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 originating summons issued by the Official Receiver for a disqualification order against 4 respondents under section 168H of the Companies Ordinance, Cap. 32.

2.  The proceedings arise out of the collapse of the Peregrine group of companies.

3.  The 1^st and 2^nd respondents, Philip Tose and Peter Wong Wing Cheong, have already been dealt with by way of a Carecraft procedure and disqualification orders were made against them of 4 years each on 8 October 2004.  The reasons appear in the judgment I handed down that day, reported in [2004] HKEC 1214.  I will refer to this as “the Judgment”.  The judgment that I am about to deliver should be read with the Judgment, as there are many matters in common and I do not wish to repeat myself.

4.  Today, I am concerned with the 3^rd respondent, John Eng Lee.  He has been served with the originating summons and related documents in these proceedings by courier out of jurisdiction, in accordance with an order made by the court in HCMP No. 104 of 2002 on 10 January 2002.  I understand from Mr Lam for the Official Receiver that all of the documents sent to the 3^rd respondent have not been returned undelivered.  He has not filed any acknowledgment of service or made any response at all.  The notice of the hearing today has been served on him.

5.  Under rule 9(1) of the Companies (Disqualification of Directors) Proceedings Rules, the court may make a disqualification order against the 3^rd respondent, notwithstanding he has not appeared, or completed and returned any acknowledgement of service of the summons, or filed any evidence.

6.  I will first deal with the status of the evidence put in by the Official Receiver in support of this application.

7.  The Official Receiver has filed a report for this application.  The report contained voluminous exhibits in 10 box files.  It also included the report of the inspector appointed by the Financial Secretary under section 143(1)(a) of Cap 32 to investigate the affairs of the companies in question, Peregrine Investments Holdings Limited (“PIHL”) and Peregrine Fixed Income Limited (“PFIL”).

8.  Rule 4(2) of the Companies (Disqualification of Directors) Proceedings Rules provides as follows:

“The evidence shall be by one or more affidavits, except where the applicant is the Official Receiver, in which case it may be in the form of one or more written reports (with or without affidavits by other persons) which shall be treated as if it had been verified by affidavit by him and shall be prima facie evidence of any matter contained in it”.

9.  Thus, by this provision, the Official Receiver’s report is prima facie evidence of its contents, notwithstanding that the report may contain statements made by others.  Further, no distinction is drawn between the body of the report and the documents annexed to it (Re City Investment Centres Limited [1992] BCLC 956 at 960b to i; Re Moonbeam Cards Limited [1993] BCLC 1099 at 1100h to 1101g; Re Rex William Leisure Plc [1994] Ch 350 at 367G).

10.  The inspector’s report is impliedly admissible evidence in directors’ disqualification proceedings.  This is because the terms of reference of the inspector required him to draw conclusions with respect to the performance of senior management and whether it was proper for the Financial Secretary or the Official Receiver to consider, on grounds of public interest, making an application for a disqualification order against specified persons under section 168I.  It would have been very odd indeed if the court is not entitled to look at the inspector’s report and is required to start from square one and be satisfied afresh by evidence as to the facts found in the inspector’s report  (Re Rex William Leisure Plc,supra. at 364G to 367C).

11.  As the 3^rd respondent has not contested this application and has not filed any evidence, I see no reason not to accept the unchallenged evidence in the Official Receiver’s report and the inspector’s report.

12.  The background matters relating to the Peregrine group and its management structure are set out in paragraphs 7, 8, 16 to 21 of the Official Receiver’s report.  I do not propose to set them out.  They are in substance the background information given in paragraphs 10 to 22 of each of the statements agreed by the 1^st and 2^nd respondents under the Carecraft procedure and annexed as Schedules 1 and 2 to the Judgment.

13.  The 3^rd respondent joined the Peregrine group in 1994 as Group Treasurer.  He was a director of PFIL from March 1994 until after the collapse of the group.  He is a Certified Public Accountant and a Certified Financial Analyst with over 15 years experience in capital markets.  As Group Treasurer, he was responsible for the proper and efficient funding of the business needs of the group and for handling the banking relationship of the group.  From January 1996, he took over from the 2^nd respondent as Head of Group Market Risk Management.  From late February 1997, he took over as Head of Group Credit Risk Management.

14.  PFIL entered into several transactions before and during 1997 which caused in large part the liquidity crisis of Peregrine during the Asian financial crisis.  One of these transactions which had serious consequences for the group was a deal with an Indonesian corporation called PT Steady Safe Tbk (“Steady Safe”).  On 29 May 1997, PFIL and Steady Safe entered into a signed mandate which committed PFIL to supply large amounts of funds to Steady Safe over several months, so much so that by November 1997, Steady Safe owed the group US$269 million, which was 35% of Peregrine’s capital base.

15.  In the latter part of 1997, the liquidity of the group came under increasing pressure.  The negotiations for equity injection into the group by two financial institutions fell through in January 1998.  The Securities and Futures Commission moved in and required a cessation of all regulated business by the group until it could be assured of its viability.  Winding-up petitions were presented against PIHL and PFIL in January 1998 and both were ordered to be wound up on 18 March 1998.  Significant deficiencies as regards creditors have arisen in the liquidations.  In the case of PFIL, the estimated total deficiency was HK$1.5 billion.

16.  In the inspector’s report, he has absolved the directors, including the 3^rd respondent, of fraud or dishonesty.  He found the failures he identified were failures of performance rather than intention.  He was of the view that a disqualification order should be sought in the case of the 3^rd respondent.

17.  In summary, the Official Receiver’s case against the 3^rd respondent is that the Peregrine group was very poorly managed, in terms of the monitoring and control of the business of PFIL and the risks PFIL was undertaking.  The failures of management and control were in areas essential to the proper conduct of a business of the sort which Peregrine and PFIL were conducting and were basic failures of director’s responsibility.  There was an almost complete failure to place any sort of limits on the business conducted by PFIL, except of the most basic kind.  There was no proper monitoring of market and credit risks in relation to PFIL.  Systems for risk control were woefully inadequate.  It was not until December 1997 that some sort of independent oversight of the credit risk in relation to PFIL and its business began to take place, when the group was close to collapse.  As Head of Group Market Risk Management, Head of Group Credit Risk Management, and a director of PFIL, the 3^rd respondent obviously had a significant share of responsibility for these failures.

18.  It is not alleged by the Official Receiver that the 3^rd respondent was dishonest in the conduct of the affairs of PFIL.  It is the Official Receiver’s case that his failings were so serious as to make him unfit to be concerned in the management of a company.  It is also not the Official Receiver’s case that the 3^rd respondent’s failings had caused the collapse of Peregrine in the sense of direct legal causation, although it is the Official Receiver’s case that the 3^rd respondent did have a heavy responsibility for the collapse, as a result of his failings.  The seriousness of the failings can be seen in the fact that the group collapsed in early 1998, in large part as a result of the fact that PFIL had entered into a series of transactions which had very severe consequences for the group, in circumstances that exemplified the failings of management and control of the group and PFIL in particular.

19.  There are 18 specific allegations against the 3^rd respondent and they are set out in paragraphs 134 to 137 of the Official Receiver’s report.  I set them out as follows, giving the relevant references in the Official Receiver’s report and the inspector’s report of the evidence in support:

(1)     the 3^rd respondent failed to ensure that PFIL’s business was subject to independent credit control and monitoring oversight before late 1997 (Official Receiver’s report paragraphs 34-37) ;

(2)     he 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 (Official Receiver’s report paragraphs 39-43) ;

(3)     he 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 (Official Receiver’s report paragraphs 46-47);

(4)     he failed to ensure there were any or any proper credit procedures within PFIL (Official Receiver’s report paragraph 38);

(5)     he 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, PIHL and or the Executive Committee (“EXCO”) (Official Receiver’s report paragraphs 48, 49, 53-54);

(6)     he failed to ensure that those syndication limits imposed upon PFIL’s business were followed, and that breaches of those limits were addressed by the boards of PFIL or PIHL and/or EXCO, properly or at all (Official Receiver’s report paragraphs 51-52);

(7)     he failed to ensure that PFIL’s credit files were adequately and properly maintained (Official Receiver’s report paragraphs 58-61);

(8)     he failed to ensure that credit mitigation documentation was completed in a timely and effective manner (inspector’s report paragraphs 2.148, 2.150 and 2.152; Official Receiver’s report paragraphs 55 and 57);

(9)     he 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 (Official Receiver’s report paragraphs 69-72);

(10)   he failed to ensure that any proper risk limits were placed upon PFIL’s business (Official Receiver’s report paragraphs 74-76);

(11)   he failed to ensure that breaches of risk limits were addressed promptly and properly (Official Receiver’s report paragraphs 77-78);

(12)   he failed to ensure that there was a properly documented and followed procedure for valuations in relation to PFIL’s business (inspector’s report paragraphs 2.81-2.91);

(13)   he failed to ensure that there was proper independent oversight of valuations placed on PFIL’s debt portfolio (Official Receiver’s report paragraphs 82-85, 87, 89 and 91);

(14)   he failed to ensure that there were adequate policies and procedures for provisioning in relation to PFIL’s business (inspector’s report paragraphs 2.101-2.109 and 2.111; Official Receiver’s report paragraphs 94-95);

(15)   he 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 (Official Receiver’s report paragraphs 101-102);

(16)   he caused or permitted the 1996 Annual Report of the Peregrine group to make seriously misleading statements in relation to the credit procedures and policies of Peregrine, particularly in relation to PFIL (Official Receiver’s report paragraphs 62-64);

(17)   he caused or permitted the draft Internal Audit Report into PFIL from 1996 to remain incomplete and not be circulated to wider management, including EXCO (Official Receiver’s report paragraph 102);

(18)   he failed to ensure and/or to take proper steps to ensure that adequate provisions were made against PFIL exposures in Peregrine public announcements of 26 October 1997 and 12 December 1997 and that the accounts referred to in those announcements properly reflected PFIL’s financial status in relation to its positions (inspector’s report paragraphs 3.34-3.49, 3.62-3.77, 3.86-3.100 and 4.67-4.73).

20.  It can be seen that these allegations, except for the last one, are the same as the 17 allegations against the 2^nd respondent.

21.  I do not propose to set out the evidence in support of the first 17 allegations, as such evidence is broadly similar to that relied on against the 2^nd respondent and has been set out in Schedule 2 of the Judgment, paragraphs 24-66.

22.  The evidence in support of the allegation in (18) may be summarized as follows.  On 26 October 1997, Peregrine made an announcement to address the rumours then circulating and gave the directors’ opinion of trading performance.  On 12 December 1997, Peregrine announced its interim results for 10 months to the end of October 1997.  Very significant provisions should have been made in these announcements for the exposures to Steady Safe, a property company in Thailand called Tanayong Public Company Limited, and a large retailer in Thailand called Robinson Department Store.  The 3^rd respondent was responsible for the insufficient provisions made.

23.  Mr Lam submitted that a number of matters should be taken into consideration in the context of the failings on the 3^rd respondent’s part, as in the case of the 1^st and 2^nd respondents.  These are the matters set out in paragraphs 25(1) to (6) and (8) of the Judgment, save that the references to the 2^nd respondent in paragraph 25(8) should be read as the 3^rd respondent in this instance.  Mr Lam added that whilst the 3^rd respondent was not aware of the Steady Safe transaction until August 1997 and so was not responsible for the entering into of that transaction, his failures meant that Peregrine was not equipped with the proper infra-structure to monitor the performance of the transaction and to deal with the worsening situation in a timely and proper manner.

24.  Under section 168H, a disqualification order is mandatory where the court is satisfied in respect of a respondent that he is or has been a director of a company, which has at any time become insolvent whilst he was a director or subsequently, and that his conduct as director of that company makes him unfit to be concerned in the management of a company.  The elements of directorship and insolvency are plainly satisfied here.

25.  I find all the specific allegations against the 3^rd respondent established.  The incompetence complained of was of a very marked degree.  Looking at the conduct complained of cumulatively, and taking into account the matters Mr Lam urged the court to take into account, I am satisfied the 3^rd respondent’s conduct has fallen below the standards of probity and competence for persons fit to be directors and is such as to make him unfit to be concerned in the management of a company.  In coming to that view, it is not necessary for the court to be satisfied of any propensity on the part of the 3^rd respondent to misconduct himself in future (Secretary of State for Trade and Industry v Gray [1995] 1 BCLC 276 at 284c to 285g).

26.  I make a disqualification order against the 3^rd respondent.  I turn to the period of disqualification.

27.  In the assessment of the period of disqualification for the 1^st and 2^nd respondents, I had started off with an appropriate period for each at the top end of the minimum bracket of 5 years or even the lowest end of the middle bracket which is 6 years.  I then adjusted the period down to 4 years, in view of the full co-operation they gave to the Official Receiver and the proceedings were conducted under the Carecraft procedure.  Here, the 3^rd respondent has shown complete disregard for these proceedings, so he cannot benefit from any discount in the disqualification period that had been given to the 1^st and 2^nd respondents for their co-operation.

28.  In the circumstances, I think an appropriate period of disqualification for the 3^rd respondent is 5 years.

29.  I make an order pursuant to 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, which is for 5 years, would begin from the day on which it is made (Re Cannonquest Limited [1997] BCC 644 at 648E to 649A).

30.  I also order the costs of the Official Receiver of these proceedings be paid by the 3^rd respondent, to be taxed if not agreed.