The Official Receiver v. Philip Leigh Tose and Others
Read the full judgment text of HCMP 112/2002 on BabelCite. This High Court CFI judgment was delivered on 4 March 2009.
1. This is an application by the Official Receiver under section 168H of the Companies Ordinance, Cap. 32 for a disqualification order against Andre Sukjin Lee, the 4 th respondent herein. The 4 th respondent is the last of the four respondents to be dealt with in these proceedings brought by the Official Receiver on 11 January 2002. All four respondents were directors of Peregrine Investments Holdings Limited (“PIHL”) and/or one of its subsidiaries, Peregrine Fixed Income Limited (“PFIL”). P
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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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---------------------- Before: Hon Kwan J in Court Date of Hearing: 4 March 2009 Date of Judgment: 4 March 2009 ------------------------ J U D G M E N T ---------------------- 1.This is an application by the Official Receiver under section 168H of the Companies Ordinance, Cap. 32 for a disqualification order against Andre Sukjin Lee, the 4th respondent herein. The 4th respondent is the last of the four respondents to be dealt with in these proceedings brought by the Official Receiver on 11 January 2002. All four respondents were directors of Peregrine Investments Holdings Limited (“PIHL”) and/or one of its subsidiaries, Peregrine Fixed Income Limited (“PFIL”). PIHL was a listed company. The Peregrine group carried on the business of investment banking in Hong Kong and elsewhere in Asia. 2.The proceedings against Philip Leigh Tose and Wong Wing Cheong Peter, the 1st and 2nd respondents herein, were disposed of in 2004 by agreement under the summary Carecraft procedure and judgment was handed down on 8 October 2004 (“the 1st judgment”). Both were disqualified for four years. The proceedings against John Eng Lee, the 3rd respondent herein, were dealt with in 2005 in his absence, after he had been properly served with the originating summons and related documents out of the jurisdiction and he had failed to make any response. Judgment in his case was handed down on 20 October 2005 (“the 2nd judgment”). He was disqualified for five years. 3.Leave was granted to issue an originating summons out of the jurisdiction on the 4th respondent in 2002. Despite the many attempts to serve him with the papers in South Korea, the United States and Canada, they were not successful. The Official Receiver obtained successive extensions of the validity of the originating summons. A comprehensive search for the 4th respondent was made by the Official Receiver’s investigative agent in the three countries I mentioned. In late 2006, the Official Receiver hired an additional investigative agent. It took the new agent four months to find out the address of the 4th respondent in West Vancouver, Canada and it was another four months when a process server managed to serve the papers on him in October 2007. The 4th respondent claimed he was not aware the Official Receiver was trying to serve proceedings on him and his moves from one country to another were for reasons entirely personal and related to his family. Having considered the 4th respondent’s affirmation, Mr. Lam, SC informed the court that the Official Receiver is not pursuing any allegation that the 4th respondent was evading service of proceedings. 4.On 3 October 2008, the 4th respondent filed an amended acknowledgment of service of the originating summons, stating that he does not intend to contest the proceedings whilst requiring the Official Receiver to prove the allegations of his unfitness to be concerned in the management of a company and that he would make submissions of mitigation if applicable. He did not reach agreement with the Official Receiver for the use of the Carecraft procedure. 5.On 14 January 2009, he filed an affirmation. It was agreed that this affirmation may be relied on only for the purpose of mitigation and not to contest liability. Mr Maurellet, who appeared for the 4th respondent in this hearing, made no submission whether the Official Receiver has proved the allegations of the 4th respondent’s unfitness to be concerned in the management of a company. The 4th respondent’s position is simply one of non-admission. His counsel’s submission only went to the length of the disqualification order, if an order should be made against him. 6.The present judgment is to be read with the 1st and 2nd judgments, as the evidence relied on by Official Receiver is drawn from the Official Receiver’s report and its enclosures, including the report of the inspector, Mr Richard Farrant, appointed in 1999 by the Financial Secretary under section 143(1)(a) of Cap. 32, and much of the Official Receiver’s evidence has been summarised in the judgments and the schedules to the 1st judgment under the Carecraft procedure. 7.The Official Receiver’s report is prima facie evidence of any matter contained in it by virtue of rule 4 of the Companies (Disqualification of Directors) Proceedings Rules, Cap. 32K and no distinction is drawn in this respect between the Official Receiver’s report and its enclosures (2nd judgment, para 9 and the cases cited). In particular, the inspector’s report is impliedly admissible evidence in directors’ disqualification proceedings (2nd judgment, para 10, citing In re Rex Williams Leisure Plc [1994] Ch 350 at 364G to 367C). This is accepted by Mr Maurellet. 8.The inspector had interviewed the 4th respondent over 2 days in 1999. He was legally represented through out the interviews. Before the inspector produced his final report in 2000, he had circulated relevant excerpts of his draft report to the 4th respondent for comments and taken into account written submissions and comments of the 4th respondent’s legal advisers to the draft report. 9.Given that the 4th respondent does not contest the proceedings and his affirmation is not for the purpose of contesting liability, I think it is right to treat the Official Receiver’s report and the inspector’s report as unchallenged evidence against him. 10.For the background of the Peregrine group of companies and management structure, and its collapse in the Asian financial crisis in 1997, I refer to paragraphs 10 to 22 of one of the schedules to the 1st judgment. 11.The 4th respondent was born on 16 January 1963 and is now aged 46. He was aged 34 at the time he committed PFIL to a package of transactions for PT Steady Safe Tbk (“Steady Safe”), an Indonesian bus and taxi company, involving the provision of up to US$350 million in financing through bond issues. He was recruited by Peregrine in 1994 from Lehman Brothers Inc. in Hong Kong to head Peregrine’s new fixed income business. He then had five years previous experience in investment banking, including four years in fixed income. He was appointed director of PFIL from 30 May 1994 to 17 January 1998 and was its managing director. He was not a director of PIHL. He reported directly to the 1st respondent who was the chairman of the group. 12.As mentioned in the inspector’s report, the 4th respondent was a strong and forceful leader, with a clear vision for PFIL and drew up detailed business plans. He set tough profit targets and took responsibility for meeting them. In his evidence to the inspector, the 4th respondent stated that the 1st respondent had held up his business plan as being the example for others to follow. According to the group annual report in 1995, the first year of operation of PFIL exceeded expectations. There was dramatic growth in its business in 1996 and the first half of 1997 was no less successful. There is no doubt the main reason for that success was due to the 4th respondent. A feature of the business of PFIL was a willingness to undertake large transactions in relation to the size and resources of the Peregrine group. The inspector was of the view that the 4th respondent had a blind spot in not sufficiently appreciating the greater vulnerability of the Peregrine group, a much smaller and less diversified business than international investment banks, to unexpected setbacks, and that the Peregrine group demanded greater safety margins. 13.Several transactions were entered into by PFIL before and during 1997 which caused in large part the liquidity crisis later faced by the Peregrine group during the Asian financial crisis. One of them was the signed mandate with Steady Safe 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 Peregrine US$269 million, approximately 35% of the capital base of the Peregrine group. In the words of the inspector, the commitment to Steady Safe was “a fundamental mistake, going far beyond a simple error of business judgment”, and the risk management of PFIL of the exposure to Steady Safe was “anything other than awful.” In January 1998, the Securities and Futures Commission required a cessation of all regulated business by Peregrine until its viability could be assured. PIHL and PFIL were ordered to be wound up in March 1998. 14.The inspector absolved the directors of fraud or dishonesty, and found the failures he identified were failures of performance rather than intention. He was critical of a number of directors, including the 4th respondent, for their failings in the discharge of their duties. It is the Official Receiver’s case the 4th respondent’s failings were so serious as to make him unfit to be concerned in the management of a company. For a broad summary of the Official Receiver’s case in his application for a disqualification order against the 4th respondent, which is similar to that against the 3rd respondent, I refer to paragraphs 17 and 18 of the 2nd judgment. The 4th respondent was very much in charge of PFIL’s management and business as its managing director, he had a significant share of the responsibility for the failures and flaws in the business. 15.There are eighteen specific allegations against the 4th respondent and they are set out in paragraphs 31 to 103, 105 to 121 of the Official Receiver’s report. These allegations with the paragraph references in the Official Receiver’s report are as follows:
16.The first to 17th allegations are the same as the allegations against the 2nd and 3rd respondents. The 18th allegation is the same as the 13th allegation against the 1st respondent. It is not necessary to set out the supporting evidence, as this is broadly similar to the evidence against the 1stand 2nd respondents, which was related in the schedules to the 1st judgment. I have also considered the relevant evidence helpfully summarised for the Official Receiver in the submission of Mr Lam. 17.The Official Receiver’s case against the 4th respondent is incompetence or negligent in a very marked degree, which rendered him unfit to be concerned in the management of a company. Mr Lam urged the court to take into account a number of matters in the context of the failings on the 4th respondent’s part. Most of these matters are substantially the same as those set out in paragraphs 25(1) to (6) and (8) of the 1st judgment, save that the references to the 2nd respondentin paragraph 25(8) should be read as the 4th respondent in this instance. In addition, the 4th respondent was most directly and almost exclusively responsible for committing PFIL to the Steady Safe transaction, which directly led to the liquidity crisis faced by the Peregrine group and led to its collapse in the Asian financial crisis. The 4th respondent’s other failures meant that the group was not equipped with the proper infrastructure to monitor the performance of the transaction and deal with the worsening situation in a timely and proper manner. 18.In addressing the question of unfitness, I have looked at the conduct complained of cumulatively. If there are any extenuating circumstances, I should take them into account. I have noted there was no suggestion of a wholesale disregard of operational control on credit risks on the 4th respondent’s part, but only that his efforts were unsystematic and not followed through. 19.I am only concerned with whether the 4th respondent’s past conduct as a director makes him unfit to be concerned in the management of a company, I do not need to be satisfied of any propensity of him to misconduct himself in future (Secretary of State for Trade and Industry v Gray [1995] 1 BCLC 276 at 284c to 285e). The fact that one or more of the respondents was also culpable and should bear part of the blame is not an extenuating factor in assessing unfitness, although this may go to mitigation. 20.As managing director of PFIL, the 4th respondent was ultimately in charge of its credit control, he was aware of the deficiencies in credit control and monitoring, he did not address adequately the risks in relation to PFIL’s business, he must bear responsibility for misleading statements on credit risk of PFIL in the group’s annual report. Last but not least, he caused PFIL to enter into the Steady Safe transaction, which was characterised by the inspector as hazardous and foolhardy, even without the benefit of hindsight. I am satisfied the 4th respondent’s failings were not mere commercial judgment but constituted a marked degree of incompetence. His conduct had fallen below the standards of probity and competence appropriate for persons fit to be directors. 21.The other requirements in section 168H for making a disqualification order are also met. The 4th respondent was a director of PFIL at all material times, and PFIL was plainly insolvent. A disqualification order is mandatory. 22.As I have mentioned in SFC v Fung Chiu & Others, HCMP No. 2524 of 2006, 27 November 2008, paragraph 12, there are two important objectives in the exercise of the jurisdiction to make a disqualification order: the protection of the public against the future conduct of persons whose past records as directors of companies have shown them a danger to those who have dealt with the companies, and general deterrence in that the sentence must reflect the gravity of the conduct complained of to give clear message to the business community if they break the trust reposed in them they will receive proper punishment. 23.Mr Lam submitted the period of disqualification in the present case should come within the lower end of the middle bracket, which is in the region of six years. Further, in contrast to the 1st and 2nd respondents who have admitted the allegations against them and agreed to dispose of the proceedings by way of the Carecraft procedure, the 4th respondent has until recently shown wholesale disregard for these proceedings and cannot benefit from any discount given to these respondents for their co-operation. 24.Mr Maurellet submitted I should have regard to cases which are very closely related to that of the 4th respondent, namely the disqualification periods given to the other three respondents, citing Re Swift 736 Limited [1992] BCC 93 at 97D to E, as most people’s notion of fairness would require the court to have regard to the penalty given in a very closely related case. I think that is right, and that was what I had been doing in deciding on an appropriate term for each of the other three respondents, that there should not be a disparity if there is nothing in the gravity of their misconduct to justify a differentiation. 25.In the case of the other three respondents, I had placed the appropriate period of disqualification at the top end of the minimum bracket (five years) or the lowest end of the middle bracket (six years). I propose to adopt the same starting point for the 4th respondent, on the basis that he is not more or less culpable compared to the others. 26.I turn to consider the mitigating factors submitted on his behalf. 27.Firstly, it was submitted that the substantial delay in bringing the 4th respondent to court is a mitigating factor, as this meant the matter had been hanging over his head for a very long time, during which period he has not served as a director of any company in Hong Kong. There was a gap of five years from the commencement of these proceedings to the time when he was served with the papers in October 2007, and the Official Receiver did not bring proceedings until almost four years after the companies were ordered to be wound up in January 1998, which was more than ten years ago. It was contended the fact that the Official Receiver could not locate the 4th respondent was not his fault, he was never aware the Official Receiver had been attempting to serve him and he was not deliberately evading service. So the delay in bringing these proceedings to a conclusion simply resulted from an unfortunate coincidence, and no blame could be laid on him. Mr Maurellet submitted if the 4th respondent had been dealt with at the same time as the 1st and 2nd respondents in 2004, and assuming he was given a similar period of disqualification, he would have served his term by now. Counsel urged the court to make an order to “reflect that state of affairs”; he did not go so far to say that the disqualification period for the 4th respondent should be reduced to the statutory minimum period of one year. It was argued that if the 4th respondent were to be given a 5-year term now to expire in 2014, that would be tantamount to a 10-year disqualification, if the order had been made in 2004. A 10-year disqualification is reserved for most serious cases, not for cases that are relatively not very serious. 28.In support of the above, Mr Maurellet cited Re Westmid Packing Service Limited [1998] 2 BCLC 646 at 657f; Secretary of State v Banarse & Another [1997] 1 BCLC 653 at 663e; Re Grayan Building Services Limited [1995] Ch 241 at 257D. 29.The length of time a person has been in jeopardy can be a mitigating factor. In Secretary of State v Banarse, the court took into account the matter had been “hanging over the heads of the respondents for some four years.” In Re Grayan Building Services Limited, disqualification orders were made against the defendants only on appeal, the entire process from the issue of proceedings against the defendants to the disposal by the English Court of Appeal took more than three years and it was five years from the commencement of liquidation. The English Court of Appeal took that into account and imposed the minimum statutory period of two years. 30.In the case of the 1st and 2nd respondents, I had taken into account the length of time they had been in jeopardy, in that disqualification proceedings had been hanging over their heads since the publication of the inspector’s report in March 2001 notwithstanding the originating summons was issued in January 2002, as it was recommended by the inspector in Part 5 of his report that it would be appropriate to seek disqualification orders against all four respondents (1st judgment, paragraph 33). 31.In the 4th respondent’s case, the situation was somewhat different. He had left Hong Kong well before the inspector’s report was published in March 2001. He did not mention if he was ever aware of the inspector’s recommendation to bring proceedings against him. He had certainly asserted he was not aware of the Official Receiver having brought disqualification proceedings against him, until he was served in October 2007. On his evidence, he had no knowledge he was in jeopardy for most of the time, and he was not in a subjective sense living under the threat of proceedings. 32.A respondent in disqualification proceedings cannot have it both ways. If he knows of the possibility of proceedings to be brought against him, he ought not to keep out of the way of the Official Receiver and evade attempts to serve him with the process. Had he done so, and substantial delay was brought about, no discount should be given for the prolonged period in jeopardy, which was brought on by the respondent himself. If he has no knowledge of proceedings that may be brought against him, and has not deliberately hidden his whereabouts, it does not seem to me appropriate to give discount for the period in jeopardy, when the respondent was not aware of any possible proceedings hanging over his head. 33.In the present situation, I will only take into account the relatively short period when the disqualification proceedings became known to the 4th respondent, that is, from the period when he was served with the papers. 34.Next, it was submitted that although the 4th respondent did not admit the allegations against him by the use of the Carecraft procedure, he did not prolong proceedings by raising substantive arguments, he had merely put the Official Receiver to proof. Mr Maurellet contended that was “practically akin” to an admission of the case against the 4th respondent. I do not agree. Although the proceedings were not prolonged or greatly prolonged, the fact remains the 4th respondent has not admitted the allegations against him. I do not think he should be given any discount in the disqualification period for that. 35.Other matters urged by Mr Maurellet in mitigation relate to the personal circumstances of the 4th respondent. Mr Maurellet said this was a dramatic fall from grace of a person who had made considerable achievements in his profession at a relatively young age, and would now have to suffer the stigma for the rest of his working life. He has lost a decade in his career. For the last ten years, he did not feel he was employable. He did not believe he could be a director of a Hong Kong company again or work in the securities business in Hong Kong. All he could do was to run his own businesses, at first a software company in Korea, later a technology consulting business in North America. The 4th respondent has suffered personal hardship and financial loss. He now has children and this has had an additional strain on his finances. 36.I accept the 4th respondent was hit very hard by matters which happened more than ten years ago, and he is still in the prime of his life. 37.Mr Maurellet went on to submit that the 4th respondent has clearly demonstrated remorse and appreciates the mistakes he made. I do not wish to appear to be unduly harsh, but I do not detect this in the affirmation made by the 4th respondent in January 2009. 38.Looking at the personal hardship the 4th respondent has endured and would probably continue to endure for some time, and taking into account the period when he became aware of the proceedings against him, I will make some discount in the term of the disqualification imposed. I order the 4th respondent to be disqualified for a period of 4 ½ years. Under rule 10 of the Companies (Disqualification of Directors) Proceedings Rules, the order is to take effect from the beginning of the 21st 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. 39.I order the 4th respondent to pay the Official Receiver’s costs in these proceedings, including the costs reserved, to be taxed if not agreed.
Mr Godfrey Lam, SC, instructed by the Official Receiver Mr Jose-Antonio Maurellet, instructed by Messrs Blank Rome, for the 4th Respondent |
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