April 22 Legal Update
HKEX censures Hsin Chong Group Holdings Limited (now delisted) and named former executive director (“ED”), criticises other named former EDs and non- executive directors, also directs directors to attend training on Listing Rules compliance. (Announcement; Statement of Disciplinary Action)
In light of former ED’s wilful failure to discharge his responsibilities, HKEX also imposes a “Prejudice to Investors’ Interest Statement” on him.
Between Aug and Dec 2016, the company entered into “sale and leaseback” (and renovation services) agreements to acquire properties from companies related to former ED and paid RMB376.5 m. It was found that there was no apparent commercial rationale. E.g. company contractually bound to transfer the properties back to sellers for RMB100, upon expiry of an 8-year lease term.
The agreements were subsequently terminated, with the sum paid thereafter treated as loans (still outstanding as at the company’s latest published annual report).
The transactions were discloseable and connected transactions under the Listing Rules, and approved by former ED. The company failed to comply with requirements including timely announcement.
The other directors were not aware of the transactions until they were discovered by the external auditors (which subsequently issued a disclaimer audit opinion).
The company admitted that it had no internal controls regarding (inter alia) Rule compliance in respect of notifiable/connected transactions, approval/reporting of transactions, and avoidance of conflict of interest.
What you should know:
HKEX announcement specifically states EACH director’s responsibility:
- Implement appropriate control and risk management framework
- Take an active interest in company operations and use of financial assets
Internal controls deficiencies include:
- Safeguard assets
- Identify/report material transactions
- Process significant payments
- Listing Rule compliance
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