A recent High Court decision confirmed that directors of listed companies may be disqualified and / or ordered to personally compensate the company for the misappropriation of company funds by other officers, even in the absence of any financial gain by the director.
(SFC v Chen Ruomao and ors. [2024] HKCFI 928)
A. Facts
The Securities and Futures Commission (“SFC”) sought a disqualification order and a compensation order under ss.214(2)(d) and (e) respectively of the Securities and Futures Ordinance (Cap.571) (“SFO”) against Chen Ruomao (“Chen”), the CFO cum director, of Changgang Dunxin Enterprise Company Limited (2229.hk) (長港敦信實業有限公司) (“Dunxin”).
In 2015 and 2016, Dunxin issued a Share Placement and Bond Placement (“Placements”) stating, respectively, that net proceeds would be “used to enrich the operational requirements and/or for future investments of the Group”, and “applied towards the general working capital of the Group and deployment of solid waste utilization project”. Collectively, Dunxin raised funds in the total sum of HK$173,661,530.98. of which HK$163 million was subsequently withdrawn and deposited into the personal bank account of the Chairman of the Board (the “Chairman”) and used for his personal purposes.
It was the SFCs position that Chen was responsible for causing or allowing the Company to give false or misleading information; procuring or causing the overstatement of cash and bank balance in the Company's financial statements; and allowing the proceeds of the Placements to be misappropriated by the Chairman, whereby relief under s.214(2) should be granted.
B. Conditions to be satisfied in order to seek relief under s.214 of the SFO
Three conditions must be satisfied in order to seek s.214(2) relief, namely:-
(1) the corporation in question is or was a listed corporation when the conduct complained of occurred;
(2) the business or affairs complained of is that of the company in question; and
(3) the conduct complained of falls within one or more heads of misconduct specified in s.214(1)(a)-(d) of the SFO.
C. Factors considered by the Court
The Court considered that the first and second conditions above had been satisfied in that (1) Dunxin was a listed corporation at the time its funds were misappropriated by the Chairman, and (2) the matters complained of by the SFC were concerned with the propriety of the application of Dunxin's assets.
As for the third condition, the SFC relied on ss.214(1)(b)-(d) of the SFO, where the business or affairs of the corporation had been conducted in a manner:-
(i) involving defalcation, fraud, misfeasance or other misconduct towards it or its members;
(ii) resulting in its members not having been given all the information with respect to its business or affairs that they might reasonably expect; or
(iii) unfairly prejudicial to its members.
The Judge considered that Chen's conduct amounted to misconduct under ss.214(1)(b)-(d) taking into account, that:-
(1) Chen was responsible for causing or allowing Dunxin to publish false information in the Announcements having approved the same in board meetings;
(2) Chen was an executive director and CFO of Dunxin, and must have known that there was no project or investment which required the funds raised and could not have honestly believed that the statements concerning the purposes of fund raising in the Announcements were true;
(3) Chen caused or procured Dunxin to publish financial reports which had overstated cash and bank balances by RMB251 million;
(4) Chen produced fictitious bank records and documents, purportedly showing that funds transferred to the Chairman were further transferred to Dunxin's principal subsidiary.
(5) Chen knew about the misappropriation, but did not take steps to recover the funds and instead concealed the misappropriation from the auditors.
Despite there being no financial benefit to Chen, the Court considered that Chen's misconduct was very serious. A disqualification order of 10 years and a compensation order of HK$163 million were therefore made against him.
D. Conclusion
S.214(2)(e) of the SFO confers the Court wide discretion to make various orders which it deems just, including orders for compensation.
This case concerns serious misconduct, but compensation orders have been made in respect of misconduct of a less serious nature. As long as the required degree of causal connection is satisfied, the Court can make a compensation order against the wrongdoer.
Leaving aside infidelity and gross misconduct in this case, the takeaway is that CFOs, senior officers and directors of a listed company should always sign or approve documents and transactions for the benefit of the company. Signing blank cheques or any document without verifying the accuracy of the content may result in misappropriation by another officer, for which the approver can be held personally liable to compensate the company.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
