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 The governance policies which the Company had in place were incomplete and out-of-date, and had neither been circulated nor followed.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.