Directors – listed company – disqualification – breaches of duty by chairman and non-executive directors – arising from contracts between listed company and holding company/affiliates also controlled by chairman – included failure to take proper steps to recover outstanding receivables – very serious breach by chairman involving conflict of interests – appropriate length of disqualification
R1 was the founder and still was the ultimate controller of H, the holding company of C, a company listed in Hong Kong. Between May 2014 and May 2016, R1 was C’s chairman and executive director. R2–5 were independent non-executive directors of C and members of its Audit Committee. C, through its subsidiaries, entered into agreements involving its solar energy business, including sales contracts, with H and its subsidiaries or affiliated companies (“Affiliates”). The Securities and Futures Commission (the “SFC”) sought disqualification orders against Rs under s. 214 of the Securities and Futures Ordinance (Cap. 571) alleging that inter alia Rs failed to take proper steps to obtain repayment of outstanding receivables from H and Affiliates under the contracts and to inform C’s shareholders they were overdue; Rs failed to properly report on or conduct due diligence on H and Affiliates’ financial position; Rs failed to act as a reasonable board would have done, continuing to place orders with H and Affiliates and making substantial prepayments to them, despite their persistent failure to meet C’s orders; and R1 consented to a loan of RMB 900 million by one of C’s subsidiaries to H, which was “misstated” in H’s books as a loan to a supplier. The SFC and Rs agreed to dispose of the application under the Carecraft procedure based on an agreed statement of facts and proposed disqualification orders against Rs, save as to the length of disqualification. R1 agreed to procure H and/or Affiliates to pay all receivables due to C within two years from the date of the order.
Held, ruling that:
- R1’s breaches of duty were very serious, given his position as the Chairman and an executor director of C and the ultimate controller of both C and the counterparties, (ie, Holding and Affiliates), giving rise to a patent and serious conflict of interests; the very substantial amounts of receivables involved; and the period of time involved. R1 plainly preferred the interests of H and Affiliates to those of C. He stood to benefit from the impugned transactions and failed to take proper steps to recover outstanding receivables from Holding and Affiliates.
- R1’s conduct fell within the top end of the middle bracket of six to 10 years’ disqualification. However, his agreement to give a personal guarantee and to charge 1.367 million shares in C owned or controlled by him as security for the outstanding receivables; his cooperation with the SFC; and his agreement to dispose of the proceedings by the Carecraft procedure and to pay the SFC’s costs were mitigating factors. Overall, a disqualification period of 8 years was appropriate.
- As for R2–4, although they owed a lower duty of care than R1 or other executive directors, they nevertheless had a duty to exercise reasonable skill and care and independent judgment, oversee the conduct of the management and protect the interests of C’s shareholders. Their incompetence and marked indifference to or disinterest in their responsibilities as directors and the interests of C’s public shareholders placed them in the middle to top end of the minimum bracket. Like R1, their cooperation with the SFC; their agreement to resolve the petition by the Carecraft procedure and to pay the SFC’s costs were mitigating factors. Overall, a disqualification period of 4 years for each of R2–3; and of three years for each of D4–5 (taking into account the longer period of default by R2–3) was appropriate.