Introduction

Under section 214 of the Securities and Futures Ordinance (“SFO”), the Securities and Futures Commission (“SFC”) may petition to the Court to seek disqualification order against a director of a listed corporation. In SFC v Andrew Liu & Others ([2018] 1 HKLRD 320), the Court analysed the requirements for engaging section 214 and shed light on the Court’s assessment in granting such an order.

The facts

On 5 October 2016, the SFC issued a petition against various directors of Freeman FinTech Corporation Limited (the “Company”) in relation to their misconducts concerning the approval of a Shares Purchase Agreement (the “SPA”) for Ambition Union Limited, a subsidiary of the Company (the “Subsidiary”) to acquire shares in Liu’s Holdings Limited (“Liu’s Holdings”).

On 8 December 2010, the Company’s board approved the execution of the SPA. On 30 December 2010, the Company published a circular containing information and recommendations in respect of the acquisition (the “Circular”) for shareholders who were required to consider and approve it at an extraordinary general meeting on 18 January 2011 (the “EGM”).

Mr Roger Best, a non-executive director of the Company at the material time, attended the board meeting on 8 December 2010 and voted in favour of the acquisition and the execution of the SPA. The independent board committee of the Company, in which Mr Best was a member, also issued a letter recommending the shareholders to accept the acquisition.

In fact, there was a deed executed in 1972 by the shareholders of Liu’s Holdings (the “Deed”) containing a complex set of pre-emption rights that placed significant restrictions on sale of shares in Liu’s Holdings to third parties. On 17 January 2011, some shareholders of Liu’s Holdings issued a letter to the Company objecting to the acquisition on the ground that it conflicted with the Deed (the “Letter”).

The Letter was discussed at the Company’s board meeting held shortly before the EGM, during which the board was advised by the Company’s legal advisors that the SPA was not in breach of the Deed. The EGM proceeded without reference to the Letter, and the board’s recommendation remained unchanged. The SPA was approved at the EGM.

The SFC issued a petition under section 214 of the Securities and Futures Ordinance (“SFO”) seeking, among others, disqualification orders against the directors, including Mr Best, who approved the SPA and recommended the same to the shareholders. Mr Best applied to strike out the petition against him.

SFC’s case against Mr Best

Pursuant to section 214 of the SFO, where it appears to the SFC that the business or affairs of a listed company have been conducted in a manner (a) oppressive to its members; (b) involving defalcation, fraud, misfeasance or other misconduct; (c) resulting in 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, the SFC may by petition apply to the Court for an order (which includes a disqualification order).

The SFC argued that section 214 would be engaged if there was a breach of duty by a director. A director’s duty was to be assessed by the conduct of a reasonably diligent person having both

1.         The general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as are carried out by that director in relation to the company; and

2.         The general knowledge, skill and experience that that director has. 

It was the SFC’s case that Mr Best had breached his duties by reason of, among others, the following:-

1.         Mr Best, who was a highly experienced accountant, should have recognized that the restriction on sale of shares in Liu’s Holdings as referred to in the SPA and the Letter called into question the viability of the transaction;

2.         Mr Best had improperly withheld the Letter from the shareholders of the Company or the EGM;

3.         Mr Best had improperly allowed or caused false or misleading statements or representations to be published by approving the Circular; and

4.         Mr Best did not act in good faith, in the best interests of the Company and/or with reasonable care, skill and diligence by, among others, withholding material information and procuring and/or allowing the shareholders to approve the SPA at the EGM.

Mr Best’s case

Mr Best argued that the type of misconduct capable of engaging section 214 of the SFO was similar to the misconduct sufficient to justify disqualification in the context of section 168H of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (“CWUMPO”), which reads:-

 “The court shall make a disqualification order against a person in any case where, on an application under this section, it is satisfied—

(a)   that he is or has been a director of a company which has at any time become insolvent whether while he was a director or subsequently; and

(b)   that his conduct as a director of that company, either taken alone or taken together with his conduct as a director of any other company or companies, makes him unfit to be concerned in the management of a company.”

Mr Best further argued that in the context of section 168H, the misconduct must be sufficiently serious and demonstrated a high degree of incompetence for the Court to reach a finding of unfitness. However, ordinary commercial misjudgement alone was not sufficient to justify disqualification.

The Court’s view

The Court was of the view that section 214 of the SFO and section 168H of CWUMPO were worded materially differently and applied in different contexts – section 214 applied to listed companies; section 168H applied in the context of insolvency. The Court further explained that the Court’s power to grant disqualification orders under section 214 would be engaged where the affairs of a company had been conducted in a way which came within one of the specified categories under section 214(1). Section 214 was directed to identifying and sanctioning misconduct in the management of companies with a view primarily to protecting the investing public and institutions.

In the context of section 168H, whether to grant a disqualification order would be assessed by reference to public interest and in the context of insolvency, the public interest primarily involved the interests of creditors.

It did not follow, however, that the Court will impose disqualifications materially more readily when dealing with petitions under section 214 than applications under section 168H. It would be necessary for the Court to be satisfied that the director’s involvement in the relevant matter involved a sufficiently serious failure to satisfy his duties that disqualification would be justified and fair.

Insofar as Mr Best’s striking out application was concerned, the Court was of the view that:-

1.         It was clearly arguable that the affairs of the Company had been conducted in a manner which came within one of the categories specified in section 214(1).

2.         It was arguable that Mr Best had breached his duties because an independent non-executive director of Mr Best’s experience should have raised concerns about proceeding with the acquisition, particularly in light of the Letter.

The Court thus dismissed Mr Best’s striking out application.

Conclusion

In this case, the Court clarified the differences in the considerations for granting disqualification orders under section 214 of the SFO and section 168H of CWUMPO. For section 214 to be engaged, the affairs of the company in question must be conducted in a manner which falls within one of the specified categories in section 214(1). The Court will then consider whether the director in question has breached his duties in respect of the company’s affairs. The Court may order a disqualification if it is of the view that the director’s breach is sufficiently serious.

However, it should be noted that this decision of the Court was made in the context of a striking out application. The Court has not yet decided that a disqualification order will be granted against Mr. Best. We shall await the trial of the case to see how the Court applies the principles enunciated in this decision.