CHANG TAT JOEL AND ANOTHER v. THE STOCK EXCHANGE OF HONG KONG LTD

bjbj HCAL 496 & 500/2019 [2020] HKCFI 675 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE CONSTITUTIONAL AND ADMINISTRATIVE LAW LIST NO 2019 BETWEEN MIU HON KIT 1st Applicant WANG HAI SHENG 2nd Applicant LU HONG Da 3rd Applicant and THE STOCK EXCHANGE OF HONG KONG LIMITED Putative Respondent and KONG SUN HOLDINGS LIMITED 1st Putative Interested Party LIU WEN PING 2nd Putative Interested Party CHANG HOI NAM 3rd Putative Interested Party MA JI 4th Putative Interested Party CHANG TAT JOEL 5th Putative Interested Party ________________ AND IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE CONSTITUTIONAL AND ADMINISTRATIVE LAW LIST NO 500 OF 2019 _______________ BETWEEN CHANG TAT JOEL 1st Applicant MA JI 2nd Applicant and THE STOCK EXCHANGE OF HONG KONG LIMITED Putative Respondent _______________ (Heard together) Before: Hon Chow J in Court Dates of Hearing: 9-10 October 2019 Date of Judgment: 7 May 2020 JUDGMENT INTRODUCTION This is the rolled-up hearing of two applications for judicial review of the decisions of the Listing Appeals Committee of The Hong Kong Stock Exchange Limited ( SEHK ) dated 23 January 2019 finding that the Applicants had breached Rule 3.08(f) of the Listing Rules and/or the Undertaking , and imposing the sanction of public censure on each of them. BASIC FACTS (i) The Company Kong Sun Holdings Limited ( the Company ) was incorporated in Hong Kong, and listed on the Main Board of SEHK on 28 November 1970. It is an investment holding company with its subsidiaries (collectively the Group ) being mainly engaged in the investment in, and operation of, photovoltaic power plants, property investments and sales of life-like plants. The Company s market capitalization was approximately HK$4.8 billion as at 21 April 2017. The board of directors ( the Board ) of the Company consisted of the following persons ( the Directors ) at the material time: Executive Directors ( ) Chang Hoi Nam, appointed on 30 September 2013 and resigned on 13 April 2017; Liu Wen Ping, appointed on 21 March 2014 and resigned on 13 April 2017; Non-Executive Directors ( NEDs ) - Applicants in HCAL 500/2019 Chang Tat Joel ( Chang ), appointed on 7 November 2014 and resigned on 24 January 2017; Ma Ji ( ), appointed on 18 June 2015 and resigned on 6 March 2017; Independent Non-Executive Directors ( INEDs ) - Applicants in HCAL 496/2019 Miu Hon Kit ( ), appointed on 8 July 2014; Wang Hai Sheng ( Wang ), appointed on 30 September 2014 and resigned on 13 April 2017; and Lu Hong Da ( ), appointed on 7 November 2014 and resigned on 24 January 2017. Ma was the Chairman of the Board. The INEDs constituted the Audit Committee of the Company, with primary responsibilities for reviewing and monitoring the financial reporting, risk management and internal control principles of the Company and assisting the Board to fulfill its responsibilities over audit. It was also the responsibility of the Audit Committee to provide supervision over the risk management and internal control systems of the Group and report to the Board on any material issues and make recommendations to the Board in relation to those matters. The senior management of the Group included the following persons: Jia Qinglin - Chief Operating Officer ( ), who was responsible for overseeing the Group s business operations in the PRC; Fung Che Wai Anthony - Chief Financial Officer ( ), who was responsible for, inter alia, ensuring proper accounting records and systems and other records were maintained in accordance with relevant regulations and directions, keeping proper accounts, and advising the Board on the internal control systems to avoid fraud and misappropriation, and Deng Chengli - Financial Controller ( ), who worked under the COO and CFO and was responsible for the preparation and supervision of the financial records and accounts of the Group s subsidiaries in the PRC. The CFO, COO and FC were not members of the Board of the Company. (ii) The unauthorized loans and late publication of the financial reports Between 26 November 2014 and 15 March 2016, the COO and FC, without the Board s knowledge or approval, authorized the Group to issue approximately RMB 1.523 billion worth of loans and advances ( the Pre-March Loans and Advances ) to Zhongke Hengyuan Technology Co Ltd ( Zhongke ) and its subsidiaries (collectively the Zhongke Group ). The Pre-March Loans and Advances were interest free, unsecured and with no fixed term of repayment, and were made without complying with the disclosure or shareholders approval requirements under Chapters 13 and 14 of the Listing Rules of SEHK (hereinafter referred to as the Listing Rules or , as appropriate). By a letter dated 15 March 2016, the Company s former auditor, KPMG, requested the Company to provide supporting documents in relation to the Pre-March Loans and Advances. Apparently, the CFO informed the Board of KPMG s said request at a meeting of the Board held on 15 March 2016 ( the March Board Meeting ), and that was the time when the Board first became aware of the Pre-March Loans and Advances. The Board also discovered that the Pre-March Loans and Advances constituted a major transaction and an advance to an entity which were subject to disclosure and shareholders approval requirements under the Listing Rules. After discovery of the Pre-March Loans and Advances, the Board instructed the CFO, COO and FC to cease all loans and advances to the Zhongke Group. Notwithstanding the Board s aforesaid instruction, between 18 March 2016 and 11 May 2016, the COO and FC made further loans and advances of approximately RMB 84.72 million to the Zhongke Group ( the Post-March Loans and Advances ), without the Board s knowledge and approval. The Post-March Loans and Advances were also subject to disclosure and shareholders approval requirements under the Listing Rules. According to the Company, the Pre-March and Post-March Loans and Advances (collectively the Loans and Advances ) were used by the Zhongke Group for the development of 6 major solar power plants and long-term investments in an insurance company and a bank in the PRC. The COO and FC, apparently, perceived that the Company had a friendly business relationship with the Zhongke Group, and by making the Loans and Advances the Group would be given priority over the purchase of the said power plants, which were still under construction as at September 2016. The Loans and Advances, totalling some RMB 1,608.2 million, were funded by the Group s cash (HK$148.1 million), proceeds raised from the Company s corporate bonds (HK$447 million) and borrowings (RMB 1.56 billion). A majority of the Loans and Advances were made to the Zhongke Group via internet banking. In the meantime, on 28 April 2016, KPMG resigned as the Company s auditors. KPMG s resignation letter stated that, as part of the unresolved issues and outstanding matters in respect of the audit of the 2015 Annual Results, the Company had yet to provide, amongst other things, sufficient supporting documents in relation to these transactions and the audit evidence on the recoverability of these balances and whether the transactions are in compliance with the [Listing Rules] and the management accounts for the year ended 31 December 2015 in respect of certain subsidiaries of the Group (together with the relevant breakdowns and supporting documents) relating to the Loans and Advances ( the Supporting Management Account Documents ). The Company acknowledged that it had not provided those documents to KPMG because they were still under preparation as at 15 March 2016, and the same were not finalized by the Company s management until May 2016. On 25 May 2016, the Company appointed BDO as its new auditors. On 8 July 2016, the Company appointed Shinewing Risk Services Limited ( Shinewing ) as its internal control reviewer to conduct a review of the Group s internal control systems, including but not limited to the Group s financial reporting, revenue and sales management, asset management systems as well as internal compliance procedures, and to make recommendations to the Company in respect of those matters. On 13 December 2016, the Company disclosed the Loans and Advances to its shareholders and the public, some 6 to 13 months after they ought to have been disclosed under the Listing Rules, in an announcement titled Fulfilment of All Resumption Conditions and Resumption of Trading the Disclosure Announcement ), in which the Company stated, inter alia, as follows: Due to inadvertent oversight, the Company has not issued any announcement in relation to the Loans and Advances and complied with the relevant requirements under Chapter 13 and Chapter 14 of the Listing Rules. No other loans or advances have been made to Zhongke Group by the Group since 12 May 2016 and up to the date of this announcement. The Group currently has no plan to provide any new loan or advance to the Zhongke Group The Board was made aware of the Loans and Advances on 15 March 2016 when KPMG requested supporting documents in relation to the relevant loans and advances. The Board immediately enquired with the relevant management staff in the PRC (the Responsible Staff ) on the Loans and Advances. The Board was informed that: the Responsible Staff had carried out due diligence on Zhongke Group s financial background prior to granting the first advance to Zhongke Group in 2014 and assessed the recoverability of the loans and advances to Zhongke Group; they were satisfied with the financial position of Zhongke Group and the recoverability of the Loans and Advances; the Responsible Staff had enquired the use of the Loans and Advances, and were given to understand that Zhongke Group would apply the loan proceeds from the Group for power plant development and long term investment in an insurance company and a commercial bank in the PRC; and they had also reviewed the corporate and financial information of the aforesaid insurance company and commercial bank. The Board and the Audit Committee were satisfied with the due diligence and the recoverability assessment conducted by the Responsible Staff and considered that the Loans and Advances are, although not having complied with Chapter 13 and Chapter 14 of the Listing Rules due to deficiencies in internal reporting/approval practices, commercially justifiable, given that each of the companies of Zhongke Group has now become the Group s associated company. As all the Loans and Advances have been fully settled by 25 October 2016, no impairment loss with regard to the Loans and Advances has been made in the consolidated financial statements of the Group for the year ended 31 December 2015. Despite the aforesaid announcement, the Company did not seek shareholders approval of the Loans and Advances. In the Disclosure Announcement, the Company also provided a summary of the internal control review carried out by Shinewing, in which 14 major deficiencies were identified, including: lack of management system in business processes including (i) financial reporting process, (ii) revenue and trade receivables management, (iii) purchase and trade payable management, (iv) fixed assets management, (v) lending process management, and (vi) investment process management; lack of control of the accessibility of accounting system and the management authority limit of each financial officer; and lack of proper record keeping on borrower s credibility, lack of formal loan agreement and board approval regarding any borrowings made by the Group. On 13 December 2016, the Company published its: 2015 Annual Results, which should have been published by 31 March 2016 under the Listing Rules (in other words, a delay of over 8 months); and 2016 Interim Results, which should have been published by 31 August 2016 under the Listing Rules (in other words, a delay of over 3 months respectively). On 16 December 2016, the Company published its 2015 Annual Report, which should have been published by 30 April 2016 under the Listing Rules (in other words, a delay of over 7 months). The 2015 Annual Results, 2016 Interim Rules and 2015 Annual Report shall hereinafter collectively be referred to as the Financial Reports . It is clear, from the Company s public announcement dated 28 April 2016, that the delay in the publication of the 2015 Annual Results and 2015 Annual Report was the result of, inter alia, the Company s failure to provide the Supporting Management Account Documents which were required by KPMG for auditing the accounts of the Company. Those documents, according to the Company, were not finalized until May 2016 (ie after the deadlines for publishing the 2015 Annual Results and 2015 Annual Report). In response to the Listing Department s enquiries in respect of the Loans and Advances, the Company (through Somerley Capital Limited) submitted or accepted, inter alia, that: it did not comply with various provisions of Chapters 13 and 14 of the Listing Rules with respect to the Loans and Advances as no announcement and circular was published by the Company and no shareholders meeting was convened to approve the Loans and Advances ; it had no written control procedures in respect of (i) the approval and disclosure of contracts, and (ii) reporting and recording of contracts and loans and advances ; it had no internal control procedures as regards the management, use and storage of the Company s chop/seal ; and it had no internal control procedures at the relevant time with respect to the remittance of large amounts of funds via internet banking . On the other hand, the Directors responses to the Listing Department s enquiries were, in summary, as follows: The Directors submitted that the Board was only made aware of the Loans and Advances on 15 March 2016. The former EDs and NEDs submitted that the Loans and Advances were recorded as other receivables in the Group s management accounts but the item was not particularized. Thus, the same was not detected. The INEDs submitted that the Loans and Advances were recorded as other receivables in the Group s financial statements with no breakdown, and the Company had adequate internal control system. (iii) LR 3.08(f) and Undertaking The Listing Rules are made pursuant to Section 23 of the Securities and Futures Ordinance (Cap 571). LR 2.03 states that: The Listing Rules reflect currently acceptable standards in the market place and are designed to ensure that investors have and can maintain confidence in the market and in particular that: - (1) applicants are suitable for listing; (2) the issue and marketing of securities is conducted in a fair and orderly manner and that potential investors are given sufficient information to enable them to make a properly informed assessment of an issuer and of the securities for which listing is sought; (3) investors and the public are kept fully informed by listed issuers of material factors which might affect their interests; (4) all holders of listed securities are treated fairly and equally; (5) directors of a listed issuer act in the interests of its shareholders as a whole - particularly where the public represents only a minority of the shareholders; and (6) all new issues of equity securities by a listed issuer are first offered to the existing shareholders by way of rights unless they have agreed otherwise. In these last four respects, the rules seek to secure for holders of securities, other than controlling interests, certain assurances and equality of treatment which their legal position might not otherwise provide. Under the Listing Rules, every director of a listed company is required to give an undertaking ( the Undertaking ) to SEHK that in the exercise of his/her powers and duties as a director of the listed company, he shall: (i) comply to the best of [his] ability with the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited from time to time in force (the Listing Rules ); (ii) use [his] best endeavours to procure that the issuer ... shall so comply . Further, LR 3.08(f) states as follows: The board of directors of an issuer is collectively responsible for its management and operations. The Exchange expects the directors, both collectively and individually, to fulfil fiduciary duties and duties of skill, care and diligence to a standard at least commensurate with the standard established by Hong Kong law. This means that every director must, in the performance of his duties as a director:- (f) apply such degree of skill, care and diligence as may reasonably be expected of a person of his knowledge and experience and holding his office with the issuer. Directors must satisfy the required levels of skills, care and diligence. Delegating their functions is permissible but does not absolve them from their responsibilities or from applying the required levels of skills, care and diligence. Directors do not satisfy these required levels if they pay attention to the issuer s affairs only at formal meetings. At a minimum, they must take an active interest in the issuer s affairs and obtain a general understanding of its business. They must follow up anything untoward that comes to their attention. Directors are reminded that if they fail to discharge their duties and responsibilities, they may be disciplined by the Exchange and may attract civil and/or criminal liabilities under Hong Kong law or the laws of other jurisdictions. Note: In determining whether a director has met the expected standard of care, skill and diligence, courts will generally consider a number of factors. These include the functions that are to be performed by the director concerned, whether he is a full-time executive director or a part-time non-executor director and his professional skills and knowledge. (iv) The Listing Department Report On 12 May 2017, the Listing Department commenced disciplinary proceedings against the Company and the Directors. In the Listing Department s report of the same date ( the LD Report ), the Listing Department stated and concluded that: the Company was in breach of various provisions of Chapters 13 and 14 of the Listing Rules for failing to (i) comply with the disclosure and approval requirements with respect to the Loans and Advances, and (ii) dispatch and/or publish the Financial Reports within the time stipulated under the Rules ; and the Company did not have, at the material time, adequate internal controls and risk management systems . The Listing Department also stated and concluded that the Directors of the Company were in breach of: LR 3.08(f) in failing to exercise skill, care and diligence reasonably required and expected of them (i) in understanding the Company s financial records, and (ii) ensuring the Company had adequate and effective internal controls and risk management system; the Undertaking by breaching LR 3.08(f); and the Undertaking by failing to ensure that the Company - complied with various provisions of Chapters 13 and 14 of the Listing Rules; had adequate and effective internal controls and risk management system . At 8.2 of the LD Report, the Listing Department stated that the Company and the Director s breaches of the Listing Rules and Undertaking were serious and triggered regulatory concerns which warranted public censure. In respect of the Company, the Listing Department stated at 8.2(a) of the LD Report as follows: (i) The Rules is designed to ensure that investors have a continued confidence in the market and they are kept fully informed by the Company. The purpose and intention of Chapters 13 & 14 Rules as well as the Reporting Rules are aimed to achieve this purpose, to which, the Company failed to disclose the Loans & Advances at the relevant time; allow shareholders the opportunity to vote on the same; and ensure the Financial Reports were published in a timely manner; (ii) The Loans & Advances exposed the Company to substantial financial risk when the Company appeared to have a negative cash flow position at the time; (iii) The Breach concerned a substantial amount of loans and advances where RMB1.348 billion of Loans & Advances were not disclosed at the relevant time and RMB264.47 million of Loans & Advances were not approved by shareholders; (iv) The Breach persisted for a further 2 months after the Company discovered the Loans & Agreement where RMB84.72 million of Loans & Advances were issued without Disclosure & Approval; (v) The Loans & Advances had a market impact for the Company s share price dropped 20.51% the next trading day after the Loans & Advances were disclosed in the Disclosure Announcement; (vi) The Financial Reports were not published for 3 to 8 months after the deadline specified in the LR; and (vii) Admits it did not have internal controls concerning (amongst other things) notifiable transactions and use of Company s chop/seal. However, it disclosed in its 2014 Annual Report that its internal control system was adequate and effective In respect of the Directors, the Listing Department stated at 8.2(b) of the LD Report as follows: (i) The former EDs and NEDs were aware of the fluctuations in the receivables in the Group s management accounts. Accordingly, they were reasonably able to identify the Loans & Advances as early as 2014 (which was not subject to disclosure at that time) and procured the Company to comply with the LR by August 2015 when the aggregated Loans & Advances became a notifiable transaction. Rather, their failure to pay attention to the Company s management accounts led to a prolongation of the Breach which was not disclosed until 16 months after the Breach had first occurred; (ii) Mr Liu had direct supervision of the COO and through their meetings Mr Liu should have been able to acquire relevant information to enable him to discover the Loans & Advances by the time he reviewed the Group s management accounts and prevent the Breach from occurring; The Former INEDs and Mr Miu being a member of the Audit Committee at the time were responsible for reviewing the Company s financial information and their failure to enquire about the receivables item in the management accounts, which had no breakdown and fluctuated substantially, was a flaw in the discharge of their directors duties; The Directors (in particular the Former INEDs and Mr Miu whose primary responsibility is to review and monitor the Company s internal controls) play a vital role in overseeing the Company s internal controls and risk management system in order to safeguard the Group s assets. The Company s admission with respect to the Internal Control Deficiencies causes serious concerns as we believe the Loans & Advances could have been identified had proper internal controls concerning notifiable transactions and use of the chops/seals been in place at the relevant time; and The concern is further compounded by the Directors failure to identify the defects in the Company s risk management system (in particular, the COO and FC had immense power and control over the Group s operations and bank accounts which led to the approval of the Loans & Advances without the Board s approval or knowledge and upon the FC s authorization most of the Loans & Advances (RMB1.608 billion) was remitted via internet banking to Zhongke Group without the Board s knowledge or approval). The Listing Department recommended the Listing Committee to impose a public censure on the Directors for their breach of LR 3.08(f) and the Undertaking . (v) Proceedings before the Listing (Disciplinary) Committee Under SEHK s disciplinary procedure in force at the material time, a party had a right of up to three separate hearings on the merits before any finding of breach and/or sanction imposed on that party would become conclusive and binding. In the present case, the first tier hearing before the Listing (Disciplinary) Committee ( ), which comprised 8 members of the Listing Committee, took place on 7 November 2017. All the Directors were present at the hearing, with the exception of Lu. The INEDs and NEDs present made oral submissions at the hearing. Counsel/solicitors of the Directors were also present at the hearing. Although were not permitted to speak on behalf of the Directors, the Directors could consult their lawyers before answering questions or making submissions. At the hearing, members of the LDC questioned the Directors in relation to (inter alia) the sufficiency of the steps taken by them to prevent the breaches of the Listing Rules in respect of the Post-March Loans and Advances. Responses to those questions were given by, amongst others, Miu, Chang and Wang. Essentially, their answers were that the Board had asked the CFO to follow up and there was little else that they could have done because (i) the business of the Company had to continue, and (ii) the Company relied heavily on the COO and FC to carry on its business. On 21 December 2017, the LDC found, as against the NEDs and INEDs, that they had breached - LR 3.08(f) for failing to apply such degree of skill, care and diligence required and expected of them in taking reasonable steps to understand the Group s management accounts as well as to establish and maintain an effective and appropriate internal control procedure and risk management system; and the Undertaking for failing to use their best endeavor to procure the Company s compliance with the Listing Rules and to comply with the Listing Rules to the best of their abilities, and impose the sanction of public censure on each of them (collectively the LDC Decision ). The LDC s reasons for its decision in relation to the INEDs, as stated in a letter to their solicitors, Michael Li & Co, dated 21 December 2017 (with a draft news release attached thereto) were as follows: Mr. Miu, Mr. Wang and Mr. Lu breached Rule 3.08(f) and the Director s Undertaking for the reasons that: After the Board became fully aware of the Pre-March Loans & Advances on 15th March 2016, Mr. Miu, Mr. Wang and Mr. Lu failed to take sufficient or effective action to stop the COO and the FC from authorising further loans and advances. Considering the unusual circumstances, Mr. Miu, Mr. Wang and Mr. Lu should have taken pro-active actions with heightened awareness to ensure no further breaches of the Listing Rules; (b) The Company s previous auditors resignation at the said time was due to, among other things, unresolved issues and outstanding matters regarding the audit for the annual results. The Directors collectively did not take sufficient or effective steps to respond to these issues, which ultimately led to breach of the Listing Rules with respect to the publication of Financial Reports; (c) Rule 3.08 permitted delegation of functions by the Directors but the delegation did not absolve the Directors from their responsibilities or from applying the required levels of skill, care and diligence. The Directors would not satisfy these required levels if they paid attention to the Company s affairs only at formal meetings. They must apply a suitably greater level of scrutiny and follow up on anything untoward that came to their attention; (d) The Directors are, collectively and individually, responsible for ensuring that the Company establishes and maintains appropriate and effective risk management and internal control systems. In addition, the Audit Committee s terms of reference specify that the INEDs are responsible for overseeing the Company s internal control systems and discuss the risk management and internal controls with management to ensure that management has provided adequate training to the Company s staff. Accordingly, the Directors failed to ensure the Company had established and maintained an effective and appropriate (i) internal control procedures, particularly when, the Company admitted to the Internal Control Deficiencies; and (ii) risk management systems particularly when the COO and the FC were given immense power over the Group s operations and funds; (e) The Directors failed to ensure the Company s staff (including the COO and the FC) had received adequate and appropriate training with respect to the Listing Rules. The provision of the relevant chapters of the Listing Rules to each of the Company s staff (including the COO and the FC) at the time of them joining the Group, without explanation or training, is inadequate. Regular training should be provided to the Company s staff with respect to the Listing Rules that is relevant to their duties/responsibilities within the Group; and (f) The Directors failed to comply with the Director s Undertaking to use their best endeavours to procure the Company s compliance with the Listing Rules and comply with the Listing Rules to the best of their abilities in relation to the Company s breaches with respect to the Loans & Advances and the failure to publish and/or dispatch the Financial Reports within the time specified under the Listing Rules. The LDC s reasons for its decision in relation to the NEDs, as stated in their letter to their solicitors, K&L Gates and INC Lawyers respectively, dated 21 December 2017 were materially the same. (vi) Proceedings before the Listing (Disciplinary Review) Committee All the NEDs and INEDs requested for a review of the LDC Decision. The second tier hearing before the Listing (Disciplinary Review) Committee ( ), which comprised 7 members of the Listing Committee who had not participated in the first tier hearing, took place on 15 May 2018. Miu, Chang and Ma were present and made oral submissions at the hearing. Counsel/solicitors of all the NEDs and INEDs were also present at the hearing. As in relation to the hearing before the LDC, counsel/solicitors were not permitted to speak on behalf of the NEDs/INEDs present, although they could consult their lawyers before answering questions or making submissions. At the hearing, members of the LRC questioned the NEDs and INED present as to the steps taken by them to prevent further breaches of the Listing Rules in respect of the Post-March Loans and Advances. Responses to those questions were given by Chang and Ma. Essentially, their answers were that the Board had given directions to the CFO/COO/FC that there should be no further loans to the Zhongke Group, and they believed the CFO and EDs would follow the instruction, and relied on them to safeguard the Company s assets. On 6 June 2018, the LRC decided to uphold the LDC Decision that the INEDs and NEDs had breached LR 3.08(f) and the Undertaking, and concluded that there were no grounds for removing or lessening the sanction imposed on them by the LDC. The LRC further decided that the appropriate sanction to be imposed on the INEDs and NEDs was a public censure (collectively the LRC Decision ). The LRC s reasons for its decision in relation to the INEDs, as stated in a letter to Michael Li & Co dated 6 June 2018 (with a draft news release attached thereto), were as follows: The Review Committee endorsed the reasons of the First Committee contained in the Decision Letter. The INEDs breached Rule 3.08(f) and the Director s Undertaking for the reasons that: The directors are, collectively and individually, responsible for ensuring that the Company establishes and maintains appropriate and effective risk management and internal control systems. In addition, the Audit Committee s terms of reference specify that the INEDs are responsible for overseeing the Company s Internal control systems and discuss the risk management and internal controls with management to ensure that management has provided adequate training to the Company s staff. Accordingly, the INEDs failed to ensure the Company had established and maintained effective and appropriate (i) internal control procedures, particularly when, the Company admitted to the Internal Control Deficiencies; and (ii) risk management systems particularly when the COO and the FC were given immense power over the Group s operations and funds; Rule 3.08 permitted delegation of functions by the INEDs but the delegation did not absolve the INEDs from their responsibilities or from applying the required levels of skill, care and diligence. The INEDs would not satisfy these required levels if they paid attention to the Company s affairs only at formal meetings. They must apply a suitably greater level of scrutiny and follow up on anything untoward that came to their attention; The INEDs failed to ensure the Company s staff (including the COO and the FC) had received adequate and appropriate training with respect to the Listing Rules. The provision of the relevant chapters of the Listing Rules to each of the Company s staff (including the COO and the FC) at the time of them joining the Group, without explanation or training, is inadequate, Regular training should be provided to the Company s staff with respect to the Listing Rules that is relevant to their duties/responsibilities within the Group; The INEDs failed to comply with the Director s Undertaking to use their best endeavours to procure the Company s Listing Rules compliance and comply with the Listing Rules to the best of their abilities in relation to the Company s breaches with respect to the Loans & Advances and the failure to publish and/or dispatch the Financial Reports within the time specified under the Listing Rules; The Company s previous auditors resignation at the said time was due to, among other things, unresolved issues and outstanding matters regarding the audit for the annual results. The INEDs did not take sufficient or effective steps to respond to these issues, which ultimately led to Listing Rules breach with respect to the publication of Financial Reports; and In addition to the above, after the Board became fully aware of the Pre-March Loans & Advances on 15th March 2016, the INEDs failed to take sufficient or effective action to stop the COO and the FC from authorising further loans and advances. Considering the unusual circumstances, the INEDs should have taken pro-active action with heightened awareness to ensure no further breaches of the Listing Rules. Simply asking the COO and the FC to stop making further loans was, in the opinion of the Review Committee, inadequate when taking account of the severity of the prior breaches. The application for review by the INEDs is therefore rejected and the sanction imposed by the First Committee on them is affirmed. The LRC s reasons for its decision in relation to the NEDs, as stated in their letter to K&L Gates dated 6 June 2018, were materially the same. (vii) Proceedings before the Listing Appeals Committee All the NEDs and INEDs requested for a further review of the LRC Decision by the Listing Appeals Committee ( ). In the NEDs submissions dated 29 August 2018, the NEDs also requested permission for their counsel to make oral submissions on their behalf at the hearing before the LAC. On 27 November 2018, the LAC gave (inter alia) the following directions for the hearing scheduled to take place on 21 January 2019: (1) All submissions, statements or answers to questions must be made by the Appellants and the representatives of the Listing Department. The legal advisers and other professional advisers have no right of audience to address the Appeals Committee, make oral submissions or respond to any questions from the Chairman or members of the Appeals Committee unless he/she is requested to do so by the Appeals Committee. The parties may confer with their respective legal advisers as required prior to making submissions or responding to questions. (8) The principal purpose of the hearing is to allow the Appeals Committee an opportunity to ask questions and to seek clarification of relevant matters. Whilst the Appeals Committee will permit oral submissions at the hearing if necessary, such submissions should be succinct and limited as far as possible to matters not adequately dealt with by way of the written submissions On 29 August 2018, K&L Gates wrote to the LAC on 14 January 2019 repeating the previous request made that the NEDs counsel be granted a right of audience before the LAC. The LAC replied on 16 January 2019 declining the request, for the following reasons: (a) In line with the established procedures of the Appeal Committee, legal advisers have no right to address the Appeal Committee. The request that Mr Bernard Man SC be granted right of audience at the Disciplinary (Review) Hearing is therefore declined; and (b) one legal adviser may accompany and represented the two NEDs and another legal adviser may accompany and represent the three INEDs at the Disciplinary (Review) Hearing. Please note that: Any papers/materials the Appellants and the Listing Department wish to present in relation to all relevant issues should have been delivered to the Acting Secretary. The parties should assume that the Appeals Committee members have read all the papers and are fully familiar with their contents. The principal purpose of the Disciplinary (Review) Hearing is to allow the Appeals Committee an opportunity to ask questions and to seek clarification of relevant matters. Whilst the parties may make relevant points at the Disciplinary (Review) Hearing if necessary, such points should be succinct and limited as far as possible to matters not adequately covered in its papers and materials. It should be borne in mind that the Disciplinary (Review) Hearing is an informal process The third tier hearing before the LAC, which comprised 3 members of the Board of Hong Kong Exchanges and Clearing Limited, took place on 21 January 2019. At that hearing, Chang and Miu, as well as counsel/solicitors of all the NEDs and INEDs were present. Oral submissions were made by Chang and Miu. As in relation to the hearings before the LDC and the LRC, counsel/solicitors were not permitted to speak on behalf of the NEDs/INEDs present, although they could consult their lawyers before answering questions or making submissions. During the hearing, members of the LAC put many questions to Chang and Miu in relation to the adequacy of the steps taken by the Directors to prevent breaches of the Listing Rules after 15 March 2016 in respect of the Post-March Loans and Advances. Their answers, in essence, were that no further action, other than the instruction given to the CFO/COO/FC that there should be no further loans to the Zhongke Group, was taken to prevent the COO and FC from authorising further loans, and no disciplinary action was taken against them, because (i) the NEDs and INEDs prioritised the recovery of the existing loans, (ii) they relied upon the EDs and CFO to monitor the situation, (iii) the business of the Company had to continue, and (iv) the Company relied heavily on the COO and FC in its business. On 23 January 2019, the LAC gave its decisions upholding the LRC Decision in respect of the INEDs and NEDs (collectively LAC Decision ). The LAC s letter to Michael Li & Co dated 23 January 2019 conveying its decision in relation to the INEDs consisted of 2 substantive parts. The first part (Section A under the sub-heading Decision ) stated that the LAC unanimously determined to uphold the LRC s findings of breach against the INEDs, as well as the sanctions imposed, on the basis that each of them had breached (i) LR 3.08(f), and (ii) the Undertaking for failing to comply with the Listing Rules to the best of their ability and failing to use their best endeavours to procure the Company to comply with the Listing Rules. Enclosed with the letter was a copy of a news release which had been approved by the LAC ( the News Release ). The News Release, so far as relevant, stated as follows: FACTS From 26 November 2014 to 15 March 2016, the Group s Chief Operating Officer ( ) and Financial Controller ( ) (who were not directors of the Company) had, without the Company s knowledge or approval, authorised the Company and its subsidiaries ( Group ) to issue approximately RMB1.523 billion of loans and advances (which were interest free, unsecured, with no fixed term of repayment) to Zhongke Hengyuan Technology Co Limited and its subsidiaries ( Pre-March Loans & Advances ). On 15 March 2016, the Company s auditors informed the Company s board of directors (the Board ) of the Pre-March Loans & Advances. The Pre-March Loans & Advances constituted (a) a disclosable transaction; (b) an advance to an entity; and (c) a major transaction under the LR, which were subject to disclosure and/or shareholders approval. The FC was told to cease all further loans and advances. Despite the Instruction to cease all further loan and advances, the COO and FC continued, from 18 March 2016 to 11 May 2016, to issue to Zhongke Group further loans and advances totaling to RMB84.72 million without the Company s knowledge or approval ( Post-March Loans & Advances ). The Post-March Loans & Advances were also subject to disclosure and shareholders approval. The Company disclosed the Pre-March Loans & Advances and the Post-March Loans & Advances (collectively, Loans & Advances ) in an announcement dated 13 December 2016, in which the Company acknowledged that due to an inadvertent oversight the Company had not complied with the relevant requirements under Chapters 13 and 14 of the LR. Despite the said announcement, shareholders approval has not been obtained for the Loans & Advances. The Company submitted that it believed the COO and FC had limited knowledge of the LR and they were not aware of the LR implications when the Loans & Advances were made, despite a copy of Chapters 13 and 14 of the LR having been provided to the COO and FC, for their reference and attention at the time of them joining the Group. The Company further admitted that it had no written internal control procedures for (a) the approval and disclosure of contracts; (b) reporting and recording of contracts/loans and advances; (c) management, use and storage of its chops/seals; and (d) remittance of large amount of funds via internet banking (collectively, Internal Control Deficiencies ). Mr Liu, Mr HN Chang, Dr Ma and Mr TJ Chang submitted that the Company had significant amount of accounts receivables and accounts payable due to the nature of the business of the Group which were subject to high degree of fluctuations. The Loans & Advances were booked as other receivables in the management accounts and no breakdown was provided when it was presented to the Board, thus they were not detected. Mr Lu, Mr Miu and Mr Wang submitted that the Loans & Advances were recorded as other receivables in the Group s management accounts but no breakdown was provided during the Audit Committee meetings. The Company was unable to publish/dispatch its (a) annual report and annual results for the financial year ending 31 December 2015; and (b) Interim results for the six months ending 30 June 2016 (collectively, Financial Reports ) within the timeframe specified under the LR for the reason that it was still preparing the supporting documents to the management accounts of certain subsidiaries of the Company. The Financial Reports were ultimately published/despatched within 3 to 8 months after the deadline as specified under the LR to publish/despatch the same had expired. LISTING COMMITTEE S FINDINGS OF BREACH The Listing Committee considered the written and oral submissions of the Listing Department, the Company and the Directors and concluded: - (1) Company breached LR13.13, 13.15, 13.46(2)(a), 13.49(1), 13.49(6), 14.34, 14.40, and 14.41 for the reasons that: (a) As admitted by the Company, it had failed to disclose at the relevant time and/or obtain shareholders approval for the Loans & Advances which constituted (i) a disclosable transaction; (ii) an advance to an entity; and (iii) a major transaction under LR13.13, 13.15, 14.34, 14.40 and 14.41; and (b) The Company had failed to publish and/or despatch the Financial Reports within the time specified under LR13.46(2)(a), 13.49(1) and 13.49(6) as it was unable to, among other things, provide to its auditors the supporting documents to the management accounts of certain subsidiaries of the Company at the relevant time. (2) Company did not have, at the material time, adequate internal controls and risk management systems for the reasons that: (a) As admitted by the Company, it had no written internal control procedures with respect to the matters constituting the Internal Control Deficiencies; and (b) The COO, and the FC were given very significant authority and control over the Group s operations which allowed the COO and the FC to issue the Loans & Advances without the Board s knowledge or approval. In particular, the FC was able to authorise internet banking remittances of up to RMB 800 million on his own. (3) Directors breached LR3.08(f) and the Undertaking for the reasons that: (a) The Directors are, collectively and individually, responsible for ensuring that the Company establishes and maintains appropriate and effective risk management and internal control systems. In addition, the Audit Committee s terms of reference specify that the INEDs are responsible for overseeing the Company s Internal control systems and discuss the risk management and internal controls with management to ensure that management has provided adequate training to the Company s staff. Accordingly, the Directors failed to ensure the Company had established and maintained effective and appropriate (i) Internal control procedures, particularly when, the Company admitted to the Internal Control Deficiencies; and (ii) risk management systems particularly when the COO and the FC were given immense power over the Group s operations and funds; (b) Rule 3.08 permitted delegation of functions by the Directors but the delegation did not absolve the Directors from their responsibilities or from applying the required levels of skill, care and diligence. The Directors would not satisfy these required levels if they paid attention to the Company s affairs only at formal meetings. They must apply a suitably greater level of scrutiny and follow up on anything untoward that came to their attention; (c) The Directors failed to ensure the Company s staff (including the COO and the FC) had received adequate and appropriate training with respect to the LR. The provision of the relevant chapters of the LR to each of the Company s staff (including the COO and the FC) at the time of them joining the Group, without explanation or training, is inadequate. Regular training should be provided to the Company s staff with respect to the LR that is relevant to their duties/responsibilities within the Group; (d) The Directors failed to comply with the Undertaking to use their best endeavours to procure the Company s LR compliance and comply with the LR to the best of their abilities in relation to the Company s breaches with respect to the Loans & Advances and the failure to publish and/or dispatch the Financial Reports within the time specified under the LR; (e) The Company s previous auditors resignation at the said time was due to, among other things, unresolved issues and outstanding matters regarding the audit for the annual results. The Directors collectively did not take sufficient or effective steps to respond to these issues, which ultimately led to LR breach with respect to the publication of Financial Reports; and (f) In addition to the above, after the Board became fully aware of the Pre-March Loans & Advances on 15 March 2016, the Directors failed to take sufficient or effective action to stop the COO and the FC from authorising further loans and advances. Considering the unusual circumstances, the Directors should have taken pro-active action with heightened awareness to ensure no further breaches of the LR. Simply asking the COO and the FC to stop making further loans was, in the opinion of the Review Committee, inadequate when taking account of the severity of the prior breaches. At the Disciplinary (Review) Hearing, the Review Committee upheld the decision of the Listing Committee at first instance in respect of the Relevant Directors. The board of directors of a listed company is collectively responsible for the management and operations of the company. The delegation of responsibility did not absolve the Relevant Directors from their responsibilities. The Appeals Committee upheld the decision of the Review Committee, concluding that the Relevant Directors failed to take effective measures to prevent the recurrence of breaches of the LR by the Company. REGULATORY CONCERNS The Listing Committee regards the breaches in this matter as serious. The LR have been made in furtherance of the Exchange s principal function to provide a fair, orderly and efficient market for the trading of securities. They are in particular, among other things, designed to ensure that investors have and can maintain confidence in the market and that investors and the public are kept fully informed by the Company. They contain continuing obligations with which an issuer must comply including details that are required to be disclosed in respect of certain transactions and whether a circular and shareholders approval are required. The requirements of LR 13.13, 13.15, 13.46(2)(a), 13.49(1), 13.49(6), 14.34, 14.40 and 14.41 are aimed at achieving this purpose and form part of these obligations. However, the Company had failed to meet these requirements. More specifically: The Loans and Advances were of a substantial amount and had exposed the Company to significant financial risks particularly when the Company appeared to have negative cash flow at that time. However, the market was not informed of the risks on a timely basis by announcements and the shareholders were neither provided with circulars providing details of the risks nor given the opportunity to vote at any meeting on whether the Company should accept such risks; It is important that issuers publish their financial information in accordance with the timeframe under the LR. However, the Company did not publish the Financial Reports for 3 to 8 months after the deadline specified in the LR; and The Company admitted it did not have the internal controls concerning the Internal Control Deficiencies. However, the Company had disclosed in its annual report for the year ending 31 December 2015 that its internal controls system was adequate and effective .. REVIEW BY THE LISTING APPEALS COMMITTEE The Relevant Directors applied for a further review to the Appeals Committee of the decisions of and sanctions imposed on them by the Listing Committee as endorsed by the Review Committee. The Appeals Committee unanimously determined to uphold the decisions of and sanctions imposed on the Relevant Directors by the Listing Committee as endorsed by the Review Committee, on the basis that each of the Relevant Directors: breached Rule 3.08(f); and breached their respective Undertakings for failing to comply with the LR to the best of their ability and failing to use their best endeavours to procure the Company s LR compliance. The Appeals Committee has thoroughly considered all the facts including the circumstances in which the Relevant Directors placed (or misplaced) their trust in their fellow directors and senior managers within the Company. The Appeals Committee concluded that the Relevant Directors failed to take effective measures to prevent the recurrence of breaches of the LR by the Company. The second part of the LAC s letter dated 23 January 2019 (Section B under the sub-heading Reasons ) stated as follows ( Statement The LAC has thoroughly considered all the facts submitted by the INEDs, including the circumstances in which the INEDs placed (or misplaced) their trust in their fellow directors and senior managers within the Company. The LAC concluded that the INEDs failed to take effective measures to prevent the recurrence of breaches of the Exchange Listing Rules by the Company The LAC s letter to K&L Gates, with a copy of the News Release attached thereto, dated 23 January 2019 conveying its decision in relation to the NEDs was materially the same as the letter to Michael Li & Co of the same date. By a letter dated 23 January 2019, K&L Gates asked the LAC to provide written reasons for its decision in relation to the NEDs. By a letter to K&L Gates dated 24 January 2019, the Acting Secretary to the LAC stated that the LAC written reasons were provided to you in the decision letter dated 23 January 2019 . In another letter to Michael Li & Co dated 28 January 2019, the Acting Secretary to the LAC gave the same confirmation in respect of the reasons for its decision in relation to the INEDs. APPLICATIONS FOR JUDICIAL REVIEW On 20 February 2019, the INEDs applied for leave to apply for judicial review of the LAC Decision in HCAL 496/2019. In their Amended Form 86 dated 27 June 2019, the following grounds of judicial review were raised: INED-Ground 1 - the LAC failed to give any reasons in the LAC Decision when fairness call for adequate reasons to be given. INED-Ground 2 - the LAC erred in (i) applying hindsight in assessing whether the INEDs had breached the Listing Rules and/or the Undertaking, and (ii) failing to ask the correct question as to the INEDs duty to exercise reasonable care, skill and diligence. INED-Ground 3 - the LAC Decision was unfair as the gist of the case that the INEDs had to answer had unfairly shifted and/or had never been properly and fairly put to the INEDs. INED-Ground 4 - the LAC Decision was unreasonable in the public law sense and/or constituted an abuse of power by the LAC. On 21 February 2019, the NEDs applied for leave to apply for judicial review of (i) the decision of the LAC on 23 January 2019 to uphold the findings of breach by the LRC against the NEDs, (ii) the decision of the LAC on 23 January 2019 to uphold the sanctions imposed by the LRC against the NEDs, and (iii) the decision of the LAC on 16 January 2019 to refuse the NEDs application for a right of audience of their counsel at the hearing before the LAC ( the Decision on Legal Representation ), in HCAL 500/2019. In their Amended Form 86 dated 28 June 2019, the following grounds of judicial review were raised: NED-Ground 1A - the LAC failed to give adequate reasons for the LAC Decision. NED-Ground 1B - the LAC erred by failing to take into account the factual circumstances surrounding the March Board Meeting, including that there was no basis for the NEDs to doubt the effectiveness of the Board s instruction in stopping the issuance of further loans and advances. NED-Ground 1 - the LAC erred by applying the wrong legal test in finding that the NEDs breached LR 3.08(f) and the Undertaking. NED-Ground 2 - it was unfair for the NEDs to be found liable or convicted on an allegation not included in the LD Report and the goalposts had continuously been shifted. NED-Ground 3 - the LAC erred by failing to take into account the materially different individual circumstances amongst the directors. NED-Ground 4 - the LAC Decision was irrational and/or Wednesbury unreasonable. NED-Ground 5 - the NEDs were deprived of a fair hearing by virtue of the Decision on Legal Representation. REASONS CHALLENGE A INED-GROUND 1 On behalf of the INEDs, Mr Benjamin Yu, SC argues that the reasons given by the LAC were grossly inadequate and demonstrated serious doubts over the decision-making process, particularly suggestive that the LAC had never properly considered the matter, and the proper thought process had never been gone through. Mr Yu further argues that the reasons were inadequate because: The reasons contained in the decision letter to Michael Li & Co dated 23 January 2019 merely set out what the LAC had considered ( The LAC has thoroughly considered within the Company ) and its conclusion ( The LAC concluded by the Company ). There was no reasoning whatsoever. The reasons were nothing more than assertions that the appeal had no merits, the INEDs had failed to take effective measures and the Company had committed recurrence breaches of the Listing Rules. Nothing in the reasons showed that the LAC had addressed or engaged the substantial issues (referred to as the core issues in 13 of Mr Yu s Skeleton Submissions) before it. Furthermore, detailed submissions had been made as to the legal approach in assessing the directors responsibility (being also the subject of challenge under INED-Ground 2 relating to error of law ), but no process of reasoning was set out. The LAC s reasons further failed to properly address (i) why the trust was misplaced and the action taken by the INEDs were ineffective in such circumstances, (ii) the Pertinent Questions , and (iii) what ought to have been done by the INEDs in the circumstances of their particular case, and whether what they did, in the circumstances, fell below the standards of competence appropriate for persons fit to be independent non-executive directors. As such, there remains substantial doubt that the LAC failed to even turn its mind to the proper legal approach and engaged the issues before it. (i) Whether the Statement constituted the entirety of the LAC s reasons for decision The validity of Mr Yu s arguments referred to in 52(1) and (2) above depends on the correct identification of the LAC s reasons for the LAC Decision. Mr Yu submits that the LAC s reasons are to be found in the Statement, and the News Release should not be regarded as constituting any part of the LAC s reasons, because: (i) the News Release merely reproduced the Statement as the reason, and (ii) the News Release was referred to and incorporated in Section A of the letter dated 23 January 2019 under the sub-heading Decision and not in Section B of the letter under the sub-heading Reasons . In my view, to treat the Statement as constituting the entirety of the reasons for the LAC Decision would be to read the LAC s letter of 23 January 2019 too rigidly and mechanically. The News Release was plainly intended to be a full published statement of the findings, reasons and decision of the LAC. It set out, amongst other things: the procedural history of the case; the basic facts of the case; the LDC s findings of breach on the part of the NEDs and INEDs; the LRC s decision to uphold the decision of the LDC; the LAC s decision to uphold the decision of the LRC; the regulatory concerns as regards the breaches committed by the NEDs/INEDs; and the sanctions imposed on the NEDs/INEDs. The Statement should, in my view, properly be read and understood as a statement of the matter which LAC wished to highlight as a clear shortcoming of the NEDs/INEDs. This does not mean, however, that the LAC did not uphold or endorse the other findings of breach on the part of the NEDs/INEDs made by the LDC, or the LDC s reasons for those findings. The breaches found by the LDC went beyond the mere failure of the NEDs/INEDs to take effective measures to prevent the recurrence of breaches. In particular, the LDC found that the NEDs/INEDs were in breach of LR 3.08(f) and/or the Undertaking in: failing to ensure that the Company had established and maintained effective and appropriate internal control procedures and risk management systems particularly when the COO and FC were given immense power over the Group s operations and funds ( the Internal Control and Risk Management Failure ); failing to ensure that the Company s staff (including the COO and FC) had received adequate and appropriate training with respect to the Listing Rules ( the Training Failure ); failing to (i) use their best endeavours to procure the Company to comply, and (ii) themselves comply, with the Listing Rules in relation to (a) the Company s breaches with respect to the Loans and Advances (both Pre-March and Post-March), and (b) the publication and/or dispatch of the Financial Reports within the time limits specified under the Listing Rules ( the Specific Breaches ); and failing, after the Board had become aware of the Pre-March Loans and Advances on 15 March 2016, to take sufficient or effective action to stop the COO and FC from authorizing further loans and advances to the Zhongke Group ( the Prevention Failure ). Items (1) and (2) were systemic failures, while item (3) related to the specific breaches of the Listing Rules in respect of the Loans and Advances and the Financial Reports. Only the last item, (4), related to the failure of the NEDs/INEDs to take effective measures to prevent the recurrence of the unauthorized loans and advances to the Zhongke Group. In the News Release, it was expressly stated that the LRC upheld the decision of the LDC, and the LAC upheld the decision of the LRC. It seems to me to be clear that the LAC must, in the circumstances, have upheld and endorsed the decision of the LDC, including the findings of breach and the reasons for those findings. In short, the LAC s letters dated 23 January 2019 and the News Release should be read together, and the contents of the News Release should be regarded as forming part of the reasons for the LAC s decision to uphold the respective decisions of the LDC and LRC. That this was the LAC s intention has been confirmed by the Chairman of the LAC which made the LAC Decision . Viewed in this light, the LAC s reasons to uphold the decisions of the LDC and LRC and find that the INEDs were in breach of LR 3.08(f) and/or the Undertaking are, I consider, adequate, and cannot be regarded as no reasoning whatsoever , or nothing more than assertions that the appeal had no merits, the INEDs had failed to take effective measures, and the Company had committed recurrence breaches of the Listing Rules. In short, I reject Mr Yu s arguments referred to in 52(1) and (2) above. (ii) The core issues In respect of the arguments referred to in 52(3) above, according to Mr Yu, the following were the core issues that were canvassed before the LAC by the INEDs: As INEDs, their duty to exercise reasonable care, skill and diligence may be materially different from the other members of the Board. KPMG, at the time when they informed the Board about the Pre-March Loans and Advances on 15 March 2016, did not suggest that there was any deliberate wrongdoing such as embezzlement or that anyone (including the Executive Directors, Non-Executive Directors and senior management of the Company) was involved in any wrongdoing. There was nothing to indicate to the INEDs that a decision or an order by the Board that the loans should cease would not be carried out or would not have been effective to stop the loans from continuing, particularly given the absence of untoward incidents prior to the discovery of the full magnitude of the Pre-March Loans and Advances. When the order of the Board was given, the focus was on the lack of awareness of the requirement to have approval from the Board rather than blatant abuse of position and power. The Audit Committee had met KPMG in March 2015 (to discuss the financial results of the Group for 2014) and again in August 2015 (to discuss the interim financial results of the Group for the 6 months ended 30 June 2015). KPMG was responsible, as the Company s external auditor, to identify any material issues of the Group s financial statements to the Audit Committee, but KPMG did not raise any issues in relation to the Pre-March Loans and Advances during the two meetings, notwithstanding the fact that they started in November 2014. This was because the balances of other receivables in relation to loans and/or advances as at 31 December 2014 and 30 June 2015 were insignificant. When KPMG for the first time informed the Board as to the existence of the Pre-March Loans and Advances without providing any details and nature and asked for supporting documents, the INEDs immediately requested the CFO and other members of the Board to (i) cease any further advances to the Zhongke Group without the approval of the Board, (ii) investigate the cause of the loans, (iii) ascertain the recoverability of the loans, and (iv) take immediate steps to recover them. After the Board had become aware of the Pre-March Loans and Advances (but before being apprised of the full magnitude thereof), it had made inquiries with relevant individuals and was advised that: the responsible staff had carried out due diligence on the Zhongke Group in 2014 and assessed the recoverability of the Pre-March Loans and Advances; they were satisfied with the financial position of the Zhongke Group and the recoverability of the Pre-Match Loans and Advances; they had enquired about the use of the loans and advances by the Zhongke Group and were told that it would apply the proceeds for power plant development and long term investments in an insurance company and a commercial bank in the PRC, and the relevant individuals had also reviewed the corporate and financial information of the said insurance company and commercial bank; the relevant individuals genuinely believed that the Zhongke Group would consider to sell its solar power projects to the Group as its first priority potential purchaser; and the Zhongke Group had repaid a significant portion of the Loans (RMB800 million) in early 2016. Mr Yu says that given the state of knowledge that the INEDs had at the time, it is by no means clear that the actions taken by the INEDs were not reasonable or that they fell below the standards of competence appropriate for persons fit to be independent non-executive directors. In my view, none of these so-called core issues were material to, or could have affected, the LAC s conclusion that the INEDs were in breach of LR 3.08(f) and/or the Undertaking. In respect of 58(1) above - Although the degree of care, skill and diligence reasonably to be expected of each Director in relation to the management of the Company is not identical in every aspect (since it depends on what may reasonably be expected of a person of his knowledge and experience and holding his office with the issuer as per Rule 3.08(f)), in so far as the Internal Control and Risk Management Failure, the Training Failure, and the Prevention Failure are concerned, I am unable to see how the duty of the INEDs would be materially different from, or lower than, the NEDs and EDs. On the contrary, the INEDs constituted the Audit Committee of the Company which were specifically responsible for reviewing and monitoring (amongst other things) the risk management and internal control principles of the Company, providing supervision over the risk management and internal control systems of the Group, reporting to the Board on any material issues, and making recommendations to the Board in relation to those matters. In my view, the degree of care, skill and diligence reasonably to be expected of the INEDs to see that a proper system of internal control and risk management was established and maintained by the Company was at least as high as, if not higher than, that of the NEDs and EDs. In so far as the Specific Breaches are concerned, it is, in my view, clear that they were consequences of the Company s Internal Control Deficiencies. In relation to the unauthorised Loans and Advances, as pointed out by the Listing Department at 8.2(b)(iv) of the LD Report, the unauthorised Loans & Advances could have been identified had proper internal controls been in place. This was effectively accepted by the Company: see its submissions (via Somerley) to SEHK dated 23 September 2016 ( The Directors considered that the Loans and Advances, although not having complied with the disclosure and reporting requirements under Chapter 14 of the Listing Rules due to deficiencies in internal reporting/approval practices, ), and the Disclosure Announcement (see 15 above). In relation to the failure to publish and/or dispatch the Financial Reports within the time limits specified under the Listing Rules, the Company also accepted that it was a result of its failure to provide the Supporting Management Accounts Documents (relating to the Loans and Advances) which were required by KPMG for auditing the accounts of the Company (see 20 above). In respect of 58(2) and (3) above, when the Board first learned about the unauthorised Pre-March Loans and Advances on 15 March 2016, any reasonable board of directors should immediately be concerned with 3 matters: (i) recovery (or recoverability) of the existing loans and advances, (ii) prevention of further unauthorized loans and advances to the Zhongke Group, and (iii) investigation of how the unauthorized loans and advances came to be made and review of any deficiencies in the internal control and risk management systems of the Company. In so far as prevention of further unauthorized loans and advances to the Zhongke Group is concerned, even if there was no suggestion or evidence of any deliberate wrongdoing such as embezzlement on the part of the COO or FC or NEDs, or any specific indication that the Board s instruction to the CFO, COO and FC not to make further loans or advances to the Zhongke Group would not be followed, having regard to the staggering amount of the unauthorized loans and advances involved as well as the seriousness of the breaches of the Listing Rules, the LDC/LRC/LAC were fully justified to take the view that the Directors (including the INEDs and NEDs) ought to have taken pro-active steps to stop the COO and FC from making any further loans or advances to the Zhongke Group. No reasonable person in the position of the INEDs and NEDs, bearing in mind their fiduciary obligation to safeguard the Company s assets, could have been satisfied with a mere instruction to the CFO, COO and FC not to make further loans or advances to the Zhongke Group, or believed that such instruction was a sufficient response in the circumstances. The obvious actions that the Directors could have taken included revoking the authority of the COO/CF to make payments from the Company s bank accounts (including payments made via internet banking), or imposing an appropriate monetary limit on their authority, or requiring a co-signing authority from a member of the Board before they could make payments beyond the set limit, or requiring the submission of weekly financial reports supported by contemporaneous bank statements and accounting records to check and ensure that no further loans or advances were made to the Zhongke Group. There were, no doubt, other reasonable measures that the Directors could have taken. A mere instruction to the CFO, COO and FC not to make further loans or advances to the Zhongke Group was, in the circumstances, patently and woefully inadequate. The lame or token effort made by the INEDs/NEDs shows, in my view, a high degree of neglect of their duty to safeguard the assets of the Company and indifference to the interests of the Company. In respect of 58(4) above, the fact that KPMG did not raise any issues in relation to the Pre-March Loans and Advances during the two meetings with the Audit Committee in March 2015 and August 2015 (because the balances of other receivables in relation to loans and/or advances as at 31 December 2014 and 30 June 2015 were insignificant) seems to me to be irrelevant. What is relevant is how the Board (including the INEDs and NEDs) reacted when it was informed by KPMG of the Pre-March Loans and Advances on 15 March 2016. In respect of 58(5) above, I have already dealt with the inadequacy of the Board s instruction to the CFO/COO/FC to cease any further advances to the Zhongke Group in so far as the Prevention Failure is concerned. The other steps taken by the Board mentioned in 58(5) above do not go to the LDC s findings (endorsed by the LRC and LAC) as regards the Internal Control and Risk Management Failure, the Training Failure, or the Specific Breaches. The same comments apply to the matters mentioned in 58(6) above. I shall consider the INEDs complaint as regards the proper legal approach in assessing their responsibility when I deal with the error of law ground below. (iii) Misplacing of trust In respect of Mr Yu s arguments referred to in 52(4) above, the LAC s statement - that the INEDs had misplaced their trust in the senior managers (ie the COO and FC) and the measure which they had taken was ineffective in the circumstances - is, I consider, a comment which the LAC was fully justified to make on the facts of the present case. B NED-GROUND 1A The NEDs also complain that the LAC failed to give adequate reasons in the following aspects : The LAC s reasons failed to show that it had considered and addressed substantial issues, ie the procedural unfairness due to the shifting of the goalposts (ie NED-Ground 2) and the appropriateness of the sanctions given the individual circumstances and extent of knowledge and involvement of the NEDs (ie NED-Ground 3). The LAC s reasons did not explain what conclusions were reached on the principal controversial issues and why they were resolved in the way they were. The reader is unable to understand why the NEDs were (or were not) entitled to place their trust in other directors and senior officers of the Company, and why or whether they did fall below the standard of competence expected of them. The reasons also did not explain what effective measures the Applicants could and should have taken to prevent the recurrence of breaches. In so far as the LAC relied on the reasons set out in the News Release, that would constitute an impermissible wholesale adoption of copying of the reasons given by the LDC and LRC. The fact that it is unclear whether the LAC relied on the reasons set out in the News Release is also in itself a manifestation of the failure to give adequate reasons. These complaints are further developed in 52-56 of the submissions of Mr Barrie Barlow, SC on behalf of the NEDs. The matters raised by the NEDs mentioned in 62(1) above will be dealt with later when I consider NED-Grounds 2 and 3. I would merely point out, at this juncture, that: In relation to the Internal Control and Risk Management Failure and the Training Failure, although the NEDs were not members of the Audit Committee, they were under a duty to use their best endeavours to procure that the Company would comply with the requirements of the Listing Rules, and exercise reasonable skill, care and diligence to a degree as might reasonably be expected of persons of their knowledge and experience in the management of the affairs of the Company. In my view, such duty must at least include a duty to see that proper internal control and risk management systems (including that staff received adequate and appropriate training on the requirements of Listing Rules) were established and maintained. The LDC s findings that the Company did not have, at the material time, adequate internal control and risk management systems, and that the Board of the Company (including the NEDs) failed to ensure that that Company had established and maintained effective and appropriate internal control and risk management systems are justified and cannot be faulted. In relation to the Specific Breaches and the Prevention Failure, I do not see that the position of the NEDs is any stronger than, or different from, the INEDs. In so far as the Specific Breaches are concerned, they were a consequence of the Internal Control and Risk Management Failure and the Training Failure. In so far as the Prevention Failure is concerned, the measure adopted by the Directors (including the NEDs) was wholly inadequate which no reasonable persons in the position of the NEDs could have considered would be sufficient in the circumstances of this case. I have already dealt with the matters raised by the NEDs mentioned in 62(2) and (3) above. I should add that there is no objection in principle for the LAC to adopt the reasons and analyses of the LDC/LRC. In all, I am of the view that the reasons given by the LAC for its decisions are proper and adequate in the circumstances of this case. ERROR OF LAW (INED-GROUND 2 AND NED-GROUND 1) Mr Yu submits that the LAC ought to have addressed the following Pertinent Questions : what was the state of the knowledge, skill and experience that may reasonably be expected of a person carrying out the functions of the INEDs in relation to the Company; what was the knowledge, skill and experience that the INEDs had; what a reasonably diligent person, exercising care and skill and diligence with the said knowledge would have done; and whether, in all the circumstances, the steps which the INEDs had taken fell below the standards of competence appropriate for persons fit to be directors of companies, and the LAC s failure to do so constituted an error of law. Under this ground, Mr Yu further submits that whether a director was negligent must not be judged by hindsight , that a director should not be found negligent for mere errors of judgment , and that the LAC should have given proper deference to the INEDs under the mere judgment doctrine particularly when they were perfectly entitled to delegate their work and when their roles were fundamentally different from that of the EDs and NEDs. Mr Barlow also submits that the LAC committed errors of law in: adopting a collective responsibility approach without considering the individual circumstances of each director, in particular his knowledge and experience plus his role and responsibilities in the Company; failing to take account of material matters, in particular at the March Board Meeting - the NEDs were provided with very limited information about the details and nature of the Pre-March Loan and Advances; the NEDs were not made aware of any materials suggestive of deliberate concealment or fraud on the part of the COO and FC in authorising the Pre-March Loans and Advances; the NEDs were not made aware that any director (including the EDs) or senior executives was involved in any wrongdoing; the special responsibilities of the Audit Committee; and the Company s acknowledgement of a lack of written internal control procedures for certain matters did not mean that the Company had no internal controls for those matters; and disregarding the differences between the NEDs and the EDs/INEDs when imposing sanctions. The relevant legal principles relating to directors duties were, however, not in dispute at the hearings before the LDC, LRC and LAC . What was in dispute was whether the INEDs and NEDs acted in breach of those duties. For the purpose of the present discussion, I shall briefly set out what I consider to be the applicable principles relating to directors duties relevant to this case. First, the contents of the duties of a director of a listed company are spelt out in LR 3.08: The board of directors of an issuer is collectively responsible for its management and operations. The Exchange expects the directors, both collectively and individually, to fulfil fiduciary duties and duties of skill, care and diligence to a standard at least commensurate with the standard established by Hong Kong law. This means that every director must, in the performance of his duties as a director: (a) act honestly and in good faith in the interests of the company as a whole; (b) act for proper purpose; (c) be answerable to the issuer for the application or misapplication of its assets; (d) avoid actual and potential conflicts of interest and duty; (e) disclose fully and fairly his interests in contracts with the issuer; and (f) apply such degree of skill, care and diligence as may reasonably be expected of a person of his knowledge and experience and holding his office within the issuer. The duty which is of particular relevance to this case is that stated in sub-paragraph (f). Second, in relation to the discharge of those duties, the following general propositions stated by Jonathan Parker J in Secretary of State for Trade and Industry v Baker (No 5) [1999] 1 BCLC 433, at 489A-C, have been adopted by the Hong Kong court (see the judgment of Kwan J (as she then was) in Re Copyright Ltd [2004] 2 HKLRD 113, at 34): (i) Directors have, both collectively and individually, a continuing duty to acquire and maintain a sufficient knowledge and understanding of the company's business to enable them properly to discharge their duties as directors. (ii) Whilst directors are entitled (subject to the articles of association of the company) to delegate particular functions to those below them in the management chain, and to trust their competence and integrity to a reasonable extent, the exercise of the power of delegation does not absolve a director from the duty to supervise the discharge of the delegated functions. (iii) No rule of universal application can be formulated as to the duty referred to in (ii) above. The extent of the duty, and the question whether it has been discharged, must depend on the facts of each particular case, including the director's role in the management of the company. Third, while some degree of delegation of specific functions by a director is permissible, the director remains under a personal, inescapable, responsibility to supervise and manage the affairs of the company. There can be no overall delegation, or total abrogation, of responsibility (Re Westmid Packing Services Ltd [1998] 2 BCLC 646, at 653 and 654 per Lord Woolf MR). Fourth, even where a director has properly delegated some specific function to another person, he remains under a duty to supervise and control the discharge of that function. In Baker (No 5), supra, Jonathan Parker J stated the following at 487-488: But just as the duty of an individual director as formulated by the Court of Appeal in Re Westmid Packing Services Ltd does not mean that he may not delegate, neither does it mean that, having delegated a particular function, he is no longer under any duty in relation to the discharge of that function, notwithstanding that the person to whom the function has been delegated may appear both trustworthy and capable of discharging the function. As Sir Richard Scott V-C said when making a disqualification order against Mr Hawes: Overall responsibility is not delegable. All that is delegable is the discharge of particular functions. The degree of personal blameworthiness that may attach to the individual with the overall responsibility, on account of a failure by those to whom he has delegated particular tasks, must depend on the facts of each particular case. Sometimes there may be a question whether the delegation has been made to the appropriate person; sometimes there may be a question of whether the individual with overall responsibility should have checked how his subordinates were discharging their delegated functions. Sometimes the system itself, in which the failures have taken place, is an inadequate system for which the person with overall responsibility must take some blame. It is not in dispute in the instant case that where delegation has taken place the board (and the individual directors) will remain responsible for the delegated function or functions and will retain a residual duty of supervision and control. As Sir Richard Scott V-C made clear in the passage quoted above, the precise extent of that residual duty will depend on the facts of each particular case, as will the question whether it has been breached. These are matters which are in dispute in the instant case. [emphasis added] Fifth, as can be seen from the above statement of principle by Sir Richard Scott V-C quoted by Jonathan Parker J, a director may also be responsible for failing to establish and maintain an adequate internal system in which failures by those to whom he has delegated particular tasks have taken place. The same point was made by Sir Richard Scott V-C in Re Barings plc [1998] BCC 583, at 586: Mr Collings made the point that if an efficient system is in place, or if the individual in question has good reason for believing there to be an efficient system in place, the delegation within the system of functions to be discharged in accordance with the system by others cannot be the subject of serious criticism if, in the event, the persons to whom the responsibilities are delegated fail properly to discharge their duties. That may be so up to a point in theory, but the higher the office within an organisation that is held by an individual, the greater the responsibilities that fall upon him. It is right that that should be so, because status in an organisation carries with it commensurate rewards. These rewards are matched by the weight of the responsibilities that the office carries with it, and those responsibilities require diligent attention from time to time to the question whether the system that has been put in place and over which the individual is presiding is operating efficiently, and whether individuals to whom duties, in accordance with the system, have been delegated are discharging those duties efficiently. It plainly becomes individuals holding high office to be responsive to warning signs that indicate some failure in the system, or in the discharge by individuals within the system of their respective responsibilities. It would, I think, be quite rare to find a case where there have been serious continuing failures on the part of individuals of which the senior executive officers could disclaim responsibility on the ground that they did not know, and were not told of the failures. There may be some cases of that sort, and if it is right that the senior executives did not know, were not told and could not have been expected to know about the failures, they may be absolved of criticism. But the responsibilities that go with the high office held by Mr Maclean, notwithstanding that there were others who held higher office, carry with them the obligation of diligent supervision. Sixth, an executive and a non-executive director owes, in principle, the same duties and responsibilities in law as to the management of a company s affairs, and regardless of whether he is paid a salary by the company (Re Boldwin Construction Co Ltd [2001] 3 HKLRD 430, at 9 per Rogers VP), although, as stated by Jonathan Parker J in Baker (No 5), supra, at 488, the higher the level of reward, the greater the responsibilities which may reasonably be expected (prima facie, at least) to go with it . Seventh, while a director s knowledge, experience and personal circumstances (including his role in the management of the company) are relevant in assessing whether he has acted in breach of duties owed to the company, the consideration is not purely subjective. It has both an objective and a subjective element. As stated by Hoffmann LJ in Re D Jan of London Ltd [1994] 1 BCLC 561, at 563, the duty of care owed by a director at common law is the conduct of - a reasonably diligent person having both - (a) the general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as carried out by that director in relation to the company, and (b) the general knowledge, skill and experience that the director has. Eighth, although the directors of a company are collectively and individually responsible for the management and supervision of the company affairs, each director should be judged separately when considering whether he has acted in breach of duties owed to the company. He is not liable or responsible merely because the other directors have failed in their duties to the company. Ninth, whether a director was negligent should not be judged by hindsight (see Duchess of Argyll v Beuselinck [1972] 2 Lloyd s Rep 172 at 185). Tenth, I am content to proceed in the present case that it remains the law that a director should not be held liable for mere errors of judgment (see In re City Equitable Fire Insurance Co Ltd [1925] 1 Ch 407, at 429 per Romer J), although, as pointed out by Rogers VP in Re Boldwin Construction Co Ltd, supra, at 434E-F, the classic exposition of the duty of care required of a director by Romer J in that case may be open to review in present day circumstances as, perhaps, being too low . Returning to the Pertinent Questions identified by Mr Yu referred to in 66 above, while an analytical, step-by-step, consideration of those questions may be helpful or necessary in some circumstances, I do not consider that such approach is required in the present case. In relation to the breaches of duties on the part of the INEDs/NEDs found by the LDC (endorsed by the LRC and LAC), namely, the Internal Control and Risk Management Failure, the Training Failure, the Specific Braches, and the Prevention Failure, the EDs, INEDs and NEDs were, in my view, in relevantly the same position. On the facts of the present case, I do not see that the particular knowledge, skill, or experience of the INEDs/NEDs, all of them being highly experienced businessmen occupying important positions and/or professional persons, required separate consideration, or could have made any difference to the conclusions reached by the LDC/LRC/LAC. As earlier mentioned, the Internal Control and Risk Management Failure and the Training Failure were systemic failures of the Company for which all the Directors were individually responsible, and the Specific Breaches were consequences of those systemic failures. In so far as the Prevention Failure is concerned, all the Directors (including the INEDs and NEDs) had the same relevant knowledge at the March Board Meeting, namely, that the senior management of the Company had made very substantial unauthorized loans to the Zhongke Group resulting in serious breaches of the Listing Rules. The measure taken by them to prevent the recurrence of further unauthorised loans to the Zhongke Group (namely, an instruction to the CFO, COO and FC not make any further loans) was, in my view, so obviously inadequate that no reasonable director in the position of the INEDs/NEDs could have considered that it was sufficient in the circumstances. The breaches of duty on the part of the INEDs/NEDs found by the LDC (endorsed by the LRC/LAC) did not require the application of any hindsight . They cannot properly be described as involving, or brushed aside as, mere errors of judgment . I am also unable to accept Mr Yu s submission that the LDC/LRC/LAC were required to give any proper deference to the INEDs under the mere judgment doctrine, bearing in mind their compositions, knowledge, experience and functions: the LDC/LRC were made up of members of the Listing Committee comprising investors, representatives of listed company, and market practitioners including lawyers, accountants, corporate finance advisers and exchange participants or officers of exchange participants who were selected by virtue of their knowledge, experience and standing; the LAC comprised 3 members of the Board of Hong Kong Exchanges and Clearing Limited; and these committees were specially constituted to deal with complaints of breaches of the Listing Rules (including directors duties) and were experienced in determining such matters. Neither do I accept the arguments of Mr Barlow referred to in 67 above. I shall not repeat the discussion above (including the discussion under INED-Ground 1 and NED-Ground 1A), but would add the following. First, it is incorrect to suggest that the Company only acknowledged a lack of written internal procedures. In Somerley s letter to the SEHK dated 11 November 2016, at 10(i), Somerley stated (on behalf of the Company) that - [t]he Company submits that there is no internal control procedures as regard the management, use and storage of the Company s chop/seal . In Somerley s letter to the SEHK dated 5 January 2017, at 4(a) and (b) and 5, Somerley stated - [a]s provided and confirmed by the Company, there were no remittance limit per day or per transaction for making internet banking fund transfer through the 6 relevant bank accounts of KS Yongtai which were involved in the Loans and Advances [t]he Company submits that there was no internal control procedures at the relevant time with respect to the remittance of large amount of fund via internet banking , and [i]t is clarified and submitted by the Company that there is no internal control procedures with respect to the compliance of the Listing Rules for notifiable transactions . In any event, the absence of written internal procedures was itself a significant deficiency of the Company s internal control and risk management systems. Second, in so far as the issue of sanction is concerned, it should be noted that under LR 2A.09, if the Listing Committee finds there has been a breach of the Listing Rules by any of the parties named in LR 2A.10 (including a director of a listed issuer), the sentencing options open to the Listing Committee are limited to the following - (1) issue a private reprimand; (2) issue a public statement which involves criticism; (3) issue a public censure; (4) report the offender s conduct to the Commission or another regulatory authority (for example the Financial Secretary, the Commissioner of Banking or any professional body) or to an overseas regulatory authority; (5) ban a professional adviser or a named individual employed by a professional adviser from representing a specified party in relation to a stipulated matter or matters coming before the Listing Division or the Listing Committee for a stated period; (6) require a breach to be rectified or other remedial action to be taken within a stipulated period including, if appropriate, the appointment of an independent adviser to minority shareholders; (7) in the case of wilful or persistent failure by a director of a listed issuer to discharge his responsibilities under the Listing Rules, state publicly that in the Exchange s opinion the retention of office by the director is prejudicial to the interests of investors; (8) in the event a director remains in office following a public statement pursuant to paragraph (7) above, suspend or cancel the listing of the issuer's securities or any class of its securities; (9) in the case of wilful or persistent failure by a listed issuer to discharge its responsibilities under the Listing Rules, order that the facilities of the market be denied for a specified period to that issuer and prohibit dealers and financial advisers from acting or continuing to act for that issuer; (10) take, or refrain from taking, such other action as it thinks fit, including making public any action taken pursuant to paragraphs (4), (5), (6), (8) or (9) above. As stated by David Graham (Head of Listing of SEHK), a public censure, aside from punishment, serves two other important purposes: it alerts investors to concerns that the Listing Committee may have in relation to a listed company or its management, and it communicates to the market the standards of conduct required by the Listing Committee under the Listing Rules . Having regard to the seriousness of the breaches in this case, the sanction of public censure imposed on the NEDs are, if anything, on the light side. Any lighter form of sanction (eg private reprimand or public statement involving criticism) would plainly not be sufficient to address the regulatory concerns raised in this case which were highlighted in the LD Report and in the successive versions of the news release attached to the LDC Decision, LRC Decision and LAC Decision respectively. While it may be argued that the INEDs, who constituted the Audit Committee, ought to bear a greater responsibility for the Internal Control and Risk Management Failure and the Training Failure, that would only mean that the LDC/LEC/LAC would have been justified in imposing a heavier sanction on the INEDs. In no way can that argument be used to justify a reduction of the sanction imposed on the NEDs. Third, Mr Barlow has referred to various questions from some members of the LAC in the course of the hearing on 21 January 2019 as suggesting that they had failed to direct themselves on the applicable law, or applied hindsight in coming to their conclusions. In my view, when considering whether the LAC made any error of law (including the application of hindsight), the focus should be on the reasons given by the LAC for its decision, and not on the questions and answers at the hearing. While the questions may reflect the thinking process of the committee members at the hearing, they could not be regarded as the final views of the members. Also, during the course of a hearing, it often happens that questions are raised for the purpose of testing the soundness of propositions advanced by a party, without affecting the ultimate conclusions of the decision-maker. PROCEDURAL UNFAIRNESS (INED-GROUND 3 AND NED-GROUND 2) Under this ground, Mr Yu argues that the INEDs were never fairly and properly informed of the true allegations against them with respect of the Post-March Loan and Advances, especially the particulars as to what they should have done but had failed to do. The Listing Department s case against the INEDs, as revealed in the LD Report, was based on their alleged failure to ensure that the Company had and maintained effective risk management and internal control systems. Yet, it transpired that the LDC made its findings on a completely different basis, namely, the Post-March Loans and Advances. Thus, the INEDs were prejudiced by procedural unfairness . On the other hand, Mr Barlow argues that : the LD Report focused on the failure of the Directors to discover the Pre-March Loans and Advances prior to the March Board Meeting; none of the allegations in the LD Report concerns any alleged failure on the part of the NEDs to take sufficient and effective action to stop the COO and FC from authorising further loans and advances which was the basis upon which the LDC concluded that the NEDs had breached their duties; the LDC, LRC and LAC pursued this new charge without requiring or asking the Listing Department to amend its charges in the LD Report to give particulars concerning the allegations that the NEDs (a) failed to take sufficient or effective action to stop the COO and FC from authorising further loans, and/or (b) should have taken pro-active action with heightened awareness to ensure no further breaches; and the amorphous nature of this new charge coupled with its lack of particulars means that the NEDs have been deprived of any meaningful opportunity to respond to it. In my view, the complaint of procedural unfairness has no merits. First, it is incorrect that the LD Report focused, or only focused, on the failure of the Directors to discover the Pre-March Loans and Advances prior to the March Board Meeting. It is apparent, form the contents of the LD Report, that the Listing Department was also concerned about: the Company s failure to disclose and obtain shareholders approval in respect of both the Pre-March and Post-March Loans and Advances ( 4.2 to 4.5); the Company s late publication of the Financial Reports ( 4.6 to 4.9); the Company s lack of internal controls and risk management systems ( 5.1 to 5.6); and the NEDs and INEDs responsibilities for - both the Pre-March and Post-March Loans and Advances ( 6.7(a)-(c) and 6.9(a)-(c)); and the Company s lack of internal controls and risk management systems, including the failure to provide adequate training to (inter alia) the COO, FC and other relevant employees of the Group in respect of the Listing Rules ( 6.7(d)-(h) and 6.9(d)-(f)). Second, the LDC found against the INEDs and NEDs not only in respect of the Post-March Loans and Advances, or the Prevention Failure (ie they failed to take sufficient and effective action to stop the COO and FC from making further loans and advances to the Zhongke Group). The LDC also found against the INEDs and NEDs in respect of the Internal Control and Risk Management Failure, the Training Failure and Specific Breaches. Third, although the matter could have been put more clearly in the Listing Report, a proper reading of the Listing Report shows, in my view, that the allegation that the INEDs and NEDs failed to take sufficient steps to prevent the Post-March Loans and Advances (in other words, to prevent the recurrence of the breaches) was included. In particular: At 6.7(g) of the Listing Report, the Listing Department stated, in respect of (inter alia) the NEDs that the lack of effective management systems is a cause for serious concern as it had attributed substantially to the Breach. It was expected that the Former NEDs to have been reasonably able to identify such deficiencies in the Company s risk management systems and taken the relevant steps to rectify such risk . At 6.9(f) of the Listing Report, the Listing Department stated that it considered reasonable for the INEDs to have (i) identified the Internal Control Deficiencies; (ii) identified the immense power and control provided to the COO and FC; and (iii) taken steps to rectify the same. Such conduct would (in our view) have reasonably led to the early identification of the Loans and Advances and potentially prevented the Breach from occurring . The expression Loans and Advances was defined in Section 9 of the Listing Report to mean Pre-March Loans & Advances and Post-March Loans & Advances totaling to RMB1.608 billion , and the expression Breach was defined to mean Breach of Chapter 13 & 14 Rules . As it was, the INEDs and NEDs failure to take immediate steps to rectify the Internal Control Deficiencies after 16 March 2016, which would include taking effective and adequate measures to stop the COO and FC from making further loans to the Zhongke Group, allowed them to make the Post-March Loans and Advances. I short, I do not accept the argument that there was any shifting of the goalposts . Fourth, in any event, the INEDs and NEDs failure to take sufficient or effective action to stop the COO and FC from making further unauthorised loans to the Zhongke Group was one of the matters found by the LDC as constituting a breach of LR 3.08(f) and the Undertaking on the part of the INEDs and NEDs. They had full notice of this allegation which they challenged at the hearings before the LRC and LAC . Each tier of the disciplinary process involved a de novo hearing on the merits . Any unfairness at the LDC level on the ground that the INEDs and NEDs did not have fair notice of the said allegation was, I consider, cured upon a consideration of the disciplinary process as a whole (see Wong Tak Wai v Commissioner of Correctional Services [2010] 4 HKLRD 409, at 66-69). Fifth, I do not consider that there was any obligation on the part of the Listing Department (or the LDC/LRC/LAC) to particularise what exactly the INEDs and NEDs ought to have done to stop the COO and FC from making further loans to the Zhongke Group. It cannot seriously be disputed that as soon as the INEDs and NEDs became aware of the unauthorized Loan and Advances at the March Board Meeting, they were under a duty to take adequate and effective steps to stop further unauthorised loans. As mentioned in 59(2) above, there were many different measures which could have been adopted and which would, or would likely, be effective to stop the COO and FC from making further unauthorised loans. The measure adopted by the INEDs and NEDs was patently inadequate. The LDC/LRC/LAC s conclusion that the INEDs and NEDs had failed to take sufficient or effective action, or pro-active action with heightened awareness, to ensure no further breaches seems to me to be inevitable on the facts of the present case. Lastly, the Prevention Failure was only one of four principal matters which the LDC/LRC/LAC found against the INEDs and NEDs. Their arguments under this ground do not affect the LDC/LRC/LAC s findings in respect of the Internal Control and Risk Management Failure, the Training Failure and the Specific Breaches. Thus, even if there is validity in the argument that the INEDs and NEDs were not given sufficient notice of, or opportunity to answer, the allegation in respect of the Prevention Failure, or that the LDC/LRC/LAC should not have found against the INEDs and NEDs in respect of the Prevention Failure because that was not included in the Listing Report, it does not mean that the whole LAC Decision should be quashed. In that scenario, the LAC s finding against the INEDs and NEDs in respect of the Prevention Failure should be quashed leaving the LAC s findings in respect of the Internal Control and Risk Management Failure, the Training Failure and the Specific Breaches intact, and the sanction of public censure imposed on the INEDs and NEDs should be quashed and remitted to the LAC for fresh consideration. LEGAL REPRESENTATION (NED-GROUND 5) Under this ground, Mr Barlow submits that the circumstances of the NEDs case called for permission for the NEDs not only to be accompanied by their legal representative, but their counsel should also be allowed to address the LAC and make submissions on their behalf, due to: the seriousness of the charges and the potential penalties; the inevitability of points of law arising; the NEDs, who were not legally trained, were not able effectively to present their own cases; there were no identified procedural difficulties; and the fairness to the NEDs plus the absence of any prejudice to SEHK . Mr Barlow further submits that it is clear from the LAC s reply on 16 January 2019, namely, - In line with the established procedures of the Appeal Committee, legal advisers have no right to address the Appeal Committee. The request that Mr Bernard Man SC be granted right of audience at the Disciplinary (Review) Hearing is therefore declined [emphasis added], that the so-called established procedures were the sole reason for the Decision on Legal Representation, and the LAC had failed to consider the circumstances of the NEDs case . The disciplinary process of SEHK relevant to a consideration of this ground of judicial review is set out in (i) Chapter 2A of the Listing Rules, and (ii) SEHK s Disciplinary Hearings Procedures ( the Procedures ). The following provisions are of note: The disciplinary procedures of SEHK are intended to enable the Listing Committee to deal with all disciplinary matters justly, expeditiously and on the merits. To this end, the procedures are flexible and may be varied at any time to suit the circumstances of any particular case ( 3 of the Preamble to the Procedures). The process under SEHK s disciplinary procedures is intended to be informal and to be conducted primarily on papers. Parties are required to file written submissions addressing all relevant issues. Whilst parties may be permitted to supplement their written submissions orally at hearings, oral submissions must be kept to a minimum and be limited as far as possible to matters not dealt with by way of the written submissions 4 of the Preamble to the Procedures). Each respondent has the right to attend the disciplinary hearing and to be accompanied by a professional adviser ( 9.1 of the Procedures and LR 2A.16). It is expected that respondents will attend the disciplinary hearing, and that they will ensure they are in a position to make supplementary oral submissions if necessary, and to answer any questions which the Disciplinary Committee may have ( 9.3 of the Procedures). The Chairman will conduct the proceedings in the manner he considers suitable for clarifying the issues before it and generally for handling the proceedings in a just and expeditious manner ( 10.1 of the Procedures). At the hearing, the Chairman will invite the representatives of the Listing Division to make any oral submission to supplement, but not repeat, the written submissions of the Listing Division. He will then invite the respondent(s) to make any oral submission to supplement, but not repeat, his/their written submissions. Any party accompanied by a professional adviser may confer with his professional adviser before making any oral submission. Such oral submissions must be kept as short as reasonably practicable ( 10.1(e) of the Procedures). The Disciplinary Committee may ask the parties and any persons attending the disciplinary hearing any question relevant to the disciplinary action. Persons answering questions are expected to do so directly and not through their professional advisers, although any party accompanied by a professional adviser may confer with his professional adviser before answering such questions. However, any member of the Disciplinary Committee may request any professional adviser present to clarify or elaborate any answers given by their clients ( 10.1(f) of the Procedures). The representatives of the Listing Division, to be followed by the respondent(s), may make a final oral submission if they so wish. Any party accompanied by a professional adviser may confer with his professional adviser before making final submission. Such oral submissions must be kept as short as reasonably practicable ( 10.1(g) of the Procedures). At hearings before the Disciplinary Committee, the matter is usually presented in person by the parties. Except in very exceptional circumstances and, in any event, only with the leave of the Chairman, professional advisers accompanying the parties do not have any right of audience at the hearing ( 10.3 of the Procedures). Any parties charged with a breach of the Listing Rules has up to three hearings before the LDC, LRC and LAC on the merits before any decision or sanction shall become conclusive and binding (LR 2A.11). The rationale behind SEHK s general policy of limiting the role of lawyers at a disciplinary hearing was summarized by Ribeiro PJ at 109 of the judgment of the Court of Final Appeal in SEHK v New World Development Co Ltd (2006) 9 HKCFA 234, as follows: SEHK s policy, reflected in the Listing Rules and the Disciplinary Procedures, of limiting (at least in the first instance) the role of lawyers at the hearing is based upon the belief that limited representation suffices in most cases; that an informal, expert, lay tribunal, steeped in the ways of the stock exchange, is best placed to deal effectively and swiftly with disciplinary issues; that the public interest in maintaining confidence in the market requires swift investigation and treatment of suspected infringements; and that over-lawyering the procedures would undermine many of these objectives, substantially lengthening and complicating proceedings, and making it difficult to persuade qualified individuals to accept unremunerated appointment to a Disciplinary Committee. These are plainly legitimate concerns. [emphasis added] It is not disputed that, under 10.3 of the Procedures, the LAC has a discretion to allow counsel to make oral submissions at a hearing before the LAC. This was accepted by the Listing Department. When responding to the NEDs request that their counsel be permitted to address the LAC, the Listing Department: referred to the judgment of the Court of Final Appeal in New World Development Co Ltd, supra, which held that any restrictions in legal representation must be fair and proportionate in the circumstances and identified several factors that should be considered when deciding whether legal representation should be permitted; analysed those factors in the light of the circumstances of the present case; and concluded and submitted that while it did not object to the NEDs legal representatives from attending the hearing before the LAC for the purpose of providing advice to the NEDs, it was not necessary to permit or allow them to make oral submissions or answer questions on behalf of the NEDs . The LAC also recognised, implicitly, that it had such discretion, as shown by the fact that in its letter dated 27 November 2018 giving directions relating to the procedures to be adopted at the hearing, it was stated that legal advisers and other professional advisers had no right to address the LAC, make oral submissions or respond to any questions unless he/she is requested to do so by the Appeals Committee . Further, the Chairman of the LAC has confirmed that: the decision made on 16 January 2019 declining the NEDs request that their counsel be granted a right of audience at the hearing before the LAC was made after the members of the LAC had discussed the request in the light of (1) the reasons given in support of the request, and (2) the Listing Department s submissions in opposition to the request; the LAC decided that it was unnecessary, as a matter of fairness, to permit the NEDs legal representative to make oral submissions or answer questions on behalf of the NEDs at the hearing; and while the LAC was not willing at that stage to give counsel a general right of audience, the directors concerned were able to bring counsel to the hearing and confer with them before making oral submissions or responding to questions, and it was open to the NEDs to make a further request for counsel to speak at the hearing in relation to specific issues or questions arising at the hearing, if they wished, and the LAC could and would consider such a request at that time . I do not therefore accept Mr Barlow s submission that the established procedures of the LAC were the sole reason for the Decision on Legal Representation, or that the LAC had failed to consider the circumstances of the NEDs case. The important question, in my view, is whether the LAC properly exercised its discretion in the present case and whether any unfairness has resulted from the LAC s decision that the NED s counsel should not be permitted to make oral submissions or answer questions on behalf of the NEDs at the hearing save with the special leave of the LAC. In answering this question, the following circumstances of the present case are relevant: There was no dispute of primary fact. There was no examination or cross-examination of witnesses at the hearing. The was no dispute of law or applicable legal principles . It did not appear, from the transcript of the hearing before the LAC, that the INED and NED who attended that hearing had any difficulty in presenting their cases, or answering questions put to time by members of the committee. The NEDs had full opportunities to instruct lawyers to prepare detailed written submission filed prior to the hearing. The NEDs were entitled to be accompanied by legal representatives at the hearing, make oral submissions prepared in advance with the assistance of their lawyers, and confer with the legal representatives prior to answering any questions put to them by members of the LAC. It is also important to bear in mind that SEHK s disciplinary process is intended to be primarily paper-based (see 4 of the Preamble to the Procedures). The principal purpose of a hearing, as stated in (8) of the LAC s letter dated 27 November 2018 (mentioned in 40 above), is to allow the members of the LAC an opportunity to ask questions and to seek clarification of relevant matters . The same pointed was repeated in (1) of the LAC s letter dated 16 January 2019 (mentioned in 41 above). There is no objection in principle for disciplinary proceedings to be primarily paper-based , so long as the disciplinary tribunal retains a discretion to conduct a oral hearing where the circumstances of any given case require such oral hearing to be held in order to meet the requirements of procedural fairness. While the allegations faced by the NEDs were serious, having regard to the general considerations behind the disciplinary process of SEHK and the particular circumstances of the present case, it was, in my view, open to the LAC to conclude that fairness did not require that the NEDs counsel be granted a right of audience at the hearing before the LAC. Further, I do not consider that any unfairness to the NEDs has resulted from this decision of the LAC. MISCELLANROUS MATTERS (NED-GROUNDS 1B AND 3) The above discussion sufficient deals with NED-Grounds 1B and 3, which do not require separate consideration. WEDNESBURY UNREASONABLENESS (INED-GROUND 4 AND NED-GROUND 4) This catch-all ground of review depends on the validity of the other grounds of review raised by the INEDs and NEDs. Having rejected those other grounds, there is no basis to find that the LAC Decision was unreasonable in the Wednesbury sense. DISPOSITION Leave to apply for judicial review is granted to the INEDs and NEDs in HCAL 496 and 500/2019, on the basis that the intended applications for judicial review are reasonably arguable with realistic prospects of success. The substantive applications for judicial review are dismissed upon full consideration of the merits. The INEDs and NEDs shall pay the costs of SEHK, including all reserved costs (if any), to be taxed if not agreed, with certificate for 2 counsel. (Anderson Chow) Judge of the Court of First Instance High Court HCAL 496/2019 Mr Benjamin Yu, SC and Mr Bernard Mak, and Mr Ernest C Y Ng, instructed by Michael Li & Co, for the 1st to 3rd Applicants Mr Victor Dawes, SC and Mr Joshua Chan, instructed by Minterellison LLP, for the Putative Respondent The 1st to 5th Putative Interested Parties were absent HCAL 500/2019 Mr Barrie Barlow, SC and Mr Jason Lee, instructed by K & L Gates, for the 1st & 2nd Applicants Mr Victor Dawes, SC and Mr Joshua Chan, instructed by Minterellison LLP, for the Putative Respondent Contained in Part 2 of Appendix 5 (titled Declaration and Undertaking with regard to Directors ) to the Listing Rules. See Somerley s letter to SEHK dated 11 November 2016, 9(a). See Somerley s letter to SEHK dated 23 September 2016, 5(c). See Somerley s letter to SEHK dated 11 November 2016, 10(i). See Somerley s letter to SEHK dated 11 November 2017 (mistakenly dated 2016), 4(b). See 7.1(a) of the LD Report. See 7.1(b) of the LD Report. See 7.1(c) of the LD Report. See 8.4(b) of the LD Report. Referred to in 25.5 of Mr Yu s Skeleton Submissions under the rubric of Error of Law See 17 of Mr Yu s Skeleton Submissions dated 27 September 2019. See 3 of the Affirmation of John Williamson dated 21 August 2019. See 50D of the NEDs Amended Form 86. See 26, 27, 29 and 33 of Mr Barlow s Skeleton Submissions. See 101-104 of the Affirmation of David Graham. For the INEDs/NEDs qualifications and experience, see the 2015 Annual Report of the Company, which are also summarized in 6.5 of the LD Report. See 23 of the Affirmation of David Graham dated 14 August 2019. See 31 and 33 of Mr Yu s Skeleton Submissions. See 38-41 of Mr Barlow s Skeleton Submissions. See (i) Section B2 of the INED s submissions dated 16 March 2018 for the LRC hearing, (ii) Sections 19.1 and 19.2 of the NED s submissions dated 16 March 2018 for the LRC hearing, (iii) Section 13.1.3 of the INED s submissions dated 8 August 2018 for the LAC hearing, (iv) Section B2 of the NED s submissions dated 12 October 2018 for the LAC hearing, and also 37 and 43 above. See SEHK Disciplinary Hearings Procedures , at 6, 16.3 and 19.1. See 46 of Mr Barlow s Skeleton Submissions. See 47-48 of Mr Barlow s Skeleton Submissions. See the Listing Department s First Composite Response dated 11 September 2018, at 4.4 to 4.9. See 5-6 of the Affirmation of John Williamson dated 21 August 2019. See 68 above. 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