Hong Kong Stock Exchange: Disciplinary Action Against Xu Jinghui, Former Independent Non-Executive Director of CHINA AOYUAN (03883)

On August 11, the Hong Kong Stock Exchange announced that it condemns Mr. Xu Jinghui, the former independent non-executive director of CHINA AOYUAN (03883), and further directed Mr. Xu to complete 17 hours of training on regulatory and legal issues as well as compliance matters relating to the Listing Rules. This includes two hours on the content of Article 2.13 of the Listing Rules and three hours each on the following topics: (i) directors' responsibilities; and (ii) the Corporate Governance Code. This case involves Mr. Xu's failure to act with the requisite skill, care, and diligence during his tenure as an independent non-executive director and a member of the audit committee of the company. He also failed to ensure that the company and its subsidiaries (the Group) established adequate internal control measures and processes regarding (among other things) the Groups centralized fund management functions. The centralized fund management functions involve the pooling and allocation of funds among the subsidiaries to enhance the efficiency of fund utilization (including mutual funding for general working capital purposes), and there were significant deficiencies in the internal control measures and processes related to these functions. For example, relevant policies had not been updated or revised for many years, and there were no effective measures in place to avoid or manage conflicts of interest and duty. The aforementioned deficiencies allowed a subsidiary of the company, which was also listed in Hong Kong, to provide a total of RMB 3.3 billion in financial assistance to the company without the approval of the subsidiary's board of directors between January 1, 2021, and March 31, 2022. The subsidiary also failed to comply with applicable announcements, circulars, and independent shareholder approval requirements under the Listing Rules. According to Mr. Xu, the centralized fund management function had been established for at least 10 years. He acknowledged being aware that the function was led, managed, and/or overseen by two joint directors from the company and the subsidiary, but lacked understanding of the activities, operational processes, or policies associated with that function. The Hong Kong Stock Exchange ruled that Mr. Xu did not actively monitor the operation of the centralized fund management function. Furthermore, before the subsidiary was spun off and listed in March 2019 (and after the spin-off was completed), Mr. Xu did not take adequate actions in response to the spin-off to assess or review (i) the risks (including regulatory and other risks) that might arise from the continued operation of the centralized fund management function after the subsidiary's listing; or (ii) whether the relevant internal control measures and processes were sufficient and effective to ensure that the companies within the Group (including the subsidiary, which remained a subsidiary of the company during and after the listing period) complied with the Listing Rules. Regarding Mr. Xu's claim that he fulfilled his duties, he stated that he relied on the operational team, internal audit department, and auditors to report any relevant issues to him. He also assumed that the subsidiary, as an independent listed issuer, had in place sufficient and effective risk management and internal control measures. The Hong Kong Stock Exchange does not accept Mr. Xu's claim that he fulfilled his responsibilities regarding the Group's internal control measures and processes.