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HCA 2428/2013
[2018] HKCFI 271
IN THE HIGH COURT OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
COURT OF FIRST INSTANCE
ACTION NO 2428 OF 2013
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BETWEEN
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SECURITIES AND FUTURES COMMISSION |
Plaintiff |
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and
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QUNXING PAPER HOLDINGS COMPANY LIMITED |
1st Defendant |
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BEST KNOWN GROUP LIMITED |
2nd Defendant |
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ZHU YU GUO (朱玉國) |
3rd Defendant |
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ZHU MO QUN (朱墨群) |
4th Defendant |
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Before: Hon G Lam J in Court
Date of Hearing: 16 and 17 May and 28 August 2017
Date of Judgment: 6 February 2018
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J U D G M E N T
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I. Introduction
1. This is an action brought by the Securities and Futures Commission, alleging that Qunxing Paper Holdings Co Ltd (“Qunxing”), a company listed on the Main Board of the Stock Exchange of Hong Kong, had made false or misleading statements in its announced financial results and thereby contravened various statutory provisions. It is alleged that a subsidiary, Best Known Group Ltd (“Best Known”), as well as the Chairman, Mr Zhu Yuguo (the 3rd defendant), and his son the Vice‑Chairman, Mr Zhu Moqun (the 4th defendant), were persons involved in those contraventions. The Commission seeks various declarations and, more importantly, orders under s 213 of the Securities and Futures Ordinance (Cap 571) (“SFO”) with a view to compensating public investors who had acquired shares or warrants in Qunxing.
2. Qunxing’s and Best Known’s defence had been struck out and the 3rd and 4th defendants have not responded to the action. The question for me is therefore whether the Commission has proved its case by the admissible evidence it has adduced and, if so, what orders should be made by way of relief.
II. Facts
3. In my judgment, the Commission’s factual case is made out on the evidence. The facts that I find proved to the requisite standard are as follows.
Fund raising and shareholding structure
4. Founded by the 3rd defendant, his wife Sun Rui Fang and their son the 4th defendant (together the “Zhus”), the underlying business of the group headed by Qunxing was in the manufacture and sale of decorative base paper products and printing paper products in the Mainland.
5. On 17 September 2007, Qunxing, a company incorporated in the Cayman Islands, issued a prospectus (“IPO Prospectus”) for the placing and public offer of its shares inviting applications from the public to subscribe for its shares. The offer price was HK$5.35 per share (with a nominal value of HK$0.10 each). Both the international placing and the Hong Kong public offer were very significantly over‑subscribed. Eventually 150m shares were issued under the public offer, and 195m shares were placed to international placees. Gross proceeds raised amounted to approximately HK$1,846m (345m x HK$5.35).
6. On 2 October 2007, Qunxing’s shares began to be listed on the Main Board of the Stock Exchange of Hong Kong (stock code 3868). At that time, the total number of issued shares was 1,045m, with the Zhus holding 67% via their own BVI company named Boom Instant Ltd (“Boom Instant”).
7. On 17 December 2010, Qunxing made an open offer of new shares at HK$0.66 per share (on the basis of 1 new share for every 2 existing shares), which was slightly under‑subscribed by public shareholders, and raised about HK$112.46m from public shareholders who were allotted 170,394,744 new shares.
8. Shortly afterwards further funds were raised, through a subscription agreement dated 14 January 2011 with an investor named Victory Asset Management Ltd (“Victory Asset”) which subscribed for 206.56m unlisted warrants of Qunxing at HK$0.05 per warrant. The exercise price was HK$2.95 per share. Victory Asset did not exercise its right to subscribe for any shares; the exercise period of 12 months had long expired.
9. On 30 March 2011, as a result of a disclaimer of opinion by Qunxing’s then auditors, KPMG, regarding its 2010 annual results, trading of the shares on the Stock Exchange was suspended. The last trading price before suspension was HK$2.18 per share. The 2010 results were published the next day. KPMG resigned as auditors on 8 June 2011.
10. Between March 2011 and the present, there were 1,586,391,450 shares in issue, of which 1,075,207,718 shares (67.78%) were held by Boom Instant and 511,184,232 shares (32.22%) by public shareholders.
11. Between 2008 and 2013, Qunxing paid cash dividends to its shareholders totalling RMB 471m, of which the Zhus, as majority shareholders via Boom Instant, would have received about RMB 329m.
The 3rd and 4th defendants
12. The 3rd and 4th defendants were at all material times the executive directors and decision‑makers of Qunxing (being its Chairman and Vice‑Chairman respectively) until their resignation on 21 March 2014. The 3rd defendant was also the chairman and legal representative of Shandong Qunxing and the 4th defendant a director. They resided in Shandong and attended to the daily operations of the business operations. There is consistent evidence from the financial controller, an independent director, and the company secretary of Qunxing that the 3rd defendant with the assistance of the 4th defendant made all the management decisions for Shandong Qunxing and they together were the decision‑makers intimately involved in managing the affairs of Qunxing.
Publication of financial results
13. In the IPO Prospectus and in the annual reports and results announcements between 2007 and 2011, Qunxing published its financial results including the following (denominated in RMB):
IPO Prospectus |
Annual Reports and Results Announcements
(RMB) |
Results for the year |
2006 |
2007 |
2008 |
2009 |
2010 |
2011 |
Publication date |
17.9.2007 |
17.3.2008 |
18.3.2009 |
17.3.2010 |
30.3.2011 |
14.3.2012 |
Turnover |
950,844,000 |
1,125,524,000 |
1,496,360,000 |
1,530,321,000 |
2,058,916,000 |
2,003,651,000 |
Gross profit |
184,117,000 |
283,469,000 |
405,516,000 |
424,804,000 |
519,785,000 |
326,910,000 |
Profit from operations |
163,317,000 |
371,637,000 |
396,681,000 |
375,862,000 |
455,973,000 |
-- |
Profit before taxation |
142,692,000 |
350,572,000 |
383,361,000 |
371,694,000 |
455,973,000 |
256,183,000 |
Profit for the year/ period |
93,937,000 |
350,572,000 |
383,361,000 |
324,087,000 |
397,506,000 |
221,968,000 |
Earnings per share |
0.13 |
0.42 |
0.37 |
0.31 |
0.38 |
0.14 |
Falsity in published financial results
14. The Commission initiated an investigation into Qunxing in April 2011. At around the same time, Qunxing itself appointed an independent professional adviser, Zhonglei Risk Advisory Services Ltd, to perform an internal control review and investigation of the audit issues highlighted by KPMG. The Stock Exchange was not satisfied with the review and Qunxing decided to commission a further review by JLA Asia Ltd in November 2011.
15. Having found irregularities in the financial results published by Qunxing, the Commission commenced the action herein on 12 December 2013 and obtained interim orders, inter alia, to freeze the assets of Qunxing and Best Known up to the value of HK$1,968m.
16. The Commission’s case is that a false and misleading picture was given in relation to Qunxing’s financial position both before and after the IPO.
Overstated sales
17. In particular, the sales to Shanghai On Hing Paper Co Ltd (“Shanghai On Hing”) and Changzhou Cuiqiao Cheunguang Paper Co Ltd (“Cuiqiao”) were materially overstated.
18. Shanghai On Hing was held out by Qunxing to be a top customer of Shandong Qunxing Paper Ltd (“Shandong Qunxing”), which was a wholly owned subsidiary of Qunxing held via Best Known and the sole operational arm of the group. In fact, Shanghai On Hing was not a customer of Shandong Qunxing from 2006 onwards, and had ceased business operations in early 2008. Certain records and documents provided by Qunxing to its auditors KPMG pertaining to the purported purchases and payments by Shanghai On Hing had later transpired to be fictitious. The purported employees of Shanghai On Hing made available to the auditors and external reporting accountants also turned out not to be employees of Shanghai On Hing or its group.
19. Shanghai On Hing (until early 2008) and a sister company called Huidong (after 2007) did place orders with a supplier called Kangmu, which was not part of the Qunxing group but a company owned by the 3rd defendant personally. However, since Kangmu occasionally received sales invoices from Shandong Qunxing and made payment accordingly, I would accept these were arguably Shandong Qunxing’s sales and therefore take the lower end of the overstated amounts pleaded by the Commission.
20. Cuiqiao was held out to be one of the top 10 customers of Shandong Qunxing from 2007 to 2010 and the top customer in 2011. In fact, its purchases from Shandong Qunxing were only about half of what was included in the reported results. Further, certain bank payment records provided by Qunxing during the investigation were later found to be fictitious. The purported employee of Cuiqiao made available to the auditors and external reporting accountants turned out to someone who had already left Cuiqiao before the meetings.
21. I find that the scale of the overstatement of turnover was as follows:
Year |
Turnover as reported in IPO Prospectus or Annul Reports or Results Announcements (RMB) |
Amount of sales overstated in relation to Shanghai On Hing (RMB) |
Amount of sales overstated in relation to Cuiqiao (RMB) |
Percentage of turnover overstated |
2006 |
950,844,000 |
107,868,158 |
11.34% |
2 |
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