Share
Our trainee solicitor Jonathan Wong also contributed as one of the authors.
Synopsis
The Court of First Instance (Jonathan Harris J) approved a proposed settlement agreement between the Securities and Futures Commission (“SFC”), Combest Holdings Limited (“Combest”) and three individual respondents (being a shadow director and two former executive directors of Combest) by way of the Carecraft procedure, under which the shadow director shall, among other things, pay Combest an agreed sum of HK$192 million, which will be distributed by way of special dividends to Combest’s independent shareholders as compensation. The shadow director and the two former executive directors of Combest are also disqualified from being directors, liquidators, receivers or managers, and being involved in the management of any corporation for 8 to 12 years.
Background facts
Combest was listed on the Growth Enterprise Market (“GEM”) of The Stock Exchange of Hong Kong (“SEHK”). Trading in Combest’s shares was suspended by the SEHK at the SFC’s direction on 29 May 2019, and Combest was delisted on 24 December 2020.
Ng Kwok Fai (Ng) had been a shadow director of Combest since 2016, whereas Liu Tin Lap (Liu) and Lee Man To (Lee) were (at different points in time) Combest’s executive directors. Liu and Lee followed Ng’s directions and instructions to operate Combest’s affairs.
On 4 January 2016, Combest announced its wholly-owned subsidiary had entered into an agreement to acquire a company called Giant Goal Limited (Giant Goal) at a consideration of HK$70 million. Giant Goal and its subsidiaries were said to be principally engaged in money lending as well as provision of credit, lending consultancy services and company secretarial services. This acquisition was procured by Ng, and was completed with Lee’s assistance.
Further, on 1 April 2017, Combest announced it had entered into an agreement to acquire a 51% interest in another company called Ultra Rich Global Limited (Ultra Rich) at a consideration of HK$170 million. Ultra Rich and its subsidiaries were said to be principally engaged in the business of fund management. Ng, Liu and Lee caused Combest to enter into this acquisition.
The SFC’s investigations showed that the two acquired subsidiary groups were in reality comprised of fictitious or artificial businesses procured by Ng. Giant Goal’s customers were related to or procured by Ng, and its revenue went into a free-fall after Giant Goal was acquired by Combest. As for the fund management business operated under Ultra Rich and its subsidiaries, the assets under management and revenue were also found to be significantly inflated. Accordingly, the SFC believed both acquisitions were substantially overvalued - by HK$229 million in total. The acquisitions enabled Ng to siphon money off from Combest to benefit himself and to create the false impression that Combest had a substantial level of operations and assets, which warranted Combest’s continued listing on the GEM Board.
In addition to the acquisitions mentioned above, Ng, Liu and Lee caused Combest to borrow loans and make payments of fees and interests of about HK$64 million to various entities controlled by, associated with or related to Ng. There were no commercial reasons for Combest to borrow such loans.
Overall, the two overpriced acquisitions and borrowings ultimately caused Combest to suffer losses of over HK$293 million in total.
In May 2020, the SFC commenced proceedings under sections 212 and 214 of the Securities and Futures Ordinance (“SFO”) to seek remedies from Ng, Liu and Lee for their wrongdoings, and for an order to wind up Combest.
Court’s decisions and reasoning
In September 2024, the SFC, Combest, Ng, Liu and Lee reached an agreement (“Settlement Agreement”) to dispose of the court proceedings by way of the Carecraft procedure. Ng, Liu and Lee admitted their misconducts, namely their involvement in Combest’s disclosure of false and misleading information and breaches of the GEM Board Listing Rules. Further, it was agreed under the Settlement Agreement:
- Ng will pay an independent administrator (“Administrator”) a compensation of HK$192 million in full and final settlement of Ng, Liu and Lee’s liabilities to pay Combest as claimed by the SFC, and the Administrator will distribute this sum in the form of special dividends to the independent shareholders of Combest; and
- two shareholders holding 24.4% of Combest’s shares will return to the Administrator their shares of the special dividends and the Administrator will be instructed to re-distribute the returned money to the other shareholders, which will result in a 32.3% increase in the special dividends payable to the independent public shareholders.
As the compensation amount which Ng agreed to pay (HK$192 million) is less than the loss suffered by Combest (HK$293 million), the Court considered whether it should make an order based on the Settlement Agreement. The Court agreed with the SFC’s submissions that:
- Given the quantum of Combest’s loss is subject to expert valuation evidence and the complexity of the case, without the settlement, it is unlikely the proceedings will be resolved soon, the payment of the proposed sum will ensure that Combest receives a substantial amount of compensation at an early stage and avoid litigation risks.
- As the beneficiary of the Settlement Agreement, Combest has agreed to the settlement terms.
- The arrangement of compensation payment in the form of special dividends, as well as the two shareholders’ forfeiture of their entitlement to the special dividends, would not be achievable by an order for monetary compensation after trial.
Accordingly, the Court considered it was in the public interest to approve the settlement scheme.
Moreover, in terms of disqualification of Ng, Liu and Lee, the Court found that:
- the misconduct and breaches of duty established against Ng fell within the top bracket in terms of seriousness, considering Ng was the mastermind behind the schemes which caused substantial harm to Combest, as well as the deception of the investing public and the SEHK; and
- Liu and Lee actively and knowingly assisted Ng and hence a disqualification period falling towards the top end of the middle bracket is appropriate.
In the circumstances, the Court made the corresponding disqualification Order, under which Ng was disqualified for 12 years, and each of Liu and Lee for 8 years, from being a director, liquidator, receiver or manager, and being involved in the management of any corporation.
Postscript in the court’s decision
It is noteworthy that the Judge made a postscript in the Reasons for Decision reminding the SFC of the importance of referring suspected criminal matters to law enforcement agencies expeditiously because delays in referral will risk prejudicing the prosecutorial process. Specifically in the present case, the Judge considered there were hallmarks of fraud perpetrated upon Combest; nonetheless, the matter was not referred to the Department of Justice due to insufficient evidence.
Key takeaways
The SFC has in the past mostly relied on section 213 of the SFO to seek orders from the Court to tackle questionable transactions and to restore parties to the positions before such transactions are entered into. A prime example is the case of SFC v Hontex Int’l Holdings Co Ltd and Ors (HCMP 630/2010, 2 August 2011), where the Court, on the basis that Hontex’s prospectus for its IPO was found to contain a number of false and misleading figures, ordered the repurchase of shares to restore shareholders back into their previous position.
In this instance, the SFC has obtained an order from the Court which will lead to independent shareholders of Combest receiving payments as compensation for the unfairly prejudicial conduct of those who managed Combest’s affairs. Such an order is the first of its kind in the context of director disqualification proceedings, and this is why the SFC has said the Court’s decision in the present case is a landmark decision.
Since the compensation amount which Ng agreed to pay is about one-third less than the total loss suffered by Combest, this essentially means that Combest (and indirectly the shareholders) will not be fully compensated in monetary terms. This caused some doubts on whether the compensation awarded is fair and just in the circumstances and whether the interests of Combest’s shareholders are sufficiently protected. As noted above, the Court’s order was made following an agreement reached between the parties, and the compensation scheme might not be achievable by an order for monetary compensation after trial.
The approach taken by the SFC and endorsed by the Court is pragmatic, as trading in Combest’s shares has been suspended for over 6 years, and Combest’s independent shareholders will receive payments equal to 2.75 times higher than the last closing price before such trading suspension. The independent shareholders will finally be compensated for Combest’s breaches which took place 8 to 9 years ago.
With this precedent, we can foresee the SFC will try to push for similar settlement schemes in other director disqualification proceedings, and this will be a further expansion of the SFC’s toolkit for investor protection. We also believe the SFC will take heed of the Court’s reminder to refer suspected criminal matters to other law enforcement agencies to ensure that perpetuators of criminal conducts will not get unpunished to the fullest extent.
Banking and finance
Hong Kong