SECURITIES AND FUTURES COMMISSION v. JIA YUETING AND OTHERS

HCMP 1074/2021

[2026] HKCFI 2152

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1074 OF 2021

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REASONS FOR DECISION

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Introduction

1.  By a petition presented on 29 July 2021 (as amended on 25 January 2024)  (“Petition”), the Securities and Futures Commission (“SFC”)  commenced these proceedings under section 214 of the Securities and Futures Ordinance, Cap. 571 (“SFO”)  seeking, inter alia, disqualification and compensation orders against the 1^st to the 8^th Respondents in respect of the business or affairs of Coolpad Group Limited (“Company”).

2.  The SFC and the 5^th Respondent, who was a former Executive Director of the Company, agreed to dispose of these proceedings by way of the Carecraft procedure[1] based on a Statement of Facts Not In Dispute dated 29 August 2025 (“Statement”), which I have appended to these Reasons for Decision.  The Statement contains an outline of the relevant facts, the SFC’s case against the 5^th Respondent and the agreed proposed orders.

3.  Based on the facts set out in the Statement, the 5^th Respondent accepts that the business or affairs of the Company had been conducted in a manner described in sections 214(1)(b), (c), and (d) of the SFO between June 2016 and July 2017[2].  The 5^th Respondent agrees that he shall be disqualified under section 214(2)(d) of the SFO for a period of 5 years, and that he shall pay a sum of HKD4 million to the Company under section 214(2)(e) of the SFO being part of the loss suffered by the Company and/or its subsidiaries (“Group”), inclusive of interest thereon.[3] The 5^th Respondent also agrees to pay HKD750,000 in full and final settlement of his share of the SFC’s costs in these proceedings[4].

Factual Background

4.  The relevant facts have been set out in full at [11] to [86] of the Statement, which can be summarised as follows.

5.  On 11 June 2002, the Company, formerly known as China Wireless Technologies Limited, was incorporated in the Cayman Islands as an exempted company with limited liability.  On 24 February 2003, the Company was registered in Hong Kong under the then Companies Ordinance, Cap. 32 as a registered overseas company.  Its shares have been listed on the Main Board of The Stock Exchange of Hong Kong Limited (“HKEX”)  since 9 December 2004 (Stock Code: 2369)[5].

6.  At all material times, the Group was primarily engaged in the provision of wireless solutions and equipment in the Mainland, with a focus on the production and sale of smartphones and the provision of wireless application services and financing services[6].

7.  The 5^th Respondent is a member of The Chinese Institute of Certified Public Accountants[7].  At all material times, the 5^th Respondent held the following positions[8]:

(1)  In relation to the Group, the 5^th Respondent was the Finance Manager of the Company between 1 December 2016 and 20 March 2017, and the Executive Director of the Company between 20 March 2017 and 5 January 2018; and

(2)  In relation to the LeShi Companies, the 5^th Respondent was responsible for the finance management of LeShi Holding Beijing Co Ltd (“Beijing LeShi”)  from around 24 July 2015, and was the Chief Financial Officer (“CFO”)  of LeShi Internet Information and Technology Corporation Beijing (“LETV”)  from around 21 May 2017.

Subject Transactions

8.  Between June 2016 and March 2017, the Group[9] had paid approximately RMB2,275 million to various payees pursuant to the 5 subject transactions, which are respectively referred to as “Transaction 1”, “Transaction 2”, “Transaction 3”, “Transaction 4-1” and “Transaction 4-2” in the Statement (“Subject Transactions”).  Out of which:

(1)  Approximately RMB1,776 million was transferred to LETV and its associated companies (“LeShi Companies”), which were held and/or controlled by the 1^st Respondent[10];

(2)  Approximately RMB14 million was transferred to an entity controlled by a friend of the 1^st Respondent and the 4^th Respondent[11]; and

(3)  The remaining RMB485 million, originating from Shenzhen Yulong under Transactions 4-1 and 4-2, was eventually channelled back to the Group to repay part of the sums paid by the Company under Transaction 1, following concerns raised by the Company’s auditor, namely, Ernest & Young (“EY”)[12].

9.  Through the Subject Transactions, large sums were lent by the Group to the LeShi Companies with little or no due diligence having been conducted on the parties concerned and without proper disclosure and/or approval[13]. As a consequence, the Company and/or the Group were exposed to heightened credit risks.  They did not have the opportunity to conduct proper due diligence on the true borrower, namely, the LeShi Companies, and suffered substantial loss of (1)  approximately RMB70 million which remains due under Transaction 4-2 and (2)  interest which ought to have been received for the prepayment in Transaction 4-2 and which exceeded RMB14 million as at the date of the Petition (“Loss”)[14].

10.  Whereas Transactions 1 and 2 predated the 5^th Respondent’s appointment as an Executive Director of the Company, he was directly involved in Transactions 3, 4-1 and 4-2.

Transaction 3 (Prepayment to Xinshiqi)

11.  On or around 20 December 2016, Dongguan Yulong entered into a purchasing framework agreement (“Xinshiqi Agreement”)  with Xinshiqi Longma (Beijing)  Technology Ltd (“Xinshiqi”). By the Xinshiqi Agreement, Dongguan Yulong agreed to purchase touchscreen display modules and related components from Xinshiqi, and to make a prepayment of RMB300 million to Xinshiqi (“Xinshiqi Prepayment”)[15].

12.  Upon receipt of the Xinshiqi Prepayment from Dongguan Yulong, Xinshiqi transferred the entire sum to Beijing LeShi via an intermediary on the same day[16]. Beijing LeShi later repaid the Xinshiqi Prepayment to Dongguan Yulong in 3 instalments of RMB100 million on 17 February 2017, 10 March 2017 and 14 March 2017[17].

13.  The Xinshiqi Prepayment was transferred to Beijing LeShi and later repaid by Beijing LeShi in the following circumstances[18]:

(1)  The Group had no prior dealings with Xinshiqi;

(2)  Xinshiqi was 98.5% owned by a friend of the 1^st and the 4^th Respondents;

(3)  The Xinshiqi Agreement did not contain any details or specifications about the goods to be purchased;

(4)  While the term of the Xinshiqi Agreement was for a period of three months, it was terminated within a month without any purchase order being placed;

(5)  The Xinshiqi Prepayment was not repaid immediately upon the termination of the Xinshiqi Agreement, but only after EY had raised its concerns in January 2017; and

(6)  The Xinshiqi Agreement and the relevant payment requests were not, contrary to usual practice, signed by a representative of the Company’s Procurement Committee.

Transaction 4-1 (Loans)

14.  In March 2017, Shenzhen Yulong entered into 6 loan agreements (“Loan Agreements”)  with 6 entities (“Borrowers”). By the Loan Agreements, Shenzhen Yulong transferred a total sum of RMB405 million to the Borrowers[19].

15.  Upon receipt of the loans, the Borrowers transferred the entire sum via intermediaries to repay the Company under Transaction 1[20]. The LeShi Companies later repaid the loans in June 2017 and July 2017[21].

16.  The funds advanced under the Loan Agreements were transferred to the Borrowers and later repaid by the LeShi Companies in the following circumstances[22]:

(1)  The Group had no prior dealings with the Borrowers;

(2)  The Borrowers were controlled by friends and/or acquaintances of the 1^st and/or the 4^th Respondents;

(3)  The Loan Agreements were entered into shortly after EY had raised its concerns about the outstanding amounts under Transactions 1 and 3;

(4)  The entire sum of the loans was subsequently used to repay the Company under Transaction 1; and

(5)  The controller of one of the Borrowers, namely, Tan Songbin, admitted that he had entered into the Loan Agreements upon the request of the 4^th Respondent, who was his former classmate, to help the LeShi Companies.

Transaction 4-2 (Prepayment to Beijing Maiji)

17.  On 22 March 2017, Shenzhen Yulong entered into an advertising agreement (“Advertising Agreement”)  with Beijing Maiji Partners Advertising Co Ltd (“Beijing Maiji”).  By the Advertising Agreement, Beijing Maiji agreed to publish advertisements for Shenzhen Yulong for the period between 29 October 2017 and 26 April 2018 for a sum of RMB80 million.  The entire sum of which had to be prepaid (“Maiji Prepayment”)[23].

18.  Upon receipt of the Maiji Prepayment from Shenzhen Yulong, Beijing Maiji transferred the entire sum via intermediaries to repay the Company under Transaction 1[24].

19.  The Advertising Agreement was subsequently cancelled and the parties entered into a settlement agreement.  By the settlement agreement, Beijing Maiji agreed to repay the Maiji Prepayment to Shenzhen Yulong in 3 instalments and Shenzhen Yulong agreed to waive its claim for interest.  However, only part of the Maiji Prepayment has been recovered, resulting in an outstanding amount of approximately RMB70 million[25].

20.  The Maiji Prepayment was transferred to repay the Company under Transaction 1 in the following circumstances[26]:

(1)  The Group had no prior dealings with Beijing Maiji;

(2)  The requirement for full prepayment was unusual and had no commercial justification;

(3)  The Company did not have a genuine need for the Advertising Agreement, given that no new products were due to be released at the time;

(4)  The Advertising Agreement was entered into shortly after EY had raised its concerns about the outstanding amounts under Transactions 1 and 3;

(5)  The entire sum of the Maiji Prepayment was subsequently used to repay the Company under Transaction 1; and

(6)  The Advertising Agreement and the relevant payment requests were not, contrary to usual practice, signed by a representative of the Company’s Procurement Committee.

Failure to Address EY’s Concerns

21.  Between January 2017 and May 2017, EY had raised concerns about the Subject Transactions and the Group’s ability to continue to operate as a going concern.  Through emails and teleconferences with EY, the 5^th Respondent had been aware of such concerns since 17 January 2017 at the latest[27].

22.  Since February 2017, EY had raised concerns about the Group’s continuing losses and whether there was sufficient cash flow for the Group to continue to operate as a going concern. The 5^th Respondent was aware of the precarious financial position of the Company[28].

23.  Upon the suggestion of the Company’s solicitors, an independent board committee (“IBC”), comprising the 5^th, the 6^th and the 7^th Respondents, was set up on 20 March 2017 to address EY’s concerns[29].  Nevertheless, the 5^th Respondent took insufficient steps to address those concerns[30].

24.  In March 2017 and April 2017, the Company, without mentioning EY’s concerns, announced delays in the publication of its 2016 financial results.  On 23 May 2017, the Company issued an announcement to finally clarify that there were six outstanding audit issues relating to the publication of its 2016 financial results[31].

25.  Between the end of 2016 and the first half of 2018, there were delays in the Company’s publication of financial results and reports.  Such delays ranged from more than 5 months to over 13 months[32]. Accordingly, the Company failed to make timely, full and proper disclosure to the public and its shareholders[33].

Findings in the HKEX Statement

26.  As found in the Statement of Disciplinary Action published by the HKEX on 24 August 2021 and accepted by the 5^th Respondent for the purpose of these Carecraft proceedings, the Company had been in breach of the Rules Governing the Listing of Securities on HKEX (“Listing Rules”)[34]:

(1)  In breach of Rules 13.46, 13.48 and 13.49, the Company delayed publishing four sets of financial results and reports, with delays ranging from more than 5 months to over 13 months;

(2)  In breach of Rule 13.13, the Company delayed announcing the agreements under Transaction 1 regarding advancements to an entity identified under Rule 13.13, with delays ranging from 4 months to 8 months;

(3)  In breach of Rule 14.34, the Company delayed announcing the agreements under Transactions 1, 3 and 4-1 regarding provisions of financial assistance, with delays ranging from 2 months to 8 months;

(4)  In breach of Rule 13.13 and Chapter 14, the Company did not have adequate internal controls for compliance, contributing to the aforesaid breaches; and

(5)  The 5^th Respondent and other directors had breached their directors’ duties under Rule 3.08 of the Listing Rules and/or their obligations under their undertaking to the HKEX that they would comply with the Listing Rules to the best of their ability and use their best endeavours to procure the Company’s compliance with the Listing Rules (“Undertakings”).

Applicable Principles to Section 214 of the SFO

27.  I have recently summarised the applicable principles to the Carecraft procedure in SFC v Superb Summit International Group Limited[35]. Three conditions must be satisfied before relief under section 214(2) of the SFO can be granted, namely, (1)  the corporation in question is or was a listed corporation, (2)  the business or affairs complained of is that of the corporation, and (3)  the conduct complained of falls within one or more heads of misconduct specified in sections 214(1)(a) to (d) of the SFO.

28.  In relation to the first condition, “listed” means “listed on a recognised stock market”[36].

29.  In relation to the second condition, the conduct complained of can be that of the listed company and/or the subsidiaries directed by or under the control of such listed company.  The Court will take a realistic approach in determining whether the affairs of the subsidiary are the affairs of the holding company[37].

30.  Regarding the third condition:

(1)  “Oppressive” under section 214(1)(a) of the SFO has been described as tyrannical conduct, abuse of power or a visible departure from the standards of fair dealing.  It typically involves an abuse of one’s rights or powers as a majority to procure the occurrence or non-occurrence of events unfair or prejudicial to the complainants who, by reason of their minority status, can only submit;

(2)  As regards section 214(1)(b) of the SFO:

(a)  “Defalcation” is defined as “misapplication, including misappropriation, of any property”. Misapplication means the disposition of the company’s property which the company or the board is forbidden, incompetent or unauthorised to make, or which is carried out by the directors in breach of their duties in good faith to promote the success of the company and for proper purposes;

(b)  “Misfeasance” is defined as “the performance of an otherwise lawful act in a wrongful manner”. The notion of misfeasance overlaps with that of breach of fiduciary duty and seemingly covers a wide range of conduct.  In particular, it covers a director’s breach of his duties to exercise reasonable care and diligence in his management of the company, and to act in good faith in the best interests of the company;

(c)  The words “other misconduct” connote improper or wrong behaviour of mismanagement, or culpable neglect of duties.  This term is something of a “belt and braces exercise”, and is intended to cover the “widest range of possible misconduct” including a director’s breach of his duties to exercise reasonable skill, care and diligence in his management of the company;

(3)  Regarding section 214(1)(c) of the SFO, it can be complementary to the other subsections[38] and covers (a)  situations such as the making of misleading or false announcements and (b)  situations requiring publication of periodic financial statements and announcements, as members are entitled to expect the listed company to provide complete and accurate information in respect of such matters; and

(4)  As regards section 214(1)(d) of the SFO, the conduct in question does not have to be wrong per se. “Unfairly prejudicial” conduct covers a range of conduct, from fraud at the one end to neglect or inaction on the part of those to whom the affairs of a company are entrusted on the other end.  The question to be asked in such circumstances is whether the conduct concerned is that which can be expected from the managers of the company to whom those affairs have been entrusted.  It covers the case where the listed company has (a)  failed to comply with the disclosure requirements, (b)  made misleading or false announcements and (c)  failed to publish periodic financial statements and announcements, as members are entitled to expect the listed company to provide complete and accurate information in respect of such matters.

Application of Section 214 of the SFO

31.  Having considered the Statement, I am satisfied that the conditions for granting relief under section 214(2) of the SFO are met.

32.  The first condition is satisfied since the Company has been listed on the Main Board of the HKEX since 9 December 2004.

33.  The second condition is satisfied since the conduct complained of by the SFC and summarised at [8] to [26] above concerns the business or affairs of the Company and its wholly-owned subsidiaries, namely, (1)  the transfer of substantial funds from the Group to the LeShi Companies, thereby exposing the Group to heightened credit risks, and (2)  breaches of disclosure obligations and the Listing Rules by the Company.

34.  In relation to the third condition, the SFC and the 5^th Respondent agree and I am satisfied that the business or affairs of the Company had been conducted in the manner described in sections 214(1)(b), (c) and (d) for which the 5^th Respondent was partly responsible[39].

35.  By reason of his responsibilities and office as an Executive Director of the Company, the 5^th Respondent owed the following duties to the Company[40]:

(1)  Duty to act in good faith and in the best interests of the Company under the common law and Rule 3.08(a)  of the Listing Rules;

(2)  Duty to exercise powers for proper purposes under the common law and Rule 3.08(b)  of the Listing Rules;

(3)  Duty to exercise independent judgment;

(4)  Duty not to place himself in a position of conflict of interests under the common law and Rule 3.08(d)  of the Listing Rules;

(5)  Duty not to misappropriate Company assets;

(6)  Duty to exercise reasonable skill, care, and diligence under the common law and Rule 3.08(f)  of the Listing Rules;

(7)  Duty to take an active interest in the Company’s affairs and to follow up on anything untoward that comes to his attention; and

(8)  Duty to comply with the Listing Rules to the best of his ability and to use his best endeavours to procure the Company’s compliance with the Listing Rules, pursuant to the Undertakings.

36.  I accept the submission by Ms Rachel Lam SC[41], leading counsel for the SFC, that the 5^th Respondent had acted in breach of the aforesaid duties.

(1)  In respect of Transaction 3, the 5^th Respondent approved the Xinshiqi Agreement, and signed the relevant payment request for the Xinshiqi Prepayment upon confirmation from the 1^st and/or the 4^th Respondents[42];

(2)  In respect of Transaction 4-1, before his appointment as an Executive Director and in his capacity as the Finance Manager of the Company, the 5^th Respondent was involved in the approval of some of the remittances, as well as the drafting of the Loan Agreements in that he had made suggestions on the level of the relevant interest rate[43];

(3)  In respect of Transaction 4-2, the 5^th Respondent approved the Advertising Agreement and the Maiji Prepayment[44];

(4)  On the whole:

(a)  The 5^th Respondent caused, permitted and/or allowed the Company and its subsidiaries to enter into Transactions 3, 4-1 and 4-2 at the expense of the Company and without proper disclosure or due diligence.  He also caused the transfer of the Group’s funds to the LeShi Companies, and caused, permitted and/or allowed the Company to breach the Listing Rules by, inter alia, failing to make timely disclosure;

(b)  The 5^th Respondent preferred and furthered the interests of the LeShi Companies at the expense of the Company, and caused the Company to breach its articles of association[45] and the Listing Rules.  In particular, he exercised his powers for the improper purpose of preferring the LeShi Companies, and placed himself in a position[46] where his duty to the Company conflicted with his duty to the LeShi Companies;

(c)  The 5^th Respondent followed the instructions of the 1^st, the 2^nd and the 4^th Respondents without exercising independent judgment in the interests of the Company;

(d)  The 5^th Respondent participated in Transactions 3, 4-1 and 4-2 without exercising reasonable care, and failed to raise questions or escalate the matters to the Company’s board of directors for discussion, and/or bring the Subject Transactions to the attention of other board members and keep them informed; and

(e)  Despite being a member of the IBC, the 5^th Respondent did not scrutinise the Subject Transactions diligently and/or properly.

Applicable Principles to Disqualification Order

37.  In SFC v Superb Summit International Group Limited[47], I summarised the applicable principles that guide the Court’s determination of the appropriate period of disqualification.  In short:

(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 some period of disqualification is justified and fair;

(2)  The objectives of a disqualification order are twofold: (a)  to protect the public and (b)  as a 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 whether to make a disqualification order, the Court takes a broad-brush approach.  Earlier decided cases are of limited assistance to the exercise of the Court’s discretion;

(4)  The Court 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 sections 214(1)(a), (b), (c) or (d) of the SFO and, if so satisfied, determine the scope and duration of the disqualification order;

(5)  The Court is not bound by the agreement reached between the parties. However, in practice, the Court is likely to be guided by the agreement that the SFC, as a responsible regulator, has reached;

(6)  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;

(7)  Generally speaking, the Court has divided the maximum period of disqualification of 15 years into 3 brackets, though these are only guides and not straitjackets:

(a)  The top bracket, of disqualification for over 10 years, for particularly serious cases;

(b)  The middle bracket, of disqualification for between 6 to 10 years, for cases which, although serious, are not so serious as to merit a period of disqualification in the top bracket;

(c)  The minimum bracket, of disqualification for up to 5 years, for relatively less serious cases; and

(8)  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 interest of shareholders, creditors and employees.

Disqualification Order

38.  A disqualification order of 5 years and a compensation order in the sum of HKD4 million (being part of the Loss)  have been agreed between the SFC and the 5^th Respondent.

39.  Recently, I emphasised in SFC v Lu Ying & Ors[48]that while the Court is not bound by the agreement reached between the parties, it will not interfere as long as the disqualification periods are within the range that the Court thinks is reasonable, even if the Court might have imposed a slightly different period of disqualification absent an agreement.

40.  Having regard to the following factors, I accept Ms Lam’s submission that the agreed disqualification order of 5 years, which falls at the top end of the minimum bracket, is appropriate:

(1)  The 5^th Respondent was directly involved in approving and facilitating the transfer of substantial funds[49] in Transactions 3, 4-1 and 4-2 despite being aware of EY’s concerns and the Company’s precarious financial position;

(2)  The Subject Transactions resulted in the Company suffering substantial Loss exceeding RMB83 million[50]; and

(3)  The 5^th Respondent was a certified public accountant in the Mainland.  Notwithstanding his qualification and the important duties that he had owed to the Company as its Finance Manager and an Executive Director, he preferred the interests of the LeShi Companies at the expense of the Company.

41.  A number of mitigating factors have been agreed between the SFC and the 5^th Respondent[51]:

(1)  The 5^th Respondent has adopted a reasonable course of action by agreeing to conclude these proceedings by way of the Carecraft procedure, thereby saving the time and costs of the SFC as well as the Court, and by agreeing to pay his share of the costs of the SFC in these proceedings;

(2)  The 5^th Respondent has been cooperative with the SFC in relation to these proceedings and accepts liability.  He has further agreed to assist the SFC by giving evidence in these proceedings in relation to the other Respondents, if required;

(3)  The 5^th Respondent did not personally benefit from the aforesaid misconduct; and

(4)  The 5^th Respondent has been a certified public accountant in the Mainland since 2001 and has built a successful career.  These proceedings have already adversely affected his reputation.  There is no real risk that the 5^th Respondent will commit similar misconduct.

42.  Mr Isaac Chan[52], counsel for the 5^th Respondent, agreed that a disqualification period of 5 years is appropriate.  In addition to the above mitigating factors, Mr Chan submitted that:

(1)  The 5^th Respondent’s involvement in the Subject Transactions was brief.  The 5^th Respondent was only involved in Transaction 3 (which took place less than 3 weeks after he was appointed as the Finance Manager of the Company)  and Transactions 4-1 and 4-2 (which took place within 1 week after he was appointed as an Executive Director of the Company); and

(2)  The 5^th Respondent’s early settlement with the SFC sufficiently demonstrates his remorse and the low likelihood of his reoffending.

Compensation Order

43.  The agreed compensation order of HKD4 million forms merely part of the Loss suffered by the Company and/or the Group, inclusive of interest thereon.  Nevertheless, I accept Ms Lam’s submission that the agreed compensation order is appropriate in the circumstances:

(1)  The SFC has reserved its rights against the other Respondents for the balance of the Loss;

(2)  Public interest favours prompt and responsible resolution of disputes. Resolving the case against the 5^th Respondent by way of the Carecraft procedure reduces the overall litigation costs, promotes efficiency in the administration of justice and ensures that at least part of the Loss is compensated at this stage; and

(3)  The SFC has taken into account the available assets of the 5^th Respondent. The value of his total net assets is verified to be approximately RMB5.8 million in his Affirmation dated 18 June 2025.

44.  Mr Chan agreed that a compensation order of HKD4 million is appropriate.  He highlighted that:

(1)  The compensation sum is commensurate with the limited role assumed by the 5^th Respondent, namely, a mere employee who started his position as an Executive Director of the Company 2 days before the Advertising Agreement was entered into on 22 March 2017 and 4 days before the sum of RMB80 million was advanced to Beijing Maiji on 24 March 2017; and

(2)  The compensation sum is reasonable considering the 5^th Respondent’s current financial condition.  Currently, the 5^th Respondent is an employee who earns RMB1.48 million per annum with net assets of approximately RMB5.8 million in value.  The sum payable pursuant to the proposed compensation and costs orders accounts for around ¾ of the 5^th Respondent’s net assets, which are sufficiently severe sanctions for his liabilities.

45.  In passing, I note that Mr Chan initially indicated in his written submissions that there is a potential argument that the Company has suffered only reflective loss which is not recoverable by it in the circumstances.  At the hearing, however, Mr Chan confirmed that the 5^th Respondent would no longer be pursuing this argument.

46.  Other than the compensation order, the 5^th Respondent also agreed to pay HKD750,000 in full and final settlement of his share of the SFC’s costs in these proceedings[53].

47.  Having regard to the above matters, I accept that the conduct of the 5^th Respondent is sufficiently serious to fall within the top end of the minimum bracket.  A disqualification period of 5 years is commensurate with the gravity of the 5^th Respondent’s conduct and gives appropriate regard to the aforesaid mitigating factors. Accordingly, I made an order in terms of the draft order submitted to this Court subject to the minor amendment discussed with counsel at the hearing.

STATEMENT OF FACTS NOT IN DISPUTE FOR CARECRAFT SETTLEMENT BETWEEN THE PETITIONER AND THE 5^TH RESPONDENT

A.  Introduction

1.  On 29 July 2021, the Securities and Futures Commission (Petitioner)  presented a Petition under section 214 of the Securities and Futures Ordinance (Cap. 571)  (Ordinance), as amended on 25 January 2024, seeking, amongst other things:

1.1  A disqualification order, pursuant to section 214(2)(d)  of the Ordinance, be made against each of the 1^st to 7^th Respondents that each of them shall not, for such periods as the Court might determine, without leave of the Court:

(a)  be, or continue to be, a director, liquidator, or receiver or manager of the property or business, of any listed or unlisted corporation in Hong Kong, including Coolpad Group Limited (Company)  or any of its subsidiaries and affiliates; and

(b)  in any way, directly or indirectly, be concerned, or take part, in the management of any listed or unlisted corporation in Hong Kong, including the Company or any of its subsidiaries and affiliates;

1.2  An order, pursuant to section 214(2)(e)  of the Ordinance, be made against each of the 1^st to 7^th Respondents requiring each of them, whether individually or jointly and severally, to compensate the Company and/or the Company and its subsidiaries (Group)  for the loss suffered by the Company and/or the Group as particularised in paragraph 0 below (Loss), together with interest thereon pursuant to section 48 of the High Court Ordinance (Cap. 4); and

1.3  In the alternative to paragraph 1.2 above, an order under sections 214(2)(b)  and 214(2)(e)  of the Ordinance that the Company shall bring civil proceedings in its own name or shall procure Yulong Computer Telecommunication Scientific (Shenzhen)  Co., Ltd （宇龍計算機通信科技（深圳）有限公司） (Shenzhen Yulong)  to bring, and/or Shenzhen Yulong shall bring, such proceedings as the Court considers appropriate against any or all of the 1^st to 7^th Respondents, to recover the Loss suffered by the Company and/or the Group as particularised in paragraph 71 below, together with interest thereon pursuant to section 48 of the High Court Ordinance (Cap. 4).

2.  Subject to the approval of this Court, the Petitioner and the 5^th Respondent, Zhang Wei (5^th Respondent), consent to the disposal of these proceedings against the 5^th Respondent by way of the summary procedure (Carecraft Procedure)  sanctioned in Re Carecraft Construction Co Limited [1994] 1 WLR 172, as clarified by the English Court of Appeal in Secretary of State for Trade and Industry v Rogers [1996] 1 WLR 1569 and as adopted by this Court in a number of cases in respect of proceedings under section 214 of the Ordinance.

3.  This Statement sets out the material facts relied upon by the Petitioner in these proceedings which are not disputed by the 5^th Respondent for the purpose of disposing of these proceedings against him by way of the Carecraft Procedure.

4.  Solely for the purpose of resolving these proceedings against the 5^th Respondent by way of the Carecraft Procedure, and by reference to the facts set out in Sections C to J below (which the 5^th Respondent admits and accepts), the 5^th Respondent accepts that during the period from June 2016 to July 2017 (Relevant Period), the business and affairs of the Company, for which the 5^th Respondent as its Executive Director (ED)  was responsible in part, have been conducted in a manner:

4.1  involving misfeasance or other misconduct towards the Company, its members or any part of its members under section 214(1)(b)  of the Ordinance;

4.2  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 under section 214(1)(c)  of the Ordinance; and

4.3  unfairly prejudicial to its members or any part of its members under section 214(1)(d)  of the Ordinance.

5.  On the basis of the facts set out in Sections C to J below, the Petitioner and the 5^th Respondent agree and the 5^th Respondent does not object to the following orders being made against him:

5.1  A disqualification order being made against him under section 214(2)(d)  of the Ordinance that, for a period of five years, the 5^th Respondent shall not, without the leave of the Court:

(a)  be, or continue to be, a director, liquidator, or receiver or manager of the property or business, of any listed or unlisted corporation in Hong Kong, including the Company or any of its subsidiaries and affiliates; and

(b)  in any way, directly or indirectly, be concerned, or take part, in the management of any listed or unlisted corporation in Hong Kong, including the Company or any of its subsidiaries and affiliates;

The definitions of “subsidiaries” and “affiliates” are set out in Appendix 1 to this Statement; and

5.2  An order under section 214(2)(e)  of the Ordinance that the 5^th Respondent shall pay the sum of HK$4,000,000 to the Company, being part of the Loss suffered by the Company and/or the Group, inclusive of interest thereon.  For the avoidance of doubt, it is expressly understood that the payment of the sum of HK$4,000,000 by the 5^th Respondent to the Company is without prejudice to the Petitioner’s right to pursue the 1^st, 2^nd, 3^rd, 4^th, 6^th and/or 7^th Respondents for the balance of the Loss, and is not intended to fix the amount of Loss as contended by the Petitioner.

6.  If, pursuant to this Statement, the Court disposes of these proceedings against the 5^th Respondent by way of the Carecraft Procedure, the 5^th Respondent agrees to pay and the Petitioner accepts the sum of HK$750,000 in full and final settlement of the 5^th Respondent’s share of the Petitioner’s costs in these proceedings.

7.  In the event of a disqualification order being made against the 5^th Respondent by reference to this Statement:

7.1  the Petitioner and the 5^th Respondent agree that they will jointly apply to this Court for a direction that this Statement be annexed to the Order to be made by this Court; and

7.2  without prejudice to all of the Petitioner’s rights, the Petitioner specifically reserves the right to:

(a)  refer to this Statement for all purposes connected with or ancillary to these proceedings, including but not limited to, the continuation of these proceedings against other respondents; and

(b)  disclose this Statement to any third party where it appears to the Petitioner proper to do so in the public interest, including, but not limited to, making use of this Statement for the purpose of any press release issued in respect of these proceedings.

8.  The 5^th Respondent has adopted a reasonable course of action to conclude these proceedings by way of the Carecraft Procedure which saves the time and costs of the Petitioner and the Court.  The 5^th Respondent has also agreed to assist the Petitioner by agreeing to give evidence in these proceedings in relation to the 1^st, 2^nd, 3^rd, 4^th, 6^th and/or 7^th Respondents, if so required.  For the avoidance of doubt, the payment of the sum of HK$4,000,000 by the 5^th Respondent to the Company is not intended to fix the amount of Loss at HK$4,000,000 and the Petitioner’s rights against the 1^st, 2^nd, 3^rd, 4^th, 6^th and/or 7^th Respondents for the balance of the Loss are expressly reserved.

9.  The Petitioner and the 5^th Respondent agree that in the event this Court for whatever reason is of the view that these proceedings shall not be dealt with by way of the Carecraft Procedure or that a full hearing is appropriate, no admission or concession by either the Petitioner or the 5^th Respondent nor any proposal for disqualification or the period of disqualification herein referred to or liability to pay costs shall be referred to or relied upon by either party at any subsequent hearing in these proceedings without the prior written consent of both parties.

B.  Facts not in dispute

10.  The structure of the following sections of this Statement is as follows:

10.1   Sections C to D below set out the background information relating to the Company and its management, and the duties owed by the 5^th Respondent to the Company.

10.2   Sections E to I below set out the facts relied upon by the Petitioner in support of its case that the business and affairs of the Company have been conducted in such manner as described in sections 214(1)(b), (c)  and (d)  of the Ordinance.

10.3   Section J below sets out the facts relied upon by the Petitioner in support of its case that the 5^th Respondent was in breach of his duties and had caused, allowed and permitted the business and affairs of the Company to have been conducted in the manner aforesaid.

10.4   Section K below sets out the mitigating factors of the 5^th Respondent.

10.5   Section L below sets out the proposal for disqualification of the 5^th Respondent.

C.  The Company

11.  The Company (formerly known as China Wireless Technologies Limited)  was incorporated in the Cayman Islands as an exempted company with limited liability on 11 June 2002 and was registered in Hong Kong under the then Companies Ordinance (Cap. 32)  as a registered overseas company on 24 February 2003.  Its shares were listed on the Main Board of The Stock Exchange of Hong Kong Limited on 9 December 2004 (Stock Code: 2369)  and remain so listed as at the date of this Statement.

12.  The registered office of the Company is situated at Cricket Square, Hutchins Drive, P.O. Box 2681, Grand Cayman, KY1-1111, Cayman Islands.  Its principal place of business in Hong Kong is situated at 44/F, Office Tower, Convention Plaza, 1 Harbour Road, Wanchai, Hong Kong.

13.  As at 31 December 2020, the authorised share capital of the Company was HK$200,000,000 divided into 20,000,000,000 ordinary shares of HK$0.01 each.  The amount of the capital issued and fully paid up as at 31 December 2020 was HK$65,334,074.80.

14.  At all material times, the Group was primarily engaged in the provision of wireless solution and equipment in Mainland China, with a focus on the production and sale of smartphones and the provision of wireless application services and financing services.

15.  The Company wholly owns and at all material times wholly owned, inter alia, the following subsidiaries:

15.1   Dongguan Yulong Telecommunication Tech Co., Ltd（東莞宇龍通信科技有限公司） (Dongguan Yulong), which was incorporated in Mainland China.  Its principal activity is the manufacture of mobile phones; and

15.2   Shenzhen Yulong, which was also incorporated in Mainland China.  Its principal activities include developing and providing integrated solutions for Coolpad smartphone sets, mobile data platform systems and value-added business operations in Mainland China.

D.  The Management of the Company

16.  The 1^st to 7^th Respondents took up the following roles on the board of directors of the Company (Board)  at the material times:

17.  According to the Company’s annual report for the financial year ended 31 December 2017:

17.1   The 1^st Respondent founded Leshi Internet Information & Technology Corp. Beijing (樂視網信息技術（北京）股份有限公司)  (LETV), a company listed on the Shenzhen Stock Exchange (stock code: 300104).

17.2   The 2^nd Respondent is responsible primarily for the finance and administrative functions of the Group. He is an associate member of the Association of the Chartered Certified Accountants and a certified public accountant in Mainland China, and had about 20 years of experience in accounting, finance and corporate management.  He joined the Group in June 2002.

17.3   The 3^rd Respondent had more than 20 years of experience in the communications industry.

17.4   The 4^th Respondent joined LETV in October 2004 and held various positions in LETV from 2004 to 2018, including deputy general manager, head of financial department and the vice-chairman.

17.5   The 5^th Respondent is a member of The Chinese Institute of Certified Public Accountants.  On around 24 July 2015, the 5^th Respondent joined Beijing Leshi (defined below)  and was responsible for the finance management of Beijing Leshi.  During the period between 1 December 2016 and 20 March 2017, the 5^th Respondent was appointed as the Finance Manager of the Company.  On 21 May 2017, the 5^th Respondent was appointed as the CFO of LETV.

17.6   The 6^th Respondent joined the Group in November 2004.  He is a member of the Hong Kong Institute of Certified Public Accountants and had more than 20 years of experience in corporate governance, management and financial controlling.

17.7   The 7^th Respondent joined the Group in November 2004 and had been an INED of another company listed on the Shenzhen Stock Exchange.

18.  On 5 August 2016, Leview Mobile HK Limited (Leview Mobile)  acquired 551,367,386 shares in the Company, increasing its shareholding in the Company from 897,437,000 shares to 1,448,804,386 shares. At all material times, the entire issued share capital of Leview Mobile was held indirectly by the 1^st Respondent through various companies controlled by him.  As at 31 December 2016, the 1^st Respondent was the largest shareholder holding 1,448,804,386 shares in the Company through, inter alia, Leview Mobile, representing 28.81% of the issued share capital of the Company.

19.  By reason of his positions and responsibilities in the Company, the 5^th Respondent owed, inter alia, the following duties to the Company:

19.1   Duty to act in good faith and in the best interests of the Company;

19.2   Duty to exercise powers for proper purposes;

19.3   Duty to exercise independent judgment;

19.4   Duty not to place themselves in a position of conflict of interests;

19.5   Duty not to make secret profits and/or obtain any benefit or gain by reason of or through their position or by reason of some opportunity or knowledge resulting from their position without the Company’s approval;

19.6   Duty not to misappropriate company assets; and

19.7   Duty to exercise reasonable care, skill and diligence in the course of acting as directors of the Company, having regard to the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions of a director in relation to the Company, and the general knowledge, skill and experience that the director has.

20.  At all material times, the 5^th Respondent also owed the following duties under Rule 3.08 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (Listing Rules):

20.1   Duty to act honestly and in good faith in the interests of the Company as a whole (Rule 3.08(a));

20.2   Duty to act for proper purpose (Rule 3.08(b));

20.3   Duty to avoid actual and potential conflicts of interests and duty (Rule 3.08(d));

20.4   Duty to apply such degree of skill, care and diligence as may reasonably be expected of a person of his knowledge and experience and holding his office within the Company (Rule 3.08(f)); and

20.5   Duty to take an active interest in the Company’s affairs and to follow up anything untoward that comes to his attention.

21.  Further, sections 500 to 504 of the Companies Ordinance (Cap. 622)  (CO)  prohibit a company from making loans to a director or a body corporate controlled by a director without obtaining the prescribed approval of its members, and the Company is prohibited from doing the same pursuant to Article 104(4)  of the Company’s Articles of Association applicable at the material time (AOA).

22.  In respect of extending loans to a director or a body corporate controlled by a director, the Company is further required to comply with, inter alia, the following provisions of the Listing Rules:

22.1   Rule 13.13, which requires issuers to announce as soon as reasonably practicable details of any advance to an entity which exceeds 8% under the assets ratio (as defined in the Listing Rules)  (Assets Ratio).  In turn, Rule 13.11(2)(c)  defines “advance to an entity” as the aggregated amount due from and all guarantees given on behalf of an entity and the entity’s subsidiaries (following the terminology in the Listing Rules).

22.2   Rule 14.34, which requires issuers to announce disclosable transactions.  In turn, a “transaction” is defined under Rule 14.04(1)(e)  to include, inter alia, providing financial assistance by an issuer unless they fall within any of the exemptions thereunder, and a transaction or a series of transactions is disclosable if, for example,the Assets Ratio or the consideration ratio (as defined in the Listing Rules)  (Consideration Ratio)  exceeded 5% but was less than 25% (following the terminology in the Listing Rules).

23.  In order to act as the director of the Company, the 5^th Respondent was required to and did sign a formal declaration, undertaking and acknowledgement as per Form B of Appendix 5 to the Listing Rules (Undertaking), whereby he undertook to the Hong Kong Exchanges and Clearing Limited (HKEX)  that he would, in the exercise of his powers and duties as director of the Company, comply with the Listing Rules to the best of his ability (Best Ability Undertaking), and would use his best endeavours to procure the Company’s compliance with the Listing Rules (Best Endeavours Undertaking).

E.  Transactions entered into by the Company and/or its subsidiaries during the Relevant Period

24.  The Petitioner acknowledges that Transactions 1 and 2 entered into by the Company and/or its subsidiaries mentioned below were entered into before the 5^th Respondent was appointed as an ED of the Company.  Details of the Petitioner’s case in respect of Transactions 1 and 2, including the relevant parties, are included in this Statement for completeness.  Unless stipulated as being admitted by the 5^th Respondent, those details in respect of Transactions 1 and 2 hereinbelow are set out as the Petitioner’s case only.

25.  During the Relevant Period, the Company and/or its subsidiaries entered into a number of transactions (defined and outlined in Sections E1 to E5 below)  (Subject Transactions)  with and/or involving the following parties (Transaction Parties):

25.1   Young Star Holdings Limited (Young Star)  (Section E1), the particulars of which are as follows:

(a)  Young Star was incorporated in Hong Kong on 29 April 2014 and was dissolved on 10 January 2020.

(b)  At all material times, the sole shareholder and director of Young Star was Xu Xiao.  Xu Xiao held the shares of Young Star and exercised all rights under those shares as an agent and for the benefit of Hao Yi (Hao), a friend of the 1^st and 4^th Respondents.

25.2   北京潔誠科技有限公司（formerly known as北京潔誠家政服務有限公司）(Beijing Jiecheng) (Section E1), the particulars of which are as follows:

(a)  Beijing Jiecheng was incorporated in Mainland China on 10 August 2015, purporting to carry on the business of the promotion of technical skills, the provision of cleaning services and the sale of daily necessities.

(b)  On incorporation, the sole shareholder, legal representative, sole executive director and general manager of Beijing Jiecheng was Fan Hao (Fan).  Fan held the shares of Beijing Jiecheng and exercised all rights under those shares as an agent and for the benefit of Hao.  On 30 September 2016, Hao replaced Fan in relation to all of the said roles.

(c)  Hao was the ultimate controller of Beijing Jiecheng.

25.3   Blitz Technology Hong Kong Co. Limited (Blitz)  (Section E1), the particulars of which are as follows:

(a)  Blitz was incorporated in Hong Kong on 24 April 2014 in the name of Beijing Electric Vehicle Hong Kong Co. Limited, which was changed to its current name on 5 April 2016.

(b)  At all material times, the sole shareholder of Blitz was Beijing Jiecheng and the sole director of Blitz was Hao.

25.4   北京多樂智慧科技有限公司 (Beijing Duole)  (Section E2), the particulars of which are as follows:

(a)  Beijing Duole was incorporated in Mainland China on 5 March 2015, purporting to carry on the business of the promotion of technical skills.

(b)  At all material times, Beijing Duole was held by Dang Zhengtao (Dang)  and Liu Chong in equal shares, and Dang was also its legal representative, sole executive director and general manager.

(c)  Yu Enyuan (Yu), a friend of the 1^st and 4^th Respondents, was and is the ultimate controller of Beijing Duole.

25.5   新石器龍碼（北京）科技有限公司 (Xinshiqi)  (Section E3), the particulars of which are as follows:

(a)  Xinshiqi was incorporated in Mainland China on 12 October 2011, purporting to carry on the business of technical development, technical promotion, technical transfer, technical services, technical consultation, import and export of goods, import and export of technical skills, agency for imports and exports, sale of electronic products, computers, software, ancillary devices and communication devices.

(b)  At all material times, the shareholders of Xinshiqi were Yu and Zhang Hui.  Between 12 August 2015 and 8 October 2016, Yu and Zhang Hui held 95% and 5% of the shareholding respectively, whilst between 9 October 2016 and 23 January 2018, Yu and Zhang Hui held 98.5% and 1.5% respectively.

(c)  Between 12 October 2011 and 28 June 2015, Yu was the legal representative, sole executive director and general manager, while Xia Xu (Xia)  was the supervisor.  Since 29 June 2015, Xia became the legal representative, sole executive director and general manager, and Yu became the supervisor.

(d)  Yu was and is the ultimate controller of Xinshiqi.

25.6   北京棒棒糖科技有限公司 (Beijing Bangbangtang)  (Section E4), the particulars of which are as follows:

(a)  Beijing Bangbangtang was incorporated in Mainland China on 11 December 2014, purporting to carry on the business of technical development, technical promotion, technical transfer, technical services, sale of daily necessities, clothing, shoes, hats, cosmetics, art pieces, cultural pieces, domestic electrical appliances, fruit, vegetables, computers, software and ancillary devices, communication devices, machinery, electronics, hardware and construction materials, graphic design, economic data consultation, enterprise management, computer maintenance, computer system servicing, domestic labour services, business planning, organization of cultural exchange activities, conferencing services, organizing exhibition activities, and designing, producing and publishing advertisements and providing agency services in relation thereto.

(b)  At the material times, the shareholding and directorship of Beijing Bangbangtang were as follows:

(i)  Between 11 December 2014 and 20 July 2017, Yu held 70% shares and Chen Zheng Yu held 30% shares, with the latter being the sole executive director.

(ii)  Since 21 July 2017, Sun Bin held 70% shares and Jie Jing Hua held 30% shares, with the former being the sole executive director.

(c)  Yu was and is the ultimate controller of Beijing Bangbangtang.

25.7   北京啟能萬維科技有限公司 (Beijing Qineng)  (Section E4), the particulars of which are as follows:

(a)  Beijing Qineng was incorporated in Mainland China on 21 May 2009, purporting to carry on the business of technical development, technical consultation, technical services, technical transfer, import and export of goods, import and export of technical skills, agency for imports and exports, professional contracting, and sale of electronic products, computers, software, ancillary devices and communication devices.

(b)  At all material times, the sole shareholder of Beijing Qineng was Yu.

(c)  On incorporation, Yu was the legal representative, sole executive director and general manager.  On 2 June 2011, Xia became the legal representative and sole executive director, and Yu remained as general manager.

(d)  Yu was and is the ultimate controller of Beijing Qineng.

25.8   北京嗨購電子商務有限公司 (Beijing Haigou)  (Section E4), the particulars of which are as follows:

(a)  Beijing Haigou was incorporated in Mainland China on 9 December 2014,  purporting to carry on the business of sales of communication devices, hardware, stationery, sports equipment, machinery, computers, software and ancillary devices, jewellery, domestic electrical appliances, construction materials, knitted goods, clothing and accessories, luggage, cosmetics, electronics, art pieces, daily necessities, photography equipment, toys, audio equipment, communications equipment, furniture, toiletries, gifts, watches, glasses, office supplies, decorative materials, small accessories, agency for imports and exports, import and export of goods, import and export of technical skills, technical development, technical services, technical transfer, technical consultation, technical promotion, economic trade consultation, basic software services and app services.

(b)  At all material times, between 27 January 2015 and 21 June 2017, the shareholders of Beijing Haigou were Yu (59.5%), Chan Zheng Yu (25.5%), and Zhao Wei Guo (15%).  Since 22 June 2017, the shareholders were Sun Bin (59.5%)  and Jie Jing Hua (40.5%).

(c)  Between 9 December 2014 and 21 June 2017, Chan Zheng Yu was the sole executive director.  Since 22 June 2017, Sun Bin became the sole executive director.

(d)  Yu was and is the ultimate controller of Beijing Haigou.

25.9   石河子市瑞晨股權投資合夥企業（有限合夥） (Shihezi Ruichen)  (Section E4), the particulars of which are as follows:

(a)  Shihezi Ruichen was incorporated in Mainland China on 12 October 2010, purporting to carry on the business of holding shares in listed companies by investing in non-listed companies, subscribing for privately-offered shares or acquiring shares.

(b)  At all material times since 23 December 2015, it was a limited partnership with its partners being Tan Songbin (Tan)  and Zhou Juan, with each holding 90% and 10% respectively between 12 October 2010 and 1 August 2017, and 60% and 40% respectively since 2 August 2017.

(c)  Shihezi Ruichen was and is controlled by Tan, who is an acquaintance of the 4^th Respondent.

25.10 深圳市華士成科技有限公司 (Shenzhen Huashicheng)  (Section E4), the particulars of which are as follows:

(a)  Shenzhen Huashicheng was incorporated in Mainland China on 17 December 2010, purporting to carry on the business of the technical development, sale and domestic trade of electronic products, import and export of products, import and export of technical skills, investment consultation and other information consultation.

(b)  At the material times, the shareholding and directorship of Shenzhen Huashicheng were as follows:

(i)  Between 31 July 2013 and 25 July 2017, the sole shareholder was Liu Mao Hua, who was also the legal representative, sole executive director and general manager.

(ii)  Between 26 July 2017 and 13 November 2017, the sole shareholder was Li Jun, who was also the legal representative, sole executive director and general manager.

(iii)  Since 14 November 2017, the sole shareholder was Li Chang Biao, who was also the legal representative, sole executive director and general manager.

(c)  Shenzhen Huashicheng was and is controlled by Huang Zewei, who met the 5^th Respondent once through the introduction of the 1^st and 4^th Respondents on a social occasion.

25.11 深圳市榮盛進出口有限公司 (Shenzhen Rongsheng)  (Section E4), the particulars of which are as follows:

(a)  Shenzhen Rongsheng was incorporated in Mainland China on 18 March 2003, purporting to carry on the business of purchase and sale of plastics, electronics, hardware, clothing, communication devices, construction materials and daily necessities, the domestic commerce and provision of supplies, and imports and exports.

(b)  At the material times, the shareholding and directorship of Shenzhen Rongsheng were as follows:

(i)  Between 27 April 2013 and 26 March 2017, the sole shareholder was Xia Yang, who was also the legal representative and sole executive director.

(ii)  Between 27 March 2017 and 25 June 2017, Sun Lin and Xia Yang were each 50% shareholders, and Xia Yang was the legal representative and sole executive director.

(iii)  Between 26 June 2017 and 13 November 2017, Sun Lin and Li Jun were each 50% shareholders, and Li Jun was the legal representative, sole executive director and general manager.

(iv)  Since 14 November 2017, Zeng Tian Shuai and Chou Jia Han were each 50% shareholders, and Zeng Tian Shuai was the legal representative, sole executive director and general manager.

(c)  Shenzhen Rongsheng was and is controlled by Huang Zewei, who met the 5^th Respondent once through the introduction of the 1^st and 4^th Respondents on a social occasion.

25.12 北京眾視訊聯科技有限公司 (Beijing Zhongshi) (Sections E3, E4 and E5), the particulars of which are as follows:

(a)  Beijing Zhongshi was incorporated in Mainland China on 24 December 2015, purporting to carry on the business of technical promotion, technical development, technical consultation, technical services, basic software services, app services, software development, computer system services, and sale of computers, software and ancillary devices, communication devices, domestic electrical appliances, automobile parts, photography equipment, sports equipment, stationery and art pieces.

(b)  At all material times, Li Xiang Hui was the sole shareholder, legal representative, sole executive director and general manager of Beijing Zhongshi.

25.13 北京邁吉夥伴廣告有限公司(Beijing Maiji)  (Section E5), the particulars of which are as follows:

(a)  Beijing Maiji was incorporated in Mainland China on 12 November 2008, purporting to carry on the business of design, production, agency and publishing of advertisements, conferencing and exhibition services, organisation of cultural exchange events and economic trade consultation.

(b)  Between 12 November 2008 and 23 October 2017, Zhang Xiao Hui was the sole shareholder. Between 24 October 2017 and 13 December 2017, the shareholders were Zhang Li and Ma Xin Tao.

(c)  Between 12 November 2008 and 13 December 2017, Zhang Xiao Hui was the legal representative, sole executive director and general manager.  Since 14 December 2017, Zhang Li became the legal representative, sole executive director and general manager.

26.  The 5^th Respondent acknowledges it is the Petitioner’s case that, between June 2016 and March 2017, the Group paid a total sum of approximately RMB 2,275 million (or in certain instances, the USD equivalent)  to various payees, out of which:

26.1   approximately RMB 1,776 million were transferred to the bank accounts of LETV and its associated companies (LeShi Companies)  which were held and/or controlled by the 1^st Respondent;

26.2   approximately RMB 14 million were transferred to the bank account of Young Star, which was controlled by Hao, a friend of the 1^st and 4^th Respondents; and

26.3   the remaining RMB 485 million were initially transferred to the bank accounts of other companies which were held and/or controlled by friends/acquaintances of the 1^st and/or 4^th Respondents, and then transferred back to the Group to effectively repay in part the amount which the Group had transferred to the LeShi Companies as referred to in paragraph 26.1 above.

27.  The 5^th Respondent was involved with and approved some of the transfers in relation to the total sum of RMB 2,275 million, which are particularised below.

28.  The LeShi Companies include but are not limited to the following entities:

28.1   LETV, the particulars of which are as follows:

(a)  LETV was a company incorporated in Mainland China on 10 November 2004.

(b)  It commenced listing on the Shenzhen Stock Exchange on 12 August 2010 (Stock Code: 300104)  and was delisted with effect from 21 July 2020 by reason of, inter alia, its poor financial performance.

(c)  As of 20 April 2017:

(i)  Its legal representative was the 1^st Respondent.

(ii)  Its non-independent directors were the 1^st Respondent (who was also the Chairman), Dr. Han Fang Ming and the 4^th Respondent. Its independent directors were Zhu Ning and Cao Bin.  Its supervisors were Wu Meng (Wu), Tian Bing Xin and Ji Xiao Qing.

(iii)  Its major shareholders included the 1^st Respondent (34.46%)  and the 4^th Respondent (3.09%), with the 1^st Respondent being the controlling shareholder and ultimate controller.

(iv)  Key management personnel included the 1^st Respondent, who was the Chairman and General Manager, the 4^th Respondent, who was a director and Deputy General Manager and Wu, who was the Chairman of the Supervisory Committee.

28.2   Le Shi Holdings (HK)  Limited (HK LeShi), the particulars of which are as follows:

(a)  HK LeShi was incorporated in Hong Kong on 29 October 2012.

(b)  At the material times, the shareholding and directorship of HK LeShi were as follows:

(i)  Its sole shareholder was Beijing LeShi (as defined below).

(ii)  Its directors were Deng Wei, Mok Chui Tin (resigned on 16 November 2016), Gao Jun (appointed on 16 November 2016)  and Wu.

28.3   Le Shi Internet Information & Technology (Hong Kong)  Limited (HK LeShi Internet), the particulars of which are as follows:

(a)  HK LeShi Internet was incorporated in Hong Kong on 24 May 2011.

(b)  At the material times, the shareholding and directorship of HK LeShi Internet were as follows:

(i)  Its sole shareholder was LETV.

(ii)  Its directors were the 1^st Respondent, the 4^th Respondent, Mok Chui Tin (20 June 2016 to 16 November 2016), Gao Jun (16 November 2016 to 19 June 2017)  and Deng Wei.

28.4   Leshi Holding Beijing Co., Ltd (樂視控股（北京）有限公司)  (Beijing LeShi), the particulars of which are as follows:

(a)  Beijing LeShi was incorporated in Mainland China on 8 September 2011, purporting to carry on the business of project investment, investment management, asset management, investment consultation, economic trade consultation and rental of office space.

(b)  At all material times since 25 December 2015, its shareholders have been the 1^st Respondent (92.08%), 匯鑫資產管理（天津）合夥企業（有限合夥） (3.21%), 晨曦資產管理（天津）合夥企業（有限合夥） (3.21%)  and the 1^st Respondent’s sister Jia Yue Fang (1.5%).

(c)  Between 8 September 2011 and 12 June 2017, the 1^st Respondent was the legal representative of Beijing LeShi.  Since 13 June 2017, Wu has been the legal representative of Beijing LeShi.  The 1^st Respondent remained the sole executive director throughout.

28.5   重慶樂視商業保理有限公司 (Chongqing LeShi),the particulars of which are as follows:

(a)  Chongqing LeShi was incorporated in Mainland China on 18 May 2016, purporting to carry on the business of commercial factoring.

(b)  At all material times, its sole shareholder was 樂視投資管理（北京）有限公司.

(c)  At all material times until 3 May 2017, its legal representative was Huang Yong Li, and since 4 May 2017, its legal representative has been Jin Jie.

28.6   Lesoar Holdings Limited (Lesoar), the particulars of which are as follows:

(a)  Lesoar was incorporated in Hong Kong on 14 January 2014.

(b)  At the material times, the shareholding and directorship of Lesoar were as follows:

(i)  Its sole shareholder was 樂視投資管理（北 京） 有限公司until at least 14 January 2017.  By 14 January 2018, its sole shareholder was Innovation Era Holding Ltd., but it is unclear when the change in shareholding occurred.

(ii)  Its sole director was Wu.

29.  The effect of the Subject Transactions was that large sums had effectively been lent by the Group to the LeShi Companies which were in financial difficulties at the material time, without proper disclosure or approval as illustrated by, inter alia, the following matters:

29.1   According to the 2016 Annual Report of LETV:

(a)  Certain LeShi Companies were experiencing financial pressure;

(b)  LETV experienced net outflow of cash in the sum of RMB 1,068,060,768.96 as a result of business activities in 2016, as compared with net inflow of cash in the sum of RMB 875,701,876.46 as a result of business activities in 2015;

(c)  LETV’s cash and cash equivalents decreased by RMB 1,245,570,140.13 in 2016, as compared with an increase of RMB 2,267,429,519.51 in 2015; and

29.2   According to the 2017 Interim Report of LETV:

(a)  LETV’s total operating income for the first half of 2017 decreased by 44.56% as compared with the same period in 2016;

(b)  LETV was loss-making in the first half of 2017 and the net loss attributable to the shareholders of LETV amounted to RMB 636,765,600; and

(c)  In the first half of 2017, LETV suffered loss amounting to approximately RMB 240,000,000 as a result of asset impairment.

29.3   Based on publicly available information:

(a)  In or around October 2015, the 1^st Respondent pledged 85% of his shares in LETV to support various projects by LeEco.

(b)  It is rumoured that, in or around November 2016, LETV was unable to repay RMB 10 billion owed to a supplier.

(c)  In or around November 2016, the 1^st Respondent admitted in an open letter to LETV’s staff that LETV was suffering from cash flow shortage.

(d)  In or around July 2017, China Merchants Bank, a creditor of the LeShi Companies, obtained a Court order in Mainland China to freeze RMB 1.24 billion worth of assets of three subsidiaries of LeEco, the 1^st Respondent and the 1^st Respondent’s wife.

30.  All of the funds lent to the LeShi Companies were repaid to the Group, except for a sum of RMB 69,875,313.17, which remains unrecovered by the Group as at the date of this Statement.

E1.  Transaction 1 – Prepayments made to Young Star[54]

31.  By agreements entered into between the Company and Young Star on or around 23 June 2016 (0623 Agreement), 10 August 2016 (0810 Agreement)  and 1 September 2016 (0901 Agreement)  (together, Young Star Agreements)  respectively, the Company purportedly appointed Young Star to negotiate on its behalf the acquisition of an unnamed US company (later identified to be Atieva, Inc.)  (Target US Company)  from Blitz and to conduct due diligence, under the following terms:

31.1   The Company would make prepayments of USD 50 million, USD 90 million and USD 30 million (Young Star Prepayments)  respectively under the Young Star Agreements to Young Star as deposit for the acquisition, which Young Star would forward to Blitz upon receipt.

31.2   If the negotiation and due diligence work could not be completed before a certain date, Young Star was to:

(a)  refund the prepayments to the Company in the following manner:

(i)  The USD 50 million prepayment made under the 0623 Agreement was to be repaid if the negotiation and due diligence work could not be completed by 8 July 2016;

(ii)  The USD 90 million prepayment made under the 0810 Agreement was to be repaid if the negotiation and due diligence work could not be completed by 25 December 2016; and

(iii)  The USD 30 million prepayment made under the 0901 Agreement was to be repaid if the negotiation and due diligence work could not be completed by 31 October 2016; and

(b)  pay a capital occupation fee to the Company.

32.  Pursuant to the Young Star Agreements, the Company advanced USD 50 million, USD 90 million and USD 30 million to Young Star on 27 June 2016, 12 August 2016 and 2 September 2016 respectively.

33.  In the meantime, on 1 July 2016, the 1^st Respondent represented Beijing Leshi to enter into a loan agreement (LeShi Loan Agreement)  with Beijing Jiecheng as lender, for a loan of RMB 1.2 billion by the issuance of bonds.

34.  Out of the total sum of USD 170 million paid to Young Star, a sum of USD 46 million was transferred by Young Star to HK LeShi Internet on 29 June 2016 and a total sum of USD 122 million was transferred by Young Star to HK LeShi on 30 June 2016, 12 August 2016 and 2 September 2016.  The net effect is that between June 2016 and September 2016, the sum of USD 2 million was caused to be advanced to Young Star and the sum of USD 168 million was caused to be advanced to the LeShi Companies, which were held and/or controlled by the 1^st Respondent.

35.  The acquisition of the Target US Company never materialised.

36.  On 8 July 2016, the sum of USD 50 million advanced under the 0623 Agreement, together with the capital occupation fee of USD 0.55 million, was repaid by Young Star to the Company, which was funded by HK LeShi.

37.  On 5 January 2017, the Company entered into a repayment agreement with Young Star, Blitz, Beijing Jiecheng and Dongguan Yulong, pursuant to which Beijing Jiecheng was to repay the funds under the 0810 Agreement and the 0901 Agreement and the capital occupation fee (which were owed by Young Star)  to Dongguan Yulong (who would receive the same on behalf of the Company)  by 31 March 2017 (Young Star Repayment Agreement).  The capital occupation fee was subsequently reduced in an undated supplemental agreement to the Young Star Repayment Agreement.

38.  Between 21 and 28 March 2017, the sum of RMB 840 million advanced under the 0810 Agreement and the 0901 Agreement was repaid by Beijing Jiecheng to Dongguan Yulong, RMB 485 million of which was transferred from funds advanced by Shenzhen Yulong under Transactions 4-1 and 4-2 (see paragraphs 59 and 65 below), and the remaining RMB 355 million of which was funded by Beijing LeShi.  A total capital occupation fee of approximately RMB 31,861,221.23 was paid for the funds advanced under the 0810 Agreement and the 0901 Agreement.

39.  The fact that the Young Star Prepayments were transferred to HK LeShi Internet and HK LeShi and were ultimately repaid partially by Shenzhen Yulong under Transactions 4-1 and 4-2 and partially by Beijing LeShi, coupled with the following indicia, demonstrate that Transaction 1 was merely a guise under which short-term funding was arranged for the LeShi Companies:

39.1   Little or no due diligence or internal assessment (and in any event no proper due diligence)  had been conducted by the Company on Young Star prior to the entry into of the Young Star Agreements, despite there being no previous dealings between the Group and Young Star.

39.2   Young Star, Beijing Jiecheng and Blitz were all controlled by Hao, a friend of the 1^st and 4^th Respondents (see paragraphs 25.1(b), 25.2(b), 25.2(c)  and 25.3(b)  above).

39.3   The 0623 Agreement was signed on behalf of Young Star by Nie Chengzhi (Nie), the deputy director of Beijing LeShi’s finance department, while the 0810 Agreement and the 0910 Agreement were signed by Wu, Chairman of LETV’s Supervisory Committee and a director of HK LeShi (see paragraphs 28.1(c)(iv)  and 28.2(b)  above).

39.4   Young Star and HK LeShi shared the same registered office from 16 November 2016 to 7 May 2017, while Blitz and HK LeShi shared the same registered office address and the same company secretary from 8 May 2017 to 23 April 2019.

39.5   The Board had never been formally notified of the proposed acquisition of the Target US Company.

39.6   The scope of business of the Target US Company is unrelated to that of the Group.

39.7   The Company never received any due diligence information regarding Blitz or the Target US Company from Young Star.

39.8   The Company never conducted any valuation to assess the value of Blitz’s shareholding in the Target US Company.

39.9   There is no commercial justification for making prepayments to Blitz through Young Star, both of which were controlled by Hao, instead of, for instance, placing the funds in escrow.

39.10 It is unclear why, for the same shareholding of Blitz in the Target US Company, the initial discussion was for a prepayment of the sum of USD 50 million (i.e. the prepayment made under the 0623 Agreement), which was later increased to the sum of USD 90 million (i.e. the prepayment made under the 0810 Agreement), and which was further increased within three weeks to the sum of USD 120 million (i.e. the total prepayment made under the 0810 Agreement and the 0901 Agreement).

39.11 The refund of the prepayments made under the 0810 Agreement and the 0910 Agreement, which had been due since 25 December 2016 and 31 October 2016 respectively, were only made between 21 and 28 March 2017, shortly after the Company’s auditor, Ernst & Young (EY)  started raising concerns as to Transaction 1 since 17 January 2017.

39.12 A substantial part of the funds used to refund the prepayments made under the 0810 Agreement and the 0910 Agreement was transferred from funds paid out by Shenzhen Yulong under Transactions 4-1 and 4-2 (defined below).

40.  The 5^th Respondent acknowledges that it is the Petitioner’s case that the 1^st, 2^nd and 4^th Respondents were directly involved in Transaction 1.  In the Petitioner’s case, their involvements include (but are not limited to)  the following:

40.1   The Young Star Agreements were drafted on the instructions of the 1^st Respondent, as relayed to Liu Mingzhuo, head of the Company’s funds department, by the 2^nd Respondent.

40.2   The 0623 Agreement was approved by the 1^st, 2^nd and 4^th Respondents, while the 0810 Agreement and the 0901 Agreement were approved by the 1^st and 2^nd Respondents.

40.3   The Young Star Agreements were signed by the 2^nd Respondent on behalf of the Company.

40.4   The remittances of the Young Star Prepayments were approved by, inter alia, the 2^nd Respondent.

E2.  Transaction 2 – Prepayments made to Beijing Duole[55]

41.  By purchasing framework agreements entered into between Dongguan Yulong and Beijing Duole on or around 11 and 18 August 2016 respectively (together, Beijing Duole Agreements), Dongguan Yulong purportedly agreed to purchase, and Beijing Duole purportedly agreed to supply, touchscreen display modules and related components, pursuant to which Dongguan Yulong would make prepayments of RMB 100 million and RMB 200 million to Beijing Duole under the respective agreements, which would be used to settle 20% of the amount payable under each purchase order.

42.  Pursuant to the Beijing Duole Agreements, Dongguan Yulong advanced RMB 100 million and RMB 200 million to Beijing Duole on 12 August 2016 and 19 August 2016 respectively (Beijing Duole Prepayments).

43.  The sums of RMB 100 million and RMB 200 million were immediately transferred by Beijing Duole to Beijing LeShi, which was held and/or controlled by the 1^st Respondent, on 12 August 2016 and 19 August 2016 respectively.

44.  The Beijing Duole Agreements were eventually terminated and no purchase orders were ultimately made under the Beijing Duole Agreements.

45.  On 19 and 20 December 2016, the sum of RMB 300 million was repaid by Beijing Duole to Dongguan Yulong, which was funded by the 1^st Respondent and Beijing LeShi.  Interest totalling RMB 9,861,112.66 was paid for the funds advanced under the Beijing Duole Agreements.

46.  In the Petitioner’s case, the fact that the Beijing Duole Prepayments were transferred to Beijing LeShi and were ultimately repaid by the 1^st Respondent and Beijing LeShi, coupled with the following indicia, demonstrate that Transaction 2 was merely a guise under which short-term funding was arranged for the LeShi Companies:

46.1   Little or no due diligence work or internal assessment (and in any event no proper due diligence)  had been conducted by the Group on Beijing Duole, despite there being no previous dealings between the Group and Beijing Duole. This was also contrary to previous practice.

46.2   Beijing Duole is controlled by Yu, a friend of the 1^st and 4^th Respondents.

46.3   As set out in paragraph 25.4(b)  above, the 50% shareholder, legal representative, sole executive director and general manager of Beijing Duole at the material time was Dang.  Dang used a LeShi email address, and his facsimile number was the same as that of the LeShi Companies.

46.4  As set out in paragraph 25.4(a)  above, according to its business registration records, Beijing Duole’s scope of business did not include the production of mobile phone components.

46.5   The Beijing Duole Agreements do not contain details or specifications about the goods to be provided by Beijing Duole beyond what is stated in paragraph 41 above.

46.6   The Beijing Duole Agreements did not provide for a discount, and provided for interest running from the date of prepayment, which was unusual for framework purchasing agreements entered into by the Group.

46.7   The Beijing Duole Agreements had not been signed or approved by the Board, contrary to previous practice.

46.8   The Beijing Duole Agreements were terminated without any purchase order having been placed thereunder.

46.9   The transaction amount under the Beijing Duole Agreements was significantly higher than under agreements previously entered into by the Group with its suppliers.

46.10 Contrary to usual practice, the Beijing Duole Agreements and the payment requests for the Beijing Duole Prepayments were not signed by any representative of the Company’s Procurement Committee (Procurement Committee).

47.  The 5^th Respondent acknowledges that it is the Petitioner’s case that the 1^st and 2^nd Respondents were directly involved in Transaction 2. Their involvements, in the Petitioner’s case include (but are not limited to)  the fact that the Beijing Duole Prepayments were approved by them.

E3.  Transaction 3 – Prepayment made to Xinshiqi

48.  By a purchasing framework agreement entered into between Dongguan Yulong and Xinshiqi on or around 20 December 2016 (Xinshiqi Agreement), Dongguan Yulong purportedly agreed to purchase, and Xinshiqi purportedly agreed to supply, touchscreen display modules and related components, pursuant to which Dongguan Yulong would make a prepayment to Xinshiqi in the sum of RMB 300 million, which would be used to settle 20% of the amount payable under each purchase order.

49.  Pursuant to the Xinshiqi Agreement, Dongguan Yulong advanced RMB 300 million to Xinshiqi on 23 December 2016 (Xinshiqi Prepayment).

50.  The entire sum of RMB 300 million was transferred by Xinshiqi to Beijing Zhongshi on 23 December 2016 and on the same day Beijing Zhongshi transferred the said sum to Beijing LeShi. The financial controller of Beijing Zhongshi is Nie(the deputy director of Beijing LeShi’s finance department), and its registered office was situated in the same building as LETV’s business address and Beijing LeShi’s registered office.

51.  The net effect is that in December 2016, a sum of RMB 300 million was caused to be advanced under Transaction 3 to Beijing LeShi.  In the Petitioner’s case, this happened shortly after the 1^st Respondent and Beijing LeShi repaid the prepayment in the sum of RM300 million in relation to Transaction 2, as mentioned in paragraph 45 above.

52.  The Xinshiqi Agreement was eventually terminated, and no purchase orders were ultimately made under the Xinshiqi Agreement.

53.  The RMB 300 million was repaid by Xinshiqi to Dongguan Yulong in three instalments of RMB 100 million on 17 February 2017, 10 March 2017 and 14 March 2017 respectively, all of which were funded by Beijing LeShi.  Interest in the sum of RMB 5,944,444.45 was paid for the funds advanced under the Xinshiqi Agreement.

54.  The Xinshiqi Prepayment was transferred to Beijing LeShi and was ultimately repaid by Beijing LeShi in the following circumstances:

54.1   Little or no due diligence work or internal assessment (and in any event no proper due diligence)  had been conducted by the Group on Xinshiqi, despite there being no previous dealings between the Group and Xinshiqi.

54.2   As set out in paragraph 25.5(b)  above, Xinshiqi is 98.5% owned by Yu, a friend of the 1^st and 4^th Respondents.

54.3   The Xinshiqi Agreement does not contain details or specifications about the goods to be provided by Xinshiqi beyond what is stated in paragraph 48 above.

54.4   The Xinshiqi Agreement was terminated without any purchase order having been placed thereunder.

54.5   In January 2017, EY has raised concerns about certain transactions, and such concerns were repeated in February and March 2017.  The sum of RMB 100 million was repaid on 17 February 2017, while the remaining RMB 200 million was repaid in March 2017 (see Section G below).

54.6   While the term of the Xinshiqi Agreement was for a period of three months only, it was terminated within a month, the Xinshiqi Prepayment was made without any order being placed or any delivery being received, and the Xinshiqi Prepayment was not fully returned immediately after termination but after two months (as found in the Statement of Disciplinary Action published by The Stock Exchange of Hong Kong Limited on 24 August 2021 (HKEx Statement)).

54.7   Contrary to usual practice, the Xinshiqi Agreement and the payment requests for the Xinshiqi Prepayment were not signed by any representative of the Procurement Committee.

55.  The 1^st, 3^rd, 4^th and 5^th Respondents were directly involved in Transaction 3. Their involvements include (but are not limited to)  the following:

55.1   The 1^st and 4^th Respondents were responsible for negotiating the Xinshiqi Agreement on behalf of the Company.

55.2   The Xinshiqi Agreement was approved by, inter alia, the 5^th Respondent.

55.3   The Xinshiqi Prepayment was approved by, inter alia, the 3^rd Respondent, despite the fact that the 3^rd Respondent was usually not part of the payment approval process.  As part of the remittance procedure, the 5^th Respondent signed the payment application form (in the space designated for the CFO’s signature)  upon confirmation from the 1^st and/or 4^th Respondents that the Xinshiqi Agreement can be approved.

E4.  Transaction 4-1 – Loans made to the Borrowers

56.  By six loan agreements dated between 20 and 28 March 2017 (Loan Agreements)  and entered into between Shenzhen Yulong and each of Beijing Bangbangtang, Beijing Qineng, Beijing Haigou, Shihezi Ruichen, Shenzhen Huashicheng and Shenzhen Rongsheng (together, Borrowers), Shenzhen Yulong agreed to lend a total sum of RMB 405 million to the Borrowers for a term of 3 months at an interest rate of 10% per annum (Loan).

57.  The interest payable under some of the Loan Agreements was subsequently reduced by supplemental agreements made around June/July 2017.

58.  Pursuant to the Loan Agreements, Shenzhen Yulong advanced the total sum of RMB 405 million to the Borrowers between 21 and 28 March 2017.

59.  The investigation of the Petitioner reveals that the entire sum of RMB 405 million was transferred by the Borrowers to Beijing Jiecheng via several companies (including Beijing Duole and Beijing Zhongshi). The 5^th Respondent acknowledges it is the Petitioner’s case that the entire sum of RMB 405 million was in turn used to repay the Company under Transaction 1.

60.  The total sum of RMB 405 million was repaid in June and July 2017, all of which originated from Beijing LeShi or Chongqing LeShi. Interest totalling RMB 9,191,666.66 was paid for the funds advanced under the Loan Agreements.

61.  The funds advanced under the Loan Agreements were transferred to Beijing Jiecheng in the following circumstances:

61.1   Tan agreed to the Loan Agreement between Shenzhen Yulong and Shihezi Ruichen upon the request of the 4^th Respondent, his former classmate, to help the LeShi Companies.  One of the reasons why he agreed was because the LeShi Companies owed a substantial sum of money to a subsidiary of a mainland listed company in which Tan held a controlling stake through Shihezi Ruichen.  Tan hoped that by helping the 4^th Respondent, there would be a higher chance that the sum could be recovered.

61.2   Little or no due diligence work or internal assessment (and in any event no proper due diligence)  had been conducted by the Group on the Borrowers and their abilities to repay, despite there being no previous dealings between the Group and any of the Borrowers.

61.3   None of the Borrowers had any prior business relationship with the Group, and:

(a)  As set out at paragraphs 25.6(c), 25.7(d)  and 25.8(d)  above, Beijing Bangbangtang, Beijing Qineng and Beijing Haigou are controlled by Yu.

(b)  As set out at paragraphs 25.9(b)  and 25.9(c)  above, Shihezi Ruichen is controlled by Tan, an acquaintance of the 4^th Respondent.

(c)  As set out at paragraphs 25.10(c)  and 25.11(c)  above, Shenzhen Huashicheng and Shenzhen Rongsheng are controlled by Huang Zewei, who met the 5^th Respondent once through the introduction of the 1^st and 4^th Respondents on a social occasion.

61.4   The Loan Agreements were made shortly after EY made it clear to the Company on 9 March 2017 that the outstanding amounts under Transactions 1 and 3 and its impact on the Group’s ability to continue operating as a going concern would significantly affect the release of the Company’s 2016 Annual Results (see Section G2 below).

The investigation of the Petitioner reveals that funds advanced under the Loan Agreements were transferred to Beijing Jiecheng. The 5^th Respondent acknowledges that it is the Petitioner’s case that the funds advanced under the Loan Agreements were used to repay the Young Star Prepayments under Transaction 1 and were ultimately repaid by Beijing LeShi and/or Chongqing LeShi.

62.  The 1^st, 2^nd, 4^th and 5^th Respondents were directly involved in Transaction 4-1.  Their involvements include (but are not limited to)  the following:

62.1   The 1^st, 2^nd and 4^th Respondents were responsible for initiating, drafting and/or negotiating the Loan Agreements.  Before the 5^th Respondent was appointed as an ED of the Company, he was provided with the draft Loan Agreements by the 4^th Respondent and had made suggestions on the level of interest rate under the Loan Agreements.

62.2   All the payment application forms were signed by, inter alia, the 2^nd Respondent.

62.3   The remittances under the Loan Agreements were approved by the 1^st, 2^nd, and/or 5^th Respondents.

E5.  Transaction 4-2 – Prepayment made to Beijing Maiji

63.  By an advertising agreement entered into between Shenzhen Yulong and Beijing Maiji dated 22 March 2017 (Advertising Agreement), Beijing Maiji purportedly agreed to publish advertisements for Shenzhen Yulong at bus stops in six major cities in Mainland China for the period between 29 October 2017 and 26 April 2018 for the sum of RMB 80 million, the entire sum of which had to be prepaid.

64.  Pursuant to the Advertising Agreement, Shenzhen Yulong advanced the sum of RMB 80 million to Beijing Maiji on 24 March 2017 (Maiji Prepayment).

65.  The investigation of the Petitioner reveals that the entire sum of RMB 80 million was transferred by Beijing Maiji to Beijing Jiecheng via Beijing Zhongshi. The 5^th Respondent acknowledges it is the Petitioner’s case that the entire sum of RMB 80 million was in turn used to repay the Company under Transaction 1.

66.  The Advertising Agreement was later cancelled by the 2^nd Respondent.

67.  On 4 April 2018, Shenzhen Yulong and Beijing Maiji entered into a settlement agreement pursuant to which Beijing Maiji was to repay the sum of RMB 80 million to Shenzhen Yulong in 3 instalments i.e. RMB 10 million by 30 June 2018, RMB 20 million by 31 July 2018 and RMB 50 million by 31 August 2018, and Shenzhen Yulong agreed to waive its claim for interest (Settlement Agreement).

68.  On 29 August 2018, Beijing Maiji refunded RMB 10 million to Shenzhen Yulong through 屹立雄風（北京）科技有限公司 (Yili Xiongfeng). On 20 November 2018, Shenzhen Yulong recovered a further sum of RMB 124,686.83 through enforcement actions taken against Beijing Maiji in the Mainland China.  To date, the sum of RMB 69,875,313.17 (i.e. RMB 80 million less RMB 10 million less RMB 124,686.83)  remains outstanding.

69.  The Maiji Prepayment was transferred to Beijing Jiecheng to repay the Company in the following circumstances:

69.1   Little or no due diligence or internal assessment (and in any event no proper due diligence)  had been conducted by the Company on Beijing Maiji or its advertising capabilities.

69.2   The Company did not have a genuine need for the Advertising Agreement, given that no new product was in fact due to be released at the time.

69.3   The requirement for full prepayment was unusual and there was no commercial justification for the same.

69.4   The Advertising Agreement was made soon after EY made it clear to the Company on 9 March 2017 that the outstanding amounts under Transactions 1 and 3 and its impact on the Group’s ability to continue operating as a going concern would significantly affect the release of the Company’s 2016 Annual Results (see Section G2 below).

69.5   Contrary to usual practice, the Advertising Agreement and the payment request for the Maiji Prepayment were not signed by any representative of the Procurement Committee.

The 5^th Respondent acknowledges it is the Petitioner’s case that the Maiji Prepayment was transferred to Beijing Jiecheng to repay the Company under Transaction 1.

70.  The 1^st, 2^nd, 3^rd and 5^th Respondents were directly involved in Transaction 4-2. Their involvements include (but are not limited to)  the following:

70.1   The Advertising Agreement was approved by the 1^st, 2^nd, 3^rd and 5^th Respondents.

70.2   The payment application form for the Maiji Prepayment was signed by the 2^nd Respondent.

70.3   The remittance of the sum of RMB 80 million was approved by the 1^st, 2^nd, 3^rd and 5^th Respondents.

F.  Consequences of the Subject Transactions

71.  As a result of the Subject Transactions, the Company and/or the Group suffered the following loss, i.e. the Loss:

71.1   The sum of RMB 69,875,313.17, which remains due from Beijing Maiji to Shenzhen Yulong under the Settlement Agreement; and

71.2   Interest which Shenzhen Yulong ought to have received for the RMB 80 million prepayment made under Transaction 4-2 at the prevailing interest rate of 4.35% per annum calculated using the ordinary 360-day simple interest method as particularised below:

72.  Further, the Company was made subject to high credit risk without the opportunity of conducting proper due diligence on the real borrower, i.e. the LeShi Companies.

G.  Concerns expressed by EY

73.  Between January 2017 and May 2017, EY expressed various concerns in relation to the Subject Transactions and the Group’s ability to continue to operate as a going concern, which the 5^th Respondent was aware of since 17 January 2017 at the latest.

G1.  EY’s concerns in relation to the Subject Transactions

74.   From 17 January 2017, EY flagged up issues in relation to the Subject Transactions to, inter alia, the 1^st to 7^th Respondents:

74.1   On 17 January 2017, EY emailed, inter alia, the 2^nd and 5^th Respondents informing them that it had concerns in respect of, inter alia, Transactions 1 and 3, which would have a material impact on the Group’s financial results, and requesting the Group to provide sufficient auditing records and solutions.

74.2   On 24 January 2017, EY had a teleconference with the 5^th Respondent and followed up with an email to, inter alia, the 2^nd and 5^th Respondents (24 January Email), in which EY further elaborated upon its concerns on Transactions 1 and 3.  In particular, EY expressly stated that it was concerned about recoverability as well as potential breaches of the Listing Rules in relation to internal auditing and controls over large prepayment sums. EY warned that these concerns may have a profound effect on the Company’s 2016 Annual Results. (“如今天電話所溝通到，相關事項可能涉及兩個問題：（1）回收性考慮；（2）預付大額投資款事宜涉及的內部審批和控制可能已違反上市規則… 兩以上事項對本年度的財務報表存在較大影響”)

74.3   On 10 February 2017, EY emailed, inter alia, the 2^nd and 5^th Respondents reporting on their progress, including the fact that they had not been able to obtain relevant information on Transactions 1 and 3 as previously requested in the 24 January Email.  EY warned that if their concerns over Transactions 1 and 3 were not resolved in a timely manner, their audit work and audit opinion in relation to the Company’s 2016 Annual Results might be materially affected. (“關於上述事項1與2，截止目前來說，尚無進展。由於相關事項涉及的金額重大，如不能及時處理，可能會對2016年集團合併報表的審計工作及我們的審計意見產生重大影響。”)

74.4   On 14 February 2017, EY had a teleconference with the 2^nd Respondent, in which a meeting with the 4^th Respondent on Transactions 1 and 3 was suggested, which was reiterated in an email from EY to, inter alia, the 2^nd and 5^th Respondents on 17 February 2017.

74.5   On 23 February 2017, EY had a teleconference with, inter alia, the 2^nd, 4^th and 5^th Respondents concerning Transactions 1 and 3.  Following this teleconference, in an email dated 24 February 2017 (24 February Email), EY set out its proposed auditing plan, which included obtaining from the Company:

(a)  A written confirmation, verified by the Board (including the Audit Committee), of the Company’s transaction and internal approval processes and business preparations relating to Transaction 1, covering, inter alia, the source of the investment opportunity, the background check and due diligence work conducted in respect of the Target US Company, the investment and fund arrangement plans, the background check conducted on Young Star and the reasons for choosing Young Star as the intermediary, the function fulfilled by Young Star in the transaction, a description of the transaction process, the internal control of funds, the conclusion of the transaction and the commercial reasonableness of the transaction (in relation to, e.g., the method of payment, the capital occupation fee arrangement, etc.)  (“公司對該交易的交易流程、內部審批流程和交易的商業實質準備書面描述並得到全體董事會（包括獨立審計委員會）的確認；建議公司在書面描述應包括如下內容：投資機會來源；投資目標公司的背景及盡調情況，並提供書面的盡調結果；投資方式及資金安排計劃；介紹中介方優星控股的背景；以及選擇優星作為中介的考慮；優星控股及其在交易中的作用，交易流程描述、交易過程審計的資金內部控制、交易處理結果等；解釋雙方交易安排的商業合理性（如資金支付的安排方式、資金佔用成本的原因及安排）”);

(b)  A written statement of the Company’s management, supported by relevant documents, showing that Young Star was not an associated company of the LeShi Companies or the Group (“獲取公司管理階層對優星與樂視和酷派並非為關聯公司的陳述及有關的支持性文件”);

(c)  Explanation for queries over certain terms of the Young Star Agreements, including but not limited to, (i)  whether the authorised signatory named Wu Meng who signed the 0810 Agreement on behalf of Young Star was the same person as the supervisor of LETV who was also called Wu Meng; (ii)  why Young Star, playing the role of investment intermediary, had to pay a capital occupation fee; (iii)  why the capital occupation fee was changed from daily interest of 1% under the 0623 Agreement to annual interest of 10% under the 0810 and 0901 Agreements; and (iv)  why Young Star stopped paying capital occupation fee after 23 November 2016 (“對合同條款中疑問的解釋，包括但不限於：（1）…第二次的優星控股方的授權人為吳孟（我們了解目前樂視網的監事，也是叫吳孟，兩者是否為同一人？）；（2）優星控股作為投資中介，為什麽會支付資金佔用費。並且第一次合同的資金佔用費為日0.1%，第二次後進行了修改為年率10%，並且從2016年11月23日之後就暫時無支付資金佔用費，想了解[一]下資金佔用費修改原因和暫停支付資金佔用費的原因”);

(d)  The internal payment approval and bank payment authorization records of the Company in relation to the payment of the RMB 300 million Xinshiqi Prepayment (“獲取公司資金付款審批單和銀行付款授權單”); and

(e)  The bank remittance records of the Company in relation to the repayment of the RMB 300 million Xinshiqi Prepayment (“獲取資金退回的銀行流水憑證”).

74.6   On 2 March 2017, the 2^nd Respondent sent an email to, inter alia, the 1^st, 3^rd, 4^th, 6^th and 7^th Respondents (but not the 5^th Respondent), informing them of, inter alia, EY’s concerns regarding Transactions 1 and 3 (2 March Email).

74.7   On 8 March 2017, EY put on record in an email to, inter alia, the 2^nd, 4^th and 5^th Respondents, that they had yet to obtain the requested information/records on Transactions 1 and 3 (8 March Email).  EY also requested a meeting with the 1^st Respondent.

74.8   On 9 March 2017, EY had a teleconference with the Audit Committee of the Group, which was attended by, inter alia, the 2^nd, 6^th and 7^th Respondents (9 March Teleconference).  Issues in relation to Transactions 1 and 3, such as recoverability, internal approval and compliance with Listing Rules were discussed during the 9 March Teleconference.  As recorded in the minutes of the 9 March Teleconference (which was circulated by an email dated 9 March 2017 to, inter alia, the 1^st, 2^nd, 3^rd, 4^th, 6^th and 7^th Respondents, but not the 5^th Respondent), EY made it clear that the issues relating to Transactions 1 and 3, including the lack of supporting documents, the recoverability of the prepayments made under these transactions, and the extent to which the Company was able to comply with the Listing Rules in disclosing information about the transactions, would have a significant impact on the publication of the audit report for the financial year ended 31 December 2016 (“財務方面的影響，首先這兩個事項一直在與公司討論，但目前拿到的數據和資料還比較少，目前已經3月9號，距離公告時間非常短，事項對公告的時間造成非常大的不確定性，影響審計報告最終出具時間；資金回收性的考慮，如果不能回收，則對集團的持續經營會造成極大影響，對報表編制基礎要有很大變化；如果能夠回收，則需要執行一定審計程序，假設對交易無法獲得足夠的審計資料，則對審計範圍造成很大影響，進而影響審計意見的發表。另外是對公司遵循上市規則方面的影響，公司要評估，審計報告要求對年報披露的信息有義務去看是否都遵循相關規則法規，如果沒有清晰的披露也會影響審計意見的發表。”). The Petitioner acknowledges that the 5^th Respondent was not present at the 9 March Teleconference.

74.9   On 14 March 2017, Messrs. DLA Piper, the Company’s solicitors, sent an email to, inter alia, the 1^st, 2^nd, 3^rd, 4^th, 6^th and 7^th Respondents, suggesting that the Group set up an independent board committee (IBC)  to address EY’s concerns.  An IBC was set up shortly thereafter on 20 March 2017, comprising the 5^th, 6^th and 7^th Respondents.

74.10 On 20 March 2017, EY sent an email to, inter alia, the 2^nd, 4^th and 5^th Respondents (20 March Email), reiterating concerns as to Transactions 1 and 3 and stating that it was still awaiting, inter alia, the following from the Company:

(a)  An investigation report in relation to Transaction 1 issued by an independent investigation committee;

(b)  The written confirmation in relation to Transaction 1 referred to in paragraph 74.5(a)  above;

(c)  The written statement of the Company’s management in relation to Transaction 1 referred to in paragraph 74.5(b)  above; and

(d)  The internal payment approval and bank payment authorization records of the Company in relation to the payment of the RMB 300 million Xinshiqi Prepayment referred to in paragraph 74.5(d)  above.

74.11 On 24 March 2017, EY sent an email update (24 March Email)  to the 2^nd, 4^th and 5^th Respondents on its investigation, recording that on Transaction 1, the Group had received some payments from Beijing Jiecheng, whose relationship with Young Star was unknown, that an IBC had been set up, and that on Transaction 3, there had been no progress.  EY also requested clarification from the Company as to the relationship (if any)  between Beijing Jiecheng, the Group and Young Star.

74.12 On 25 March 2017, EY sent an email to, inter alia, the 2^nd, 4^th and 5^th Respondents, stating that further payments had been made, but that information on the payments, including the payor, as well as the report of the IBC, were still outstanding.  Later on the same day, a draft report by the IBC (Draft IBC Report)  was circulated, which was subsequently revised on, inter alia, 3 June 2017.

74.13 On 27 March 2017, EY set out its comments on the Draft IBC Report by way of an email to, inter alia, the 2^nd and 5^th Respondents.  The Draft IBC Report was never finalised and no follow up action was taken in respect of the said report, whether by the 5^th Respondent or otherwise. The 5^th Respondent acknowledges it is the Petitioner’s case that a new IBC was appointed on 26 January 2018 (after the 5^th Respondent ceased to be an ED of the Company)  consisting of Mr. Leung Siu Kee, Mr. Lam Ting Fung Freeman, Mr. Liang Rui, Mr. Ng Wai Hung, and the 6^th and 7^th Respondents, which eventually engaged Baker Tilly Hong Kong Risk Assurance Limited to publish another investigation report dated 18 October 2018.

74.14 On 30 March 2017, EY informed the 1^st to 7^th Respondents by way of a letter (30 March Letter)  that because of outstanding audit matters, its auditing report for the financial year ended 31 December 2016 would have to be delayed. EY stated that it was still waiting for the Company to provide, inter alia, the following information:

(a)  In relation to Transaction 1:

(i)  Details regarding the transaction to acquire the Target US Company, including the identity and background of the Target US Company, the shareholders of the Target US Company, and the due diligence, financial, risk (including legal risk)  and acquisition price analysis conducted by the Company’s management on the Target US Company (“有關貴集團擬收購某標的公司的交易細節，包括標的公司的身份及其背景、標的公司的股東、管理層對標的公司的調研分析、財務分析、法律風險分析、收購交易對價的分析、評估及風險評價等等。”);

(ii)  Details regarding Young Star’s background, including the identity and background of the shareholders of Young Star, Young Star’s financial status, the due diligence analysis conducted by the Company’s management on Young Star, the relationship between Young Star and the Target US Company, and how the Company’s management became acquainted with Young Star (“有關優星的背景、包括優星股東的身份及其背景、優星的財務狀況、管理層對優星的調研分析、優星與標的公司的關係、管理層是怎樣認識優星等等。”);

(iii)  A reasonable explanation from the Company’s management, supported by evidence (including payment trail and other supporting documents), regarding, inter alia, (A)  the fact that one of the agreements was signed by Wu Meng (who had the same name as one of the senior management staff of the Leshi group)  on behalf of Young Star; and (B)  the commercial reasonableness of the prepayment arrangement (“有關貴集團與優星進行的交易條款細節，其中一份合同沒有雙方簽署，另一份合同，優星簽署代表為吳孟（與樂視集團其中一高管為同名同姓）。我們要求管理層就以上各事項提供合理解釋及證據、解釋預付款交易安排的商業合理性、提供資金路徑及有關支持性文件。”);

(iv)  Transaction details regarding the repayment of the Young Star Prepayments, including (A)  a reasonable explanation from the Company’s management, supported by evidence, as to why the repayment was made by another company and not Young Star and why the repayment was made in Renminbi instead of US Dollars, which was the denomination in which the prepayments had been made; (B)  confirmation from the entity which made the repayment that it did so to repay the prepayment sums owed by Young Star to the Group; (C)  further background information regarding the entity which made the repayment, including the identity of its shareholders and its relationship with Young Star (“有關預付款退回的交易細節，從管理層提供的銀行單據中，其顯示付款人是另外一家公司卻不是優星，且回款是人民幣卻不是原來預付款美金。我們要求管理層提供合理解釋及證據，安排回款人確認該4筆款項是優星退還貴集團的預付款。此外，我們要求管理層提供更多有關付款人的背景，包括其股東的身份、回款人跟優星的關系。”);

(v)  Information on the integrity of the Group’s internal controls and the findings of the independent investigation committee established by the Group on the same, including (A)  how the Group arranged the transaction funds and monitored the use of the funds; (B)  whether the transactions with Young Star and the proposed acquisition of the Target US Company had gone through and passed the necessary internal approval processes of the Group; and (C)  whether the Young Star Agreements had been approved by the Company’s legal advisors (“有關貴集團的內部控制的完善性及貴集團成立的獨立調查委員會對該事項的調查評估報告（初稿）的發現，包括貴集團是如何安排以上交易資金及監控資金使用、對於擬收購某標的公司及與優星進行的交易是否均通過貴集團內部應有的審批流程、與優星簽署的合同是否得到公司法律顧問核准等等。”); and

(vi)  Documents and evidence to be provided by the Board in connection with the assessment of whether relationships and connections existed between the various parties involved in the transaction (“另外，我們亦要求董事會對有關交易各方是否存在關聯關係的評估，提供有效的文件及證據”);

(b)  In relation to Transaction 3:

(i)  The internal payment approval and bank payment authorization records of the Company in relation to the RMB 300 million Xinshiqi Prepayment, details of the terms of the transaction, and the background of Xinshiqi, including the identity of its shareholders (“我們特此提請董事會提供相關資料，包括相關資金付款審批單和銀行付款授權單、交易條款細節、新石器龍碼的背景、包括其股東的身份等等。”); and

(ii)  The reason for the cancellation of the transaction, to be obtained by interviewing the person at the Company’s procurement department responsible for liaising with suppliers (“此外，我們希望管理層能安排我們對採購部與供貨商對接負責人進行訪談，了解[其]後交易取消的原因”).

74.15 On 6 April 2017, EY sent another email to, inter alia, the 2^nd, 4^th and 5^th Respondents (6 April Email). Apart from reiterating its concerns as to Transactions 1 and 3, EY also raised concerns as to Transactions 4-1 and 4-2 by reason of the large sums involved and the fact that the counter-parties were new to the Group.  EY requested information and supporting documents in this regard. Further emails chasing for the requested information were sent to, inter alia, the 2^nd, 4^th, 5^th, 6^th and 7^th Respondents on 7, 10, 11, 14, 17, 19 and 27 April 2017.

74.16 On 9 May 2017, EY sent an email to, inter alia, the 2^nd, 4^th, 5^th, 6^th and 7^th Respondents (9 May Email), reiterating concerns as to Transactions 1 and 3 and raising concerns as to Transaction 2 in light of the large sums involved and inconsistencies between the terms of the transaction and Beijing Duole’s scope of business.

G2.  EY’s concerns as to the Group’s ability to continue to operate as a going concern

75.   Since around 24 February 2017, EY flagged up issues in relation to the precarious financial state of the Company and/or the Group:

75.1   In the 24 February Email, EY expressed concerns as to the continuing losses made by the Group, stating that the Group needed to consider whether it had sufficient funds to continue operating as a going concern.

75.2   In the 8 March Email, EY reiterated and elaborated upon its concerns on the losses made by the Group and again requested the Group to consider whether there was sufficient cash flow for the Group to continue operating as a going concern in the next financial year, and warning that this may have an impact on the timely publication of the Group’s financial results.

75.3   In the 9 March Teleconference and the 20 March Email, EY reiterated its concerns as to the uncertainties as to the Group’s ability to operate as a going concern, and stated that the Group’s plans on operations and use of funds in the coming financial year had to be approved by the Board.  However, in the 24 March Email, it was recorded that no progress had been made in relation to this concern.  The same concern was reiterated in the 30 March Letter, the 6 April Email and the 9 May Email, to which the 5^th Respondent was a recipient.

76.  In fact, the 5^th Respondent knew the precarious financial position of the Company, particularly in light of the following:-

76.1   The profit warning issued by the Company on 18 November 2016 announcing, inter alia, that:

“…based on the preliminary assessment of the Group’s unaudited consolidated management accounts the Company’s unaudited loss attributable to the owners of the Company for the years ending 31 December 2016… will be approximately HK$3,000 million, as compared to a profit attributable to the owners of the Company of approximately HK$2,325 million for [the previous year].”  

76.2   The circulation of the monthly management accounts and group-level operation analysis reports to, inter alia, the 1^st to 5^th Respondents and other senior management of the Company since, at the latest, December 2016.

H.  Failure to address EY’s concerns and late disclosure of material information

77.  Notwithstanding the matters pleaded in paragraphs 73 to 76 above, the 5^th Respondent took insufficient steps to address EY’s concerns in relation to the Subject Transactions and the Company’s precarious financial state.

78.  On 30 March 2017, the Company announced that there may be a delay in the publication of the 2016 financial results as the Company required more time to provide information requested by the auditor and the auditor required more time to conduct the audit of the 2016 Annual Results (30 March Announcement).

79.  On 31 March 2017, the Company announced that certain outstanding information must be provided to the auditor in order for it to complete its audit procedures and that as at the date of the announcement, the Company was still in the course of gathering such information. The Company was therefore not able to publish the 2016 Annual Results by 31 March 2017 as required under Rule 13.49(1)  of the Listing Rules. The Board expected the 2016 Annual Results to be finalised and published by the end of April 2017 (31 March Announcement).

80.  On 26 April 2017, the Company announced that additional time was required for the Company to provide outstanding information to the auditor and the auditor needed time to take auditing measures to verify the information provided by the Company.  The Board expected the 2016 Annual Results to be finalised and published by the end of May 2017 (26 April Announcement).

81.  The 30 March Announcement, the 31 March Announcement and the 26 April Announcement did not mention:

81.1   The concerns raised by EY in relation to the Subject Transactions as stated in paragraph 74 above, including but not limited to:

(a)  The lack of or severely inadequate background check and/or due diligence work and/or risk or other assessment conducted by the Company and/or its subsidiaries in relation to the Subject Transactions and/or the parties involved in the Subject Transactions;

(b)  The lack of or highly deficient internal approval processes and/or internal control of funds displayed by the Company and/or its subsidiaries in relation to the Subject Transactions and the prepayments made thereunder;

(c)  The apparent lack of commercial reasonableness of the Subject Transactions and the prepayment and repayment arrangements thereunder;

(d)  The potential failure of the Company to comply with the Listing Rules as a result of the aforementioned matters and/or the failure to make timely and/or full and proper disclosure to the shareholders of the Company and the public regarding the Subject Transactions and related material facts;

81.2   The concerns raised by EY as to the Group's ability to continue to operate as a going concern as stated in paragraph 75 above; and

81.3   The potential material impact of the matters stated in paragraphs 81.1 and 81.2 above on the Group's financial results for 2016.

82.  It was not until 23 May 2017 that the Company issued an announcement, inter alia, to clarify that there were six outstanding auditing issues for the publication of the 2016 Annual Results, being (1)  the Young Star Prepayments totalling USD 120 million (i.e. USD 90 million plus USD 30 million)  made under Transaction 1, (2)  the Xinshiqi Prepayment of RMB 300 million made under Transaction 3, (3) the going concern of the Company and its subsidiaries, (4)  the related party transactions / continuing connected transactions of the Company, (5) the loans/payments totalling RMB 485 million made under Transactions 4-1 and 4-2 and (6)  the Beijing Duole Prepayments totalling RMB 300 million made under Transaction 2.

83.  As found in the HKEx Statement referred to in paragraph 85 below, the Company delayed in publishing four sets of financial results and reports from the end of 2016 to the half year of 2018 as follows:

84.  By reason of the aforesaid matters, the Company has failed to make timely disclosure to the shareholders of the Company and the public and failed to make full and proper disclosure of material facts or matters to them.

I.  Findings in the HKEx Statement

85.  On 24 August 2021, the HKEx Statement in respect of Transactions 1, 3, 4-1 and late financial reporting was published, in which it was held that:

85.1   The Company breached Rule 13.13 of the Listing Rules, in that the 0810 Agreement together with the 0901 Agreement (in aggregate)  and the Young Star Repayment Agreement each amounted to an advance to an entity under Rule 13.13, and the Assets Ratio exceeded 8%. The Company was required to announce them on 1 September 2016 and 5 January 2017 respectively, but only did so on 23 May 2017.

85.2   By reason of the delays pleaded in paragraph 83 above, the Company breached Rules 13.46, 13.48 and 13.49 of the Listing Rules, which required issuers to (a) publish their interim results and send the interim report to shareholders not later than two and three months respectively after the end of the interim period, and to (b)  publish their annual results and send the annual report to shareholders not later than three and four months respectively after the end of the annual period.

85.3   The Company breached Rule 14.34 of the Listing Rules:

(a)  The 0810 Agreement together with the 0901 Agreement (in aggregate)  and the Young Star Repayment Agreement each amounted to financial assistance under Rule 14.04(1)(e), and the Assets Ratio and Consideration Ratio of the prepayments made under the 0810 Agreement and the 0910 Agreement in the total sum of USD 120 million exceeded 8% and 13.1% respectively.  The Company was required to announce them on 1 September 2016 and 5 January 2017 respectively, but only did so on 23 May 2017.

(b)  The Xinshiqi Agreement was in substance a provision of financial assistance to Xinshiqi, and the Consideration Ratio was 7.19%.  The Company was required to announce the Xinshiqi Agreement on 20 December 2016 but only did so on 23 May 2017.

(c)  The Consideration Ratio for the Loans made to Beijing Bangbangtang, Beijing Qineng and Beijing Haigou totalling RMB 240 million (in aggregate)  was 7.58%.  The Company was required to announce this on 28 March 2017 but only did so on 23 May 2017.

85.4   The Company did not have adequate internal controls for compliance with Rule 13.13 and Chapter 14 of the Listing Rules, contributing to the breaches set out in the preceding sub-paragraphs. In particular:

(a)  Despite having an “Information Disclosure Management System” manual (Disclosure Manual)  governing the disclosure of inside information and information required to be disclosed by regulators, Transactions 3 and 4-1 were not reported to the Board in accordance with the Disclosure Manual.

(b)  The 3^rd Respondent (in the capacity of CEO)  had complete control over the payment approval process without a clear check-and-balance framework i.e. without the need to report to or seek approval from the Board, including with respect to the prepayments under the 0810 Agreement and the 0910 Agreement and the Xinshiqi Prepayment.

(c)  Despite having a procedural manual, being “Administrative Rules on the Examination and Approval of Financial Matters” (Financial Rules), there were insufficient means in the internal control system to ensure that payments could only be made after the Financial Rules were complied with or brought to the Board for approval.  For example, the Xinshiqi Prepayment was paid without the 2^nd Respondent (as CFO)’s approval, and the loans made to Beijing Bangbangtang, Beijing Qineng and Beijing Haigou were made without the 3^rd Respondent (as CEO)’s approval.

85.5   The 1^st to 5^th Respondents, together with Mr. Li Bin, a former ED of the Company, had breached their directors’ duties under Rule 3.08 of the Listing Rules and/or their obligations under their Undertaking provided to the HKEX, including the Best Ability Undertaking and the Best Endeavours Undertaking.

86.  For the purpose of resolving these proceedings by way of the Carecraft Procedure, the 5^th Respondent admits and accepts the findings in the HKEx Statement as set out at paragraph 85 above.

J.  Liability of the 5^th Respondent

87.  At all material times, as a director of the Company, the 5^th Respondent owed duties to the Company outlined in paragraphs 19 to 23 above.  In relation to the facts and matters set out in Sections C to I above, the 5^th Respondent had acted in breach of his duties owed to the Company as set out at paragraphs 19 and 20 above, and breached Rule 3.08(f)  of the Listing Rules, the Best Ability Undertaking and the Best Endeavours Undertaking, and as such, is partly responsible for the business and affairs of the Company being conducted in the manners complained of, namely:

87.1   involving misfeasance or other misconduct towards the Company, its members or any part of its members under section 214(1)(b)  of the Ordinance;

87.2   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 under section 214(1)(c)  of the Ordinance; and

87.3   unfairly prejudicial to its members or any part of its members under section 214(1)(d)  of the Ordinance.

88.  The 5^th Respondent acted in breach of the aforesaid duties and was responsible for conducting the business and affairs of the Company in the aforesaid manners by reason of the matters set out below:

88.1   The 5^th Respondent:

(a)  approved the Xinshiqi Agreement and signed the payment application form (in the space designated for the CFO’s signature)  for the Xinshiqi Prepayment for Transaction 3 upon confirmation from the 1^st and/or 4^th Respondents that the Xinshiqi Agreement can be approved;

(b)  was involved in the drafting of the Loan Agreements by giving his opinion on the interest rates and approved some of the remittances for Transaction 4-1; and

(c)  approved the Advertising Agreement and the Maiji Prepayment of RMB 80 million for Transaction 4-2.

88.2   The 5^th Respondent caused, permitted and/or allowed the Company and its subsidiaries to enter into Transaction 3, Transaction 4-1 and Transaction 4-2, at the expense of the Company as stated in Section F above, and without proper disclosure or due diligence.

88.3   The 5^th Respondent breached his duties as pleaded in paragraphs 19.1, 19.2, 19.4, 19.6, 20.1, 20.2, 20.3 above, in that he:

(a)  preferred the interests of the LeShi Companies to that of the Company and furthered the interests of the LeShi Companies at the expense of the Company as stated in Section F above and caused the Company to breach Article 104(4)  of the AOA and Rules 13.13 and 14.34 of the Listing Rules;

(b)  exercised his power for the improper purpose of preferring the LeShi Companies;

(c)  placed himself in a position where his duty to the Company conflicted with his duty to the LeShi Companies; and

(d)  caused the transfer of the Group’s funds to the LeShi Companies.

88.4   The 5^th Respondent followed the instructions of the 1^st, 2^nd and 4^th Respondents without exercising independent judgment in the interests of the Company in breach of the duty pleaded in paragraph 19.3 above.

88.5   The 5^th Respondent breached his duties as pleaded in paragraphs 19.7, 20.4 and 20.5 above, the Best Ability Undertaking and the Best Endeavours Undertaking, in that he:

(a)  participated in Transaction 3 in the manner pleaded in paragraph 88.1(a)  above despite the circumstances pleaded in paragraph 54 above.  Without prejudice to the generality of the foregoing, on the 5^th Respondent’s admission, at the material time:

(i)  he did not know the background of Xinshiqi;

(ii)  he was not aware of any benefits the Xinshiqi Agreement would bring to the Group; and

(iii)  he signed the payment application form (in the space designated for the CFO’s signature)  for the Xinshiqi Prepayment for Transaction 3 upon confirmation from the 1^st and/or 4^th Respondents that the Xinshiqi Agreement can be approved.

(b)  participated in Transaction 4-1 in the manner pleaded in paragraph 88.1(b)  above despite the circumstances pleaded in paragraph 61 above. Without prejudice to the generality of the foregoing, this was so even though at the material time, the 5^th Respondent purportedly had concerns as to the impact of the Loan Agreements on the Group’s cash flow position;

(c)  participated in Transaction 4-2 in the manner pleaded in paragraph 88.1(c)  above despite the circumstances pleaded in paragraph 69 above;

(d)  failed to raise questions relating to Transaction 3, Transaction 4-1 and Transaction 4-2 and escalate the matters to the Board for discussion, and/or bring the Subject Transactions to the attention of the other Board members and keep them informed;

(e)  caused, permitted and allowed the Company to breach Article 104(4)  of the AOA and Rules 13.13 and 14.34 of the Listing Rules. Without prejudice to the generality of the foregoing, the Petitioner relies on, inter alia, the matters pleaded in paragraphs 85.1 and 85.3 above;

(f)  caused, permitted and allowed the Company to breach Rules 13.46, 13.48 and 13.49 of the Listing Rules as pleaded in paragraphs 83 and 85.2 above;

(g)  caused, permitted and allowed the Company to breach Rule 13.13 of the Listing Rules as pleaded in paragraph 85.1 above, even though he knew by 17 January 2017 at the latest, EY’s concerns regarding Transactions 1 and 3 through an email from EY of the same date;

(h)  caused, permitted and allowed the Company to fail to make timely disclosure of the matters stated in paragraph 81 above.  In particular:

(i)  he failed to cause or procure the Company to timely correct or clarify the same between 30 March 2017 and 22 May 2017, despite the Company having made 3 public announcements on 30 March 2017, 31 March 2017 and 26 April 2017; and

(ii)  by engaging in the aforementioned conduct, he failed to ensure that the Company issued accurate and complete announcements; and

(i)  despite being a member of the IBC, the 5^th Respondent did not scrutinise the Subject Transactions diligently and/or properly.  In particular:

(i)  When the 5^th Respondent scrutinised the Young Star Agreements as a member of the IBC, he did not consider or did not adequately consider issues such as:

(1)  Why negotiations had to be conducted through Young Star and not directly with Blitz;

(2)  Who conducted negotiations for the Young Star Agreements on behalf of the Company;

(3)  Why Nie and Wu signed on behalf of Young Star for the 0623 Agreement and the 0810 Agreement respectively;

(4)  How the consideration under the Young Star Agreements was calculated; and

(5)  Why the acquisition of the Target US Company did not take place ultimately.

(ii)  When the 5^th Respondent scrutinised the Beijing Duole Agreements as a member of the IBC, he did not consider or did not adequately consider issues such as:

(1)  Who signed or negotiated the Beijing Duole Agreements on behalf of Dongguan Yulong;

(2)  Why prepayments had to be made to Beijing Duole;

(3)  What benefits there were to the Group in making prepayments to Beijing Duole; and

(4)  Why the Beijing Duole Agreements were later terminated.

K.  Agreed Mitigating Factors

89.  By entering into this Statement for the purpose of disposing of these proceedings against the 5^th Respondent by way of the Carecraft Procedure, the 5^th Respondent accepts responsibility for his actions including by the expressed admissions set out above.  The following set out the agreed mitigating factors when determining the orders to be made against the 5^th Respondent:

89.1   The 5^th Respondent has adopted a reasonable course of action in agreeing to conclude these proceedings by way of the Carecraft Procedure which would save the time and costs of the Petitioner and the Court, and in agreeing to pay his share of the costs of the Petitioner in these proceedings in the sum agreed with the Petitioner.

89.2   The 5^th Respondent has been cooperative in relation to these proceedings with the Petitioner and accepts liability.  He has further agreed to assist the Petitioner by agreeing to give evidence in these proceedings in relation to the 1^st, 2^nd, 3^rd, 4^th, 6^th, and/or 7^th Respondents, if so required.

89.3   The 5^th Respondent stood no personal gain from the misconduct.

89.4   The 5^th Respondent has been a certified accountant in the PRC since 2001 and has built up a successful career.  These proceedings have already adversely affected his reputation developed for years.  There is no real risk that the 5^th Respondent will commit similar misconduct.

L.  Proposal for disqualification

90.  On the basis of the facts not in dispute as set out in Sections C to J above and the agreed mitigating factors in Section K above, the Petitioner and the 5^th Respondent agree that it would be appropriate for the following orders to be made against the 5^th Respondent:

90.1   A disqualification order to be made against the 5^th Respondent under section 214(2)(d)  of the Ordinance that, for a period of five years, he shall not, without the leave of the Court:

(a)  be, or continue to be, a director, liquidator, receiver or manager of the property or business, of any listed or unlisted corporation in Hong Kong, including the Company or any of its subsidiaries and affiliates; and

(b)  in any way, directly or indirectly, be concerned, or take part, in the management of any listed or unlisted corporation in Hong Kong, including the Company or any of its subsidiaries and affiliates; and

90.2   An order under section 214(2)(e)  of the Ordinance that the 5^th Respondent shall pay the sum of HK$4,000,000 to the Company, being part of the Loss suffered by the Company and/or the Group, inclusive of interest thereon. For the avoidance of doubt, the payment of the sum of HK$4,000,000 by the 5^th Respondent to the Company is not intended to fix the amount of Loss at HK$4,000,000 and the Petitioner’s rights against the 1^st, 2^nd, 3^rd, 4^th, 6^th and/or 7^th Respondents for the balance of the Loss are expressly reserved.

91.  If the Court disposes of these proceedings against the 5^th Respondent by way of the Carecraft Procedure, pursuant to this Statement, the 5^th Respondent agrees to pay and the Petitioner accepts the sum of HK$750,000 in full and final settlement of the 5^th Respondent’s share of the Petitioner’s costs in these proceedings.

Dated the   day of August 2025.

Appendix 1

“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 or any subsidiaries of any of the holding companies of such company.