SECURITIES AND FUTURES COMMISSION v. FAN DI AND OTHERS

HCMP 1761/2009

[2018] HKCFI 346

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1761 OF 2009

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D E C I S I O N

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1.  This is the hearing of the petition for an order for disqualification as a director against the 1^st respondent by way of the Carecraft procedure. The 1^st respondent is in the Mainland and has not attended this hearing, of which he is aware. The petition has already been disposed of as against the 2^nd to 4^th respondents, in May 2011. It has taken considerably longer to come on as against the 1^st respondent because, initially, he could not be located and, subsequently, protracted negotiations failed to achieve an agreement on the facts until recently.

2.  Eventually, on 26 June 2017, the Commission and the 1^st respondent signed a statement of agreed facts for the purposes of the disposal of these proceedings under the Carecraft procedure.  An English translation of this statement will be attached to my judgment when it is reduced to writing.  It is therefore unnecessary for me to narrate the facts in any detail. 

3.  Suffice it to say that the 1^st respondent was the Chairman, President and an Executive Director of the company in question, namely Pearl Oriental Innovation Limited (“the Company”), which was listed on the Main Board of the Stock Exchange of Hong Kong (stock code 0632).  As set out in section B2 of the statement, in 2005 a subsidiary of the company, DC Warehouse, had paid out Rmb 60 million to an intermediary called Shenzhen International Trust and Investment Company Limited (“SZITIC”), which, as instructed by the 1^st respondent, lent the sum to 2 Mainland companies, namely CM Information and CM Business, of which he was the Legal Representative, Chairman, and General Manager.  In August 2005, the sum of Rmb 55.8 million was paid back by these two companies to SZITIC, and SZITIC paid back Rmb 64.84 million to DC Warehouse. But DC Warehouse then paid Rmb 64.5 million to another Mainland company, called Double Happiness, apparently for the acquisition of a logistics company called Wangda.  To complete the circle, Double Happiness paid Rmb 57 million to CM information and CM Business. 

4.  As detailed in section B3 of the statement, the acquisition of Wangda was dubious, and never proceeded to completion.  The sum of Rmb 64.5 million paid to Double Happiness was never repaid to DC Warehouse or the Company.  The purpose of the so‑called acquisition was, in fact, to enable the round‑robin payments to be made to Double Happiness, and further on to CM Information and CM Business.  While there is no evidence or admission that the 1^st respondent misappropriated the money himself, as Mr Lui summarised he was responsible for a number of failures in his duties as a director of the Company as follows: 

(1)   Failure to obtain the approval of the board or shareholders of DC Warehouse or the Company before authorising the investment through SZITIC;

(2)   Failure to conduct any or any proper assessment or enquiry relating to SZITIC before authorising the investment;

(3)   Failure to conduct due diligence or any appropriate enquiry on the entities to which SZITIC lent the sum invested by DC Warehouse;

(4)   Failure to disclose unfavourable findings about Wangda to the board of the Company in getting its retrospective approval of the substantial payments to Double Happiness;

(5)   Failure to present accurate or relevant valuation information of the assets of Wangda to the board of the Company in getting its retrospective approval of the substantial payments to Double Happiness;

(6)   Failure to fully disclose to the board of the Company proposed details of the Wangda acquisition (in particular, that it did not include Wangda’s land) in getting its retrospective approval of the substantial payments to Double Happiness;

(7)   Failure to inform the shareholders of the Company of the substantial payments to Double Happiness and circumstances in which they were made, including the round‑robin cash flow for which there was no legitimate commercial reason and as a consequence of which DC Warehouse never recouped its investments via SZITIC;

(8)   Failure to procure the Company to properly and promptly announce, as disclosable transaction, the substantial payments made by DC Warehouse to Double Happiness, thereby causing the Company to act in breach of the Listing Rules;

(9)   Failure to accurately and truthfully inform the special investigation unit set up by the Company of the circumstances in which the Wangda acquisition failed;

(10)   Having acted in the manner described above thereby causing substantial losses to the Company and/or DC Warehouse to the extent of Rmb 65 million.

5.  There is, in these circumstances, in my view, ample basis in the agreed facts for concluding that there had been defalcation, misfeasance, and other misconduct towards the Company in the conduct of its affairs and that the 1^st respondent is a person to whom s 214(1)(b) and (c) of the Securities and Futures Ordinance (Cap 571) applied.  There is no doubt the relevant jurisdiction of the court to make a disqualification order is engaged. 

6.  The parties have not reached agreement on the number of years of disqualification.  I accept the submission of Mr Lui on behalf of the Commission that 6 years’ disqualification would be entirely justified.  As set out in section B4 of the statement, and as summarised above, the 1^st respondent, without prior board approval, entered into relevant agreements for the purported acquisition of Wangda and caused DC Warehouse to pay out Rmb 64.5 million to Double Happiness.  He was clearly aware of certain reports and information concerning Wangda which he inexplicably did not disclose to the board.  In my view the case is one beyond mere lack of competence and diligence.  Moreover, the amounts paid out eventually constituted significant losses for the Company. In my judgment, this case falls into the second of the three brackets that conduct justifying disqualification has conventionally been divided into.  There would therefore be a disqualification order for the period of 6 years.  There will also be an order for costs as agreed. 

Annex

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STATEMENT OF FACTS NOT IN DISPUTE FOR THE PURPOSES
OF A CARECRAFT SETTLEMENT BETWEEN
THE PETITIONER AND THE 1^ST RESPONDENT

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A.   Introduction

1.   On 9 September 2009, the Securities and Futures Commission (“Petitioner”) issued these proceedings pursuant to section 214 of the Securities and Futures Ordinance (Cap. 571) seeking a disqualification order against Mr. Fan Di (“1^st Respondent”) and others in respect of their conduct of the business or affairs of Pearl Oriental Innovation Limited (“POIL”).

2.   On 1 December 2011, POIL announced (among others) that the name of the company would be changed from Pearl Oriental Innovation Limited to Pearl Oriental Oil Limited, effective from 7 November 2011; its stock code would remain unchanged, being 632.  Despite the change of its name as aforesaid, the company is still referred to as POIL for the purposes of this Statement.

3.   Subject to the approval of this Court, the Petitioner and the 1^st Respondent consent to dispose of these proceedings against the 1^st Respondent by way of the summary procedure sanctioned in Re Carecraft Construction Co Ltd [1994] 1 WLR 172, as clarified by the English Court of Appeal in Secretary of State for Trade and Industry v Rogers [1996] 1 WLR 1569, and which was adopted by this Court in respect of the proceedings under section 214 of the Securities and Futures Ordinance mentioned below (apart from other similar cases), including Securities and Futures Commission v Yick Chong San [2007] 4 HKLRD 46, Securities and Futures Commission v Shum Ka Sang Charlie & Shen Yi (HCMP 1014/2008, unrep., 22 May 2009), Securities and Futures Commission v Fung Chiu & Others [2009] 2 HKC 19, Securities and Futures Commission v Yeung Kui Wong & Others (HCMP 1742,(sic)2009, unrep., 9 April 2010) and Re Styland Holdings Limited [2011] 1 HKLRD 96.

4.   This Statement is produced in order to identify the material facts relied on by the Petitioner in these proceedings that are not disputed by the 1^st Respondent, for the disposal of these proceedings on the basis that the case against the 1^st Respondent will be dealt with by this Court by way of the Carecraft procedure.

5.   Solely for the purposes of resolving these proceedings by way of the Carecraft procedure, the 1^st Respondent accepts that, by reference to the facts set out in Section B (which the 1^st Respondent admits and accepts), during the relevant period in 2003 to 2005 or any part thereof, the business and affairs of POIL (for which the 1^st Respondent, as an Executive Director, the Chairman and the President of POIL at the material time and its only Director taking part in the negotiation for the proposed acquisition of Wangda, was responsible) have been conducted in a manner described in sections 214(1)(b) and 214(1)(c) of the Securities and Futures Ordinance, namely

5.1   involving defalcation, misfeasance or other misconduct towards POIL or its members or any part of its members; and

5.2   resulting in the members of POIL or any part of its members not having been given all the information with respect to the business or affairs of POIL that they might reasonably expect.

6.   On the basis of the facts set out in Section B below,

(1)   the Petitioner and the 1^st Respondent agree, and the 1^st Respondent is prepared to accept, that it would be appropriate for a disqualification order to be made against the 1^st Respondent under section 214(2)(d) of the Securities and Futures Ordinance that he shall not:-

6.1.   be, or continue to be, a director or liquidator of any listed or unlisted company in Hong Kong (including POIL or any of its subsidiaries and affiliates), or a receiver or manager of the property or business of any listed or unlisted company in Hong Kong (including POIL or any of its subsidiaries and affiliates); and

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

The definitions of “company”, “subsidiary” and “affiliate” are set out in Appendix 1 to this Schedule.

(2)   no agreement on an appropriate disqualification period has been reached between the two parties, and the 1^st Respondent agrees that an appropriate disqualification period is to be determined by the Court.

7.   If the Court disposes of these proceedings against the 1^st Respondent by way of the Carecraft procedure pursuant to this Statement, the 1^st Respondent agrees that there should additionally be an order to be made by the Court that the 1^st Respondent shall pay such portion of the costs of the Petitioner in these proceedings as the Court thinks appropriate, to be taxed if not agreed.

8.   In the event of a disqualification order being made against the 1^st Respondent by reference to this Statement, the Petitioner reserves the right to:-

8.1.   disclose the contents of this Statement to a third party where it appears to the Petitioner proper to do so to serve the public interest, including but not limited to making use of this Statement for the purposes of issuing any press release in respect of these proceedings; and

8.2.   refer to this Statement for all purposes connected with or ancillary to these proceedings.

9.   In the event of a disqualification order being made against the 1^st Respondent by reference to this Statement, the Petitioner and the 1^st Respondent also agree that they will jointly apply to this Court for a direction that this Statement be annexed to the judgment of this Court.

10.   The Petitioner and the 1^st Respondent agree that in the event of this Court refusing for any reason to make a disqualification order against the 1^st Respondent by reference to this Statement, and ordering a full hearing to be conducted, either of them will not make reference to this Statement (or to any admission or concession or any proposal for disqualification contained in this Statement) at any subsequent hearing in these proceedings without the prior written consent of the other party to this Statement.

B.   Facts not in dispute

11.   The structure of this Section is as follows:-

11.1.   Section B1 sets out the background information relating to POIL and its management.

11.2.   Sections B2 and B3 set out the facts relied upon by the Petitioner in support of its case that the business and affairs of POIL have been conducted in a manner

(1)   involving defalcation, misfeasance or other misconduct towards POIL or its members or any part of its members; and

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

11.3.   Section B4 sets out the grounds for invoking sections 214(1)(b) and 214(1)(c) of the Securities and Futures Ordinance, and the basis upon which the 1^st Respondent accepts that he shall be responsible for the conduct of the business and affairs of POIL in the manner as aforesaid.

B1.   Background and management of POIL

12.   POIL is and was at all material times:-

12.1.   an exempted company with limited liability in Bermuda, with its registered office at Clarendon House, 2 Church Street, Hamilton HM 11, Bermuda;

12.2.   registered under Part XI of the Companies Ordinance (Cap. 32) as an overseas company in Hong Kong, with its current principal place of business at Suite 2805-6, 28^th Floor, Bank of America Tower, 12 Harcourt Road, Central, Hong Kong.

13.   POIL’s shares were listed on the Main Board of the Hong Kong Stock Exchange (“Stock Exchange”) on 30 April 1993 and remain so listed as at the date of this Statement.  Its stock code has always been 0632. 

14.   POIL changed its name to the current one, namely Pearl Oriental Oil Limited, on 7 November 2011.  Before this change it was called:-

14.1   Pearl Oriental Innovation Limited (from 8 August 2006 to 6 November 2011); and

14.2   China Merchants DiChain (Asia) Limited. 

POIL was at all material times an investment holding company, with its principal business in the provision of logistics services.

15.   As at 31 May 2009, POIL had an authorised share capital of HK$20,000,000,000, divided into 200,000,000,000 shares of HK$0.1 each, of which 581,403,960 shares had been issued.

16.   DiChain Holdings Limited (“DC Holdings”) is a limited company incorporated in Hong Kong.  It was at all material times the ultimate holding company of POIL with a majority shareholding in POIL.

17.   DiChain Warehouse Services (Shenzhen) Co., Ltd (“DC Warehouse”) is a wholly foreign owned enterprise in the People’s Republic of China (“PRC”).  It was at all material times a wholly owned subsidiary of POIL.

18.   The 1^st Respondent was an Executive Director, the Chairman and the President of POIL during the period from 25 March 2002 to 24 May 2006. According to the company’s annual reports for 2003, 2004 and 2005, he had substantial working experience in financial and business management, and was responsible for overseeing the strategic development of the company.  In addition, according to the company’s annual reports for 2003 and 2004, as of 31 March 2003 and 31 March 2004, he nominally held the deemed interests in 2,682,515,000 shares in POIL (representing 59.13% of the issued share capital), and according to the annual report for 2005, as of 31 March 2005, he nominally held the deemed interests in 3,096,553,083 shares in POIL (representing 56.94% of the issued share capital), all the shares were nominally held through two companies, namely Farsight Holdings Limited and DiChain Holdings Limited.  At all material times, he was a director of DC Holdings, and was also responsible for leading the overall financial management of DC Warehouse.

19.   Mr. Li Xinggui (“2^nd Respondent”), Mr Zheng Yingsheng (“3^rd Respondent”) and Mr. Zhou Li Yang (“4^th Respondent”) at all material times also occupied positions of significant responsibility for the conduct of the business and affairs of POIL and took part in the management of DC Holdings and DC Warehouse.

20.   The 2^nd Respondent was an Executive Director of POIL in the period from 26 August 2002 to 31 December 2005.  He had substantial experience in logistics operation and business management, and was responsible for overseeing the company’s logistics business.  He was also a director of DC Holdings.

21.   The 3^rd Respondent was an Executive Director of POIL in the period from 27 March 2003 to 31 August 2010, responsible for overseeing its logistics business.  He had over 20 years of experience in logistics management and transportation operations.

22.   The 4^th Respondent was an Executive Director and the Managing Director of POIL in the period from 17 September 2004 to 24 May 2011 and has been holding the same positions since 10 April 2013, responsible for its strategic development and daily operations. 

23.   By reason of his position and responsibilities in POIL, the 1^st Respondent owed to POIL the duty to exercise reasonable care, skill and diligence which would be exercised by a reasonably diligent person with the general knowledge, skill and experience which might reasonably be expected of a person carrying out the same functions as were carried out by the 1^st Respondent in relation to POIL, and the knowledge, skill and experience possessed by the 1^st Respondent.

24.   Further, under Rule 3.08 of the Rules Governing the Listing of Securities on the Stock Exchange (“Listing Rules”), the directors of POIL, both collectively and individually, at all material times had to fulfill fiduciary duties and duties of skill, care and diligence to a standard at least commensurate with the standard established by Hong Kong law.  In performing their duties, the directors of POIL were answerable to POIL for the application or misapplication of POIL’s assets, and had to apply such degree of skill, care and diligence as might reasonably be expected of individuals of their knowledge and experience and holding their offices within POIL.

25.   Further, in order to act as a director of POIL, the 1^st Respondent was required to and did sign a formal declaration and undertaking in the form as set out in Form B in Appendix 5 to the Listing Rules whereby the 1^st Respondent undertook with the Stock Exchange that he, in the exercise of his powers and duties as a director of POIL, would comply with and use his best endeavours to procure that POIL would comply with (among others) the Listing Rules from time to time in force.

B2.   RMB60,000,000 investment through Shenzhen International Trust and Investment Co., Ltd. (“SZITIC”)

26.   Between 21 April 2003 and 20 June 2005, DC Warehouse and SZITIC entered into 12 trust fund agreements (“Trust Fund Agreements”).

27.   Pursuant to the Trust Fund Agreements, DC Warehouse paid a total of RMB60,000,000 to SZITIC as a trustee, and SZITIC was obliged to lend the said sum invested by DC Warehouse to third parties to earn interest.

28.   The 1^st Respondent eventually approved the investment of RMB60,000,000 through SZITIC.  Before doing so, he had not obtained the official written approval from the board of directors or shareholders of DC Warehouse.

29.   The 1^st Respondent, the 3^rd Respondent and Mr. Wu Shiyue (“Mr. Wu”) (an Executive Director of POIL in the period from 2002 to 30 August 2005) signed the Trust Fund Agreements on behalf of DC Warehouse.

30.   On 25 July 2005, the Audit Committee of POIL held a meeting to discuss the audit exercise for that financial year (“Audit Committee Meeting”).  The attendees were the 4^th Respondent, Mr. Yu Wai Kit Eddie (“Mr. Yu”) (the company secretary and financial controller), accountants from Deloitte Touche Tohmatsu (“Deloitte”) (the company auditors) and two independent non-executive directors, Mr. Barry J. Buttifant and Mr. Victor Yang.

31.   At the Audit Committee Meeting, the independent non-executive directors complained that the Audit Committee had not been given any prior notice of the investment made by DC Warehouse through SZITIC.  Furthermore, the accountants from Deloitte expressed concerns over the recoverability of the invested sum of RMB60,000,000 and demanded the management of POIL to either call back the investment or obtain a list of the entities to which SZITIC had lent the invested sum so as to enable Deloitte to review and assess the relevant entities’ credibility.

32.   After the Audit Committee Meeting, Mr. Yu tried but failed to obtain from SZITIC a list of the entities to which it had lent the sum invested by DC Warehouse.  As a result, the management of DC Warehouse decided to terminate the Trust Fund Agreements with SZITIC.

33.   Between 3 August 2005 and 9 August 2005, SZITIC paid DC Warehouse its invested sum with interest amounting to RMB64,840,849.99 in total.

34.   On 10 August 2005, SZITIC issued a certificate confirming the termination of the Trust Fund Agreements and that the sums invested by DC Warehouse had been refunded with interest.  The said certificate did not reveal the identity of the entities to which SZITIC had lent the invested sum of DC Warehouse, and was the only written confirmation from SZITIC that was provided to Mr. Yu, the auditors and the Audit Committee at that time.

35.   The Petitioner has discovered in the course of its inquiries that SZITIC had in fact prepared six official repayment reports dated 16 August 2005 and 17 August 2005 and sent the same to DC Warehouse.  According to SZITIC, this was part of its normal procedures.  Prior to the inquiries conducted by the Petitioner, Mr. Yu and the Audit Committee had never received the said official repayment reports, and had never been informed of their existence.

36.   The official repayment reports showed that SZITIC had lent the invested sum of DC Warehouse to two companies in the PRC, namely, China Merchants GTong Information (Shenzhen) Company Ltd. (transliteration) (“CM Information”) and Shenzhen China Merchants DiChain Business Systems Company Ltd. (transliteration) (“CM Business Systems”).

37.   The 1^st Respondent was at all material times the Legal Representative, the Chairman and the General Manager of CM Information and CM Business Systems.

38.   In the course of the Petitioner’s inquiries, SZITIC also revealed that there was an arrangement of the trust fund investment of DC Warehouse under which DC Warehouse would designate the entities to which its invested sum would be lent and that SZITIC was bound to follow such instructions from DC Warehouse.

39.   The Petitioner’s investigations revealed that the 1^st Respondent was responsible for the trust fund investment by DC Warehouse through SZITIC including designating the entities to which SZITIC should lend the invested sum of DC Warehouse:-

39.1.   The 1^st Respondent finally approved the investment of RMB60,000,000 via SZITIC, causing DC Warehouse to enter into the Trust Fund Agreements.  He had not obtained any prior official written approval from the board of directors or shareholders of POIL or DC Warehouse. 

39.2.   The investment of RMB60,000,000 made by DC Warehouse had to be approved by the 1^st Respondent.

40.   The Petitioner further discovered that:-

40.1.   No assessment or other appropriate enquiry of any kind had been carried out on SZITIC for the purposes of entering into the Trust Fund Agreements.

40.2.   No due diligence or other appropriate enquiry of any kind had been carried out on the entities to which SZITIC would lend the invested sum of DC Warehouse to earn interest.

41.   Contemporaneous with the refund from SZITIC, between 3 August 2005 and 9 August 2005, CM Information and CM Business Systems paid a total of RMB55,840,849.99 to SZITIC.

42.   In the same period, between 3 August 2005 and 10 August 2005, DC Warehouse transferred a total sum of RMB64,500,000 to a company in the PRC called Dalian Double Happiness Trading Development Company Ltd. (transliteration) (“Double Happiness”).  The circumstances under which DC Warehouse made this payment are set out in Section B3 below.

43.   At the time of such payment by DC Warehouse, Mr. Zang Hongwei was the Legal Representative of Double Happiness.  He was a director of and owned 90% of the shares in Double Happiness, and a former brother-in-law of the 1^st Respondent.

44.   Between 3 August 2005 and 19 October 2005, Double Happiness paid RMB57,005,000 to CM Information and CM Business Systems.

B3.   Purported acquisition of Yixing Wangda Logistics Co., Ltd. (“Wangda”)

45.   Wangda operated logistics business in Yixing in the PRC.  Mr. Kong Baisong (“Mr. Kong”) was at all material times the Legal Representative and the General Manager of Wangda.

46.   DC Holdings had in the past operated a beer factory in Yixing.  Later when the Yixing municipal government resumed the land on which the said factory was built, it granted a separate piece of land in Yixing to DC Holdings. 

47.   Instead of continuing with its beer production business, DC Holdings proposed to operate logistics business on that new piece of land.  However, the Yixing municipal government rejected that proposal.

48.   On or about 13 December 2004, Mr. Zhu Runlin (“Mr. Zhu”), who was the development advisor of DC Holdings according to the 1^st Respondent’s evidence, submitted a report on the logistics business of Wangda to the 1^st Respondent, Mr. Wu and Mr. Li Haozhang (the then Vice President of DC Holdings).  The 1^st Respondent at the time employed Mr. Zhu to explore investment opportunity in the PRC on behalf of POIL and DC Holdings. 

49.   Mr. Zhu stated in his report as follows:-

49.1.   A number of parties were interested in investing in Wangda and had been actively negotiating for investment opportunities.

49.2.   The Yixing municipal government, which had an interest in Wangda, was then inclined to cooperate with Hero Vantage Limited (“Hero Vantage”), a Hong Kong company with business in the PRC.

49.3.   Mr. Li Shenen was the director and majority shareholder of Hero Vantage.  He had an edge in the negotiations because of his business connections in Yixing.

49.4.   However, Mr. Li Shenen did not have sufficient funds and had expressed an intention to bring in a strategic shareholder for financing purposes.

49.5.   Mr. Zhu had explored with Mr. Li Shenen the possibilities of cooperation, and Mr. Li Shenen’s feedback was positive.

49.6.   Mr. Zhu advised the management of POIL and DC Holdings to carry out further investigations into the proposed acquisition of Wangda.

50.   On 7 July 2005, a joint board meeting of POIL and DC Holdings was held.  As shown in the minutes of that meeting, the attendees were the 1^st Respondent, the 2^nd Respondent, Mr. Wu, Mr. Li Haozhang, Mr. Zhu and others.  The 3^rd Respondent did not attend. 

51.   At this meeting, Mr. Li Haozhang and Mr. Zhu reported as follows:-

51.1.   Hero Vantage and Wangda had already reached a consensus that Hero Vantage would acquire the logistics assets of Wangda including its land in Yixing.

51.2.   Mr. Li Haozhang and Mr. Zhu had discussed with Hero Vantage the possible modes of acquisition of Wangda.  They recommended DC Holdings or POIL to acquire 70% of the shares in Hero Vantage so as to obtain control of the logistics assets of Wangda in Yixing.

51.3.   The estimated value of the logistics assets of Wangda in Yixing was HK$180,000,000.

51.4.   Mr. Li Shenen had agreed to sell 70% of the shares in Hero Vantage to DC Holdings or POIL for a consideration of HK$60,000,000, which he would then use to acquire the logistics assets of Wangda in Yixing.

52.   It was unanimously resolved at the said meeting on 7 July 2005 that:-

52.1.   POIL would be the vehicle to cooperate with Hero Vantage or to acquire the shares of Hero Vantage.

52.2.   Since the board of directors of POIL would need time to consider and approve the acquisition of Wangda, therefore DC Holdings would first enter into relevant agreements with Hero Vantage for that purpose.

52.3.   Should POIL approve the acquisition of Wangda subsequently, it would then enter into formal agreements with Hero Vantage, after which DC Holdings would drop out. Otherwise, should the matter remain unresolved within three months from the date of the said meeting, DC Holdings would proceed with the acquisition on its own in accordance with the agreements that it had signed with Hero Vantage.

52.4.   Given the transitory role of DC Holdings, it was desirable for POIL to make an internal fund transfer or loan to DC Holdings.  Should POIL decide subsequently not to proceed with the acquisition of Wangda within the next three months, DC Holdings would repay the same amount to POIL.

53.   Despite passing the aforementioned resolutions, in the course of its inquiries the Petitioner had tried but failed to obtain any of the following evidence:-

53.1.   any transitory agreement entered into by DC Holdings and Hero Vantage pending the consideration and approval by the board of directors of POIL of the acquisition of Wangda; or

53.2.   any internal fund transfer or loan made by POIL to DC Holdings.

54.   On or about 21 July 2005, Hero Vantage issued a payment notice to both POIL and DC Holdings, requesting them to make payments to Double Happiness on or before 19 September 2005 in the amounts stated in the Asset Transfer Deposit Agreement (transliteration) (“July 2005 HV Deposit Agreement”) and the Loan Agreement (transliteration) (“July 2005 HV Loan Agreement”), both of which were allegedly entered into on 19 July 2005.

55.   In the course of its inquiries, the Petitioner had tried but failed to locate the July 2005 HV Deposit Agreement and the July 2005 HV Loan Agreement.  However, the Petitioner obtained two other agreements entered into by Hero Vantage and POIL (with the 1^st Respondent signing on its behalf) dated 27 September 2005, these two agreements were also entitled Asset Transfer Deposit Agreement (transliteration) and Loan Agreement (transliteration).  These two agreements are referred to below as “September 2005 HV Deposit Agreement” and “September 2005 HV Loan Agreement” respectively.

56.   Under the September 2005 HV Deposit Agreement, POIL agreed to pay Hero Vantage a deposit of HK$42,000,000 for the purpose of the acquisition of certain logistics business assets in Yixing.

57.   Under the September 2005 HV Loan Agreement, POIL agreed to lend HK$18,000,000 to Hero Vantage for a period of 2 years with interest at 4% per annum.

58.   Between 3 August 2005 and 10 August 2005, DC Warehouse, presumably in accordance with the payment notice from Hero Vantage referred to in paragraph 54 above, transferred RMB64,500,000 (equivalent to HK$60,000,000) in total to Double Happiness.  The said payment is referred to as “Double Happiness Payment” below.

59.   As already described in Section B2 above, the round-robin cash flow was as follows:-

59.1.   Because of the queries and objections raised by the accountants of Deloitte and the independent non-executive directors of POIL at the Audit Committee Meeting, and the subsequent failure to obtain a list of the entities to which SZITIC had lent the invested sum of DC Warehouse, the management of DC Warehouse decided to call back its investment under the Trust Fund Agreements.

59.2.   Between 3 August 2005 and 9 August 2005, CM Information and CM Business Systems paid RMB55,840,849.99 to SZITIC.

59.3.   Between 3 August 2005 and 9 August 2005, SZITIC paid RMB64,840,849.99 to DC Warehouse, as refund of its investment.

59.4.   Between 3 August 2005 and 10 August 2005, DC Warehouse made the Double Happiness Payment pursuant to Hero Vantage’s direction, purportedly for the purposes of the acquisition of Wangda.

59.5.   Between 3 August 2005 and 19 October 2005, Double Happiness paid RMB57,005,000 back to CM Information and CM Business Systems.

60.   The Petitioner’s case in these proceedings is that there was no reason or no legitimate commercial reason at the material time for POIL and/or DC Warehouse to procure the above round-robin cash flow.  The 1^st Respondent does not dispute this for the purposes of the Carecraft procedure.

61.   In or around August 2005, the 1^st Respondent instructed Mr. Chong Siu Po Bryan (“Mr. Chong”), who was an Assistant Vice President of POIL, and Mr. Liu Jun (“Mr. Liu”), who was the Chief Accountant of DC Holdings, to conduct due diligence on Wangda.

62.   Mr. Chong and Mr. Liu conducted due diligence on Wangda in Yixing from 18 August 2005 to 20 August 2005.  They submitted a due diligence report to the 1^st Respondent and Mr. Li Haozhang thereafter.

63.   In the report, Mr. Chong and Mr. Liu identified various problems with the business of Wangda, and their assessment of the merit of the proposed acquisition of Wangda was unequivocally not favourable.

64.   Shortly after 20 August 2005, Mr. Chong and Mr. Liu had a meeting with the 1^st Respondent in which they explained to him the negative findings of their due diligence exercise on Wangda.

65.   On 5 September 2005, Yixing municipal government officials had a meeting with Mr. Kong and Mr. Li Haozhang and Mr. Liu.  Mr. Li Haozhang and Mr. Liu attended the said meeting on behalf of DC Holdings.  The following matters were discussed at this meeting:-

65.1.   DC Holdings would set up a new company in Yixing for the purposes of acquiring the logistics assets of Wangda.

65.2.   The acquisition price would be determined by a third party to be appointed by DC Holdings and Wangda.

65.3.   The actual usable area of the land to be acquired would take into account the land owned by DC Holdings in Yixing (i.e. the land granted by the Yixing municipal government to DC Holdings as described in paragraph 46 above).

65.4.   DC Holdings would not take over the liabilities of Wangda.

66.   As a result of its inquiries, the Petitioner discovered (and the 1^st Respondent accepts that to be true for the purposes of the Carecraft procedure) that in fact up to 5 September 2005, all the discussions among the Yixing municipal government, Wangda and DC Holdings or POIL were only preliminary in nature and the parties had never agreed on anything concrete which was capable of being implemented.  In particular, DC Holdings’ representative had represented to Wangda and the Yixing municipal government the following:-

66.1.   DC Holdings would acquire all the tangible assets of Wangda, but not its land and liabilities.

66.2.   DC Holdings would not acquire the shares of Wangda and hence would not be using those tangible assets in the name of Wangda after the acquisition.

66.3.   DC Holdings would exchange the piece of land previously granted to it by the Yixing municipal government for the land occupied by Wangda, so that the acquisition would not include the land of Wangda.

67.   In September 2005, Mr. Kong on behalf of Wangda and Mr. Liu on behalf of DC Holdings engaged an accountants’ firm in Wuxi called Wuxi Puxin Certified Public Accountants Co., Ltd (“Wuxi Accountants”) to conduct a valuation of the fixed assets of Wangda.

68.   The Wuxi Accountants produced a preliminary draft report valuing the fixed assets of Wangda at RM56,447,433.40 as at 31 August 2005, but the valuation did not take into account the value of the land owned by Wangda in Yixing and its debts.  This basis of valuation was consistent with the findings of the Petitioner.

69.   Mr. Liu (on behalf of DC Holdings) considered the valuation by the Wuxi Accountants to be excessive and refused to accept the said report as the basis for further negotiations with Wangda and the Yixing municipal government.

70.   On 26 September 2005, the 1^st, 2^nd, 3^rd and 4^th Respondents attended a board meeting of POIL.  At the meeting, the 1^st Respondent tabled a valuation report prepared by Shenzhen Guosong Assets Appraisal Co. Ltd. (“SGAA”) dated 22 September 2005 (“Guosong Report”) and an assets acquisition proposal for Wangda for discussion. 

71.   As stated in the Guosong Report:-

71.1.   SGAA was instructed to conduct a valuation of the fixed assets of Wangda (including Wangda’s land in Yixing); and

71.2.   SGAA valued the fixed assets of Wangda at RMB185,752,400.

72.   The basis for valuing Wangda’s fixed assets adopted in the Guosong Report was clearly inconsistent with the findings of the Petitioner.  As discovered by the Petitioner in its investigation, a consensus had been reached by Wangda, the Yixing municipal government and DC Holdings that the acquisition of Wangda would not include its land in Yixing, andtherefore, Wangda’s land in Yixing should not be included in the valuation of the fixed assets of Wangda.  The 1^st Respondent’s evidence is that the Yixing municipal government stated at the time that it would separately provide a piece of logistics land with an area of 500 mu to DC Holdings as a part of the transaction if the Yixing municipal government and DC Holdings acquired Wangda.

73.   The Petitioner’s case in these proceedings is that as of the date of the said meeting on 26 September 2005, the 1^st Respondent had full knowledge of the details of the proposed acquisition of Wangda as described above.  The basis of this conclusion as reached by the Petitioner is as follows:-

73.1.   On 7 July 2005, the 1^st Respondent attended the joint board meeting of POIL and DC Holdings.

73.2.   In August 2005, the 1^st Respondent instructed Mr. Chong and Mr. Liu to visit Wangda and to conduct due diligence on Wangda.

73.3.   The 1^st Respondent received the due diligence report prepared by Mr. Chong and Mr. Liu.

73.4.   The 1^st Respondent had a meeting with Mr. Chong and Mr. Liu sometime after 20 August 2005.  At the meeting, Mr. Chong and Mr. Liu explained to the 1^st Respondent their findings in the due diligence exercise on Wangda and their conclusion on the merits of the acquisition.

73.5.   The 1^st Respondent signed the September 2005 HV Deposit Agreement and the September 2005 HV Loan Agreement on behalf of POIL.

The 1^st Respondent does not dispute the matters stated in this paragraph for the purposes of the Carecraft procedure.

74.   The 1^st Respondent was the only director of POIL who took part in the negotiations with respect to the acquisition of Wangda.  He reported the following matters at the said meeting on 26 September 2005:-

74.1.   Hero Vantage was, under the Listing Rules, an independent third party not connected to either the Yixing municipal government or POIL or any of its directors, and had agreed to acquire all the logistics assets of Wangda.

74.2.   POIL was considering acquiring the logistics assets of Wangda through the acquisition of a controlling interest in Hero Vantage.

74.3.   The Secretary of the Yixing municipal Party Committee, relaying the words of the officials of the Ministry of Transport of the PRC, informed him that the Yixing municipal government would subsidize any company operating a logistics business in the Yangtze River Delta region, and that the logistics business in Yixing might obtain a subsidy of RMB20,000,000 to RMB30,000,000.

74.4.   As there were other parties who were interested in acquiring the logistics assets of Wangda, POIL needed to pay a deposit for the acquisition as soon as possible.

74.5.   DC Holdings had already paid RMB60,000,000 on behalf of POIL as deposit for the acquisition of Wangda.  The 1^st Respondent would like to obtain the approval from the board of directors so that POIL could reimburse DC Holdings for that RMB60,000,000 and proceed with the proposed acquisition.

75.   Despite his involvement in the negotiations on the acquisition of Wangda, at the board meeting of POIL on 26 September 2005, the 1^st Respondent, as the Chairman of the board and the meeting, had the responsibility but failed to confirm with the other members of the board of POIL or remind the other members of the board of POIL of:-

75.1.   the due diligence report prepared by Mr. Chong and Mr. Liu;

75.2.   the preliminary draft valuation report prepared by the Wuxi Accountants with respect to Wangda’s logistics assets as at 31 August 2005; or

75.3.   the fact that the acquisition of Wangda would not (or at least might not) include its land or liabilities.

76.   Under such circumstances, the board of directors of POIL unanimously approved on 26 September 2005 all the previous prepayments made on behalf of POIL to Hero Vantage or pursuant to the direction of Hero Vantage, purportedly for the purposes of the acquisition of Wangda and the acquisition of a controlling interest in Hero Vantage.

77.   The 1^st Respondent never advised or took any steps to procure POIL to make an announcement of the payments made on behalf of POIL to Hero Vantage or pursuant to the direction of Hero Vantage, that were approved for the purposes of the acquisition of Wangda and the acquisition of a controlling interest in Hero Vantage.

78.   The proposed acquisition of Wangda never proceeded to completion.  The RMB64,500,000 paid by DC Warehouse to Double Happiness pursuant to the direction of Hero Vantage was never repaid to POIL or DC Warehouse; as alleged by the 1^st Respondent, the said sum was paid for the purposes of the acquisition of Wangda.

79.   In June 2006, the Stock Exchange received complaints alleging that the 1^st Respondent, the 4^th Respondent and Mr. Li Haozhang had misappropriated the funds of POIL.

80.   As a result, the board of directors of POIL set up a special unit to investigate the relevant complaints.  When being questioned by the special unit, the 1^st Respondent explained that the proposed acquisition of Wangda fell through for the following reasons:-

80.1.   It was discovered in subsequent investigations that Wangda had in fact incurred “contingent liability” of over RMB200,000,000.

80.2.   Hero Vantage requested that the proposed acquisition of Wangda exclude the latter’s debts, but such request was rejected by the Yixing municipal government.

80.3.   For the above reasons, the negotiations came to a standstill and failed in the end.

81.   In the course of its inquiries, the Petitioner came to the conclusion that the above explanations provided by the 1^st Respondent were false and untrue.

81.1.   The negotiations with respect to the Wangda acquisition had actually come to a halt much earlier, after the Wuxi Accountants had finished the preliminary draft valuation report because Mr. Liu, who at all material times had been acting on behalf of DC Holdings, was not satisfied with the results of the valuation and refused to accept the said report as the basis for further negotiations.

81.2.   The parties had no discussion thereafter and in December 2005, the Yixing municipal government and Wangda concluded that the proposed acquisition had failed.

81.3.   Wangda had never incurred “contingent liability” of over RMB200,000,000.

81.4.   Hero Vantage and Double Happiness had never been involved in the negotiations for the Wangda acquisition.

81.5.   Wangda had never received any payment from POIL or DC Holdings or any of their connected companies.

The 1^st Respondent does not dispute the matters stated in this paragraph for the purposes of the Carecraft procedure.

82.   The Petitioner’s case is that the only purpose, or one of the purposes, of the purported acquisition of Wangda was to procure the round-robin cash flow as described in Paragraph 59 above.  The 1^st Respondent does not dispute this for the purposes of the Carecraft procedure.

83.   The Double Happiness Payment and the circumstances under which it was made, including the entering into of the September 2005 HV Deposit Agreement and the September 2005 HV Loan Agreement by POIL, were only made known to the members of POIL or the public by way of an announcement on 23 March 2006 and a circular on 4 May 2006 which were only published upon the request by the Stock Exchange.

B4.   Grounds for invoking sections 214(1)(b) and 214(c) of the Securities and Futures Ordinance and the basis of the 1^st Respondent’s responsibility

84.   Among the directors of POIL, the 1^st Respondent was at all material times the only director of POIL in relation to the negotiations for the proposed acquisition of Wangda.  In the circumstances where he had not obtained  prior approval from the board of directors of the company, he:-

84.1.   entered into the September 2005 HV Deposit Agreement and the September 2005 HV Loan Agreement; and

84.2.   caused DC Warehouse to pay RMB64,500,000 to Double Happiness.

85.   At the company’s subsequent board meeting held on 26 September 2005, the 1^st Respondent, as the Chairman of the board and the meeting, only provided or explained the information as described in Paragraphs 71 and 74 above to the board, which appeared to be favourable to the acquisition of Wangda, causing the board to approve of the aforementioned payment being made to Double Happiness.  At the said meeting, the 1^st Respondent, as the Chairman of the board and the meeting, had the responsibility but failed to confirm with the other directors or remind the other directors of:-

85.1.   the negative due diligence report prepared by Mr. Chong and Mr. Liu;

85.2.   the preliminary draft report prepared by the Wuxi Accountants; and

85.3.   the fact that the acquisition of Wangda would not (or at least might not) include its land or liabilities, so as to justify that the exaggerated valuation of Wangda’s logistics assets at RMB185,752,400 was reasonable.

86.   In addition, pursuant to the Listing Rules, the payment of RMB64,500,000 made by DC Warehouse to Double Happiness was a disclosable transaction.  However, the 1^st Respondent did not take any step to procure the company to issue the announcements and notices as required under Rules 13.13, 13.20, 14.34 and 14.38 of the Listing Rules.

87.   The 1^st Respondent had made a declaration and signed a letter of undertaking in accordance with the Listing Rules, undertaking that he would use his best endeavours to comply with the Listing Rules from time to time in force.

88.   Since the 1^st Respondent was also responsible under Rule 3.12 of the Listing Rules to accept full responsibility, collectively and individually and at all material times, for the company’s compliance with the Listing Rules, therefore he shall be held responsible for the non-compliance with the Listing Rules as set out above.

89.   Moreover, the 1st Respondent caused the company to make the above payment but failed to procure it to duly comply with the Listing Rules, hence breaching his duties under Rules 3.08(c) and 3.08(f) of the Listing Rules.

90.   The Stock Exchange publicly reprimanded POIL on 23 March 2009, stating that POIL was:

(i)   in breach of Rule 13.20 of the Listing Rules in failing to include the details of the Double Happiness Payment in its interim report published on 30 December 2005.

(ii)   in breach of Rules 13.13, 14.34 and 14.38 of the Listing Rules in failing to publish an announcement in respect of the Double Happiness Payment until 23 March 2006.

On 16 February 2009, the Stock Exchange issued a warning to the 2^nd, 3^rd and 4^th Respondents and stated that there had been breaches of Rules 13.13, 13.20, 14.34 and 14.38 of the Listing Rules.  The Stock Exchange also stated that the 2^nd, 3^rd and 4^th Respondents failed to use their best endeavours to procure POIL’s compliance with the Listing Rules, in breach of the Director’s declaration, undertaking and acknowledgment made by him to the Stock Exchange in the form set out in Form B in Appendix 5 to the Listing Rules.

91.   Since the 1^st Respondent could not be located at the time for serving on him the documents in the disciplinary proceedings, the decision of the Listing Committee was not applicable to him, but the Stock Exchange reserves the right to consider the situation of the 1^st Respondent when he is located and served with the documents.  Nobody has appealed against the decision of the Listing Committee.

92.   On the basis of the facts stated in Sections B2 and B3 above, the 1^st Respondent acknowledges and accepts that the business and affairs of POIL (including such business and affairs carried out by POIL through DC Warehouse) have been conducted in a manner:

92.1   involving defalcation, fraud, misfeasance or other misconduct towards the company or its members or any part of its members; and

92.2   resulting in the members of POIL or any part of its members not having been given all the information with respect to the business or affairs of POIL that they might reasonably expect, namely, by failing to make a prompt and comprehensive announcement in respect of the Double Happiness Payment.

93.   By reason of his position and duties in POIL, the 1^st Respondent acknowledges and accepts that he shall be responsible for the conduct of the business and affairs of POIL (including such business and affairs carried out by POIL through DC Warehouse) in the manner as aforesaid.

94.   On 24 May 2011, the Petitioner resolved these proceedings against the 2^nd, 3^rd and 4^th Respondents by way of the Carecraft procedure, and the Court made an order that, for a period of one year, the 2^nd, 3^rd and 4^th Respondents shall not:

94.1   be, or continue to be, a director or liquidator of any listed or unlisted company in Hong Kong (including POIL or any of its subsidiaries and affiliates), or a receiver or manager of the property or business of any listed or unlisted company in Hong Kong (including POIL or any of its subsidiaries and affiliates); and

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

C.   Proposal for disqualification

95.   On the basis of the facts not in dispute as set out in Section B above, the parties agree that it would be appropriate for a disqualification order to be made against the 1^st Respondent under section 214(2)(d) of the Securities and Futures Ordinance that, for a period of [  ] year, he shall not:-

95.1.   be, or continue to be, a director or liquidator of any listed or unlisted company in Hong Kong (including POIL or any of its subsidiaries and affiliates), or a receiver or manager of the property or business of any listed or unlisted company in Hong Kong (including POIL or any of its subsidiaries and affiliates); and

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

96.   If the Court disposes of these proceedings against the 1^st Respondent by way of the Carecraft procedure pursuant to this Statement, the 1^st Respondent agrees that there should additionally be an order to be made by the Court that the 1^st Respondent shall pay such portion of the costs of the Petitioner in these proceedings as the Court thinks appropriate, to be taxed if not agreed.

D.   Agreed mitigating factors

97.   The 1^st Respondent adopted a reasonable course of action in agreeing to conclude these proceedings by way of the Carecraft procedure which would save the time and costs of the Petitioner and the Court.

Dated the 26^th day of June 2017.

____________(Signed)______________

Securities and Futures Commission

(Signed) Fan Di

Fan Di

APPENDIX 1

“Corporation” means a company or other body corporate incorporated either in Hong Kong or elsewhere.

“Company” means a company as defined in section 2(1) of the Companies Ordinance, Cap. 32.  The expression “company” in the definitions of subsidiary, holding company and affiliate below, shall be read as including a corporation.

“Subsidiary” means, with respect to its holding company, a company:-

(1)   the composition of the board of directors of which is directly or indirectly controlled by the holding company; or

(2)   more than half of the issued share capital of which is directly or indirectly controlled by the holding company; or

(3)   which is a subsidiary of a company which is a subsidiary of the holding company; or

(4)   which is accounted for and consolidated in the holding company’s consolidated financial statements.

“Holding company” in relation to a company shall be read as a reference to a company of which that last-mentioned company is a subsidiary.

“Affiliate” in respect of a company, means any subsidiaries or holding companies of such company or any subsidiaries of any of the holding companies of such company.