Disqualification of Director

Though the process of codifying certain provisions in Listing Rules is yet to be finished, SFC is not a teethless tiger. Under S.214 of SFO, SFC may make an application to the Court where it appears that the business or affairs of a listed company have been conducted in a manner that:

1. is oppressive to the shareholders;
2. involves defalcation, fraud, misfeasance or misconduct towards the listed company or its shareholders;
3. results in shareholders not receiving all the information with respect to its affairs or business that they might reasonably expect; or
4. is unfairly prejudicial to the shareholders.

Last week SFC obtained orders in the High Court against Mr Yick Chong San, a former director and CFO of Riverhill Holdings Ltd, a company previously listed on GEM. The orders disqualify Yick from being a director or involved in the management of any listed company, subsidiary or affiliate, without the leave of the Court, for 4 years.

This is the first time SFC has applied to the High Court seeking a disqualification order based on misfeasance or misconduct.

SFC’s allegations concerned a decision by Yick to pledge $10m of Riverhill’s money (raised by Riverhill in the IPO) to secure a loan for a third party. This was a misuse of the funds because it was contrary to representations made in Riverhill’s prospectus and no information was given to shareholders about any changes in the use of the IPO funds.Yick failed to take proper skill and care in entering into the deal and did not ensure the company’s funds were recoverable or properly secured on commercial terms. The third party defaulted on the loan and Riverhill lost the entire $10m reducing its net asset value by more than 20%.

There were also similar breaches in relation to unsecured loans totalling about $25 million authorised by Yick to employees of Riverhill and other third parties, again not disclosed to shareholders. The moneys loaned to the employees were used to open accounts with brokers through which Yick then directed trading in securities for Riverhill.

Given the seriousness of the above misconduct, I don't think the disqualification order is sufficient to create a deterrent effect.