On 25 June 2021, the Hong Kong Court of Appeal (CA) handed down its judgment in the Securities & Futures Commission (SFC)'s appeal against three former executive directors of EganaGoldpfiel (Holdings) Ltd, which is now in liquidation (Egana). 

The SFC initiated the case against David Wong Wai Kwong, Peter Lee Ka Yue and Tony Chik Ho Yin (Directors) in 2011 pursuant to section 214 of the Securities and Futures Ordinance (Cap. 571) (SFO), in which the SFC sought disqualification and compensation orders against the Directors as a result of their role in a large-scale misapplication of funds belonging to the Egana group.

The Court of First Instance then made a disqualification order against the Directors but declined to make a compensation order for the losses suffered by Egana as a result of the Directors’ breaches of duties. The SFC brought the case to the CA, which recently made a compensation order of HK$622 million plus interest as sought by the SFC. 

Background 

Egana was formerly listed on the Hong Kong Stock Exchange. Trading of its shares was suspended in September 2007. Following Egana’s winding up in May 2011, the listing of Egana’s shares on the Hong Kong Stock Exchange was cancelled in January 2012.

Trading of Egana’s shares was suspended because of queries raised by the public about Egana’s finances. KPMG was appointed to conduct an independent review of Egana’s financial position. KPMG subsequently found that Egana had “doubtful receivables” of approximately HK$2.55 billion, part of which consisted of a sum of HK$622 million, being the proceeds of a loan granted by a syndicate of banks to Egana. This sum of HK$622 million was transferred, via three “debtors” (which were found to be mere conduits acting under the instructions of David Wong), to an entity owned by the family of Egana’s then chairman (Transactions). The money was later used to effect a buy-back of a controlling stake in Egana. 

At first instance, the trial judge found that, as a result of the Directors’ involvement in the Transactions, each of them had breached their duty of care and skill and their duty to act in the best interest of Egana. In addition, David Wong was also found to have breached his duty not to put himself in a position of conflict. 

While the trial judge made disqualification orders against the Directors and accepted that a compensation order can, where appropriate, be made irrespective of whether a respondent has received any financial benefits, in exercise of his discretion, he declined to make a compensation order. The reason being that issues relating to limitation period, remoteness, causation and mitigation were not entirely straightforward and these issues were not sufficiently addressed at the trial. Accordingly, the trial judge accepted that it should remain with Egana’s liquidators to assess whether it would be beneficial to bring proceedings in Egana’s name. 

Appeal Decision 

As to whether it was viable for Egana itself to pursue the Directors, the CA said the trial judge was in error. The CA considered it was unlikely for Egana to commence proceedings as:

  • No proceedings had been brought by the liquidators against the Directors despite the lapse of more than 10 years due to the lack of funds;
  • If proceedings were brought by Egana now, the defence of limitation would be an issue;
  • The limited cash available in the liquidation restricted the liquidators’ ability to commence fresh actions against the Directors.

The CA also took the view that the sum of HK$622 million, which the SFC sought orders for the Directors to pay, was misapplied through the Directors’ wrongful activities and was a loss readily ascertainable. 

In the appeal, Peter Lee and Tony Chik contended that should Egana commence proceedings against them, they could raise the defences of causation, foreseeability, mitigation, contributory negligence and limitation, but these matters were not addressed by the SFC at the trial. The CA found this argument to be a “red herring”, saying that it should not be concerned with such potential defences when it was clear that no separate proceedings would be brought. Further, since the breaches fell into the category of “involving an element of infidelity or disloyalty which engage the conscience of the fiduciary”, causation was to be established on a “but for” basis without the constraints of the common law rules on remoteness and foreseeability. In other words, once the plaintiff has shown a loss arising out of a transaction to which the breach is material, the plaintiff is entitled to recover the loss unless the defendant shows that the loss or damage would have occurred in any event, which the Directors clearly failed to establish. 

Taking into account the above matters and the fact that Egana had no objection to the making of a compensation order, the CA held that there were no other good reasons for refusing the compensation sought by the SFC, which would be payable to Egana and made available to its creditors. 

Comment 

The total amount payable by the Directors, including interest will be over HK$1.16 billion but it remains to be seen whether the Directors have the resources to comply with the compensation order. Nonetheless, this should still be a piece of long-awaited good news for Egana’s creditors and shareholders. 

The CA’s judgment is good news for the SFC as it indicates a willingness by the Court to exercise its wide discretion under section 214(2) of the SFO to make compensation orders, especially where there are impediments to the relevant listed companies in bringing proceedings themselves. This is one way to ensure that delinquent directors of listed companies are made to pay for their breaches of duties. It may open the door to more claims by the SFC in the future for compensation orders for the benefit of shareholders and creditors in particular, although it should also be remembered that in this case, there was a clear causal connection between the Directors’ wrongful conduct and the loss sustained, which was readily ascertainable.