Further to our news update, on 4 May 2023, the Court of Final Appeal handed down its judgment in Re Guy Kwok-Hung Lam [2023] HKCFA 9, affirming the earlier decision of the Court of Appeal to dismiss a bankruptcy petition in light of an exclusive jurisdiction clause. In so doing, the Court of Final Appeal put an end to the longstanding debate on the effectiveness of an exclusive jurisdiction clause in bankruptcy context.

In the judgment by Mr Justice French NPJ (with whom Cheung CJ, Mr Justice Ribeiro PJ, Mr Justice Fok PJ, and Mr Justice Lam PJ agree), it was held that the “established approach” (i.e. a petitioner will ordinarily be entitled to a bankruptcy/winding up order if the petition debt is not subject to a bona fide dispute on substantial grounds) is not appropriate where an exclusive jurisdiction clause is involved.  Where the underlying dispute of the petition debt is subject to an exclusive jurisdiction clause, the court should generally dismiss the petition and hold the parties to their contract, unless there are countervailing factors, such as the risk of insolvency affecting third parties, a frivolous defence, or an abuse of process.

In so finding, the Court of Final Appeal noted that the jurisdiction of the Courts in bankruptcy matters is conferred by statute and is not amenable to exclusion by contract. However, the parties’ agreement to refer their disputes to a foreign court is relevant to the court’s exercise of its discretion to decline jurisdiction. Furthermore, the determination of whether there is a bona fide dispute on substantial grounds, while being a necessary element of the court’s jurisdiction, is a threshold question. It is at that stage that public policy consideration comes into play and the court will adopt a multi-factorial approach. Where a bankruptcy petition is brought by one creditor against another and there is no evidence of a creditor community at risk, the significance of public policy of the legislative scheme for bankruptcy jurisdiction is much diminished.

While the Court of Final Appeal makes clear that its findings do not cover the case where an exclusive jurisdiction clause requires bankruptcy proceedings to be instituted in a foreign court, this decision will likely have far-reaching impact not only in bankruptcy proceedings but also on the treatment of arbitration clauses in bankruptcy or insolvency context.

For further details, the full judgment can be found here.

A brokerage firm (the “Firm“) has been recently reprimanded and fined HK$6 million by the Securities and Futures Commission (the “SFC“) for various regulatory breaches committed in the course of acting as the placing agent in a share placement between November and December 2019.

During the relevant period, the Firm acted as the placing agent for the majority shareholder (the “Shareholder“) of a listed company in Hong Kong (the “Company“) to procure not less than six placees to subscribe for the shares of the Company. In the absence of the Shareholder’s consent, the Firm (i) entered into bought and sold notes in respect of the shares on behalf of the Shareholder with the placees, where the transaction prices were inconsistent with the placing price agreed with the Shareholder, and (ii) transferred the shares from the Shareholder’s account to the placees’ accounts, hoping that the placees would sell the shares on the market to settle the placing price with the Shareholder.

Upon investigation, the SFC found that in failing to safeguard the assets of its client and acting beyond the client’s authorities and instructions, the Firm was grossly negligent and it breached certain provisions of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission in relation to safeguarding client assets, and acting with proper authorization. Nevertheless, the SFC acknowledged that there was no sufficient evidence to support a finding of dishonesty or recurrent breaches on the part of the Firm.

This case serves as a helpful reminder to all licensed firms that it is important to act within their authorities, including verifying whether the instructions they were acting on were given by the person ultimately responsible for the origination of the instructions, and to act with due care and in the best interests of the clients (which is fundamental to the fitness and properness of licensed corporations).

Recently, the Labour Department has revoked the employment agency (“EA“) license of Lifree Employment Agency Limited (“Lifree”) and reminded operators of EAs to conduct their business in compliance with the law and the requirements of the Code of Practice (“Code“) for EAs at all times.  This has been the third case of revocation of an EA license in 2023.

The basis of such revocation stems from sections 53(1)(c)(iva) and 53(1)(c)(v) of the Employment Ordinance (“EO“) – the Commissioner for Labour (“Commissioner“) may revoke the licence of an EA if she is satisfied that the licensee concerned has not complied with the Code, or the licensee concerned is not a fit and proper person to operate an EA.  In the current case, Lifree failed to meet the requirements set out in the Code, including failing to ensure that any information that is made available to employers or to job seekers is consistent with the facts made known to it, failing to include all required items in the service agreements drawn up with employers, failing to provide payment receipts to employers, etc.  In addition, Lifree was considered not a fit and proper person to operate an EA.

It may be helpful to note that section 53(1) of the EO also lists out various grounds (including the ones mentioned above) on which the Commissioner may revoke a licence, such as a contravention of any provisions of Part XII of the EO (i.e. the section on Employment Agencies) or any regulation made under section 62 of the EO, such as overcharging job seekers or operating an EA without a licence.  Any person aggrieved by a decision of the Commissioner taken in respect of him under section 53(1) may, within 28 days after he is notified of the decision, appeal to the Administrative Appeals Board.

On 25 April 2023, the Stock Exchange of Hong Kong Limited (Exchange) issued a Statement of Disciplinary Action against S&S Intervalue China Limited (Delisted, Previous Stock Code: 8506) (Company) and five of its former and current directors (Directors).

Summary of facts

During 2018 to 2020, the Company’s subsidiary (Subsidiary) entered into unauthorised transactions (Unauthorised Transactions) under which the Subsidiary provided a loan (Loan) and multiple bank guarantees for the due performance of certain liabilities owed by third parties. There was no justifiable commercial reason for the Unauthorised Transactions, which caused the Company to suffer significant loss.

The Company claimed that the Unauthorised Transactions were not reported to, nor authorised by, the Board, and were arranged, inappropriately, by two former executive directors without the Board’s knowledge and attributed the occurrence of the Unauthorised Transactions to their misconduct.

Listing Committee’s key findings

The key findings made by the Listing Committee include:

1. The Unauthorised Transactions constituted discloseable and major transactions. The Company breached the announcement, circular and shareholders’ approval requirements under Chapter 19 of the GEM Listing Rules (GLRs) in connection with the Unauthorised Transactions.
2. There were material deficiencies in the Company’s internal controls, which contributed to the Company’s failure to comply with the GLR requirements applicable to the Unauthorised Transactions.
   1. The Subsidiary adopted a sole-directorship system which led to a concentration of power in the sole director, which led to a deterioration in corporate governance and internal control at the subsidiary level.
   2. The Company did not have any proper system in respect of management appointments or to define the limits of management power.
   3. The disclosure system was ineffective due to inadequacies in reporting lines, compliance culture, and director/staff training. The governance policies which the Company had in place were incomplete and out-of-date, and had neither been circulated nor followed.
   4. The Company’s financial reporting function was ineffective and its financing activities were unmonitored.
   5. The Company had no policy or practice to prepare and circulate monthly updates to the Board.
3. All Directors breached GLR 5.01 and their Undertakings with regard to Directors (Undertakings) to (i) comply with the GLR to the best of their ability and (ii) use their best endeavours to ensure that the Company had adequate and effective internal controls, including those relevant for the Company’s compliance with the GLR.
4. The compliance officer of the Company breached GLR 5.20 by failing to advise the Company in respect of the GLR requirements applicable to, at least, the Loan approved by her.
5. Certain Directors’ failure to respond to the Division’s investigation and reminder letters constituted a breach of their Undertakings as well as the GLR.

Key takeaways from this decision

The Exchange wishes to send a strong message to the market that “[d]irectors, whether executive or non-executive, are collectively and individually responsible for overseeing the company’s corporate governance matters.  Even where non-executive directors are not involved in the day-to-day operations, they are expected to proactively seek sufficient information for the proper discharge of their directors’ duties.“

Undetected misconduct by senior management of a company poses a question as to whether the board of directors put in place adequate oversight mechanisms and policies to mitigate the risk of misconduct. In this regard, the Exchange expects the independent directors to perform their monitoring role on behalf of the shareholders and other stakeholders to ensure compliance. 

The Stock Exchange of Hong Kong Limited (HKEx) in its recent Enforcement Bulletin raises concern regarding issuers’ announcements which only tell part of the story. This can happen where the facts and information of the disclosure that are given are not necessarily false, but the disclosure omits, buries, or downplays material facts of an unfavourable nature, or if favourable possibilities are presented as more probable than they really are. It warns issuers that an announcement which is misleading by omission can be just as damaging as an announcement which states something which is incorrect or untrue.  Disciplinary action may follow against those responsible and it is no defence that limited information that was disclosed was not factually wrong.

Resignation of directors and auditors is specifically highlighted as a problematic area of such “partial truth” disclosures.

HKEx points out that it is common to see resignation announcements which state simply that a director is resigning for personal reasons or to pursue other endeavours, or that an auditor has resigned because of an inability to agree an audit fee. While such disclosure is appropriate in many cases, there is sometimes meaningful information for investors that requires a step deeper.  For example:

• a director may have decided to spend time on other endeavours because there has been an unresolved breakdown in his or her relationship with the rest of the board over a corporate governance issue.
• The impossibility of agreeing an audit fee may have arisen because the auditor has identified high-risk, problematic areas of concern in the audit which the issuer appears reluctant to address.

Resignation of directors

HKEx reminds issuers that careful attention must be paid to ensuring that appropriate disclosure regarding a director’s resignation are made, particularly if the resignation comes during a time of sensitivity, pressure (financial or otherwise), or disagreement for the listed issuer, the board or the director personally. In addition, “personal reasons” should only encompass reasons such as illness, bereavement or other genuine personal difficulties that change the director’s circumstances.

HKEx also reminds resigning directors that they should raise inadequate announcement regarding his or her resignation with the issuer or contact the Exchange directly if concerns persist.  HKEx restates the importance of good record-keeping, which could demonstrate how duties have been individually discharged.  Such record may be particularly important for a director who has resigned, or if there has been a disagreement amongst the board.

Resignations of auditors

HKEx echoes the concern of the Accounting and Financial Reporting Counsel (AFRC) that “disagreement over audit fees” has been used as a generic reason to hide the real root cause of the auditors’ resignation.

In AFRC’s open letter to public interest entity auditors and members of audit committee published in January 2023, it notes that out of 56 auditor resignations for the period from 1 November to 31 December 2022, 44 attributed their resignations to disagreement over audit fees.  AFRC is unconvinced of such reasoning given that audits for the December 2022 year-end financial statements should have already been commenced in the period, with related audit fees having been agreed in advance.

HKEx restates its reminder to audit committees that they are expected to ensure that the auditors’ resignation letter clearly reflects the reasons for their resignation, and procure the issuer to disclose in the auditors’ resignation announcement anything that needs to be brought to the shareholders’ attention regarding any issues or matters affecting the audit process or fee, or the issuer’s relationship with the auditors. HKEx further reminds AFRC’s expectation that audit committees should understand, and make appropriate disclosure of, the reasons for an auditor’s resignation.

HKEx also urges issuers and directors to avoid satisfying themselves with a “partial truth” disclosure either to avoid addressing sensitive matters or to buy time – such as attributing a delay in the publication of audited results to the Covid-19 pandemic, when the issuer is aware that serious audit issues have been raised by the auditors, which would likely have resulted in delayed publication regardless of the pandemic.