THE FINANCIAL SECRETARY v. PEREGRINE INVESTMENTS HOLDINGS LTD. (in liquidation) AND OTHERS

HCMP 1968/99

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1968 OF 1999

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J U D G M E N T

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1. I have before me a notice of motion taken out by the Financial Secretary seeking a declaration that the affairs of Peregrine Investments Holdings Limited ("Peregrine") as well as Peregrine Fixed Income Limited ("PFIL") ought to be investigated by an inspector or inspectors, to be appointed by the Financial Secretary.

2. Section 143(1)(a) of the Companies Ordinance provides as follows :

"143. Without prejudice to his powers under section 142, the Financial Secretary -

(a) shall appoint one or more competent inspectors to investigate the affairs of a company and to report thereon in such manner as the Financial Secretary may direct, if the court by order declares that its affairs ought to be investigated by an inspector appointed by the Financial Secretary."

The other sub-paragraphs of sub-section (1) are irrelevant for the purposes of today's application. They deal with other situations which do not arise for consideration today.

3. The evidence that is before me consists of an affidavit of Paul Richard Bailey, a senior director of the Securities and Futures Commission ("SFC") which exhibited a report compiled by the SFC ("the SFC Report"). This was presented to the Financial Secretary on 1 May 1998. There is an affirmation from Mr Chan Ping Keung, the Principal Assistant Secretary for Financial Services of the Financial Services Bureau, as well as an affidavit from the Financial Secretary. The main affidavit is that of Mr Chan. As a preliminary matter, it is to be noted that both the affidavits of Mr Chan and of the Financial Secretary referred to a "Submission" that had been prepared for the Financial Secretary by the Securities Division of the Financial Services Bureau. Mr Aiken SC who appears for the Financial Secretary is content not to place any reliance on this Submission which has not been exhibited and is therefore not before the Court. I will therefore proceed to consider the application on this basis.

4. Mr Chan's affidavit refers to the reasons why an inspector ought to be appointed. The need arises out of the events leading up to the appointment of Provisional Liquidators in January 1998, following the presentation of winding-up petitions in respect of Peregrine and of PFIL. His conclusion, after studying the SFC Report, is that it raises serious questions about the conduct of Peregrine and PFIL, their subsidiaries and their management which should be fully investigated.

5. Quite apart from the SFC Report, he sets out a number of reasons in support of the Financial Secretary's application :

"As Peregrine was one of the largest and fastest-growing financial conglomerates in Hong Kong and the region, there was considerable public interest and interest in the financial market ....., as to exactly what went wrong with Peregrine and PFIL. .....

There is a need to clarify for the shareholders of Peregrine through the investigation if anyone in the leadership and management of Peregrine and PFIL was responsible for their collapse, whether any offences had been committed, and whether the respective duties of individual managers and directors were fully and honestly discharged. This would help strengthen the confidence of the general investing public in the financial market of Hong Kong.

There are concerns in both the local and international investing community caused by the collapse of Peregrine and PFIL. Hong Kong has been successful in establishing itself as an international financial centre and a sound regulatory regime with effective enforcement. The confidence of local as well as international investors in our regulatory regime and our status as international financial centre would be adversely affected should these concerns be left unaddressed. The investigation would also aim to identify any lessons to be learned ...."

6. The Financial Secretary, having read the SFC Report, has come to the view that a more comprehensive investigation by an inspector of the affairs of Peregrine and PFIL ought to be carried out, and he agrees with the other reasons set out in the affirmation of Mr Chan referred to earlier.

7. There are two other aspects that should be mentioned at this stage. First, the SFC Report was based on a very limited investigation. It was based largely on material obtained by the SFC invoking its powers under section 29A of the SFC Ordinance. It was also produced under very severe time constraints. If an inspector were to be appointed, the inspector's inquiry would not be so circumscribed. The other matter relates to the liquidators. Whilst the liquidators' main concern is to secure assets for the creditors, in contrast, by its nature, an inspector's focus is different : his function is inquisitorial. There are other differences : liquidators will not publish a report whilst an inspector will publish a report which may be made public. The inspector will necessarily consider wider issues than the liquidators. He would be in a position to consider, for example, the state of current regulations and would be in a position to make recommendations to reduce the risk of a collapse similar to Peregrine occurring again. Whilst there is a duty on the liquidators to report criminal conduct, they do so only if they come across it. In contrast, an inspector will inquire into any illegal activity.

8. There are very few cases on the operation of section 143(1)(a). There is an English decision In re Miles Aircraft Limited (No.2) [1948] W.N. 178 in which Roxburgh J had to consider an application by the Board of Trade under section 43(1) of the Companies Act 1947, that an order might be made declaring that the affairs of that company ought to be investigated by an inspector to be appointed by the Board of Trade. Section 43(1) of the Companies Act 1947 is in substance the same as section 143(1)(a) of Cap.32. The test that is set out in Re Miles Aircraft is that the court has to be satisfied that a prima facie case has arisen for investigation. The only other case that is relevant isIn re San Imperial Corporation Ltd [1978] HKLR 270. That was an application brought by judgment creditors for a declaration under section 143(a). After reviewing a large number of English and Commonwealth authorities, based on those authorities, the learned judge formulated 14 principles.

9. Having read the report, I have some difficulty in seeing the relevance of some of the cases relied on for the simple reason that they concerned provisions that were perhaps similar to section 143(1)(c) but not section 143(1)(a). Section 143(1)(c) deals with specific matters which are therein set out, such as whether the business of a company had been conducted with intent to defraud its creditors, or carried on for an unlawful purpose, or if person concerned with its formation or management had been guilty of fraud, misfeasance or other misconduct. Section 143(1)(a) does not refer to any such specific matter; all it requires is that the court be satisfied that the affairs of the company ought to be investigated. As the learned judge recognized, section 143(1)(a) is extremely wide, I would agree with that. He further went on to say (with which I respectfully agree) that the court should consider whether the public interest would be served by a declaration (principle 7). There are two other principles set out in his judgment which should be mentioned (at 276 and 277) :

"(3) On the authorities cited above, there must be a strong suspicion of some grave misconduct or mismanagement to warrant the making of a declaration. A mere feeling that something is wrong will not suffice.

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(12) The remedy offered by section 143(a) must be given with extreme caution and is usually given in cases of fraud, unlawful or oppressive conduct or other grave misconduct, gross [mismanagement] or incompetency, or concealment of information."

With the greatest respect to the learned judge, I cannot accept that these limitations are to be read into section 143(a). The Court's discretion under that sub-section is cast in very wide terms and is in no way to be cut down by the matters set out in sub-paragraph (c). As noted earlier, the learned judge formulated those principles relying on the authorities which he reviewed earlier on in his judgment. The premise for those conclusions is questionable since those authorities did not deal with the scope of the court's powers under section 143(1)(a). To this extent, I part company with the views expressed in San Imperial. In my judgment, the court's power under section 143(1)(a) is not to be read restrictively and ought not to be restricted in the manner suggested by principles 3 and 12.

10. It has to be remembered that factually San Imperial was a very different case because it concerned a company whose shares were traded on the stock market, and any investigation of course would lead to a suspension of trading. No doubt that was a matter that the learned judge quite rightly took into account in exercising his discretion in that case. Those considerations do not arise in the present case since both Peregrine and PFIL are in liquidation.

11. So far as the appropriate legal test that is to be applied, I accept Mr Aikens' submission that it is that set out in Re Miles Aircraft. I would also add that the principle stated in San Imperial, that the court should consider whether the public interest would be served by a declaration, I am in agreement. I also agree with principle (14) which is that the purpose of the investigation is to discover facts and not to make any pronouncement on the propriety or impropriety on what has transpired.

12. Before applying the law to the facts before me, I should mention two matters. First, the liquidators of Peregrine and PFIL, although parties to this application are absent. I am informed by leading counsel for the Applicant that they do not oppose today's application and that they will abide by any order made by this court. It is relevant to note that In re Peregrine Fixed Income Limited [1998] 4 HKC 151 which came before me in September last year, the liquidators accepted that the collapse of the Peregrine Group is a matter that will require investigation (157B). They also considered that the liquidation of PFIL and the collapse of the Peregrine Group as a whole is a matter of public concern (157G). There is no reason to believe that the liquidators' current views are any different.

13. So far as the position of the Official Receiver is concerned, for the purposes of the application in the case just referred to, a report was filed with the court under section 191(1) by the liquidators jointly with the Official Receiver in which it is stated that "further investigations into the collapse of PFIL and of the Peregrine Group are desirable". The Official Receiver supports the application today.

14. In the light of the evidence that has been filed, I have no doubt whatsoever that the public interest would be served by the appointment of an inspector. I do not propose to rehearse the reasons advanced in support of the application that I have already set out. They are valid reasons : the shareholders, as well as the public, are entitled to know as to exactly what went wrong that caused Peregrine and PFIL to collapse. It is undoubtedly in Hong Kong's interest, if it is to continue to flourish as an international financial centre, that the concerns as to the failure of Peregrine should not be left unaddressed. If improvements can be made to the regulatory system as a result, it can only advance Hong Kong's interest.

15. For all those reasons, I am satisfied that the affairs of both Peregrine and PFIL ought to be investigated and I make the declaration sought.