In or about 1989, WONG Sun approached an investment banker by the name of LEUNG Pak To (‘Francis LEUNG’) to obtain advice on the possible listing of Hanny on the Hong Kong Stock Exchange. Initially, Francis LEUNG, the Group Managing Director of the Peregrine Group of Companies (‘Peregrine’), was of the opinion that it was premature to make such an application. However, he took an active interest in Hanny’s affairs and joined the board of directors.
Concerning financial matters, there was no evidence that WONG Sun considered himself to be an expert in that field. Francis LEUNG of Peregrine recalled that, after Hanny’s flotation in 1991, WONG Sun did not have a ‘hands-on’ role in respect of finances; he recalled that William FUNG and the Chief Financial Officer, TAM Kam Biu (‘William TAM’), took a more active role in that regard. However, William TAM himself spoke of reporting to WONG Sun concerning Hanny’s finances and there was never any suggestion during the course of the inquiry that WONG Sun was in any way ignorant of at least the fundamental principles of company accounting.
As a young man, William FUNG had attended business school in Shanghai. That apparently had been during the years of the Second World War. Thereafter had worked for an extended time with a finance company before moving into the field of textile and garment marketing. He was, therefore, well versed in business matters and had an educated knowledge of company accounts. Francis LEUNG of Peregrine remembered William FUNG taking an active role in Hanny’s finances in the period immediately after the listing. He was of the opinion, however, that, as time went by, William FUNG, now into his late sixties or early seventies, appeared to go into a form of ‘semi-retirement’.
Despite this bullish forecast, one director at least was not confident that a rational programme had been put together to enable Hanny to finance the Memorex Acquisition. That director was Francis LEUNG of Peregrine. Indeed, it resulted in him resigning from the Board of Directors of Hanny in March 1994. In the course of his testimony, Francis LEUNG said that he had advised both WONG Sun and Sanrita WONG to arrange long-term financing. His advice, however, was not accepted. He said that WONG Sun and Sanrita WONG chose instead to use a short-term syndicated loan to finance the Memorex acquisitions. Repayment in terms of that loan was due in 6 months. According to Francis LEUNG the two were confident that – with the Hong Kong stock market being so bullish – they could, if necessary, raise the necessary funds with a share issue or re-finance the short-term loan.
In addition, in general terms, it was the opinion of Francis LEUNG that Hanny did not possess the management resources and skill to handle the sheer size and geographical breadth of the Memorex businesses that had been acquired. To express it in a phrase, it was his testimony that Hanny had bitten off more than it could chew. As he said in the course of his testimony :
Before I resigned in March 1994, the financial position of the Company was not that bad. That is why they were … able to make the acquisition and borrow money from the banks. However, after the acquisition of Memorex, they could not handle the situation because, I mean, Memorex was a troubled company, it was losing money and its operations were mainly in the States. Hanny Magnetics did not have enough resources to manage the situation.
In order to ensure the profitable integration of this diverse group of companies, it was necessary to put into effect a system of accounting information that would reveal the consolidated position of the Group month by month. Only with the provision of accurate consolidated accounts could effective management decisions then be made. But, as Francis LEUNG said, Hanny simply did not have the technical or human resources to put into operation an effective system of accounting controls. It is apparent that, while management accounts were prepared, they were not detailed enough to be of real benefit nor – more importantly – were they consolidated.
By 15th May 1995, WONG Sun had already compiled strategic plans to restructure operations in the United States and had relayed those plans back to Hong Kong where they were then passed on to Francis LEUNG of Peregrine and Canning FOK of Hutchison Whampoa for consideration.
Francis LEUNG of Peregrine did not attend the meeting on the morning of 18th May but was perturbed by the reports he received. The possible need to make provision for exceptional losses of US$30 million in the 1995 end of year accounts was, he believed, price sensitive information. He therefore advised WONG Sun to issue an immediate circular to all Hanny directors warning them not to trade in shares of the company. Help was provided to WONG Sun to draft the circular which was dated 19th May 1995 and began :
You will be aware that the Board has now commenced discussions on Hanny’s business plan, budget and related matters. For this reason, I do not believe that it is appropriate for directors to deal in Hanny’s shares at the current time.
Francis LEUNG, an investment banker of considerable experience, was at one time on the board of Hanny. The Tribunal found him to be a balanced, fair and credible witness. During the course of his testimony he said that he came to know Sanrita WONG when Peregrine was first engaged as financial advisor, that would have been shortly before Hanny went public :
Q:How well did you come to know [Sanrita WONG] in the following years?
A:Because she was an executive director of the company, so I came across her on many occasions when we acted as the
financial advisers of the company in respect of various matters.
Q:In respect of what kind of matters did you have dealings with her?
A:Mainly for financing. She was in charge of the finance of Hanny Magnetics.
Q:What were the kind of occasions when you would meet her in that capacity in charge of finance of Hanny Magnetics?
A:Sorry, may I correct that statement? Actually, she was more involved in marketing and sales, but after Hanny Magnetics acquired Memorex, she was then involved in finance as well. I mean, initially I did not deal with her very often, because she was involved in marketing, rather than the financial matters of Hanny, but as I said, after the acquisition of Memorex she was more involved in the finance area. [our emphasis]
Later, when questioned by Wilson CHAN, Sanrita WONG’s counsel, Francis LEUNG spoke directly of his assessment of Sanrita WONG’s abilities :
Q:I think you have already told us that Sanrita WONG was essentially a sales and marketing person before she got involved with the financing of the acquisition of Memorex?
Q:From your dealing with Sanrita WONG, would you say that she was someone knowledgeable in accounting and financial matters in general?
A:Although financing was not her expertise, I thought she had a general understanding of financing.
Q:Financing of the acquisition?
It is clear that Francis LEUNG of Peregrine appreciated the effect that publication of the news could have on the market. He did not attend the meeting. However, he received reports of what occurred and acted immediately. In this regard, the transcript of his evidence reads :
Q:Going back to your record of interview : “During the board of directors meeting of Hanny, I remember there was a discussion regarding a possible write down of an investment in the US. There was a large discrepancy between the draft accounts reviewed by the auditors and management accounts. We asked the financial officer for the reason, but he could not answer. The figure was around US$30 million. I thought this information is price sensitive and I thought that I and the other directors could not deal in shares of Hanny. I then told WONG Sun and advised him to circulate a statement in this regard. As a result, this document is drafted and WONG Sun signed on 19th May 1995 and distributed to the other directors for them to sign.” Is that accurate?
Q:Do you know who it was, the financial officer who could not provide the answers to the provision?
The statement referred to by Francis LEUNG was circulated in the form of a memorandum the very next day; that is on 19th May 1995. It was addressed by WONG Sun to all the directors and read :
RE : Hanny Magnetics Limited (“Hanny”) – Dealing in Hanny’s shares
You will be aware that the Board has now commenced discussions on Hanny’s business plan, budget and related matters. For this reason, I do not believe that it is appropriate for directors to deal in Hanny’s shares at the current time. With immediate effect and until further notice, please ensure that you do not deal in Hanny’s shares and that you ensure that no dealings take place by your spouse or by or on behalf of any child and that no other dealings take place in which you would be treated as interested by the Securities (Disclosure of Interests) Ordinance. If you have any doubt you should seek appropriate advice.
Signatures of acknowledgment were sought from all the directors. William FUNG signed but Sanrita WONG refused to do so. As will be seen, she was by then actively selling her Hanny shares.
The memorandum was not open to misunderstanding. It was not just advice, it was a clear directive not to deal in Hanny shares until further notice.
Nor, in the opinion of the Tribunal, could the timing of the memorandum be overlooked by those who received it. The memorandum was circulated the day after WONG Sun had returned from a visit of critical importance to the United States to decide how best to deal with Hanny’s troubled operations there. It was circulated the day after a 3-hour meeting attended by senior members of Hutchison Whampoa and Peregrine at which those present were told of a claim by the United States management for an exceptional write-off of HK$233 million.
At the meeting the next day, the minutes record Sanrita WONG,playing an active role :
Sanrita tabled an offer from Hagemeyer. In general the offer was not satisfactory. We would insist that it would also acquire our Memorex Drive at market value. WONG Sun preferred Rekotan better than Hagemeyer. He requested Eugene to look into the turnover figures of the offer letter and report back to the meeting.
James Capel – Brokers
Sanrita WONG requested the meeting to look into the matters of maintaining good relationship with investment brokers. James Capel was frustrated as no one seemed to be interested in seeing them. Joseph LI was requested to meet them.
Sanrita tabled again further communication from BASF regarding an offer. In general the offer was not acceptable and we had to decline it.
Sanrita WONG questioned whether VO was still a viable business and wasting our resources…
In the judgment of the Tribunal, when all relevant matters are viewed as a whole, those within Hanny with a knowledge of what was happenning must have known that the company was at that time in a state of deep crisis. There was now quite patently an air of desperation in Hanny’s workings. If any of those within Hanny’s senior management were blind to the obvious, their eyes would have been opened when Peregrine sent a letter dated 6th June to Hanny’s directors. Counsel to the Tribunal has described the letter as a ‘devastating critique’. The letter was jointly signed by Francis LEUNG and John Nicholls. It hi-lighted the need for detailed business and financing plans which could only be produced by the executive directors and had to carry their recommendation. Despite the public impression that new and highly competent management was at the helm, concerns were now expressed at a perceived ‘lack of effective control by the executive directors over the operations and strategic direction of the Hanny Group’. In particular, reference was made to Hanny’s financingarrangements, that portion of the letter reading :
Hanny’s continuing debt burden, the short term nature of most of its borrowings, the fact that it remains in breach of covenants relating to a number of its loan facilities and the resultant concern and pressure from its bankers is a matter of grave concern to us.
In respect of the operating difficulties then facing Hanny, the letter read :
It now appears, from the budge presented to the Board on 26th May 1995, that the Zhuhai facility is projected to operate on a significantly worse basis than was the case in the budget prepared for the Board less than two months ago. This raises serious concern as to the effect this information will have on Hanny’s bankers and creates real doubt in our minds as to whether Hanny will be able to continue to operate on a going concern basis. [our emphasis]
In his expert’s report, Clive Rigby was of the opinion that this letter (read with other contemporary correspondence), if placed in the hand’s of an investor, would indicate that Hanny was at that time ‘in extreme jeopardy’.
On a plain reading of the letter, the directors of Hanny must have been impressed by the fact that Peregrine, Hanny’s business advisors and experts in the field, were gravely concerned at the company’s position and did not see early signs of recovery. In short, to echo the words of Clive Rigby, that the year end results for 1995 would reveal a substantial loss, far greater than earlier anticipated.