A Macao Scam
30 June 2015
Hong Kong Court winds up listed company on grounds of public interest.
On 9 March 2015, the High Court of the Hong Kong Special Administrative Region issued its grounds of decision in Re: China Metal Recycling (Holdings) Ltd
 HKCFI 332 in which it ordered a listed company to be wound up pursuant to a public interest petition filed by the Hong Kong Securities and Futures Commission (“Commission”).
On 10 June 2009, China Metal Recycling (Holdings) Limited (“Company”) issued a Prospectus (“Prospectus”) in connection with an initial public offering of its shares. The shares were listed on the Main Board of the Stock Exchange of Hong Kong Limited (“Exchange”) on 22 June 2009.
The Company is a holding company and has 38 subsidiaries (collectively “Group”), one of which is Central Steel (Macao Commercial Offshore) Limited (“Macao Subsidiary”), an indirect wholly-owned subsidiary of the Company.
According to the Prospectus, the Group is involved in the scrap metal business. The Prospectus also disclosed that the Macao Subsidiary was the sourcing arm of the Group and purchased scrap metal from the international markets for the Group’s operations in China and sold scrap metal to external customers.
Based on evidence submitted by the Commission, the Macao Subsidiary contributed substantially to the revenue and profits of the Group. Before the listing of the Company, the Macao Subsidiary contributed between 34.8% to 60.3% of the Group’s revenue and between 69.5% to 120.0% of the Group’s profits. Thereafter, from 2009 to 2012, the Macao Subsidiary contributed between 36.6% to 78.1% of the Group’s revenue and between 100.3% to 142.5% of the Group’s profits.
THE BASIS FOR THE PETITION
Subsequent to investigations initiated by the Commission against the Company for its alleged involvement in the disclosure of false or misleading information to induce transactions in its shares, the Commission filed a petition on 26 July 2013 to wind up the Company.
The petition was founded on section 212(1)(a) of the Securities and Futures Ordinance (“SFO”) which, inter alia
, permits the Commission to apply to wind up a corporation where “it appears to the Commission that it is desirable in the public interest that a corporation should be wound up … on grounds that it is just and equitable …
” and section 117(1)(f) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (“C(WUMP)O”) which permits the court to wind up a company if the court is of the opinion that it is just and equitable to do so.
The learned judge, Harris J, observed that although the Commission had on previous occasions exercised its powers under section 212 of the SFO and its predecessor provision in other circumstances, this case was the first instance in which the Commission had sought to wind up a company on a public interest petition under the said provision.
In the absence of local case law on section 212, the learned judge, Harris J drew on cases under sections 124(4) and 124A of the Insolvency Act 1986 of the United Kingdom (“UK Insolvency Act”) for guidance in dealing with the petition.
Approach to a Public Interest Petition
In Re Walter L. Jacob & Co Ltd
(1989) 5 BCC 244, the court opined that a two-staged approach should be adopted in a public interest petition. First, the Secretary of State had to form and hold an opinion that it is in the public interest that a company should be wound up. This is a prerequisite to the presentation by him of a winding up petition under section 124(4) of the UK Insolvency Act.
Once a petition has been presented by the Secretary of State, the next stage is when the petition comes before the court. At this stage, the court has to consider the totality of the evidence, weighing the factors which support the conclusion that it would be just and equitable to wind up the company against those which support the opposite conclusion, and must be satisfied that it is in the public interest to make a winding up order. This is so even when the petition is undefended (Secretary of State for Trade & Industry v Driscoll Management Facilities Ltd & Ors
(2001) 1 WL 949826, 29 June 2001 at page 1).
Although the expression “public interest
” is not defined in the relevant statutes in Hong Kong, Harris J drew on the regulatory objectives and functions of the Commission in the SFO for guidance, which inter alia
(1) providing protection for members of the public investing in or holding financial products and minimising crime and misconduct in the securities and futures industry (sections 4(c) and 4(d)); and
(2) securing an appropriate degree of protection for members of the public investing in or holding financial products and suppressing illegal, dishonourable and improper practices in the securities and futures industry (sections 5(1)(l) and 5(1)(n)).
Referring to The Inertia Partnership LLP
 Bus LR 879, a decision of the English courts, the Judge concluded that it is in the public interest that, where necessary, the Commission seeks orders from the court to advance and achieve the regulatory objectives stated in the SFO.
The court highlighted the significance attached by the legislature to the integrity of material produced for the purposes of dealing in securities by referring to sections 294, 298 and 300 of the SFO and section 342F of the C(WUMP)O which render it an offence to disseminate false or misleading financial information.
The Judge referred to Re Walter L. Jacob & Co Ltd
) where Nicoll LJ observed (at page 256E) that –
“For many years Parliament has recognised the need for the general public to be protected against the activities of unscrupulous persons who deal in securities … The public interest requires that individuals and companies who deal in securities with the public should maintain at least the generally accepted minimum standards of behaviour, and that of those who, for whatever reason, fall below those standards should have their activities stopped
The Judge then referred to Re Derek Colins Associates Limited
(No 3092, 3093 and 3094 of 2002, 31 July 2002 at section 47) and In re Highfield Commodities Ltd
 1 WLR 149 at 156E where the courts opined that a company which “is run on the back of a fundamental misrepresentation or falsehood
” or is a “fraudulent company
” should be wound up to promote public interest.
The court stated that the fact that a company has ceased the offending activities before the presentation of the winding up petition does not mean that a more lenient approach should be taken and cited Re UK-Euro Group plc
 EWHC 2102 (Ch) as authority for this proposition.
During the trial, the Commission produced extensive evidence, including evidence from a forensic accounting expert who conducted a funds flow tracing analysis of funds transferred among the Macao Subsidiary and its suppliers and customers between 2007 to 2009 and in 2012, and a shipping expert who analysed certain bills of lading for purported shipments of scrap metal from various ports to China between 2007 to 2009 and in 2012 and 2013 among the Macao Subsidiary and its suppliers and customers.
Round Robin Funds Flow
The forensic accounting expert concluded that there had been a “round robin” flow of a substantial amount of funds during the relevant years. Moneys belonging to the Macao Subsidiary had been transferred to certain suppliers and a substantial amount of those funds had been transferred almost immediately by those suppliers to the customers of Macao Subsidiary, who in turn, transferred a substantial amount of the funds back to the Macao Subsidiary, thereby completing the round robin flow of funds. The forensic accounting expert opined that the circular flow of funds was unusual and lacked commercial substance.
As the Company did not provide any sensible explanation for the circular funds flow, the court was satisfied that the Commission had demonstrated, on the balance of probabilities, that a round robin funds transfer had taken place.
Bills of Lading
Having examined approximately 1,042 bills of lading for the periods under review, the shipping expert was of the view that 71.50% of the bills of lading did not represent genuine shipments and a further 9.60% of the bills were unlikely to represent genuine shipments.
The Commission also adduced evidence that 17 master bills of lading had been fabricated as the shipping company stated that the seal numbers on those bills had not been generated by them.
The Commission also submitted evidence that most of the purported suppliers and customers of the Macao Subsidiary had been set up upon the instructions of Chun Chee Wai (“Chun”), the Chairman, Chief Executive Officer and controlling shareholder of the Company, or persons associated with him.
A former sales manager of the Macao Subsidiary said that she had been instructed by her supervisor to issue emails to certain webmail accounts (i.e. Gmail or Yahoo mail) to confirm the business transactions to “make up some proof of contact and confirmation for the purposes of coping with (the request) of the auditor
” of the Company.
The court was satisfied that the evidence adduced by the Commission established that fraud on an “industrial scale” had been perpetrated by persons in charge of the Company on investors, the Exchange and others involved in the listing of the Company. The Judge was of the view that it was highly likely that Chun had caused the round robin transactions and the creation of the bogus bills of lading to produce significantly better figures in order to advance the Company’s initial public offering and induce investors to subscribe for shares. Having started this process necessitated its continuance.
According to Harris J, “It is difficult to think of a clearer case of it being in the public interest that a petition be brought by the Commission for a winding up
” and “… the appropriate remedy given the gravity of what has taken place is clearly an immediate winding up of the Company
THE LEGAL POSITION IN MALAYSIA
Although we do not have a provision which is in pari materia
with section 212(1)(a) of the SFO, the Companies Act 1965 (“CA”) and the Capital Markets and Services Act 2007 (“CMSA”) of Malaysia contain provisions that could be relied upon by the Malaysian regulatory authorities to wind up a company which participates in fraudulent conduct of a similar nature.
Section 195 of the CA, inter alia
, confers power on the Minister of Domestic Trade, Co-operatives and Consumerism (“Minister”) to declare a company, whether incorporated under the CA or a foreign company, to be a “declared company” if he is satisfied that –
(a) a prima facie
case has been established that, for the protection of the public or the creditors of the company, it is desirable that the affairs of the company should be investigated; or
(b) it is in the public interest that allegations of fraud, misfeasance or other misconduct by persons who are concerned with the formation or management of the company should be investigated; or
(c) it is in the public interest that the affairs of the company should be investigated for any other reason.
Upon a declaration being made under section 195, the Minister will appoint one or more inspectors to investigate the affairs of that company and provide a report to him.
After a report has been made by the inspector in respect of a declared company, the Minister may petition to the court under section 205 of the CA for the winding up of the company, or in the case of a foreign company, the winding up of the affairs of that company in relation to its assets within Malaysia.
The court may order a “declared company” to be wound up under section 218(1)(g) of the CA if an inspector appointed in respect of that company has opined in his report that it is in the interest of the public or creditors that the company should be wound up.
The court may also wind up a company if it is of the opinion that it is just and equitable that the company be wound up or is satisfied that the company is being used for unlawful purposes or for any purpose which is prejudicial to public interest.
Section 361 of the CMSA provides that a company which has contravened any securities laws (including the CMSA and any subsidiary legislation made thereunder) may be wound up by the court upon the petition of the Securities Commission of Malaysia (“SC”) regardless of whether the company has been charged with an offence in respect of that contravention, and whether the contravention has been proved.
While it is clear that the Malaysian court has the power under section 361 to wind up a listed company which is incorporated in Malaysia, it would not have the power to do so in respect of a foreign company which is listed on Bursa Malaysia as that section applies only to a company which is incorporated under the CA or any corresponding previous legislation.
The only instance where the SC has sought recourse under section 361 of the CMSA occurred in 2010, when it successfully obtained a winding up order against SJ Asset Management Sdn Bhd, an asset management company, on grounds that the latter had been involved in deceitful and improper business practices.
A stock exchange, derivatives exchange and an approved clearing house may also petition to wind up a company under section 361 of the CMSA. It is likely that such an entity may only exercise this power against a company which is subject to the regulatory oversight of the relevant entity and not against one which is not subject to its oversight. However, this remains a moot point.
From the above, it can be seen that if a listed company which is incorporated in Malaysia contravenes any provision of any securities laws in Malaysia, the SC may petition for that company to be wound up under section 361 of the CMSA.
On the other hand, if the misconduct, whether committed by a locally incorporated company or foreign company, does not constitute a contravention of any securities law in Malaysia, the SC can nevertheless seek assistance from the Minister to exercise his powers under sections 195 and 205 of the CA.
Whilst the Malaysian court does not have the jurisdiction to wind up a foreign company which is listed on Bursa Malaysia under section 361 of the CMSA for a contravention of Malaysian securities laws, the court can nevertheless issue an order upon the application of the Minister under section 205 of the CA to wind up the affairs of the foreign company in relation to its assets in Malaysia if the conduct giving rise to a contravention of the securities laws falls within any of the circumstances in which the Minister may declare such company to be a “declared company” under section 195 of the CA.