Introduction
In the landmark disqualification case Securities and Futures Commission v Chen Li-Jun & Others [2025] HKCFI 2024, the SFC secured 2–9-year director bans against four executives (comprising 1 financial manager, 2 executive directors, and 1 independent non-executive director (who was a member of the audit committee)) of a delisted GEM company. This ruling exposes the severe consequences of governance failures – and underscores why directors need professional legal defense.
| Role | Disqualification | Key Failures |
|---|---|---|
| Financial Manager | 9 years | Orchestrated dubious fund transfers (RMB 1.85B) |
| Executive Directors | 7 years each | Enabled chairman’s dominance; ignored fraud (HK$384M misappropriation) |
| INED/Audit Committee | 2 years | Failed to exercise independent oversight |
Breaches that triggered SFC action
HK$676.7M unpaid share subscriptions by controlling shareholder.
HK$384M diverted to unauthorized entity that was not the intended recipient, and using the sum for non-intended purposes.
RMB1.85B “pass-through” transactions with no commercial purpose.
HK$50M loan disguising a transfer to former chairman.
Legal issues
The SFC alleged that the respondents breached their fiduciary duties and other duties by:
- Failing to ensure proper oversight of the affairs of the Company and subsidiaries,
- Allowing the Company’s affairs to be dominated by certain individuals (e.g. the former chairman) for personal gain,
- Neglecting to identify or rectify misconduct (such as questionable transactions) and/or breach of duties by certain individuals (e.g. the former chairman),
- Failing to comply with the Listing Rules, particularly Rule 3.08, to fulfil fiduciary duties and duties of skill, care and diligence, and
- Failing to exercise independent judgment and supervision.
The SFC argued that the Company’s business was conducted in a manner involving defalcation, fraud, misfeasance, or misconduct, withholding information from shareholders, and causing unfair prejudice, under section 214 of the SFO.
Carecraft procedures
The respondents admitted liability based on undisputed facts set out in a Carecraft procedure. As a result, the Court imposed the disqualification orders.
Non-negotiable lessons for directors and companies
Challenge Dominant Figures or Face Bans
Lesson from Executive Directors’ 7-year bans: All boards MUST actively scrutinize controlling shareholders. Passive compliance could amount to personal liability.INEDs: Your Independence is Your Armor
The 2-year INED ban proves: Audit committees must demand evidence, reject rubber-stamping, and escalate red flags.Robust Internal Controls = Your First Line of Defense
Had the company implemented transaction monitoring and payment verification protocols, HK$1.1B+ in fraud could have been prevented.Document or Perish
SFC evidence relied on missing board minutes, unsigned contracts, and unverified transfers. Rule: No record = no defense.Delisting is Just the Start
The SFC pursued personal sanctions against directors. Regulatory exposure outlives corporate existence.
YTL LLP defense framework
1. Pre-Emptive Governance Fortification
Board Audits: Stress-test decisions against SFO and Listing Rule.
Control Systems: Design payment/transaction protocols with forensic-level verification.
INED Empowerment: Train audit committees to detect and challenge fraud markers.
2. SFC Investigation Defense – Before Bans Are Sought
Evidence Lockdown: Secure emails, minutes, and financial trails before the SFC subpoenas them.
Carecraft strategy: Negotiate undisputed fact frameworks to minimize disqualification terms.
3. Courtroom Defense Against Disqualification
Duty Breach Counter-evidence: Reconstruct decision trails proving diligence (e.g., dissent records, due diligence reports).
Sentencing Mitigation: Leverage remediation, cooperation, and compliance overhauls to reduce bans.
How YTL LLP Can Help
YTL LLP’s Regulatory Enforcement Team combines deep knowledge of the SFO and Listing Rules. Contact us before you become targeted by regulatory authorities.
[1] A Carecraft procedure is often used in Hong Kong for disqualification proceedings. The parties will set out the core facts that are not disputed between the parties in a schedule, on the basis that the case against the respondent(s) will be dealt with by the Court by way of a summary procedure. The Court will consider whether the relevant disqualification order should be made on this basis.
Tiffany Lee, Of Counsel
tiffanylee@hkytl.com; +852 3468 7038
Alfred Leung, Partner
alfredleung@hkytl.com; +852 3468 7202
This article is introductory in nature. Its content is current at the date of publication. It does not constitute legal advice and should not be relied upon as such. You should always obtain legal advice based on your specific circumstances before taking any action relating to matters covered by this article. Some information may have been obtained from external sources, and we cannot guarantee the accuracy or currency of any such informatiowhen
