FAN REN DA ANTHONY AND ANOTHER v. THE STOCK EXCHANGE OF HONG KONG LTD

HCAL 1211/2023

[2023] HKCFI 2932

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTITUTIONAL AND ADMINISTRATIVE LAW LIST NO 1211 OF 2023

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BETWEEN

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J U D G M E N T

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A. Introduction

1.  The Applicants (individually, “Mr Fan” and “Dr Loke” respectively) were, at all material times, independent non-executive directors (“INEDs”) of Hong Kong Resources Holdings Company Ltd (“Company”), and subject to the regulatory regime operated by the putative respondent, The Stock Exchange of Hong Kong Ltd (“Exchange”).

2.  By these proceedings, the Applicants seek leave to apply for judicial review to challenge the 21 June 2023 decision (“LRC Decision”), made by the Listing Review Committee (“LRC”) of the Exchange, upholding the Listing Committee’s decision that they breached Rule 3.08 of the Listing Rules and their Director’s Undertakings, and that they should be publicly censured and required to undergo training (“Sanctions”).

3.  I gave directions to bring the matter to a ‘rolled-up’ hearing on 14 November 2023. At that hearing, the Applicants were represented by Mr William Wong SC leading Mr Martin Kok of Counsel, and the Exchange was represented by Mr Victor Dawes SC leading Mr Joshua Chan of Counsel.

4.  At the end of the hearing, I reserved my decision. This is my Judgment.

B. Material Background

5.  The Company was incorporated in Bermuda, and was listed on the Main Board of the Exchange on 30 June 2003. It is principally engaged in trademark licensing and retailing for gold and jewellery projects in Hong Kong, Macau and Mainland China.

6.  Mr Fan and Dr Loke were, at the material times, both INEDs of the Company. Dr Loke was the chairman of the Audit Committee of the Company, of which Mr Fan was also a member. The Audit Committee’s Terms of Reference at §8.1 expressly stated that the Audit Committee duties included:

(d) to monitor the integrity of financial statements of the Company and the Company’s annual report and accounts, interim report and, if prepared for publication, quarterly reports, and to review significant financial reporting judgments contained in them. In reviewing these reports before submission to the Board, the Committee should focus particularly on:

• any changes in accounting policies and practices;

• major judgmental areas;

• significant adjustments resulting from audit;

• the going concern assumptions and any qualifications;

• compliance with accounting standards; and

• compliance with listing rules and legal requirements.

In performing its duties set out in this paragraph, the Committee should consider any significant or unusual items that are, or may need to be, reflected in the annual report and accounts, interim report and, if prepared for publication, quarterly reports, and it should give due consideration to any matters that have been raised by the Company’s staff responsible for the accounting and financial reporting function, compliance officer or auditors. In addition, the Committee members must liaise with the Company’s Board and senior management.

(e) to oversee the Company’s financial reporting system and internal control procedures:

• to review the Company’s financial control, internal control and risk management system;

• to discuss the internal control system with the management and to ensure that the management has performed its duty to establish an effective internal control system. This discussion should include the adequacy of resources, staff qualifications and experience, training programmes and budget of the Company’s accounting and financial reporting function;

• to consider major investigation findings on internal control matters as delegated by the Board or on its own initiative and management’s response to these finding;

• to review the Company’s statement on internal control system (where such statement is included in the annual report) before submission to the Board;

• where an internal audit function exists, to review the internal audit plan and ensure co-ordination between the internal and external auditors. The Committee shall also ensure that the internal audit function is adequately resourced and has appropriate standing within the Company. The Committee shall also review and monitor its effectiveness;

• the head of internal audit is directly accountable to the Committee and the Board. The Committee shall review the internal audit report and report to the Board and make recommendations;

• to review the group’s financial and accounting policies and practices;

• to review the external auditors’ management letter, any material queries raised by the auditors to the management about accounting records, financial accounts or systems of control and management’s response;

• to ensure that the Board will provide a timely response to the issues raised in the external auditors’ management letter;

• to review arrangements by which employees of the Company can use, in confidence, to raise concerns about possible improprieties in financial reporting, internal control or other matters. The Committee should ensure that proper arrangements are in place for fair and independent investigation of such matters and for appropriate follow up action; and

• to act as the key representative body for overseeing the Company’s relations with the external auditors.

7.  In summary, those duties might be said to include duties to:

(1) monitor the integrity of the Company’s financial statements (in particular, consider any significant or unusual items that are or may need to be reflected in the interim report, and give due consideration to any matters that have been raised by the Company’s auditors); and

(2) oversee the Company’s internal control procedures (in particular, review the Company’s internal control and risk management systems, and ensure that management has performed its duty to establish an effective internal control system).

8.  On 8 June 2017, the Company’s Group acquired (“Acquisition”) the entire issued shareholding of Prosten Wealth Investment Ltd (“PWIL”), whose wholly-owned subsidiary, Prosten Finance Ltd (“PFL”) held a money-lending licence. The Acquisition price was HK$1,480,260.

9.  Though it may not matter, I accept Mr Wong’s submission that the consideration/price can be described as “insubstantial”. I also note that it has later been said that it was reasonable to take the view that the Acquisition was a normal commercial transaction or investment made by the Company using a small amount of spare cash, and that the Company might hold the money lenders licence without engaging in money lending business. But, presumably, the whole point of the Acquisition was the contemplation that there would be some such business at some time.

10.  The Applicants only became aware of the Acquisition in late 2017, in the course of the preparation of the Group’s annual report for the year ended 30 June 2017. At that time, Mr Lam Kwok Hing Wilfred, the then executive director (“ED”) of the Company, represented to the Applicants that the Company had no plans to commence the money lending business. It is not in dispute that the Applicants had no reason to doubt what was represented by Mr Lam at the time. The Applicants say that, on that basis, it was unrealistic for them and the Board of directors to formulate internal control measures in advance for a money lending business that simply did not exist at the time.

11.  On 14 February 2018, Mr Xu Zhigang (“Mr Xu”) – who had been the chairman, director and shareholder of the seller of PFL – joined the Company as ED, CEO and Chairman. At all material times, Mr Xu remained a director of PFL. In other words, the new ED, CEO and Chairman of the Company was the person who had previously been in charge of the recently purchased money lending business, which might have identified that business as at least potentially raised in importance for the Company. Together with another then executive director of the Company, Mr Wu Xiaolin (“Mr Wu”), Mr Xu was designated responsible for the Company’s money lending business.

12.  It is not in dispute that Mr Xu had substantial knowledge, skill and experience in the money lending business, and extensive understanding and expertise in the regulatory requirements of a money lending business in Hong Kong.

13.  Between June 2018 and March 2019, PFL provided 12 loans to 9 different borrowers at interest rates ranging between 15% and 22% per annum (“Loans”). The 12 Loans totalled approximately HK$74.4 million. All but one of the Loans were for a term of one year. Only two of the Loans were secured. As early as November 2018, some of the borrowers were late in the interest repayments on the Loans.

14.  It is not in dispute that the Loan amounts were structured, such that they stayed just below the Listing Rules’ required announcement thresholds, and therefore no Board approval was given. The Loans were also apparently structured so as to circumvent the then existing internal control policies, such that the then Company’s board (including the Applicants) had no knowledge of the Loans at the time they were made.

15.  The then existing internal control policy in relation to the Company’s money lending business was a two-page Money Lending Policy. I accept Mr Dawes’ description of it as “rudimentary”. As he points out, there were no mandatory requirements in relation to the taking of security or the recovery of overdue loans, and the operation of the business was left almost entirely to the discretion of Mr Xu.

16.  I also note that the Money Lending Policy on its face states that it is only “For the year ended Jun 30, 2018”, and the box relating to ‘Collection of overdue loans’ says that “There was no overdue and uncollectible loan in 2018, no walk-through and control points would be specified thereof”.

17.  In around September 2018, the Applicants were first made aware of the first Loan, in the course of the preparation of the Company’s 2018 Annual Report. The first Loan had not fallen due, and interest payments had been made in full.

18.  Upon “making inquiries with the Company’s management” (as it is put in the Form 86), the Applicants were informed that this was a “one-off” loan only.

19.  However, though it might be correct that the first Loan was the only loan made before the accounting period ending 30 June 2018, the first Loan was not a “one-off” loan by the time the Applicants made inquiries in September 2018. I note that, in fact by then, 9 Loans had already been made in amounts totalling HK$58.6 million. Also, a further Loan of HK$10 million was made in late September 2018.

20.  Neither the Form 86 nor the affirmations of Mr Fan identify the particular persons in “the Company’s management” with whom it is said the inquiries were made – though I note that in the hearing before the Listing Committee, Dr Loke talked about being reassured by (only) Mr Xu. But even the rudimentary Money Lending Policy suggests that the money lending business ought to have involved to some extent not just the CEO, but also (1) the Administrative Manager, who was to prepare a risk assessment form, (2) the CFO, who was to prepare the loan agreement according to the approved risk assessment form, and subsequently to review and approve the settlement of interest income, (3) the Accountant, who was to be involved in the provision of credit and preparing monthly interest income calculations, and (4) the Assistant Finance Manager, who was to be involved in the provision of credit and checking the amount of interest income.

21.  If the Applicants had made inquiries with any of those four persons in the Company’s management – they being the logical persons of whom to make any inquiries, assuming the then Money Lending Policy had been implemented – it is difficult to imagine that the first Loan could possibly have been described as “one-off”. Alternatively, if those four persons had no knowledge of any money lending, the Applicants would have known that even the rudimentary Money Lending Policy was not being followed. If the Applicants made their inquiries with other persons, it might be asked who and why.

22.  In any event, the Applicants say they were informed that this was a “one-off” loan, and in those circumstances, the Applicants say they were not aware of any significant internal control issues, and were satisfied at the time not to take more substantial follow-up actions. In the Applicants’ joint written submissions appended to the Note of Advice from Mr Kenneth Yeo (see further below), they put it this way (sic):

At the time, only one of the Loans was granted and included in the draft 2018 Annual Report, and there was also no significant red flags regarding the Group’s newly commenced money lending business as the first loan has not fall due and interest payments were made in full, as such, both Dr. Loke and Dr. Fan as part of the then board, were not aware of any significant internal control issues and was satisfied at the time to not have taken more substantial follow-up actions.

23.  It might be noted that those submissions appear to have recognised that the money lending business had commenced (contrary to the submission made by Mr Wong in these proceedings: see below). Those submissions also focused on the making of the first Loan, and not any inquiries about other loans as may have been made since the money lending business had commenced (perhaps after the year end 30 June 2018, up to September 2018).

24.  As a result of the views taken by the Applicants, no steps were taken by them either (1) to prevent the granting of further loans, or (2) improve the internal controls for the money lending business.

25.  The next occasion when the Applicants were notified of the Loans was during the course of preparation of the Group’s financial year 2018/2019 (“FY18/19”) Interim Report. An Auditors’ Report prepared by Deloitte Touche Tohmatsu (“Auditors”) was addressed to Audit Committee of the Company, and circulated to them on 27 February 2019 It raised certain issues relating to the Loans and the Company’s internal controls.

26.  The Auditors noted the amounts of the loans granted and the delayed interest repayments, and raised questions regarding the Company’s proposed expected credit loss (“ECL”) model to be adopted for the interim results. In the ‘Overview’ section, the Auditors noted that:

The completion of our review is subject to the satisfactory clearance of the matters set out below:

• obtaining sufficient evidence for addressing no expected credit loss provided for the loan receivables; …

We will report to you in respect of any modifications to the findings contained in this report that arise on completion of these matters. In particular to the expected credit loss assessment provided by the directors of the Company, we were unable to determine its appropriateness and whether any adjustments were necessary. Accordingly, we have scoped it out during the course of our review as agreed with the management.

27.  In the ‘Control finding’ section, under the heading ‘Inadequate Internal Control on Loan Receivables’, the Auditors noted:

Observation

The Group started moneylending business during the year ended 30 June 2018. Before accepting any new borrower, the Group carries out research on the creditability of the new borrower and assesses the potential customer’s credit quality and defines loan terms with borrower. The credit of the borrowers granted with loans are reviewed once a year. As at 31 December 2018, the carrying amount of the Group’s loan receivables amounting to HK$71,500,000. All the loan receivables are unsecured, carries fixed-rate interests ranging from 15% to 22% per annum with a maturity of ranging between 6 months to 1 year. The principal will be received on maturity date.

During the course of our review, we noted that the internal control in approving and granting loan on the money lending business is inadequate due to:

(i) Insufficient due diligence assessment on the repayment abilities of the borrowers;

(ii) Insufficient written documentation on the risk assessment form about the background of the borrowers;

(iii) Insufficient evidence to demonstrate the validity about income sources and market values of the underlying assets of the borrowers;

(iv) No segregation of duties in approving and granting loan; and

(v) No follow-up and remedial actions for late interest payment.

In particular, upon application of HKFRS 9 for the current interim period, the Group applies the HKFRS 9 general approach to measure 12 months expected credit losses (“ECL”) for loan receivables. Loan receivables have been assessed individually based on the Group’s historical loss experience and the historical observed default rates adjusted by forward-looking estimates. The directors of the Company considered that no allowance is required to be recognised as at 31 December 2018.

During the course of our review we identified the following deficiencies on the ECL assessment provided by the directors of the Company:

(i) Insufficient evidence to demonstrate the reasonableness about the ECL;

(ii) Insufficient documentation on the assessment of each borrowers’ credit risk characteristics; and

(iii) Lack of consideration on the repayment abilities of the borrowers at the initial loan application.

We were unable to determine on its appropriateness and whether any adjustments were necessary. Accordingly, we have scoped it out during the course of our review.

Implication

Insufficient internal control procedures of money lending business not only increase the cost for the whole finance processes but will also negatively impact the risk management of the Group.

Recommendation

We recommend the management to strengthen the control on the approving and granting loans. The Group should closely monitor the repayment schedule of loan receivables and loan interest receivables. Adequate resources should be made available to manage and monitor the loan and loan interest collection on timely and regular basis.

The Group should also consider the repayment abilities of each borrowers into the ECL with supporting documents.

28.  The Auditors’ Report then recorded the management response as being that the management “will closely monitor the repayment schedule of loan receivable and loan interest receivable and consider ECL if necessary”.

29.  As was subsequently explained by the Auditors (in response to the Exchange’s enquiries), the Company required the Auditors to conduct the review of the FY18/19 Interim Results by excluding the loan receivables and the related interest receivables as the assessment would be covered by the management together with the Audit Committee. Hence, the Auditors informed the management of the Company, including Mr Xu and Ms Ho, that they were unable to complete the review and express a conclusion.

30.  Upon receiving the Auditors’ Report, the Applicants enquired with the management and the Auditors for further information. In response, Mr Xu made assurances that the Company would closely monitor the Loans and ensure the due repayment of the Loans, and explained that none of the principal amount of the Loans was due in February 2019, and the Group continued to receive interest repayment from the borrowers after 31 December 2018.

31.  On 28 February 2019, the Applicants also held a telephone conference of the Audit Committee attended by the Auditors to discuss the Auditors’ Report. At the telephone conference, the Auditors repeated their views expressed in the Auditors’ Report. Whilst the Applicants say that the Auditors did not make known to them that any ECL provision should be made to the FY18/19 Interim Results, it seems to me that the reason why the Auditors would not have said any such thing is obvious from what they did express. Because they had not obtained sufficient evidence, they could not address the ECL provision.

32.  At the same telephone conference, the Applicants say, Mr Xu further represented to the Audit Committee that the management would follow up on the settlement afterwards, and he was confident that the loan receivables would ultimately be recovered. In those circumstances, the Audit Committee resolved that the FY18/19 Interim Report be recommended to the board for adoption.

33.  Mr Xu made a number of other representations to the applicants including that, unlike large financial institutions, PFL’s Loans adopted a high reward high risks model, in which the Loans were subject to higher interest rates, and as such Mr Xu and the PFL’s management had contemplated the occurrence of occasional delay in interest payments, and were content with the repayment situation at the time.

34.  Essentially, upon the recommendation of Mr Xu, the Company decided on 28 February 2019 not to make any ECL provision for the Loans or to disclose any issues raised or flagged in the Auditors’ Report when the FY18/19 Interim Report was published.

35.  In passing, I note that the Applicants have laid some stress on the fact that, as at end February 2019, none of the Loan receivables were past due, and the Company had in fact been receiving interest repayments whilst any outstanding interest payments were not material. However, (1) there had already been 15 reminders sent by 28 February 2019, and (2) more importantly, the purpose of having adequate internal controls does not arise only when something has gone wrong, and surely such adequate internal controls are supposed to be in place so as to seek to prevent anything going wrong. In any event, the fact that problems have not yet arisen does not necessarily mean that the internal controls in place are adequate. In this case, plainly they were not.

36.  The last of the Loans was made on 20 March 2019. On 22 March 2019, Ms Dai requested the CFO of the Company to suspend the Company’s money lending business.

37.  On 28 March 2019, the FY18/19 Interim Report were published. By that date, more than half of the total amount of interest receivables for the Loans was overdue, but the Report did not disclose that fact. The Report reported the principal and outstanding interest for the relevant Loans separately, but did not flag any issues raised in the Auditors’ Report. Instead, a note (“Note”) was included to the effect that (1) the Company carried out research on the creditability of new borrowers and assesses their credit quality, (2) the credit of the borrowers granted with loans would be reviewed once a year, (3) there were no loan receivables past due at the end of the reporting period, (4) loan receivables had been assessed individually based on the Company’s historical loss experience and the historical observed default rates adjusted by forward-looking estimates, and (5) the directors of the Company considered that no allowance was required to be recognised as at 31 December 2018.

38.  The Applicants were supportive of the Auditors’ proposal to strengthen the Group’s internal control systems. Together with an ED of the Company, Ms Dai Wei (“Ms Dai”), they responded to the recommendations in the Auditors’ Report. A new Money Lending & Operation Manual was completed, approved and issued under the supervision of (amongst others) the Applicants in or around April 2019.

39.  In other words, the Company acted fairly quickly, but adopted the improved manual only after the money lending business had already been suspended – though it was available should that business have been resumed.

40.  Subsequently, all the borrowers defaulted on the Loans. The Company incurred approximately HK$86 million of impairment loss on the principal (HK$74.4 million) and interest receivable (HK$11.6 million) – being a 100% impairment for the Loans – in its FY2019 financial statements. The impairment accounted for around 40% of the loss incurred by the Company for the year.

41.  During work for the annual audit in FY 2019, the Auditors continued to raise concerns regarding the Loans and required the Company to undertake an independent forensic investigation on 14 October 2019. In that month, the Company’s board authorised (amongst other things) the Applicants to form a Special Investigation Committee (“SIC”) to undertake investigational matters pertaining to the Loans, and Mr Xu was re-designated as a non-Executive Director, and he resigned as CEO of the Company.

42.  On 8 November 2019, the Audit Committee established the SIC, which in turn commissioned an independent consultant, RSM Corporate Advisory (Hong Kong) Ltd (“RSM”) to carry out an independent investigation into the Loans. RSM’s findings were later provided in a report dated 6 January 2020 (“RSM Report”).

43.  The RSM Report found, amongst other things, that (1) no reasonable or reliable credit evaluation was established, (2) credit risk assessment was not conducted by a professional credit team for the money lending business, (3) there was no effective internal control mechanism to monitor the credit review and approval process, and (4) no proper due diligence and background check was conducted before the granting of the Loans.

44.  Subsequently, the Listing Division commenced investigation into the conduct of the Company and its relevant directors, including the Applicants (who cooperated with the investigation).

45.  On 25 July 2022, the Listing Division filed its report and initiated the disciplinary case against the Company and each of its directors at the material time, including the Applicants.

46.  On 20 December 2022, the Listing Committee conducted a hearing, and issued its decision by letter dated 3 February 2023.

47.  Only the Applicants and Ms Dai applied for review of the Listing Committee’s decision (and the other directors did not challenge the disciplinary decision against them).

C. The LRC Decision

48.  The review hearing took place on 6 June 2023, and the LRC Decision was given by letter dated 21 June 2023.

49.  As already stated, the LRC upheld the Listing Committee’s decision, albeit with slight modifications to the directions regarding the Applicants’ training.

50.  In the LRC Decision, the LRC first set out the background facts and applicable Listing Rules, before summarising the submissions of the parties to the review. No complaint has been directed at the LRC’s summary of those matters. The LRC then dealt with its own analysis and views, as follows:

Discussion and LRC’s views

40. The LRC noted that it had to consider whether the Applicants had breached their directors’ duties under Rule 3.08, and their Undertakings in respect of:

(i) Inadequate internal controls in place at the Company at the relevant time; and

(ii) Inaccurate disclosures in FY18/19 Interim Report.

Inadequate Internal Controls

41. As to whether the Applicants failed to ensure the Company had proper internal controls, the LRC took into account that the Applicants were the members of the Company’s Audit Committee with Dr Loke serving as the Committee chair at the relevant times. While all directors were individually and collectively responsible for ensuring that the Company establishes and maintains an adequate and effective internal controls and risk management system, it is the Audit Committee that has primary responsibility for monitoring and overseeing that the internal controls of the Company are adequate and work effectively.

42. The LRC therefore had to assess whether the Applicants discharged their duties as directors and also specifically as members of the Audit Committee in overseeing the Company’s internal controls. The LRC noted the following:

(i) Dr Loke and Mr Fan are very experienced and sit as INEDs on the boards of many Hong Long listed companies. In particular, Dr Loke, has over 40 years of accounting and auditing experience. Mr Fan had been serving on the Company’s board for a long time.

(ii) It was not disputed, that the Company’s internal controls, in particular for the money lending business, were deficient at the relevant times. The LRC noted that deficiencies in the internal controls for the money lending business had been identified by (i) the Auditors’ Review Report addressed to the Audit Committee and circulated to the board on 27 February 2019; and (ii) the RSM Report dated 6 January 2020. The deficiencies identified included the absence of basic controls such as no proper due diligence was conducted on the borrowers and their creditworthiness.

43. The LRC therefore concluded that the Company’s internal controls for the money lending business were defective. In terms of whether the Applicants undertook sufficient steps, particularly in their capacity as members of the Audit Committee, to ensure the money lending business was conducted with proper internal controls, the LRC noted:

(i) The Applicants became aware of the Company’s acquisition of the money lending business in late 2017. While the Applicants submitted that they had not initially been aware that the Company had commenced the money lending business, they acknowledged that they became aware that this business had commenced and the first of the Loans had been made by September 2018 during the annual audit work. Despite such awareness, no steps had been taken to ensure the Company conducted proper due diligence or otherwise had proper internal controls for the money lending business.

(ii) The Applicants were made aware of the deficiencies in the internal controls for the money lending business when they received the Auditors’ Review Report in late February 2019.

(iii) Internal controls for the money lending business were only updated in April 2019 after further Loans had been made, more than half of the total amount of interest receivables for the Loans had become overdue, and the money lending business had already been suspended.

44. The LRC concluded that the Applicants had failed to demonstrate they had undertaken sufficient steps to ensure the money lending business was conducted with proper internal controls in place. Even if the intention of the Company may initially have been to not right away commence the money lending business, the latest by September 2018, the Applicants had become aware that this business had then commenced. They should have ensured at the latest at that point in time that proper internal controls for the money lending business had been implemented to prevent risks for the Company. Even after clear deficiencies had been identified in the Auditors’ Review Report, the internal controls for the money lending business were only updated at a later stage when the money lending business had already been suspended and evidence existed of the possible default of the Loans.

45. The LRC did not agree with the Applicants’ submission that they were entitled to rely on the expertise of Mr Xu ZG for the internal control measures for the money lending business. The Applicants are very experienced professionals who have served as INEDs for many listed companies. They should have been aware of the inherent risks of a money lending business, and, at the latest, once clear evidence existed that this business had already commenced, they should have recognized their duties as directors and members of the Audit Committee to ensure proper internal controls were put in place.

Inaccurate disclosures in the FY18/19 Interim Report

46. As to whether the Applicants failed to ensure the disclosures in the FY18/19 Interim Report were accurate, the LRC noted the following:

(i) The terms of reference of the Audit Committee set out that the duties of the Audit Committee include “to monitor the integrity of financial statements” (including the interim report) and in performing its duties to consider “any significant or unusual items that are, or may need to be, reflected in the annual report and accounts, interim report” and to give “due consideration” to any matters that have been raised by the Company’s Auditors.

(ii) In February 2019, the Auditors had raised many issues in the Auditors’ Review Report and decided that they could not complete their review and express a conclusion under HKSRE 2410 (which they had done in previous year). The Audit Committee nevertheless endorsed publication of the FY18/19 Interim Results without ECL assessment.

(iii) Despite the Auditors’ comments and refusal to express a conclusion under HKSRE 2410, no further follow-up with the Auditors took place after the publication of the FY18/19 Interim Results. Even after more than half of the total amount of interest receivables for the Loans had become overdue, no further update to the ECL assessment was made, and the FY18/19 Interim Report was published with the Note at the end of March 2019.

47. The LRC did not agree with the Applicants’ submissions that the Auditors had failed to bring the relevant issues properly to the Applicants’ attention. The Auditors’ Review Report highlighted various issues and concerns and the Auditors did not express a review opinion under HKSRE 2410 which they had otherwise done in the previous years. The LRC noted that even the Applicants’ expert Mr Yeo had noted that under relevant accounting standards Auditors had the option to withdraw from an engagement when they believed that it was necessary to make a material adjustment – by deciding not to complete their review and express a conclusion, which was what the Auditors did in the present case. In accordance with the Audit Committee’s terms of reference, the Applicants as members of the Audit Committee, very experienced INEDs and in the case of Dr Loke, a professional with numerous years of accounting expertise, should have followed up and made sure that they fully understood the concerns of the Auditors to confirm that the relevant information presented in the FY18/19 Interim Report is indeed accurate.

48. The LRC also did not agree with the Applicants’ submission that they did not have sufficient time to consider the relevant information as they only learned of the Auditors’ Review Report a day before the publication of the FY18/19 Interim Results. The LRC noted that from the time the Applicants learned of the Auditors’ Review Report to the publication of the FY18/19 Interim Report, more than a month had passed, which would have been sufficient for the Applicants to further consider the accuracy of the statements in the FY18/19 Interim Report. The LRC noted that there was no follow up on the ECL assessment or disclosure in the Interim Report after the FY18/19 Interim Results was published.

49. The LRC further noted that the Applicants’ expert stated in his Advice that for the ECL assessment the FY18/19 Interim Report had not been incomplete or inaccurate in his opinion from a materiality point of view. The LRC, however, noted that at the time, the Applicants as members of the Audit Committee had not taken any steps to address the concerns voiced by the Company’s Auditors in the Auditors’ Review Report and undertake their own assessment. Instead, the Applicants submitted they had relied on Mr Xu ZG for the ECL assessment. The LRC did not agree that it was proper for the Applicants to rely on recommendations made by Mr Xu ZG on the basis of his expertise in money lending. The Applicants, in particular Dr Loke, had considerable audit / accounting expertise and as members of the Audit Committee had a duty under its terms of reference to independently monitor the integrity of Company’s financial statement, review significant financial reporting judgements and to give due consideration on issues raised by the Auditors.

50. Based on the Applicants’ roles and duties as directors and members of the audit committee, in particular for the oversight of the Company’s internal controls and the monitoring of the integrity of the financial statements, the LRC found that the Applicants breached their duties under Rule 3.08 and their Undertakings. The Applicants’ breaches were severe, in particular, as the Applicants did not demonstrate they had the requisite understanding of their roles and duties as members of the Audit Committee under the Audit Committee’s terms of reference.

51. For the avoidance of doubt, despite the Applicants’ submission on mitigating factors, given the severity of the Applicants’ breaches, the LRC found that the imposition of public censures was warranted.

52. Finally, as the Applicants had demonstrated a lack of understanding for their obligations as members of the Audit Committee, the LRC directed that the training directive for the Applicants as set out in the LC Decision should be modified to the following:-

“Mr. Fan and Dr. Loke to (a) attend 20 hours of training on regulatory and legal topics including Listing Rule compliance (“Training”). The Training must include at least three hours on each of (i) directors’ duties; (ii) the Corporate Governance Code (including, in particular, on part D.3 Audit Committee); and (iii) the Listing Rules requirements for disclosure obligations under Chapter 13, to be provided by training providers approved by the Division and completed within 90 days from the date of the publication of the statement of disciplinary action; and (b) provide the Division with the Training provider’s written certificate of full compliance within two weeks after the Training completion.”

51.  Enclosed with the LRC Decision was a Statement of Disciplinary Action. That Statement identifies the dates of the hearings before the Listing Committee and the LRC, and provides a summary of facts, the requirements of the Listing Rules and the Director’s Undertaking, and the Exchange’s findings of breach. The Statement also identifies what sanctions and directions were imposed in respect of the Company and the directors, including the Applicants. I think it is fair and appropriate to read the LRC Decision and that Statement together.

D. Regulatory Framework

52.  The Sanctions were imposed on the Applicants in the context of the well-established duty on company directors to act with reasonable care and skill in the management of the company.

53.  Specifically, Rule 3.08 of the Listing Rules provides that directors of a listed issuer must fulfil fiduciary duties and duties of skill, care and diligence to a standard at least commensurate with the standard established by Hong Kong law. Hence, in this regard, directors of listed issuers must take an active interest in the issuer’s affairs and follow up on anything untoward that comes to their attention.

54.  Relevantly for present purposes, such duties may include the duty to cause the company to establish and maintain an adequate internal control system.

55.  Directors of listed issuers must also undertake to use their best endeavours to procure the issuer to comply with the Listing Rules (“Directors’ Undertaking”). The Listing Rules also contain requirements for the purpose of promoting good corporate governance through oversight by INEDs and an audit committee.

56.  Rule 3.10 requires the board of directors of every listed issuer to include at least three INEDs, at least one of whom must have appropriate professional qualifications or accounting or related financial management expertise. Rule 3.10A requires the INEDs to make up at least one third of the board.

57.  Rule 3.21 requires all listed issuers to establish an audit committee made up of non-executive directors only, with a minimum of three members, at least one of whom is an INED with appropriate professional qualifications or accounting or related financial management expertise. The majority of the audit committee members must be INEDs of the listed issuer, and the audit committee must be chaired by an INED.

58.  Rule 3.22 requires the audit committee to have written terms of reference clearly establishing the audit committee’s authority and duties. The terms of reference are expected to include monitoring the integrity of the issuer’s financial statements, and overseeing the issuer’s internal control systems.

59.  Rule 2A.09 empowers the Listing Committee to impose sanctions in case it finds that there are breaches of the Listing Rules by any director of a listed issuer. The imposition of sanctions is not contingent upon any finding that the breaches resulted in loss to the listed company. The purposes of disciplinary sanctions include deterring future breaches, educating the market, influencing compliance culture and attitude, and enhancing corporate governance.

E. Intended Grounds of Review

60.  In the Form 86, the Company identified for intended grounds of review, as follows:

(1) Ground 1: The LRC erred in law and/or failed to give adequate reasons with respect to alleged “inadequate internal controls”.

(2) Ground 2: The LRC erred in law and/or failed to give adequate reasons with respect to alleged “inaccurate disclosures”.

(3) Ground 3: The LRC erred in law and/or failed to give adequate reasons in imposing sanction of public censure.

(4) Ground 4: the LRC Decision was irrational and/or Wednesbury unreasonable.

61.  At the hearing, Mr Wong helpfully divided his oral submissions into three parts, so as to focus on matters dealing with the three main topics covered by the Grounds, being (1) the internal controls, (2) the alleged inaccurate disclosure, and (3) the proportionality of the sanction of public censure.

62.  Indeed, Ground 4 essentially relies on the other Grounds (whether taking singly or cumulatively), so unlikely significantly adds to the matters raised by those Grounds.

63.  Mr Wong also stressed that the Applicants are not seeking to appeal the case on the merits. Rather, the judicial review application is directed that the legality and rationality of the Decision.

64.  Indeed, though the Form 86 itself does not expressly assert irrationality as an intended ground of review, the way in which the Grounds are formulated and argument does seem to me to extend beyond mere assertions of illegality and to include assertions of irrationality.

F. Adequacy of Reasons

65.  Each of Grounds 1, 2, and 3 suggest in the heading that there was a failure on the part of the LRC to give adequate reasons with respect to its findings. I think it convenient to deal with the question of adequacy of reasons separately.

66.  The principles relating to adequacy of reasons are well-settled. What amounts to adequate reasons for decision given by a public authority depends on the context in which the decision-maker is operating and the circumstances of the case in question. The reasons must be intelligible and adequate, enabling the reader to understand why the matter was decided as it was and what conclusions were reached on the principal important or controversial issues. Recognition must be given to the fact that the decision is addressed to parties well aware of the issues involved and the arguments they advanced.

67.  Reasons may be briefly stated, may refer only to the main issues in dispute, and need not canvass every material consideration, nor address every single issue that has arisen. The essential question for the Court when assessing a challenge as to the adequacy of reasons is to determine whether, when viewed objectively in the specific factual context of the case and the information and materials objectively known to the parties at the material time, the reasons as provided in the decision were adequate to enable the applicant to understand why the respondent decided as it did.

68.  In the present proceedings, it seems to me that the suggestion of inadequate reasons is really part of the criticism as to where it is suggested the LRC fell into legal error. In other words, the reasons point does not significantly add to the real complaint. For example, under Ground 1, the complaint about reasons is stated at §42 as follows (bold and italics in original, footnotes omitted):

First, the LRC’s purported analysis with respect to “inadequate internal controls” only consisted of five short paragraphs (at §§41 to 45 of the Decision). The Applicant aver that the reasons given by the LRC were grossly inadequate, and they demonstrate that the LRC had not properly considered the matter at all. The sheer inadequacies of the LRC’s purported reasoning (or lack thereof) are further exemplified in light of the following matters.

69.  The “following matters” are the following 19 paragraphs or sub-paragraphs which fill the next 4½ pages of the Form 86 – which does not suggest any great difficulty in identifying and understanding what the LRC did, nor any great obstacle to the ability to make assertions as to why that was in error.

70.  Ground 2 does not make any express reference to inadequacy of reasons.

71.  Ground 3 does make reference to inadequacy of reasons, but essentially to make the point that what has been stated in the LRC Decision does not properly address the Applicants’ submissions as to the mitigating factors and severity of the Applicants’ alleged breaches – such that it can be said that the LRC simply failed to consider or deal with the submissions at all, whereas had they done so the LRC would have concluded that the sanction of public censure was grossly disproportionate and not warranted in the circumstances.

72.  In any event, subject to returning to the impact of how the LRC Decision was expressed, it seems to me that the LRC did give adequate reasons for its LRC Decision, which were intelligible and adequately met the substance of the arguments advanced. As I have canvassed above, the LRC set out the factual basis upon which it proceeded, the principal arguments advanced by the parties with which it then engaged, and the substantive reasoning leading to its conclusions. In short, the LRC Decision did come to grips with the main contentions advanced, and explained the LRC’s views on those contentions, with the conclusions identified.

73.  Further, as Mr Dawes submits, and as I have shown above, the Form 86 itself identifies that the reasons were sufficient to reveal whether the LRC made any error of law, as the Applicants now put forward comprehensive challenges relating to the substantive merits of the LRC Decision. Other than perhaps in respect of Ground 3 – to which I shall return below – the Applicants have not identified any aspect of the LRC Decision which they are unable to understand.

74.  I also accept Mr Dawes’ submission that if the Applicants’ argument is in substance that the LRC ought to have said more about the arguments and evidence upon which it relied, that is not a sufficient criticism for intervention by a judicial review Court.

G. Ground 1: Internal Controls

75.  On behalf of the Applicants, Mr Wong submits that that the LRC plainly erred on the matter relating to Internal Controls, for various reasons.

76.  First, he submits that the Company did have in place an internal controls mechanism and a money lending policy, which was primarily handled by Mr Xu and Mr Wu. So, he submits, the LRC failed in appreciating that the Applicants were entitled to delegate and trust the Company’s management to exercise all relevant internal controls competently and honestly, unless there was a reason to distrust them. Mr Wong relies on authorities that identify: (1) it is permissible for a company’s board to have a proper degree of delegation and division of responsibility, with each individual director retaining a residual duty of supervision and control; (2) non-executive directors are entitled to place reliance on a highly experienced chairman who has had far greater involvement with the company; (3) business cannot be carried on upon principles of distrust, so that persons in responsible positions must be trusted until there is reason to distrust them; and (4) whether or not a director is culpable for misconduct should not be judged by hindsight.

77.  Mr Wong submits that, if the benefit of hindsight is ignored, it was perfectly reasonable for the Applicants to place trust and reliance on Mr Xu, where Mr Xu had extensive experience as a director of listed issuers, a proven track record in operating a money lending business, and was an ED at the material time and the director primarily involved in the handling of the Loans.

78.  But, with respect, that submission ignores the fact that – as the LRC Decision plainly took into account (§§41-42) – the Applicants were not merely INEDs, but were the chairman and member of the Audit Committee at the relevant times. It is not reasonably arguable to suggest that the LRC failed to distinguish between EDs and INEDs, because they were alive to the distinct positions of the various directors (as was also apparent from the imposition of different sanctions on the Applicants on the one hand and Mr Xu and another former ED on the other). As recognised by the LRC Decision (§41), whilst all directors were individually and collectively responsible for ensuring that the Company established and maintained an adequate and effective internal controls and risk management system, it was the Audit Committee that had primary responsibility for monitoring and overseeing that the internal controls of the Company were adequate and worked effectively.

79.  Contrary to the submission made on behalf of the Applicant, I do not think the LRC was requiring that the Applicants somehow to have successfully uncovered Mr Xu’s deliberate concealment of his deceptive scheme. It is of course correct that directors cannot be held to be “insurers of the success” of any actions they may take. But, what the LRC Decision involved was a finding that the Applicants, in particular when wearing their Audit Committee hats, had failed to meet their primary responsibility for monitoring and overseeing the internal controls of the Company. In other words, that efficient (as opposed to deficient) controls might not have uncovered any improper behaviour is not a reason for having no efficient and proper controls.

80.  Further, submitting that the Company in fact had in place a money lending policy or control means little if that policy or control was not fit for purpose. In this case, it was not disputed that the Company’s controls were deficient (see, further, below). Plus, it seems to have been the Applicants’ position that because they thought that the money lending business had not yet commenced, they need not either consider or update the controls as might relate to that business. But, I have already mentioned that it seems to me the relevant internal controls should be put into place before the business commences, and not only as or after it does. In any event, at the latest by September 2018, the Applicants knew that the business had commenced, but they still took no relevant steps in relation to the internal controls.

81.  In that context, Mr Wong submits that – where the Applicants had been told the first Loan was a “one-off” – the money lending business had not in fact commenced. I reject that submission. First, any business must commence with the first transaction. Secondly, from what the Applicants have themselves said, they recognised that transaction as the commencement of the business. Thirdly, even if they had not recognised, it was obviously in fact the commencement of a money lending business, because it involved the business of lending money.

82.  Ultimately, as chairman and member of the Audit Committee, the Applicants were under clear duties to review the Company’s internal control and risk management systems, and to take steps necessary to ensure that the management had performed its duty to establish an internal control system. Those duties could not be delegated without defeating the whole point of having INEDs and an audit committee comprised partly of, and chaired by, INEDs.

83.  As Mr Dawes submits (and I accept), even if the Applicants were entitled to engage in some form of delegation, they retained a core non-delegable duty to supervise the discharge of the delegated functions.

84.  Mr Wong’s oral submission emphasises that there is no dispute that the Applicants were told in September 2018 that the first Loan was a “one-off”. But, there is the additional point, which I raised with Mr Wong at the hearing, namely that in September 2018 the Applicants were made aware that the previous representation given to them by Mr Xu that the Company was not about to start the money lending business had been breached. It had started, without their being informed. It might be thought that that fact could and should at least have raised some proper concern, if not suspicion, as to the operation of that business. Had the Money Lending Policy then been considered, and had the persons who were supposed to have been involved in the operation of that policy been consulted by the Applicants, they would likely have found that the claim to a “one-off” transaction was false, and/or that the policy (rudimentary as it was) was simply being side-stepped.

85.  I note that Dr Loke gave evidence before the Listing Committee that the Applicants were reasonably satisfied and expected that Mr Xu would properly operate the money lending business in accordance with the internal control policy that had been adopted, but it turned out that Mr Xu went behind their back and granted further unauthorised loans subsequently. As Dr Loke put it, the Applicants were “blindsided by the culprits who took advantage of our trust and granted the unauthorised loans before we had a chance to review the internal control system”. However, the LRC Decision obviously included the conclusion – the rational conclusion – that the events in September 2018 did give the Applicants the chance to review, indeed that was the latest point in time to exercise the duty to review, the then existing internal control system. No one suggests the existing internal control system was anything other than deficient, and Dr Loke’s own evidence was that later, when the lending was suspended, the Applicants “immediately recognised that there was probably a deficiency in the internal control system”, hence the implementation of a new one. In passing, I note that tends to suggest that there had been no earlier consideration of the previous policy.

86.  I do not think that the fact that the Auditors did not subsequently suggest any suspected abuse of power or fraud on the part of Mr Xu changes the position.

87.  Mr Wong relies on what he refers to as the “illuminating analysis” of the MMT (chaired by Mr Michael Hartmann) in its Report dated 29 December 2016 concerning Greencool Technology Holdings Ltd. In that case, the MMT found two INEDs (who were members of the relevant audit committee) were not culpable for the misconduct alleged against them. Mr Wong relies on passages in the Report where it was held:

(1) If commercial reasoning is found to be acceptable to auditors of repute, it may well be found to be acceptable to the INEDs.

(2) The INEDs are not paid, full-time executives, and auditors of repute and competence had been appointed, so that the INEDs were entitled to rely on their advice, subject of course to employing their own wisdom and experience in order to weigh that advice.

(3) Absent grounds for suspicion, the INEDs were entitled to trust the management to do their work competently and honestly.

(4) Whether the INEDs might have more vigorously and incisively discharged their obligations is not the test – where undoubtedly it might be thought, looking back over the years and knowing what is now known, criticisms could be levelled.

88.  Mr Wong submits that those elements of reasoning are particularly apposite in the present case. But, part of the problem with the submission is that the Auditors in the present case did not find the internal controls to be acceptable. Indeed, they pointed to problems with the controls, and an inability to make a proper conclusion in the absence of appropriate evidence. Nor did the Auditors, therefore, consider that they would simply trust the management to do the work competently and honestly. Nor does it seem to me that the LRC simply engaged in the improper test of applying hindsight to whether the Applicants discharged their obligations, on the basis that they might have done so more vigorously or incisively. Nor did the LRC reach its conclusion in the LRC Decision on the basis that the INEDs were somehow under an obligation to turn themselves into auditors or executives to try and ferret out deceit.

89.  I do not see any reasonably arguable error of law in the approach taken by the LRC to this question as regards internal controls, nor was it in any way reasonably arguably irrational to have concluded in the circumstances that the Applicants had breached their duties.

90.  In so far as Mr Wong also submits that the LRC erred in failing to consider the full scale of remedial actions undertaken by the Applicants after they became aware of the issues as set out in the Auditors’ Report, the submission is misplaced. The LRC Decision demonstrates that the LRC was clear about the remedial actions undertaken, but in essence took the view that they were taken too late (indeed, after the money lending business had been suspended – though I acknowledge it may be said that the suspension was part of the remedial actions). The lack of criticism by the LRC of any inadequacies in the new manual issued in April 2019 is beside the point, where the main point was as to its timing. Mr Wong’s submission that as soon as the Applicants knew about the recurrent nature of the money lending business, they took steps to suspend that business completely and to put in place the new operation manual within one month, is also no answer to that point on timing.

91.  Lastly, Mr Wong submits that the LRC wrongly reversed the burden of proof, in particular when it concluded that “the Applicants had failed to demonstrate that they had undertaken sufficient steps to ensure the money lending business was conducted with proper internal controls in place”. I do not think that criticism is a fair criticism. That phrase was used in §44 of the LRC Decision, which was preceded by the LRC’s statements or conclusions that:

(1) It was not disputed that the Company’s internal controls, in particular for the money lending as this, were deficient at the relevant times, as had been identified by (a) the Auditors’ Report and (b) the RSM Report. (See §42)

(2) The deficiencies identified included the absence of basic controls. (§42)

(3) The Applicants became aware of the Company’s acquisition of the money lending business in late 2017. (§43)

(4) The Applicant became aware that the Company had commenced the money lending business by September 2018. (§43)

(5) Despite that awareness, no steps had been taken to ensure the Company conducted proper due diligence or otherwise had proper internal controls for the money lending business. (§43)

(6) The Applicants were made aware of the deficiencies in the internal controls by way of the Auditors’ Report in February 2019.

(7) Internal controls for the money lending business were only updated in April 2019 after further Loans had been made, more than half of the total amount of interest receivables for the Loans had become overdue, and the money lending business had already been suspended.

92.  The LRC Decision (also at §44) found that at the latest by September 2018 the Applicants became aware that the money lending business had commenced and should at that latest point in time have ensured that proper internal controls for the money lending business had been implemented to prevent risks for the Company. That was the basis upon which the LRC concluded (at §44) that the Applicants had not demonstrated they had undertaken sufficient steps, and that phrase was clearly not reversing the burden of proof, but instead was rejecting the Applicants’ case that they had undertaken sufficient steps.

93.  Ground 1 is not reasonably arguable with any realistic prospect of success.

H. Ground 2: Inaccurate Disclosure

94.  The main thrust of the argument on Ground 2 centres on Mr Wong’s submission that the LRC erred on its conclusion as to inaccurate disclosures because of its “failure to consider or understand the crucial expert evidence of Mr Kenneth Yeo”.

95.  It is said that the LRC’s finding of breach was essentially based on the Company’s alleged omission to make ECL provision in the FY18/19 Interim Report. But, pertinently, Mr Yeo opined that the impairment of the Loans in the FY18/19 Interim Report would not have been material to the Company’s total assets, and hence the omission of the ECL assessment did not render the Report incomplete or inaccurate from the materiality point of view.

96.  Mr Wong submits that:

(1) The LRC did not reject Mr Yeo’s expert analysis as to the immateriality of ECL, yet still asserted that the Applicants were in breach for not taking further steps to address the Auditors’ concerns.

(2) That was illogical reasoning, because if the ECL assessment was immaterial, it must follow that the Applicants could not be in breach of any alleged inaccurate disclosures relating to an immaterial issue. The LRC’s conclusion is an error of reasoning which “robs the decision of logic”.

(3) In any event, it was wrong to suggest that the Applicant had not taken any steps to address the Auditors’ concerns, in particular in light of the remedial actions taken by them.

(4) Further, the Applicants did not merely rely on Mr Xu for ECL assessment, but (as was their clearly stated position) they undertook their own independent assessment and considered the immateriality of the overdue interest and made the judgment call not to make any ECL adjustment.

(5) If the LRC effectively rejected Mr Yeo’s expert evidence and conclusion, that would have heightened the requirement to give adequate (or full or appropriate) reasons as to why, but the LRC gave no reasons at all.

(6) The LRC failed to consider or recognise that the Auditors’ Report never expressly stated that ECL provision should be made, nor did the Auditors modify any comments or qualifications on the ECL or any internal control issues.

(7) The LRC further erred by falsely asserting that the Auditors had taken the option to withdraw the engagement, which was wrong as a matter of fact, because the Auditors continued to act as the Company’s auditors and provided the Auditors’ Report for use by the Audit Committee.

(8) Reference to the Statement of Disciplinary Action cannot save the deficiencies in the LRC Decision itself.

97.  Before turning to deal with some of the detail of those submissions, I think it might be convenient to make some comments on the status and quality of Mr Yeo’s evidence. Whilst it is described as “expert evidence” – and I have no reason to doubt Mr Yeo’s general experience and expertise – I am not sure that is an appropriate description. The way in which the quotation marks are also used in the LRC’s summary of the Listing Division’s submissions, it seems that the Listing Division also doubted the appropriateness of the description.

98.  First, as a matter of general principle, expert evidence (properly so called) is ordinarily available and admissible in a situation where the tribunal cannot be expected to have the relevant knowledge or expertise. Even leaving aside strict rules of admissibility, the LRC is a tribunal comprised of members who can be expected (at least as a body) to have the relevant knowledge or expertise to determine what is or is not material. Though the reception of materials at the hearing is a matter for the LRC, I think a note of caution might be sounded as to the true nature or quality of evidence which might be offered as being “expert evidence”.

99.  Secondly, Mr Yeo’s Note of Advice and later Memorandum (as they were called) seem to me to read more like his own commentary on the materials, as a result of his own activities conducted long after the events involving the Applicants themselves. With respect, that kind of commentary is really in the form of submission or argument, which could be made by anyone with a modicum of understanding of financial statements. If the LRC were to treat it on that basis, I do not think there could be any criticism.

100.  In any event, the suggestion that the LRC failed to take into account and weigh Mr Yeo’s evidence seems to me to be incorrect. Mr Yeo’s evidence was referenced in the LRC Decision at §33 (by reference to the Listing Division’s submissions on it), §39 (by reference to the Applicants’ submissions) and §§47 and 49 (in the expression of the LRC’s views). From the latter paragraphs, it is clear that the LRC thought the materiality point addressed by Mr Yeo was not the material point at issue. For that reason, it did not need to be expressly rejected or dismissed. This was because the Applicants as members of the Audit Committee had not taken any steps to address the concerns voiced by the Company’s Auditors. In other words, even if the materiality opinion were to be accepted, the LRC took the view that the disclosure was inadequate not because it considered that ECL provision necessarily ought to have been made, but because the disclosure did not mention the Auditors’ concerns and because it gave the false impression that there were no issues with the Loan repayments.

101.  This was also made clear in the Statement of Disciplinary Action which accompanied the LRC Decision letter (and which should fairly be read together with it), where the relevant breach was described as follows:

The Relevant Directors (except Mr Wu, who resigned in August 2018) failed to procure the Company to disclose accurate and complete information in the FY18/19 Interim Report. Mr Xu ZG was the director responsible for liaising with the Auditors regarding the issues and took the view that no ECL allowance for the Loan receivables was required, even though the Auditors disagreed. Although Mr Phan and Dr Loke, both members of the Company’s audit committee (Audit Committee), had enquired about the details of the Loans with Mr Xu ZG, they took the view, without conducting Mina for further inquiry, that the failure of the Borrower is to make interest payments on time was immaterial. Further, there was no evidence of any critical assessment of, or discussions on, the FY18/19 Interim Report or the Auditors’ Report by the Audit Committee. The Exchange observed that the Audit Committee was notably ineffective and failed to discharge its duties to monitor the integrity of the Company’s financial statements and reports as required under its terms of reference. Ms Dai simply relied on Mr Xu ZG and the Audit Committee’s recommendation. There was no evidence of any exercise of independent judgment or of how they had satisfied themselves that Mr Xu ZG’s recommendation should be adopted. All the Relevant Directors (except Mr Wu) approved the publication of the FY18/19 Interim Report according to the minutes of the relevant Board meeting. The Board should have critically considered the issues when making the ECL assessment and ensured any disclosures in connection with were accurate.

102.  As to the alleged error on the part of the LRC in falsely asserting that the Auditors had taken the option to withdraw the engagement, which was wrong as a matter of fact, that seems to me to be playing with semantics. As pointed out by Mr Dawes, the Auditors did not issue any review report. Further the Auditors’ Report raising the concerns expressly stated that (1) the completion of the review was subject to obtaining sufficient evidence to address management’s assessment that there should be no ECL provision, (2) the Auditors were unable to obtain such evidence, (3) therefore, the Auditors were unable to determine the appropriateness of the ECL assessment, or whether any adjustments were necessary, and (4) accordingly, it was scoped out during the course of the review.

103.  Indeed, the fact that the Auditors did not include any modifications or qualifications because they scoped out the issue (and not because they considered it to be immaterial) means that the Applicants’ reliance on the lack of modifications or qualifications in the Auditors’ Report is misplaced.

104.  Lastly, as to the Applicants’ having made their own independent assessment and judgment call, the Applicants have placed reliance on their submissions dated 6 April 2023. However, the sufficiently full reference to those submissions – in §17(50) – is as follows:

Given all the factors set out above, upon conducting independent assessment and judgment call, the INEDs took the view that the disclosures in the draft unaudited FY18/19 Interim Report were not inaccurate and incomplete at the material time. Without being informed of the Auditors’ request to make ECL provisions and upon reliance on Mr. Xu ZG’s representations and promise not to grant further loans, it was reasonable for the INEDs to decide, as a matter of commercial decision, to evaluate the ECL issue at a later stage. The INEDs were entitled to take the view that any impairment arising from the Loans would be premature and/or insignificant at the time. Taking into account the overall situation, the INEDs considered that there was no inaccurate or incomplete disclosure

105.  As Mr Dawes submits, the assessment in essence included not making an assessment relating to ECL at the time, but to evaluate that issue at a later stage.

106.  Mr Wong also referred to Dr Loke’s evidence before the Listing Committee, and the Applicants’ submissions to the LRC, which included the following:

(1) At the time of approving the FY18/19 Interim Report, the extent of disclosure was based on the Directors’ judgments and assessment.

(2) The disclosure was not fabricated with the purpose to mislead the shareholders, and in truth was factually correct and conformed with the relevant disclosure requirements.

(3) There is a fine margin between (a) being ignorant of the due process and (b) making an innocent and genuine judgment. This was a case of the latter.

(4) The assessment was made of the information delivered at the time, and any better judgment or assessment could only have been possible if the required information had been made available at the material time.

(5) There were discussions with the Auditors, and they did not have any strong objection.

(6) Applying hindsight’s rise to problems, but at the time there was a bona fide commercial judgment from the management’s assurances about ability to pay.

(7) The INEDs were not aware of the Auditors’ request to make ECL provisions and that Mr Xu had disagreed with the Auditors’ request, and were only aware that there was “deficiency in ECL assessment”.

(8) It was reasonable for the INEDs to delegate the duty to consider to Mr Xu against the wider context of the money lending business and the Loans.

(9) It was also reasonable and justified for the INEDs to form the view is that (a) in discharge of their professional responsibilities and in compliance with the professional standards applicable, the Auditors had communicated all the relevant matters to them and had not considered that ECL provisions were necessary; (b) the Auditors had entrusted the Company the decision or discretion as to whether adjustments would be required for the FY18/19 Interim Results and Interim Report, which was a matter of commercial judgment; and (c) the Auditors considered that the issues identified were not material or significant enough to warrant any qualification/explanatory notes/adverse comment.

107.  I note those points, but there is no reason to think that the LRC had not grappled with those points. Most of them are expressly traversed in LRC Decision, in the recitation of the submissions made by the Applicants to the LRC (see, in particular, §38), and in the LRC’s analysis and conclusions (see, in particular §§46-49).

108.  What to make of those points was a matter for the LRC to decide, and this application for judicial review does not give rise to a merits review (unless irrationality is demonstrated). I accept Mr Dawes’ submission that it was rationally open to the LRC – and did not amount to any error of law for the LRC – to conclude that the Applicants’ decisions both (1) to leave the ECL issue for evaluation at the later stage and (2) not to disclose the concerns expressed by the Auditors in respect of the ECL issue fell short of the standards required of them.

109.  Ground 2 is not reasonably arguable with any reasonable prospect of success.

I. Ground 3: Proportionality of Sanction

110.  Mr Wong submits that the imposition of the public censure was irrational. He also submits that the LRC failed to give adequate reasons to impose this action, simply rejecting the mitigating factors raised by the Applicants through a conclusionary assertion without any analysis. This was, he says, notwithstanding that the Applicants had provided comprehensive 10-page mitigation submissions.

111.  I do not think it is fair to suggest that the LRC “rejected” the Applicants’ mitigation submissions. Indeed, §51 of the LRC Decision expressly identified that they had been taken into account, and I do not think the LRC was required to have engaged point by point, or page by page, with the mitigation submissions. Of course, from the Applicants’ point of view, they might prefer to see particular responses to the mitigation submissions they have taken care to prepare and put forward. But, that more reasons might have been given does not make the reasons which were given inadequate to the circumstances.

112.  Essentially, despite the points made in mitigation, the LRC considered the sanction of a public censure to be appropriate. The LRC was of the view (which it expressed at §50) that the breaches of duties were severe, in particular as the Applicants did not demonstrate that they had the requisite understanding of their roles and duties as members of the Audit Committee under the Audit Committee’s terms of reference.

113.  Indeed, that point was also identified (at §52) as the reasoned basis for the direction regarding training on regulatory and legal topics – and the reason why the LRC modified the training directive from that originally set out by the Listing Committee.

114.  Insofar as Mr Wong submits that the LRC failed to have regard to the relevant principles as stated in the Exchange’s Enforcement Sanctions Statement – which included the need to consider the seriousness of the misconduct, any mitigating factors, and the position of each respondent separately in view of their extent and nature of the involvement of misconduct – that submission seems to me to overlook that the LRC expressly took into account (at §50-51) what it regarded as the severity of the Applicants’ breaches, the Applicants’ submission on mitigating factors, and that the LRC Decision was dealing only with the Applicants’ position.

115.  Mr Wong submits that the imposition of sanctions on the Applicant’s “makes a complete mockery of the process” (Mr Wong’s words), when the sanctions imposed on each respondent are compared, and where even those most at fault received the same sanction of public censure is as did the Applicants. But, it is not correct that the sanctions imposed upon the Applicants were the same as those imposed on Mr Xu and Mr Wu (whom Mr Wong pointed out were the parties who had orchestrated the entire fraud and deliberately concealed it). Whilst it is correct that those directors were the subject of public censures, they were also made subject to a ‘prejudice to investors’ interests statement’, which was not a sanction imposed on the Applicants.

116.  Nor, contrary to Mr Wong’s submission, was there anything “remarkable” about Mr Lam and Mr Wu receiving sanctions of public censure and 17 hours of training, namely three hours less of training than was imposed on the Applicants. That is wholly explicable, and was in fact explained by the LRC, by the fact that the Applicants were the chairman and member of the Audit Committee with the particular duties arising as a result, and a concern that those duties had not been properly understood.

117.  I acknowledge – as did Mr Dawes in his submissions – that the sanctions imposed on the Applicants have serious ramifications, and the imposition of such sanctions are matters to be weighed carefully. Different decision-makers might have weighed matters differently, and I have some sympathy with the Applicants’ position that they were to an extent “blindsided”. However, it seems to me that it was rationally open to the LRC to take the view – which it has adequately explained and reasoned – that, notwithstanding the points raised in mitigation, the particular breaches found nevertheless justified the imposition of public censures and training.

118.  Ground 3 is not reasonably arguable with any reasonable prospect of success.

J. Ground 4: Wednesbury Unreasonableness / Irrationality

119.  As already identified, the Applicants’ case on Ground 4 is based on the same arguments as Grounds 1, 2 and 3. I have dealt with the question of irrationality in that context as well.

120.  Therefore, where I have found the other Grounds to fail, so must Ground 4 fail.

K. Result

121.  In the circumstances, the Applicants’ application for leave to apply for judicial review is dismissed.

122.  Further, had I granted leave on any of the Grounds, I would nevertheless have dismissed the substantive application. Passing the arguability threshold would not change my decision on the substantive review.

123.  I see no reason why the costs should not follow the event, and I order the Exchange’s costs to be paid by the Applicants, with certificate for two Counsel. If the amount cannot be agreed between the parties, I will quantify those costs on a summary assessment, by reference to the Exchange’s Statement of Costs already provided, and with the benefit of any Objections made to that Statement by or on behalf of the Applicants, to be provided within 14 days.