Troubled waters

Sound Global Ltd was an investment holding company with shares listed on The Stock Exchange of Hong Kong Limited (SEHK), and was engaged in the business of wastewater treatment through its subsidiaries in the mainland. On 13 April 2016, trading in the company's shares was suspended and has yet to resume.

Mr. Wen Yibo was the founder, executive director and chairman of the company since 2005. Mr. Zhang Jingzhi, Mr. Wang Kai and Mr. Zhang Xiquan were members of senior management of the company at the times of the impugned transactions.

One of the issues the court had to address, was whether Mr. Wen had caused, directed and/or orchestrated a scheme for fraudulent inflation and falsification in the company subsidiaries' bank balances, and whether bank statements and balance confirmations had been fabricated.

Mr. Wen argued he had left the day-to-day management and operation of the company, including that of the subsidiaries, in the hands of the senior management team. Conveniently, Mr. Wen had allowed the relevant senior management employees to leave the company after the commencement of SFC investigations, all of them leaving for alleged "personal reasons" and without leaving the company with their future contact details.

It was only subsequent to the disappearance of the relevant personnel that the company decided to engage Gaowen Law Firm and PKF Accountants & Business Advisors to consider the matters under investigation.

Linda Chan J noted the disappearance of all relevant personnel and documents which made it impossible for the SFC and the company to identify the true extent of the wrongs done to the group and the extent of financial loss.

She said the relief sought by the SFC against the company "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."

A resounding message

In closing, Linda Chan J said "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."

This case is a fine example of the court sending a message to regulators that they need to "talk the talk" when it comes to investor protection. Linda Chan J was vocal that “the regulators in particular the SEHK may want to review the position and address the problem sooner than later".

Whilst directors are required to provide an address for service of notices in the Declaration and Undertaking with regard to Directors (Form B) upon the original listing, the address provided when a company comes to market is insufficient to satisfy the requirements for serving an originating process such as a petition, sometimes years later and with the directors often located in mainland China.

Linda Chan J addressed this head on by suggesting that that "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."

This is especially important as "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."

The ball is now in the regulators' court to consider appropriate measures which can be put in place to address the issue of non-resident directors of Hong Kong listed companies evading service. 

Authored by Jonathan Leitch, Mark Lin, Sammy Li, Stephanie Tang, Nelson Tang, Hillary Chung, and Nigel Sharman.