SECURITIES AND FUTURES COMMISSION v. LAM WO PING AND OTHERS

HCMP 2328/2019

[2024] HKCFI 315

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 2328 OF 2019

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JUDGMENT

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1.  This is the Petition of the Securities and Futures Commission (“SFC”) filed on 20 December 2019 pursuant to s.214 of the Securities and Futures Ordinance, Cap 571 (“Ordinance”). This Judgment deals with the Carecraft procedure in respect of the 4^th Respondent (“Chan”).

2.  The SFC and Chan have agreed to the summary disposal of this Petition in respect of the latter by way of Carecraft procedure. For this purpose, the SFC and Chan have agreed to a Statement of Facts Not in Dispute for the Purposes of a Carecraft Settlement (“Statement”) which contains an outline of the relevant facts, the case against Chan and the agreed proposal for disqualification, namely, for a period of 2 years, Chan 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 Fuguiniao Co, Ltd (“Company”) (or any of its subsidiaries or affiliates) or any other corporation in Hong Kong; or

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

3.  Further, Chan agrees to pay the SFC’s costs in the sum of HK$500,000 within 42 days from the date of this hearing, ie, by 6 March 2024, in full and final settlement of his share of the SFC’s costs of these proceedings.

Background

4.  The background facts have been set out in the Statement. The parties have asked for a copy of the Statement be annexed to this Judgment. It is a sensible suggestion which will serve the purpose of fully informing the public about these matters. I agree. In the circumstances, it is only necessary to provide a brief summary of the relevant facts here.

5.  The Company was at all material times a limited liability company incorporated in the PRC. It was principally engaged in the manufacture and sale of footwear, business casual menswear and leather accessories in the Mainland.

6.  The H-shares of the Company were listed on the main board of the Stock Exchange of Hong Kong Ltd (“SEHK”) from 20 December 2013 to 25 November 2019 (stock code: 1819). On 1 September 2016, the Company’s shares were suspended from trading. According to the Company’s announcement on 26 August 2019, the Quanzhou Intermediate Court announced the bankruptcy of the Company on 23 August 2019. The listing of the Company’s shares on SEHK was cancelled on 25 November 2019.

7.  The Company had managed to raise net proceeds of approximately HK$1,134 million (about RMB 898 million) (“Listing Proceeds”) pursuant to its listing on SEHK.

8.  At all material times, the 1^st to 3^rd Respondents (“R1” to “R3”) were directors and occupied senior positions in the Company and/or its subsidiaries. R1 and R2 are brothers; R3 is a cousin of R1 and R2. Together with Lam Kwok Keung (deceased, who was also a cousin of R1, R2 and R3), R1 to R3 were the founders of the Company (“Founders”).

9.  Chan was (i) the CFO of the Company between 30 June 2014 and 17 March 2017; and (ii) company secretary and authorized representative of the Company between 13 April 2015 and 6 October 2016.

10.  The Petition is centred on a number of undisclosed transactions involving the Company and 4 wholly-owned subsidiaries (“Group”), pursuant to which the Group provided deposit pledges in the total sum of about RMB 5,348.7 million (“Pledges”) :

(1)  3 of the Pledges were used as security for credit facilities extended to Fuguiniao Group Ltd (“Holdco”), a substantial shareholder of the Company which was owned by the Founders;

(2)  18 of the Pledges were executed in respect of 18 guarantee agreements entered into by 2 of the subsidiaries as security for credit facilities extended to 5 external parties with no apparent relationship with the Group other than such transactions;

(3)  66 Pledges were executed in respect of credit facilities granted by 9 banks to (i) the 5 external parties; (ii) Holdco; and (iii) 6 other external parties (again with no apparent relationship with the Group other than such transactions).

11.  Under the Pledges, RMB 1,788 million had been forfeited by the banks with the balance released.

12.  Notwithstanding discovery of possible deposit pledge agreements in mid-August 2016 by the Company’s auditors at the time, KPMG, and its letter to the Company’s Board dated 26 August 2016 notifying it of such discovery :

(1)  No mention of any of the Pledges was made in the Company’s announcements made on 26 August 2016 or 31 August 2016;

(2)  On 22 September 2016, the Company issued an announcement referring for the first time to the fact that “certain subsidiary of the Company might have provided certain guarantee for related/connected party(ies)”;

(3)  The Company did not disclose the full extent of the Pledges until around June 2018.

13.  The existence of any of the Pledges had not been disclosed in any of the Company’s Annual or Interim Reports published for the years 2013 to 2015. In the premises, such Annual and Interim Reports contained false and misleading statements as to the existence of any of the Pledges.

Chan’s duties and involvement

14.  By reason of his positions in the Company, Chan agrees that he owed the duties to :

(1)  exercise reasonable care, skill and diligence in respect of the financial affairs of the Group;

(2)  be familiar with, monitor and manage the financial affairs and accounts of the Group, including any material transactions, significant deposit pledges and/or guarantee arrangements entered into by the Group;

(3)  keep and maintain a proper system of record keeping in respect of the financial affairs and accounts of the Group;

(4)  take reasonable care in ensuring the accuracy of the consolidated financial accounts of the Company and the accuracy of statements in respect of the Group’s financial affairs as published in the Company’s annual reports, interim reports, announcements and other public disclosures;

(5)  take reasonable steps to verify the aforesaid statements, make independent enquiries and exercise independent judgment in respect of the Group’s financial affairs; and

(6)  take reasonable care in ensuring proper compliance by the Company of the Listing Rules and in ensuring accuracy of the Company’s reply to the SFC.

15.  It is agreed between the parties that Chan acted in breach of his duties in that :

(1)  Prior to KPMG’s discovery in August 2016, Chan did not have knowledge that any of the Pledges existed and/or that significant or any deposits of the Group had been pledged to various banks during his employment;

(2)  Chan failed to ensure or verify the accuracy of the consolidated financial statements, annual reports, interim reports and other announcements of the Company during his appointment;

(3)  Chan failed to ensure proper compliance by the Group with the Listing Rules and relevant disclosure requirements;

(4)  Chan failed to ascertain or verify whether deposits of the Group were subject to pledges with banks;

(5)  Chan assumed a limited role, failed to exercise independent judgment and failed to exercise due care and skill, in the preparation of the Company’s consolidated financial statements;

(6)  Chan was not familiar with and did not have oversight of the Company’s financial matters in the Mainland in abdication of his duties;

(7)  Chan failed to successfully monitor the financial affairs of the Group, including its material transactions, significant deposit pledges and/or guarantee arrangements;

(8)  Chan showed a serious lack of understanding of his role, responsibilities and duties as CFO of a listed company;

(9)  Even after KPMG first raised its concerns, Chan accepted the representations of R1 and/or the Founders without taking sufficient steps to verify the accuracy of the same or the existence of the Pledges notwithstanding that the Founders were in positions of conflict of interest; and

(10)  Chan failed to follow up on the matter even after the existence of some of the Pledges was revealed in an investigations report published by Elite Partners Risk Advisory Services on 17 November 2016.

Applicable principles

16.  There is no dispute that :

(1)  The Court is not bound by the parties’ agreement, and must be independently satisfied, based on the agreed facts, that the business and affairs of the company have been conducted in a manner which falls within one or more of the sub-paras under s.214(1) of the Ordinance. However, the Court may be guided by the agreement reached by the SFC (Re Long Success International (Holdings) Ltd [2021] HKCFI 624, [4]-[5]);

(2)  If s.214(1) is engaged, the Court has a discretion to make orders under s.214(2), including a disqualification order if it considers justified under s.214(2)(d). The relevant considerations are well-settled:

(a)  The relevant conduct involves a sufficiently serious failure to satisfy the respondent’s duties that some period of disqualification is justified and fair;

(b)  The purpose of imposing a disqualification is, first and foremost, protection of the public. Secondly, general deterrence;

(c)  In determining the period of disqualification, the Court will adopt a broad-brush approach. The period of disqualification must reflect the gravity of the conduct. A starting point of assessment may be fixed by reference to the gravity of the conduct, with a discount given for any mitigating factors;

(d)  There are starting points within brackets which had been identified by previous authorities as guidelines. The brackets are (i) over 10 years for particularly serious cases, (ii) below 5 years for relatively less serious cases, and (iii) between 6 and 10 years for cases in between;

(e)  The Court will have regard to a wider range of considerations including the age, state of health and character of the offender, the nature of the breaches, the honesty and competence of the offender, the length of time he has been in jeopardy, whether he appreciates and/or admits the breaches, his general conduct before and after the offence, the periods of disqualification of his co-directors that may have been ordered by other courts, and the interests of shareholders, creditors and employees.

See Re Long Success, [40]; Re First China Financial Network Holdings Ltd [2015] 5 HKLRD 530, [5]-[9]

Breach of s.214

17.  For the present purpose, Chan agrees that the business and affairs of the Company and the Group had been conducted in a manner as described under s.214(1)(b), (c) and (d) of the Ordinance. The correctness of the agreement is not open to doubt given the agreed facts before the Court.

Submissions of Chan

18.  Ms So, who appeared for Chan, highlighted the following aspects of this case (agreed by the SFC) :

(1)  There was deliberate concealment by senior management of the Company concerning the Pledges;

(2)  One or more of the banks involved with the Pledges had failed to make timely entries or upload information on such transactions on the credit search system of the People’s Bank of China, which would have enabled verification. Certain of the banks had failed to identify errors contained in banking confirmation requests specifically on the question of whether deposits had been pledged and even issued false banking confirmations on the existence of deposit pledges, such that there was failure to comply with PRC banking regulations;

(3)  Not even the combined efforts of KPMG and Elite Partners revealed the full extent of the Pledges. It was only in around June 2018 that the full picture was revealed.

19.  Ms So submitted that Chan’s involvement was relatively limited. There is no suggestion he was in any way involved in the execution of any of the Pledges. His liability rests on his failure to ascertain or verify the existence of the Pledges, and consequently failed to ensure the accuracy of the Company’s published information.

20.  There are a number of mitigating factors agreed between the parties, amongst which Ms So emphasised :

(1)  The objective fact of limitations on Chan which caused significant hindrance to his performance as CFO;

(2)  The hidden nature of the Pledges, facilitated by the conduct of the bank counterparties;

(3)  Chan actively assisted in the investigation of Guotai Junan Securities Co., Ltd (the trustee of corporate bonds issued by the Company), and in procuring the provision of banking confirmations by the relevant banks.

(4)  Chan has been cooperative in relation to these proceedings and accepts liability. He has adopted a reasonable course of action in agreeing to conclude these proceedings by way of Carecraft procedure, thereby saving time and costs;

(5)  Chan’s tragic personal circumstances, namely, the death of his 3 year old daughter in March 2022 during these proceedings.

21.  In respect of confining the second limb of prohibition to listed companies (see para 2(2) above), Ms So relies upon the dicta in Re Minth Group Ltd [2020] HKCFI 1457, [13] :

“…so long as the conduct in question is honest and not lacking in commercial integrity, even if the director falls short of the standard of competence which might be expected of a director of a publicly listed company, it does not necessarily follow that the director is unfit to be concerned in the management of any company, however small, private and simple its affairs may be”.

Appropriate length of disqualification

22.  The seriousness of these matters cannot be overstated. According to para 76 of the Statement, the entirety of the Listing Proceeds was transferred to the Mainland bank accounts of the Company and one of its subsidiaries between December 2013 and February 2014, ie, the transfer started very soon after the receipt of the Listing Proceeds by the Company. About 72% of the Listing Proceeds were then used as deposit pledge in favour of Holdco. Such use was contrary to the representations made in the listing prospectus, and the facts were concealed from the investing public.

23.  The Statement provided no specific detail about the remainder of the Listing Proceeds.

24.  Although Chan’s culpability may be said to be limited to gross negligence or incompetence, the Court should not overlook the fact that it is a bad case of such type. There is no excuse for a man occupying the important position of CFO of a listed company not to have discharged his duties to the Company so that the interest of the innocent investing public may be safeguarded.

25.  I take into account all that has been said by Ms So on behalf of Chan, who is 45 years old. Although I am inclined to the view that a period of 2 years of disqualification is very lenient, the Court should bear in mind that Chan, with his co-operative attitude, has shown real remorse for his failings. A shorter period of disqualification will give Chan an earlier opportunity to put this episode behind him and to start afresh. He should be given such an opportunity.

26.  For these reasons, I make the order sought in the draft order before the Court, save that “within 42 days from the date hereof” in para 2 be substituted with “on or before 6 March 2024”.

27.  Lastly, I am grateful to all counsel for their assistance.