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Directors’ duties

 (Loans, subsidiary, conflicts of interest) HKEX censures 3 directors (2 executive directors including chairman/CEO and his wife (non-executive director)) of Xinming China Holdings Limited, directs these directors to attend training on Listing Rule compliance.   (Announcement; Statement of Disciplinary Action)  

It concerns an impairment loss in connection with loans obtained by the company’s subsidiary (“Sub”) from 2016-7.

Sub experienced cashflow difficulties and the chairman offered assistance by raising funds via a company privately owned by him and his wife (“Private Co”). The intended structure was for Private Co to be named as the borrower, but in practice Sub would use and repay the loans.

Sub was only able to repay a portion of the loans. Lenders demanded default interest (24% per annum), to be charged on a retroactive basis. Chairman agreed to the payment of the default interest without informing the board of the company. Private Co settled the outstanding loans and default interest. Sub repaid such loans to Private Co, but not the default interest.

Such default interest (paid to the lenders by Private Co) was recorded as “other receivables” in Sub’s financial statements, on the basis that Private Co would negotiate with the lenders to procure a refund of the default interest paid.

Eventually, the company recorded an impairment loss (RMB 49.4 m) on its “other receivables”.

The company’s board was not informed on the loans /lenders’ demand for default interest. Regular updates circulated to it did not contain any information about the loans. Sub and Private Co did not retain a copy of the agreement for the loans. The loans were not reflected in the company’s relevant financial statements.

The relevant directors were found to have breached Rule 3.08  and their directors’ undertaking.

As regards conflicts of interest, HKEX announcement expressly states that a director of a listed issuer should take active steps to manage actual or potential conflicts of interest, such as when acting in another capacity in a transaction involving the listed issuer.

What you should know/do:

Breaches in directors’ duties

• Not bring the loans to the attention of the board for consideration and approval
• Internal control policies not followed;  proper loan documentation not retained
• Chairman’s conflict of interest: as a director of the company and owner of Private Co
  • Not inform the board about lender’s demand for default interest
  • Agreed to pay the same without reporting to the board

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