[HONG KONG] Hong Kong's securities regulator is set on Tuesday to take landmark legal action against China Metal Recycling Holdings Ltd in a court case that will test laws to sanction mainland Chinese companies listed in its market.
The Securities and Futures Commission (SFC) forced China Metal Recycling (CMR), which describes itself as China's biggest recycler of scrap metal, into provisional liquidation in July 2013, alleging it had found evidence of accounting fraud. The action was the first time the regulator used a special provision of Hong Kong's securities law, designed to protect investors, in the case of a listed company.
On Tuesday, the SFC goes before the Hong Kong High Court to wind up CMR with the aim of recovering as much value as possible for shareholders and creditors. "This is a critical test for the SFC," said Michael Cheng, Asian Corporate Governance Association's research director for China and Hong Kong. "What the SFC has to demonstrate is that regardless of where a company is incorporated, or where its assets are located, the regulator will go after it." A victory for the SFC would represent a breakthrough in the watchdog's policing of Chinese companies listed in its market by establishing for the first time its ability to force rogue listed companies into liquidation when it sees a public interest.
But a victory would also set the scene for a potentially tougher battle ahead - an attempt by Hong Kong-appointed liquidators to secure CMR assets on the mainland.
The SFC and the courts have limited authority outside of Hong Kong, which means reaching beyond the territory's borders to dismantle CMR Group, a Cayman Islands incorporated holding company, will be difficult. CMR has operations in Hong Kong and Macau, but its most valuable assets are in mainland China.
In an added complication for the SFC, the metal recycling company is subject to separate reorganisation and bankruptcy court proceedings in China.
The SFC declined to comment. Calls and emails to CMR were not answered.
Mainland companies account for around 60 per cent of Hong Kong listings. A record 66 Chinese firms were listed on the Hong Kong market in 2014, Thomson Reuters data shows.
At least 20 Hong Kong stocks, most of which are mainland Chinese companies, are currently suspended by Hong Kong stock exchange due to irregularities or investigations, a Reuters analysis of exchange announcements shows.
The SFC alleges that CMR overstated its financial position in its prospectus for a 2009 initial public offering. The allegations were outlined in a high court judgement relating to the case that was handed down in November.
The SFC says around 38 per cent, 64 per cent and 90 per cent of CMR's gross profits for the years 2007, 2008 and 2009, respectively, were fictitious.
The SFC's winding up petition, summarised in the November judgement, alleged there is evidence CMR Chairman Jacky Chun Chi-wai was directly involved in the fraud and might have orchestrated it.
Chun has denied any wrongdoing. A lawyer representing Chun said his client was not available for comment.
The November judgement shows that the SFC argued CMR created fake steel transactions between its wholly owned subsidiary Central Steel Macao and its top three suppliers to inflate revenues and profits. Central Steel Macao could not be reached for comment.
Separately, transactions arranged by CMR subsidiaries in China allowed the firms to access short-term borrowing, using bank acceptance bills, which they then allegedly used to finance a lending scheme, said a person familiar with the investigation, requesting anonymity because he is not authorised to speak to the media.
In April, 2014, Shanghai Pudong New Area People's Court found that a CMR Shanghai subsidiary conducted fictitious transactions. The court said CMR Shanghai used "legal means to cover an illegal purpose" by arranging trade finance deals with a supplier designed to make "profits by money lending".
In China, reorganisation and bankruptcy proceedings, brought by creditors against six separate CMR mainland subsidiaries, are under way.
CMR's top creditors on the mainland include Bank of China Ltd and Industrial and Commercial Bank of China Ltd , which are pushing for a corporate reorganisation, court filings show.
Such proceedings may leave Hong Kong creditors with a long wait. "Securing and realising CMR's assets will not be a straight forward process," said Cosimo Borrelli, founder of insolvency specialist Borrelli Walsh, appointed in Hong Kong as the provisional liquidator of CMR. "But the provisional liquidators will use their best endeavours to pursue all the available means to protect the interests of CMR's stakeholders."