SECURITIES AND FUTURES COMMISSION v. LIU ZHONGKUI AND OTHERS

HCMP 314/2020

[2025] HKCFI 839

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 314 OF 2020

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J U D G M E N T

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1.  This is a Carecraft procedure arising from the Amended Petition (“Petition”) of the Securities and Futures Commission (“SFC”) filed on 11 March 2024 pursuant to section 214 of the Securities and Futures Ordinance, Cap 571 (“Ordinance”). There are 5 Respondents to the Petition. This procedure concerns the 4^th Respondent (“Yang”), who was the CFO of Anxin-China Holdings Ltd (“Company”) at the material times.

2.  For the present purpose, the SFC and Yang have agreed to a Statement of Agreed Facts, which is attached hereto as Annex A. The Statement contains an outline of the relevant facts, the case against Yang and the agreed proposed orders.

3.  The parties have agreed that a disqualification order for a period of 2 years be made against Yang. It was also agreed that Yang should pay the costs of the SFC in these proceedings, or such portion thereof as the Court thinks appropriate, to be taxed if not agreed.

4.  The primary consideration here, certainly as far as Yang is concerned, is the approval by this Court of the agreed period of disqualification.

Applicable principles

5.  The principles applicable to Carecraft procedure are trite. The Court is not bound by the parties’ agreement and must be independently satisfied, based on the agreed facts, that the business and affairs of the company had been conducted in a manner which falls within one or more of the sub-paragraphs under section 214(1). However, the Court may be guided by the agreement reached by the SFC: Re Fuguiniao Co Ltd [2024] 1 HKLRD 1073, [16(1)].

6.  If section 214(1) is engaged, the Court has a discretion to make a disqualification order if it considers justified. The relevant considerations are as follows (Re Fuguiniao, [16(2)]) :

“(a) The relevant conduct involves a sufficiently serious failure to satisfy the respondent’s duties that some period of disqualification is justified and fair;

(b) The purpose of imposing a disqualification is, first and foremost, protection of the public. Secondly, general deterrence;

(c) In determining the period of disqualification, the Court will adopt a broad-brush approach. The period of disqualification must reflect the gravity of the conduct. A starting point of assessment may be fixed by reference to the gravity of the conduct, with a discount given for any mitigating factors;

(d) There are starting points within brackets which had been identified by previous authorities as guidelines. The brackets are (i) over 10 years for particularly serious cases, (ii) below 5 years for relatively less serious cases, and (iii) between 6 and 10 years for cases in between;

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

Background

7.  The facts can be found in the Statement of Agreed Facts. The salient features of the case against Yang are as follows. The gravamen of the SFC’s case for the Petition is that there were massive overstatements of the cash position found in the Company’s audited consolidated financial statements for the years ended 31 December 2012 and 31 December 2013 (“Year 2012” and “Year 2013”) concerning the Company and its subsidiaries (“Group”).

8.  The overstatements were purportedly corroborated by written confirmations (“Confirmations”) obtained by the Company’s auditors at the time (“BDO”). In fact, the Confirmations were false and overstated the amounts held in various bank accounts of some of the Company’s subsidiaries. The overstatements of the relevant accounts were approximately RMB 990.5 million and RMB 1,291 million for Year 2012 and Year 2013 respectively.

9.  After BDO had identified discrepancies in the Company’s banking records and management accounts during the audit for the year ended 31 December 2014 (“Year 2014”), the Company formed a Special Team to investigate into the same. Yang was a member of the Team. The Team later concluded that, inter alia, the discrepancies had been caused by misappropriation by two accounting staff of a Shenzhen subsidiary and that the funds in question had been returned to the Group. In fact, such investigation results were false and the funds had not been returned. Despite their falsity, the results were communicated to BDO and announced to the public.

10.  As a consequence of the unresolved discrepancies, the publication of the Company’s annual results for Year 2014 had to be delayed. The trading of the Company’s shares was suspended on 1 April 2015.

11.  As a condition for the resumption of trading of the Company’s shares imposed by The Stock Exchange of Hong Kong Ltd, RSM Nelson Wheeler Corporate Advisory Ltd (“RSM”) was engaged in 2015 to conduct a forensic accounting investigation into the discrepancies. For that investigation, the Company provided false bank statements to RSM which showed different bank balances from bank statements obtained by RSM directly from the banks.

12.  On 23 September 2015, RSM emailed Yang to seek an explanation on certain unusual features in relation to the bank statements which were provided to them. Yang did not respond to the request and resigned on the same day (effective from 30 September 2015).

13.  Yang joined the Group in 2011 as Senior Finance Manager. She became the CFO of the Company from January 2013 to 30 September 2015. She was at all material times a certified public accountant in the Mainland.

14.  In her resignation letter, Yang stated that, inter alia :

(1) She had doubts on some of the banking records for use in the investigation provided to her by certain senior management of the Company;

(2) There might be material discrepancies between the actual deposit information and that shown on some of the banking records, and there might be losses of the Company’s assets; and

(3) She had doubt on the integrity of certain member(s) of the senior management of the Company.

15.  Yang agrees that she owed the Company the duty to exercise reasonable care, skill and diligence in the course of acting as CFO and a member of the Special Team. Her duties and responsibilities included, inter alia, properly planning, organising and implementing accounting functions, overseeing the audit and the preparation of the financial statements of the Company, to have a detailed understanding of the financial condition of the Company (including the cash reserves of the Company and its subsidiaries) and to properly verify payments and reimbursements.

16.  Yang accepts that she failed to discharge her duties with due and reasonable skill, care and diligence, and failed to take reasonable steps which would have enabled her to realise that the Group’s cash position had been overstated between 2011 and 2015. Further, she admits that :

(1)  She did not take steps to voice out her concerns regarding the Company’s cash flow and the bank records provided to RSM, and the suspicions about the integrity of senior management or to draw this to the attention of the Board or the shareholders (at least until her resignation).

(2)  She had failed to fully or properly verify or ascertain the veracity of the cash reserves of the Company’s Mainland subsidiaries, and why such substantial cash reserves were being amassed and/or whether or how the same were being utilised.

(3)  She did not carry out her duties to the requisite standard in ascertaining the Group’s financial position.

(4)  She was negligent in the course of acting as a member of the Special Team. She accepted the findings of the Team (compiled by the 2^nd Respondent) at face value, and did not take steps to verify such purported findings.

Mitigation

17.  Yang is 45 years old. I accept that the duration of disqualification will impact upon her ability to find work that is commensurate with her qualification and experience.

18.  Ms So, who appeared for Yang, submitted that it is common ground that Yang’s culpability is limited to negligence and she did not personally benefit from the misconduct. There is also no suggestion that she was personally involved in the overstatements or creation of the false Confirmations or documents provided to RSM. Yang’s breach of duties was predicated upon a failure to verify/ascertain overstatements and to voice out her concerns earlier, as well as taking the 2^nd Respondent’s findings at face value.

19.  Yang was not a director of the Company. She resigned in September 2015 when RSM had begun its investigation, and unusual features in bank statements provided by the Company had been pointed out to her directly. She expressly referred to her doubts about the Company’s banking records and the integrity of senior management when resigning.

20.  Yang has been cooperative in these proceedings and has frankly accepted liability for her inadequacies. She has adopted a reasonable course of action to conclude the proceedings by way of Carecraft procedure, which saves the time and costs of the SFC and the Court.

21.  Ms So submitted that for these reasons the agreed proposed disqualification period of 2 years is appropriate.

22.  For comparison, Ms So referred to :

(1)  In Re Fuguiniao, the Court also acceded to the agreed disqualification period of 2 years for the 4^th respondent who was not only the CFO, but also a company secretary and authorised representative of the company [9]. The Court took into account that there was apparent misuse of listing proceeds contrary to the representations made in the prospectus which was concealed from the public [22]. Although the Court observed that the proposed period of disqualification was very lenient [25], there is no equivalent misfeasance of misuse of listing proceeds in the present case. Further, Yang had drawn to the attention of the Board in September 2015 her concerns about the Company’s banking records and senior management when she resigned (around 6 months after BDO first identified the discrepancies in the accounts).

(2)  In Re DBA Telecommunication (Asia) Holdings Ltd [2022] HKCFI 653, the 7^th Respondent in that case (being an INED and a member of the Audit Committee [28]) was disqualified for a period of 1½ years [38], taking into account, inter alia, the fact he was not involved in the day-to-day management of the company as an INED [37(3)] and there was “no evidence of any personal gain or other improper purpose for the misconduct” [37(4)]. Similarly in this case, Yang was the CFO and not in charge of the day-to-day management of the Company. Nor has the SFC suggested or demonstrated that there was any improper purpose for her failure to take sufficient steps.

23.  Finally, Ms So submitted that bearing in mind that the power to order disqualification is protective rather than punitive, and the fact that Yang has not committed any conduct which is lacking in commercial integrity, the agreed order reflects Yang’s conduct and mitigating factors.

Finding

24.  The parties agree that the business and affairs of the Company, for which Yang was partly responsible, were conducted in the manner described under limbs (1)(b), (1)(c), and (1)(d) of section 214 of the Ordinance. In light of the agreed facts and the parties’ agreement, I find accordingly.

Disqualification

25.  I have to say that the negligence on the part of Yang, acting as the CFO of a listed company, is nothing short of breath-taking. It seems as though she was not present in her job.

26.  The importance of the CFO in a listed company cannot be understated. He or she is the goalkeeper in respect of the finance of the company. The investing public rely on the integrity and reliability of the management and CFO to safeguard the company’s financial interests.

27.  The sheer scale of overstatment of the Group’s cash position over no less than 5 years has the hallmark of a possible fraud by the senior management. There can be no serious question that irregularities of the scale in this case could not have been possible without a grossly negligent CFO.

28.  Whilst the Court takes into account that Yang has not derived any personal benefit from these matters, the only real mitigation for her is her cooperation, and her admission of liability which reflects remorse on her part.

29.  I bear in mind everything which has been said by Ms So. I regret that I am unable to agree with the agreed period of disqualification. I do not believe that it reflects adequately the gravity of the case, nor is it sufficient for the purpose of protecting the public or general deterrence.

30.  For these reasons, I impose a period of disqualification of 3 years against Yang. Accordingly, I make the order sought in para 1 of Part III of the Statement of Agreed Facts.

Costs

31.  As for costs, the Court was informed at the hearing that the parties have reached agreement on costs as follows. SFC’s costs in these proceedings in the sum of HK$291,021, subject to the set-off of HK$65,397 being the agreed costs payable by the SFC to Yang under the Order of the Honourable Madam Justice Linda Chan dated 19 March 2024, be paid by Yang. I so order.

32.  Last but not least, I am grateful for counsel for their assistance.

Annex A