On 29 December 2016, the Market Misconduct Tribunal (MMT) found four former executive directors and the former financial controller of Greencool Technology Holdings Ltd (Greencool) had disclosed false or misleading information in Greencool’s accounts, thereby inducing transactions (purchase of Greencool shares by investors) and had therefore engaged in market misconduct, contrary to section 277 (1) of the Securities and Futures Ordinance (SFO). The MMT, however, found that the two independent non-executive directors (INEDs) of the company had not engaged in market misconduct because the MMT could not conclude that the INEDs were reckless or negligent for failing to look more deeply into the falsified accounts of the company. In short, what the INEDs did at the material time was sufficient to let them off the hook. This article focuses on the SFC’s case against the INEDs, the actions taken by the INEDs and the MMT’s reasoning.

MMT’s Findings of Fraud against Executive Directors

Greencool was listed on the Growth Enterprise Market (GEM) of the Hong Kong Stock Exchange, but is now delisted. It had offices in Hong Kong, but conducted its activities through subsidiaries in the Mainland in the marketing and sale of a new form of environmentally friendly refrigerant.

The MMT found that Greencool’s former Chairman and CEO (Gu), with the assistance of two other executive directors had perpetrated a massive fraud (known by another executive director and a number of employees in the Mainland subsidiaries). The fraud was perpetrated within the subsidiaries and consisted of inflating assets (cash held in bank accounts in the PRC) and understating or failing to disclose liabilities (loans due to banks in the PRC) in the accounts, thereby giving the impression through the Group Accounts, that Greencool’s results were far stronger than they really were and making Greencool shares more attractive to investors.

SFC’s Case against the INEDs

The INEDs in question were Fan (Chairman of the Audit Committee) and Man (member of the Audit Committee), both of whom had considerable experience in matters of banking and/or finance. It was not asserted that either of them had actual knowledge that the Group accounts were false or misleading, but rather that, in failing in their corporate duties, they may have been reckless or negligent as to that fact.

The SFC’s case was that Fan and Man were made aware of a number of matters that should have alerted them to the real possibility that something was materially amiss in respect of the finances, including:

(i) extravagantly high bank balances maintained by the Greencool subsidiaries (ranging from RMB 850 million to RMB 1.1 billion) and at the same time the Group was making substantial borrowings (ranging from RMB20 million to RMB 80 million);

(ii) disturbing allegations (anonymous complaint that Greencool had inflated its sales and misused funds raised via listing and media speculation as to the accuracy of Greencool’s accounts);

(ii) recommendations by Greencool’s then auditors that were not followed after the auditors had alerted the Audit Committee to deficiencies in the financial management of the Greencool Group.

INEDs’ Defences

It was not in dispute that the first three elements of section 277(1) were satisfied in respect of Fan and Man. It was accepted that they authorised publication (dissemination) of the accounts, that the accounts were likely to have an impact on the market (by inducing transactions and having an influence on the share price) and that those accounts were false as to material matters. The issue was at the time when Fan and Man authorised publication of the accounts, what information did they have (or what information with reasonable diligence should they have had) and based on that information was it reasonable for them, in their capacity as INEDs, to believe those accounts to be true?

In response to the SFC’s allegations:

(i) in relation to high bank balances: Man said that banks were unlikely to make false confirmations so she had no concern as to whether the reported cash balances reflected the true situation. As to why there were surplus funds, Man explained that she understood the surplus funds were being kept for future mergers and acquisitions. As to why the Group still borrowed significant sums from banks despite holding large cash surpluses, Greencool’s management said the funds had been borrowed for two reasons: to build closer relationships with the banks and to maintain own sources of funding;

(ii) in relation to disturbing allegations:

a. The allegations contained in an anonymous letter sent to the Stock Exchange were refuted by Greencool’s solicitors. The Stock Exchange had dropped its enquiries. Man considered that the matter was taken no further;

b. An article published in Caijing Magazine in which industry experts were sceptical as to whether the new technology was quite the break through that it was promoted to be and questioning the earnings of Greencool as disclosed in the 2000 annual report as being unattainable and alleging that certain clients of Greencool denied entering into any contract with the Group. Man said that the Audit Committee took action to investigate the position, namely:

i. She discussed with an analyst who had experience in covering Greencool.

ii. She discussed with the director responsible for sponsoring the listing.

iii. She studied the press conference results given by senior management of Greencool and learnt that 5 major clients of Greencool had attended the conference.

iv. The Audit Committee met on 5 occasions to discuss the media reports.

v. She took further steps after meeting with the auditors, including instructing an independent valuation firm to conduct an appraisal of the Mainland market, which supported the viability of Greencool’s business model, making inquiries with the company’s insurer as to whether the company had made a claim under its insurance and making surprise visits to the refrigerant supplier’s company.

vi. Eventually, the INEDs came to the conclusion that the media analysis was fundamentally flawed and that no reliance could be placed upon it.

(i) In relation to failure to follow the auditor’s recommendations: Man said that the auditor’s proposals were not related to any concern as to any form of wrongdoing within the Group, but were standard proposals made by the auditors seeking to enhance internal management procedures.

General Liability of INEDs

The MMT referred to the distinction between executive directors and non-executive directors. It said that the essential characteristic of an executive director is his discharge, usually as an employee, of executive functions in the management and administration of a company. By contrast, a non-executive director is usually independent of the corporate management and administration, his duties being performed at periodic board meetings and meetings of any committees of the board, appointment as a non-executive director carrying no express or implied grant of executive power. However, while there is such distinction, their responsibilities in law remain the same. The MMT said that it was bound by the Court of Appeal’s decision in Re Boldwin Construction Co Ltd & Anor [2001] 3 HKLRD 430, in which the Court of Appeal said:

Executive directors and non-executive directors have the same responsibility in law as to the management of the company’s business. They have the same responsibility in law with regard to the finances of the company and as regards accounting to the shareholders for the company’s finances. The law, and, in particular, the Companies Ordinance, does not have any regard to whether a director has an executive position within the company, or whether a director is paid a salary. The duties and responsibilities arising from a directorship are the same.”

MMT’s Conclusion

The MMT held that, although with the benefit of hindsight, the fraud perpetrated on the subsidiaries may appear simple enough, the disguising paperwork was obviously sufficiently sophisticated and coherent to conceal the fraud over an extended period of time – even the SFC accepted that the investigation had been a lengthy and complex one, spanning seven years and several jurisdictions. Accordingly, the MMT accepted that at the relevant time nobody who was not part of the fraud itself had any reason to suspect that it was in progress.

The MMT was unable to find that Fan or Man were negligent of reckless, after taking into account the following:-

(i) At all relevant times Greencool auditors, Arthur Anderson and Deloittes (both firms of international repute), accepted Greencool management’s explanations and issued a clean bill of health in respect of the Group’s financial affairs, despite the fact that certain concerns had been raised in the media.

(ii) Neither Fan nor Man were paid, full-time executives. Greencool had appointed auditors of repute and competence and Fan and Man were entitled to rely on their advice, subject of course to employing their own wisdom and experience in order to weigh that advice. In addition, absent grounds for suspicion, they were entitled to trust Greencool’s management to do their work competently and honestly.

(iii) Looking to culpability, it must be remembered that neither Fan nor Man were under an obligation to turn themselves into auditors or executives to try and ferret out deceit. Nor were they required to give continuous attention to Greencool’s affairs.

It was apparent on the evidence, the MMT said, that the media concerns did put both Fan and Man on alert, but the evidence indicated that they both did not simply abandon their responsibilities to the auditors. Instead they worked with the auditors, considering their suggestions, and taking a number of positive and rational steps to investigate matters. It had therefore not been demonstrated to the MMT that, with reasonable diligence, either of them should at the time have been able to unearth information undermining the integrity of the Group accounts. On the information available to Fan and Man at the relevant times, the MMT was satisfied that when, as members of the Audit Committee, they authorised publication of the Group accounts, it was reasonable for them to believe that the accounts were true. Accordingly, neither was culpable of market misconduct.


This case serves as a good reminder to INEDs that as directors of listed companies, they have an obligation to exercise their skills and independent judgment to bring about good corporate governance in the listed companies and guard against improprieties. While they are entitled to rely on external auditors and trust the management of the listed companies to do their work competently and honestly, they cannot discharge their obligation by simple adoption of and complete reliance on the work of others and they still need to employ their own wisdom and experience in order to weigh the external advice and work, assess the situation and dispel any suspicion to their satisfaction. The INEDs in Greencool were fortunate (perhaps wise or diligent enough) that they had done enough work of their own in the eyes of the MMT to get them off the hook.