Exchange’s Disciplinary Action against Hong Kong Resources Holdings Company Limited (Stock Code: 2882) and Eight Directors

香港联合交易所有限公司
(香港交易及结算所有限公司全资附属公司)
THE STOCK EXCHANGE OF HONG KONG LIMITED
(A wholly-owned subsidiary of Hong Kong Exchanges and Clearing Limited)

The Stock Exchange of Hong Kong Limited 

CENSURES:
(1) Hong Kong Resources Holdings Company Limited (Stock Code: 2882); 

IMPOSES A PREJUDICE TO INVESTORS’ INTERESTS STATEMENT against:
(2) Mr Xu Zhigang, former executive director;
(3) Mr Zhao Jianguo, former executive director;

CENSURES:
(4) Mr Fan Ren Da Anthony, independent non-executive director;
(5) Dr Loke Yu, independent non-executive director;
(6) Ms Dai Wei, former executive director;
(7) Mr Lam Kwok Hing Wilfred, former executive director;
(8) Mr Wu Xiaolin, former executive director; and
(9) Mr Xu Xiaoping, former independent non-executive director.

AND FURTHER DIRECTS:
Ms Dai, Mr Fan, Dr Loke, Mr Xu Xiaoping, Mr Lam and Mr Wu to attend training.

The statement made in respect of each of Mr Xu Zhigang and Mr Zhao above is made in addition to a public censure against them.  The Prejudice to Investors’ Interests Statement is a statement that, in the Exchange’s opinion, had Mr Xu Zhigang and Mr Zhao remained on the board of directors of the Company, the retention of office by them would have been prejudicial to the interests of investors.

Between June 2018 and March 2019, the Company’s subsidiary granted loans to borrowers totaling $74.4 million.

By early 2019, some interest repayments in respect of the loans had become overdue. The Company’s auditors raised concerns regarding the loans, noting that there were inadequate controls in place for the money lending business, and that the due diligence on the borrowers’ ability to repay was insufficient. The auditors were also concerned about, and disagreed with, the Company’s expected credit loss assessment.

After these concerns were raised, the Company published its interim report (for the six months ended 31 December 2018) in March 2019. The interim report did not say anything about the auditors’ concerns, and gave the impression that there were no issues with the loan repayments.  No expected credit loss provision was taken by the Company.

A few months later, during the audit process for financial year end, the auditors continued to raise concerns regarding the loans. The auditors questioned their commercial rationale and the lack of follow-up action when sums had become overdue.

All the borrowers defaulted on the loans. The Company recorded a 100 per cent impairment loss of around $86 million.

The interim report was not accurate and complete. It omitted material facts of an unfavourable nature and, as a result, misled investors.

The Board at the time (being the above directors except Mr Wu, who had already resigned) were responsible for the accuracy and completeness of the interim report but failed in their duties. They failed to critically consider the issues raised by the auditors when making the expected credit loss assessment. They should have ensured the relevant disclosures were accurate.

The audit committee was found to have been notably ineffective. Amongst other things, there was a lack of meaningful enquiry regarding the overdue payments, and no evidence of any exercise of independent judgement.

There was also a failure by the directors in respect of the internal controls for the money lending business. There were insufficient checks and balances to restrict the powers of individual directors in relation to the granting of loans. There was insufficient due diligence and credit risk assessment.  There was a money lending policy, but it was wholly inadequate, demonstrating a lack of understanding of a proper internal control system.

Mr Xu Zhigang and Mr Zhao failed to respond to our enquiries.

Ends