SFC faces mainland China legal obstacle course on CMR
By Enoch Yiu From South China Morning Post
The challenges for the regulator are piled high in the CMR case.
The Hong Kong Securities and Futures Commission has had an initial win in its bid to wind up recycling firm China Metal Recycling, but faces a tougher battle when it applies to mainland courts to get access to the mainland assets of the company.
Accountants and lawmakers said this could be a lengthy and painful process for the city’s securities watchdog, although it would not be mission impossible.
The SFC won an order from the Court of First Instance on July 29 to appoint provisional liquidators to the company and to hear an appeal to have the company wound up. The company is accused of overstating its financial position when it applied for a listing on the Hong Kong market in 2009 and in its annual report for that year. The regulator believes those misstatements remain in force.
The provisional liquidators secured a court injunction on July 31 to freeze almost HK$1.7 billion of assets, and filed a writ against the founding chairman of the company Jacky Chun Chi-wai and his wife Lai Wun-yin and 10 firms for losses incurred from false information and financial statements provided by Chun and “purported payments for fictitious transactions”.
But in a setback for the SFC, Lai and two companies asked the court on August 9 to lift the injunctions to freeze the assets and the judge, Jason Pow Wing-nin, agreed to their request.
“There was no basis to suggest [Lai] was in fraudulent breach of fiduciary duties. There was no evidence that the defendant knew or participated in the fictitious transactions,” Pow said.
Together with executive director Fung Ka-lun, Chun and Lai have also served notice they will oppose the winding-up petition and argument is to be heard on October 16 which may turn into a lengthy legal battle.
But even if the court grants a winding-up order, more challenges lie ahead.
While the company is listed in Hong Kong, China Metal Recycling is incorporated in the Cayman Islands and its major assets and operations are on the mainland. Hence the Hong Kong-appointed liquidators can get access only to books and records and assets located in the city and not on the mainland or in the Cayman Islands, which will require separate court actions.
To get access to the company’s mainland assets, the SFC will first need to apply to the Cayman Islands’ courts to secure an order winding up the company. Legal experts and liquidators told the South China Morning Post this would not be too difficult. But the tricky part would be the following steps required on the mainland.
Under China’s bankruptcy law the liquidators would need to go to the local courts in each of nine cities in which the company operated.
Alan Tang Chung-wah, a partner and head of specialist advisory services in the Hong Kong office of mainland accounting firm ShineWing, said in many cases local courts were shown to be heavily influenced by local governments and business partners of the joint ventures that had fallen under bankruptcy administration.
“Also, under mainland law, employees and the government are placed above everyone else when it comes to distributing the proceeds from the sale of the assets of a company that is wound up. Overseas investors and lenders have little say in the process,” Tang said.
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