03 Apr 2015

Listed company wound up in Hong Kong on the grounds of public interest

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On 2 March 2015, the Companies Court ordered the winding up of China Metal Recycling (Holdings) Limited (the “Company”) after a three day trial. The petition was taken out by the Securities and Futures Commission (the “SFC”) pursuant to section 212 of the Securities and Futures Ordinance (Cap 571) and the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32). The trial was the first in Hong Kong based on a public interest petition presented by the SFC.
 
The Company was incorporated in the Cayman Islands in 2007 and was registered as a non Hong Kong company. It is the holding company of 38 subsidiaries in various jurisdictions and its shares were listed on the Main Board of The Stock Exchange of Hong Kong Limited in 2009. According to its prospectus issued in 2009, the Company Group mainly engaged in scrap metal business and the Company’s Macao subsidiary was the sourcing arm of the Group.
  
In supporting its case, the SFC filed extensive evidence from factual witnesses and experts. These include funds flow tracing analyses conducted by an accounting expert and an analysis of bills of lading concerning purported shipments conducted by a shipping expert. The SFC’s evidence showed that a large amount of purchases by the Macao subsidiary were not genuine transactions and the Company had operated large scale “round robin” funds flow schemes over the years which resulted in substantial overstatements of the Company’s financial position. The SFC also found that the Company’s conduct amounted to serious mismanagement of its affairs, intentional and dishonest deceit of the public, and contravened the statutory provisions.
  

Principles in relation to winding up of a company based on the public interest ground

Harris J summarised the Court’s approach to a public interest petition based on a number of English decisions in this area as follows:

  1. The Court has to be satisfied that it is in the public interest to make a winding up order on the just and equitable ground, and this is so even when the petition is undefended.
  2. The more serious the nature of the matter complained of the greater the public interest is likely to be in restraining or sanctioning it.
  3. Where a winding up order is sought on the grounds that there has been contravention of regulations and winding up, the solvency or viability of the business of the company is not of itself significant. The principal concern is the interest of the investing public and the integrity of the market.
  4. The appropriate sanction where there has been fraud in the promotion of the company will normally be the liquidation of the company.
  5. The fact that offending activities have ceased does not mean that a more lenient approach should be taken.

The Court’s decision

Harris J was of the view that the evidence adduced by the SFC established that a massive fraud had been perpetrated by those in charge of the Company on investors, the Stock Exchange and others involved in the listing of the Company. Also, Harris J considered that it was not a case of isolated wrongful acts which are unlikely to be repeated, nor was it a case of wrongdoing which was limited in scope. Furthermore, Harris J found that there was fraud on “an industrial scale” which went directly to the integrity of the listing. Harris J concluded that this was a clear case that fell firmly into the category of cases in which a winding up order is appropriate. 

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