Introduction

Disqualification order is a powerful weapon of the Securities and Futures Commission (the “SFC”) to sanction “bad directors”, of listed companies.  In the recent case of Securities and Futures Commission v Kwok Wing [2015] HKEC 567, the Court of First Instance, upon petition by the SFC under section 214 of the Securities and Futures Ordinance (Cap. 571) (the “SFO”), made a disqualification order against a former director of Tack Fat Group International Limited, pursuant to section 214(2)(d) of the SFO.

Section 214 of the SFO

Section 214(1) of the SFO allows the SFC to apply to the Court for a disqualification order if the business or affairs of a listed corporation have been conducted in a manner:-

1. oppressive to its members or any part of its members;
2. involving defalcation, fraud, misfeasance or other misconduct towards it or its members or any part of its members;
3. 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
4. unfairly prejudicial to its members or any part of its members.

The Court of First Instance in Securities and Futures Commission v Fung Chiu & Ors [2009] 2 HKC 19, which has subsequently been cited in Securities and Futures Commission v Wong Shu Wing & Anor [2013] HKCU 1008, discussed in its judgment three requirements to be satisfied under section 214(1) of the SFO: firstly, the company must be a listed corporation; secondly, the concerned affairs or business is related to the corporation; and lastly, the concerned conduct falls within the scope of one of the subsections (a) to (d).

With regard to the second condition that the concerned affairs or business must be related to the listed corporation, in the circumstances of a group of companies, it is possible for the court, on a case-by-case basis, to hold that the business or affairs of one corporation may also be that of another corporation. In other words, it is possible for directors of a listed company to be liable for his misconduct in relation to the business or affairs of its subsidiaries.

Upon satisfaction under section 214(1) of the SFO, the Court may impose a disqualification order against a director of the company under section 214(2)(d) of the SFO, i.e. an order to prohibit that person from being a director, liquidator, or receiver or manager of any companies or taking part in the management of any companies for a specified period up to 15 years.

In relation to the length of the disqualification order, the Court of First Instance in Securities and Futures Commission v Shum Ka Sang Charlie & Anor [2009] HKCU 792 applied the guidance on the imposition of the periods of disqualification laid down by the English Court of Appeal in Re Sevenoaks Stationers Ltd [1991] Ch 164:-

1. The top bracket of over 10 years should only be imposed in particularly serious cases, such as a second disqualification;
2. A middle bracket of 6 to 10 years is for serious cases which do not merit the top bracket; and
3. A minimum bracket of 2 to 5 years applies to less serious cases in the UK but in Hong Kong there is no minimum period of disqualification under the SFO.

The Court of First Instance in Securities and Futures Commission v Yeung Kui Wong & Ors [2010] HKCU 778 applied the following 8 criteria to determine the actual period of disqualification:-

1. character of the offenders;
2. nature of breaches;
3. structure of the companies and the nature of their business;
4. interests of shareholders, creditors and employees;
5. risks to others from the continuation of offenders as company directors;
6. honesty and competence of offenders;
7. hardship to offenders and their personal and commercial interests;
8. offenders’ appreciation that future breaches could result in future proceedings.

Background of the Recent Case

The recent case of Securities and Futures Commission v Kwok Wing [2015] HKEC 567 has demonstrated the above discussed principles in relation to section 214 of the SFO.  The 4^th Respondent (“Lam”) was a director of Tack Fat Group International Limited, a formerly listed company (the “Company”), between 24 June 2008 and 9 September 2008.  The SFC complained of the following matters when the 4^th Respondent was the director of the Company:

Firstly, Lam represented the Company to enter into six new loan agreements totalling HK$98 million, while it had already had substantial outstanding liabilities, by signing documents for the loan to be secured by charges over shares in major subsidiaries and real properties.  He signed these documents simply by following the instructions from the Chairman of the Board of Directors (the “Chairman”) without making any independent enquiries.  Secondly, he was required to but did not disclose to the public any information about these loans.  Thirdly, Lam, as the sole director of the subsidiary company, Forever Fit Holdings Ltd (the “Subsidiary”), caused the company to enter into an agreement to acquire 40% of the shareholding and interests in the shareholders’ loans of Global Agricultural Development Limited (the “Transaction”).  The vendor of this agreement was a nominee of the Chairman, Li Zhong Ming (“Li”).  The receivables turned out to be fictitious and did not even exist.  Fourthly, the Company made false and misleading announcements to the public and the Stock Exchange by claiming that Li was an independent third party while he in fact was a nominee of the Chairman.  Lastly, Lam represented the Subsidiary to enter into the Transaction simply following the instructions from the Chairman but he did not duly exercise any independent judgement.

Decision

As the 4^th Respondent admitted the above facts, the Court held that the conditions under section 214(1) of the SFO had been satisfied.   The 4^th Respondent was demonstrably lacking in diligence, competence and independence in the performance of his duties, and had disregarded his responsibilities as a director to the Company and, indirectly, to all those who had interests in it.  While the 4^th Respondent was a director for less than 3 months, he was, during that period, the person who signed the documents relating to the very significant loans and the questionable Transaction.  His conduct placed him in the middle bracket, i.e. 6 to 10 years, of the disqualification period referred to in Re Sevenoaks Stationers (Retail) Ltd [1991] Ch 164 at 174.  The Court, after considering all the circumstances and his conduct in the proceedings, made a disqualification order of 6 years against the 4^th Respondent.

Implications

When a director of a listed company, acting under the control of another director/shareholder, is involved in any misconduct in relation to the business or affairs of the company, his claim to have no knowledge of the misconduct and merely acting under the instructions of another director/shareholder is unlikely to assist him to escape from liability.  He still owes director’s duties to the company and may be sanctioned with a disqualification order for his involvement of any misconduct.