Jenny WY Yu, Partner, and Raymond NH Chan, Partner, Johnson Stokes & Master, analyse four recent Exchange and SFC disciplinary cases, highlighting a tightening regulatory focus on directors’ accountability, due diligence and internal controls.

Directors of listed companies are held accountable to a high standard of ultimate responsibility for the company.

Published findings of disciplinary action taken by The Stock Exchange of Hong Kong Limited (the Exchange) in 2024 and 2025 underline that directors are expected to exercise independent judgement and ensure robust corporate governance with effective internal controls.

As demonstrated by the following case studies, the disciplinary trends show that directors cannot simply absolve themselves of responsibility by relying on other board members or even external professionals.

Case 1: sanctioned for failing to question a sevenfold increase of land valuation in six months

Background

In January 2018, Wisdom Wealth Resources Investment Holding Group Ltd (Wisdom Wealth) announced the acquisition of land in Zhanjiang and engaged a professional valuer to assess its market value.

The value of the land had varied significantly within a year of the acquisition. It was initially valued at RMB1.15 billion in December 2017. However, by 30 June 2018, the valuation had dramatically increased, to RMB8 billion, and then decreased to RMB3.1 billion as of 31 December 2018.

Despite the sevenfold increase in the land’s value within six months in early 2018, the directors did not take adequate steps to ensure that their reliance on the valuer’s valuation was reasonable.

They failed to seek clarification from the valuer regarding the substantial increase in value, did not consult Wisdom Wealth’s auditor and did not consider obtaining a second opinion or other professional advice.

This lack of due diligence and failure to properly discharge their duties led to misleading financial disclosures.

Result

The Exchange took disciplinary action against Wisdom Wealth and its directors, criticising 10 of its directors for their failure to ensure the reasonableness of their reliance on the valuation.

Additionally, two directors were censured for providing incomplete, misleading and/or deceptive information about the valuation methods during the investigation. The directors were also required to attend 17 hours of training on Listing Rule compliance.

Takeaway

Directors must exercise independent judgement, particularly when relying on external information such as valuations, and must consider whether the information is reasonable and well founded. If there is anything unusual, directors should consider seeking clarification or further professional advice.

Case 2: criticised for negligence in risky acquisitions

Background

Three former directors of National Arts Group Holdings Ltd (National Arts) were found to have breached their fiduciary duties during the approval and execution of two acquisitions involving target companies with property units under construction in Malaysia.

Under the acquisition terms, the vendors and/or their related parties would remain responsible for the target companies’ outstanding payment to developers. National Arts made full payment upfront by issuing new shares valued at HK$108.8 million as consideration to the vendors.

The acquisitions were expected to yield a decent business return, but involved significant risks. The vendors and their related parties failed to pay the developers and ultimately none of the property units were delivered to National Arts.

Result

The Exchange criticised the three former directors for their failure to exercise reasonable skill, care and diligence in safeguarding National Arts’ interests. They should have been aware that the acquisitions involved major risk, including that if the vendors failed to make payment, the project may not be completed.

Takeaway

Directors should consider the risks of any proposed acquisition, including the credit risks of any parties responsible for payment.

Case 3: accountability in high-stakes urgent corporate decisions

Background

In a disciplinary action against Fantasia Holdings Group Co, Ltd (Fantasia) and Colour Life Services Group Co, Ltd (Colour Life), the Exchange found significant regulatory breaches.

The case involved the disposal of Colour Life’s wholly owned subsidiary, Link Joy Holdings Group Co, Ltd (Link Joy), which was executed without obtaining the necessary shareholders’ approval, as is required for a ‘very substantial disposal’ (VSD). At the material time, Fantasia was the controlling shareholder of Colour Life and was also subject to shareholders’ approval for a VSD.

Pan Jun, the former chairman, CEO and executive director of both Fantasia and Colour Life, arranged the disposal to address imminent liquidity concerns.

On 28 September 2021, Colour Life entered into an agreement to sell Link Joy to Country Garden Property Services HK Holdings Co Ltd (Country Garden) for RMB3.3 billion. However, two days later, Colour Life entered into a loan agreement with Country Garden for RMB700 million, which was repayable within a brief period. This loan agreement included terms that allowed Country Garden to request the transfer of Link Joy in the event of certain default conditions.

On 4 October 2021, the default conditions were triggered, leading to the transfer of Link Joy to Country Garden. Mr Pan did not consult the board of directors of either Fantasia or Colour Life before entering into the loan agreement, nor did he disclose the agreement to either of the boards in a timely manner.

When the other directors became aware of the situation, some of them failed to make necessary inquiries or to seek further information about the transaction. Additionally, they did not question Mr Pan’s conduct, including his decision to keep the arrangement to himself, disregarding the companies’ internal control policies.

Result

The Exchange issued a Prejudice to Investors’ Interests Statement against Mr Pan, indicating that his continued involvement in the companies could harm investor interests. Additionally, the other directors who did not question Mr Pan’s actions were censured and directed to undergo 15 to 18 hours of training on Listing Rule compliance.

Takeaway

Directors should actively voice their views and concerns, particularly if they become aware that another member has withheld information or has failed to comply with internal controls.

Case 4: beware the consequences of bypassing board approval

Background

The Securities and Futures Commission (SFC) and the Exchange took enforcement action against FingerTango Inc (FingerTango) and its former directors, including independent non-executive directors (INEDs).

The case related to a policy adopted by all directors, which allowed certain investment decisions to bypass board approval. This policy led to a series of problematic investments and loans, resulting in substantial financial losses for the company.

FingerTango, a company that had been listed on the Main Board of the Exchange since July 2018, raised net proceeds of HK$967 million from its initial public offering. Shortly after listing, the company invested HK$450 million of these proceeds in an unlisted wealth management product without the board’s knowledge.

This investment deviated from the intended use of proceeds as stated in the company’s prospectus, which had indicated that any unused proceeds would be placed in short-term demand deposits or money market instruments. The company did not disclose this change in the use of proceeds in its prospectus or subsequent announcements, violating several listing rules.

In December 2019, FingerTango partially redeemed the fund and immediately invested another HK$250 million in loan notes issued by a small-scale private company. This investment resulted in a loss of HK$258.75 million, including accrued interest, due to a default on the loan notes.

Between May 2020 and March 2021, FingerTango and its subsidiaries subsequently entered into 20 loan agreements with 15 borrowers, totalling over HK$500 million. These loans were largely unsecured and interest-free, leading to an impairment loss of approximately HK$424 million, with over 80% of the loans in default.

Result

The SFC’s investigation showed that the directors failed to carry out proper procedures and due diligence before entering into these loan agreements. Hence, the SFC commenced legal action seeking disqualification and compensation orders against the former directors, holding them accountable for the losses incurred by the company and its subsidiaries.

Takeaway

Directors, including INEDs, should ensure there is a robust corporate governance system in place, with adequate internal control policies and procedures that are properly implemented. They cannot simply absolve themselves by adopting a loose policy – and they should ensure they are involved in the material decision-making processes of the company.

Concluding remarks

These recent disciplinary cases show a regulatory trend focusing on enhancing and strengthening internal controls, as well as holding directors accountable for inadequate internal controls.

Directors are expected to exercise independent judgement and to consider material risks when approving company transactions or acquisitions. It is insufficient to simply rely on other board members or external information.

This demonstrates a focus on corporate governance controls to maintain investor confidence in Hong Kong listed companies.

Jenny WY Yu, Partner, and Raymond NH Chan, Partner

Johnson Stokes & Master

© Copyright Johnson Stokes & Master, August 2025