24 April, 2015
On 26 February 2015, the Court of First Instance ordered that China Metal Recycling (Holdings) Limited ("China Metal") be wound-up in the public interest. This is the first public interest petition issued by the SFC to wind-up a company listed in Hong Kong. The Reasons for Decision was handed down by The Hon Mr Justice Harris on 9 March 2015.
China Metal was engaged in the scrap metal business with two business models: (1) purchasing scrap metal from suppliers and producing recycled scrap metal products that meet its customers' requirements, and (2) reselling scrap metal that it had purchased without further processing. China Metal was listed on the Main Board on 22 June 2009. It is the holding company of 38 subsidiaries in the BVI, Hong Kong, Macao, PRC and Taiwan.
It was alleged by the SFC that the affairs of China Metal involved a complex, sophisticated and dishonest scheme spanning Hong Kong, Macao, the PRC and USA which inflated its performance, revenue and profit dating back to the time it applied to be listed. The scheme continued to expand in size and complexity until the SFC commenced proceedings against China Metal in 2013.
The SFC alleged that central to the scheme was China Metal's wholly owned off-shore subsidiary in Macao, Central Steel (Macao Commercial Offshore) Limited, which purportedly contributed a substantial part of the company’s annual profits between 2006 and 2012. It was also a factory for generating false documents and instruments by which these profits were falsified. It also involved fake shipments of scrap metal between the US and PRC, false shipping documents, false accounts, and highly complex round robin transactions spanning continents.
The SFC began investigating China Metal in December 2009 as to whether persons might have disclosed false or misleading information inducing transactions in the shares of the company. Given the scale and complexity of the fraudulent scheme, extensive investigations were required. Trading in China Metal's shares was suspended from January 2013. Following the SFC's investigations, the company was placed into provisional liquidation on 26 July 2013. On the same day, the SFC applied for the company to be wound-up.
Section 212 of the SFO gives the SFC the standing to apply for a winding-up order when it considers that such relief is desirable in the public interest, and the court may grant the order on the ground that it is just and equitable and after considering the circumstances of the case. While the term "public interest" is not defined under relevant statutes in Hong Kong, the court considered in detail what the term meant in the context of this case. The court found that the SFC had established that a fraud on a massive scale had been perpetrated by those in charge of China Metal on its investors, the Hong Kong Stock Exchange and others involved in the listing of the company. It was clear that this was not a case of isolated wrongful acts which were unlikely to be repeated, nor was this a case of wrongdoing which initially was limited in scope but later grew as circumstances caused the instigator to lose control. It was a carefully planned and implemented scheme and a fraud on an industrial scale, which goes directly to the integrity of the listing. The case fell firmly into the category of cases in which the courts take the view that a winding-up order is appropriate.
The former management of China Metal and its subsidiaries prior to the appointment of the provisional liquidators denied any impropriety and, until recently, opposed the SFC’s case. However, without accepting any liability, the former management withdrew from the case and took no part in the hearing.
After considering the SFC’s evidence, given the gravity of the case the court found that the appropriate remedy was clearly the immediate winding-up of China Metal.
For further information, please contact:
Jamie Barr, Partner, Hogan Lovells
jamie.barr@hoganlovells.com
Tim Fletcher, Partner, Hogan Lovells
tim.fletcher@hoganlovells.com
Terence Lau, Partner, Hogan Lovells
terence.lau@hoganlovells.com
Mark Parsons, Partner, Hogan Lovells
mark.parsons@hoganlovells.com
Nelson Tang, Partner, Hogan Lovells
nelson.tang@hoganlovells.com
Thomas Tarala, Partner, Hogan Lovells
thomas.tarala@hoganlovells.com
Steven Tran, Partner, Hogan Lovells
steven.tran@hoganlovells.com
