HKSI Paper 1 Market misconduct and improper trading practices question: director of Tai Hang Foods Ltd

HKSI Paper 1Market misconduct and improper trading practices

Grace Leung, a director of Tai Hang Foods Ltd, a listed company, knows of unannounced results well above forecast. Needing HK$3 million for her mother's urgent surgery, she sells some of her Tai Hang shares. What is her position under Part XIII?

A She has a defence only if the board chairman approved the sale in writing before she placed the sell order
B She has no defence, as the only defences for individuals are the director-qualification, underwriting and liquidator ones
C She has a defence if she shows her purposes did not include profiting or avoiding a loss by using the information
D She has no defence, as a director may never deal in the company's shares while holding inside information

Show the answer and explanation

Answer: C. She has a defence if she shows her purposes did not include profiting or avoiding a loss by using the information

Section 271(3) of the SFO (criminal equivalent s.292(3)) provides that a person is not regarded as engaging in insider dealing if he establishes that the purposes of the dealing did not include securing or increasing a profit, or avoiding or reducing a loss, by using inside information. Selling before good news to raise cash for surgery fits that defence, and the burden of establishing it is on Grace. The s.271(1) list (qualification shares, underwriting, liquidators) is not the only defence. Part XIII sets no rule that a director may never deal, and a chairman's approval is not a statutory condition; dealing during a results blackout raises separate Listing Rules Model Code issues. Source: SFO (Cap. 571) s.271(1), (3); s.292(3) (as at October 2026). Source: SFO (Cap. 571) s.270(1)(a), s.271(1), (3); criminal equivalent s.292(3) (as at October 2026).

Common mistake

Candidates learn the three s.271(1) defences and forget the general purpose defence in s.271(3), which the person must establish.

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