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Hong Kong SFC and failure to file statements

BIScom Subsection: 
Editorial Staff

The story of Warderly International Holdings Ltd is strange. Formed in 2002, it floated almost immediately. In 2007, shares were suspended when Hong Kong's Securities and Futures Commission raised questions about the management of the listed company and, as was learned much later, allegations of insider trading.

Warderly had floated on Hong Kong's Main Board in 2002. It was a manufacturer of domestic consumer goods for the, mainly, European market.

Having ordered the shares suspended, some 18 months later, the SFC started court procedings to seek an order banning former and then current directors from holding any corporate office in Hong Kong.

The reasons that were given are why the story is strange: the company had, like so many, run into financial trouble. There are strict rules over what listed companies must disclose in such circumstances and the rules are clear. The failure to make those disclosures is what makes the case surprising.

The SFC has commenced proceedings in the High Court against the company’s current executive director, Mr Godfrey Hung Kwok Wa, four former executive directors, namely Mr Yeung Kui Wong, Mr John Lai Wing Chuen, Ms Ellen Yeung Ying Fong and Mr Yu Hung Wong and former alternate non-executive director, Mr Hermann Leung Ping Chung.

The SFC alleges that the six directors:

- failed to manage Warderly with the necessary degree of skill, care, diligence and competence as is reasonably expected of persons of their knowledge and experience holding their offices and functions within Warderly; and

- failed persistently to ensure Warderly fully complied with disclosure requirements under the Listing Rules.

The SFC also alleges that Leung has acted in breach of his fiduciary duty owed to Warderly by obtaining a profit and/or placing himself in a position of conflict through lending to Warderly’s subsidiaries at an excessively high interest rate.

According to the SFC’s case, the alleged breaches are centred on a number of material events during July 2006 to April 2007 concerning the financial position of Warderly which should have been disclosed under the Listing Rules, including:

- commencement of legal proceedings in Hong Kong and the Mainland against Warderly and its subsidiaries by banks for repayment of bank loans and by creditors for repayments;
- occurrence of several labour strikes in Warderly’s Mainland factory which caused serious disruption to its factory production;
- appointment of a financial adviser in respect of Warderly’s proposed debt restructuring and re-organisation;
- appointment of adviser to monitor Warderly’s cash position at the request of a syndicate of banks who had lent money to Warderly and formation of a management committee to solve its financial problems; and
- grants of loans by Leung and third parties at excessively high interest rates.

A summary of the SFC's allegations is at http://www.sfc.hk/web/doc/EN/g...

Material in that summary is that "nett profit dropped by approximately 99.3% to HK$398,000 from HK$58,014,000 in the year ended 30 April 2005."

That collapse in profit was accompanied by an almost 30% drop in turnover.

Clearly, there were indicators that worried the syndicate of banks which had outstanding loans to the company.

The story demonstrates that the banks were aware of the position and were taking steps to protect themselves but the company's officers failed to ensure that this fact, which is disclosable under the Listing Rules, was disclosed.

The application was filed in 2009 but not heard until March 2011. Four had admitted their failings at a hearing in 2010 and been banned. According to the SFC "This is the first time directors have been disqualified for failing to ensure timely disclosure of material information to the company’s shareholders."

Only Hung and Leung went to trial. At trial, they, too, admitted failings and were also banned . All the bans have since expired.

See http://www.sfc.hk/edistributio... and http://www.sfc.hk/edistributio...

But the Warderly story wasn't over. In 2016, there were allegations that Mr Lo Hang Fong, a former Company Secretary of Warderly International Holdings Limited (Warderly), and Mr Luu Hung Viet Derrick, a lender and potential investor of Warderly, had been engaged in insider trading. On the Market Misconduct Tribunal found no evidence that that was so and rejected the SFC's application. See http://www.mmt.gov.hk/eng/repo... . That case related to circumstances in 2005 and 2006.

In 2013, Warderly International Holdings Limited was acquired by Nanjing Fullshare Asset Management Limited,