SECURITIES AND FUTURES COMMISSION v. CHEN LI-JUN AND OTHERS

HCMP 36/2021

[2023] HKCFI 1538

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 36 OF 2021

________________

________________

________________

________________

D E C I S I O N

________________

Introduction

1.  The Securities and Futures Commission (“Commission”) as Petitioner commenced these proceedings to seek (among other reliefs) disqualification orders against the 1^st Respondent to the 12^th Respondent, all former directors or senior officers of National Agricultural Holdings Limited (“NAH”), under section 214 of the Securities and Futures Ordinance (Cap 571) (“SFO”): see Petition.

2.  This hearing concerns the 8^th, 10^th and 11^th Respondents (together, “Relevant Respondents”), each of whom has consented to dispose of the proceedings through the summary procedure in Re Carecraft Construction Co Ltd[1], which has been adopted by the Court in section 214 proceedings. Carecraft schedules have been agreed by the parties setting out the undisputed facts as between the Commission and each of the Relevant Respondents.

3.  The Carecraft schedules are expressly subject to approval of the Court. As explained in [5] of Re Styland Holdings Ltd[2]:

“It is…trite that the court in deciding whether to make a disqualification order is not bound by the agreement reached by the parties. It must be independently satisfied, based on the agreed facts, that the business or affairs of the company…have been conducted in a manner described in s.214(1)(a), 214(1)(b), 214(1)(c) or 214(1)(d) and, if so satisfied, determine the scope and duration of the [dis]qualification order. In practice, however, the court is likely to be guided by the agreement that the SFC has reached”.

Background Facts

4.  The detailed background is contained in the Carecraft schedules. The salient facts are as follows. NAH was listed on the GEM Board of the Stock Exchange of Hong Kong Limited (“SEHK”) on 17 December 1999 and the Main Board of the SEHK on 29 August 2011 (stock code: 1236). According to NAH’s 2015 Annual Report, its principal activity was investment holding. The activities of the NAH group (“NAH Group”) included research, development and distribution of software, provision of related maintenance, usage and information services and provision of financial leasing business in the People’s Republic of China (“PRC”).

5.  Between July and November 2013, Parko (Hong Kong) Limited (“Parko”) acquired a 54.73% interest in NAH and became its controlling shareholder through a share acquisition and mandatory general offer (“MGO”).

6.  The sole shareholder of Parko has been Million Rich Hong Kong Holdings Company Limited (“Million Rich”), which in turn has been owned 51% by Hebei Agriculture Means of Production Company Limited (“Hebei AMP”) and 49% by Hebei New Cooperative Holding Group Company Limited. Parko has been ultimately controlled by Hebei Supply and Marketing Cooperative, which for administration and operation purposes has been under the All China Federation of Supply and Marketing Cooperatives (“All China Federation”).

7.  The Relevant Respondents had occupied the following positions at NAH. The other directors of the board (“Board”) and key management personnel are set out at [12] of the Carecraft schedules.

(1)  The 8^th Respondent: executive director (“ED”) from 1 July 2014 to 13 May 2016.

(2)  The 10^th Respondent: independent non-executive director (“INED”) and Chairman of the Audit Committee from 2 December 1999 to 8 November 2019.

(3)  The 11^th Respondent: INED and Member of Audit Committee from 12 January 2015 to 8 November 2019.

8.  According to a set of Board minutes in respect of a meeting on 28 January 2015, the Board resolved to approve (among other things) the entering into of a Subscription Agreement between NAH and Parko (“Subscription Agreement”). The meeting was attended by (among others) the Relevant Respondents.

9.  Also on 28 January 2015, NAH made an Announcement about the Subscription Agreement, by which the parties conditionally agreed for Parko to subscribe for up to 212,194,500 subscription warrants (“Warrants”) (at the subscription exercise price of HK$3.0 per Warrant) to be issued by NAH (at the subscription issue price was HK$0.189 per Warrant).

10.  On 27 April 2015, NAH published a Circular and a Notice of Extraordinary General Meeting (“EGM”) in respect of the Subscription Agreement which (among other things) was subject to shareholders’ approval. The Circular contained recommendations from NAH’s Board, Independent Board Committee (comprising all INEDs at the time) and Independent Financial Advisor respectively for shareholders to vote in favour of the Subscription Agreement.

11.  On 13 May 2015, the EGM was held in which the shareholders of NAH unanimously approved the Subscription Agreement.

12.  According to a written resolution dated 2 June 2015, the Board resolved to approve (among other things) the issuance and allotment of the Warrants. The written resolution was signed by (among others) the Relevant Respondents.

13.  Also on 2 June 2015, NAH announced that the subscription was completed and the Warrants issued to Parko. The Warrant Shares would be allotted and issued upon the exercise of the subscription rights attached to the Warrants representing approximately 10% of the issued share capital of NAH. Upon completion of the subscription and exercise of the subscription rights, Parko would have approximately 52.55% interest in NAH.

14.  According to a share certificate produced by NAH to the Commission, 212,194,500 shares in NAH were issued to Parko on 9 June 2015. On the same day, NAH filed a disclosure return with the SEHK which shows that the total number of issued shares had increased by 212,194,500. Based on the subscription issue price for the Warrants and subscription exercise price for the Warrant Shares, the consideration payable by Parko for the subscription and the conversion into Warrant Shares totalled HK$676,688,260.50 (“Shares Consideration”):

Subscription price per Warrant	HK$0.189
Subscription exercise price per Warrant Share	HK$3.0
Shares Consideration for 212,194,500 shares	HK$3.189 x 212,194,500 = HK$676,688,260.50

15.  Notwithstanding the foregoing, in particular the repeated references to the Subscription Agreement in NAH’s Board minutes and public announcements/circular, NAH was unable to produce the Subscription Agreement upon the Commission’s request.

16.  NAH however stated in its Annual Results Announcement for 2015 that:

“During the year ended 31 December 2015, the Group used part of the proceeds from the issue and exercise of warrants, a cheque issued by Parko to Dongyue Holdings Limited [(‘Dongyue’)], a wholly owned subsidiary of China Coopinvest, for its subscription and exercise of the warrants to [NAH] amounting to RMB 528,491,000, as an earnest money for a possible investment in the investment Fund…”

17.  NAH made a similar statement about the use of a cheque issued by Parko to Dongyue in its 2015 Annual Report, 2016 Interim Results Announcement and 2016 Interim Report.

18.  In response to the Commission’s request, NAH produced a China Construction Bank cheque dated 2 June 2015 (“CCB Cheque”) purportedly issued by Parko to Dongyue in the amount of HK$676,688,261. The CCB Cheque was signed by the 1^st Respondent on Parko’s behalf.

19.  NAH also produced a tripartite agreement purportedly entered into by NAH, Parko and Dongyue on 2 June 2015 (“Tripartite Agreement”), which provided that:

(1)  Parko had to pay NAH HK$676,688,261 as the Shares Consideration.

(2)  NAH was obligated to pay Dongyue “certain sum of money…for an investment and/or joint venture”.

(3)  Parko was to pay the Shares Consideration to Dongyue rather than NAH within 10 days and, upon full payment of the Shares Consideration to Dongyue, Parko’s obligation to pay the Shares Consideration to NAH would be fully discharged.

20.  Meanwhile, on 25 August 2015 and 27 August 2015, NAH announced that it had entered into a framework cooperation agreement (“Cooperation Framework Agreement”) with China Co-Op (Shanghai) Equity Investment Fund Management Company (“China Co-Op”) in relation to the possible cooperation between NAH and China Co-Op for the establishment of a fund (“Fund”).

21.  It was further announced that:

(1)  NAH, as one of the general partners of the Fund, was to make a capital contribution commitment in an amount of not more than 3% of the total capital of the Fund.

(2)  As a result of the Cooperation Framework Agreement, NAH had deposited RMB850,000,000 (“Retainer Money”) to Dongyue, a subsidiary of Coopinvest Company Limited (“Coopinvest”, which in turn owned 50% interest in China Co-Op), to hold in escrow as earnest money for the establishment of the Fund.

(3)  Pursuant to the Cooperation Framework Agreement, if the Fund was unable to obtain necessary approval from the All China Federation or relevant authority before 31 December 2015 or such other dates as agreed by the parties, the parties would not enter into any legally binding definitive agreement, and the Retainer Money (after deducting necessary expenses for preparation of the Fund) was to be returned to NAH forthwith. Prior to the establishment of the Fund, the Retainer Money would not be considered as capital contribution of the Fund and would be wholly-owned assets of NAH.

22.  Also on 25 August 2015, NAH and China Co-Op entered into an Escrow Agent Agreement which provided for (among other things) the matters in [21(3)] above. Dongyue was neither a party to this Escrow Agent Agreement nor specified as the escrow agent therein.

23.  On 31 December 2015, NAH announced that the parties were still in discussion in respect of the establishment of the Fund. Since NAH might make less capital commitment to the Fund than expected, the parties agreed that part of the Retainer Money in an amount not exceeding RMB450,000,000 was to be returned to NAH.

24.  According to NAH, there were no Board minutes or resolutions relating to the discussion about the establishment of the Fund, except for resolutions dated 28 March 2016 regarding the refund of monies, as referred to below. The 1^st Respondent admitted that no Board meeting was convened regarding the establishment of the Fund.

25.  Separately, on 27 November 2015, NAH announced that it had entered into a non-legally binding letter of intent with Parko and two other companies (which, together with Parko, were the potential vendors) in relation to the possible acquisition of not less than 51% equity interests in a company established in the PRC (“Target Company”). The Target Company would be the beneficial owner of a piece of land and certain properties in Shanghai.

26.  On 11 January 2016, NAH announced that NAH and the aforesaid potential vendors had entered into a sale and purchase agreement (“SPA”), pursuant to which the parties conditionally agreed for NAH to purchase from the vendors the entire equity interest in the Target Company at RMB2,685 million (comprising cash consideration and new shares to be issued by NAH to Parko).

27.  On 14 March 2016, NAH further announced that:

(1)  At the request of Parko’s management, NAH, Parko and Shi Jia Zhuang Ao Yuan Trading Company Limited (“Ao Yuan”) had entered into an escrow agreement, pursuant to which NAH was to pay RMB1,300,000,000 as earnest money to Ao Yuan being the escrow agent designated by NAH and Parko within six months after entering into the escrow agreement as refundable earnest money for the potential acquisition of the Target Company.

(2)  Ao Yuan was a 51% shareholder of Xinyuen Taifeng Agricultural Asset Management (Beijing) Company Limited. The latter was a substantial shareholder of Guonong Taifeng Agricultural Consultancy Co., Ltd (“Guonong Taifeng”), which in turn was a subsidiary of NAH.

(3)  Pursuant to the said escrow agreement, NAH and Parko were to enter into formal agreement in respect of the acquisition of the Target Company within 15 working days after NAH had paid the earnest money in full. In the event that the formal agreement failed to complete within six months after the escrow agreement (or such other dates the parties otherwise agreed in writing), or the formal agreement had been terminated for whatever reason, Ao Yuan would refund the earnest money together with accrued interest to NAH upon joint instructions from NAH and Parko. The earnest money was not to be used by Ao Yuan without the prior consent of NAH and Parko, and was the wholly owned asset of NAH.

(4)  Up to December 2015, the NAH Group had paid an aggregate of approximately RMB1,220,000,000 to Ao Yuan. Upon receiving such amount, Parko’s management was satisfied that NAH had sufficient financial resources for the acquisition and a formal agreement was entered into on 11 January 2016.

28.  On 31 March 2016, NAH announced the following purported transfers of funds:

(1)  Under NAH’s direction, Dongyue transferred the Retainer Money of RMB850,000,000 (see §21 above) to Guangzhou Yin Qian Investment Management Company Limited (“Guangzhou Yin Qian”), another subsidiary of Coopinvest, to hold the same in escrow.

(2)  Under NAH’s direction, Guangzhou Yin Qian further transferred part of the refund of the Retainer Money in the sum of approximately RMB250,000,000 (out of RMB850,000,000) to Ao Yuan for the purpose of settling the earnest money for the potential acquisition of the Target Company.

(3)  As the SPA for acquisition of the Target Company had not completed, Ao Yuan had refunded the earnest money of approximately RMB1,220,000,000 to NAH on 30 March 2016 and it was deposited into a bank account of a non-wholly-owned subsidiary of NAH which was to be used solely for the acquisition.

(4)  The parties agreed that the remaining portion of the Retainer Money in the sum of approximately RMB600,000,000 was to be refunded to NAH. The remaining portion was refunded to NAH from Guangzhou Yin Qian on 30 March 2016 and deposited into a bank account of a non-wholly-owned subsidiary of NAH which was to be used solely for the purpose of the Fund.

29.  At the Commission’s request, NAH has produced the following documents as purported evidence of the above transfers:

(1)  a set of vouchers and corresponding bank transfer records showing the payment of HK$384,000,000 from NAH to one South Financial Company Limited (“South China Financial”) through a series of transfers between 13 January 2015 to 5 June 2015;

(2)  a letter dated 9 January 2015 issued by NAH instructing South China Financial to transfer HK$384,000,000 to Dongyue;

(3)  the CCB Cheque and Tripartite Agreement, which purportedly show that Parko had paid the Shares Consideration of HK$676,688,261 to Dongyue at NAH’s request. In a letter from NAH’s solicitors, Deacons, dated 25 May 2017 to the Commission, NAH described in detail how the CCB Cheque was signed by the 1^st Respondent, delivered to Dongyue’s Hong Kong office and then taken away by one Ji Hong, a director of Dongyue. It was also stated that Dongyue did not cash the CCB Cheque;

(4)  a letter dated 31 December 2015 issued by NAH purportedly instructing Dongyue to transfer RMB850,000,000 to Guangzhou Yin Qian;

(5)  a letter dated 31 December 2015 issued by NAH purportedly instructing Guangzhou Yin Qian to transfer RMB250,000,000 to Ao Yuan;

(6)  a letter dated 28 March 2016 issued by NAH purportedly instructing Ao Yuan to transfer RMB1,220,000,000 to an account held with Guangzhou Ping An Bank numbered 1101-4500-448506 (“Account 8506”);

(7)  a deposit agreement dated 30 March 2016 with Guangzhou Ping An Bank purportedly showing that the holder of the said Account 8506 is Guonong Taifeng (which was a subsidiary of NAH);

(8)  a letter dated 28 March 2016 issued by NAH purportedly instructing Guangzhou Yin Qian to transfer RMB600,000,000 to Account 8506;

(9)  a set of minutes purportedly showing that the Board resolved by a written resolution on 28 March 2016 to approve the purported refund of the Retainer Money of RMB850,000,000 to NAH as set out above;

(10)  purported bank records of Guangzhou Ping An Bank and a voucher which purportedly show two deposits of RMB1,220,000,000 and RMB600,000,000 on 30 March 2016 into Account 8506. The bank records also purportedly show that, as of 30 June 2016, Account 8506 had a balance of RMB1,821,450,944.44. Similar bank records had been provided by NAH to its auditors, Deloitte Touche Tohmatsu (“Deloitte”);

(11)  an unpaid invoice (“Invoice”) purportedly issued by Dongyue to NAH in respect of a sum of HK$1,060,688,261 (equivalent to around RMB850,000,000, i.e. the amount of the Retainer Money). The Invoice was said to be attached to an email dated 25 August 2015 from Ji Hong (Dongyue’s director) to the 4^th Respondent (NAH’s General Manager Assistant). NAH represented to the Commission that Dongyue would issue the Invoice after it had received the said sum as per the “usual practice” in the PRC. NAH further represented to the Commission that it did not have the original of the Invoice because the same was only transmitted to NAH electronically.

30.  The bank balance of around RMB1.8 billion was a highly substantial sum to NAH. It accounted for 92% of NAH’s cash and cash equivalents (RMB1,974,324,000) and 76% of its net assets (RMB2,398,075,000), as reported in NAH’s 2016 Interim Results.

31.  The purported transfers above are illustrated at Appendix 2 to the Carecraft schedules. If they had taken place, by the end of June 2016, Guangnong Taifeng’s Account 8506 was supposed to have received a total of RMB1,820,000,000 (“Refunded Sum”), being the RMB1,220,000,000 from Ao Yuan plus the RMB600,000,000 from Guangzhou Yin Qian. These sums were supposed to represent the refunds from the two projects announced in 2015 in which NAH planned to acquire the Target Company and to establish the Fund respectively.

32.  On around 18 August 2016, the Commission commenced a formal inquiry into the affairs of NAH. It sought documents from NAH and interviewed its former and current directors and officers.

33.  The Commission has investigated into the transfer of HK$384,000,000 from NAH to South China Financial which, together with the Shares Consideration of HK$676,688,261 purportedly paid by Parko, should have made up the RMB850,000,000 (or HK$1,060,688,261) that purportedly went into Dongyue.

34.  Parko acquired the controlling interest in NAH in 2013 through a share acquisition and MGO. According to the joint announcement of NAH and Parko dated 16 August 2013, Parko was required to pay HK$165,775,000 to acquire 87,250,000 (34.54%) shares in NAH from the former substantial shareholder. As a result of the share acquisition, the MGO was triggered and HK$314,165,000 was required for making the MGO. As such, Parko required a total of HK$479,940,000 (being the sum total of HK$165,775,000 and HK$314,165,000) for the share acquisition and MGO (assuming it were to take over 100% interest in NAH).

35.  The 1^st Respondent represented to the Commission that Parko had obtained a loan facility from CCB International Securities Limited (“CCBI”) and one Precursor Management Inc (“PMI”) for the share acquisition and MGO. PMI was in turn wholly owned by the 2^nd Respondent, NAH’s former General Manager. The 9^th Respondent, who is the 2^nd Respondent’s ex-wife, was appointed as an ED of NAH by PMI.

36.  According to CCBI and PMI, the credit facility extended by CCBI and PMI to NAH were HK$200,000,000 and HK$280,000,000 respectively.

37.  Eventually, according to NAH’s announcement dated 12 November 2013, only 51,009,200 (20.19%) shares accepted the MGO and Parko was required to pay approximately HK$96,917,480 for the MGO.

38.  According to CCBI, Parko had to repay HK$115,832,842.11 to CCBI in four tranches.

39.  As to the transfer of HK$384,000,000 from NAH to South China Financial, it was found in the Commission’s investigations that:

(1)  The 2^nd Respondent was a 65% beneficial owner of South China Financial and 100% owner of PMI. The 4^th Respondent was the 2^nd Respondent’s partner in PMI.

(2)  While NAH had transferred HK$384,000,000 to South China Financial from 13 January 2015 to 5 June 2015, South China Financial did not transfer the sum to Dongyue, contrary to NAH’s representation.

(3)  Instead, South China Financial had transferred HK$64,351,578.95 to Parko and HK$5,776,900 to PMI between February 2015 and March 2015.

(4)  The HK$64,351,578.95 received by Parko was transferred to CCBI, apparently for repayment of the credit facility.

40.  Findings from the Commission’s investigation further refute the alleged connection between the said transfer of HK$384,000,000 from NAH to South China Financial and the purported payment of Retainer Money to Dongyue for the Fund:

(1)  The transfers from NAH to South China Financial took place from January 2015 to June 2015, much earlier than the Cooperation Framework Agreement on 25 August 2015 for the potential establishment of the Fund.

(2)  Most of the said transfers also preceded the Tripartite Agreement dated 2 June 2015 among NAH, Parko and Donyue, by which Dongyue was first designated by NAH to receive payment from Parko.

(3)  None of the individuals who ought to know about the arrangement, namely the 1^st Respondent, the 2^nd Respondent (NAH’s General Manager, 100% beneficial owner of PMI and 65% beneficial owner of South China Financial), the 4^th Respondent (NAH’s General Manager Assistant and the 2^nd Respondent’s partner in PMI) or the 3^rd Respondent (NAH’s Financial Controller/Manager), could account for the transfers from NAH to South China Financial.

(4)  There is no reasonable explanation for why monies allegedly had to go through South China Financial, when NAH and the supposed ultimate recipient, Dongyue, are and were both Hong Kong companies having bank accounts in Hong Kong.

(5)  NAH admitted that it did not conduct any due diligence on South China Financial, which was purportedly introduced to NAH by either the All China Federation (as represented by NAH to the Commission), or by the 2^nd Respondent (as represented by the 2^nd Respondent himself and the 1^st Respondent to the Commission).

41.  In reply to the Commission’s enquiries, Dongyue:

(1)  denied having received the Retainer Money of RMB850,000,000 from NAH, Parko or any third party;

(2)  denied having received the CCB Cheque issued by Parko, or HK$676,688,261 (being the amount of the Shares Consideration) or any portion thereof from Parko;

(3)  contended that the Invoice was not a receipt but a demand by Dongyye on NAH to pay Dongyue a sum equivalent to the Retainer Money; and

(4)  denied having received the letter dated 31 December 2015 by which NAH purportedly instructed Dongyue to transfer the Retainer Money to Guangzhou Yin Qian.

42.  In January 2017, Deloitte corresponded with the 3^rd Respondent (NAH’s Financial Manager) and Simon Wong (NAH’s Senior Accounting Manager) and drew attention to the discrepancy found between the interest income shown on different bank statements and NAH’s vouchers that record the interest income in Account 8506.

43.  By letter dated 21 February 2017, Deloitte informed NAH’s Board and Audit Committee that:

(1)  Deloitte had received a bank confirmation in respect of Guonong Taifeng from Guangzhou Ping An Bank which included a statement that Account 8506 did not exist. This was inconsistent with the information provided by NAH’s management.

(2)  Bank staff had confirmed to Deloitte during bank visits on 15 February 2017 that Account 8506 did not exist and Guonong Taifeng had only one account with the bank opened in April 2016 with no balances.

(3)  Bank staff who had examined the bank statements provided by NAH’s management to Deloitte informed Deloitte that, based on her experience, the chops on each of the bank statements did not correspond to the official business chop of the bank.

(4)  Bank staff could not verify and confirm the identity of one Cai Zhen Hao, who, as indicated in a bank confirmation provided by NAH, was a bank contact person.

(5)  Another individual called Zhang Hui Ping, who NAH said was a bank contact person and purported to be a male bank official whom Deloitte met during its bank visit for the interim audit in October 2016, turned out to be a female staff. The female staff informed Deloitte in February 2017 that she had no knowledge of Guonong Taifeng and had never been present at any previous bank visit by Deloitte.

44.  On 28 March 2017, NAH suspended its trading and announced that it would not be in a position to publish its annual results on or before 31 March 2017 because a forensic review and/or investigation was being carried out by an independent accounting firm in connection with a bank account of a wholly-owned subsidiary of NAH. The announcement referred to the (previously announced) fact that RMB1,820,000,000 (i.e. the Refunded Sum) had been refunded to NAH on 30 March 2016 and was deposited into the bank account.

45.  It was also stated in the said announcement that the forensic review was recommended by the auditors of NAH during the course of their audit as they encountered certain incidents and information which called into question the existence of the bank account and the validity of the related bank balance and underlying transactions, “while the executive directors of [NAH] were skeptical [sic] about it”. There was no elaboration in the announcement of the EDs’ “scepticisms”.

46.  The independent accounting firm referred to above was Ernst & Young, China (“EY”). In EY’s final forensic report dated 14 February 2018 (“EY Report”), it was stated (among other things) that:

(1)  EY was not able to confirm the existence of Account 8506, or that Account 8506 received the Refunded Sum from Guangzhou Yin Qian or Ao Yuan.

(2)  EY encountered various limitations when making requests for information from NAH’s management regarding Account 8506.

(3)  EY was subsequently informed on 8 November 2017 that Account 8506 had been closed. EY requested but had not been provided with any relevant material in this regard, and was not able to confirm the closing of Account 8506.

(4)  The 1^st Respondent represented to EY at his interview that it was one Li Yi Jun, the then General Manager of Hebei AMP, who had misappropriated the Refunded Sum from Account 8506. This however contradicts both Deloitte’s and EY’s findings that the existence of Account 8506 could not be confirmed.

47.  On 12 March 2018, NAH made an announcement of (among other things) the above findings of EY.

48.  Meanwhile, China Construction Bank (“CCB”) informed the Commission that there was no withdrawal in the amount of HK$676,688,261 (i.e. the amount supposedly paid by Parko to Dongyue under the CCB Cheque) from Parko’s account numbered 9658931 from 6 February 2015 to 22 February 2017. The bank statements produced by CCB further show there were insufficient funds in the account to honour payment of the CCB Cheque during the said period.

49.  CCB also furnished documents showing that the 1^st Respondent was one of the authorised signatories of the said Parko’s account. It further confirmed that the 1^st Respondent was also an authorised signatory of NAH’s bank accounts.

50.  Further, upon an enquiry with Guangzhou Ping An Bank on Account 8506, the Commission was not able to obtain any records of Account 8506 which purportedly received the Refunded Sum. The Commission was only able to obtain records of an account in the name of Guonong Taifeng opened in April 2016 and there was no Refunded Sum in that account.

51.  In light of the above findings, the Commission made further enquiries with NAH regarding the payment of the Retainer Money and the Refunded Sum.

52.  In Deacons’ letter (on behalf of NAH) to the Commission dated 25 May 2017, it was stated that the CCB Cheque had not been used as payment of the Shares Consideration or as part of the payment of the Retainer Money to Dongyue. Instead, it was claimed, for the first time, that the Shares Consideration payable by Parko was settled by:

(1)  73 transfers from 14 May 2015 to 10 January 2016 totalling RMB381,149,102 made in the PRC from various companies related to Parko’s majority shareholder (i.e. Hebei AMP) to various related companies of the ultimate controller of Dongyue (i.e. one China Co-op Group Company Limited) (“Co-op Group”); and

(2)  18 transfers from 8 December 2015 to 23 December 2015 totalling around RMB158,863,834 made in Hong Kong by Parko to Dongyue and various related companies of the Co-op Group.

53.  The total amount of funds involved in the above purported transfers (“Alternative Transfers”) was RMB540,003,936 (said to be equivalent to approximately HK$676,000,000).

54.  However, the evidence does not substantiate NAH’s new claim that the Shares Consideration payable by Parko was settled by the Alterative Transfers:

(1)  All the 18 Alternative Transfers in Hong Kong and at least 8 out of the 73 Alternative Transfers in the PRC apparently took place after 25 August 2015, which was claimed by NAH to be the date on which it received the Invoice from Dongyue as alleged receipt of the Retainer Money of RMB85,000,000.

(2)  On the assumption that the Alternative Transfers were made to Dongyue or companies in the Co-op Group (instead of NAH directly) because Dongyue was supposed to be the entity to receive the Retainer Money, three of the Alternative Transfers in the PRC took place before the Tripartite Agreement dated 2 June 2015, by which Dongyue was purportedly first designated by NAH to receive payment from Parko.

(3)  There is also no reasonable explanation or evidence as to when or how the Alternative Transfers, many of which were purportedly paid to the Co-op Group related companies other than Dongyue, were eventually paid over to Dongyue—which was supposed to have further transferred the same to Guangzhou Yin Qian as part of the Retainer Money.

(4)  Neither NAH nor Parko have produced complete or reliable records of the Alternative Transfers:

(a)  NAH represented to the Commission that the original accounting records were in the custody of Hebei AMP and, since the Commission had not given permission to disclose its investigation of NAH to Hebei AMP, NAH could not obtain such records from Hebei AMP.

(b)  While Parko has produced certain purported records of settlement in respect of the Alternative Transfers in Hong Kong for a sum of up to HK$157,500,000 (out of a total of HK$182,471,000), such purported records of settlements do not specify the purpose of the payments.

(c)  Further, it was found in the Commission’s investigations that at least four of the Alternative Transfers in Hong Kong (as set out below) amounting to approximately HK$47,000,000 were for purposes unrelated to the Retainer Money (which was supposed to be paid by Parko to various related companies of the Co-op Group, being the ultimate controller of Dongyue as represented in Deacons’ letter in [52] above).

Date	Transfer sum (HK$)	Alleged recipient	Investigation result
22 December 2015	7,960,000	Dongyue	Ji Hong (Dongyue’s director) denied having received the Retainer Money.
8 December 2015	17,000,000	Lam Leung Hung (“Lam”)	Lam, who is a friend of the 2nd Respondent, represented to the Commission that the sum was repaid by 2nd Respondent to him in relation to a share subscription of NAH.
15 December 2015	12,043,000	Yield Point Trading Limited (“Yield Point”)	Yield Point, a remittance agent, produced to the Commission a record showing that it transferred RMB10,080,000 to Ao Yuan and the remaining RMB890,312 to two individuals.
22 December 2015	10,000,000	China Score Development Limited (“China Score”)	China Score, a metal trading company, represented to the Commission that its sole shareholder had borrowed the sum from a friend who settled the repayment in the PRC through another friend.
Total	47,003,000

(d)  As to the other records (including records of the 73 Alternative Transfers in the PRC), Parko represented to the Commission that (a) the relevant sums were paid by Hebei AMP; (b) Hebei AMP was subject to an audit and had delivered all financial and accounting records to the authorities; and (c) Parko would immediately liaise with Hebei AMP for submission of the relevant materials to the Commission upon completion of the audit. To-date, the Commission has not received any such materials from Parko.

55.  It was further claimed in Deacons’ letter, for the first time, that:

(1)  After issuing the CCB Cheque, Parko decided to make the bulk of payment to Dongyue in the PRC considering that investments into the Fund would predominantly be in the PRC, exchange fluctuations and other practical factors.

(2)  While the said decision was made by the 1^st Respondent on behalf of Parko, it would be more accurate to say that it reflected the wishes of Parko’s majority shareholder, Hebei AMP, and that of the Hebei Supply and Marketing Cooperative.

(3)  Persons who knew about the foregoing arrangements were the 1^st, 2^nd and 4^th Respondents.

(4)  The INEDs had no knowledge as the management did not report the various transfers in Board meetings.

(5)  NAH maintained it had successfully received (“成功收回”) the HK$676,000,000 on 30 March 2016.

(6)  NAH expressed regret for not having reflected the foregoing arrangements accurately in its announcements and annual reports.

56.  In a letter from NAH to the Commission dated 30 June 2017, NAH further stated that the persons who were involved in deciding the change in payment method by Parko were the 1^st, 2^nd 8^th and 4^th Respondents, and the same was not reported to the Board, the Audit Committee or Deloitte.

57.  According to NAH’s announcement dated 12 March 2018, EY was informed by NAH that:

(1)  An amount of RMB1.75 billion had been deposited on 30 August 2017 into a bank account of the Group in the PRC which was opened on 6 July 2017. EY had visited the relevant bank and confirmed with the bank that the said sum had been so deposited by a micro-credit company in the PRC.

(2)  An amount of RMB100 million was deposited on 31 August 2017 into another bank account of a subsidiary of the Group by a company. As at the date of the announcement, EY had not been engaged to perform any verification work on the second deposit.

(3)  As at the date of the announcement, NAH was unable to provide EY with any supporting documents in relation to the background or nature of the said deposits (“RMB1.85 billion Deposits”) or arrange for EY to interview the micro-credit company in the PRC or the company. Consequently EY was not able to establish the connection between the Refunded Sum (of RMB1,820,000,000) and the RMB1.85 billion Deposits.

(4)  The 1^st Respondent, Chairman and ED of NAH, had provided an undertaking to the Board dated 3 September 2017 that “he will use his best endeavours to ensure that the [RMB1.85 billion Deposits] shall remain in the relevant bank accounts until the [Board] shall have approved any use or transfer of the [RMB1.85 billion Deposit]” (“Undertaking”).

58.  Matters regarding the RMB1.85 billion Deposit were first drawn to the Commission’s attention by NAH’s Audit Committee through its submission on around 13 November 2017 of a draft report of EY dated 8 September 2017. The 1^st Respondent’s Undertaking was attached to the EY draft report.

59.  In an undated letter from NAH which was received by NAH’s Audit Committee on 23 April 2018, NAH quoted the EY Report as purportedly saying that the Refunded Sum had been returned at the end of August 2017 to Guonong Taifeng accounts in full (“資金已全額回到國農泰豐帳戶”), and claimed that this was “most important and key”. This is however inconsistent with the relevant findings in the EY Report, as summarised in the 12 March 2018 announcement at [57] above, by which EY did not confirm that the Refunded Sum had been returned to Guonong Taifeng in full.

60.  In any event, according to NAH’s announcement dated 31 October 2018, NAH’s new auditors, RSM Hong Kong (“RSM”), had reported that:

(1)  Although there was the Undertaking by the 1^st Respondent, the RMB1.75 billion and RMB100 million were transferred out of the relevant accounts on 1 September 2017 and 4 September 2017 respectively.

(2)  According to the ledger of Guonong Taifeng, the RMB1.85 billion Deposits had been used to purchase certain financial products on 30 September 2017.

(3)  However, according to the bank slips inspected by RSM:

(a)  RMB1.75 billion was transferred to one Guangzhou Parko Investment Limited (“Guangzhou Parko”), which was a subsidiary of Parko; and

(b)  RMB100 million was transferred to a bank account of Guonong Taifeng at the business department of Shijiazhuang branch of Bank of Beijing. The transfer of RMB100 million was not recorded in the ledger of Guonong Taifeng and had not been disclosed to RSM.

(4)  The nature of the financial products in the aggregate amount of RMB1.85 billion had not yet been ascertained, and the existence and recoverability of the balance of RMB1.85 billion was in doubt.

(5)  After reviewing the bank statements of Bank of Beijing, RSM noted that there were certain transactions transacted but not recorded in the ledger of Guonong Taifeng, being payments to Guonong Taifeng from certain parties (including related parties of NAH) in the total amount of RMB1.75 billion, and payment to Guonong Taifeng to Guangzhou Parko in the amount of RMB1.85 billion. There might be other off-books transactions not recorded by the Group.

61.  In light of the above developments, the Commission made further enquiries with NAH and Parko:

(1)  NAH’s response was that, due to the departure of the relevant personnel, it was unable to provide supporting documents for the transfers in [60] above. NAH nevertheless represented that:

(a)  The micro-credit company which was said to have deposited the RMB1.75 billion was one 湖北中經小額貸款有限公司.

(b)  The company which was said to have deposited the RMB100 million was one 河北卓誠企業管理服務有限公司.

(2)  Parko’s response was that:

(a)  Guangzhou Parko had received both the sums of RMB1.75 billion and RMB1.85 billion from Guonong Taifeng. The RMB1.75 billion was received through 浦發銀行 while the RMB1.85 billion was received through 北京銀行.

(b)  According to the bank documents, the sum of RMB1.75 billion was transferred to 湖北中經小額貸款有限公司, while the sum of RMB1.85 billion was transferred to 中合(大連)置業有限公司. For the RMB1.85 billion, it was intended to be used by NAH for the purchase of 南海中心. Due to a series of issues, the transaction did not go through.

62.  The response from Parko is inconsistent with NAH’s announcement or response:

(1)  According to NAH, the RMB1.75 billion formed part of the RMB1.85 billion. But Parko’s response suggested that there was one sum of RMB1.75 billion and a further sum of RMB1.85 billion.

(2)  According to NAH, the RMB1.75 billion came from the micro-credit company 湖北中經小額貸款有限公司. But Parko said RMB1.75 billion was transferred to the same entity.

(3)  There was no mention by NAH that it could still utilise the RMB1.85 billion, let alone for the purchase of 南海中心.

Other Developments

63.  On 3 July 2017, the Commission, under section 8(1) of the Securities and Futures (Stock Market Listing) Rules, directed the SEHK to suspend the trading of NAH’s shares from 4 July 2017 due to a number of concerns, including (i) possible false and misleading statements about the existence of NAH’s RMB1.8 billion bank balance as stated in its financial statements; and (ii) Parko might have defrauded NAH through subscription of the Warrant Shares by not paying the Shares Consideration.

64.  NAH was given the opportunity to respond prior to the suspension, but it only made a holding response requesting for an extension so that it could further investigate the matter. To-date, save for the EY Report provided to the Commission by NAH’s Audit Committee, NAH has not submitted any investigation findings or reports to the Commission.

65.  On 1 August 2018, NAH announced that the SEHK had issued a notice to the company stating that the amendments to the delisting framework under the Rules Governing the Listing of Securities of the SEHK (“Listing Rules”) would come into effect on 1 August 2018. Pursuant to these amendments, the SEHK has discretion to cancel the listing status of a listed company if the trading of such company’s shares has remained suspended for 12 consecutive months from 1 August 2018. The 12-month period expired for NAH on 31 July 2019 and NAH failed to resume trading in its shares.

66.  On 9 August 2019, the Listing Committee of the SEHK (“Listing Committee”) decided to cancel the listing of NAH’s shares on the SEHK under Rule 6.01A of the Listing Rules.

67.  On 20 August 2019, NAH sought a review of the Listing Committee’s decision by the Listing Review Committee. On 15 November 2019, the Listing Review Committee upheld the decision of the Listing Committee to cancel NAH’s listing. Accordingly, the SEHK cancelled NAH’s listing with effect on 22 November 2019. The same was announced by NAH on 20 November 2019.

Resignation of directors

68.  On 26 July 2018, NAH announced that the 1^st, 6^th, 7^th and 9^th Respondents had resigned as EDs with effect from 26 July 2018 “[i]n order to facilitate the ongoing investigation of the audit issues of the Company and adherence to good corporate governance going forward”.

69.  The announcements referred to above were issued in the name of three new EDs (and the three then existing INEDs).

70.  The three new EDs were Ma Zhaohui (“Ma”), Yang Ruisheng (“Yang”) and Lei Zhen. According to the 26 July 2018 announcement, both Ma and Yang are from Hebei AMP. It is evident that NAH’s ultimate controlling shareholder (through Parko and Million Rich) still exercises control over the company through appointments to the Board.

71.  On 20 November 2019, NAH announced that the three then existing INEDs, the 10^th Respondent, the 11^th Respondent and Cheung Pak To Patrick had resigned with effect from 8 November 2019, with the result that all INEDs and all members of NAH’s Audit Committee had resigned.

Alleged Loan from NAH to Dongyue

72.  Separately, the Commission has investigated into an alleged loan from NAH to Dongyue, the circumstances were as follows.

73.  In NAH’s 2015 Annual Results and Annual Report, NAH recorded an “Impairment loss of amount due from a related party” of RMB40,000,000 (which would be equivalent to around HK$50,000,000). The amount was said to be “unsecured, interest-free and repayable on demand” and, in the opinion of the directors, it “cannot be recovered and was fully impaired”.

74.  Then, on 9 May 2016, NAH announced that:

(1)  On 28 April 2016, NAH entered into a loan agreement (“Loan Agreement”) with Dongyue as the borrower in relation to a loan of HK$50,000,000 advanced on 26 August 2015 (“Loan”).

(2)  NAH had received payment of the loan and the interest accrued thereon in full in the total amount of HK$51.7 million from Dongyue.

(3)  As to the statement in the 2015 Annual Results announcement that the Loan could not be recovered and was fully impaired, NAH would like to supplement and clarify that NAH “had made several attempts to demand and was not able to obtain the financial information of [Dongyue] as at 31 December 2015 to assess its financial position and was unable to assess its recoverability and were in doubt of the recoverability due to the delay in repayment”.

(4)  Having considered the business relationship with the group companies of the Co-op Group and the short-term nature of the Loan, the directors considered that the Loan could facilitate the maintenance of good business relationship with the Co-op Group.

75.  The Chinese Loan Agreement (借款協議) was dated 29 April 2016. It was signed by the 1^st Respondent on NAH’s behalf. The purpose of the Loan was stated to be for Dongyue’s short-term operation funds.

76.  The Loan Agreement was approved by the Board according to a set of minutes in respect of a meeting on 21 April 2016, attended by (among others) the 10^th and 11^th Respondents.

77.  In NAH’s 2016 Interim Results Announcement dated 31 August 2016, it was stated that the settlement of an impaired loan with accrued interest of approximately HK$51,700,000 was made by Parko on behalf of Dongyue. It was not explained why Parko would be discharging Dongyue’s liability under the Loan Agreement.

78.  In response to the Commission’s enquiries, Dongyue stated that:

(1)  In August 2015, Ji Hong (Dongyue’s sole director) knew from China Co-op that NAH and China Co-op had entered into an escrow agreement pursuant to which NAH was to transfer HK$50,000,000 to a bank account designated by China Co-op.

(2)  On 26 and 28 August 2015, Dongyue received a total of HK$49,999,994 from NAH.

(3)  On around 10 September 2015, Dongyue transferred the same sum to one China Agriculture Media (Hong Kong) Group Co. Ltd (“China Agriculture Media”) at the request of NAH and upon the confirmation of China Co-op. The 1^st Respondent was a director of China Agriculture Media at the relevant times.

(4)  To Ji Hong’s knowledge, in around mid-April 2016, NAH requested China Co-op to take the following actions:

(a)  Dongyue (as borrower) and NAH (as lender) was to execute the Loan Agreement;

(b)  Dongyue (as borrower) and China Agriculture Media (as lender) was to execute another loan agreement; and

(c)  Pursuant to the said agreements, China Agriculture Media was to remit the amount of the Loan to Dongyue, which in turn was to remit the same to NAH.

(5)  Further to negotiations between China Co-op and NAH (in which Dongyue did not participate), the said agreements were executed by Dongyue, NAH and China Agriculture Media on 7 May 2016. To protect Dongyue’s interest and at the request of China Co-op, NAH issued an explanatory note on 7 May 2016 (which was dated 29 April 2016) to confirm that Dongyue was only required to retrospectively sign the Loan Agreement for audit purposes and it did not have to bear any responsibility for the Loan.

(6)  As it turned out, China Agriculture Media did not remit the Loan to Dongyue, and Dongyue as such did not remit the same to NAH.

(7)  At the request of NAH, Dongyue signed an audit confirmation to confirm the Loan as at 31 December 2015.

(8)  The persons who liaised with Dongyue in respect of the above arrangements were the 3^rd Respondent (Financial Manager of NAH) and the 8^th Respondent (director of China Co-op and ED of NAH).

79.  In other words, on Dongyue’s version of events, the RMB50,000,000 was not in fact a loan advanced by NAH to Dongyue. Dongyue has produced (among other things) the following documents in support of its version of events:

(1)  bank statement showing the deposit of around HK$49,999,994 into Dongyue’s account in August 2015 and withdrawal of the sum in September 2015;

(2)  the explanatory note (signed by the 1^st Respondent on behalf of NAH), referred to above, and a further explanatory note (also signed by the 1^st Respondent on behalf of NAH) dated 25 March 2016 to similar effect;

(3)  the Loan Agreement;

(4)  a further loan agreement between Dongyue and China Agriculture Media; and

(5)  an audit confirmation signed by Dongyue.

The Commission’s Complaints

80.  It is evident that Parko did not in fact pay the Shares Consideration of HK$676,688,260.5 to NAH pursuant to the Subscription Agreement:

(1)  CCB’s confirmation that the CCB Cheque had not been cashed from Parko’s account, which in any event had insufficient funds during the relevant period to honour the cheque;

(2)  Dongyue’s denial of ever receiving the CCB Cheque or any portion of the Shares Consideration from Parko;

(3)  Findings of Deloitte, EY and the Commission that the existence of Account 8506, into which the Refunded Sum (of which the Shares Consideration should have formed part) was supposed to have gone, could not be confirmed;

(4)  NAH’s new case that Parko did not settle the Shares Consideration by the CCB Cheque but instead through the Alternative Transfers. Such a wholesale change of evidence and running of a completely new case directly contradict NAH’s publicly announced position and its previous submissions to the Commission;

(5)  The Commission’s findings as set out above;

(6)  NAH’s inability to produce any underlying records for the Alternative Transfers. NAH’s claim that it could not obtain such records from Hebei AMP because the Commission had not given permission to NAH to disclose these investigations is unreasonable and incredible, given that:

(a)  The Alternative Transfers were purportedly for settlement of the Shares Consideration with NAH. NAH ought to have retained the underlying records;

(b)  In any event, NAH could reasonably have demanded the records from Hebei AMP without having to reveal the Commission’s investigations;

(7)  Parko’s inability to produce complete or reliable records of the Alternative Transfers:

(a)  For the Alternative Transfers in Hong Kong, the purported records produced by Parko only added up to HK$157,500,000, around HK$47,000,000 of which were for unrelated purposes. In any event none of the records themselves show that the purpose of the transfers was for settlement of the Shares Consideration by Parko to NAH.

(b)  Parko’s claim that all outstanding records were retained by Hebei AMP which was allegedly subject to an audit is unreasonable and incredible. Parko and/or Hebei AMP ought to have retained at least copies of such records. In any event Parko has not followed up on the matter with the Commission as promised.

(8)  The common directors of NAH and Parko (i.e. the 1^st Respondent, the 6^th Respondent and Zhang Yuliang) and those who admittedly knew about the alleged Alternative Transfers (i.e. the 1^st, 2^nd and 4^th Respondents) knew or ought to have known whether and if so how Parko had paid the Shares Consideration of HK$676,688,260.5 to NAH. These individuals have not proffered any or any reasonable account or explanation.

81.  It seems to be clear that:

(1)  NAH issued 212,194,500 shares to Parko, NAH’s controlling shareholder, for no or grossly inadequate consideration in return. The Shares Consideration was supposed to represent a highly substantial sum to NAH.

(2)  NAH’s public statements about the use of the proceeds from Parko paid by “cheque” in its 2015 Annual Results Announcement, 2015 Annual Report, 2016 Interim Results Announcement and 2016 Annual Report were false. To-date, there has been no public clarification by NAH of the above, notwithstanding NAH’s own new case that Parko did not actually pay the Shares Consideration by cheque.

(3)  The arrangements regarding the two alleged projects announced in 2015, i.e. the potential establishment of the Fund and the intended acquisition of the Target Company, were not genuine. Both projects purportedly involved deployment of the Shares Consideration; neither of them came to fruition in the end. At the very least, NAH’s public announcements dated:

(a)  25 August 2015 (stating that NAH had deposited the RMB850,000,000 Retainer Money to Dongyue);

(b)  31 December 2015 (stating that part of the Retainer Money was to be returned to NAH);

(c)  14 March 2016 (stating that NAH had paid RMB1,220,000,000 to Ao Yuan); and

(d)  31 March 2016 (describing how the Refunded Sum was received by Guonong Taifeng’s Account 8506)

contained false or misleading information. In short, if Parko did not pay the Shares Consideration to Dongyue, Dongyue would not have the RMB850,000,000 Retainer Money to transfer to Guangzhou Yin Qian, and the subsequent transfers to Ao Yuan/Guonong Taifeng could not have happened.

(4)  The genuineness of the documents produced by NAH in support of Parko’s payment of the Shares Consideration, including the CCB Cheque, purported letters of instruction, bank records and vouchers is highly questionable or were fabricated.

82.  Furthermore, the aforesaid matters have resulted in the continued suspension of trading in NAH’s shares since 4 July 2017 (as directed by the Commission) and the delisting of the company.

Second Complaint—NAH’s Payment of HK$384 million to South China Financial

83.  It is evident that the HK$384,000,000 transferred by NAH to South China Financial did not eventually go to Dongyue (to form part of the RMB85,000,000 Retainer Money) but went instead to Parko and PMI for purposes unrelated to NAH.

84.  In the premises:

(1)  A substantial sum of HK$384,000,000 had been misappropriated from NAH.

(2)  The misappropriation had been concealed from NAH’s minority shareholders, to whom it was announced that Dongyue received a total of RMB850,000,000 as Retainer Money (which sum was supposed to include the HK$384,000,000 from South China Financial).

(3)  NAH’s letter dated 9 January 2015 and signed by the 1^st Respondent purportedly instructing South China Financial to transfer HK$384,000,000 to Dongyue was not genuine.

Third Complaint—The RMB1.85 billion Deposit

85.  After enquiries were raised about the existence of Guonong Taifeng’s Account 8506 (into which the RMB1,820,000,00 Refunded Sum from the projects was supposed to have been injected), a total of RMB1.85 billion was apparently deposited with certain bank accounts within the NAH Group. However, within a few days and notwithstanding (i) the 1^st Respondent’s Undertaking, (ii) supposed monitoring by NAH’s Audit Committee and (iii) the involvement of independent forensic accountants, the RMB1.85 billion was transferred out of the accounts again through a series of opaque transactions and for purposes that cannot be verified.

Fourth Complaint—The Alleged Loan to Dongyue

86.  It is evident that the alleged Loan of HK$50,000,000 from NAH to Dongyue was not in fact a loan to Dongyue, but a sum transferred through Dongyue to China Agriculture Media (of which the 1^st Respondent was a director) for an unexplained purpose. The sum was returned with interest by Parko to NAH.

87.  It is clear that:

(1)  The advancement of HK$50,000,000 to a third party without any documentary record or security amounted to misappropriation of NAH’s funds. This is so notwithstanding that the sum happened to be returned to NAH subsequently.

(2)  The following announcements of NAH contained false or misleading information which was never publicly rectified by NAH:

(a)  the 2015 Annual Results and Annual Report, which referred to the “Loan” from a “related party” as being not recoverable and fully impaired;

(b)  the 9 May 2016 announcement, which described the “Loan” and the “Loan Agreement” between NAH and Dongyue with no mention of the arrangement with China Agriculture Media;

(c)  the 2016 Interim Results Announcement, which referred to “settlement” of the “Loan” by Parko with no mention of the arrangement with China Agriculture Media;

(d)  The “Loan Agreement” which was executed by NAH and approved by the Board did not reflect the true position.

(e)  In any event, the sum of HK$50,000,000 was transferred to Dongyue on 26 August 2015. On Dongyue’s evidence, the “Loan Agreement” was not executed until eight months later on 7 May 2016 (but dated 28 April 2016) and only for audit purposes. Even assuming that the sum was a loan to Dongyue or China Agriculture Media (which is not accepted by the Commission), it could not have been in NAH’s interests for such a loan to be advanced without any documentary record or security in the first place.

SFO Section 214 Liability

88.  Section 214(1) of the SFO provides that:

“Where, in relation to a corporation which is or was listed, it appears to the Commission that at any relevant time the business or affairs of the corporation have been conducted in a manner—

(a) …;

(b) involving defalcation, fraud, misfeasance or other misconduct towards it or its members or any part of its members;

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

(d) unfairly prejudicial to its members or any part of its members, the Commission may, subject to subsection (3), by petition apply to the Court of First Instance for an order under this section.”

89.  Section 214(2) provides that:

“If, on an application under this section, the Court of First Instance is of the opinion that the business or affairs of a corporation have been conducted in a manner described in subsection (1)(a), (b), (c) or (d), whether through conduct consisting of an isolated act or a series of acts or any failure to act, the Court may:

(a) …;

(b) …;

(c) …;

(d) order that a person wholly or partly responsible for the business or affairs of the corporation having been so conducted shall not, without the leave of the Court—

(i) be, or continue to be, a director, liquidator, or receiver or manager of the property or business, of the corporation or any other corporation; or

(ii) in any way, whether directly or indirectly, be concerned, or take part, in the management of the corporation or any other corporation,

for such period (not exceeding 15 years) as may be specified in the order;

(e) … .”

90.  Three conditions have to be satisfied under section 214(1):

(1)  the corporation in question is or was a listed corporation (“Condition 1”);

(2)  the business or affairs complained of is that of the corporation (“Condition 2”); and

(3)  the conduct complained of falls within one or more heads of “misconduct” specified in subsections (a) to (d) (“Condition 3”).

91.  The “business or affairs of the corporation” under section 214 could include the business or activities of a subsidiary: Securities and Futures Commission v Fung Chiu[3]. The Court will take a “realistic approach” in determining whether the affairs of the subsidiary are the affairs of the holding corporation. I agree that the affairs of Guonong Taifeng were clearly the affairs of NAH.

92.  The words “other misconduct” in section 214(1)(b) connote improper or wrong behaviour or mismanagement, culpable neglect of duties. These words are included in section 214(1)(b) to cover the widest range of possible misconduct. An example is a director’s failure to exercise the degree of skill and care that may reasonably be expected of a person of his knowledge and experience and holding his office and functions within the company: SFC v Yu Longrui & Ors[4].

Application

93.  Condition 1 is undoubtedly satisfied since NAH was listed first on the GEM Board and then the Main Board of the SEHK before its delisting. Accordingly, it was a listed corporation at the material times.

94.  Condition 2 is also satisfied because the business or affairs complained of by the Commission are all in relation to NAH.

95.  As to Condition 3, the Commission invites the Court to find—as is accepted and agreed between the Commission and each of the Relevant Respondents—that by reason of the matters set out above, the business or affairs of NAH have been conducted in a manner:

(1)  involving defalcation, fraud, misfeasance and/or other misconduct as described in section 214(1)(b) of the SFO;

(2)  resulting in its members (i.e. the minority shareholders, not Parko) not having been given all the information with respect to its business or affairs that they might reasonably expect under section 214(1)(c) of the SFO; and/or

(3)  unfairly prejudicial to its members (i.e. the minority shareholders, not Parko) under section 214(1)(d) of the SFO.

96.  The following principles on disqualification orders under section 214(2)(d) are well established: see Re First China Financial Network Holdings Ltd[5].

(1)  The power to determine the appropriate period of disqualification is a discretionary power. It will be necessary for the Court to be satisfied that the director’s involvement in the relevant matter involves a sufficiently serious failure to satisfy his duties that disqualification is justified and fair.

(2)  The purpose of imposing a disqualification order is twofold: (i) protection of the public; and (ii) general deterrence. The former is recognised to be the primary purpose. It is of the greatest importance that any individual who undertakes the statutory and fiduciary obligations of being a company director should realise that these are personal responsibilities.

(3)  In determining the period of disqualification the Court will adopt a broad-brush approach. Earlier decided cases are of limited assistance to the exercise of the Court’s discretion.

(4)  The period of disqualification must reflect the gravity of the offence. The period of disqualification may be fixed by starting with an assessment of the correct period to fit the gravity of the conduct, and a discount is then given for mitigating factors.

(5)  As a starting point the Court will have reference to the following brackets, although these are signposts and not straightjackets:

(a)  disqualification of over 10 years for particularly serious cases;

(b)  disqualification of below 5 years for relatively less serious cases; and

(c)  disqualification between 6 to 10 years for cases in between.

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

The Relevant Respondents

97.  The role and misconduct of the 1^st Respondent and other senior officers of NAH (the 2^nd, 3^rd and 4^th Respondents) are recognised and set out in the Carecraft schedules insofar as they pertain to the role and misconduct of the Relevant Respondents.

98.  The Relevant Respondents, being respectively the ED (i.e. the 8^th Respondent) and INEDs (i.e. the 10^th and 11^th Respondents) of NAH at the material times, owed the following duties to NAH:

(1)  fiduciary duties, including:

(a)  to act honestly and in good faith in the interests of NAH;

(b)  to act for proper purpose(s);

(c)  to avoid situations where his or her interests may be in actual or potential conflict with that of NAH;

(2)  not to obtain any undisclosed profit from his or her position;

(3)  a duty to exercise the due and reasonable care, skill, competence and independent judgment that would be exercised by a reasonably diligent person with:

(a)  the general knowledge, skill and experience that may be reasonably expected of a person carrying out the same functions as carried out by the director or senior officer in relation to NAH; and

(b)  the general knowledge, skill and experience that he or she has.

99.  At all material times, the Relevant Respondents were also under a duty to ensure full compliance with the Listing Rules, including Rule 3.08 thereof.

100.  Further, the Relevant Respondents owed a duty to NAH to properly supervise the affairs of its subsidiaries, including Guonong Taifeng. By reason of the matters set out above, the business or affairs of Guonong Taifeng were also the business or affairs of NAH.

101.  The Commission acknowledges in the Corporate Governance Guide for Boards and Directors of the SEHK that EDs, non-executive directors and INEDs have different roles and functions, and the manner in which their duties should be discharged may also be different. EDs are involved in the day-to-day operations of an issuer’s businesses. INEDs play an important role and are expected to keep up-to-date with the issuer's business affairs and be involved in scrutinising the issuer’s performance in achieving agreed corporate goals and objectives, monitor performance reporting; bring independent judgment on issues of strategy, policy, performance, accountability, resources, key appointments and standard of conduct, help review some of the board's major decisions, the issuer’s performance in relation to corporate goals; take the lead where potential conflicts of interest arise; and serve on the audit, remuneration, nomination and other governance committees if invited.

102.  The evidence demonstrates that at the material times:

(1)  The 1^st Respondent and (to a lesser extent) the 2^nd, 3^rd and/or 4^th Respondents were able to, and did, dominate and control the affairs of NAH and the Board for personal advantage or other ulterior purposes.

(2)  There was no or no effective system of internal control in NAH.

(3)  The Relevant Respondents had allowed the affairs of NAH and/or the Board to be so dominated, and neglected or omitted to identify or rectify the misconduct and/or breach of duties by 1^st, 2^nd, 3^rd and/or 4^th Respondents.

103.  In particular:

(1)  There are no Board minutes or resolutions regarding the establishment of the Fund, as the 1^st Respondent admitted that no board meeting was convened regarding the establishment of the Fund. No prior approval was apparently sought from the Relevant Respondents at the time in relation to the potential establishment of the Fund. There was a Board meeting where the letter of intent for the potential acquisition of the Target Company was confirmed and approved.

(2)  It is evident that the Relevant Respondents did not have prior knowledge of, let alone participate in, any consideration or discussions regarding the Fund or the potential acquisition of the Target Company. Nor were they shown the underlying agreements for these projects.

(3)  The EDs (including the 8^th Respondent) had not taken any active steps to understand or investigate the situation even after Deloitte had raised concerns regarding Guonong Taifeng’s Account 8506 in February 2017, or after their interviews with the Commission in August or September 2017. They did not seek information or raise queries about the above projects even when they were announced in August 2015 in the name of the Board, notwithstanding the substantial amount involved (including the payment of the RMB850,000,000 Retainer Money).

(4)  There is no evidence to show that the INEDs (including the 10^th and 11^th Respondents) sought information or raise queries about the above projects even when they were announced in August 2015 in the name of the Board, notwithstanding the substantial amount involved (including the payment of the RMB850,000,000 Retainer Money).

(5)  The Relevant Respondents did not seek information or raise queries as to how (if at all) Parko had paid for the Shares Consideration, which was supposed to form part of the Retainer Money.

(6)  The Relevant Respondents did not raise concerns when it was announced in March 2016 in the name of the Board that neither of the above projects had completed and a total of RMB1,220,000,000 (the Refunded Sum) was returned through a series of transfers to Guonong Taifeng.

(7)  The EDs (including the 8^th Respondent) have not taken any active steps to understand or investigate the situation even after Deloitte had raised concerns regarding Guonong Taifeng’s Account 8506 in February 2017, or after their interviews with the Commission in August or September 2017.

(8)  Whilst the Audit Committee took some steps to follow-up on the Guoneng Taifeng Account 8506 after Deloitte raised concerns in February 2017, the INEDs (including the 10^th and 11^th Respondents) did not take sufficient steps to understand or investigate the situation.

(9)  The EDs (including 8^th Respondent) did not seek information, raise queries or concerns or take any active steps to understand or investigate the HK$50,000,000 alleged “Loan” to Dongyue. When the Board approved the Loan Agreement in April 2016 and announced the same in May 2016, they ought to have known then (if not earlier) that the “Loan” was advanced some 8 months previously without any contemporaneous documentary record or security in NAH’s favour.

(10)  There is no evidence to show that the INEDs (including the 10^th and 11^th Respondents) sought information, raised queries or concerns or took any active steps to understand or investigate the HK$50,000,000 alleged “Loan” to Dongyue. When the Board approved the Loan Agreement in April 2016 and announced the same in May 2016, they ought to have known then (if not earlier) that the “Loan” was advanced some 8 months previously without any contemporaneous documentary record or security in NAH's favour.

(11)  Having said the above, the Commission recognises that there is no evidence to show that the INEDs (including the 10^th and 11^th Respondents) had knowledge of the incidents described above at the time when they occurred, or that they had been consulted when decisions on major transactions were made by the 1^st Respondent.

104.  Clearly, the 8^th Respondent, as an ED, was in breach of his duties to NAH as set out above. The 10^th and 11^th Respondents were also in breach of their duties to NAH in failing to exercise independent judgment and supervision.

105.  By reason of the acts or omissions of the Relevant Respondents, the business or affairs of NAH have been conducted in a manner as described in [95] above, and each of the Relevant Respondents were partly responsible for the business or affairs of NAH having been so conducted.

Proposed Orders

106.  In gist, the Commission seeks disqualification orders against the Relevant Respondents of the following duration, which, says the Commission, is commensurate with the gravity of their respective conduct, give appropriate regard to the mitigating circumstances set out in the Carecraft schedules, and meet the principles in [96] above.

(1)  The 8^th Respondent: 3 years

(2)  The 10^th Respondent: 20 months

(3)  The 11^th Respondent: 20 months.

107.  The Commission has also agreed to carve-out certain non-listed Hong Kong companies from the disqualification orders sought against the 10^th and 11^th Respondents on the basis that the carving-out of these companies would not be against the public interest i.e. the important purpose of protecting the public would still be achieved by the disqualification orders despite the carve-outs (primarily because the Commission notes from the 10^th and 11^th Respondents’ responses to its requisitions that these carved-out companies are either private companies that do not engage in any actual business operations and are not directly or indirectly connected with any listed corporations in Hong Kong, or non-governmental organisations i.e. tax-exempt charities registered under section 88 of the Inland Revenue Ordinance).

108.  The Relevant Respondents also agree to pay the costs of the Commission in these proceedings, or such portion thereof as the Court thinks appropriate, to be taxed if not agreed with a certificate for two counsel.

109.  At the hearing of the Petition I accepted that the proposed periods were appropriate as was the proposed carve-out in respect of the 11^th Respondent. I queried the proposed carve-outs in respect of the 10^th Respondents. In her case this extended to six companies at least two of which appeared to be significant charities. My initial view was that particularly in the case of the two charities, which had a public component, a carve-out was questionable and was open to the interpretation that the disqualification was a minor, technical matter. I gave leave for further evidence to be filed and submissions made on this issue. Only the 10^th Respondent filed further evidence and substantive submissions.

110.  The 10^th Respondent has now limited the application to the carve-out of five companies. Two are small private companies one of which is dormant (Prime Investments Group Limited) and the other (Gooders International Investment Limited) is a service company used only as a conduit to pay the 10^th Respondent’s personal assistant. I accept that these two companies can properly be excluded from the disqualification. The two companies with which I was primarily concerned are The Association of Po Leung Kuk Chairmen Limited (“PLK”) and the Hong Kong Tennis Foundation Limited (“HKT”). Both companies were set up by the 10^th Respondent when she ceased to be the chair of the principal charities, with which they are associated—as their names suggest the Po Leung Kuk and the Hong Kong Tennis Foundation respectively. PLK is not a charity. As I understand it, it is a vehicle for retiring chairs to remain connected to the principal charity. The chairs become members. All members are directors, but the articles provide that PLK is managed by a 11 person council, which the 10^th Respondent is not on. PLK arranges dinners and events through its members’ connections, which raise some funds, which are donated to the Po Leung Kuk.

111.  HKT is similar, although it is more active and raises more money than PLK.

112.  The final company is Peace and Development Foundation. It is a charity. It raises modest sums, which are used to fund youth training opportunities with the United Nations and other NGOs. Like the other two companies it is the 10^th Respondent’s evidence that the fund raising largely takes the form of dinners and similar events arranged by her and other directors using their personal connections and social standing.

113.  Mr Tang, who appeared for the 10^th Respondent, argued in his supplemental submissions that the proposed disqualification would not be a nominal penalty that sent the wrong signal to directors of public companies. The 10^th Respondent has been sitting as a INED on the Board of three companies and the directorship fees represent her sole source of income—she retired from her original occupation as a banker in 1997. Mr Tang says, probably correctly, that she is unlikely to be appointed an INED by another listed company in the future. A disqualification order in the form proposed will have an adverse financial impact on her and is a blemish on her reputation. The disqualification will not be a token penalty. Mr Tang reminded me of the observations of the Court in Yu Longrui[6]:

“[i]n the context of disqualification under the English insolvency regime the court has recognised that, so long as the conduct in question is honest and not lacking in commercial integrity, even if the director falls short of the standard of competence which might be expected of a director of a publicly listed company, it does not necessarily follow that the director is unfit to be concerned in the management of any company, however small, private and simple its affairs may be”

114.  Mr Tang argued that, although the 10^th Respondent’s conduct fell short of the standards to be expected of an INED there is no suggestion that it involved any dishonesty or lack of integrity.

115.  On balance I accept that the proposed carve-out, now in respect of five companies, is not inconsistent with the purpose and effect of making a disqualification order in the first place. I will, therefore, make the order proposed and submitted together with the Commissions written submissions dated 28 November 2022 save that the carve-out in respect of the 10^th Respondent shall be only for the five companies I have referred to.