SECURITIES AND FUTURES COMMISSION v. WANG JIAN HUA AND OTHERS

bjbj HCMP 745/2013 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE MISCELLANEOUS PROCEEDINGS NO 745 OF 2013 ____________ IN THE MATTER of CHINA BEST GROUP HOLDING LIMITED and IN THE MATTER of Section 214 of the Securities and Futures Ordinance, Cap 571 _____________ BETWEEN SECURITIES AND FUTURES COMMISSION Petitioner and WANG JIAN HUA 1st Respondent MA JUN LI 2nd Respondent ZHANG DA QING 3rd Respondent CHINA BEST GROUP HOLDING LIMITED 4th Respondent ____________ Before: Hon G Lam J in Court Dates of Hearing: 2 and 4 September 2015 Date of Decision: 29 October 2015 _____________ D E C I S I O N _____________ I. INTRODUCTION These proceedings were brought by petition by the Securities and Futures Commission ( the Commission ) pursuant to s. 214 of the Securities and Futures Ordinance (Cap. 571) ( the Ordinance ) in relation to the affairs of China Best Group Holding Limited ( China Best ), which is the 4th respondent to the petition. The complaints in the petition concern an aborted acquisition of certain equity interest in a Mainland company. The events directly related to that acquisition took place in the years 2007 to 2009. By the petition the Commission seeks orders from the court to disqualify the 1st to 3rd respondents from being a director or concerned in the management of any corporation, and sought an order that China Best procure one of its subsidiaries to bring an action to recover interest on certain sums paid out for the acquisition. II. FACTUAL BACKGROUND In this section I shall set out the principal facts and events. Unless otherwise specified, they are uncontroversial. The parties China Best is a company incorporated in Bermuda in 1996 as an exempted company. Its head office and principal place of business was and still is in Hong Kong. The issued shares of China Best were listed on the Main Board of The Stock Exchange of Hong Kong Limited ( Stock Exchange ) on 26 March 1996 and remain so listed to date. China Best was an investment holding company. The principal activities of the group consisting of China Best and its associated and subsidiary companies ( the Group ) were coal processing, international air and sea freight forwarding and the provision of logistics services as well as trading of securities. Three of the subsidiaries, all incorporated in the British Virgin Islands ( ), are relevant to these proceedings, namely, Clearmind Investments Limited ( Clearmind ), Fortune Zone International Limited ( Fortune Zone ) and Heatwave Industries Limited ( Heatwave ). The 1st respondent is the husband of the 2nd respondent. He was at all material times indirectly a substantial shareholder holding over 30% of the issued shares of China Best via his own BVI company called Best Chance Holdings Limited ( Best Chance ). Prior to 25 November 2005, he was the chairman of the board of directors and an executive director of China Best. On 25 November 2005, he resigned as executive director and the 2nd respondent, an executive director, was elected chairman of the board in his place. The 1st respondent however continued to hold the position of Group BOD Advisor and remained part of China Best s senior management. The 1st respondent was also at all material times a director of Clearmind and Heatwave, and an authorised signatory of the bank accounts of China Best, Clearmind, Fortune Zone and Heatwave. The 3rd respondent was at all material times an executive director of China Best and had since 5 June 2007 been its Chief Executive Officer. Asset Rich and ChongHou The petition is concerned with the Group s aborted acquisition of 60% of the shareholding of a company called ChongHou Energy Resources Limited ( ChongHou ) from another company called Asset Rich International Limited ( Asset Rich ) in 2008. Asset Rich and ChongHou are companies incorporated in the BVI on 8 June 2007 and 25 July 2007 respectively, with the latter being a wholly owned subsidiary of the former. Between 1 September 2007 and 1 October 2008, another BVI company called Rich Wisdom Group Limited, which was held by a Mainland resident called Zhang Ying, held 50% of Asset Rich. Zhang Ying also became a director of Asset Rich on 1 September 2007. In September 2007, the other 50% of the shareholding in Asset Rich was held by a person called Chan Son Wui, and was transferred to another person called Ngan Iek on or about 12 October 2007. These two individuals were Macau residents known to the 1st respondent. Since 1 October 2008, Rich Wisdom Group Limited had held 100% of the shareholding of Asset Rich. There is an issue as to whether, in the transactions that I shall presently describe, Zhang Ying was acting on her own account, or acting as a nominee and on the instructions of the 1st respondent or someone else. This is the principal factual issue that requires determination in these proceedings. Asset Rich s and ChongHou s acquisition of Qipanjing Mining and Qipanjing Coking On 8 September 2007, by an Equity Transfer Contract, ChongHou agreed with the existing shareholders of a Mainland company called Inner Mongolia Qipanjing Mining Co Limited ( Qipanjing Mining ) to acquire 60% of the equity interest in Qipanjing Mining at the price of RMB million. I shall call the vendor in this contract the Transferors . The contract was signed by Chan Son Wui on behalf of ChongHou. The Transferors also agreed in this contract to transfer to Qipanjing Mining the entire equity interest of another Mainland company known as Qipanjing Coking Co Limited ( Qipanjing Coking ). The result was therefore that, upon the completion of this contract, ChongHou would own 60% of the equity interest of Qipanjing Mining which would in turn own 100% of the equity interest of Qipanjing Coking. Qipanjing Mining and Qipanjing Coking are Mainland companies engaged, as their names suggest, in the coal mining and coke processing industries in Inner Mongolia. The Acquisition by the Group On about 3 March 2008, Clearmind, a subsidiary of China Best, signed a non-binding memorandum of understanding ( Memorandum of Understanding ) with Asset Rich, whereby Clearmind agreed to purchase and Asset Rich agreed to sell, certain equity interest (as yet unquantified) in ChongHou at a consideration dependent on the valuation of the assets of ChongHou, Qipanjing Mining and Qipanjing Coking ( the Acquisition ). A public announcement regarding the Memorandum of Understanding was made by China Best on the same date (the March 2008 Announcement ), which had been approved by the board at a meeting attended by the 1st to 3rd respondents amongst others. On about 20 March 2008, Clearmind paid Asset Rich HK$15 million as refundable earnest money under the Memorandum of Understanding (the money was actually remitted by Clearmind to ChongHou). This in turn enabled ChongHou to pay HK$15 million to the Transferors under the Equity Transfer Contract on 28 March 2008. In June 2008, Asset Rich obtained a loan of HK$250 million in Hong Kong from CITIC International Assets Management Limited ( CITIC ) pursuant to a loan agreement dated 24 June 2008 ( the CITIC loan ). Of the entire amount of the loan, HK$235 million was expressly earmarked for the purpose of completing the acquisition of Qipanjing Mining. Financial due diligence on the Acquisition was then conducted for the Group by a firm of certified public accountants (ShineWing (HK) CPA Ltd) and financial advisers (Wallbanck Brothers). Legal due diligence was conducted by the Hong Kong solicitors firm of Angela Ho & Associates and by a firm of Mainland lawyers, namely, East Associates. Further to the Memorandum of Understanding, on about 27 November 2008, Clearmind entered into an Acquisition Agreement with Asset Rich whereby Clearmind agreed to purchase and Asset Rich agreed to sell 60% of the shares of and in ChongHou at a consideration of HK$720 million. A public announcement regarding the Acquisition Agreement was made by China Best on 3 December 2008 (the December 2008 Announcement ). Since ChongHou in turn held 60% of the equity in Qipanjing Mining, the interest that the Group would in effect be acquiring in Qipanjing Mining and its subsidiary Qipanjing Coking was 36% (i.e. 60% 60%). Under the Acquisition Agreement, the consideration of HK$720 million was to be satisfied in the following manner: HK$305 million was payable in cash ( the Cash Deposit ), of which HK$15 million had been paid in March 2008 as the earnest money under the Memorandum of Understanding; HK$130 million was payable by the issuance of new shares at an issue price of HK$0.05 per share by China Best to Asset Rich (such shares representing approximately 24.65% of the existing issued share capital of China Best); HK$85 million was payable by the issuance of convertible bonds convertible to shares at a conversion price of HK$0.05 per share by China Best to Asset Rich (the conversion shares representing approximately 16.12% of the existing issued share capital of China Best); and HK$200 million was payable by Clearmind assuming part of the loan borrowed by Asset Rich from CITIC by novation at completion of the Acquisition. The Acquisition Agreement and a draft of the December 2008 Announcement had been approved at a board meeting of China Best held on 26 November 2008 and attended by the 1st to 3rd respondents amongst others. The payments Between 28 November 2008 and 22 January 2009, pursuant to the Acquisition Agreement, China Best and its subsidiaries paid the balance of the Cash Deposit in sums totalling HK$190 million to Asset Rich and sums totalling HK$100 million to CITIC to the order of Asset Rich. The details may be summarised in the following table: Date From Amount (HK$) 28.11.2008 Fortune Zone CITIC (per Asset Rich s instructions) 50m 28.11.2008 China Best CITIC (per Asset Rich s instructions) 50m 1.12.2008 Heatwave Asset Rich 38m 1.12.2008 Fortune Zone Asset Rich 1.12.2008 China Best Asset Rich 5.12.2008 Clearmind Asset Rich 45m 10.12.2008 Clearmind Asset Rich 45m 16.12.2008 Clearmind Asset Rich 22m 19.12.2008 China Best Asset Rich 15m 22.1.2009 China Best Asset Rich 18m TOTAL: 290m It has now transpired that, between 4 and 18 December 2008, upon receiving funds from the Group as summarised above, Asset Rich in turn paid approximately HK$141.965 million on behalf of Best Chance to a company known as Beida Jade Bird Universal Sci-Tech (Cayman) Development Company Limited ( Jade Bird ), as repayment of loans previously advanced by Jade Bird to Best Chance. The payments may be summarised as follows: Date From Amount (HK$) 4.12.2008 Asset Rich Jade Bird 44.9m 8.12.2008 Asset Rich Jade Bird 44.95m 12.12.2008 Asset Rich Jade Bird 10m 17.12.2008 Asset Rich Jade Bird 18.12.2008 Asset Rich Jade Bird 7,115,632.77 TOTAL: 141,965,632.77 Further, on 7 January 2009, Asset Rich paid approximately HK$13.034 million to Best Chance itself. The 1st respondent made no disclosure to China Best s board of directors or to the public either in the December 2008 Announcement or otherwise that a very substantial part of the Cash Deposit paid by the Group to Asset Rich for the Acquisition was to find its way to Best Chance a private company owned by the 1st respondent. Termination of the Acquisition Agreement By letters dated 11 June 2009 and 14 July 2009, the Stock Exchange sought China Best s response to complaints it had received to the effect that (a) ChongHou and Asset Rich were companies under the control of the 1st respondent; (b) the equity interest in Qipanjing Mining was sold to China Best by Asset Rich at 5 times its original acquisition cost; and (c) the Cash Deposit of HK$305 million paid by Clearmind to Asset Rich under the Acquisition Agreement was used to pay off the 1st respondent s personal loan, and the 1st respondent had thereby misappropriated China Best s assets. In the replies to the Stock Exchange, China Best supplied a confirmation letter signed by the 1st respondent dated 15 June 2009 that his account did not receive the amount of HK$305 million and a confirmation letter signed by Zhang Ying stating that the sum of HK$305 million had not directly or indirectly been given to or deposited in the account of the 1st respondent. Nevertheless, apparently because the Group was unable to confirm the truthfulness or otherwise of the contents of the complaint, due diligence had not been completed by the long stop date of 30 June 2009 under the Acquisition Agreement. The Acquisition was eventually aborted. On about 11 August 2009, Clearmind and Asset Rich entered into a deed formally to terminate the Acquisition Agreement ( Deed of Termination ) on the terms and conditions set out therein. The terms of this deed include: (1) Asset Rich should refund the Cash Deposit (HK$305 million) in full by one-off payment to Clearmind within 30 days; (2) if Asset Rich refunded the Cash Deposit in full by one-off payment to Clearmind within 30 days, it would not be obliged to pay interest accrued before the refund of the Cash Deposit; and (3) if Asset Rich failed to refund the Cash Deposit in full by one-off payment within 30 days, it should pay to Clearmind interest accrued before the refund. Asset Rich failed to repay the Cash Deposit within 30 days of the execution of the Deed of Termination, ie by 10 September 2009. By a letter dated 11 September 2009, the Group s solicitors demanded from Asset Rich repayment of the Cash Deposit together with interest. On about 26 September 2009, the 1st respondent, acting on behalf of Clearmind, orally agreed with Asset Rich to waive the accrued interest if Asset Rich was to repay the Cash Deposit in full on or before 30 September 2009 ( Waiver Agreement ). On or about 27 September 2009, Zhang Ying entered into a loan agreement with one Mr Wong Lik Ping for a loan of HK$320 million. On 28 and 29 September 2009, Wong Lik Ping, pursuant to this loan agreement, repaid the Cash Deposit in the sum of HK$305 million to China Best and its subsidiaries, without interest. There was discussion in October 2009 for Mr Wong Lik Ping s company the Fushan Group to acquire ChongHou, but the acquisition did not ultimately proceed. In October 2011, the respondents resigned from all positions in the Group and the 1st respondent sold his shares in China Best. The Group has to date not brought any action against Asset Rich for the recovery of interest on the Cash Deposit. The public announcements In these proceedings the Commission alleges that the March 2008 Announcement referred to in paragraph 15 above and the December 2008 Announcement referred to in paragraph 19 above are each false and misleading in material particulars. I shall deal with the allegations below. The relevant parts of the announcements may be set out as follows. (1) The March 2008 Announcement stated: (a) Clearmind had on that day entered into the Memorandum of Understanding with Asset Rich. Pursuant to the Memorandum of Understanding, Clearmind intended to acquire from Asset Rich certain equity interest in ChongHou. (b) ChongHou held 60% equity interest in Qipanjing Mining, a sino-foreign joint venture company principally engaged in the business of coal mining. (c) Qipanjing Mining had one wholly-owned subsidiary viz. Qipanjing Coking, principally engaged in the business of coke processing. (d) In particular: To the Company s [i.e. China Best s] directors best knowledge, information and belief and having made all reasonable enquiry, Asset Rich and its ultimate beneficial owners are third parties independent of the Company and its connected persons (as defined under the Listing Rules). (2) The December 2008 Announcement stated: (a) Clearrnind had on 27 November 2008 entered into the Acquisition Agreement to acquire from Asset Rich 60% equity interest in ChongHou for a total consideration of HK$720 million. (b) The acquisition constituted a very substantial acquisition for China Best under Chapter 14 of the Listing Rules. As no Shareholder has any material interest in the Acquisition, no Shareholder is required to abstain from voting in the [Special General Meeting] in respect of the resolution to approve the Acquisition. (c) In particular: To the best of the Directors knowledge information and belief having made all reasonable enquiries, each of Asset Rich and members of the Target Group [i.e. ChongHou and its subsidiaries] is independent of and not connected with the Company and its connected persons (as defined in the Listing Rules). Asset Rich (and its ultimate beneficial owner(s)) does not have any prior business relationship with the Company and its connected persons III. THE COMMISSION S CASE The Commission s case against the 1st respondent The Commission s case is that the 1st respondent had diverted to himself the corporate opportunity of the acquisition of 60% of Qipanjing Mining, and devised a scheme to conceal it, for his own personal benefit and at the expense of China Best ( the Scheme ). Under the Scheme, the 1st respondent procured ChongHou (Asset Rich s wholly-owned subsidiary) to acquire a 60% interest in Qipanjing Mining at the price of RMB216 million, with the acquisition being financed by China Best s own monies and the ClTIC Loan, which loan was to be repaid by China Best s own monies and/or assumed by China Best. The 1st respondent then arranged for China Best to buy from Asset Rich a 60% interest in ChongHou (ie indirectly a 36% interest in Qipanjing Mining) at the much higher price of HK$720 million. The 1st respondent had intended to make and would have made a substantial profit from the Scheme but for the termination of the Acquisition Agreement. The Scheme involved both Asset Rich and Zhang Ying acting as the 1st respondent s nominees to conceal his interest in the Acquisition. Before, during and after the Acquisition, the 1st respondent in breach of his duty of fidelity to China Best, failed to disclose to the board of directors of China Best his connection with Asset Rich and Zhang Ying and his interest and role in the Acquisition. In particular, the 1st respondent was responsible for the contents and issue of the March and December 2008 Announcements which were false or misleading in a material particular. In fact, contrary to what was stated in the announcements, Asset Rich and its ultimate beneficial owner Zhang Ying were not independent of China Best or its connected person viz. the 1st respondent. Instead, both Asset Rich and Zhang Ying were at all material times the 1st respondent s nominees and acted on his instructions. Further, contrary to what was stated in the December 2008 Announcement, a shareholder of China Best viz. the 1st respondent had a material interest in the Acquisition in that under the Scheme, the whole or substantially the whole of the profit that Asset Rich would have made if the Acquisition had been completed would have belonged beneficially to him, and a substantial part of the monies received by Asset Rich under the Acquisition Agreement were intended to be used and were in fact used to discharge the indebtedness of the 1st respondent or his personal company Best Chance to Jade Bird or were paid directly to Best Chance. The Commission s case against the 2nd respondent The case of the Commission against the 2nd respondent is that, in dereliction of her duties to China Best, she: (1) knew or ought to have known that Zhang Ying was not independent but failed to inform China Best s board of directors of or make any enquiries in relation to the same; and/or (2) failed to make any enquiries as to the 1st respondent s connection with Asset Rich and Zhang Ying and/or the 1st respondent s potential secret profit from and/or material interest in the Acquisition before approving the contents of the March 2008 Announcement, the December 2008 Announcement or the Acquisition Agreement. It is said that, in dereliction of her duties, the 2nd respondent wrongfully authorized the issue of the March 2008 Announcement and the December 2008 Announcement which were false or misleading in a material particular in the way described above. Finally, it is alleged that in further dereliction of her duties to China Best, the 2nd respondent had wrongfully approved the Waiver Agreement and/or failed to procure Clearmind to take legal action against Asset Rich for the recovery of interest on the Cash Deposit despite the fact that the Waiver Agreement was unsupported by consideration and was legally unenforceable, resulting in loss to Clearmind and/or China Best. The Commission s case against the 3rd respondent The Commission s case against the 3rd respondent is that, in dereliction of his duties to China Best, he: (1) knew that Zhang Ying remained on the payroll of the Group and continued to receive salary and other payments after her purported resignation but did not inform China Best s board of directors of this fact; (2) knew of, alternatively deliberately turned a blind eye to, the 1st respondent s connection with Asset Rich and Zhang Ying and/or the 1st respondent s potential secret profit from and/or material interest in the Acquisition but failed to inform China Best s board of directors of or make any or any further enquiries in relation to the same; (3) in the alternative to paragraph (2) above, failed to make any enquiries as to the 1st respondent s connection with Asset Rich and Zhang Ying and/or the 1st respondent s potential secret profit from and/or material interest in the Acquisition before approving the contents of the March 2008 Announcement, the December 2008 Announcement or the Acquisition Agreement. The Commission makes the same additional allegations against the 3rd respondent about the two announcements and the Waiver Agreement as those against the 2nd respondent set out in paragraphs 37 and 38 above. IV. THE 1ST TO 3RD RESPONDENTS CASE There are unfortunately no pleadings in this case. The 1st to 3rd respondents have each filed two affirmations but none of them has been tendered for cross-examination with the result that, by virtue of a previous order of the court, their affirmations do not form part of the evidence on the hearing of the petition. Their stance as appears from the submissions of their counsel Mr Daniel Fung SC and Mr Gary Lam is as follows. The 1st respondent denies that Asset Rich or Zhang Ying was his nominee or that they were acting on his behalf or instructions. In December 2008 to January 2009, Zhang Ying lent the 1st respondent HK$155 million pursuant to a written loan agreement dated 5 December 2008 to enable Best Chance to repay a loan it owed Jade Bird. The 1st respondent admits that given his position as adviser to the board of directors of China Best, he should have disclosed but failed to disclose such interest to China Best, either at the time of the December 2008 Announcement (which was made on 3 December 2008) or at the latest by 4 December 2008 when Jade Bird received the first tranche of the repayment made on behalf of Best Chance (HK$44.9 million). The 1st respondent accepts that the December 2008 Announcement was misleading in not disclosing the intended benefit he would derive by way of the loan from Zhang Ying or Asset Rich. The 2nd and 3rd respondents contend that there is no evidence that they had any knowledge of the 1st respondent s interest in the form of that loan. The 1st respondent submits that no case has been shown that either Zhang Ying or Asset Rich was his nominee. The 1st to 3rd respondents submit that since the entire amount of the Cash Deposit in the sum of HK$305 million paid out by the Group had been refunded, the Group had suffered no loss and they had gained no benefit from the Acquisition. V. SECTION 214 OF THE ORDINANCE So far as relevant s. 214(1) and (2) of the Ordinance provide as follows: (1) Where, in relation to a corporation which is or was listed, it appears to the Commission that at any relevant time the business or affairs of the corporation have been conducted in a manner- (a) oppressive to its members or any part of its members; (b) involving defalcation, fraud, misfeasance or other misconduct towards it or its members or any part of its members; (c) resulting in its members or any part of its members not having been given all the information with respect to its business or affairs that they might reasonably expect; or (d) unfairly prejudicial to its members or any part of its members, the Commission may, subject to subsection (3), by petition apply to the Court of First Instance for an order under this section. (2) If, on an application under this section, the Court of First Instance is of the opinion that the business or affairs of a corporation have been conducted in a manner described in subsection (1)(a), (b), (c) or (d), whether through conduct consisting of an isolated act or a series of acts or any failure to act, the Court may- (a) make an order restraining the carrying out, or requiring the carrying out, of any act or acts; (b) order that the corporation shall bring in its name such proceedings as the Court considers appropriate against such persons, and on such terms, as may be specified in the order; (c) (d) order that a person wholly or partly responsible for the business or affairs of the corporation having been so conducted shall not, without the leave of the Court- (i) be, or continue to be, a director, liquidator, or receiver or manager of the property or business, of the corporation or any other corporation; or (ii) in any way, whether directly or indirectly, be concerned, or take part, in the management of the corporation or any other corporation, for such period (not exceeding 15 years) as may be specified in the order; (e) make any other order it considers appropriate, whether for regulating the conduct of the business or affairs of the corporation in future, or for the purchase of the shares of any members of the corporation by other members of the corporation or by the corporation (and, in the case of a purchase by the corporation, for the reduction accordingly of the corporation s capital), or otherwise. China Best is and was at the material times a listed corporation. It is not seriously in dispute, and I am satisfied, that the conduct alleged by the Commission on the part of the respondents was conduct of the affairs of China Best. Even though some of the relevant acts directly involved Clearmind or other subsidiaries rather than China Best itself, in light of the fact that China Best was a listed investment holding company, the observations of Chu J in Securities and Futures Commission v Fung Chiu [2009] 6 HKC 423 at 19-20 are in my view applicable in this case: 19. Under the second condition that the business or affairs must be that of the listed corporation, in the context of a group of companies, it is possible that, depending on the facts, the business or affairs of one company may also be that of another company. As was observed by Sir Martin Nourse in Gross v. Rackind [2004] EWCA Civ 815, at para.26, the expression the affairs of the company is one of the widest import which can include the affairs of a subsidiary. Equally, I would hold that the affairs of a subsidiary can also be the affairs of its holding company especially where, as here, the directors of the holding company, which necessarily controls the affairs of the subsidiary, also represent a majority of the directors of the subsidiary. See also Nicholas v. Soundcraft Electronics Ltd [1993] BCLC 360; Arrow Nominees Inc v. Blackledge [2000] 2 BCLC 167; and Jesner v. Jarrad Properties Ltd [1993] BCLC 1033. 20. In my view, a realistic approach should be adopted in considering whether the affairs of a subsidiary may be regarded as that of the holding company. In cases where, as here, the principal business and activities of the group is undertaken by the subsidiary in question and the listed company is essentially an investment holding vehicle, it is legitimate for the Court to take a broad and overall view of the situation and to regard the affairs of the subsidiary as the affairs of the holding corporation. In this case the Commission alleges that the conduct in question falls within the heads of misfeasance and other misconduct in s. 214(1)(b), and also within s. 214(1)(c). Misfeasance is defined in s. 1, Part 1 of Schedule 1 to the Ordinance to mean the performance of an otherwise lawful act in a wrongful manner . Since there is no real dispute that either the conduct alleged by the Commission if established, or the conduct admitted by the respondents, would amount to misfeasance, other misconduct or conduct within s. 214(1)(c), I do not propose to discuss the detailed meaning of these provisions. What divides the parties principally, so far as the 1st respondent is concerned, is the crucial question of fact as to whether there was a Scheme as alleged which involved the 1st respondent s use of Asset Rich and Zhang Ying as nominees. Obviously, if there was no such Scheme, then even though the 1st respondent would nonetheless be guilty of non-disclosure in the manner he has admitted, the culpability would be far less than if the 1st respondent had sought to make a secret profit by entering into a transaction with the Group, using nominees to hide his interest. VI. STANDARD OF PROOF AND DRAWING OF INFERENCES On the applicable standard of proof in these proceedings Mr Eugene Fung SC relied on s. 387(b) of the Ordinance, which provides: Where it is necessary for the Commission to establish or to be satisfied, for the purposes of any of the relevant provisions (other than provisions relating to criminal proceedings or to an offence), that- (b) a person has been responsible for an unlawful act or omission; it is sufficient for the Commission to establish, or to be satisfied as to, the matter referred to in paragraph (a), (b), (c), (d), (e) or (f) (as the case may be) on the standard of proof applicable to civil proceedings in a court of law. The phrase relevant provisions includes the provisions of the Ordinance: see Schedule 1 to the Ordinance. The word unlawful is not defined. On behalf of the Commission it was submitted that the 1st respondent s alleged conduct constitutes an unlawful act or omission under s. 387(b). It is in my view unnecessary to decide this question. Proceedings for disqualification orders under s. 214 of the Ordinance are akin in their nature to directors disqualification proceedings under other enactments such as s. 168H of the Companies (Winding up and Miscellaneous Provisions) Ordinance (Cap. 32). In Official Receiver v Chan Min Simon (unreported, HCMP 6570/2000, 26 August 2002) at 7, in an application for a disqualification order under s. 168H, Yuen J stated that disqualification proceedings are civil proceedings, applying the civil standard of proof on the balance of probabilities . In Koon Wing Yee v Insider Dealing Tribunal (2008) 11 HKCFAR 170 at 72 & 73, the Court of Final Appeal held that the primary purpose of the power to disqualify persons from acting as directors is to protect investors and the public and that a disqualification order in the context of the Securities (Insider dealing) Ordinance (Cap. 395) (repealed) was to be classified as protective rather than punitive. S. 214 of the Ordinance does not in my view import any factor which fundamentally alters the character of a disqualification order sought under that section. As a matter of principle there is no reason why a different standard of proof should apply where a disqualification order is sought under s. 214 of the Ordinance as opposed to other Ordinances. The conditions for liability under s. 214(1) of the Ordinance do not suggest the criminal standard of proof is imported. Nor did Mr Daniel Fung SC suggest otherwise. What Mr Daniel Fung SC did submit and emphasise, relying on the judgment of Ribeiro PJ in Nina Kung v Wang Din Shin (2005) 8 HKCFAR 387, can I think be divided into three points. First, although the civil standard of proof applies, such standard is to be applied flexibly, factoring in the inherently greater improbability of serious misconduct as compared with lesser forms of misconduct, and therefore requiring the person bearing the burden of proving the allegation to prove it with evidence of a commensurate cogency (Nina Kung at 182). See also Solicitor (24/07) v Law Society of Hong Kong (2008) 11 HKCFAR 117 at 72-75. Secondly, where the court is invited to reach a conclusion of wrongdoing as an inference to be drawn on the basis of circumstantial evidence, any such inference must be properly grounded in the primary facts found. The court guards against indulging in conjecture under the guise of drawing an inference where the primary evidence does not logically and reasonably justify the particular inference in question (Nina Kung at 185). Thirdly, where the court is asked to find by inference fraud or serious misconduct, such inferences are to be drawn only where they are compelling, sufficient to overcome the inherent improbability that such conduct had occurred. The conclusion has to be plainly established as a matter of inference from proved facts (Nina Kung at 186-187; HKSAR v Lee Ming Tee (2003) 6 HKCFAR 336 at 72). The principle is clearly set out in paragraph 72 of Sir Anthony Mason NPJ s judgment in Lee Ming Tee which I quote below in full: In the present case, where the allegation is that senior officers of the SFC deliberately and improperly terminated an investigation into Meocre Li s conduct in the Kin Don placement, in order to avoid the need to make a disclosure which might compromise Meocre Li s standing as an expert witness in the trial, that conclusion was not to be reached by conjecture nor, as the respondent submitted, on a mere balance of probabilities. It was to be plainly established as a matter of inference from proved facts. It is not possible to state in definitive terms the nature of the evidence which the court will require in order to be satisfied, in a civil proceeding, that a serious allegation of this kind, is made out. It would not be right to say that the requisite standard prescribes that the inference of wrongdoing is the only inference that can be drawn (cf. Sweeney v. Coote [1907] AC 221 at 222, per Lord Loreburn) for that is the standard which applies according to the criminal standard of proof. In the particular circumstances, it was for the respondent to establish as a compelling inference that very senior officers of the SFC had deliberately and improperly terminated the investigation into Meocre Li s conduct for the ulterior purpose alleged, sufficient to overcome the inherent improbability that they would have done so (see ADS v. Brothers (2000) 3 HKCFAR 70 at 91H, 96G-I, per Lord Hoffmann). Unfortunately the Judge made no mention of the relevant standard of proof and there are indications that he failed to apply it, notably in drawing too readily inferences adverse to the SFC. In my opinion the allegation made by the Commission especially against the 1st respondent is a serious charge of misconduct. In essence it is alleged that the 1st respondent acquired an asset and proceeded to try to sell it (or rather, 60% of it) to China Best at a much higher price and a massive profit to himself, using nominees throughout as a cloak to present an impression of an arm s length transaction with independent third parties, and to conceal from the company and the public his true role and interest in the transaction. Although Mr Eugene Fung SC made clear in his submissions that the Commission relied on the grounds of misfeasance and other misconduct and not the grounds of defalcation or fraud in s. 214(1)(b) (albeit all four grounds were alleged in the petition), it seems to me for present purposes the seriousness of the accusation is to be gauged by reference to the substance of the allegations made rather than the label the petitioner puts on it or the statutory provisions invoked. It is necessary to look not only at the charge but also the particulars of the offence alleged. Accordingly I accept that in applying the three principles above I should do so on the footing that serious misconduct of the nature described is being alleged against the 1st respondent. VII. THE CLAIM AGAINST THE 1ST RESPONDENT The central allegation against the 1st respondent is that Asset Rich and Zhang Ying were at the material times acting as his nominees and on his instructions. The matters relied upon by the Commission The matters relied upon by the Commission in support of the inference they seek to draw are set out in paragraph 48 of the petition. Those are the pleaded facts (despite that the petition is not as such a pleading) by reference to which the case should be assessed. The court can of course look at the evidence adduced in support of the facts to ascertain the details but it would not in my opinion be right to travel wholly outside the petition to examine new facts and matters. On this basis the matters relied upon against the 1st respondent may be stated as follows. Zhang Ying was born in 1984 and after graduating from North China University of Technology, started work as an intern in an accounting service company in Beijing. In July 2006 she became a junior employee of a Mainland subsidiary of China Best called Beijing China Best Jie Ya Logistics Consulting Co., Ltd. ( CB Beijing ) and was on its payroll between July 2006 and August 2008. The 1st respondent was the Legal Person s Representative and Chairman of CB Beijing and signed the employment contract of Zhang Ying on behalf of CB Beijing. The 1st respondent and Zhang Ying came to know each other by reason of her employment with CB Beijing. The employment contract recorded that Zhang Ying was employed to perform business project assistant work, participating in due diligence of the project, analysis, organisation according to the employer s needs. The employment came into effect on 3 July 2006 with a probation period of 3 months. Her monthly salary was RMB 2,000 during probation and RMB 2,500 thereafter, with certain additional benefits to cover illness and pension for which the employer paid a monthly sum of RMB 1,500 for insurance. The employment contract was renewed for a year in July 2007. Her salary was increased to RMB 2,800 per month from September 2007 to August 2008. An additional total sum of RMB 6,400 for that period was granted to her as allowance for business travel and communications. It was the 1st respondent who informed China Best, via the 3rd respondent, of the availability of ChongHou s equity interest (and indirectly Qipanjing Mining) for sale ( the Project ). In his interview by the Commission the 1st respondent claimed that he had himself been informed by Zhang Ying about the Project, though he did not know how she in turn became aware of the Project. Asset Rich was a company incorporated in the BVI on 8 June 2007. Until 10 June 2008, only two shares of US$1 each had been issued. On 10 June 2008, 129,998 new shares of US$1 each were allotted at par to Rich Wisdom and Ngan Iek. See further paragraph 10 above. It was not seriously disputed by the respondents that Asset Rich did not have the internal resources to finance the acquisition of 60% of Qipanjing Mining via ChongHou (at the price of RMB 216 million). Under that transaction ChongHou had to pay HK$15 million to the Transferors at an early stage, which it only managed to pay (on 28 March 2008) after it had received (on behalf of Asset Rich) the same sum from Clearmind on 20 March 2008 pursuant to the Memorandum of Understanding. Likewise, there is no serious dispute that ChongHou did not have the funds internally to pay the balance of the consideration for the acquisition of Qipanjing Mining. It obtained a loan from CITIC to do so. It was the 1st respondent who introduced Zhang Ying to Mr Sun Yeung Yeung with a view to obtaining the CITIC loan. Mr Sun was the General Manager of the Investment Department of CITIC, as well as an independent non-executive director of China Best at the time. In his interview by the Commission, he said: This project was passed by me to the company, and then, I set the interest rate, and then , er, this was the at that time -- at that time, I don t know if you people are referring to Mr. Wang Jianhua, (he) said that there was such a project, and then (he) asked me if I was able to do it. That is, whether our CITIC Assets Management Limited could do it. At that time, I answered him saying, I said that as far as money was concerned, At that time, as far as I recall, the company still had , that is, (we) were able to do so. At that time, he (wanted to borrow) 250 million. I said, As far as I recall, the company still has this sum of money, it can do it. If your project is good, we can do it. And then, he said a bridging (loan) was required. I said a bridging (loan) could be provided, and then, -- I said, ( ) But your time is very short. ( ). I said, Can you pay me the interest rate that I ask for? He said I said, If you can pay (the interest rate required), I would ask someone to follow up. It was also the 1st respondent who introduced Zhang Ying to a Hong Kong solicitors firm viz. Messrs. Hammonds ( Hammonds ) to represent Asset Rich in relation to the CITIC loan. A solicitor called Linda Ngan handled the transaction on behalf of Asset Rich. On 24 June 2008 a loan agreement was entered into between Asset Rich and CITIC. The loan was for HK$250 million with HK$235 million earmarked for payment of the consideration under the Equity Transfer Contract. The term of the loan was one year. It was only with the CITIC loan that Asset Rich was able to complete the acquisition of Qipanjing Mining in June 2008. As the Commission alleges, the 1st respondent took an active part in the structuring and negotiation of the CITIC loan, as well as the giving of instructions to Hammonds. Ms Ngan stated in her interview by the Commission that in May 2008, it was the 1st respondent who approached Hammonds first. Hammonds did not have any contact with Zhang Ying until June 2008. From May to August 2008 the 1st respondent acted from time to time in passing information and instructions between Asset Rich on the one hand and Hammonds on the other. Discussions on the structure of the transaction were held with the 1st respondent in May 2008, though he was informed by the solicitors that there must not be any connected transaction and he stated to the solicitors that he had no involvement in the deal. Discussions and negotiations of the loan were also held among Ms Ngan, the 1st respondent and Gary Kwok of CITIC. The 1st respondent also instructed another executive director of China Best, namely Mr David Ng, to review certain financial information in relation to the CITIC loan. Hammonds issued a feenote to Asset Rich dated 28 May 2008 for HK$41,580 stating the matter as Loan and Sale and Purchase in relation to Qipangjin [sic] and another feenote dated 24 June 2008 for HK$81,619 for Review of Loan Documentation between Asset Rich International Limited and CITIC International Assets Management Limited . They appear to have been the first two feenotes issued in the engagement. Instead of being settled by Asset Rich, these two feenotes were paid by two cheques drawn by Heatwave (a subsidiary of China Best) and signed by the 1st respondent. Further, the feenote dated 28 May 2008 described the work done as follows: TO OUR PROFESSIONAL CHARGES for services rendered from 06 May 2008 to 22 May 2008 in connection with the above matter including telephone discussion with Mr. Wang [ie the 1st respondent] and letter to Mr. Wang with proposed structure on 5 May 2008; telephone discussion with client on instruction on 6 May 2008; meeting with Mr. Ng and Angela on proposed revision of MOU, telephone discussion with Gary Kwok (Citic) on proposed change of loan structure on 8 May 2008; preparing meeting notes with structure diagram to Mr. Wang, email to Gary Kwok (Citic) on proposed change of loan structure with structure diagram on 9 May 2008; review and revise Loan Agreement, Debenture and Share Mortgage, various telephone discussions with Angela Ho, Mr. Wang, David Ng and Gary Kwok separately on the same on 13 May 2008; prepare letter to Mr. Wang and engagement letter on 15 May 2008; prepare letter of authorisation for Chonghou and Asset Rich, telephone discussion with Mr. Wang and personal assistant and email follow up, email instruction to BVI lawyer Janice Beaumont on 22 May 2008; all several emails; telephone discussions and general care, conduct and attendance throughout including matters not therein specifically set out. Further, the payment of company secretarial fees for Asset Rich, ChongHou and Rich Wisdom was also significant. Smartfaith Services Limited ( Smartfaith ) was a BVI agent in Hong Kong that provided company secretarial services to Asset Rich, ChongHou and Rich Wisdom. (1) On 18 January 2008 Smartfaith issued an invoice to ChongHou for the attention of Zhang Ying and Ngan Iek for HK$17,955. This was paid by a cheque dated 21 January 2008 drawn on Heatwave s bank account for HK$17,955 made payable to cash and signed by the 1st respondent. (2) On 22 April 2008, Smartfaith issued an invoice to Rich Wisdom for the attention of Zhang Ying for HK$750. This was paid by a cheque dated 25 April 2008 drawn on Heatwave s bank account for HK$5,670 made payable to cash and signed by the 1st respondent. (The same cheque was also used to pay an invoice for HK$4,920 in relation to another BVI company called Funeway Investments Limited.) (3) On 12 June 2008 Smartfaith issued an invoice to Asset Rich for the attention of Zhang Ying and Ngan Iek for HK$19,350. The work done covered the increase in the share capital and allotment of shares on 10 June 2008 (referred to in paragraph 59 above). This invoice was paid by a cheque dated 5 June 2008 drawn on Heatwave s bank account for HK$19,550 made payable to cash and signed by the 1st respondent. (4) On 15 October 2008 Smartfaith issued two invoices to Rich Wisdom and ChongHou respectively for the attention of Zhang Ying for HK$4,920 each being the BVI Government licence fees and resident agent s fees. This was paid by a cheque dated 27 October 2008 drawn on Heatwave s bank account for HK$9,840 made payable to cash and signed by the 1st respondent. These cash cheques may be contrasted with several cheques dated 25 April 2008 and 27 October 2008 respectively which were also drawn on Heatwave s bank account and also signed by the 1st respondent to settle Smartfaith s fees for secretarial services provided to known companies within the Group (such as Clearmind and Fortune Zone) and the 1st respondent s known personal company Best Chance, but those cheques were crossed cheques made payable to Smartfaith. When an account for Asset Rich was opened with Standard Chartered Bank ( the SCB account ) in Hong Kong on 27 November 2008 at a time when Zhang Ying was no longer an employee of the Group or on its payroll, the address of Room 3405, Bank of America Tower, 12 Harcourt Road, Hong Kong which was in fact the principal place of business and office of China Best in Hong Kong was nevertheless put down as its correspondence address. Zhang Ying signed the account opening form as director of Asset Rich. Between January 2009 and April 2010, monthly statements of the SCB account were sent to that address at the Bank of America Tower. The SCB account was used to handle very substantial amounts of monies ie part of the Cash Deposit paid to Asset Rich under the Acquisition Agreement and Asset Rich s payments to Jade Bird and Best Chance referred to in paragraphs 20 and 21 above. Shortly after Asset Rich began to receive in tranches the cash consideration under the Acquisition Agreement in late 2008 (totalling $290 million of which $100 million was paid by Clearmind directly to CITIC and $190 million was paid to Asset Rich), it paid: (1) approximately HK$141.965 million to Jade Bird between 4 and 18 December 2008 to discharge the 1st respondent s personal company Best Chance s loans previously obtained from Jade Bird; and (2) approximately HK$13.034 million directly to Best Chance on about 7 January 2009. When questioned by the Commission, the 1st respondent explained these payments by Asset Rich to or on behalf of Best Chance on the basis that by a loan agreement dated 5 December 2008, Zhang Ying had agreed to grant him an unsecured personal loan of HK$155 million for a fixed term of one year with interest at the rate of 10% per annum. As the term of the loan was for one year, it should have been due for repayment in December 2009. The 1st respondent stated, however, during his interview with the Commission on 22 April 2010, that he had not yet repaid the loan. The 1st respondent did not disclose to China Best s board of directors the payments made by Asset Rich to Jade Bird and Best Chance, or the alleged personal loan agreement between Zhang Ying and him. On the contrary, when enquiries were made by the Stock Exchange in mid 2009 in relation to the Acquisition, both the 1st respondent and Asset Rich, by Zhang Ying, issued signed confirmations stating that no part of the Cash Deposit in the total sum of HK$305 million received by Asset Rich under the Acquisition Agreement had directly or indirectly been paid to the 1st respondent s account. The 1st respondent was present at a meeting with Wong Lik Ping and Zhang Ying in about September 2009 to negotiate the terms of the HK$320 million loan to be made by Wong Lik Ping to Zhang Ying to fund the repayment of the Cash Deposit to the Company. Finally, the Commission also relies on the fact that the 1st respondent had on behalf of Clearmind entered into the Waiver Agreement to waive interest on the Cash Deposit. Discussion I am satisfied that the matters relied upon above are supported by the documents or interview records of various persons. In fact they are largely unchallenged by the respondents. I accept them as primary facts established by evidence. Do they prove sufficiently the Scheme that the Commission alleges? In the absence of direct evidence of the nominee relationship, the court may draw appropriate inferences from the objectively established facts. In drawing inferences, the court need not be satisfied that the matters to be inferred are the only possible explanation, for the criminal standard of proof does not apply here (see Lee Ming Tee, supra, at 72), but that according to the course of common experience they are probable to the standard required. The court must of course guard against speculation or making informed guesses or choosing from equally possible permutations of fact. As the High Court of Australia said in Bradshaw v McEwans Pty Ltd (HC of Aust., unreported, 27 April 1951), quoted in Luxton v Vines (1952) 85 CLR 352 at 358: In questions of this sort, where direct proof is not available, it is enough if the circumstances appearing in evidence give rise to a reasonable and definite inference: they must do more than give rise to conflicting inferences of equal degrees of probability so that the choice between them is mere matter of conjecture While under the civil standard of proof, an inference can be drawn without there being practical certainty, I bear in mind the principle referred to in paragraph 52 above, applicable where allegations of serious wrongdoing are involved. Although the standard of proof remains the civil one, I need to look for inferences that are compelling and refrain from drawing damning inferences on a bare or mere balance of probabilities. On the basis of these facts, it was inherently unlikely that Zhang Ying had the requisite experience, capability or means to orchestrate ChongHou s acquisition of Qipanjing Mining or that Asset Rich itself had the capability to obtain outside resources to finance that acquisition. In fact the 1st respondent admitted he knew Asset Rich had no money as at March 2008. It is highly unlikely that Zhang Ying was acting on her own account with Asset Rich being (beneficially) her own company. Mr Daniel Fung SC did not contend otherwise. What he argued is that the matters relied upon by the Commission give rise equally, if not more compellingly, to an inference that Zhang Ying was a nominee of some person or entity other than the 1st respondent, especially Ngan Iek and Chan Son Wui. I am unable to agree with this submission. In my judgment, these matters, taken as a whole, and left unexplained as they have been, are clearly probative of the 1st respondent s role as the principal behind Zhang Ying. Mr Daniel Fung SC submitted that there was nothing untoward in the 1st respondent assisting his interlocutors, with a view to sealing a commercial deal beneficial to China Best, in securing professional advice and financial assistance. On the evidence, however, the 1st respondent took an active part in the structuring and negotiation of the CITIC loan, as well as in the giving of instructions to Hammonds as solicitors of Asset Rich. It was one thing for the 1st respondent to introduce Zhang Ying to a solicitor or banker; it was quite another thing for him to be actively involved in fact more so than Zhang Ying was in the relevant instructions and negotiations. Furthermore, the fact that the 1st respondent instructed an executive director of China Best to review financial information in relation to the CITIC loan, which was supposedly a loan being obtained by the vendor (Asset Rich) in a sale to the Group, also tended to show that the relationship between the 1st respondent and Asset Rich was not at arm s length. It was inexplicable, if the 1st respondent was merely a middleman trying to help Zhang Ying and the real principal behind her to secure a deal, why he should be involved in paying the professional and secretarial fees incurred by Asset Rich, ChongHou and Rich Wisdom, which were all companies in which the 1st respondent ostensibly had no interest, and furthermore why he should use Heatwave s money to do so. Neither Zhang Ying, Ngan Iek nor Chan Son Wui was a substantial shareholder of China Best. Nor was there any explanation why the 1st respondent should use cash cheques to pay Smartfaith on behalf of Asset Rich, ChongHou and Rich Wisdom but crossed cheques to pay the fees of known subsidiaries, if it was not for the purpose of concealing the fact of payment. The fact that China Best s address was used for Asset Rich s SCB account and statements were sent to that address (at a time when Zhang Ying was no longer on the payroll of any company within the Group) also tends to show that the principal behind Zhang Ying was connected to China Best. It was telling that as and when part of the cash consideration was paid by the Group to Asset Rich pursuant to the Acquisition Agreement, the money almost immediately found its way to the 1st respondent s personal company, Best Chance, or its creditor, Jade Bird. The 1st respondent was indisputably the person who obtained the immediate benefit of the payment. The written payment instructions issued by Best Chance (signed by the 1st respondent) to Asset Rich simply instructed Asset Rich to pay Jade Bird. A one-page loan agreement had subsequently been put forward as the explanation, but it was inexplicable why Zhang Ying would grant an unsecured loan for such a large sum as HK$155 million to the 1st respondent. Although it was said to be a loan for the term of one year it is notable that the 1st respondent on his own admission had not repaid Zhang Ying or Asset Rich by April 2010. The Commission does not accept the authenticity of this loan agreement. As the party who propounded the document, the onus lies on the 1st respondent to prove that it was genuine, not on the Commission to prove that it was a sham: Club Deluxe v Club Metropolitan [1995] 2 HKLR 69 at 82 and 88; Doe d. Devine v Wilson (1855) 10 Moo PC 502; Pacific Electric Wire & Cable Co Ltd v Texan Management Ltd (CACV 90, 91, 93-96 of 2012, 17 September 2013) at 61. The 1st respondent has, however, chosen not to give evidence. The loan agreement seems to me to be inconsistent with the 1st respondent s and Zhang Ying s explanation in June 2009 (when the Stock Exchange was make enquiries) that the money did not directly or indirectly go to the 1st respondent s account. I am unable to accept the loan agreement as a genuine commercial document. Mr Eugene Fung SC, for the Commission, invited the court to draw an adverse inference from the failure of the 1st respondent to give evidence. The principles on the drawing of inferences from the failure to call a witness have been set out in two English cases cited with approval by the Court of Appeal in Pacific Electric Wire & Cable Co Ltd v Texan Management Ltd, supra, at 106-107, namely, Wisniewski v Central Manchester Health Authority [1998] PIQR 324 at 340 and Prest v Petrodel Resources Ltd [2013] UKSC 34 at 44. The principles are not in dispute and need not be repeated here. Mr Daniel Fung SC submitted that the court should simply look at the materials before it to see if the case advanced is established. In Re Styland Holdings (No. 2) [2012] 2 HKLRD 325 at 17-18, although the point was not argued, Barma J (as he then was) accepted that adverse inferences could be drawn against respondent directors in disqualification proceedings from their failure to give evidence if the court was satisfied that the evidence before it raised a prima facie case which called for an answer, and that where a defendant might be expected to be in a good position to answer the allegations made against him, his silence could turn a prima facie case into a strong case against him. In my view, the evidence relied upon by the Commission raised a case for the 1st respondent to answer. He was uniquely well placed to provide an explanation but chose not to do so. The only reason offered was that there was no prima facie case against him, with which I disagreed. In my opinion his failure to give evidence served to strengthen the case against him. Putting it in another way, I look at the primary facts on the basis that they have consciously been left unexplained by the 1st respondent. To my mind, the primary facts relied upon form a sufficiently cogent and compelling basis for an inference that Zhang Ying and Asset Rich were the 1st respondent s nominees and acting on his instructions in connection with the acquisition of Qipanjing Mining and in the sale of a 60% interest in ChongHou to Clearmind, and I so find. I am satisfied that the case of the Commission against the 1st respondent in relation to the Scheme is established. The 1st respondent also misconducted himself in failing to disclose his interest to China Best s board and in the issue of the public announcements. On that basis, the 1st respondent s conduct in my view plainly constituted misfeasance and other misconduct towards China Best or its members within the meaning of s. 214(1)(b) of the Ordinance, and also resulted in the members of China Best not having been given all the information with respect to its business or affairs that they might reasonably expect within the meaning of s. 214(1)(c). Although the petition contains an allegation that the 1st respondent wrongfully entered into the Waiver Agreement on behalf of Clearmind on 26 September 2009, it was not a complaint separately opened upon by counsel for the Commission as against the 1st respondent. In light of my findings on the main case above it is unnecessary to deal with any separate complaint arising from the Waiver Agreement although it may be relevant to the question whether the Group suffered any loss as a result of the matters complained of under the primary case. VIII. THE CLAIM AGAINST THE 2ND RESPONDENT The case of the Commission against the 2nd respondent is essentially that she either knew Asset Rich was not an independent party or failed to make enquiries in relation to Asset Rich s and Zhang Ying s independence when approving the two public announcements and the Acquisition Agreement. Based on what the 2nd respondent told the Commission during the interview, she did precious little to find out anything about the counterparty in the Acquisition. She claimed that the 3rd respondent had told the directors of China Best at a board meeting that Zhang Ying was a former staff member of the Group but had already left. The 3rd respondent, however, denied that he made such a statement at a board meeting. There is insufficient material for me to make a finding about that alleged board meeting. Counsel for the Commission made the following points which are in my view borne out by the evidence: (1) The 2nd respondent did not try to find out how the Project had arisen as an opportunity for China Best and why the vendor wanted to sell the mine if it was so profitable. (2) The 2nd respondent did not consider finding out for what consideration Asset Rich had acquired the interest in the mining business. (3) The 2nd respondent claimed not to know that Zhang Ying was a director of Asset Rich and ChongHou, or a shareholder of Asset Rich in June 2008. According to her, she came to know that Zhang Ying was a shareholder of Asset Rich only when the 3rd respondent reported this to China Best s board of directors at a meeting in late 2008. The 3rd respondent denied there was such a meeting. (4) The 2nd respondent claimed not to know Zhang Ying s date of resignation from the Group, or that at the time of entering into the Memorandum of Understanding Zhang Ying was still receiving a salary from the Group. (5) The 2nd respondent claimed not to know either Zhang Ying s age or how much she earned when working for the Group. She claimed that it was unnecessary for her to care about how much Zhang Ying earned in the Group. (6) The 2nd respondent claimed not to know that Asset Rich needed to borrow money before it could purchase the interest in Qipanjing Mining. (7) The 2nd respondent claimed not to know that the 1st respondent (her husband) had borrowed money from Jade Bird in order to purchase shares in China Best until Jade Bird announced it, and that it was only when she saw the complaint letter from the Stock Exchange that she came to know that when China Best made payment to Asset Rich for the Acquisition, Asset Rich transferred sums to Jade Bird in order to repay the loan. (8) The 2nd respondent also claimed not to know that Asset Rich paid HK$13.034 million to Best Chance, the 1st respondent s private company. (9) Even after China Best received a complaint from the Stock Exchange concerning the use of funds by Asset Rich to repay the loan from Jade Bird, the 2nd respondent refrained from finding out more about the matter on the ground that there might be a conflict of interests given her marital relationship with the 1st respondent. In my view, there is insufficient evidence to prove that the 2nd respondent actually knew that Asset Rich and Zhang Ying were the 1st respondent s nominees in the way I have found. There is evidence, however, to show that the 2nd respondent made no enquiry at all about who the owner of Asset Rich was or the background of the owner, why Asset Rich proposed to sell the mine if it was so profitable, when and how Asset Rich had itself acquired the interest in Qipanjing Mining, and what price Asset Rich had paid for acquiring it. If she had made these elementary enquiries, she would have found out that the ostensible owner of Asset Rich was Zhang Ying and that she was a junior employee of the Group still on its payroll in March 2008 when the Memorandum of Understanding was entered into. A reasonably competent chairman would then have caused enquiries to be made regarding Zhang Ying s connection with the Group before approving the contents of the public announcements which asserted that Asset Rich was an independent third party. Had the 2nd respondent done so she would not have concluded that Asset Rich and its ultimate beneficial owner were independent third parties. It should be noted that the Acquisition was a very substantial acquisition for China Best within the meaning of the Listing Rules. It involved payment of cash consideration of HK$305 million (to be seen against the background of consolidated total net assets of HK$364.418 million according to the Group s annual report for 2008) and the issuance of new shares and convertible bonds potentially representing shares which in aggregate exceed 40% of the existing issued share capital of China Best. The 2nd respondent s failure to make the most basic enquiries was, in my opinion, wholly unacceptable. In the circumstances, I find that the 2nd respondent culpably failed to make any reasonable enquiries in respect of Asset Rich s and Zhang Ying s connection with the 1st respondent before approving the contents of the public announcements or the Acquisition Agreement and that she therefore wrongfully authorised the issue of the two announcements which were false or misleading in a material particular. The 2nd respondent failed in her duties properly to inform herself about China Best s affairs and to exercise reasonable care and diligence in its management. Her failure in my view amounted to misfeasance and other misconduct towards China Best or its members within the meaning of s. 214(1)(b), and also resulted in the members not having been given all the information that they might reasonably expect within the meaning of s. 214(1)(c). There is a separate allegation that the 2nd respondent had wrongfully approved the Waiver Agreement and failed to procure Clearmind to take legal action against Asset Rich for the recovery of interest. In my view however it was at least arguable that the Waiver Agreement was supported by consideration. That question has to be approached in the light of commercial realities and practicalities: Chong Cheng Lin Courtney v Cathay Pacific Airways Ltd [2011] 1 HKLRD 10 at 50-51. To secure recovery of the principal sum of HK$305 million was of paramount concern, especially before the interim results announcement date of 30 September. It was in my view at least arguable in the circumstances that it was within the range of permissible commercial judgment to prefer ensuring repayment of the principal of HK$305 million by 30 September 2009 whilst forgoing the interest, to holding out for the entire amount including interest with the possible need of litigation against Asset Rich in the BVI or the Mainland: see Tony Vick v Vogle-Gapes Ltd [2006] EWHC 1665 (TCC) at 91. In my judgment, the Commission has not sufficiently made out a case that in approving the Waiver Agreement the 2nd respondent was acting in dereliction of her duties. This allegation against the 2nd respondent is therefore rejected. IX. THE CLAIM AGAINST THE 3RD RESPONDENT The 3rd respondent was at the material times the CEO of China Best, in charge of the company s day-to-day management and operations. He knew the 1st respondent had been negotiating with others regarding the Project and the Project was first referred by the 1st respondent to him. It was the 3rd respondent who then introduced the Project to China Best s board of directors. The 3rd respondent knew that Zhang Ying was the legal owner of Asset Rich, the vendor in the transaction with the Group. He knew that Zhang Ying had worked for the Group and had resigned in 2007. It was he who requested Zhang Ying not to leave the Group until after completing the hand-over of her responsibilities. He knew that Zhang Ying was still on the Group s payroll and working in the Group when the Memorandum of Understanding was entered into in March 2008. Further, the 3rd respondent knew that Asset Rich had just acquired 60% of Qipanjing Mining for RMB 216 million, and that Asset Rich was selling 60% of that 60% to the Group for HK$720 million times the cost to Asset Rich. Yet the 3rd respondent said he was not concerned with it and thought the price to be paid by the Group was reasonable. On his own case, despite being responsible for leading various surveys on the Project, the 3rd respondent failed to inform China Best s board of directors of these matters before approving the contents of the March 2008 Announcement and the December 2008 Announcement. Despite his knowledge, the 3rd respondent failed to make enquiries as to how Zhang Ying a junior employee of the Group with a modest salary and with no special knowledge of the mining industry managed to enter into a transaction via a company apparently owned by her (Asset Rich) to acquire Qipanjing Mining for RMB 216 million. On this basis I am satisfied that the 3rd respondent turned a blind eye to matters raising doubt about Zhang Ying s independence and failed to make any reasonable enquiries in respect of Asset Rich s and Zhang Ying s background and ultimately their connection with the Group and the 1st respondent before approving the contents of the two public announcements or the Acquisition Agreement. Had the 3rd respondent conducted proper enquiries he would not have concluded that Asset Rich and its ultimate beneficial owner were independent third parties. In the circumstances, I find that the 3rd respondent culpably failed to make any reasonable enquiries in respect of Asset Rich s and Zhang Ying s connection with the 1st respondent before approving the contents of the public announcements or the Acquisition Agreement and wrongfully authorised the issue of the two announcements which were false or misleading in a material particular. The 3rd respondent failed in his duties properly to inform himself about China Best s affairs, to inform the board of relevant matters and to exercise reasonable care and diligence in its management. His failure amounted to misfeasance and other misconduct towards China Best or its members within the meaning of s. 214(1)(b), and also resulted in the members not having been given all the information that they might reasonably expect within the meaning of s. 214(1)(c). The same allegation against the 2nd respondent in relation to the wrongful waiver of the accrued interest on the Deposit has been made against the 3rd respondent. For the reasons stated in paragraph 102 above in relation to the 2nd respondent, this part of the case is also in my opinion not established as against the 3rd respondent. X. THE 4TH RESPONDENT S POSITION In the petition the Commission originally sought an order pursuant to s. 214(2)(e) of the Ordinance that China Best shall procure Clearmind to bring in its name such proceedings against Asset Rich on such terms as the Court considers appropriate for the purpose of recovering the interest accrued on the HK$305 million Cash Deposit paid under the Acquisition Agreement . China Best had from the outset taken a neutral stance towards this claim and agreed to abide by any judgment and order made by the court. I have some doubt if this was not an improper abdication of responsibility since it is in general for the directors of a company to form a view, if necessary with legal and other professional advice, as to what lies in the best interests of the company, and to act accordingly. It was unsatisfactory that the court was not provided with evidence of why China Best and Clearmind had not pursued such action. The claim had, however, been superseded by events. On the first day of the hearing, Mr Eugene Fung SC informed the court that the Commission had recently found out that Clearmind had been put into solvent winding up in the BVI and dissolved. On the second day of the hearing, I was informed that the Commission had also ascertained that Asset Rich had been struck off the register of companies in the BVI for non-payment of fees in November 2014. For the intended action to be instituted, it would therefore require not only an application by China Best (as member) in the BVI for a court order for Clearmind to be reinstated but also, thereafter, an application by Clearmind (claiming to be a creditor) for an order for the restoration of Asset Rich to the BVI register of companies. Given that the limitation period would, on the Commission s own view, expire on 11 September 2015 in all likelihood before the potential plaintiff and defendant could be resurrected, and given the considerable doubt that Asset Rich would actually have any asset to meet a judgment against it, the Commission informed the court on the second day of the hearing that it had decided not to pursue the claim for an order under s. 214(2)(e) against China Best. For these reasons the claim is dismissed. By agreement I make no order as to costs as between the Commission and China Best. I would add that, if the claim had been pursued, I would have required the Commission to satisfy me why an order in the terms sought was both appropriate and necessary given that the commencement of legal proceedings is in general a matter for the board of directors of the company in which the cause of action is vested, there being no suggestion that the directors of Clearmind (or indeed of China Best) had been other than fully independent from the respondents, Asset Rich and Zhang Ying since 2011. I would also have required the Commission to demonstrate that bringing the action would at least prima facie be in the interests of China Best. As the Court of Appeal recognised in SFC v Cheung Keng Ching [2011] 4 HKC 453 at 28-33, the granting of this kind of relief involves an exercise of discretion, which has to be carried out on a case by case basis. The court has to consider what is necessary, permissible and appropriate in the particular circumstances of the case. This cannot be done in an evidential vacuum. XI. FURTHER CONDUCT At the request of Mr Daniel Fung SC for the 1st to 3rd respondents, I indicated at the hearing that I would deal with the question of liability first with the question of the length of the period of disqualification including any submissions in mitigation to be dealt with at a subsequent hearing. I therefore reserve all outstanding matters to a hearing to be fixed on an early date before me in consultation with counsel s diaries. (Godfrey Lam) Judge of the Court of First Instance High Court Mr Eugene Fung SC and Ms Queenie Lau, instructed by Securities and Futures Commission, for the petitioner Mr Daniel R. 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