Hong Kong Stock Exchange: Disciplinary action against Xu Jinghui, former independent non-executive director of China Aoyuan (03883)

Zhitong Finance App learned that on August 11, the Hong Kong Stock Exchange issued a notice condemning Mr. Xu Jinghui, a former independent non-executive director of China Aoyuan (03883); and further ordered Mr. Xu to complete 17 hours of training on regulatory and legal issues and compliance with the Listing Rules, including two hours on section 2.13 of the Listing Rules and three hours each of the following: (i) directors' duties; and (ii) the “Corporate Governance Code”.

This case involved Mr. Xu's failure to act with due skill, prudence and diligence during his time as an independent non-executive director of the Company and a member of the Audit Committee, and failed to induce the Company and its subsidiaries (the Group) to develop adequate internal control measures and procedures for (among others) the Group's centralized fund management functions.

The centralized fund management function involves concentrating and allocating the funds of various subsidiaries to improve the efficiency of the use of funds (including providing each other with funds for general working capital use), and there are significant deficiencies in internal control measures and procedures for this function. For example, the relevant policies have not been updated or reformulated for many years, and no effective measures have been put in place to avoid or manage conflicts of interests and positions.

As a result of these deficiencies, the company's subsidiary, which was also listed in Hong Kong at the time (the subsidiary), was able to provide a total of RMB 3.3 billion in financial support to the company from January 1, 2021 to March 31, 2022 without approval from the subsidiary's board of directors. The subsidiary also failed to comply with the applicable announcements, circulars and independent shareholder approval requirements of the Listing Rules.

According to Mr. Xu, the centralized fund management function has been in place for at least 10 years. He acknowledged that he understood that the centralized fund management function was led, managed and/or overseen by the two co-directors of the company and its subsidiary, but lacked understanding of the activities, operating procedures or policies carried out by the function.

The Hong Kong Stock Exchange ruled that Mr. Tsui was not actively concerned about the operation of the centralized fund management function. Furthermore, prior to the spin-off and listing of the subsidiary in March 2019 (and after the completion of the spin-off listing), Mr. Tsui did not take sufficient action in response to the spin-off to assess or review (i) the risks (including regulatory risks and other risks) that may arise from the continued operation of the subsidiary's centralized fund management function after listing; or (ii) whether the relevant internal control measures and processes were sufficient and effective to ensure that all companies within the group (which remained a subsidiary of the company after listing and during the relevant period) could comply with the Listing Rules.

As far as Mr. Xu claims that he has carried out his duties, Mr. Xu stated that he relies on the operation team, internal audit department and auditors to report any relevant issues to him. He also assumes that the subsidiary, as an independent listed issuer, has adequate and effective risk management and internal control measures. The Hong Kong Stock Exchange is not convinced that Mr. Xu has fulfilled his responsibilities with respect to the group's internal control measures and procedures.