In Securities and Futures Commission v. Lam Wo Ping and Others [2024] HKCFI 315, the Hong Kong Court of First Instance held that a former Chief Financial Officer and company secretary (the “CFO”) of Fuguiniao Co., Ltd. (a formerly listed company on the HKEx) (“Fuguiniao”) be disqualified from being a director, liquidator, or receiver or manager of the property or business, of Fuguiniao, or any corporation in Hong Kong or being involved in the management of Fuguiniao or any listed corporation in Hong Kong, for a period of two years.  Further, the CFO was ordered to pay HK$500,000, being the Securities and Futures Commission’s (the “SFC”) costs in the proceedings.

Background

This is a petition of the SFC filed on 20 December 2019 pursuant to section 214 of the Securities and Futures Ordinance against, among others, the CFO.  The SFC and the CFO have agreed to the summary disposal of this petition by way of Carecraft procedure.  The SFC and the CFO have agreed to a statement of fats no in dispute for the purposes of a Carecraft Settlement contains the relevant facts, the SFC’s case against the CFO, and the agreed disqualification (as described above) and that the CFO would pay the SFC’s costs of the proceedings in the sum of HK$500,000 by 6 March 2024.

The Petition is centred on a number of undisclosed transactions involving the Fuguiniao and four wholly owned subsidiaries (the “Group”), pursuant to which the Group provided deposit pledges in the total sum of about RMB 5,348.7 million (the “Pledges”):

1. 3 of the Pledges were used as security for credit facilities extended to Fuguiniao Group Ltd (the “Holdco”), a substantial shareholder of Fuguiniao which was owned by the founders;
2. 18 of the Pledges were executed in respect of 18 guarantee agreements entered into by 2 of the subsidiaries as security for credit facilities extended to 5 external parties with no apparent relationship with the Group other than such transactions;
3. 66 Pledges were executed in respect of credit facilities granted by 9 banks to (i) the 5 external parties; (ii) Holdco; and (iii) 6 other external parties (again 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 existence of any of the Pledges had not been disclosed in any of Fuguiniao’s Annual or Interim Reports published for the years 2013 to 2015.  In the premises, such Annual and Interim Reports contained false and misleading statements as to the existence of any of the Pledges. 

The CFO’s duties

The CFO agrees that he owed the duties to:

1. exercise reasonable care, skill and diligence in respect of the financial affairs of the Group;
2. be familiar with, monitor and manage the financial affairs and accounts of the Group, including any material transactions, significant deposit pledges and/or guarantee arrangements entered into by the Group;
3. keep and maintain a proper system of record keeping in respect of the financial affairs and accounts of the Group;
4. take reasonable care in ensuring the accuracy of the consolidated financial accounts of the Company and the accuracy of statements in respect of the Group’s financial affairs as published in the Company’s annual reports, interim reports, announcements and other public disclosures;
5. take reasonable steps to verify the aforesaid statements, make independent enquiries and exercise independent judgment in respect of the Group’s financial affairs; and
6. take reasonable care in ensuring proper compliance by the Company of the Listing Rules and in ensuring accuracy of Fuguiniao’s reply to the SFC.

CFO’s breach of his duties

It is agreed between the parties that the CFO acted in breach of his duties in that:

1. Prior to the auditors of Fuguiniao discovery in August 2016, the CFO did not have knowledge that any of the Pledges existed and/or that significant or any deposits of the Group had been pledged to various banks during his employment;
2. The CFO failed to ensure or verify the accuracy of the consolidated financial statements, annual reports, interim reports and other announcements of Fuguiniao during his appointment;
3. The CFO failed to ensure proper compliance by the Group with the Listing Rules and relevant disclosure requirements;
4. The CFO failed to ascertain or verify whether deposits of the Group were subject to pledges with banks;
5. The CFO assumed a limited role, failed to exercise independent judgment and failed to exercise due care and skill, in the preparation of Fuguiniao’s consolidated financial statements;
6. The CFO was not familiar with and did not have oversight of the Fuguiniao’s financial matters in the Mainland in abdication of his duties;
7. The CFO failed to successfully monitor the financial affairs of the Group, including its material transactions, significant deposit pledges and/or guarantee arrangements;
8. The CFO showed a serious lack of understanding of his role, responsibilities and duties as CFO of a listed company;
9. Even after the auditors of Fuguiniao first raised its concerns, the CFO accepted the representations of director and/or founders without taking sufficient steps to verify the accuracy of the same or the existence of the Pledges notwithstanding that the founders were in positions of conflict of interest; and
10. The CFO failed to follow up on the matter even after the existence of some of the Pledges was revealed in an investigations report published by external accountants on 17 November 2016.

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Alfred Leung, Partner

(E: alfredleung@hkytl.com; T: +852 3468 7202)

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