SECURITIES AND FUTURES COMMISSION v. SHANGDONG MOLONG PETROLEUM MACHINERY CO LTD AND OTHERS

HCMP 1094/2019

[2020] HKCFI 637

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1094 OF 2019

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J U D G M E N T

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1.  This is a Petition brought by the Securities and Futures Commission (“SFC”) under s. 214(1)(b), (c) and (d) of the Securities and Futures Ordinance, Cap 571 (“Ordinance”), against the Company (1^st Respondent) and its Senior Officers (2^nd to 8^th Respondents). Pursuant to a Consent Order dated 10 December 2019, the Petition in relation to the Company is to be dealt with by way of summary procedure, which is now before the court.

2.  Upon the invitation of the court, the SFC and the Company have agreed to the determination of the summary procedure on paper.

3.  For the present purpose, the SFC and the Company have agreed to a Schedule containing a summary of the relevant facts, the case against the Company and the agreed proposed orders.  A copy of the Schedule is annexed to this Decision.

4.  The Company has been listed on the Hong Kong Stock Exchange since April 2004, initially on the Growth Enterprise Market and subsequently changed its listing to the Main Board in February 2007. 

5.  The SFC says that the Company’s financial position and performance were falsely and substantially inflated in 6 Result Announcements, covering the first 3 quarters of 2015 and 2016.  Those Announcements presented a false and misleading picture of a financially healthy company. 

6.  The 6 Result Announcements were each materially false due to the fact that: (i) revenue and profits of the Company had been substantially inflated or overstated; and (ii) operating costs had been substantially understated.

7.  The inflation or overstatements were attributable to fictitious or false entries on the operating revenues and costs of the Company.  These overstatements, and the corresponding discrepancies between the 6 Results Announcements and the clarifications subsequently made, were substantial and not isolated events.  For example, the range of overstatement of profits was between about 5 times and about 2,189 times. 

8.  Senior Officers of the Company knowingly instigated, permitted and/or participated in a scheme to overstating revenues and understating operating costs (“Inflation Scheme”).  Further or alternatively, they at least acquiesced and/or turned a blind eye to the Inflation Scheme.  Further or in the further alternative, they acted negligently and in breach of their duties of care and diligence by failing to uncover the material misstatements.

9.  By reason of these undisputed facts, the Company has accepted that its business or affairs had been conducted by the Senior Officers in a manner which infringed s. 214(1)(b) to (d) of the Ordinance. These sections provide as follows :

“(1) 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—

…

(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.”

10.  The court is asked by the SFC to exercise its power pursuant to s. 214(2)(a) and (e) which provide as follows :

“(2) 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) make an order restraining the carrying out, or requiring the carrying out, of any act or acts;

…

(e) make any other order it considers appropriate, whether for regulating the conduct of the business or affairs of the corporation in future … or otherwise.”

11.  The agreed proposed orders are for the Company to be directed to:

(1) Reconstitute its Audit Committee afresh with independent members or professionals in compliance with the Main Board Listing Rules of the Hong Kong Exchange (including without limitation rule 3.21 of the Main Board Listing Rules);

(2) Appoint an independent external auditor acceptable to the SFC to review and prepare a report on its internal control and financial reporting procedures so as to ensure that the Company complies with all relevant rules and regulations in Hong Kong and minimise the risk of recurrence of the misconduct complained of in the Petition; and

(3) Publish and implement the suggested measures as may be advised in the report by such independent external auditor.

12.  On the material before the court, and having considered the submissions of the SFC and the Company, I am satisfied that the jurisdiction of the court to make the proposed orders is clearly engaged.  I am also satisfied that terms of the proposed orders are within the power of the court, appropriate and necessary.

13.  Further, the SFC and the Company have agreed that the latter should pay the costs of the former in these proceedings, to be taxed if not agreed, with a certificate for counsel.

14.  For these reasons, I make an order in terms of the draft Order before the court, with the deletion of the reference to a hearing in the preamble.

Annex