Top stories

Liability of company secretaries and non-board management

(A) HKEX censures the former Company Secretary (CS) of Venus Medtech (Hangzhou) Inc, and further directs him to attend training. (Announcement; Statement of Disciplinary Action)

This case concerns the company’s provision of unauthorised financial assistance (total RMB2.48b) to 2 executive directors between Jan 2020 – June 2023. It admitted failure to comply with disclosure and shareholders’ approval requirements under the Listing Rules.

The CS, an associate director of a corporate service provider, was appointed as joint CS during the relevant time. He was responsible (inter alia) for reviewing the company’s interim and annual results and reports and providing advice on their contents.

CS received drafts of years 2021 and 2022 financial statements which contained references to some of the unauthorised financial assistance (e.g. significant amounts of “advances to a director”). However, he did not personally review these drafts.

After publication of the 2021 and 2022 annual results and reports, the 2 directors obtained additional financial assistance without authority and compliance with the Listing Rules.

Specific Failures as company secretary

• Had CS properly discharged his responsibilities, he should have personally reviewed the draft financial results

• Could then have identified and raised possible Listing Rule implications with the board, and provided professional advice to enable the company to (i) take timely remedial action (including disclosure), (ii) prevent further unauthorised financial assistance and (iii) ensure that further financial assistance would comply with Listing Rule requirements

• Delegated his company secretarial functions to a service team from the corporate service provider and relied on other professional advisers (e.g. external legal counsel, auditors) to alert him to irregularities

• Failed to actively supervise the delegated work or maintain sufficient knowledge of the matters to discharge his own responsibilities

• The involvement of other professional parties did not relieve CS of his professional obligations as joint company secretary

CS accepted the finding of breach, sanctions and directions imposed.

What you should watch out for

HKEX key messages in announcement

• Company secretaries play a crucial role that goes well beyond administrative functions: they support the issuer’s board by ensuring good information flow within the board and that board policies and procedures are followed, and they are also responsible for advising the board on governance matters

• The appointment as company secretary is personal to the named company secretary. It therefore requires the named company secretary to provide direct and adequate attention to the listed issuer he/she serves and to use his/her personal judgment and regulatory knowledge when discharging his/her responsibilities

• Company secretaries therefore cannot simply delegate all functions assigned to them or rely on the assistance of other professional advisers without exercising adequate supervision and maintaining an active involvement in the delegated matters

(B) SFC obtained a disqualification order in the Court of First Instance against the former financial controller and company secretary (FCCS) of Qunxing Paper Holdings Company Limited (Announcement) (Judgment)

SFC disqualified FCCS for 2 years from being a director, liquidator, receiver or manager of the property or business, and being involved in the management of any listed or unlisted corporation in HK without leave of the Court. These legal proceedings began in Sept 2019 under s. 214 of the Securities and Futures Ordinance (SFO) against FCCS, for the disclosure of false and misleading information.

There were also prior orders against the company, the former Chairman and the former Vice Chairman.

The SFC investigation found that the company, (inter alia) published financial statements from 2007 – 2011 with (i) overstated annual turnovers and (ii) understated bank borrowings. In addition, the company failed to disclose a restructuring matter in 2014 concerning a subsidiary of the company, which implied a sudden deterioration of its financial position.

Financial controller’s failures

• As the most senior finance officer May 2009 – Apr 2014, FCCS failed to discharge his duties and responsibilities in overseeing the company’s accounting and finance functions and internal controls

• Had FCCS properly fulfilled his duties and responsibilities as the company’s financial controller, he would reasonably have been likely to discover the relevant irregularities in the company’s financial statements

Company secretary’s failures

• As company secretary from Jan – Apr 2014, FCCS failed in his duties to immediately inform the company’s board or address its reporting and compliance obligations in relation to the restructuring matter

The SFC and the defendant agreed to the sanctions.

Market infrastructure developments

Legislation

This Update in PDF