Introduction

The Securities and Futures Commission (“SFC”) presented a petition to the Court of First Instance (“CFI”) against two executive directors and a suspected shadow director (collectively, the “ex-Directors”, as defined below) of Combest Holdings Limited (“Combest”), a company delisted on 24 December 2020, pursuant to section 214 of the Securities and Futures Ordinance (“SFO”) on 18 May 2020. A settlement to compensate the public shareholders was recently reached between SFC and the ex-Directors under which the ex-Directors would pay compensation to independent public shareholders of Combest.

SFC’s case

The SFC conducted investigation on Combest and the ex-Directors in July 2018 and it came to its attention that, amongst other things:

1.      The ex-Directors caused Combest and one of its subsidiaries to enter into two overpriced acquisitions of two subsidiary groups in 2016 and 2017 respectively (the “Overpriced Acquisitions”), whereas the two acquired subsidiary groups were comprised of fictitious or artificial businesses. These acquisitions were overvalued by a total of HK$229 million;

2.      Combest overstated its revenue by more than 84% to 99% during various accounting periods between 2016 and 2019 by including in its financial statements revenue generated by the above-mentioned Overpriced Acquisitions; and

3.      The Overpriced Acquisitions and the artificial and/or fictitious businesses have caused losses of more than HK$293 million to Combest (the “Loss”).

Contravention of the SFO

Section 214 of SFO provides certain situations where the SFC can apply to the CFI to disqualify directors. Common scenarios where the SFC would exercise this power includes where a company is oppressive to or defraud its members, causes 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. The SFC may seek, among other things, (i) an order to disqualify individuals wholly or partly responsible for the business or affairs of the listed corporation having been so conducted from being a director, or being concerned, whether directly or indirectly, in the management, of any company for up to 15 years; and/or (ii) any other order it considers appropriate, including an order for any person to compensate the loss of the corporation.

As a result of the gravity of Combest’s (and/or the ex-Directors’) misconduct, to protect the interest of the investing public, the SFC directed The Stock Exchange of Hong Kong Limited (“SEHK”) to suspend the trading of Combest’s shares on 29 May 2019. Combest’s shares were delisted by SEHK on 24 December 2020.

The settlement

On 16 September 2024, the SFC announced that a settlement has been reached with the ex-Directors by way of a summary procedure commonly known as the Carecraft procedure, which is a settlement and expedited resolution mechanism commonly used in proceedings under section 214 of the SFO. Settlements by the Carecraft Procedure often involve the parties agreeing to (i) a statement of facts, meaning that the respondents will have to admit to some wrongdoings; (ii) the period for which the respondents will be disqualified as directors (if applicable); and (iii) the amount of compensation to be paid by the respondents.

In this case, the ex-Directors agreed to pay Combest compensation of about HK$192 million. Combest has agreed to distribute the full amount of the compensation to its shareholders through special dividends. Additionally, two shareholders who collectively hold 24.4% of Combest have undertaken to return the special dividends they are entitled to receive for redistribution to independent public shareholders.

Further, as part of the settlement, the SFC and the ex-Directors have agreed to a statement of facts, which includes, among others:

1.      The executive directors, Liu Tin Lap (“Liu”) and Lee Man To (“Lee”) were under Ng Kwok Fai (“Ng”)’s directions and instructions to operate Combest’s affairs, who was a shadow director of Combest since 2016.

2.      The ex-Directors caused Combest to enter into the Overpriced Acquisitions which were substantially overvalued by a total of $229 million, enabling Ng to misappropriate money off from Combest to benefit himself and create the false impression that Combest had a substantial level of operations and assets to warrant the continued listing of its securities. The two acquired subsidiary groups were comprised of fictitious or artificial businesses procured by Ng.

3.      The ex-Directors caused Combest to borrow loans and make payments of fees and interests of about HK$64 million for no commercial reasons.

4.      The ex-Directors artificially inflated the revenue of Combest during various accounting periods between 2016 and 2019 and caused Combest to suffer the Loss.

5.      By reason of the above, the ex-Directors breached their fiduciary duties owed to Combest.

(the settlement terms collectively, the “Settlement”)

Settlements under the Carecraft procedure are subject to the CFI’s approval and the hearing for the parties’ proposals for the Settlement has been scheduled on 2 April 2025. Upon CFI’s approval, the independent public shareholders will receive $0.066 per share, which is 2.75 times higher than the last closing price of Combest’s shares before suspension.

Takeaway

Whilst it is not yet certain whether the Settlement will be approved ultimately, this Settlement is regarded as unprecedented in the sense that it will benefit the minority shareholders of Combest from the compensation paid by the wrongdoers directly. It is expected the SFC will continue to take a robust and rigorous approach when dealing with potential non-compliances by listed companies, and on this note companies are reminded to always stay abreast of the regulatory regime and act in strict conformity with the SFO and other relevant legislations and code of conducts.