THE OFFICIAL RECEIVER v. PHILIP LEIGH TOSE AND OTHERS

HCMP 112/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 112 OF 2002

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J U D G M E N T

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1.  This is an application by the Official Receiver for an order for disqualification against the 1^st and 2^nd respondents herein, Philip Leigh Tose and Wong Wing Cheong Peter, pursuant to section 168H of the Companies Ordinance, Cap. 32. The respondents were the former directors of Peregrine Investments Holdings Limited (“PIHL”) and a subsidiary, Peregrine Fixed Income Limited (“PFIL”).

2.  The Official Receiver and the 1^st and 2^nd respondents have reached agreement for this application to be dealt with summarily by way of the Carecraft procedure, on the basis of agreed facts.  Hence, there were placed before the court two “Statements of Facts Not in Dispute” dated 12 May 2004 and 28 May 2004, relating to the 1^st and 2^nd respondents, which are annexed to this judgment as Schedules 1 and 2, and I shall refer to them in this judgment accordingly.  It has also been agreed between the parties that, subject to the approval of the court, a period of disqualification of three years is appropriate for the 1^st respondent and a period of disqualification of four years is appropriate for the 2^nd respondent.

Use of the Carecraft procedure

3.  This summary procedure, which originated from the decision of Ferris J in In re Carecraft Construction Co. Ltd. [1994] 1 WLR 172, was approved by the English Court of Appeal with modifications in Secretary of State for Trade and Industry v. Rogers [1996] 1 WLR 1569.  The procedure has been adopted in Hong Kong (Re Design Positive Architects Planners Ltd., Official Receiver v. Chan Min Simon, HCMP No. 6570 of 2000, [2002] HKEC 1085, 26 August 2002, Yuen J; Re Emperor Hotel Management Co. Ltd. [2002] 3 HKLRD 805).

4.  As stated in Rogers, supra. at 1571G to H, the purpose of this procedure is to enable disqualification proceedings to be dealt with summarily in these circumstances where:

“(a)   facts regarding the director’s conduct in managing the company or companies in question are either agreed or, at least, are not disputed;

(b)     the Secretary of State [the Official Receiver in our case] is willing for the case to be dealt with by the judge on the agreed (or not disputed) facts and does not consider it necessary to endeavour to prove the additional facts that have been alleged in the evidence filed in support of the summons;

(c)     the director is willing for the case to be dealt with by the judge on the agreed (or not disputed) facts and does not dispute that those facts require the court to make a disqualification order under section 6 of the Act [i.e. the Company Directors Disqualification Act 1986, the legislative provisions in Hong Kong are closely modelled on this Act]; and

(d)     the Secretary of State and the director have reached agreement either as to the length of the disqualification order that would be appropriate or, at least, as to the bracket of years into which the disqualification period should fall.”

5.  Where this procedure is employed, no oral evidence will be led.  The court is informed of the length or the range of the disqualification period which the parties have agreed is appropriate and they will address the court on the basis of an agreed statement of facts placed before the court.  By adopting this procedure, the court will be confined to the facts upon which it can base its judgment.  Thus, the court is not allowed to make a finding which is outside the agreed statement of facts, even though the period of disqualification imposed was the same as that agreed by the parties as appropriate, as in Rogers.  Nor should the court decline approval of a Carecraft settlement and recommend a longer period of disqualification by having regard to materials not contained in the agreed statement of facts, as in Re SIG Security Services Ltd., Official Receiver v. Bond [1998] BCC 978.

6.  Disqualification proceedings are in the nature of civil proceedings.  There is nothing untoward, in an adversarial procedure, for parties to limit the facts placed before the court in civil proceedings without the judge’s consent.  In reaching a settlement with the director on the use of this procedure, it goes without saying that the Official Receiver will have regard to the public interest in deciding which allegations he should pursue and which allegations need not be proceeded with, see section 168I(1) of Cap. 32.  The public interest “lies in the protection of the public against persons acting as directors or shadow directors of companies who are unfit to do so”, and “that in turn involves ensuring, so far as possible, that disqualification orders of appropriate length are made in all cases which merit such orders and that they are made as speedily and economically as is reasonably practicable” (Official Receiver v. Cooper [1999] BCC 115 at 117B).  If the judge feels strongly that the course taken by the Official Receiver is ill advised, he can invite the Official Receiver to reconsider his position over a short adjournment (Rogers, supra. at 1573H).  That said, the court has no power to require the Official Receiver to open and rely on any particular part of the evidence in the case against the wishes of the Official Receiver (Rogers, supra. at 1573F to 1574E; Re SIG Security Services Ltd., supra. at 982H to 983A).

7.  Mr Harris, appearing for the respondents, submitted that if this court should hold a different view as to the periods of disqualification agreed by the parties as appropriate, the court should not make any finding and the application should be placed before another judge for a full hearing.  He relied on what was recorded as “common ground” between the parties in Carecraft, supra. at 179E to F.  He said his present instructions were to consent to the use of the Carecraft procedure only if the periods of disqualification agreed as appropriate were approved by the court.

8.  Mr Godfrey Lam, appearing for the Official Receiver, took a different position as to what the court might do where the Carecraft procedure is employed.  He put forward four possible scenarios:

(1)     the court might take the view that the use of this procedure is not appropriate, for instance, where serious allegations are watered down or not pursued, and although the court cannot require the Official Receiver to present his case in a particular way, the court might ask the Official Receiver to reconsider his position;

(2)     the court might take the view that the agreed facts do not disclose a case that the director’s conduct makes him unfit to be concerned in the management of a company, in which case the court would dismiss the application for a disqualification order;

(3)     the court might accept that the agreed facts do disclose a case that the director’s conduct makes him unfit to be concerned in the management of a company and so a disqualification order is mandatory, but might not accept that the period of disqualification agreed by the parties is appropriate, in which case it would be open to the court to impose a different term based on the agreed statement of facts;

(4)     the court might accept the agreed facts do disclose a case that the director’s conduct makes him unfit to be concerned in the management of a company as well as the term of disqualification agreed by the parties as appropriate, in which case the court would make a disqualification order in the period as agreed.

9.  Mr Lam also submitted that in scenario (3), if the court should take the view that an appropriate period of disqualification should fall within a different bracket, as a matter of fairness to the parties, the court might wish to notify the parties of its view so they could reconsider whether they should still ask the court to dispose of the application by using the Carecraft procedure.  If the court should have doubts as to whether the period should fall within the agreed bracket, “the doubts should be voiced at the earliest possible moment so that the parties can consider whether they, or either of them, would prefer a full trial” (Rogers, supra. at 1575B).

10.  I agree with Mr Lam’s analysis and submissions.  The use of this procedure “does not mean that the Court could or would be asked to simply make a consent order” (Re Design Positive Architects Planners Ltd., supra., para. 12).  In giving approval for the use of this summary procedure, the courts have emphasised that it remains a matter of judicial judgment whether the agreed facts warrant a finding that a director’s conduct makes him unfit to be concerned in the management of a company, and that the disqualification period should be of a particular period (Carecraft, supra. at 181C to D; Rogers, supra. at 1574E to G).  As stated in the latter decision at 1574H to 1575A:

“In summary, Carecraft procedure can effectively, and without the judge’s consent, limit the facts on which the judge can base his judgment as to the order that should be made; but Carecraft procedure cannot oblige the judge to make a disqualification order and cannot bind him as to the period of disqualification to be imposed.”

11.  Clear statements to similar effect were made by Rimer J in Re BPR Ltd. [1998] BCC 259 at 260D to E:

“The parties’ recognition of what is an appropriate period does not, as it seems to me, bind the court.  I have a discretion in the matter as to what is the right period, although it would not be right for me to disqualify these respondents for periods which are materially different from those to which they effectively consent without first giving notice to them of any such intention to do so, so that they could, if so advised, in that circumstance reconsider their position.”

12.  In this instance, I had at the outset of the hearing made known to the parties my reservations if the agreed periods of disqualification are appropriate, particularly in respect of the 1^st respondent.  I invited submissions as to the reasoning behind the disparity in the periods of disqualification proposed for the two respondents.  I did not envisage what I might regard as appropriate terms of disqualification for the respondents on final deliberation would be different from what was proposed by a very wide margin, otherwise the parties would have been told and asked to reconsider if they still intended to proceed by the Carecraft procedure.  It would be very rare and unusual if the court should take the view that an appropriate period of disqualification would come within an entirely different range, as the court would be restricted to the agreed statement of facts which, if properly drawn up, should be clear and unambiguous, with “no room or need for infilling or interpretation by way of inference of secondary fact” (Re PB Banarse & Co. (Products) Ltd. [1997] BCC 425 at 429C).  Nevertheless, I consider it within my power to impose a different term of disqualification period for the respondents, provided that my judgment is founded on the facts agreed in respect of each of them.

The case for a disqualification order

13.  Section 168H(1) of Cap. 32 makes it mandatory to make a disqualification order against a person where the court is satisfied of these matters:

“(a)   that he is or has been a director of a company which has at any time become insolvent whether while he was a director or subsequently; and

(b)     that his conduct as a director of that company, either taken alone or taken together with his conduct as a director of any other company or companies, makes him unfit to be concerned in the management of a company.”

14.  Section 168H(2) provides that for the purpose of this section, a company becomes insolvent if, inter alia, the company goes into liquidation at a time when its assets are insufficient for the payment of its debts and other liabilities and the expenses of the winding up.  Insolvency is clearly established here, see paragraphs 18 and 19 in each of Schedules 1 and 2.

15.  By virtue of section 168K(1), in determining whether a person’s conduct as a director of any particular company or companies makes him unfit to be concerned in the management of a company, the court shall have regard “in particular” to the matters stated in Part I of the 15^th Schedule to Cap. 32 in all cases and to the matters mentioned in Part II of that Schedule where the company has become insolvent.  Relevant matters in this instance would include the following:

(1)     any misfeasance or breach of any fiduciary or other duty by the director in relation to the company (item 1 in Part I of the 15^th Schedule); and

(2)     the extent of the director’s responsibility for the causes of the company becoming insolvent (item 1 in Part II of the 15^th Schedule).

16.  I should however point out that in considering whether there is unfitness justifying a disqualification order, any misconduct of the respondent qua director may be relevant to the finding of unfitness, even if it does not fall within a specific provision of the companies legislation (Re Bath Glass (1988) 4 BCC 130 at 133), and unfitness may be demonstrated by conduct which does not involve misfeasance or a breach of any statutory or common law duty in relation to the company (Re Barings plc (No. 5) [1999] 1 BCLC 433 at 486d to e).  The court is not prevented from having regard to matters not specified in the 15^th Schedule.

17.  Further, the Official Receiver is not restricted to using only one company as the “lead company” and other companies as “collateral companies” for the purpose of establishing unfitness in relation to these companies (Re Surrey Leisure Ltd., Official Receiver v. Keam & Anr. [1999] 2 BCLC 457).  Here, the application is made in respect of both PIHL and PFIL as lead companies.

18.  The Official Receiver’s case against both respondents is not one of dishonesty or breach of commercial morality but of gross incompetence.  “Incompetence or negligence in a very marked degree” could render a director unfit to be concerned in the management of a company (In re Sevenoaks Stationers Ltd. [1991] Ch. 164 at 184C).  A line should be drawn between a marked degree of incompetence and mere commercial judgment, “which could not be made the basis for disqualification on grounds of unfitness without putting at risk the willingness of people to undertake entrepreneurial activities” (Palmer’s Company Law, vol. 2, para. 8.110).  I was also referred by Mr Lam to the dicta of Henry LJ in Secretary of State for Trade and Industry v. Gray [1995] 1 BCLC 276 at 288f to 289a which would seem to be apt to the present situation:

“The concept of limited liability and the sophistication of our corporate law offers great privileges and great opportunities for those who wish to trade under that regime.  But the corporate environment carries with it the discipline that those who avail themselves of those privileges must accept the standards laid down and abide by the regulatory rules and disciplines in place to protect creditors and shareholders.  And while some significant corporate failures will occur despite the directors exercising best managerial practice, in many too many there have been serious breaches of those rules and disciplines, in situations where the observance of them would or at least might have prevented or reduced the scale of the failure and consequent loss to creditors and investors. …

The Parliamentary intention to improve managerial safeguards and standards for the long term good of employees, creditors and investors is clear. … as s 6 of the Company Directors Disqualification Act 1986 makes clear, the court’s focus should be on their conduct – on the offence rather than the offender.  The statutory corporate climate is stricter than it has ever been, and those enforcing it should reflect the fact that Parliament has seen the need for higher standards. …”

19.  With that, I turn to the specific allegations against each respondent.

The specific allegations against the 1^st respondent

20.  The specific allegations against the 1^st respondent are that, as a director of PFIL and PIHL, he failed properly to monitor and control the business of PFIL, in particular he:

(1)     failed to ensure that PFIL’s business was subject to independent credit control and monitoring oversight before late 1997;

(2)     failed to ensure that counterparty limits were applied to the business of PFIL;

(3)     failed to ensure that there were proper credit procedures within PFIL;

(4)     failed to ensure that prudent limits on counterparty and country exposures were applied to PFIL, and to ensure that concentration risks were properly considered by the boards of PFIL, PIHL and/or the Executive Committee (“EXCO”);

(5)     failed to ensure that syndication limits imposed upon PFIL’s business were followed, and that breaches of those limits were properly addressed by the board of PFIL or PIHL and/or EXCO;

(6)     failed to ensure that economic risks in relation to PFIL’s business were adequately addressed, monitored and controlled by the boards of PFIL or PIHL and/or EXCO;

(7)     failed to ensure that any proper economic risk limits were placed upon PFIL’s business;

(8)     failed to ensure that breaches of risk limits were addressed promptly and properly;

(9)     failed to ensure that there was a properly documented and followed procedure for valuations in relation to PFIL’s business;

(10)   failed to ensure that there was proper independent oversight of valuations placed on PFIL’s debt portfolio;

(11)   failed to ensure that there were adequate policies and procedures for provisioning in relation to PFIL’s business;

(12)   failed to ensure that PFIL was subject to proper internal audit procedures; and

(13)   caused or permitted PFIL to enter into the mandate letter of 29 May 1997 with PT Steady Safe Tbk (“Steady Safe”) and the associated transactions without ensuring that this deal had been subject to independent scrutiny, particularly by the boards of PFIL or PIHL and/or EXCO and the Group Credit Risk function.  In particular, he failed to ensure that the credit risk implications of the transaction had been properly and independently assessed, failing even to inform Mr John Eng Lee (“J Lee”), the head of Group Credit Risk Management, of the existence and/or nature of the transaction before it was entered into.

21.  The components of each of the above allegations are set out in Schedule 1, paragraphs 23 to 54.

The specific allegations against the 2^nd respondent

22.  The specific allegations against the 2^nd respondent are that, as a director of PFIL and PIHL, he failed properly to monitor and control the business of PFIL, in particular he:

(1)     failed to ensure that PFIL’s business was subject to independent credit control and monitoring oversight before late 1997 [same as (1) for the 1^st respondent];

(2)     failed to ensure that the recommendations of the draft internal audit report into PFIL from 1996 in relation to credit monitoring and control were implemented in a timely manner or at all;

(3)     failed to ensure that counterparty limits were applied to the business of PFIL, whether following the recommendation of the draft internal audit report into PFIL from 1996, or at all [similar to (2) for the 1^st respondent];

(4)     failed to ensure that there were any or any proper credit procedures within PFIL [similar to (3) for the 1^st respondent];

(5)     failed to ensure that prudent limits on counterparty and country exposures were applied to PFIL, and to ensure that concentration risks were considered by the boards of PFIL, PIHL and/or EXCO [similar to (4) for the 1^st respondent];

(6)     failed to ensure that syndication limits imposed upon PFIL’s business were followed, and that breaches of those limits were addressed by the board of PFIL or PIHL and/or EXCO properly or at all [same as (5) for the 1^st respondent];

(7)     failed to ensure that PFIL’s credit files were adequately and properly maintained;

(8)     failed to ensure that credit mitigation documentation was completed in a timely and effective manner;

(9)     failed to ensure that the risks in relation to PFIL’s business were adequately addressed, monitored and controlled by the boards of PFIL or PIHL and/or EXCO [similar to (6) for the 1^st respondent];

(10)   failed to ensure that any proper risk limits were placed upon PFIL’s business [similar to (7) for the 1^st respondent];

(11)   failed to ensure that breaches of risk limits were addressed promptly and properly [similar to (8) for the 1^st respondent];

(12)   failed to ensure that there was a properly documented and followed procedure for valuations in relation to PFIL’s business [similar to (9) for the 1^st respondent];

(13)   failed to ensure that there was proper independent oversight of valuations placed on PFIL’s portfolio [similar to (10) for the 1^st respondent];

(14)   failed to ensure that there were adequate policies and procedures for provisioning in relation to PFIL’s business [same as (11) for the 1^st respondent];

(15)   failed to ensure that the recommendations of the 1996 draft internal audit report into PFIL were properly implemented in a timely manner, or at all; and

(16)   permitted the 1996 annual report of the Peregrine group to make misleading statements in relation to the credit procedures and policies of Peregrine, particularly in relation to PFIL.

23.  The components of each of the above allegations are set out in Schedule 2, paragraphs 23 to 66.

If the allegations warrant a finding of unfitness

24.  Both respondents have accepted that by reference to the facts which are not in dispute, the court can be satisfied as to the unfitness of each to be concerned in the management of a company.  Looking at the allegations against each respondent cumulatively, and taking into account any extenuating circumstances in the case of each, I am firmly of the view that incompetence or negligence of a marked degree is proved against each of them as to warrant a finding of unfitness.

25.  In making that finding, I have taken into account the following matters submitted by Mr Lam to be of significance:

(1)     The business of PFIL produced significant credit risks for the Peregrine group, given the size of its exposures relative to Peregrine’s own capital base, the relatively immature and occasionally unstable nature of the Asian markets in which PFIL primarily operated, and the nature of the counterparties, being second-tier corporates, targeted by PFIL (Schedule 1, paragraph 25; Schedule 2, paragraph 24).

(2)     The failings with respect to credit risk were serious and obvious: credit risk procedures were implemented but were not applied to PFIL; until shortly before its collapse, there was no independent credit monitoring function in relation to PFIL as those in charge of trading were also in charge of credit risk control; there were no counterparty risk limits or country risk limits, contrary to acknowledged international industry practice; such limits as there were applied to syndication deals were routinely broken for long periods with impunity (Schedule 1, paragraphs 27, 28, 29, 30, 31, 34 and 35; Schedule 2, paragraphs 26, 27, 34, 35, 36, 39 and 40).

(3)     There was a lack of proper valuation policy and procedure and no proper provisioning procedure.  Without proper valuations, not only would Peregrine’s accounts not be accurate, but also its risk information and reports would not have been accurate.  Similarly, a proper provisioning policy was necessary not only for risk management, but also for the purpose of producing accurate accounts (Schedule 1, paragraphs 40 to 46; Schedule 2, paragraphs 48 to 55).

(4)     The risks run by PFIL and the group and the inherent inadequacies in credit risk control were not hidden but fairly apparent and had been identified by various persons at various stages (Schedule 1, paragraphs 26, 30, 32, 35 and 37; Schedule 2, paragraphs 25, 28 to 33, 35, 40 and 45).

(5)     The risks were concentrated and substantial.  The transaction with Steady Safe alone accounted for 35% of the group’s capital base.  Exposures to Steady Safe and APP/Sinar Mas together amounted to three-quarters of the group’s capital.  Exposure to Indonesia was 65% of PFIL’s overall position.  According to Mr Richard Henry Farrant, the Inspector appointed by the Financial Secretary, this was “hazardous and foolhardy” (Schedule 1, paragraphs 32 and 35; Schedule 2, paragraphs 37 and 40).

(6)     PIHL was a listed company and so its liquidation had not only brought substantial losses to creditors but also to the investing public.  The estimated total deficiency of PIHL as regards creditors was HK$4.5 billion and the estimated distribution to ordinary creditors was 35.2%.  The estimated total deficiency of PFIL as regards creditors was HK$1.5 billion and the estimated distribution to ordinary creditors was 35%.  Hence, there was no recovery for the shareholders of PIHL in the liquidation (paragraphs 11, 18 and 19 in each of Schedules 1 and 2).

(7)     The management system of the Peregrine group was that EXCO, consisting of 22 persons who were the managing director of each business product line or head of each significant overseas business, was the management body responsible for the group’s business, and that the performance of EXCO was supervised and reviewed by the PIHL board. The respondents were executive directors of PIHL and sat on EXCO.  The full EXCO met only four times in 1997 and the managing directors serving on EXCO met only twice in 1997.  The PIHL board ceased to meet in 1996 and 1997 save to transact formal business.  The PFIL board likewise met only to transact formal business (paragraph 15 in each of Schedules 1 and 2).

(8)     In the case of the 2^nd respondent, his failings in relation to the 1996 internal audit and the 1996 annual report, both of which dealt with the crucial topic of credit risks, were serious.  Notwithstanding “immediate corrective action is required” in respect of credit risk issues of PFIL, as recommended in the draft internal audit report, the 2^nd respondent took no action, relying on remedial action purportedly being taken by PFIL and waiting for a further internal audit to verify if the required improvements had been made.  As for the two misstatements in the annual report, they were in the body of the report under the sections on “credit risk”.  The 2^nd respondent had approved the same with J Lee when he should have been aware from the draft internal audit report that these were misstatements (Schedule 2, paragraphs 28 to 33, 56 to 66).

26.  I should also mention that although the proximate cause of the collapse of the Peregrine group was the Asian Financial Crisis, the extent and severity of which was not anticipated, it was found by the Inspector, and accepted by the respondents, that Peregrine was badly prepared for the crisis and better infrastructure and risk management would have in all probability enabled the group to survive, even if severely affected by the crisis (Schedule 1, paragraph 56; Schedule 2, paragraph 68).  Mr Harris further made the point that in considering the extent to which the respondents had contributed to the insolvency of the group, this was not a case where insolvency arose primarily as a result of their dereliction in duty.

The period of disqualification

27.  The primary purpose of the power to make a disqualification order is “not to punish the individual but to protect the public against the future conduct of companies by persons whose past records as directors of insolvent companies have shown themselves to be a danger to creditors and others” (Re Lo-Line Electric Motors Ltd. [1988] BCLC 698 at 703e).  In Sevenoaks, supra. at 174E to G, Dillon LJ endorsed the division of the potential 15-year disqualification period (this is the same in Hong Kong) into three brackets:

(1)     the top bracket of over ten years, reserved for particularly serious cases; these may include cases where a director who has already had one period of disqualification imposed on him falls to be disqualified again;

(2)     the minimum bracket of two to five years (in Hong Kong, the statutory minimum period is one year), applicable to cases where although disqualification is mandatory, they are, relatively, not very serious; and

(3)     the middle bracket of six to ten years, applicable to serious cases which do not merit the top bracket.

28.  This broad division into the three brackets has been adopted in Hong Kong.  In using a “broad and undefined system of tariffs for defaults of varying degrees of blame”, it was envisaged by the English courts that as more of these cases came before the court, there must come a point when it is no longer necessary or desirable to go through the facts of previous cases, as the principles applicable to the court’s jurisdiction to impose disqualification orders are reasonably clear and the application of those principles to the facts of the particular case is a matter for the trial judge (Re Civica Investments Ltd. [1983] BCLC 456 at 457h to 458a; Re Westmid Packing Services Ltd., Secretary of State for Trade and Industry v. Griffiths & Ors. [1998] 2 BCLC 646 at 657h to 658c).  Mr Lam has therefore not cited to me cases as to the period of disqualification in comparable fact situations.

29.  Nevertheless, as I understand from the parties that this is the first case to come before our courts where disqualification orders are made on the basis of a marked degree of incompetence or negligence, it may be appropriate in this instance to refer to some English decisions on the appropriate bracket of disqualification period that a case of this nature should come under.  Sevenoaks itself was a case of incompetence or negligence in a very marked degree where no dishonesty was involved, the resulting absence of proper financial control was the main reason for the failure of five companies with large deficiencies (at 184C and G); the Court of Appeal reduced the period of disqualification from seven years to five years, placing this at the top end of the minimum bracket.  I have also considered the terms imposed for some of the directors in Re Barings plc [1998] BCC 583 and in Re Barings plc (No. 5) [1999] 1 BCLC 433 and [2000] 1 BCLC 523.  The director in the first case, which was conducted under the Carecraft procedure, was disqualified for four years; this was a case of serious failures in the discharge of duties of diligence and competence of a senior director, with no question of dishonesty.  Three directors in the second case, which had proceeded to a full hearing, had terms of disqualification imposed for six years, five years and four years ([2000] 1 BCLC at 525g); each was found to be grossly incompetent in the management role, whether of bad management or non-management, and each bore a heavy responsibility for the causes of the companies becoming insolvent.

30.  I should start with an assessment of what should be an appropriate period of disqualification for each respondent, to fit the gravity of the allegations established against him, before I make allowance for any mitigating factors.  In my judgment, the gravity of the allegations against each is such that I would place the appropriate period for each at the top end of the minimum bracket or even the lowest end of the middle bracket.

31.  I do not agree with the parties that the 1^st respondent should receive a shorter period of disqualification because of a lesser number of allegations against him; nor do I agree that the allegation against the 1^st respondent in respect of the Steady Safe mandate letter and associated transactions (not made against the 2^nd respondent) is but an illustration of the management failures and not an additional allegation in the true sense.  The allegation in respect of Steady Safe should be looked at in the proper context, by having regard to the role played by the 1^st respondent and the grave financial consequences which followed.  It was the responsibility of the 1^st respondent, as Chairman of the group, to take on senior management oversight of Mr Andre Sukjin Lee (“A Lee”), the managing director of PFIL, and A Lee reported directly to him (Schedule 1, paragraphs 14, 15 and 22).  A Lee was ultimately in charge of the PFIL credit process, and could not be overruled, although he was answerable to the 1^st respondent (Schedule 1, paragraph 28).  By the mandate letter and the associated transactions, PFIL was committed to supply funds to Steady Safe over several months, covering the issuance of three tranches of bonds totalling around US$350 million with maturities of up to five years.  The 1^st respondent, although aware of the Steady Safe transaction, did not even inform J Lee, the head of Group Credit Risk Management, before the transaction was entered into.  The transaction was not canvassed at board level or EXCO level.  By November 1997, some US$269 million had been lent by Peregrine to Steady Safe against little effective security, amounting to some 35% of the capital base of the group.  This was to have dire consequences when the Indonesian market collapsed in late 1997, precipitating the insolvency of the group (Schedule 1, paragraphs 52 to 54).  In my view, notwithstanding the differences in some of the allegations against the 1^st and 2^nd respondents, there is little to distinguish between them in the gravity of their conduct so as to justify a differentiation in the period of disqualification of each.

32.  Both respondents, in admitting the allegations against them under the Carecraft procedure, have saved considerable time and expense of all concerned; for that, they should be allowed a discount in the disqualification period (Westmid, supra. at 655g to i).

33.  I have considered other points of mitigation raised by each respondent (Schedule 1, paragraphs 55 to 62; Schedule 2, paragraphs 67 to 73).  Matters of mitigation are not restricted to the facts of the offence, a wide variety of matters may be taken into account (Westmid, supra. at 656i to 657g).  The respondents have suffered substantial financial losses on the collapse of the Peregrine group.  The Inspector has found that the directors were conscientious in preparing public announcements of PIHL in the six months leading up to its collapse, and that none of the executive directors had knowingly failed to disclose to shareholders matters relating to the financial position of PIHL.  The respondents had given full cooperation to the liquidators and the Inspector.  I have taken on board all the matters urged on their behalf, save for the submission that each had in effect undergone “self imposed” disqualification since the collapse of the group, as no mention was made of the reasons of each in their decision to withdraw from business life.  I do however take into account the length of time the respondents have been in jeopardy, in that disqualification proceedings have been hanging over their heads since the publication of the Inspector’s report in March 2001.

34.  Looking at all relevant matters in the round, I come to the view that an appropriate period of disqualification in respect of each respondent is four years.

Orders

35.  I make a disqualification order of four years against each of the 1^st and 2^nd respondents.  Under rule 10 of the Companies (Disqualification of Directors) Proceedings Rules, the disqualification order is to take effect from the beginning of the 21^st day after the day on which the order is made, but the term of the disqualification order would begin from the day on which it is made (Re Cannonquest Ltd. [1997] BCC 644 at 648E to 649A).

36.  In accordance with the agreement reached between the parties, I make an order that the 1^st and 2^nd respondents should pay the Official Receiver’s costs of these proceedings, to be taxed if not agreed.

Mr Godfrey Lam, instructed by the Official Receiver, for the Applicant.

Mr Jonathan Harris, instructed by Messrs. Richards Butler, for the 1^st and 2^nd Respondents.

SCHEDULE 1

STATEMENT OF FACTS NOT IN DISPUTE FOR THE

PURPOSES OF A “CARECRAFT” SETTLEMENT AS BETWEEN THE OFFICIAL RECEIVER AND THE 1ST RESPONDENT

Introduction

1.    On 11th January 2002 the Official Receiver issued proceedings under section 168H of the Ordinance seeking disqualification orders against the respondents, including the 1st Respondent.  The proceedings arise out of the collapse of the Peregrine group of companies in January 1998.

2.    Subject to the approval of this Honourable Court, the Official Receiver and the 1st Respondent are willing to dispose of these proceedings against the 1st Respondent by way of the shortened form of procedure sanctioned in Re Carecraft Construction Co. Limited [1994] 1 WLR 172, as clarified by the English Court of Appeal in Secretary of State for Trade and Industry v Rogers[1996] 4 All ER 854.

3.    This Statement is produced in order to identify, for the purpose of a “Carecraft settlement” with the 1st Respondent, the core material facts which are not disputed by the 1st Respondent in relation to the allegations of unfitness relied on by the Official Receiver.  Solely for the purposes of these proceedings and any related proceedings or applications under the Ordinance, the 1st Respondent does not dispute the facts set out below.

4.    The Official Receiver submits that, by reference to the undisputed facts herein, the conduct of the 1st Respondent as a director of PIHL and of PFIL makes him unfit to be concerned in the management of a company and that, accordingly, the Court is bound (pursuant to section 168H of the Ordinance) to make a disqualification order against the 1st Respondent.  It is further submitted by the Official Receiver that the conduct of the 1st Respondent is such that a disqualification order of 3 years (which, subject to the approval of the Court, has been agreed between the parties) is appropriate.

5.    Solely for the purpose of resolving these proceedings as set out above, the 1st Respondent accepts that, by reference to the facts which are not in dispute, the Court can be satisfied as to his unfitness to be concerned in the management of a company, and that it would be appropriate to make an order against him of 3 years.  The 1st Respondent also agrees that if, pursuant to this Statement, there is a Carecraft disposal of these proceedings, then there should additionally be an order made that he should pay the Official Receiver’s costs of these proceedings, to be taxed if not agreed.

6.    In the event of a disqualification order being made by reference to this Statement, the Official Receiver reserves the right to disclose this Statement to third parties where it appears proper to do so, to make use of it for the purpose of any press release issued in respect of these proceedings, and to refer to it for all purposes connected with or ancillary to these proceedings and any other proceedings against the 1st Respondent under the Ordinance.

7.    The Official Receiver and the 1st Respondent agree that, if for any reason, the Court is unwilling to approve a Carecraft disposal of these proceedings, that no further reference may be made by any party to this Statement (or to the admissions or to the concessions contained herein) during the course of these proceedings and they will remain confidential thereafter.  The Official Receiver and the 1st Respondent, also agree that, in such event, they will jointly apply to the Court for a direction that a different judge should hear the contested trial.

8.    In the event of a disqualification order being made by reference to this Statement, the Official Receiver and the 1st Respondent agree that they will jointly apply for a direction that this Statement be annexed to the Court’s judgment. 

Structure of this Statement

9.    The structure of this Statement is as follows:-

(1)    Paragraphs 10 to 22 set out background information in relation to the PIHL, PFIL, the Peregrine Group and its management, the 1st Respondent’s role and responsibilities therein;

(2)    Paragraphs 23 to 54 relate to the allegations of unfitness that are made by the Official Receiver and set out the components of those allegations; and

(3)    Paragraphs 55 to 62 contain matters of mitigation relied upon by the 1st Respondent in relation to his conduct as a director other than in relation to the allegations of unfitness relied upon by the Official Receiver.

Facts not in Dispute Relating to the Conduct of the 1^st Respondent

The Peregrine Companies and Group Structure

10.    The Peregrine group was founded by the 1st Respondent and Mr Leung in 1988.  The 1st Respondent, Mr Leung and Mr Wong (the 2nd Respondent herein) were the key managers of the new business which was initially purely an equity house.

11.    PIHL was started in 1988.  It began trading as part of the Peregrine Group in 1990, when the operating Peregrine group companies were sold into a Hong Kong listed vehicle (which was then renamed Peregrine Investments Holdings Limited).  It became the parent company of a large group of companies (approximately 250) carrying on the business of investment banking in Hong Kong and elsewhere in Asia.

12.    The core business of the growing group remained equities (sales and research) and corporate finance.  In the early 1990’s it expanded into other countries in Asia by means of joint venture companies.  The initial starting capital of US$38 million grew to US$447 million by the end of 1992 and US$599 by the end of 1994.  The corporate finance business (headed by Mr Leung) in particular was buoyed by the introduction of Chinese companies onto the Hong Kong Stock Exchange in late 1992.

13.    Towards the end of 1993, Peregrine added a fixed income business capability to their existing businesses in equities and equity related corporate finance, in order that the Peregrine Group could offer a wider choice of debt financing to its corporate clients.  In order to develop the fixed income business, Peregrine hired specialist personnel trained in overseas markets including Mr A Lee (the 4th Respondent herein) and his team from Lehman Brothers in New York.  PFIL was incorporated on 14th October 1988, but did not commence trading until 1994 as the vehicle for the fixed income business.

14.    The Peregrine Group’s diversification into fixed income business required new operational systems and controls, and more sophisticated financing of its own balance sheet, which was to be provided by a new Treasury function.  It was decided that the 1st Respondent would take on senior management oversight of Mr A Lee and the fixed income team.  Mr J Lee (the 3rd Respondent herein) was likewise recruited from Lehman Brothers to be the Peregrine Group’s Treasurer, reporting to Mr Wong, and it was intended for Mr J Lee to progressively take over Mr Wong’s responsibilities.  Mr J Lee began a programme of broadening Peregrine’s sources of funding, which process continued until the summer of 1997 when the crisis in Asian financial markets precluded further development or diversification.  In January 1996, Mr J Lee was appointed Head of Group Market Risk Management, taking over this responsibility from Mr Wong.  In early 1997, he became Head of Group Credit Risk Management (GCRM), again taking over this responsibility from Mr Wong.  Peregrine’s Product Control and Internal Audit functions were also strengthened.

15.    The Peregrine Group’s management system underwent a reorganisation at the end of 1995.  It was reorganised along product and business lines, and the Board of PIHL was reduced to four executive and two non-executive directors.  EXCO was formed, consisting of the managing director of each business product line and head of each significant overseas business or office, 22 persons in all.  EXCO was to become the management body responsible for the group’s business, whose performance was supervised and reviewed by the PIHL Board.  The 1st Respondent, Mr Leung, Mr Wong and Alan Mercer (who headed the Group’s legal and compliance department) were the executive directors on PIHL Board and sat as members of EXCO.  The full EXCO met formally once every few months (although only 4 times in 1997), with certain of its members meeting more often on an informal basis (the EXCO MDs) (although only twice in 1997).  Mr A Lee reported both to EXCO and to the 1st Respondent.  The  PIHL Board ceased to meet in 1996 and 1997 save to transact formal business (such as the approval of accounts and the use of the company seal).  PFIL’s Board likewise met only to transact such formal business.

16.    PFIL was successful at the outset and a feature of its business was its willingness to undertake large transactions in relation to the Peregrine Group’s own size.  Through the period 1994 to 1997, its inventory of debt holdings and derivative positions grew.  In 1997, the Group correctly anticipated financial problems in Thailand and shifted focus to prefer Indonesia.  In May 1997, PFIL committed to a package of transactions for Steady Safe, an Indonesian transport company, involving the provision of up to US$350 million in financing through bond issues.

17.    When the Asian Financial Crisis began in July 1997, PFIL became more pessimistic about business prospects in Asia and ceased to search actively for new business.  The steep fall in the Hong Kong stock market and rumours concerning the Peregrine group in October 1997 made management of its funding more difficult, as did the continuation of the Asian Financial Crisis which had by then affected Japan and Korea, both important sources of funds for the Peregrine Group’s business.  The economic situation in Indonesia continued to deteriorate through the end of 1997.

18.    A petition for the winding up of PIHL (HCCW 20/1998) was presented on 13th January 1998 by PBL, a Peregrine Group Company and a creditor of PIHL.  A provisional liquidator was appointed on the same date.  A winding-up order against PIHL was made on 18th March 1998.  Liquidators were formally appointed on 2nd July 1998.  Its estimated total deficiency as regards creditors was HK$ 4.5 billion.  The estimated distribution to creditors is 100% for preferential creditors and 35.2% for ordinary creditors.

19.    A petition for the winding up of PFIL (HCCW 32/1998) was presented on 15 January 1998 by PML, a Peregrine Group company and a creditor of PFIL.  Provisional liquidators were appointed on 16 January 1998.  A winding-up order against PFIL was made on 18th March 1998.  Liquidators were appointed on 2nd July 1998.  Its estimated total deficiency as regards creditors was some HK$ 1.5 billion.  The estimated distribution to creditors is 100% for preferential creditors and 35% for ordinary creditors.

20.    On 23rd April 1999, Mr Farrant was appointed by the Financial Secretary under section 143(1)(a) of the Ordinance to investigate the affairs of PIHL and PFIL.  The Report was published on 26th March 2001.

The 1st Respondent

21.    The 1st Respondent was born on 1st December 1945.  He was one of the co-founders of  the Peregrine Group (together with Mr Leung) and the Chairman of PIHL.  He was a director of PIHL from 13th March 1990 to 30th October 1998.  He was a director of numerous other companies, both within and outside the Peregrine group and has over 30 years experience in the financial services industry, including over 20 in the Hong Kong equity brokerage business, 17 of these as head of the Vickers da Costa Hong Kong office.

22.    Mr A Lee, the managing director of PFIL, reported directly to him.  The 1st Respondent was also a director of PFIL from 31st May 1991 to 30th October 1998. 

Management and Control

23.    The specific allegations against the 1st Respondent are that, as a director of PFIL and PIHL, he failed properly to monitor and control the business of PFIL, in particular he:-

(1)     Failed to ensure that PFIL’s business was subject to independent credit control and monitoring oversight before late 1997;

(2)     Failed to ensure that counterparty limits were applied to the business of PFIL;

(3)     Failed to ensure that there were proper credit procedures within PFIL;

(4)     Failed to ensure that prudent limits on counterparty and country exposures were applied to PFIL, and to ensure that concentration risks were properly considered by the boards of PFIL, PIHL and/or EXCO;

(5)     Failed to ensure that syndication limits imposed upon PFIL’s business were followed, and that breaches of those limits were properly addressed by the board of PFIL or PHIL and/or EXCO;

(6)     Failed to ensure that the economic risks in relation to PFIL’s business were adequately addressed, monitored and controlled by the boards of PFIL or PIHL and/or EXCO;

(7)    Failed to ensure that any proper economic risk limits were placed upon PFIL’s business;

(8)     Failed to ensure that breaches of risk limits were addressed promptly and properly;

(9)     Failed to ensure that there was a properly documented and followed procedures for valuations in relation to PFIL’s business;

(10)   Failed to ensure that there was proper independent oversight of valuations placed on PFIL’s debt portfolio;

(11)   Failed to ensure that there were adequate policies and procedures for provisioning in relation to PFIL’s business;

(12)   Failed to ensure that PFIL was subject to proper internal audit procedures.

24.    The 1st Respondent admits these allegations for the purposes of this Statement by reference to the undisputed facts set out below.

Independent Credit Control of PFIL

25.    The nature of PFIL’s business meant that it was a major contributor to the group’s credit risks.  The size of its exposures to counterparties necessarily meant that they contained significant credit risks (many of which, such as Steady Safe, came home to roost as the markets in Asia collapsed in 1997).  This was quite apart from the fact that Peregrine was operating in relatively (compared to Western Europe, Japan and the US) immature, and occasionally unstable, Asian markets and deliberately targeting second tier corporates for its activities.

26.    In 1996, the Japan Bond Research Institute (a credit rating agency), investigated Peregrine.  Their conclusions were given prominence in Peregrine’s 1996 Annual Report.  This included a rating commentary dated 16th January 1997, which highlighted in its Summary of Evaluation, “Unfavourable Points”, the increase in Peregrine’s credit risk exposure as a result of the growth of Peregrine’s fixed income business (PFIL).

27.    A set of Group credit risk procedures was produced in 1994 and early 1995, consisting of a number of separate memos describing policies in relation to credit matters (the “Procedures”), which were implemented by the Group Credit Risk Management (GCRM) function.  By the beginning of 1997, the majority of the Peregrine Group’s business functions had implemented procedures in line with the Procedures, but PFIL, under Mr A Lee, did not do so and used its own credit risk procedures under which a credit committee consisting of senior PFIL staff approved new commitments.

28.    In fact, it was not actually until December 1997, with the transfer of staff from PFIL credit to Group Credit, that some sort of independent oversight of credit risk in relation to PFIL and its business began to take place.  Prior to that time, PFIL’s credit process was entirely without oversight and was not independent from the trading process.  Indeed, Mr A Lee accepted that he was ultimately in charge of the PFIL credit process, and could not be overruled, although he was answerable to The 1st Respondent.  Thus, those in charge of the trading side were also in charge of this important control, clearly a conflict of interest and in breach of best practice.  The 1st Respondent, although he would have been aware of the importance of independent credit risk control over PFIL, simply assumed that this had taken place properly once Mr J Lee took over in early 1997.  Mr J Lee did not tell him that it had not done so; but, on the other hand, The 1st Respondent never took any steps to ensure that it had, or to inquire about how the process was progressing (although he was aware of Mr J Lee’s concerns about the quality of staff in Group Credit Management).

Allegation:  The 1st Respondent, in failing properly to monitor and control the business of PFIL, in particular, failed to ensure that PFIL’s business was subject to independent credit control and monitoring oversight before late 1997.

Credit Processes within PFIL

29.    Within PFIL, there appear only to have been occasional credit limits applied to various deals, often flagrantly breached.  There were no counterparty risk limits, nor any country risk limits.  Thus, in relation to PFIL, Peregrine had no independent credit monitoring function until shortly before its collapse, while those credit functions and processes that there were within PFIL, were seriously deficient in themselves, quite apart from the lack of oversight.  The deficiencies are expanded upon below.  Each of the points set out below in relation to PFIL’s actual and limited credit process relate to the allegation against the 1st Respondent that he failed to ensure that there were any or any proper credit procedures within PFIL.

Allegation: Each of the Respondents, in failing properly to monitor and control the business of PFIL, in particular, failed to ensure that there were any or any proper credit procedures within PFIL.

30.    The internationally recognized 1994 BIS Derivative Risk Management guidelines, Part V, paragraph 5, in relation to Credit state that: “Credit limits … should be established for all counterparties with whom the institution conducts business… in all cases, it is important that credit limits be determined by personnel who are independent of the derivatives function…”.  However, no counterparty limits were ever instituted or imposed upon PFIL.  Moreover, it was not until late 1996 at the earliest that counterparty risk reports were produced on a regular basis.  Even then they were only being produced every other week and then after the fact.  An email from Mr J Lee correctly pointed out that this did not amount to, “an ability to monitor counterparty risk in a manner which purports some resemblance of control”.  Even into May 1997, counterparty risk reports were not being updated in a timely manner.  In fact, counterparty risk reports were not produced on a regular basis until 14th August 1997.  The 1st Respondentought to have ensured that PFIL had a proper and effective system of counterparty limits and approvals in accordance with well acknowledged industry practice.

Allegation: The 1st Respondent, in failing properly to monitor and control the business of PFIL, in particular, failed to ensure that counterparty limites were applied to the business of PFIL.

31.    Further, PFIL failed to follow acknowledged international industry practice in relation to counterparty risks.  BIS guidelines recommended that exposures to a counterparty or its group should not have exceeded 25% of Peregrine’s capital base, or 10% of the couterparty’s capital base.  While PFIL was not a regulated company and so not obliged to keep within these limits, they are well acknowledged industry practice which reflects a prudential approach to counterparty risk.  However, Peregrine had no such policy and at no time does there appear to have been any discussion or decision at board or committee level of Peregrine’s and PFIL’s approach to large exposures of this sort, or as to whether PFIL should enter into transactions substantially in excess of the recognized prudential limits. 

32.    That PFIL did enter into a number of transactions substantially in excess of these limits was highlighted in the Counterparty Credit reviews belatedly produced by Luis Maglanoc in August and September 1997.  In relation to the counterparties APP, Steady Safe, Medco Energi, Robinson, Tanayong, Van der Horst, and SVOA, Luis Maglanoc’s reviews showed a substantial breach of the BIS prudential guidelines.  This was something highlighted in the Counterparty Credit Reviews of the individual companies named above.  It was also something that Mr J Lee had highlighted in a memo to Mr A Lee dated 16th June 1997.  Lloyd Ong (a credit risk assessment officer) had sent Mr J Lee an email on concentrations in the Aged Inventory of PFIL as at May 1997.  Mr J Lee forwarded this to Mr A Lee, noting that the credit exposure to one counterparty (Sinar Mas) was 50% of Peregrine’s capital base.  He concluded: “Even if we cut it in half it is still too large as that would represent 25% of our equity.  Industry practice limits exposures to any one counterparty to 10% of capital base.”  The 1st Respondent was aware of this email, but it did not prompt him at any point to consider the question of the credit risks inherent in PFIL’s positions.  Peregrine’s exposure to Steady Safe alone was some 35% of Peregrine’s capital base, while its exposure to Steady Safe and APP/Sinar Mas, both of them Indonesian counterparties, together amounted to about three quarters of the Group’s capital.  This was, according to the Inspector, “hazardous and foolhardy”.

33.    PFIL’s business of its nature exposed it and the group to substantial credit risks, particularly given the limited markets in which Peregrine operated and the nature of its clients.  Industry practice and commercial prudence required that Peregrine considered the nature of those risks, including the BIS’s recognized prudential limits on counterparty exposures.  The 1st Respondent, as a director of both PFIL and PIHL ought to have ensured that such risks were properly assessed and considered by the boards of PFIL/PIHL or EXCO.

Allegation: The 1st Respondent, in failing properly to monitor and control the business of PFIL, in particular, failed to ensure that prudential limits on counterparty and country exposures were applied to PFIL, and to ensure that concentration risks were considered by the boards of PFIL, PHIL and/or EXCO.

34.    PFIL did have some limits on syndication deals.  However, these were routinely broken, for long periods.  This would have been absolutely apparent to anybody receiving the PFIL aged inventory report, as the 1st Respondent did.  Although these reports showed significant and long term breaches of limits, there is no sign that these breaches led to any action on the part of any of those seeing them: in short, the limits might as well not have been there.

Allegation: The 1st Respondent, in failing properly to monitor and control the business of PFIL, in particular, failed to ensure that those syndication limits imposed upon PFIL’s business were followed, and that breaches of those limits were addressed by the board of PFIL or PIHL and/or EXCO, properly or at all.

35.    There was a total absence of country or other concentration risk limits.  Although concentration risk reports were produced (from about mid-1997), which showed extraordinarily high country risk concentrations (for example, 73% of the bond position and 65% of PFIL’s overall position was to Indonesia as at 22nd August 1997), at no time do there appear to have been any country limits set, or any sort of assessment of such concentration risks by senior management.  Although he received the country risk reports, The 1st Respondent appears never to have considered the credit risks involved in these concentrations.  Similarly, there is no sign that there was any ever informed discussion at board, EXCO or EXCO MD level of Peregrine’s approach in this respect.  The 1st Respondent ought to have ensured that there was a proper and prudent policy and proper limits in relation to such risks.

Allegation: The 1st Respondent, in failing properly to monitor and control the business of PFIL, in particular, failed to ensure that prudential limits on counterparty and country exposures were applied to PFIL, and to ensure that concentration risks were considered by the boards of PFIL, PHIL and/or EXCO.

Risk Management and Reporting in relation to PFIL

36.    PFIL was subject to inadequate supervision by its board of directors or the board of directors of PIHL, which ceased to have direct management oversight following the reorganisation of Peregrine’s management system at the end of 1995.  EXCO and the EXCO MDs, which replaced the boards of directors, did not adequately supervise PFIL’s credit procedures and the other risks involved in its business.  This was contrary to well established industry practice which requires strong control of risk from the highest levels.

37.    The culture at Peregrine in relation to risk was well summarised by Mr J Lee at the EXCO meeting of 6th July 1996, where he presented a paper on Market Risk Management.  It noted a culture whereby deals involving market risk were undertaken without prior approval and/or involvement of the required parties.  This resulted not only in losses but a lack of accountability for them.  Mr J Lee’s paper referred to the need to establish approved trading limits for all risk activities and enforce strict compliance.  At the meeting, the minutes show that trading limits needed a procedure for formal approvals and monitoring.  Thus, the poor risk culture and lack of limits was raised at EXCO in mid-1996, but it appears that there was a failure to take any proper steps to ensure that the risk culture was changed, or proper limits were imposed.  The 1st Respondent, as a director of PFIL and PIHL ought to have ensured that they and the boards and committees of PFIL/PIHL were properly aware of and in control of risks in relation to PFIL’s business and/or that those risks were properly monitored and controlled.

Allegation: The 1st Respondent, in failing properly to monitor and control the business of PFIL, in particular, failed to ensure that risks in relation to PFIL’s business were adequately addressed monitored and controlled by the boards of PFIL or PIHL and/EXCO.

38.    The failure properly to monitor and control risk in relation to PFIL was reflected most clearly in the almost total absence of risk limits on PFIL’s business until August 1997.  The only limits were those introduced in August 1995, which were not even risk limits per se: rather they were overall net position limits and an overall funding limit.  The 1st Respondent stated in interview that the funding limits were the only limits on PFIL’s business, although he could have instructed it to cease to do a certain business.  This provided no proper control over the business.  By comparison to internationally accepted standards on risk control, Peregrine’s systems for risk control were seriously inadequate.

39.    Further, also contrary to internationally accepted standards, there were no procedures within Peregrine for dealing with breaches of the limited risk limits which there were, although such breaches were regularly reported in reports seen by, amongst others, the 1st Respondent.  No steps were ever taken in respect of such breaches.

Allegation: The 1st Respondent, in failing properly to monitor and control the business of PFIL, in particular, failed to ensure that any proper risk limits were placed upon PFIL’s business.

40.    There were also fundamental difficulties and deficiencies in relation to the risk and other financial reports provided to senior management.  These related, in particular to the valuation of PFIL’s very substantial inventory of bonds and the provisioning in respect of them.

41.    PFIL was engaged in a range of activities and had positions which were complex and difficult to value.  The basis of valuation for PFIL’s trading portfolio was termed ‘mark-to-market’ but was actually based on simply the last traded price of any given type or category of bond.  This resulted in the ‘mark-to-market’ values of the more illiquid bonds becoming an unreliable estimate of what the position could be sold for by PFIL.  As a tool for adjusting the valuations, a policy was introduced in 1997 to make provisions against ‘aged inventory’, which required long held positions to be marked down in value gradually: this was still seriously inadequate.

42.    Moreover, there was no formally documented policy on valuations in Peregrine until mid-1997, when some steps were taken towards producing one.  However, there were still serious deficiencies in Peregrine’s approach to the valuations of PFIL’s positions.  The 1st Respondent should have ensured that there was a properly documented and followed procedure for valuations in relation to PFIL’s business: without this, he could not even have been satisfied as to the accuracy of PFIL’s accounting records and accounts.

43.    More importantly, there was an absence of independent oversight of PFIL’s valuations.  PFIL’s traders valued their own holdings or positions.  The independent verification of traders’ valuations is a cornerstone of robust risk management; not only to ensure that the books and records are fair, but also that risk management data is accurate.

44.    The importance of proper valuations of positions was known to Peregrine and the 1st Respondent.  The valuation of PFIL’s positions became more difficult and more important as the Asian crisis developed.  Many of the positions in PFIL’s inventory were very old by mid-1997, reflecting Peregrine’s inability to sell them (and therefore a lack of market).  This increased the need to ensure that the positions were being correctly and conservatively valued.  Without proper valuations, not only would Peregrine’s accounts not be accurate, but its risk information and reports would not have been accurate.  Similarly, what stress testing that there was within Peregrine in relation to PFIL did not take sufficient account of the fact that many of the securities held by PFIL had been held for long periods, and failed to take sufficient account of the credit risks involved.

45.    The 1st Respondent took no proper steps to satisfy himself that Product Control, established to provide independent control on valuations, was fulfilling its role once its head had departed in April 1997.  The 1st Respondent, as Chairman of the group and as a director of PFIL, ought to have taken steps to have satisfied himself that PFIL’s positions were being independent valued, particularly after the departure of the head of Product Control in April 1997.

Allegation: The 1st Respondent, in failing properly to monitor and control the business of PFIL, in particular, failed to ensure that there was a properly documented and followed procedure for valuations in relation to PFIL’s business.

Allegation: The 1st Respondent, in failing properly to monitor and control the business of PFIL, in particular, failed to ensure that there was proper independent oversight of valuations placed on PFIL’s portfolio.

46.    In conjunction with the absence of a formal policy on valuation, and the lack of independent oversight of the valuations of PFIL’s positions, there was also no policy on provisioning within Peregrine, although this was necessary not only for risk management purposes, but also for the purposes of producing accurate accounts.  Instead there was nothing more than ad hoc provisioning.  The 1st Respondent ought to have ensured that there was a proper provisioning policy in place within Peregrine, and in particular in relation to PFIL.

Allegation: The 1st Respondent, in failing properly to monitor and control the business of PFIL, in particular, failed to ensure that there were adequate policies and procedures for provisioning in relation to PFIL’s business.

Internal Audit

47.    Internal audits are a well recognised and important method of evaluating and controlling risks in a business such as Peregrine.  The Peregrine Group’s internal audit function produced reports on various aspects of the Group’s business.  However, it failed to complete the draft reports which it produced in relation to PFIL in 1996 and in 1997 (which highlighted a number of serious weaknesses in PFIL’s controls).  This illustrated the deficiencies in the Peregrine Group’s procedures for internal audit.

48.    The 1st Respondent was unaware of the draft internal audits reports on PFIL on 1996 and 1997.  However, the internal audit timetable for 1997 showed that a high priority internal audit of PFIL was scheduled for 1997, and the 1st Respondent did not take appropriate steps to ensure that this was done or to ascertain whether this had been done.  The 1st Respondent should have satisfied himself that internal audit was functioning effectively and had conducted an internal audit of PFIL in accordance with its stated priorities.

Allegation: The 1st Respondent, in failing properly to monitor and control the business of PFIL, in particular, failed to ensure that PFIL was subject to proper Internal Audit procedures.

Steady Safe

49.    The specific allegation against the 1st Respondent under this head is that, as a director of PIHL and PFIL, the 1st Respondent caused or permitted PFIL to enter into the Steady Safe mandate letter of 29th May 1997 and the associated transactions without ensuring that this deal had been subject to independent scrutiny, particularly by the boards of PFIL or PIHL and/or EXCO and the Group Credit Risk function.  In particular, he failed to ensure that the credit risk implications of the transaction had been properly and independently assessed, failing even to inform Mr J Lee of the existence and/or nature of the transaction before it was entered into.

50.    The 1st Respondent admits this allegation for the purposes of this Statement by reference to the undisputed facts set out below.

51.    Steady Safe is an Indonesian bus and taxi company, with which PFIL began to develop a relationship in 1996.  From October 1996  up to the beginning of May 1997, PFIL issued and placed Steady Safe notes of an aggregate value of approximately US$50 million.  All the notes were sold in the market within a short time of issuance.  In April 1997, Steady Safe and CMNP, which was an Indonesian government controlled toll road operator and a listed company, approached PFIL with a merger plan for steady safe.  CMNP had valuable long term government concessions to build and operate toll roads around Jakarta.  By this time, PFIL had an established working relationship with Steady Safe and its President, Jopie Widjaja.  PFIL and the 1st Respondent were also familiar with CMNP through previous dealings in Indonesia.  PFIL was asked to structure a substantial financing package to fund the acquisition by Steady Safe of a 20% stake in CMNP and to repay an existing syndicate of lenders led by HSBC.

52.    After much negotiation on the structure and timing of the transaction between Steady Safe and PFIL, the deal was considered and approved by PFIL’s credit committee (with the knowledge of the 1st Respondent), resulting in PFIL signing a mandate letter with Steady Safe on 29th May 1997, covering the issuance of three tranches of bonds totalling around US$350 million with maturities of up to 5 years.  A rights issue by Steady Safe following the acquisition of the CMNP shares was expected to reduce the exposure and in the meantime, the CMNP shares would be pledged to PFIL as security.  Nevertheless, the deal committed PFIL to supply funds to Steady Safe over several months.  In the event, there was no rights issue and there was considerable delay in obtaining the security over the CMNP shares.  As a result, Peregrine’s exposure to Steady Safe was extraordinarily large (some US$269 million had been lent by Peregrine to Steady Safe by November 1997 against little effective security), amounting to some 35% of its capital base.  This was to have dire consequences when the Indonesian market collapsed in late 1997, precipitating Peregrine’s insolvency.

53.    Given its size and open-ended basis, the Steady Safe transaction required proper and detailed consideration by an independent credit and risk management function.  In fact, there was no independent credit approval of the Steady Safe transactions.  Mr J Lee, who was Head of GCRM, was not involved in the approval process and it appears that he was not aware of the mandate at the time of its signing.  The fact that, particularly with the existing exposure to APP, the Steady Safe deal also raised significant concentration risks through the size of the exposure to Indonesia (as set out above), was yet further reason to have ensured that the matter was fully considered by the independent credit and market risk functions.

54.    The 1st Respondent ought to have ensured that Mr J Lee, as head of GCRM, was aware of and approved the Steady Safe transaction, and that a commitment of this magnitude and nature was fully canvassed at board or EXCO level.  Instead, the matter was not raised at this level at all.

Allegation: The 1st Respondent caused or permitted PFIL to enter into the Steady Safe mandate letter of 29th May 1997 and the associated transactions without ensuring that this deal had been subject to independent scrutiny, particularly by the boards of PFIL or PIHL and/or EXCO and the Group Credit Risk function.  In particular, he failed to ensure that the credit risk implications of the transaction had been properly and independently assessed, failing even to inform Mr J Lee of the existence and/or nature of the transaction before it was entered into.

Points of Mitigation Raised by the 1^st Respondent

55.    The 1st Respondent, (along with Mr Leung the co-founders of the Peregrine and Mr Wong) invested substantially in Peregrine themselves, thus making their personal fortunes and Peregrine’s fortunes inter-related.  The 1st Respondent had every incentive to act in the bests interests of PIHL, and believes that he did do so to the best of his ability.  On the collapse of the Peregrine Group, the 1st Respondent lost not only his career and life’s work but also sustained substantial financial losses.

56.    The collapse of PIHL was precipitated by the Asian Financial Crisis, the extent and severity of which was not anticipated, and could not have been anticipated, by leading economists and bankers around the world.  The Inspector came to this conclusion and found that the Asian Financial Crisis was the proximate cause of the Peregrine Group’s collapse, in the sense that, if the crisis had not occurred, there is no reason to think that the group would have failed in early 1998.  However, he also concluded that Peregrine was badly prepared for the crisis.  Better infrastructure and risk management would have in all probability enabled the Group to survive, even if severely affected by the crisis.

57.    Mr Farrant, in the Report, found there had been no fraud or dishonesty on the part of any of Peregrine’s directors, including the 1st Respondent.

58.    The 1st Respondent’s good faith is demonstrated by the fact that although a substantial shareholder in PIHL (which was publicly quoted), the 1st Respondent did not sell any of his PIHL shares in the months before the collapse.  To the contrary, as late as 31st December 1997 the 1st Respondent (along with Mr Leung and Mr Wong) increased his shareholdings in PIHL reflecting his faith in the Group, its management and systems and the 1st Respondent’s view that the Group ability to overcome the Asian financial crisis.

59.    Mr Farrant further concluded that the directors were conscientious in preparing public announcements made by PIHL in the six months leading up to its collapse.  In particular, Mr Farrant did not consider that any of the executive directors had knowingly failed to disclose to shareholders matters in relation to the financial position of PIHL.

60.    In reorganising the management structure of the Peregrine Group, the 1st Respondent sought to duplicate the management structure employed by larger and more sophisticated investment banks (particularly American investment banks) and believe that in doing so the management systems of the Peregrine Group would be strengthened.

61.    The 1st Respondent has given full cooperation to the liquidators of the Peregrine Group and the Inspector.

62.    Since the collapse of the Peregrine Group, the 1st Respondent has largely withdrawn from business life and in effect has undergone almost 6 years of self imposed disqualification.

Dated this 12^th day of May 2004

SCHEDULE OF ABBREVIATIONS

SCHEDULE 2

STATEMENT OF FACTS NOT IN DISPUTE FOR THE PURPOSES OF A “CARECRAFT” SETTLEMENT AS BETWEEN THE OFFICIAL RECEIVER AND THE 2nd RESPONDENT

Introduction

1.    On 11th January 2002 the Official Receiver issued proceedings under section 168H of the Companies Ordinance (the “Ordinance”) seeking disqualification orders against the respondents, including the 2nd Respondent. The proceedings arise out of the collapse of the Peregrine group of companies in January 1998.

2.    Subject to the approval of this Honourable Court, the Official Receiver and the 2nd Respondent are willing to dispose of these proceedings against the 2nd Respondent by way of the shortened form of procedure sanctioned in Re Carecraft Construction Co. Limited [1994] 1 WLR 172, as clarified by the English Court of Appeal in Secretary of State for Trade and Industry v Rogers [1996] 4 All ER 854.

3.    This Statement is produced in order to identify, for the purpose of a “Carecraft settlement” with the 2nd Respondent, the core material facts which are not disputed by the 2nd Respondent in relation to the allegations of unfitness relied on by the Official Receiver. Solely for the purposes of these proceedings and any related proceedings or application under the Ordinance, the 2nd Respondent does not dispute the facts set out below.

4.    The Official Receiver submits that, by reference to the undisputed facts herein, the conduct of the 2nd Respondent as a director of PIHL and of PFIL makes him unfit to be concerned in the management of a company and that, accordingly, the Court is bound (pursuant to section 168H of the Ordinance) to make a disqualification order against the 2nd Respondent. It is further submitted by the Official Receiver that the conduct of the 2nd Respondent is such that a disqualification order of 4 years (which, subject to the approval of the Court, has been agreed between the parties) is appropriate.

5.    Solely for the purpose of resolving these proceedings as set out above, the 2nd Respondent accepts that, by reference to the facts which are not in dispute, the Court can be satisfied as to his unfitness to be concerned in the management of a company, and that it would be appropriate to make an order against him of 4 years. The 2nd Respondent also agrees that if, pursuant to this Statement, there is a Carecraft disposal of these proceedings, then there should additionally be an order made that he should pay the Official Receiver’s costs of these proceedings, to be taxed if not agreed.

6.    In the event of a disqualification order being made by reference to this Statement, the Official Receiver reserves the right to disclose this Statement to third parties where it appears proper to do so, to make use of it for the purpose of any press release issued in respect of these proceedings, and to refer to it for all purposes connected with or ancillary to these proceedings and any other proceedings against the 2nd Respondent under the Ordinance.

7.    The Official Receiver and the 2nd Respondent agree that, if for any reason, the Court is unwilling to approve a Carecraft disposal of these proceedings, that no further reference may be made by any party to this Statement (or to the admissions or to the concessions contained herein) during the course of these proceedings and they will remain confidential thereafter. The Official Receiver and the 2nd Respondent also agree that, in such event, they will jointly apply to the Court for a direction that a different judge should hear the contested trial.

8.    In the event of a disqualification order being made by reference to this Statement, the Official Receiver and the 2nd Respondent agree that they will jointly apply for a direction that this Statement be annexed to the Court’s judgment.

Structure of this Statement

9.    The structure of this Statements is as follows:-

(1)     Paragraphs 10 to 22 set out background information in relation to the PIHL, PFIL, the Peregrine Group and its management, the 2nd Respondent’s role and responsibilities therein;

(2)     Paragraphs 23 to 66 relate to the allegations of unfitness that are made by the Official Receiver and set out the components of those allegations; and

(3)     Paragraphs 67 to 73 contain matters of mitigation relied upon by the 2nd Respondent in relation to his conduct as a director other than in relation to the allegations of unfitness relied upon by the Official Receiver.

Facts not in Dispute Relating to the Conduct of the 2^nd Respondent

The Peregrine Companies and Group Structure

10.    The Peregrine group was founded by the 1st Respondent and Mr Leung in 1988. The 2nd Respondent, together with the 1st Respondent and Mr Leung were the key managers of the new business which was initially purely an equity house.

11.    PIHL was started in 1988. It began trading as part of the Peregrine Group in 1990, when the operating Peregrine Group companies were sold into a Hong Kong listed vehicle (which was then renamed Peregrine Investments Holdings Limited). It became the parent company of a large group of companies (approximately 250) carrying on the business of investment banking in Hong Kong and elsewhere in Asia.

12.    The core business of the growing group remained equities (sales and research) and corporate finance. In the early 1990’s it expanded into other countries in Southeast Asia by means of joint venture companies. The starting capital of US$38 million grew to US$447 million by the end of 1992 and US$599 by the end of 1994. The corporate finance business (headed by Mr Leung) in particular was buoyed by the introduction of Chinese company shares onto the Hong Kong Stock Exchange in October 1992.

13.    Towards the end of 1993, Peregrine added a fixed income business capability to their existing businesses in equities and equity related corporate finance, in order that the Peregrine group could offer a wider choice of debt financing to its corporate clients. In order to develop the fixed income business, Peregrine hired specialist personnel trained in overseas markets including Mr A Lee (the 4th Respondent herein) and his team from Lehman Brothers in New York. PFIL was incorporated on 14th October 1988, but did not commence trading until 1994 as the vehicle for the fixed income business.

14.    The Peregrine Group’s diversification into fixed income business required new operational systems and controls, and more sophisticated financing of its own balance sheet, which was to be provided by a new Treasury function. It was decided that Mr Tose would take on senior management oversight of Mr A Lee and the fixed income team.  Mr J Lee (the 3rd Respondent herein) was likewise recruited from Lehman Brothers to be the Peregrine Group’s Treasurer, reporting to the 2nd Respondent, and it was intended for Mr J Lee to progressively take over the 2nd Respondent’s responsibilities.  Mr J Lee began a programme of broadening Peregrine’s sources of funding, which continue until the summer of 1997 when the crisis in Asian markets precluded further development or diversification. In January 1996, Mr J Lee was appointed Head of Group Market Risk Management, taking over this responsibility from the 2nd Respondent. In early 1997, he became Head of Group Credit Risk Management (GCRM), again taking over this responsibility from the 2nd Respondent. Peregrine’s Product Control and Internal Audit functions were also strengthened.

15.    The Peregrine Group’s management system was reorganised at the end of 1995. It was reorganised along product and business lines, and the Board of PIHL was reduced to four executive and two non-executive directors.  EXCO was formed, consisting of the managing director of each business product line and head of each significant overseas business or office, 22 persons in all. EXCO was to become the management body responsible for the group’s business, whose performance was supervised and reviewed by the PIHL Board. The 2nd Respondent, Mr Tose, Mr Leung and Alan Mercer (who headed the Group’s legal and compliance department) were the executive directors on the PIHL Board and sat as members of EXCO. The full EXCO met formally once every few months (although only 4 times in 1997), with certain of its members meeting more often on an informal basis (although only twice in 1997) (the “EXCO MDs”).  Mr A Lee reported to EXCO and to Mr Tose. The  PIHL Board ceased to meet in 1996 and 1997 save to transact formal business (such as the approval of accounts and the use of the company seal). PFIL’s Board likewise only met to transact such formal business.

16.    PFIL was successful at the outset and a feature of its business was its willingness to undertake large transactions in relation to the Peregrine Group’s own size. Through the period from 1994 to 1997, its inventory of debt holdings and derivative positions grew. In 1997, the Group correctly anticipated financial problems in Thailand and shifted focus to prefer Indonesia. In May 1997, PFIL committed to a package of transactions for Steady Safe, an Indonesian transport company, involving the provision of up to US$350 million in financing through bond issues.

17.    When the Asian Financial Crisis began in July 1997, PFIL became more pessimistic about Asian prospects and ceased to search actively for new business. The steep fall in the Hong Kong stock market and rumours against the Peregrine group in October 1997 made management of its funding more difficult, as did the continuation of the Asian Financial Crisis which had by then affected Japan and Korea, both important sources of funds for the Peregrine Group’s business. The economic situation in Indonesia continued to deteriorate through the end of 1997.

18.    A petition for the winding up of PIHL (HCCW 20/1998) was presented on 13th January 1998 by PBL, a Peregrine Group company and a creditor of PIHL. A provisional liquidator was appointed on the same date. A winding-up order against PIHL was made on 18th March 1998. Liquidators were formally appointed on 2nd July 1998. Its estimated total deficiency as regards creditors was HK$4.5 billion.  The estimated distribution to creditors is 100% for preferential creditors and 35.2% for ordinary creditors.

19.    A petition for the winding up of PFIL (HCCW 32/1998) was presented on 15th January 1998 by PML, a Peregrine Group company and a creditor of PFIL. Provisional liquidators were appointed on 16th January 1998. A winding-up order against PFIL was made on 18th March 1998. Liquidators were appointed on 2nd July 1998.  Its estimated total deficiency as regards creditors was some HK$1.5 billion.  The estimated distribution to creditors is 100% for preferential creditors and 35% for ordinary creditors.

20.    On 23rd April 1999, Mr. Farrant was appointed by the Financial Secretary under section 143(1)(a) of the Ordinance to investigate the affairs of PIHL and PFIL. The Report was published on 26th March 2001.

The 2nd Respondent

21.    The 2nd Respondent was born on 28th March 1947. He was a director of PIHL from 13th March 1990 to 10th October 1998. He was a director of numerous other companies within the Peregrine group, including PFIL, of which he was a director from 8th April 1991 to 10th October 1998. He is a qualified accountant with over 30 years experience of accounting and stockbroking, and had previously been Finance Director of Vickers da Costa, Hong Kong.

22.    The 2nd Respondent was Deputy Managing Director and Finance Director of the Peregrine Group. At the beginning, he was effectively the chief operating officer of the Peregrine Group, with a wide range of group-level responsibilities including compliance, internal audit, treasury, risk management, IT, personnel and back office settlement functions. As the business grew and diversified, and in preparation for his eventual retirement and emigration to Australia, there was a phased transfer of some of his responsibilities to Alan Mercer and Mr J Lee.

Management and Control

23.    The specific allegations against the 2nd Respondent are that, as a director of PFIL and PIHL, he failed properly to monitor and control the business of PFIL, in particular he:-

(1)     Failed to ensure that PFIL’s business was subject to independent credit control and monitoring oversight before late 1997;

(2)     Failed to ensure that the recommendations of the draft Internal Audit Report into PFIL from 1996 in relation to credit monitoring and control were implemented in a timely manner or at all;

(3)     Failed to ensure that counterparty limits were applied to the business of PFIL, whether following the recommendation of the draft Internal Audit Report into PFIL from 1996, or at all;

(4)     Failed to ensure that there were any or any proper credit procedures within PFIL;

(5)     Failed to ensure that prudent limits on counterparty and country exposures were applied to PFIL, and to ensure that concentration risks were considered by the boards of PFIL, PIHL and/or EXCO;

(6)     Failed to ensure that syndication limits imposed upon PFIL’s business were followed, and that breaches of those limits were addressed by the board of PFIL or PHIL and/or EXCO properly or at all;

(7)     Failed to ensure that PFIL’s credit files were adequate and properly maintained;

(8)     Failed to ensure that credit mitigation documentation was completed in a timely and effective manner;

(9)     Failed to ensure that the risks in relation to PFIL’s business were adequately addressed, monitored and controlled by the boards of PFIL or PIHL and/or EXCO;

(10)   Failed to ensure that any proper risk limits were placed upon PFIL’s business;

(11)   Failed to ensure that breaches of risk limits were addressed promptly and properly;

(12)   Failed to ensure that there was a properly documented and followed procedure for valuations in relation to PFIL’s business;

(13)   Failed to ensure that there was proper independent oversight of valuations placed on PFIL’s portfolio;

(14)   Failed to ensure that there were adequate policies and procedures for provisioning in relation to PFIL’s business;

(15)   Failed to ensure that the recommendations of the 1996 draft Internal Audit report into PFIL were properly implemented in a timely manner, or at all.

The 2nd Respondent admits these allegations for the purpose of this Statement by reference to the undisputed facts set out below.

Independent Credit Control of PFIL

24.    The nature of PFIL’s business meant that it was a major contributor to the group’s credit risks.  The size of its exposures to counterparties necessarily meant that they contained significant credit risks (many of which, such as Steady Safe, came home to roost as the markets in Asia collapsed in 1997).  This was quite apart from the fact that Peregrine was operating in relatively (compared to Western Europe, Japan and the US) immature, and occasionally unstable, Asian markets and deliberately targeting second tier corporates for its activities.

25.    In 1996, the Japan Bond Research Institute (a credit rating agency), investigated Peregrine.  Their conclusions were given prominence in Peregrine’s 1996 Annual Report.  This included a rating commentary dated 16th January 1997, which highlighted in its Summary of Evaluation, “Unfavourable Points”, the increase in Peregrine’s credit risk exposure as a result of the growth of Peregrine’s fixed income business (PFIL).

26.    A set of group credit risk procedures was produced in 1994 and early 1995, consisting of a number of separate memos describing policies in relation to credit matters (the “Procedures”), which were implemented by the Group Credit Risk Management (GCRM) function, then reporting to the 2nd Respondent.  Mr J Lee, who had been specifically hired for his expertise in the area and who was already Head of Group Market Risk Management, took over responsibility from the 2nd Respondent as Head of Group Credit Risk Management (GCRM) in early 1997.

27.    By the beginning of 1997, the majority of the Peregrine Group’s business functions had implemented procedures in line with the Procedures, but PFIL, under Mr A Lee, did not do so and used its own credit risk procedures under which a credit committee consisting of senior PFIL staff approved new commitments. Through 1997, PFIL continued to operate without adequate group level oversight from GCRM, and it was only in late 1997 that steps were taken to put in place independent oversight of credit risk in relation to PFIL. Prior to that time, PFIL’s credit process was entirely without oversight and was not independent from the trading process.  Indeed, Mr A Lee accepted that he was ultimately in charge of the PFIL credit process, and could not be overruled, although he was answerable to the 1st Respondent. Thus, those in charge of the trading side were also in charge of this important control, clearly a conflict of interest and in breach of best practice.  The 2nd Respondent, as set out further below, was aware of these deficiencies, but took no steps to ensure that his successor, Mr J Lee, had taken control of these matters in 1997.

Allegation:  The 2nd Respondent, in failing properly to monitor and control the business of PFIL, in particular, failed to ensure that PFIL’s business was subject to independent credit control and monitoring oversight before late 1997.

Draft 1996 Internal Audit Report on PFIL

28.    In about March 1996, the Internal Audit department conducted an audit of PFIL, producing a draft report in the middle of that year.  The draft Internal Audit Report into PFIL of 1996 noted in its Executive Summary the fact that PFIL’s credit approval process and structure was not the subject of independent oversight and recommended that this be changed as a result of theconflict of interest between revenue generation and proper control of credit risk.  This and the other issues highlighted in the executive summary were described as “highly significant and … of a nature which exposes Fixed Income to major risk.  Immediate corrective action is required.”

29.    In paragraph 1.1 of the 1996 draft Internal Audit Report, these control weaknesses were expanded upon.  The first bullet point highlighted the absence of independent monitoring and the inherent conflict of interest.  The second bullet point raised the lack of independent oversight, and the fact that PFIL’s new issues were not the subject of approval by any higher body (such as the board or EXCO).  The third bullet point noted the total absence of fixed income counterparty limits.  It referred to the claim by PFIL that its counterparties were well respected and sound: this begged the question, in the absence of proper and independent credit analysis.  In relation to PFIL’s claim that it held securities (collateral) against counterparty default, the internal auditors noted that there were no signed agreements in this respect (as to which see below).

30.    The implications section in relation to credit, described as being “High Risk”, stated that the absence of formal controls meant that: “Fixed Income may incur counterparty exposure that is excessive to the risk appetite of the Group without anyone’s knowledge”.  In fact, there never was, at any time, any proper consideration of the credit risk appetite of the group, or any criteria against which those risks could be assessed in relation to PFIL.  There was no proper credit policy in relation to PFIL, and, as considered below, there were no proper risk limits of any sort, or proper independent consideration of risk levels and appetites by the boards of either PFIL or PIHL, or EXCO or the EXCO MDs in relation to PFIL.

31.    The Internal Auditors concluded that there needed to be an independent credit assessment and approval system for PFIL and pre-defined credit approval procedures and authorities, as well as pre-approved counterparty credit limits.  None of these were properly in place by the time of the collapse.

32.    The 2nd Respondent, who was responsible for internal audit at the time, saw the 1996 draft Report on PFIL but took no action to bring it to the attention of the boards or committees of PIHL and/or PFIL, and did not brief his successor as Head of Internal Audit, Alan Mercer, on the priority to be given to the outstanding matters under the Internal Audit Report, instead relying on the fact that remedial action was purportedly already being taken by PFIL and waiting for a further internal audit to verify whether the required improvements had been made.

33.    The 2nd Respondent, after handing over responsibility to Mr J Lee for GCRM, appears not to have taken steps to ensure that his successor was in control. Further, as a director of PIHL and PFIL, the 2nd Respondent failed to ensure that PFIL’s business was subject to independent credit control and monitoring before late 1997, and the 2nd Respondent failed to ensure that the recommendations of the Internal Audit Report were implemented in a timely manner.

Allegation: The 2nd Respondent, in failing properly to monitor and control the business of PFIL, in particular, failed to ensure that the recommendations of the draft Internal Audit Report into PFIL from 1996 in relation to credit monitoring and control were implemented in a timely manner or at all.

Credit Processes within PFIL

34.    Within PFIL, there appear only to have been occasional credit limits applied to various deals, often flagrantly breached.  There were no counterparty risk limits, nor any country risk limits.  Thus, in relation to PFIL, Peregrine had no independent credit monitoring function until shortly before its collapse, while those credit functions and processes that there were within PFIL, were seriously deficient in themselves, quite apart from the lack of oversight.  The deficiencies are expanded upon below, and many had been highlighted in the draft Internal Audit Report on PFIL for 1996.  Each of the points set out below in relation to PFIL’s actual and limited credit process relate to the allegation against the 2nd Respondent that he failed to ensure that there were any or any proper credit procedures within PFIL.

Allegation: The 2nd Respondent, in failing properly to monitor and control the business of PFIL, in particular, failed to ensure that there were any or any proper credit procedures within PFIL.

Lack of Counterparty Limits

35.    The internationally recognized 1994 BIS Derivative Risk Management guidelines, Part V, paragraph 5, in relation to Credit state that: “Credit limits … should be established for all counterparties with whom the institution conducts business… in all cases, it is important that credit limits be determined by personnel who are independent of the derivatives function…”.  However, no counterparty limits were ever instituted or imposed upon PFIL.  Moreover, it was not until late 1996 at the earliest that counterparty risk reports were produced on a regular basis.  Even then they were only being produced every other week and then after the fact.  An email from Mr J Lee correctly pointed out that this did not amount to, “an ability to monitor counterparty risk in a manner which purports some resemblance of control”.  Even into May 1997, counterparty risk reports were not being updated in a timely manner.  In fact, counterparty risk reports were not produced on a regular basis until 14th August 1997.  The 2nd Respondentought to have ensured that PFIL had a proper and effective system of counterparty limits and approvals in accordance with well acknowledged industry practice.

Allegation: The 2nd Respondent, in failing properly to monitor and control the business of PFIL, in particular, failed to ensure that counterparty limits were applied to the business of PFIL, whether following the recommendations of the draft Internal Audit Report into PFIL in 1996, or at all.

Lack of Prudential Limits

36.    Further, PFIL failed to follow acknowledged international industry practice in relation to counterparty risks.  BIS guidelines recommended that exposures to a counterparty or its group should not have exceeded 25% of Peregrine’s capital base, or 10% of the counterparty’s capital base.  While PFIL was not a regulated company and so not obliged to keep within these limits, they are well acknowledged industry practice which reflects a prudential approach to counterparty risk.  However, Peregrine had no such policy and at no time does there appear to have been any discussion or decision at board or committee level of Peregrine’s and PFIL’s approach to large exposures of this sort, or as to whether PFIL should enter into transactions substantially in excess of the recognized prudential limits. 

37.    That PFIL did enter into a number of transactions substantially in excess of these limits was highlighted in the Counterparty Credit reviews belatedly produced by Luis Maglanoc in August and September 1997.  In relation to the counterparties APP, Steady Safe, Medco Energi, Robinson, Tanayong, Van der Horst, and SVOA, Luis Maglanoc’s reviews showed a substantial breach of the BIS prudential guidelines.  This was something highlighted in the Counterparty Credit Reviews of the individual companies named above.  Peregrine’s exposure to Steady Safe alone was some 35% of Peregrine’s capital base, while its exposure to Steady Safe and APP/Sinar Mas, both of them Indonesian counterparties, together amounted to about three quarters of the Group’s capital.  This was, according to the Inspector, “hazardous and foolhardy”.

38.    PFIL’s business of its nature exposed it and the group to substantial credit risks, particularly given the limited markets in which Peregrine operated and the nature of its clients.  Industry practice and commercial prudence required that Peregrine considered the nature of those risks, including the BIS’s recognized prudential limits on counterparty exposures. The 2nd Respondent, as a director of both PFIL and PIHL ought to have ensured that such risks were properly assessed and considered by the boards of PFIL/PIHL or EXCO.

Allegation: The 2nd Respondent, in failing properly to monitor and control the business of PFIL, in particular, failed to ensure that prudential limits on counterparty and country exposures were applied to PFIL, and to ensure that concentration risks were considered by the boards of PFIL, PHIL and/or EXCO.

Breaches of syndication limits

39.    PFIL did have some limits on syndication deals.  However, these were routinely broken, for long periods.  This would have been absolutely apparent to anybody receiving the PFIL aged inventory report, as the 2nd Respondent did.  Although these reports showed significant and long term breaches of limits, there is no sign that these breaches led to any action on the part of any of those seeing them: in short, the limits might as well not have been there.

Allegation: The 2nd Respondent, in failing properly to monitor and control the business of PFIL, in particular, failed to ensure that those syndication limits imposed upon PFIL’s business were followed, and that breaches of those limits were addressed by the board of PFIL or PIHL and/or EXCO, properly or at all.

Lack of Concentration Risk Limits

40.    There was a total absence of country or other concentration risk limits.   Although concentration risk reports were produced (from about mid-1997), which showed extraordinarily high country risk concentrations (for example, 73% of the bond position and 65% of PFIL’s overall position was to Indonesia as at 22nd August 1997), at no time do there appear to have been any country limits set, or any sort of assessment of such concentration risks by senior management.  The 2nd Respondent never properly considered the credit risks involved in these concentrations.  Similarly, there was never any informed discussion at board, EXCO or EXCO MD level of Peregrine’s approach in this respect. The 2nd Respondent ought to have ensured that there was a proper and prudent policy and proper limits in relation to such risks.

Allegation: The 2nd Respondent, in failing properly to monitor and control the business of PFIL, in particular, failed to ensure that prudential limits on counterparty and country exposures were applied to PFIL, and to ensure that concentration risks were considered by the boards of PFIL, PHIL and/or EXCO.

Credit Files/Credit Mitigation Documentation

41.    The credit files maintained by PFIL, including the credit files for certain very large transactions (Tanayong and Robinson), were insubstantial and contained seriously inadequate information.

Allegation: The 2nd Respondent, in failing properly to monitor and control the business of PFIL, in particular, failed to ensure that PFIL’s credit files were adequate and properly maintained

42.    Although unsigned ISDA agreements were not unusual in the banking industry, PFIL had not properly monitored the process of ensuring that ISDA agreements were signed up with counterparties (such as Robinson and Tanayong) before they proceeded to execute transactions. The ISDA documentation would have given PFIL protection, including in the form of legal entitlement to collateral. In the Steady Safe transaction, the pledge of share collateral by Steady Safe to PFIL was not properly documented and resulted in difficulties in perfecting the security in late 1997. There were similar problems with perfecting the security given by Tanayong in mid 1997 as a result of unsigned ISDA documentation.

43.    Despite the fact that the inadequacies of PFIL’s ISDA’s had been highlighted in the draft Internal Audit Report on PFIL in 1996, which he had seen, the 2nd Respondent failed to ensure that PFIL’s credit files were adequate and properly maintained, or to ensure that credit mitigation documentation was completed in a timely and efficient manner.

Allegation: The 2nd Respondent, in failing properly to monitor and control the business of PFIL, in particular, failed to ensure that credit mitigation documentation was completed in a timely and effective manner.

Risk Management and Reporting in relation to PFIL

44.    PFIL was subject to inadequate supervision by its board of directors or the board of directors of PIHL, which ceased to have direct management oversight following the reorganisation of Peregrine’s management system at the end of 1995.  EXCO and the EXCO MDs, which replaced the boards of directors, did not adequately supervise PFIL’s credit procedures and the other risks involved in its business.  This was contrary to well established industry practice which requires strong control of risk from the highest levels.

45.    The culture at Peregrine in relation to risk was well summarised by Mr J Lee at the EXCO meeting of 6th July 1996, where he presented a paper on Market Risk Management.  It noted a culture whereby deals involving market risk were undertaken without prior approval and/or involvement of the required parties.  This resulted not only in losses but a lack of accountability for them.  Mr J Lee’s paper referred to the need to establish approved trading limits for all risk activities and enforce strict compliance.  At the meeting, the minutes show that trading limits needed a procedure for formal approvals and monitoring.  Thus, the poor risk culture and lack of limits was raised at EXCO in mid-1996, but it appears that there was a failure to take any proper steps to ensure that the risk culture was changed, or proper limits were imposed.  The 2nd Respondent, as a director of PFIL and PIHL ought to have ensured that he and the boards and committees of PFIL/PIHL were properly aware of and in control of risks in relation to PFIL’s business and/or that those risks were properly monitored and controlled.

Allegation: The 2nd Respondent, in failing properly to monitor and control the business of PFIL, in particular, failed to ensure that risks in relation to PFIL’s business were adequately addressed monitored and controlled by the boards of PFIL or PIHL and/or EXCO.

46.    The failure properly to monitor and control risk in relation to PFIL was reflected most clearly in the almost total absence of risk limits on PFIL’s business until August 1997.  The only limits were those introduced in August 1995, which were not even risk limits per se: rather they were overall net position limits and an overall funding limit.  This provided no proper control over the business.  By comparison to internationally accepted standards on risk control, Peregrine’s systems for risk control were seriously inadequate.  The draft Internal Audit Report for PFIL for 1996, seen by the 2nd Respondent, was critical of this lack of controls.

47.    Further, also contrary to internationally accepted standards, there were no procedures within Peregrine for dealing with breaches of the limited risk limits which there were, although such breaches were regularly reported in reports seen by, amongst others, the 2nd Respondent.  No steps were ever taken in respect of such breaches.  Again, the 1996 draft Internal Audit Report, seen by the 2nd Respondent, had been critical of this failure to follow-up breaches.

Allegation: The 2nd Respondent, in failing properly to monitor and control the business of PFIL, in particular, failed to ensure that any proper risk limits were placed upon PFIL’s business.

Allegation: The 2nd Respondent, in failing properly to monitor and control the business of PFIL, in particular, failed to ensure that breaches of risk limits were addressed promptly and properly.

Failures in relation to valuation and provisioning

48.    There were also fundamental difficulties and deficiencies in relation to the risk and other financial reports provided to senior management.  These related, in particular to the valuation of PFIL’s very substantial inventory of bonds and the provisioning in respect of them.

49.    The 2nd Respondent was Finance Director of the Peregrine Group and was responsible at group level for Product Control, whose head reported to him.  Product Control had been established in May 1996 in order to provide independent valuations and provisioning across the group.

50.    PFIL was engaged in a range of activities and had positions which were complex and difficult to value. The basis of valuation for PFIL’s trading portfolio was termed ‘mark-to-market’ but was actually based on simply the last traded price of any given type or category of bond. This resulted in the ‘mark-to-market’ values of the more illiquid bonds becoming an unreliable estimate of what the position could be sold for by PFIL. As a tool for adjusting the valuations, a policy was introduced in 1997 to make provisions against ‘aged inventory’, which required long held positions to be marked down in value gradually: this was still seriously inadequate.

51.    Moreover, although the 1996 draft Internal Audit Report on PFIL (seen by the 2nd Respondent) had been critical of the failure, there was no formally documented policy on valuations in Peregrine until mid-1997.  Some steps were then taken towards producing one, although there remained serious deficiencies in Peregrine’s approach to the valuations of PFIL’s positions.  The 2nd Respondent should have ensured that there was a properly documented and followed procedure for valuations in relation to PFIL’s business: without this, he could not even have been satisfied as to the accuracy of PFIL’s accounting records and accounts.

52.    More importantly, there was an absence of independent oversight of PFIL’s valuations.  PFIL’s traders valued their own holdings or positions.  The independent verification of traders’ valuations is a cornerstone of robust risk management; not only to ensure that the books and records are fair, but also that risk management data is accurate.  This deficiency in PFIL’s valuation procedures had been highlighted in the Internal Audit Report for PFIL in 1996, seen by the 2nd Respondent.  He took no steps to ensure that Product Control was fulfilling its function in respect of PFIL.

53.    The importance of proper valuations of positions was known to Peregrine and the 2nd Respondent, who had responsibility for it, since Product Control reported to him.  The valuation of PFIL’s positions became more difficult and more important as the Asian crisis developed.  Many of the positions in PFIL’s inventory were very old by mid-1997, reflecting Peregrine’s inability to sell them (and therefore a lack of market).  This increased the need to ensure that the positions were being correctly and conservatively valued.  Without proper valuations, not only would Peregrine’s accounts not be accurate, but its risk information and reports would not have been accurate.  Similarly, what stress testing that there was within Peregrine in relation to PFIL did not take sufficient account of the fact that many of the securities held by PFIL had been held for long periods, and failed to take sufficient account of the credit risks involved.

54.    The 2nd Respondent took no steps to have satisfied himself that Product Control, established to provide independent control on valuations, was fulfilling its role in relation to PFIL, particularly once its head had departed in April 1997.  The 2nd Respondent, as the person to whom Group Product Control reported and as a director of PFIL and PIHL, ought to have taken steps to have satisfied himself that PFIL’s positions were being independent valued.

Allegation: The 2nd Respondent, in failing properly to monitor and control the business of PFIL, in particular, failed to ensure that there was a properly documented and followed procedure for valuations in relation to PFIL’s business.

Allegation: The 2nd Respondent, in failing properly to monitor and control the business of PFIL, in particular, failed to ensure that there was proper independent oversight of valuations placed on PFIL’s portfolio.

55.    In conjunction with the absence of a formal policy on valuation, and the lack of independent oversight of the valuations of PFIL’s positions, there was also no policy on provisioning within Peregrine, although this was necessary not only for risk management purposes, but also for the purposes of producing accurate accounts.  Instead there was nothing more than ad hoc provisioning.  The 2nd Respondent ought to have ensured that there was a proper provisioning policy in place within Peregrine, and in particular in relation to PFIL.

Allegation: The 2nd Respondent, in failing properly to monitor and control the business of PFIL, in particular, failed to ensure that there were adequate policies and procedures for provisioning in relation to PFIL’s business.

Internal Audit

56.     The specific allegations against the 2nd Respondent in this respect are that, as a director of PFIL and PIHL:

(1)     The 2nd Respondent, in failing properly to monitor and control the business of PFIL, in particular, failed to ensure that the recommendations of the draft Internal Audit Report into PFIL were properly implemented in a timely manner or at all[1].

(2)     The 2nd Respondent permitted the draft Internal Audit report from 1996 into PFIL to remain incomplete and not to be circulated to wider management, including EXCO.  Further the 2nd Respondent failed to ensure that the recommendations of that report were implemented in a timely manner or at all.

57.    The 2nd Respondent admits these allegations for the purposes of this statement by reference to the undisputed facts set out below.

58.    The 2nd Respondent was responsible for internal audit until March 1997, when the function was passed on to Alan Mercer.

59.    The 1996 Internal Audit Report on PFIL, which was circulated in draft in mid 1996 but never completed, made a number of serious criticisms of PFIL’s control procedures (some of which have been set out above) and made a number of important recommendations to remedy the position.  However, none ofthese had been properly implemented by the time of Peregrine’s collapse. The 2nd Respondent, who was responsible for internal audit at the time, saw the Report but did not take adequate action to bring it to the attention of the boards or committees of PIHL and/or PFIL, or to brief Alan Mercer on the priority to be given to the outstanding matters under the Report, instead relying on the fact that remedial action was purportedly already being taken by PFIL and waiting for a further internal audit to verify whether the required improvements had been made.

Allegation: The 2nd Respondent, in failing properly to monitor and control the business of PFIL, in particular, failed to ensure that the recommendations of the draft Internal Audit Report into PFIL were properly implemented in a timely manner or at all.

Allegation: The 2nd Respondent permitted the draft Internal Audit report from 1996 into PFIL to remain incomplete and not to be circulated to wider management, including EXCO.  Further the 2nd Respondent failed to ensure that the recommendations of that report were implemented in a timely manner or at all.

1996 Annual Report

60.    Page 32 of the annual report of PIHL for the year ended 31st December 1996 (“1996 Annual Report”) described the Peregrine Group’s credit risk management process. It referred to a Group Credit Risk Committee as being responsible for approval of credit limits to clients. The Group Credit Risk Committee in fact never met as a formal functioning body. The 2nd Respondent and Mr J Lee, being those in charge of Group Credit Risk either just before, during or just after the publication of this passage, approved this description, although they should have been aware that it mis-stated the position.

61.    The specific allegation against the 2nd Respondent in this respect is that, as a director of PFIL and PIHL: the 2nd Respondent permitted the 1996 Annual Report of the Peregrine group to make misleading statements in relation to the credit procedures and policies of Peregrine, particularly in relation to PFIL.

62.    The 2nd Respondent admits this allegation for the purposes of this statement by reference to the undisputed facts set out below.

63.    Page 32 of the 1996 Annual Report of Peregrine for the year ended 31st December 1996, in a section on Credit Risk, stated:

“The Group Credit Risk Management Department evaluates the creditworthiness of each client with which the Group may do business, including institutions, corporates, individuals, and country exposure.  The authority to approve risks its tiered with the highest approval limit resting with the Group Credit Risk Committee.  The Group Credit Risk Committee is responsible for the ongoing approval of credit limits granted to clients and the monitoring thereof.  Credit is extended to clients on a “credit risk equivalent” basis which most notably covers derivative products…”.

64.    Page 54 of the Annual Report contained a section on Credit Risk in relation to Off Balance Sheet Financial Instruments.  This stated that: 

“The Group manages the credit risk of its derivative on an off balance sheet positions by: [amongst other things] imposing limits on individual counterparties”.  It continued: “The Group’s credit risk limits to customers/counterparties are managed centrally to optimize credit availability and the control of risk concentration.”

65.    These statements were misleading, and in most respects false when applied to PFIL.  As at the date of this Report (i.e. March 1997) it was not the case that there were individual counterparty limits in relation to PFIL, or country limits, or any central or independent monitoring of PFIL’s credit risks.  Moreover, the “Group Credit Risk Committee”, referred to in the Annual Report, did not meet as a functioning body.  Thus, the Annual Report was inaccurate in this respect also.

66.    Both Mr J Lee, who was by then either in charge or just about to become in charge of Group Credit Risk when this section was apparently approved, and Mr Wong, who was or just had been, in charge of Group Credit Risk, approved this passage of the Annual Report (see the Report, paragraphs 4.75 and 4.96).  Mr Wong had seen the draft Internal Audit Report on PFIL from 1996 and should have been aware that the Annual Report was a clear misstatement.

Allegation: The 2nd Respondent permitted the 1996 Annual Report of the Peregrine group to make misleading statements in relation to the credit procedures and policies of Peregrine, particularly in relation to PFIL.

Points of Mitigation Raised by the 2^nd Respondent

67.    The 2nd Respondent (along with the 1st Respondent and Mr  Leung, the co-founders of the Peregrine Group) invested substantially in Peregrine themselves, thus making their personal fortunes and Peregrine’s fortunes inter-related. The 2nd Respondent had every incentive to act in the bests interests of PIHL, and did do so to the best of his ability.

68.    The collapse of PIHL was precipitated by the Asian Financial Crisis, the extent and severity of which was not anticipated, and could not have been anticipated, by leading economists and bankers around the world. Mr. Farrant came to this conclusion and found that the Asian Financial Crisis was the proximate cause of the Peregrine Group’s collapse, in the sense that, if the crisis had not occurred, there is no reason to think that the group would have failed in early 1998. However, he also concluded that Peregrine was badly prepared for the crisis. Better infrastructure and risk management would have in all probability enabled the Group to survive, even if severely affected by the crisis.

69.    Mr Farrant, in his report, found there had been no fraud or dishonesty on the part of any of Peregrine’s directors, including the 2nd Respondent.

70.    The 2nd Respondent’s good faith is demonstrated by the fact that although a substantial shareholder in PIHL (which was publicly quoted), the 2nd Respondent did not sell any of his PIHL shares in the months before the collapse. To the contrary, as late as 31st December 1997 the 2nd Respondent (along with Mr Tose and Mr Leung) increased his shareholdings in PIHL reflecting his faith in the Group, its management and systems and the 2nd Respondent’s view that the Group had the ability to overcome the Asian financial crisis.

71.    The Inspector further concluded that the directors were conscientious in preparing public announcements made by PIHL in the six months leading up to its collapse. In particular, the Inspector did not consider that any of the executive directors had knowingly failed to disclose to shareholders matters in relation to the financial position of PIHL.

72.    The 2nd Respondent has given full cooperation to the liquidators of the Peregrine Group and the Inspector.

73.    Since the collapse of the Peregrine Group, the 2nd Respondent has emigrated to Australia and has largely withdrawn from business life, having undertaken some consultancy work between April 1998 to October 1998 and thereafter between December 2000 and June 2001.  In effect, the 2nd Respondent has undergone almost 6 years of self imposed disqualification.

Dated this 28^th day of May 2004

SCHEDULE OF ABBREVIATIONS

[1]                   This forms part of the general allegation of failure properly to monitor and control, set out above, but is taken here because it has the same subject matter as the other, separate allegation against the 2nd Respondent in relation to the Internal Audit.