From Peregrine to Next Digital: Hong Kong invokes rarely-used powers in company law

Hong Kong's government this week appointed Clement Chan Kam-wing of accounting firm BDO as a special inspector to look into the financial affairs of Next Digital, the publisher of the now-defunct Apple Daily newspaper.

It marks the first time in 22 years the government has invoked a clause in the city's Companies Ordinance that empowers the financial secretary to order an investigation into a public company for misconducts and intent to cheat creditors.

Several such appointments have been made since the early 1970s, although only three have taken place in the 1990s. Such rare occurrences suggest the clause is reserved for extraordinary situations. They also come at a big cost to taxpayers and often lead to further enforcement actions.

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Here is what you need to know about the history of such probes and the latest case.

Veteran accountant Clement Chan Kam-wing of BDO. Photo: Nora Tam alt=Veteran accountant Clement Chan Kam-wing of BDO. Photo: Nora Tam

Under Sections 841 (2) and (3) of the Companies Ordinance, the financial secretary may appoint a person to investigate a company's financial affairs for conduct deemed prejudicial to its shareholders, or with intent to defraud its creditors.

The financial secretary can only make such an appointment when it is in the public interest.

The publisher has come under intense heat from authorities since China imposed the national security law in June last year. Its chairman Jimmy Lai Chee-ying has been sentenced to jail under various charges, while several corporate and editorial executives have since been arrested.

Shares of Next Digital have also swung wildly in recent months before its collapse, prompting market regulators to probe for stock manipulations.

The company is also being investigated for various transactions involving Lai and his private businesses.

Apple Daily founder Jimmy Lai Chee-ying seen leaving the Lai Chi Kok Centre in December 2020. Photo: Winson Wong alt=Apple Daily founder Jimmy Lai Chee-ying seen leaving the Lai Chi Kok Centre in December 2020. Photo: Winson Wong

The government has used the power vested by the Ordinance to investigate 38 companies since records began in 1971. Among them, 16 were subjected to three probes in the 1990s.

The biggest of the cases involved Malaysian property and financial tycoon Lee Ming Tee of Allied Group. In August 1992, the then financial secretary Hamish Macleod appointed accountant Nicholas Allen to look into the suspicious share placements and transactions between Allied Group and nine related companies.

The investigation took 13 months at a cost of HK$46 million to taxpayers. A 688-page report to the government uncovered chunks of Allied shares changing hands without payment records between 1990 and 1992, among other findings.

A lengthy police investigation and legal battle ensued over the next 12 years, ending only in 2004 when Lee was sentenced to one-year in prison for deception to inflate the true value of the Allied Group.

A file photo from 1987 of Lee Ming Tee of Allied Group. Photo: SCMP alt=A file photo from 1987 of Lee Ming Tee of Allied Group. Photo: SCMP

Not really. Macleod appointed accountant John Lees in August 1992 to investigate irregularities surrounding Thomson Pacific's takeover in 1990 of Bond Corp, a company owned by Australian businessman Alan Bond.

Lees produced a 959-page report two years later at the cost of HK$20 million, laying the basis for the arrest of five individuals in 1996 and charges for bribery and conspiracy to defraud.

They included broker Arthur Lai Cheuk-kwan, former Tomson Pacific executive chairman David Tong Cun-lin, and the latter's sister-in-law and former movie actress Jade Hsu Jye. All five were acquitted after a six-month trial in 1998, costing taxpayers HK$52 million.

Macau casino magnate Stanley Ho Hung-sun, then a director of Thomson Pacific, a Taiwanese developer, denied allegations of illegal share dealings and was not charged for any wrongdoing.

The most-recent case, involving the probe into the collapse of investment bank Peregrine Holding in 1998, was less costly.

The government appointed Richard Farrant, former chief operating officer of the UK's Financial Services Authority, in 1999 to look into Peregrine, set up by two former Citigroup bankers Philip Tose and Francis Leung.

The firm went into liquidation in January 1998 after taking a hit for underwriting a US$269 million bond issued by Indonesian taxi company Steady Safe, which defaulted during the Asian financial crisis that soon followed.

Farrant spent 10 months on his probe at a cost of HK$10 million. His 157-page report cited poor management and the Asian crisis, which crushed many Southeast Asian currencies, among the causes in the collapse of Peregrine.

While the special inspector cleared the company directors of any dishonesty or fraud, he blamed four senior executives for "incompetence of a high degree" and called for banning them as directors.

The market watchdog, the Securities and Futures Commission, gained wider investigative and prosecutorial powers over public listed companies with the introduction of the Securities and Futures Ordinance in April 2003.

Some critics argued the appointment of an inspector for Next Digital would duplicate a parallel investigation by the SFC. Former SFC chairman Carlson Tong Ka-shing believes there are no conflicts as the two have different roles to play.

The inspector will ask the company and banks for documents to scour evidence and build his case. He also has the power to summon witnesses for information and statements. He is expected to submit his report and recommendations to the financial secretary in six months or so.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2021 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2021. South China Morning Post Publishers Ltd. All rights reserved.