Introduction

Under section 214 of the Securities and Futures Ordinance (“SFO”), in cases of unfair prejudice, the Securities and Futures Commission (“SFC”) may petition to the Court to seek disqualification order against a director of a listed corporation. We had previously issued a newsletter titled “How does the Court assess whether to grant a disqualification order against a director under s.214 of the Securities and Futures Ordinance?” (September 2019 Issue) which discussed the Court’s requirements in granting an order under section 214. 

In SFC v Chin Jong Hwa and Others [2019] HKCFI 2735 (6 November 2019), the Court of First Instance (“CFI”) laid out the Court’s approach when determining the appropriate period of disqualification orders and its willingness to recognise “mitigating” factors put forward by the respondents.

Background

Mr Chin Jong Hwa (“Mr Chin”) was the former chairman and executive director of Minth Group Limited (the “Company”), which was at the relevant time and is listed on the Main Board of the Stock Exchange of Hong Kong Limited (“SEHK”).

Mr Shi Jian Hui (“Mr Shi”), Mr Mu Wei Zhong (“Mr Mu”) and Mr Zhao Feng (“Mr Zhao”) were former executive directors of the Company.

On 31 August 2016, the SFC filed an amended petition against Mr Chin, Mr Shi, Mr Mu and Mr Zhao (collectively, the “Directors”) under section 214 of the SFO in relation to their misconduct in connection with the loss suffered by Decade (HK) Limited (“Decade”), a wholly-owned subsidiary of the Company, in the acquisition of two companies in 2008. At all material times, Mr Chin was and is the sole director of Decade.

Facts

In April 2008, the Company, through Decade, acquired the entire issued share capital of Magic Figure Investments Limited (“Magic Figure”) and Talentlink Development Limited (“Talentlink HK”) from Mr Hsu Chun Wei (“Mr Hsu”) and Talentlink Development Limited BVI (“Talentlink BVI”) respectively (the “Acquisition”). At the relevant time, Ms Hsu Hsiao Ling (“Ms Hsu”) was on record the sole director and shareholder of Talentlink BVI.

Mr Hsu and Ms Hsu (“Hsus”) are the nephew and niece of Mr Chin. Therefore, the Acquisition was a connected transaction as defined in the Listing Rules of the SEHK but the Company did not make a public announcement nor obtain prior approval from the Company’s independent shareholders for the Acquisition. 

On 29 April 2008, Decade entered into agreements to acquire the shares in Magic Figure and Talentlink HK. The agreement for the acquisition of Magic Figure took into account the price of the lands owned by two wholly-owned PRC subsidiaries of Magic Figure.

Decade was required not only to provide cash consideration for the Acquisition but also to discharge the liabilities of Magic Figure and Talentlink HK. The payments made by Decade in respect of the Acquisition eventually ended up in the accounts of or related to Mr Chin. As a result, Mr Chin’s connection with the Acquisition was concealed.

The Company had conducted a due diligence investigation but failed to ascertain Mr Chin’s true connection or role in the Acquisition. Accordingly, the above matters were not disclosed in the Company’s announcement or circular.

The relevant provisions

Under section 214 of the SFO, the Court may make orders disqualifying a person from being a director or being involved, directly or indirectly, in the management of any corporation for up to 15 years, if the person is found to be wholly or partly responsible for the company’s affairs having been conducted in a manner involving misfeasance or other misconduct towards the company. The CFI was satisfied that the conditions for granting the remedies set out under section 214(2) of the SFO are met.

Generally speaking, the Court has divided the maximum period of disqualification of 15 years under section 214 of the SFO into three brackets:

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

2.         the middle bracket, of disqualification for between 6 to 10 years, for cases which, although serious, are not so serious as to merit a period of disqualification in the top bracket; and

3.         the minimum bracket, of disqualification for up to 5 years, for relatively less serious cases. 

The Court would take into account all relevant circumstances, including any mitigating factors put forward, when determining the appropriate period of disqualification. 

Admissions by the Directors and the CFI’s view

The Directors had collectively and respectively made various admissions of findings and liabilities, including their admissions that:-

1.         they did not consider whether it was in the interest or best interests of Decade or the Company to acquire Magic Figure; and

2.         the business or affairs of the Company have been conducted by the Directors in a manner within the meaning of section 214(1)(b) to (d) of the SFO.

For Mr Chin

Mr Chin accepted that:-

1.         in breach of the Listing Rules, he had failed to disclose his relationship with the parties in the above transactions and/or funds flow;

2.         he had acted in breach of his fiduciary duties owed to the Company and Decade, and caused Decade to suffer loss; and

3.         he shall pay a global sum of RMB 12,000,000 (together with interest thereon) to Decade in full and final settlement of the monetary claim against him (the “Compensation”). 

The CFI found that there is no allegation of dishonesty against Mr Chin and there are a number of “mitigating” factors, including his agreement to pay the Compensation and the SFC’s costs.

The CFI agreed with the SFC that Mr Chin’s conduct would fall within the lower end of the middle bracket and a disqualification period of 6 years would be appropriate. Mr Chin also agreed on the same.

For Mr Shi, Mr Mu and Mr Zhao

Each of Mr Shi, Mr Mu and Mr Zhao accepted that, in breach of the Listing Rules, they had failed to make further inquiries in respect of the above transactions and/or funds flow.

As for each of Mr Shi, Mr Mu and Mr Zhao, the CFI found that their culpability primarily rests in their failure to make the necessary inquiries or take the necessary steps to ascertain the matters which Mr Chin failed to disclose.

The CFI agreed with the SFC that their conduct would fall within the lowest bracket and a disqualification period of 3 years would be appropriate.  Mr Shi, Mr Mu and Mr Zhao also agreed on the same.

Conclusion

In this case, the CFI reinforced the Court’s approach to the length of disqualification orders and it provides helpful guidance as to how a respondent’s conduct may affect the appropriate period of disqualification to be imposed.

Of note is the CFI’s emphasis that, while the Court is not bound by the agreement between the SFC and the Directors in deciding what order to be made, the Court is likely to be guided by such agreement insofar as the terms are appropriate. Given the Court’s recognition in this regard, respondents should give thought to a reasonable compensation proposal and actively liaise with the SFC in order to reach a favourable agreement.