Victory City: Corporate Governance Risks for International Investors

Victory City International Holdings Ltd. was principally engaged in the textile businesses and had subsidiaries in mainland China that manufactured and sold its own products. The company was founded in 1983 in Hong Kong, and it was listed on the main board of the Hong Kong Stock Exchange (SEHK: 539) in 1996. On 22 February 2021, Victory City announced that, on 22 January 2021, Deloitte had obtained two credit reports as evidence that two of its main subsidiaries in mainland China had outstanding bank loans in the aggregate amount of CNY946m (USD148m). According to the credit reports, Victory City's mainland subsidiary signed bank facilities of CNY994m (USD156m) on 11 December 2020 with mainland banks, and a substantial portion of these loan amounts was not recorded in the consolidated financial statements of the company. If Deloitte's findings were valid, the company's management had possibly committed accounting fraud and embezzled funds by transferring a substantial portion of the unrecorded loan of CNY946m (USD148m) to their own pockets. After 22 January 2021, Deloitte, as the whistleblower, suggested remedial actions that the company should take, but no significant governance response was received and the management in Hong Kong denied any knowledge of the bank loans or the location of the funds. On 11 February 2021, Victory City filed a winding-up petition; it stated as one of the reasons that it had defaulted on a scheduled bank loan repayment of approximately HKD290m (USD37m) to a syndicate of banks in Hong Kong. On 19 March 2021, the Hong Kong government's Financial Reporting Council (FRC) initiated an investigation into Victory City's financial statements to determine the extent of the unrecorded loans. In addition, FRC was investigating whether Deloitte had conducted its work in accordance with the relevant auditing standards. Victory City requested that the trading of its shares be suspended at SEHK, effective 22 March 2021. On 27 April 2021, the

• Government policy and regulation
• Manufacturing strategy
• Corporate governance