The Hong Kong Stock Exchange has taken disciplinary action against ORIENTSEC INT (08001) and six former directors. The Hong Kong Stock Exchange condemned ORIENTSEC INT and issued director unsuitability statements and condemnations for the company's former executive director Ms. Li Yazhen, former independent non-executive director Mr. Xiao Jianwei, and former independent non-executive director Ms. Chen Minyi. The exchange issued an investor prejudice statement and condemnation for the company's former independent non-executive director Mr. Deng Zongwei. The exchange criticized the company's former executive director Ms. Sun Tianxin and former independent non-executive director Ms. Lu Xuanling.
The director unsuitability statement means that the Stock Exchange considers Ms. Li, Mr. Xiao and Ms. Chen unsuitable to serve as directors or senior management members of the company or any of its subsidiaries. The investor prejudice statement means that the Stock Exchange considers that if Mr. Deng remained as a director on the company's board, it would prejudice investors' interests.
This case involves serious board negligence in failing to properly manage and supervise the company's money lending business. Despite increasing borrower defaults and auditor warnings regarding the enforceability of multiple loans, the company's directors failed to take action to protect the company's assets, resulting in significant impairment losses for the company.
It is understood that from 2015 to 2022, ORIENTSEC INT granted multiple loans totaling HK$378 million (including interest) to various individual clients and extended loan terms. The company conducted only high-level due diligence before granting loans or extending loan terms, and failed to (among other things) ensure that relevant mainland China properties were properly registered as loan collateral, so that the company could enforce the collateral in case of borrower default.
The company's auditors had warned the company's audit committee as early as 2018 that loan collateral was not registered, which would greatly reduce the enforceability of the collateral, and requested the audit committee to inform the company of the situation. Despite repeated warnings from auditors and borrowers' failure to repay most of the loan principal and interest over the years, the company and its directors still did not take sufficient measures to protect the company's assets and continued to extend loan terms.
Eventually, all borrowers defaulted on their loans, and the company made an impairment provision of HK$145 million in the 2022/23 financial year. As of March 31, 2024, the total confirmed impairment losses amounted to HK$181 million.
An internal control review revealed multiple internal control deficiencies at the company, which led to its continued inability to conduct proper due diligence, register loan collateral, take sufficient measures to address loan defaults, and ultimately protect its own assets. The internal control deficiencies also resulted in the company's failure to identify that loan and payment extensions constituted notifiable transactions, and therefore failed to disclose such transactions in a timely manner or seek shareholder approval for them.