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Court made a Share Purchase Order under s.214(2)(e) of SFO against a top executive for orchestrating a fraud scheme on a listed company

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Authored by: Peter So and Victor Wong

The Court of First Instance made an order under s.214(2)(e) of the Securities and Futures Ordinance (Cap. 571) (SFO), requiring the 2nd Defendant, being the chairman, executive director and controlling shareholder of the 1st Defendant, i.e. Sound Global Ltd (former stock code: 967.HK) (Company), to make an offer to purchase shares of the Company from the other members, at a price to be determined by the court. In addition, the Court issued a disqualification order for 12 years against the 2nd Defendant and awarded costs to the SFC on an indemnity basis.


The Company, through its subsidiaries (Group) in the Mainland, carries on business in turnkey water and wastewater treatment. It has offices in Hong Kong, Singapore and Beijing. The Company was listed in Hong Kong (until 2022) and Singapore (until 2014). The 2nd Defendant was a director of each of the Company’s three indirect subsidiaries.

The Securities and Futures Commission (SFC) commenced its investigation in 2015 in relation to whether false or misleading information had been disclosed or provided by the Company. It was later found that the bank balances of the Group stated in its audited consolidated financial statements had been inflated by RMB 2.18 billion (2012 Discrepancy) and RMB 2.72 billion (2013 Discrepancy) respectively, which represented 82% and 89% of the net assets of the Company as reported in its 2012 and 2013 annual reports. It was also discovered that the 2nd Defendant gave false explanations as to the discrepancy of around RMB 2 billion between the balances in the Group’s bank accounts and the information previously provided by the management (Cash Discrepancy).

The SFC presented this Petition against the Company on 14 June 2019. It was the SFC’s case that the 2nd Defendant knowingly caused, directed and/or orchestrated a scheme for (a) the fraudulent inflation and falsification in the bank balances of the subsidiaries and/or (b) the fabrication of falsified bank statements and bank balance confirmations, to support the inflated and fictitious bank balances (Schemes), resulting in the 2012 and 2013 Discrepancies.

The nature of s.214 proceedings

S.214 of the SFO sets out the remedies available to members of listed corporations in cases of unfair prejudice or the like. The SFC is required to establish 3 conditions in a s.214 petition namely:

  1. The corporation in question is or was a listed corporation;
  2. The business or affairs complained of is that of the corporation or/and its subsidiaries; and
  3. The conduct complained of falls within one or more heads of misconduct specified in s.214(1)(a)-(d) of the SFO, such as misfeasance, any manner resulting in the company’s members not having been given all the information with respect to its business or affairs that they might reasonably expect, or any manner unfairly prejudicial to its members, etc.


It was undisputed that the first and second conditions were satisfied.

In arriving at its conclusion that the third condition was satisfied, the Court found that the Schemes and the 2nd Defendant’s provision of false explanations regarding the Cash Discrepancy were frauds perpetrated on the Company and the subsidiaries, which constituted misfeasance or misconduct. The Court considered the above resulted in the Company’s members not having been given all the information with respect to the Company and the subsidiaries’ business and affairs that they might reasonably expect. Besides, the Schemes and the provision of false explanations were unfairly prejudicial to the Company and its members in that the financial positon of the Group had been grossly overstated and the true position remained unknown. The Company and its members (other than the 2nd Defendant and his companies) were prejudiced as trading of the Company’s shares had since April 2016 been suspended, and there was no indication as to whether trading would resume (which never occurred, due to subsequent delisting).

Share Purchase Order

The Court considered the following factors before granting a share purchase order under s.214(2)(e) of the SFO: (i) whether there is a lesser remedy sufficient to deal with the unfairly prejudicial conduct and there is no likelihood of the conduct repeating; (ii) whether there are difficulties or impracticalities in framing orders for regulating the Company’s affairs in future or to remedy the misconduct; (iii) whether the other members would otherwise be locked in the Company due to difficulties in disposing of the shares; and (iv) whether the 2nd Defendant was in control of the Company at the material times of the misconduct and his interests in the Company; whether he acted in clear disregard of the interests of the minority shareholders; his pattern of conduct and whether he acted in breach of the Listing Rules and other applicable regulations; and (v) whether the 2nd Defendant has the financial means to comply with the order.

Applying the above principles, the Court considered that this was an appropriate case to make a share purchase order since (i) as a result of the Schemes and the Cash Discrepancy, the true financial state of the Company and of the Group remained unclear; (ii) the prejudice suffered by the Company and its members was substantial and irreversible; (iii) there was no lesser remedy which may redress the 2012 and 2013 Discrepancies and the Cash Discrepancy; (iv) there was no suggestion that the 2nd Defendant did not have the financial means to purchase the shares of the other members. 


The share purchase order was the first of its kind made under s.214(2)(e) of the SFO. This case confirms the availability of such remedy to protect the investing public from wrongful conduct by management of listed companies.

On the other hand, the relevant share price for the share purchase order has yet been determined. It remains to be seen whether other members of the Company will be properly compensated.

Key Contacts

Peter So

Partner | Litigation and Dispute Resolution

Email or call +852 2825 9247

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