Jurisdiction - Hong Kong
Hong Kong – Listed Company, New Listing Decision LD86- 2015, Cash Flow During Non-Compliance Period Not To Count Towards Minimum Cash Flow Requirement.

4 June, 2015


Listing Decision LD86-2015, which was published on 24 April 2015, confirmed that the cash flow generated by a listing applicant during a period of non-compliance should not be counted towards the calculation of minimum cash flow under the GEM Listing Rules.
The listing applicant, Company A, operated in an industry which required compliance with certain regulations (the “Regulations“). The Regulations expressly prohibited the carrying out of that particular business unless all the requirements under the Regulations had been complied with. Any breach of the Regulations was an imprisonable offence. Company A failed to comply with the Regulations for 22 months during its track record period. For the purposes of its listing application, exclusion of the cash flow generated from the business during this period of non-compliance meant that Company A would not meet the minimum cash flow requirement under Rule 11.12A of the GEM Listing Rules.
Despite its failure to comply with the Regulations, the legal advisers to Company A were of the view that the income generated during this period of non-compliance was not illegal because:
  • the Regulations did not stipulate that income generated during this period was illegal or will be confiscated; and
  • the relevant income generated during this period would not be rendered illegal under any other legislation.
Company A’s sponsors also believed that the incidents should not affect the suitability and competence of the directors due to their lack of familiarity with the Regulations, the incidents did not involve any fraud or dishonesty, and the acts were unintentional. After the non-compliant incidents had ceased, the directors had also attended a seminar on relevant laws and regulations on the business.
In the Hong Kong Stock Exchange’s analysis, it considered that compliance with the Regulations was fundamental and a pre-requisite for the legal operation of Company A’s business. It also considered the severity of the penalty imposed. In this case, breach of the Regulations, which were fundamental to Company A’s business, was serious in nature and lasted for a substantial part of the track record period. As such, the non-compliant cash flow could not be regarded as being generated in the ordinary and usual course of its business and therefore should be excluded from the minimum cash flow calculation under the GEM Listing Rules. As a result, Company A was not able to meet the minimum cash flow requirement and was not eligible for listing.
Hogan Lovells 

For further information, please contact:


Jamie Barr, Partner, Hogan Lovells



Tim Fletcher, Partner, Hogan Lovells



Terence Lau, Partner, Hogan Lovells



Mark Parsons, Partner, Hogan Lovells



Nelson Tang, Partner, Hogan Lovells



Thomas Tarala, Partner, Hogan Lovells



Steven Tran, Partner, Hogan Lovells



Hogan Lovells Capital Markets Practice Profile in Hong Kong


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