On August 11, the Hong Kong Stock Exchange issued a notice censuring Mr. Xu Jinghui, former independent non-executive director of CHINA AOYUAN (03883). It further instructed Mr. Xu to complete 17 hours of training on regulatory and legal issues, as well as Listing Rules compliance matters, including two hours on Listing Rule 2.13 and three hours each on: (i) director duties; and (ii) the Corporate Governance Code.

The case involves Mr. Xu failing to act with the requisite skill, care, and diligence during his tenure as independent non-executive director and audit committee member of the company. He also failed to ensure that the company and its subsidiaries (the Group) established adequate internal control measures and processes for, among other things, the Group's centralized treasury management function. This function involves centralizing and transferring funds among subsidiaries to enhance capital efficiency, including providing mutual financial support for general working capital purposes. However, the internal control measures and processes for this function had significant deficiencies. For example, relevant policies had not been updated or revised for years, and no effective measures were in place to avoid or manage conflicts of interest and duties.

These deficiencies allowed a subsidiary of the company, which was also listed on the Hong Kong Stock Exchange at the time, to provide a total of RMB 3.3 billion in financial assistance to the company between January 1, 2021, and March 31, 2022, without approval from the subsidiary's board of directors. The subsidiary also failed to comply with the applicable announcement, circular, and independent shareholder approval requirements under the Listing Rules.

According to Mr. Xu, the centralized treasury management function had been in place for at least 10 years. He acknowledged being aware that the function was led, managed, and/or supervised by two common directors of the company and the subsidiary, but he lacked understanding of the activities, operational processes, or policies of the function. The Hong Kong Stock Exchange determined that Mr. Xu did not actively concern himself with the operation of the centralized treasury management function.

Furthermore, both before and after the subsidiary's spin-off listing in March 2019, Mr. Xu failed to take sufficient action in response to the spin-off to assess or review: (i) the potential risks, including regulatory and other risks, arising from the continued operation of the centralized treasury management function after the subsidiary's listing; or (ii) whether the relevant internal control measures and processes were adequate and effective to ensure compliance with the Listing Rules by all entities within the Group, including the subsidiary (which remained a subsidiary of the company after its listing and during the relevant period).

In claiming to have fulfilled his duties, Mr. Xu stated that he relied on the operational team, internal audit department, and auditors to report or escalate any issues to him. He also assumed that the subsidiary, as an independent listed issuer, had already established adequate and effective risk management and internal control measures. The Hong Kong Stock Exchange was not satisfied that Mr. Xu had discharged his duties regarding the Group's internal control measures and processes.