SECURITIES AND FUTURES COMMISSION v. FUNG CHIU AND OTHERS

HCMP 2524/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 2524 OF 2006

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J U D G M E N T

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1.  This is the hearing of the amended petition of the Securities and Futures Commission (“the SFC”) for a disqualification order against Chow Chun Kwong, the 5^th respondent herein, who has consented to the disposal of the proceedings by way of the Carecraft procedure (In re Carecraft Construction Company Limited [1994] 1 WLR 172).  There is placed before the court a “Statement of Agreed Facts”, annexed to this judgment as Schedule 1, being the facts upon which the judgment is based.  The agreed facts follow closely the facts set out in the amended petition.

2.  The 5^th respondent was an executive director, the finance director and compliance officer of GP NanoTechnology Group Limited, formerly known as Guang Ping NanoTechnology Group Limited (廣平納米科技集團有限公司; “the Company”), now in liquidation.  The shares of the Company were at one time listed on the Growth Enterprise Market (“GEM”) of The Stock Exchange of Hong Kong Limited (“SEHK”).  He was chairman of the audit committee of the Company, made up of him and two independent non-executive directors.  He was responsible for the overall financial management of the Company and its subsidiaries.

3.  By reference to the agreed facts in Schedule 1, the 5^th respondent does not object to a disqualification order made against him under which he shall not, without leave of the court:

(1)     be, or continue to be, a director of any corporation listed on the SEHK or any corporation that is a subsidiary or an affiliate of such a listed corporation; or

(2)     in any way, whether directly or indirectly, be concerned, or take part, in the management of any such listed corporation or of any corporation that is a subsidiary or an affiliate of such a listed corporation.

4.  For present purpose, the terms “subsidiary” and “affiliate” would bear the meanings of these terms as agreed in Re Riverhill Holdings Limited [2007] 4 HKLRD 46 at 77.

5.  The 5^th respondent agrees that the appropriate period of disqualification will be determined by this court.

6.  The case of the SFC against the 5^th respondent is one of gross incompetence.  There is no allegation he was guilty of fraud or dishonesty, or that he had personally obtained any part of the loans or advances made by the Company.  The complaints against him may be grouped under these five heads:

(1)     misrepresentation or misleading presentation of facts regarding the five questionable transactions in the 1^st and 2^nd Clarification Announcements published by the Company in 2003 at the request of SEHK (paragraphs 49 to 53 of Schedule 1);

(2)     abdication of responsibility as a director of a publicly listed company (paragraphs 54 to 55 of Schedule 1);

(3)     failure to exercise reasonable skill, care and diligence and/or to act in the best interests of the Company (paragraphs 56 to 63 of Schedule 1);

(4)     misrepresentations or misstatements of the duties of the executive directors in the prospectus of the Company dated 9 July 2001 and the annual reports (paragraphs 64 to 67 of Schedule 1); and

(5)     other breaches of rules and regulations being the GEM Listing Rules and the Code on Takeovers and Mergers (paragraphs 68 to 78 of Schedule 1).

7.  On the agreed facts in Schedule 1, I am satisfied that during the relevant period, the business and affairs of the Company had been conducted in a manner:

(1)     involving misfeasance or other misconduct, and/or

(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, and/or

(3)     unfairly prejudicial to its members or any part of its members, as described in section 214(1)(b), (c) and (d) of the Securities and Futures Ordinance, Cap. 571.

Having regard to his positions held, the 5^th respondent was partly responsible for the business and affairs of the Company having been so conducted.

8.  I shall not repeat the legal principles applicable to the determination of the appropriate period of disqualification.  They have been set out in paragraphs 11 and 12 of the judgment I gave in relation to the 2^nd respondent in these proceedings on 27 November 2008.

9.  As in the case of the 2^nd respondent, Mr. Anderson Chow, SC has emphasised the following features in respect of the 5^th respondent:

(1)     large sums of money were involved in the five questionable transactions, relative to the paid-up capital of HK$50 million of the Company;

(2)     these transactions took place shortly before or after the GEM listing of the Company in July 2001;

(3)     there was a high degree of incompetence or negligence on the part of the 5^th respondent in discharging his duties as an executive director of a listed company;

(4)     he exhibited a marked indifference to, or disinterest in, his responsibilities as an executive director of a listed company, in particular the proper application of the Company’s funds; and

(5)     there were numerous breaches of the GEM Listing Rules and the Code on Takeovers and Mergers.

10.  Mr. Chow submitted that the present case would fall within the middle bracket of six to ten years applicable to serious cases which do not merit the top bracket.

11.  Some of the mitigating factors are agreed, namely that the 5^th respondent has been co-operative with the SFC, that he has admitted the complaints against him, and has agreed to give evidence consistent with the agreed facts against the other respondents if required.  Furthermore, he has agreed to pay one-fifth of the costs of the SFC in these proceedings.

12.  The 5^th respondent’s present job is working as a director in a number of private companies, some incorporated in Hong Kong and some overseas, and he relies on the director’s remuneration payable by one of those private companies to earn a living.  Hence, the SFC seeks a disqualification order only in respect of his taking part in the management of any corporation listed on the SEHK or in any corporation that is a subsidiary or an affiliate of such a listed corporation.

13.  The 5^th respondent has urged on the court other mitigating factors, which are not agreed to by the SFC.  Essentially, they relate to circumstances under which he agreed to accept appointment as an executive director of the Company.  He was allegedly assured by an individual who represented the major shareholders that his role would simply be talking to and liaising with fund managers and brokers to prepare the Company for listing in GEM, and that the management of the Company would be looked after by other executive directors.  I would not regard these as mitigating factors.  As stated by Lord Woolf, MR in Re Westmid Packing Services Limited [1998] 2 BCLC 646 at 654g, “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 inescapable personal responsibilities.” The 5^th respondent has now acknowledged by his counsel that he had been out of his depths, he should have known better, and has now learnt his lesson.

14.  In the case of the 2^nd respondent, who was the chief executive officer of the Company, I imposed a disqualification period of five years, but his disqualification order is more stringent in that it is not restricted to taking part in the management of listed corporations.  I think it would be appropriate to impose a slightly longer period of disqualification in the 5^th respondent’s case, as the scope of his order would be less stringent.  I will impose a term of six years, taking into account the mitigating factors and the submissions of counsel on his behalf.

15.  There will be a disqualification order against the 5^th respondent in the terms and for the period as indicated, to take effect at the beginning of the 21^st day after the day on which this order is made.

16.  I order the 5^th respondent to pay the costs of the SFC of and occasioned by the adjournment of the hearing on 27 November 2008.  Save as aforesaid, he is to pay one-fifth of the costs of the SFC in these proceedings up to the date of this order, to be taxed if not agreed, pursuant to the agreement reached by the parties.

SCHEDULE 1

Agreed Facts for the Purposes of a Carecraft Settlement between
the Securities and Futures Commission and the 5^th Respondent

The Company

1.     GP NanoTechnology Group Limited (in liquidation) (the “Company”) was incorporated as an exempted company with limited liability in Bermuda under the Companies Act 1981 of Bermuda on 17 July 2000, and was registered in Hong Kong under Part XI of the Companies Ordinance, Cap. 32, on 13 November 2000.

2.     The registered office of the Company was at Clarendon House, 2 Church Street, Hamilton HMll, Bermuda, and its principal place of business was at Unit A, 8^th Floor, Wah Kit Commercial Centre, 302 Des Voeux Road, Central, Hong Kong.

3.     The nominal capital of the Company was HK$500,000,000 divided into 5,000,000,000 shares of HK$0.10 each.  The amount of the capital paid up or credited as paid up was HK$50,000,000.

4.     The Company was an investment holding company.  The Company and its subsidiaries (the “Group”) were principally engaged in the manufacture and sale of nanomaterials for use as fillers in different industrial applications such as the manufacturing of plastic and rubber products.  The Group also commenced its production of ceramic fine powder in February 2000 and subsequently launched it in the PRC market in March 2000.

5.     The Group’s headquarters were located in Hong Kong and its production facilities were centralized in Encheng Municipality, Enping, Guangdong Province, PRC.  The principal manufacturing and operating arm of the Group was a PRC corporation known as 廣平化工實業有限公司 (Guang Ping Chemical Industrial Enterprise Co. Ltd.) (“Guang Ping”).

6.     On 17 July 2001, the shares of the Company were listed on the Growth Enterprise Market (“GEM”) of the Stock Exchange of Hong Kong Limited (“SEHK”) by way of placing.  From the placement, the Company raised net proceeds of around HK$44 million (after deduction of the listing expenses).

7.     On 7 August 2003, trading in the shares of the Company was suspended.  On 10 June 2005, the listing of the shares of the Company was cancelled.

8.     On 17 August 2005, the Company was ordered to be wound up by the High Court under the provisions of the Companies Ordinance, Cap. 32.

The substantial shareholders of the Company

9.     At the time of listing, the Company had, inter alia, the following substantial shareholders:-

(1)  Modem World Resources Limited (“Modern World”) - 36.17%;

(2)  Solidbase Holdings Limited (“Solidbase”) - 19.35%;

(3)  Victory Move Technology Limited (“Victory Move”) - 15.48%.

10.  In the Prospectus of the Company dated 9 July 2001 (the “Prospectus”), it was stated that:-

(1)  Modem World was a company incorporated on 2 May 2000 in the BVI and was beneficially owned by Ms. Wong Yau Ming (“Wong”) and the 1^st and 4^th Respondents.

(a)   Wong was said to be the beneficial owner of 68.75% of the issued share capital of Modem World and the ex-wife of the 4^th Respondent.  She was also a director of GP Nano (HK) Limited (“GPHK”), a wholly owned subsidiary of the Company.

(b)  The 1^st Respondent was said to be the beneficial owner of 18.75% of the issued share capital of Modem World.

(c)   The 4^th Respondent was said to be the beneficial owner of 12.5% of the issued share capital of Modem World.

(2)  Solidbase was a company incorporated on 28 February 2001 in the BVI and wholly and beneficially owned by Full Joy Management Limited, which was a company incorporated on 22 February 2001 in the BVI and owned as to 99.99% by Modem World and 0.01 % by Suez Asia Holdings Pte Limited, a strategic investor of the Company.

(3)  Victory Move was a company incorporated on 2 May 2000 in the BVI and was said to be beneficially owned by two independent third parties, Ng Kwok Kuen and Chan Tak Shun Frederick, in equal shares.

11.  Modem World had fully disposed of its shareholding in the Company by the end of August 2003, shortly after the suspension of trading in the shares of the Company on 7 August 2003.

12.  Although Wong was, on the face of the matter, the ultimate controlling shareholder of the Company, in fact Cheung Long Chung (“Cheung”) was at all material times the real, de facto, controller of the Company.  Wong was represented throughout the listing process of the Company by Cheung acting as her “adviser”.

The executive directors of the Company

13.  At all material times up to 12 August 2003, the 1^st to 5^th Respondents were the only “executive directors” of the Company.

The 5^th Respondent as Executive Director, Finance Director and Compliance Officer

14.  The 5^th Respondent was the finance director and compliance officer of the Company.  The Company represented to shareholders through the Prospectus and Annual Reports that the 5^th Respondent was responsible for the overall financial management of the Group.  The 5^th Respondent had worked for reputable accounting firms in Hong Kong for more than 13 years and had been a financial controller of a manufacturing company for 2 years.  He held a Diploma in Accounting from the Hong Kong Shue Yan College and a Bachelor of Commerce (Banking and Finance) from the Curtin University of Technology, Western Australia, and he was appointed as a director of the Company on 13 October 2000.

15.  The 5^th Respondent failed to carry out the duties of finance director and compliance officer of the Company.  He failed to take an active role in the decision making of the Company and failed to ask for supporting information that the proposed transactions were in the best interests of the Company and failed to take any reasonable steps to satisfy himself that various transactions were in the interest of the Company.  Although the 5^th Respondent was the finance director and chairman of the audit committee of the Company, he had little or no involvement in the Company’s financial matters.  He allowed Cheung, who was not a director or a member of staff, to control the finances of the Company.  Although he was a director of the Company, the 5^th Respondent acted under or according to the directions of Cheung.  The 5^th Respondent failed to take reasonable steps to check that public announcements made by the Company were correct and failed to raise questions on the matters disclosed in the announcements.

The independent non-executive directors and Audit Committee of the Company

16.  As disclosed in the Prospectus and Annual Reports, the Company had at all material times up to 25 March 2003, being the date of the Directors’ Report contained in the 2002 AR: (a) two independent non-executive directors, and (b) an Audit Committee which was made up of the two independent non-executive directors and the 5^th Respondent.  The primary duties of the Audit Committee were stated to be (i) to review the Company’s annual report and accounts, half-yearly reports and quarterly reports, and (ii) to review and supervise the financial reporting and internal control procedure of the Company.

Cheung –  the real or de facto controller of the Company

17.  The executive directors of the Company, including the 5^th Respondent, at all material times acted, in relation to the business or affairs of the Company, under or in accordance with the directions or instructions of Cheung, who was neither a director nor a shareholder of the Company.  In the Company’s public announcement dated 10 October 2003, Cheung was described as the “Company consultant” after the listing of the Company until the middle of May 2003 and the chief representative of Modem World, a substantial shareholder of the Company.

18.  Cheung has a criminal record in Hong Kong for offences of false accounting, for which he was sentenced to seven years imprisonment in May 1984.  Cheung was also a bankrupt who was discharged from bankruptcy in 1999.

19.  The main manufacturing and operating activities of the Company were carried out through its major subsidiaries in the PRC, in particular Guang Ping.  However, the finance and administrative functions of the Company were handled by the Company’s Hong Kong office, through its subsidiary GPHK.  The Hong Kong office was under the effective control of Cheung in relation to both the listing and financial affairs of the Company.

20.  Cheung was directly involved in appointing all the directors of the Company and allocated roles to each of them after the Company was listed.  In his interviews with the Petitioner, the 5^th Respondent stated, inter alia, that: (i) Cheung invited him to join the Company to assist in the proposed listing, (ii) he had invested HK$1.5 million in the Company via Cheung for a client/friend called Chan Tak Shun, (iii) Chan Tak Shun’s shares in the Company were held through a company called Victory Move, (iv) Chan Tak Shun and Ng Kwok Kuen were the two shareholders of Victory Move but that company was managed by Cheung, (v) no money was returned to Chan Tak Shun or him after Cheung had sold the shares of the Company held by Victory Move.

21.  Cheung maintained control over the finances of the Company and was a bank signatory of the bank accounts of the Company (at Citic Ka Wah Bank Ltd. and HSBC) and its subsidiaries, GPHK (at Nanyang Commercial Bank, Bank of China (HK) Ltd. and HSBC), and GP Nano Technology Holdings Limited (at Bank of China (HK) Ltd. and HSBC).

22.  In the Company’s public announcement dated 10 October 2003, Cheung was described as the “Company consultant” after the listing of the Company until the middle of May 2003 and also the chief representative of Modem World.  It was stated that being the consultant of the Company, the primary role of Cheung involved identifying and introducing potential joint venture partners or strategic partners to the Company.  It was also stated that Wong and Cheung were the “treasurer” of the Company at the “relevant times”.  On 13 February 2004 the Company informed the Petitioner that Wong and Cheung were the “treasurer” of the Company up to May 2003.

23.  Further, a company called Global Essence Holdings Limited (“Global Essence”) was appointed as a consultant to the Company by an agreement dated 20 July 2001.  Global Essence was owned almost entirely (99.9999%) by a company called Richest Resources Limited, which in turn was owned 50% by Cheung and one Cheung Kin Cho and 50% by one Li Xiao Wu.  The other shareholder of Global Essence, holding 1 share, was Cheung Kin Cho.  Global Essence received a consultancy fee of HK$1 million from the Company for the year ended 31 December 2001 and obtained substantial loans from the Company (details of which will be set out below).

24.  Cheung was a “shadow director” of the Company, who had effective control over the management of the Company at all material times since its listing in July 2001 up to around mid-2003.

Five questionable transactions

25.  In 2001, the same year that the shares of the Company got listed on the GEM of the SEHK, the Company or its principal subsidiary, Guang Ping, entered into 5 questionable transactions resulting in substantial loss to the Company or the Group, namely:-

(1)  the Heilongjiang Investment;

(2)  the Enping Investment;

(3)  the Honvest Loan of RMB¥3.43 million;

(4)  the Enping Chemical Loan of RMB¥6.61 million; and

(5)  the Global Essence Advances,

details of which are summarised below.

26.  In response to a complaint (the “Complaint”) to the SEHK against the Company alleging lack of explanation for the progress of acquisition of investments for which the Company had paid deposits of RMB¥15 million and for loans of approximately HK$19 million made to third parties, the Company published 2 Clarification Announcements dated 14 January 2003 and 5 March 2003 (the “1^st Clarification Announcement” and “2^nd Clarification Announcement” respectively and “Clarification Announcements” collectively) at the request of the SEHK.

(i)  The Heilongjiang Investment

27.  On 8 October 2001, Guang Ping signed a letter of intent (the “Letter of Intent”) with 黑龍江省百利豪建設發展有限公司(Hei1ongjiang Province Bai Li Hao Construction Development Company Limited) (the “Heilongjiang Party”) for the proposed acquisition of an interest in 黑龍江華能重鈣廠 (Heilongjiang Huanong Double Superphosphate Factory) (the “Heilongjiang Plant”).  The Letter of Intent concerned a proposal for Guang Ping to acquire a shareholding in the Heilongjiang Plant (the “Heilongjiang Project”).  Under the terms of the Letter of Intent, Guang Ping paid a deposit of RMB¥7 million to the Heilongjiang Party as an indication of interest in the proposed acquisition.  The deposit was not placed into an escrow account.  The proposed acquisition was conditional on a formal agreement being entered into within 12 months of 8 October 2001.  In the event that no agreement was entered into, the Letter of Intent was to be terminated and the Heilongjiang Party was required to return the deposit, without interest, within 14 days after the expiry of the 12 months negotiation period.

28.  According to the 2^nd Clarification Announcement:-

(1)  The Heilongjiang Project was introduced by the 4^th Respondent who had conducted a site visit to the Heilongjiang Plant and had met and negotiated with the management of the Heilongjiang Plant and the Heilongjiang Party, with whom he had developed a business relationship over a period of time.

(2)  The board of directors of the Company (the “Board”), excluding the independent non-executive directors, discussed the terms of the Letter of Intent in October 2001, after taking into consideration details about the Heilongjiang Plant provided by the Heilongjiang Party.

(3)  The Board considered that the terms of the Letter of Intent were beneficial to the future development of the Company and in the interests of the shareholders of the Company.

(4)  On 31 December 2001, a meeting of the Board, excluding the independent non-executive directors, was convened to ratify the payment of the deposit of RMB¥7 million.

(5)  No formal agreement was ever concluded for the acquisition of the Heilongjiang Plant.

(6)  When the Company demanded a refund of the RMB¥7 million deposit on 8 October 2002, the Heilongjiang Party apparently claimed that it was unable to make the payment.

(7)  Accordingly, on 8 October 2002, Guang Ping entered into a cancellation agreement with the Heilongjiang Party to rearrange the repayment of the deposit and the Board approved the cancellation agreement on the same day.

(8)  Under the terms of the cancellation agreement, the repayment of the deposit was to be by way of three instalments, over a period of seven months, with penalty interest being charged in the event of late payment.

(9)  The Heilongjiang Party failed to pay the first instalment on 8 January 2003.  On 9 January 2003, Guang Ping sent a letter to the Heilongjiang Party, through a PRC law firm, demanding repayment of the first instalment together with interest.

(10)    On 7 February 2003, the first instalment of RMB¥2 million plus interest was received from the Heilongjiang Party.

29.  In the Company’s announcement dated 10 October 2003, it was stated that no further repayment had been received from the Heilongjiang Party and, in view of the information given by Cheung to the Group in late April 2003 that the Heilongjiang Party had financial difficulties and was unable to settle the outstanding amount of RMB¥5 million, full provision had been made in the Company’s accounts for the said sum of RMB¥5 million.

(ii)  The Enping Investment

30.  On 28 November 2001, Guang Ping entered into an agency agreement (the “Agency Agreement”) with an Enping government-owned consultancy agent, the Technology Service Centre of Guangdong Province Enping City Economic Committee (廣東省恩平市經委科技服務中心) (the “Enping Party”).  Under the terms of the Agency Agreement, the Enping Party was appointed to negotiate on behalf of Guang Ping for the acquisition of a controlling stake in 恩平市橫坡鎮碳酸鈣廠  (Enping Hengpo County Calcium Carbonate Factory) (the “Enping Plant”), hereinafter referred to as the “Enping Project”.

31.  Under the terms of the Agency Agreement, Guang Ping agreed to pay a sum of RMB¥8 million as 保証金 (guarantee money) to the Enping Party within 3 days of the signing of the Agency Agreement.  If the proposed acquisition was successful, the Enping Party was to receive RMB¥2 million as 中介費 (intermediary fee) to be deducted directly from the said guarantee money.  On the other hand, if an agreement for the acquisition could not be reached between 28 November 2001 and 30 September 2002 (the “Agreement Period”), the Agency Agreement would be terminated and the guarantee money would be refunded to Guang Ping before 3 October 2002, subject to the payment of an unspecified 勞務費 (service fee), which presumably was to be agreed between the parties.  The sum of RMB¥8 million was paid directly to the Enping Party on 30 November 2001.

32.  On 30 September 2002, a supplemental agreement (the “Supplemental Agreement”) was entered into to extend the Agreement Period to 30 September  2003.

33.  In the Company’s announcement dated 21 November 2003, it was stated that:-

(1)  Due to the current liquidity problem faced by the Company, the Board decided to cancel the Agency Agreement and the Supplemental Agreement relating to the proposed acquisition of the Enping Plant and demanded the repayment of the deposit (i.e. the aforesaid guarantee money) in the sum of RMB¥8 million.

(2)  A cancellation agreement was signed on 30 September 2003, under which the Enping Party agreed to repay the said sum of RMB¥8 million by two instalments within a period of two months from the date of the cancellation agreement, with the first instalment of RMB¥4 million due on or before 31 October 2003 and second instalment of the remaining RMB¥4 million due by no later than November 2003.

(3)  On 28 October 2003, the Company recovered the first instalment of RMB¥4 million from the Enping Party.

34.  Apparently, the Company has never received the second instalment of RMB¥4 million from the Enping Party.

(iii)  The Honvest Loan of RMB¥3.43 million

35.  On 3 January 2001, Guang Ping signed a loan agreement (the “Honvest Loan Agreement”)with 中邦制造有限公司 (Honvest Manufacturing Limited) (“Honvest”), a private company incorporated in Hong Kong, to give Honvest an interest free loan of RMB¥3.43 million (the “Honvest Loan”).  The Honvest Loan was repayable on demand but no collateral was obtained to secure the repayment, and was advanced over the period from January to November 2001.

36.  Honvest was a former shareholder of Guang Ping but ceased to have any interest in Guang Ping after October 1996.

37.  According to the 1^st and 2^nd Clarification Announcements:-

(1)  Honvest had extensive business networks and relationships with various government authorities and chemical companies in Enping City.

(2)  The purpose of the loan was to facilitate the operation of business and assisting the financial difficulty of Honvest.

(3)  The granting of the loan could help build up a relationship with Honvest that might be beneficial to the Group’s future business development and investment in Enping City.

(4)  The 3^rd Respondent was responsible for negotiating the loan to Honvest, and the signing of the Honvest Loan Agreement was approved by the Board excluding the independent non-executive directors.

38.  According to the 2^nd Clarification Announcement, the signing of the Honvest Loan Agreement was discussed by the Board, excluding the independent non-executive directors, in January 2001, and the Board convened a meeting on 31 December 2001 to ratify the granting of the Honvest Loan.

39.  It was stated in the 1^st and 2^nd Clarification Announcements that all outstanding amounts due under the Honvest Loan had been fully settled on 25 April 2002.

(iv)     The Enping Chemical Loan of RMB¥6.61 million

40.  On 5 April 2001, Guang Ping signed a loan agreement (the “Enping Chemical Loan Agreement”) with 恩平市化工工業公司 (Enping Chemical Industrial Company) (“Enping Chemical”), a state-owned enterprise established in July 1984 in the PRC, to give Enping Chemical an interest free loan of RMB ¥6.61 million (the “Enping Chemical Loan”).  The Enping Chemical Loan was repayable on demand but no collateral was obtained to secure the repayment, and was advanced over the period from June to December 2001.

41.  Enping Chemical was a former shareholder of Guang Ping but ceased to have any interest in Guang Ping after October 1996.

42.  According to the 1^st and 2^nd Clarification Announcements:-

(1)  Enping Chemical had good relationships with most chemical companies in Enping City.

(2)  The purpose of the loan was to facilitate the operation of business and assisting the financial difficulty of Enping Chemical.

(3)  The granting of the loan could help maintain a close relationship with Enping Chemical that might be beneficial to the Group’s future business development and investment in Enping City.

(4)  The 3^rd Respondent was responsible for negotiating the loan to Enping Chemical, and the signing of the Enping Chemical Loan Agreement was approved by the Board, excluding the independent non-executive directors.

43.  According to the 2^nd Clarification Announcement, the signing of the Enping Chemical Loan Agreement was discussed by the Board in April 2001, and the Board convened a meeting on 31 December 2001 to ratify the granting of the Enping Chemical Loan.

44.  It was stated in the 1^st and 2^nd Clarification Announcements that all outstanding amounts due under the Enping Chemical Loan had been fully settled on 19 April 2002.

(v)  The Global Essence Advances

45.  On 20 July 2001, the Company and Global Essence entered into a Consultancy Services Agreement under which Global Essence was appointed as the Company’s consultant to identify acquisition targets for the Company in the PRC.  The Consultancy Services Agreement required the Company to provide the necessary funding to Global Essence to facilitate it to locate investment opportunities in the PRC on behalf of the Company.  It also provided that after the Company had completed any acquisition, the Company would pay Global Essence a remuneration equivalent to 10% of the investment amount for that acquisition.

46.  In the 1^st Clarification Announcement, it was stated that the aggregate advances of HK$9.43 million had been made by the Company to Global Essence over the period from March to December 2001.

47.  In the 2^nd Clarification Announcement, it was stated that the aggregate advances of HK$9.43 million had been made by the Company to Global Essence starting from March 2001 before the signing of the Consultancy Services Agreement, and the Board considered that at first the outstanding amounts of the advances to Global Essence were immaterial to the Group but once substantial advances were foreseen by the Group it was decided to sign a formal agreement as part of its risk management procedure.

48.  In both the 1^st and 2^nd Clarification Announcements, it was stated that all outstanding advances to Global Essence had been fully settled on 30 September 2002.

Misrepresentation or misleading presentation of facts regarding the five questionable transactions in the 1^st and 2^nd Clarification Announcements

49.  In each of the Clarification Announcements, it was expressly stated that the directors of the Company collectively and individually accepted full responsibility, and that the directors, having made all reasonable enquiries, confirmed that, to the best of their knowledge and belief: (l) the information contained therein was accurate and complete in all material respects and not misleading, (2) there were no other matters the omission of which would make any statement therein misleading, and (3) all opinions expressed therein had been arrived at after due and careful consideration and were founded on bases and assumptions that were fair and reasonable.

50.  The Heilongjiang Investment:

(1)  In the 1^st Clarification Announcement, it was stated that the signing of the Letter of Intent had been approved by the Board (excluding the independent non-executive directors) after taking into consideration details of the Heilongjiang Project provided by the Heilongjiang Party.

(2)  In the 2^nd Clarification Announcement, it was stated that the terms of the Letter of Intent were discussed by the Board (excluding the independent non-executive directors) in October 2001 after taking into consideration details of the Heilongjiang Plant, including its location, gross floor area, annual production capacity, production facilities, and machinery and equipment, provided by the Heilongjiang Party but not including details of sales, profit and loss and net tangible assets of the Heilongjiang Plant.  The Board (excluding the independent non-executive directors) thereafter convened a meeting on 31 December 2001 to ratify the deposit of RMB¥7 million for the proposed acquisition of the Heilongjiang Plant.  This information was also repeated In the Company’s subsequent announcement dated 10 October 2003.

(3)  The 5^th Respondent claimed that he could not recall if meetings were held in October or on 31 December 2001.  He stated that he arranged for the December Board minutes to be prepared after the auditors had asked him, in March 2002, for details of the Board approval for the deposits and loans.  The 5^th Respondent took no reasonable steps to satisfy himself that the Board had in fact given proper approval for the deposit.  The 5^th Respondent also failed to make reasonable enquiries into whether it was appropriate for the Company to make the deposit and whether there were sufficient measures in place to ensure repayment.

(4)  The 5^th Respondent denied having seen the Letter of Intent before the 3^rd Respondent signed it.  He also claimed he took no part in the negotiation or implementation of the transaction.  Having been informed by Mr. Fung Chiu of the plan to acquire the Heilongjiang Plant, the 5^th Respondent failed to take reasonable steps to satisfy himself that the transaction was in the interest of the Company.

(5)  No board minutes have ever been disclosed by the Company or by any of the Respondents which show that the terms of the Letter of Intent were considered or discussed by the Board in October 2001, nor has any document regarding the negotiation of the terms of the Letter of Intent, the proposed acquisition of the Heilongjiang Plant or the cancellation agreement of 8 October 2002 been disclosed by the Company or by any of the Respondents.

(6)  In the premises, the above statements in the 1^st and 2^nd Clarification Announcements are false or, at the very least, misleading in a material way.  The 5^th Respondent failed to take reasonable steps to satisfy himself that the information in the 1^st and 2^nd Clarification Announcements was accurate and failed to raise questions on the matters disclosed in the announcements.

51.  The Enping Investment:

(1)  In the 1^st Clarification Announcement, it was stated that the proposed acquisition of the Enping Plant was introduced by the 3^rd Respondent, and the signing of the Agency Agreement was approved by the Board (excluding the independent non-executive directors) after taking into consideration details of the Enping Plant as introduced by the Enping Party.

(2)  In the 2^nd Clarification Announcement, it was stated that the terms of the Agency Agreement were discussed by the Board (excluding the independent non-executive directors) in November 2001 after taking into consideration details of the Enping Plant including the Enping Plant’s principal engagement as introduced by the Enping Party, but not including details on sales, profit and loss, and net tangible assets of the Enping Plant.  It was also stated that the Board (excluding the independent non-executive directors) thereafter convened a meeting on 31 December 2001 to ratify the deposit of RMB¥8 million for the proposed acquisition of the Enping Plant.

(3)  The 5^th Respondent stated that he did not attend any Board meeting in November 2001 or on 31 December 2001 and did not know whether meetings took place to ratify the Enping Project.

(4)  The 5^th Respondent denied being involved in the negotiation regarding the Enping Project and stated that he did not know about the payment of the deposit, but confirmed that he signed the Board minutes dated 31 December 2001.  The 5^th Respondent failed to make inquiries into the Enping Project prior to signing the Board minutes and failed to take reasonable steps to satisfy himself that the investment was in the interests of the Company.  The 5^th Respondent took no reasonable steps to satisfy himself that the Board had in fact given approval for the deposit.  He also failed to take reasonable steps to enquire into whether it was appropriate for the deposit to be made and whether there were sufficient measures in place to ensure recovery of the deposit.

(5)  As in the case of the Heilongjiang Investment, no Board minutes have been disclosed which show that the terms of the Agency Agreement were considered or discussed by the Board of the Company in November 2001, nor has any document regarding the negotiation of the terms of the Agency Agreement, the proposed acquisition of the Enping Plant or the cancellation agreement of 30 September 2003 been disclosed by the Company or by any of the Respondents.

(6)  The Agency Agreement or Enping Project was in fact never discussed, considered or approved by the Board in November 2001.  Also, no Board meeting was actually held on 31 December 2001, although minutes of that date were signed by the directors.

(7)  In all, the above statements in the 1^st and 2^nd Clarification Announcements are false or, at the very least, misleading in a material way.  The 5^th Respondent failed to take reasonable steps to satisfy himself that the information in the 1^st and 2^nd Clarification Announcements was accurate and failed to raise questions on the matters disclosed in the announcements.

52.  The Honvest Loan and Enping Chemical Loan:

(1)  In the 1^st Clarification Announcement, it was stated that the 3^rd Respondent was responsible for the negotiation of the Honvest Loan, and that the signing of the Honvest Loan Agreement was approved by the Board (excluding the independent non-executive directors).

(2)  In the 2^nd Clarification Announcement, it was stated that the signing of the Honvest Loan Agreement was discussed by the Board (excluding the independent non-executive directors) in January 2001, and the Board (excluding the independent non-executive directors) thereafter convened a meeting on 31 December 2001 to ratify the granting of the Honvest Loan.

(3)  Similar representations were made in respect of the Enping Chemical Loan in the 1^st and 2^nd Clarification Announcements, save that in respect of this loan the agreement was allegedly discussed by the Board in April 2001.

(4)  The 5^th Respondent denied having any involvement in the negotiation and approval of these loans.  He also denied knowing anything about the payment of the loans.  The 5^th Respondent confirmed that he ratified the loans by signing the Board minutes dated 31 December 2001 without knowing anything about them and without making any inquiries about the granting of the loans.  The 5^th Respondent also failed to take reasonable steps to consider whether it was appropriate or in the best interests of the Company to make the loans and failed to make any reasonable inquiries or take any reasonable steps to ensure that the Company would be able to recover the money loaned to Honvest and Enping Chemical.

(5)  Apart from the loan agreements themselves, the Company and the Respondents have not been able to provide the Petitioner with any other document in relation to loan approval, assessment of the credit standing of the borrowers or the recoverability of the loans.

(6)  In the premises, the statements that the said loan agreements were discussed or approved by the Board in January and April 2001 respectively are false, as are that statements that the Board subsequently convened a meeting on 31 December 2001 to ratify the 2 loans.  The 5^th Respondent failed to take reasonable steps to satisfy himself that the information in the 1^st and 2^nd Clarification Announcements was accurate and failed to raise questions on the matters disclosed in the announcements.

53.  The Global Essence Advances:

(1)  In the 1^st Clarification Announcement, it was stated that the signing of the Consultancy Services Agreement was approved by the Board (excluding the independent non-executive directors).

(2)  In the 2^nd Clarification Announcement, it was stated that the signing of the Consultancy Services Agreement was approved by the Board (excluding the independent non-executive directors) at a meeting held on 19 July 2001.

(3)  There is in existence a document purporting to be the Board minutes of a meeting dated 19 July 2001 approving the Consultancy Services Agreement and authorizing the 1^st Respondent to sign it on behalf of the Company.

(4)  The Consultancy Services Agreement was signed by the 1^st Respondent.

(5)  The 5^th Respondent confirmed in his interview that he did not attend any meeting to approve the appointment of Global Essence as consultant, even though he was named in the Board minutes as having been present at the purported Board meeting on 19 July 2001.  The minutes were signed by the 1^st Respondent only.  The 5^th Respondent stated that he knew nothing about the advances to Global Essence or the repayment, apart from the fact that Global Essence was connected with Cheung.

(6)  In the premises, the aforesaid statements in the 1^st and 2^nd Clarification Announcements are false or misleading.  The 5^th Respondent failed to take reasonable steps to check the accuracy of the 1^st and 2^nd Clarification Announcements.  After becoming aware of the advances to Global Essence, the 5^th Respondent failed to make inquiries into the circumstances in which the advances were made to Global Essence and to take steps to find out what services, if any Global Essence had provided to the Company.

(7)  Further, it was stated in both the 1^st and 2^nd Clarification Announcements that:-

(a)   Global Essence was a consultancy firm incorporated in Hong Kong with limited liability and engaged in the provision of consultancy services on behalf of clients seeking potential investment opportunities and handling merger and acquisition projects in the PRC.  Global Essence was beneficially owned as to 999,999 shares by Richest Resources Limited (which was 50% jointly owned by Cheung and one Cheung Kin Cho, and the remaining 50% owned by one Li Xiao Wu) and as to 1 share by Cheung Kin Cho, and all of them were independent third parties not connected with any of the directors, chief executive, initial management shareholders or substantial shareholders of the Company or any of their respective associates (as defined in the GEM Listing Rules).

(b)  Global Essence was introduced by Wong, the controlling shareholder of the Company, to the Group.

(c)   Global Essence had assisted the Group to identify acquisition targets in the PRC by completing 2 feasibility reports in relation to the investment in two factories engaging in the production of nanomaterials (in the 2^nd Clarification Announcement, it was added that the same were presented to the Group in September 2001).

(d)  The aggregate advances of HK$9.43 million had been made by the Company to Global Essence over the period from March to December 2001 (as per the 1^st Clarification Announcement); or the aggregate advances of HK$9.43 million had been made by the Company to Global Essence starting from March 2001 before the signing of the Consultancy Services Agreement (as per the 2^nd Clarification Announcement).

(e)   All outstanding advances had been fully settled on 30 September 2002.

(8)  Contrary to the above statements or representations:-

(a)   Global Essence was not an independent third party, in that (i) Cheung was at all material times the real or de facto controller of the Company, (ii) Cheung is described as an employee of Global Essence in a “Service Registration Form for HSBC Premier with Integrated Account” produced by HSBC, and (iii) Cheung and one Cheung Kin Cho jointly owned 50% of Richest Resources Limited, which in turn owned 99.9999% of the issued share capital of Global Essence.

(b)  There is no evidence that Global Essence has ever produced any feasibility reports to the Company.  On a copy of the Consultancy Services Agreement kept by Deloitte Touche Tohrnatsu (“DTT”), one of the joint auditors of the Company, it was stated that subsequent to the contract date, no service had been rendered by Global Essence.  No minutes showing that any feasibility reports prepared by Global Essence were received or considered by the Board, whether in September 2001 or at any other time, have ever been produced by the Company to the Petitioner.

(c)   According to a schedule (the “Schedule”)provided by the Company with the title “GP Nano (H.K.) Limited 31.12.2001 Amount due by Global Essence” on the first page and “GP Nano (H.K.) Limited 30.9.2002 Current account with Global Essence Holdings Ltd” on the second page, Global Essence had during the period from 1 March 2001 to 11 July 2001 received 17 sums totalling HK$6,410,000 from GPHK and made one repayment of HK$5,044,611.95, leaving a net balance of HK$I,365,388.05 due to GPHK as at 11 July 2001.

(d)  It appears further from the Schedule that:-

  (i)  during the period from 24 July 2001 to 31 December 2001, GPHK made 28 further payments totalling HK$15,005,327.01 to Global Essence, and during the same period Global Essence made 3 repayments to GPHK amounting to HK$6.94 million.  The outstanding balance due to GPHK was therefore increased to HK$9,430,715.06 as at 31 December 2001.

      (ii)  between 30 January 2002 and 14 March 2002, GPHK made 17 more payments to Global Essence totalling HK$1,726,251.40 with the result that the outstanding balance was increased to HK$II,156,966.46 as at 17 March 2002;

    (iii)  between 18 March 2002 and 23 March 2002, Global Essence made 3 repayments (the “Three Purported Repayments”) of HK$3 million, HK$2.5 million and HK$3 million respectively, totalling HK$8.5 million, to GPHK;

   (iv)  all outstanding balances were fully repaid on 24 September 2002.

(e)   In respect of the Three Purported Repayments, based on the investigation and analysis carried out by the Petitioner, it appears that the first repayment of HK$3 million was paid out from a personal account of Cheung and deposited into an account of GPHK on 18 March 2002.  Thereafter, this HK$3 million was circulated between various bank accounts in the name of GPHK, Cheung and Huprowk Group Limited (a company associated with Cheung) which were subsequently recorded as the second and third repayments of HK$2.5 million and HK$3 million respectively.  A summary of the fund movements together with 3 flow charts are attached hereto as Appendix 1.

(f)    In the premises, there was no full repayment of all outstanding advances as at 24 September 2002 or at any time.

Abdication of responsibility as director of a publicly listed company

54.  The facts and matters set out in paragraphs 25 to 53 above demonstrate that the 5^th Respondent displayed a cynical disinterest in managing, overseeing or supervising the affairs of the Company, including in particular the proper application of the Company’s funds, notwithstanding his position as executive director, finance director and compliance officer of the Company.  Having accepted the title of finance director and compliance officer of the Company, the 5^th Respondent failed to take steps to ensure that the use of Company funds was in best interests of the Company and its shareholders.  The 5^th Respondent failed to raise questions about investments made by the Company and failed to take reasonable steps to enquire about loans and advances made by the Company to third parties and to ensure their repayment.  The 5^th Respondent signed Board minutes without questioning the transactions for which he was giving approval.  Further, he allowed announcements to be issued to the public without taking reasonable steps in verifying their accuracy.

55.  Effectively the 5^th Respondent treated himself as no more than an employee of the Company and allowed Cheung and/or Wong, neither of whom was a director or officer of the Company, to dominate the management of the Company and to assume effective control of the financial affairs and the disposition of funds of the Company.  In so doing, he abdicated his responsibilities as an executive director of a publicly listed company, upon whom the shareholders and investing public could reasonably have relied to protect the interests of the Company.

Failure to exercise reasonable skill, care and diligence and/or to act in the best interests of the Company

56.  Rule 5.01 of the GEM Listing Rules provides that:-

“The board of directors of an issuer is collectively responsible for the management and operations of the issuer.  The Exchange expects the directors, both collectively and individually, to fulfil fiduciary duties and duties of skill, care and diligence to a standard at least commensurate with the standard established by Hong Kong law.  This means that every director must, in the performance of his duties as a director:-

(1)  act honestly and in good faith in the interests of the company as a whole;

(2)  act for proper purpose;

(3)  be answerable to the issuer for the application or misapplication of its assets;

(4)  [not material];

(5)  [not material];

(6)  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 with the issuer.”

57.  Rule 5.03 of the GEM Listing Rules further provides that:-

“The directors of an issuer are collectively and individually responsible for ensuring the issuer’s full compliance with the GEM Listing Rules.”

58.  The facts and matters set out in paragraphs 25 to 55 above demonstrate that the 5^th Respondent failed to exercise reasonable skill, care and diligence in the management of the business and affairs of the Company and/or failed to act in the best interests of the Company, contrary to his common law duty of care and/or fiduciary duty and/or Rule 5.01 of the GEM Listing Rules, with which he had given a written undertaking to the SEHK to comply to the best of his ability prior to the listing of the Company.  As an executive director and more particularly as finance director and compliance officer, the 5^th Respondent failed to take reasonable steps to safeguard the finances of the Company and to protect the interests of the Company and its shareholders.  In addition, the following facts and matters are relevant to the complaint under this head.

59.  The Heilongjiang Investment:

(1)  In the 2^nd Clarification Announcement, it was stated that the terms of the Letter of Intent had been discussed by the Board, excluding the independent non-executive directors, in October 2001, and that the independent non-executive directors considered that they did not participate in the discussion or approval of the Heilongjiang Project and were only notified of the same after the Company had received the Complaint.  Given that the Audit Committee of the Company, which comprised the two independent non-executive directors of the Company and the 5^th Respondent, was responsible for reviewing the Company’s internal control procedures and given that the size of the proposed acquisition was substantial and material, the executive directors should have consulted the independent non-executive directors about the proposed acquisition before any decision was made to enter into the Letter of Intent.  In particular, given his role on the Audit Committee, the 5^th Respondent should have raised the issue of consulting the independent non-executive directors.

(2)  In the 2^nd Clarification Announcement, it was stated that the terms of the Letter of Intent were discussed by the Board (excluding the independent non-executive directors) in October 2001 after taking into consideration details of the Heilongjiang Plant such as its location, gross floor area, annual production capacity, production facilities and machinery and equipment, but not details on sales, profit and loss, or net tangible assets of the Heilongjiang Plant.  In view of the size of this proposed acquisition, it was unreasonable of the 5^th Respondent and the rest of the Board not to consider the financial performance or the assets and liabilities of the Heilongjiang Plant prior to making payment of a substantial deposit of RMB¥7 million.  No feasibility study or other evaluation assessing the Heilongjiang Plant’s past performance or existing assets and liabilities at the time of the proposed acquisition or budget cashflow together with an expected return from the proposed investment was ever prepared or considered by the 5^th Respondent or the rest of the Board.

(3)  In the 2^nd Clarification Announcement, it was stated that the 4^th Respondent had conducted a site visit of the Heilongjiang Plant and had met and negotiated with the management of the Heilongjiang Party and Heilongjiang Plant.  However, the Company has failed to produce to the Petitioner any site visit report, feasibility study, meeting records or other relevant documents to support the above assertions.

(4)  In the 2^nd Clarification Announcement, it was stated that the Company or Guang Ping had conducted negotiations with the Heilongjiang Party on about three occasions in the twelve months after signing the Letter of Intent but the proposed acquisition had fallen through because certain major commercial terms (such as total consideration, settlement method and the percentage of equity interests to be invested) could not be agreed.  It was also stated that the Heilongjiang Party had asked the Company to pay a consideration of not less than RMB¥15 million and all the liabilities of the Heilongjiang Plant in return for the entire shareholding interest in the Heilongjiang Plant.  However, the Company has failed to produce to the Petitioner any document showing how the proposed consideration of RMB¥15 million was calculated or giving any information about the liabilities of the Heilongjiang Plant.

(5)  The Letter of Intent did not impose any contractual obligation on the Heilongjiang Party.  Neither the Company nor Guang Ping asked the Heilongjiang Party to pay any interest on the deposit of RMB¥7 million received by it in advance.  The Company and/or Guang Ping therefore suffered a credit risk without obtaining any benefit in return should the proposed acquisition fall through.

(6)  The payment of the deposit of RMB¥7 million to the Heilongjiang Party was not made in the best interests of the Company or Guang Ping, in that.-

(a)   it was not paid into an escrow account;

(b)  no approval was given by the directors of the Company prior to the payment; apparently the Board only ratified this payment on 31 December 2001;

(c)   the Heilongjiang Party was not required to pay any interest and no security or guarantee was given by the Heilongjiang Party for the repayment of the deposit should the proposed acquisition fall through.

(7)  In all, the proposed acquisition had not been properly planned or discussed amongst the executive directors of the Company before the Letter of Intent was entered into.

(8)  Further, the 4^th Respondent gave a written undertaking to the Board dated 15 March 2002 that the deposit of RMB¥7 million paid to the Heilongjiang Party under the Letter of Intent could be recovered and that he would arrange for the settlement of the said sum of RMB¥7 million to the Group should it be unable to recover the same from the Heilongjiang Party.

(9)  As earlier mentioned, the proposed acquisition of the Heilongjiang Plant eventually fell through and the Group was only able to recover RMB¥2 million from the Heilongjiang Party and had to make a full provision in respect of the balance RMB¥5 million.  However, the 4^th Respondent did not honour his said undertaking and the Board failed to take any step or action to recover the outstanding RMB¥5 million from the 4^th Respondent.

60.  The Enping Investment:

(1)  In the 2^nd Clarification Announcement, it was stated that the terms of the Agency Agreement had been discussed by the Board, excluding the independent non-executive directors, in November 2001, and that the independent non-executive directors considered that they did not participate in the discussion or approval of the Enping Project and were only notified of the same after the Company had received the Complaint.  Given that the Audit Committee of the Company, which comprised the two independent non-executive directors of the Company and the 5^th Respondent, was responsible for reviewing the Company’s internal control procedures and given that the size of the proposed acquisition was substantial and material, the executive directors should have consulted the independent non-executive directors about the proposed acquisition before any decision was made to enter into the Agency Agreement.  In particular, given his role on the Audit Committee, the 5^th Respondent should have raised the issue of consulting the independent non-executive directors.

(2)  In the 2^nd Clarification Announcement, it was stated that since the Enping Plant was one of the major competitors of Guang Ping, no detailed information on the Enping Plant was available publicly to the Company, and that the directors of the Company had no knowledge about the shareholding structure or the background of the shareholders or beneficial owners of the Enping Plant.  The Company did not have adequate information and understanding about the Enping Project before entering into the Agency Agreement.

(3)  In the 2^nd Clarification Announcement, it was further stated that, in November 2001, the Board had discussed and taken into consideration details of the Enping Plant including its principal engagement as introduced by the Enping Party, but not details on sales, profit and loss, or net tangible assets of the Enping Plant, prior to entering into the Agency Agreement.  No minutes of any Board meeting held in November 2001 to discuss the proposed acquisition of the Enping Plant or the Agency Agreement have ever been produced to the Petitioner.  Further, in view of the size of this proposed acquisition, it was unreasonable of the 5^th Respondent and the rest of the Board not to consider the financial performance or the assets and liabilities of the Enping Plant prior to making payment of a substantial sum of RMB¥8 million as guarantee money to the Enping Party.  No feasibility study or other evaluation assessing the Enping Plant’s past performance or existing assets and liabilities at the time of the proposed acquisition or budget cashflow together with an expected return from the proposed investment was ever prepared or considered by the 5^th Respondent or the rest of the Board.

(4)  The payment of the guarantee money of RMB¥8 million to the Enping Party was not made in the best interests of the Company or Guang Ping, in that:-

(a)   it was not paid into an escrow account;

(b)  no approval was given by the directors of the Company prior to the payment; apparently the Board only ratified this payment on 31 December 2001;

(c)   the Enping Party was not required to pay any interest and no security or guarantee was given by the Enping Party for the repayment of the guarantee money.

(5)  No information has been disclosed by the Company as to how the intermediary fee of RMB¥2 million was fixed or arrived at.  Further, it was unusual or uncommercial for the service fee to be unspecified in the Agency Agreement.

(6)  In all, the proposed acquisition of the Enping Plant had not been properly discussed and/or evaluated amongst the executive directors of the Company before the Agency Agreement was entered into.

(7)  Further, in the Company’s announcement dated 21 November 2003, it was stated that on 28 October 2003 the Company had recovered the first instalment of RMB¥4 million from the Enping Party as part repayment of the guarantee money.  However, the Petitioner is not aware of any document which evidences this alleged repayment of RMB¥4 million by the Enping Party.

61.  The Honvest Loan of RMB¥3.43 million:

(1)  According to the 1^st and 2^nd Clarification Announcements, the independent non-executive directors did not participate in the discussion or approval of the Honvest Loan, and they were notified of the Honvest Loan only after the Company had received the Complaint.  Given that the Audit Committee of the Company, which comprised the two independent non-executive directors of the Company and the 5^th Respondent, was responsible for reviewing the Company’s internal control procedures and that the granting of the loan was not in Guang Ping’s normal course of business (as it was advanced to Honvest for the purpose of facilitating the operation of the business and assisting the financial difficulty of Honvest), the executive directors should have consulted the independent non-executive directors about the making of the loan to Honvest.  In particular, given his role on the Audit Committee, the 5^th Respondent should have raised the issue of consulting the independent non-executive directors.

(2)  The granting of the Honvest Loan was not made in the best interests of the Company or Guang Ping, in that:-

(a)   no interest was charged on the loan;

(b)  the loan was for an indefinite term with no fixed date for repayment;

(c)   no security was taken to secure Honvest’s obligation to repay the loan;

(d)  no approval was given by the directors of the Company prior to the granting of the loan; apparently the Board only ratified this loan on 31 December 2001; and

(e)   the granting of the loan was not in the normal course of business of Guang Ping.

62.  The Enping Chemical Loan of RMB¥6.61 million:

(1)  According to the 1^st and 2^nd Clarification Announcements, the independent non-executive directors did not participate in the discussion or approval of the Enping Chemical Loan, and they were notified of the Enping Chemical Loan only after the Company had received the Complaint.  Given that the Audit Committee of the Company, which comprised the two independent non-executive directors of the Company and the 5^th Respondent, was responsible for reviewing the Company’s internal control procedures and that the granting of the loan was not in Guang Ping’s normal course of business (as it was advanced to Enping Chemical for the purpose of facilitating the operation of the business and assisting the financial difficulty of Enping Chemical), the executive directors should have consulted the independent non-executive directors about the making of the loan to Enping Chemical.  In particular, given his role on the Audit Committee, the 5^th Respondent should have raised the issue of consulting the independent non-executive directors.

(2)  The granting of the Enping Chemical Loan was not made in the best interests of the Company or Guang Ping, in that:-

(a)   no interest was charged on the loan;

(b)  the loan was for an indefinite term with no fixed date for repayment;

(c)   no security was taken to secure Enping Chemical’s obligation to repay the loan;

(d)  no approval was given by the directors of the Company prior to the granting of the loan; apparently the Board only ratified this loan on 31 December 2001; and

(e)   the granting of the loan was not in the normal course of business of Guang Ping.

63.  The Global Essence Advances:

(1)  Global Essence was incorporated on 21 March 2001.  However, according to the Schedule, an advance of HK$60,000 had already been made by GPHK to Global Essence on 1 March 2001.  Further substantial advances totalling HK$6,350,000 were made by GPHK to Global Essence during the period from 7 May 2001 to 11 July 2001 prior to the making of the Consultancy Services Agreement on 20 July 2001.  There was no proper basis for GPHK to make such substantial advances to Global Essence prior to the making of the Consultancy Services Agreement.  Even for the period after the making of the Consultancy Services Agreement, there is no evidence that the further advances made by GPHK to Global Essence were made pursuant to the Consultancy Services Agreement, or that the Company had asked Global Essence to provide any justification or proof that the advances were required in connection with the proper discharge by Global Essence of its obligations under the Consultancy Services Agreement.

(2)  The granting of the Global Essence Advances was not made in the best interests of the Company or GPHK, in that:-

(a)   no interest was charged on the advances;

(b)  the advances were for an indefinite term with no fixed date for repayment;

(c)   no security was taken to secure Global Essence’s obligation to repay the advances.

Misrepresentations or misstatements of the duties of the executive directors in the Prospectus and Annual Reports

64.  In the Prospectus (at page 34), it is expressly stated that:-

“The prospectus, for which the Directors collectively and individually accept full responsibility, includes particulars given in compliance with the Companies Ordinance, Cap. 32 and the GEM Listing Rules for the purpose of giving information with regard to the Company.  The Directors, having made all reasonable enquiries, confirm that, to the best of their knowledge and belief:

(a)   the information contained in this prospectus is accurate and complete in all material respects and not misleading;

(b)  there are no other matters the omission of which would make any statement in this prospectus misleading; and

(c)   all opinions expressed in this prospectus have been arrived at after due and careful consideration and are founded on bases and assumptions that are fair and reasonable.”

65.  The Prospectus and the Annual Reports contain material misrepresentations or misstatements regarding the duties of the 5^th Respondent as executive director of the Company.  In respect of the 5^th Respondent, he is described as the finance director and compliance officer of the Company responsible for the overall financial management of the Group.

66.  The above representation as regards the 5^th Respondent’s duties or responsibilities as executive director of the Company was false or misleading in that the overall management of the Company’s business and affairs were in fact under the control of Cheung, who acted as shadow director and assigned duties to them as de jure directors.  The 5^th Respondent took no steps to correct or to clarify his role in the Company or the role of Cheung.

67.  Further, the matters set out in paragraph 15 above are repeated which demonstrate that the aforesaid representation of the duties or responsibilities of the 5^th Respondents was false or misleading.

Other breaches of rules and regulations

68.  Prior to the listing of the Company, the 5^th Respondent had given a written undertaking to the SEHK as follows:-

“(a)      in the exercise of my powers and duties as a director of the issuer I shall

(i)  comply to the best of my ability with the Rules Governing the Listing of Securities on the Growth Enterprise Market of The Stock Exchange of Hong Kong Limited from time to time in force (the “GEM Listing Rules”);

(ii)  use my best endeavours to procure that the issuer shall so comply; and

(iii)  use my best endeavours to procure that any alternate of mine shall so comply;

(b)  I shall, in the exercise of my powers and duties as a director of the issuer, comply to the best of my ability with the Companies Ordinance, Cap. 32, the Securities Ordinance, Cap. 333, the Securities (Disclosure of Interests) Ordinance, Cap. 396, the Code on Takeovers and Mergers, the Code on Share Repurchases and all other securities laws and regulations from time to time in force in Hong Kong, and I shall use my best endeavours to procure that the issuer shall so comply;

(c)  I shall co-operate in any investigation conducted by the GEM Listing Division (as such term is defined in rule 1.01 of the GEM Listing Rules) and/or the GEM Listing Committee (as such term is defined in rule 1.01 of the GEM Listing Rules) of The Stock Exchange of Hong Kong Limited, including answering promptly and openly any questions addressed to me, promptly producing the originals or copies of any relevant documents and attending before any meeting or hearing at which I am requested to appear”.

69.  Notwithstanding the aforesaid undertaking, the Company has committed, and the 5^th Respondent has caused, allowed or permitted the Company to commit, numerous breaches of the GEM Listing Rules and the Code on Takeovers and Mergers.

70.  On 21 August 2003, the Company announced that, in breach of Rule 12.1 of the Takeovers Code, it had published an announcement dated 20 August 2003 without first having sought confirmation from the Petitioner that it had no further comments thereon, and had apologized and undertaken to the Petitioner to attend to all further matters in relation to the Takeovers Code in a more cautious manner.

71.  On 18 October 2004, the Petitioner announced that the Company and its directors accepted that they had breached Rule 8.4 of the Takeovers Code and had agreed to the disciplinary action taken against each of them under section 12.3 of the Introduction to the Code, including a public censure of the Company and the 5^th Respondent by the Takeovers and Mergers Executive (“Executive”).

72.  On 27 February 2004, the Company announced that it had, in breach of Rule 18.66 and 18.67 of the GEM Listing Rules, failed to publish the Third Quarterly Results of the Group by 14 November 2003 as required.

73.  On 30 March 2004, the Company announced that it had, in breach of Rule 18.03 and 18.49 of the GEM Listing Rules, failed to publish the audited final results (“Final Audited Results”) and despatch of the annual report for the year ended 31 December 2003 within the relevant time limit, but the Company expected to publish and despatch the same on or before 14 May 2004.

74.  On 27 October 2004, the Company announced that:-

(1)  in breach of Rules 18.48A, 18.49 and 18.03 of the GEM Listing Rules, the Final Audited Results and the despatch of the 2003 annual report including the audited financial statements of the Company would be further delayed and that it was the intention of the Board to release the Final Audited Results as soon as practicable and in any event by 31 December 2004;

(2)  in breach of Rules 18.66 and 18.79 as well as 18.53 and 18.78 of the GEM Listing Rules, the publication of the financial results of the Group for the three months ended 31 March 2004 (“FY 2004 First Quarter Results”) and six months ended 30 June 2004 (“FY 2004 Interim Results”) would be delayed by reason of the unavailability of the Final Audited Results, but the Board expected that the FY 2004 First Quarter Results and FY 2004 Interim Results would be available for publication around the middle and the end of January 2005 respectively.

75.  By letter dated 12 November 2004 (the “Letter”), the SEHK gave notice to the Company that it proposed to exercise its right to cancel the listing of the Company on the expiry of the prescribed six months period from the date of the letter (i.e. 11 May 2005), if the Company could not submit a valid resumption proposal at least 10 business days before the expiry of the six months period.  The SEHK indicated in the Letter that a viable resumption proposal in the circumstances of the Company should be able to demonstrate the Company’s compliance with the GEM Listing Rules and all applicable laws and regulations.

76.  By the end of the deadline mentioned above, the Company had failed to submit a valid resumption proposal.  On 8 June 2005, the SEHK announced that with effect from 10 June 2005, the listing of the shares of the Company would be cancelled pursuant to Rule 9.14 of the GEM Listing Rules.

77.  None of the Final Audited Results, FY 2004 First Quarter Results or FY 2004 Interim Results had been published prior to the deli sting of the Company’s shares on 10 June 2005.

78.  On 8 June 2006, the GEM Listing Committee of the SEHK: (i) publicly censured the Company for breach of Rule 17.11 of the GEM Listing Rules (which provides that an issuer should respond promptly to any enquiries made of it by the SEHK concerning unusual movements in the price or trading volume of its listed securities or any other matters), (ii) publicly censured, inter alia, the 5^th Respondent for breach of the director’s undertaking to use his best endeavours to procure that the Company should comply with the GEM Listing Rules and to co­operate in any investigation conducted by the Listing Division.

Conclusion

79.  The 5^th Respondent as finance director and compliance officer of the Company was partly responsible for the business or affairs of the Company, including those of its subsidiaries, having been conducted in the manner as complained of aforesaid.

80.  By reason of the matters aforesaid, the business or affairs of the Company were conducted in a manner (i) involving misfeasance or misconduct and/or (ii) 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, and (iii) unfairly prejudicial to its members or any part of its members.