On
Background
The SFC's case was that the Directors misapplied funds belonging to the Company and its subsidiaries which resulted in approximately
The Court found that (1) the Directors had approved transactions and signed cheques including payments to at least seven debtors which were under the control of Wong and (2) the underlying transactions for the payments were not genuine commercial transactions in the first place.
As a result the Court held that the Directors had breached their duties of care and skill by not carrying out proper inquiries and not performing due diligence before allowing the Company to enter into the transactions and make the payments. The Court also held that each Director had committed defalcation, misfeasance or other misconduct and in a manner unfairly prejudicial to the members of the company, in contravention of section 214(1)(b) and 214(1)(d) of the SFO.
Disqualification Orders
The misfeasance by the Directors in this case was serious, particularly on the part of Wong. However, the Court took into account a number of mitigating factors in arriving at a nine year disqualification for Wong.
Applications for disqualification of directors have become one of the SFC's most frequently employed enforcement remedies since the SFO came into effect in 2003. To date, it has obtained disqualification orders against 58 individuals prohibiting them from being a director or taking part in the management of listed and unlisted companies in
While this case went to trial, the majority of the SFC's disqualification applications have been resolved by way of the Carecraft procedure in which a schedule of the agreed facts in relation to the SFC's allegations against the directors is submitted to the Court. Where appropriate, an agreed period of disqualification is included as well. Then the Court determines the appropriate sanction on the basis of the facts in the schedule alone.
Compensation Orders
Section 214(2)(e) empowers the Court to "make any other order it considers appropriate .....". In previous cases this has been interpreted by the Courts to cover orders for payment of compensation or restitution by directors. For example, in Re
In this case, the SFC sought compensation from the Directors under section 214(2)(e), SFO for payment to the Company of
However, the Court declined to make a compensation order against the Directors for a number of reasons. First, the Court was concerned that the compensation sought was not "readily ascertainable" as it had been in the
Second, the Court said the SFC brings proceedings under section 214 "primarily for public benefit"4, which may not always be the appropriate proceedings to resolve matters relating to "damages" and "compensation"5. In doing so, the SFC "does not act merely as a cipher for a company or the liquidators of the company"6.
Finally, as the SFC did not suffer any loss, "it may not be a necessary exercise of the widest powers to do justice" under section 214 for it to claim compensation, "where the person actually suffering the loss could have brought, or could still bring, an action of the more typical sort in which such forms of compensation are claimed and entitlement proved".7 The Court considered that it was for the Company (or specifically its liquidators, in this case) to assess the benefits of bringing proceedings in the Company's name against any party.8
Comment
In cases involving flagrant misappropriation of company funds for personal use, the Courts have not hesitated to order delinquent directors to repay the victim company under section 214(2)(e), SFO. However, while not ruling out orders for compensation or damages from directors under this section, to date the Courts have declined to entertain compensation claims by the SFC against directors for trading or transaction losses which are difficult to quantify and prove. In doing so, the Courts have expressed reservations about the SFC pursuing these types of claims under section 214 when the company is likely to be in a better position to assess whether it would be in the interests of shareholders to pursue the directors. There is also a sense that the Courts regard the petition procedure under section 214 as a less satisfactory means of determining issues such as quantum, causation and remoteness than proceedings begun by writ in the
Under section 214(2)(b) of the SFO, the Courts also have the power to order companies that have suffered loss to bring proceedings in their names against persons who have acted contrary to section 214(1). Despite the Courts' preference for the victim companies themselves to bring proceedings, an order under this section has only been granted once:
As the case law under section 214, SFO develops, it remains to be seen whether the SFC will continue to pursue more complex claims for compensation or whether it will focus on straightforward repayment claims against directors which have proved more successful.
Footnotes
1
2 [2012] 2 HKLRD 325
3 [2017] HKEC 313
4
5 ibid, §215
6 ibid, §25
7 ibid, §25
8 ibid, §216
9 [2011] HKEC 657
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