As possibly the last shoe to fall as a result of the demise of former NZX -listed company QEX Logistics Limited, QEX along with Jingjie Xue – who was its founder, director and CEO have been ordered to pay civil penalties $875k and $175k respectively. Mr Xue has also been banned as a director of any FMC reporting entities for 3 years.
This is the first time that the FMA has issued civil proceedings for a breach of the financial reporting obligations in the FMC Act.
The penalties and ban were imposed by the High Court after QEX failed to prepare and file its annual financial statements for several years. QEX was suspended and then delisted from the NZX because of breaches of the NZX Listing Rules. Those breaches led to two substantial fines and censures at the hands of the NZX Markets Disciplinary Tribunal.
Background
While QEX was listed on the NZX, it undertook a capital raise – which was a ‘regulated offer’ under the FMC Act. As a result, it was a ‘FMC reporting entity’ for the purposes of the FMC Act.
QEX was delisted from NZX as a result of breaches of its continuous disclosure and corporate governance obligations. Theses breaches included the non-filing of financial statements.
As an FMC reporting entity, QEX was required to lodge audited financial statements with the Registrar of Companies within 4 months of its balance date. Having failed to do so for the 2021, 2022 and 2023 financial years, the FMA brought proceedings alleging breaches of the financial reporting obligations of FMC reporting entities in Part 7 of the FMC Act.
[Spoiler alert: a breach triggers accessory liability, for directors under Part 8 of the FMC Act.]
After the High Court’s decision, the FMA press release noted that the proceedings were brought in this case because hundreds of shareholders were left without important financial information due to poor management.
Sadly, it seems that nowhere in either the press release or the decision itself was there any discussion about the impact of the penalty. Put simply, it is borne by the shareholders. The very people the legislation and the FMA seeks to protect.
QEX is now earmarked for removal from the Companies Register for non-filing of annual returns. Shareholders have not received financial statements since 2020. Whilst the judgment refers to a payment plan for the penalty against Mr Xue, it seems unlikely that the company penalty will be paid. The FMA’s concerns about poor management should have led it to push to preserve whatever remaining assets remained for the benefit of shareholders. However, the fact that QEX was unrepresented in the High Court proceedings would suggest that there is little to be claimed by shareholders.
Takeaways
The QEX decision is a sharp reminder, for FMC reporting entities, of their compliance obligations – particularly those for financial reporting obligations.
This is a matter for those which have made a regulated offer under the FMC Act, or which fall into the FMC reporting entity bracket because of shares or other securities which were issued under the (old) Securities Act prospectus regime – and which remain on issue. (Unless they can bring themselves under the 50-shareholder threshold).
The prospect of accessory liability underlines the point that directors, particularly, must ensure that these financial reporting obligations are met – or face the prospect of personal liability (and a banning order as well). Although, in this case, the penalty for Mr Xue was only 20% of that for the (unrepresented) company and the Court accepted a payment plan proposal.
For more information, please do not hesitate to contact me.