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In brief

This recent Court of First Instance judgment ([2023] HKCFI 2932) is another unsuccessful judicial review against the decision of the Listing Review Committee (LRC) of The Stock Exchange of Hong Kong Limited to impose disciplinary sanctions on two independent non-executive directors (INED) (“Applicants“) of a listed company (“ListCo“). These applications remain to be an uphill battle.

In June 2023, the LRC upheld the Listing Committee’s decision that the Applicants should be publicly censured for breaching Rule 3.08 of the Listing Rules and their Director’s Undertakings. The Applicants sought leave to apply for judicial review to challenge the LRC’s decision. On 27 November 2023, the Court of First Instance dismissed the Applicants’ application for leave to apply for judicial review. 


  1. Key takeaways
  2. In more detail
  3. Conclusion

Key takeaways

This judgment serves as a good reminder of the roles and responsibilities expected to be discharged by directors of listed issuers, in particular INEDs who do not have any role in the day-to-day operations. Rule 3.08 requires directors to take an active interest in the issuer’s affairs and follow up on anything untoward that comes to their attention. Upon acquisition of a new business, directors should cause the issuer to establish and maintain an adequate internal control system which could cover such new business segment/operation.

The Audit Committee has primary responsibility for monitoring and overseeing that internal controls are adequate and worked effectively.  In this case, the Court placed great emphasis on the fact that the Applicants were not merely INEDs, but were the chairman and member of the Audit Committee at the relevant times.  Whilst all directors were individually and collectively responsible for ensuring that the ListCo established and maintained adequate and effective internal controls, it was the Audit Committee which had the primary responsibility for monitoring and overseeing such internal controls.

While the Applicants (as INEDs) were entitled to engage in some form of delegation, they retained “a core non-delegable duty” to supervise the discharge of the delegated functions.

In more detail

ListCo’s acquisition of money lending business 

In June 2017, the ListCo group acquired a subsidiary which, in turn, held a money-lending licence in Hong Kong. The consideration was less than HKD 1.5 million, which was described by the Applicants (and accepted by the Court) as “insubstantial”.

In February 2018, a new director (who had previously been in charge of the money lending business acquired by the ListCo) joined the ListCo and took up the roles of Chief Executive Officer (CEO), Chairman and Executive Director.  

Inquiries ought to be made by the Applicants

Between June 2018 and March 2019, the ListCo (through the newly acquired subsidiary) granted 12 loans to nine different borrowers in the total amount of almost HKD 75 million (“Loans“). 

The Applicants explained that they only became aware of the first Loan in around September 2018 (i.e., three months after the first loan), and were told that this was a “one-off” loan upon making inquiries with the ListCo’s management. It was in those circumstances that the Applicants were satisfied not to take steps to improve internal controls for the money lending business.

Such argument was rejected by the Court. The truth was that by September 2018, nine loans had already been granted.  The Court pointed out that the then “rudimentary” Money Lending Policy of the ListCo suggested that the money lending business ought to have involved not just the CEO, but some other personnel (e.g., the CFO, the Administrative Manager, etc.) too. If the Applicants had made inquiries with those personnel, the Applicants would likely have found out that the first Loan was not a “one-off” transaction. If those personnel had no knowledge of the Loans, the Applicants would have discovered that the Money Lending Policy had not been followed.

Undisclosed issues flagged by the auditors 

During the preparation of the 2018/19 Interim Report, the ListCo’s auditors raised issues about the inadequate internal control in terms of approving and granting loans. Nevertheless, these issues were eventually not disclosed in the said Interim Report as the CEO assured the Applicants that the ListCo would ensure the due repayment of the Loans. The Audit Committee (including the Applicants) resolved to recommend the Interim Report to the board for adoption. 

Subsequently, all the borrowers defaulted on the Loans, and the ListCo incurred substantial losses as a result.

LRC’s decision 

The Listing Committee found that the Applicants had violated Rule 3.08 of the Listing Rules and their Director’s Undertakings for (i) the inadequate internal controls in place at the ListCo and (ii) the inaccurate disclosure in the 2018/19 Interim Report at the relevant times. The LRC upheld the decision. 


  • This case once again demonstrates that it is difficult to seek leave to apply for judicial review of the Listing Committee’s or LRC’s decision. It is an uphill battle for issuers and/or directors to persuade the Court that there is reasonably arguable error of law in the approach taken by the LRC or its decision is irrational.  
  • We are frequently asked to advise on the extent of listed companies’ and INEDs’ duties in respect of internal control. This judgment shows that the duties are extensive and all directors and INEDs should understand the business operations and ensure the corresponding internal controls are adequate and effective. 
  • Issuers should put in place relevant internal controls before commencing any (new) business  instead of when or after it is commenced.  Audit Committees have primary responsibility for monitoring and overseeing that the internal controls are adequate and effective. Existence of a policy alone is not sufficient if such policy is not fit for purpose or deficient.   
  • Although the Court shared empathy with the Applicants’ position that they were to an extent “blindsided” at the time, the Applicants were nevertheless responsible for taking steps necessary to ensure that the management had performed its duty to establish an internal control system. These duties could not be delegated, otherwise it will defeat the whole point of having INEDs and an Audit Committee.  
  • In this case, the Applicants also argued that the LRC failed to consider the “expert evidence” related to the assessment as to the immateriality of the expected credit loss. The Court made a note of caution as regards the status and quality of such “expert evidence”. The judge noted that the LRC is a tribunal comprised of members who can be expected (at least as a body) to have the relevant knowledge or expertise to determine what is or is not material.

Cynthia Tang is the head of the Dispute Resolution Group for the Firm’s Hong Kong and China offices. She has over 25 years of experience in Hong Kong and Asia. Chambers Asia Pacific, PLC Which Lawyer? and Asia Pacific Legal 500 have ranked her as one of the leading lawyers in the Financial Services/Regulatory field for five consecutive years. She previously served on a number of committees in the Securities and Futures Commission and is currently appointed by the Hong Kong Government as a Member of the Standing Committee on Company Law Reform and Disciplinary Panel A of the Hong Kong Institute of Certified Public Accountants. She is also a China-Appointed Attesting Officer.


Bryan Ng is a partner in Baker McKenzie's Hong Kong office and a member of the Firm's Dispute Resolution Group. He has written articles and delivered trainings and seminars on topical issues including regulatory enforcement matters.


Cheryl Tang is an Associate in Baker McKenzie, Hong Kong office.

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