Accusations of Improper Management of Business by HKEX Directors: A Look at Perspectives and Events.

The Hong Kong Stock Exchange (HKEX) has taken disciplinary action against four former directors of Freeman FinTech Corporation Limited (now Arta TechFin Corporation Limited). They will investigate the commercial basis for expanding the company’s money lending business at a crucial time and concluded that the business was “seriously mismanaged.”

The four directors who were responsible for or involved in the money lending business did not apply the necessary level of skill, care, and diligence required under the Listing Rules, resulting in accusations of failing to exercise their fiduciary duties and provide the necessary supervision and information to conduct the company’s money lending business.

One of the directors who failed to cooperate with HKEX’s investigation was also served with a Director Disqualification Statement (DUS). The HKEX found that unsecured loans totaling HK$2.28 billion were granted between July 2017 and April 2018, of which over 93% were paid to third party nominees. All loans defaulted, and the company suffered an impairment loss of over HK$1.9 billion.

The evidence suggests that there was a limited or minimal level of discussion or consideration by the directors regarding the expansion of the lending business, due diligence on borrowers, risk assessment and ongoing monitoring of loans, and subsequent reassessment or evaluation of circumstances. However, no other listing rule compliance violations were found.

HKEX has reminded directors that they “are expected to critically assess the commercial basis of their business and play an active role in protecting the issuer’s assets.” The key takeaway is that HKEX may investigate the commercial basis of a company’s business activities, and inappropriate management is sufficient grounds for imposing sanctions on directors. Failure to cooperate with HKEX investigations may result in severe DUS sanctions.

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