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A A
CACV 91/2010
B B
IN THE HIGH COURT OF THE
C C
HONG KONG SPECIAL ADMINISTRATIVE REGION
D COURT OF APPEAL D
CIVIL APPEAL NO. 91 OF 2010
E E
(ON APPEAL FROM HCMP NO. 1869 OF 2008)
F F
G BETWEEN G
SECURITIES AND FUTURES Petitioner/Respondent
H H
COMMISSION
I I
and
J CHEUNG KENG CHING 1st Respondent/1st Appellant J
K CHOU MEI 2nd Respondent/2nd Appellant K
L LAU KA MAN, KEVIN 3rd Respondent L
M
RONTEX INTERNATIONAL 4th Respondent M
HOLDINGS LIMITED
N N
O
Before: Hon Tang Acting CJHC, Fok JA and Chu J in Court O
Date of Hearing: 4 May 2011
P P
Date of Handing Down Judgment: 16 May 2011
Q Q
JUDGMENT
R R
Hon Tang Acting CJHC:
S S
T 1. I have had the advantage of reading Fok JA‟s judgment in draft. I T
am in complete agreement with his reasons and the orders he proposes.
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Hon Fok JA:
B B
C Introduction C
D 2. This appeal arises out of directors‟ disqualification proceedings D
brought by the Securities and Futures Commission (“the SFC”) in relation to the
E E
affairs of Rontex International Holdings Limited (“the Company”).
F F
3. Until the abandonment of certain issues at the commencement of
G G
the hearing before us, the 1st and 2nd appellants sought to challenge:
H H
(1) the Judge‟s exercise of discretion, when directing the Company to
I commence civil proceedings against its former directors under I
section 214(2)(b) and/or (e) of the Securities and Futures
J J
Ordinance, Cap. 571 (“the Ordinance”), to require that any
K compromise of the civil proceedings so commenced be subject to K
the approval of the court;
L L
(2) the Judge‟s jurisdiction to make orders (a) requiring reports
M M
concerning the prosecution of the proceedings in question to be
N submitted by the Company to the SFC, and (b) giving liberty to the N
SFC to apply to the court for further directions as to the conduct of
O O
those proceedings;
P P
(3) the length of the disqualification orders made against them; and
Q Q
(4) the Judge‟s costs order.
R R
4. At the commencement of the hearing, Mr Paul Shieh SC, leading
S S
counsel for the 1st and 2nd appellants, informed the court that his clients no
T longer pursued their appeals against the orders requiring reports concerning the T
prosecution of the proceedings directed to be pursued by the Company to be
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submitted to the SFC and giving liberty to the SFC to apply to the court for
B B
further directions as to the conduct of those proceedings, and the costs order (i.e.
C sub-paragraphs (2) and (4) above), and that the 1st appellant no longer sought to C
appeal against the length of the disqualification order made against him (i.e.
D D
sub-paragraph (3) above).
E E
5. The hearing of the appeal was therefore limited to:
F F
(1) The appeal against the court‟s exercise of discretion, when
G G
directing the Company to commence civil proceedings against its
H former directors, to require that any compromise of those H
proceedings so commenced be subject to the approval of the court;
I I
and
J J
(2) The appeal against the length of the disqualification order made
K against the 2nd appellant. K
L L
6. In addition to the abandonment of parts of the appeal, Mr Shieh
M also informed the court at the commencement of the hearing that the 1st and M
2nd appellants did not oppose the SFC‟s application by summons dated 18 April
N N
2011 seeking to adduce further evidence on the appeal, the substance and
O relevance of which I shall refer to below. O
P Background facts P
Q Q
7. The proceedings below were brought by way of petition by the
R SFC under section 214 of the Securities and Futures Ordinance, Cap. 571 (“the R
Ordinance”) against three former directors of the Company and against the
S S
Company itself. The 1st respondent (1st appellant in this appeal) was the
T founder of the group of companies of which the Company was the holding T
company and the chairman of the Company, responsible for overall business
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strategy and merchandising functions of the group. The 2nd respondent
B B
(2nd appellant in this appeal) is the wife of the 1st respondent and was the
C co-founder of the group, responsible for the procurement functions of the group. C
The third respondent was responsible for the financial management and
D D
corporate finance matters of the group. Since the 1st and 2nd appellants in this
E appeal have been referred to in the papers throughout as the 1st and E
2nd respondents, I shall continue to refer to them as such.
F F
G 8. The proceedings arose out of four questionable transactions: G
H (1) The first transaction concerned the acquisition by the Company of H
shares in Grandtop International Holdings Limited (“Grandtop”).
I I
These shares were acquired at a 45% premium over the then
J prevailing trading price. The SFC‟s complaints, in summary, J
were that: there was no sensible commercial reason justifying the
K K
acquisition of the Grandtop shares at a substantial premium; the
L acquisition constituted a marked departure from the investment L
policy stated in the Company‟s listing prospectus; and, false
M M
information about the price paid to the acquisition of the shares
N was given in the Company‟s internal records. N
O (2) The second transaction concerned the acquisition by the Company O
of an equity interest in Macau Asia Investments Limited
P P
(“MAIL”). The SFC‟s complaints, in summary, were that: there
Q was no due diligence done before the acquisition; the management Q
had no clue of the value of the investment or of the way to realise
R R
that investment; the management gave false estimations for its
S S
decision to invest in the MAIL share option; this acquisition also
T
constituted a marked departure from the investment policy stated in T
the Company‟s listing prospectus; and no disclosure was given in
U U
relation to such a position in breach of the Listing Rules.
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(3) The third transaction concerned the making of payments by the
B B
Company to a Mr Wan Lin, a PRC citizen. The SFC‟s
C complaints, in summary, were that: the payments were made C
without proper approval by the board; no safeguards were imposed
D D
to ensure proper use of such payments; Mr Wan was permitted to
E use them without paying any interest to the Company; and no E
disclosure was given in relation to the making of such payments in
F F
breach of the Listing Rules.
G G
(4) The fourth transaction concerned an investment by the Company in
H Beijing Kut Ka Lok Fashion Apparels Limited (“KKL Fashion”). H
I
The SFC‟s complaints, in summary, were that: the advance of I
loans by the Company to KKL Fashion was made without proper
J J
approval by the board; there was no due diligence done before the
K
investment; and there was failure to exercise due care in seeking K
full recovery when the Company decided to withdraw from the
L L
investment.
M M
The proceedings below and the Judge’s order
N N
9. In the court below, as recorded by the Judge, none of the
O O
respondents challenged or disputed any of the evidence adduced on behalf of
P the SFC. None of them called any witnesses or evidence and none of the P
witnesses called by the SFC were questioned on behalf of any of the
Q Q
respondents. None of the director respondents challenged the making of an
R order of disqualification from being a director and the Company did not R
challenge the order directing the commencement of proceedings by it against
S S
the three director respondents.
T T
10. The 3rd respondent agreed to the action being disposed of against
U U
him summarily by way of the “Carecraft” procedure. The agreed schedule
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containing an outline of the case against him, as amended in the course of the
B B
hearing, was incorporated by the Judge into his judgment. Although that
C procedure was not adopted for the 1st and 2nd respondents, the schedule C
provided all the necessary background and factual details concerning the four
D D
transactions in issue which were also relevant to the SFC‟s petition against the
E 1st and 2nd respondents and the Company and which were not challenged by E
them.
F F
G 11. After setting out the Carecraft schedule, the Judge ordered that the G
3rd respondent should not, for a period of four years from the date of the order,
H H
without leave of the court: (1) be or continue to be a director, liquidator,
I receiver or manager of the property or business of the Company or any other I
corporation or their subsidiaries or affiliates, or (2) in any way, whether directly
J J
or indirectly, be concerned or take part in the management of the Company or
K any other corporation or their subsidiaries or affiliates. K
L L
12. In respect of the 1st and 2nd respondents, the Judge accepted the
M evidence brought in support of the petition against them and adopted the M
contents of the Carecraft schedule in respect of the background information and
N N
each of the four transactions in question.
O O
13. Specifically in respect of the first transaction, the Judge held that
P the following complaints of the SFC against the 1st and 2nd respondents were P
made out, namely:
Q Q
“(1) The acquisition of the Grandtop shares at a 45% premium over
R the prevailing trading price was against the Company‟s interest R
and constituted „misfeasance‟, „misconduct‟, „defalcation‟
S and/or „unfair prejudice‟ under section 213(1)(b) and (d). S
(2) The signing of the relevant bought and sold notes by the
T 3rd Respondent and the relevant board minutes by the 1st and T
2nd Respondents, both of which understated the actual
purchase price paid for the acquisition, constituted
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„misfeasance‟ and/or „misconduct‟ under section 214(1)(b), and
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that in relation to the acquisition of a total of 3,620,000
B Grandtop shares under the 1st and 2nd acquisitions, the failure B
to invest the Company‟s funds in accordance with the statement
contained in the Prospectus, the failure to support the
C C
Company‟s investment with sound commercial reasons and the
failure to review the Company‟s investment policy constituted
D „misfeasance‟, „misconduct‟ and/or „unfair prejudice‟ under D
section 214(1)(b) and (d).”1
E E
14. Specifically in respect of the second transaction, the Judge held
F that the following complaints of the SFC against the 1st and 2nd respondents F
were made out, namely:
G G
“First, the MAIL Acquisition constituted a „misfeasance‟,
H „misconduct‟ and „defalcation‟ under section 214(1)(b) in that: H
(1) The Respondents failed to carry out any due diligence exercise;
I I
(2) The Respondents did not even know the percentage of the
J
shareholding in MAIL represented by the 10,000,000 MAIL J
shares acquired by the Company (through Magic Ace);
K (3) The Respondents had little idea as to how the MAIL shares K
could be sold in the market and they also did not keep track of
the market value of the shares; and
L L
(4) The Respondents failed to act honestly and candidly in relation
M
to the MAIL Acquisition. M
Second, the making of the MAIL Acquisition was contrary to the
N Company‟s commitment contained in the Prospectus that its N
investment in listed equity securities would be confined to „balanced
investment portfolio‟ of „high-quality listed equity securities‟. It,
O therefore, constituted „unfair prejudice‟ under section 214(1)(d). O
P
Third, the MAIL Acquisition was a disclosable transaction under P
Chapter 14 of the Listing Rules. The failure to make proper
disclosure of the MAIL Acquisition resulted in its members „not being
Q given full information‟ under section 214(1)(C).”2 Q
R 15. Specifically in respect of the third transaction, the Judge held that R
the following complaints of the SFC against the 1st and 2nd respondents were
S S
made out, namely:
T T
1
U Judgment §22. U
2
Judgment §24.
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“First, the Wan Payments constituted a „misfeasance‟, „misconduct‟
B and „defalcation‟ under section 214(1)(b) in that: B
(1) No board resolution was adopted by the Company to approve
C C
the payment of additional sums of HK$3,000,000 and
HK$6,520,000 to Wan;
D D
(2) No safeguards were imposed by the Company to ensure the
return of monies by Wan should the intended acquisition fall
E through; E
(3) No requirement was imposed on Wan to pay interest or put the
F F
monies into interest-bearing account(s) and the Company was
thereby deprived of income from interest deriving from those
G monies for a substantial period of time. G
Second, the Wan Payments also constituted „an unfair prejudice‟ under
H section 214(1)(d), in that Wan was given substantial sums of money H
without being required to pay interest to the Company or depositing
the same into an interest-bearing account for the benefit of the
I I
Company.
J Third, the initial payment of HK$18,200,000 to Wan was a disclosable J
transaction under Chapter 13 of the Listing Rules. The failure to
make proper disclosure of such payment to Wan resulted in its
K members „not being given full information‟ under section 214(1)(c).”3 K
L 16. Specifically in respect of the fourth transaction, the Judge held that L
the following complaints of the SFC against the 1st and 2nd respondents were
M M
made out, namely:
N N
“First, in relation to the advancement of loans to KKL Fashion, this
advance was not approved by any board resolution and it therefore
O constituted a „misfeasance‟, „misconduct‟ and/or „defalcation‟ under O
section 214(1)(b).
P P
Secondly, in relation to the decision to acquire an equity interest KKL
Fashion, the Company‟s management failed to exercise due and/or
Q reasonable care in making this decision in that they failed to conduct Q
any due diligence or to obtain proper advice from professional sources.
It, therefore, constituted a „misfeasance‟ and/or „misconduct‟ under
R R
section 214(1)(b).
S Thirdly, in relation to the Company‟s withdrawal from its investment S
in KKL Fashion, the Company‟s management failed to exercise due
and/or reasonable care and/or best endeavours in seeking full recovery
T from KKL Fashion and its shareholders. It, therefore, constituted T
„misfeasance‟ and/or „misconduct‟ under section 214(1)(b).
U U
3
Judgment §26.
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Fourthly, the conduct on the part of the Company‟s management in
B relation to the KKL Investment complained of constitutes „unfair B
prejudice‟ under section 214(1)(d).”4
C C
17. Having considered the submissions made on behalf of the SFC and
D the 1st and 2nd respondents, the Judge made an order that the 1st and D
2nd respondents should not (save and except in the case of RC Apparels
E E
Limited) for a period of five years from the date of the order, without leave of
F the court: (1) be or continue to be a director, liquidator, receiver or manager of F
the property or business of the Company or any other corporation or their
G G
subsidiaries or affiliates, or (2) in any way, whether directly or indirectly, be
H concerned or take part in the management of the Company or any other H
corporation or their subsidiaries or affiliates.
I I
J 18. In respect of the proceedings which the SFC sought to have the J
Company institute against the 1st, 2nd and 3rd respondents, the Judge made the
K K
following orders:
L L
“(3) The 4th Respondent do within 60 days from the date hereof
commence civil proceedings in its own name and at its own
M expense by way of a High Court Action against the 1st, 2nd and M
3rd Respondents to seek the recovery of compensation for the
N
loss and damage as prayed for in the Amended Petition filed in N
these proceedings.
O (4) The 4th Respondent shall have conduct of such civil O
proceedings commenced against the 1st, 2nd and
3rd Respondents and shall have authority to enter into
P mediation, compromise, settle and/or abandon such P
proceedings, subject to obtaining from the court approval so to
Q do. Q
(5) The 4th Respondent and any party to such civil proceedings are
R for the purposes of such proceedings at liberty to rely on or R
refer to all or any affirmations, statements, records of interview
and other documents filed and/or otherwise disclosed by the
S S
parties in these proceedings.
T (6) Without prejudice to the generality of the foregoing, the T
4th Respondent and any party to such civil proceedings shall
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4
Judgment §27.
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for the purposes of such proceedings be entitled to rely on and
B refer to the admissions or concessions made by the B
3rd Respondent and the underlying documents referred to in the
Schedule of Facts Not in Dispute in Part B of his Schedule for
C C
Carecraft Procedure.
D (7) For the avoidance of doubt, the directions in paragraphs 5 and 6 D
above are made on the basis that the court hearing the said civil
proceedings retains the jurisdiction to determine the
E admissibility of and weight to be attached at trial to such E
affirmations, statements, records of interview and other
F
documents filed and/or otherwise disclosed by the parties and F
the 3rd Respondent‟s Carecraft Schedule in these proceedings.
G (8) The 4th Respondent shall submit to the Petitioner herein a G
quarterly report commencing three months from the date of the
issue of the writ as to the steps it has taken, and the steps it
H intends to take in pursuance of the legal proceedings and with a H
view to obtaining a judgment in such proceedings as
I expeditiously as is reasonably possible. I
(9) The Petitioner and the 4th Respondent shall have liberty to
J apply to the court for the purposes of seeking further directions J
as to the conduct of the legal proceedings hereby ordered to be
commenced with reasonable notice to the other parties.”
K K
19. By a separate judgment following the receipt of written
L L
submissions from the parties on the issue of costs, the Judge made the following
M order as to costs: M
N “(1) As between the petitioner and the 4th respondent there shall be N
no order as to costs.
O O
(2) 80% of the petitioner‟s costs shall be paid by the 1st, 2nd and
3rd respondents.
P P
(3) Of those costs the 1st and 2nd respondents shall be jointly and
severally liable for 80% and the 3rd respondent 20%.
Q Q
(4) The 4th respondent‟s costs shall be paid by the 1st, 2nd and
3rd respondents in the same proportions as in (3) above.
R R
(5) The petitioner‟s application for a certificate for 2 counsel is
S granted.” S
T T
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The issues in this appeal
B B
C 20. As indicated in the introduction above, the issues in this appeal C
were limited to two issues, namely as to:
D D
(1) the Judge‟s exercise of his discretion in ordering that the Company
E E
must obtain the sanction of the court to enter into mediation,
F compromise, settlement or abandonment of the civil proceedings; F
and
G G
(2) the length of the disqualification order imposed on the
H H
2nd respondent.
I I
The further evidence on appeal
J J
21. Before addressing those issues, it is convenient to refer to the
K K
further evidence adduced by the SFC on this appeal. As noted above, the 1st
L and 2nd respondents did not oppose the SFC‟s summons to adduce this L
evidence and so an order in terms of the summons will follow. The further
M M
evidence consisted of an affirmation from Ms Leung So Ching, an Associate
N Director of the Enforcement Division of the SFC, in which she set out N
up-to-date information about the progress of the civil proceedings which the
O O
Company was ordered to commence against the 1st, 2nd and 3rd respondents.
P P
22. In summary, the up-to-date position in respect of those civil
Q Q
proceedings is as follows:
R R
(1) On 29 April 2010, following the issue by the Company of demand
S letters to the 1st, 2nd and 3rd respondents, the 1st and S
2nd respondents asked for mediation.
T T
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(2) On 15 May 2010, a writ was issued in HCA 706/2010 against the
B B
1st, 2nd and 3rd respondents for loss and damages in the total sum
C of HK$18,980,000. C
D (3) On 31 May 2010, a mediation meeting was held and, following D
further negotiations, the parties reached an agreement to settle the
E E
Company‟s claim at HK$10,500,000, subject to the court‟s
F approval. F
G (4) A hearing of a consent summons for the approval of the settlement G
on 27 July 2010 was adjourned for counsel for the Company to
H H
supplement his advice regarding the settlement in respect of
I I
various matters.
J J
(5) On 14 August 2010, the Company‟s solicitors provided the SFC
K
with a first report on the proceedings, which contained the matters K
set out in sub-paragraphs (1) to (4) above.
L L
(6) The consent summons for the approval of the settlement was
M M
restored for hearing on 29 September 2010 but the court did not
N approve the settlement and the consent summons was again N
adjourned.
O O
(7) At the hearing on 29 September 2010, the Master refused to
P P
approve the settlement and adjourned the summons again pending
Q the provision of information from counsel for the Company, as to Q
the following concerns of the Master:
R R
(a) the relationship between the present management of the
S S
Company and the 1st, 2nd and 3rd respondents;
T T
(b) the reason why the court in the section 214 proceedings had
U directed the Company to issue proceedings against its former U
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directors, rather than leaving the matter to the Company
B B
itself;
C C
(c) the risk that the claims in respect of the transactions for
D Grandtop shares and the MAIL share option would be D
regarded as being time-barred had not been substantiated;
E E
and
F F
(d) the risk of incurring further costs and the difficulty in
G recovering the same from the 1st, 2nd and 3rd respondents G
should the action proceed had not been substantiated.
H H
I
(8) On 15 November 2010, the Company‟s solicitors provided the SFC I
with a further report on the proceedings, which included the
J J
matters set out in sub-paragraph (6) above.
K K
(9) On 14 February 2011, the Company‟s solicitors provided the SFC
L
with a further report on the proceedings stating that Senior Counsel L
had been instructed to advise on the approval of the proposed
M M
settlement by the court.
N N
(10) On 12 April 2011, the Company‟s solicitors wrote to the SFC
O stating that the Company was advised by its Senior Counsel to O
conduct further investigations in order to consider restoring the
P P
application for approval of the proposed settlement.
Q Q
The requirement of court approval of settlement of the civil proceedings
R R
23. Section 214(2) of the Ordinance provides:
S S
“(2) If, on an application under this section, the Court of First
T Instance is of the opinion that the business or affairs of a T
corporation has been conducted in a manner described in
subsection (1)(a), (b), (c) or (d), whether through conduct
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consisting of an isolated act or a series of acts or any failure to
B act, the Court may – B
…
C C
(b) order that the Corporation shall bring in its name such
D proceedings as the Court considers appropriate against D
such persons, and on such terms, as may be specified in
the order;
E E
…
F (e) make any other order it considers appropriate, whether F
for regulating the conduct of the business or affairs of
G the corporation in future, or for the purchase of the G
shares of any members of the corporation by other
members of the corporation or by the corporation (and,
H in the case of the purchase by the corporation, for the H
reduction accordingly of the corporation‟s capital), or
otherwise.”
I I
[Emphasis added]
J 24. At paragraph 36 of his Judgment, the Judge said: J
K “I am satisfied that the orders I make in paragraph 41 of this K
judgment are permissible under sections 214(2)(b) and (e), Cap. 571.
L I am satisfied that expressions such as „and on such terms as may be L
specified in the order‟ and „may make any other order it considers
appropriate‟ are drafted in wide and flexible terms because they are
M intended to be construed in a wide and flexible way. Given that the M
SFC is a statutory regulatory body I do not agree that it is
objectionable, in proceedings such as this one, that it may maintain a
N N
supervisory role in future proceedings. Modest reporting
requirements are reasonable. A „liberty to apply‟ direction is sensible
O and a request that the court approves any proposed settlement is, in O
light of the history of events, a desirable and common sense safety
net.”
P P
25. It was not disputed that the Judge had jurisdiction to impose the
Q Q
order requiring approval of a settlement of the civil proceedings the Company
R was directed to commence against the 1st, 2nd and 3rd respondents. It was, R
however, the 1st and 2nd respondents‟ case on this appeal that the Judge was
S S
wrong to exercise his discretion to make such an order. As such, it is trite that
T the 1st and 2nd respondents must show that the Judge has gone clearly wrong or T
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made some mistake as to the evidence or as to the law which would enable this
B B
court to set aside the order which has been made.
C C
26. It was submitted on behalf of the 1st and 2nd respondents that there
D D
was no evidence to sustain the Judge‟s exercise of discretion to order the
E requirement of court approval of any settlement of the civil proceedings. E
Mr Shieh referred to the fact that, by 2 July 2008, the 1st and 2nd respondents
F F
had disposed of almost all of their shares in the Company to a third party,
G namely Plenty Holdings Limited (“Plenty”). The petition, which was issued G
on 25 September 2008 disclosed that, on 3 September 2007, the 1st and
H H
2nd respondents, through Star Master International Limited (“Star Master”),
I through which they held their shares in the Company, sold 62 million shares I
in the Company in the market, thereby reducing Star Master‟s shareholding in
J J
the Company to below 50%. Then, on 15 October 2007, Star Master granted
K an option to Plenty Holdings Limited (“Plenty”) to purchase 820 million shares K
in the Company, which option was exercised and resulted in the transfer of
L L
those shares to Plenty on 2 July 2008. After that transfer, Star Master only
M held 1.01% of the shares of the Company. M
N N
27. Mr Shieh submitted that prima facie the Company is sui juris and
O ought to be allowed to pursue the civil proceedings at the discretion of the O
current board. There was no plea or evidence that the current board is in
P P
cahoots with the 1st and 2nd respondents, who resigned as directors on
Q 12 November 2008, or under their influence. On the contrary, he referred to a Q
public announcement made by the Company which showed that the board
R R
resolved on 8 October 2008 to establish a Special Review Committee to review
S the transactions raised in the section 214 petition. S
T
28. Whilst I agree with Mr Shieh‟s submission that the mere making of T
U
an order directing a company to bring proceedings under section 214(2)(b) of U
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the Ordinance cannot, as a matter of default, require directions as to court
B B
supervision of those proceedings, it is clear from the Judgment that the Judge
C did not take this approach. At §38 of the Judgment he said: C
D “It should be emphasized however that such directions should D
be considered on a case by case basis. In each case the court must
consider what is necessary, permissible and appropriate. Accordingly
E E
the directions I make later in this judgment are, in the judgment of this
court, proper and necessary in the particular context of this case.”
F F
29. Furthermore, I do not agree that there was a lack of evidential basis
G G
for the exercise of the Judge‟s discretion to direct that any settlement of the civil
H proceedings the Company was ordered to commence be subject to court H
approval.
I I
30. Given its timing, there was clearly a question over whether the sale
J J
of the 1st and 2nd respondents‟ interest in the Company, through Star Master, to
K Plenty was an arms‟ length transaction. If Plenty had conducted due diligence K
in respect of the Company, it is to be expected that the claims against the former
L L
directors would have come to light. If so, one would expect them to be
M pursued by Plenty. If due diligence was not conducted, it begs the question as M
to why this was not done.
N N
O 31. Furthermore, notwithstanding the establishment of the Special O
Review Committee on 8 October 2008, the only further announcement by the
P P
Company was made on 13 August 2009 in which it was stated that the Special
Q Review Committee was still in the course of reviewing the transactions and Q
would make a further announcement “if and when appropriate”. The evidence
R R
before the Judge was therefore that, apart from establishing the Special Review
S Committee, the Company had not done anything even to assert any claim S
against the 1st and 2nd respondents as at the time of the hearing of the petition.
T T
Clearly, this was a case in which the Company was, at best, slow, if not actually
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reluctant, to seek compensation for its losses caused by the actions of its former
B B
directors.
C C
32. The Company had to be ordered under section 214(2)(b) of the
D D
Ordinance to commence proceedings to seek such compensation from the 1st,
E 2nd and 3rd respondents and, in those circumstances, the proceedings cannot be E
regarded as ordinary litigation but, rather, was litigation directed by the court
F F
specifically for the protection of the shareholders of the Company.
G G
33. All this was material on which, in my opinion, the Judge was
H entitled to, and did, exercise his discretion to make the order requiring court H
I
approval of any settlement of the proceedings ordered to be brought by the I
Company. I do not therefore agree with Mr Shieh‟s characterisation of the
J J
Judge‟s reference to the history of events as being “nebulous”. Nor do I agree
K
with the submission that these matters were not sufficiently raised before the K
Judge at the time of the hearing of the petition or that the Company did not have
L L
a chance to deal with them by evidence in response. It was clear from the
M pre-hearing correspondence between the parties regarding the Carecraft M
procedure that the SFC was seeking directions for any proceedings by the
N N
Company against its former directors to be subject to some form of independent
O oversight. It was therefore open to any of the respondents to the petition to file O
evidence to explain why such directions were not required.
P P
34. In my opinion, there is no basis for interfering with the Judge‟s
Q Q
exercise of discretion to make the sanction order. It is therefore not necessary
R to go on to consider whether, if this court had to exercise a fresh discretion, it R
would make the sanction order in any event. However, in this regard, it is
S S
relevant to note that the events disclosed by the further evidence since the
T T
hearing before the Judge below reinforce, in my opinion, the appropriateness of
U
the order requiring sanction of any settlement since it now appears that the 1st U
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and 2nd respondents are seeking to compromise the claim for $18.98 million,
B B
excluding interest, by a payment of $10.5 million, which is apparently inclusive
C of interest. C
D D
35. I would add in conclusion on this issue that the question of whether
E the proposed settlement, or indeed any other settlement that may be proposed by E
way of compromise of the Company‟s proceedings against its former directors,
F F
is not before this court on this appeal. That remains a matter for the Master
G and the questions raised by him at the hearing on 29 September 2011 do not go G
to the question of whether the sanction order should have been made but rather
H H
go to the different question of whether the proposed settlement should be
I approved. I
J J
The length of the disqualification orders
K K
36. The Judge referred to Re Sevenoaks Stationers (Retail) Ltd [1990]
L BCC 765, in which the potential maximum 15 year period of disqualification L
under the section 6 of the Company Directors Disqualification Act 1986 was
M M
divided into three brackets (see per Dillon LJ at p. 174E-G) namely:
N N
(1) The top bracket of over 10 years, reserved for particularly serious
O cases; these may include cases where a director who has already O
had one period of disqualification imposed on him falls to be
P P
disqualified again.
Q Q
(2) The minimum bracket of 2 to 5 years (in Hong Kong, the statutory
R minimum is 1 year), applicable to cases where although R
disqualification is mandatory, they are, relatively, not very serious.
S S
T
(3) The middle bracket of 6 to 10 years, applicable to serious cases T
which do not merit the top bracket.
U U
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37. These “brackets” have been applied in a number of cases in Hong
B B
Kong (see e.g. SFC v Fung Chiu & ors [2009] 2 HKC 19 at §14 and Re Styland
C Holdings Ltd [2011] 1 HKLRD 96 at §13) and it is accepted on behalf of the 1st C
and 2nd respondents that these brackets are applicable to a disqualification
D D
order under section 214(2)(d) of the Ordinance.
E E
38. In making a disqualification order against the 2nd respondent of
F F
5 years, therefore, the Judge considered the 1st and 2nd respondents‟ conduct to
G merit being placed at the top end of the minimum bracket. G
H 39. The imposition of a period of disqualification under H
I
section 214(2)(d) of the Ordinance is an exercise of judicial discretion. I
Accordingly, an appellate court will only interfere with the period of
J J
disqualification imposed in accordance with the usual, well-established
K
principles concerning the circumstances in which the court will intervene in a K
judge‟s exercise of discretion vested in him. There is ample authority for this
L L
proposition in respect of the English statutory provisions governing
M disqualification orders (see Re Swift 736 Ltd [1993] BCLC 896 at 897d-e, M
Secretary of State for Trade and Industry v McTighe & anor (No. 2) [1996] 2
N N
BCLC 477 at 485f-486a and Re Westmid Packing Services Ltd [1998] 2
O BCLC 646 at 653g-654c) and the same approach should govern appeals in O
respect of disqualification orders under section 214(2)(d) of the Ordinance.
P P
40. In the written submissions of the 1st and 2nd respondents, it was
Q Q
noted that there was no allegation of fraud or dishonesty against them raised by
R the SFC. It is also said that there was no element of self-benefit, since one of R
the four transactions did not even result in any alleged loss to the Company. In
S S
respect of the 2nd respondent, it was submitted that, in the light of her lesser
T T
and more passive role in the affairs of the Company, disqualification for a
U
period of 2 years would be appropriate. U
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41. In view of the findings made by the Judge in respect of the four
B B
transactions in question (summarised above), I cannot see any basis to fault the
C Judge‟s decision to impose a disqualification order of 5 years on the C
2nd respondent, subject to the question of differentiation between the
D D
respondents (addressed below). Notwithstanding the fact that there was no
E allegation of fraud in the SFC‟s amended petition, the facts found by the Judge E
clearly demonstrate a marked degree of incompetence, dereliction of duty and
F F
lack of corporate governance over a substantial period of time. Four factors
G may be stressed: G
H (1) This was not a case involving a single incident of the business or H
I
affairs of the Company being conducted in a manner described in I
section 214(1)(a), (b), (c) or (d) of the Ordinance; instead, there
J J
were four transactions giving rise to findings of such conduct.
K K
(2) The transactions resulted in losses to the Company of a substantial
L sum of money, namely $18.98 million. L
M (3) The losses resulted from a deliberate departure from the M
Company‟s Prospectus for its public offering dated 28 October
N N
2002 in which the principal business of the group was stated to be
O “the sourcing, manufacture and sale of garments to countries in O
South America and the trading of a variety of items … to countries
P P
in South America and Canada” and in which the group‟s future
Q plans were stated to be “to expand its production facilities and to Q
explore new markets for its garments such as Japan and European
R R
countries.” The transactions giving rise to the losses were also
S inconsistent with the statement in the Prospectus that “in the long S
term, a balanced investment portfolio of the Group‟s surplus funds
T T
should include investments in high-quality listed equity securities
U from the worldwide stock markets.” U
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(4) At the time of the questionable transactions, the 2nd respondent
B B
was an executive director of the Company, responsible for the
C procurement functions of the group, and she owned 50% of Star C
Master, which held the majority stake in the Company. She
D D
contributed to the occurrence of those transactions by signing
E relevant board resolutions. E
F F
42. I would accept that the absence of illicit gain and dishonesty justify
G keeping the 2nd respondent‟s case out of the middle bracket and, having regard G
to the periods of disqualification imposed in SFC v Fung Chiu & ors (see
H H
§§13-15) and Re Styland Holdings Ltd (see §14), I would consider that placing
I the 2nd respondent‟s case (when viewed on its own) at the top end of the lower I
bracket was appropriate and that the imposition of a disqualification order of
J J
5 years could not be faulted as an exercise of judicial discretion. For my own
K part, I would consider a 5 year disqualification order to be appropriate and the K
suggested period of disqualification of 2 years would, in my view, be
L L
inadequate.
M M
43. However, in considering the appropriateness of the period of the
N N
disqualification order made in respect of the 2nd respondent, it is relevant, albeit
O not decisive, to have regard to the periods of disqualification also imposed on O
the 1st and 3rd respondents in respect of the same transactions. The roles of
P P
the three directors as pleaded in the petition were clearly different. As noted
Q above, the Judge imposed disqualification orders of 5 years and 4 years Q
respectively on them. He therefore equated the blameworthiness of the
R R
2nd respondent with that of the 1st respondent and discounted the culpability of
S the 3rd respondent from that of both the 1st and 2nd respondents. No S
cross-appeal has been made in respect of the 5 year period of disqualification
T T
imposed on the 1st respondent.
U U
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44. I would accept that there are grounds for discounting the
B B
culpability of the 3rd respondent from that of the 1st respondent in that, first,
C although a director of the Company, he was in effect a salaried employee and, C
secondly, he consented to the Carecraft procedure. But it was plainly the
D D
SFC‟s case that the 1st respondent husband was more culpable than his wife, the
E 2nd respondent, in respect of the four transactions in question. In the light of E
that greater culpability on the part of the 1st respondent, the lack of any
F F
differentiation made by the Judge between the 1st respondent and the
G 2nd respondent is, in my opinion, an error which justifies this court in G
interfering with his exercise of discretion in respect of the disqualification order
H H
imposed on the 2nd respondent.
I I
45. In my view, having regard to the disqualification order made in
J J
respect of the 1st respondent, against which, as noted, there is no cross-appeal,
K and in order fairly to reflect a differentiation of culpability between his case and K
that of the 2nd respondent, it would be appropriate to reduce the disqualification
L L
order imposed on the 2nd respondent to the same period of disqualification as
M that imposed on the 3rd respondent, namely 4 years and I would therefore allow M
the appeal of the 2nd respondent to that extent.
N N
O Conclusion and costs O
P 46. For the reasons set out above, I would allow the 2nd respondent‟s P
appeal to the extent of substituting the period of the disqualification order
Q Q
imposed on her by the Judge from 5 years to 4 years. The 1st and
R 2nd repsondents‟ appeal is otherwise dismissed. There will be an order in R
terms of the SFC‟s summons to adduce further evidence.
S S
T 47. As to costs, in view of the outcome of the appeal and the late T
abandonment of issues by the 1st and 2nd respondents, I consider that the SFC
U U
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should be entitled to an order of costs in its favour. To reflect the limited
B B
success of the 2nd respondent on the appeal, in respect of the period of her
C disqualification order, I would make an order nisi that the 1st and C
2nd respondents pay 75% of the costs of the SFC‟s costs of the appeal, to be
D D
taxed if not agreed.
E E
Hon Chu J:
F F
48. I agree.
G G
H H
I I
J J
(Robert Tang) (Joseph Fok) (Carlye Chu)
K Acting Chief Judge Justice of Appeal Judge of the K
High Court Court of First Instance
L L
M Mr John Scott SC and Mr Anson Wong, for the Petitioner/Respondent M
N
Mr Paul Shieh SC and Mr Jin Pao, instructed by Messrs Cheung & Yip, for the N
1st and 2nd Respondents/Appellants
O O
P P
Q Q
R R
S S
T T
U U
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