LONGRUN TEA GROUP CO LTD v. THE STOCK EXCHANGE OF HONG KONG LTD

HCAL 3809/2019

[2021] HKCFI 1883

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTITUTIONAL AND ADMINISTRATIVE LAW LIST NO 3809 OF 2019

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J U D G M E N T

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A. Introduction

1.  The applicant (“Company”) has been listed on the Main Board of the putative respondent (“Exchange”) since 5 September 2002.

2.  By its decision dated 22 August 2019 (“LC Decision”), by the Listing Committee (“Listing Committee”) of the Exchange decided that the Company’s listing should be cancelled under Rule 6.01A of the Rules Governing the Listing of Securities on the SEHK (“Listing Rules”).

3.  By its decision dated 9 December 2019 (“Review Decision”), the Listing Review Committee (“LRC”) of the Exchange upheld the LC Decision.

4.  By an Amended Notice of Application in Form No 86 (“Form 86”), the Company seeks leave to apply for judicial review, so as to challenge the Review Decision.  The challenge is sought to be pursued on various grounds, including a constitutional challenge.

5.  I fixed a ‘rolled-up’ hearing, so that the application for leave to apply for judicial review and any substantive application for judicial review would be dealt with together.  The originally intended reasonably rapid disposal of the application was interrupted for various reasons.  Subsequently, although a date was then fixed for oral argument, I directed the matter to be resolved by way of paper submissions.

6.  Very full and helpful written submissions have been filed for the Company and the Exchange.  Mr Rimsky Yuen SC and Mr Byron Chiu are Counsel for the Company; Mr Victor Dawes SC and Mr Joshua Chan are Counsel for the Exchange.  I mean no disrespect to Counsel who drafted the submissions that I shall not rehearse every facet of the argument made by them, nor every reference to authority.  Instead, I shall attempt a more succinct – if not exactly short – Judgment.

7.  This is my Judgment.

8.  This Judgment is being handed down at the same time as my Decision in HCAL 2337/2020, [2021] HKCFI 1899.  This is because of some degree of overlap or inter-relationship in the matters raised by and falling for consideration in the two sets of proceedings.

B.     Background and Chronology

9.  The Company was incorporated in the Cayman Islands in May 2002, and has been listed since 5 September 2002.

10.  At all times material for present purposes, the Company’s executive directors were Dr Chiu Ka Leung (“Dr Chiu”), his younger brother Mr Jiao Shaoliang (“Mr Jiao”), Ms Yeh Shu Ping and Dr He William (aka Lu Pingguo).

11.  Dr Chiu is the largest shareholder of the Company, with a 55.51% interest.  Mr Jiao, Ms Yeh and Dr He hold 0.08%, 3.03% and 1.16% respectively.

12.  As its name might suggest, the Company has been engaged in a tea business in the PRC, essentially since acquiring the entire shareholding of what became its wholly-owned subsidiary (“YNLRT”) in around July 2009.  YNLRT sources and procures tea and tea-related products, for subsequent packaging, design, marketing and distribution.  Dr Chiu and Mr Jiao are executive directors of YNLRT.

13.  Shortly before being acquired by the Company, YNLRT entered into a purchase agreement (“Purchase Agreement”) with Yunnan Longrun Tea Group Ltd (“Supplier”).  The Supplier was (and remains) beneficially co-owned by Dr Chiu and Mr Jiao – respectively holding 97.06% and 2.94% shareholdings.

14.  The Purchase Agreement had a term of 10 years expiring on 12 May 2019, and gave YNLRT, as the sole customer of the Supplier, the exclusive right for that period to purchase tea and tea-related products manufactured by the Supplier for YNLRT’s onward sales and distribution.  The Company says this would generate sales revenue for YNLRT and in turn the Company.  While YNLRT was free to purchase tea from other suppliers, the Supplier was its dominant supplier.  For example, for the year ended 31 March 2019, the Company’s purchases from the Supplier made up 94% of its total purchases of tea.

15.  Mr Yuen emphasises that the facts that (a) the Supplier is the counterparty to the Company/YNLRT under the Purchase Agreement and (b) the transactions under the Purchase Agreement would constitute connected transactions by reason of Dr Chiu’s and Mr Jiao’s respective shareholdings in the Supplier, were known to and approved by the public and independent shareholders of the Company as well as the Exchange.

16.  On 15 June 2017, trading in the Company’s shares were suspended pending an inside information announcement arising from the discovery in May 2017 of certain audit issues (“Audit Issues”) raised by the Company’s then auditors Ernst & Young (“EY”), and as a result of which EY suspended its audit work for the financial year ended 31 March 2017, and publication of the Company’s 2017 financial results had to be delayed.

17.  The Audit Issues related to two of YNLRT’s bank accounts, namely:

 (1)  the balance of around RMB36,000 shown on the bank confirmation was about RMB 81.6 million less than the balance stated on the corresponding bank reconciliation statement; and

 (2)  the balance of around RMB56.1 million shown on a reconciliation statement of another bank account was inconsistent with the supporting documents and given by the Company’s management, which indicated that YNLRT had applied such funds to provide a loan of RMB56 million to another entity.

18.  Following the discovery of the Audit Issues, on 26 May 2017, EY wrote to the Company stating that EY needed to know what steps the board of directors, especially the audit committee, was going to take as part of the Group’s corporate governance measures, for investigating and resolving this significant matter.  EY advised the Company to engage an independent accounting firm to conduct an independent forensic investigation into the Audit issues.

19.  The Company chose not to follow that advice. Instead, the Company’s board of directors and audit committee resolved to remove EY as auditors and to appoint Baker Tilly Hong Kong Risk Assurance Ltd (“Baker Tilly”) to perform certain agreed upon procedures (“AUP”) in relation to the Audit Issues.  The decision for the appointment of Baker Tilly was made on 13 May 2017, shortly before trading in the Company’s shares was suspended.

20.  On 14 June 2017, EY wrote to the Company to put on record its view that the proposed AUP were too narrow in scope and would not provide sufficient evidence upon which EY could place reliance.  On 23 June 2017, the Company informed EY of its intention to terminate their services as auditors, and to appoint another firm in their place.  On 4 October 2017, EY was formally removed and replaced by Moore Stephens CPA Ltd (“Moore Stephens”).

21.  On 18 September 2017, the Listing Division imposed four resumption conditions, as follows:

 (1)  to address the Audit Issues (“RC1”);

 (2)  to publish all outstanding financial results and address any audit qualifications (“RC2”);

 (3)  to demonstrate that the Company had put in place adequate internal control systems to meet the obligations under the Listing Rules (“RC3”); and

 (4)  to inform the market of all material information (“RC5”).

22.  Subsequently, on 13 August 2018 and in the circumstances identified below, the Listing Division imposed a further resumption condition, requiring the Company to demonstrate that there was no reasonable regulatory concern about management integrity, and/or any persons with substantial influence over the Company’s management and operations, which would pose a risk to investors and damage market confidence (“RC4”).  (RC1 to RC5 together comprise the “Resumption Conditions”).

23.  Following the suspension of trading, the discovery was made that YNLRT had paid substantial sums of approaching RMB140 million to the Supplier, on the instructions of Dr Chiu and Mr Jiao, but without any board approval, shareholder approval or public announcement.  It is not in dispute that this involved serious breaches of the Listing Rules.

24.  The matter also gave rise to the Exchange’s concern (“Regulatory Concern”) about management integrity, and/or any persons with substantial influence over the Company’s management and operations, which would pose a risk to investors and damage market confidence.

25.  The Company sought to address the Regulatory Concern, and to explain the transfers, on the basis of an arrangement (“Arrangement”) involving (a) YNLRT, (b) the Supplier and (c) 萍鄉市時代工藝包裝有限公司 (“Borrower”), a Mainland Company, whose founder and legal representative was one Ms Xiong Jiang (“Ms Xiong”), a long-term personal acquaintance of Dr Chiu.  (I note that Mr Dawes would prefer the Borrower, Mr Yuen’s offered definition which I have used, to be defined as “Potential Purchaser”, but obviously the substance is more important than the label.)

26.  The Arrangement comprised two agreements both dated 1 September 2016:

 (1)  one agreement is a tea storage agreement (“Tea Storage Agreement”) made between the Borrower and the Supplier, under which (a) the Borrower would invest in ‘Longrun’ tea products for not less than RMB200 million, and (b) the Supplier agreed to store tea products purchased by the Borrower free of charge for two years from the date of the agreement; and

 (2)  the other agreement is a loan agreement (“Loan Agreement”) between the Borrower and YNLRT, under which YNLRT agreed to provide the Borrower with a six-month bridging loan of up to RMB140 million.  It was a term of the Loan Agreement that the Borrower would primarily use the loan to invest in ‘Longrun’ tea products.

27.  However, it is of significance that neither agreement imposed any obligation on the Borrower actually to purchase or take delivery of any tea products from YNLRT or the Supplier.

28.  Between September and December 2016, a total sum of RMB137,570,000 was advanced under the Loan Agreement.  However, the sums were advanced by YNLRT not to the Borrower, but directly to the Supplier.  The Supplier used the funds to repay certain bank loans.

29.  As Mr Dawes describes it, the net effect of the Arrangement was for YNLRT to provide a loan, of an amount representing over 76% of its cash balance, to the Supplier.

30.  Mr Yuen has sought to emphasise what he calls the ‘commercial underpinnings’ behind the Arrangement, as that is what provides the proper context in which the intended Grounds for review, as set out in the Form 86, are formulated and ought to be analysed.  Using a mix of the present and past tenses and the conditional, Mr Yuen says that the Company stands to benefit from the Arrangement in that:

 (1)  By reason of the Purchase Agreement, and pursuant to the Tea Storage Agreement, when the Borrower calls for delivery of the tea products, the Supply would be required to first sell the tea products to YNLRT before the same can be distributed and sold onwards by YNLRT to the Borrower.  This route of procurement and onward distribution conforms with all sales activities of the Company.

 (2)  As such, this would be booked under the sales revenue for YNLRT and in turn the Company in the same manner as the Company’s other sales revenue from tea business.

 (3)  YNLRT remitted the loan amount directly to the Supplier pursuant to the Loan Agreement.  This ensures that the loan amount is applied to the Borrower’s investment of tea products, and not used by the Borrower for other purposes.  This is akin to a variety of commonplace security arrangements where the funds are directly remitted by the lender to the counterparty to the borrower in the underlying transaction.

 (4)  In other words, it minimised the credit risk of the Borrower to be borne by the Company/YNLRT.  The need to have recourse to and seek recovery from the third party Borrower was likewise reduced.

 (5)  The Company/YNLRT would stand to benefit from the substantial interest payable under the Loan Agreement even if the Borrower ultimately decided not to proceed with the intended purchase of the ear-marked lots of ‘Longrun’ pu-er tea.

31.  However, what actually happened was that the Arrangement was eventually unwound in 2017 without any tea being purchased. The Borrower defaulted on repayment of the Loan when it matured in March 2017. On 17 April 2017, the Borrower and the Supplier signed an agreement to terminate the Tea Storage Agreement.  Thereafter, the Supplier refunded the Loan to the Borrower, and the Borrower repaid the Loan with interest to YNLRT in June 2017.

32.  On 17 November 2017, Baker Tilly produced its AUP Report.  The Company says that it considered the AUP Report and implemented remedial measures as recommended.  It also further engaged Baker Tilly to conduct a subsequent internal control review, which concluded that the Company had established effective internal control procedures.

33.  Having made enquiries, the Listing Division was concerned about the commercial rationale of the Arrangement and the management integrity of Dr Chiu and Mr Jiao.  Therefore, as stated above, it imposed the further resumption condition, RC4.

34.  Pursuant to Listing Rule 6.01A, the Company had to resume trading by 31 July 2019.  Though this was a longer period than the 18-month remedial period set out in Rule 6.01A, that was because of the transitional arrangements related to the fact that the Company’s shares were suspended from trading more than 12 months before that Rule came into effect.

35.  On 11 April 2019, the Company submitted its resumption proposal, later supplemented by a set of submissions dated 27 June 2019, provided in response to the Listing Division’s comments and queries.

36.  As to the Regulatory Concern, the Company submitted, amongst other things, that:

 (1)  the purpose of the Loan was to “lock in” the Borrower’s investment in tea products, and to avoid any possible change of mind whilst it waited to receive funding;

 (2)  the money constituting the Loan was advanced directly to the Supplier so that the Company/YNLRT could have more control over the money and to reduce risk;

 (3)  the Company’s failure to comply with the Listing Rule requirements for announcement and shareholder approval were because Dr Chiu and Mr Jiao overlooked the relevant requirements when approving the Arrangement;

 (4)  in any event, the Regulatory Concern could be addressed by a proposed arrangement under which (a) the existing directors of the Company would resign, and (b) Dr Chiu would sell his shares in the Company to an independent third party – it being stated that Dr Chiu and the prospective purchaser had entered into a memorandum of understanding in relation to the proposed sale.

37.  As to the inconsistencies in the bank balances of YNLRT, the Company’s explanation was that it was caused by the misconduct of two accounting staff, in that the staff effected a premature remittance of part of the Loan to the Borrower, and to cover up the mistake did not record the remittance in YNLRT’s accounts, thereby causing the inconsistencies.

38.  On 19 August 2019, the Listing Division informed the Company that it was not satisfied with the Company’s measures to comply with the resumption conditions and that it would be recommending to the Listing Committee that the Company’s listing be cancelled.

39.  On 22 August 2019, the Listing Committee considered the case.  On 23 August 2019, the LC Decision was made.  The Listing Committee’s reasons provided on 27 August 2019 simply provided a copy of the Listing Division’s Report with a statement that the Listing Committee agreed with the recommendation made.  As regards the Regulatory Concern, the Listing Division’s Report had submitted that:

 (1)  the Company’s assertions about the commercial rationale of the Loan Agreement were inconsistent with the fact that the Borrower was not bound by any contractual terms to pay for, or purchase, any tea products at all;

 (2)  the truthfulness of the Company’s claim that the remission of the Loan to the Supplier was intended to enable the Company to control the usage of the Loan was questionable, given that (a) the Supplier applied the Loan monies for its own purpose, and (b) since YNLRT had the exclusive right to purchase tea products from the Supplier, the Borrower would have paid the purchase price to YNLRT and not to the Supplier;

 (3)  the work done by Moore Stephens and Baker Tilly was not sufficient to address the concerns because:

 (a)  Moore Stephens did not have sufficient appropriate audit evidence to make a judgment on the commercial reasons for the Loan Agreement, and

 (b)  Baker Tilly was not tasked to conduct an independent forensic investigation, so that its findings were primarily based on representations made by the interviewees (namely Dr Chiu, Mr Jiao, the Company’s accounting managers, and the chairman of the Borrower) – which representations were not verified;

 (4)  there was a concern that the Tea Storage Agreement and the Loan Agreement were made to disguise the Company’s provision of financial assistance to Dr Chiu and Mr Jiao, particularly based on the observations that:

 (a)  the Loan was material to the Company, representing about 71% and 76% of its total bank and cash balance at the time; and

 (b)  there was reason to doubt the credibility of the assertion that the failures to comply with the announcement and shareholder approval requirements were due to mere oversight, as Dr Chiu and Mr Jiao had been the Company’s directors since its initial listing in 2002, and the Company had announced connected transactions in almost each of the recent years.

40.  Following a request for a review of the LC Decision, the LRC conducted a review hearing on 29 November 2019. The review hearing was conducted with the benefit of detailed written submissions (with appendices) and oral submissions, as well as the opportunity to respond to the LRC’s questions.

41.  On 9 December 2019, the LRC made the LRC Decision.

C.     The LRC Decision

42.  In the LRC Decision, the LRC gave the summary of its own analysis, expressly pointing out that it did not purport to set out exhaustively the facts or address all of the arguments presented.

43.  Having summarised the background facts, the Resumption Conditions, the applicable Listing Rules and guidance, the Company’s steps towards resumption, the Listing Department’s recommendation to the Listing Committee, the Listing Committee’s decision and the Further Submissions, the LRC expressed its views and decision as follows:

Listing Review Committee’s views

31.  The Listing Review Committee noted that, as a matter of fact, trading had not resumed by 31 July 2019.  Accordingly, the Company’s listing could be cancelled under Rule 6.01A.

32.  The Listing Review Committee considered further whether or not the Company had satisfied the resumption conditions.  The Listing Review Committee did not consider that the Regulatory Concern condition had been satisfactorily addressed. In particular, the Listing Review Committee was not satisfied with the explanation given by the Company regarding the Contractual Arrangement, and was not convinced of the commercial rationale for the arrangements relating to the loan.  The Listing Review Committee noted that the money paid under the Contractual Arrangement was transferred between two companies under the Chairman’s control, and there was evidence that the money, once transferred, was used for other purposes by the Supplier.  The Listing Review Committee noted that although the Company had instructed an investigation into the Audit Issues, the scope of that investigation (based on agreed upon procedures) gave less comfort than would have been the case had the Company followed the advice of its then auditors and arranged an independent audit investigation.

33.  The Listing Review Committee considered that the proposed sale was not a sufficient response to the Regulatory Concern issue as: (a) the sale had not been completed and it was uncertain whether it ever would be given it was only at a relatively preliminary stage; and/or (b) even if the sale were completed, the Listing Review Committee had doubts as to whether the Chairman would no longer be involved in the Company and its business, given his strongly professed preference not to sell, a doubt held by the Listing Review Committee over whether the proposed purchaser was truly arm’s length and independent, and the Chairman’s indications during the hearing as to how he expected the Company would be managed and operated after the sale.

34.  The Listing Review Committee was accordingly of the view that, as at least one of the resumption conditions (namely the Regulatory Concern condition) had not been satisfactorily addressed, and resumption of trading had, as a result, not taken place, the Company’s listing should be cancelled.

35.  As the findings above were determinative of the review, the Listing Review Committee did not consider it necessary to decide whether or not the Company had satisfied the other resumption conditions, or whether the Company did not or would not in the future satisfy the requirements of Rule 13.24.  The Listing Review Committee accordingly expresses no view on these issues.

Decision

36.  The Listing Review Committee therefore decided to uphold the Listing Committee’s decision that the Company’s listing should be cancelled under Rule 6.01A.

D.     Legal and Regulatory Framework

D.1    Overview of the Exchange’s Role

44.  It is necessary to set out in some detail the key provisions of the Listing Rules, and the policy objectives underpinning the delisting framework.  I have also canvassed the relevant statutory provisions and regulatory rules in [2021] HKCFI 1899, relying in part on the recent decisions of Chow J (as he then was) in Bolina Holding Co Ltd (in liquidation) v Stock Exchange of Hong Kong [2021] HKCFI 460 at §§16-42, and by me in Brightoil Petroleum (Holdings) Ltd v The Stock Exchange of Hong Kong Ltd [2020] HKCFI 1601 at §§46-55, 66-71 and 76-80.  With certain changes and additions, insofar as they are relevant to this particular case, the principles are canvassed here.

45.  The Exchange operates the stock market in Hong Kong pursuant to the Securities and Futures Ordinance Cap 571 (“SFO”), and acts as the frontline regulator of listed companies and their directors.

46.  Section 21 of the SFO imposes a duty on the Exchange to ensure, so far as reasonably practicable, an “orderly, informed and fair market”.  In discharging its duty, the Exchange is further required to act in the interest of the public, having particular regard to the interest of the investing public, and to ensure that the interest of the public prevails where it conflicts with the interest of the Exchange.

47.  Section 23 of the SFO empowers the Exchange to make rules for such matters as are necessary or desirable for the proper regulation and efficient operation of the stock market.  The Exchange is specifically authorised to make rules for, amongst other things: (1) the cancellation and withdrawal of the listing of, and the suspension and resumption of dealings in, securities listed on the recognized stock market operated by the Exchange; (2) the imposition on any person of obligations to observe specified standards of conduct, or to perform, or refrain from performing, specified acts reasonably imposed in connection with the listing or continued listing of securities; (3) procedures or conditions which may be imposed, or circumstances which are required to exist, in relation to matters which are provided for in the rule.

48.  The Listing Rules are made by the Exchange pursuant to section 23 of the SFO.  The Listing Rules impose requirements on listed companies and their directors to ensure that investors have and can maintain confidence in the market.  Each company listed on the Main Board of the Exchange must undertake to comply with the Listing Rules when the company submitted its application for listing.  The Listing Rules are to reflect currently acceptable standards, such that they may be amended by the Exchange from time to time, subject to the approval of the SFC.  Further, the Listing Rules are not exhaustive, and the Exchange may impose additional requirements or make listing subject to special conditions whenever it considers it appropriate.

D.2    Suitability for Listing

49.  The Listing Rules provides that, in order to be listed on the Main Board of the Exchange, issuers must be suitable for listing (Rules 2.03 and 8.04).  The Listing Rules set out certain specific requirements which must be met in order for a new applicant to be qualified for listing.

50.  Suitability for listing is not, however, simply a matter of compliance with quantitative requirements; it also involves a qualitative assessment of the new applicant by the Exchange.  Thus, Rule 2.06 states:

Suitability for listing depends on many factors. Applicants for listing should appreciate that compliance with the Exchange Listing Rules may not of itself ensure an applicant’s suitability for listing. The Exchange retains a discretion to accept or reject applications and in reaching their decision will pay particular regard to the general principles outlined in rule 2.03. Prospective issuers (including listed issuers) are therefore encouraged to contact the Exchange to seek informal and confidential guidance as to the eligibility of a proposed application for listing at the earliest possible opportunity.

51.  Once a new applicant is listed and becomes a listed issuer, it must continue to be suitable for listing in order to maintain its listing status.

52.  When applying for listing status, the applicant must submit a particular Form A1, containing an undertaking on the part of the applicant, amongst other things, to comply at all times with all the requirements of the Listing rules from time to time in force for so long as any of its securities are listed on the Main Board of the Exchange.

D.3    Suspension of Trading under the Listing Rules

53.  Where the Exchange considers it necessary for the protection of investors or the maintenance of an orderly market, the Exchange is empowered by the Listing Rules to suspend trading in, and cancel the listing of, a listed issuer’s securities in such circumstances and subject to such conditions as the Exchange thinks fit.  The Exchange may also suspend trading in, and cancel the listing of, a listed issuer’s securities where the Exchange considers that the issuer does not carry on a business as required under Rule 13.24, or the issuer or its business is no longer suitable for listing.

54.  Rule 6.01 states as follows:

Listing is always granted subject to the condition that where the Exchange considers it necessary for the protection of the investor or the maintenance of an orderly market, it may at any time direct a trading halt or suspend dealings in any securities or cancel the listing of any securities in such circumstances and subject to such conditions as it thinks fit, whether requested by the issuer or not. The Exchange may also do so where:

(2)  the Exchange considers there are insufficient securities in the hands of the public (see rule 8.08(1)); or

(3)  the Exchange considers that the issuer does not carry on a business as required under rule 13.24; or

(4)  the Exchange considers that the issuer or its business is no longer suitable for listing.

55.  Rules 6.04 and 6.05 further provide that the procedure for lifting suspension will depend on the circumstances and the Exchange reserves the right to impose such conditions as it considers appropriate.  It is also stated as follows:

The continuation of a suspension for a prolonged period without the issuer taking adequate action to obtain restoration of listing may lead to the SEHK cancelling the listing.

D.4    Delisting of Long-Suspended Issuers

56.  In the period leading up to September 2017, prolonged suspensions of trading became a significant issue for the Exchange. The then delisting procedures did not facilitate prompt action to delist long-suspended issuers, with the consequence that there had built up a very large number of issuers whose shares had been suspended for more than a year, with no certainty as to when the suspension would be lifted or the issuer delisted (because, for example, the issuer’s financial position remained uncertain and the Exchange did not have a clear basis for delisting under Rule 6.01).  This was thought to prevent proper functioning of the market, and to undermine the quality of the market and its reputation, as well as undermining the objective of maintaining a fair, orderly and informed market.

57.  In September 2017, the Exchange commenced a market consultation exercise on the introduction of a prescribed period for issuers to resolve issues which had led to a suspension and to satisfy any resumption conditions imposed by the Exchange, failing which the issuers would be delisted.  The purpose of the proposed rule amendments and the objectives of the consultation were set out in the “Consultation Paper – Delisting and Other Rule Amendments” published by the Exchange in September 2017:

5.  As at 30 June 2017, there were 56 issuers whose securities had been suspended for three months or more. They included 25 issuers that did not have sufficient operations or assets of sufficient value to meet the continued listing criteria (PN17 companies), 3 issuers that did not have sufficient public float, and 28 issuers that failed to announce financial results and/or inside information (a majority of which had alleged accounting irregularities or corporate misconduct issues). 40 issuers had been suspended for over a year.

6.  Whilst trading suspension gives an issuer the opportunity to remedy the issues causing the suspension with a view towards trading resumption, a prolonged suspension prevents the proper functioning of the market.

7.  In 2015, the Listing Committee reviewed the delisting policy and considered it necessary to adopt a more robust delisting policy in the interest of maintaining the reputation of the Hong Kong market. The existence of long suspended issuers in persistent breach of the Rules in a material manner, or suspected of illegal or improper activities, undermines the quality of our market and its reputation. A robust delisting policy with an effective delisting procedure will facilitate an orderly exit of poor quality issuers, incentivize suspended issuers to act promptly towards resumption and provide a deterrent effect against issuers committing material breaches of the Rules. This will also provide more certainty to the market on how the Exchange handles suspended issuers and brings its practice more in line with other major markets.

8.  This paper proposes Listing Rule amendments to improve the effectiveness of the delisting framework applicable to Main Board issuers and GEM issuers (Chapter 2)…

58.  After the consultation, the Exchange decided to implement the proposal (with minor modifications in response to market comments).  In particular, the Exchange resolved (a) to add a separate delisting criterion to allow the Exchange to delist an issuer after its continuous suspension for a prescribed period; and (b) to allow the Exchange to publish a delisting notice and give the issuer a period of time to remedy the issues or be delisted.  For issuers whose securities are listed on the Main Board, the prescribed period is 18 months.

59.  The Exchange’s rationale for the 18-month period (called the prescribed remedial period) for an issuer whose securities are listed on the Main Board to comply with the resumption conditions imposed by the Exchange, and the intention that the period would only be extended in exceptional circumstances, are explained in §§23-25 of the Exchange’s “Consultation Conclusions: Delisting and Other Rule Amendments” (“DORA Consultation Conclusions”) published on 25 May 2018:

23.  As noted in the Consultation Paper, the fixed period delisting criterion is aimed at delisting issuers which remain unable to resolve the issues requiring their suspensions after a continuous period of suspension. It would give suspended issuers a clear deadline, incentivizing them to look into the issues and to develop a viable action plan to ensure that it will have remedied the relevant issues to the Exchange’s satisfaction and resumed trading before the end of the prescribed fixed period.

24.  With this additional criterion, the Exchange will be able to delist an issuer where it does not have a clear basis to do so under MB Rule 6.01. This will provide certainty for the delisting process and address the issue of prolonged suspension in the interests of market quality and reputation, while reasonable opportunities are given to suspended issuers to take remedial actions with a view to resuming trading.

25.  The Listing Committee may only extend the prescribed fixed period in exceptional circumstances to ensure the effectiveness and credibility of the delisting framework and prevent undue delay of the delisting process. It may do so where an issuer has substantially implemented the steps that, it has shown with sufficient certainty, will lead to resumption but, due to factors outside its control, it becomes unable to meet its planned timeframe and requires a short extension of time to finalize the matters. Guidance on the circumstances when an extension of time may be given is set out in the new Guidance Letter on Long Suspension and Delisting, which is published together with this consultation conclusions paper.

60.  It was also considered appropriate that there may be cases where an issuer may be delisted, even though the listed issuer is taking steps to facilitate resumption.  The Exchange also made it clear that the new delisting framework was not intended to promote resumption of trading.  Instead, it was intended to be an effective delisting framework to enable the Exchange to meet its statutory obligation to maintain a fair, orderly and informed market for the trading of securities, by delisting issuers that no longer meet the continuing listing criteria in a timely manner, incentivizing suspended issuers to act promptly towards resumption and deterring issuers from committing material Rule breaches (see §28 of the DORA Consultation Conclusions).

61.  On 1 August 2018, the Exchange introduced Rule 6.01A(1), which Mr Dawes described as the ‘cornerstone’ provision of the new regime.  It states as follows:

Without prejudice to its power under rule 6.01, the Exchange may cancel the listing of any securities that have been suspended from trading for a continuous period of 18 months.

62.  The Exchange also published a Guidance Letter (HKEX-GL95-18) in May 2018, which has since been updated in September 2019, on the subject of ‘Guidance on long suspension and delisting’ (“GL95-18”).  That document provides guidance to long suspended issuers on the operation of the amended delisting Rules, their general obligations and the Exchange’s regulatory actions during the resumption process.  GL95-18 makes clear that the Exchange’s powers under Rule 6.01A(1) may be exercised without prejudice to the rights under Rules 6.01 and 6.10.  The following provisions are of particular relevance (bold in original):

8.  The objective of the amended delisting Rules is to keep the necessary trading suspension to the minimum, by facilitating timely delisting of issuers that no longer meet the continuing listing criteria. This, in turn, provides certainty to the market on the delisting process. The delisting Rules are also aimed at incentivizing suspended issuers to act promptly towards resumption and deterring issuers from committing material breaches of the Rules.

…

12.  Under the Rules, the Exchange would cancel the listing of a long suspended issuer upon the expiry of the remedial period (prescribed or specific) if the issuer has not remedied the issues causing the suspension and re-complied with the Rules. This remedial period sets a deadline referenced to the resolution of the relevant issues and resumption of trading, as opposed to submission of a resumption proposal as in the previous regime.

13.  Accordingly, the issuer must devise its own resumption plan setting out the actions that it considers appropriate to remedy the issues, announce such resumption plan, work according to that plan, and announce regular updates on its resumption progress and business developments. Based on these announcements, the Exchange will monitor the issuer’s resumption status and, where appropriate, give guidance to the issuer. While the Exchange may give guidance to assist the issuer, it is the issuer’s primary responsibility to devise its own resumption plan in order to ensure that it will remedy the relevant issues and re-comply with the Rules before the end of the remedial period to avoid delisting. The issuer may also consult the Exchange at any stage. When the issuer considers that it has remedied the issues and re-complied with the Rules, it must then seek a confirmation from the Exchange that this is the case. Trading will resume after the Exchange gives the confirmation.

14.  In light of the above, the steps that a suspended issuer should take include:

(a)  promptly after trading is suspended, review the matter giving rise to the suspension and identify the relevant issues;

(b)  devise a resumption plan with actions that it intends to take to remedy the issues and re-comply with the Rules. The resumption plan should be accompanied with a clear timeframe in respect of each stage of work under the plan to ensure that the relevant issues can be remedied and the Rules can be re-complied as soon as practicable and, in any event, before the remedial period ends. The timeframe should take into account not only the time required by it to implement the resumption plan, but the time that may be reasonably required by the Exchange to be satisfied that the issues have been remedied and the Rules re-complied;

(c)  work diligently towards resumption in accordance with the resumption plan.  In case of any delay, it should promptly assess its impact and make appropriate adjustments to the timetable but, in any event, continue to ensure trading to resume before the remedial period ends;

(d)  timely announce the resumption plan and its timetable, any material change in the plan and timetable, and any material developments to the fulfilment of the resumption conditions/guidance (for example, the outcome of any forensic investigation or internal control review);

…

(i)  where it considers that it has remedied the issues and re-complied with the Rules, seek the Exchange’s confirmation that this is the case.  It must ensure that it provides the Exchange with sufficient information to properly assess the situation, avoiding the risk of the Exchange not being satisfied with the issuer’s position for lack of information.  When seeking the Exchange’s confirmation, the issuer should also provide the Exchange with a draft resumption announcement for pre-vetting.

15.  Trading can resume only after the Exchange has confirmed that the issuer has remedied the issues and re-complied with the rules to its satisfaction.  Before such confirmation is given, the issuer must state in each of its announcements that trading will remain suspended with an explanation of the reasons for the continued suspension.

16.  During a suspended issuer’s remedial period, the Exchange will:

(a)  issue resumption conditions/guidance to the issuer, setting out the requirements that the issuer must have fulfilled before trading can resume. These conditions/guidance are primarily based on the issuer’s announcement(s) about the matter giving rise to the suspension and the issues identified by the issuer, and are generally issued within the first three months of the suspension of trading. The Exchange may revise these resumption conditions/guidance from time to time as the issuer’s circumstances change (for example, a suspended issuer subsequently found to be involved in fraudulent activities will be required to conduct a forensic investigation);

…

17.  The Exchange will respond to a suspended issuer’s request for confirmation about its resumption status … or guidance as soon as practicable, and generally not more than 10 business days after receipt of the issuer’s written request and the relevant information.

18.  If the issuer fails to fulfil the resumption conditions/guidance before the remedial period ends, the Listing Department will take the matter to the Listing Committee for consideration and recommend the Listing Committee to delist the issuer.

19.  To ensure the effectiveness and credibility of the delisting framework and prevent undue delay of the delisting process, the Listing Committee may only extend the remedial period in exceptional circumstances. It may do so where:

(a)  an issuer has substantially implemented the steps that, it has shown sufficient certainty, will lead to resumption of trading; but

(b)  due to factors outside its control, it becomes unable to meet its planned timeframe and requires a short extension of time to finalize the matters. The factors outside the issuer’s control are generally expected to be procedural in nature only.

This may happen where, for example, an A1 application has been approved by the Exchange but, due to a delay in the court hearing for approving a scheme of arrangement, the issuer requires additional time to implement the relevant transactions. The Exchange envisages that if an extension of time is given on the expiry of the remedial period, the Listing Committee would not normally extend the remedial period for a second time.

63.  It seems to me that the approach to delisting in cases of long suspended issuers as set out in GL95-18 can be summarised as follows:

 (1)  First, the Exchange will generally cancel the listing of a long suspended issuer upon the expiry of the remedial period if the issuer has not remedied the issues leading to suspension.  The remedial period sets a deadline for resolution of the relevant issues and resumption of trading, as opposed to submission of a resumption proposal.

 (2)  Second, the issuer bears the responsibility to devise its own resumption plan, accompanied with a clear timeframe in respect of each stage of work to ensure that the relevant issues can be remedied before the end of the remedial period.

 (3)  Third, the issuer bears the responsibility to assess the impact of any delay, and to make appropriate adjustments to the timetable, nevertheless to ensure trading to resume before the end of the remedial period.

 (4)  Fourth, the issuer may consult the Exchange at any stage, and in particular when it considers it has remedied the issues and re-complied with the Rules.  In such circumstances, the Exchange will swiftly respond to a request for consultation or confirmation that the remedy has been achieved.

 (5)  Fifth, a failure by the issuer to fulfil the resumption conditions/guidance before the remedial period ends will result in a recommendation to the Listing Committee to delist the issuer.

 (6)  Sixth, to ensure the effectiveness and credibility of the delisting framework and prevent undue delay of the delisting process, the Listing Committee may only extend the remedial period in “exceptional circumstances”.  It may do so where:

 (a)  an issuer has substantially implemented the steps that, it has shown with sufficient certainty, will lead to resumption of trading, but

 (b)  due to factors outside its control, it becomes unable to meet its planned timeframe and requires a short extension of time to finalise the matters.  The factors outside the issuer’s control are generally expected to be procedural in nature only.

 (7)  Seventh, the Exchange envisages that if an extension of time is given on the expiry of the remedial period, the Listing Committee would not normally extend the remedial period for a second time.

64.  Whether the circumstances are “exceptional” for the purpose of extending the remedial period is primarily a matter for the Exchange, not the court, to decide.

65.  In cases where trading a suspended because an issuer fails to announce periodic financial results or inside information due to accounting irregularities or weaknesses in internal controls, there could be serious issues about the accuracy and credibility of its published financial statements and the integrity of its management.  In such a case, the issuer would ordinarily be expected to satisfy the Exchange that there is no reasonable regulatory concern about management integrity which may pose a risk to shareholders and investors or damage market confidence, and steps should be taken to address the concerns: see GL95-18 at §§32 and 34.

D.5    The Exchange’s Decision-Making Process

66.  Rule 2A.01 provides that the Board of the Exchange has arranged for all of its powers and functions in respect of all listing matters to be discharged by the Listing Committee and/or its delegates, subject to the review procedure set out in the Listing Rules.

67.  Rule 2A.17 provides that the Listing Committee shall consist of 28 members or such greater number as the Board of the Exchange may from time to time agree, comprising at least 8 individuals who represent the interests of investors, 19 individuals who will be a suitable balance of representatives of listed issuers and market practitioners including lawyers, accountants, corporate finance advisers and Exchange Participants or officers of Exchange Participants, with the Chief Executive of the Hong Kong Exchanges and Clearing Limited acting as ex officio non-voting member.  The composition of the Listing Committee is intended to ensure that it is made up of persons who are independent and have specialist expertise in relation to listing-related matters including business, accounting, finance and legal/regulatory aspects, and are well placed to determine currently acceptable standards in the market place.

68.  The Listing Committee, whose members serve on a part-time basis and only meet to make decisions periodically, delegates the day-to-day administration of the Listing Rules to the Listing Division, which is made up of full-time employees of the Exchange.  Subject to certain specific exceptions (eg the power to cancel the listing of a listed issuer), the Listing Committee has arranged for most of its powers under the Listing Rules to be discharged by the Listing Division in the first instance (Rule 2A.02). The Listing Division will also interpret, administer and enforce the Listing Rules subject to the review procedures set out in Chapters 2A and 2B of the Listing Rules.

69.  Under Rule 2A.08, the Listing Committee has reserved to itself the power to cancel the listing of a listed issuer.  It is the first instance decision-maker in respect of all cancellation decisions.  Rule 2A.08 provides as follows:

The Listing Committee has reserved to itself the power to cancel the listing of a listed issuer. This means that a listed issuer will not have its listing cancelled unless the Listing Committee has considered the matter.

70.  Rule 2A.27 of the Listing Rules provides for the functions and powers of the Listing Committee as follows:

The Listing Committee shall exercise all the powers and functions of the Board in relation to all listing matters. The Listing Committee’s exercise of such powers and functions is only subject to the powers of review in the Listing Review Committee.

71.  Rule 2A.28 of the Listing Rules provides for the conduct of meetings of the Listing Committee as follows:

The Listing Committee shall meet for the despatch of business, adjourn and otherwise regulate its meetings in accordance with the provisions of the rules made by the Board for this purpose, including rules governing members’ conflicts of interest, subject to the provisions of this rule 2A.28. The quorum necessary for the transaction of any business by the Listing Committee shall be five members present in person. The Chief Executive of the HKEC will not attend meetings of the Listing Committee at which the Listing Committee is determining a matter in the first instance or on review.

D.6    Possible Review

72.  The Listing Rules, however, provide for a process of review.  Rule 2B.06 of the Listing Rules provides:

(1)  Where the Listing Division [ie. the Listing Department] makes a decision on the listed issuer, the listed issuer may request the decision be referred to the Listing Committee for a review by the Listing Committee.

(2)  Subject to rule 2B.04, where the Listing Committee endorses, modifies or varies the Listing Division’s decision or makes its own decision, the listed issuer may request the decision be referred to the Listing Review Committee for a further and final review.

(3)  Subject to rule 2B.16, the decision of the Listing Division or the Listing Committee, as the case may be, shall be conclusive and binding on the listed issuer if the listed issuer does not seek review of the decision of the Listing Division or the Listing Committee, as the case may be; otherwise, the decision of the Listing Review Committee shall be conclusive and binding on the listed issuer.

73.  In August 2018, the Exchange published a consultation paper on proposals to enhance governance within the Exchange’s structure for reviewing Listing Committee decisions and to promote transparency, accountability and consistency in decision-making.  Following the conclusion of the consultation period, and its consideration of market feedback, the Exchange published its ‘Consultation Conclusions: Review Structure in Relation to Listing Committee Decisions’ (“RS Consultation Conclusions”).

74.  The major changes proposed to be adopted included revision of the then extant review structure so that decisions of “material significance” made by the Listing Committee would be subject to only one level of review.  That review would be by an independent review committee – the LRC – consisting entirely of outside market participants with no current Listing Committee members or representatives of the SFC or the Exchange.  The RS Consultation Conclusions included that:

47.  … All review hearings of the new Listing Review Committee will take the form of a hearing de novo.  The Listing Review Committee will rehear the case and decided afresh, after considering all the relevant evidence and arguments made at the earlier hearings and any additional evidence or information which may be adduced in accordance with the procedures and regulations for review hearings and any directions made by the Listing Review Committee.  The Listing Review Committee will consider the decision of the previous decision making body and state the reasons for its own decision.  The Listing Review Committee will also address the prior decision (and the basis therefor) in its own decision, whether it is upholding or overturning that prior decision.

75.  The relevant parts of the Listing Rules were amended accordingly in July 2019.

76.  Under Rule 2A.37A, the LRC shall consist of 20 members or such greater number of members as the Board may from time to time agree.

77.  Under Rule 2A.37B, the LRC shall comprise: (1) at least six individuals who represent the interest of investors; and (2) the remaining members who represent a suitable balance of representatives of listed issuers and market practitioners, including lawyers, accountants, corporate finance advisers and Exchange Participants (or their officers), and who have experience and expertise in Listing Rule matters, or are familiar with the work of the Listing Committee.  No current Listing Committee members or representatives of the SFC or Hong Kong Exchanges and Clearing Limited shall be members of the Listing Review Committee.

78.  Rule 2A.37K of the Listing Rules provides for the function and powers of the LRC as being the review body in respect of any decision of the Listing Committee.

79.  Rule 2A.37L provides for the conduct of meetings of the LRC as follows:

The Listing Review Committee shall meet for the despatch of business, adjourn and otherwise regulate its meetings in accordance with the provisions of the rules made by the Board for this purpose, including rules governing members’ conflicts of interest, subject to the provisions of this rule 2A.37L. The quorum necessary for the transaction of any business of the Listing Review Committee shall be five members present in person. All review hearing shall be heard de novo. The Listing Review Committee will rehear the case and decide it afresh, after considering all the relevant evidence and arguments made at the earlier hearings and any additional evidence or information which may be adduced in accordance with the procedures and regulations for review hearings and any directions made by the Listing Review Committee. The Listing Review Committee will consider the decision of the previous decision making body and state the reasons for its own decision. The Listing Review Committee will also address the prior decision (and the basis therefor) in its own decision, whether it is upholding or overturning that prior decision.

D.7    Overview of Regime

80.  Hence, the Listing Rules are intended to be administered primarily by the Listing Committee, which is made up of investors and representatives of listed companies and market practitioners, who are well-placed with their relevant knowledge and experience to determine currently acceptable standards in the marketplace.  Those members act on a part-time basis and meet only periodically to make decisions.  The day-to-day administration is delegated to the Listing Division, which is made up of full-time employees of the Exchange.  But in certain cases of significant decision, such as regarding possible cancellation of listing status, the Listing Committee has reserved to itself the relevant power.

81.  In exercising that power, the Listing Committee considers and decides matters administratively, without conducting an adversarial hearing.  This assists in promoting an effective and expeditious determination of whether a listing should be cancelled.  But, the non-adversarial and administrative nature of the Listing Committee’s process is subject to the safeguard of a de novo adversarial hearing on the merits by the LRC.  Should the listed issuer require such a form of hearing, it may request one.

82.  That request will be met by the review process. There will be an oral hearing, and the listed issuer is entitled to attend the hearing and to make written and oral submissions.  Whatever decision is made by the LRC will supersede the previous decision by the Listing Committee.  Upon request, the LRC will provide written reasons for its decisions.

83.  This approach (with one level of review) strikes a fair balance between administrative efficiency and fairness.  However, if the LRC were to make a decision in breach of administrative law requirements for fairness and procedural propriety, such decision might be amenable to judicial review.  Whilst the Court is not tasked with the merits of delisting decisions, it remains open to act in a supervisory role to ensure the integrity of the decision-making process.

84.  In that regard, Mr Yuen emphasises that when considering the crucial question of (a) whether the trading of shares of a listed company should be allowed to resume, and relatedly (b) whether the listing status of that listed company should be cancelled by virtue of the non-resumption of trading, the Exchange – in particular, the Listing Committee and the LRC – should adopt a holistic and balanced approach by considering the interest of all the relevant stakeholders.  Further, Mr Yuen says that the Listing Rules and any relevant Guidance Letter should not be construed or applied mechanistically.

85.  In so far as those submissions suggest that each particular decision should turn on the individual circumstances of the particular case, and that those circumstances should be considered and balanced by the decision-maker, I agree.  On the other hand, it is also trite that in the absence of statutory prescription, the factors to be taken into account and the scope of the investigation required are matters for the regulator to decide, subject only to the possibility of challenge on Wednesbury grounds.

E.     Overview of Intended Challenge

86.  In his summary of the intended Grounds for review, the detail of which is to be found in the Form 86 and the evidence filed in support of it, Mr Yuen submitted that:

 (1)  First, the LRC has failed properly to exercise and/or has unduly fettered its discretion in coming to the LRC Decision and/or has failed to ask the correct question that should have been asked.  In particular, when considering whether the Company’s listing should be cancelled, the LRC has failed to consider all the relevant circumstances, and instead placed undue (if not overriding) emphasis on RC4 (“Ground 1”).

 (2)  Second, RC4 is unlawful in the public law sense.  It is not sufficiently clear, certain and/or well-defined and falls short of legal certainty.  The LRC failed to take this into account and placed undue (if not overriding) emphasis on whether the Company fulfilled RC4 (“Ground 2(1)”).

 (3)  Third, the LRC erred in misconstruing the elements of RC4 and consequentially failed to ask the right questions when considering whether the Company had fulfilled RC4 (“Ground 2(2)”).

 (4)  Fourth, the LRC has erred in law and/or on the facts in considering, and also in its consideration of, the commercial rationale of the Arrangement, this being the genesis of the majority of the Listing Division’s complaints leading to suspension of trading of the Company’s shares, and consequently the LC Decision and the LRC Decision (“Ground 3”).

 (5)  Fifth, the LRC has failed to give adequate reasons in the LRC Decision (“Ground 4”).

 (6)  Six, the LRC decision is unreasonable in the public law sense (“Ground 5”).

87.  As Mr Yuen recognised, these grounds are to an extent inter-related, and he invited the Court to take an overall view. Though he put it at greater length, the core of his suggested overall view was that: (1) the LRC failed to ask the correct question, and so missed the overall picture; (2) that resulted in the over-emphasis on the importance of the commercial rationale of the Arrangement; at the same time as (3) failing to appreciate that RC4 is unlawful in the public law sense; so that (4) the LRC improperly substituted its own judgment for the management’s assessment, when there was no basis to reject the commercial rationale as explained by the Company; and therefore (5) viewed from any angle, the LRC Decision is unreasonable in the public law sense.

88.  Mr Yuen also made the preliminary submission that the genesis of the suspension of trading of the Company shares arose out of the Audit Issues, and the regulatory focus thereafter was on the purported cause of the Audit Issues.  However, Mr Yuen submitted:

 (1)  The Audit Issues did not involve any allegation against the integrity of the Company’s board of directors and, as confirmed by the AUP Report, the genuineness or good faith of the underlying commercial transactions were not called into question.

 (2)  The Audit Issues were not caused by the Arrangement, but by the intentional misconduct and deliberate concealment of two accounting staff.

 (3)  The LRC failed to address the correct or relevant issues that (a) the Arrangement made ‘perfect commercial sense’ and was an important step to extend the business model of the Company, (b) the Borrower eventually withdrew from the intended purchase through no fault on the part of the Company, whose commercial interest was adequately protected by the Arrangement, and (c) thus, it cannot be seriously suggested or insinuated that there is any impropriety or lack of management integrity on the Company’s or the directors’ part in devising or executing the Arrangement.

89.  It will not go unnoticed that, though put forward as identifying a fundamental misunderstanding of the material events justifying the submission that there was unreasonableness in the public law sense, those points read rather like complaints about the underlying merits of the LRC Decision.  In his reply submissions, Mr Yuen has emphasised that the Company fully appreciates the nature of this application, and has confined itself to conventional and permissible grounds of judicial review.  But, it seems to me that there is some force in Mr Dawes’ submission that many of the intended Grounds for review are either disguised or explicit attempts to challenge the merits of the LRC’s view that the Regulatory Concern had not been satisfied.

F.   Ground 1

90.  Mr Yuen submitted that it is trite that the LRC ought to have asked the right question and taken reasonable steps to acquaint itself with the relevant information to enable it to answer the question correctly.  If a public body or tribunal asks itself the wrong question, the decision would be flawed on the ground of illegality.  As authority in support of those propositions, Mr Yuen cited Secretary of State for Education and Science v Tameside Metropolitan Borough Council [1977] AC 1014 at 1065B, and R v Secretary of State for the Home Department, ex p Launder [1997] 1WLR 839 at 858E.

91.  Mr Yuen submitted that the correct ‘broad or overall question’ – as he put it, and which he defined as the “Cancellation Question” – that had to be asked and answered by the LRC was whether the Company’s listing should be cancelled, having regard to all relevant considerations including the relevant matters set out in Rules 6.01(2) to (4) and all the Resumption Conditions.

92.  However, instead, the LRC failed properly to exercise and/or unduly fettered its discretion and/or failed to ask the correct question, and failed to take account of or consider all the relevant circumstances.  Rather, it placed undue (if not overriding) emphasis on whether RC4 was fulfilled.  Further, the LRC did not give reasons for its narrow and mechanistic approach, but simply stated that the non-fulfilment of RC4 was “determinative of the review”.  Mr Yuen submitted this is important when there is nothing in the Listing Rules which mandate the disjunctive consideration of the Resumption Conditions, such that failure of any one of them would lead to the cancellation of the sting without more.

93.  Further, Mr Yuen submitted, even if the LRC could legitimately take the view that the Company had failed to fulfil RC4, there remained the questions of (a) the seriousness of such failure, (b) how such failure would impact upon the overall consideration, and (c) what is the overall assessment when considering the Company’s performance in respect of all the Resumption Conditions.  Mr Yuen submitted that the LRC’s failure to take into account all relevant considerations, including the fulfilment of RC1, RC2, RC3, and RC5, and the adequacy of the whole of the Resumption Proposal submitted, render the LRC Decision unlawful and unreasonable, in the public law sense.

94.  I disagree.  First, by reference to the suggested remaining questions in the previous paragraph, there plainly was not the suggested failure.  The finding of the failure to fulfil RC4 and the statement that that failure was “determinative” identified that the LRC plainly (a) considered the failure to be serious, (b) and of such seriousness that it would impact the overall consideration, and (c) the assessment of the overall impact on the consideration was that it would be determinative.  In other words, the LRC formed and made clear its view that compliance with RC1, RC2, RC3 and RC5 and the other aspects of the resumption proposal were insufficient to over-balance the failure to have complied with RC4.

95.  Further, whilst it is obviously a correct principle of administrative law that a decision-maker has a duty not to act in a manner which is unreasonable or irrational in the Wednesbury sense, it is also settled that, apart from considerations identified in any relevant legislation as those which must or must not be taken into account, the relevancy of any particular consideration is for the decision-maker, and not for the court, to decide: see, for example, China Trends Holdings Ltd v Stock Exchange of Hong Kong Ltd [2020] HKCFI 3045 at §45, a decision upheld on appeal yesterday, [2021] HKCA 980.  Further, the weight to be given to any particular factor is a matter for the decision-maker, not the court.

96.  There is also nothing at all in the suggestion that the LRC failed to ask itself the Cancellation Question.  Obviously, that was the question that the LRC was addressing on the requested review from the LC Decision, which specifically addressed the question as to whether or not the listing status of the Company should be cancelled.  In the context of answering that question, it was obviously relevant to consider whether the Regulatory Concern had been satisfactorily addressed within the remedial period.  In fact, in one of the introductory paragraphs in the LRC Decision, before identifying its reasoning, the LRC makes clear that it was addressing the correct question and on the correct basis, almost exactly in the terms Mr Yuen submitted it should have – see §91 above –  because it stated:

Having carefully considered all the facts and evidence, and all the submissions (written and oral) presented by the Company and the Listing Department, the Listing Review Committee decided that the Company’s listing should be cancelled under Rule 6.01A.

97.  I agree with Mr Dawes that the real substance of the challenge is the contention that the LRC acted unreasonably in focusing on the Regulatory Concern, and so on RC4, and ignoring the fulfilment of the other regulatory conditions.  But that contention is a bad one.  It was perfectly open to the LRC, and reasonable for it, to conclude that the failure to address the Regulatory Concern, and so to satisfy RC4, was determinative of the review.  Whatever the original basis which triggers any suspension of trading, management integrity is a fundamental requirement for listing and continued listing.  Under a further Guidance Letter HKEX-GL-96-18 (“GL96-18”) the members of the management of the issuer are collectively and individually responsible for the issuer’s management and operations.  Thus, it was properly open to the LRC reasonably to conclude that the Company’s failure to meet concerns about questionable integrity was determinative, irrespective of compliance with other aspects of the Resumption Conditions.  That is not the same thing as saying something like “fail one, fail all”; rather, it is a weighing exercise that assesses the particular failure against the other considerations in the balancing exercise, and to see it as being of such weight as to lead to the decision identified.

98.  This Ground must fail.

G.     Ground 2(1)

99.  Mr Yuen’s submission on Ground 2(1) was, in summary, as follows:

 (1)  In law, the Company’s listing status is a recognised form of asset: see Re China Solar Energy Holdings Ltd (No 2) [2018] 2 HKLRD 338 at §39.  Indeed, as a matter of commercial reality, it is “common knowledge” that the listing status of a company is a valuable asset which could fetch a substantial price.

 (2)  This is protected under Article 6 and 105 of the Basic Law (“BL6” and “BL105”) respectively.  The protection must be in accordance with law, and the principle of legal certainty applies, so that the laws and regulations must be accessible and precisely defined.  The guarantee of property rights is not to be left to uncharted administrative administration: see Hysan Development Co Ltd v Town Planning Board (2016) 19 HKCFAR 372 at §§29-30.

 (3)  Policies, guidelines, directives, measures and the like, such as RC4 can constitute “law” for the purpose of the requirement of “prescribed by law” and “in accordance with law”: see Kwok Wing Hang v Chief Executive in Council [2019] HKCFI 2820 at §119.

 (4)  Notwithstanding the serious consequences of non-fulfilment of RC4 – which Mr Yuen submitted was the deprivation of the Company’s important property right/asset – RC4 was not “formulated with sufficient precision to enable the citizen to regulate his conduct so that he is able – if need be with appropriate advice – to foresee, to a degree that is reasonable in the circumstances, the consequences which a given action may entail”: see the Kwok Wing Hang case at §111.

 (5)  This is because RC4 was framed in very general and imprecise language, raising many questions such as: What is reasonable regulatory concern?  What would constitute risk to investors and what would damage market confidence?  What is the relationship between the alleged lack of commercial rationale and regulatory concern?  Why would a one-off transaction impose risks to investors or cause damage to market confidence?

 (6)  RC4 effectively serves the function of a vague and arbitrary catch-all condition, without giving sufficient advance notice as to the issues that the Company is required to address, so that it gave room to “uncharted administrative discretion” and a degree of arbitrariness.

 (7)  This failure of RC4 positively to identify the specific regulatory concerns which, if addressed, would enable the resumption of the Company’s listing, fails to meet the principle of legal certainty and constitutes procedural unfairness: cf Sanyuan Group Ltd v The Stock Exchange of Hong Kong (unreported, FAM 52/2009, 3 December 2009) at §§9-10.

100.  I am afraid that I think this Ground is also without merit.  I agree with Mr Dawes that (1) BL105 is not engaged because the Company’s listing status is not a form of its “property” protected by BL105, and (2) in any event, the meaning of the Regulatory Concern requirement is sufficiently clear, not least against the guidance materials made available by the Exchange.

101.  BL105 provides that:

The Hong Kong Special Administrative Region shall, in accordance with the law, protect the rights of individuals and legal persons to the acquisition, use, disposal and inheritance of property and their right to compensation for unlawful deprivation of their property.

102.  Hence, BL105 is engaged only if there is some form of restriction on the relevant person’s acquisition, use disposal or inheritance of property.  In the present case, the question is whether the Company’s listing status is a form of “property” of the Company within the meaning of the term in BL105.

103.  The term “property” is not a term of art with immutable meaning, but takes its meaning from its context.  As Mr Dawes submitted, one central theme underpinning the Basic Law – and a theme which is integral to an understanding of its structure – is the continuity of the social, economic and legal institutions and systems prior to the resumption of Chinese sovereignty on 1 July 1997, including of the capitalist economic system: see, for example Vallejos v Commission of Registration [2012] 2 HKC 185 at §48 (not disturbed on the subsequent appeal to the CFA); and RV v Director of Immigration [2008] 4 HKLRD 529 at §70.  So it might be said that BL105 was not intended to create a new, autonomous definition of property, but was rather to preserve and protect the pre-existing system of property ownership from the threat of expropriation by the state: see, further, the Chinese version of BL105; the text of BL5 and BL6; and also Harvest Good Development Ltd v Secretary for Justice [2007] 4 HKC 1 at §151.

104.  Nevertheless, I accept that the concept of “property” in BL105 warrants a “generous interpretation”, and that the Court is concerned with substance, not form: see the Harvest Good case at §§78-80; Interush Ltd v Commissioner of Police [2019] 1 HKLRD 892 at §§6.3 and 6.4.  Further, in the context of BL6 and BL106, property is not confined to tangible assets but include “any right which has an economic value”: see the Interush case at §6.18.  It might even cover choses in action and anything from intellectual property, goodwill and statutory licences.

105.  However, Mr Dawes submitted that there are certain minimum essential characteristics of common-law proprietary rights, and without purporting exhaustively to list all the criteria which must be fulfilled before falling within the definition of “property” under BL105, the relevant rights must fulfil at least the four basic criteria identified in National Provincial Bank Ltd v Ainsworth [1965] AC 1175.  Those four criteria are: (1) the right must be definable; (2) the right must be identifiable by third parties; (3) the right must be capable in its nature of assumption by third parties, that is it must be transferable; and (4) the right must have some degree of permanence or stability.

106.  Mr Dawes submitted that a ‘listing status’ does not meet the third and fourth criteria.  First, this is because it is not transferable and so not capable of assumption by third parties.  Second, the right to list on the Exchange is neither a permanent nor stable one, as it is subject to a myriad of regulatory controls involving the exercise of judgment or discretion on the part of the Exchange.  But Mr Yuen submitted, and I agree, that the non-transferability point was addressed by Harris J in the China Solar case at §39(2), where (in the relevant context) he described the listing status as a chose in action and said that the fact that the company may not assign the listing status is irrelevant because some choses in action are incapable of assignment.  I also agree that the fact that the Company’s listing status is subject to regulatory control by the Exchange probably does not affect the listing status as “property”.

107.  However, those two points seem to me to give rise to separate considerations and are connected with the Company’s attempt to place wider reliance on the China Solar case.

108.  Between the filing of the submissions in this case and this Judgment, I relevantly considered the nature of a company’s listing status in my Judgment in Kwok Hiu Kwan v Convoy Global Holdings Limited [2021] HKCFI 814.  Some of the matters dealt with by me were anticipated by Mr Dawes in his submissions, to which Mr Yuen replied.

109.  The Convoy case was concerned with a claim to damages where the claimed loss was based primarily on loss said to flow from the loss of, or failure to ensure reinstatement of, the company’s listing status.  The submission was made for the plaintiff that there are cases which have identified the listing status as a valuable asset, something which has been said to be “well-known”.  (This was echoed by Mr Yuen in this case where he stated that it was “common knowledge”.)  Reference was made to the China Solar case and to Re Plus Holdings Ltd [2007] 2 HKLRD 725 at §9, where Kwan J (as she then was) described the relevant company’s listing status as its “most valuable asset”.

110.  However, I agree with Mr Dawes that the China Solar case was dealing with the fundamentally different issue of whether provisional liquidators of the company should be discharged on the ground that provisional liquidation could not be permitted when their sole or primary function was to carry out business or debt restructuring.  It was in that context that Harris J held at §39 that the company’s listing status was a form of asset which provisional liquidators could be appointed to protect.  But, contrary to Mr Yuen’s submission, that does not simply translate to the idea that a listing status is a form of “property” within BL105.

111.  Further, as I pointed out in the Convoy case at §112, not only were the Plus Holdings case and the other cases relied upon for the plaintiff, dealing with insolvent companies, in the same §9, Kwan J pointed out the clear evidence that the relevant company was insolvent, and followed it with the reference to the listing status as a valuable asset, effectively the only asset of value.  I expressed my view that (1) the same position does not arise in relation to companies which are not insolvent and (2) in any event, those previous cases where there was assumed to be a value of the listing status occurred prior to the change of regulation which now prevents ‘reverse takeovers’.  I expressed the view that it is, therefore, extremely unlikely that the listing status of most companies remains a real valuable asset.

112.  Perhaps more importantly for present purposes, I stated at §113 that, even if it is an asset, it is not clear that the asset actually belongs to the company.  There was certainly no such asset reflected in the balance sheet of the company in that case, nor of the Company in this case.  Even in the ‘reverse takeover’ scenario, the real value was to the creditors or contributors of the insolvent company, as the value was essentially taken as a means of removing or resolving the relevant debts upon the restructuring arising out of the insolvency, and the relevant scheme.

113.  Therefore, however generously one approaches the concept of “property” for the purposes of BL105, the listing status of the Company is not within that concept.  I do not think it is within the concept of “property” at all, and anyway it is also not something that can properly be described as the “property” of the Company so as to trigger BL105. 

114.  In any event, in my view, even if BL105 were to bite, the Regulatory Concern requirement readily meets the standard of certainty required under the Basic Law.

115.  The requirements of legal certainty, often referred to as the “prescribed by law” requirement, has two elements: see Chee Fei Ming v Director of Food and Environmental Hygiene [2020] 1 HKLRD 373 at §§23-28.  They can be summarised in the following way:

 (1)  First, the law must be adequately assessable. The citizen must be able to have an indication that is adequate in the circumstances of the legal rules applicable to a given case. 

 (2)  Second, the norm must be formulated with sufficient precision to enable the citizen to regulate his conduct: he must be able – if need be with appropriate advice – to foresee, to a degree that is reasonable in the circumstances, the consequences which a given action may entail.

116.  The second point is unsurprisingly in the same language used in the Kwok Wing Hang case at §111, tracking language used in Sunday Times v United Kingdom (1979-80) 2 EHRR 245 and often adopted in Hong Kong, and is the point relevant for present purposes.  But in the Chee Fei Ming case, the Court of Appeal also explained that (1) the degree of precision required of the law in this connection will depend upon the particular subject matter of the discretion, (2) a law which confers a discretion is not in itself inconsistent with the requirement, provided the scope of the discretion and the manner of its exercise are indicated with sufficient clarity to give the individual protection against interference which is arbitrary, (3) absolute precision or certainty is not achievable, and (4) what is important is that there is a settled core of meaning of the norm in question.

117.  It seems to me to be obvious that in determining whether the law or norm is sufficiently precise and foreseeable, the court may have regard not only to the provision in question but also to published policies and guidelines and the common law: see also the Chee Fei Ming case at §37, where there was reference to adopting a ‘holistic approach’.  Further, in determining whether there are adequate and effective safeguards against abuse, the court may also have regard to the protections against arbitrary interference offered by the common law and the availability of judicial review.  As the Court of Appeal put it at §45, so long as there is sufficient guidance in the published rules or policies setting out the boundaries of an administrative discretion, it would provide an adequate basis for working out the precise outcome in a particular case by way of judicial review.

118.  In light of these principles, Mr Dawes described the Company’s contention that the Regulatory Concern is excessively uncertain (put elsewhere as inherently uncertain) as “hollow”.  I agree. 

119.  The assessment of suitability for listing depends on many factors and the Exchange has to cater for a wide variety of different factual scenarios.  Accordingly, the suitability criteria (including the Regulatory Concern requirement) is or must be necessarily framed in somewhat open and flexible terms.  Nevertheless, though I even doubt that there is any difficulty in understanding the meaning of the words or concept of “management integrity”, the guidance materials published by the Exchange identify a settled core of meaning surrounding the concept of management integrity.  Therefore, I reject Mr Yuen’s submission that the Regulatory Concern condition somehow served the function of “a vague and arbitrary catch-all condition” or permitted “uncharted administrative discretion”. 

120.  For example, GL96-18 has clear and detailed guidance on the types of factual matters which may cast doubt on the integrity of the issuer’s management.  Under the heading ‘Suitability issues concerning directors or persons with substantial influence’, §§16-17 read as follows:

16.  Directors of a listed issuer are, collectively and individually, responsible for the issuer’s management and operations.

17.  An individual may not be suitable to be a director if an incident involving him raises a serious doubt as to his character or integrity and his ability to fulfil his duty to act honestly, in good faith and for a proper purpose.  A non-exhaustive list of examples include: involvement in fraud, theft or other types of dishonesty (such as false accounting, bribery, conspiracy to defraud, misappropriation of funds, money laundering and provision of false and misleading testimony to regulators), or breach of securities law, rules or regulations (either personally or through the company of which he is or was a director).  This assessment is on a case-by-case basis.

18.  If a director is no longer suitable to act as director, the retention of office by the director is prejudicial to the interests of minority shareholders.  If he is also a person being highly likely to be able to exert control or substantial influence over the issuer’s operation and management, the concern about the company’s suitability for continued listing would exist irrespective of whether he ceases to be a director.

121.  Further, GL95-18 also identifies the steps that an issuer is expected to take where trading is suspended because an issuer fails to announce periodic financial results or inside information due to accounting irregularities or weaknesses in internal controls, and where the issuer is required to satisfy the Exchange that there is no reasonable Regulatory Concern.  Those steps are not limited to, but:

34.  … include:

(a)  If any director is, or is suspected to be, involved in the issues, consider setting up an independent committee to review the matter.  This is to avoid any conflict of interests which may arise during the review process. …

(b)  If the matter involves or indicates potentially fraudulent activities (such as false accounting or misappropriation of assets), engage forensic accountants to investigate the matter. …

122.  There are, of course, also past decisions of the LRC, published on the Exchange’s website.  Further still, listed issuers are entitled and encouraged to consult and seek guidance from the Exchange on steps required to address any resumption conditions imposed.  Tied together with the requirement for the listed issuer to devise its own resumption proposal in a timely manner, it is perfectly open to issuers – and it was open to the Company in this case – to engage with the Exchange so as to ensure first that it understood the concerns expressed and second that its proposal would satisfy the conditions for trading to resume.  Indeed, on the facts of this case, the Company apparently chose not to engage with the Exchange, not because it perceived any difficulty in understanding the Regulatory Concern and what was needed to meet it, but because the Company was arguing that it had met it. Looking at the materials, it is clear that the Exchange had explained its concerns about management integrity, and the Company fully understood those concerns when it argued about the commercial rationale underpinning the Arrangement, offered an explanation for the Audit Issues, and put forward the proposal relating to the changes on the board of directors and the sale of Dr Chiu’s shares.

123.  The fact that the Company was able to, and did, seek a de novo review hearing before the LRC – with membership comprised of independent market specialists representing a variety of interests, as I have described above – is also a further safeguard against any abuse of power.  Yet further, the Company was able to, and did, apply for judicial review, permitting the court to scrutinise the decision-making process.

124.  This Ground must fail.

H.     Ground 2(2)

125.  Mr Yuen submitted that it is wrong to suggest that Ground 2(2) is similar to Ground 1.  However, in my view, Ground 2(2) at least significantly overlaps and essentially echoes Ground 1, and it is of equal merit. 

126.  Mr Yuen submitted that, without prejudice to his submissions on Ground 2(1), the LRC in any event erred in misconstruing the requirements of RC4, and consequently failed to ask the right questions when considering whether the Company had fulfilled RC4.

127.  Relying on the principle that the construction of RC4 is an objective question of law for the court to decide, Mr Yuen submitted that when RC4 is objectively construed, it raises at least three main “pertinent questions” (his phrase):

 (1)  whether there is/are any subsisting reasonable regulatory concern(s) about the Company’s management integrity;

 (2)  whether there is/are any subsisting reasonable regulatory concern(s) about any persons with substantial influence over the Company’s management and operations; and

 (3)  whether the reasonable regulatory concern(s) as identified, if any, would pose risk to investors and damage market confidence.

128.  Mr Yuen submitted that the LRC did not deal with those questions, but instead arrived at its conclusion that RC4 had not been satisfactorily addressed on the basis that: (1) it was not satisfied with the explanation given regarding, nor convinced of the commercial rationale for, the Arrangement; (2) the Company did not engage in a forensic investigation into the Audit Issues; and (3) the proposed sale of Dr Chiu’s stake to a potential investor was not a sufficient response to RC4 because it was not completed and there remain doubts as to whether Dr Chiu would still be involved in the Company and its business.  Mr Yuen suggested that the LRC confined its considerations to those matters and so misconstrued RC4 or consciously failed to deal with the proper questions raised.

129.  However, it seems to me that the basis of the LRC’s reasoning, as described by Mr Yuen and as is found in the LRC Decision, actually itself identifies that the LRC did address those “pertinent questions”. Indeed, with respect to Mr Yuen’s submission, it strikes me as obvious that the LRC was addressing those questions precisely because it was considering whether RC4 had been satisfied, and the matters it took into account in its reasoning were directly relevant to the Regulatory Concern requirement embodied within RC4.

130.  This Ground must fail.

I.   Ground 3

131.  Ground 3 is based upon what is said to be the LRC’s proper role or approach in considering the Arrangement.  Mr Yuen submitted that the LRC made an error of law in substituting its own judgment for that of the Company, contrary to the well-established position that it is not for the LRC or the court to substitute its own judgment for managerial decisions of the company regarding the commercial justification for its dealings: see Fisher v Cadman [2006] 1 BCLC 499 at §95.  Therefore, for the LRC to find the Company’s explanation “unsatisfactory” is objectionable. 

132.  Indeed, Mr Yuen also submitted that whilst the Exchange has an important role to play to ensure that the securities market is fair and orderly, a holistic approach should be adopted and the Exchange and the LRC should not be (and should not be encouraged to be) overzealous, in venturing from the field of management integrity to commercial rationale. Here, he said, the LRC has stepped over the line.

133.  But, though I accept the general proposition that the court does not ordinarily interfere in internal management matters or the commercial decisions of a company, I agree with Mr Dawes that the argument mischaracterises the issue before the LRC.  The issue before the LRC was whether the Company had discharged the onus of demonstrating that there was no reasonable concern with respect to management integrity, arising from the Audit Issues.  That required an exercise of judgment, turning not just on a management decision or the commercial judgment of the Company’s directors, but involving an overall assessment of the evidence and submissions, including consideration of the credibility of the offered explanations and whether there had been adequate investigations.

134.  In reply, Mr Yuen submitted that the fact that the onus rested with the Company to show that it had met the Resumption Conditions is neither here nor there in the present case, because the flaws in the LRC Decision arose as a result of the LRC’s failure properly to consider the matter, such as by failing to ask the correct question.  But I have already rejected that submission.

135.  Mr Yuen further submitted the LRC’s judgment was in any event without basis, and was based on further errors of law and/or fact.  First, he cautioned the court in its consideration of any suggestion by the LRC that there was the Regulatory Concern, pointing out that: (1) the court may review a decision in which the conclusion is made without proper factual foundation; (2) the LRC made no finding that the Arrangement was a sham, nor was that suggested by the Listing Division or in the LC Decision; (3) nor was there any finding that the choice of AUP was so unreasonable that it constituted mismanagement, or was an attempt to hide anything; so that (4) there was no basis to suggest a lack of bona fides on the part of the Company.  Yet, Mr Yuen said, for all practical purposes, the view formed by the LRC was that there was a lack of integrity or lack of bona fides.

136.  Further, Mr Yuen submitted, the LRC failed in its approach to remind itself of the principle that the more serious the act or omission alleged, the more inherently improbable it must be regarded, and the more compelling will be the evidence needed to prove it on a preponderance of probabilities: see Solicitor (24/07) v Law Society of Hong Kong (2008) 11 HKCFAR 117 at §116, and Sun Hung Kai International Ltd v SFC (SFAT 3/2013, 27 January 2014) at §§36-37.  So, findings which amount to an “attack” (Mr Yuen’s word) on the management integrity and fitness and properness of Dr Chiu and Mr Jiao as directors was unwarranted.

137.  As to the Arrangement itself and the assessment of its commercial rationale, Mr Yuen said that the LRC failed to take into account relevant factors (including those relevant to the tea industry), and took into account irrelevant factors:

 (1)  there was a failure to take into account or have sufficient regard to the “security” aspect of the Arrangement, meaning the structure of it so as to minimise the credit risk to be borne by the Company/YNLRT and to ensure that the application of the loan amount would be in the investment in the tea products and the funds would not be siphoned off elsewhere beyond the reach of the Company/YNLRT; and

 (2)  there was taken into account the irrelevant factor that the loan amount, once transferred to the Supplier, was used for other purposes.

138.  Mr Yuen submitted that if the first point had been taken into account, there would at the very least have been no valid basis for doubting the commercial underpinnings of the Arrangement.  Further if the irrelevant factor had not been taken into account, it could not have unduly influenced the conclusion that the Arrangement was designed to disguise financial assistance to Dr Chiu and Mr Jiao.

139.  However, the problem with the first point is that the Company’s explanation as to the rationale for the payment of the loan monies directly to the Supplier was clearly taken into account by the LRC, and was indeed summarised by the LRC in §20 of the LRC Decision.  The real complaint is a ‘merits’ complaint, in that the argument was rejected by the LRC.  It seems to me that the problem with the second point is that it was open to the LRC to look at the actual use of the Loan as a factor relevant to the assessment of the motivation behind the Arrangement and the credibility of the explanation offered.  Indeed, once it is recognised that the Supplier used the Loan monies for repayment of its bank loans, that heavily damages the argument that the arrangement was for the Company to be able to retain control over the Loan monies (not least when the more obvious way of controlling the funds would have been to keep them, unless and until the Borrower actually placed an order for tea products – which it never did).

140.  As to the suggestion that the LRC erred in law by concluding without proper evidential foundation that there were concerns about the integrity of the Company’s management, Mr Dawes submitted the suggestion was based on a fundamental misunderstanding of the nature of the decision required under the Listing Rules.  As he put it:

 (1)  Once the Resumption Conditions had been imposed, the Company was required to devise an acceptable resumption proposal which would meet the Resumption Conditions and to implement that proposal before the prescribed remedial period under Rule 6.01A.

 (2)  Therefore, the onus was on the Company to put forward appropriate measures or adduce appropriate evidence to satisfy the LRC that there was no reasonable regulatory concern about management integrity – in circumstances where the Listing Rules place the onus on the issuer seeking resumption of trading, and where the Exchange has no statutory powers of investigation.

 (3)  The LRC’s conclusion was simply that the Company had not discharged that onus, and that its listing should therefore be cancelled.  That is not a decision based on a finding of fault or misconduct, but one based on the fact that the issuer had not yet fulfilled the Resumption Conditions which must be met in order for trading to resume within the remedial period.

 (4)  Further, the Exchange bore no responsibility of finding or adducing evidence to prove fault or bad faith on the part of the Company or its directors.  The task of the LRC was simply to examine the information and materials relied upon by the Company to determine whether it had addressed or remedied all material issues and was therefore suitable for resumption of trading and continued listing.

141.  Mr Dawes also submitted that the last mentioned point was one of the reasons why the suggested error of law on the standard of proof was misconceived.  Further, Mr Dawes submitted that in any event the LRC was not under any duty to remind itself in every case on the technical principles concerning the standard of proof, and is only obliged to do so when fairness dictates such a course: see Li Fu Shan v Director of Immigration (unreported, HCAL 813/2001, 7 November 2002, Hartmann J) at §54.  Here, there is nothing to suggest that the LRC was dictated by fairness to recite the principles, nor indeed had they been cited in any written or oral submissions made to the LRC.

142.  I agree with the analysis in Mr Dawes’ submission.  In essence, this case is dealing with the situation where a specific concern had been raised in the context of the particular area of regulation relating to listed issuers, where trading of its shares had been suspended.  It fell to the Company, and its directors, to address that concern in whatever way they thought fit (with or without the further engagement with the Exchange which it was entitled and encouraged to pursue).  It then fell to the members of the LRC on the review hearing to consider afresh those matters put forward by the Company and its directors in seeking to address the particular concern.  With the benefit of the independence and market expertise those members of the LRC possessed, their task was simply to gauge whether or not they thought the matters put forward by the Company and its directors sufficiently addressed the concerns previously identified, in such a way as should lead to a resumption of trading.  In this case, their assessment was that the specific regulatory concerns had not been sufficiently addressed, for the reasons explained in the LRC Decision.

143.  That is not to say that the question of whether the Company could maintain its listing status or whether it should be delisted was not a serious question with serious implications.  But I think it is somewhat far-fetched if it is somehow being suggested that the LRC either did not know this was a serious question with serious implications or failed to approach the matter without recognising and taking into account that it was a serious question with serious implications, so that it should scrutinize the evidence and submissions with a high degree of care.

144.  This Ground must fail.

J.     Ground 4

145.  Ground 4 is a challenge to the adequacy of the reasons in the LRC Decision.  Mr Yuen submitted that there were only five paragraphs which purported to set out the reasons, namely §§31-35.  Whilst brevity can sometimes be a virtue, Mr Yuen said, adequacy of reasons is important, and a failure to give adequate reasons may indicate that a decision is irrational.

146.  He further relied on the principles – for which he gave references to authorities, but which I shall not set out as the principles are broadly settled – that:

 (1)  the giving of reason serves the purposes of fairness, to permit a party to know why the decision has been made against him and because without reasons it may not be obvious that justice has been done;

 (2)  once reasons are given, the adequacy of them can be scrutinised by the court;

 (3)  the reasons should show that the substantial issues have been addressed and why conclusions have been reached, and the courts are entitled to expect the answer to be sufficiently clear from the evidence before it without having to resort to guesswork;

 (4)  whilst it is to be borne in mind that the decision will be considered by parties who know what the issues were, the reasons must sufficiently inform the parties as to the findings, and added significant arises where the decision may have to be considered by those who are not present at all parties to the hearing;

 (5)  notwithstanding the “informed audience” point – which requires the court to assess the adequacy of reasons from the perspective of an informed reader with knowledge of the evidence given and submissions made – a tribunal must at least indicate the reasoning process by which it has decided to accept some and reject other evidence;

 (6)  it is not sufficient for the tribunal simply to state that it accepts or rejects a submission, and it must explain why; similarly, simply stating a conclusion is not sufficient, and the reasons must show that the issues raised were addressed and how the conclusion was reached.

147.  However, it is also settled that the adequacy of the reasons given depends on context, by reference to the character of the tribunal or decision-maker and the nature of the decision-making process. Further, relevant reasons can be briefly stated and need not deal with every point relied upon by the parties.  The core requirement is for the reader to be able to understand why the matter was decided as it was and what conclusions were reached on the main or important areas of controversy.  That may on occasion require having regard to documents which are referred to or adopted in the decision. 

148.  These various points were recently summarized in Ng Shek Wai v Hong Kong Institute of Certified Public Accountants [2019] HKCFI 2439 at §41 – a paragraph referred to by both Chow J (as he then was) and by the Court of Appeal in the China Trends case – where Au J (as he then was) stated (italics in original):

(1)  The duty to give reasons for administrative decision can be required expressly or implied by the relevant statute or can arise in common law out of the requirement of fairness.

(2)  If there is a duty to give reasons, the adequacy of the reasons given would depend on the context in which the decision maker is operating and the particular circumstances of the case in question. 

(3)  The reasons given should show to the objective reader that the decision maker has addressed the substantial issues (but not necessarily every single issue) before it and why it has come to its decision. 

(4)  Depending on the circumstances of each case, the reasons may not require great elaboration and they may be brief.  It is only when they are defective in substance that they should be considered inadequate.  Ultimately, what are adequate reasons in the circumstances of a particular case has to be approached sensibly.

149.  In other words, where there is an adequacy of reasons challenge, the essential question to be determined by the court is whether, when viewed objectively in the specific factual context of the present case and the information and materials that were objectively known to the applicant as at the material time, the reasons as provided in the Decision were adequate to enable the applicant (and a reasonable person in his position) to understand why the respondent decided as it did.

150.  Mr Yuen submitted that §§31-35 of the LRC Decision can hardly be regarded as adequate.  He particularly criticised §32 (which I have set out earlier), saying the first three sentences only stated what the LRC had considered and its conclusion, the fourth sentence simply stated what the LRC noted, but the LRC did not explain why these aspects would affect the commercial rationale of the Arrangement, nor did it explain why it rejected the Company’s explanations.  Further, as regards the Company’s choice of investigation on the basis of AUP instead of an investigation as suggested by its former auditor, the expression of “less comfort” is difficult to follow, and there was no explanation why the Company’s explanation for the use of an AUP investigation was rejected, or why it was insufficient in the context of this case, or why it did not regard the Company’s overall conduct after discovery of the Audit Issues as sufficient to dispel any concern of management integrity.

151.  I do not think this criticism is fair, and I reject Mr Yuen’s submission that the LRC never properly considered the matter and never went through the proper thought process.  First, the suggestion that the other paragraphs of the LRC Decision do not form part of the reasoning is incorrect.  For example, they summarise certain specific factual matters and the submissions taken into account and weighed in the process of reaching the ultimate conclusions set out in the five paragraphs upon which Mr Yuen focused.  Further, the LRC expressly referenced and decided to uphold the LC Decision, which itself adopted the Listing Division’s observations, so that the content of the LC Decision is also material which may be taken into account when assessing adequacy of the reasons.  I have already pointed out that Rule 2A.37L states that the LRC will, in the rehearing of the case, and amongst other matters, consider and address the decision of the previous decision making body, and the basis therefor.

152.  A fair reading of the LRC Decision shows that the LRC identified the applicable regulatory rules to apply in the determination whether or not to cancel the Company’s listing, and the resumption conditions which were to be satisfied.  In forming and expressing the view that the Regulatory Concern had not been satisfactorily addressed, the LRC stated it was not satisfied with the explanation given, by reference to the matters it took into account, and further explained why the Company’s investigation into the Audit Issues and the Arrangement were inadequate to meet and remove the concerns about management integrity.  For example, the reference to “less comfort” in context clearly and simply identifies the LRC’s view that the course of investigation chosen by the Company was insufficient to meet the concern, and that the Company should rather have adopted the course its own auditor had recommended.

153.  It seems to me that the LRC has given adequate reasons from a public law point of view based on the relevant test, and this Ground has no merit.

K.     Ground 5

154.  Ground 5 is a Wednesbury challenge, it being said that the LRC Decision is unreasonable in the public law sense. Mr Yuen acknowledged that the matters relied upon for this Ground to some extent overlap with the submissions made on the other Grounds, but he stressed:

 (1)  there was no or no sufficient reason, basis and/or evidence to question the integrity or commercial morality of Dr Chiu and/or Mr Jiao, and in particular there was no evidence that there was any need to make use of the Arrangement as a “disguise” to obtain financial assistance;

 (2)  the LRC failed to remind itself of the cautious approach and high threshold to be adopted, and it reached conclusions without sufficient or cogent evidence;

 (3)  the LRC failed to take into account or properly appreciate the unique and specific circumstances of the tea industry in the Mainland (which were key to the execution of the Arrangement) despite the previous submissions and explanations made by the Company to the Listing Division, the Listing Committee and the LRC; and

 (4)  the views taken by the LRC in respect of the proposal to divest Dr Chiu’s interest in the Company to the potential investor were without any basis and mere speculation.

155.  However, I do not think that the Company can meet the high threshold for this challenge.  First, the court will be slow to intervene on the merits where the decision-making body is a specialist or expert body appointed by the legislature to deal with expert issues, and the LRC is such a body (as the explanation as to its composition and membership detailed above identifies).  Secondly, I do not think that the Company can demonstrate that the LRC as decision-maker has acted so unreasonably that no authority properly directing itself on the relevant law and acting reasonably could have reached the LRC Decision.

156.  Indeed, I agree with Mr Dawes’ submission that it was open to the LRC to conclude that the Company had failed to demonstrate that there were no reasonable regulatory concerns about management integrity arising from the fact that Dr Chiu and Mr Jiao authorised the loan of almost RMB140 million, which comprised around three-quarters of the Company’s cash assets, to another company which they owned and controlled, doing so without obtaining board authorisation or shareholder approval or making an announcement and where there were at least significant doubt as to any genuine commercial rationale underpinning the Arrangement. Further, as to the commercial rationale put forward, I do not think it can be said that no authority properly directing itself could have reasonably reached the view not to accept the stated purpose of “locking in” the Borrower’s investment in tea products in circumstances where there was no dispute that the Arrangement did not in fact impose any actual obligation on the Borrower to purchase any tea products from YNLRT and when no products were ever in fact purchased.  To put it bluntly, nothing was “locked in”.  It was also reasonably open to the LRC to reject the explanation relating to the advancement of the Loan monies to the Supplier, when the monies were advanced even before the Borrower placed any orders for tea products and the suggested “security” aspect does not explain why the Company did not take the obvious course of keeping greater control over the Loan monies by simply keeping them unless and until the Borrower actually placed a purchase order.

157.  I also agree with the submission that it was reasonably open to the LRC to form the view that the proposals relating to change of control were not sufficient to assuage the concerns about management integrity.  The LRC review hearing took place almost 4 months after the deadline for the resumption of trading, and the proposal had not in fact been implemented; neither Dr Chiu nor Mr Jiao had resigned from their executive directorships, and Dr Chiu had not sold his shareholding to the prospective purchaser.  The prospective purchaser had prior business dealings with Dr Chiu, and Dr Chiu had since 2014 pledged more than half of the Company’s issued share capital to a company owned by the prospective purchaser, an accountant who did not profess to have any prior experience in the tea industry.  These facts, together with the fact that the Company relied heavily on supply of tea products by the Supplier, might reasonably lead any decision-maker to conclude that Dr Chiu and Mr Jiao would retain control of or substantial influence over the Company, even if the proposed sale of shares were to be implemented.

158.  Lest it should matter, I do not think describing the threshold to be cleared before a Wednesbury challenge can succeed as a “high threshold” is somehow seeking to “seek refuge” (Mr Yuen’s phrase).  Nor is the threshold, however described, met even if the matters in the various grounds of complaint are viewed together, as Mr Yuen invited.

159.  I do not think it can be reasonably argued that the LRC Decision was Wednesbury unreasonable, and this Ground has no merit.

L.     Result

160.  The Company’s application for leave to apply for judicial review is dismissed.

161.  Even had the matter been dealt with not on a ‘rolled-up’ basis, and even had leave been granted, I would have dismissed the substantive application for review.

M.     Costs

162.  I do not think it is seriously disputed that costs should follow the event.  Therefore, I order costs to the Exchange, to be taxed if not agreed, with certificate for two Counsel.

163.  But Mr Dawes also sought the order for costs to be taxed on the indemnity basis, saying (which I accept) that the principle that indemnity costs may be ordered if proceedings have been conducted in an unreasonable or disproportionate way applies to judicial review proceedings.  Mr Dawes submitted that indemnity costs would be appropriate in this case because:

 (1)  The Company has advanced numerous grounds, including a constitutional challenge, which are devoid of merit.

 (2)  Notwithstanding that the Company was permitted at a late stage to amend its Form 86, it continued to adopt an unfocused, scattergun approach.

 (3)  As a result of the unreasonable and disproportionate conduct, the Exchange has had to incur a substantial amount of time and costs in response to these proceedings, which has led to a diversion of resources which could have been deployed for the benefit of the investing public.

164.  Mr Yuen submitted that there was no basis for the grant of indemnity costs because:

 (1)  It cannot be suggested that there is any abuse of process.  The grounds of challenge are proper judicial review grounds, and even if they are rejected that does not mean that the Company has been acting unreasonably.

 (2)  The suggestion that the Exchange has had to incur time and costs in response to the application is true in all legal proceedings, and cannot be a factor justifying indemnity costs.

 (3)  Further, given the importance of its listing status and given the efforts that people like Dr Chiu and Mr Jiao had put into the Company over many years, it is wholly understandable that they feel aggrieved with the LRC Decision (especially what they regard as inadequate reasons which did not really address the explanations put forward by the Company) and so brought this application.

165.  I am not sure that last point is really capable of avoiding taxation on the indemnity basis if it is otherwise warranted in the circumstances.  The fact that someone is aggrieved does not somehow give carte blanche to them to conduct proceedings in a way which might attract indemnity costs. 

166.  However, on overall balance and in the exercise of my discretion, I do not think an award of indemnity costs in this case is correct or required.