Section 214 of the Securities and Futures Ordinance (“SFO”) has been commonly relied on by the Securities and Futures Commission (“SFC”) for seeking disqualification order against directors of a listed company committing misconduct or misfeasance. However, as demonstrated in the case of SFC v Lam Wo Ping & Ors. [2019] HCMP 2328/2019, the disqualification order can be used against persons such as members of the senior management who is held responsible for a listed company’s business or affairs so conducted, even though they did not hold the office of directors.

Background

Fuguiniao Co., Ltd. (the “Company”) was listed on the main board of The Stock Exchange of Hong Kong Limited (the “SEHK”) was first listed on 20 December 2013 and was subsequently delisted on 25 November 2019. Through its listing on SEHK, it raised net proceeds of approximately HK$1,134 million.

The SFC’s case

In December 2019, a petition was filed by the SFC pursuant to section 214 of the SFO against (i) the 1^st to 3^rd Respondents, who at all material times were directors and occupied senior positions in the Company and/or its subsidiaries; (ii) the 4^th Respondent, being the chief financial officer (“CFO”) of the Company between 30 June 2014 and 17 March 2017; and (iii) the Company.

The proceedings arose from a number of undisclosed transactions under which the Company and four wholly-owned subsidiaries (the “Group”) provided deposit pledges (the “Pledges”) totalling about RMB5,348.7 million as security for credit facilities in favour of a substantial shareholder and other external parties with no apparent relationship with the Group other than such transactions. Under the Pledges, RMB1,788 million had been forfeited by the banks with the balance released. The fact that the Pledges had not been disclosed in any of the annual or interim reports of the Company during the financial years of 2013 to 2015 rendered the financial reports of the Company false and misleading.

Admission

The case against the CFO was disposed of by Carecraft procedure. It was agreed between the parties that the CFO had failed to, among other things (i) ensure or verify the accuracy of the consolidated financial statements, annual reports, interim reports and other announcements of the Company during his appointment; (ii) ensure proper compliance by the Group with the Listing Rules and relevant disclosure requirements; (iii) ascertain or verify whether deposits of the Group were subject to pledges with banks; (iv) successfully monitor the financial affairs of the Group, including its material transactions, significant deposit pledges and/or guarantee arrangements; and (v) follow up on the matter even after the revelation of the Pledges, thereby breaching his duties as the CFO of the Company.

Applicable principles

In determining whether to make and how to determine the length of a disqualification order, the Court has considered the following well-established principles under Re Long Success, [40]; Re First China Financial Network Holdings Ltd [2015] 5 HKLRD 530, [5]-[9]:

1.       The relevant conduct involves a sufficiently serious failure to satisfy the respondent’s duties that some period of disqualification is justified and fair;

2.       The purpose of imposing a disqualification is, first and foremost, protection of the public. Secondly, general deterrence;

3.       In determining the period of disqualification, the Court will adopt a broad-brush approach. The period of disqualification must reflect the gravity of the conduct. A starting point of assessment may be fixed by reference to the gravity of the conduct, with a discount given for any mitigating factors; 

4.       There are starting points within brackets which had been identified by previous authorities as guidelines. The brackets are (i) over 10 years for particularly serious cases, (ii) below 5 years for relatively less serious cases, and (iii) between 6 and 10 years for cases in between; 

5.       The Court will have regard to a wider range of considerations including the age, state of health and character of the offender, the nature of the breaches, the honesty and competence of the offender, the length of time he has been in jeopardy, whether he appreciates and/or admits the breaches, his general conduct before and after the offence, the periods of disqualification of his co-directors that may have been ordered by other courts, and the interests of shareholders, creditors and employees.

Analysis

The Court was of the view that although the CFO’s culpability may be said to be limited to gross negligence or incompetence, the fact that it is a bad case of such type should not be overlooked. There is no excuse for a man occupying the important position of CFO of a listed company not to have discharged his duties to the Company so that the interest of the innocent investing public may be safeguarded. Yet the Court accepted the submission that the CFO, with his co-operative attitude, has shown real remorse for his failings, and hence should be given an opportunity to put this episode behind him and to start afresh. The Court therefore made a disqualification order of 2 years as sought against the CFO.

Conclusion

It is noted that the proceedings against the 1^st to 3^rd Respondents are still ongoing. While it is a general misconception that the regulators may only pursue a disqualification order or take disciplinary actions against the directors of a listed company who committed misconduct or misfeasance, this case is an unequivocal reminder to all members of the senior management of listed companies that their misconduct or negligence in fulfilling their corporate governance duties may be equally liable as a director in the eye of the regulators.