Hong Kong: Securities Law - Disqualification Order Under The Securities And Futures Ordinance

Last Updated: 7 August 2009

Ong Hong Hoon ("Ong") was the executive director of GP NanoTechnology Group Limited, formerly known as Guang Ping NanoTechnology Group Limited (the "Company") previously listed on the Growth Enterprise Market ("GEM") of the Stock Exchange of Hong Kong Limited ("HKSE") and de-listed in June 2005. Ong was also the chief executive of the Company and its subsidiaries (the "Group") and had responsibility for the overall daily management of the Group.

The Securities and Futures Commission (the "SFC") sought an order under section 214(2)(d) of the Securities and Futures Ordinance, Cap 571 ("SFO") against the ex-executive directors of the Company including Ong to the effect that they shall not, without leave of the court, be or continue to be a director, liquidator, or receiver or manager of the property or business of any corporation, or in any way, whether directly or indirectly, be concerned in the management of any corporation for a period not exceeding 15 years ("Disqualification Order").

Ong consented to the disposal of the proceedings against him by way of a summary procedure known as the Carecraft procedure. He did not object to a disqualification period of 6 years, subject to the approval of the court.

Background

The Group was principally engaged in the manufacture and sale of nanomaterials for use as fillers in different industrial applications. Modern World Resources Limited ("Modern Word") was the substantial shareholder of the Company and beneficially owned by Wong Yau Ming ("Wong"). Although Wong was, on the face of the matter, the ultimate controlling shareholder of the Company, Cheung Long Chung ("Cheung") was, at all material times, the real de facto controller of the Company.

The executive directors of the Company, including Ong, at all material times, acted in relation to the business of the Company, under or in accordance with the directions or instructions of Cheung, who was neither a director or shareholder of the Company.

Cheung has a criminal record in Hong Kong for offences relating to false accounting for which he was sentenced to 7 years imprisonment in 1984 and was also a bankrupt but was discharged from bankruptcy in 1999.

Cheung was directly involved in the appointment of directors and maintained control over the finances of the Company and was a bank signatory of the bank accounts of the Company. Cheung was in fact a "shadow director" of the Company, who had effective control over the management of the Company at all material times.

In 2001, the Group entered into 5 questionable transactions resulting in substantial losses to the Group. The Company published two clarification announcements dated 14 January 2003 and 5 March 2003 ("Clarification Announcements") stating that for the 1st and 2nd transactions, the signing of the Letter of Intent and the Agency Agreement had been discussed and approved by the board and all the outstanding loans and advances due under the 3rd, 4th and 5th transactions had been fully recovered and settled.

However, Ong denied having attended any meeting or seen the Letter of Intent or the Agency Agreement and no board minutes have ever been disclosed by the Company showing that the transactions were considered or discussed by the board. Ong further denied having any involvement in the negotiation and approval of the loans or knowing anything about the payment of the loans and advances.

Although Ong did not attend any board meeting in connection with the above transactions, he confirmed that he did ratify the 5 transactions by signing the board minutes without knowing anything about them or making any inquiries about the Letter of Intent, the Agency Agreement and the granting of the loans.

In the premises, the statements in the Clarification Announcements are false, or, at the very least, misleading in a material way.

Court's Decision

In the Carecraft procedure, the Court was not asked simply to make a consent order. It would need to be satisfied on the agreed facts that at all times when the Company had remained a listed company, its business or affairs had been conducted in a manner as described in section 214(1) of the SFO, whether through conduct consisting of an isolated act or a series acts or any failure to act, and that Ong was wholly or partly responsible for the business or affairs of the Company. If the Court was so satisfied, it would decide on the scope and duration of the Disqualification Order. The agreement reached by the SFC and Ong did not bind the Court on these matters.

On the agreed facts, the business and affairs of the Company during the relevant period were conducted in a manner :-

  1. involving misfeasance or misconduct; and/or
  2. resulting in its members or any part of its members not having been given all the information with respect to its business or affairs they might have reasonably expected; and/or
  3. unfairly prejudicial to its members or any part of its members.

The Court held that Ong was partly responsible for the conduct of the business and affairs of the Company.

The Court also held that Ong failed to exercise reasonable skill, care and diligence in the management of the business and affairs of the Company and/or failed to act in the best interests of the Company, contrary to his common law duty of care and/or fiduciary duty and/or Rule 5.01 of the GEM Listing Rules, with which he had given a written undertaking to the HKSE to comply to the best of his ability prior to the listing of the Company.

There were two important objectives in the exercise of jurisdiction to make the Disqualification Order :-

  1. protection of the public against the future conduct of persons whose past records as directors of listed companies have showed them to be a danger to those who have dealt with the companies, including creditors, shareholders, investors and consumers; and
  2. general deterrence in that the sentence must reflect the gravity of the conduct complained of so that members of the business community are given a clear message that if they break the trust reposed in them they will receive proper punishment.

Ong was cooperative with the SFC. He admitted the complaints against him and agreed to give evidence consistent with the agreed facts. Ong further agreed to pay part of the costs of the SFC in these proceedings. The agreed Disqualification Order of six years was therefore on the high side and did not give sufficient discount for these mitigating factors. As a result, the Disqualification Order of 5 years was imposed on Ong in his case.

Conclusion

Based on the decision of this case, it is clear that the failure of a director of a listed company to exercise his or her duties under the common law and Listing Rules with due care and diligence would have adverse consequences against the director. These consequences include disqualification to act as director or be concerned in the management of a company.

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