In a recent disciplinary action against four former directors of Freeman FinTech Corporation Limited (now known as Arta TechFin Corporation Limited), the Hong Kong Stock Exchange (HKEX) looked into the commercial rationale for the expansion of the company's money lending business during the material time and concluded that the business was "seriously mismanaged".
The four directors who were responsible for or involved in the money lending business were publicly censured for failure to discharge their fiduciary duties and apply the levels of skill, care and diligence required in supervising and carrying out the company's money lending business as required under Listing Rule 3.08, a general provision on directors' duties.
One of the directors who failed to cooperate with the HKEX's investigation was further imposed a director unsuitability statement (DUS).
HKEX found that during the period between July 2017 and April 2018, a total of HK$2.28 billion unsecured loans were granted, of which over 93 percent were paid to third party nominees. All the loans defaulted and the company suffered impairment losses of over HK$1.9 billion. Evidence showed that only limited or minimal level of discussions or considerations took place amongst the directors in respect of expanding the money lending business, due diligence on the borrowers, risk assessments and continued monitoring of the loans, re-assessment or evaluation of the situation after certain loans went into default. However, no other compliance breaches of the Listing Rules were found.
In announcing the sanctions, the HKEX said the directors "are expected to critically assess the commercial rationale for the business, and to play an active role in safeguarding the assets of the issuer".
Key Takeaways:
- HKEX may look into the commercial rationale for the company's business actions
- Mismanagement is already a sufficient ground for imposing sanctions against directors
- Non-cooperation with HKEX's investigation may lead to severe DUS sanction.
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