Parties Beware: The Court has a Final Say on Disqualification Orders

 

When misconduct is established against directors or senior management, the Securities and Futures Commission (SFC) may seek disqualification orders from the court under section 214 of the Securities and Futures Ordinance (SFO). To streamline proceedings, the SFC and respondents often use the Carecraft procedure, agreeing on a proposed disqualification period for the court’s approval without a full trial.

 

In a recent case, Re: Anxin-China Holdings Limited [2025] HKCFI 839, the Court of First Instance for the first time imposed a longer disqualification period than agreed by the SFC and the respondents under a Carecraft procedure in a section 214 SFO case, marking a significant precedent.

 

Background

 

The case involved substantial overstatements of Anxin-China Holdings Ltd's (Company) cash position in its audited financial statements for 2012 and 2013, amounting to approximately RMB 990.5 million and RMB 1,291 million, respectively. The decision focused on the 4th Respondent, the Chief Financial Officer (CFO) of the Company at the time.

 

Discrepancies in the Company's bank accounts were uncovered during the 2014 audit, prompting the formation of a special investigation team, which included the CFO. The team inaccurately concluded that the discrepancies were due to misappropriation by two accounting staff, incorrectly claiming that the funds had been returned. This misleading information was shared with auditors and the public.

 

Trading of the Company's shares was suspended on 1 April 2015, and a forensic accounting investigation was initiated. The 4th Respondent failed to respond to inquiries during this process and resigned, expressing doubts about the integrity of the bank records and senior management.

 

Agreement between the SFC and the 4th Respondent

 

The SFC and the 4th Respondent agreed that she had failed to fulfil her duties with the necessary skill and diligence, acknowledging her negligence in the overstatement of the Company’s cash position from 2011 to 2015. They proposed a two-year disqualification order for the Court's approval.

 

Decision

 

The Honourable Mr Justice Anthony Chan of the Court found that the agreed disqualification period did not adequately reflect the severity of the 4th Respondent's negligence. Instead, the Court imposed a three-year disqualification, considering several factors:

 

• The investing public relied on the integrity of management and the CFO.
• The scale of the cash overstatements suggested possible fraud by senior management.
• Such irregularities could not have occurred without gross negligence from the CFO.
• Although the 4th Respondent did not gain personally, her cooperation and acceptance of liability were the only mitigating factors.

 

Key Takeaways

 

This case underscores that the Court does not simply endorse agreements between the SFC and respondents in SFO misconduct cases. It will assess the circumstances and impose disqualification orders that reflect the seriousness of the misconduct. The Court serves as a safeguard for public interest, sending a strong deterrent message.

 

 

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Disclaimer: The information contained in this article is intended to be a general guide only and is not intended to provide legal advice. Please contact [email protected] if you have any questions about the article.