Overview and Background

This judgment, delivered by Deputy High Court Judge Wong on 18 July 2025, concerns a petition filed by the Securities and Futures Commission (SFC) on 1 March 2019 under section 214 of the Securities and Futures Ordinance (SFO), Cap. 571, seeking disqualification orders against Zhang Yuqing (the 3rd Respondent, “Zhang”), a former executive director and vice-chairman of Zhongda International Holdings Limited (“Zhongda” or “the Company”). Zhongda, a Bermuda-incorporated company listed on the Hong Kong Stock Exchange (Stock Code: 0909) until its delisting in 2019, operated in automobile equipment and bus manufacturing primarily in Mainland China. 

Zhang, responsible for the Group’s financial management, internal controls, and strategic planning in the Mainland, resigned on 7 September 2011. He did not participate in the proceedings or attend the trial. The SFC’s case focused on three complaints (“Complaints”) alleging Zhang’s breaches of director duties, leading to misconduct in Zhongda’s affairs. The SFC called five witnesses to verify interviews and documents, and the court made factual findings based on the evidence.

The other respondents (Xu Lian Guo and Xu Lian Kuan, the “Xu Brothers”) were Zhongda’s chairman and vice-chairman, respectively, but the judgment addressed only the petition against Zhang.

Key Facts and Complaints

Zhongda’s shares were suspended on 5 September 2011 due to the issues raised in the Complaints.

1. 1st Complaint: Unauthorized Transfer of Funds
   • On 14 June 2011, the Board resolved to transfer RMB 150 million (“Funds”) from Zhongda Automobiles (a subsidiary) to Zhongda’s Hong Kong accounts for debt repayment (“Funds Transfer Resolution”), signed by Zhang and others. The Xu Brothers were tasked with implementation.
   • The Funds were not transferred; instead, in July/August 2011, the Xu Brothers diverted them to companies they controlled (Zhongda Industrial and Zhongda Steel) (“Unauthorized Transfers”).
   • Zhang knew of the non-compliance by July 2011 (via discussions with Xu Lian Guo) but failed to report it to the Board until September 2011. The Board discovered the issue via audit confirmations in August 2011, leading to the Xu Brothers’ suspension and share trading halt.
2. 2nd Complaint: Purported Sale of 20% Shareholding
   • Zhongda held a 20% indirect interest in Zhongwei Bus (an associated company) via subsidiary Ausen.
   • On 15 July 2011, the Xu Brothers orchestrated a purported transfer of this interest to Zhongda Industrial for RMB 18.46 million (“Purported Sale”), at a substantial undervalue (Zhongwei Bus was valued at up to RMB 515 million based on 2010 audits and valuations).
   • No consideration was paid. The full Board (except the Xu Brothers and Zhang) learned of it in mid-2013. Zhang, a director of Zhongwei Bus until 15 July 2011 and involved in its financial oversight, failed to prevent or report it.
3. 3rd Complaint: Non-Disclosure in 2011 Interim Results
   • Zhongda’s 2011 Interim Results, approved by the Board (including Zhang) on 31 August 2011 and published the same day, complied with Listing Rules and Hong Kong Accounting Standard 34 (HKAS 34), requiring disclosure of material post-period events.
   • The results omitted the Unauthorized Transfers and Purported Sale (both pre-publication events) and falsely stated Zhongwei Bus as an associated company, rendering them misleading.

SFC’s Case Against Zhang

The SFC alleged Zhang breached his duties as a director (under common law and fiduciary principles) by:

• Failing to exercise skill, care, and diligence in financial management and internal controls, allowing him to prevent, detect, or report the Unauthorized Transfers and Purported Sale.
• Neglecting to timely disclose material information to the Board, enabling recovery or public announcements.
• Approving misleading 2011 Interim Results despite knowledge of the issues.

These breaches allegedly conducted Zhongda’s affairs in a manner involving misfeasance/misconduct, withholding information from members, and unfairly prejudicing shareholders, triggering section 214(1)(b)-(d) SFO.

Legal Analysis (Emphasis)

The court’s analysis centered on whether the SFC satisfied the three conditions for relief under section 214(1) SFO: (1) Zhongda was a listed corporation; (2) the complaints concerned its business/affairs; and (3) the conduct fell within subsections (b)-(d) (misfeasance/misconduct, non-disclosure of expected information, or unfair prejudice).

Applicable Principles (Drawn from Precedents):

• Citing SFC v Zheng Dunmu [2024] 2 HKLRD 688, the court outlined:
  • Section 214(1)(b) (Defalcation, Misfeasance, or Other Misconduct): “Defalcation” means misapplication of property; “misfeasance” is wrongful performance of a lawful act, overlapping with breaches of fiduciary duty or care/diligence (e.g., SFC v Yeung Chung Lung, HCMP 205/2013; SFC v Xu Jinpei [2023] HKCFI 2908). “Other misconduct” broadly covers improper behavior, mismanagement, or culpable neglect (Re DBA Telecommunication (Asia) Holdings Limited [2022] HKCFI 653; Re Long Success International (Holdings) Ltd [2021] HKCFI 624).
  • Directors’ duty of care, skill, and diligence requires exercising what a reasonably diligent person with expected knowledge/experience would (Re D’Jan of London Ltd [1993] BCC 646; Re Long Success, §31). This includes:
    • Acquiring/maintaining sufficient knowledge of company affairs (Re Copyright Ltd [2004] 2 HKLRD 113, §§34-35).
    • Supervising subsidiaries and delegated functions without total abrogation (Re Long Success, §32-33).
    • Breaches here constitute misfeasance/misconduct.
• Section 214(1)(c) (Non-Disclosure of Expected Information): Complementary to other subsections; covers misleading/false announcements or failure to publish accurate financials, as shareholders expect complete/accurate information (SFC v Yeung Chung Lung, §84; SFC v Li Wo Hing, HCMP 1023/2011; Re Shandong Molong Petroleum Machinery Company Limited [2021] HKCFI 497). Failure to disclose connected transactions triggers this (Re Styland Holdings Ltd (No 2) [2012] 2 HKLRD 325, §105).
• Section 214(1)(d) (Unfair Prejudice): No need for per se wrongful conduct; covers fraud to neglect. Assesses if conduct meets expectations of entrusted managers (Re Shandong Molong, §19(3); SFC v Fung Chiu [2009] 6 HKC 423, §22; Re Long Success, §39). Includes non-compliance with disclosure rules or misleading announcements (SFC v Kwok Wing, HCMP 3392/2013; SFC v Sound Global Ltd [2022] HKCFI 3025).

Application to Complaints:

• Conditions 1 and 2: Satisfied—Zhongda was listed, and complaints involved asset application and disclosure compliance.
• Condition 3 (By Complaint):
  • 1st Complaint: Zhang’s failure to prevent/report the Unauthorized Transfers (despite July 2011 knowledge) breached duties of care/diligence and supervision of subsidiaries. This constituted misfeasance/misconduct (s.214(1)(b)) and unfair prejudice (s.214(1)(d)). Explanations from Xu Lian Kuan (e.g., alleged loan security) did not excuse non-disclosure; Zhang’s duty was to inform the Board for reconsideration.
  • 2nd Complaint: Zhang ought to have known/prevented the Purported Sale (given his roles in Zhongwei Bus and financial oversight). Failure to report breached duties, amounting to misfeasance/misconduct (s.214(1)(b)) and unfair prejudice (s.214(1)(d)). As a connected transaction (Xu Brothers’ interest in beneficiary), non-disclosure triggered s.214(1)(c).
  • 3rd Complaint: Approving misleading 2011 Interim Results (omitting material events per HKAS 34) despite knowledge breached disclosure duties, triggering s.214(1)(c).

The court rejected potential defenses (e.g., Zhang being deceived), emphasizing his supervisory obligations.

Relief and Conclusion

Under section 214(2)(d) SFO, the court imposed a 6-year disqualification (lower end of middle bracket: 6-10 years for serious but not top-tier cases), citing SFC v Sound Global Ltd [2022] HKCFI 3025 principles: two-fold objective (public protection/deterrence); factors like breach nature (RMB 150 million Funds; undervalued shareholding), no personal benefit to Zhang, and broad-brush approach (brackets: >10 years top; 6-10 middle; <5 minimum). Orders included disqualification from directorships/management without leave (s.214(2)(d)(i)-(ii); Re Riverhill Holdings Ltd [2007] 4 HKLRD 46) and costs against Zhang.

link to the decision: (https://legalref.judiciary.hk/lrs/common/search/search_result_detail_frame.jsp?DIS=170607&QS=%2B%7C%28hcmp%2C283%2F2019%29&TP=JU)

Alfred Leung, Partner

alfredleung@hkytl.com; +852 3468 7202

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