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'Incompetence' in the dock

USUALLY THEY HAVE burned the books, plundered funds or disappeared into the sunset. Very seldom do directors of insolvent companies find themselves hauled before a judge for being 'incompetent'.

Yet, if all goes according to plan, former Peregrine directors Philip Tose and Peter Wong Wing-cheong will soon be fighting an attempt to strip them of directorships for up to 15 years.

The pair failed to thwart disqualification proceedings at the Court of First Instance on Tuesday.

Legal steps had been taken by the Official Receiver to ban Mr Tose and Mr Wong from holding directorships on the recommendation of Richard Farrant, a financial inspector probing the Peregrine Group collapse.

That was in May last year, just two months after the inspector's report on the investment bank's downfall was released to the public.

In January, the pair launched a judicial review seeking to quash the decision to seek disqualifications.

Having failed, they now face the task of defending their action - or inaction - in the run-up to the group's 1998 collapse.

It will be a beguiling case. A blow-by-blow account of their alleged mismanagement.

There was no fraud and no dishonesty. Peregrine essentially collapsed because of the Asian financial crisis and the burden of a US$269 million Steady Safe loan.

It ran out of cash. Assets were not being realised fast enough and they could not close out of derivative positions to meet maturing liabilities. The Steady Safe loan accounted for 35 per cent of Peregrine's paid-up capital.

Directors were singled out for their failures, in particular a lack of risk-management controls over the fixed-income business.

Personalities also played a part. Mr Tose was described by Mr Farrant as 'king in Peregrine, and his every word and gesture mattered'.

'If he appeared to support one side rather than the other in a discussion, this would be likely to have a disproportionate effect on his colleagues' perception of the balance of argument. This is the environment in which those responsible for group risk-management infrastructure worked.'

The report also stressed that in valuing its illiquid portfolio of stocks, Peregrine tended toward optimism. The result was a lack of stern action to reduce the exposure earlier.

Does this render Mr Tose and Mr Wong unfit? The disqualification proceedings in this case will be charting new territory. It is not a simple case of a fraud or asset-stripping; it is a more subtle form of corporate ineptitude. Individual performance will be put under the microscope. The consequences of these individual acts may have been momentous, but the parameters by which to judge them are in shades of grey.

The Companies Ordinance empowers a court to disqualify a person from being a director of a company, a receiver or manager of its property or in any way - directly or indirectly - from being concerned in the promotion, formulation or management of a company.

'Unfit' conduct is the trigger, as is the public interest.

In his ruling on Tuesday, Mr Justice Michael Hartmann pointed to the words of Lord Justice Balcombe in a 1991 ruling. The purpose of the act is clear, he states: 'The ability to trade through a company with the protection of limited liability, and with the use of capital subscribed by third parties, is of great economic advantage, and confers considerable privileges upon persons so enabled.

'These privileges involve corresponding responsibilities and the public . . . needs to be protected from persons whose conduct has shown that they have abused those privileges.'

Official Receiver Eammon O'Connell admits these proceedings will be of a different nature. 'It's a completely different level here.'

He points to the size of the firm. Previous disqualifications have involved insolvent firms of a much smaller scale. And usually it is a case of the books going missing, accounts not being presented on time or theft.

For example, in April, Lam Wai-keung was disqualified for eight years after failing to explain withdrawals from two accounts of his company, Glory Central Investment. He also failed to keep proper books of account.

This was after he served two years in jail for a number of theft offences relating to a property investment.

In contrast, the Official Receiver will have to prove a less tangible misdeed in the Peregrine case, that of inadequacy.

Corporate governance issues will be put to the test. A ream of experts will be called in. 'By any measure, this is going to be a large case,' Mr O'Connell admits. Judging by their determination this far, Mr Tose and Mr Wong are unlikely to give up without a fight.

The case will be an invaluable insight into the conduct expected to be befitting of Hong Kong's directors.

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