SECURITIES AND FUTURES COMMISSION v. AU YEUNG HO YIN

HCMP 736/2019

[2024] HKCFI 2573

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 736 OF 2019

_________________

_________________

_________________

___________________________________

REASONS FOR DECISION

__________________________________

Introduction

1.  By a Petition filed on 22 May 2019 pursuant to s 214 of the Securities and Futures Ordinance, Cap 571 (“SFO”), the Petitioner (“SFC”) seeks a disqualification order against the Respondent for his conduct of the business and affairs of Fujian Nuoqi Co., Ltd. (“Company”).

2.  The SFC and the Respondent had reached an agreement on the facts not in dispute for the purpose of a Carecraft settlement as well as the proposed sanction ie a disqualification order for a period of 3 years.  A Carecraft statement had been signed by the parties.

3.  At the hearing, this court was invited to make an Order in terms of the draft Order submitted to this court (“Draft Order”)^[1], on the basis of the agreement reached between the SFC and the Respondent. Those instructing Mr Lui SC had previously stated that the Respondent fully accepted the submissions of Mr Wong SC in his skeleton submissions.

4.  After hearing Mr Wong SC and Mr Lui SC, this court granted an Order in terms of the Draft Order as follows:

“1.  Pursuant to section 214(2)(d) of the Securities and Futures Ordinance (Cap. 571) (“SFO”), the Respondent shall not, without leave of the Court, for a period of 3 years with effect from the date of this Order:

(a)   be, or continue to be, a director, liquidator, receiver or manager of the property or business, of the Fujian Nuoqi Co. Ltd including any of its subsidiaries and affiliates (whether in Hong Kong or otherwise), or any corporation in Hong Kong; and

(b)   in any way, whether directly or indirectly, be concerned, or take part, in the management of Fujian Nuoqi Co. Ltd, including any of its subsidiaries and affiliates (whether in Hong Kong or otherwise), or any corporation in Hong Kong.

2.  The Respondent shall pay the Petitioner’s costs in these proceedings, to be taxed if not agreed, with certificate for two Counsel.”

5.  At the request of the SFC, this court shall give a short decision explaining the Order, which this court hereby does.

Agreed Facts

6.  The material facts are set out in the Carecraft statement  annexed to this Judgment (“Annex A”).  It is not necessary to set them out in full here.  Suffice it for this court to give an Overview which is taken from Mr Wong SC’s skeleton submissions.

7.  The Company was incorporated in the People’s Republic of China.  Its shares were listed on the Main Board of the Stock Exchange of Hong Kong Limited (“Stock Exchange”) on 9 January 2014. Trading of the shares was suspended since 23 July 2014.  The listing status of the Company was cancelled by the Stock Exchange with effect from 8 February 2021. At the material time in 2014, the principal activities of the Company and its subsidiaries (collectively “Group”) were investment holding and retailing of the Group’s own brand of men’s casual apparel.  One of the Company’s wholly-owned subsidiaries was Nuoqi Fashion International Limited (“Nuoqi Fashion”).

8.  At all material times, the Respondent was the Chief Financial Officer (“CFO”) and Company Secretary of the Company. As the CFO and the Company Secretary, he (a qualified accountant) was responsible for the overall financial management and reporting of the Group. He was also responsible for preparing announcements, liaising with the Stock Exchange and reporting and sending relevant information and documents to members of the Board in a timely manner and ensuring good information flow within the Board and that Board policy and procedures were followed.  He was involved in formulating internal control measures, overseeing and implementing the internal control and compliance measures. 

9.  Further, the Respondent became an Executive Director (“ED”) of the Company on 14 June 2014.

10.  At the material time, Ding Hui (“Ding”) was the Chairman, an ED and the Chief Executive Officer of the Company.

11.  The Company published its prospectus dated 30 December 2013 (“Prospectus”) in respect of the global offering of its shares (“Global Offering”).  According to the Prospectus, (i) 70.3% of the net proceeds from the Global Offering would be used to expand the Group’s sales network, (ii) 19.7% would be used for the construction of research and development part of the Group’s product centre in Shanghai, and (iii) 10.0% would be used as general working capital of the Group.  There was no mention that the Group intended to use the proceeds to acquire any particular brand of fashion.  The Company stated that in the event of any change in its use of the net proceeds of the Global Offering from the purposes described in the Prospectus, a formal announcement would be made.  Proceeds from the Global Offering were approximately HK$300m (RMB237m) (“Net Proceeds”).

12.  During the period between 27 January 2014 and 3 April 2014, Ding procured the transfer of a substantial part of the Net Proceeds out of the Group, as follows:

(a)  On 27 January 2014, Nuoqi Fashion^[2] transferred a sum of RMB160m from its bank account in Hong Kong to its account with Xiamen International Bank of the Mainland of China (“Transfer to Xiamen Bank”).

(b)  On the same day, Nuoqi Fashion transferred to Sky Set Holdings Limited (“Sky Set”) a sum of RMB50m (“1^st Transfer to Sky Set”).  Sky Set was a company incorporated in Samoa; one Hong Changcheng was its sole shareholder.

(c)  On 3 April 2014, Nuoqi Fashion transferred a further sum of HK$19.55m to Sky Set (“2^nd Transfer to Sky Set”).

13.  It later transpired that:

(a)  The deposit of RMB160m with Xiamen Bank was forfeited by the bank in partial satisfaction of the loans provided by the bank to Sun Power Resources Holdings Limited (“Sun Power”).  The Group had no interest in Sun Power.  At all material times, Sun Power was in fact under Ding’s control, although one Chuang Yim was, on record, the sole director.

(b)  Sky Set has never returned the funds received from Nuoqi Fashion or any part thereof. 

14.  Ding had not informed the Respondent of the Transfer to Xiamen Bank or the 1^st Transfer to Sky Set before or after they were effected.  The Respondent learnt about the said transfers in mid-February 2014 from Bank of Communications Hong Kong Branch.

15.  Soon after the Respondent learnt about the 1^st Transfer to Sky Set, he asked Ding about it.  Ding explained that Sky Set was an agent to facilitate potential acquisition of brands by the Group.  The transfer of RMB50m was sincerity money. The Respondent told Ding that documents would need to be prepared to support the transfer. Ding said he would supply them but never did.

16.  In the rest of February and March 2014, Ding continuously (i) failed to report to the Board on the 1^st Transfer to Sky Set or the purported reason therefor and (ii) failed to provide basic information or supporting documents about the possible acquisition or Sky Set.

17.  On 3 April 2014, the Respondent scanned, and sent to Bank of Communications Hong Kong Branch, the transfer instructions signed by Ding for the 2^nd Transfer to Sky Set.  He asked Ding about the purpose of the 2^nd Transfer to Sky Set and was told that it was to top-up the sincerity money. 

18.  On 7 February 2014, Nuoqi Fashion placed 4 fixed deposits of RMB40m each (RMB160m in total) with Xiamen Bank for a year. On 13 February 2014, Nuoqi Fashion as pledgor entered into agreements with Xiamen Bank as pledgee to pledge all 4 said fixed deposits to secure the loans of HK$197.9m advanced by Xiamen Bank to Sun Power (“Pledge”).

19.  The Respondent was provided with bank statements which showed the fixed deposits placed with Xiamen Bank, but not the Pledge.

20.  The 2 transfers to Sky Set (approximately HK$82m in total) amounted to about 27% of the Net Proceeds.  Neither the 1^st nor the 2^nd Transfer to Sky Set served any genuine commercial purpose.

21.  The Board has never approved the two transfers to Sky Set.  Members of the Board, other than Ding and the Respondent, were not informed of the same until about 23 July 2014 when the Company requested a suspension of trading of its shares, following an unusual depression of its share price.

22.  The Respondent was responsible for the preparation of the Company’s annual report for the year ended 31 December 2013 (“Annual Report 2013”).  On 11 April 2014, he inserted, or permitted the insertion of, a paragraph on “Use of Gross Proceeds from Initial Public Offering” to the draft Annual Report 2013, which reads:

“As at 28 March 2014, the unused proceeds were deposited in licensed banks in Hong Kong. As stated in the Prospectus, it is expected that we shall use the net proceeds in the following manner: (a) 70.3% for expansion of our sales network; (b) 19.7% for construction of research and development part of our product centre in Shanghai and (c) 10.0% as general working capital of our Group” (“Disclosure”). (emphasis added)

23.  On 24 April 2014, the Annual Report 2013, incorporating the Disclosure, was released.

24.  On 21 July 2014, Ding became uncontactable. The Company and the Respondent noticed the unusual decrease in share price and increase in trading volume of the shares of the Company.  Upon the Stock Exchange’s request, the Respondent and the other Directors of the Company, except Ding, approved the publication of an announcement at about 10:31 p.m. that day (“July 21 Announcement”), which stated:

“Having made such enquiry with respect to the Company as is reasonable in the circumstances, the Board confirms that the Board is not aware of any reasons for such decreases in the price and increases in the trading volume of the shares of the Company or of any information which must be announced to avoid a false market in the Company’s securities or of any inside information that needs to be disclosed under Part XIVA of the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong)”. (emphasis added)

25.  On 23 July 2014, the Company requested a suspension of trading in its shares, pending the release of an announcement in relation to insider information of the Company.

26.  On 25 July 2014, the Respondent resigned from the Board. On 5 September 2014, he ceased to be the CFO and Company Secretary of the Company. 

27.  Sky Set has never returned the funds received from Nuoqi Fashion or any part thereof.  The Pledge was forfeited by Xiamen Bank in partial satisfaction of the loans provided to Sun Power.  During the year ended 31 December 2014, the Group incurred substantial losses of approximately RMB721m, which were mainly due to the impairment of assets (approximately HK$684m) caused by the unauthorised acts of Ding, including the transfers to Sky Set and the Pledge. 

28.  The two transfers to Sky Set were defalcations of the Company’s properties within the meaning of s 214(1)(b) and Schedule 1 of the SFO, as they were misappropriation or misapplication of the Company’s monies derived from the Net Proceeds.

29.  Insofar as the Transfer to Xiamen Bank was concerned, the sum of RMB160m was not deposited in licensed banks in Hong Kong, contrary to the Disclosure in the Annual Report 2013.  The Disclosure in the Annual Report 2013 was thus false or misleading in a material respect.

30.  Despite (i) the decrease in share price and increase in trading volume of the shares of the Company which prompted the Stock Exchange’s enquiry and (ii) Ding became uncontactable since 21 July 2014, the Company published the July 21 Announcement which stated that the Board was not aware of any disclosable insider information. 

31.  In view of the above, the business or affairs of the Company have been conducted in a manner resulting in part of its members not having been given all the information with respect to its business or affairs that they might reasonably expect within the meaning of s 214(1)(c) of the SFO. 

32.  Lastly, the business or affairs of the Company have been conducted in a manner unfairly prejudicial to its members or part of its members within the meaning of s 214(1)(d) of the SFO. 

The Respondent’s failures

33.  The Respondent was partly responsible for the affairs of the Company having been conducted in the manner aforesaid. In particular, he has failed to take reasonable steps to ascertain the basis for the transfers to Sky Set, cause investigation to be made of the same, and refer the matter to the Board for consideration and approval, even though the circumstances suggested that the transfers might involve unauthorised misappropriation or misapplication of the Company’s monies. 

34.  With respect to the 1^st Transfer to Sky Set, the amount was substantial and the Respondent knew there was no prior Board’s deliberation or approval of it. Ding’s explanation about it in response to the Respondent’s enquiry was vague and grossly deficient. The Respondent has breached his duties as CFO by failing to bring the 1^st Transfer to Sky Set to the Board’s attention as soon as he learned about it.

35.  With respect to the 2^nd Transfer to Sky Set, more than 2 months had lapsed since the 1^st Transfer, but Ding still failed to report to the Board about the transfer or the explanation for it.  He also failed to provide basic information or documents in support of his explanation to the Respondent. Yet, the Respondent scanned and sent Ding’s instructions to Bank of Communications Hong Kong Branch to effect the 2^nd Transfer to Sky Set, again without the Board’s knowledge or approval. The Respondent has breached his duties as CFO by failing to alert the Board about the 2^nd Transfer to Sky Set.

36.  Between 14 June and 25 July 2014, the Respondent as an ED of the Company failed to discharge his duties by alerting his fellow directors about the transfers to Sky Set.  He was negligent in failing to take reasonable steps or carry out any proper investigation to avert the risk of defalcation of the Net Proceeds.

37.  With respect to the Respondent’s insertion on 11 April 2014 of the Disclosure in the Annual Report 2013, it was false or misleading because, contrary to what was stated therein, RMB160m of the Net Proceeds was not deposited in licensed banks in Hong Kong, but with a bank in Xiamen. Further, by that time RMB50m had already been transferred to Sky Set. The Respondent was aware that the Net Proceeds were not being applied for the purposes stated in the Prospectus.

38.  Lastly, notwithstanding the decrease in share price and increase in trading volume of the shares of the Company which prompted the Stock Exchange’s enquiry and Ding becoming uncontactable, the Company published the July 21 Announcement which stated that the Board was not aware of any disclosable inside information.

Relief

39.  On the basis of the Agreed facts set out in the Carecraft statement, this court is satisfied that the conditions for granting relief under s 214(2) of the SFO are met and that the Order which the parties have agreed are, in principle, appropriate. 

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

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

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

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

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

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

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

41.  By agreeing to the Draft Order, the SFC had accepted that the Respondent’s conduct fell within the lowest bracket and a disqualification period of 3 years would be appropriate.  This court, having taken into account all relevant circumstances, also agrees. 

42.  This court is not bound by the agreement between the SFC and the Respondent in deciding what Order to be made. It must be satisfied on the basis of the agreed facts that the business or affairs of the Company have been conducted in a manner described in section 214(1) of the SFO and decide on the scope and duration of the Order. However, in practice, it is likely to be guided by their agreement: Securities and Futures Commission v Yeung Kui Wong unrep., HCMP 1742/2009, 27 October 2010, Harris J at [5]. This is based on the Court’s recognition that the SFC, as a responsible regulator, would have reached an agreement on the appropriate sanction to be imposed: SFC v Li Wo Hing & Ors unrep, HCMP 1023/2011, 26 September 2012, Barma J (as he then was).

43.  This court accepts Mr Wong SC’s submission that the gravity of the conduct is such that the Respondent falls within the minimum bracket.  There is a marked degree of incompetence and negligence on his part, but there is no allegation of dishonesty against him. This court also accepts the following 2 mitigating factors are relevant: (i) Ding had deliberately withheld from the Respondent the defalcation of the Company’s funds and the Respondent had not obtained any benefit from it and (ii) the Respondent has been cooperative in relation to these proceedings with the SFC and accepts liability. 

44.  It only remains for this court to thank the parties for their very helpful assistance.

ANEX AANNEX A

 HCMP 736/2019

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 736 OF 2019

________________

________________

STATEMENT OF FACTS NOT IN DISPUTE FOR THE PURPOSE OF A CARECRAFT SETTLEMENT BETWEEN THE PETITIONER AND THE RESPONDENT

A.   INTRODUCTION

1.  On 22^nd May 2019, the Securities and Futures Commission (the “Petitioner”) issued these proceedings under section 214 of the Securities and Futures Ordinance (Cap. 571) (the “Ordinance”) seeking, inter alia, a disqualification order against Mr. Au Yeung Ho Yin (the “Respondent”) for his conduct of the business and affairs of Fujian Nuoqi Co. Ltd (the “Company”).

2.  Subject to the approval of this Court, the Petitioner and the Respondent consent to the disposal of these proceedings against the Respondent by way of the summary procedure (“Carecraft 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 as adopted by this Court in a number of cases including but not limited to Securities and Futures Commission v Yick Chong San [2007] 4 HKLRD 46, Securities and Futures Commission v Fung Chiu and Others [2009] 2 HKC 19, Securities and Futures Commission v Shum Ka Sang Charlie and Shen Yi (HCMP 1014/2008, unrep, 22.05.2009), Securities and Futures Commission v Cheung Chi Shing and Others [2011] 1 HKLRD 96, Securities and Futures Commission v Cheung Keng Ching and Others (HCMP 1869/2008, unrep, 18.03.2010), and Securities and Futures Commission v Kwok Wing & Others (HCMP 3392/2013, unrep, 27.03.2015) in respect of proceedings under section 214 of the Ordinance.

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

4.  Solely for the purposes of resolving these proceedings by way of the Carecraft Procedure, and by reference to the facts set out in Section B below (which the Respondent admits and accepts), the Respondent accepts that during the relevant period, the business and affairs of the Company, for which the Respondent, who was the Chief Financial Officer (“CFO”), Company Secretary and an Executive Director (“ED”) (between 14 June and 25 July 2014), was partly responsible, have been conducted in a manner described in section 214(1)(b), (c) and (d) of the Ordinance, namely:

(1)  Involving defalcation, misfeasance or other misconduct towards the Company, its members or part of its members;

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

(3)  Unfairly prejudicial to its members or part of its members.

Unopposed Orders

5.  On the basis of the facts set out in Section B below and the agreed mitigating factors set out in Section C below, the Petitioner and the Respondent agree, and the Respondent is prepared to accept, that it would be appropriate for a disqualification order to be made against the Respondent under section 214(2)(d) of the Ordinance under which he shall not for a period of 3 years, without the leave of the Court:-

(1)  be, or continue to be, a director, liquidator, or receiver or manager of the property or business, of the Company, including any of its subsidiaries and affiliates (whether in Hong Kong or otherwise), or any corporation in Hong Kong ; and

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

6.  The definition of “subsidiaries” and “affiliates” are set out in Appendix 1 to this Statement.

7.  The Respondent agrees to pay the Petitioner’s costs in these proceedings, to be taxed if not agreed with certificate for two Counsel.

8.  In the event of a disqualification order made against the Respondent by reference to this Statement: (1) the Petitioner and the Respondent agree that they will jointly apply to this Court for a direction that this Statement be annexed to a judgment of this Court; and (2) the Petitioner reserves the right to refer to this Statement for all purposes connected with or ancillary to these proceedings or other proceedings against other directors of the Company at the material time. 

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

B.    FACTS NOT IN DISPUTE

10.  The structure of Section B of this Schedule is as follows:-

(1)  Section B1 sets out the background information relating to the Company and its management.

(2)  Sections B2 to B9 set out the facts relied on by the Petitioner in support of its case that the business and affairs of the Company have been conducted in such manner as described in section 214(1)(b), (c) and (d) of the Ordinance.

(3)  Section B10 sets out the facts relied upon by the Petitioner in support of its case that the Respondent was responsible, or partly responsible, for the aforesaid business and affairs of the Company.

B1  BACKGROUND AND MANAGEMENT OF THE COMPANY

11.  The Company is, and at all material times was, a company incorporated in the People’s Republic of China (“PRC”) and listed on the Main Board of the Stock Exchange of Hong Kong Limited (“Stock Exchange”) on 9 January 2014 (Stock Code: 1353).  Trading of the shares of Company on the Stock Exchange was suspended since 23 July 2014, and the listing of the Company’s shares was cancelled by the Stock Exchange with effect from 8 February 2021.

12.  The registered office of the Company was situated at Room 2602, Block 5, Jialong Shandu, Jitai Road, Economic and Technical Development Zone, Quanzhou, PRC, and its principal place of business in Hong Kong was at Room 4901, 4938 – 4940, 49/F Sun Hung Kai Centre, 30 Harbour Road, Wanchai, Hong Kong.

13.  As stated in the Monthly Return of Equity Issuer on Movement in Securities for the month ended 31 December 2020, the Company has an authorised share capital of RMB122,158,800 divided into 610,794,000 shares at RMB0.20 each.

14.  At the material time:-

(1)  the principal activities of the Company and its subsidiaries (“Group”) were investment-holding and retailing of its own brand of men’s casual apparel;

(2)  the Company’s Board of Directors comprised 4 EDs being Ding Hui (“Ding”),Ding Canyang, Chen Quanyi (“Chen”) and Jin Wenge (“Jin”) who retired on 13 June 2014 whereupon the Respondent became an ED on 14 June 2014; 2 Non-Executive Directors (“NEDs”)being Han Huiyan and Ding Lixia; and 3 Independent Non-Executive Directors (“INEDs”);

(3)  the Chairman and the Chief Executive Officer (“CEO”)of the Company was Ding.

15.  Ding Canyang and Ding Lixia are, respectively, the brother and sister of Ding.

16.  The Respondent was the only senior management personnel of the Group based in Hong Kong.  Most Board members were stationed in the PRC, saved for one of the INEDs.  Ding would travel to Hong Kong occasionally for business. 

17.  The Respondent was the CFO and Company Secretary of the Company.  He became an ED of the Company on 14 June 2014 and resigned on 25 July 2014.

18.  In his position as the CFO and Company Secretary, the Respondent was responsible for the overall financial management and reporting of the Group.  He was also responsible for preparing announcements, liaising with the Stock Exchange and reporting and sending relevant information and documents to members of the Board in a timely manner and ensuring good information flow within the Board and that Board policy and procedures were followed.  He was involved in formulating internal control measures, and he oversaw and implemented the internal control and compliance measures jointly with Chen. 

19.  The Respondent was also one of the authorised representatives of the Company (“Authorised Representative”) appointed pursuant to Rule 3.05 of the Main Board Listing Rules of the Stock Exchange.

B2   PROCEEDS OF GLOBAL OFFERING AND THE COMPANY’S DISCLOSURES IN THE PROSPECTUS

20.  The Company published its prospectus dated 30 December 2013 (“Prospectus”) in respect of the global offering of its shares (“Global Offering”). According to the Prospectus:

(1)  70.3% of the net proceeds from the Global Offering would be used to expand the Group’s sales network;

(2)  19.7% would be used for the construction of research and development part of the Group’s product centre in Shanghai; and

(3)  10.0% would be used as general working capital of the Group.

21.  The Board authorised Ding to be the sole signatory of the Company’s two bank accounts in Hong Kong including the Bank Comm A/C.  Ding had full authority to make any payments or transfers for the Company and its subsidiaries in Hong Kong. 

22.  There was no mention that the Group intended to use the proceeds to acquire any particular brand of fashion.

23.  The Company stated that in the event of any change in the Company’s use of the net proceeds of the Global Offering from the purposes described in the Prospectus, a formal announcement would be made.

24.  The shares of the Company were listed on the Main Board of the Stock Exchange on 9 January 2014.

25.  Proceeds from the Global Offering were approximately HK$302,918,000 (approximately RMB236,519,000) (“Net Proceeds”) after deducting the issuing expenses.

B3  NUOQI FASHION INTERNATIONAL LIMITED (“NUOQI FASHION”)

26.  Nuoqi Fashion was incorporated in Hong Kong on 21 January 2014. Nuoqi Fashion was a wholly-owned subsidiary of the Company with Ding as its sole director.  At all material times Nuoqi Fashion maintained:

(1)  Chinese Yuan and Hong Kong Dollar accounts with the Bank of Communications Co., Ltd. Hong Kong Branch (“Bank Comm”) (collectively “Bank Comm A/C”);

(2)  an account with Xiamen International Bank of 10 North Hubin Road, Xiamen, PRC (“Xiamen Bank A/C”).

B4  SKY SET HOLDINGS LIMITED (“SKY SET”) 

27.  Sky Set Holdings Limited (“Sky Set”) was a limited company incorporated in Samoa. One Hong Changcheng (洪長城) was its sole shareholder and director.

B5  TRANSFERS BY DING 

28.  During the period between 27 January 2014 and 3 April 2014, Ding procured the transfer of a substantial part of the Net Proceeds out of the Bank Comm A/C, as follows:

(1)  On 27 January 2014, a sum of RMB160,000,424.96 was transferred from Bank Comm A/C to Xiamen Bank A/C (“Transfer to Xiamen Bank A/C”).

(2)  On the same day, a sum of RMB50,000,000 was transferred from Bank Comm A/C to a bank account (“Sky Set’s HSBC Account”) held by Sky Set in the Hongkong and Shanghai Banking Corporation in Hong Kong (“1^st Transfer to Sky Set”).

(3)  On 3 April 2014, a further sum of HK$19,550,000 was transferred from Bank Comm A/C to Sky Set’s HSBC Account (“2^nd Transfer to Sky Set”).

The l^st Transfer to Sky Set and the 2^nd Transfer to Sky Set are collectively referred to as “1^st and 2^nd Transfers to Sky Set”.The 1^st and 2^nd Transfers to Sky Set, together with the Transfer to Xiamen Bank A/C, are collectively referred to as “Transfers”.

29.  The Respondent only learnt about the Transfer to Xiamen Bank A/C and the 1^st Transfer to Sky Set by mid-February 2014 from Bank Comm.  Ding had not informed him of the said transfers before or after they were executed.  

30.  Soon after he learnt about it, the Respondent asked Ding about the 1^st Transfer to Sky Set.  Ding explained that Sky Set was an agent to facilitate potential acquisition of brands by the Group and the acquisition would involve opening of new shops. The sum of RMB50,000,000 in the 1^st Transfer to Sky Set was sincerity money. The Respondent told Ding that documents would need to be prepared to support the transfer and Ding said he would prepare them.

31.  Shortly after discovering the 2^nd Transfer to Sky Set, the Respondent also asked Ding about the purpose of the 2^nd Transfer to Sky Set and was told this was to top-up the sincerity money as the potential acquisition was larger than what had been envisaged initially. 

32.  The Respondent scanned and sent the transfer instructions signed by Ding for the 2^nd Transfer to Sky Set to Bank Comm on 3 April 2014.

B6  EVENTS FOLLOWING THE TRANSFER TO XIAMEN BANK A/C

33.  After the Transfer to Xiamen Bank A/C:

(1)  On 7 February 2014, Nuoqi Fashion placed 4 fixed deposits of RMB40,000,000 each (RMB160,000,000 in total) with Xiamen International Bank for a year.

(2)  On 13 February 2014, Nuoqi Fashion as pledgor signed contract nos. GH14002, GH14002-1, GH14002-2, GH14002-3 and GH14002-4 with Xiamen International Bank as pledgee to pledge the aforementioned 4 fixed deposits (“Pledge”)to secure the loans advanced by Xiamen International Bank to one Sun Power Resources Holdings Limited (“Sun Power”). 

(3)  Xiamen International Bank lent HK$197,900,000 to Sun Power.

(4)  The Group had no interest in Sun Power. At all material times, Sun Power was in fact under Ding’s control, although Chuang Yim was, on record, the sole director.

(5)  The Respondent was provided with bank statements for the Xiamen Bank A/C but this only showed the fixed deposits and not the Pledge.  The Respondent did not know about the Pledge until end of July 2014.

B7  EVENTS FOLLOWING THE 1^ST AND 2^ND TRANSFERS TO SKY SET

34.  The 1^st and 2^nd Transfers to Sky Set (approximately HK$82 million in total) amounted to about 27% of the Net Proceeds. Neither the 1^st Transfer to Sky Set nor the 2^nd Transfer to Sky Set served any genuine commercial purpose:

(1)  Shortly after the 1^st Transfer to Sky Set, on 11 February 2014 and 13 February 2014, Sky Set paid a total sum of RMB50,000,000 into a bank account held by one Oriental Century Limited with Citibank.

(2)  Immediately after the 2^nd Transfer to Sky Set, Sky Set paid HK$19,550,000 into a bank account held by one So Wing Hon with Standard Chartered Bank.  The Respondent has no knowledge of the transfer of HK$19,550,000 from Sky Set to So Wing Hon’s bank account.

(3)  At all material times until about 23 July 2014, members of the Board (except Ding and the Respondent who became an ED in June 2014) were not informed of the said transfers to Sky Set.

(4)  The Board has never approved either the 1^st or the 2^nd Transfer to Sky Set.

B8  DISCLOSURE IN THE ANNUAL REPORT 2013

35.  The Respondent was responsible for the preparation of the Company’s annual report for the year ended 31 December 2013 (“Annual Report 2013”).  On 11 April 2014, the Respondent inserted, or permitted the insertion of, a paragraph on “Use of Gross Proceeds from Initial Public Offering” to the draft Annual Report 2013, which reads:

“As at 28 March 2014, the unused proceeds were deposited in licensed banks in Hong Kong. As stated in the Prospectus, it is expected that we shall use the net proceeds in the following manner: (a) 70.3% for expansion of our sales network; (b) 19.7% for construction of research and development part of our product centre in Shanghai and (c) 10.0% as general working capital of our Group” (“Disclosure”).

36.  The Annual Report 2013, incorporating the Disclosure, was released on 24 April 2014.

B9  ANNOUNCEMENTS BY THE COMPANY

37.  On 21 July 2014, the Company and the Respondent noticed the unusual decrease in share price and increase in trading volume of the shares of the Company.  Ding was not contactable. 

38.  Upon the Stock Exchange’s request, the Respondent and the other Directors of the Company (except Ding) approved the publication of an announcement at about 10:31 p.m. that day (“July 21 Announcement”), which relevantly stated:

 “Having made such enquiry with respect to the Company as is reasonable in the circumstances, the Board confirms that the Board is not aware of any reasons for such decreases in the price and increases in the trading volume of the shares of the Company or of any information which must be announced to avoid a false market in the Company’s securities or of any inside information that needs to be disclosed under Part XIVA of the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong).”

39.  On 23 July 2014, the Company requested a suspension of trading in the Company’s shares with effect from 11:25 a.m., pending the release of an announcement in relation to inside information of the Company.

40.  On 25 July 2014, the Respondent resigned from the Board but he remained as the CFO and Company Secretary of the Company.

41.  On 28 July 2014 and 29 July 2014, the Company reported to the Ministry of Public Security of the PRC and the Hong Kong Police Force in relation to the Transfers.

42.  On 31 July 2014, the Company made an announcement pursuant to Part XIVA of the Ordinance (disclosure of inside information) regarding the Board’s discovery of the Transfers.

43.  Ding has since July 2014 absconded from the jurisdiction of Hong Kong.  The Respondent ceased to be the CFO and Company Secretary of the Company on 5 September 2014. 

44.  Sky Set has never returned the funds received from Nuoqi Fashion or any part thereof. The deposit of RMB160,000,000 pledged by the Company in favour of Xiamen International Bank was forfeited by the bank in partial satisfaction of the loans provided by the bank to Sun Power.  During the year ended 31 December 2014, the Group has incurred substantial losses of approximately RMB721 million, which were mainly due to the impairment of assets amounted to approximately HK$684 million, which impairment was in turn attributable to the unauthorised acts of Ding, including the 1^st and 2^nd Transfers to Sky Set and the Pledge, which adversely compromised and resulted in the said impairment of the Company’s assets. 

B10  COMPANY’S BUSINESS OR AFFAIRS CONDUCTED IN A MANNER DESCRIBED IN SECTION 214(1) OF THE Ordinance

45.  The Company had no interest in, or any genuine business relationship with Sky Set.  Neither the 1^st Transfer nor the 2^nd Transfer to Sky Set served any genuine commercial purpose.  Neither of them was known to, let alone approved by, the Board.

46.  In the premises, the 1^st and 2^nd Transfers to Sky Set were defalcations of the Company’s properties within the meaning of section 214(1)(a) and Schedule 1 of the Ordinance, being misappropriation or misapplication of the Company’s monies derived from the Net Proceeds. 

47.  Insofar as the Transfer to Xiamen Bank A/C was concerned, the RMB160,000,000 was not deposited in licensed banks in Hong Kong, contrary to what was purportedly stated the Disclosure in the Annual Report 2013.  In the premises, the Disclosure in the Annual Report 2013 was false or misleading in this material respect and the business or affairs of the Company have been conducted in a manner resulting in part of its members not having been given all the information with respect to its business or affairs that they might reasonably expect within the meaning of section 214(1)(c) of the Ordinance.

B11  LIABILITY OF THE RESPONDENT

48.  By reason of the matters below, the Respondent was partly responsible, for the affairs of the Company having been conducted in a manner involving defalcation, misfeasance or misconduct under section 214(1) of the Ordinance during the relevant period:

(1)  The 1^st Transfer to Sky Set represented more than one-fifth of the Net Proceeds, and was substantial.  The Respondent knew that there was no prior Board’s deliberation, let alone approval, of the 1^st Transfer to Sky Set.  Ding did not notify the Respondent, as the CFO of the Company, about the transfer both before and after it was effected.  The Respondent only learnt about the transfer from a staff of Bank Comm in about mid-February 2014.

(2)  Despite the Respondent’s request to Ding for explanation for the 1^st Transfer to Sky Set and provision of basic information about Sky Set and the underlying contract, Ding only vaguely asserted to the Respondent that the money transferred was sincerity money to facilitate negotiation of possible acquisition of unidentified brand(s), and failed to provide any basic information about Sky Set.  Plainly, Ding’s responses and failure to provide any supporting documents were grossly deficient.  There was no justification for Ding’s failure to provide information or documents about the possible acquisition or Sky Set.  The Respondent also requested Ding to inform the other Board members about the possible acquisition but Ding failed to do so.

(3)  In the circumstances, the Respondent breached his duties as the CFO by failing to bring the 1^st Transfer to Sky Set to the Board’s attention as soon as he knew about it from Bank Comm.

(4)  With respect to the 2^nd Transfer to Sky Set, (i) more than 2 months had lapsed since the 1^st Transfer to Sky Set; (ii) Ding continuously failed to report to the Board on the transfer and the purported reason for the transfer; and (iii) Ding continuously failed to provide basic information or supporting documents about the purported negotiation/possible acquisition or Sky Set; the Respondent forwarded Ding’s instructions to Bank Comm to effect the 2^nd Transfer to Sky Set, once again without the Board’s knowledge or approval.  As in the case of the 1^st Transfer to Sky Set, Ding told the Respondent that the money for this transfer was to be paid to Sky Set as a kind of sincerity money to assist in the said possible acquisition of unidentified brand(s).  No supporting documents were provided by Ding.  In these circumstances, the Respondent did not immediately alert the Board about Ding’s intention to effect the 2^nd Transfer.  Instead, the Respondent proceeded to send the instructions to Bank Comm as requested by Ding in the absence of any approval by the Board.

(5)  After the Respondent’s repeated requests to Ding for supporting documents, a draft “委託協議” (“Draft Agreement”) and draft written broad resolutions of Nuoqi Fashion (“Draft Resolutions”) were prepared by Ms. Xu Meilin, an officer of the Company’s legal and compliance department, to provide support for the 1^st and 2^nd Transfers to Sky Set.  The Draft Agreement and the Draft Resolutions were, however, never signed.  Insofar as the Draft Agreement is concerned:

(a)  Parties to the Draft Agreement were left unspecified.  The Respondent was told by Ding that Ding would fill in the parties himself.   Given Ding’s purported explanation for the 1^st Transfer and 2^nd Transfer to Sky Set, and the fact that the parties to the Draft Agreement were Nuoqi Fashion and Sky Set, there was no good reason why the parties in the Draft Agreement should be left blank.

(b)  The introductory paragraph and Clause 1(1) of the Draft Agreement stated that Party A engaged Party B for acquisition of “men’s apparel, women’s apparel or children’s clothing brand(s)”.  At all material times, the principal activities of the Group were trading of men’s apparel.  The Prospectus stated that “we also plan to introduce women’s wear products in selected retail points in 2016 and further pilot test and market children’s wear products two years thereafter if we successfully launch our women’s wear products”.  The Prospectus did not mention or suggest the possibility of any acquisition of fashion brands.     In any event, any acquisition of women’s apparel or children’s clothing brand(s) in 2014 would have marked a substantial divergence of the Group’s business and departure from the Prospectus.  There was hence no justification to omit to draw the attention of the Board to any intention or plan to acquire a new brand of fashion (as alleged by Ding).

(c)  The Respondent suggested that a time limit should be specified.  Clause 2 of the Draft Agreement purported to provide that the “appointment period” would expire on 30 June 2014.  Clause 5.2 purported to provide that the prepayment shall be refunded after the “appointment period” if there was no acquisition.  It transpired that the Draft Agreement was not signed before the purported expiry date.  Ding told the Respondent that the time limit was extended to mid-July or late July as it was possible that the negotiation for buying a new brand of fashion might succeed.    The Respondent accepted Ding’s words.  As the CFO and an ED of the Company, the Respondent failed to (i) take reasonable steps to ascertain the reason for the failure to refund before the purported deadline, (ii) request Ding to provide the supporting documents relating to the alleged agreement to extend the deadline; and (iii) alert the Board of the same.

(d)  Clause 3(2) of the Draft Agreement stated that “為了讓乙方順利展開收購工作，證明甲方資金充裕，甲方向乙方支付了港幣伍千萬元的預付款。” (in translation: “To enable Party B to proceed smoothly with acquisition, and to show that Party A has abundant funds, Party A made a pre-payment of HK$50,000,000 to Party B”).    The purported reason stated in the Draft Agreement was different from what Ding told the Respondent i.e. sincerity money.  It should have been apparent that if the purpose was merely to show that “Party A” had abundant funds, a confirmation by its banker would have sufficed; and such could not be shown by transfers of funds to “Party B” because at best it would only show to a potential vendor of brand(s) that “Party B” had funds. 

(6)  Insofar as the Draft Resolutions are concerned, the Company’s auditors informed the Respondent that such resolutions were required.  Ding was the sole director of Nuoqi Fashion and he was under a duty to verify and sign the Draft Resolutions, but he failed to do so. 

49.  In these circumstances, there were signs (or “red flags”) suggested that the 1^st and 2^nd Transfers to Sky Set might involve unauthorized misappropriation or misapplication of the Company’s monies.  The Respondent failed to take reasonable steps to ascertain the basis for the 1^st and 2^nd Transfers, cause investigation to be made of the same, and refer the matter to the Board for consideration and approval.  

50.  As the CFO and Company Secretary of the Company, and as a qualified accountant himself, the Respondent was under a duty to, inter alia, oversee the accounting and finance functions of the Company, to advise and assist the Board and to take such steps as may be necessary to implement internal controls and other procedures that are necessary to provide the Board with a reasonable basis for making sound commercial judgments.  He was also responsible for supervising the preparation of the Company’s accounts and financial reports and to ensure proper corporate governance.  However, in dereliction of his duties, the Respondent failed to carry out any proper investigation, or to take any reasonable steps to consider and advise the Board regarding the 1^st and the 2^nd Transfers to Sky Set.

51.  Further, during the period between 14 June 2014 and 25 July 2014 whilst the Respondent was an ED of the Company, he failed to discharge his duties as an ED by alerting his fellow directors on the Board about the Transfers.  In view of his professional background as an accountant and the red flags over a period of almost 6 months, the Respondent was negligent in failing to draw the Board’s attention to, and take those reasonable steps or carry out any proper investigation referred to in paragraphs 48 to 50 above to avert, the risk of defalcation of the Net Proceeds.

52.  By reason of the matters aforesaid, the business or affairs of the Company have been conducted in a manner involving defalcation, misfeasance or misconduct towards it or its members or any part of its members.

53.  Further, the business or affairs of the Company have been conducted in a manner resulting in part of its members not having been given all the information with respect to its business or affairs that they might reasonably expect:

(1)   The Disclosure in the Annual Report 2013 was false or misleading because, contrary to what was purportedly stated therein:

(a)  RMB160,000,000 or about 68% of the Net Proceeds was not deposited in licensed banks in Hong Kong, but with Xiamen International Bank of Xiamen, PRC.  As stated above, the deposit of RMB160,000,000 was pledged by the Company in favour of Xiamen International Bank and was eventually forfeited by the bank in partial satisfaction of the loans provided by the bank to Sun Power. 

(b)  RMB50,000,000, although remained “unused”, had already been transferred to Sky Set.

(c)  the Net Proceeds had not been and were not being applied for the purposes or in the manner as stated in the Prospectus.

(2)   Despite (i) the decrease in share price and increase in trading volume of the shares of the Company which prompted the Stock Exchange’s enquiry and (ii) Ding became uncontactable since 21 July 2014, the Company published the July 21 Announcement which specifically stated that the Board was not aware of any inside information.

54.  By reason of the aforesaid, the Company’s business or affairs have been conducted in a manner unfairly prejudicial to its members or part of its members within the meaning of s.214(1)(d) of the Ordinance.

55.  By reason of the matters aforesaid, the Respondent accepts that he is partly responsible, for the business or affairs of the Company having been conducted in the manner referred to paragraphs 52 to 54 above.

C.  AGREED MITIGATING FACTORS

56.  Ding had deliberately withheld from the Respondent the defalcation and misappropriation of the Company’s funds, and the Respondent did not obtain any benefit or profit from the defalcation and misappropriation. 

57.  The Respondent has been cooperative in relation to these proceedings with the Petitioner and accepts liability.

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

D.   PROPOSAL FOR DISQUALIFICATION

59.  On the basis of the facts not in dispute as set out in Section B above and the agreed mitigating factor set out in Section C above, the Petitioner and the Respondent agree that it would be appropriate for a disqualification order to be made against the Respondent under section 214(2)(d) of the Ordinance that, for a period of 3 years, he shall not, without the leave of the Court:-

(1)  be, or continue to be, a director, liquidator, or receiver or manager of the property or business, of the Company, including any of its subsidiaries and affiliates (whether in Hong Kong or otherwise), or any corporation in Hong Kong; and

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

60.  The Respondent agrees to pay the Petitioner’s costs in these proceedings, to be taxed if not agreed with certificate for two Counsel.

Dated the   day of           2023.

Appendix 1

“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 which is accounted for and consolidated in the holding company’s consolidated financial statements.

“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 or any subsidiaries of any of the holding companies of such company.