On 11 April 2022, The Stock Exchange of Hong Kong Limited (“Exchange“) published a Statement of Disciplinary Action against Hsin Chong Group Holdings Limited (delisted, previous Stock Code: 404) (“Company“) and seven of its former directors (“Directors“).
Between August and December 2016, the Company entered into a sale and leaseback agreement and a renovation cooperation agreement (“Agreements“) with two related companies of Mr. Zhou Wei (“Mr. Zhou“), a then executive director of the Company. The Agreements were subsequently terminated, and the total sum of RMB376.5 million that had been paid out were treated as loans made to the related companies of Mr. Zhou. Such loans remained outstanding as at 23 March 2018, being the date of the Company’s last published annual report before its delisting in December 2019.
The Agreements and the transactions thereunder (“Transactions“), which constituted discloseable and connected transactions of the Company, were approved by Mr. Zhou alone without knowledge of the board of directors of the Company. Mr. Zhou did not address his conflict of interest, nor did the Company comply with the relevant reporting, announcement, circular and shareholders’ approval requirements set out in Chapters 14 and 14A of the Listing Rules. The Transactions were subsequently discovered by the auditors of the Company and became an audit issue which led to disclaimer opinions from the auditors. The Company admitted that the Transactions had not been brought to the attention of the board due to lack of internal controls in place.
The Company was censured by the Exchange for failing to publish and/or despatch its 2016 Annual Results and 2017 Annual Reports in a timely manner, while Mr. Zhou was censured for, among other things, wilfully failing to discharge his responsibilities to avoid actual conflict of interest and to act honestly and in good faith in the interests of the Company and its shareholders. In the public censure of Mr Zhou, the Exchange made a PII statement to the effect that had Mr Zhou remained in office and the Company remained listed, his retention of office would have been prejudicial to the interests of investors. It is noteworthy that had the Company not been delisted and had Mr Zhou not ceased to be a director way before the delisting, the seriousness of Mr Zhou’s misconduct could have warranted a Director Unsuitability Statement with follow-on action as part of the disciplinary sanctions within the powers of the Listing Committee under Chapter 2A of the Listing Rules which had been enhanced since 3 July 2021.
As for the Directors other than Mr. Zhou, they were publicly criticised by the Exchange for breach of their duties of skill, care and diligence as directors, hence the failure to safeguard the Company’s assets and ensure the Company had adequate and effective internal controls for compliance with the Listing Rules.
This case serves as a reminder that every director of a company listed on the Exchange bears the responsibility to procure the company to implement appropriate internal control and risk management measures, and to provide training to the relevant staff. Above all, each director must take an active interest in the operations and use of financial assets of the company.