Case Detail

HCMP 868/2019

[2025] HKCFI 2052

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 868 OF 2019

_______________

	IN THE MATTER OF Sound Global Limited
	and
	IN THE MATTER OF Section 214 of the Securities and Futures Ordinance (Cap. 571)

_______________

BETWEEN
	SECURITIES AND FUTURES COMMISSION	Petitioner
and
	SOUND GLOBAL LTD. (桑德國際有限公司)	1st Respondent
	WEN YIBO (文一波)	2nd Respondent
	ZHANG JINGZHI (張景志)	3rd Respondent
	WANG KAI (王凱)	4th Respondent
	ZHANG XIQUAN (張希泉)	5th Respondent

_______________

Before:

Hon Linda Chan J in Court

Dates of Hearing:	9 and 10 April 2025
Date of Judgment:	15 May 2025

___________________

J U D G M E N T

___________________

1. On 30 September 2022 this Court handed down the judgment [2022] HKCFI 3025 (“Judgment”)[1] and ordered, inter alia, that Mr Wen shall make an offer to purchase the shares held by the other members of the Company (“Minority Members”) at the price to be determined by the court (“Buy-Out Offer”)[2].

2. Apart from the issue of price (“Price Issue”), which is hotly contested, there is a further issue regarding the identity of the administrator to be appointed for the purpose of administering the Buy-Out Offer (“Administrator Issue”).

3. For the purpose of determining the Price Issue:

(1) The SFC adduces 2 opinions prepared by its expert, Mr Lung Hak Kau (“Mr Lung”), on 23 May 2024 (“Lung 1^st”) and 7 November 2024 (“Lung 2^nd”).
(2) Mr Wen adduces an opinion made by his expert, Ms Leung Churk Yin Jeanny (“Ms Leung”) on 16 September 2024 (“Leung 1^st”).

A. FACTUAL BACKGROUND

4. The relevant factual background has been set out in §§20 to 40 of the Judgment. The following facts are relevant to the Price Issue.

5. The Company through its subsidiaries in the Mainland carries on business in turnkey water and wastewater treatment.[3] Its shares have since 30 September 2010 been listed on the SEHK. The Company’s shares were also listed on the Singapore Stock Exchange from 6 October 2006 to 27 January 2014[4].

6. The Company published its 2012 AFS and 2013 AFS on 22 March 2013 and 11 April 2014 respectively, both of which had been audited by Deloitte. In the 2013 AFS, the Company represented to its shareholders and the public that as at 31 December 2013, the Group had capital/reserves of RMB 3.07 billion and bank balances/cash of RMB 3.53 billion[5].

7. On 4 and 16 February 2015, the Emerson Reports were published, which suggested that the revenues of 2 subsidiaries within the Group had been inflated by RMB 1.38 billion; the true cash/bank balances of the Group was only 1/3 of the amount reported; and its true profit was ¼ of the amount reported[6]. In response, the Company issued clarification announcements on 13, 17 and 24 February 2015.

8. On 10 March 2015, Deloitte discovered the 2015 Cash Discrepancy of around RMB 2 billion in the Group’s bank balances[7].

9. On 16 March 2015, the SFC issued a notice under s.183 of the SFO requiring the Company to produce bank statements and information relating to the Group’s bank balances/cash as at 31 December 2012 and 31 December 2013[8].

10. On 23 June 2015, the Company announced that PKF had been engaged by the independent review committee to review the 2015 Cash Discrepancy[9].

11. On 31 August 2015, the Company further announced that RSM had conducted forensic investigations into the 2015 Cash Discrepancy. In its report dated 20 November 2015, RSM stated that PKF’s findings were consistent with the Company’s explanation that the 2015 Cash Discrepancy was due to the earnest money paid through SGC as its agent for the Proposed Acquisitions[10].

12. In light of RSM’s findings, the SEHK did not pursue the matter further, and trading in the Company’s shares resumed on 25 January 2016[11].

13. On 13 April 2016, the SFC exercised its power under rule 8(1) of the Securities and Futures (Stock Market Listing) Rules to suspend trading in the Company’s shares (“Suspension”) which has never resumed.[12]

14. On 13 September 2022, the Company was delisted from the SEHK.

15. In the Judgment, this Court found, inter alia, that:

(1)  The cash/bank balances reported in the 2012 AFS and 2013 AFS had been inflated by RMB 2.18 billion and RMB 2.72 billion respectively, which represented 82% and 89% of the net assets of the Group as at 31 December 2012 and 2013[13].
(2)  Mr Wen had knowledge of and was involved in causing, directing and orchestrating (a) the fraudulent inflation and falsification in the Subsidiaries’ bank balances for the financial years of 2011, 2012 and 2013 (i.e. Falsification Scheme), and (b) the fabrication of falsified bank statements and bank balance confirmations to support the inflated and fictitious bank balances (i.e. Fabrication Scheme)[14].
(3)  Regarding the 2015 Cash Discrepancy, Mr Wen gave false explanations to the other members of the board, the audit committee, Deloitte, PKF and RSM, the members of the Company, the SEHK and the SFC[15].
(4)  The business and affairs of the Company were conducted by Mr Wen in an unfairly prejudicial manner within the meaning of s.214(1)(b), (c) and (d) of the SFO[16].

B. PRICE ISSUE

16. On the Price Issue:

(1) The SFC contends that the court should adopt HK$2.98 as the price of the Buy-Out Offer, which was the closing price of the Company’s shares on the last trading date on 12 April 2016 (“LTD”). On top of that, there should be interest at 1% above the prime lending rate from the LTD to the date of payment, to reflect the fact that the Minority Members have been kept out of pocket for the period.
(2) Mr Wen contends that the price should be valued as at the date of the Judgment (30 September 2022), alternatively, the date of the petition (14 June 2019) or the date of the amended petition (13 September 2019), with downward adjustments to account for the market factor since the LTD (“Market Factor”) and the “distressed discount to address the heightened risks and uncertainties resulting from [the Company’s] financial issues, suspension and subsequent delisting”[17] (“Distress Factor”). As regards interest, if the price is valued as at the date of the Judgment, no interest should be awarded as the Minority Members have not been kept out of pocket.

17. The order requiring Mr Wen to make the Buy-Out Offer was made under s.214(2)(e) of the SFO[18], which provides that the court may “make any other order it considers appropriate, whether for regulating the conduct of the business or affairs of the corporation in future, or for the purchase of the shares of any members of the corporation by other members of the corporation or by the corporation (and, in the case of a purchase by the corporation, for the reduction accordingly of the corporation’s capital), or otherwise.”

B1. Applicable principles

18. It is common ground that given the similarity in wordings between s.214(2)(e) of the SFO and the provision for “unfair prejudice” under s.725 of the Companies Ordinance (Cap. 622)[19], the court should apply the principles governing valuation of a company in the context of “unfair prejudice” petition when determining the Price Issue.

19. The overriding consideration is fairness as between the parties. This was described by Kwan VP in Li Guozhu v New Century Iatrical Inv. Management Limited [2020] 3 HKLRD 464, §§29-30:

“29. In valuing a company for the purposes of ascertaining the price to be paid for shares to be acquired by one party from another ordered in a petition based on unfair prejudice, the overriding consideration is fairness as between the parties. Which of the various approaches to valuation of a shareholding should be adopted is to be determined by what fairness in a particular case requires (Re Yung Kee Holdings Ltd [2014] 2 HKLRD 313 at [146]). Which approach should be adopted as appropriate depends on all the circumstances, and the choice must be fair to both parties (CVC/Opportunity Equity Partners Ltd v Demarco Almeida [2002] 2 BCLC 108 at [38]).
30. The statutory framework of the remedies for unfair prejudice confers on the court a wide discretion to do what is considered fair and equitable between the parties in all the circumstances of the case, in order to put right and cure for the future the unfair prejudice which the petitioner has suffered at the hands of the other shareholders of the company.”

20. Mr Jenkin Suen SC [20], counsel for the SFC, submits that:

(1)  The overriding requirement of fairness applies to all aspects of valuation, including the date of valuation, the basis upon which the valuation is made,[21] and the choice of valuation methodology, assumptions and directions.[22] The court has a wide discretion which must be exercised to achieve, so far as possible, fairness as between the parties in all the circumstances of the case (Re Elgindata [1991] BCLC 959 at 1006c-d, 1007e, per Warner J).
(2)  The court takes into account all the circumstances, including (a) when arriving at a fair value, it is necessary to assume that a notional sale would take place between the participants since the purpose of valuation is to achieve fairness as between the parties; and (b) the history of the events in the litigation (Re Luk Fai Holdings§101).
(3)  To achieve fairness, valuation can be conducted on the footing that the conduct complained of had not occurred (Re Sparkle Consultants (HK) Limited(CA)§33; In re London School of Electronics[1986] Ch 211 at 224E-F, per Nourse J;[23]Re Tai Lap Investment Co Ltd[1999] 1 HKLRD 384at 400I-J, 401E, per Le Pichon J (as she then was). This may require valuation to be done on a date prior to presentation of the petition (Re Golden Bright Limited, HCMP 6472/2001, 27 February 2004, §66, per Kwan J (as she then was)).[24]
(4)  The court also takes into account any difficulties in formulating or implementing a particular valuation method. For example, in Re Cumana Ltd [1986] BCLC 430 at 444i-445a[25], in rejecting the inclusion of an “escape clause” in the valuation, the court was satisfied that the difficulties in formulating and implementing such a clause would make that proposal “impracticable and unsatisfactory”. Similarly, in Re Elgindata, the court declined to adopt a valuation method on the basis that it did not afford a workable formula for valuation in the circumstances of the case even though it expressed a sound principle (1006d-e).

21. Mr Anson Wong SC[26], counsel for Mr Wen, does not take issue with the above principles. He submits that where the company is a going concern, the valuation should be conducted as at the date of the buy-out order. Reliance is placed on the following authorities:

(1)  In Re London School of Electronics Limited at 224A-B, Nourse J said:
“If there were to be such a thing as a general rule, I myself would think that the date of the order or the actual valuation would be more appropriate than the date of the presentation of the petition or the unfair prejudice. Prima facie an interest in a going concern ought to be valued at the date on which it is ordered to be purchased. But whatever the general rule might be it seems very probable that the overriding requirement that the valuation should be fair on the facts of the particular case would, by exceptions, reduce it to no rule at all.”
(2)  In Profinance Trust SA [2002] BCC 356§61, Robert Walker LJ (as he then was) stated the principle in this way:
“The general trend of authority over the last 15 years appears to us to support that as the starting point, while recognising that there are many cases in which fairness (to one side or the other) requires the court to take another date. It would be wrong to try to enumerate all those cases but some of them can be illustrated by the authorities already referred to:
(i) Where a company has been deprived of its business, an early valuation date (and compensating adjustments) may be required in fairness to the claimant (Meyer).
(ii) Where a company has been reconstructed or its business has changed significantly, so that it has a new economic identity, an early valuation date may be required in fairness to one or both parties (OC Transport, and to a lesser degree London School of Electronics). But an improper alteration in the issued share capital, unaccompanied by any change in the business, will not necessarily have that outcome (DR Chemicals).
(iii) Where a minority shareholder has a petition on foot and there is a general fall in the market, the court may in fairness to the claimant have the shares valued at an early date, especially if it strongly disapproves of the majority shareholder’s prejudicial conduct (Cumana).
(iv) But a claimant is not entitled to what the deputy judge called a one-way bet, and the court will not direct an early valuation date simply to give the claimant the most advantageous exit from the company, especially where severe prejudice has not been made out (Elgindata).
(v) All these points may be heavily influenced by the parties’ conduct in making and accepting or rejecting offers either before or during the course of the proceedings (O'Neill v Phillips).”
(3)  In Profinance, the court adopted the date of the buy-out order as the date of valuation as there was no evidence or circumstances which justify the departure from the general rule. In Re Sparkle Consultants (HK) Limited, HCMP 1538/2000, 24 April 2001, §§147-148, Yuen J (as she then was) came to a similar conclusion.
(4)  In Re Elgindata Limited, Warner J adopted the date of the buy-out order for valuation (1991), even though the fortunes of the company had declined considerably since 1987 (when they were at their peak), and since 1989 (when the petition was presented). Although the petitioner had established unfair prejudice, the decline in value was not attributable to the respondent’s conduct (1004i-1005b). In those circumstances, “to fix a date for the value of the shares at or near the time when the company’s fortunes were at their peak would be grossly unfair to [the respondent].” (1006f-g).
(5)  More recently, in Dinglis v Dinglis [2019] EWHC 3327 (Ch), DHCJ Adam Johnson QC followed Profinance and held that “a petitioner is not entitled to a one-way bet”, given that “a shareholder must normally take the rough with the smooth, as far as fluctuations in the value of the business are concerned” and “a minority shareholder whose shareholding has been subjected over time to fluctuations in value in the ordinary course of the company’s business cannot pick and choose an exit date which is most advantageous to him” (§66).
(6)  The remedy must be proportionate to the unfair prejudice found, and the exercise of the jurisdiction under the unfair prejudice provision[27] is not a punishment for bad behaviour (Hawkes v Cuddy [2008] BCC 390, §246, per Lewison J).

22. In my view, the principle governing the date of valuation of a company which is a going concern is clear:

(1)  If the company’s business has not been affected by the unfairly prejudicial conduct and it continues to carry on the business up to the date of the buy-out order, it would usually be fair for valuation to be conducted as at the date of the order. This is because any profit generated (or loss sustained) by the company in the meantime will be reflected in the valuation in one or 2 aspects. First, the profit (or loss) will be reflected in the balance sheet as an increase (or decrease) in the net assets if no dividend is declared and paid in the meantime. If dividend had been declared and paid, all shareholders including the petitioner would have received the same. Second, the earnings every year (whether increase or decrease) will be taken into account when assessing the price-earning multiple applicable to the company. Such valuation would necessarily have taken into account and reflected both the upside and downside of the business.
(2)  If the business of the company has been adversely affected by the unfairly prejudicial conduct, and the adverse effect is one which can be ascertained and quantified, it would still be fair for valuation to be made as at the date of the order and adjustments would be made to the valuation. In making the adjustments, the court is in effect reversing the financial impact of the unfair prejudice.
(3)  If, however, the unfair prejudice has adversely affected the business of the company and the effect is not one which can be ascertained or quantified, so that it is not possible to reverse the unfair prejudice by making adjustments to the valuation, the court would either adopt the date which pre-dated the unfairly prejudicial conduct or the date of the petition. Very often, the reason for adopting the date of the petition is because that was the date when the petitioner decided to exit from the company.
(4)  The many cases cited by counsel, properly understood, were instances where the court decided the appropriate date of valuation on the basis of the findings of unfair prejudice and the circumstances faced by the company in question.

B2. Date of Judgment inappropriate

23. Mr Wong’s arguments that the court should adopt the date of the Judgment as the date of valuation do not assist the determination of the Price Issue.

(1)  There is little utility in contending that the price should be valued as at the date of the Judgment or the date of the petition or amended petition when no reliable financial information of the Company made up to any of these dates has been made available by Mr Wen to the experts or the court.
(2)  As pointed out by Mr Lung, although the Company belatedly published its AFS for the years 2014 to 2019, the auditors expressed disclaimers of opinion on all of them[28]. This means that no reliance can be placed on any of these AFS.
(3)  The Company has not published any AFS for the financial years from 2020 onwards.
(4)  Mr Wen has not offered to make available the books and records of the Company to the experts for the purpose of assessing the value of the Company and the shares. This is despite the fact that he has been in control of the Company and the Group.
(5)  Without any financial information, it is impossible for the experts to conduct any meaningful valuation of the Company or the price for the purpose of the Buy-Out Offer, whether on the date of the Judgment or the alternative dates advocated by Mr Wong.
(6)  Indeed, Ms Leung does not take issue with Mr Lung’s opinion that no reliable valuation can be conducted. She only suggests that adjustments should be made to the price on the LTD to reflect the Market Factor and the Distress Factor[29].

B3. Price on LTD should be adopted

24. Mr Suen submits that it is fair, just and appropriate to adopt the price of HK$2.98 on the LTD as the price of the Buy-Out Offer for the following reasons:

(1)  The purpose of the Buy-Out Offer is to allow the Minority Members whose interests have been unfairly prejudiced by Mr Wen’s misconduct to dispose of their shares at a fair price that reflects the market value of the shares without regard to any negative effect caused by the misconduct.
(2)  The price of HK$2.98 is the clearest evidence and reflection of the open market’s sentiment on the value of the Company’s shares based on the information available in the market at the time,[30]before the Suspension on 13 April 2016 and the eventual delisting on 13 September 2022.
(3)  The price on the LTD represented:
(a)  the last time and opportunity when the Minority Members could have exited the Company, before the Suspension was imposed in the course of the SFC’s investigations over the 2012 and 2013 Discrepancies, for which Mr Wen was wholly or partly responsible; and
(b)  the closest available approximation to the market value of the Company’s shares at a time when the 2012 and 2013 Discrepancies were not yet known to the market and hence not factored into the market price of the shares.
(4)  There is no realistically workable or more suitable alternative price to be adopted. As a result of the misconduct and the Schemes, there is virtually no prospect of ascertaining the true financial state of the Company[31] at the material times or conducting any meaningful valuation exercise given that:
(a)  Mr Wen had allowed all senior employees involved in the fictitious bank balances to leave, without any record or contact details, and all financial records and bank documents of the Subsidiaries were allegedly “lost in a fire” on 25 November 2016[32].
(b)  There were significant qualifications and limits on the reports prepared by PKF, RSM and Gaowen Law Firm back in 2015 to 2017.[33] The difficulties faced now, so many years after the event, could only have been amplified and the true status further obscured.
(c)  The Company’s AFS from 2014 to 2019 were unreliable and in any event outdated.
(d)  It is simply not feasible or possible to value the fair or market value of the Company’s shares on any dates.

25. I agree with the points made by Mr Suen which I consider to be well founded.

26. Mr Wong does not dispute the points summarized in §24(1) and (4) above. As regards the points in §24(2)-(3) above, Mr Wong contends that (1) the Minority Members could have elected to exit the Company through “off-market transactions” and the difficulties in selling their shares due to the Suspension was a risk which the Minority Members voluntarily assumed; and (2) before the Suspension, the “public investors had been fully aware of the allegations of inflated revenue raised by the Emerson Reports published in February 2015” as well as the 2015 Cash Discrepancy. Those investors chose to keep or even buy the shares of the Company and should have been taken as having voluntarily assumed the risk involved in doing so[34].

27. I have no hesitation in rejecting Mr Wong’s contentions:

(1)  The Suspension was imposed by the SFC after it had commenced investigations into the 2012 and 2013 Discrepancies for which Mr Wen was responsible (as I so find).
(2)  There is no evidence to suggest that the Minority Members were aware of the 2012 and 2013 Discrepancies or the Schemes when they acquired the Company’s shares before the LTD.
(3)  While the Emerson Reports which contained allegations of inflated bank balances/cash, inflated revenue and inflated profits were published in February 2015, one cannot ignore the fact that the Company (under the control of Mr Wen) immediately denied the allegations by making the announcements on 13, 17 and 24 February 2015 (see §7 above). This was followed by the publication of the reports of PKF and RSM which, on their face, supported the denial put forward by the Company.
(4)  There is simply no basis in support of the contentions that the Minority Members have voluntarily assumed the risk of the Suspension.
(5)  To the contrary, the Minority Members’ expectation when they acquired the shares was that they could be traded on the SEHK, which is one of the unfair prejudice suffered by the Minority Members[35].

28. In my view, subject to the question of interest, the price on the LTD should be adopted as the price of the shares for the purpose of the Buy-Out Offer as it is the only objective evidence on the market price of the shares as at that date. Indeed, neither Mr Wen nor Ms Leung has put forward any other price which they contend is fair or appropriate in the circumstances of this case.

B4. Adjustments proposed by Ms Leung

29. As stated above, Ms Leung opines that the price of the shares should be adjusted by the Market Factor and the Distress Factor.

30. The Distress Factor can be disposed of shortly. The so-called distress was the direct result of Mr Wen’s misconduct. The Buy-Out Offer was made to redress the prejudice suffered by the Minority Members as a result of such misconduct. I am unable to see any basis for the court to make any downward adjustment for the distress suffered by the Company and hence the Minority Members. At the hearing, Mr Wong rightly abandons the argument[36].

31. As regards the Market Factor, Mr Wong makes the following points:

(1)  The Market Factor is unrelated to Mr Wen’s conduct.
(2)  Without the adjustment for the Market Factor, it would result in a disproportionate and unfair penalty to Mr Wen since “a shareholder must normally take the rough with the smooth, as far as fluctuations in the value of the business are concerned” (Dinglis v Dinglis).
(3)  To account for the Market Factor, Ms Leung analysed the price-to-earnings (“P/E”) and price-to-book (“P/B”) of various companies operating in the same industry and geographic region on the assumption that the Company remains a going concern[37].
(4)  The comparables were selected on the basis that they were (a) listed on the Main Board of the SEHK from the LTD to the respective assessment dates[38], (b) principally engaged in water utilities sector, and (c) mainly operated in the Mainland, with 60% or more of its revenue derived from the Mainland in the relevant financial years[39].
(5)  Although Mr Lung suggests that Ms Leung’s inclusion of some comparable which were listed after the LTD is inappropriate because inter alia they tend to have smaller market capitalisation and therefore lower P/E and P/B[40], however, even if one were to take the average P/E and P/B of only those comparables with similar market capitalisation as the Company, the adjusted share prices on the assessment dates would still be much lower than the price on the LTD[41].

32. According to Ms Leung, after making adjustments for the Market Factor, the adjusted price of the shares on the date of the Judgment would be HK$1.27 (if adjusted by the average P/E of the comparables) or HK$0.68 (if adjusted by the average P/B of the comparables).[42]

33. Mr Lung does not consider the adjustment for the Market Factor to be appropriate for the following reasons:

(1)  The assumption that the P/E, P/B and the share price of the Company would change according to the change in the average P/E or P/B of the companies within the same industry is unjustified and does not accord with the reality. There are different reasons which affect the P/E and P/B of different companies, and market condition is just one of the many factors affecting a company’s P/E or P/B.[43]
(2)  Mr Lung illustrates the inappropriateness of using the average P/E and P/B to adjust the Company’s share price in that between the LTD and the date of the petition, the P/E of one comparable increased by 32.7%, while the P/E of another comparable decreased by 72.9%. Similarly, the change in P/B of the comparable ranged from an increase of 28.6% to a decrease by 62.0%. Such huge difference in performance between companies in the same industry shows that one cannot simply take the average P/E or P/B to reflect the market condition or development.[44]
(3)  During cross-examination, Ms Leung accepts that a company’s P/E and P/B are affected by the specific circumstances of the company. She emphasizes that by taking an average P/E and P/B of the comparables, she is seeking to ascertain the changes in the financial performance of all the comparables which, she opines, reflect the condition of the market.

34. While I can see the rationale in taking the average P/E or P/B of various comparables as an indication of any changes in the market condition faced by the Company, in the end, I do not think that the proposed adjustment for the Market Factor is appropriate. There are 2 reasons for this:

(1) The adjustment for Market Factor is premised on the assumption that the valuation should be conducted as at the date of the Judgment or any of the alternative dates advocated by Mr Wong, which I consider to be inappropriate.
(2) More importantly, Mr Wen chose not to make available to the experts or the court any books and records of the Company which, if produced, would show the actual financial state of the Company and its performance for the period when he contends that adjustment should be made for the Market Factor or the period from 2017 (i.e. after the books and records of the Subsidiaries had allegedly been destroyed in a fire). The court is left in the dark as to whether the Company’s performance has in fact declined owing to the alleged deterioration of the market condition, still less to the extent of 44.11% to 77.29%. I do not think that it is open to Mr Wen, who has decided to withhold the relevant financial information from the court, to suggest that there should be a downward adjustment for the Market Factor to the price of the shares.

B5. Interest

35. Mr Suen submits that interest should be awarded on the price from the LTD to the date of payment to reflect the fact that the Minority Members have not been able to realise their shares and have been kept out of pocket of the proceeds. An award of interest would accord with the requirement of fairness and is amply justified on the facts of this case given the lapse of almost 9 years since the Suspension[45]. Reliance is placed on:

(1)  Re Tai Lap Investment Company Limited, where Le Pichon J (as she then was) said (§59) that an order for payment of interest reflects “the fact that the shareholder has been kept out of the enjoyment of that value in the meantime”, and has been described as “money compensation for the injury done” to the oppressed shareholder.[46]
(2)  Re Power Hong Kong Limited[2023] HKCFI 2539, §13, where Ng J said “Since the court has a wide discretion to do what is considered fair and equitable between the parties in all the circumstances of the case, the same overriding consideration as to fairness between the parties should apply not just in relation to the valuation of the Company, but to all aspects of a buy-out Order including the formula for the calculation and payment of interest on the purchase price. It is also trite that generally an award of interest is within the discretion of the Court”.
(3)  Re Golden Bright Ltd[2007] 1 HKC 89, §§36, 38, 39, 41, where Kwan J (as she then was) awarded interest on the purchase price from the date of valuation (prior to the date of the petition).

36. Mr Wong accepts that the interest element is to compensate the Minority Members for being kept out of the money in the meantime but submits that no interest should be added to the price of the Buy-Out Offer for the following reasons:

(1)  If the date of valuation is the date of the Judgment, “it is doubtful whether the relevant shareholder can in any way be said to have been kept out of any money for any period prior to the buy-out order” (Re Maxtop International Investment Ltd [2014] 4 HKLRD 416, §8(2),per DHCJ Stewart Wong SC)[47].
(2)  It is wrong in principle to award interest covering the period before the Judgment. Unlike a private company where there would be restrictions on a member’s right to transfer shares[48], the Minority Members were not subject to any restriction and could have sold their shares through off-market transactions notwithstanding the Suspension.
(3)  It is also wrong in principle to award interest for the period before the presentation of the petition as the Minority Members voluntarily assumed the risk of the Suspension when they acquired the shares in the Company.
(4)  As a matter of discretion, it would be unfair to Mr Wen to bear interest for the time taken by the SFC to prepare and present the petition.

37. In my judgment, it is fair and appropriate to award interest on the price of HK$2.98 for the period from the LTD to the date of payment, for the following reasons:

(1)  The Minority Members have not been able to sell their shares through the SEHK for the entire period from the LTD to the date of payment. They should be compensated for the loss of the use of the value represented by the shares they held in the Company.
(2)  It was open to Mr Wen to buy out the shares of the Minority Members without waiting for the SFC to complete its investigations or for the court to order him to make the Buy-Out Offer. At trial, it was Mr Wen’s own evidence that he had intended to privatise the Company by acquiring all the shares held by the Minority Members although he did not explain why he did not pursue that course any further.
(3)  Mr Wen remains the majority shareholder and has control over the Company and the Group. Any profits made by the Company during the entire period from the LTD to the date of payment have not been distributed to the shareholders in the meantime. Upon completion of the Buy-Out Offer, Mr Wen will become the sole shareholder of the Company[49] and will be able to enjoy any profits generated by the Company to the exclusion of the Minority Members.

38. As for the rate of interest, Mr Suen submits that it should be 1% above prime lending rate, which was the rate awarded in Re Power Hong Kong Limited§24;[50]Re Golden Bright Ltd§§42-43, 45 (adopting Wong Man Yin v Law Lam Wai[2001] 3 HKLRD 720);[51]Re New Century§58[52]). Mr Wong submits that if interest is awarded, Mr Wen does not object to the rate proposed by the SFC[53].

39. The rate proposed by the SFC is fair and should be adopted.

C. ADMINISTRATOR ISSUE

40. Mr Suen submits that it is necessary and desirable for independent professional administrator to be appointed by the court pursuant to s.214(2)(c) of the SFO[54] to assist and deal with the logistics involved in the execution of the Buy-Out Offer, in view of the following facts and matters:

(1)  The substantial public interest at stake, and the fact that the SFC has identified over 3,300 Minority Members located in different jurisdictions, whose shares are held through 149 brokers/intermediaries.[55]
(2)  The proposed appointees from JLA Asia Limited (“JLA”) have professional expertise and track record in dealing with the type and extent of work required for the Buy-Out Offer.
(3)  Tricor Investor Services Limited (“Tricor”) proposed by Mr Wen does not have such track record. There is no assurance as to Tricor’s ability to undertake such important tasks to the requisite standard within its preliminary fee quotation.
(4)  The present case cannot be compared with general offers and privatisations in which the share registrar would normally handle. The implementation of the Buy-Out Offer involves the additional tasks or responsibilities of dealing with investors’ queries as well as monitoring and reporting to the court. Tricor’s preliminary fee quotation does not appear to take into account these additional tasks.
(5)  As regards Ms Leung’s suggestion that Tricor could work together with Mr Wen’s legal adviser “in conjunction with SFC’s oversight”, it is unclear what and why input from Mr Wen’s legal advisers is required in relation to the administration of the Buy-Out Offer.
(6)  The share registrar usually reports back to the company, and in this case, it would be Mr Wen. If Tricor is to handle the Buy-Out Offer, investors would likely question why Mr Wen should be given control and management of the process.
(7)  There is no suggestion that Mr Wen is unable to afford the fees of JLA, which would in any event be scrutinised and need to be reasonable.

41. Mr Wen does not oppose the appointment of administrator to handle the logistics and implementation of the Buy-Out Offer but opposes the appointment of JLA on the ground that its estimated fee in the amount of HK$3.2 to HK$3.5 million is excessive; and the same task can be undertaken by Tricor, the share registrar of the Company, at less than HK$1 million.

42. In my view, the concern raised by Mr Wen is reasonable. There is no proper basis to doubt the competence or experience of Tricor in handling the implementation of the Buy-Out Offer. Indeed, Tricor being the share registrar, is in a better position in administering the Buy-Out Offer as it has possession of all the necessary information regarding the present location and contact details of the Minority Members. There is no reason why the court should appoint JLA at a considerably higher fee for administering the same task.

43. Upon hearing the observation of this Court, Mr Suen confirms that the SFC will not object to the appointment of Tricor as administrator for the purpose of the Buy-Out Offer provided that Tricor is impartial in undertaking such task.

D. DISPOSITION AND COSTS

44. For the reasons set out above, I hold that:

(1)  Mr Wen shall make the Buy-Out Offer to the Minority Members at the price of HK$2.98 per share;
(2)  Interest at 1% above the prime lending rate published by HSBC for the period from the LTD to the date of payment (“Interest”) shall be added to the price of HK$2.98 per share; and
(3)  Tricor is appointed as the administrator for the purpose of handling and administering the Buy-Out Offer.

45. Upon considering the parties’ respective contentions on the detailed terms on the implementation of the Buy-Out Offer and the timetable for Mr Wen to make available the funds required for the Buy-Out Offer, I make an order in the following terms:

(1)  Pursuant to section 214(2)(e) of the SFO, Mr Wen shall make an offer (“Buy-Out Offer”) to purchase the shares in the Company held by all its members other than Mr Wen and the companies owned and/or controlled by him (“Minority Members”) (i) at the price of HK$2.98 per share, and (ii) with interest at 1% above prime rate (“Interest”) from the LTD until the date of payment. The price of HK$2.98 per share plus Interest from the LTD until the date of the Offer Document (as defined below) shall be the purchase price of the shares held by the Minority Members. The Interest from the date of the Offer Document to the date of payment shall be referred to as “Further Interest”;
(2)  Tricor Investor Services Limited be appointed as administrator (“Administrator”) for the purpose of handling and administering the Buy-Out Offer subject to the terms of this Order and the terms set out in the Schedule hereto;
(3)  The Administrator shall, within 14 days of this Order, provide to the SFC and Mr Wen its written consent to the appointment, failing which JLA shall be appointed as the Administrator in place of Tricor;
(4)  Within 14 days of receipt of the Administrator’s written consent to the appointment, Mr Wen shall pay to the Administrator an amount to be mutually agreed between Mr Wen and the Administrator as an advance payment towards the Administrator’s fee; and
(5)  The Buy-Out Offer shall be implemented in the following manner:
5.1.  Mr Wen shall, within 14 days of the appointment of the Administrator:
(i)   provide to the Administrator and the SFC a draft offer document and accompanying form of acceptance (“Draft Offer Document”) containing the terms of the Buy-Out Offer, procedure for acceptance of the Buy-Out Offer, and all such information as may be necessary for the acceptance of the Buy-Out Offer; and
ii)  inform the Administrator of the number of shares in the Company held by him and the companies owned and/or controlled by him and provide supporting documentation to the satisfaction of the Administrator.
5.2.  The SFC and the Administrator shall provide their comments on the Draft Offer Document within 14 days thereafter, and Mr Wen shall within 14 days thereafter finalise the Draft Document in the form as agreed by the SFC and the Administrator (“Offer Document”);
5.3.  The Administrator shall within 28 days of its appointment compute and notify the SFC and Mr Wen (“Notification”) the amount of the funds (“Funds”) required to be paid by Mr Wen for purchasing all the shares held by the Minority Members;
5.4.  Mr Wen do:
(i)    within 14 days after the Notification, pay 3% of the Funds to the Administrator;
ii)   within 60 days after the Notification, pay 22% of the Funds to the Administrator; and
(iii)  within 120 days after the Notification, pay 50% of the Funds to the Administrator;
5.5.  On behalf of Mr Wen, the Administrator shall, within 14 days after the Administrator’s receipt of the Funds as referred to in paragraph 5.4(ii) above, make the Buy-Out Offer to each of the Minority Members, by:
(i)    issuing to each of the Minority Members a letter together with the Offer Document by one or more of the following means:-
(a)  in the case of those Minority Members having a last known address in Hong Kong, by prepaid surface mail posted to such address;
(b)  in the case of those Minority Members having a last known address elsewhere, by prepaid airmail posted to such address;
(c)  in the case of those Minority Members having an email address, by email delivered to such email address; and
(d)  in the case of those Minority Members having mobile number(s), by WhatsApp delivered to such mobile number(s).
ii)   advertising, by a mode to be agreed with the SFC, a notice of the Buy-Out Offer once in Chinese and once in English in local newspapers, both by paper publication and by electronic publication;
(iii)  setting out, in the steps mentioned in paragraphs 5.5(i) and (ii) above, the means of acceptance of the Buy-Out Offer and the First Offer Period (as defined below) within which the Buy-Out Offer shall be open for acceptance;
5.6.  The Buy-Out Offer shall be open for acceptance for a period of 42 days (“First Offer Period”) from the date on which the Offer Document is dispatched by the Administrator to the Minority Members;
5.7.  Th e Administrator shall, within 7 days from the expiration of the First Offer Period compute and provide written notification to Mr Wen of (i) the amount of the funds (“First Batch of Funds”) required to be paid (out of the Funds received by the Administrator as referred to in paragraph 5.4 above) to those Minority Members who have accepted the Buy-Out Offer (“First Batch of Minority Members”) and (ii) the shortfall of the Funds (if any) required to meet the payment obligation of the First Batch of Funds (“Shortfall”) (collectively “First Acceptance Notification”);
5.8.  Mr Wen do, within 14 days of receiving the First Acceptance Notification, transfer the Shortfall (if any) to the Administrator;
5.9.  The Administrator shall make payment to the First Batch of Minority Members no later than 28 days following the date of the First Acceptance Notification or the receipt of the Shortfall, whichever is later;
5.10.  Following the First Acceptance Notification, the Administrator may inform the SFC and Mr Wen in writing of any required additional payment to be made by Mr Wen (“Top-up Payment”), and Mr Wen shall pay such amount to the Administrator within 14 days thereafter;
5.11.  On behalf of Mr Wen, the Administrator shall handle and administer the Buy-Out Offer pursuant to the powers and duties set out in the Schedule hereto and in accordance with a protocol to be agreed between the SFC, Mr Wen and the Administrator in respect of the following matters:
(i)    receiving and processing the acceptances of those Minority Members who have accepted the Buy-Out Offer;
ii)   ;setting the timing and time limits for procedures under the Buy-Out Offer;
(iii)  taking such steps as may be necessary or reasonable to follow up with the Minority Members who have not accepted the Buy-Out Offer by the First Offer Period;
(iv)  distributing to each of the Minority Members who have duly accepted the Buy-Out Offer:
(a)  the payments for the purchase of shares of the Minority Members; and
(b)  any Further Interest;
(6)  There be a long-stop date (“Long-Stop Date”), being 6 months from the expiration of the First Offer Period, after which the Buy-Out Offer will lapse, unless otherwise agreed in writing between the SFC and Mr Wen or as ordered by the Court;
(7)  If any Minority Members who have responded to the Administrator and accepted the Buy-Out Offer after the expiration of the First Offer Period but before the Long-Stop Date (collectively “Second Batch of Minority Members”), the following terms shall apply:
7.1.  The Administrator shall, within 7 days after the Long-Stop Date, compute and provide written notification to Mr Wen of the amount of the funds (“Second Batch of Funds”) required to be paid by Mr Wen to the Second Batch of Minority Members and the shortfall of the Funds (if any) required to meet the payment obligation of the Second Batch of the Funds (“Further Shortfall”) (collectively “Second Acceptance Notification”);
7.2.  Mr Wen do, within 28 days of receiving the Second Acceptance Notification, transfer the Further Shortfall (if any) to the Administrator;
7.3.  The Administrator shall make payment to the Second Batch of Minority Members no later than 28 days following the date of the Second Acceptance Notification or the receipt of the Further Shortfall, whichever is later;
(8)  Within 28 days after completing the Buy-Out Offer, the Administrator shall return to Mr Wen any surplus balance from the Funds and the Top-up Payment (if any) remaining in its possession, after deducting all the applicable fees, costs and expenses of the Administrator;
(9)  The time stipulated in this order continues to run during summer vacation; and
(10)   Liberty to apply.

46. As for costs, I make a costs order nisi that the costs of and occasioned by the determination of the Price Issue and the Administrator Issue be paid by Mr Wen to the SFC, to be taxed if not agreed, with certificate for 2 counsel.

	(Linda Chan)
	Judge of the Court of First Instance
	High Court

Mr Jenkin Suen SC leading Ms Sheena Wong, instructed by Securities and Futures Commission, for the Petitioner

Mr Anson Wong SC leading Ms Tara Liao, instructed by DLA Piper Hong Kong, for the 2^nd Respondent

SCHEDULE

(1) The Administrator shall be appointed for inter alia the following purposes:

(a)  to assist with and implement the Buy-Out Offer;
(b)  to receive, hold and administer the funds transferred from Mr Wen (including the Funds and any Top-up Payment);
(c)  to determine the amounts to be paid and make payments to each Minority Member who accepts the Buy-Out Offer;
(d)  to assist in the transfer of the shares from the Minority Members (who accept the Buy-Out Offer) to Mr Wen;
(e)  to perform all duties incidental to and necessary for the implementation of the Buy-Out Offer.

(2) The Administrator shall have, inter alia, the following powers and duties:

(a)  to request the Company, brokers, market intermediaries, CCASS and/or the share registrar to provide all information on the Minority Members as may be required for carrying out the Buy-Out Offer, and to compile a list setting out the identities, shareholding and contact details of each of the Minority Members;
(b)  to take all necessary steps (including corresponding with any person, advertising and making announcements as the Administrator deem fit) in communicating the Buy-Out Offer to the Minority Members;
(c)  to receive, hold and administer the funds transferred from Mr Wen (including the Funds and any Top-up Payment) for the purpose of purchasing the shares held by the Minority Members and paying any Further Interest due to them;
(d)  to hold the Funds and any Top-up Payment (or any part thereof), when received by the Administrator, in a designated client account or accounts of the Administrator at a bank, such account(s) to be interest bearing pending payment;
(e)  to transmit payments out of the Funds and any Top-up Payment, to the Minority Members who accept the Buy-Out Offer in such manner as may be determined by the Administrator;
(f)  to take all necessary steps to transfer the shares of the Minority Members who accept the Buy-Out Offer to Mr Wen (or such other persons or entities as nominated by him);
(g)  to carry out their functions and duties expeditiously and use all reasonable efforts to conclude the Buy-Out Offer as soon as reasonably practicable;
(h)  to keep proper accounts of all payments received and made pursuant to the Buy-Out Offer and report to the SFC, the Company and Mr Wen of the progress of the Buy-Out Offer upon (i) communication of the Buy-Out Offer to the Minority Members; (ii) receipt of response from the Minority Members in relation to the Buy-Out Offer; and (iii) conclusion of the Buy-Out Offer;
(i)  with the consent of Mr Wen or leave of the Court, to appoint agents to do any business(es) which the Administrator is unable to do itself in the discharge and exercise of its powers;
(j)  with the consent of Mr Wen or leave of the Court, to appoint solicitors (whose fees will be subject to taxation if not agreed) to advise on any points of law arising in the course of the Buy-Out Offer, subject to the right of the SFC, the Company and Mr Wen to be heard in respect of such points of law; and
(k)  to do all other things incidental to the exercise of the foregoing powers.

(3) The SFC, the Company and Mr Wen shall provide all reasonable assistance to the Administrator in the performance of the exercise of its powers and duties.

(4) Mr Wen shall pay the fees, costs and expenses of the Administrator, to be taxed if not agreed.

(5) The SFC, Mr Wen and the Administrator shall be at liberty to apply for the purpose of carrying out the terms of this Order.

[1] Unless otherwise stated, the abbreviations used in the Judgment are adopted

[2] Judgment §119(2).

[3] Judgment §22

[4] Judgment §20

[5] Judgment §§27-30

[6] Judgment §31

[7] Judgment §34

[8] Judgment §33

[9] Judgment §36

[10] Judgment §37

[11] Judgment §38

[12] Judgment §21

[13] Judgment §§46-55

[14] Judgment §§56-71

[15] Judgment §§81-90

[16] Judgment §100

[17] Leung 1^st §§19-20

[18] Judgment §§106-117

[19] Replacing s.168A of the former Companies Ordinance (Cap. 32)

[20] Leading Ms Sheena Wong

[21] Re Sparkle Consultants (HK) Limited[2002] 3 HKLRD 62 (CA), §33, per Rogers VP

[22] Re Luk Fai HoldingsCompany Limited[2023] HKCFI 2268, §100

[23] Citing In re O.C. (Transport) Services Ltd[1984] BCLC 251 at 258

[24] Before the diversion of substantial business from the company which was found to be unfairly prejudicial to the interests of the petitioner.

[25] In that case, the majority shareholder was ordered to purchase the minority shareholder’s shares as at the date of the petition (rather than the date of the order, which was after the valuation of shares had declined).

[26] Leading Ms Tara Liao

[27] Section 996 of the Companies Act 2006, equivalent to s.725 of the Companies Ordinance

[28] Cheng 5^th §§11-17

[29] Leung 1^st §§19-20

[30] Lung 1^st §§21, 32

[31] Judgment §113

[32] Judgment §§67-68

[33] Judgment §115

[34] Mr Wen’s Skeleton §§25-27

[35] Judgment §114(3)

[36] Mr Wen’s Skeleton §36

[37] Leung 1^st §§34-35

[38] That is, the 3 alternative dates of valuation contended by Mr Wong

[39] Leung 1^st §36

[40] Lung 2^nd §§21-24

[41] See Scenario 2 in the Table of Adjusted Valuation handed up by Mr Wong on 10 April 2025

[42] Leung 1^st §40; Mr Wong’s Table Scenario 1.

[43] Lung 2^nd §14.

[44] Lung 2^nd §§15-17.

[45] SFC Skeleton §§40-42

[46] Quoting Dynasty Party Ltd v Coombs(1996) 138 ALR 64 at 85.

[47] Mr Wen’s Skeleton §§45-47

[48] Companies Ordinance (Cap. 622), ss.11-12

[49] Assuming all the Minority Shareholders accept the Buy-Out Offer

[50] Interest was awarded from the date of the buy-out order (§31).

[51] Interest was awarded from the date of valuation to the date of the order for valuation, and at judgment rate thereafter.

[52] Interest was awarded from the date of judgment until determination of the price.

[53] Mr Wen’s Skeleton §50

[54] Which empowers the court to “appoint a receiver or manager of the whole or any part of the property or business of the corporation and may specify the powers and duties of the receiver or manager and fix his remuneration”

[55] Cheng 5^th §§21-24; Cheng 6^th §15.

HCMP 868/2019

[2022] HKCFI 3025

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 868 OF 2019

_______________

	IN THE MATTER OF Sound Global Limited
	and
	IN THE MATTER OF Section 214 of the Securities and Futures Ordinance (Cap. 571)

_______________

BETWEEN
	SECURITIES AND FUTURES COMMISSION	Petitioner
and
	SOUND GLOBAL LTD. (桑德國際有限公司)	1st Respondent
	WEN YIBO (文一波)	2nd Respondent
	ZHANG JINGZHI (張景志)	3rd Respondent
	WANG KAI (王凱)	4th Respondent
	ZHANG XIQUAN (張希泉)	5th Respondent

_______________

Before:

Hon Linda Chan J in Court

Dates of Hearing:	14 – 17, 23 June 2022
Date of Judgment:	30 September 2022

_______________

J U D G M E N T

_______________

1. This is the trial of the petition presented by the Securities and Futures Commission (“SFC”) on 14 June 2019 (as amended on 13 September 2019) (“Petition”) under s.214 of the Securities and Futures Ordinance(Cap. 571)(“SFO”) against inter alios Sound Global Ltd (“Company”) and Mr Wen Yibo (“Mr Wen”), who are respectively the 1^st and 2^nd respondents named in the Petition.

2. In the Petition, the SFC seeks:

(1) a disqualification order[1] against Mr Wen and an order requiring him to purchase the shares of the Company from the other members at a price to be determined by the court;[2] and/or
(2) an order directing the Company to appoint an independent external auditor to review and prepare a report on its internal control and finance reporting procedures, and to publish and implement such suggested measures.

A. PROCEDURAL MATTERS

3. The 3^rd to 5^th respondents, who were former directors of the Company, are residents in the Mainland. Despite having obtained leave to serve the Petition on the 3^rd to 5^th Respondents in the Mainland pursuant to Order 11 rule 5A of the Rules of the High Court on 12 September 2019, and the repeated attempts by the relevant judicial authorities to effect service, the Petition has not been served on such respondents. The SFC decides to proceed with the trial against Wen and the Company only.

A1. No Case Management Hearing before Trial

4. Upon the joint application of the SFC and Mr Wen by way of a consent summons, on 6 October 2020, Mr Recorder Pow SC gave inter alia the following directions (collectively “Directions”):

(1  Leave to the SFC to fix the substantive hearing of the Petition before a bilingual Judge in consultation with counsel’s diaries with 8 days reserved (§1);
(2)  In the event that the court makes an order requiring Mr Wen to purchase the shares of the Company from public shareholders, further directions shall be given in respect of (a) the filing of expert evidence for determining the price of the shares to be purchased and (b) the substantive hearing of such issue (§2);
(3)  The deponent of the affirmations shall attend the substantive hearing for cross-examination failing which their affirmations shall not be admitted as evidence. Unless otherwise directed by the trial judge, the affirmations shall stand as evidence in chief (§§5-7); and
(4)  Subject to §7 (which requires the deponents to attend the trial for cross-examination), all exhibits (including the records of interviews (“ROIs”)) to the affidavits / affirmations shall be admitted as evidence at the substantive hearing (§8).

5. The parties proceeded to fix the date for the trial. None of the parties brought the Petition to the court for further directions at a case management conference or pre-trial review. Consequently, the court did not have the opportunity to consider questions relevant to the fair disposal of the Petition including:

(1)     whether the Company should take an active step or incur any legal costs in the proceedings;
(2)     whether there is a proper basis to fix the trial before a bilingual judge;
(3)     whether it is cost-effective and a proper use of judicial resources for the court to hear a trial which only involves 2 out of the 5 respondents;
(4)     whether it is appropriate to admit the ROIs as evidence without requiring the interviewees to attend trial for cross-examination;
(5)     whether the SFC will call any of the interviewees to attend trial for cross-examination;
(6)     whether Mr Wen intends to cross-examine any of the interviewees, which has a bearing on the length of trial; and
(7)     the time table, directions on trial bundles and the documents to be submitted for trial.

6. Had the parties pursued the Petition in the same way as a petition concerning a company[3], the court would have required the parties to address the aforesaid questions and give appropriate directions at an early stage. In particular:

(1)  The Petition is brought by the SFC to redress the wrongs allegedly done to the Company and the relief is sought for the benefit of the Company. It is difficult to see why the Company should incur legal costs in filing affirmation in response to the Petition and engaging solicitors and counsel to appear at trial.
(2)  It does not appear that there is any basis for the Petition to be fixed before a bilingual judge. Given the prevalence of companies whose shares are listed on The Stock Exchange of Hong Kong Limited (“SEHK”) with businesses and investments located in the Mainland, it is inevitable that most of the documentary and oral evidence concerning these companies are in Chinese. The savings in time and costs involved in translating documents and evidence per se are not sufficient justifications for the matter to be fixed before a bilingual judge. It is also wrong for the parties to assume that if the matter is to be heard before a bilingual judge it would not be necessary to translate the documents essential to their case. This is particularly so when the substantive hearing is to be conducted in English and without translation, the judge will have to do his/her own translation when it comes to writing judgment.
(3)  It does not seems to me that there is any justification for the SFC not to ask its witnesses to prepare and adduce affirmations as evidence. While it may be convenient and cost-effective for the SFC to adduce ROIs as evidence, when it comes to trial, many of the answers recorded in the ROIs are no longer relevant to the issues between the parties. It is also unfair to require the respondents and the court to trawl through voluminous ROIs to ascertain which parts are relevant to the issues or will be relied on by the SFC at trial.
(4)  The SFC has not identified the basis for asking the court to give a special status to ROIs or why the court’s hands should be tied in the manner suggested in §8 of the Directions. As ROIs are not affidavits or affirmations, §7 of the Directions (which require the deponents to attend trial for cross-examination) does not apply. §8 states that ROIs shall be admitted as evidence at trial, but the question of admissibility of evidence is a matter for the court.

7. It was only when the parties applied by consent on 19 April 2022 for an extension of time to comply with some of the Directions that on 22 April 2022, this Court gave the usual directions requiring the parties to file trial bundles, Agreed List of Issues, Statement of Agreed Facts, Agreed Chronology and Agreed Dramatis Personae and Abbreviations for use at trial. As for the other issues identified in §5 above, the position of the SFC is as follows:

(1)  Unless there is any change of circumstances, the SFC does not envisage that it will pursue the Petition against the 3^rd to 5^th respondents;
(2)  The SFC has procured 4 interviewees to attend trial for cross-examination (see §10(1)-(4) below); and
(3)  There are 7 interviewees whose ROIs are in the trial bundles but will not attend trial for cross-examination (see §12 below). The SFC adduces their ROIs as hearsay evidence, and accepts that it is for the court to decide what weight should be given to such ROIs.

A2. Role of the Company

8. The Company engaged Messrs. Stevenson, Wong & Co (“SWC”) and counsel Mr Thomas WK Wong to attend trial. In his Opening, Mr Wong stated that the Company “does not contest” the relief sought in §3 of the prayer and “stays neutral” to the rest of the Petition. He points to the Affirmation of Feng Ji (“MrFeng”) dated 24 December 2019 filed on behalf of the Company (“Feng 1^st”)and submitted that the Company “is not in a position to confirm / agree” to the various facts stated in the Statement of Agreed Facts because (1) the relevant financial records had been destroyed in fire; (2) the relevant banks had not responded to letters of enquiry or could not print out bank statements for the relevant period; and (3) the relevant personnel had left the Company and were untraceable.

9. On the first day of trial, this Court observed that the allegations made by the SFC are all directed against the 2^nd to 5^th respondents, who are former directors of the Company, and the relief is sought for the benefit of the Company. As the Company is neutral and does not seek to cross-examine any of the witnesses or make any submissions on the relief sought in the Petition, it is not clear why the directors considered that it would be in the interests of the Company to engage SWC and counsel to attend trial. If the court is not satisfied that the attendance of solicitors and counsel at trial is necessary for the fair disposal of the Petition, it may consider ordering the costs incurred by the Company to be paid by the directors. Before the commencement of Day 2 of trial, SWC confirmed that they would not attend the remaining days of trial unless otherwise directed by the court.

A3. Factual Witnesses

10. The SFC called the following factual witnesses:

(1)  Ms Wang Linlin Freya (“MsWang”) of Deloitte Touche Tohmatsu Certified Public Accountants LLP, Beijing office (“Deloitte BJ”). She was interviewed by the China Securities Regulatory Commission (“CSRC”) in Beijing on 26 April 2017 and her answers were recorded in ROI of the same date. From October 2013 onwards, Ms Wang performed audit work in relation to the bank accounts, fixed assets and sales management fees of the companies within the “Group” (as defined in §12(4) below) as part of the audit on the consolidated financial statements of the Group for the year ended 31 December 2013 (“2013 AFS”) and.
(2)  Mr Yu Man To Gerald Maximillian (“MrYu”), the Chief Financial Officer (“CFO”) and Joint Company Secretary of the Company from 21 June 2011 to 28 February 2013. He was interviewed by the SFC on 18 May 2017 and his answers were recorded in ROI of the same date.
(3)  Mr Seow Han Chiang Winston (“MrSeow”), an Independent Non-Executive Director (“INED”) of the Company from 24 August 2006 to 13 July 2015. Mr Seow is a qualified lawyer and practices in merger, acquisition and corporate matters. He was interviewed by the SFC on 13 March 2017 and his answers were recorded in ROI of the same date.
(4)  Mr Wong See Meng (“MrWong”), an INED of the Company from 19 May 2009 and 26 March 2015 during which he acted as Chairman of the Audit Committee. He has always been based in Singapore. He was interviewed by the SFC on 19 May 2017 and his answers were recorded in ROI of the same day.
(5)  Mr Cheng Tak Ka (“MrCheng”), an associate director of the enforcement division of the SFC. He made an affirmation dated 14 June 2019 (“Cheng 1^st”) and a 4^th Affirmation dated 6 February 2020 in support of the Petition.

11. Amongst them, Mr Cheng and Mr Yu gave viva voce evidence in court, while Mr Seow, Mr Wong and Ms Wang gave evidence via VCF. They adopted their ROIs as evidence in chief. Ms Tara Liao, counsel for Mr Wen, only cross-examined Mr Cheng briefly.

A4. ROIs

12. In addition, the SFC adduced the ROIs of the following 7 persons without calling them to give oral evidence at trial:

(1  Ms Susan Su Xiulan (“Ms Su”), formerly a staff of Deloitte BJ. She was interviewed by the CSRC on 25 April 2017 and her answers were recorded in ROI of the same day.
(2)  Ms Viola Fang Junqiu (“Ms Fang”), a former staff of Deloitte BJ. She was interviewed by the CSRC on 26 April 2017 and her answers were recorded in ROI of the same date.
(3)  Ms Maggie Yu Han (“Ms Yu”), formerly a staff of Deloitte BJ. She was interviewed by the CSRC on 26 April 2017 and her answers were recorded in ROI of the same date.
(4)  Mr Li Fajun (“Mr Li”), contact person and relationship manager of the Company and its subsidiaries (together “Group”) who worked at Chegongzhuang branch of Hua Xia Bank (“HXB”) at the material time. He was interviewed by the CSRC on 25 April 2017 and his answers were recorded in ROI of the same date.
(5)  Ms Huang Qiong (“Ms Huang”), accounting manager of Chegongzhuang branch of HXB. She was interviewed by the CSRC on 16 June 2017 and her answers were recorded in ROI of the same date.
(6)  Ms He Hufeng (“Ms He”), contact person and relationship manager for the Group at Zhongguancun branch of Ping An Bank (“PAB”) at the material time. She was interviewed by the CSRC on 25 April 2017 and her answers were recorded in ROI of the same date.
(7)  Ms Dong Junyu (“Ms Dong”), internal control manager of Zhongguancun branch of PAB. She was interviewed by the CSRC on 6 June 2017 and her answers were recorded in ROI of the same date.

13. Mr Jenkin Suen SC (leading Ms Sheena Wong), counsel for the SFC, explained that the reasons for not calling the aforesaid 7 interviewees to give viva voce evidence were: (1) Ms Su, Ms Fang and Ms Yu were no longer employed by Deloitte BJ; (2) Mr Li and Ms He were implicated in the wrongdoings complained of in the Petition[4]; and (3) Ms Huang and Ms Dong were colleagues of Mr Li and Ms He at the respective branches, and they showed reluctance to give evidence in these proceedings. Given that the explanations were only provided at trial, the matter could not properly be explored.

14. Mr Suen submitted that ROIs are hearsay evidence and the parties have agreed to their admissibility (as reflected in §8 of the Directions). There is no ground for excluding the ROIs under s.47(1) of the Evidence Ordinance (Cap. 8). Nor is there any rule against admitting ROIs in s.214 proceedings, for eg., SFC v Cheung Keng Ching & ors, HCMP 1869/2008, 18 March 2010, §§10, 21, 41(3) & 41(5) per Burrell J; and the appeal therefrom [2011] 4 HKC 453, §§18(5) & 18(7) per Fok JA. Insofar as the court finds it appropriate to rely on such ROIs, it may have regard to the considerations as to weight as set out in s.49 of the Evidence Ordinance (Cap. 8).

15. I am unable to accept the approach of the SFC:

(1)  The proceedings in SFC v Cheung Keng Ching were disposed of summarily by way of Carecraft procedure. The court did not need to consider any disputed evidence of facts or make any findings for such purpose. There was no discussion on any of the questions concerning the use of ROIs including those identified in §5(4) above.
(2)  The directions in SFC v Cheung Keng Ching (relied on by Mr Suen), which allowed the company to use the affirmations, statements, ROIs and other documents filed or disclosed by the parties in the s.214 proceedings in the civil proceedings to be commenced[5] against the 1^st to 3^rd respondents (former directors of the company against whom the court made the disqualification orders), were made in the context of the court having ordered the company to commence civil proceedings against such respondents to seek recovery or compensation for the loss suffered. The court made clear that the questions of admissibility and weight of such evidence are matters for the court hearing the civil proceedings.
(3)  It was for the SFC (not the court) to identify which specific parts of ROIs it relied on, so that Mr Wen could decide whether to dispute their contents. The SFC could then make submissions on what weight should be given to those ROIs, taking into account their relevance, probative value and the reasons for not calling the interviewees to attend trial to give oral evidence.

16. Mr Suen confirmed that the SFC mainly relied on those ROIs referred to in footnotes 4 and 5 to his written Closing. The ROIs identified in footnote 4 relate to the answers given by the staff of HXB and PAB where they said that they had not seen the “Company’s Records” (as defined in §39 below). Those answers were in very general terms and not sufficient to prove that the Schemes had been perpetrated. However:

(1) The SFC has adduced all the records of the “8 Bank Accounts” (as described in §39(2) below) for the period from 2012 to 2015 obtained by the CSRC from HXB and PAB (collectively “CSRC’s Records”) as documentary evidence. The CSRC’s Records did not include all the documents within the Company’s Records for the same period. This confirms the fact that the Company’s Records, to the extent that they cannot be found in the CSRC’s Records, were not genuine records of the 8 Bank Accounts generated by PAB and HXB but were fictitious documents.
(2) Although Ms Liao in her written Opening attempted to challenge the authenticity of the CSRC’s Records, I do not think that she was entitled to do so given that Mr Wen had not disputed the authenticity of the CSRC’s Records in Wen 1^st or filed any notice of non-admission for such purpose.

A5. Mr Wen and Mr Feng’s evidence

17. Mr Wen adduced his affirmation dated 17 December 2019 (“Wen 1^st”) as evidence. He gave evidence through VCF and was cross-examined by Mr Suen for 2 days. Although in Wen 1^st he denied many of the allegations raised in the Petition, under cross-examination, Mr Wen admitted that (a) the CSRC’s Records are authentic; (b) there were material discrepancies in the Company’s Records and some of the bank statements and bank confirmations provided by the Company were false; and (c) such discrepancies were one of the problems which the Group had tried to investigate.

18. Mr Feng is and has since October 2017 been the assistant to Chairman and general manager of the securities department of the Company. Mr Feng was cross-examined by Mr Suen. It is clear from his answers that he was not involved in, nor did he have any personal knowledge of, the transactions complained of in the Petition as they all pre-dated his employment by the Company. Mr Feng’s evidence is no more than his subjective belief or re-construction of past events based on the documents available to him. I do not think that there is any probative value in Mr Feng’s evidence.

B. FACTUAL BACKGROUND

19. The following facts are not in dispute or are based on documents which are not disputed.

B1. The Company and Management

20. The Company is an investment holding company. Its shares have since 30 September 2010 been listed on the Main Board of SEHK (stock code: 967).[6] The Company’s shares were also listed on the Singapore Stock Exchange between 6 October 2006 until its voluntary delisting on 27 January 2014.[7]

21. On 13 April 2016, trading in the Company’s shares was suspended pursuant to rule 8(1) of the Securities and Futures (Stock Market Listing) Rules and has not resumed to-date.[8]

22. The Company through its subsidiaries in the Mainland carries on business in turnkey water and wastewater treatment. It has offices in Hong Kong, Singapore and Beijing.[9]

23. The Company has 3 indirect wholly owned subsidiaries which accounted for a significant part of the assets and revenue of the Group namely: (1) Beijing Epure International Water Co Ltd (“BJ Epure”), (2) Beijing Sound Environmental Engineering Co Ltd (“BJ Sound”), and (3) Beijing Hi-Standard Water Treatment Equipment Co Ltd (“BJ Hi-Standard”) (collectively “Subsidiaries”).

24. Mr Wen is the founder of the Group and an executive director (“ED”) and Chairman of the Company from 7 November 2005.[10] He is the controlling shareholder of the Company holding at least 50% of its issued shares. As at 31 December 2013, Mr Wen held an effective 55.31% shareholding in the Company.[11] He was a director of each of the Subsidiaries and the sole or one of the authorised signatories of the 8 Bank Accounts at the time of the transactions complained of in the Petition.

25. The other members of the senior management of the Company at the times of the impugned transactions included:

(1)  Mr Zhang Jingzhi (“R3”) who joined the Group in April 2001. He was an ED and Chief Executive Officer (“CEO”) of the Company from 4 March 2013 to 11 August 2016.[12]
(2)  Mr Wang Kai (“R4”) who joined the Group in 1998. He was appointed an ED of the Company on 24 December 2010. He was CEO from 2 February 2011 to 3 March 2013, and CFO from 4 March 2013 to 17 December 2015.[13]
(3)  Mr Zhang Xiquan (“R5”) who joined the Group as an accountant in September 2003. He was vice general manager of the finance department from March 2008 to July 2011, and was general manager and head of the finance department at the Group’s office in Beijing from August 2011 to 13 April 2016.[14]

B2. 2012 AFS and 2013 AFS

26. Deloitte Touche Tohmatsu Certified Public Accountants LLP (“Deloitte”) were the auditors of the Company from 2008 until its resignation on 17 July 2015.

27. On 22 March 2013, the Company published its 2012 Annual Report together with the audited consolidated financial statements of the Group for the year ended 31 December 2012 (“2012 AFS”).

28. On 11 April 2014, the Company published its 2013 Annual Report together with 2013 AFS.

29. The 2012 AFS and 2013 AFS were audited by Deloitte.

30. In the 2012 AFS and 2013 AFS, the Company represented to its shareholders and the public that the Group had (1) capital and reserves and (2) bank balances and cash in the following amounts:

As at 31.12.2011
RMB As at 31.12.2012
RMB As at 31.12.2013
RMB
Capital and reserves 2,304,669,000 2,654,512,000 3,074,291,000
Bank balances and cash 2,074,426,000 2,912,077,000 3,533,547,000
Increase in bank balance and cash 837,651,000 621,470,000

B3. Emerson Reports and SFC’s investigations

31. On 4 and 16 February 2015, Emerson Research Analysts Co, an equities research firm, issued 2 reports in relation to the Company (together “Emerson Reports”) which suggested that:

(1)  BJ Epure had purportedly supplied the Company with about RMB 1 billion of false revenue in technology services, and BJ Epure was a shell company used for booking such revenue;
(2)  There was evidence to suggest that the 2013 revenue from its Anshan plant had been fraudulently inflated by RMB 380 million;
(3)  The Group’s true cash and bank balances likely averaged only one third of the amounts reported; and
(4)  The real profitability of the Group in 2013 was only slightly more than a quarter of the amount reported.

32. In response to the Emerson Reports, the Company issued clarifications on 13, 17 and 24 February 2015.

33. The SFC was concerned about whether false or misleading information had been disclosed or provided by the Company.[15] On 16 March 2015, the SFC issued a notice under s.183 of the SFO (“s.183 Notice”) requiring the Company to produce (inter alia) bank statements and information relating to the Group’s bank balances and cash positions as at 31 December 2012 and 31 December 2013.[16]

B4. 2015 Cash Discrepancy

34. On 10 March 2015, a representative of the Company (Mr Si Zhiqiang) visited the Chegongzhuang branch of HXB together with representatives of Deloitte to confirm the Group’s bank account balances for the year ended 31 December 2014. During the visit, Deloitte discovered that there was a discrepancy of around RMB 2 billion between the balances in the Group’s bank accounts at HXB and the information previously provided by the management (“2015 Cash Discrepancy”).[17]

35. At that time, the existence of the 2015 Cash Discrepancy was not in dispute:

(1)  At the meeting held on 10 March 2015 between Deloitte and the Company’s audit committee[18] and during a telephone conversation with Deloitte, R5 acknowledged that there were discrepancies between the bank balances previously provided to Deloitte and the Group’s actual balances.
(2)  At the meeting between Deloitte, Mr Wen and R5 on 11 March 2015, Mr Wen acknowledged the existence of the 2015 Cash Discrepancy, and said that RMB 2 billion cash had been used by him for his other businesses (“1^st Explanation”).
(3)  By letter dated 12 March 2015 addressed to the board and the audit committee of the Company, Deloitte drew their attention to the 2015 Cash Discrepancy, and stated that (a) there were “[s]ignificant governance, internal control and financial reporting and regulatory concerns” regarding the Company’s finances; (b) the board should take steps to “prevent continuing reliance on the Group’s financial reports in the public domain”; (c) Mr Wen and R5 should make full disclosure of the facts, including the precise amount of the Group’s missing cash and whether such amount was recoverable by the Group; (d) the audit committee should obtain bank statements from all the banks used by the Group; and (e) the audit committee should consider the need to suspend the directors from participation in the financial reporting process.
(4)  Also on 12 March 2015, Mr Wen met with and informed the audit committee that: (a) he was responsible for the 2015 Cash Discrepancy; (b) he had taken and used RMB 2 billion for his own investments; and (3) the amount had not been returned to the Group, but he would find the means to return the money as soon as possible.
(5)  On 16 March 2015, trading of the shares was suspended. At the meeting between the INEDs and Deloitte’s representatives, Mr Wen was urged to meet and cooperate with the audit committee, and the audit committee must ascertain from Mr Wen whether there was any other shortfall in the Group’s bank balances apart from the 2015 Cash Discrepancy.
(6)  At the board meeting of the Company held on 19 March 2015, Mr Wen acknowledged the existence of the 2015 Cash Discrepancy but put forward a different explanation. He said RMB 2 billion had been used in the second half of 2014 in negotiating several acquisitions carried on by his associated companies on behalf of the Group as it was inconvenient to involve the Company due to the scale of the acquisitions. The matter was discussed with R3 and R4, and it was decided that Mr Wen’s associated companies would be used for such purpose. The negotiations fell through but the funds had not yet been repaid to the Company (“2^nd Explanation”).
(7)  Further board and audit committee meetings were held on 20 March and 26 March 2015 to discuss the 2015 Cash Discrepancy at which R4 reported the status of obtaining bank statements from the Group’s 6 largest banks and further enquiries to be made with other banks.

B5. Investigations by PKF and RSM

36. On 23 June 2015, the Company announced that PKF Accountants & Business Advisors (“PKF”) engaged by the independent review committee of the Company to review the 2015 Cash Discrepancy, reported that the said Discrepancy was the result of:

(1) the Company having paid RMB 2 billion as earnest money for a proposed acquisition of 2 Chinese water treatment companies (“Proposed Acquisitions”) through Sound Group Co Ltd (“SGC”), a company held by Mr Wen and his wife; and
(2) the payment had not been recorded in the Group’s bank accounts in a timely manner.[19]

37. In the further announcement dated 31 August 2015, the Company stated that RSM Corporate Advisory (Hong Kong) Limited (“RSM”) had conducted forensic investigations into the 2015 Cash Discrepancy[20]. In its report dated 20 November 2015, RSM stated that PKF’s findings were consistent with the Company’s explanation that the 2015 Cash Discrepancy was due to the earnest money paid through SGC as its agent for the Proposed Acquisitions, which transactions had been omitted from the Company’s accounting records.[21] In particular, RSM reported that:

(1)  According to its confirmation results, RMB 2 billion was paid by SGC on behalf of the Group in that: (a) on 4 November 2014, RMB 600 million was paid to Changye Environ Prot. Group on behalf of BJ Sound; (b) on 24 November 2014, RMB 530 million was paid (on behalf of BJ Sound), and RMB 870 million was paid (on behalf of BJ Epure), both to Dongda Group Co Ltd.
(2)  None of the aforesaid payments were recorded in the accounts of BJ Sound, BJ Epure or the Group until 3 April 2015.
(3)  By a supplemental agreement dated 20 March 2015, SGC agreed to transfer RMB 2 billion (together with interest) back to the Company’s bank accounts within 1 month.
(4)  On 13 April 2015, SGC repaid RMB2 billion to the Group of which RMB 870 million was paid into BJ Epure’s account with China Merchants Bank and RMB1.13 billion into BJ Sound’s account with Bank of China.

38. In light of RSM’s findings, SEHK did not pursue the matter further, and trading in the Company’s shares resumed on 25 January 2016.[22]

B6. Company’s Records v CSRC’s Records

39. Meanwhile, in response to the s.183 Notice, on 13 July 2015 and 4 August 2015, the Company through its solicitors, Messrs. Brandt Chan & Partners (“BCP”) provided to the SFC (1) some excel tables setting out the Group’s bank details,[23] and (2) copies of the Group’s bank statements for the years 2012 and 2013[24] (“Company’s Records”) which, on their face, showed that:

(1) The bank balance of the Group was RMB 2,992,785,280 as at 31 December 2012, and RMB 3,643,039,301 as at 31 December 2013; and
(2) The Group had over 200 bank accounts, of which the following 8 accounts maintained by the Subsidiaries at HXB and PAB (collectively “8 Bank Accounts”) accounted for 75% of the Group’s balance as at 31 December 2012 and 77% as at 31 December 2013[25]:
Account no. As at
31.12.2012
RMB As at
31.12.2013
RMB

HXB BJ Epure 10282000000392483
(“483”) 36,363,637 302,726,462
BJ Sound 4066200001801500001551
(“551”) 553,252,948 785,393,392
BJ Sound 10282000000448756
(“756”) 30,000,000
BJ Hi-Standard 4066200001819100006105
(“105”) 120,971,866 90,925,102

PAB BJ Epure 11008393782501 (“501”) 1,089,049,992 994,904,877
BJ Sound 11000951057002 (“002”) 433,281,406 571,497,631
BJ Sound 18000951057001 (“001”) 10,000,000 27,000,000
BJ Hi-Standard 11009345733702 (“702”) 4,207 4,223
Total 2,242,924,055 2,802,451,687
Bank balance in all Group’s bank accounts 2,992,785,281
3,643,039,301

% held in 8 Bank Accounts 75% 77%

B7. CSRC’s Records

40. On 25 March 2016 and 12 August 2016, the SFC received from CSRC the bank records of the 8 Bank Accounts for the period from 2012 to 2015[26]. The CSRC’s Records were obtained from PAB and HXB.

C. ISSUES

41. It is the SFC’s case that:

(1)  The Group’s financial position in the 2012 AFS and 2013 AFS had been falsely and substantially inflated as a result of the fictitious balances in the 5 out of the 8 Bank Accounts maintained by the Subsidiaries.
(2)  Mr Wen knowingly caused, directed and/or orchestrated a scheme for (a) the fraudulent inflation and falsification in the Subsidiaries’ bank balances at HXB and PAB for the financial years of 2011, 2012 and 2013 (“Falsification Scheme”) and/or (b) the fabrication of falsified bank statements and bank balance confirmations to support the inflated and fictitious bank balances (“Fabrication Scheme”) (collectively “Schemes”).
(3)  Alternatively, Mr Wen:
(a)  knew or turned a blind eye to the Schemes and did not report the same to other members of the Company’s board of directors, shareholders, auditors and/or the regulatory authorities;
(b)  took active steps to conceal the Schemes and to mislead other members of the board of directors, shareholders, auditors and/or the regulatory authorities; and/or
(c)  acted negligently and/or in breach of his duties of skill, care and diligence owed to the Company.[27]
(4)  Further, Mr Wen knowingly gave false and/or misleading explanations regarding the 2015 Cash Discrepancy to inter alios RSM, the independent accountants appointed by the Company to investigate the issue, the Company’s auditors, board of directors and/or members.
(5)  By reason of the above matters, the business and affairs of the Company were conducted by Mr Wen in a manner:
(a)  involving defalcation, misfeasance or misconduct towards the Company, its subsidiaries and its members (s.214(1)(b));
(b)  resulting in its members not having been given all the information with respect to its business or affairs that they might reasonably expect (s.214(1)(c)); and/or
(c)  which was unfairly prejudicial to its members or part of its members (s.214(1)(d)).[28]

42. Ms Liao’s in her Opening and Closing made much submission on the SFC’s pleaded case and the evidence adduced and argued that they fell short of the standard and cogency commensurate with the serious nature of the allegations. While it is correct that the burden is on the SFC to prove its allegations with cogent evidence, one cannot lose sight of the fact that under cross-examination, Mr Wen no longer disputed the existence of the “2012 Discrepancy” (as defined in §47(1) below), the “2013 Discrepancy” (as defined in §47(2) below) (together “Discrepancies”) and the 2015 Cash Discrepancy. Rather, his case is that:

(1)  he was not involved in and had no knowledge of the Discrepancies;
(2)  he did not deliberately provided a false explanation for the 2015 Cash Discrepancy; and
(3)  he acted honestly and reasonably by taking reasonable steps to investigate the Discrepancies and the 2015 Cash Discrepancy after they had been uncovered including appointing PKF and RSM to investigate them.

43. As for relief, Ms Liao argued that:

(1)  No disqualification order should be made against Mr Wen as he did not act in breach of duties owed to the Company;
(2)  Even if the court finds that Mr Wen was negligent in allowing the Schemes to take place or that he participated in the Schemes, the disqualification should be within the middle bracket of 6-10 years given that no financial loss has been suffered by the Company and Mr Wen did not derive any benefit from the Schemes; and
(3)  There is no justification for the court to order Mr Wen to buy out the shares held by other members.

44. Accordingly, the issues which require determination by the court are as follows:

(1)  whether the financial position of the Group in the 2012 AFS and 2013 AFS had been inflated as a result of the Falsification Scheme and/or the Fabrication Scheme (1^st Issue);
(2)  whether Mr Wen knowingly caused, directed and/or orchestrated the Falsification Scheme and/or the Fabrication Scheme (2^nd Issue);
(3)  alternatively, whether Mr Wen took a blind eye to the Schemes (3^rd Issue);
(4)  alternatively, whether Mr Wen acted in breach of his duty of skill, care and diligence owed to the Company in allowing the Schemes to be perpetrated against the Subsidiaries and the Group (4^th Issue);
(5)  whether Mr Wen gave false or misleading explanations regarding the 2015 Cash Discrepancy to RSM, Deloitte, the board and members of the Company and/or took steps to conceal the Schemes from other members of the board, members, auditors and the regulatory authorities (5^th Issue);
(6)  whether if the aforesaid matters (or any of them) are established, the business and affairs of the Company were conducted by Mr Wen in a manner within the meaning of s.214(b), (c) and (d) of the SFO (6^th Issue); and
(7)  if the transactions complained of by the SFC are established, whether the court should grant the relief sought against the Company and Mr Wen (7^th Issue).

45. I consider the issues in turn.

D. DISCUSSION

D1. 1^st Issue: whether 2012 AFS & 2013 AFS were inflated

46. The evidence proving the existence of the Falsification Scheme and the Fabrication Scheme is overwhelming.

47. First, a comparison of the CSRC’s Records (which are indisputable for the reasons stated in §16 above) and the Company’s Records shows that there were the following discrepancies in 5 out of the 8 Bank Accounts (collectively “5 Bank Accounts”)[29]:

(1) As at 31 December 2012, a discrepancy of RMB 2.18 billion (“2012 Discrepancy”)[30]:
Bank Accounts Per CSRC’s
Records (RMB) Per Company’s
Records
(RMB) Discrepancy
(RMB)

HXB BJ Epure 483 0 36,363,637 (36,363,637)
BJ Sound 551 17,369,185 553,252,948 (535,883,763)
BJ Hi-Standard 105 4,463,422 120,971,866 (116,508,444)

PAB BJ Epure 501 20,622 1,089,049,992 (1,089,029,369)
BJ Sound 002 30,438,634 433,281,406 (402,842,771)
Total 52,291,863 2,232,919,848 (2,180,627,985)
(2) As at 31 December 2013, a discrepancy of RMB 2.72 billion (“2013 Discrepancy”):
Bank
Accounts Per CSRC’s
Records
(RMB) Per Company’s
Records
(RMB) Discrepancy
(RMB)

HXB BJ Epure 483 8,905 302,726,462 (302,717,557)
BJ Sound 551 20,003,847 785,393,392 (765,389,545)
BJ Hi-Standard 105 425,049 90,925,102 (90,500,053)

PAB BJ Epure 501 9,317 994,904,877 (994,895,560)
BJ Sound 002 18,451 571,497,631 (571,479,180)
Total 20,465,568 2,745,447,464 (2,724,981,896)

48. In other words, through the Company’s Records, the Subsidiaries had created fictitious bank balances in the 5 Bank Accounts in the amount of RMB 2.18 billion and RMB 2.72 billion as at 31 December 2012 and 2013 respectively[31]. The discrepancies were very significant in that they represented 82% and 89% of the net assets of the Group as at 31 December 2012 and 2013.

49. Second, it is the unchallenged evidence of Ms Wang (a staff of Deloitte BJ) that the Company’s Records had been provided to and relied upon by Deloitte as evidence confirming the existence of the bank balances stated in the 2012 AFS and 2013 AFS.[32]

50. Third, the undisputed evidence shows that the Fabrication Scheme was carried out in the following manner[33]:

(1)  Member(s) of senior management provided or caused to be provided to Deloitte fabricated bank statements and false information pertaining to the 5 Bank Accounts.
(2)  In reliance on such fabricated bank statements and false information, Deloitte prepared and issued bank confirmation forms in respect of the balances of the 5 Bank Accounts as shown in the fabricated bank statements.[34]
(3)  The bank confirmation forms were sent by Deloitte to PAB and HXB for completion. However, officers of PAB and HXB (including Mr Li of HXB, and Ms He of PAB) intervened and bypassed normal confirmation procedures and issued the confirmation forms without the banks’ authority, and applied chops which were different from those used by PAB and HXB.[35]
(4)  The completed bank confirmation forms were sent to Deloitte’s audit department, which relied on them as evidence confirming the existence of the bank balances of the 5 Bank Accounts during the audit of the 2012 AFS and 2013 AFS[36].

51. Fourth, during cross-examination, Mr Wen admitted that the Falsification Scheme and the Fabrication Scheme had been perpetrated on the Group.

52. The above evidence is sufficient to prove that the Company had used the Schemes to inflate the bank balances of the Group as stated in the 2012 AFS and 2013 AFS.

53. Nevertheless, the SFC said that according to its investigation:

(1) In the Company’s Records, there were numerous transactions described as “project funds” and “account transfers” and the credit and debit entries in the ledgers of the 5 Bank Accounts for the years 2012 and 2013 but no corresponding transactions could be found in CSRC’s Records (collectively “Fictitious Transactions”). Details of the Fictitious Transactions are as follows:
2012 2013
No. RMB No. RMB
Debit entries/ transactions 327 (61,500,758) 708 (745,671,451)
Credit entries/ transactions 215 641,231,137 303 1,289,994,499
Net credit 579,730,379 544,323,048
Increase in cash & bank balance as stated in AFS 837,651,000 621,470,000
Net credit / Increase in cash & bank balance 69% 87%
(2) The net credit created by the Fictitious Transactions represented 69% and 87% of the Group’s net increases in bank / cash balances recorded in the 2012 AFS and 2013 AFS.

54. Although Ms Liao criticised the lack of particularity in respect of the Fictitious Transactions, she did not challenge any part of the evidence of Mr Cheng where he referred to the relevant parts of ROIs and documents in support of the allegations. In my view, the criticism is misplaced. The Fictitious Transactions only go to illustrate how the Group recorded the fictitious bank balances (i.e. 2012 Discrepancy and 2013 Discrepancy) in the books of accounts of the Subsidiaries (without which the relevant accounting ledgers would not be balanced) and reinforces the fact that the Schemes were perpetrated on the Group. The SFC does not have to prove the precise manner in which the Group recorded the 2012 Discrepancy and 2013 Discrepancy.

55. For the above reasons, I find that the Schemes were devised and perpetrated on the 5 Bank Accounts. As a result of the Schemes, the bank balances of the Group stated in the 2012 AFS and 2013 AFS had been inflated by RMB 2.18 billion (i.e. 2012 Discrepancy) and RMB 2.72 billion (2013 Discrepancy) respectively.

D2. 2^nd Issue: whether Mr Wen caused, directed and/or orchestrated the Schemes

56. Mr Wen denied that he had any knowledge of or involvement in the Schemes. In particular:

(1)  Although he was Chairman and ED of the Group, he left the day-to-day management and operation of the Group including the Subsidiaries to R3, R4 and R5. He relied entirely on R4.
(2)  The Finance Department was in charge of the bank accounts of the Subsidiaries. It dealt with the employees of PAB and HXB and provided the Company’s Records to Deloitte during the audit. The Finance Department reported to R5 who, in turn, reported to R4.
(3)  Mr Wen did not have access to or personal knowledge of the Group’s bank accounts and had no reason to question the veracity of the bank statements of the 8 Bank Accounts.

57. In my judgment, Mr Wen plainly had knowledge of and was involved in causing, directing and orchestrating the Schemes for the reasons stated below.

58. First, it is not in dispute that the Subsidiaries were corporate vehicles used by the Company to secure water treatment projects in the Mainland and were at all times managed by inter alios Mr Wen:

(1)  According to the answer provided by SWC (on behalf of the Company) to the SFC on 2 May 2017, the Subsidiaries were “merely corporate vehicles to secure water treatment projects in the PRC, and were managed by the relevant staff of the Company and/or its subsidiaries. As such, there are no senior managerial staff specifically for the 3 Subsidiaries”
(2)  Since 7 November 2005 and at all material times, Mr Wen had been Chairman and ED of the Company.
(3)  Mr Wen was a director of the Subsidiaries at all material times.
(4)  Mr Wen was at all material times the legal representative of BJ Epure and BJ Sound. He signed at least 9 contracts on behalf of BJ Sound and BJ Epure.

59. Second, the undisputed evidence showed that Mr Wen had actual control of, and had full access to, the 5 Bank Accounts:

(1)  He was an authorised signatory of the 5 Bank Accounts.
(2)  In the account opening documents submitted by BJ Epure and BJ Sound to PAB and HXB, Mr Wen was listed as the responsible person of BJ Epure and BJ Sound. No other person was listed as authorsied signatory of the accounts of BJ Epure at HXB (483), BJ Sound at HXB (551), BJ Sound at PAB (002) and BJ Epure at PAB (501).
(3)  As Mr Wen admitted under cross-examination, he had power to access the information and obtain documents from PAB and HXB in respect of the 5 Bank Accounts if he wanted.

60. Third, the undisputed evidence shows that all payments made by the companies within the Group had to be approved by Mr Wen and he made all decisions for the Company in that:

(1)  According to the Company’s Financial System – Funds Management (“Management System”), all payments in respect of the works of the projects abroad should be directed to the Company, and the department concerned should prepare application for payment which had to be approved by the heads of the Finance Department, the Works Department and so on. It was only after the Chairman (Mr Wen) had signed the applications that payments could be paid by the Company. Mr Wen confirmed that the Management System accurately reflected the position at the time and he continued to grant and sign such financial approvals until April 2015[37]; and
(2)  According to the Management System, all transfers and payments to third parties of over RMB2 million for construction and RMB0.5 million for equipment, the approval of Chairman was required. Mr Wen confirmed that such requirement applied in 2013.[38]
(3)  Mr Yu confirmed that he reported to Mr Wen. Although R4 was CEO, in fact, the Company was being run by Mr Wen who made all the decisions, be that minor or major decisions.
(4)  Mr Seow also confirmed that Mr Wen was the person in charge of the whole Company and its direction.

61. Fourth, Mr Wen’s assertion that he was not involved in the day-to-day operation and financial matters of the Company and the Group and the same had been delegated to R3, R4 and R5 cannot be true in view of the following uncontradicted evidence:

(1)  Mr Wen made all the decisions for the Group and was intimately involved in approving all the transfers and payments for the companies within the Group at the relevant times (see §§58-60 above).
(2)  R3 was absent from the Group between 2010 and 2013.[39]
(3)  For a great portion of time between 2011 and 2013, R4 was based in Saudi Arabia for work.[40]
(4)  R5 reported to Mr Wen.[41]

62. Fifth, as the person having actual control of the Subsidiaries and the 5 Bank Accounts, Mr Wen must knew that the Subsidiaries did not have bank balances of over RMB 2 billion (as stated in the 2012 AFS and 2013 AFS). This is reinforced by the fact that at all material times: (1) the Subsidiaries were principal subsidiaries of the Company and held the most significant assets of the Group according to the 2012 AFS and 2013 AFS; (2) Mr Wen was familiar with the financial position of the Group and of the Subsidiaries; and (3) Mr Wen was the only person who could approve payments of any significant amounts by the Subsidiaries.

63. Sixth, the Schemes were not one-off or insignificant incident but involved elaborate and coordinated actions taken over 2 years. These included (1) creating fictitious substantial bank balances by fabricating bank statements in respect of the 5 Bank Accounts; (2) creating fictitious transactions which resulted in payments of monies to and from the Subsidiaries (eg. the Fictitious Transactions); and (3) creating false credit and debit entries in the books of accounts of the Subsidiaries and of the Company. Such Schemes could only have been directed and orchestrated by the person with the highest authority in the Group who (i) was familiar with the financial position of the Subsidiaries, (ii) had the power to approve any project carried on by and payment to the Subsidiaries, (iii) had the power to operate the 5 Bank Accounts and obtain any information and statements of such Accounts, and (iv) had unrestricted access to the books of accounts of the Subsidiaries. It is indisputable that Mr Wen was the only person in the Group who had the powers and the means to direct these coordinated actions. Although during cross-examination, Mr Wen asserted that certain unspecified employees in the Finance Department might had access to and used his personal chop in dealing with the 5 Bank Accounts, I do not accept his assertion which never featured in Wen 1^st and makes no sense. Mr Wen did not proffer any explanation as to why he allowed the employees to have access to his personal chop.

64. Seventh, the Discrepancies were not very sophisticated or difficult to detect given that Emerson (a group of independent research analysts) was able to identify the existence of possible fictitious bank balances and revenues by analysing the business of the Group and the published financial statements of the Company in the past including the 2012 AFS and 2013 AFS. It is inconceivable that Mr Wen, who made all decisions for the Group and was familiar with its financial position, would not have been alerted to the existence of the massive Discrepancies.

65. Eighth, the manner in which Mr Wen dealt with the allegations in the Emerson Reports and the subsequent investigation carried on by the SFC is inconsistent with Mr Wen having no knowledge of or involvement in the Schemes as he alleged:

(1)  In February 2015, the Emerson Reports were published which contained very serious allegations against the Company, including (a) the Group’s real cash/bank balances only averaged one third of the amounts disclosed, (b) the real profitability was slightly over a quarter of what was disclosed, and (c) concerns about its inability to make social security payment in 2011.
(2)  In response, the Company issued 3 clarification announcements in February 2015, under Mr Wen’s name as Chairman, denying all allegations in Emerson Reports. At trial, Mr Wen tried to disown the clarification announcements and claimed that he simply approved their publication. I do not accept his evidence. If Mr Wen were unaware of the Schemes as he claimed, he would have caused the Company to take immediate and serious steps to investigate the allegations in particular the discrepancies in bank balances, rather than giving elaborate reasons to refute all the allegations in the Emerson Reports.
(3)  Even after the discovery of the 2015 Cash Discrepancy, which suggested that one of the allegations in the Emerson Reports was well founded,followed by Deloitte’s demand that the Company should take immediate steps to obtain bank statements from the banks, Mr Wen still failed to take any step to ensure that genuine statements were obtained from PAB and HXB. His attempt to shift the responsibility to the audit committee is unacceptable, as it was Mr Wen (not the audit committee) who had actual control of the Subsidiaries and the 5 Bank Accounts.
(4)  Even by the time of the board meeting on 26 March 2015 when R4 claimed to have obtained banks statements from PAB and HXB, Mr Wen still did not ask for copies of the same or take reasonable steps to verify or supervise and ensure investigation was done properly. His evidence was that he did not even see or ask to have a look at the bank statements.
(5)  It was Mr Wen’s evidence that when the Company’s Records were supplied to the SFC on 13 July 2015 and 4 August 2015, he had only looked at the cover letters but not the Company’s Records. This was despite the fact that the s.183 Notice was addressed to him personally.

66. Had Mr Wen been unaware of the Schemes, he would have been very concerned about the allegations in Emerson Reports and would have been keen to cause the Company to carry out extensive and thorough investigations into the allegations. This is because the allegations, if true, would mean that the Company and his 50% shareholding worth a lot less than the shareholders’ equity as stated in the 2012 AFS and the 2013 AFS.

67. Instead, Mr Wen did the complete opposite. He allowed all relevant personnel and documents relating to the 5 Bank Accounts to disappear after the SFC had issued the s.183 Notice in March 2015 in that:

(1)  All senior employees involved in the fictitious bank balances left the Company: R4 left on 18 December 2015, R5 left on 16 April 2016 (3 days after suspension of trading), R3 left in August 2016, and other relevant finance staff left in 2015-2016[42]. All of them left allegedly for personal reasons, without any record of any discussion or explanation on the Schemes and without leaving any contact details to the Company. It is implausible that Mr Wen would allow all senior employees to leave without even asking them to provide information and documents relating to the 8 Bank Accounts which the SFC had been investigating since at least mid-July 2015.
(2)  The 5 Bank Accounts were cancelled and closed on 21 August and 2 September 2015, after BCP had provided the Company’s Records to the SFC on 13 July 2015 and 4 August 2015. Mr Wen’s assertion that he did not know or approve the closure of the 5 Bank Accounts is incredible, given that (as I so find) he had actual control of and access to the 5 Bank Accounts.
(3)  All company chops of the Subsidiaries were changed. Mr Wen asserted that the change had been made without his knowledge or approval, and there was no record or explanation in respect of (a) the time of change, (b) the reason of replacement, and (c) the whereabouts of the original chops. The assertion cannot be true as Mr Wen was the person who made all the decisions for the Group and he was the legal representative of BJ Epure and BJ Sound. Without his approval qua legal representative, it was impossible for BJ Epure and BJ Sound to replace their chops.
(4)  All financial records and bank documents of the Subsidiaries were allegedly lost in a fire on 25 November 2016. There was no credible explanation as to why the fire had only been reported to the local fire service on 30 December 2016. In any event, the one-page report only described the named vehicle caught fire. It did not say that the vehicle was in any way related to the Group, still less that the vehicle carried all the records and bank statements of the Subsidiaries and the same had been destroyed in the fire. Nor was there any credible explanation as to why the incident had only been announced by the Company 7 months later, on 19 June 2017 or why the Company claimed that “some of the financial documents of the Company” were lost and/or damaged.

68. It was only after the disappearance of the relevant personnel and documents that in 2017, Mr Wen belatedly caused the Company to engage Gaowen Law Firm[43] and PKF to investigate the Discrepancies. As all the relevant personnel and documents had not been made available to them, they were only able to produce heavily qualified reports based on the Company’s information without any independent verification.[44]

69. The timing and the surreptitious manner in which Mr Wen allowed the personnel and documents to disappear is consistent with and reinforces the SFC’s case that Mr Wen knowingly caused, directed and orchestrated the Schemes.

70. Lastly, taking into account the following facts (which are either not in dispute or are established by cogent evidence discussed above), the only inference which can be drawn is that the Schemes must have been carried out with the knowledge and approval of Mr Wen:

(1)  The Management System and the way in which the Group had been managed show that Mr Wen’s approval was required for all decisions made by the Group, and all payments and transfers of funds by the Subsidiaries could only be made after Mr Wen had signed the relevant applications for approval.
(2)  The complexity of the Schemes, which involved creating substantial fictitious bank balances and the corresponding fictitious transactions and entries in the accounts of the Subsidiaries and of the Group over a prolonged period of time, required the participation of many senior employees including at least R4 and R5. Mr Wen was the only person who had the authority to direct and mobilise all these senior employees to engage in the fraud for the entire period.
(3)  The fictitious bank balances of the 5 Bank Accounts were very significant to the Group in that:
(a)  The balances in the 5 Bank Accounts represented 75% and 77% of the Group’s bank balances and 84% and 91% of the Group’s net assets as at 31 December 2012 and 31 December 2013 respectively.
(b)  Mr Wen acknowledged that the Subsidiaries were important subsidiaries of the Group and contributed a substantial part of its assets and financial performance.
(4)  Mr Wen admitted that he was familiar with the Group and the Subsidiaries. Other than bare denial, he has not proffered any explanation as to how he could have overlooked the fact that the balances of the 5 Bank Accounts and the net assets of the Group had been overstated by over RMB 2 billion.
(5)  Mr Wen stood to gain the most financially from the Schemes. Amongst the senior management, he was the only one who held over 50% shareholding in the Company, whereas the other EDs (including R3 and R4) or senior officers (including R5) only held immaterial shareholding. Indeed, under cross-examination, Mr Wen accepted that if the share price of the Company increased, the value of his shareholding would also increase.

71. For the reasons explained above, there is compelling evidence to prove that Mr Wen knowingly caused, directed and orchestrated the Falsification Scheme and the Fabrication Scheme.

D3. 3^rd Issue: whether Mr Wen took a blind eye to the Schemes

72. The SFC puts this as an alternative case against Mr Wen, presumably on the assumption that taking a “blind eye” to the Schemes is not or cannot be equated with dishonesty. The assumption goes against the authorities where the courts explained that a person deliberately closing one’s eyes and ears and not asking questions of the fraud to avoid confirmation of the facts in whose existence there is a good reason to believe is as dishonest as a person having actual knowledge (see Royal Brunei Airlines v Tan [1995] 2 AC 378, at 389-391, per Lord Nicholls; Grupo Torras v Al-Sabah [2001] LI Rep PN 117; Twinsectra Ltd v Yardley & ors [2002] AC 164, at 195, per Lord Millett; Manifest Shipping Co Ltd v Uni-Polaris Insurance Co Ltd [2003] 1 AC 469, at §116, per Lord Scott; Barlow Clowes International Ltd (in liquidation) v Eurotrust International Ltd [2006] 1 All ER 333, §§10-12, per Lord Hoffmann).

73. In light of the findings under section D2 above, it is unnecessary to consider whether Mr Wen took a blind eye to the Schemes.

D4. 4^th Issue: whether Mr Wen acted negligently in allowing the Schemes to be perpetrated

74. This is the other alternative case made by the SFC against Mr Wen.

75. If, contrary to the above findings, Mr Wen had no knowledge or involvement in the Schemes, it is necessary to consider whether he acted in breach of his duty to exercise proper skill, care and diligence as an ED of the Company.

76. Although Mr Wen made no admission on the breach of duty of care, skill and diligence as alleged in the Petition, it is clear from his oral evidence that he did not take issue with the SFC’s case on negligence as pleaded in the Petition[45]. This is reinforced by the fact that Ms Liao did not make any submissions in respect of the SFC’s case on negligence.

77. The principles are not in dispute. As Mr Suen submitted:

(1)  A director owes a duty to exercise such care, skill and diligence as would be exercised by a reasonably diligent person with the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions of a director in relation to the company and the general knowledge, skill and experience that the director has.[46] Such duty can be found in common law (Re Long Success International (Holdings) Ltd,§31, per Coleman J; Re D’Jan of London Ltd [1993] BCC 646 at 648 per Hoffmann LJ (as he then was),s.465 of the Companies Ordinance (Cap. 622) and the Listing Rules r.3.08(f)[47]).
(2)  A director is under a continuing duty to acquire and maintain a sufficient knowledge and understanding of the company’s business and affairs to enable them to properly discharge their duties as directors. Whilst a director is entitled to delegate particular functions to others, he remains under a duty to supervise the discharge of the delegated functions (Re Copyright Ltd[2004] 2 HKLRD 113, §§34-35; Re Long Success,§33).
(3)  The duty incorporates a duty to supervise the affairs of the company’s subsidiaries (Re Long Success,§32).
(4)  A director must read and understand the financial statements of the company and consider whether they are consistent with his knowledge of the company’s financial position and statutory requirements, and make enquiries if matters revealed in the financial statements call for such enquiries. (Law of Companies in Hong Kong,3^rd ed.,§8.158).

78. As stated in the 2012 Annual Report of the Company, and was not in dispute:

(1) Mr Wen had responsibility for the overall management and corporate governance of the Group, and had a duty to ensure that the business of the Group was effectively managed and properly conducted day-to-day; and
(2) Mr Wen had direct responsibility in considering and approving the financial results of the Group, overseeing its business and affairs; reviewing and approving material acquisitions and disposal of assets; reviewing a framework for proper internal controls and risk management; and ensuring the Group’s compliance with laws, regulations, policies, guidelines.

79. In view of the duty of care and skill owed to the Company and his responsibility in the Group, Mr Wen ought to have:

(1)  a proper understanding and knowledge on the overall business, finances and performance of the Group including its bank balances;
(2)  taken steps to ascertain and satisfy himself that the financial position including the bank balances reported in the 2012 AFS and 2013 AFS were accurate or within a reasonable range;
(3)  procured the Group to provide the regulators (SFC and SEHK) and the investing public with all material information and documents, and to ensure that such information and documents were complete and true.

80. If, contrary to my findings in section D2 above, Mr Wen did not knowingly caused, directed and orchestrated the Schemes, on Mr Wen’s own evidence, he failed to do any of the above acts. This was despite the allegations raised in the Emerson Reports in February 2015, followed by the concerns raised by Deloitte on 12 March 2015 and the investigation undertaken by the SFC from 16 March 2015. A reasonable person standing in the position of Mr Wen would have asked questions and made all necessary enquiries to ensure that the amounts of bank balances stated in the 2012 AFS and 2013 AFS were accurate, and would have caused the Company to carry on extensive and thorough investigations into all the concerns raised so as to ensure that the financial position of the Group had not been overstated. None of these steps were undertaken by Mr Wen despite the fact that he remained Chairman and ED of the Company throughout the period.

D5. 5^th Issue: whether Mr Wen gave false or misleading explanations regarding the 2015 Cash Discrepancy

81. It is not in dispute that following Deloitte’s discovery of the 2015 Cash Discrepancy in March 2015, Mr Wen provided the 1^st Explanation and 2^nd Explanation to the board and the audit committee in that:

(1) At the meetings of 11 and 12 March 2015, Mr Wen proffered the 1^st Explanation, admitting that he had used RMB 2 billion cash belonging to the Group for his other business.
(2) However, at the board meeting on 19 March 2015, Mr Wen proffered the 2^nd Explanation which suggested that RMB 2 billion cash had been used for the Proposed Acquisitions for the Group.

82. As it is Mr Wen’s case that the 2^nd Explanation represented the true position, the 1^st Explanation must be false. Ms Liao has not advanced any explanation as to why Mr Wen provided such false information to the board and the audit committee.

83. As regards the 2^nd Explanation, the evidence before the court shows that the 2^nd Explanation must be false.[48]

84. First, there was no dispute that the Group’s bank balances in the 2012 AFS and 2013 AFS had been overstated by RMB 2.18 billion and RMB 2.72 billion respectively. If one deducts the 2012 Discrepancy and the 2013 Discrepancy from the Group’s “bank balances and cash” in the 2012 AFS and 2013 AFS, the Group only had “bank balances and cash” of RMB 732 million and RMB 814 million as at 31 December 2012 and 2013 respectively. This means that the Group would not have RMB 2 billion cash alleged to have been withdrawn from its bank accounts in November 2014.

85. Second, the CSRC’s Records show that none of the 3 alleged payments of (1) RMB 600 million on 4 November 2014, (2) RMB 870 million on 24 November 2014, and (3) RMB 530 million on 24 November 2014, referred to by Mr Wen and formed part of his 2^nd Explanation, had in fact been paid out of the 8 Bank Accounts.

86. Third, although Mr Wen asserted that RMB 2 billion had been paid as earnest money for the Proposed Acquisitions, he has not produced any documents in respect of the Proposed Acquisitions.

87. The 2^nd Explanation was admittedly provided by Mr Wen to, and relied upon by RSM and PKF, which were engaged by the Company to investigate the 2015 Cash Discrepancy. The conclusions of the reports of RSM and PKF were announced by the Company to the members and provided to SEHK and the SFC[49].

88. In her Closing, Ms Liao submitted that “there is no evidence to suggest that the Proposed Acquisitions are not genuine” and reliance was placed on RSM’s conclusions which she said had been reached by RSM after carrying out on-site inspections of the projects, conducting extensive interviews and forensic analysis of the Company’s staff and electronic documents relating to the Proposed Acquisitions. The submission misses the point. The burden is on Mr Wen to prove his assertions (i.e. that the Proposed Acquisitions were genuine and RMB 2 billion was paid by the Group for such Acquisitions). It is not for the SFC to prove a negative. As for RSM’s conclusions, they were based on the 2^nd Explanation provided by Mr Wen. The conclusions cannot be right in view of the facts and matters stated in §§84 - 86 above.

89. Lastly, Ms Liao argued that it was reasonable for Mr Wen to form the view that the Company as a whole had sufficient funds to pay for the earnest money. Reliance was placed on the 2013 AFS which referred to the funds raised by the Company in 2013 and Mr Yu’s evidence where he said that his impression was that the Company had sufficient funds at its disposal in 2012-2013. The argument is flawed. The issue is whether the 1^st and 2^nd Explanations were false. For the reasons stated, the Group could not have the cash/bank balances to pay the earnest money and none of the 3 alleged payments were in fact paid out of the 8 Bank Accounts. It is irrelevant whether Mr Wen thought that the Company had sufficient funds to pay the earnest money.

90. For the above reasons, there is cogent evidence in support of the SFC’s case that Mr Wen gave false explanations regarding the 2015 Cash Discrepancy to the other members of the board, the audit committee, Deloitte, RSM, PKF, the members of the Company and the regulators (i.e. SEHK and the SFC).

D6. 6^th Issue: whether the business and affairs of the Company were conducted in an unfairly prejudicial manner

91. The principles are not in dispute.

92. The SFC has to satisfy the 3 conditions stipulated in s.214 of the SFO namely, (1) the corporation in question is or was a listed corporation; (2) the business or affairs complained of is that of the corporation; and (3) the conduct complained of falls within one or more heads of misconduct specified in s.214(1)(a)-(d).

93. As regards the second condition, the conduct complained of can be that of the listed company and the subsidiaries directed by or under the control of such listed company (Re Shandong Molong Petroleum Machinery Company Limited[2021] HKCFI 497, §17).

94. Section 214(b), (c) and (d) of the SFO prescribes the various heads of misconduct and may be summarised as follows.

95. With respect of s.214(1)(b):

(1)  “Misfeasance” is defined in Part 1 of Schedule 1 to the SFO as “the performance of an otherwise lawful act in a wrongful manner”. The notion of “misfeasance” overlaps with that of breach of fiduciary duty and seemingly covers a wide range of conduct (SFC v Yeung Chung Lung,HCMP 205/2013, 17 February 2017, §81).
(2)  The words “other misconduct” connote improper or wrong behaviour or mismanagement, or culpable neglect of duties. This term is something of a “belt and braces exercise”, and is intended to cover the “widest range of possible misconduct” (Re DBA Telecommunication (Asia) Holdings Limited[2022] HKCFI 653, §10; Re Long Success, §37).
(3)  A breach of the duty to exercise reasonable care and diligence in the management of company may constitute both “misfeasance” and “other misconduct” (Re DBA Telecommunication, §10; Re Long Success, §37).

96. As for s.214(1)(c) (i.e. members not having been given all the information with respect to its business or affairs that they might reasonably expect), it can be complementary to the other subsections (SFC v Yeung Chung Lung,HCMP 205/2013, 17 February 2017, §84; Re Long Success§38), and covers situations such as (1) the making of misleading or false announcements; and (2) situations requiring publication of periodic financial statements and announcements, as members are entitled to expect the listed company to provide complete and accurate information in respect of such matters (SFC v Li Wo Hing, HCMP 1023/2011, 26 September 2012, §§10(1)(b), 10(2)(a); Re Shandong Molong, §19(2)).

97. With respect to s.214(1)(d):

(1) The conduct in question does not have to be wrongful per se (Re Shandong Molong,§19(3)).
(2) “Unfairly prejudicial” conduct covers a range of conduct, from fraud at the one end to neglect or inaction on the part of those to whom the affairs of a company are entrusted on the other end. The question to be asked in such circumstances is whether the conduct concerned is that which can be expected from the managers of the company to whom those affairs have been entrusted (SFC v Fung Chiu§22; Re Long Success§39).

98. In the present case, all 3 conditions stipulated in s.214 of the SFO are satisfied.

99. It is not in dispute that the first and second conditions are satisfied.

100. In view of the findings on the 1^st Issue, the 2^nd Issue and the 5^th Issue, there is more than sufficient bases for the court to conclude that the business and affairs of the Company were conducted by Mr Wen in a manner within the meaning of s.214(1)(b), (c) and (d) of the SFO in that:

(1)  The Schemes were fraud perpetrated on the Company and the Subsidiaries, which constituted misfeasance or misconduct within the meaning of s.214(1)(b) of the SFO;
(2)  The provision of false explanations (i.e. the 1^st and 2^nd Explanations) on the 2015 Cash Discrepancy constituted misfeasance or misconduct under s.214(1)(b);
(3)  The Schemes and the provision of false explanations resulted in the Company’s members not having been given all the information with respect to the Company and the Subsidiaries’ business and affairs that they might reasonably expect under s.214(1)(c) of the SFO;
(4)  The Schemes and the provision of false explanations were unfairly prejudicial to the Company and its members under s.214(1)(d) in that the financial position of the Group had been grossly overstated and the true position remains unknown. The Company and its members (other than Mr Wen and his companies) were prejudiced as trading of the Company’s shares had since April 2016 been suspended, and there was no indication as to whether trading would resume, if at all.

D7. 7^th Issue: Remedies

101. It is not in dispute that if the court is of the opinion that the business or affairs of the Company have been conducted in the manner described in s.214(1), the court may make any order stipulated in s.214(2) including a disqualification order against the person responsible for the impugned conduct if it considers it justified (Re Long Success§40).

D7.1 Disqualification order

102. The principles governing the exercise of discretion in making a disqualification order may be summarised as follows:

(1)  The court takes into account the two-fold objectives of a disqualification order viz., to protect the public against the future conduct of the respondent and as a general deterrence (Re Shandong Molong§20).
(2)  The court will have regard to a wide spectrum of factors, including the respondent’s age and state of health, the length of time he has been in jeopardy, whether he has admitted the offence, his general conduct before and after the offence, and the periods of disqualification of his co-directors that may have been ordered (Re First China Financial Network Holdings Ltd[2015] 5 HKLRD 530 §8).
(3)  There are 8 criteria which govern the court’s exercise of discretion namely (a) the character of the offenders, (b) the nature of breaches, (c) the structure of the companies and the nature of their business, (d) the interests of the shareholders, creditors and employees, (e) the risks to others from the continuation of the offenders as company directors, (f) the honesty and competence of the offenders, (g) the hardship to the offenders and their personal and commercial interests, and (h) the offenders’ appreciation that future breaches should result in future proceedings (Re First China Financial Network§8; Re DBA Telecommunication §31(4)).
(4)  The court adopts a reasonably broad-brush approach, and will have regard to 3 brackets of disqualification periods:
(a)  the top bracket of disqualification for over 10 years for particularly serious cases;
(b)  a minimum bracket of below 5 years’ disqualification for cases which are relatively less serious; and
(c)  a middle bracket of 6 to 10 years’ disqualification for cases which although serious, are not so serious as to merit a period of disqualification in the top bracket (Re First China Financial Network§§5-6, 9; Re DBA Telecommunication§§31(2)-(3)).

103. Mr Suen submitted that a disqualification period of 10 to 11 years is appropriate to reflect the gravity of the misconduct, the deliberate and misleading explanations proffered, and the need for deterrence and protection of the investing public against Mr Wen’s wrongdoing. The court in Re Shandong Molong adopted a starting point of 11 years for the 2^nd respondent, who was Chairman and ED of the company, and the misconduct did not involve embezzlement of funds or loss suffered by the company (§§29-30).

104. Ms Liao on the other hand emphasised that the Company had not suffered any loss, and Mr Wen’s conduct was less serious than the conduct of the 1^st respondent in SFC v Li Hejun, HCMP 166/2017, 4 September 2017. I disagree. The 1^st respondent in SFC v Li Hejun acted in breach of his fiduciary duty in failing to cause the company to collect a very substantial amount of receivables owed by entities under his control. His conduct fell within the top end of the middle bracket as it did not involve any fraud or mis-statement of the financial position of the company.

105. I consider that a disqualification period of 12 years is appropriate given the very serious nature of the misconduct, which involved fraud and dishonesty on the part of Mr Wen, who is found to have caused, directed and perpetrated the Falsification Scheme and the Fabrication Scheme for over 2 years. He also provided false explanations on the 2015 Cash Discrepancy to the audit committee, auditors, members and the regulators. Such conduct was highly prejudicial to the Company and its members and resulted in suspension in trading for a prolonged period substantial time and costs were incurred by the Company to engage various entities to investigate the impugned transactions as required by the audit committee and the regulators. Worse still, after the SFC had taken step to investigate the affairs of the Company, Mr Wen caused or allowed all relevant personnel and documents to become unavailable. This made it impossible for the SFC and the Company to conduct a thorough investigation into the Schemes and the 2015 Cash Discrepancy, which is necessary to identify the full extent of the prejudice or damage suffered by the Company and to take steps to address and rectify the same.

D7.2 Share purchase order

106. The SFC seeks an order requiring Mr Wen do make an offer to purchase the shares held by other members at a price to be determined by the court.

107. Section 214(2)(e) of the SFO provides that the court may “make any other order it considers appropriate, whether for regulating the conduct of the business or affairs of the corporation in future, or for the purchase of the shares of any members of the corporation by other members of the corporation or by the corporation…. or otherwise”. The share purchase order sought by the SFC falls within the ambit of s.214(2)(e). There is no dispute that Mr Wen is a member of the Company.

108. Contrary to Ms Liao’s contention[50], the grant of a purchase order does not require the SFC to establish that there was any financial gain received by the respondent or any loss suffered by the company/members. Nor does it require the SFC to prove that such gain / loss was quantifiable and was caused by the misconduct:

(1)  There is no such requirement in s.214(2)(e).
(2)  The authorities relied on by Ms Liao (Re Styland Holdings Ltd (No 2) [2012] 2 HKLRD 325, §§106, 139, 142; SFC v Wong Wai Kwong David[2021] HKCA 897, §§36-39; SFC v Yeung Chung Lung, HCMP 205/2013, 17 February 2017, §§94, 109; SFC v Li Wo Hing, HCMP 1023/2011, 26 September 2012, §§8, 10, 18(3)) are distinguishable. In all these cases, the court had to consider whether to make an order requiring the respondent to compensate the company for the loss suffered. It was in that context that the court had to consider whether the evidence established (a) some financial advantage was received by the respondent or financial loss was caused to the company; (b) the financial advantage / loss was readily quantifiable; and (c) the causal link between the conduct and the financial advantage / loss.
(3)  Where, as here, the order sought is a share purchase order, no such consideration arises as the court does not have to be concerned about whether the compensation ordered to be paid by the respondent would result in a windfall or double recovery to the company.

109. In considering whether a share purchase order should be made against a respondent, the court may be guided by the principles applicable to an “unfair prejudice” petition under ss.724-725 of the Companies Ordinance (Cap. 622) (“CO”) (which replaced s.168A of the former Companies Ordinance (Cap. 32)), given the similarity in wordings and width of both provisions. As noted by Barma J (as he then was) in Re Styland Holdings (No 2), §138, both provisions are designed to provide the court with a high degree of flexibility in terms of the remedies it might provide.

110. In my view, the court should take into account the following differences between the 2 statutory remedies in that under s.214(2)(e):

(1)  The petitioner is the SFC, which pursues the proceedings in the interests and for the benefit of the company and its members, and to redress wrongful conduct of those concerned in the management of listed company for the protection of the public. By contrast, the petitioner under ss.724-725 of the CO pursues the proceedings to advance his private interest and generally, public interest does not come into play.
(2)  The company in question is a listed company. Its constitution contains no restriction on transfer of shares, and the members are at free to buy and sell their shares through the SEHK or by private agreement. This means that if members are dissatisfied with the manner in which the affairs of the company has been conducted, they can extricate the investment by selling their shares through the market without any impediment.
(3)  Generally, there is greater transparency in the manner in which the business and affairs of the listed company have been conducted as the board has to make disclosure and announcement to the members in accordance with the requirements of the Listing Rules. In this sense, it may be said that if the company had made announcements on matters relating to the misconduct, their impact would have been reflected (at least in part) in the prices of the shares of the company. For those investors who decided to acquire shares in the company with the knowledge of the matters disclosed or announced by the board, they voluntarily assumed the risk that they may not be able to sell their shares if the regulators decide to suspend trading of the shares.

111. In view of the aforesaid differences, in deciding whether to make a share purchase order in the context of a listed company, the court may take into account the following factors:

(1)  whether there is a lesser remedy sufficient to deal with the unfairly prejudicial conduct and there is no likelihood of the conduct repeating;
(2)  where there are difficulties or impracticalities in framing orders for regulating the company’s affairs in future or to remedy the misconduct;
(3)  whether the other members would otherwise be locked in the company due to difficulties in disposing of the shares (cf. Lo & Qu,Law of Companies in Hong Kong§10.211; Re Elgindata Ltd[1991] BCLC 959 at 1005g-i);
(4)  whether the person against whom the order is sought was in control of the company at the material times of the misconduct and his interests in the company; whether he acted in clear disregard of the interests of the minority shareholders; his pattern of conduct and whether he acted in breach of the Listing Rules and other applicable regulations (Re Mandarin Resources Corporation Limited, HCCW 348/1996, 19 November 1999, pp.5-6, 103, 109-110, a case decided on the now repealed Securities and Futures Commission Ordinance (Cap. 24)); and
(5)  whether the respondent has the financial means to comply with the order. In this regard, I do not agree with Mr Suen’s submission that the fact that the respondent is impecunious may not be a sufficient ground to deny the petitioner a buy-out order where it is otherwise appropriate, citing Lo & Qu,Law of Companies in Hong Kong§10.211; Re Cumana Ltd[1986] BCLC 430 at 436h-437b. Generally, the court would not make an order in vain. It does not serve the interests of justice to order a respondent to purchase the shares of other members if the evidence shows that the respondent does not have the financial means to comply with such order.

112. Applying the above principles, I consider that it is an appropriate case where the court should make an order requiring Mr Wen to make an offer to purchase the shares held by other members (i.e. other than companies owned or controlled by Mr Wen). There are 4 reasons for this.

113. First, as a result of the Schemes and the 2015 Cash Discrepancy, the true financial state of the Company and of the Group remains unclear. The position is exacerbated by the subsequent disappearance of all relevant personnel and documents, which render it impossible for the SFC and the Company to identify the full extent of the wrongs done to the Group and whether any financial loss has been suffered by the Group. The latter also means that the Company would not be able to bring any proceedings and seek compensation against the persons responsible for causing the loss to the Company.

114. Second, the prejudice suffered by the Company and its members is substantial and irreversible in that:

(1)  The existence of the Discrepancies and the 2015 Cash Discrepancy and the inability of the Company to conduct full investigation and redress the same would inevitably affect the confidence of the financiers and investors who might otherwise be willing to advance loans to or invest in the bonds or shares issued by the Company as any seasoned financier and investor would require accurate and complete financial information before deciding to advance loans to or invest in the Company.
(2)  Trading in the Company’s shares has been suspended for over 6 years. According to the announcement dated 1 August 2018,the SEHK imposed 2 resumption conditions on the Company namely: (1)publication of all outstanding financial results of the Group in accordance with the Listing Rules and address any audit modification; and (2) restoring and maintaining sufficient public float under rule 8.08(1)(a) of the Listing Rules. According to the announcement dated 4 December 2020, the SEHK added a 3^rd resumption condition requiring the Company to demonstrate compliance with rule 13.24 of the Listing Rules.
(3)  To-date, there is no indication that the Company will be able to comply with the above conditions. If and for so long as trading remains suspended, the other members will not be able to sell their shares through the SEHK. It is no answer to say that these members may still sell their shares through private agreements as the members acquired their shares on the basis that the Company’s shares could be traded on the SEHK.
(4)  Further, trading of the shares has been suspended for more than 12 months as at 1 August 2018 and may be delisted under rule 6.01A(2)(b)(ii) of the Listing Rules. According to the announcement dated 8 February 2022, the SEHK after consultation with the SFC would withhold exercising its right to cancel the listing of the Company under rule 6.01A(2)(b)(ii)until 31 July 2022. These show that the SEHK may cancel the listing of the Company’s shares at any time.

115. Third, there is no lesser remedy which may redress the Discrepancies and the 2015 Cash Discrepancy. In particular, the relief sought by the SFC against the Company, even if granted, would not redress the wrongs done to the Company. Indeed, the futility of the appointment is illustrated by the fact that the Company has previously engaged RSM, PKF and other law firms to investigate the Discrepancies and the 2015 Cash Discrepancy, and the heavily qualified reports produced by such firms.

116. Fourth, there is no suggestion that Mr Wen does not have the financial means to purchase the shares of the other members. Indeed, since June 2017, Mr Wen has indicated to the board that he intends to privatise the Company albeit that he has not taken any concrete steps to pursue such privatisation.

117. Ms Liao contended that based on the disclosure of interests as of 16 June 2022, the second largest shareholders holding 32.53% shares in the Company appear to be institutional investors. There is no evidence that the SFC has sought the view of such investors or indeed, any members. There is no evidence of any complaint from any members or that they prefer a share purchase order. I do not think that these matters, even if correct, are relevant to the consideration as to whether a share purchase order should be made. The order sought by the SFC is that Mr Wen be ordered to make an offer to purchase the shares of the other members at the price to be determined by the court. It is a matter for the members to decide whether they want to accept the offer.

E. DISPOSITION AND COSTS

118. For the reasons set out above, I find that:

(1)  the Schemes were perpetrated on the 5 Bank Accounts. As a result of the Schemes, the bank balances of the Group stated in the 2012 AFS and 2013 AFS had been inflated by RMB 2.18 billion and RMB 2.72 billion respectively;
(2)  Mr Wen plainly had knowledge of and was involved in causing, directing and orchestrating the Schemes;
(3)  Mr Wen gave false explanations regarding the 2015 Cash Discrepancy to other members of the board, the audit committee, Deloitte, RSM, PKF, members of the Company and the regulators; and
(4)  the business and affairs of the Company were conducted by Mr Wen in a manner within the meaning of s.214(1)(b), (c) and (d) of the SFO.

119. As for relief, I make the following order against Mr Wen:

(1) A disqualification order for 12 years from the date of this Judgment; and
(2) An order that Mr Wen shall make an offer to purchase the shares held by the other members of the Company (i.e. members other than himself and the companies owned and/or controlled by him) at the price to be determined by the court at a further hearing.

120. For the above purpose, the SFC is directed to submit within 14 days of this Judgment (1) a draft setting out the proposed terms of the order; and (2) the proposed directions on the court’s determination on the price at which Mr Wen shall make an offer to purchase the shares held by the other members, taking into account the comments which have been made by Mr Wen (if any). If the parties are unable to agree on the wordings, the SFC is to lodge the draft orders setting out the terms which are in agreement and those which the parties are not able to agree and the respective contentions of the parties.

121. As for costs, I make a costs order nisi that:

(1) Mr Wen do pay the costs of and occasioned by the Petition including the costs of trial to the SFC on an indemnity basis, to be taxed if not agreed and with certificate for 2 counsel. The higher scale of costs reflects the gravity of the misconduct.
(2) Mr Wen do pay the costs incurred by the Company in the Petition on an indemnity basis. This reflects the fact that the Company is only a nominal party and is the victim of the fraud committed by Mr Wen against it, and should be entitled to recover the costs occasioned by the Petition from Mr Wen.

122. The present case is a paradigm example where the directors of a listed company were able to avoid the enforcement action taken by the SFC by choosing to stay out of the jurisdiction. It is a matter well known to the regulators and practitioners that service of the originating process such as a petition on persons who stay in the Mainland often require many months and may even be futile when the persons deliberately took steps to avoid being served by the relevant authorities. The regulators in particular the SEHK may want to review the position and address the problem sooner than later. One possible avenue available to the regulators would be for the SEHK to require any person who assumes the position as director of a listed company to agree, as part of the undertaking he/she gives to the SEHK, to designate a place within the jurisdiction at which the regulators may serve the originating process on him/her when they take enforcement action against such director. There is no reason why a person who agreed to assume the important role as director of a listed company and to abide by the duties imposed by the Listing Rules and other relevant regulations would be able to avoid enforcement action by choosing to stay out of the jurisdiction.

	(Linda Chan)
	Judge of the Court of First Instance
	High Court

Mr Jenkin Suen SC leading Ms Sheena Wong, instructed by Securities and Futures Commission, for the Petitioner

Mr Thomas WK Wong, instructed by Stevenson, Wong & Co., for the 1^st Respondent (on 14 June 2022 only)

Ms Tara Liao, instructed by DLA Piper Hong Kong, for the 2^nd Respondent

[1] Under SFO s.214(2)(d) or s.214(2)(a).

[2] Under SFO s.214(2)(e).

[3] Which is governed by PD 3.4 Case Management for Bankruptcy Petitions, Winding-up Petitions and Petitions under section 724 of the Companies Ordinance.

[4] Petition §48.

[5] Which was necessary given that the parties were bound by the implied undertaking not to use any documents obtained under compulsory powers in the proceedings for a collateral purpose including other legal proceedings.

[6] Petition §§2, 10.

[7] Petition §10.

[8] Petition §36.

[9] Petition §2.

[10] Petition §12(1).

[11] Petition §12(1).

[12] Petition §12(2).

[13] Petition §12(3).

[14] Petition §12(6).

[15] Petition §22.

[16] Petition §38.

[17] Petition §§23-30.

[18]

[19] Petition §31.

[20] Petition §33.

[21] Petition §§32, 34.

[22] Petition §35.

[23] Petition §39.

[24] Petition §39.

[25] Petition §§39-40.

[26]

[27] Petition §9.

[28] Petition §89.

[29] Petition §42.

[30]

[31] Petition §44.

[32] Petition §41; Ms Wang’s ROI.

[33] Petition §§50-58; Cheng 1^st §§41-44; Ms Huang’s ROI; Ms Dong’s ROI; Mr Li’s ROI; Ms He’s ROI; Ms Wang’s ROI; Ms Su’s ROI; Ms Fang’s ROI; Ms Yu’s ROI; RSM Report §24.

[34] Petition §53.

[35] Petition §§55-58.

[36] Petition §56.

[37] Mr Wen’s ROI Q7.

[38] Mr Wen’s ROI Q8.

[39] PKF report §3.3.14; admitted by Mr Wen [Day 2 (am), XX].

[40] Mr Yu’s ROI. Mr Wen initially admitted this, but later retracted and said R4 only went to Saudi Arabia when problems arose [Day 2 (am), XX].

[41] Mr Yu’s ROI Q300-301, 331-340. Mr Wen initially conceded that he had called R5 to inquire into the Group’s financials [Day 2 (am), XX of Mr Wen], but he later retracted and said he never had and did not call R5’s mobile [Day 3 (am), XX of Mr Wen].

[42] The relevant finance staff include (i) Si Zhi Qiang (司志強), who took part in the bank visit with Deloitte on 10 March 2015 and left employment on 25 July 2015; (ii) Zhang Xue (張雪), who left employment on 25 September 2016; and (iii) Zhang Yijie (張宜潔), who left employment on 17 February 2016.

[43] Gaowen Law Firm’s report dated 25 December 2017, Mr Wen accepted that they were engaged in or around December 2017, they only tried to contact previous finance staff on 19 December 2017, and tried to contact the banks on the same day.

[44] PKF was purportedly engaged in January 2017, but its report was dated 8 January 2018. PKF’s report was compiled based on information provided by the Group only and they could not obtain any information in respect of the bank balances discrepancies.

[45] Petition §§84-88.

[46] Petition §§60-61.

[47] For which the Company and each of the director gave an undertaking to the SEHK to comply with.

[48] Petition §§77, 78(3).

[49] RSM’s report dated 20 November 2015 and the announcements dated 31 August 2015 and 18 December 2015. PKF’s report dated 9 June 2015 and the announcement dated 23 June 2015.

[50] Opening §§16, 18 &19

SECURITIES AND FUTURES COMMISSION v. SOUND GLOBAL LTD AND OTHERS

Related cases with same parties

Files (2)

	As at 31.12.2011 RMB	As at 31.12.2012 RMB	As at 31.12.2013 RMB
Capital and reserves	2,304,669,000	2,654,512,000	3,074,291,000
Bank balances and cash	2,074,426,000	2,912,077,000	3,533,547,000
Increase in bank balance and cash		837,651,000	621,470,000

		Account no.	As at 31.12.2012 RMB	As at 31.12.2013 RMB
HXB	BJ Epure	10282000000392483 (“483”)	36,363,637	302,726,462
	BJ Sound	4066200001801500001551 (“551”)	553,252,948	785,393,392
	BJ Sound	10282000000448756 (“756”)		30,000,000
	BJ Hi-Standard	4066200001819100006105 (“105”)	120,971,866	90,925,102
PAB	BJ Epure	11008393782501 (“501”)	1,089,049,992	994,904,877
	BJ Sound	11000951057002 (“002”)	433,281,406	571,497,631
	BJ Sound	18000951057001 (“001”)	10,000,000	27,000,000
	BJ Hi-Standard	11009345733702 (“702”)	4,207	4,223
Total			2,242,924,055	2,802,451,687
Bank balance in all Group’s bank accounts			2,992,785,281	3,643,039,301
% held in 8 Bank Accounts			75%	77%

		Bank Accounts	Per CSRC’s Records (RMB)	Per Company’s Records (RMB)	Discrepancy (RMB)
HXB	BJ Epure	483	0	36,363,637	(36,363,637)
	BJ Sound	551	17,369,185	553,252,948	(535,883,763)
	BJ Hi-Standard	105	4,463,422	120,971,866	(116,508,444)
PAB	BJ Epure	501	20,622	1,089,049,992	(1,089,029,369)
PAB	BJ Sound	002	30,438,634	433,281,406	(402,842,771)
Total			52,291,863	2,232,919,848	(2,180,627,985)

		Bank Accounts	Per CSRC’s Records (RMB)	Per Company’s Records (RMB)	Discrepancy (RMB)
HXB	BJ Epure	483	8,905	302,726,462	(302,717,557)
	BJ Sound	551	20,003,847	785,393,392	(765,389,545)
	BJ Hi-Standard	105	425,049	90,925,102	(90,500,053)
PAB	BJ Epure	501	9,317	994,904,877	(994,895,560)
PAB	BJ Sound	002	18,451	571,497,631	(571,479,180)
Total			20,465,568	2,745,447,464	(2,724,981,896)

	2012		2013
	No.	RMB	No.	RMB
Debit entries/ transactions	327	(61,500,758)	708	(745,671,451)
Credit entries/ transactions	215	641,231,137	303	1,289,994,499
Net credit		579,730,379		544,323,048
Increase in cash & bank balance as stated in AFS		837,651,000		621,470,000
Net credit / Increase in cash & bank balance		69%		87%