel on costs, I wish to express my gratitude for their assistance.