IT WAS A routine currency swap. A German bank would remit 73 million deutschemarks and receive US$40 million in return. The bank fulfilled its end of the agreement, yet the US$40 million never entered its New York bank account. The bank's counterpart in the deal, a high-profile Hong Kong investment bank, was on the brink of collapse. In 24 hours, it would face liquidation. The date was January 9, 1998, and it is being re-lived over and over again in boardrooms, classrooms, saloons and, in the near future, the courts. If nothing else, it has proved that a day is a long time in the life of an imploding investment bank. The 24 hours leading up to the dissolution of Peregrine Group - a winding-up petition was filed on January 10 - may soon be dissected to a microscopic degree, being the focus a lawsuit brought by Commerzbank Aktiengesellschaft. Perhaps most intriguing will be the question of exactly how much the former Peregrine directors knew about the group's financial bill of health: did they really believe there were genuine prospects for survival even on January 9? The lawsuit centres on the former directors' state of mind and disclosure, and promises to keep Peregrine in the public eye despite a financial inspector's report into the collapse which supposedly closed the book on this particular chapter of Hong Kong's corporate history. The report by Richard Farrant pinpointed no illegal activity and did not attribute blame to one single person. Instead, it cited botched supervision, poor risk management and untenable loan exposure. Peregrine, once Asia's biggest independent investment bank, collapsed in January 1998, in particular under the burden of a portfolio of Indonesian corporate bonds and promissory notes which had a face value of US$694 million. Exposure in particular to Indonesian taxi firm Steady Safe, judged to have been US$235 million, was 'the straw that broke the camel's back', according to Mr Farrant. The loan accounted for 35 per cent of Peregrine's paid-up capital. By November 1997, the loan was worth a mere US$60 million and by December the entire portfolio was 'unsellable'. Rumours of Peregrine's struggles had been circulating in Hong Kong for months prior to its collapse. It was however business as usual as far as Peregrine Fixed Income Limited's relationship with Commerzbank was concerned; the pair entered into a swap transaction agreement on January 8. The German bank agreed to sell 73.22 million marks on January 9, with Peregrine in return agreeing to buy the same for US$40.11 million the same day. On January 12, according to legal documents, it was agreed that Commerzbank would buy 73.22 million marks on January 12 from Peregrine, which in turn would sell the same at the value of US$40.12 million that day. The German bank remitted 73.22 million marks as agreed on January 9. According to a High Court writ however, Peregrine failed to remit the US$40.11 million into Commerzbank's New York bank account. It wants its money back and is embroiled in a legal battle, already spanning more than three years, which yesterday spilled into the High Court in the form of a procedural obstacle. The Hong Kong Bar Association has objected to the use of London silk Robin Potts QC for an interlocutory application by Commerzbank - an appeal to be heard next month - concerning certain key documents. Lawyers for Commerzbank are battling to get their hands on financial papers showing the financial state up to January 9 - vis-a-vis its bankers - of the holding company, Peregrine Investments Holdings. Peregrine Investments was effectively treasurer of the other companies in the group. 'It is absolutely essential to be able to paint the picture in full of the financial status of the group at the material time,' explained legal counsel for Commerzbank, barrister Neville Sarony SC, adding: 'And if it is not possible to do so, the plaintiff [Commerzbank] will simply not get its case off the ground.' The papers are arguably crucial to show that the Peregrine directors were aware of the parlous financial state of the whole group and that they had 'responsibility to have known that there would be a default in relation to this particular transaction', Mr Sarony said. The papers are in the hands of the liquidators of the parent company, not Peregrine Fixed Income, requiring the use of subpoenas for Commerzbank to obtain them. A hearing at the end of next month will determine the issue. Lawyer for Commerzbank Camille Jojo explained: '[Peregrine Investments'] bankers might have agreed to a standstill on debt or providing a working-capital facility. To test this, we have to look at the position the banks had vis-a-vis the parent company, the indebtedness and scale of the defaults.' Commerzbank contends that at 6pm on January 9, negotiations with the Zurich Group relating to an investment of 24.1 per cent in the equity of the Peregrine Group for approximately US$200 million fell apart. At the time, this would have been known by former chairman Philip Tose, deputy chairman Francis Leung Pak-to, ex-managing director Peter Wong Wing-cheong and Peregrine Fixed Income director John Lee, according to court papers. Moreover, that afternoon, a meeting had been held with the Hong Kong Monetary Authority, which refused a loan to Peregrine. At 3pm, Commerzbank's general manager, Michael Oliver, was informed by Mr Lee that he believed the Peregrine Group would default on all its payments in New York by midnight. The bank contends that Peregrine Fixed Income either before or no later than 3pm knew through its directors that it would not be able to meet its financial obligations on January 9. The 73 million marks thus should have been held on constructive trust. Yet the sum was remitted on the same day to a counterpart in respect of another transaction. While Commerzbank argues that the directors knew the company was going to collapse, the defence relies on an 11th-hour lifeline. According to Mr Jojo, the directors would contend that there was still a reasonable prospect of survival. A meeting had been scheduled with bankers on January 11. However, the HKMA had refused assistance and many banks they were seeking help from had already been subject to defaults by the group. It will however be up to the courts to paint a detailed picture of the exact financial position and the mindset of the directors. As Mr Jojo stressed: 'A chronology of events will be key.' The trial itself is not due to go ahead until November 2002. Yet such a microscopic look at the final days may still appease Peregrine-watchers somewhat deflated by Mr Farrant's report, which may not have gone into the detail some craved. After years of speculation and investigation, it was somewhat of an anti-climax to hear Mr Farrant's simple statement that Hong Kong's high-flier failed merely because it ran out of cash. 'It is . . . essential to be able to paint the [financial] picture in full'