SFC and HKEX collaborated in enforcement actions against a listed company and its former directors for misconduct involving over HK$660 million of losses, seeking disqualification and compensation orders 

Background

On 16 January 2025, the Securities and Futures Commission (“SFC”) and The Stock Exchange of Hong Kong Limited (“HKEX”) collaborated in enforcement actions against Mainboard-listed FingerTango Inc. (“FingerTango”) and eight (8) of its former directors (“Former Directors”) for misconduct and breach of their duties towards FingerTango and its subsidiary.

At the time of listing, all then directors of FingerTango, including the independent non-executive directors, resolved to adopt a policy that would allow certain investment decisions to bypass board approval. Shortly after its listing in July 2018, FingerTango used proceeds from its initial public offering to invest HK$450 million in a fund without the knowledge of its full board. FingerTango partially redeemed the fund in December 2019, and immediately invested another HK$250 million in loan notes issued by a small-scale private company (“2019 Loan Notes”). It transpired that FingerTango suffered a loss of HK$258.75 million, including accrued interest, from a default on the 2019 Loan Notes.

SFC and HKEX Action

Against this backdrop, the SFC commenced its legal action in the Court of First Instance in October 2023 seeking various court orders, including disqualification and compensation orders, against FingerTango and the Former Directors.

Subsequently, the SFC discovered that between May 2020 and March 2021, FingerTango and two of its subsidiaries entered into 20 loan agreements with 15 borrowers, for loans totalling over HK$500 million (“2020-21 Loans”). FingerTango subsequently suffered an impairment loss of approximately HK$424 million with over 80% of the 2020-21 Loans in default.

In the light of this discovery, in November 2024, the SFC expanded the scope of the misconduct in its legal action to include the 2020-21 Loans and, in particular, for the Former Director’s failure to carry out proper procedures and due diligence before entering into the loans. The SFC alleges that the losses resulting from the 2019 Loan Notes and 2020-21 Loans were attributable to breaches of the duties by former directors of FingerTango, Liu Jie, Wang, Liu Zhangxi, Zhu, Guo and/or Yao, rendering them liable to compensate the company and its subsidiaries for the incurred losses.

The HKEX also held the view that there were no adequate and effective internal controls to govern the money lending activities, nor was there proper oversight over such activities at the board level until after a majority of the loans had defaulted. The loans were granted in the absence of:

(i) adequate due diligence,

(ii) credit assessment on the borrowers and/or their guarantors and collateral (if any), and

(ii) proper assessment of the enforceability of the security or guarantee provided. 

The HKEX further held that there were multiple breaches of the Listing Rules in relation to the alleged misconduct, including:

(i) the failure by FingerTango to announce a number of the loans which constituted discloseable transactions under the Listing Rules,

(ii) the failure by the Former Directors to discharge their director’s duties by taking sufficient steps to protect FingerTango’s interests, including putting in place adequate and effective internal controls for the money lending activities.

Actions

The enforcement actions sought by the HKEX and the SFC for the alleged misconduct by FingerTango and the Former Directors include the following:

(1) the HKEX issuing censures, criticisms and a range of statements, including director unsuitability statements and prejudice to investors’ interests statement, against FingerTango and the Former Directors; and

(2) the SFC seeking disqualification and compensation orders from the Court of First Instance against the Former Directors.  

Commentary

These proceedings serve as a reminder to directors of the importance of properly and diligently carrying out their director’s duties and ensuring adequate internal controls are in place and functioning as intended. Directors, including independent non-executive directors, owe duties to the company which include overseeing the activities of management and ensuring that adequate internal control policies and procedures are established and operate effectively.

A material failure by directors to carry out their duties properly may have significant consequence for the directors. In the present proceedings, the Former Directors have already been publicly criticised by the HKEX with unsuitability statements issued against them. Additionally, if the SFC is successful in obtaining the compensation orders against the relevant Former Directors, the relevant Former Directors may be required to compensate the entirety of FingerTango’s loss of funds as a result of their misconduct and their failure to properly carry out their duties.

Russell Bennett and John Lee

For more information on employment matters, please contact:

Russell Bennett

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Disclaimer: This publication is general in nature and is not intended to constitute legal advice. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.