SECURITIES AND FUTURES COMMISSION v. FUNG CHIU AND OTHERS

HCMP2524/2006

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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BETWEEN

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REASONS FOR JUDGMENT

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1.  This is an Amended Petition brought by the Securities and Futures Commission (“SFC”) under section 214(1) of the Securities and Futures Ordinance, cap. 571 against the respondents, who are former executive directors of GP NanoTechnology Group Limited (in liquidation) (“the Company”). The SFC primarily seeks an order against each of the respondents disqualifying them from being directors of any corporation or from taking part in the management of any corporation for a period specified by the Court. Consequent upon his death, the proceedings against the 4^th respondent were discontinued on 21 September 2009. As against the 2^nd and 5^th respondents, the proceedings had been disposed of by way of the Carecraft procedure.

2.  The present hearing relates to the 1^st and 3^rd respondents. Both of them, despite being served with the papers and notified of the hearing, were absent at the hearing. The SFC had called five witnesses, namely, Miss Leung So Ching, the case officer responsible for the inquiry into the Company, Miss Vickie Ng Lai Lin, the forensic accounting expert, Mr Tso Sze Wai, the finance manager and company secretary of the Company, Miss Tse Wa, the executive secretary of the Company, Miss Wu Wing Yan, the accountant of the Company and also the 5^th respondent.

3.  At the conclusion of the SFC’s case against the 1^st and 3^rd respondent, I made a disqualification order against each of them for a respective period of seven and six years. My reasons for the Judgment appear below.

Background facts

4.  The facts upon which the SFC based its case against the respondents, and as set out in the Amended Petition, are contained in Schedule 1 to the Judgment of Kwan J (as she then was) dated 27 November 2008, dealing with the disqualification order against the 2^nd respondent: [2009] 2HKC 19, 24. On the evidence in this hearing against the 1^st and 3^rd respondents, I am satisfied that these facts have been proved. For the present purpose, I will not repeat them. I will only refer to the more salient facts.

5.  The Company was incorporated in Bermuda on 17 July 2000 and registered in Hong Kong under Part XI of the Companies Ordinance, cap. 32 on 13 November 2000. The Company was an investment holding company. The principal manufacturing and operating arm of the group was a PRC Corporation called Guang Ping Chemical Industrial Enterprise Co Ltd (“Guang Ping”), which is a wholly owned subsidiary of the Company.

6.  On 17 July 2001, the Company was listed on the GEM of the Hong Kong Stock Exchange by way of placing. From the placement, the Company raised a net total of about HK$ 44 million. On 7 August 2003, trading in the shares of the Company was suspended. On 10 June 2005, the Company was de-listed.

7.  By order dated 17 August 2005, the Company was compulsorily wound up.

8.  The five respondents were appointed the executive directors of the Company in October 2000. The 1^st respondent was the chairman of the board. Both the 1^st and 3^rd respondents are residents in mainland China.

9.  Apart from the respondents, the Company had, up to 25 March 2003, two independent non-executive directors and an audit committee comprising the two non-executive directors and the 5^th respondent.

10.  On the face of the matter, one Ms Wong Yau Ming (“Wong”), through her shareholdings in Modern World Resources Limited and indirectly in Solidbase Holdings Limited, was at all material times the ultimate controlling shareholder of the Company. Modern World Resources Limited and Solidbase Holdings Limited were two of the three substantial shareholders of the Company. However, the person who actually operated, managed and controlled the business and affairs of the Company was one Mr Cheung Long Chung (“Cheung”), who was neither a director nor a shareholder. Cheung also controlled the finances of the Company and was a bank signatory of the bank accounts of the Company and its subsidiaries, including Guang Ping.

Five questionable transactions

11.  The SFC’s complaint against the respondents stems from five transactions entered into by the Company or Guang Ping in 2001. They had been referred to in these proceedings as: (1) the Heilongjiang Investment; (2) the Enping Investment; (3) the Honvest Loan; (4) the Enping Chemical Loan; and (5) the Global Essence Advances.

12.  Briefly put, the first two transactions involved proposed investment projects by Guang Ping in Heilongjiang and Enping. For the Heilongjiang Investment, a Letter of Intent to acquire a plant in Heilongjiang was signed in October 2001, based upon which a deposit of RMB 7 million was paid to the Heilongjiang party. Subsequently, the transaction did not proceed through. However, only RMB 2 million of the deposit paid was returned, resulting in a loss of RMB 5 million. As for the Enping Investment, an Agency Agreement dated 28 November 2001 was signed appointing an Enping government-owned agent to negotiate for the acquisition of a controlling interest in a plant in Enping. Shortly thereafter, RMB 6 million was paid to the Enping agent as guarantee money. The project did not proceed. However, only RMB 4 million of the guarantee money paid was returned, resulting in a loss of RMB 4 million.

13.  The 3^rd and 4^th transactions are loans made by Guang Ping to two corporations, Honvest Manufacturing Limited and Enping Chemical Industrial Company, which were its former shareholders. The former is a Hong Kong company and the latter a state-owned PRC enterprise. The loans were in the respective sums of RMB3.43 million and RMB 6.61 million. They were both interest free and unsecured. The Company had in two clarification announcements issued on 14 January and 5 March 2003 (respectively “the 1^st and 2^nd Clarification Announcements”) stated that these loans had been fully settled. Due to the lack of documentation, the SFC is not in a position to say that this is not the case.

14.  The 5^th transaction involved a series of advances made by the Company to a company called Global Essence Holdings Limited (“Global Essence”), in which Cheung was indirectly interested. The Company had entered into a Consultancy Services Agreement dated 20 July 2001 with Global Essence. From two schedules supplied by the Company to the SFC, the amount of advances to Global Essence between 1 March 2001 and 14 March 2002 totalled over HK$17 million. The first of the advances was recorded to be made on 1 March 2001, at a time when Global Essence was not even incorporated. As at 17 March 2002, the outstanding balance due from Global Essence was in excess of HK$11 million. The advances were all interest free and not secured by any collateral. In the 2^nd Clarification Announcement, it was stated that all the outstanding advances had been settled on 30 September 2002. The forensic accounting expert of the SFC had analyzed three of the repayments recorded on the schedules in the total sum of HK$8.5 million made between 18 and 23 March 2002. In her conclusion, which I accept, there was only one sum of HK$3 million that came from Cheung’s personal bank account. After it was deposited into the account of the Company’s subsidiary, GP Nano (H.K.) Limited, to constitute the first repayment, the sum was being continuously circulated between various bank accounts of GP Nano (H.K.) Limited, Cheung and some third parties to constitute the second and third repayments of HK$2.5 million and HK$3 million. The upshot of all these is that there is in truth no repayment to the tune of HK$8.5 million as represented by the Company, hence there is no full repayment of the advances by Global Essence.

Section 214(1), cap. 571

15.  Section 214 (1) of the Securities and Futures Ordinance provides:

“Where, in relation to a corporation which is or was listed, it appears to the Commission that at any relevant time the business or affairs of the corporation have been conducted in a manner-

(a)  oppressive to its members or any part of its members;

(b)  involving defalcation, fraud, misfeasance or other misconduct towards it or its members or any part of its members;

(c)  resulting in its members or any part of its members not having been given all the information with respect to its business or affairs that they might reasonably expect; or

(d)  unfairly prejudicial to its members or any part of its members,

the Commission may, subject to subsection (3), by petition apply to the Court of First Instance for an order under this section.”

16.  In the present case, the SFC relies on subsections (b) to (d) against the respondents.

17.  Under section 214(2)(d) of the Ordinance, the Court may upon such an application order that a person wholly or partly responsible for the business or affairs of the corporation having been so conducted shall not, “without the leave of the Court (i) be, or continue to be, a director, liquidator, or receiver or manager of the property or business, of the corporation or any other corporation; or (ii) in any way, whether directly or indirectly, be concerned, or take part, in the management of the corporation or any other corporation, for such period (not exceeding 15 years) as may be specified in the order.”

18.  Mr Chow SC submitted, and I agree, that under section 214(1), three conditions have to be satisfied. They are:

(1)  The corporation in question is or was a listed corporation.

(2)  The business or affairs complained of is that of the corporation.

(3)  The conduct complained of falls within one or more heads of “misconduct” specified in subsections (a) to (d).

19.  Under the second condition that the business or affairs must be that of the listed corporation, in the context of a group of companies, it is possible that, depending on the facts, the business or affairs of one company may also be that of another company. As was observed by Sir Martin Nourse in Gross v. Rackind [2004] EWCA Civ 815, at para.26,

“… the expression ‘the affairs of the company’ is one of the widest import which can include the affairs of a subsidiary.  Equally, I would hold that the affairs of a subsidiary can also be the affairs of its holding company especially where, as here, the directors of the holding company, which necessarily controls the affairs of the subsidiary, also represent a majority of the directors of the subsidiary.”

See also Nicholas v. Soundcraft Electronics Ltd [1993] BCLC 360; Arrow Nominees Inc v. Blackledge [2000] 2 BCLC 167: and Jesner v. Jarrad Properties Ltd [1993] BCLC 1033.

20.  In my view, a realistic approach should be adopted in considering whether the affairs of a subsidiary may be regarded as that of the holding company. In cases where, as here, the principal business and activities of the group is undertaken by the subsidiary in question and the listed company is essentially an investment holding vehicle, it is legitimate for the Court to take a broad and overall view of the situation and to regard the affairs of the subsidiary as the affairs of the holding corporation.

21.  As for the third condition of showing misconduct falling within the meaning of section 214(1)(a) to (d), subsection (1)(b) encompasses four concepts: defalcation, fraud, misfeasance and other misconduct. In the present case, the SFC relies on misfeasance and other misconduct. “Misfeasance” is defined in section 1, Part 1 of Schedule 1 to the Ordinance to mean “performance of an otherwise lawful act in a wrongful manner”. “Other misconduct” are ordinary English words, connoting improper or wrong behaviour or mismanagement, culpable neglect of duties: Shorter Oxford Dictionaries (6^th edition, 2007). In Re Riverhill Holdings Ltd [2007] 4 HKLRD 46, 53 at para.15, the Court was satisfied that a case of misconduct under section 214(1)(b) was made out against a director who was found to have failed to exercise the degree of skill and care as may reasonably be expected of a person of his knowledge and experience and holding his office and functions within the company in question.

22.  In respect of subsection (1)(d), it covers unfairly prejudicial conduct towards members of the company. There is a substantial body of authorities on the meaning of “unfairly prejudicial conduct”. For the present purpose, it suffices to note the observations of Rogers J (as he then was) in SFC v. Chesterfield Limited, HCMP 3504/1994 (unreported, 22 May 1995), when dealing with the term in the context of section 37A(1) of the repealed Securities and Futures Commission Ordinance, cap.24:

“10. In my view, conduct which is unfairly prejudicial is conduct which results in harm to the members of the company or part of the membership in their capacity as members of the company. The harm is harm which could either have been avoided or ameliorated without harming the legitimate interests of others who were parties to the particular transaction.

11.  It covers a range of conduct. At one end of the scale is fraud. At the other end of the scale the conduct can take the form of neglect or inaction on the part of those to whom the affairs of a company are entrusted. The question to be asked in such circumstances is whether the conduct concerned is that which can be expected from the managers of the company to whom those affairs have been entrusted. The directors of course cannot leave their duties to be performed by others.”

Findings

23.  With these legal principles in mind, I turn to the facts of the present case. The first condition of section 214(1) is clearly met, as the Company is a publicly listed company.

24.  As to the second condition under the section, looking at the realities in this case, I accept that the affairs of Guang Ping can properly be regarded as the affairs of the Company, having regard to the fact that the former is a principal subsidiary and the Company is in essence an investment holding vehicle.

25.  Turning then to the third condition of misconduct on the part of the 1^st and 3^rd respondents, the SFC’s complaints against them fall into five heads as follows:

(1)  Misrepresentation or misleading presentation of facts relating to the five questionable transactions in the 1^st and 2^nd Clarification Announcements.

(2)  Abdication of responsibility as directors of a listed company.

(3)  Failure to exercise reasonable, skill, care and diligence and/or to act in the best interest of the Company.

(4)  Misrepresentations or misstatements as to the duties of the executive directors in the prospectus and annual reports of the Company.

(5)  Various breaches of rules and regulations, including GEM Listing Rules and the Code on Takeovers and Mergers.

26.  I shall deal with these five heads in turn.

(1)  1^st head of misconduct

27.  The 1^st and 2^nd Clarification Announcements were issued by the Company on the request of the Hong Kong Stock Exchange after there were complaints against the Company about lack of explanation for acquisition of investments for which deposits and loans had been made to third parties. In the two announcements, it was stated that the directors of the Company collectively and individually accepted full responsibility, and that they, having made all reasonable enquiries, confirmed to the best of their knowledge and belief: (i) the information contained in the announcements was accurate and complete in all material respects and not misleading; (ii) there were no other matters the omission of which would make any statement therein misleading; and (iii) 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.

28.  In respect of the Heilongjiang Investment, the Letter of Intent was signed by the 3^rd respondent. In written answers that he provided to the SFC, he stated that he did so under the instruction of Cheung and the 4^th and 5^th respondents and that he knew nothing about the project and had not seen any documentation about it. The 1^st respondent, in his interview with the SFC, stated that the 4^th respondent had given a verbal briefing about the project, but did not provide any documentation, and he himself had not seen the Letter of Intent before it was signed. In respect of the board minutes dated 31 December 2001 ratifying the payment of the RMB 7 million deposit, both the 1^st and 3^rd respondents stated that they were arranged to sign it. The 1^st respondent claimed that a board meeting was held in December 2001 to confirm the project. The 3^rd respondent, on the other hand, had no recollection of attending a board meeting on 31 December 2001. According to the 5^th respondent, who had given a statement to the SFC and was called as a witness in this hearing, and whose evidence I accept, it was in the course of audit in about March 2002 that the minutes dated 31 December 2001 was made out and was back-dated. On Cheung’s instruction, the minutes was prepared and sent to the executive directors to sign. The SFC’s investigations did not find any board minutes showing that the proposed acquisition of the plant in Heilongjiang, the payment of the deposit or other terms of the Letter of Intent had been considered or discussed by the Board. There was also no documentation or record on the cancellation of the project and of the Letter of Intent. The 5^th respondent also stated that, upon the auditor’s request, the 4^th respondent had on 15 March 2002 given an undertaking to the board regarding the recoverability of the deposit for the proposed acquisition. However, when the Heilongjiang party failed to return the balance of RMB 5 million deposit, the Company took no step to enforce the undertaking given by the 4^th respondent.

29.  In the 1st Clarification Announcement, however, it was stated that the signing of the Letter of Intent had been approved by the Board (excluding the independent non-executive directors) after considering detailed information about the Heilongjiang project provided by the Heilongjiang party. The 2^nd Clarification Announcement also stated that the terms of the Letter of Intent had been discussed by the Board (excluding the independent non-executive directors) after considering details of the Heilongjiang plant that were provided by the Heilongjiang party. It further stated that the board had convened a meeting on 31 December 2001 to ratify the payment of RMB 7 million deposit for the acquisition.

30.  In these circumstances, the 1^st and 2^nd Clarification Announcements clearly contained false or materially misleading statements of fact about the Heilongjiang Investment.

31.  As for the Enping Investment, the proposed investment in the Enping plant was introduced to the Company by the 3^rd respondent. In his written answers to the SFC, he stated that he conducted the negotiations under the authorisation of Cheung and the 5^th respondent. He had no recollection of attending any board meeting to approve the Agency Agreement or discussing the project with any other director. The 1^st respondent, in his interview with SFC, claimed that there was a board meeting to discuss the project and the 3^rd respondent had given a verbal introduction of it, but no documentation was provided. He stated further that he did not know about the payment of the RMB 8 million guarantee money. The investigations by the SFC did not find any board minutes showing that the proposed acquisition of the plant in Enping, the payment of the guarantee money or any of the terms of the Agency Agreement had been discussed or considered by the board. There was also no documentation regarding the negotiation or the subsequent cancellation of the project and of the Agency Agreement. According to the statement of the 5^th respondent, on the auditor’s request and Cheung’s instruction, a board minutes dated 31 December 2001 was prepared and signed by the executive directors in March 2002 to ratify the payment of the RMB 8 million guarantee money.

32.  In the 1^st Clarification Announcement, however, it was stated that the Agency Agreement had been approved by the board (excluding the independent non-executive directors) after considering details of the Enping plant that were provided by the Enping agent. In the 2^nd Clarification Announcement, it also stated that the terms of the Agency Agreement had been discussed by the board in November 2001 after considering the details of the Enping plant provided by the Enping agent. It further stated that the board had held a meeting on 31 December 2001 to ratify the payment of the RMB 8 million guarantee money for the acquisition of the plant.

33.  These statements of fact in the 1^st and 2^nd Clarification Announcements are false or misleading in a material way in that there is no factual basis for believing that the board had discussed, let alone approved, the terms of the Agency Agreement and that no board meeting was in fact held on 31 December 2001 to ratify the payment of the guarantee money.

34.  In relation to the Honvest Loan and the Enping Chemical Loan, the loan agreements were signed by the 3^rd respondent. In his written answers to the SFC, the 3^rd respondent stated that the loans were in fact arranged by Cheung and the 5^th respondent. The 1^st respondent in his interview with the SFC denied having any knowledge about the loans and claimed that the payments were arranged and controlled by Cheung, Wong and the 5^th respondent. He confirmed having signed the board minutes dated 31 December 2001 to ratify the loans, but stated that he had made no enquiries about the transactions before signing. Apart from the loan agreements, there is no other documentation evidencing discussion, deliberation or approval of the loans by the board. The evidence of the 5^th respondent is that the 31 December 2001 minutes was prepared in March 2002 upon the auditor’s request and at Cheung’s instruction.

35.  In the 1^st Clarification Announcement, it was stated that the two loans were approved by the board (excluding the independent non-executive directors). The 2^nd Clarification Announcement further stated that the Honvest Loan and the Enping Chemical Loan were discussed by the board in January and April 2001 respectively and that a board meeting was held on 31 December 2001 to ratify the granting of the loans.

36.  These statements of fact in the 1^st and 2^nd Clarification Announcements are false or misleading in a material way in that there was no discussion nor approval of the loans by the executive directors and no board meeting was held on 31 December 2001 to ratify the loans.

37.  With respect to the Global Essence Advances, the Consultancy Services Agreement was signed by the 1^st respondent. In his interview with the SFC, the 1^st respondent said he did so on the instruction of Cheung and Wong and the matter had not been discussed among the directors. He said he had no knowledge of the amount of advances involved or who caused or authorised the advances to Global Essence. He also stated that Global Essence did not refer any project to the Company. The 3^rd respondent denied any involvement in the dealings with Global Essence. There was a document purporting to be minutes of a board meeting on 19 July 2001, recording that the Consultancy Services Agreement was approved and the 1^st respondent was authorised to sign it. The document was only signed by the 1^st respondent.

38.  In both the 1^st and 2^nd Clarification Announcement, it was stated that the Consultancy Services Agreement had been approved by the board (excluding the independent non-executive directors). This representation of fact is on the 1^st and 3^rd respondent’s own statements to the SFC, evidently false or materially misleading.

39.  In addition, the 1^st and 2^nd Clarification Announcements also stated the following:

(i)  Global Essence was a consultancy firm beneficially owned as to 999,9999 shares by Rich Resources Limited (which was 50% jointly owned by Cheung and one Cheung Kin Cho, with the remaining 50% owned by one Li Xiao Wu) and as to 1 share by Cheung Kin Cho, and that 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).

(ii)  Global essence had assisted the Group to identify acquisition targets in the PRC by completing two feasibility reports in relation to investment in two factories engaging in nonmaterial.

(iii)  The aggregate advances made by the Company to Global Essence were HK$9.43 million and they were made between March to December 2001 (as per the 1^st Clarification Announcement) or starting from March 2001 before the signing of the Consultancy Services Agreement (as per the 2^nd Clarification Announcement), and that all the outstanding advances had been fully settled on 30 September 2002.

40.  These statements are false or materially misleading in a number of ways. First, Global Essence was not an independent third party. Cheung was interested in Global Essence indirectly and was described as an employee of Global Essence in an account service registration form with HSBC. According to the 5^th respondent, Cheung had told him that he controlled Global Essence. On the other hand, Cheung was at all material times the real controller of the Company. The evidence shows that he was a shadow director of the Company and managed its affairs and finances. Second, there is no material to support or show that Global Essence had made any referral of projects or provided consultancy service to the Company. There is no evidence of any feasibility report provided by Global Essence. Third, from the two accounting schedules provided by the Company, the advances made to Global Essence were in far excess of HK$ 9.43 million and extended beyond December 2001. Fourth, the evidence of the forensic accounting expert demonstrates that the three purported repayments made between 18 and 23 March 2002 and totalling HK$8.5 million did not take place as represented in the two schedules. It is therefore highly doubtful whether there was in fact full settlement of the advances to Global Essence.

(ii)  2^nd head of misconduct

41.  Clearly, from the matters set out under the 1^st head of misconduct, the 1^st and 3^rd respondents, despite being the chairman of the board and an executive director, took no interest in and did not concern themselves with the affairs, finances and management of the Company. They were content to follow the instructions of Cheung, notwithstanding that he was neither a director nor an officer of the Company. Cheung was in fact allowed to have unchecked control over the finances and affairs of the Company. In the circumstances, each of the 1^st and 3^rd respondents had abdicated their responsibilities as executive director of a publicly listed company and further failed to carry out their duty to safeguard the interests of the Company and its shareholders and the investing public.

(iii)  3^rd head of misconduct

42.  The SFC’s case under the 3^rd head of misconduct is that each of the 1^st and 3^rd respondents failed to exercise reasonable skill, care and diligence in the management of the Company and/or failed to act in the best interest of the Company, which is both contrary to their common law of duty of care and fiduciary duty and also contrary to Rule 5.01 of the GEM Listing Rules, with which each of them had, prior to the listing of the Company, given a written undertaking to the Hong Kong Stock Exchange to comply to the best of his ability.

43.  The relevant part of Rule 5.01 states:

“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)  …

(5)  …

(6)  apply such degree of skill, care and diligence as may be reasonably expected of a person of his knowledge and experience and holding his officer with the issuer.”

44.  Apart from the matters set out under the 1^st head of misconduct, the following aspects of the five transactions are also relevant to show the failure in duties on the part of the 1^st and 3^rd respondents. First, in respect of the Heilongjiang Investment and Enping Investment, having regard to the substantial amounts involved, the executive directors, including the 1^st and 3^rd respondents, acting reasonably and with due care and diligence, ought to have consulted the independent non-executive directors on the proposed acquisitions before entering into the Letter of Intent and the Agency Agreement. Further, before paying substantial sums for the deposit or guarantee money, there was no proper study and evaluation of the proposed acquisitions, its feasibility and commercial viability, and also the credit risks involved in making the payments. There was also no proper discussion among the executive directors and no prior approval was given by the board for the payments. The two payments were not made in the best interest of Guang Ping, and in turn the Company, in that there was no adequate information about the proposed acquisitions, that there was no proper deliberation by the board, that the deposit/ guarantee money was paid without proper authority of the board, and that the money was not held in an escrow account, but was paid over to the Heilongjiang party and Enping agent with no security provided in return. There was at the same time, no document evidencing the allege repayment of RMB 4 million by the Enping agent.

45.  Second, in relation to the Honvest Loan and the Enping Chemical Loan, given that the granting of the loans was not in the normal course of business of Guang Ping and having regard to the substantial amount involved, the executive directors (including the 1^st and 3^rd respondents), acting reasonably and with due care and diligence, ought to have consulted the independent non-executors before granting the loans. The granting of these two loans was further not made in the best interests of Guang Ping, and in turn the Company, in that they were granted without proper authority of the board, that the money was lent for an indefinite term with no date fixed for repayment, that no interest was charged and no security was given for them, and additionally were not made within the normal course of business of Guang Ping.

46.  Third, with regard to the Global Essence Advances, they were extraordinary transactions. There was no basis at all for the series of very substantial advances made to Global Essence. Despite the Consultancy Services Agreement between the Company and Global Essence, none of the advances was shown to be in any way related to the agreement or services rendered to the Global Essence. In effect, funds were continuously drained out of the Company without any proper purpose, justification or authority. The advances were all for an indefinite term with no fixed date for repayment, with no interest charged on them and were not secured by any collateral. The granting of the advances is plainly not in the interests of the Company.

(4)  4^th head of misconduct

47.  The 4^th head of misconduct relates to the descriptions of the duties of the executive directors in the prospectus and the annual reports of the Company. In the prospectus dated 9 July 2001 (at p.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 in the 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 the 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.”

48.  In the prospectus and also the 2001 and 2002 annual reports of the Company, the 1^st respondent was described as the chairman of the Company responsible for the strategic planning, corporate policy and overall management of the Group. As for the 3^rd respondent, he was described as an executive director of the Company responsible for the daily operations of Guang Ping.

49.  These representations as to the duties and responsibilities of the 1^st and 3^rd respondents as executive directors of the Company were false or misleading for, in truth and in fact, the overall management and operation of the business and affairs of the Company were under the control of Cheung and the 1^st and 3^rd respondents, as the above analysis shows, took no charge of and merely acted on Cheung’s directions and instructions on matters relating to the Company or its subsidiaries. Further according to the 5^th respondent, the 1^st respondent was only responsible for running the factory production in Enping.

(5)  5^th head of misconduct

50.  The 5^th head of misconduct concerns the numerous breaches of rules and regulations by the Company, which the respondents had caused or allowed or permitted, within the short duration of its being listed on the GEM. The breaches include:

(1)  Breach of Rule 12.1 of the Code on Takeovers and Mergers in the publication of an announcement dated 20 August 2003, without first seeking confirmation from the SFC that it had no further comments thereon.

(2)  Breach of Rules 18.66 and 18.67 of the GRM Listing Rules by failing to publish the Third Quarterly Results of the Group by 14 November 2003 as required.

(3)  Breach of Rules 18.03 and 18.49 of the GEM Listing Rules by failing to publish the audited final results (“2003 final audited results”) and despatch of the annual report for the year ended 31 December 2003 within the relevant time limit.

(4)  Further breach of Rules 18.03, 18.49 and 18.48A of the GEM Listing Rules in further delaying the publication of the 2003 audited final results and the despatch of the 2003 annual report

(5)  Breach of Rule 8.4 of the Code on Takeovers and Mergers by the Company and its directors.  The directors agreed to disciplinary action against them by the SFC.  In consequence, the Takeovers and Mergers Executive imposed an order denying the 1^st and 3^rd respondents access to the securities markets for a period of 24 months commencing from 19 October 2004; and further publicly censured the Company and the 1^st to 3^rd and 5^th respondents.

(6)  Breach of Rules 18.66 and 18.79 as well as 18.53 and 18.78 of the GEM Listing Rules in delaying the publication of the financial results of the Group for the first quarter of 2004 and the first six months of 2004 that was occasioned by the unavailability of the 2003 final audited results.

51.  By the time the Company was de-listed on 10 June 2005, the 2003 final audited results, the 2004 first quarter results and the 2004 interim results remained unavailable. These breaches were admitted by the Company and its executive directors.

52.  In addition, on 8 June 2006, the GEM Listing Committee of the Hong Kong Stock Exchange: (1) publicly censured the Company for breach of Rule 17.11 of the GEM Listing Rules (requiring an issuer to respond promptly to enquiries made of it by the Hong Kong Stock Exchange concerning unusual movements in the price or trading volume of its listed securities or any other matters); (ii) publicly censured, inter alia, the 1^st 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 co-operate in investigations conducted by the Listing Division; and (iii) issued a public statement which involved criticism of, inter alia, the 3^rd respondent for his breach of the aforesaid director’s undertaking. The GEM Listing Committee further concluded in its announcement that the breach by the 1^st respondent was wilful and/or persistent and the retention of office by the 1^st respondent was prejudicial to the interests of the investors.

53.  In a nutshell, the materials before the court demonstrate an overwhelm case that each of the 1^st and 3^rd respondents as executive directors of the Company was collectively or individually responsible for the business or affairs of the Company having been conducted in a manner involving misfeasance or other misconduct towards it or its members or part of its members; resulting in its members or part of its members not having been given all the information with respect to its business or affairs that they might reasonably expect; or unfairly prejudicial to its members or part of its members.

Disqualification Order

54.  The Amended Petition is therefore proved against each of the 1^st and 3^rd respondents and a case for making a disqualification order against each of them is made out.

55.  As to length of the disqualification order, in imposing the disqualification order on the 2^nd respondent, Kwan J (as she then was) had pointed out that there are two important objectives in the exercise of the jurisdiction to make disqualification orders: firstly, protection of the public against the future conduct of persons whose past records as directors of listed companies have shown them to be a danger to those who have dealt with the companies, including creditors, shareholders, investors and consumers; and secondly, general deterrence in that the sentence must reflect the gravity of the conduct complained of so that members of the business community are given a clear message that if they break the trust reposed in them they will receive proper punishment: [2009] 2 HKC 19, 23 at para.12.

56.  The disqualification order against the 2^nd respondent is for a period of five years and the disqualification applies to all corporations. In the case of the 5^th respondent, the scope of disqualification is limited to listed corporations and the disqualification period is six years. As noted above, the 2^nd and 5^th respondents consented to the making of a disqualification order against them and the Amended Petition was disposed of by way of the Carecraft procedure.

57.  In the case of the 1^st and 3^rd respondents, Mr Chow SC submitted that the following matters are relevant in determining the disqualification period:

(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 on the part of each of the 1^st and 3^rdrespondents in the discharge of his duties as an executive director of a listed company;

(4)  Each of the 1^st and 3^rd respondents exhibited a marked indifference to, or disinterest in, his responsibilities as an executive director of the 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.

58.  In my view, there is no justifying reason for limiting the scope of the disqualification order to be imposed on the 1^st and 3^rd respondents and the order should relate to all corporations. As to the disqualification period, it should be no less than five years, which is the period imposed on the 2^nd respondent who did not contest the proceedings. Additionally, considering that the 1^st respondent assumed the position of chairman of the board and in light of the conclusion and criticism made against him by the GEM Listing Committee in its announcement, a longer period of disqualification should be imposed on the 1^st respondent.

59.  Having regard to all the circumstances of the case, I am of the view that disqualification periods of seven years and six years should be imposed on the 1^st and 3^rd respondents respectively.

Orders

60.  Accordingly, I make the following orders:

(1)  The 1^st respondent shall not for a period of seven years without leave of the court: (a) be, or continue to be, a director, liquidator, or receiver or manager of the property or business, of any corporation; or (b) in any way, whether directly or indirectly, be concerned, or take part in the management of any corporation.

(2)  The 3^rd respondent shall not for a period of six years without leave of the court: (a) be, or continue to be, a director, liquidator, or receiver or manager of the property or business, of any corporation; or (b) in any way, whether directly or indirectly, be concerned, or take part in the management of any corporation.

(3)  The above orders shall take effect at the beginning of the 21^st day after the day on which this order is made, namely, as from 27 October 2009.

(4)  The 1^st and 3^rd respondents shall jointly and severally pay the petitioner the costs of this hearing, to be taxed if not agreed.

(5)  Subject to (4) above, each of the 1^st and 3^rd respondents shall pay the petitioner one-fifth of the costs of these proceedings, to be taxed if not agreed.

(6)  The petitioner shall have leave to serve this order on the 1^st and 3^rd respondents out of jurisdiction.