Hong Kong – Competition Tribunal Made Its First Director Disqualification Order Against An Individual: Time To Review Compliance.

13 November 2020

 

On 30 October 2020, the Hong Kong Competition Tribunal (Tribunal) made the first director disqualification order (Disqualification Order) pursuant to the Competition Ordinance (Ordinance) against a director of Luen Hop Decoration Engineering Company Limited (Luen Hop) in the case of Competition Commission v Fungs E&M Engineering Company Limited and Others [2020] HKCT 9 (Case). Pursuant to the Disqualification Order, Cheung Yun Kam (Cheung) was disqualified for one year and ten months until the end of August 2022.

 

The Case involves allegations against six decorating contractors and three individuals of participating in an agreement to fix prices and allocate customers in connection with the provision of decoration works to tenants in the newly built On Tai Estate public housing project in 2017. Cheung admitted the allegations.

 

At the time when the alleged price fixing and customer allocation agreement was taking place in On Tai Estate in 2017, the Hong Kong Competition Commission (Commission) had already commenced investigation against Luen Hop for the same anti-competitive conduct in another project.[1] As such, the Tribunal held that even though Cheung did not directly contribute to the contravention in this Case, he had reasonable grounds to suspect that the conduct of Luen Hop constituted a contravention, but took no steps to prevent it. Based on section 103(2)(b) of the Ordinance, the Tribunal found Cheung unfit to be concerned in the management of a company. 

 

The Commission proposed a two-year disqualification period for Cheung. The Tribunal accepted it as an appropriate starting point, as Cheung’s situation was in the lower range of medium severity. Mitigation factors considered by the Tribunal included Cheung’s early admission, and delay in the proceedings due to Covid-19 and another respondent’s objection proceedings. Accordingly, the Tribunal reduced the proposed disqualification period to twenty two months. Cheung was also ordered to pay his share of the Commission’s litigation costs, reduced by 20%.

 

The implications of a disqualification order are significant. Unless with permission from the Tribunal, a disqualified director cannot engage in the following acts in relation to any company (whether incorporated in Hong Kong, or outside Hong Kong but carrying on business in Hong Kong) during the disqualification period:

 

(a)       Be, or continue to be, a director of a company.

 

(b)       Be a liquidator or provisional liquidator of a company.

 

(c)        Be a receiver or manager of a company’s property.

 

(d)       Be involved in the promotion, formation or management of a company in any way, whether directly or indirectly.

 

The scope of (a) and (d) set out above is broad. For example,

 

• “Director” in (a) includes any person involved in the management of a company by whatever name called, and also a shadow director.
   

• “Management” in (d) not only refers to acts at board level, but also covers decision-making by any rank for the direction of a company. It does not matter whether the act is done directly or indirectly, with pay or not, or in an employment capacity or not.
   

It is worth noting that the above provisions of the Ordinance regarding disqualification order (sections 101(2)(a)-(d)) mirror sections 168D(1)(a)-(d) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (CWUMPO). 
 

Under section 105 of the Ordinance, a person who contravenes a disqualification order will be liable on indictment for a maximum fine of HK$1 million and two years’ imprisonment. In addition, according to section 168O of CWUMPO, if a person is involved in the management of a company in contravention of a disqualification order, he shall become personally liable for all the relevant debts of the company. Any person who is involved in the management of the company and acts or is willing to act on instructions given by the disqualified director will likewise be liable. The company concerned will also be jointly and severally liable for such debts.
 

In four of the six legal actions the Commission has taken to date, the Commission has sought director disqualification orders from the Tribunal. The Tribunal’s judgment against Cheung sends warning of a genuine risk that a director may face if his company is found to be in violation of competition law. On the eve of the 5thanniversary of the Competition Ordinance, it is high time for businesses in Hong Kong, large or small, to review their business practices and company procedures to ensure that they are in full and effective compliance of the law.

For further information, please contact:

 

Lilian Chiang, Senior Partner, Deacons

lilian.chiang@deacons.com.hk