SFC action against CMR serves as test case for HK laws involving mainland China firms
Monday, 23 February, 2015, 8:37pm
A victory for the regulator will set the scene for a tough battle by HK-appointed liquidators to secure China Metal Recycling’s mainland assets
The Securities and Futures Commission is set to take landmark legal action today against China Metal Recycling (Holdings) in a court case that will test laws to sanction mainland Chinese firms listed in the city. The securities regulator forced China Metal Recycling, which describes itself as the country’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 the securities law, designed to protect investors, in the case of a listed firm. Today, the SFC will go before the High Court to wind up the company 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, the Asian Corporate Governance Association’s research director for mainland 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 commission would represent a breakthrough in the watchdog’s policing of mainland 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 – an attempt by Hong Kong-appointed liquidators to secure China Metal Recycling’s assets in mainland China.
The SFC and the courts have limited authority outside Hong Kong, which means reaching beyond the city’s borders to dismantle CMR Group, a Cayman Islands-incorporated holding firm, will be difficult. The recycler has operations in Hong Kong and Macau, but its most valuable assets are in mainland China.
In an added complication for the regulator, the company is subject to separate reorganisation and bankruptcy court proceedings in mainland China.
The SFC alleges that China Metal Recycling overstated its financial position in its prospectus for a 2009 initial public offering. The allegations were outlined in a High Court judgment in November last year.
The commission says about 38 per cent, 64 per cent and 90 per cent of the company’s gross profits for 2007, 2008 and 2009, respectively, were fictitious.
The regulator’s winding-up petition, summarised in the November judgment, alleged there was evidence that China Metal Recycling chairman Jacky Chun Chi-wai was 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 judgment shows the SFC argued China Metal Recycling created fake steel transactions between its wholly owned subsidiary Central Steel Macao and its top three suppliers to inflate revenues and profits.
Separately, transactions arranged by the metal recycler’s subsidiaries in mainland 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 source familiar with the investigation.
In April last year, the Shanghai Pudong New Area People’s Court found that a CMR Shanghai subsidiary conducted fictitious transactions. It 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 mainland China, reorganisation and bankruptcy proceedings, brought by creditors against six of the recycler’s mainland Chinese units, are under way. Such proceedings may leave Hong Kong creditors with a long wait.
“Securing and realising CMR’s assets will not be a straightforward process,” said Cosimo Borrelli, the founder of Borrelli Walsh, appointed in Hong Kong as the provisional liquidator of the recycler. “But the provisional liquidators will … pursue all the available means to protect CMR’s stakeholders.”