Financial regulation

Can Hong Kong’s regulator help out-of-pocket shareholders collect on Qunxing’s fraud penalty?

Qunxing Paper Holdings was ordered to pay HK$1.42 billion to 27,000 investors for fraud, but the company has only HK$112 million of assets in Hong Kong.

PUBLISHED : Thursday, 08 February, 2018, 4:37pm
UPDATED : Thursday, 08 February, 2018, 11:35pm

Qunxing Paper Holdings, a Chinese printing company that was kicked off the Hong Kong stock exchange last year for fraud, has been ordered to compensate the 27,000 investors who have invested in it since its 2007 initial public offering, closing the final chapter in the company’s decade-long journey from boom to bust.

Qunxing Paper goes into receivership under court order

The wallpaper printer, based in Bingzhou city in Shandong province, must pay HK$1.42 billion (US$181.6 million) to shareholders because it had misled them with false financial information, according to Hong Kong’s Securities and Futures Commission, citing a verdict by the Court of First Instance.

Qunxing’s founder and former chairman Zhu Yuguo, and his son Zhu Moqun, as well as a subsidiary called Best Known Group were found to have disclosed false or misleading information in Qunxing’s 2007 stock offer prospectus, as well as overstating its turnover while understating its debts in the company’s earnings announcements from 2007 to 2011, according to the regulator.

The court also instructed Qunxing to pay Victory Asset Management, which bought 206.56 million unlisted warrants of the company in January 2011. Bruno Arboit of Zolfo Cooper was appointed to administer the payout.

However, Qunxing was liquidated in 2014 under close to 5 billion yuan (US$790 million) of debt in mainland China, and claimed to have only HK$112 million of assets in Hong Kong.

The case underscores the lack of protection for Hong Kong’s investors when the cash and assets of the companies they’ve invested in are based outside the city’s jurisdiction. Even if investors win the day in the city’s courts, the regulators are powerless to get the money back for investors.

“It has always been a problem for Hong Kong’s regulators and liquidators,” said Alan Tang Chung-wah, a partner at accounting firm ShineWing (Hong Kong), and head of specialist advisory services.  “With more Chinese companies seeking to list in Hong Kong, there’s a dire need for the mainland government to work a mechanism to improve the protection of creditors and shareholders outside the mainland.”

Trading in Qunxing’s shares have been halted since March 30, 2011, after its auditor raised the alarm over the company’s 2010 annual results. It hadn’t filed any financial results since 2013.

Hong Kong’s regulator began to take legal actions since the end of 2013 to freeze HK$1.9 billion of assets on Qunxing’s books. However, only HK$112 million, or 8 per cent of the total assets, were located in Hong Kong.

The SFC in early 2014 obtained a Hong Kong court order to appoint interim receivers to take over the management of Qunxing Paper, while the commission had expressed its concerns over the company’s management integrity.

Hong Kong Exchanges and Clearing in November last year cancel the listing status of the company.