SECURITIES AND FUTURES COMMISSION v. WANG JIAN HUA AND OTHERS

HCMP 745/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 745 OF 2013

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J U D G M E N T
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1. The is my judgment on the petition of the Securities and Futures Commission with respect to the 1^st to 3^rd respondents which was heard on 24 May 2016, following my decision in October 2015 making certain findings on the petition against the 1^st to 3^rd respondents and dismissing the claim against the 4^th respondent (“Decision”). I do not propose to repeat what I have said in the Decision, in conjunction with which this judgment should be read. The three issues that need to be dealt with are the length and scope of the respective disqualification orders and the question of costs. Although I directed that the remaining matters be fixed for further hearing on an early date, the case has unfortunately only returned for hearing now, almost 7 months after the Decision.

2. S 214(2)(d) empowers the court to:

“(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”.

3. The principles governing the exercise of such power as that conferred by s 214(2)(d) as regards the length of disqualification are not in dispute.  I bear in mind the twin purposes of protecting the public and general deterrence in a disqualification order, with protection being the primary purpose.  As a general approach, the court has divided the maximum possible period of disqualification of 15 years into the following three brackets (see eg Re First China Financial Network Holdings Ltd [2015] 5 HKLRD 530): 

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

(2) a minimum bracket, of below five years disqualification, for cases which are relatively less serious; and

(3) a middle bracket, of six to ten years’ disqualification, for cases which, although serious, are not so serious as to merit a period of disqualification in the top bracket.

I bear in mind however that a broadbrush approach is to be adopted, and that these brackets are more signposts than straitjackets.

4. As regards the 1^st respondent, I have found that the Commission has established its main case against him, which involves the 1^st respondent having tried to sell to China Best an asset at a massive profit to himself, using nominees to present a false impression of an arm’s length transaction and to conceal his role (see Decision §§33, 53, 93).  He failed to disclose his interests to the board of directors or otherwise to the company; meanwhile misleading public announcements were made by the listed company.  Plainly that was very serious wrongdoing for a person who was “Group BOD Advisor” and part of the senior management of the group.  The transaction was also a “very substantial acquisition” within the meaning of the Listing Rules, involving as it did payment of cash consideration of HK$305 million (to be seen against consolidated net assets of the group of HK$364.418 million in 2008) and the potential issuance of new shares and convertible bonds amounting to 40% of the existing issued share capital of China Best.  The 1^st respondent also benefited from the Scheme in that funds originating from the group were, as to HK$141.965 million, used to pay off the loans owed by his personal company Best Chance, and, as to HK$13.034 million, paid to Best Chance itself.  As Barma J (as he then was) said in Re Styland Holdings Ltd (No. 2) [2012] 2 HKLRD 325 at §133:

“The obtaining of personal benefits by directors from company funds, without disclosure and informed consent from the shareholders is a serious matter, and justifies the making of a lengthy disqualification order.”

I consider the gravity of the conduct is such that prima facie the 1^st respondent falls within the top bracket I have referred to. 

5. In favour of the 1^st respondent Mr Daniel Fung SC has submitted that he has ceased to have any position in China Best since June 2011, that he has been “in jeopardy” for over 6 years because the Commission had started investigation into the case before April 2010.  I am also prepared to accept, as stated by Mr Fung, that the 1^st respondent had not been a director of any Hong Kong listed company since June 2011.  Mr Fung also emphasised that China Best has suffered no loss because the acquisition did not go through and the Cash Deposit of HK$305 million had been repaid in full to the group by or on behalf of Asset Rich.  I think these are valid factors that I can take into account, although it should be noted that China Best did lose the use of the greater part of the Cash Deposit for some 9 months and did not recover any interest on the money it paid out. 

6. On the other hand, the 1^st respondent did not make any admission of misconduct until his counsel’s written opening was served, and then only in a limited manner premised on a denial of the scheme alleged by the Commission.  While this is not an aggravating factor in itself, I am unable to give him much credit for the limited “admission” or for the fact that he did not call any evidence at the trial.

7. In all the circumstances, taking into account everything that has been said by Mr Daniel Fung on his behalf, I think the appropriate period of disqualification for the 1^st respondent is 10 years.

8. The 2^nd and 3^rd respondents are in a materially different position from the 1^st respondent in that, on my findings, they were guilty of omission rather than commission, a failure to make enquiries and inform themselves about the company’s affairs and to exercise care and diligence, rather than positive wrongdoing.  I take into account the fact that they had already resigned from the group in October 2011 and am prepared to accept Mr Fung’s statement that they had not been directors of any Hong Kong listed company since then.  Like the 1^st respondent, however, they cannot claim any discount for admitting the complaints, in contrast to previous cases decided on the Carecraft procedure. 

9. In all the circumstances, I think the appropriate period of disqualification for each of the 2^nd and 3^rd respondent is 6 years. 

10. The order sought by the Commission is that each of the 1^st to 3^rd respondents shall not, without leave of the court, for the period specified with respect to each one of them with effect from the date of the order:

“(1) be, or continue to be, a director liquidator, or receiver or manager of the property or business, of any listed or unlisted company in Hong Kong including the 4^th Respondent or any its subsidiaries and affiliates [as defined in the Appendix to this judgment]; and

(2) in any way, whether directly or indirectly, be concerned, or take part, in the management of any listed or unlisted company in Hong Kong including the 4^th Respondent or any its subsidiaries and affiliates [as defined in the Appendix to this judgment].”

11. It was submitted on behalf of the respondents that there is no justification for the disqualification orders to cover any unlisted companies except those that are subsidiaries or affiliates of listed companies, and that the Commission’s proposed order would be a disproportionate response to the misconduct found. 

12. There have been disqualification orders made previously under s 214 that are limited to management of listed corporations in Hong Kong and their subsidiaries and affiliates: see Re Riverhill Holdings Ltd [2007] 4 HKLRD 46, §31; Securities and Futures Commission v Fung Chiu (unrep, HCMP 2524/2006; 30 January 2009) at §3; Re Styland Holdings Ltd [2011] 1 HKLRD 96 at §20, but they appear to have been cases disposed of by way of the Carecraft procedure in which the Commission did not seek a more extensive form of order.

13. Counsel for the Commission have pointed to more extensive orders (covering listed and unlisted corporations in Hong Kong), similar to those being sought by the Commission here, made in Securities and Futures Commission v Yeung Kui Wong (unrep, HCMP 1742/2009, 9 April 2010) at §14; Re Styland Holdings Ltd (No 2) [2012] 2 HKLRD 325 at §148; and Securities and Futures Commission v Kwok Wing (unrep, HCMP 3392/2013; 9 October 2014) at §18.  Counsel have also alluded to another form of order that has been made in several other cases which refers simply to “any corporation” or “any other corporation” without the phrase “in Hong Kong”: Securities and Futures Commission v Fung Chiu [2009] 2 HKC 19, §4; [2009] 6 HKC 423, §60; Securities and Futures Commission v Li Wo Hing (unrep, HCMP 1023/2011; 26 September 2012) at §18; and Securities and Futures Commission v Cheung Keng Ching (unrep, HCMP 1869/2008; 18 March 2010) at §39. 

14. It appears that the point has not been the subject of much argument.  In Re Riverhill Holdings Ltd, the Commission did not object to the order being limited to listed corporations and their subsidiaries and affiliates (see §18).  The respondent was content to accept that formulation so far as the order under s 214(2)(d)(i) is concerned, but argued that the order under s 214(2)(d)(ii) (ie being concerned, or taking part, in the management) should be confined to listed corporations without reference to their subsidiaries and affiliates.  That argument which was rejected by the court (see §§17-24) is not directly relevant to the dispute here.

15. In Securities and Futures Commission v Fung Chiu [2009] 6 HKC 423, §§54-58, Chu J (as she then was) noted that a disqualification order previously made against the 5^th respondent in that case was limited to listed corporations.  She concluded however that there was no justification for the order against the 1^st and 3^rd respondents to be so limited and ruled that it should relate to all corporations.

16. It is true that the remedies that can be granted under s 214(2) are premised on the affairs of a listed corporation having been conducted in an objectionable manner specified in s 214(1): Securities and Futures Commission v Fung Chiu [2009] 6 HKC 423, §§18-19.  The disqualification order envisaged in s 214(2)(d), however, is not in terms limited to the listed corporation itself.  It may include “any other corporation”.  As stated by Kwan J (as she then was) in Re Riverhill Holdings Ltd at §19:

“… in making an order under section 214(2)(d), the court has power to extend the disqualification order to all or such companies as it considers appropriate, as a response to misconduct or misfeasance by a director of a listed corporation”.

17. It is to be recalled that the power to order disqualification in the present context is primarily protective rather than punitive in character.  The fact that misfeasance has been committed in relation to a listed company does not mean that only listed companies and their shareholders need protection from the person concerned.  The impugned conduct may be such as to show that the respondent is unfit to be a director of companies with the attendant duties and responsibilities generally.  As Kwan J said in Securities and Futures Commission v Fung Chiu [2009] 2 HKC 19, §12, a primary objective in the exercise of the jurisdiction is the “protection of the public against the future conduct of persons whose past records as directors of listed companies have shown them to be a danger to those who have dealt with the companies, including creditors, shareholders, investors and consumers”.

18. Having regard to the circumstances of the present case, and in particular the nature of the 1^st to 3^rd respondents’ conduct, I consider that the scope of the order proposed by the Commission is appropriate.  I see no reason to confine the order to listed companies as argued for the respondents.  I should add that a disqualification order such as is made under s 214 is not absolute.  As stated in s 214(2)(d) itself, the order disqualifies the person from acting “without the leave of the Court”.  Where there are circumstances justifying the relaxation of the order in any particular way, an appropriate application can always be made to the court.

19. There will therefore be disqualification orders in the form indicated in paragraph 10 above with respect to the 1^st, 2^nd and 3^rd respondents for the periods of 10, 6 and 6 years respectively.

20. Finally, as regards costs, I think that the Commission should have its costs against the 1^st to 3^rd respondents.  The fact that the Commission has not succeeded against the 2^nd and 3^rd respondents on a relatively minor allegation about the agreement to waive interest on the Cash Deposit (see §§102 & 108 of the Decision) does not detract from the fact that the Commission is overall the successful party.  There will therefore be an order that the 1^st to 3^rd respondents do pay the costs of the Commission with a certificate for two counsel.

Appendix

HCMP 745/2013

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

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

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

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

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

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