Introduction

On 30 May 2016, the Securities and Futures Commission obtained disqualification orders for 6 to 10 years against three former senior executives of China Best Group Holdings Limited (the “Company”), a listed company in Hong Kong, pursuant to section 214(2)(d) of the Securities and Futures Ordinance (Cap. 571) (“SFO”).

The Facts

By a decision in October 2015, the judge found that all the respondents were in breach of their directors’ duties. The 1st respondent, being the former chairman, executive director and advisor of the Company, tried to sell an asset to the Company at a massive profit and devised a scheme to conceal such by using nominees to create a false impression that it was an arm’s length transaction. In effect, the 1st respondent had diverted to himself the corporate opportunity of the proposed acquisition. The 2nd and 3rd respondents, on the other hand, are the former chairman/chief executive officer and former executive directors of the Company. It was found that they ought to have known or knew the breach committed by the 1st respondent, yet they failed to make any enquiries.

The Court’s Ruling

Section 214(2)(d) of SFO

Section 214 of the SFO kicks in when the business or affairs of the companies are oppressive or unfairly prejudicial to its members or there is fraud or misfeasance towards the members.  As a consequence, section 214(2)(d) empowers the court to disqualify a person from being the director, liquidator, receiver or manager of the subject company or any other companies, or directly or indirectly taking part in the management of the subject company or any other companies for a maximum of 15 years, without leave of the Court.

The duration of sanction

In the current case, the judge ruled that admission by the wrongdoer would not result in any discount to the sanction, while non-admission of misconduct is not an aggravating factor either.

The judge considered that the wrongdoing of the 1st respondent was very serious and the amount involved in the transaction was so huge that it amounted as a “very substantial acquisitions” under the Listing Rules. Such gravity would warrant disqualification for over ten years. However, given the 1st respondent had not been a director since June 2011 and the amount was fully repaid to the Company, only a 10-year disqualification was ordered.

Regarding the 2nd and 3rd respondents, the judge distinguished their positions from the 1st respondent as they are guilty of omission instead of commission.  No positive wrongdoing was involved. Therefore, a shorter period of 6-year sanction is appropriate.

The scope of sanction

Counsel for the respondents argued that the disqualification orders should not cover unlisted companies which are not the subsidiaries or affiliates of any listed companies in Hong Kong. Although the judge acknowledged that section 214(2) is premised on the affairs of a listed company, he found that the disqualification orders in this case should cover unlisted companies in Hong Kong. This is because such a disqualification order has twin purposes, namely protecting the public and secondarily, effecting general deterrence. Even the misconduct was committed in relation to a listed company, other listed as well as unlisted companies may be covered by the disqualification order because all their shareholders need protection. Further, the sanction is not absolute. Under section 214(2)(d), where appropriate circumstances arise, the respondents can apply for the leave of the Court to relax the disqualification orders.

The Conclusion

The wide scope and lengthy years of sanction in the case serve as a good reminder to all directors and senior management staff of the serious consequences of breaching their fiduciary duties to their companies. Not only should they not commit any misconduct proactively, the directors should also be cautious of any suspicious misconduct of other senior management staff and/or directors, which their failure to enquire may also result in disqualification orders against them.

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Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.