HKEX Imposes Disciplinary Action against Independent Non-Executive Directors of a Delisted Company

In its Statement of Disciplinary Action dated 24 August 2023, the Hong Kong Stock Exchange (HKEX) imposed a "Prejudice to Investors’ Interests" Statement (PII Statement) against six directors of a delisted company (Company) - two of whom are independent non-executive directors (INEDs) - in addition to a public censure against them.

The PII Statement, which is a severe reputational sanction, is a statement that, in the opinion of HKEX, the retention of office by the named directors is or would have been prejudicial to the interests of investors. 

In this case, listing of the Company’ shares was cancelled in November 2022, following a prolonged suspension of trading since June 2020. Breaches of Listing Rules were first uncovered when the Company’s auditors resigned, disclosing details of certain material audit issues. Upon further investigations, the HKEX found that:

• Unapproved loans and advances amounting to nearly RMB 150 million were provided for the personal benefit of the chairman of the board (Chairman) against the Company’s commercial interest.
• Information about the audit issues was withheld until the auditors resigned; and when the auditors raised their concerns with the Company, none of the directors took active steps either to make enquiries with the Company’s management about the nature of the advances, or to procure the Company’s compliance with the Listing Rules.
• In considering an investment agreement entered into by the Chairman to subscribe US$30 million worth of shares of an IPO listing applicant, none of the directors enquired about the Chairman’s failure to comply with the Company’s internal policy to seek prior board approval and to provide immediate disclosure of the subscription (which constituted a major transaction). The disclosure was given almost three weeks later.
• No timely disclosure was made when 14 different winding-up petitions were served on the Company’s group between April 2019 and July 2020 – one of which was announced almost a year later. 

In criticising the two INEDs sanctioned with the PII Statement, the HKEX said both seriously disregarded their obligations as directors under the Listing Rules – as no steps were taken after becoming aware of the Company’s repeated delay in announcing the winding-up petitions, nor enquiries made in respect of the disclosure of receivables due from a director (the Chairman) in the Company’s annual reports. Their failure to procure the Company’s disclosure of the audit issues was just egregious. 

Takeaway

Independent non-executive directors, although not involved in the day-to-day operation and management of the company, have a key role to play in Listing Rules' compliance and corporate governance. Serious failures to discharge their duties may lead to imposition of severe reputational sanctions on them.