SECURITIES AND FUTURES COMMISSION v. LI WO HING AND OTHERS

HCMP 1023/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1023 OF 2011

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D E C I S I O N

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1.  By these proceedings, the Securities and Futures Commission (“the SFC”) seeks disqualification orders under section 214 of the Securities and Futures Ordinance (“the Ordinance”) against the 1st and 2nd Respondents, who are directors of a company called Medical China Limited (subsequently renamed China Asean Resources Limited) (“the Company”). The Company is the 3rd Respondent in these proceedings. It has been listed on the Growth Enterprise Market (“GEM”) of the Stock Exchange of Hong Kong Limited (“the stock exchange”) since 31 December 2001. So far as the Company is concerned, the petition seeks orders under section 214(2)(b) of the Ordinance requiring it to bring proceedings to recover its funds which are said to have been misapplied by the 1st Respondent.

2.  The SFC and the 1st and 2nd Respondents have agreed to the disposal of the proceedings against those respondents by way of the summary procedure first sanctioned in England in Re Carecraft Construction Company 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, a procedure which has been adopted in Hong Kong in respect of proceedings under section 214 of the Ordinance in a number of previous cases:  see, eg, Re Riverhill Holdings Limited [2007] 4 HKLRD 46; SFC v Fung Chiu & Others [2009] 2 HKC 19;  SFC v Shum Ka Sang Charlie & Shen Yi (unreported, HCMP1014/2008, Kwan J, 22 May 2009); SFC v Cheung Keng Ching & Others (unreported, HCMP1869/2008, Burrell J, 18 March 2010); SFC v Yeung Kui Wong & Others (unreported, HCMP1742/2009, Harris J, 27 October 2010); and Re Styland Holdings Limited [2011] 1 HKLRD 96.

3.  The Carecraft procedure involves the submission by the parties to the court of an agreed statement of facts upon which the court is invited to assess what order should be made.  The parties will often, but not always, agree as to what they consider to be an appropriate length of disqualification.  However, such agreement is not binding on the court which must satisfy itself, on the basis of the facts agreed, that the business or affairs of the company have in fact been conducted in the manner described in one or more of sections 214(1)(a), (b), (c) or (d) of the Ordinance (as the case may be) and come to its own view as to the scope of the disqualification order and as to the appropriate period of disqualification to be imposed.

4.  In doing this, the court will bear in mind first, the need to protect the public against the future conduct of persons who have shown themselves to be a danger to those dealing with the companies of which they are directors; and second, the need to provide a general deterrent by ensuring that the sentence reflects the gravity of the conduct complained of, thus sending a message to company directors that breaches of trust will be properly punished (see per Kwan J, as she then was, in SFC v Fung Chiu at paragraph 12 of the judgment).

5.  Although the court will come to its own view on these matters, so far as the penalty is concerned at least, it is, as Harris J pointed out in SFC v Yeung Kui Wong, likely to be guided by the agreement that the SFC, as the responsible regulator, has reached as to the appropriate sanction to be imposed.

6.  In this case, the SFC has agreed with the 1st Respondent that the appropriate period of disqualification against him would be seven years and with the 2nd Respondent that the appropriate period of disqualification in his case would be four years.  In addition, the 1st Respondent has agreed to repay to the Company within 30 days the sum of HK$10,712,605.26, which is the subject of one of the complaints in the present proceedings, and both Respondents have agreed to bear part of the SFC’s costs of these proceedings – each agreeing to bear half of the SFC’s costs of these proceedings against him.  The 1st Respondent has further agreed to bear the Company’s costs in respect of these proceedings. 

7.  As a result of the agreement of the 1st Respondent to repay the sum of HK$10,712,605.26 to the Company, it is no longer necessary for the SFC to pursue any claim for relief against the Company of the nature of an order requiring it to bring proceedings to recover that amount. 

8.  The parties have agreed that the agreed statements of facts in respect of each of the 1st and 2nd Respondents should be appended to this decision and I therefore do so.  It is therefore unnecessary to set the facts out in detail here.  However, it is convenient to summarise the complaints made against the Respondents as follows.  The complaints relate to the role and involvement of the 1st and 2nd Respondents in four main respects, namely:

(1)  Two payments totalling HK$10,712,605.26 made by the Company to Blessford International Limited, which was not a creditor of the Company or any of its subsidiaries, which were thereafter paid on to the 1st Respondent and persons associated with him, with the 1st Respondent personally receiving a payment of HK$2,000,000.00.

(2)  An announcement and circular, respectively dated 23 December 2004 and 14 January 2005, concerning the sale of an indirectly owned subsidiary of the company to a Madam Wang, who was wrongly described as a third party who was independent of the Company and persons connected with it when, in fact, part of the purchase price for the acquisition of that subsidiary was funded by the 1st Respondent so that Madam Wang had a connection with the 1st Respondent who was himself obviously a connected person of the Company.

(3)  An announcement dated 19 February 2003 concerning a distributorship held by an indirectly owned subsidiary of the Company with the manufacturer of medical products in the United States.  The announcement wrongly stated that there had been no change in the distribution rights of that subsidiary, whereas the distributorship had in fact been terminated, to the knowledge of the 2nd Respondent.

(4)  There was a practice of financial management (or more accurately, lack of management) on the part of the Company, whereby the 2nd Respondent, who was normally resident in the United States, would sign in advance cheques in blank, not knowing what they would be used for, thereby enabling the 1st Respondent to cause the Company to make payments on his own without any checks or oversight. 

9.  The fourth of these complaints is levelled against both the 1st and 2nd Respondents whereas the first and second complaints are made against the 1st Respondent only and the third complaint against the 2nd Respondent alone.

10.  Having considered the agreed facts and the submissions of Mr Shieh, SC, who appears for the SFC, I accept that they do establish that the 1st and 2nd Respondents have been in breach of their duties to the Company and that the affairs of the Company have been conducted by them in the manner described in sections 214(1), paragraphs (b), (c) and (d) of the Ordinance as follows:

(1)  In the case of the 1st Respondent:

(a)  The payments to Blessford were misappropriations of the Company’s assets as they were paid without any proper or legitimate reason.  The 1st Respondent personally received HK$2,000,000.00 out of such payments.  He has therefore acted in breach of his duties to the Company and has conducted the business or affairs of the Company in a manner involving misfeasance or misconduct towards its members, or part of them, and also in a manner unfairly prejudicial to its members or some part of them, contrary to sections 214(1)(b) and (d) of the Ordinance.

(b)  The announcements in relation to the sale of the subsidiary were false and misleading in the respects indicated above, and had been approved by the 1st Respondent on behalf of the board, thus resulting in the 1st Respondent having conducted the business or affairs of the Company in a manner resulting in its members or any part of them not having been given all the information with respect to its business or affairs that they might reasonably expect, contrary to section 214(1)(c) of the Ordinance.

(c)  The practice whereby the 2nd Respondent pre-signed blank cheques exposed the Company to significant risks of financial misconduct and irregularity and being privy to that practice, the 1st Respondent had conducted the business or affairs of the Company in a manner involving misfeasance towards its members or part of them, contrary to section 214(1)(b) of the Ordinance.

(2) As to the 2nd Respondent:

(a)  The announcement and circular in respect of the distributorship agreement were false and misleading in the respects indicated above and had been issued by the 2nd Respondent on behalf of the Company, resulting in his having conducted the business or affairs of the Company in a manner resulting in its members or any part of them not having been given all the information with respect to its business or affairs that they might reasonably expect, contrary to section 214(1)(c) of the Ordinance.

(b)  The practice whereby the 2nd Respondent pre-signed blank cheques exposed the Company to significant risk of financial misconduct and irregularity, and having participated in that practice, the 2nd Respondent had conducted the business or affairs of the Company in a manner involving misfeasance towards its members or part of them, contrary to section 214(1)(b) of the Ordinance.

11.  Turning to the question of the penalty to be imposed, the courts have approached the determination of the period of disqualification to be ordered in applications under section 214 of the Ordinance in much the same way as they have approached the position in the case of analogous applications in respect of company directors under section 157H of the Companies Ordinance (see eg Re Styland Holdings Limited per Au J at paragraph 13 of the judgment and also Re Styland Holdings Limited (No.2) [2012] 2 HKLRD 325, per Barma J at paragraphs 129 to 130 of the judgment).  That approach involves dividing the possible disqualification period into three brackets:

(1)  the top bracket, of disqualification for over 10 years, for particularly serious cases;

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

(3)  a middle bracket, of six to 10 years’ disqualification,  for cases which, although serious, are not so serious as to merit a period of disqualification in the top bracket (see, for example, Hoida Industrial Company Limited [2004] 1 HKLRD 744 at paragraph 24, applying the approach first referred to in Re Sevenoaks Stationers (Retail) Limited [1990] BCC 765 at 771-2).

12.  In the present case, so far as the 1st Respondent is concerned, Mr Shieh submits that the nature of his misconduct and breaches of duty should be regarded as serious, but not so serious as to merit the imposition of a period of disqualification in the top bracket.  Mr Shieh drew attention to the fact that the complaints involved misappropriation of company assets and personal benefit to the 1st Respondent of HK$2,000,000.00, a failure to provide proper information to members of the Company and the failure to implement a proper system of financial control and management. 

13.  Although the fact of personal benefit from the misappropriations is a serious matter which, in Styland (No. 2), resulted in a 12-year period of disqualification being imposed, both Mr Shieh and Mr Law, who appeared for the 1st Respondent, pointed out that there were relevant differences between that case and this.  Here, unlike in Styland, the 1st Respondent had admitted responsibility and had not fought these proceedings.  He had also agreed to bear half the SFC’s costs and had agreed to make full restitution to the Company by repaying the full amount misappropriated, none of which had been done in Styland (No. 2).  Further, the personal benefit to the 1st Respondent in this case was HK$2,000,000.00  on a single occasion as compared to the situation in Styland where there had been a series of substantial defalcations totalling HK$79,000,000.00.

14.  Having regard to all of these factors, I agree that the misconduct and breaches of duty established as against the 1st Respondent fall in the middle of the middle bracket in terms of seriousness and that the proposed term of seven years’ disqualification is appropriate.

15.  As to the 2nd Respondent, Mr Shieh and Miss Leung, who represented the 2nd Respondent, submitted that the nature of his misconduct and breaches of duty fall towards the top end of the minimum bracket, bearing in mind the nature of the complaints against him, these being the failure to provide adequate information to shareholders and failure to ensure that the Company had a proper system of financial management and control which made the misappropriations which were the subject of the first complaint against the 1st Respondent possible.  Account, it was suggested, should also be taken of his admission of misconduct and his agreement to pay half the costs of the proceedings against him.  It was also pointed out that there is no suggestion that he benefited personally from any of the misappropriations of the Company’s funds. 

16.  I accept that, in these circumstances, a period of disqualification of four years, falling towards the top of the minimum bracket, should be imposed on him.

17.  So far as the 3rd Respondent, the Company, is concerned, as I have noted, in the light of the 1st Respondent’s agreement to make full restitution within 30 days of the funds misappropriated, there is no longer any need for an order to be sought requiring the Company to bring proceedings in that regard.  It is therefore not necessary to make any order in respect of the Company, other than to provide that its costs should, as agreed by the 1st Respondent, be paid by him.

18.  I therefore make an order in the following terms:

(1)  The 1st Respondent shall not, without leave of the Court, for a period of 7 years:

(a)  be, or continue to be, a director, liquidator, or receiver or manager of the property or business of the 3rd Respondent or any other corporation or their subsidiaries or affiliates; and

(b)  in any way, whether directly or indirectly, be concerned or take part in the management of the 3rd Respondent or any other corporation or their subsidiaries or affiliates;

(2)  The 2nd Respondent shall not, without leave of the Court, for a period of 4 years:

(a)  be, or continue to be, a director, liquidator, or receiver or manager of the property or business of the 3rd Respondent or any other corporation or their subsidiaries or affiliates; and

(b)  in any way, whether directly or indirectly, be concerned or take part in the management of the 3rd Respondent or any other corporation or their subsidiaries or affiliates;

(3)  The 1st Respondent do pay the 3rd Respondent the sum of HK$10,712,605.26 within 30 days from the date of the order to be made;

(4)  The 3rd Respondent do notify the Petitioner of receipt of the sum of HK$10,712,605.26 from the 1st Respondent and provide supporting documents to prove the same within 3 days of receipt of the said sum from the 1st Respondent;

(5)  Upon compliance with paragraphs 3 and 4 above, the proceedings herein against the 3rd Respondent be discontinued;

(6)  The 1st Respondent do pay half of the costs of the Petitioner in these proceedings, to be taxed if not agreed;

(7)  The 1st Respondent do pay the costs of the 3rd Respondent in these proceedings, to be taxed if not agreed;

(8)  The 2nd Respondent do pay half of the costs of the Petitioner in these proceedings, to be taxed if not agreed; and

(9)  As between the Petitioner and the 3rd Respondent there shall be no order as to costs.