Case Detail

HCCW 435/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO 435 OF 2012

_________________

	IN THE MATTER OF China Medical Technologies, INC
	and
	IN THE MATTER OF the Companies (Winding Up and Miscellaneous Provisions) Ordinance, Cap 32

_________________

BETWEEN
	THE JOINT AND SEVERAL LIQUIDATORS OF CHINA MEDICAL TECHNOLOGIES, INC	Applicants
and
	KPMG (A FIRM)	1^st Respondent
	JACK CHOW	2^nd Respondent
	JANETTE YU	3^rd Respondent
	BRUCE ZIRLEN	4^th Respondent
	JANET CHEUNG	5^th Respondent
	PAUL LAU	6^th Respondent
	FRANCIS CHING	7^th Respondent
	IAN PARKER	8^th Respondent
	STEPHEN YIU	9^th Respondent
	ISAAC LAP KEI YAN	10^th Respondent
	BENNY LIU	11^th Respondent
	MARIA LEE	12^th Respondent
	EDWIN FUNG	13^th Respondent
	DAVID KO	14^th Respondent
	DANIEL CHAN	15^th Respondent
	TONY CHEUNG	16^th Respondent
	RONALD SZE	17^th Respondent

_________________

Before: Hon Harris J in Chambers

Date of Hearing: 6 July 2017

Date of Decision: 26 July 2017

_________________

D E C I S I O N

_________________

1. On 24 February 2016 (“2016 Order”) I made an order that required KPMG HK to produce to the Liquidators Documents, as defined in the order, and in particular in para 2 that:

“Insofar as the aforesaid Documents or copies thereof are located in Hong Kong or a jurisdiction other than the Mainland of the People’s Republic of China (‘Mainland’), or they are stored in a form as at 24 February 2016, which allows them to be accessed outside the Mainland, the Documents, or copies thereof, shall be produced by the 1^st Respondent to the Liquidators in Hong Kong on or before 23 March 2016 or such other date as the parties agree or the Court directs.”

2. On 12 January 2017 I made a further order amending para 3 of the 2016 Order. That order was appealed. It was upheld by the Court of Appeal, although certain necessary changes to the time periods for compliance were made. The order in the form made by the Court of Appeal was as follows (“2017 Order”):

“Insofar as the Documents referred to in paragraph 1 of the February Order or copies thereof are located in the Mainland or stored in a form which allows them, as at 24 February 2016, to be accessed only in the Mainland:
(1) the 1st Respondent shall within 35 clear calendar days produce copies of the Documents to the Liquidators in the Mainland after redacting the information identified by Zhong Lun Law Firm as ‘sensitive information’;
…”

3. KPMG HK’s case in respect of its ability to produce the Documents or access them from Hong Kong has evolved over time. This has given rise to a series of decisions. The most recent of which is the Court of Appeal’s decision of 12 April 2017, which led to the 2017 Order and my decision of 15 May 2017 dealing with, amongst other things, an unsuccessful application by KPMG HK seeking effectively to stay the 2017 Order.

4. KPMG HK have advanced over time the following different reasons why they should not be required to produce the Documents:

(1) The Documents might contain State Secrets;
(2) They might contain sensitive information, which the Ministry of Finance (“MOF”) wanted assessed before access to the Documents be given;
(3) The MOF objected to copies of the Documents, as opposed to the opportunity to inspect them in KPMG’s offices in the Mainland, being provided to the Liquidators in the Mainland.

5. The court has rejected these arguments, although orders have been framed to take into account the MOF’s sensitivities including not making the court’s various decisions public. The position has now been reached that this court and the Court of Appeal have ordered KPMG HK to provide copies of the Documents to the Liquidators in the Mainland. KPMG HK have not done so because they say they are held by KPMG’s Mainland entity, KPMG Huazhen, and they refuse to provide them because KPMG Huazhen take the view that whatever the courts of Hong Kong have concluded to do so would be inconsistent with what KPMG Huazhen believe the MOF have directed. KPMG Huazhen have also refused to provide the necessary access to their servers to allow access to Documents stored on them to be accessed in Hong Kong. The Liquidators say that KPMG HK have de facto control of KPMG Huazhen and suggest that KPMG Huazhen’s refusal to assist in providing copies of the Documents or remote access to them is not genuine and is a contrived excuse to hamper the Liquidators’ attempts to review the Documents effectively and is in breach of the 2016 and 2017 Orders.

6. The Liquidators have issued summons seeking orders intended to require remote access to be given and copies of the Documents provided respectively. In respect of remote access, a summons was issued on 31 October 2016 seeking orders:

“1. that within 14 days of the service of this Order, the 1^st Respondent comply with paragraph 2 of the Order made by the Honourable Justice Harris on 24 February 2016 (‘February Order’) by:
1.1 the 1^st Respondent accessing all documents identified in paragraph 1 of the February Order (‘Documents’) located on servers in the Mainland through any of the available methods of electronic access to the Documents set out in the Affirmation of Chung Kam Ming (‘Chung 1’) and the Sixth Affirmation of Jacqueline Wong (‘Wong 6’), both filed on 23 September 2016; and
1.2 every partner of the 1^st Respondent who is also a partner of KPMG Huazhen (‘Common Parners’), including but not limited to the 9^th to 17^th Respondents, in their capacity as partners of KPMG Huazhen, take all necessary steps to ensure that paragraph 1 hereof is complied with;
…”

7. Appended to Mr Manzoni’s submissions was a reformulation of the order that the Liquidators seek:

“Within 14 days of the service of this Order, KPMG comply with paragraph 2 of the February 2016 Order by accessing all the Documents identified in paragraphs 1.1 to 1.3 and 1.5 to 1.11 of the February 2016 Order located on servers in the Mainland through any of the methods of electronic access to the Documents including those set out in Chung 1, Wong 6, Chung 2, Yan 5 and Wong 9.”

8. By a summons filed on 6 June 2017 dated 2 June 2017 the Liquidators seek the following order in respect of the provision of copy Documents:

“1. The obligation of the 1^st Respondent to comply with paragraph 3(1) of the Order of this Court dated 24 February 2016 (‘February 2016 Order’), as varied by the Order of this Court dated 12 January 2017 (‘January 2017 Order’) and upheld by the Order of the Court of Appeal dated 12 April 2017 which has not been the subject of any further appeal or variation, and paragraph 2 hereof, is not contingent upon cooperation, approval or any other action by any person who is a partner or employee of the firm called KPMG Huazhen (also known as KPMG Huazhen LLP).
2. Without limitation to the generality of the February 2016 Order as varied by the January 2017 Order, the 1^st Respondent shall comply with the February 2016 Order by producing the Documents referred to therein within three (3) business days of the date of this order to the Liquidators at Borrelli Walsh, Room 3706, Fortune Plaza Building A, No.7 East Third Ring Middle Road, Chaoyang District, Beijing, Peoples [sic] Republic of China, 100020.”

9. Mr Manzoni argued that I had in my Decision of 24 February 2016 (“February Decision”) already determined that KPMG HK had de facto control of KPMG Huazhen, that all relevant evidence had been filed and I should make these new orders to make the position clear and to require KPMG HK to cease avoiding compliance and produce copies of the Documents and remote access to them. The particular paragraphs of my February Decision the Liquidators rely on are:

“27. It seems to me clear from the evidence that so far as possible KPMG China operates as one commercial entity and, so far as permissible by law, is managed as such by a panel of partners very largely drawn from the Hong Kong partnership. Subject to any specific legal restriction KPMG HK is, therefore, in practice able to direct that KPMG Huazhen comply with its directions. I did not understand this to be disputed by KPMG HK in the present application. However, I note that in a letter from KPMG HK to the Liquidators’ solicitors dated 21 December 2012 and also a letter from Smyth & Co dated 12 August 2013, KPMG HK suggested that in respect of papers held by KPMG Huazhen the [Liquidators’] ‘enquiries may be best served if they are made by your client’ to [KPMG] Huazhen. It seems to me that this was disingenuous given what has become clear as a result of my request for information was the substantive nature of the relationship between KPMG HK and KPMG Huazhen.
28. It seems to me also to be clear that those behind the formation of KPMG China, largely partners in KPMG HK, choose to represent themselves as operating one, integrated operation in the Mainland and Hong Kong. It seems to me that this representation sits uncomfortably with KPMG HK’s evidence, which I address in detail later, seeking to explain the regulatory environment in which it operated in the Mainland and the restrictions on its ability to produce to the Liquidators the documents that they seek. If KPMG HK’s assertions contained in the evidence of Jacqueline Wong about the relationship between KPMG HK and KPMG Huazhen and the restrictions on the transfer of documents out of the Mainland are correct KPMG China cannot fairly hold itself out as one business entity.
…
90. I am satisfied for the reasons explained earlier that the Liquidators do reasonably require the documents that they seek. I am also satisfied as a result of the evidence filed by Mr. Weir that the fact that KPMG HK and KPMG Huazhen are separate legal entities does not prevent KPMG HK obtaining the documents to the extent that they are in the possession or control of KPMG Huazhen.”

10. KPMG HK have raised a number of objections to the course advanced by the Liquidators. The principal ones are that whether or not KPMG HK are prevented from providing copies of the Documents or remote access goes to KPMG HK’s likely defence to any contempt proceedings brought by the Liquidators and that the issue should be resolved in contempt proceedings if the Liquidators take the view that KPMG HK have no lawful excuse for non-compliance with the orders and in accordance with the procedural safeguards and standard of proof contempt proceedings involve. Secondly, it is wrong for the Liquidators to suggest that the issue of control has been resolved and, if it is so argued, issue estoppel arises, because the conclusions reached in the February Decision were not central to the issues in the application and are made more by way of background. I agree with both submissions.

11. It is not suggested that either the 2016 or 2017 Orders are unclear or that there is much room for argument about what KPMG HK have done, or not as the case may be, by way of compliance with them. If the Liquidators, consider KPMG HK do not have a legitimate excuse for non-compliance the appropriate course is to commence contempt proceedings.

12. I also have another more practical objection to the way in which the Liquidators wish to progress the matter. If I have to decide the summonses on the basis of the evidence filed to date, which is Mr Manzoni’s preferred course, I cannot see how I could be expected to do other than make an order substantially in the terms of the first part of paragraph 27 of the February Decision, which would not advance the matter very far; although I note in passing that there may be a material difference in the position in respect of the audit working papers for the financial years up to and including 2007, when the audit was done by the KPMG HK and from 2008, when as I understand the position, KPMG Huazhen carried out the audit on the Mainland as a component auditor. If the question of KPMG HK’s ability to direct KPMG Huazhen to take such steps as are necessary for KPMG HK to comply with the 2016 and 2017 Orders is going to have to be resolved by further evidence and possibly cross-examination, particularly, having regard to the importance of the Liquidators having access to the Documents and the nature of KPMG HK’s reasons for failure to comply, this should be by way of contempt proceedings.

13. In conclusion I will dismiss the two summonses. I will make a costs order nisi that the costs are paid out of the assets of the Company with a certificate for two counsel.

(Jonathan Harris)
Judge of the Court of First Instance
High Court

Mr Charles Manzoni SC, instructed by Lipman Karas, for the applicants

Mr Paul Shieh SC and Mr Wilson Leung, instructed by Reynolds Porter Chamberlain, for the 1^st to 17^th respondents

HCCW 435/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO 435 OF 2012

_________________

	IN THE MATTER OF China Medical Technologies, INC
	and
	IN THE MATTER OF the Companies (Winding Up and Miscellaneous Provisions) Ordinance, Cap 32

_________________

BETWEEN
	THE JOINT AND SEVERAL LIQUIDATORS OF CHINA MEDICAL TECHNOLOGIES, INC	Applicants
	and
	KPMG (A FIRM)	1^st Respondent
	JACK CHOW	2^nd Respondent
	JANETTE YU	3^rd Respondent
	BRUCE ZIRLEN	4^th Respondent
	JANET CHEUNG	5^th Respondent
	PAUL LAU	6^th Respondent
	FRANCIS CHING	7^th Respondent
	IAN PARKER	8^th Respondent
	STEPHEN YIU	9^th Respondent
	ISAAC LAP KEI YAN	10^th Respondent
	BENNY LIU	11^th Respondent
	MARIA LEE	12^th Respondent
	EDWIN FUNG	13^th Respondent
	DAVID KO	14^th Respondent
	DANIEL CHAN	15^th Respondent
	TONY CHEUNG	16^th Respondent
	RONALD SZE	17^th Respondent

_________________

Before: Hon Harris J in Chambers

Date of Hearing: 8 May 2017

Date of Decision: 15 May 2017

Date of Reasons for Decision: 19 May 2017

______________________________

REASONS FOR DECISION

______________________________

1. There are two summonses before the Court. A summons issued on 28 April 2017 by the Liquidators seeking an order for cross-examination of Chung Kam Ming and Bruce Zirlen of KPMG Hong Kong at a hearing before me to commence on 6 July 2017. A summons issued on 5 May 2017 by KPMG Hong Kong seeking effectively to stay an order requiring them to produce copies of documents to the Liquidators in the Mainland. I deal with them in turn.

Cross-examination

2. The hearing in July is to consider the Liquidators’ application by summons issued on 31 October 2016 principally for orders that:

“1. … within 14 days of the service of this Order, the 1^st Respondent comply with paragraph 2 of the Order made by the Honourable Justice Harris on 24 February 2016 (‘February Order’) by:
1.1 the 1^st Respondent accessing all documents identified in paragraph 1 of the February Order (‘Documents’) located on servers in the Mainland through any of the available methods of electronic access to the Documents set out in the Affirmation of Chung Kam Ming (‘Chung 1’) and the Sixth Affirmation of Jacqueline Wong (‘Wong 6’), both filed on 23 September 2016; and
1.2 every partner of the 1^st Respondent who is also a partner of KPMG Huazhen (‘Common Partners’), including but not limited to the 9^th to 17^th Respondents, in their capacity as partners of KPMG Huazhen, take all necessary steps to ensure that paragraph 1 hereof is complied with;”

3. Paragraph 2 of my order of 24 February 2016 ordered that:

“Insofar as the aforesaid Documents or copies thereof are located in Hong Kong or a jurisdiction other than the Mainland of the People’s Republic of China (‘Mainland’), or they are stored in a form as at 24 February 2016, which allows them to be accessed outside the Mainland, the Documents, or copies thereof, shall be produced by the 1^st Respondent to the Liquidators in Hong Kong on or before 23 March 2016 or such other date as the parties agree or the Court directs.”

4. In short the Liquidators are not satisfied that the Respondents have complied with [2]. They complain that the various affirmations the Respondents have filed purporting to address the access issue leave it unclear precisely what the position is.

5. When the October summons first came on before me I made directions for KPMG Hong Kong to file further evidence. I explained that it seemed to me that if it is KPMG Hong Kong’s position that they have complied with [2] of the 24 February 2016 order it should be possible for this to be stated very clearly and avoid a forensic analysis of the discursive evidence filed to date.

6. KPMG Hong Kong filed a number of further affirmations, which touch on this subject. The two most important in my view are the 9^th affidavit of Jacqueline Wong, who is a partner in KPMG Hong Kong and in the Quality and Risk Management Department, and the 3^rd affirmation of Chung Kam Ming who is a director in KPMG Hong Kong’s IT Department. Ms Wong’s 9^th affidavit summarises her evidence in [7]:

“7. However, save for those Documents which have already been produced to the Liquidators pursuant to paragraph 2 of the February Order, there are no further Documents to be produced thereunder. In particular, for the reasons explained below:
7.1 as at 24 February 2016, there were no Documents located on servers in the Mainland which were accessible by the Respondents from Hong Kong;
7.2 as of now, there are no Documents located on servers in the Mainland which are accessible by the Respondents from Hong Kong.”

7. Ms Wong then goes on to explain at some length her reasons for holding that view. Mr Chung says something similar in [10] of his 3^rd affirmation and explains rather more succinctly his reasons for so stating. Mr Shieh who appeared for KPMG Hong Kong, confirmed that it was his instructions that at the material times none of the Respondents could access the relevant stored documents on KPMG Huazhen’s server in the Mainland.

8. I asked Mr Manzoni if it was the Liquidators’ case that KPMG Hong Kong did have access to the documents stored on KPMG Huazhen’s server. He replied that it was the Liquidators’ case that they had not been provided with confirmations that [7] of the February order and [6] of a subsequent order of 2 September 2016 required. Paragraph 6 provides:

“Within 21 days hereof, the 1^st Respondent is to file and serve corrective evidence to comply with paragraph 7 of the Order of the Honourable Mr Justice Harris of 24 February 2016 (‘February Order’). The deponent of the evidence shall have direct knowledge of the matters deposed to therein and in the evidence shall (a) provide full particulars of the steps taken by the 1^st Respondent for the purpose of compliance with paragraph 2 of the February Order; and (b) provide full particulars of the information technology systems of ‘KPMG China’ and the ability to access information stored in the Mainland from outside of the Mainland, including by way of addressing each of the matters set out in Annexure A.”

9. As I understand it, it is the Liquidators’ position that if one scrutinises the various affirmations that have been filed one can find inconsistencies and evidence that raises questions that are unanswered.

10. I do not understand there to be any material dispute between the parties as to the relevant principles. They are summarised by Fuad JA (as he then was) in WendyWenta Seng Yuen v Philip Pak-yiu Yuen [1]. He says this:

“… the true rule must be that the court has an unfettered discretion to permit cross-examination on an affidavit but the applicant is not entitled to this right as of course. He has to establish that in all the circumstances of the case there is a good and sufficient reason for the application. He will not find this difficult where the evidence on the affidavits will result in what I might call a final order. He will find it more difficult in interlocutory matters, perhaps, for, as the judge below had in mind, great delay and expense might be entailed. It seems to me that what is essential for the applicant to show is that the proposed cross-examination might be productive of a useful result at the stage that the application is made. If no reason can be suggested for supposing that the cross-examination will then be helpful, the application will be refused in the discretion of the court, indeed, in certain circumstances it might be regarded as oppressive and, as such, an abuse of the process of the court.”

11. The relevant question is whether cross-examination might be helpful in resolving the issues to be determined at the hearing in July. Mr Manzoni suggested that the cross-examination would be helpful in establishing whether or not the documents on the servers in the Mainland could be accessed at the relevant times. I disagree.

12. KPMG Hong Kong’s position it seems to me is quite clear. The documents could not be accessed. Mr Manzoni did not point to any evidence to suggest that this was in some respect wrong. What it seems to me the Liquidators have done is carry out a careful forensic analysis of the evidence and identified various paragraphs of various of the affirmations that they suggest leave in doubt whether KPMG Hong Kong’s position is strictly correct. Even assuming, and I tend to the view that Mr Manzoni’s reading of much of the evidence is excessively pedantic, there are matters about which questions can be asked, the fact is that I can see no reason at all to think that either Mr Zirlen or Mr Chung are likely to be able to give anything other than fairly general answers that will be consistent with KPMG Hong Kong’s case. For example, the Liquidators point to the evidence of Ms Wong in [26] of her 6^th affidavit, which reads:

“The hard copy files which have been produced for the Liquidators’ inspection in Mainland China have been scanned and stored in electronic form on a Mainland China server. This was done in anticipation of the need to produce these documents to the MOF for review of state secrets and sensitive information which did not occur. These scanned documents are subject to the same MOF direction as the physical files so that inspection of the scanned copies of the audit files can only take place within Mainland China.”

13. The Liquidators complain that these documents are not referred to in Ms Wong’s 9^th affidavit and that the evidence filed to date only addresses access to those documents by KPMG’s audit engagement team and does not expressly state that no other partner or employee of KPMG Hong Kong could access them from overseas. It seems to me that [7] of Ms Wong’s 9^th affidavit must be read as applying to all documents including those referred to in [26] of her 6^th affidavit. The Liquidators do not point to any evidence that suggests that the scanned documents are not covered by [7]. Further no reason has been identified for thinking that either Mr Zirlen or Mr Chung would be able to say anything other than that they are not aware of any partner or employee of KPMG Hong Kong having access to the scanned documents. I cannot see any sensible reason for reading Mr Chung’s 3^rd affirmation as leading to any other conclusion.

14. In my view cross-examination is unlikely to assist in the determination of the summons in July and I dismiss the Liquidators’ summons and make a costs order nisi that the Liquidators and the Respondent’s costs of the summons be paid out of the assets of the company.

Production of Documents

15. On Friday 5 May 2017 the Respondents sought leave to issue a summons returnable on Monday 8 May 2017 seeking an order that paragraph 3(1) of my order dated 24 February 2016 be varied and paragraph 3(2) be stayed.

16. Paragraphs 3(1) and (2) provide:

“3. …
(1) the 1^st Respondent shall within 35 clear calendar days produce copies of the Documents to the Liquidators in the Mainland after redacting the information identified by Zhong Lun Law Firm as ‘sensitive information’;
(2) the Liquidators shall retain, maintain and keep safe the copies of the Documents provided to the Liquidators and any further copies whether in physical or digital form taken by the Liquidators in the Mainland until further order;”

17. These paragraphs were introduced into the Order by a variation to its original terms made on the application of the Liquidators on 12 January 2017. I shall refer to the February 2016 order as varied on 12 January 2017 as the “Order”. The decision to make that variation was unsuccessfully appealed. The appeal was held on 3 April 2017 and judgment handed down on 12 April 2017.

18. Paragraph 3(8) of the Order gave the Respondents liberty to apply specifically to allow them to seek a variation of the Order in the event that the Ministry of Finance took steps to prohibit provision of copy documents to the Liquidators in the Mainland as paragraph 3(1) required. By the time the appeal came on for hearing the Supervision and Inspect Bureau of the Ministry of Finance had written a letter to KPMG Hangzhou, which is dated 6 March 2017, the material parts of which read as follows:

“We acknowledge receipt of your request for instructions on matters relating to the High Court of Hong Kong’s order to provide audit work papers of China Medical Technologies Inc. We will consult the relevant authorities and carry out the approval formalities in accordance with the working procedures, and revert to you with an opinion afterwards. Before obtaining any opinion in reply, you should strictly comply with the relevant laws and regulations. You shall not provide paper and electronic audit work papers overseas. You shall not allow access to and download of electronic audit work papers stored on a server in Mainland China from overseas.”

19. The Court of Appeal took this development into account in reaching their decision.

20. When the Respondents’ application came on before me on 8 May 2017 I asked Mr Manzoni whether he accepted that I should hear the application rather than the Court of Appeal as it seemed at least arguably to be seeking an alteration in the decision reached by the Court of Appeal. Mr Manzoni said, fairly I think as the matter had come on quickly, that he was not sure, but did not object to me hearing it. Having subsequent to the hearing given the matter further thought it seems to me unclear whether it is appropriate for me to deal with the application, but be that as it may having heard the application and the time for compliance with paragraph 3(1) expiring on 17 May it seems to be expedient for me to determine it.

21. Paragraphs 35 to 39 of the Court of Appeal’s judgment addressed the MOF letter of 6 March 2017 and its impact on the conclusion that I had reached, namely, that no real risk of the MOF imposing a serious sanction against KPMG Hong Kong or KPMG Hangzhou had been demonstrated and that in the absence of a real risk the need for the Liquidators to have meaningful and effective access to the documents prevailed and justified paragraph 3(1) of the Order:

“35. The judge did not have the benefit of the latest evidence as we did. Even taking such evidence into account, we come to same conclusion as the judge: as the evidence stands, there is no real risk of the Ministry of Finance imposing serious sanctions against KPMG or KPMG Huazhen for complying with the January Order.
36. All the written responses from the Ministry of Finance (the letters of 6 March 2017 and 24 March 2016) referred to the written rules and regulations and there was no suggestion that any additional oral protocol has to be complied with.
37. As invited by Mr Coleman, we read these letters in the context of the oral discussions between the parties. At the same time, the Ministry of Finance was clearly aware of the judgment of Harris J and His Lordship’s analysis of lack of written laws or regulations which prohibit KPMG from complying with the January Order. Against such background, though we see no reason to doubt the veracity of the evidence on what had been said by the officials of Ministry of Finance orally in telephone conversations or meetings, we do not accept that those intimations would have the force of law or regulatory directives to back up any sanctions against KPMG in case of non-compliance.
38. In this connection, we have not lost sight of the evidence of Mr Wagner on soft law or directives in the PRC. However, with due respect, we find the evidence of Professor Yao to be more persuasive. If the Ministry of Finance has really intended to impose sanctions against KPMG or KPMG Huazhen in case of any breach of the terms communicated orally, we believe they would have set it out in writing.
39. As we said above, on the evidence before us, it seems that the main concern of the Ministry of Finance is that the papers or copies are not to be removed out of Mainland. Though (as discussed earlier) the January Order obliged the Liquidators to keep the copies in the Mainland, we accept that the Ministry of Finance may have a legitimate concern that it has no authority over the Liquidators.”

22. Consequently the Court of Appeal dismissed the Appeal, but extended the time for compliance.

23. It is understandable that following this decision KPMG Huazhen might have thought it appropriate to send a copy of the decision to the MOF and informing them that that they and KPMG Hong Kong intended to comply with it. KPMG Hong Kong, however went further than this.

24. KPMG Hong Kong drafted a letter, which is dated 26 April 2017 referring to the MOF’s letter of 6 March 2017, reporting on the progress of the Appeal. The letter says this:

“The appeal was heard on 3 April 2017. It was heard in open court but subject to an order that there should be no reporting of the hearing without the leave of the Court of Appeal. On 12 April 2017 the Court of Appeal handed down its judgment of which a copy and a Chinese translation are enclosed. The Court of Appeal dismissed the appeal, on the basis that:
1. It did not see any risk of non-compliance with any written laws or regulations of the PRC if KPMG Huazhen were to provide copies of the Documents to the Liquidators, given that no state secrets had been identified therein and any ‘sensitive information’ had been redacted;
2. On its reading, the Notice does not prohibit the provision of copies of the Documents to the Liquidators in Mainland China;
3. It took the view that, while the MOF may prefer that copies of the Documents should not be given to the Liquidators, if the MOF really intended to impose sanctions upon KPMG Huazhen or KPMG HK, its instruction not to provide copies to the Liquidators would have been set out in writing; and
4. It did not perceive any real risk that the MOF would impose serious sanctions on KPMG Huazhen or KPMG HK for providing copies of the Documents to the Liquidators in Mainland China.
The Court of Appeal extended the time for compliance with the January 2017 Order for a further 35 days until 17 May 2017, by which date KPMG HK is obliged to provide copies of the Documents to the Liquidators in Mainland China.
Further to item 2 above, the Court of Appeal is of the view that the Notice stipulates that, before obtaining any opinion in reply from the MOF, KPMG Huazhen shall not provide paper and electronic audit work papers ‘overseas’. We respectfully seek your clarification as to whether, as interpreted by the justices of appeal, copies of the Documents may be provided to the Liquidators in Mainland China and the only restriction on the provision of copies is that no paper and electronic audit work papers shall be sent ‘overseas’ or outside of Mainland China. The accurate interpretation of this stipulation is critical. If the Court of Appeal’s interpretation above is incorrect, we should inform the Hong Kong Court immediately and seek to vary the January 2017 Order.”

25. The letter seeks “clarification” of whether the interpretation of the Court of Appeal was right or wrong. It seems to me that this was not a legitimate way to proceed. The matter had been determined and it was inappropriate for KPMG Hong Kong to try and, as they now do, reopen the matter by getting something new from the MOF.

26. The letter was delivered to Director Wang of the MOF on 26 April 2017 by Len Jui, who is a partner in KPMG Huazhen familiar with the matter, and his colleague Priscilla Miao. Mr Len explains that he took Director Wang through the letter. He then says this in [12] to [15] of his affirmation.

“12. Director Wang responded that, after the MOF’s consultation with the Ministry of Justice and other relevant government bodies has been completed, a written direction would be issued to all CPA firms, which would not be a direct response to these proceedings but would be of general application. He said that the direction would take into account the memorandum of understanding, entered into between the Supreme People’s Court and the Hong Kong government in December 2016, which became effective on 1 March 2017.
13. A copy of the memorandum of understanding to which Director Wang referred, the ‘Supreme People’s Court Mutual Evidence Collection Arrangements Concerning Civil and Commercial Cases Between Courts in the Mainland and in Hong Kong Special Administrative Region’ (Fa Shi [2017] No. 4), is exhibited at ‘LJ-10’.
14. Director Wang stated that the focus in the present case should not be upon whether or not production of the Documents may be permitted take place within Mainland China. He stated that production of the Documents should follow the written direction, upon it being issued.
15. My clear understanding from the meeting with Director Wang, therefore, is that the MOF’s position is that copies of the Documents should only be provided to the Liquidators in compliance with the written direction and should not be provided until the written direction is issued.”

27. Director Wang does not say that provision of copies of documents would infringe any law or regulation in the Mainland. He seems to have said that he would like the matter to be left until the direction referred to in [12] had been issued.

28. In [38] of their judgment the Court of Appeal state that if the MOF really intended to impose sanctions for any breach of an instruction, they would have set this out in writing. The present position is no different in that regard from when the matter was before the Court of Appeal on 3 April 2017. There is no written instruction or statement from the MOF stating that copies of the documents should not be provided and that if they are the MOF may instigate some form of disciplinary action against KPMG Huazhen. All the Court has been provided with is Mr Jen’s apparent understanding of what Director Wang would like to happen.

29. It seems to me that in order for KPMG Hong Kong to succeed in the present application it is necessary for them to demonstrate that something has taken place since the hearing of the appeal, which materially alters the position that was before the Court of Appeal. It does not seem to me that it has. I, therefore, dismiss the application and make an order nisi that the Respondents pay the Liquidators costs.

(Jonathan Harris)
Judge of the Court of First Instance
High Court

Mr Charles Manzoni SC, instructed by Lipman Karas, for the applicants

Mr Paul Shieh SC and Mr Wilson Leung, instructed by Reynolds Porter Chamberlain, for the respondents

[1] [1984] HKLR 431 at 436

HCCW 435/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING‑UP) NO 435 OF 2012

_________________

	IN THE MATTER OF China Medical Technologies, INC
	and
	IN THE MATTER OF the Companies (Winding Up and Miscellaneous Provisions) Ordinance, Cap 32

_________________

BETWEEN
	THE JOINT AND SEVERAL LIQUIDATORS OF CHINA MEDICAL TECHNOLOGIES, INC	Applicants
	and
	KPMG (A FIRM)	1^st Respondent
	JACK CHOW	2^nd Respondent
	JANETTE YU	3^rd Respondent
	BRUCE ZIRLEN	4^th Respondent
	JANET CHEUNG	5^th Respondent
	PAUL LAU	6^th Respondent
	FRANCIS CHING	7^th Respondent
	IAN PARKER	8^th Respondent
	STEPHEN YIU	9^th Respondent

_________________

Before: Hon Harris J in Chambers

Date of Hearing: 10 February 2017

Date of Decision: 10 February 2017

_________________

D E C I S I O N

_________________

Application

1. I have before me a summons issued by the Respondents (“KPMG”) seeking leave to appeal my order of 12 January 2017 (“Order”) varying the terms of earlier orders that I have made requiring KPMG to allow inspection of documents identified in the earlier orders to the Applicants, who are the provisional liquidators of China Medical Technologies Inc (“ProvisionalLiquidators”).

Background

2. The first order in the series leading to the Order was made by me on 24 February 2016. The reasons for making the order, that was contested, are set out in my comprehensive decision of the same date. In short I ordered that KPMG allow inspection of primarily audit working papers located in the Mainland. I rejected arguments that KPMG should not be required to do so because the documents might contain State secrets and KPMG would be in breach of various laws and directions from Mainland Regulators if they did so. I did, however, expressly provide in [5] of the order that “In the event of any matter occurring subsequent to the Order, which in the view of the Respondents or any of them inhibits or prevents them from complying with any part of this Order, there be liberty to apply for the terms of the Order to be varied.” As is apparent from [93] of my decision the reasons for including [5] was to give KPMG the opportunity to return to court to have the order varied in the event that the authorities in the Mainland took a different view to the one I had reached on the impact of the laws and regulations brought to my attention by KPMG and as a result KPMG could not comply with the order without risk of becoming subject to some adverse action by Mainland authorities.

3. On 3 June 2016 I made limited variations to the order of 24 February 2016 for the reasons explained in my decision of the same date.

4. The Order arose from an application by the Liquidators to vary the existing order to require KPMG to provide copies of the documents to the Liquidators in the Mainland of which they had been ordered to allow inspection on the terms set out in the order. My reasons for so ordering are explained in my decision of 12 January 2017.

5. Paragraph 2 of the Order amends [3] of the 24 February 2016 order to provide in [3(1)] that KPMG produce copies of the relevant documents to the Liquidators in a redacted form (the reasons for the redactions are not relevant) within 35 days. Paragraph 3(6)‑(8) directed that KPMG inform the Ministry of Finance (“MOF” the authority who were dealing with the regulatory aspect of the matter in the Mainland) of the Order, my decision and provide translations and gave KPMG liberty to apply. As I explain in [16] of my decision of 12 January 2017 the reason for so ordering was to allow the MOF the opportunity to take steps to prohibit KPMG from producing copies of the documents and, if this happened, to give KPMG the opportunity to come back before me and to seek a variation of the Order.

Circumstances in which leave to appeal will be granted

6. The principles by reference to which the court determines an application for leave to appeal an interlocutory order, which involves the exercise of a discretion are not in dispute. It is convenient to quote from the written submissions of Mr Wilson Leung who appeared on behalf of KPMG:

“2. Leave to appeal will be granted only if the applicant can show that there is reasonable prospect of success. This involves the notion that the prospects of succeeding must be ‘reasonable’ and therefore more than ‘fanciful’, but without having to be ‘probable’: SMSE v KL [2009] 4 HKLRD 125, §17 (Le Pichon JA).
3. In the Judgment, this Court exercised its discretion to vary its order dated 24 February 2016 (‘February 2016 Order’) in substantially the way sought by the Liquidators but not in the way sought by the Respondents. In an appropriate case, the Court of Appeal can overturn such an exercise of discretion. This can be done if the exercise of discretion was plainly wrong; based on a misapprehension of the facts; and/or failed to take into account relevant matters: see e.g. Topwell Corp Ltd v Kwan Kam Kee [2014] 5 HKLRD 1 (CA), §§4, 38.”

Grounds of Appeal

7. The relevant paragraphs of the grounds of appeal attached to the summons read as follows:

“2. In deciding whether to vary the February 2016 Order, and if so in what manner, the Judge needed to take into account and balance the following factors:
(1) The real and serious risk that KPMG Huazhen would be exposed to severe sanctions, penalties, and other regulatory punishments from the PRC government authorities (especially the PRC Ministry of Finance (‘MOF’)) if KPMG Huazhen: (i) provided copies of the subject documents to the Applicants (as opposed to allowing the Applicants to inspect the documents at KPMG Huazhen’s premises); or (ii) allowed the Applicants to inspect the subject documents in a manner which did not meet the conditions expressly laid down by the MOF in discussions between the MOF and KPMG Huazhen on 18 April 2016 (the Respondents’ evidence of such discussions not having been contradicted by any evidence from the Applicants); versus
(2) The alleged convenience to the Applicants of being provided with copies of the subject documents rather than being given access to inspect the documents at KPMG Huazhen’s premises.
3. In the premises, the balance lay between:
(1) On the one hand, making an order which had the potential of exposing KPMG Huazhen to severe sanctions, penalties, and other regulatory punishments from the PRC government authorities; and
(2) On the other hand, the convenience of the Applicants (given that the Applicants already had access to the documents in question and continued to have such access).
4. In the premises, the Judge’s starting point should have been that:
(1) the risks set out in paragraph 2 above were not in any sense equal in nature;
(2) the balance lay in making an order which did not give rise to the risks in paragraph 2(1) above, save in exceptional circumstances.
The Judge erred in failing to approach the matter on this basis or with this starting point.
5. Further, by varying the February 2016 Order in the way sought by the Applicants but rejecting the proposed variations sought by the Respondents, the Judge was in effect ordering the Respondents to flout the express conditions laid down by the MOF against KPMG Huazhen, for the mere purpose of enabling the Applicants to access the subject documents in a more convenient manner.”

8. The main thrust of the grounds of appeal would appear to be that I did not give sufficient weight to the risks of ordering provision of copy documents in the Mainland and, in particular, [5] I ordered KPMG to flout conditions laid down by the MOF in agreeing to the Liquidators being given access to documents. Before me Mr Leung put the case, as it seems to me, differently. He submitted that the court had approached the matter from the wrong starting point, which was, he argued, that the court should not require KPMG to flout terms of the protocol approved by the MOF, which allowed the Liquidators access to the documents, but which expressly prohibited provision of documents, unless genuinely exceptional circumstances had been demonstrated by the Liquidators. He further submitted that where a risk had been demonstrated it was not permissible for the court to address it by putting in place, as I have done in the present case, a mechanism for managing the risk.

9. This was not the way the matter was argued before me, but more importantly it is inconsistent with what I understand to be the relevant authorities. In [93] of my decision of 24 February 2016 I explain the relevant principle as explained by Chadwick LJ in Re Mid East Trading Ltd [1998] 1 BCLC 240, 257A-C, which was not in dispute at the October 2015 hearing, namely, that in deciding whether or not to grant an order for production the court had regard to “any risk that compliance with an order would or might expose the [respondents] to claims for breach of confidence, or to criminal penalties in the jurisdiction in which the documents are.” In other words the court undertakes a balancing exercise that takes into account the risk that any order may expose the respondent to some risk of being accused of breaching a contract, law or possibly a regulation. Mr Leung has cited no authority suggesting that this is wrong and that if such a risk is demonstrated an order should not be made unless exceptional circumstances can be shown and it is impermissible for the court to address the risk by putting in place a mechanism for managing it.

10. I am not satisfied that it has been demonstrated that there is a reasonable prospect of the Court of Appeal concluding that I applied the wrong principle in assessing the application.

11. It seems to me that the correct approach is to undertake a balancing exercise taking into account the risks identified by KPMG and if appropriate structure any order to provide a mechanism to manage the risks. I do not understand KPMG to suggest that the Order does not do this. The Order envisages and requires KPMG to inform the MOF of the new Order and the reasons it has been granted and gives KPMG the opportunity to return to court and ask for it to be varied if the MOF objects to KPMG complying with it. It seems to me that in so ordering I was giving weight to the possible difficulties the order might cause to KPMG and expressly providing a mechanism of which the MOF would be informed, which would enable the Order to be changed if the MOF took the view that provision of copy documents was unacceptable. Therefore, if the correct approach is to undertake the kind of balancing exercise to which I have referred it seems to me that KPMG has not demonstrated a reasonable prospect of establishing that the balancing exercise failed to take into account relevant matters or was plainly wrong.

12. I therefore dismiss the application for leave.

13. Mr Leung asked me to order a stay of the Order pending determination of an application to the Court of Appeal for leave to appeal. This was opposed by Mr Manzoni who appeared for the Provisional Liquidators principally on the grounds that KPMG are seeking to stay the Order in order to avoid the MOF’s position becoming clear rather than because unless it is stayed the appeal will be rendered nugatory.

14. I am not satisfied that the Order should be stayed. What I will do of my own motion is to extend the date for production of documents until 12 noon on 10 March 2017. That way the Order remains in force. If the circumstances justify it KPMG can always apply for a further extension.

15. KPMG will pay the Provisional Liquidators costs of the application for leave to appeal and the application for a stay.

(Jonathan Harris)
Judge of the Court of First Instance
High Court

Mr Charles Manzoni SC, instructed by Lipman Karas, for the applicants

Mr Wilson Leung, instructed by Smyth & Co, for the 1^st respondent

HCCW 435/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO 435 OF 2012

____________________

	IN THE MATTER OF China Medical Technologies, INC
	and
	IN THE MATTER OF the Companies (Winding Up and Miscellaneous Provisions) Ordinance, Cap 32

_________________

BETWEEN
	THE JOINT AND SEVERAL LIQUIDATORS OF	Applicants
	CHINA MEDICAL TECHNOLOGIES, INC
and
	KPMG (A FIRM)	1^st Respondent
	JACK CHOW	2^nd Respondent
	JANETTE YU	3^rd Respondent
	BRUCE ZIRLEN	4^th Respondent
	JANET CHEUNG	5^th Respondent
	PAUL LAU	6^th Respondent
	FRANCIS CHING	7^th Respondent
	IAN PARKER	8^th Respondent
	STEPHEN YIU	9^th Respondent

_________________

Before: Hon Harris J in Chambers

Date of Hearing: 15 September 2016

Date of Decision: 12 January 2017

_________________

D E C I S I O N

_________________

Introduction

1. I have before me 2 summonses arising from orders that I made on 24 February 2016 and 3 June 2016 for the production of documents by the Respondents (“KPMG”) to the Applicant (“Liquidators”) pursuant to s221 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance, Cap 32. In order to fully understand the background to these applications it is necessary to read my order of 24 February 2016 as varied by my subsequent order of 3 June 2016 and my decisions in respect of those orders, which explain comprehensively the background to the present application and the disputes that have arisen concerning the production of documents by KPMG to the Liquidators.

2. The 2 summonses sought more extensive orders than was pursued before me at the hearing. The applications finally advanced are:

(1) The adjourned portion of the summons of KPMG dated 26 April 2016 seeking to vary paragraph 3 of the February order to allow for redaction of the identity of certain parties referred to in a number of documents.
(2) The Liquidators’ summons dated 1 August 2016 seeking to vary the February order to replace the order that provided that insofar as the relevant documents are in the Mainland the Liquidators be given access to them with an order that requires copies to be provided and also extending the period covered by the order by an extra year from 2009 to 2010.

3. In addition it was agreed that the Liquidators’ application that documents should be produced in Hong Kong be deferred to a further hearing on a date to be fixed.

4. After the hearing of the application for what became the February order was made, but before my decision was delivered, KPMG approached the Ministry of Finance in Beijing (“MOF”) to discuss further with them a protocol for providing access to documents to the Liquidators. As I explain in my February decision it had been KPMG’s case before me at the hearing in October 2015 that resulted in the February order that the MOF had issued various directives (which applied generally to auditors not just KPMG and the present case) that prohibited them giving access to the majority of documents of which production is sought without the permission of a relevant Government entity. It was KPMG’s case at the outset that they had not been able to find a Mainland Government entity, including the MOF, that was willing to give the necessary permission. As matters transpired when the MOF were approached after the hearing before me (and at a time when I think it reasonable to assume that KPMG recognised that they might well lose the application) they proved considerably more helpful than KPMG’s evidence filed for the October hearing suggested they would. The MOF approved a protocol, which provided for KPMG to have the documents inspected by an independent law firm, Zhong Lun, to see if any contained state secrets or sensitive information. I note in passing that at the October hearing KPMG’s case had focused on a concern (which as matters have transpired proved unsurprisingly illusory) that the documents might contain State secrets. After the October hearing in discussions with the MOF, KPMG suggested that the inspection include checking for sensitive information not just State secrets.

Redaction

5. Zhong Lun did not identify any documents containing State secrets amongst the 145,000 pages of documents that they apparently screened. Zhong Lun did, however, identify 68 pages in 41 documents that they considered contained sensitive information. These they recorded in a log, which has been adduced in evidence. In each case KPMG wish to produce copies redacted to exclude the name of a government body referred to in the document and in a few cases additional lines. Mr. Li suggested that one could readily see why the Mainland authorities would regard the information to be sensitive and require redaction. I disagree.

6. The agreement with the MOF did not define “sensitive information”. Ms Jacqueline Wong in paragraph 31b) of her 5^th affidavit and Len Jui in paragraph 38b) of his affirmation both say that the MOF told KPMG that “KPMG Huazhen must engage external PRC counsel to review the documents[1], to ensure that no information which amounts to a state secret or is otherwise regarded as sensitive information shall be disclosed to the Liquidators”. They do not say what they understood sensitive information to mean. “Sensitive information” was defined in Zhong Lun’s retainer letter of 28 October 2015:

“…‘sensitive information’ shall mean information the disclosure of which might bring harm to the state interest or public interest, including: (i) non-public information involving national economy or social development; (ii) enterprise information relating to business secret, operating management, product formula, business intelligence etc; (iii) personal information involving privacy or significant economic interest; (iv) information that might affect foreign affairs, including but not limited to fiscal subsidies, tax preference, export credit, industrial policy, and industrial preferential treatment; (v) information (for instance major contract) relating to special authorities or enterprises, including but not limited to police office, national defense department, military enterprise or institution, and government.”

As I understand it KPMG suggest that this tracked similar language in arrangements agreed between the MOF and the United States’ Securities and Exchange Commission (“SEC”) for the inspection of audit documents in unrelated cases.

7. The only evidence that has been placed before the court, which provides any information about the proposed redactions, is the log itself. This does not explain why the proposed redactions contain “sensitive information”. I will give the first item on the log by way of example:

No. Date of document Author Receipt(s) Email subject Pages of blackout Nature of information redacted Extent of blackout
1 2008-05-29T00:46:36.3
57+0800 Jin, Grace (Beijing/A11) Zirlen, Bruce
(HK/PTR)
CC:
Lin, Michelle (BJ/A11); Seah, Meng Teow (Beijing/A11); Zhu, Diane (Beijing/A11) CMED draft AR memo 1 Name of government body Name

8. What seems to have happened is that Zhong Lun went through the documents and treated as sensitive any reference to a government body. Why references to all government bodies should be treated as “sensitive” is nowhere explained. There is no evidence before me which suggests that KPMG has made any effort to clarify with the MOF whether it has any concerns about the limited number of documents that they wish to provide in redacted form. I am not satisfied on the evidence filed by KPMG that the information that they wish to redact falls within the definition of “sensitive information” in the retainer letter.

9. I will explain how these documents are to be dealt with after considering the Liquidators’ application.

Liquidators’ Application

10. The Liquidators’ justification for seeking a modification of the February order to require production of copies is this. The Liquidators accept that the February order, although not in the terms they had sought, represented a sensible balance between obtaining access for the Liquidators and KPMG’s concerns about the regulatory restrictions they believed themselves to be under. However, since the hearing in October 2015 it has become apparent that the concerns expressed by KPMG were exaggerated. Further, KPMG has not complied properly with the 2 orders. KPMG simply ignored the initial deadlines imposed on them and have similarly disregarded paragraph 1.3 of the June order. It is inconvenient and costly for the Liquidators to go to Beijing to inspect the documents rather than be provided with copies. It is also inefficient because they are forced to work from notes of what staff thought were relevant parts of documents at the time they inspected the documents rather than use analytical software and storage capabilities to deal with the very large number of documents, a significant number of which they say are helpful in advancing their investigations. In addition the Liquidators say that the electronic data with which they have been provided is in a form that is difficult to analyse effectively. In the circumstances, say the Liquidators, the court should make an order requiring production of copies unless the MOF or other relevant entity takes steps to prevent KPMG so doing and that the order should provide a mechanism to cater for that possibility.

11. Mr Li opposed a variation to the existing order on 2 grounds:

(1) The February order did not give general liberty to apply and it is now too late to seek a variation to it.
(2) It seeks to reopen a decided issue.

12. I do not think there is any substance to either of these points. It is correct that the February order does not grant general liberty to apply. It does not seem to me that this bars the Liquidators returning to court with a new application if the circumstances can be demonstrated to have materially altered. Similarly, the fact that I originally decided that it was appropriate to order inspection rather than production of copies does not in my view bar the Liquidators returning to court with a new application if they can demonstrate the circumstances have changed materially. It is also an unattractive argument for KPMG to advance as they have filed in support of their own application a considerable amount of evidence, much of which as matters transpired was unnecessary, including new expert evidence, which sought to reopen issues concerning the regulations under which KPMG operate in the Mainland and the approach of the MOF to supervision of auditors.

13. It seems to me that there is justification for the Liquidators returning to court. It is quite clear that the evidence put before the court for the October hearing exaggerated the difficulties KPMG faced. It is apparent from my February decision that I felt that KPMG had not been candid with the court. The way in which matters developed after the hearing and, in particular, the MOF’s accommodating approach to this matter only serve to confirm the views I expressed in my decision. For example, the thrust of KPMG’s case was that the documents might contain State secrets and this was clearly intended to influence the court and encourage a sympathetic response to KPMG’s attempts to avoid a production order. It is now clear that this was not the case and the reason why the evidence as to what the State secrets might be was vague was because there was nothing of substance to the point; a fact that it is difficult not to conclude was known to those members of KPMG with knowledge of the contents of the documents.

14. I recognise that in recent years the regulatory environment in the Mainland has developed in such a way as to impose restrictions on the freedom of auditors to allow audit work papers out of the Mainland. I also recognised the logistical problems of dealing with such a large quantity of documents. However, given their accommodating approach since October 2015 there is reason to doubt whether the MOF would object to copies of the vast majority of the documents being produced to the Liquidators on condition that they are not taken out of the Mainland and they will, if so directed by the MOF, be returned to KPMG or such other entity as the MOF directs.

15. In the circumstances I consider that it is appropriate to make a new order in the following terms:

3.   Insofar as the Documents referred to in paragraph 1 of the February order or copies thereof are located in the Mainland or stored in a form which allows them, as at 24 February 2016, to be accessed only in the Mainland:
(1)   the 1^st Respondent shall within 35 clear calendar days, produce copies of the Documents to the Liquidators in the Mainland after redacting the information identified by Zhong Lun law firm as “sensitive information”;
(2)   the Liquidators shall retain, maintain and keep safe the copies of the Documents provided to the Liquidators and any further copies whether in physical or digital form taken by the Liquidators in the Mainland until further order;
(3)   the 1^st Respondent shall within 21 clear calendar days hereof cause such application as is required and alternatively permitted and alternatively possible under the Laws of the People’s Republic of China to be made for a determination as to whether or not there is any restriction under the Laws of the People’s Republic of China on copies of the aforesaid documents without redactions being provided to the Liquidators alternatively inspection of the aforesaid documents without redactions being made available for inspection by the Liquidators;
(4)   the 1^st Respondent shall in the event that it is determined that copies of the aforesaid documents without redactions may be provided to the Liquidators or inspected by them, provide copies or allow inspection as the case may be within 14 clear calendar days of the Respondents receiving notification of the relevant determination;
(5)   the 1^st Respondent shall maintain a written record of any application or applications made pursuant to sub-paragraph 3 hereof including hearings, meetings or telephone conversations;
(6)   the 1^st Respondent shall within 14 clear calendar days hereof provide to the Ministry of Finance of the People’s Republic of China a copy of this order along with a translation in simplified Chinese and a copy of this decision along with a translation in simplified Chinese;
(7)   the 1^st Respondent shall within 14 clear calendar days to notify the Ministry of Finance of the People’s Republic of China in writing of the date on which the Respondents will provide documents in accordance with sub-paragraph 1 hereof; and
(8)   there be general liberty to apply.

16. This order is structured so as to allow the MOF to take any action it considers appropriate to prohibit production of copies of documents and for KPMG to make any necessary applications to this court.

Extending Order to 2010

17. There are 2 other matters that remain to be dealt with. The first is the Liquidators’ application in paragraph 12 of their summons of 1 August 2016 to vary the date in paragraph 1.3 of the February order from 31 December 2009 to 31 December 2010. Mr Borrelli explains in paragraph 89 of his 34^th affidavit sworn on 1 August 2016 that during the course of inspection of the documents the Liquidators have discovered that KPMG undertook work for the Company in connection with its financial statements for the year ending 31 March 2010 and the convertible notes prospectus dated 30 November 2010. The Liquidators say that at the time the initial summons was issued they were not aware that KPMG had carried out any work after the end of 2009.

18. In his 4^th affirmation, deposed on 9 September 2016, Isaac Yan explains in paragraphs 61 to 70 that Mr Borrelli’s assumptions about the work KPMG carried out in 2010 is incorrect. He explains in paragraphs 63 to 70 that the only work carried out in 2010 by KPMG related to various filings that were necessary with the SEC. Mr Yan describes the work in some detail and then says in paragraph 70 that no other work was carried out by KPMG for the Company in 2010. However, KPMG seek time to file further evidence in relation to paragraph 12 of the Liquidators’ summons of 1 August 2016 and for their legal advisers to consider their response. I have difficulty in understanding why this is necessary. In my view KPMG has had sufficient time to deal with this matter and on the basis of what Mr Yan says there would appear to be little that can usefully be added. All that KPMG has will relate to the SEC’s filings, which he has described. This matter has dragged on for longer than is desirable. It seems to me that in order for the Liquidators to understand the affairs of the Company it is necessary for the Liquidators to be given the opportunity at least to inspect such further documents as KPMG has which come within the original order for the year 2010. For reasons I explained in my February 2016 decision they have little information from the Company itself.

19. Mr Li on behalf of KPMG suggested that this application is not for a variation of paragraph 1.3 of the February order as it is framed in the summons, but in the nature of a new application, although he took no point in respect of this. It seems to me that nothing of substance turns on this issue. I will order that paragraph 1.3 of the February order is varied to replace “31 December 2009” with “31 December 2010”.

Publication of February Decision

20. The final matter concerns the publication of my February decision, which has not been uploaded onto the Judiciary website because of concerns that the MOF might be reluctant to cooperate further if my reasons are made public at this stage. I think it is desirable that my reasons are made public as soon as possible, because they deal with matters of some importance. However, I will delay doing so until after the revised order for production has been implemented and it is clearer how the MOF responds to it.

Costs

21. In the light of my conclusions in my view it is appropriate that KPMG pay the costs of those paragraphs of both summonses that have been determined by this decision. I make a costs order nisi to this effect.

(Jonathan Harris)
Judge of the Court of First Instance
High Court

Mr Charles Manzoni SC, instructed by Lipman Karas, for the applicants

Mr Lawrence Li, instructed by Smyth & Co, for the 1^st respondent

[1] Len Jui says “work papers”.

HCCW 435/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO 435 OF 2012

____________

	IN THE MATTER OF China Medical Technologies, Inc.
	and
	IN THE MATTER OF the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32)

____________

BETWEEN
	THE JOINT AND SEVERAL PROVISIONAL LIQUIDATORS OF CHINA MEDICAL TECHNOLOGIES INC.	Applicants
	and
	KPMG (A FIRM)	1^st Respondent
	JACK CHOW	2^nd Respondent
	JANETTE YU	3^rd Respondent
	BRUCE ZIRLEN	4^th Respondent
	JANET CHEUNG	5^th Respondent
	PAUL LAU	6^th Respondent
	FRANCIS CHING	7^th Respondent
	IAN PARKER	8^th Respondent
	STEPHEN YIU	9^th Respondent

____________

Before: Hon Harris J in Chambers

Date of Hearing: 10 May 2016

Date of Decision: 3 June 2016

_________________

D E C I S I O N

_________________

1. On 24 February 2016 I made an order (“Order”) for the production by the 1^st respondent, KPMG, of documents to the Liquidators and handed down lengthy reasons for so doing. On 26 April 2016 KPMG issued a summons seeking an order which would provide for the way in which the documents to be produced pursuant to paragraph 3 of the Order should be made available to the Liquidators. They also sought an order that, to the extent that paragraph 2 of the Order covered back‑up tapes in Hong Kong, provided a protocol for determining the parameters by reference to which KPMG would decide which back‑up tapes needed reconstructing.

2. For present purposes paragraph 3 of the Order can be divided into two parts. The first are those sub‑paragraphs that do not relate to audit working papers, namely, sub‑paragraphs 1.1 to 1.3 and 1.5 to 1.11 and those that do, namely, sub‑paragraph 1.4. KPMG’s first application is premised on the assumption that for reasons discussed in my reasons for the Order there are restrictions on their freedom to make available to the Liquidators audit working papers. It seems to me, as I explained in my earlier reasons, that KPMG have not advanced any reason why they should not give production of documents, which do not fall within sub-paragraph 1.4 and none of the evidence that has been filed for the present application changes this in my view. Accordingly, KPMG should give the Liquidators access to those documents and they should do so within 7 clear days or such other period as the parties agree or the court directs. KPMG wish to impose some conditions on access, primarily that a representative of KPMG is present. It seems to me that this is unnecessary and I agree with the Liquidators that they should be free to inspect the documents and discuss amongst themselves what they find whilst doing so without a representative of KPMG in the room. I consider this reasonable as in the normal course they would have been given copies if they wished them and would have been able to read them in private. The current arrangement results from KPMG’s concerns about the removal of documents from the Mainland. I will, therefore, order that access is given to the documents between the hours of 9:30 am to 5 pm Monday to Friday, other than public holidays, or as otherwise agreed by the parties and that production takes place in a room without the presence of a representative of KPMG or their legal or other advisers unless agreed by the Liquidators.

3. So far as the audit working papers are concerned, sub‑paragraph 1.4, KPMG say that the current position is this, and I summarise, the Ministry of Finance has agreed to inspection subject to certain conditions, which are contained in paragraph 1 of the summons before me:

“i) The fact that the Liquidators have been permitted access to the Documents in Beijing shall remain confidential;
ii) Documents assessed by KPMG Huazhen’s external PRC Counsel to contain information which amounts to a state secret or is otherwise sensitive and whose passing to an overseas institution or individual would be prohibited by Article 6 of the PRC’s Provisions on Strengthening Confidentiality and Archives Administration of Overseas Issuance and Listing of Securities of 2009 shall be redacted prior to access being provided to the Liquidators;
iii) Staff from KPMG Huazhen and from their external PRC counsel shall be present when access to the Documents is provided to the Liquidators;
iv) No copies of the Documents may be made by the Liquidators; and
(v) The Documents must not be removed by the Liquidators from KPMG Huazhen’s premises in Beijing.”

The documents have already been inspected by external counsel who have identified 50 documents as containing sensitive information but no State secrets. In respect of those documents KPMG wish to file further evidence including opinion evidence from a lawyer in the Mainland and for there to be a further hearing to consider whether the Order should be varied in respect of those documents. This I indicated at the hearing I would permit and adjourn the summons insofar as it is concerned with those documents with one day reserved, the date to be fixed in consultation with counsels’ diaries. I order that KPMG file such further evidence as they wish to rely on by 5 pm on 21 June 2016. The Liquidators have leave to file evidence in reply by 5 pm on 12 July 2016.

4. So far as the balance of the audit working papers are concerned I order that KPMG give access to them at KPMG’s Huazhen office in Beijing on the terms referred to above pending substantive determination of KPMG’s application for amendment of paragraph 3 of the Order. It is a matter for the Liquidators whether they wish to access the documents on that basis pending the determination of KPMG’s application.

5. Paragraph 1 of the Order applies to KPMG’s back‑up tapes in Hong Kong. I appreciate KPMG’s desire to limit reconstruction of the back‑up tapes to those that include only documents caught by paragraph 1. However, I accept the Liquidators’ argument that it is difficult for them to agree any particular parameters for limiting reconstruction other than those that arise naturally from the terms of paragraph 1. KPMG are better placed to assess how to determine what tapes to reconstruct. I do not intend to vary the Order to introduce a protocol for agreeing parameters. It does seem to me sensible for KPMG to send to the Liquidators their parameters for reconstructing and searching the back‑up tapes and inviting comments, if any, and I would expect that Liquidators to deal with this constructively. What is not clear to me is how long it will take to reconstruct the back‑up tapes. I direct that KPMG inform the court in writing within 7 days how long the process will take to complete and for a list of documents obtained from the back‑up tapes or copies of those documents to be available to the Liquidators in Hong Kong.

6. I adjourn the question of who should pay the costs of reconstructing the back‑up tapes until after production of the documents obtained from the tapes are available.

7. So far as the costs of the hearing on 10 May 2016 is concerned I order that the costs are paid by KPMG to the Liquidators. KPMG has not provided access to the majority of the documents covered by paragraphs 1 and 3 despite the fact that their reasons for applying to vary the Order only applied to audit working papers and the back‑up tapes in Hong Kong.

(Jonathan Harris)
Judge of the Court of First Instance
High Court

Mr Charles Manzoni, instructed by Lipman Karas, for the Liquidators

Mr Laurence Li, instructed by Smyth & Co, for the 1^st respondent

HCCW 435/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO 435 OF 2012

____________

	THE JOINT & SEVERAL LIQUIDATORS OF CHINA MEDICAL TECHNOLOGIES, INC.	Applicants
and
	KPMG (A FIRM)	1^st Respondent
	JACK CHOW	2^nd Respondent
	JANETTE YU	3^rd Respondent
	BRUCE ZIRLEN	4^th Respondent
	JANET CHEUNG	5^th Respondent
	PAUL LAU	6^th Respondent
	FRANCIS CHING	7^th Respondent
	IAN PARKER	8^th Respondent
	STEPHEN YIU	9^th Respondent

____________

Before: Hon Harris J in Chambers

Dates of Hearing: 6 and 7 October 2015

Date of Decision: 24 February 2016

_________________________

D E C I S I O N

_________________________

The Application

1. I have before me an application[1] by Mr. Cosimo Borrelli and Ms. Yuen Lai Yee Liz, who were appointed by me as provisional liquidators (“Liquidators) of China Medical Technologies, Inc. (“Company”) on 29 November 2012. The Liquidators seek the production of documents by the 1^st Respondent[2] (“KPMG HK”) and the examination of a number of the Firm’s partners, employees and people from other KPMG entities in connection with the affairs of the Company and, in particular, the audit of its subsidiaries in the Mainland[3]. The scope of the application for production of documents is very wide. For all practical purposes the Liquidators seek every document that KPMG HK and other associated KPMG entities have in their possession concerning the Company and its subsidiaries. The Liquidators are particularly concerned to obtain access to KPMG HK’s audit working papers. The precise categories of documents that the Liquidators request in their summons are set out in the Appendix to this Decision.

2. Prior to issue of the application KPMG HK provided the Liquidators with copies of a limited amount of documents: the Company’s audited accounts for the year ending 31 March 2008, management accounts prepared by the Company for the year also ending 31 March 2008, invoices, information on properties, deposits, accounts receivables, bank accounts, documents supplied by the Company regarding its future plans, strategies and proposals, certain engagement letters and ten boxes of largely draft and superseded working papers.

3. The application raises an issue of considerable importance. The principal ground for opposing it is that taking audit working papers currently in the possession of by KPMG affiliates in the Mainland out of the Mainland would be unlawful as would allowing inspection of them by the Liquidators at a location in the Mainland. The significance of this issue will become apparent as I describe the Company and the circumstances in which it came to be wound up in more detail.

Background

4. The Company was incorporated in the Cayman Islands in 2004. On 10 August 2005 it was listed on the NASDAQ and its shares traded until it was delisted on 28 February 2012.

5. The Company was purportedly carrying on business developing, manufacturing and marketing advanced surgical and medical equipment in Mainland China, using in-vitro diagnostic products such as FISH and SPR Technology.

6. The Company carried on its business through its corporate group which included:

6.1 three wholly-owned indirect holding companies incorporated under the laws of Hong Kong, namely CMED Diagnostics (Hong Kong) Limited, East Crest Enterprises Limited and CMED ECLIA Diagnostic Technology (Hong Kong) Limited; and
6.2 three wholly-owned indirect operating subsidiaries incorporated under the laws of the Mainland, namely Beijing GP Medical Technologies Company, Limited, Beijing Bio‑Ekon Biotechnology Company, Limited and Beijing Yuande Bio-Medical Engineering Company, Limited.

7. Prior to the purported disposal of the Company’s Mainland China incorporated operating subsidiaries on 9 February 2012, the structure of the Company’s corporate group was as follows:

8. On 9 February 2012, 60% of the equity interests of the Company’s Mainland China incorporated operating subsidiaries were transferred by the Company’s management to two Mainland China companies, which the Liquidators believe are connected to the Company’s management. To date, the Liquidators have not found any evidence that any consideration was actually received by the Company for the sale of the equity interests and the transfers are the subject of further investigations and legal proceedings brought by the Liquidators in the Mainland. The information available to the Liquidators to date indicates that these purported transfers were not bona fide.

9. Between August 2005 and December 2010, the Company raised net debt and equity capital of US$631 million, including by issuing various senior unsecured convertible notes. The Company had US$515 million of funds available to it following the repayment of amounts due to Deutsche Bank Trust and Bank of America totalling US$116 million.

10. On 15 December 2011, the Company failed to make an interest payment of US$4,687,500 on its 6.25% senior unsecured convertible notes. Two months later, on 15 February 2012, the Company failed to make an interest payment of US$4,930,000 on its 4% senior unsecured convertible notes. These two interest payment defaults formed the basis of a petition to the Grand Court on 15 June 2012 for the winding up of the Company in the Cayman Islands and the appointment of Mr Krys and Mr. Borrelli as liquidators (“Cayman Liquidators”) on 27 July 2012.

11. On 11 October 2012, the Cayman Liquidators obtained an Order under Chapter 15 of the United States Bankruptcy Code. Pursuant to that Order, Judge Robert E. Gerber of the United States Bankruptcy Court for the Southern District of New York ordered that the Company’s winding‑up proceedings in the Cayman Islands be recognised as “foreign main proceedings” and that Mr Krys be recognised as the “foreign representative” for the purposes of Chapter 15 of the US Bankruptcy Code.

12. On 26 November 2012, the Company, acting at the direction of the Cayman Liquidators filed a petition for an ancillary winding-up in Hong Kong (“Hong Kong Petition”). As I have already explained the Liquidators were appointed provisionally on 29 November 2012.

13. On 1 September 2014 I made an order winding up the Company in Hong Kong. The grounds for so doing are explained in 2 decisions[4], which describe in detail what would appear to be the principal cause of the Company’s being unable to pay interest on the 2 tranches of senior unsecured convertible notes, namely, the misappropriation of at least the US$355,000,000 of US$631,000,000 raised through the share offerings and issue of senior unsecured convertible notes. In summary, the Liquidators believe for credible reasons that the misappropriation was achieved by the bogus acquisition of technology and intellectual property rights from two companies: Molecular Diagnostics Technologies Ltd and Supreme Well Investments Limited (“Supreme Well”). They also believe, once again for credible reasons, that the misappropriation was orchestrated by, and for the benefit of, the former Chairman, Chief Executive Officer and major shareholder of the Company, Mr. Wu Xiaodong, and its Chief Financial Officer, Mr. Samson Tsang Tak Yung.

14. The Liquidators have been able to obtain few of the Company’s documents or those of its subsidiaries. Those they have obtained have principally come from production by the Bank of China and Bank of East Asia, which, as I explain in my August 2014 decision, has allowed the Liquidators to identify how the sums received by Supreme Well have been channeled through bank accounts of which Mr. Tsang is a signatory and to accounts in which he and Mr. Wu would appear to have a beneficial interest. It is in these circumstances that they seek from KPMG HK, at one time the Company’s auditor, extensive production of documents and examination of partners and staff of KPMG HK with involvement in the engagement.

KPMG

15. KPMG HK was initially engaged by the Company to perform the audit of the Company’s financial statements and act as the reporting accountant for the purposes of its initial public offering. KPMG HK performed a review of the Company’s unaudited quarterly financial statements prior to the Company’s filings with the United States Securities and Exchange Commission (“SEC”). KPMG HK was then appointed the auditor of the Company for the audit years ending 31 March 2006 to 2008. KPMG HK commenced the audit for the year ending 31 March 2009, but they were replaced by PwC Zhong Tian CPAs Limited Company in August 2009. In addition KPMG HK reviewed an offering memorandum and interim financial statements for 6 months ending 30 September 2005 and 30 September 2006 in respect of the filing by the Company of Form F3 with the SEC in connection with a share repurchase and convertible bond offering in 2006. KPMG HK also reviewed an offering memorandum and quarterly financial statements for three months ending 30 June 2007 and 30 June 2008 in respect of another Form F3 filing with the SEC in connection with a bond offering in 2008.

16. KPMG HK says that it does not have the first engagement letter it signed. It has produced the engagement letter in its final form for the audit years ending 31 March 2006 and 2007, which is dated 23 March 2007 and was signed by Mr. Wu and Mr. Iain Bruce, the Chairman of the audit committee, on behalf of the Company. The engagement letter is comprehensive and runs to 9 pages it provides, amongst other things, that:

“We will issue a written report upon our audit of the consolidated balance sheets of the Company as of March 31, 2007 and 2006, the related consolidated statements of income and comprehensive income, cash flows and changes in stockholders’ equity for each of the years in the three-year period ended March 31, 2007, and schedules supporting such financial statements, all of which are to be included in the annual report (“Form 20F”) proposed to be filed by the Company under the Securities Exchange Act of 1934.
We have a responsibility to conduct and will conduct the audit of the consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), with the objective of expressing an opinion as to whether the presentation of the consolidated financial statements and schedules, taken as a whole, conforms with U.S. generally accepted accounting principles (“USGAAP”). It should be understood that our report and the consolidated financial statements and schedules may be subject to review by the U.S. Securities and Exchange Commission (“SEC”) staff and to the application by them of their interpretation of the relevant rules and regulations.
It is important to note that the PCAOB, created as a result of the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley Act), has the authority to establish auditing quality control, ethics, independence and other standards relating to the preparation of audit reports for issuers, as that term is defined in the Sarbanes-Oxley Act, subject to oversight by the SEC.
….
Our report will be addressed to the board of directors of the Company and will be in a form that is in accordance with the published rules and regulations of the SEC. We cannot provide assurance that an unqualified opinion will be rendered. Circumstances may arise in which it is necessary for us to modify our report or withdraw from the engagement.
….
We understand that the consolidated financial statements and schedules and our written audit report thereon, as described above, are to be included by the Company in its annual report (Form 20-F), and that in so doing the Company will be incorporating by reference these consolidated financial statements and schedules and our report thereon in previously filed and effective Form F-3 and S-8. Prior to issuing our consent to the incorporation by reference in these registration statements of our report with respect to the consolidated financial statements and schedules described above, we will perform procedures as required by the standards of the PCAOB, including, but not limited to, reading information incorporated by reference in these registration statements and performing subsequent event procedures.
….
This letter is made under, and shall be governed by Hong Kong laws and all disputes arising from or under this letter shall be subject to the exclusive jurisdiction of the courts of Hong Kong Special Administrative Region of the People’s Republic of China.
….
KPMG is a limited liability partnership comprising both certified public accountants and certain principals who are not licensed as certified public accountants. Such principals may participate in the engagements to provide the services described in this letter.
….
Work Paper Access by Regulators and Others
The work papers for this engagement are the property of KPMG. In the event KPMG is requested pursuant to subpoena or other legal process to produce its documents relating to this engagement for the Company in judicial or administrative proceedings to which KPMG is not a party, the Company shall reimburse KPMG at standard billing rates for its professional time and expenses, including reasonable attorney’s fees, incurred in responding to such requests.
However, we may be requested to make certain work papers available to the PCAOB and Regulator pursuant to authority given to it by law or regulation. If requested, access to such work papers will be provided under the supervision of KPMG personnel. Furthermore, upon request, we may provide photocopies of selected work papers to PCAOB and Regulator. PCAOB and Regulator may intend, or decide, to distribute the photocopies or information contained therein to others, including the SEC and other government agencies. We agree to communicate to you on a timely basis any requests by the PCAOB for direct contact with members of the Audit Committee.”

17. As the Company was listed on NASDAQ it was subject to the SEC’s regulations, which imposed reporting requirements additional to those imposed by the Public Company Accounting Oversight Board (“PCAOB”) standards and US Generally Accepted Accounting Principles (“USGAAP”).

18. KPMG HK audited the Company’s consolidated financial statements. This is clear from the audit reports, which, taking 2005/6 as an example, commences: “We have audited the accompanying consolidated balance sheets of China Medical Technologies, Inc. and its subsidiaries as of March 31, 2005 and 2006, and the related consolidated statements of income and comprehensive income, shareholders’ equity and cash flows for each of the years in the three-year period ended March 31, 2006.” In the financial statements themselves it provides, in the notes summarising significant relevant accounting policies and practices, that the “consolidated financial statements include the financial statements of the Company and its subsidiaries”.

19. Ms. Jacqueline Wong of KPMG HK, who is a partner in KPMG HK and works in the Quality and Risk Management Department, explains in her evidence that up to the audit for the year ended 31 March 2007, the audit field work undertaken in the Mainland, where the Company’s main operating subsidiaries were located, was carried out by partners and staff of KPMG HK. For the audit year ended 31 March 2008 onwards whilst KPMG HK remained the Company’s auditor, the audit field work in the Mainland was carried out by what Ms. Wong describes as a component auditor, namely, KPMG Huazhen. KPMG Huazhen was a Beijing based joint venture between KPMG HK and 华振会计师事务所有限公司 (“KPMGHuazhen”) a Mainland firm of certified accountants. KPMG Huazhen was formed during a period in which the Mainland Government permitted international accounting firms to form joint ventures with local firms affiliated to the Ministry of Finance (“MOF”). KPMG HK, and the other Big 4 accounting firms, were granted 20-year licences to operate on this basis. During that period it was intended that the profession on the Mainland would develop and in time be able to operate without the direct participation of international firms. These licences expired in 2012. The existing joint ventures were converted into special general partnerships, which was a legal structure created by the MOF specifically for the Big 4 Sino-foreign cooperative accounting firms in recognition of their contribution to the development of the accounting profession. In August 2012 KPMG Huazhen[5] converted into a special general partnership and all its staff transferred to the new entity, which continued the existing business.

20. I asked for evidence to be filed by KPMG HK explaining the extent to which KPMG HK and KPMG Huazhen were interrelated in terms of common partners and management. As a consequence an affidavit was filed by Andrew Weir who is a partner in KPMG HK and also, what Mr. Weir describes as “KPMG China’s” Regional Senior Partner for Hong Kong, in which capacity he sits on the Executive Committee of KPMG China. Mr. Weir explains that the original KPMG Huazhen joint venture was owned 50% by KPMG HK and 50% by Huazhen. When the special general partnership was established it consisted of 66 equity partners of whom 20 were also partners in KPMG Hong Kong. As at 30 September 2015 KPMG Huazhen consisted of 102 equity partners of whom 32 were also partners in KPMG HK.

21. The original joint venture was managed by a committee consisting of 3 persons from each of KPMG HK and KPMG Huazhen. The special general partnership has been managed by an Executive Committee. Its first senior partner was Stephen Yiu who was also KPMG HK’s Chairman and has since retired. After 3 years the chairman has to be a Chinese national. However, when the Executive Committee was formed it comprised of 10 partners of whom 6 were equity partners of the special general partnership only. The other 4 were also partners in KPMG HK. The current Executive Committee consists of 11 partners of whom 6 are partners in KPMG Huazhen only including the senior partner.

22. This does not, however, tell the full story. KPMG’s website refers to “KPMG China”, which includes, so the websites says, offices in various cities in the Mainland, Hong Kong and Macau. KPMG China operates with a single management structure. For this reason I asked to be told whether KPMG China is a virtual partnership and whether it exercises effective management control over KPMG HK and KPMG Huazhen. Mr. Weir accepts in paragraph 38 of his affidavit that “KPMG China could be characterized as a “virtual partnership” because it operates under a single governance structure” and in paragraph 39 he explains:

“39. KPMG entities operating in Mainland China and Hong Kong are collectively referred to as KPMG China and work together on a collaborative basis, subject to local applicable laws. KPMG China, itself, is not a legal entity. It does not own or have power to control the operations of individual KPMG entities. Collectively, KPMG China has offices in 16 cities, of which Hong Kong is one city. Each of these has its own senior partner who has autonomy to manage his or her local office”

23. KPMG China, which I note was not referred to at all in the evidence of Ms. Jacqueline Wong purporting to describe the structure of the relevant part of KPMG’s operations, has its own executive committee, which Mr. Weir says has 13 members. The table provided by Mr. Weir listing its members shows that 11 of the 13 members are partners in KPMG HK and of the 2 remaining members, 1 is not a partner in either KPMG HK or KPMG Huazhen. I assume he has a purely management function. There are only 2 members, who are partners only of KPMG Huazhen.

24. In paragraph 51 Mr. Weir asserts that:

“51. The Executive Committee of KPMG China does not exercise management control over KPMG Huazhen LLP’s operations, including in relation to matters concerning regulatory compliance or compliance with the laws of the PRC. These are matters for which each KPMG entity has responsible autonomy. The same is true of KPMG HK.”

25. I accept that KPMG China’s executive committee may not exercise direct management control over KPMG Huazhen’s general operations, but its membership indicates that KPMG HK’s partners exercise, or purport to exercise, ultimate de facto control over KPMG Huazhen’s affairs.

26. This is further demonstrated by the fact that when it was decided to engage KPMG Huazhen as component auditor to audit the Mainland subsidiaries the engagement team was led by Mr. Bruce Zirlen, who is the 4^th Respondent. Ms. Jacqueline Wong describes him in paragraph 31 of her affirmation as “Lead Audit Engagement Partner. Mr. Zirlen was a partner in KPMG HK who was based in Beijing. He is an US-qualified CPA, with experience of auditing SEC issuers and their affiliates. Mr. Zirlen was designated a “partner” in KPMG Huazhen, although, as a joint venture, strictly speaking KPMG Huazhen did not have partners and only had employees.” She goes on in paragraphs 32 to 34:

“32. While the engagement of KPMG Huazhen to carry out the audit field work in the PRC was not recorded in any written contract, it was regarded by KPMG HK as a sub‑contracting arrangement, in line with the arrangements that KPMG HK usually has with its component auditors (including other KPMG member firms and non‑KPMG firms) to whom it delegates performance of specific elements of the audit. In this case KPMG Huazhen invoiced the Company directly in respect of the work which it carried out on the audit for year ended 31 Mar 2008 onwards, as recorded in the Affirmation of Isaac Yan Kei Yan of KPMG Huazhen, of even date.
33. Consistently with the provisions of AU543 promulgated by the US Public Company Accounting Oversight Board established under the Sarbanes-Oxley Act of 2002, KPMG HK issued the auditor’s report as principal auditor in respect of the Company’s consolidated financial statements for year ended 31 Mar 2008, without making reference to the fact that the audit work had been carried out by a component auditor, namely KPMG Huazhen. As can be seen from AU543, this is acceptable practice in the industry. A copy of AU543 can be found at “JW-1” tab 1.
34. I am advised by Mr Zirlen that the relevant audit engagement team at KPMG Huazhen reported to him in Beijing, in his capacity as a partner of KPMG HK, such that KPMG HK was able to discharge its duty as principal auditor and issue an auditor’s report for the year ended 31 March 2008.”

27. It seems to me clear from the evidence that so far as possible KPMG China operates as one commercial entity and, so far as permissible by law, is managed as such by a panel of partners very largely drawn from the Hong Kong partnership. Subject to any specific legal restriction KPMG HK is, therefore, in practice able to direct that KPMG Huazhen comply with its directions. I did not understand this to be disputed by KPMG HK in the present application. However, I note that in a letter from KPMG HK to the Liquidators’ solicitors dated 21 December 2012 and also a letter from Smyth & Co dated 12 August 2013, KPMG HK suggested that in respect of papers held by KPMG Huazhen the Liquidators “enquiries may be best served if they are made by your client” to KPMG Huazhen. It seems to me that this was disingenuous given what has become clear as a result of my request for information was the substantive nature of the relationship between KPMG HK and KPMG Huazhen.

28. It seems to me also to be clear that those behind the formation of KPMG China, largely partners in KPMG HK, choose to represent themselves as operating one, integrated operation in the Mainland and Hong Kong. It seems to me that this representation sits uncomfortably with KPMG HK’s evidence, which I address in detail later, seeking to explain the regulatory environment in which it operated in the Mainland and the restrictions on its ability to produce to the Liquidators the documents that they seek. If KPMG HK’s assertions contained in the evidence of Jacqueline Wong about the relationship between KPMG HK and KPMG Huazhen and the restrictions on the transfer of documents out of the Mainland are correct KPMG China cannot fairly hold itself out as one business entity.

29. Further KPMG HK signed the audit reports without reference to the fact that the audit of the subsidiaries was carried out by a component auditor in the Mainland. Presumably this was done, and I understand that it is the normal practice of the Big 4 accounting firms, to give the impression that KPMG in China is one firm. I explain in paragraph 32 this was permissible under the PCAOB standards, but as a consequence obligations were imposed on KPMG HK, which they now say they are unable to comply with. I now turn to consider the relevant accounting standards and the obligations that they imposed on KPMG HK to obtain and retain documents.

Accounting Standards

30. A foreign company listed on the NASDAQ is required by the United States Securities Exchange Act of 1934 to file its audited annual report with the SEC as Form 20-F. The financial statements were required to be audited by reference to the standards of the PCAOB. It is stated in the letter of engagement from which I have quoted that this would be the case. These standards require an audit to be properly documented and the auditor is required to prepare adequate audit working papers. Audit working papers are described and their purpose explained in PCAOB AU Section 339A. Paragraphs .01, .03 and .07 provide:

“.01 The auditor should prepare and maintain working papers, the form and content of which should be designed to meet the circumstances of a particular engagement. The information contained in working papers constitutes the principal record of the work that the auditor has done and the conclusions that he has reached concerning significant matters.
….
.03 Working papers are records kept by the auditor of the procedures applied, the tests performed, the information obtained, and the pertinent conclusions reached in the engagement. Examples of working papers are audit programs, analyses, memoranda, letters of confirmation and representation, abstracts of company documents, and schedules or commentaries prepared or obtained by the auditor. Working papers also may be in the form of data stored on tapes, films, or other media.
….
.07 Certain of the auditor’s working papers may sometimes serve as a useful reference source for his client, but the working papers should not be regarded as a part of, or a substitute for, the client’s accounting records.”

31. Paragraph 14 of PCAOB Auditing Standard 3 provides that the auditor is to retain audit working papers for 7 years from the date of the audit report. If an audit is not completed the documents must be retained for 7 years from the date the engagement ceased. Rule 2-06 of SEC Regulation S‑X also requires an auditor to retain working papers for 7 years after an audit is completed.

32. As I have already explained the audit of the subsidiaries was carried out by KPMG Huazhen. The PCAOB standards permit this and the auditor carrying out audits of financial statements of subsidiaries, which are to form part of the consolidated financial statements of the holding company, if, other than the auditor of the holding company, is referred to in the standards as a “component auditor”. The role of the principal auditor where there is a component auditor is dealt with in detail in paragraphs 2 and 3 of AU 543. Paragraph 3 provides that “If the auditor decides that it is appropriate for him to serve as the principal auditor, he must then decide whether to make reference in his report to the audit performed by another auditor. If the principal auditor decides to assume responsibility for the work of the other auditor insofar as that work relates to the principal auditor’s expression of an opinion on the financial statements taken as a whole, no reference should be made to the other auditor’s work or report.” This is what KPMG HK decided to do in the present case.

33. AU 543 deals in paragraph 12 with what the principal auditor must do if he decides not to make reference to the audit of subsidiaries performed by another auditor.

“.12 When the principal auditor decides not to make reference to the audit of the other auditor, in addition to satisfying himself as to the matters described in AU sec. 543.10, the principal auditor must obtain, and review and retain, the following information from the other auditor:
a.An engagement completion document consistent with paragraphs 12 and 13 of PCAOB Auditing Standard No. 3
Note: This engagement completion document should include all cross-referenced, supporting audit documentation.
b.A list of significant fraud risk factors, the auditor’s response, and the results of the auditor’s related procedures.
c.Sufficient information relating to significant findings or issues that are inconsistent with or contradict the auditor’s final conclusions, as described in paragraph 8 of PCAOB Auditing Standard No. 3.
d.Any findings affecting the consolidating or combining of accounts in the consolidated financial statements.
e.Sufficient information to enable the office issuing the auditor’s report to agree or reconcile the financial statement amounts audited by the other firm to the information underlying the consolidated financial statements.
f.A schedule of audit adjustments, including a description of the nature and cause of each misstatement.
g.All significant deficiencies and material weaknesses in internal control over financial reporting, including a clear distinction between those two categories.
h.Letters of representations from management.
i.All matters to be communicated to the audit committee.
The principal auditor must obtain, and review and retain, such documents prior to the report release date. In addition, the principal auditor should consider performing one or more of the following procedures:
• Visit the other auditor and discuss the audit procedures followed and results thereof.
• Review the audit programs of the other auditor. In some cases, it may be appropriate to issue instructions to the other auditor as to the scope of the audit work.
• Review additional audit documentation of the other auditor relating to significant findings or issues in the engagement completion document.” (footnotes omitted,emphasis added)

34. Paragraph 18 of PCAOB Auditing Standard 3 (9 June 2004) requires the principal auditor to ensure that the component auditor produces the required audit working papers and that the principal auditor must keep copies of them or have access to them. Paragraph 19 requires, like paragraph 12 of AU543, the principal auditor to obtain, review and retain the documentation relating to work performed by a component auditor if the component auditor is not referred to in the audit report. The documents required by paragraph 19 are substantially the same as those required by paragraph 12.

35. It follows from this that KPMG HK should have in its possession at least the documents required by the PCAOB Auditing Standards and, in particular, AU543. The documents that KPMG HK have disclosed do not appear to include the documents required by paragraph 12 of AU543 and Ms. Ismail did not suggest otherwise.

36. KPMG HK does not suggest that they have an office in the Mainland. It follows that these documents should be kept in Hong Kong. In practice one would expect KPMG HK to have access to KPMG Huazhen’s audit working papers and I do not understand it to be suggested that they do not. KPMG HK have not suggested that they failed to comply with the requirements of the PCAOB’s standards in either regard. I note that in her second affirmation Ms. Jacqueline Wong suggests in paragraph 14 that KPMG HK had retained them by virtue of the fact that they are securely held by KPMG Huazhen in the Mainland. I disagree and find it disingenuous for Ms. Wong to suggest this given the arguments KPMG HK advance opposing the Liquidators’ application. It is KPMG HK’s case, which I address later in detail, that:

(1)   KPMG HK and KPMG Huazhen are separate legal entities (which is uncontroversial);
(2)   KPMG HK does not have control of the audit working papers[6];
(3)   KPMG HK cannot take the audit working papers it chose to transfer to KPMG Huazhen out of the Mainland or show them to the third parties even if this Court were so to direct.

I do not see how it can sensibly be suggested in these circumstances that KPMG HK retained the papers it transferred to KPMG Huazhen. It is notable that in paragraph 56 of KPMG HK’s written submissions they assert that they have already disclosed all the documents sought in the summons “within its custody”. The clear implication is that they do not have possession, custody or meaningful control of the documents sought in the summons, which have not already been disclosed and, in particular, the documents referred to in paragraph 1.4 of the Appendix to this decision, namely, audit working papers.

37. KPMG HK must be taken to have appreciated that the reason why the PCAOB’s standards required working papers to be retained and accessible was in order that it would be possible for the Company, PCAOB, regulators, and professional bodies to review the audit if they had lawful grounds for so requesting. That is apparent from the final paragraphs of the letter of engagement that I have quoted in paragraph 16. They must also be taken to have appreciated as one of the Big 4 accounting firms with a significant insolvency practice, that in the event that the Company were to go into liquidation any liquidator might want to access to all or some of KPMG HK’s papers. They must also be taken to know that it is common for the Hong Kong Companies Court to so order.

38. Although this point was not addressed before me it would seem from the accounting standards I have referred to that if a principal auditor considers that he might have difficulty in complying with his obligations to obtain and retain documents he should make express reference to the audits undertaken by component auditors and, as required by AU 543.02, before deciding whether or not to accept any engagement give careful consideration to whether or not, given the significance of the subsidiaries and the audit of their financial statements, and any limitations placed on his ability to comply with the letter and intention of the standards, he should accept the engagement.

39. If, as in the present case, the subsidiaries in the Mainland are significant in terms of holding company’s activities and turnover and, if KPMG HK are correct that the Laws and Regulations in the Mainland restrict transfer overseas and access to documents produced and obtained by auditors during their audits, in my view a principal auditor outside the Mainland is unable to comply with the PCAOB accounting standards to which I have referred and the standards require the engagement to be declined.

KPMG HK’s grounds of opposition

40. In summary KPMG HK opposes the application on the following grounds:

40.1   The excessive breadth of the terms of the orders sought compared to the stated areas of necessary investigation in their supporting affirmation.
40.2   The lack of evidence of other routes for obtaining information.
40.3   The documents sought by the Liquidators are located in the Mainland and held by a separate legal entity, KPMG Huazhen. There is a real possibility that KPMG HK and KPMG Huazhen would breach the laws of the Mainland if they permitted the documents to be transferred out of the Mainland or allowed the Liquidators access to them in the Mainland.
40.4   The 2^nd to 9^th Respondents would be required to answer questions about matters that took place between 6 and 11 years ago and in the case of the 7^th to 9^th Respondents they had very little knowledge of the engagement. None of the Respondents have been given the opportunity to provide information by answering questionnaires.

41. In order to address these grounds I will divide the remainder of this decision into the following sections:

41.1   Relevant legal principles;
41.2   The first 2 grounds of opposition;
41.3   The 3^rd ground, the legality issue; and
41.4   The terms of the order that I will make, which will address the 4^th ground of opposition.

Legal Principles

42. Section 221(1) and (3) of the Companies (Winding Up andMiscellaneous Provisions) Ordinance, Cap. 32, provides:

“(1) The court may, at any time after the appointment of a provisional liquidator or the making of a winding-up order, summon before it any officer of the company or person known or suspected to have in his possession any property of the company or supposed to be indebted to the company, or any person whom the court deems capable of giving information concerning the promotion, formation, trade, dealings, affairs, or property of the company.
….
(3) The court may require him to produce any books and papers in his custody or power relating to the company, but, where he claims any lien on books or papers produced by him, the production shall be without prejudice to that lien, and the court shall have jurisdiction in the winding-up to determine all questions relating to that lien.”

43. The principles that govern this Court’s exercise of the discretion conferred by s221 is explained by Lord Millett in the following paragraphs of his judgment in the Joint and Several Liquidators of Kong Wah Holdings Ltd v Grande Holdings Ltd [7]:

“23. Section 221 and corresponding provisions overseas are designed to enable a liquidator to carry out his functions. These are twofold: (i) to collect the assets of the company, settle its liabilities and distribute its surplus funds amongst its creditors; and (ii) to investigate the causes of the company’s failure and the conduct of those concerned in its dealings and affairs: see Re Pantmaenog Timber Co Ltd [2004] 1 AC 158 at pp. 164, 172‑173, 177. The first of these functions is primarily of concern to the company’s creditors and shareholders; the second serves a wider public interest in enabling the authorities to take appropriate action against those guilty of misconduct in relation to the company. The appellants have never challenged the bona fides of the Liquidators in making the present applications or alleged that they have done so for an ulterior purpose.
….
25. The section is a vital part of the statutory insolvency regime. It is designed to meet the difficulties faced by liquidators in finding out what has happened to the company’s assets and what has caused the failure of the company. It has often been observed that a liquidator is usually a stranger to the affairs of the company. He relies on orders for examination and production to reconstitute the knowledge of the company, in circumstances where the records are often inadequate, in order to be able to perform his duties in recovering the company’s assets and generally to enable him to carry out his functions effectively and with as little expense and as expediently as possible
26. The section’s purpose, however, is not limited to reconstituting the state of the company’s knowledge, even though that may be one of the purposes most clearly justifying the making of an order: see British & Commonwealth Holdings Plc v Spicer & Oppenheim [1993] AC 426 at p.439. It may be used to discover facts and documents relating to potential claims by the liquidator against third parties or to enable him to report to the authorities with a view to taking action against those responsible for the company’s failure: see Re Pantmaenog Timber Co Ltd [2004] 1 AC 158, where it was used to enable disqualification proceedings to be taken against former directors. There is an important public interest ensuring that the liquidator should obtain the information needed to understand the company’s affairs and the reasons for its failure; and to report to the authorities to enable them to take appropriate action against those guilty of misconduct in relation to the company’s affairs.
27. It has been repeatedly stated, and the legislative purpose demands, that the powers conferred on the court by the section or its overseas equivalents are wide, general and unlimited. The liquidator must satisfy the court that the information or documents sought are reasonably required to enable him to carry out his functions. In considering this question, the authorities establish that great weight should be given to the views of the liquidator, for he is an officer of the court and alone has the necessary knowledge of the problems facing him in understanding the affairs of the company and his reasons for seeking production of documents in the terms proposed; moreover, there are often great difficulties in seeing how the terms of the order can be cut down and remain effective: see Re Rolls Razor Ltd (No 2) [1970] Ch 576 at p.592 per Megarry J; Re Castle New Homes Ltd [1979] 1 WLR 1075 at p.1092, per Slade J; Cloverbay Ltd (Joint Administrators) v Bank of Credit and Commerce International SA [1991] Ch 90 per Sir Nicolas Browne-Wilkinson V-C at p.104; and British & Commonwealth Holdings Plc v Spicer & Oppenheim [1993] AC 426.
….
29. In exercising its discretion, the court must endeavour to strike a balance between the liquidator’s reasonable requirements and the need to avoid making an order that is unreasonable, unnecessary or oppressive to the party from whom the documents or information are sought: see for example British & Commonwealth Holdings Plc v Spicer & Oppenheim [1992] Ch 342 at p.370 per Ralph Gibson LJ, and at p.384 per Woolf LJ; British & Commonwealth Holdings Plc v Spicer & Oppenheim [1993] AC 426 at p.439; Re Bank of Credit and Commerce International SA (No 12) [1997] 1 BCLC 526 at p.537 per Robert Walker J. These cases have been consistently followed in Hong Kong: see for example the Joint Liquidators of Chark Fung Securities Co Ltd & Others v Chan Kwong Hung [2001] 1 HKLRD 772 case.
30. over the years the courts have laid down general principles governing the balancing exercise which the court is called upon to undertake. They are conveniently set out in the Cloverbay Ltd (Joint Administrators) v Bank of Credit and Commerce International SA [1991] Ch 90 at pp.102-103 per Sir Nicolas Browne-Wilkinson V-C and British & Commonwealth Holdings Plc v Spicer & Oppenheim [1992] Ch 342 at p.372 per Ralph Gibson LJ and at p.392 per Woolf LJ. They can be summarised as follows:
(1) The liquidator must show that the documents are reasonably required to enable him to carry out his functions, not that they are necessary to enable him to do so;
(2) the case for making an order under the section in respect of a former officer is usually stronger than in respect of a stranger who owes no fiduciary duties to the company and who is not under a statutory duty to assist the liquidator;
(3) there is an element of oppression in requiring a party to provide information which exposes him to potential liability;
(4) an order for oral examination is likely to be more oppressive than an order to produce documents;
(5) it is oppressive to require a person suspected of wrongdoing to prove the case against himself on oath prior to proceedings being brought;
(6) an order is not necessarily oppressive because it is inconvenient for the party subject to it or causes him a lot of work or may make him vulnerable to future claims;
(7) in the light of the summary nature of the procedure and the need for expedition, the court cannot be expected to indulge in fine judgments as to the precise width of the order which should be made; and
(8) the court must take care not to cut down the width of the order sought by the liquidator in a way which would risk making it ineffective.”

Is the order reasonably required?

44. KPMG HK contend that the Liquidators have not demonstrated that the order is reasonably required. They suggest that the justification for the application focuses on the need to investigate the FISH and SPR acquisitions, which the Liquidators believe were the means by which monies were misappropriated from the Company. However, the Liquidators seek production of all papers generated by KPMG HK or received by them in connection with their audit work, which is a very considerable quantity of documents. Further the Liquidators have not demonstrated that they cannot obtain the information that they require from other sources including the directors of the Company.

45. As Mr. Borrelli explains in his affidavit in support of the application, that the Liquidators have been unable to retrieve the Company’s books and records and the Company’s former management and directors have refused to provide any meaningful assistance to the Liquidators. I do not understand KPMG HK to question the accuracy of Mr. Borrelli’s assertion.

46. It is correct that in his affidavit Mr. Borrelli focuses on the most significant matter that the Liquidators wish to investigate, namely, the FISH and SPR acquisition. He, however, also mentions the sale of the equity interests of the 60% of the Company’s Mainland incorporated operating subsidiaries. More generally it is clear from Mr. Borrelli’s evidence that the Liquidators have simply been unable to obtain the information about the Company and its subsidiaries that the Liquidators need in order to carry out their functions as described in Kong Wah. It is not necessary, as KPMG HK’s submissions suggest, for the Liquidators to explain why they need each category of documents that they seek from KPMG HK and demonstrate in detail their efforts to obtain them from other sources. Where, as in the present case, the Company’s affairs cry out for thorough investigation and the Liquidators have been unable to obtain documents from the Company and its subsidiaries, it seems to me sufficient for them to explain this and that consequently it is necessary for them to look to the auditors to provide documents that may assist them in investigating the Company’s failure and the conduct of those concerned in its dealings and affairs.

47. The Company’s auditors are an obvious source of information about the Company and its subsidiaries, particularly, in the circumstances the Liquidators find themselves in. It is correct that the Liquidators are seeking production of a very considerable quantity of documents. However, if KPMG HK has ensured that the PCAOB standards have been complied with it does not seem to me that producing them would (subject to what I have to say later about the illegality issue) be especially onerous. Presumably the files are readily identifiable and locatable. All that would be required of KPMG HK is for them to make them available for inspection. It may be that the production of some categories of documents is more difficult than others. This can be addressed in the framing of the order.

48. It does seem to me, subject to what I say in relation to the precise terms of the order, that the Liquidators have demonstrated a reasonable need for the documents that they seek.

Illegality - Audit working papers in the Mainland

49. KPMG HK’s case in relation to restrictions imposed on them in the Mainland is largely contained in 3 affirmations of Melody Wang. Ms. Wang is a partner in Fangda Partners, which is a law firm based in Beijing. She explains that she has been instructed to advise them in relation to the application of relevant laws and regulations in the Mainland, which impact on the lawfulness of KPMG HK and KPMG Huazhen producing working papers in the possession of KPMG Huazhen to the Liquidators. It is not clear from Ms. Wang’s affirmations what relevant expertise she has. Ms. Ismail argued that the Respondents were entitled to rely on those parts of Ms. Wang’s affirmations, which contained evidence of Mainland Law, although it was not produced in the form of an expert’s report.

50. The Liquidators have produced a report, in the form of an affirmation, of Professor Fu Hualing of the Department of Law at Hong Kong University, which complies with RHC O38 r37C(1). Professor Fu’s expertise is in public law, State secrets law, archives law, criminal law and cross-border legal relations between Hong Kong and the Mainland. He is not an expert in securities law or the regulation of the accountancy profession and practice in the Mainland.

51. The Liquidators object to the admission of Ms. Wang’s evidence on Mainland Law on the grounds that it does not satisfy RHC O38 r37C(1) and that she is the Respondents’ legal adviser and not independent. Ms. Ismail submits that this is wrong and drew my attention to the decision of Anthony Chan, J in Re Loong San Investment Ltd [8], in which he held that RHC O38 r37C(1) only applies where there is an application to adduce oral opinion evidence. RHC O38 r36(2) expressly states that nothing in paragraph RHC O38 r36(1) shall apply to evidence, which it is permitted to give by affirmation. It is permissible to give evidence by affirmation in the present application.

52. Mr. Manzoni invited me to take a different view. Mr. Manzoni argued that RHC O38 r37(2) means that it is not necessary to make an application to the court for leave to adduce evidence in proceedings in which evidence is adduced by affidavit and affirmation. It does not mean that the regime in Part IV of RHC O38, which is intended to ensure that the court receives opinion evidence from experts who are subject to the procedures required by RHC O38 rr37A, 37B and 37C, which are intended to ensure that the court receives opinion evidence from witnesses who understand that their duty to the court is to give independent evidence, does not apply. I agree. It seems to me that the wording of RHC O38 r36(2) is open to the interpretation that it simply means that the requirement in r36(1) that an application is necessary for leave to adduce expert evidence does not apply. This interpretation leads to a conclusion which is more consistent with the purpose of Part IV than the alternative interpretation preferred by Anthony Chan J, whose conclusion I, with respect, disagree with. It follows that insofar as Ms. Wang is purporting to give expert evidence on matters of Mainland Law her affirmations cannot be relied on as they simply do not comply with the mandatory requirement of O38 r37C(1).

53. As Anthony Chan J points out, notwithstanding his interpretation of the Rules, it is desirable that all experts’ reports contain a declaration of their duty to the court. With this I firmly agree. Appendix D to the Rules contains the Code of Conduct for expert witnesses and the form of declaration that they are required to make. The Code provides that an expert has an overriding duty to help the court impartially and independently and that this paramount duty is to the court and not to the person instructing him. The declaration required of an expert states that the expert has read the Code, understands his duty to the court and agrees to be bound by the Code. I cannot see how Ms. Wang could ever have signed such a declaration. She states in paragraph 2 of her 1^st affirmation that she is “instructed by the 1^st to 9^th Respondents to advise them in relation to the application of relevant laws and regulations of the PRC to the factual matters which are set out in the body of this Affirmation.” It is apparent from her affirmations that this is precisely what she had done and that she has represented them in relation to the production of the audit working papers at meetings with the MOF. She was not instructed to provide impartial and independent expert evidence to the court. If I had taken a different view on the interpretation of O38 r37 I would still have given Ms. Wang’s evidence less weight than that of Professor Fu given the basis on which she was instructed and the fact that in my view inevitably she would have been inclined to interpret the Mainland’s Laws and Regulations mindful of the Respondents’ interests.

54. Given the importance of this issue it seems to me extraordinary that it was not thought prudent by those advising the Respondents to retain a genuinely independent expert to assist this Court. It does not seem to me to be an answer to this criticism, as Ms. Ismail suggested, that the Court does not have to reach a conclusion on Mainland Law, because the material issue is whether or not it is demonstrated that there is “any risk that compliance with the order would or might expose the [Respondents] to claims for breach of confidence, or to criminal penalties, in the jurisdiction in which the documents are” as Ms. Ismail argued quoting from Chadwick LJ’s judgment in Re Mid East Trading Inc.[9]. This still requires the court to take a view, albeit not a final one, on the content, scope and operation of foreign laws and in so doing the court needs independent opinions, not ones that are likely to be slanted to suit a particular party’s interests, in order to assess whether any alleged risk is real or exaggerated.

55. Although in my opinion KPMG HK is not entitled to rely on Ms. Wang’s evidence to establish the relevant Laws in the Mainland in case I am wrong in that conclusion, and given the importance of this issue, I will have regard to her evidence, although I consider that the weight to be given to it restricted by Ms. Wang’ s lack of independence and, for reasons which will become apparent when I deal with that evidence, what in my view is her partial approach to the issues on which she expresses views.

56. Before turning to address KPMG HK’s case on the restrictions placed by the Laws and regulations in the Mainland on disclosure of the audit working papers to the Liquidators there is one further point concerning the evidence on those Laws and regulations I will address. In the Securities and Futures Commission v Ernst & Young [10] Ng J considered the extent to which Mainland Laws and regulations restricted the ability of Ernst & Young in Hong Kong to obtain from its associated firm in the Mainland papers in connection with an initial public offering for onwards transmission to the Securities and Futures Commission (“SFC”). I will address Ng J’s judgment later in this decision. However, Ms. Ismail argued that the issues are not exactly the same (the documents were sought by a foreign regulator not a foreign liquidator) and the Law has developed further since the hearing of the SFC’s application. Section 59(2) of the Evidence Ordinance, Cap. 8, provides that:

“(2) Where any question as to the law of any country or territory outside Hong Kong with respect to any matter has been determined (whether before or after the commencement of this Part) in any such proceedings as are mentioned in subsection (4), then in any civil proceedings (not being proceedings before a court which can take judicial notice of the law of that country or territory with respect to that matter)–
(a) any finding made or decision given on that question in the first-mentioned proceedings shall, if reported or recorded in citable form, be admissible in evidence for the purpose of proving the law of that country or territory with respect to that matter; and
(b) if that finding or decision, as so reported or recorded, is adduced for that purpose, the law of that country or territory with respect to that matter shall be taken to be in accordance with that finding or decision unless the contrary is proved:

57. It follows, says Ms. Ismail, that it is open to KPMG HK to demonstrate that the findings in SFC v Ernst & Young is not applicable or no longer reflects (Ms. Ismail did not accept that it was correctly decided on the law as it stood at the time Ng J heard the application) the Law in the Mainland.

58. I accept that it is open to KPMG HK to argue before me that the relevant Laws of the Mainland are not as found in SFC v Ernst & Young.

59. KPMG’s case is as follows. KPMG Huazhen is required to comply with the Laws in the Mainland. This, unsurprisingly, is not in issue. This includes Laws dealing with State secrets. On 20 October 2009 a provision came into force which, in translation, is entitled “Provisions of China Securities Regulatory Commission, State Secrecy Bureau and State Archives Administration on Strengthening Confidentiality and Archives Administration on Overseas Issuance and Listing of Securities”. Before me it has been referred to as Regulation 29. Paragraphs 3and 6 provide:

“3. In the event that an overseas listed company shall provide or publicly disclose to the relevant securities company, securities service institution and overseas regulatory authority any document, material and other items which involve any State secrets in the course of any overseas issuance and listing of securities, the overseas listed company shall report the same to the in-charge authorities with examination and approval power for approval in accordance with the law and shall make a filing with the secrecy administrative department at the same level for records. Where it is uncertain or in dispute whether such item contains State secrets, such issue shall be submitted to the relevant secrecy administrative department for determination.
….
6. Any archives, including workpapers, which are created in mainland China by the securities company and securities service institution providing relevant securities service in the course of any overseas issuance and listing of the securities, shall be stored in mainland China.
In the event that the workpapers referred to in the preceding paragraph involve any State secrets, national security or vital interests of the State, such workpapers shall not be stored in, processed with and/or transferred via any non-confidential computer information systems; without the approval of the relevant in-charge authorities, such workpapers shall not be carried or shipped overseas, or delivered to overseas institutions or individuals through any means such as information technology.”

60. These provisions do not refer expressly to audit working papers. Giving them a generous interpretation they seem to be saying that a listed company should not disclose to any overseas person carrying out a regulatory function any documents that “involve any State secret” and if the company has any doubts about whether or not any document contains State secrets it should make an application to the relevant secrecy administrative department for determination. Ms. Wang suggests that this prohibits cross-border transmission of audit work papers. Ms. Wang refers expressly to this restriction of “audit work papers” in paragraph 47 of her first affirmation. The justification for so doing seems to be the reference in the first line of Article 6 of Regulation 29 of “workpapers”. However, nowhere in her affirmations does Ms. Wang explain what she understands is meant by the term “audit work papers”, which is the expression used by her throughout her affirmations or “workpapers” in Article 6. Ms. Wang does not explain whether she uses the expression to cover the documents described in PCAOB AU section 339A para .03, alternatively those referred to in paragraph 1.4 of the summons (paragraph 1.4 of the Appendix). It is as a result unclear what documents she is referring to. It would appear to be the case that she is only addressing the documents referred to in paragraph 1.4, because those are the only documents described in the summons as working papers. It follows that the objections that she advances in her affirmations to production of documents do not apply to the other categories of documents sought. Similarly, Ms. Wang does not tell the Court whether she uses the expression to cover the documents required to be kept and retained by AU 543 paragraph 12. It would appear not. Accordingly, the objections do not apply to those documents.

61. It is not clear from article 6 what “workpapers” include. This article appears to be addressed to documents produced by securities companies rather than auditors. It requires the archives containing such documents to be kept in the Mainland. The final paragraph provides that if such documents contain State secrets they should not be sent overseas. This suggests that if they do not contain State secrets copies can be transferred overseas although the original files must be maintained and kept in the Mainland.

62. Ms. Wang has referred to a number of other Laws and Regulations, which she argues demonstrate that the audit working papers cannot lawfully and safely be transferred out of the Mainland.

63. On 2 May 2012 the MOF promulgated a “Plan for Localised Transformation of Chinese-Foreign Cooperative Accounting Firms”. This contains the regime for the transformation to which I have referred earlier of Chinese-Foreign accounting firms including KPMG Huazhen[11] into special general partnerships. Article 22 provides:

“After accounting firms adopt the organization form of special general partnership, the various document files of original Chinese-foreign cooperative accounting firms shall be kept properly and shall not be disposed of arbitrarily or carried out of the territory of China in any way without the approval of the Ministry of Finance. All staff of accounting firms shall strictly comply with national confidentiality regulations and systems.”

64. The relevant documents which are the subject of this application consist both of documents of KPMG Huazhen, the special general partnership, and documents of KPMG HK, which were transferred to KPMG Huazhen for storage. Article 22 has no application to the latter.

65. Ms. Wang points to a document entitled “Interim Provisions for Performing Cross-border Auditing Practices by Accounting Firms”, which is dated 2014 and is described as an “exposure draft”, which I understand to be in the nature of a press release indicating the MOF’s view. However, it states in Article 2 that it does not apply to the overseas listing of enterprises which are registered overseas but whose operating entities are in the Mainland and does not, therefore, appear applicable to the present case. It also seems mainly concerned with regulation of overseas accounting practices, who undertake audit work in the Mainland for the purposes of overseas listings rather than controlling the use of audit working papers.

66. Ms. Wang also refers to a speech given by an unnamed MOF official in May 2014, which Ms. Wang suggests makes it clear that it is the MOF’s view that audit working papers of Chinese companies cannot be taken out of the Mainland. The relevant part of the press release reads as follows in translation:

“Different regulations on auditors for regulatory authorities in the listing locations make it a normal practice for overseas accounting firms that assume audit responsibility, in certain circumstances, to enter China to carry out audit business for Chinese mainland companies listed overseas and to work closely with the mainland firms, but in practice, the following outstanding problems are revealed: First, some overseas firms fail to perform any filing or reporting procedures and enter China to carry out auditing in a variety of names and even carry audit working papers overseas. This practice severely violates the Regulations on Strengthening Confidentiality and Archives Administration in Overseas Issuance and Listing of Securities (Announcement of the China Securities Regulatory Commission, the State Secrecy Bureau and the State Archives Administration [2009] No. 29), and this traceless practice are not allowed in any legal countries or regions.”

67. A number of points arise in relation to this document. First, it is not a law or a regulation. Secondly, it is clear from the paragraph that I have quoted that the unnamed official is not aware of the provisions of PCAOB and GAAP and is mistaken in the suggestion that in developed legal systems in which the major stock exchanges are located there are restrictions on taking audit working papers in and out of the country. I do not consider that this document should be treated as authoritative.

68. Ms. Wang suggests that her view of what she describes as “the regulatory trend that PRC regulatory authorities emphasise the importance of ensuring that work papers related to red-chip companies do not leave Mainland China without approval”[12] is supported by a document issued by the MOF entitled “Interim Provision on the Audit Services Provided by Accounting Firms for the Overseas Listing of Mainland Chinese Enterprises” which is stated to have an effective date of 1 July 2015 and was promulgated on 25 May 2015. Article 5 of this document provides that where an overseas accounting firm audits a Mainland enterprise the audit working papers should be kept in the Mainland. Article 12 provides:

“Article 12 Mainland Chinese enterprises and accounting firms that provide audit services for the overseas listing of Mainland Chinese enterprises shall strictly abide by the Provisions on Strengthening Confidentiality and Archives Management Work Related to Securities Issuance and Listing on Overseas Markets (Announcement [2009] No. 29 of the China Securities Regulatory Commission, the National Administration for the Protection of State Secrets and the State Archives Administration).
Where overseas judicial departments or regulatory authorities need to retrieve and inspect audit working papers because the overseas listing of Mainland Chinese enterprises involves litigations or other relevant matters, or where overseas regulatory authorities need to retrieve and inspect audit working papers for performing regulatory functions, the regulatory agreements reached by domestic and overseas regulatory authorities shall prevail.”

69. It does not seem to me that Article 12 can be fairly read as saying that audit working papers, which there is no reason to think contain State secrets cannot be taken out of Mainland or shown, within the Mainland, to the Liquidators.

70. Ms. Wang suggests that as KPMG Huazhen is not in a position to determine whether or not any of the information in the audit working papers constitutes a State secret that it needs to obtain a determination by the relevant Government authority before releasing any of them. She then goes on to consider the law specifically dealing with State secrets.

71. “State secrets” are broadly defined in article 2 of the State Secrets Law to include “matters that have a vital bearing on State security and national interests”. Article 8 provides that the relevant national interests include “secrets in thenational economic and social development” and “secrets concerningscience and technology”.

72. The description of a document is not determinative of whether it is a State secret. This is not in dispute. Ms. Wang notes that it may not be immediately obvious whether or not it is a State secret. This may be correct, but it does not follow that every document should be approached on the basis that it may contain a State secret. Presumably very large quantities of documents in physical form and electronic form pass out of the Mainland every day without anybody worrying whether their contents infringe State secrecy laws. If every document had to be scrutinised to assess whether or not it contained sensitive material that needed to be referred to a Government agency for consideration commercial activity would grind to a halt.

73. Ms. Wang seems to acknowledge in paragraphs 6 to 7 of her second affirmation that the Laws and Regulations relating to State secrets do not require every document to be checked for sensitivity before it can be taken out of the Mainland. I note that in paragraph 6 she chooses, in my view rather disingenuously, to suggest that this is because it would not be possible rather than the more likely explanation that this is not what the legal regime requires. In paragraph 7 she goes on to try to justify what in my view is the substance of her position, namely, documents should be presumed to contain State secrets unless the opposite can be demonstrated, by emphasising that the relevant criminal law makes it an offence to disclose a document that is known or should be known to contain a State secret. This, however, does not address the rather obvious point that necessarily the vast majority of the audit working papers for any company will not contain State secrets. Rather than address this point Ms. Wang chooses in paragraphs 12 to 15 to emphasise how complex and obscure the State secrecy regime is. In paragraphs 23 and 24 of her 2^nd affirmation Ms. Wang suggests that the correct approach is not to ask whether there is a genuine risk that documents may contain State secrets and if there is seek the approval of the relevant authorities, rather the correct approach is to ask for all documents to be checked. She refers by way of example of the correct approach to cases (she does not give details) of documents being passed by accountants to the Securities and Exchange Commission of the United States only after all such documents have been checked. Unfortunately, Ms. Wang does not tell the Court which authority the documents were checked by. This information would have been helpful, because it is part of KPMG HK’s case, which I address later, that despite their inquiries they have not managed to identify an authority who acknowledges responsibility to do so.

74. In paragraphs 64 to 73 of her first affirmation Ms. Wang explains that she has not looked at any of the audit working papers. As I have already noted Ms. Wang does not explain in her affirmation what she understands audit working papers to consist of. What Ms. Wang does do is to speculate on what State secrets the audit working papers might contain. The Company’s subsidiaries purported businesses concern medical technology and Ms. Wang speculates that in particular there is a risk that the Regulations on Guarding Scientific Technology Secrets within Chinese and Western Medicine and Medical Devices and also the Regulation on Guarding Scientific Technology Secrets might be infringed. In paragraph 69 of her first affirmation she says this:

“69. In this case, I am instructed that CMED has been a medical devices producer with multiple inventions on both products and technologies recognized under Chinese law. In its 2007-2009 Form-20 CMED stated that its products and manufacturing techniques were in a leading position within China, and that it was the first domestic company to have invented and produced certain medical devices (“MW‑1” Tab 26). On the basis of that understanding, when conducting audit work for CMED, KPMG HK or Huazhen could likely have come across various products of CMED, which could include products that might fall within the scope described above, such as inventions, partial discoveries, unique design of certain medical devices, and secret manufacturing methods. All of this information could have been recorded in the audit work papers. As a result, in our view there is an appreciable risk that the audit work papers of the Engagement may contain State secrets as such are understood in the Regulations on Guarding Medical Secrets, the disclosure of which without the appropriate approvals would amount to a breach of the Regulations.”

75. Ms. Wang does not explain why she thinks “all of this information could have been recorded in the audit work papers” and neither do any of KPMG HK’s other witnesses. It seems to me that there is no sensible reason to suggest that “all of this information could have been recorded in the audit work papers” and this must be known to KPMG HK. If she had proper regard to what constitutes audit working papers I would not expect her to express this view. Ms. Wang has also not recognised that her opinion is difficult to reconcile with the fact that the Company or subsidiaries has registered patents outside the Mainland and provided technical information to customers, which if her evidence is correct, would seem to have resulted in the distribution of State secrets overseas. Ms. Wang does not seem to recognise that as this part of her argument relies on the application of the State Secrets Law, which is of general application, if she is correct it would appear to follow that any document of any type generated by any person or organisation that there is any possibility (as is clear from Ms. Wang’s evidence she considers the bar to be very low in this regard) might contain a State secret cannot be transferred or transmitted outside the Mainland without first being vetted by some official agency. Ms. Wang does not, however, suggest that there is well established procedure for dealing with, what, if her evidence is correct, must be a very large problem for people and companies in the Mainland trying to do business overseas. On the contrary it is both the evidence of Ms. Wang, Ms. Wong and Mr. Yan that there is no established procedure[13]. There must be a way for commercial enterprises operating in the technology field in particular to deal with these practical problems, but Ms. Wang neither acknowledges them nor addresses them, which calls into question the objectivity, accuracy and value of her opinion.

76. Ms. Wang also rejects the suggestion that it might be possible to overcome her suggested problems in taking work papers out of the Mainland by allowing the Liquidators to inspect them in the Mainland. She says that this would be inconsistent with Regulation 29 and also it would defeat the legislative intent behind the Regulation. Ms. Wang does not say what she understands the legislative intent to be, but the implication is that Chinese companies that list overseas should not allow other than most innocuous information about their activities in the Mainland to leave the Mainland without first having it vetted by the responsible Government department or agency. In paragraphs 50 and 58 of her 1^st affirmation Ms. Wang goes so far as to suggest that information obtained by component auditors cannot be transferred out of the Mainland for the use of auditors of a holding company incorporated elsewhere and listed on a foreign stock exchange such at NASDAQ. It would also follow that records of information obtained by a component auditor, or a principal auditor while in the Mainland, about inadequacies in accounting practices or misappropriations could not be passed to foreign directors of the listed company including independent non-executive directors.

77. Professor Fu disagrees with Ms. Wang’s evidence. He explains that the Mainland State Secrets Laws and the State Council’s 2014 regulation dealing with the implementation of laws guarding State secrets comprise the legislative framework for the protection of State secrets. In addition there are ministerial rules that deal with the implementation of procedures and mechanisms of classification of State secrets. Professor Fu says that Order No. 1 of 2014, that Ms. Wang herself refers to, is an example of this. Professor Fu opines that contrary to Ms. Wang’s evidence the import of which is that things are deemed State secrets until it is determined otherwise, it is clear from articles 2 and 4 of the State Secrets Law that this is not the case. Article 4 provides that “The work of guarding State secrets shall be carried out in line with the principle of actively preventing their leak and laying emphasis on priorities so that State secrets are kept while work in all other fields is facilitated.” This indicates, says Professor Fu, that the Law is not intended to provide sweeping restrictions on the dissemination of information. The ministerial regulations that have been produced are intended to implement procedures that provide for the identification of State secrets not, as Ms. Wang suggests, to establish a default position where everything is assumed to be a State secret until the contrary is established.

78. I recognise that the authorities in the Mainland maybe more cautious in allowing the dissemination of commercially valuable information than the major Western economies and that the Mainland’s Laws and Regulations extend to subjects that might not be thought in overseas jurisdictions to be State secrets. It does not seem to me that it follows, or that Ms. Wang has demonstrated, that the State Secrets Law is an impediment to audit working papers being transferred out of the Mainland unless there is reason to believe that, and this I anticipate would be very rare, a particular document may contain a State secret.

79. The position is more complicated in relation to the position of the MOF. The documents to which Ms. Wang refers produced by the MOF do suggest, even though they do not refer expressly to audit working papers produced by component auditors for subsidiaries of a company with an overseas listing, an intention to control the transfer of audit working papers outside the Mainland. KPMG HK and KPMG Huazhen were obviously aware of this by the time they were faced with the request for documents from the Liquidators.

80. KPMG HK have filed 2 affirmations from Mr. Isaac Lap Kei Yan, who is a partner in KPMG Huazhen LLP (which was formerly KPMG Huazhen) and is responsible for Quality and Risk Management. Mr. Yan explains in his 1^st affirmation that KPMG Huazhen approached the China Securities Regulatory Commission (“CSRC”) in March 2015 (he does not provide details) to discuss the Liquidators’ request for disclosure of documents. KPMG Huazhen were told the MOF was the appropriate authority to deal with the matter. At the time Mr. Yan made his 1^st affirmation, KPMG Huazhen were still awaiting “a formal response” from the MOF to a screening procedure that KPMG Huazhen has proposed. In paragraph 28 of his 1^st affirmation he explains KPMG Huazhen’s previous experience of disclosing audit working papers.

“I am aware from other occasions where KPMG Huazhen has been asked to disclose audit work papers held in the PRC that the PRC regulatory authorities have approved and implemented a screening process for the identification, removal and redaction of information which constitutes State secrets from audit work papers prior to the cross-border production of those work papers. My understanding of that screening process is that it operates as follows:
(a) The relevant PRC regulatory authorities engage in meetings and discussions with the accounting firm, which discussions would include providing examples of potential State secrets and state sensitive information in audit work papers;
(b) Pursuant to direction from the regulatory authorities, the accounting firm reviews the audit work papers, with the assistance and advice from external PRC counsel it retains. There may be interim meetings with regulatory authorities for further discussions on the review as the review progresses;
(c) Upon completion of the review, the accounting firm submits to the regulatory authorities a report on the review and seeks approval from the regulatory authorities; and
(d) The regulatory authorities then conduct their own internal examination and evaluation of the audit work papers, before deciding on whether to give approval.”

81. Mr Yan does not explain to what kind of parties the audit working papers were disclosed, how extensive were the papers, which regulatory authority conducted the screening process and how the screening process was instigated. Mr. Yan gives evidence in his 2^nd affirmation about a telephone call between a member of his team, Priscilla Miao, with an unidentified representative of the MOF. He explains what she was told and how the matter progressed in paragraphs 10 to 16:

“10. On 15 June 2015, a member of my team at KPMG Huazhen, Priscilla Miao, who reports directly to me, had a telephone call with a representative of the MoF, in order to follow up on the previous meeting and explore how best to progress the resolution of the legal and practical difficulties faced by KPMG Huazhen in releasing the Company’s audit work papers to KPMG HK in Hong Kong for possible disclosure to the Liquidators.
11. In the course of this telephone call, Ms Miao was informed by the MoF that such request should be dealt with by way of a “judicial assistance channel”. In the alternative, the request should first be submitted to the State Archive Bureau and to the State Secrets Bureau for their approvals and then be submitted to the MoF, as KPMG Huazhen’s regulatory body, for further approval.
12. With the agreement of KPMG Huazhen, Fangda approached the PRC Ministry of Justice, in order to explore the availability of the “judicial assistance channel” to review the audit work papers and, potentially, approve their release to KPMG HK.
13. On 24 July 2015, KPMG Huazhen was informed by Jacqueline Wong of KPMG HK that Fangda Partners had approached the Ministry of Justice and had been advised that at present there is no established judicial procedure for dealing with cross-border document production issues between the PRC and Hong Kong.
14. On that basis and with the agreement of KPMG Huazhen, KPMG HK instructed Fangda to approach the relevant central or provincial offices of the State Archive Bureau and the State Secrets Bureau to establish whether they would accept jurisdiction over the review of the audit work papers.
15. As recorded in the Second Affirmation of Melody Wang, Fangda’s communications with the Beijing State Secrets Bureau and the State Archive Bureau have so far been inconclusive.
16. On that basis, KPMG Huazhen is seeking a further meeting with the MoF to obtain their guidance as to how best to move the matter forward. As things currently stand, however, the MoF’s position remains that the audit work papers for the Company which are held by KPMG Huazhen in the PRC must not be removed from the PRC without the approval of a relevant regulatory body.”

82. This is all very vague. The Court has not been told who at the MOF KPMG Huazhen have spoken to. Nothing appears to have been recorded in writing. The evidence does not sit comfortably with Mr. Yan’s evidence in paragraph 28 of his 1^st affirmation, which suggests that KPMG Huazhen have previously been able to arrange for documents to be screened and released. Mr. Yan does not explain why it has been possible to do so in other cases, but not the present one. The explanation may lie in what the China Securities Regulatory Commission and MOF have been told by KPMG Huazhen. KPMG Huazhen and Ms. Wang have not written to the China Securities Regulatory Commission or MOF about the matter and not in their affirmations descended to detail of what precisely they said. It is, therefore, not possible for the Court to assess to what extent the authorities may have been influenced by the way in which KPMG Huazhen framed its request and a preference on KPMG Huazhen’s part for receiving exactly the kind of unhelpful response they say they received from the MOF. If KPMG Huazhen exaggerated the possibility of the audit working papers containing confidential information it would be unsurprising if what may be, the Court has not been told, a low level administrator in the MOF gave what he saw as the safest response without any regard to precisely what the relevant Laws and regulations say or how the issue might be addressed.

83. Another relevant omission from KPMG HK’s evidence is its failure to explain how in practice it goes about audits of foreign companies with operating subsidiaries incorporated in the Mainland and carrying on business there. It appears quite clear from PCAOB AU 543 paragraph 12 that documents containing information about subsidiaries must pass out of Mainland and to KPMG HK’s office in Hong Kong and possibly to other overseas offices for the purposes of the audit of consolidated accounts. KPMG HK has not provided documents complying with paragraph 12 to the Liquidators. My impression is that it has been overlooked that Ms. Wang’s evidence only appears to apply to the documents sought in paragraph 1.4 of the summons. It seems to have been assumed that what she is saying is that no documents can be taken out without prior approval from the relevant regulating authority. It may be that this is what she intended to say. Be that as it may it is certainly the case that this is what Ms. Ismail argued before me, which invites the question I have referred to earlier: what does KPMG HK do in practice? Either KPMG HK does not obtain and retain the documents required by the PCAOB standards or it does obtain them and it is being less than candid with the Court.

The authorities

84. This is not the first time this issue has come before the Court. In 2013 the SFC sought an order under s185 of the Securities and Futures Ordinance, Cap 571, against Ernst & Young Hong Kong (“EY”) for the disclosure of, amongst other documents, audit working papers and related correspondence produced by EY’s associated firm in the Mainland (in other words the equivalent of KPMG Huazhen) in connection with the listing on the The Stock Exchange of Hong Kong Limited of a company incorporated in the Cayman Islands whose business was conducted through subsidiaries in the Mainland[14]. Some of the issues that arose for determination concerned whether or not EY had a right to obtain the documents sought from its associated firm in the Mainland. In the present case KPMG HK are not advancing that objection. As I have explained their objections concern the necessity of the order sought (which I have rejected) and the restrictions imposed in the Mainland on disclosure of the audit working papers. EY argued before Ng J that the Laws in the Mainland restrict cross-border transmission of audit working papers and prohibit direct production of them to overseas security regulators (“Regulators”) (§§58(3) and 75(2)).

85. As is explained by Ng J in paragraph 78(3) the experts before him, who were Professor Fu for the SFC and Professor Liu Yan of the Law School of Peking University, agreed that Regulation 29 is the most important departmental rule governing cross-border transmission of audit working papers to Regulators. It was also common ground between the experts that Regulation 29 is neither a law nor an administrative regulation, but a departmental rule which only helps clarify the application of the Securities Law, State Secrets Law and the Archive Law – it does not create new legal obligations with regard to cross-border transmission of audit working papers.

86. Both Professors agreed that Regulation 29 does not provide a blanket prohibition on cross-border transmission of audit working papers. It is permissible if prior approval of the relevant governmental department is obtained. The experts disagreed on what documents needed to be approved before they could be transmitted out of the Mainland to Regulators. They did agree that whether or not a document contained a State secret was fact sensitive and depended entirely on the contents of the document.

87. They agreed that other than Regulation 29 the most germane law was Article 18 of the Archives Law and Article 19 of the Archives Law Implementation Rules. It has not been argued before me that the Archives Law and associated Rules are relevant.

88. Neither expert had seen the relevant documents and EY did not identify any document that it believed might contain a State secret. Ng J took the view that in the absence of any evidence that anybody suspected any of the documents contained State secrets the objection based on State secret fell away (§§135-141)[15]. The Judge did, however, go onto consider the application of Regulation 29. Ng J concluded that Articles 6 and 8 of Regulation 29 did not prevent the cross-border transmission of audit working papers. Article 6 draws a distinction between a requirement to keep archives including audit working papers in the Mainland and a requirement in respect of documents that contain State secrets that they should not be sent abroad. The distinction would not need to be drawn if the intended effect of Article 6 was that audit working papers, regardless of their content, should not be sent abroad. Articles 8 states that the CSRC shall, for the purposes of protection of secrets, be responsible for liaising and cooperating with overseas securities regulatory authorities and other relevant authorities. It goes on to provide that where an overseas regulatory authority or other relevant authority requests inspection of documents involving State secrets the request must be reported to the competent Mainland authority empowered to approve the inspection. Ng J found that Article 8 was dealing with documents, which it was believed contained State secrets. It did not contain a blanket restriction on allowing inspection of audit working papers. With both these conclusions I agree. Having reached this view and found that there was no evidence that any of the documents the subject of the application before him contained State secrets Ng J found that it followed that it had not been demonstrated that Regulation 29 restricted cross‑border transmission of audit working papers. A conclusion with which I also agree. I would note that in paragraph 178 of his judgment Ng J records the following:

“178. Lastly, it is noteworthy that HM itself has not raised any issue of Regulation 29 with the CSRC when it refused to produce the audit working papers back in mid-2010. Regulation 29, the Archives Law, State Secrets law and CPA Law were all in existence at that time. As evident from its reply letter to SFC dated 23 July 2010, the CSRC was also not troubled by any issues concerning Regulation 29 and apparently took the view that, but for HM’s refusal to cooperate and its challenge to CSRC’s jurisdiction (on the ground that the Company was incorporated in the Cayman Islands) the audit working papers could be provided to SFC. This is so notwithstanding the absence of evidence that prior approval from the State Secrets Bureau, the State Archives Administration and the MoF as ‘other relevant department” has been obtained. Subsequently, HM, through its PRC legal advisers Fangda Partners, said in a letter dated 5 December 2012 that it was prepared to cooperate with the CSRC, again without making any reference to Regulation 29 or the need to also seek prior approval from the various other government departments.”

89. This does not sit comfortably with Ms. Wang (of Fangda Partners) and Mr. Yan’s evidence about their discussions with the CSRC and MOF.

Conclusion

90. I am satisfied for the reasons explained earlier that the Liquidators do reasonably require the documents that they seek. I am also satisfied as a result of the evidence filed by Mr. Weir that the fact that KPMG HK and KPMG Huazhen are separate legal entities does not prevent KPMG HK obtaining the documents to the extent that they are in the possession or control of KPMG Huazhen.

91. In my view KPMG HK has not demonstrated that the transfer or transmission of copies of the documents sought in this application to the Liquidators in Hong Kong would infringe any Law or Regulation controlling the dissemination of State secrets.

92. It also seems to me that KPMG HK has failed to demonstrate that the Laws and Regulations in the Mainland dealing expressly with the storage, use, disclosure and transmission of what the Laws and Regulations I have been referred to describe as “working papers”, provide a blanket restriction on the transmission of copies of the documents to the Liquidators in Hong Kong or the disclosure of their contents to the Liquidators in the Mainland. In particular, it does not seem to me that Ms. Wang’s unsatisfactory evidence provides a basis for refusing production of the documents sought in paragraphs 1.1 to 1.3 and 1.5 to 1.12 of the Appendix.

93. I accept that the test for determining whether or not the application for production of documents is oppressive because it puts KPMG HK at risk in some way is as explained by Chadwick LJ in Re Mid East Trading Ltd[16], namely, whether it has been demonstrated that there is “any risk that compliance with the order would or might expose the [Respondents] to claims for breach of confidence, or to criminal penalties, in the jurisdiction in which the documents are”. In determining whether an order might expose a respondent to a claim or penalty the Court needs to be satisfied that the risk is real and not speculative. Therefore, even if it seems to me that given my conclusions on the affect of the relevant Laws and Regulations it should be possible for KPMG HK to, for example, allow the Liquidators to inspect the documents they seek that are in the Mainland, I should have regard to whether the reality is that the authorities in the Mainland might take a different view and the consequences of them doing so might be serious for KPMG HK. I recognise that the interpretation of Laws and Regulations and the actions of the authorities in the Mainland are less predictable than they would be in more developed legal and regulatory environments. Therefore, the order that I will make, the precise terms of which I address later, needs to be tailored to allow for this reality.

94. Before turning to deal with the terms of the order, there are a number of matters about which I am concerned and which have made the determination of this application and the formulation of an order more difficult for the Court than was necessary. The first relates to the way in which KPMG HK has approached this application.

95. There is nothing wrong with KPMG HK’s lawyers considering the impact of Ng J’s judgment in SFC v Ernst & Young and concluding that issues were not fully explored before him or that the Law has developed and as a consequence this Court should be invited to take a different view. It does not seem to me that this is what has happened. KPMG HK’s evidence seems to have been carefully crafted to overcome the problem posed by the absence of any substantive evidence that the papers sought contain State secrets. Rather than adduce an expert’s report which addresses objectively the difficulties of determining what restrictions the Laws and Regulations and MOF practice create in determining whether or not the Liquidators can be given access to the audit working papers, KPMG HK has chosen to adduce evidence from its own lawyer in the Mainland who has not been asked to sign the declaration required of witnesses giving expert evidence to the Court and whose evidence it seems to me is clearly tailored to advance KPMG HK’s case. KPMG HK’s legal team has exploited Anthony Chan J’s decision in Re Loong San Investment Ltd ibid to avoid adducing impartial opinion evidence. Similarly, Mr. Yan’s evidence and the associated evidence of Ms. Wong and Ms. Wang in connection with KPMG HK’s discussions with the MOF is unsatisfactory. It manifestly lacks the detail necessary for the Court to assess how much weight should be given to whatever was said to the unnamed official at the MOF who it is suggested told KPMG HK that the audit working papers should not be taken out of the Mainland. The evidence amounts to saying to the Court “take our word for it, we are not meant to take the documents out of the Mainland.” It does not seem to me to have been a genuine attempt to find a solution to the problem that KPMG HK say that they face in providing access to the documents to the Liquidators.

96. It also seems to me unsatisfactory that KPMG HK has not dealt with what happens in practice to the audit of overseas incorporated listed companies with subsidiaries in the Mainland. If KPMG HK could have confidently explained how they comply with the accounting standards that I have discussed in this decision I would have expected them to do so. The fact that they have chosen not to do so invites the suspicion that KPMG HK has exaggerated either the extent of the problem it faces in taking papers out of the Mainland or is reluctant to admit that it does not comply with accounting standards.

97. It is necessary for the terms of the order to provide flexibility to address any genuine problems that KPMG HK and KPMG Huazhen encounter. In determining the extent and the form of that flexibility I take into account the way in which KPMG HK has dealt with this application and what I consider to be the unreliability of their evidence.

Terms of order

98. There is one category of documents of which I am satisfied that production is not necessary and that is the time entries referred to in paragraph 1.9 of the Appendix. I am satisfied that they will not contain any material information. I understand that they are limited to recording time rather than detailed activities.

99. So far as the other categories of documents of which production is sought in the summons (“Documents”) are concerned I order that except for those that have already been provided:

(1)   Insofar as the Documents or copies of them are located in Hong Kong or a jurisdiction other than the Mainland or they are stored in a form, at the date of this decision, which allows them to be accessed outside the Mainland, copies of the Documents shall be provided to the Liquidators in Hong Kong within 28 days of the date of this decision or such other date as the parties agree or the Court directs.
(2)   Insofar as the Documents or copies of the Documents are located in the Mainland or are stored in a form which only allows them, at the date of this decision, to be accessed in the Mainland, the Liquidators shall be given access to the Documents within 35 days of the date of this decision or such other date as the parties agree or the Court directs.
(3)   In the event of any matter occurring subsequent to this Order which in the view of the Respondents or any of them inhibits or prevents them from complying with any part of this order there be liberty to apply for the terms of the Order to be varied.
(4)   Should any matter occur, or be anticipated, which the Respondents or any of them consider may or will inhibit or prevent them complying with any part of this order the Respondents and each of them shall, without prejudice to their right to assert legal privilege, maintain in written form a complete and accurate record of all communications concerning the relevant matter between (a) the Respondents themselves, their employees and agents or (b) between the Respondents, their employees and agents or their legal advisers on the one part and third parties on the other part.

100. I will make an order for the service of an affirmation or affidavit within 28 days or such other period as the parties agree or the Court directs dealing with the matters referred to in paragraphs 3 of the summons. I do not consider that an affirmation or affidavit dealing with the matters referred to in paragraph 4 of the summons is currently required and ordering it at this time would in my view be unnecessarily onerous. The Liquidators have liberty to apply for such an order if they consider that in some respect the production of documents is materially unsatisfactory.

101. So far as examination is concerned I do not intend to order immediate examination of the 2^nd to 9^th Respondents. I accept, as Ms. Wong explains in her 1^st affidavit, that a number of the Respondents are unlikely to be able to provide much useful information to the Liquidators given their limited scope of involvement with the retainer. The matters that I anticipate the Liquidators wish to obtain information in respect of occurred some time ago and it seems to me more efficient and fairer to the Respondents that initially they are given the opportunity to provide information in writing. In the first instance the Liquidators should serve a questionnaire, which each of the Respondent shall respond to in writing within 35 days of its receipt. In case this proves inadequate I will give the Liquidators liberty to restore the application for an examination.

102. The Liquidators solicitors should send a copy of the draft order to KPMG HK’s solicitors for their comments before sending it to the Court.

103. I will make an order nisi that the Respondents pay the Applicants’ costs forthwith on a party and party basis.

(Jonathan Harris)
Judge of the Court of First Instance
High Court

Mr Charles Manzoni SC and Mr Jason Karas, instructed by Lipman Karas, for the applicants

Ms Roxanne Ismail SC and Mr Wilson Leung, instructed by Smyth & Co, for the 1^st to 9^th respondents

Appendix to HCCW 435 / 2012

1. KPMG (“1^st Respondent”) produce to the Provisional Liquidators (“PLs”) all documents within the 1^st Respondent’s custody or power which relate to China Medical Technologies, Inc. (“Company”), including its subsidiaries and associated companies (particulars of which are set out in Schedule 1) (collectively “CMED Group”), whether in printed or any other form including but not limited to computer generated records and information inscribed on, stored in or otherwise fixed in a tangible medium or other medium that it retrievable in a perceivable form in particular computer server, computer hard drive, floppy disk, compact disk, USB flash drive, memory card and/or zip storage device or other electronic storage media or device, including, without limitation:

1.1. All signed engagement letters entered into between the Company and the 1^st Respondent for the provision f auditor or any other professional services.
1.2. All draft and final audited financial statements and interim reviews of the CMED Group issued by the 1^st Respondent.
1.3. All documents provided by the CMED Group to the 1^st Respondent and / or its agents or contractors (collectively “KPMG”) between the date when the 1^st Respondent was engaged by the Company in whatever capacity and 31 December 2009 (the 1^st Respondent having been replaced as auditor of the CMED Group on 7 August 2009) (“Relevant Period”) including, but not limited to:
1.3.1.statutory records;
1.3.2.management accounts;
1.3.3.memoranda and reports of the Company and CMED Group;
1.3.4.accounting records including vouchers, ledgers and trial balances; and
1.3.5.bank statements.
1.4. All working papers produced by KPMG in connection with all audits of the CMED Group’s financial statements for each accounting period, whether the audit was completed or incomplete, during the Relevant Period including, but not limited to all:
1.4.1.documents in the audit permanent file;
1.4.2.documents in the audit and interim working files;
1.4.3.audit planning documentation;
1.4.4.audit program documentation;
1.4.5.site attendance notes; and
1.4.6.internal memoranda and / or communications associated with the audits.
1.5. All correspondence between KPMG and the CMED Group, the Company’s Audit Committee and/or professional advisors during the Relevant Period including, but not limited to all:
1.5.1.email correspondence;
1.5.2.reports and / or memoranda issued by the 1^st Respondent;
1.5.3.management letters issued by KPMG to the CMED Group in connection with the audits;
1.5.4.representation letters issued by the CMED Group to KPMG in connection with the audits of the CMED Group’s financial statements during the Relevant Period;
1.5.5.letters issued by the 1^st Respondent to the CMED Group in respect of the 1^st Respondent’s resignation as the auditor of the CMED Group;
1.5.6.the professional clearance issued by the 1^st Respondent to PricwewaterhouseCoopers Zhong Tian CPAs Limited Company after it was appointed as the auditor of the Company in place of the 1^st Respondent; and
1.5.7.notes of telephone attendances and meetings between KPMG and the CMED Group, the Company’s Audit Committee and / or the Company’s professional advisors.
1.6. All documents created by the 1^st Respondent and/or any other KPMG entity regarding the CMED Group including all internal communications and deliberations regarding the anonymous letter dated 4 February 2009 which was sent to the 1^st Respondent.
1.7. All documents created by the 1^st Respondent and/or any other KPMG entity regarding all discussions or deliberations as to whether or not the 1^st Respondent should resign as the auditor of the CMED Group and also the Company’s request that the 1^st Respondent resign.
1.8. The 1^st Respondent’s internal audit manuals applicable to each of the audits of the Company during the Relevant Period.
1.9. The time entries of the 1^st Respondent’s personnel who carried out the audit of the CMED Group including, but not limited to, the identity of the personnel, the description of each activity performed and the time spent on each activity.
1.10. All documents relating to the provision of financial, tax, valuation, accounting advice or other advice or professional services provided by KPMG to the CMED Group (or the companies therein) during the Relevant Period.
1.11. All invoices issued by the 1^st Respondent to the CMED Group in respect of the audit and other professional services provided by KPMG to the CMED Group.
1.12. Any documents evidencing the relationship between the 1^st Respondent and KPMG Huazhen in regard to the audit of the CMED Group or otherwise.

[1] The Liquidators were represented at the hearing by Charles Manzoni SC and Jason Karas and the Respondents by Roxanne Ismail SC and Wilson Leung.

[2] The 1^st Respondent is a Hong Kong partnership and part of the KPMG global network of professional accounting firms. The 2^nd, 7^th, 8^th and 9^th Respondents were partners in KPMG HK during the relevant engagement periods. The 6^th Respondent was a partner in KPMG USCMG Ltd. The 3^rd Respondent was an engagement manager for the year ending 31 March 2007 only. The 4^th Respondent was a notional partner in KPMG Huazhen for part of the engagement period. The 5^th Respondent is a valuer and a director of KPMG Transaction Advisory Services Limited.

[3] I shall adopt the convention of using “Mainland” to describe the People’s Republic of China other than the Hong Kong SAR and Macau SAR.

[4]China Medical Technology Inc [2014] 2 HKLRD 997 and unreported decision of 28 August 2014 in HCCW 435/2012

[5] I shall refer to the special general partnership as KPMG Huazhen.

[6] Melody Wang (1) §34

[7] (2006) 9 HKCFAR 766

[8] [2014] 2 HKLRD 1116

[9] [1998] 1 BCLC 240 at 257a-c

[10] [2014] 3 HKC 406

[11] Article 2

[12] §16 of Ms. Wang’s 2^nd affirmation

[13] See §§80-82

[14]SFC v Ernst & Young [2014] 3 HKC 406

[15] A similar approach was taken by Judith Prakash J in BNY Corporate Trustee Services Ltd v CelestialNutrifoods [2014] 4 SLR 331§§54 & 58

[16] ibid

HCCW 435/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO 435 OF 2012

____________

	IN THE MATTER OF CHINA MEDICAL TECHNOLOGIES, INC.
	and
	IN THE MATTER OF THE COMPANIES (WINDING UP AND MISCELLANEOUS PROVISIONS) ORDINANCE, CAP. 32

____________

BETWEEN
	THE JOINT & SEVERAL LIQUIDATORS OF CHINA MEDICAL TECHNOLOGIES, INC.	Applicants
	and
	THE BANK OF CHINA (HONG KONG) LIMITED	1st Respondent
	THE BANK OF EAST ASIA, LIMITED	2nd Respondent
	A	3rd Respondent
	B	4th Respondent
	C	5th Respondent

____________

Before: Hon Harris J in Chambers

Dates of Hearing: 12 August, 16 - 17 September 2015

Date of Decision: 15 December 2015

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D E C I S I O N

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The Application

1. On 10 March 2015 the Liquidators of China Medical Technologies, Inc. (“Company”) issued a summons pursuant to section 221 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance, cap. 32, seeking:

1.1 production of documents by the Bank of East Asia Limited (“BEA”) and Bank of China (Hong Kong) Limited (“BOC”); and
1.2 orders for the examination of C, anex‑employee of BEA and A and B of BOC.

2. There was a certain amount of refinement of the description of the documents in the summons sought during the course of the hearing. The orders for production that the Liquidators sought from BOC at the end of the hearing are the following:

2.1 Documents in respect of the accounts referred to in paragraphs 2.2 to 2.4 below pursuant to any of BOC’s obligations under the Hong Kong Monetary Authority Guideline 3.3 – Prevention of Money Laundering and the Supplement thereto dated March 2003, or any BOC policy or procedure relating thereto, in respect of payment, a payor or a payee, including but not limited to:
(a) Assess, verify or monitor the legitimacy of the payment;
(b) Records or reports from the management information systems used by BOC to detect patterns of unusual or suspicious activity in respect of the accounts of the payor or payee;
(c) Any internal communications amongst BOC officers or employees; and
(d) Any communication between BOC and the payer or payee (or their respective representatives) in relation to the payment.
(“Payment Approval Documentation”)
2.2 Payment Approval Documentation relating to all payments made between 28 June 2005 until 31 December 2008 by the Company from the specified bank account with BOC to Supreme Well Investments Limited (“Supreme Well”).
2.3 All payments made between 17 September 2006 until 1 December 2011 from Supreme Well to the accounts of 10 specified companies and persons (“Supreme Well Payees”).
2.4 All payments made by the Supreme Well Payees between 7 November 2006 until those accounts were closed and all payments during that period to specified bank accounts with BEA of X Limited (“X”) and of Y Limited (“Y”).
2.5 All account opening and closing documents and operating mandates created by BOC in respect of those accounts specified in a document.
2.6 All account statements and all bank vouchers, forms, instructions, transaction advices, cheques and correspondence (“Transaction Documents”) created by BOC in respect of the BOC bank accounts listed in a document.
2.7 All client, credit and risk assessment documentation in respect of the Company, Supreme Well, East Hope International Limited, Kam Hing Trading Co, Innovative Technology Limited, Mr Chong Wing Hip, Mr Zhu Feng, Mr Chen Zhong, and the BOC bank accounts listed in a document created by BOC from the date the relevant bank accounts were opened until 27 July 2012.
2.8 All internal policy documents in place during the period from 28 June 2005 to 27 July 2012 concerning BOC’s policies regarding the treatment of suspicious transactions and its policies for ensuring compliance with the laws and regulations concerning the monitoring and reporting of suspicious transactions, including the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance (Cap. 615).
2.9 Following production of the documents referred to in paragraphs 2.2 to 2.4, and upon written notice(s) being given by the Liquidators (“Notice(s)”), BOC shall produce to the Liquidators within a reasonable period of receipt of a Notice:
a. Payment Approval Documentation which pertain to payment transactions on the Further Supreme Well Payee accounts to be specified by the Liquidators in the Notices;
b. Transaction Documents which pertain to bank accounts in respect of the BOC bank accounts listed in a document to be specified by the Liquidators in the Notices;
c. Client, credit and risk assessment documentation in respect of the BOC bank accounts listed in a document to be specified by the Liquidators in the Notices;
d. Documents falling within paragraph 2.8 dated after 27 July 2012 to be specified by the Liquidators in the Notices; and
e. Payment Approval Documentation which pertains to payments from the Supreme Well Payees to entities and persons who do not hold accounts at BOC or BEA.
The Liquidators shall serve any Notice within four months from the production of the documents referred to in paragraphs 2.5 to 2.7.
2.10 The Liquidators be at liberty to examine orally A, the 3^rd Respondent, on oath before a Master on the earliest date available in the Court’s diary with one day reserved and a further one day reserved approximately six weeks thereafter.
2.11 The Liquidators be at liberty to examine orally B, the 4^th Respondent, on oath before a Master on the earliest date available in the Court’s diary with one day reserved and a further one day reserved approximately six weeks thereafter.

3. The Liquidators seek a very similar order against BEA, although in the case of payments by the Supreme Well Payees the request is more extensive as it also includes a document. Theequivalent order to that sought in respect of BOC referred to in paragraph 2.4 above reads:

“All payments made by the Supreme Well Payees between 7 November 2006 until those accounts were closed and all payments during that period to specified bank accounts with BEA of X and of Y.”

4. The other material differences are that rather than orders in the terms referred to in paragraphs 2.5 and 2.6 the following are sought:

4.1 All account opening and closing documents and account operating mandates, account statements and all bank vouchers, forms, instructions, transaction advices, cheques and correspondence created by BEA in respect of the bank accounts of X and Y.
4.2 All client, credit and risk assessment documentation in respect of Supreme Well, East Hope International Limited, Cheer Link International Limited, Dynamic Sense Limited, X and Y created by BEA from the date the relevant bank accounts were opened until 27 July 2012.
4.3 The Liquidators be at liberty to examine orally the 5^th Respondent, C on oath before a Master on the earliest date available in the Court’s diary with one day reserved and a further one day reserved approximately six weeks thereafter.

5. Self-evidently the Liquidators seek production of potentially a very large quantity of documents from both banks. The documents are related to a suspected misappropriation of funds from the Company.

Background

6. The circumstances in which the Company came to be wound up are explained in detail in 2 of my earlier judgments in these proceedings[1]. The first judgment dismissed the Petition to wind up the Company, which is incorporated in the Cayman Islands where it was already in liquidation. In the second judgment I considered new evidence that had come to light concerning the connection between the Company and Hong Kong, an issue which was relevant to my determination of whether or not the Company had sufficient connection with Hong Kong to justify winding it up in Hong Kong, which indicated that Hong Kong had been central to what prima facie appeared to be a substantial fraud involving the misappropriation of some US$355,500,000 of the Company’s funds by its Chief Financial Officer and Chairman and major shareholder. I will quote from paragraphs 8 to 14 and 22 of my August 2014 judgment as it sets out background matters directly relevant to the present applications. In addition I append to this judgment as Appendix A a chart prepared by the Liquidators showing the flow of funds, which they have been able to compile as a result of the documents received to date from the banks.

“8. I found in my earlier decision that the first and second criteria which I refer to in paragraph 2 above had been met. In other words I was satisfied that there was a substantial connection with Hong Kong and that there were tangible benefits in making a winding-up order. The reason I thought that there was a substantial connection are explained in paragraphs 14 to 20 and 56 and 58. The reasons I thought that there would be a tangible benefit in making a winding‑up order are explained in paragraph 62. The reason why I was not satisfied that the connection and the benefits were sufficiently great to justify making a winding-up order in the absence of creditors with claims of sufficient value in Hong Kong are explained in paragraphs 58 to 60. At that time of the trial it appeared that the Company’s principle business activities had been carried out outside Hong Kong. The liquidators were particularly concerned to investigate the matters referred to in paragraphs 29 to 34 of the Re‑Amended Petition, which are quoted in paragraph 22 and their import summarised in paragraph 23. Essentially what was being suggested was that the circumstances in which approximately US$355,000,000 of the Company’s funds raised through its initial public offering and 2 subsequent bond issues, came to be paid in Hong Kong to a company called Supreme Well Investments Limited (‘Supreme Well’) in exchange for the acquisition of medical technology, known by the acronyms FISH and SPR, from Supreme Well and its wholly owned subsidiary Molecular Diagnostics Technologies Limited (‘Molecular’) (paragraph 12), were highly suspicious as the liquidators can find no evidence of anything of substantial value having been transferred to the Company. The liquidators wished to investigate the transaction and, in particular, examine the Company’s former director and chief financial officer, Mr. Tsang. I did not think that the fact that the transaction was substantially completed in Hong Kong was enough to lift this case into the exceptional category discussed in paragraphs 50 to 52.
9. The new evidence relates to how the money received by Supreme Well came to be dealt with. It is suggested that the new evidence indicates that the acquisitions of the FISH and SPR were indeed bogus and that the payment of US$355,000,000 to Supreme Well by a series of 55 cashier orders between November 2006 and December 2009 was part of a massive fraud a significant part of which can now be seen to have been conducted in Hong Kong and involved Hong Kong parties. It is suggested that this represents such a significant part of the affairs of the Company that it elevates this case into the type which justifies making a winding‑up order even if the third criteria is not satisfied.
10. The transaction between the Company and Supreme Well and Molecular was, according to public announcements made by the Company at the time, an arm’s length transaction. However, the new documents obtained by the liquidators show that the 2 accounts into which US$355,000,000 was deposited with Bank of China Hong Kong and the Bank of East Asia respectively, had as their sole authorised signatory Mr. Tsang. The shareholder of the account opening documents is a Mr. Chen Zhong, who was allegedly the developer of the technology sold to the Company. However, through a series of transfers made initially out of the Supreme Well accounts to various other accounts the large majority of the proceeds, US$294,500,000, ended up in accounts controlled by Mr. Tsang and the Company’s former Chairman and Chief Executive Officer Mr. Wu. Mr. Chen seems to have received US$3,000,000.
11. For the purposes of the application the liquidators prepared a funds flow chart showing what was known at the time of the trial and what the liquidators have come to know subsequently. I have had this chart divided into pages and they are appended to this decision as it is the most convenient way of summarising the relevant information. As can be seen it was known last July that the net fund raising of the IPO and 2 note issues was US$631,000,000 of which, after redeeming some of the notes, US$515,000,000 was available to the Company. US$63,390,000 was transferred to China Medical Technologies Inc in Beijing. The balance of US$451,000,000 was transferred to the Company’s account with Bank of China in Hong Kong and the signatories of that account were Mr. Tsang and Mr. Wu. As I have mentioned a total of US$355,500,000 was transferred to Supreme Well by December 2009 of which US$150,500,000 went into a Bank of East Asia account and US$205,000,000 went into a Bank of China account. This was known to the liquidators at the time of the trial of the Petition.
12. On the second page of the funds flow chart is shown what the liquidators have discovered since July 2013. I will explain how they came to discover it later in this decision. What can be readily seen is that by a series of transactions involving Hong Kong bank accounts opened in the name of companies incorporated in the British Virgin Islands, which were purportedly owned by persons who had some connection with the Company, all of which, other than Kam Hing Trading Co, had Mr. Tsang as one of the signatories, US$294,500,000 was transferred ultimately into accounts controlled by Mr. Wu or Mr. Tsang. The individual transactions all appear to have taken place physically in Hong Kong. None were made electronically and in fact in the case of each account it can be seen from the account opening forms that the applicant crossed out those sections requesting electronic banking services. This is inconsistent with the Company’s assertion that the sale of FISH and SPR by Supreme Well and Molecular to the Company was an arm’s length transaction.
13. The way in which the accounts were opened and operated is also suspicious. I will take the East Hope accounts with both Bank of East Asia and Bank of China as an example. The Bank of East Asia account is described in the account opening documents as a private banking account and the documents indicate that it was to be used for investing in a balanced portfolio of equities and bonds. In the forms Mr. Kwan Po Ming is said to be the beneficial owner of East Hope. Mr. Kwan is a Hong Kong certified public accountant with an office in Kowloon. Mr. Wu and Mr. Tsang, however, were the account’s only signatories, not Mr. Kwan, who I note has declined to provide any information voluntarily about the account. Between 2 February and 23 December 2009 the account received US$60,000,000 from Supreme Well’s Bank of East Asia account. There is no evidence of this money being invested. The account seems to have been simply a conduit for the onward transfer of money. One would have expected the Bank of East Asia to have asked questions about the source of the very substantial sums being transferred to Supreme Well and then to East Hope. If they had been told it was the proceeds of the sale of FISH and SPR to the Company one might have expected them to be suspicious about the fact that Mr. Tsang and Mr. Wu were signatories to the Supreme Well and East Hope accounts given their connection with the Company and its public statements that the sale was an arm’s length transaction. It may be that the Bank of East Asia made a report pursuant to section 25A of the Organised and Serious Crimes Ordinance, Cap. 455; about that there is no evidence. What is clear is that there is good reason to be very suspicious about the genuineness of the sale of FISH and SPR and that the way in which the proceeds of sale were dealt with subsequently require investigation.
14. There is now reason to think that a very large part of the Company’s assets has been misappropriated through a scheme operated in Hong Kong involving various persons who themselves are normally resident here (Mr. Tsang, Mr. Kwan and Mr. Chong Wing Hip) and using bank accounts in Hong Kong which were operated personally by Mr. Tsang in Hong Kong. Mr. Karas in his submissions suggested that it can now be seen that the Company’s principal activity was probably conducting a large scale fraud and that, therefore, Hong Kong is properly characterised as the location of its principal activities. I disagree with that characterisation which I think was driven by an assumption arising from the language that I use in paragraph 58 that in order to convince me that the Company’s connection with Hong Kong was sufficiently great to justify winding up the Company, although there are no material creditors in Hong Kong, it would have to be demonstrated that the Company’s ‘principal activities’ took place here. In a normal case that would be probably be so, but this type of description is not apposite in characterising a case such as the present one. What is important is that the evidence demonstrates that something of great significance has occurred in Hong Kong so that it can fairly be concluded that not only does the Company have a substantial connection with this jurisdiction but that the connection is in a relevant way central to the liquidation of the Company. In this regard it is relevant that the process of liquidation of an insolvent company involves not just the realisation of assets for ultimate distribution to creditors, but a broader investigation into its affairs. Such an investigation serves two purposes. The first is the identification of possible wrong doing that has caused loss to a company and which gives rise to a right to recover that loss from a third party. The obvious example is a claim against a director for breach of fiduciary duty or misfeasance giving rise to a statutory claim under section 277 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance. As Vaughan Williams J observed in Re Krasnapolsky Restaurant and Winter Garden Co[2]:
‘…if the circumstances appearing by affidavit are sufficient to shew, prima facie, that an investigation into the formation or promotion of the company or the issuing of debentures or shares is required, that alone is an advantage to the unsecured creditors.’
Similar statements can be found in subsequent authorities including a number in Hong Kong[3]. As Morritt LJ explained when considering whether or not the second core requirement had been satisfied in the Court of Appeal’s judgment in Stocznia Gdanska SA v Latreefers Inc (No. 2[4]):
‘…potential claims for misfeasance and wrongful and fraudulent trading do provide a reasonable possibility of benefit to the Yard and other creditors of Latreefers so as to comply with the second core requirement.’
….
22. It also seems to me that the problem with this case is not so much that the evidence was obtained late as that the petition was issued before the liquidators had obtained all the evidence necessary to address properly the jurisdiction issue. Mr. Karas argued that whilst with the benefit of hindsight this might appear to be the case it was not in fact so. At this juncture it is necessary to explain how the new evidence came to be obtained. Having been notified on 5 September 2013 of my decision the liquidators issued a subpoena in New York to obtain documents from Bank of East Asia’s New York branch containing information about Supreme Well’s bank account. They considered this to be a speculative application and initially it was opposed. To their surprise shortly before Christmas the Bank of East Asia voluntarily provided documents which demonstrated that Mr. Tsang was a signatory to the bank account. Encouraged by this they sought further documents from the Police in Hong Kong. This resulted in an application to the Court which the Police, after initially opposing it, did not contest. This also produced further helpful documents. The decision was then made to apply to this court for an order that Bank of East Asia and Bank of China Hong Kong provide documents concerning the accounts of the recipients of funds from Supreme Well. This was done by seeking a letter of request from the Grand Court of Cayman Islands for recognition of the appointment of the liquidators in Hong Kong and for an order for the production of those documents[5]. Mr. Karas accepted that it might be said that this latter step could have been taken much earlier, but he argued that just as prior to the handing down of my decisions in Re Yung Kee Holdings Ltd[6] and Pioneer Iron and Steel Group Co Ltd[7] the law in Hong Kong on the circumstances in which the Court would order the winding up of an unregistered company was not well developed, it was unclear until my decision in In re A company[8] to what extent the Companies Court considered itself able to provide assistance to a foreign liquidator. I accept that viewed from the perspective of practitioners in November 2012, when the Petition was issued, perhaps the jurisdiction issue appeared less controversial than I considered it to be and that the proceedings were approached in what at the time was a fairly conventional way. In any event it does not seem to me that on the facts of this case their ability or otherwise to obtain the evidence earlier is an important factor.”

7. Neither BOC nor BEA opposed the application pursuant to the letter of request from the Grand Court of the Cayman Islands and on 10 April 2014 I made an order for production by the banks of account opening documents, account operating mandates, know your client documentation, account statements and all bank vouchers, forms, instructions, transaction advices, cheques and correspondence relating to 8 accounts and 3 accounts, other than Supreme Well, with BOC and BEA respectively. As is apparent from my earlier judgment and Appendix A a significant part of the details of the transfers referred to in the passages that I have quoted came from the documents produced by BOC and BEA pursuant to the April 2014 order.

8. The Liquidators say that the additional production and examination now sought is necessary in order for them to investigate the flow of funds and the circumstances of the transfers in order to identify those responsible for the misappropriations and the ultimate destination of the Company’s property with a view to recovering the property of the Company for the benefit of its creditors.

9. BEA does not object to producing the documents referred to in paragraph 4.1 above other than those which come within the definition of Payment Approval Documentation. BOC objects to production of all the documents sought by the Liquidators. Both banks oppose the applications for examination.

Grounds of Opposition

10. In broad terms the grounds of opposition to the contested parts of the applications can be summarised as follows:

10.1 The documents that are sought are not “relating to the Company” and production cannot be ordered under section 221.
10.2 On 2 December 2014, which was subsequent to the production of documents by the banks, the Liquidators issued writs against BOC and BEA. It would be oppressive to require further production of documents and examination of the banks’ staff both of which would have little, if any, relevance to tracing the flow of funds and identifying their ultimate recipients and are clearly directed to obtaining documents and information that might assist the Liquidators in pursuing claims against the banks.

Documents relating to the Company

11. Section 221(1) and (3) provide that:

“(1) The court may, at any time after the appointment of a provisional liquidator or the making of a winding-up order, summon before it any officer of the company or person known or suspected to have in his possession any property of the company or supposed to be indebted to the company, or any person whom the court deems capable of giving information concerning the promotion, formation, trade, dealings, affairs, or property of the company.
…
(3) The court may require him to produce any books and papers in his custody or power relating to the company, but, where he claims any lien on books or papers produced by him, the production shall be without prejudice to that lien, and the court shall have jurisdiction in the winding up to determine all questions relating to that lien.”

12. In China Medical Technologies Inc. (No 2) [9] I consider the ambit of section 221(3) and whether the expression “relating to the company”should be given the meaning adopted by Kwan J (as she then was) in Weihong Petroleum Co Ltd (No 2) [10] or, as the Liquidators argued, “relating to the Company” should be given the same meaning as “concerning the promotion, formation, trade, dealings, affairs or property of the company”; the language that appears in section 221(1). I agreed with Kwan J’s decision. In my view in order to come within section 221(3) a document must be demonstrated to relate to the Company and in assessing whether or not it does (to quote from Lord Millett in Kong Wah) “The test is essentially a commercial one, which a layman will normally be able to understand.”[11] Mr. Karas invited me to allow this question to be reargued, which I declined.

13. I do not understand it to be in dispute that some of the documents might contain information concerning the fraud suspected to have been perpetrated on the Company, but that, say the banks, is not the test as China Medical Technologies Inc (No 2) makes clear. I also do not understand it to be in dispute that if section 221(3) used the same language as section 221(1), it would be sufficiently broad to include documents of the type sought by the Liquidators as there is sufficient evidence to establish that the funds flowing from Supreme Well to the Supreme Well Payees and X and Y were the proceeds of fraud and that the transfers probably formed part of a scheme for misappropriating the Company’s assets. If it had been in dispute I would have so found and also found that the Liquidators reasonably required the documents to carry out their functions.

14. Similarly, I do not understand it to be suggested by the banks that the Payment Approval Documentation might not contain information that would assist the Liquidators in understanding how it was possible for the transfer of monies derived from the payments made by the Company to Supreme Well to be made and also to identify possible claims that might be advanced by the Company for recovery of property derived from the initial transfer or damages for loss caused by the suspected misappropriation of its assets.

15. The expression “relating to the Company” needs to be interpreted and applied in a practical, commercial manner. It assumes some knowledge of the circumstances in which the documents come to be sought. Necessarily, given my decision in China Medical Technologies Inc (No 2), it requires an understanding that it does not mean relating to the affairs or property of the company, although conversely a document “relating to the company” will relate to its affairs, and may, depending on its subject matter, relate to its property.

16. In my view the documents sought by the Liquidators do not relate to the Company. This is most obvious in the case of the documents referred to in paragraph 2.8 above. Documents produced by the banks containing internal guidelines and protocols dealing with monitoring suspicious transactions of clients generally do not relate to the Company. They relate to the internal affairs of the two banks. The Payment Approval Documentation in respect of the Supreme Well Payees relate to the banks and each of the Supreme Well Payees. They do not relate to the Company. Similarly the documents referred to in paragraph 2.5 above relate to the entities referred to not to the Company.

17. The summons seeks documents that go beyond what is obtainable pursuant to section 221(3). The only category of documents that in my view can fairly be said to be “relating to the company” are those I have referred to in paragraph 2.2 above. Except for that category of documents, and to the extent that BEA has agreed to provide particular categories of documents, in my view the Liquidators are not entitled to the order they seek.

Oppression

18. The banks also object to the production of documents on the grounds of oppression, although as I understand it this objection is mainly directed at the Payment Approval Documentation and the documents sought in paragraphs 2.7 and 2.8 referred to above rather than any outstanding documents that simply record transfers and bank account details. The banks say that these documents are relevant to the claims against them in the writs that have been issued. Before turning to consider those claims I will deal with the relevant legal principles.

19. Section 221 gives the court a discretion to order the examination of persons whom the court deems capable of giving information about a company and its affairs and require the production of documents relating to a company that is in liquidation. As Lord Millett explains in paragraphs 29 and 30 of his judgment in Kong Wah Holdings ibid:

“29. In exercising its discretion, the court must endeavour to strike a balance between the liquidator’s reasonable requirements and the need to avoid making an order that is unreasonable, unnecessary or oppressive to the party from whom the documents or information are sought: see for example British & Commonwealth Holdings Plc v Spicer & Oppenheim [1992] Ch 342 at p.370 per Ralph Gibson LJ, and at p.384 per Woolf LJ; British & Commonwealth Holdings Plc v Spicer & Oppenheim [1993] AC 426 at p.439; Re Bank of Credit and Commerce International SA (No 12) [1997] 1 BCLC 526 at p.537 per Robert Walker J. These cases have been consistently followed in Hong Kong: see for example the Joint Liquidators of Chark Fung Securities Co Ltd & Others v Chan Kwong Hung [2001] 1 HKLRD 772 case.
30. Over the years the courts have laid down general principles governing the balancing exercise which the court is called upon to undertake. They are conveniently set out in the Cloverbay Ltd (Joint Administrators) v Bank of Credit and Commerce International SA [1991] Ch 90 at pp.102-103 per Sir Nicolas Browne-Wilkinson V-C and British & Commonwealth Holdings Plc v Spicer & Oppenheim [1992] Ch 342 at p.372 per Ralph Gibson LJ and at p.392 per Woolf LJ. They can be summarised as follows:
(1) The liquidator must show that the documents are reasonably required to enable him to carry out his functions, not that they are necessary to enable him to do so;
(2) the case for making an order under the section in respect of a former officer is usually stronger than in respect of a stranger who owes no fiduciary duties to the company and who is not under a statutory duty to assist the liquidator;
(3) there is an element of oppression in requiring a party to provide information which exposes him to potential liability;
(4) an order for oral examination is likely to be more oppressive than an order to produce documents;
(5) it is oppressive to require a person suspected of wrongdoing to prove the case against himself on oath prior to proceedings being brought;
(6) an order is not necessarily oppressive because it is inconvenient for the party subject to it or causes him a lot of work or may make him vulnerable to future claims;
(7) in the light of the summary nature of the procedure and the need for expedition, the court cannot be expected to indulge in fine judgments as to the precise width of the order which should be made; and
(8) the court must take care not to cut down the width of the order sought by the liquidator in a way which would risk making it ineffective.”

20. As Lord Millett makes clear in sub-paragraph 30(3) and (5) there is an element of oppression in requiring a person to provide information or documents that may expose him to liability. Consistent with this in assessing an application for production or examination a relevant consideration is the existence of litigation, or its contemplation, and the prospect of liquidators obtaining an advantage that the company would not otherwise have in prosecuting a claim.

21. For the reasons explained by Sir Nicolas Browne Wilkinson V‑C in Cloverbay Ltd v BCCI Ltd (CA [12].) whether or not litigation has been commenced, or the subjective state of mind of the liquidator as to whether or not he has enough information to proceed with an action, cannot be the determining factor in deciding whether or not it would be unfairly oppressive to make an order. The Vice Chancellor goes onto explain:

“Nor do I think that there is any other simple test that can be substituted. The words of the Insolvency Act 1986 do not fetter the court’s discretion in any way. Circumstances may vary infinitely. It is clear that in exercising the discretion the court has to balance the requirements of the liquidator against any possible oppression to the person to be examined. Such balancing depends on the relationship between the importance to the liquidator of obtaining the information on the one hand and the degree of oppression to the person sought to be examined on the other. If the information required is fundamental to any assessment of whether or not there is a cause of action and the degree of oppression is small (for example in the case of ordering premature discovery of documents) the balance will manifestly come down in favour of making the order. Conversely, if the liquidator is seeking merely to dot the i’s and cross the t’s of a fairly clear claim by examining the proposed defendant to discover his defence, the balance would come down against making the order. Of course, few cases will be so clear: it will be for the judge in each case to reach his own conclusion.
That said there are a number of points which in my judgment should be borne in mind in exercising the discretion. First, the reason for the inquisitorial jurisdiction contained in section 236 of the Act of 1986 is that a liquidator or administrator comes into the company with no previous knowledge and frequently finds that the company’s records are missing or defective. The purpose of section 236 is to enable him to get sufficient information to reconstitute the state of knowledge that the company should possess. In my judgment its purpose is not to put the company in a better position than it would have enjoyed if liquidation or administration had not supervened. In many cases an order under section 236 may have the result that the company is in such improved position e.g. an order for discovery of documents made against a third party in order to reconstitute the company’s own trading records may disclose the existence of claims which would otherwise remain hidden. But that is the result of the order not the purpose for which it is made.
Second, as a corollary to the first point, I do not think that the test of absolute “need” as opposed to a reasonable requirement for the information is a workable or appropriate test. This was the determinative distinction relied upon by the judge. But if the applicant has to show an absolute ‘need’ this would lead to endless argument about whether the circumstances of each case disclose such need and would lead to the order being refused even in cases where the information would be of great utility to the applicant (short of absolute need) and could be obtained (e.g., by discovery of documents) without any great oppression to the person sought to be examined.
Third, in my judgment the case for making an order against an officer or former officer of the company will usually be stronger than it would be against a third party. Officers owe the company fiduciary duties and will often be in possession of information to which the company is entitled under the general law. Their special position as officers of the company is emphasised by section 235 of the Insolvency Act 1986 which imposes on them a statutory obligation to assist the liquidator or administrator. The enforcement of these duties owed by its officers to the company may require an order under section 236 of the Act of 1986 even though it exposes such officers to the risk of personal liability. No such considerations apply when an order is sought against a third party. He owes no duty to the company. In an otherwise proper case he may be required to disclose documents or answer questions so as to provide the liquidator with the information necessary to carry out his functions even though this may have unfortunate repercussions for him. But he owes no general duty to give such information (apart from an order under section 236) and if by giving the information he risks exposing himself to liability this involves an element of oppression. That is not to say that an order cannot or should not be made against a third party. But it should be borne in mind that the degree of possible oppression is greater in his case.”

22. Mr. Karas suggested that this did not reflect the current approved approach in Hong Kong. That, he suggested, is to be found illustrated by my decision in Pioneer Iron and Steel Group Co Ltd v Pioneer Metals Co Ltd [13] in which I refer to the judgment of Sir Peter Gibson LJ in Shierson v Rastogi [14] and then say this:

“12. However, as Shierson v Rastogiibid demonstrates the fact that proceedings have already been commenced which concern matters, which it is proposed are the subject of examination is not necessarily a bar to such an examination being ordered. The Court of Appeal explained this in the following terms:
‘46. I accept that an order for examination is not indispensable in relation to some matters indicated in the statement of grounds in view of Mr Rastogi's and Mr Jain's limited offer to co-operate. But I have no doubt that considerable areas remain, questions on which will only be answered in the near future if the examination order stands, in particular relating to missing moneys and the trading system. I do not accept that when the liquidators sought an order for examination knowing that the answers obtained may go to issues in the litigation, they did so for a collateral purpose. The liquidators, acting in good faith as is conceded, seek the information for the purposes of the liquidation and in particular to get in the assets of the company. Nor do I accept that the liquidators, having opted for court proceedings against Mr Rastogi and Mr Jain are thereby precluded from obtaining a s 236 order against them. ... for the reasons given in Cloverbay I accept that to require defendants accused in civil proceedings of serious wrongdoings to give answers to questions, from those bringing those proceedings, which go to issues in the proceedings is oppressive.
…
48. As against those factors must be set the following. First, Mr Rastogi as the chief executive officer and Mr Jain as an executive director with particular responsibility for trading not only owed fiduciary duties to the company but, as the judge aptly said, are‘the most crucial sources of information relating to what went on inside [the company]’ and were ‘its brains’. They are obliged to co-operate with the liquidators, who are accountants with no prior knowledge of the company. Secondly, the estimated deficit is very large, some US$350 million, the crash occurring with remarkable suddenness. Thirdly, the liquidators want the answers to their questions as soon as possible so that they can act quickly, for example, in respect of outstanding receivables and missing moneys.
…
50. On conducting the balancing exercise I have no doubt but that the scales come down in favour of making the order. This is a case where the legitimate requirements of the liquidators to obtain speedy information from those who have run the company and the other considerations set out in para 48 above outweigh the oppression to Mr Rastogi and Mr Jain in being required to submit to a private examination. Like the judge I conclude that the need for making the order is overwhelming.’[15]
‘There is no justification for any suggestion that the purpose of the examination under s 236 [in that case] is to obtain any advantage in the current civil proceedings. That is also to view the matter from the wrong perspective. The nature of the application and the evidence in its support shows that its purposes are both more fundamental and more wide-ranging. They are to reconstitute the company's records, to understand its affairs and, with that understanding, to identify its assets wherever they may be, including any causes of action against anyone whoever they may be. It is true that, inthe course of any examination on these matters, information may well be forthcoming that will bear on, or expand the scope of, the current civil proceedings against the directors. But that will be an incidental consequence or effect of an examination which is needed in order to enable the liquidators to perform their functions generally: see Re Brook Martin & Co [1993] BCLC 328 at 335. While any effect on the civil proceedings should be taken into consideration when deciding whether to make an order for examination, I have no doubt that in this case the need to have an examination, if the liquidators are to fulfil their functions generally, outweighs any such consideration.’[16]
13. The Court is, therefore, required to balance the legitimate need of liquidators to understand the relevant part of a company’s affairs and the right of the examinee not to be subject to an examination, which will put him at a disadvantage that he would not normally be under in the course of litigation or, approaching the matter from the opposite direction, will not give a company in liquidation an advantage not available to other litigants. In approaching this balancing exercise the Court has regard to the fact that the liquidators of an insolvent company are commonly at a disadvantage in advancing claims on behalf of an insolvent company with a view to ensuring recovery of assets for the benefit of creditors, namely, that they are appointed normally with no prior knowledge of a company’s affairs and by the very nature of insolvency commonly find the company’s records incomplete and unsatisfactory and its officers unhelpful. This in my view is the position in this case. The liquidators have had considerable difficulty in obtaining documents and, despite the endless protestations to the contrary by Ms Chen and the lawyers who she has instructed during the course of the winding‑up proceedings, it seems clear to me that she has no genuine interest in assisting the liquidators; quite the contrary.”

23. I do not consider that Sir Peter Gibson LJ is saying anything inconsistent with what is said in Cloverbay, a decision referred to with apparent approval by Lord Millett in paragraph 29 of Kong Wah. What is necessary is a consideration of the extent to which the Liquidators require the documents and information they seek through an examination and the extent to which so ordering will prejudice the banks.

24. As the Vice-Chancellor observes in the passage from Cloverbay that I have quoted, seeking information that goes to a possible defence is more likely to be oppressive than information reasonably required to assess whether or not a company has a viable cause of action. Similarly, if a liquidator has in the view of the court enough information to decide to proceed with an action it is more likely that the court will take the view that it is oppressive to require a prospective defendant to provide more information about the claim.

25. In the present case the banks say that the Liquidators clearly have enough information to decide whether or not to proceed with the actions that they have issued. The claims in the 2 writs are identical except for the inclusion in paragraph 2.1 of the indorsement in respect of BOC of a claim for damages for breach of contract.

“1. The Plaintiff’s claims against the Defendant arise from the following circumstances:
….
1.6 All of the transfers of Funds were made by certain directors and/or executives of the Plaintiff to misappropriate the Funds for their personal benefit and without proper authority, in breach of their fiduciary and other duties to the Plaintiff, including their duties not to act in conflict of interest and not to profit from their position; and
1.7 The Defendant had knowledge, being either actual knowledge or knowledge which is to be inferred from willful blindness or reckless indifference, or alternatively was put on enquiry and failed to make necessary enquiries, that the transfers of Funds were made in breach of fiduciary duty by certain directors and/or executives of the Plaintiff as set out above.
2. The Plaintiff’s claim against the Defendant is for the following:
2.1 Damages for breach of contract; and/or
2.2 A declaration that the Defendant held the Funds as constructive trustee; and/or
2.3 Equitable compensation and/or damages for dishonest assistance, knowing receipt, breach of duty (contractual, tortious, equitable, fiduciary, statutory, regulatory and other duties), conspiracy, breaches of trust and/or duty of care and skill by, negligence by an/or unjust enrichment of, the Defendant; and/or
2.4 Repayment or restitution of the Funds; and
2.5 Compound interest on the value of the Funds (or a portion thereof) accountable to the Plaintiff at such rates and for such period as the Court thinks fit, or alternatively, interest pursuant to section 48 of the High Court Ordinance (Cap. 4) at such rate and for such period as the Court sees fit; and
2.6 All further or other orders, accounts, enquiries, directions as may be necessary; and
2.7 Costs; and
2.8 Further and/or other relief.”

26. Towards the end of the hearing before me a dispute arose as to whether or not it was necessary for the Company to prove knowledge, actual or inferred, of breach of duty by directors of the Company in order for the Company to succeed in a proprietary claim against the banks. Mr. Man argued that it was not. The question of knowledge, he said, was relevant to the defence. And if it is relevant to the defence the court should be slower to order production of documents and examination of witnesses as is explained in the first paragraph of Sir Nicolas Browne Wilkinson’s judgment in Cloverbay which I have quoted in paragraph 21. His argument was as follows.

27. If the banks received money directly from the Company as a result of a breach of trust then the Company has a proprietary claim for recovery of that money. It is not necessary in order to prove that claim for the Liquidators to establish that the banks knew or should have known of the breach of trust. If the banks have parted with the money they may be able to defend such a claim on the basis of a bona fide change of position. It is at that stage that the extent to which the banks adequately investigated the source of the money becomes relevant. The Liquidators dispute this. Mr. Karas argued that it is a necessary component of any claim that the Company may have against the banks in respect of monies that has been transferred on to the Supreme Well Payees, they had knowledge either actual, or to be inferred from the banks willful indifference or failure to make appropriate enquiries in respect of the transfers, of the breach of trust.

28. I agree with Mr. Karas. The Liquidators are not advancing a claim in respect of monies in Supreme Well’s bank accounts. In substance any claim is for knowing assistance or knowing receipt arising from the transfer to the Supreme Well Payees and beyond.

29. In my view, however, the most significant consideration is the amount of information that the Liquidators have already obtained from the banks. The Liquidators say that they have not yet made up their minds whether or not there is a sufficiently strong claim against the banks to justify proceeding with the actions that they have commenced to stop the limitation periods running. I accept that the Liquidators would prefer to obtain further information if possible before deciding how to proceed, but in my view it is not necessary. They have such information as they reasonably need to make an informed decision.

30. As I have already explained the Liquidators have been provided with considerable information by the banks about the transfer of funds to the Supreme Well Payees. They have been provided with the account opening forms and related documents, which has allowed them to establish the flow of money which has its origin in the transfers to the Supreme Well bank accounts. The extent of the information they have about the transfers and the identity of the alleged beneficial owners of the Supreme Well Payees and account signatories is conveniently illustrated by Appendix A to this decision. From the account opening documents that I have seen in the evidence in support of the Petition I would also have thought that they have sufficient information to make an informed assessment, sufficient for the purposes of deciding whether or not to proceed, of the prospects of the banks being able to assert credibly that they took reasonable steps to comply with the HKMA Guidelines and their own internal protocols intended to ensure that so far as possible the banks are not used as a conduit for unlawful money transfers. The extent of the information that the Liquidators have received relevant to a consideration of the provenance of funds received by the various accounts is illustrated by paragraph 13 of my 28 August 2014 judgment in respect of the East Hope account opened with BEA.

31. The Liquidators do not need any more information in order to decide whether or not they have a viable claim. To provide them with the level of information they seek and, in particular, to allow them to examine the banks’ staff about the steps they took to ensure that the monies received to the credit of Supreme Well’s banks accounts and the onward transfers were not improper, would be to enable them to assess in a very direct way the strength of any defence and potentially put the banks at a considerable disadvantage that they would not otherwise be under in defending the claims.

32. It seems to me that the potential oppression to the banks outweighs the Liquidators need for the further documents and information that they seek.

33. The final objection is advanced only by BOC, which suggests that it is not practicable to obtain the Payment Approval Documentation generated 7 years before any search for them was commenced. The Liquidators are seeking Payment Approval Documentation back to 2005. Tiffany Leung, a senior operations manager with BOC, explains in paragraphs 16 and 17 of her first affirmation:

“16. As of May 2014, in accordance with the 1^st Respondent’s policy and practice, it generally does not retain a client’s transaction history (‘Record of Transaction’) for more than 7 years. The Record of Transaction acts as an index for locating the relevant documents relating to each particular transaction, and contains very brief information such as the (i) date of the transaction; (ii) time of the transaction; and (iii) (most importantly) workstation number. The documents themselves are retained by the Bank for a period of 15 years. However, without the Record of Transaction or more particularly, the work station number, it is impossible to locate the relevant documents.
17. For this reason, although the 1^st Respondent may have in its possession documents going back to 2000, it is only able to retrieve documents from 12 March 2008 (calculated as from the date of the Summons). This applies to all categories of Documents sought under the Summons including §1.1(a).”

34. As I understand it, what Ms. Leung is saying is that there is no record, which would enable BOC to locate a particular document generated more than 7 years prior to the time it is decided to locate a document. I do not find Ms. Leung’s evidence in this regard very convincing. If BOC keeps records back to 2000, it must do so for a reason and have some way of identifying what those retained records are. I appreciate that BOC may have decided not to check prior to the determination of this application whether they can, in fact, find documents generated before 2007 (it seems to me that BOC should have at least kept the most recent transaction history when notified of the Liquidators’ request), but at this stage if I had been inclined to make an order I would have required them to produce documents for the entire periods sought by the Liquidators with liberty to apply in the event of them encountering insuperable problems in locating any of the documents.

Examinations

35. It follows from what I have said above that in my view it would be oppressive to order the banks’ staff to answer questions about compliance with the HKMA guidelines and internal protocols intended to minimise the risk of the banks facilitating unlawful transfers of monies generally and in relation to the particular transfers to and from the accounts referred to in the draft orders.

36. Examination can be ordered in respect of matters that go beyond those “relating to the Company”. I accept that it is reasonable for the Liquidators to want to ensure that they have obtained, so far as possible, all information concerning the propriety of the acquisition by the Company of the FISH and SPR technology and to trace the proceeds of the acquisition. I will direct that C, A and B answer interrogatories about these matters. It seems to me that this is more likely to produce information, if they have any, about matters which took place many years ago than an oral examination. I will also give general liberty to apply. The Liquidators should produce a draft order and in the first instance circulate it to the banks’ solicitors for their comments.

37. As the banks have been very substantially successful in opposing the applications I will make an order nisi that their costs are paid out of the assets of the Company.

	(Jonathan Harris)
	Judge of the Court of First Instance
	High Court

Mr Jason Karas, Solicitor Advocate, of Lipman Karas, for the applicants

Mr Leo Remedios and Ms Yvonne Ngai, instructed by K W Ng & Co, for the 1^st, 3^rd and 4^th respondents

Mr Bernard Man SC and Mr Keith Lam, instructed by Linklaters, for the 2^nd and 5^th respondents

[1] [2014] 2 HKLRD 1001 and unreported judgment of 28 August 2014

[2] [1892] 3 Ch 174 at 178

[3]Re China International Business Development (Hong Kong) Ltd (unrep., HKCA, 8 Nov. 2005)at [21]-[23]

[4] [2001] 2 BCLC 116 at §40

[5]In re A company, HCMP 902/2014, 21/7/2014, Harris J

[6] [2012] 6 HKC 246

[7] Unrep., HCCW 322/2010, [2013] HKEC 317

[8] ibid

[9] [2015] 2 HKLRD 27

[10] [2003] 2 HKRLD 747

[11]Joint & Several Liquidators of Kong Wah Holdings Ltd v Grande Holdings Ltd [2007] 1 HKLRD 116

[12] [1991] Ch 90. Sir Nicolas Browne-Wilkinson V-C

[13] Unrep., HCMP 1974/2011, 15 July 2013

[14] [2003] 1 WLR 586, §§46-50, at 602-603

[15] per Peter Gibson LJ at §§46-50, at 602-603

[16] per Mance LJ at §62, at 606-607

HCCW 435/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO 435 OF 2012

-----------------------------

	IN THE MATTER OF CHINA MEDICAL TECHNOLOGIES, INC.
	and
	IN THE MATTER OF THE COMPANIES (WINDING UP AND MISCELLANEOUS PROVISIONS) ORDINANCE, CAP. 32

-----------------------------

Before : Hon Harris J in Chambers

Date of Hearing : 2 October 2015

Date of Decision: 2 October 2015

------------------------

DECISION

------------------------

1. I have before me a summons issued on 2 July 2015 by the Liquidators in Hong Kong of the Company pursuant to s.200(3) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance, Cap. 32. The summons seeks the court’s directions in respect of a number of questions formulated in the summons.

2. It is easiest to quote paragraph 1 of the summons:

“1. Directions in respect of the following questions:
1.1 whether the Company’s audit committee (“Audit Committee”) had any independent legal status separate from the Company;
1.2 whether the Audit Committee was acting as an organ of the Company and/or the Company’s agent when it instructed the Hong Kong office of Freshfields Bruckhaus Deringer (“Freshfields”) to carry out an independent investigations (“Indpenendent Investigation”) into complaints that had been made about the Company’s management in an anonymous letter dated 2 February 2009 that had been sent to KPMG Hong Kong, the Company’s former auditor;
1.3 whether Freshfields’ client in connection with the Independent Investigation was the Company; and
1.4 whether any application brought in Hong Kong for the determination of whether or not legal professional privilege applies to any documents created by Freshfields in connection with the Independent Investigation would be determined by the laws of Hong Kong, being the lex fori of the proceedings.”

3. As can be seen from the questions that have been posed for the Court’s consideration, what is being asked is whether or not the Audit Committee of the Company, which is incorporated in the Cayman Islands, had an independent legal status and had its own independent right of privilege in respect of advice obtained from Freshfields.

4. There is a further more general question implicit in the more detailed ones, namely, regardless of whether the answer to the question is in the affirmative, do the Liquidators step into the shoes of the Audit Committee and have the power to waive any privilege which attaches to the advice Freshfields have given.

5. Before turning to the questions themselves, I would say something about the procedure that has been adopted in the present case. As I have already mentioned the application has been made under s.200(3). The Liquidators have proceeded on the basis that the question that has arisen for determination is appropriately dealt with by that procedure, and drew my attention to authorities which they say illustrate that that is the proper course: Re Barlow Clowes Gilt Managers Ltd [1992] Ch 208 and Re Singapore Insurance Co. Ltd [1985] 2 HKC 244.

6. The application has been brought mainly because Freshfields have requested the Liquidators to make an application which clarifies Freshfields’ position in respect of the documents which the Liquidators have requested they pass to them. As I understand it from Mr Karas, who appeared for the Liquidators, Freshfields’ position is most fairly summarised as cautious but not obstructive.

7. Accepting that Freshfields’ concerns may be genuine it does seem to me, however, that probably the better course, where the Liquidators are seeking documents and the only issue for the court is a fairly narrow one, is for them to consider issuing an originating summons for delivery up of the documents. My principal reason for suggesting that that may be the better course is that it puts the Respondent in the position of having to take a decision whether or not to contest or concede, or possibly take an entirely neutral position in respect of the application.

8. That potentially makes the issue more readily disposed of by the Court because the Court’s role is normally only to determine matters that are in dispute rather than provide comfort to concerned parties. It also would normally give the court the opportunity to make costs orders against a respondent who the court takes the view should properly be required to bear the costs of determining the matter about which it is concerned. It seems to me in the present case that given the way the Liquidators have proceeded and the fact that they are not suggesting any criticism of Freshfields it would not be appropriate to make an order against Freshfields if, as I do, I determine the questions in the way advanced by the Liquidators.

9. The first question is whether the legal professional privilege in respect of the documents in the files of the Hong Kong office of Freshfields Bruckhaus Deringer brought into existence pursuant to a retainer letter dated 4 March 2009 addressed to the Audit Committee of China Medical Technologies, Inc and held in Hong Kong, is governed by Hong Kong law. In my view the answer to that question is in the affirmative. The engagement letter itself contains a governing law provision which clearly provides that the retainer is to be construed in accordance with the law of Hong Kong.

10. Further at common law legal professional privilege is a matter of procedure rather than substance and questions of privilege are determined by the lex fori which in this case is the law of Hong Kong: see RMBSA Corporate Services Ltd v Secretary for Justice [2010] 1 HKLRD 737.

11. The second question is who was Freshfields’ client? Implicit in the question is that it was either the Company or the Audit Committee. Apparently the reason why it was thought that there was any issue in this regard at all is because of a decision by Mr Justice Gerber of United States Bankruptcy Court in Re China Medical Technologies, Inc, case no. 12-13736 (REG) in which the Judge seems to have treated the Audit Committee in proceedings brought in New York by the Cayman Islands Liquidator as having some kind of independent legal status.

12. In my view the answer to the question is the Company. I can see no basis for concluding otherwise. The Audit Committee was simply a group of directors’ tasked with one specific function. I can see no basis at all for treating it as having some independent legal status which is capable of attracting its own independent right of privilege and none has been advanced before me.

13. The third question is if the answer to the first question is in the affirmative who may assert and waive the legal professional privilege which attaches to the documents Freshfields have produced. In my view the answer to that question must be the Liquidators. Upon the winding up of the Company, the Liquidators stepped into the shoes of the Company, and it is the Liquidator who can assert and waive privilege: Re Dallhold Investments Pty Ltd [1994] 53 FCR 339 at 342D-E per Sackville J and Re Konigsberg [1989] 3 AER 289 at 297J-298A per Gibson J. The right to decide how to exercise the Company’s extant rights and obligations, including any right to assert privilege, passes into the hands of the Liquidators who can make a decision whether or not to waive any privilege which attaches to particular documents.

14. So far as the terms of the order is concerned, Mr Karas has handed to me a draft order, the substantive part of which I will make as it naturally flows from the answers to the questions that I have given: “the Liquidators may assert and waive any legal professional privilege in respect of the documents in the files of the Hong Kong office of Freshfields Bruckhaus Deringer brought into existence pursuant to the retainer letter dated 4 March 2009 addressed to the Audit Committee of China Medical Technologies, Inc and held in Hong Kong”.

15. The Liquidators’ costs be paid out of the estate of the Company.

(Jonathan Harris)
Judge of the Court of First Instance
High Court

Mr Jason Karas, the solicitor advocate, of Lipman Karas, for the applicants

Freshfields Bruckhaus Deringer, for the respondent, absent

Attendance of the Official Receiver was excused

HCCW 435/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO 435 of 2012

-----------------------------

	IN THE MATTER OF X COMPANY
	and
	IN THE MATTER OF THE COMPANIES (WINDING UP AND MISCELLANEOUS PROVISIONS) ORDINANCE, CAP. 32

-----------------------------

BETWEEN
	Y	Applicants
and
	A	1^st Respondent
	B	2^nd Respondent
	C	3^rd Respondent
	D	4^th Respondent
	E	5^th Respondent
	F	6^th Respondent
	G	7^th Respondent

-----------------------------

Before : Hon Harris J in Chambers

Date of Hearing : 19 August 2015

Date of Decision : 19 August 2015

-----------------------

DECISION

-----------------------

1. I have before me a summons dated 23 April 2015 seeking orders pursuant to section 221 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance, Cap 32, for the production of documents and the examination of the various respondents to the application.

2. Much of the application has been dealt with by consent between the liquidators and the respondents. However, there are three respondents who have taken no part in the application. It is unclear whether or not these three respondents, the 3^rd to 5^th Respondents, have notice of the application or are aware of the liquidators’ wish to talk to them about the affairs of the Company.

3. The three respondents were not officers of the Company nor were they employed by it. The liquidators wish to talk to them because it is believed that they may have been the beneficial owners of three companies who formed part of a chain of legal entities through which very significant sums of money appear to have been misappropriated from the Company.

4. It seems to me that generally the Companies Court should be slow to make applications pursuant to section 221 against persons who were not officers of the relevant company, who have not been contacted by the liquidators and where there is no evidence of them have tried to avoid the liquidators.

5. It seems to me that there needs to be some special reason which justifies making an order in such circumstances.

6. In this case I am satisfied that there are special circumstances. The misappropriation of money to which I have referred seems to have arisen as a result of a very significant fraudulent scheme perpetrated on the Company. It may be that the 3^rd to 5^th Respondents had no involvement in that scheme. However, even if that proves to be the case, it seems to me to be reasonable given the magnitude of the prima facie wrongs done to the Company, to make the order that the liquidators seek in the hope that it does come to the attention of the 3^rd to 5^th Respondents, and as a result they are able to provide some assistance to the liquidators even if it is no more than explaining that their names have been misused.

7. I will, therefore, make an order in terms of the draft that has been provided to me save that paragraph 9 of the order will simply provide that the 3^rd to 5^th Respondents have liberty to apply to set aside the order. I will impose no time period for any such application to be made. I will also reserve costs.

(Jonathan Harris)
Judge of the Court of First Instance
High Court

Representation removed for the reason of confidentiality

HCCW 435/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO 435 OF 2012

____________

	IN THE MATTER OF CHINA MEDICAL TECHNOLOGIES, INC.
	and
	IN THE MATTER OF THE COMPANIES (WINDING UP AND MISCELLANEOUS PROVISIONS) ORDINANCE, CAP. 32

____________

BETWEEN
	THE JOINT & SEVERAL PROVIISONAL LIQUIDATORS OF CHINA MEDICAL TECHNOLOGIES, INC.	Applicants
and
	SAMSON TSANG TAK YUNG	Respondent
____________

Before: Hon Harris J in Chambers

Date of Hearing: 6 January 2015

Date of Decision: 6 February 2015

_______________

D E C I S I O N
_______________

Introduction

1. On 15 September 2014, I made orders under section 221 for the examination of, and production of documents by, Mr Samson Tsang Tak Yung (“Mr Tsang”). The oral examination of Mr Tsang has since been set down for a total of five days, from 11 to 13 February and 13 to 14 April 2015 before Master Au-Yeung. The relevant paragraphs of the order for production of documents are in Appendix 1 to this decision. I adjourned paragraphs 2.4 and 3 of the Summons dated 27 February 2013, pursuant to which the order of 15 September 2014 was made, for argument, which took place before me on 6 January 2015. Paragraphs 2.4 and 3 seek disclosure of:

“2.4 all documents in relation to the purported divorce between the Respondent and Ms Chui Sai Kuen (“Ms Chui”) including all documents filed with this Honourable Court in connection therewith, any relevant Orders issued by this Honourable Court including any decree nisi and/or decree absolute, and any settlement agreement entered into between the Respondent and Ms Chui.
3. The Respondent deliver up and produce to the Applicants within fourteen (14) days from the date of the Order made herein all of the documents in the Respondent’s possession, custody or control as set out below, whether in printed or documentary form or any other form including computer generated records and information inscribed on, stored in or otherwise fixed in a tangible medium or that are retrievable in a perceivable form, including those stored, in particular, on computer hard drive, floppy disk, compact disk, USB flash drive, memory card and/or zip storage device:
3.1 all bank statements for the past eight (8) years for all bank accounts wherever located which are held or were formerly held in the name of the Respondent whether individually or jointly with any other person or which are held or were formerly held in the name of any companies or other entities controlled or formerly controlled by the Respondent including, without limitation, Bright Field (China) Limited (“Bright Field”), Eastwood International Investment Limited (“Eastwood”) and Sino Merit Corporation Limited (“Sino Merit”); and
3.2 all documents relating to Bright Field, Eastwood and Sino Merit in the Respondent’s possession, custody or control, including all books, records, correspondence and/or papers.”

2. The Provisional Liquidators have produced a draft order which expands on the terms of the order sought in the summons, which is in Appendix 2 to this decision.

3. Mr Tsang was a director and chief financial officer of the Company. His involvement in the matters, which led to me making a winding up order are explained in my decisions of 9 April and 28 August 2014. In short, Mr. Tsang played a central role in the Company’s affairs including in its two principal “acquisitions” pursuant to which US$355.5 million was transferred to bank account of the purported vendor, Supreme Well, of which Mr Tsang was sole bank account signatory. Mr Tsang’s role in these transactions on behalf of Supreme Well was not disclosed to the Company or its shareholders.

4. In my Decision of 28 August 2014 I found that:

[13] “… What is clear is that there is good reason to be very suspicious about the genuineness of the sale of FISH and SPR and that the way in which the proceeds of sale were dealt with subsequently require investigation.”
[14] “There is now reason to think that a very large part of the Company’s assets has been misappropriated through a scheme operated in Hong Kong involving various persons who themselves are normally resident here (Mr Tsang, Mr Kwan and Mr Chong Wing Hip) and using bank accounts in Hong Kong which were operated personally by Mr Tsang in Hong Kong. …”
….
[16] “there are strong prima facie grounds for suspecting that a very significant part of the Company’s assets have been misappropriated in Hong Kong using a number of Hong Kong bank accounts operated by persons in Hong Kong. … the events that took place in Hong Kong are central to the liquidation both in the sense that they need to be investigated in order that the liquidators can determine whether claims are available against third parties and also in order to determine whether offences have occurred.”

5. In addition to assisting them to determine whether claims are available against Mr Tsang and others and whether offences have occurred, the Provisional Liquidators seek to examine Mr Tsang and have him produce documents as to:

(1) the value and recoverability of any such claims; and

(2) the assets of the Company under the control of Mr Tsang, his wife or persons or entities associated with them, including the subsequent use of those assets.

6. The Provisional Liquidator’s case in support of their contention that they are entitled to production of the aforesaid documents can be summarised as follows:

(1) An examination by the court and production of documents as to the recoverability of claims which may be available to the Company is within the ambit of section 221.

(2) Information about the worth of any judgment for damages which may be obtained by the Company is information about the Company’s property and is within the permissible scope of an examination under section 221.

(3) As to the exercise of the Court’s discretion, Mr Tsang is a former officer of the Company who has engaged in prima facie self-dealing with the majority of the Company’s assets, which appear to have been misappropriated. The present application is a paradigm case in which it is appropriate for the Court to make an order of broad scope for production of the documents sought by the Provisional Liquidators and to affirm that questioning of Mr Tsang at the examination in respect of the additional topics identified in paragraph 5 above is appropriate.

7. This argument requires careful consideration because it invites me to make an order that in my view is inconsistent with the decision of Kwan J (as she then was) in Re Weihong Petroleum Co Ltd (No 2)[1] (“Weihong”) and it is helpful to start with a consideration of that case.

The Decision in Weihong

8. Section 221(1) and (3) of the Companies (Winding-up and Miscellaneous Provisions) Ordinance, cap. 32 (“Ordinance”), provides:

“(1) The court may, at any time after the appointment of a provisional liquidator or the making of a winding-up order, summon before it any officer of the company or person known or suspected to have in his possession any property of the company or supposed to be indebted to the company, or any person whom the court deems capable of giving information concerning the promotion, formation, trade, dealings, affairs, or property of the company.
(2) The court may examine him on oath concerning the matters aforesaid, either by word of mouth or on written interrogatories, and may reduce his answers to writing and require him to sign them.
(3) The court may require him to produce any books and papers in his custody or power relating to the company, but, where he claims any lien on books or papers produced by him, the production shall be without prejudice to that lien, and the court shall have jurisdiction in the winding up to determine all questions relating to that lien.”

9. The liquidators in Weihong sought an order that the respondents, who had been directors of Weihong, produce pursuant to section 221(3) of the Ordinance, a broad range of documents including banks accounts, management accounts and audited accounts of the respondents or any firm, business or company in which they held an interest of 25% or more, the wage receipts, share certificates and documents showing their real and personal property and tax liabilities. Production of the documents was sought on 3 grounds. First that they were relevant to the liquidators concern that Weihong’s business interests had been transferred at nil consideration. The documents were sought from the respondents in order to ascertain whether they had made a secret profit out of the transactions. Secondly, they were relevant to certain bank transfers to some of the respondents. Thirdly, in order to assess whether or not the 3^rd and 4^th Respondents had sufficient assets to make it worthwhile proceeding against them. Kwan J dismissed the application. In summary her reasons were as follows. The wording of section 221(3) is materially narrower than the wording of section 221(1) and (2) which allows oral examination “concerning the promotion, formation, trade, dealings, affairs, or property of the company”. Section 221(3) refers to production of documents “relating to the company”. Even on a liberal interpretation of this language it did not extend to documents of the type sought. The equivalent statutory provisions in England and Australia used materially different language. This is particularly the case in Australia which means that Australian authorities are of limited assistance in determining the scope of section 221(3).

10. The Provisional Liquidators say this analysis is wrong. Their argument boils down to this: the expression “relating to the Company” in section 221(3) should be given the same meaning as “concerning the promotion, formation, trade, dealings, affairs, or property of the company.” in section 221(1). As is apparent from my summary of Wei Hong, Kwan J took the view that “relating to the Company” should be given its natural meaning.

The meaning of “property” in Section 221(1)

11. The Provisional Liquidators’ contention that the construction of section 211(3) adopted in Weihong is incorrect starts with a consideration of the language of section 221(1) and the breadth of the matters that can be examined pursuant to that sub‑section. Of particular importance to their argument is the meaning of “property” in sub‑section (1). The word “property” is defined in Section 3 of the Interpretation and General Clauses Ordinance, Cap 1,as including:

“(1) money, goods, choses in action and land; and
(2) obligations, easements and every description of estate, interest and profit, present or future, vested or contingent, arising out of or incident to property as defined in paragraph (a) of this definition;”

12. This is a broad definition and is consistent with the wide definition at common law: see for example Jones v Skinner[2] where Lord Langdone referred to “property” (at 90) as the “most comprehensive of all the terms which can be used, inasmuch as it is indicative and descriptive of every possible interest which the party can have.”

13. Section 199(2)(a) of the Ordinanceconfers upon a liquidator the power, subject to the control of the court:

“to sell the real and personal property and things in action of the company by public auction or private contract, with power to transfer the whole thereof to any person or company, or to sell the same in parcels;”

14. That a cause of action is a thing in action constituting property of the Company is recognised in Hong Kong: see my decision in Re Cyberworks Audio Video Technology Ltd[3]. Thus, argue the Provisional Liquidators, an order for examination and production of documents as to the value and recoverability of legal claims which may be available to the Company is plainly within the ambit of section 221(1) as a cause of action of the Company is a thing in action belonging to the Company; in other words the property of the Company. It follows that information concerning the property of the Company, including a contingent cause of action and its value, is within the ambit of section 221(1). Similarly, say the Provisional Liquidators, documents concerning the property of the Company, including a contingent cause of action and its value, relate to the Company and are within the ambit of section 221(3).

Kong Wah Holdings

15. The Provisional Liquidators say that this conclusion is consistent with the Court of Final Appeal’s decision in The Joint & Several Liquidators of Kong Wah Holdings Ltd v Grande Holdings Ltd [4] (“Kong Wah”). In Kong Wah the Court of Final Appeal addressed in detail the scope and purpose of section 221. In the concurring judgments of Bokhary PJ and Chan PJ, with whom Li CJ and Ribeiro PJ agreed, it is explained in paragraph 2 that:

“… The broad purpose of provisions like s.221 of the Companies Ordinance (Cap.32), is plain. Quite simply, it is to help liquidators to carry out their duties as effectively, quickly and economically as possible. To that end, liquidators need to identify, at an early stage, what promising paths they can pursue and, let it never be forgotten, what blind alleys they had best avoid so as not to throw good money after bad. It can be seen – perhaps even more clearly nowadays than in the past – that the section’s language and its purpose combine to call for a wide interpretation of the court’s powers thereunder. …”

16. The leading judgment in Kong Wah was delivered by Lord Millett NPJ, with whom Li CJ, Bokhary PJ, Chan PJ and Ribeiro PJ agreed. At paragraphs 21 to 28, Lord Millett addressed in detail the scope and purpose of section 221:

“Legislation corresponding to section 221 may be found in Australia, Singapore, Canada and New Zealand. All these enactments derive their origins from the English Companies Act 1862 and form an integral part of the insolvency regime in each of those countries.” at [21];

“the overriding requirement is to construe the words of section 221 in the light of its own legislative purpose” at [22];

“Section 221 and corresponding provisions overseas are designed to enable a liquidator to carry out his functions.” at [23];

“These are twofold: (i) to collect the assets of the company, settle its liabilities and distribute its surplus funds amongst its creditors; and (ii) to investigate the causes of the company’s failure and the conduct of those concerned in its dealings and affairs…” at [23];

“Section 221 has often been described as a section which confers extraordinary powers on the court…” at [24];

“The section is a vital part of the statutory insolvency regime. It is designed to meet the difficulties faced by liquidators in finding out what has happened to the company’s assets and what has caused the failure of the company. It has often been observed that a liquidator is usually a stranger to the affairs of the company. He relies on orders for examination and production to reconstitute the knowledge of the company, in circumstances where the records are often inadequate, in order to be able to perform his duties in recovering the company’s assets and generally to enable him to carry out his functions effectively and with as little expense and as expediently as possible.” at [25];

“The section’s purpose, however, is not limited to reconstituting the state of the company’s knowledge, even though that may be one of the purposes most clearly justifying the making of an order: … It may be used to discover facts and documents relating to potential claims by the liquidator against third parties or to enable him to report to the authorities with a view to taking action against those responsible for the company’s failure:… There is an important public interest ensuring that the liquidator should obtain the information needed to understand the company’s affairs and the reasons for its failure; …” at [26];

“It has been repeatedly stated, and the legislative purpose demands, that the powers conferred on the court by the section or its overseas equivalents are wide, general and unlimited.” At [27];

“The liquidator must satisfy the court that the information or documents sought are reasonably required to enable him to carry out his functions. In considering this question, the authorities establish that great weight should be given to the views of the liquidator, for he is an officer of the court and alone has the necessary knowledge of the problems facing him in understanding the affairs of the company and his reasons for seeking production of documents in the terms proposed; moreover, there are often great difficulties in seeing how the terms of the order can be cut down and remain effective: …” at [27]; and

“The jurisdiction conferred on the court by the section is necessarily wide, and being of an inquisitorial nature it is capable of working with great severity against third parties: … The width and potentially oppressive nature of the jurisdiction, however, is tempered by the fact that it does not follow that the court is bound to make an order merely because it has jurisdiction to do so. It has a discretion to make or refuse the order sought or to modify or limit its terms.” at [28].

17. It is evident from the above passages in Kong Wah that examination of matters relating to possible claims comes within section 221, although I do not accept the Provisional Liquidators’ argument that it is clear from the judgment that section 221(3) extends to production of documents in respect of the value and recoverability of claims.

18. Bokhary PJ and Chan PJ at paragraph 2 of their joint judgment draw attention to section 221’s function in helping “liquidators to carry out their duties as effectively, quickly and economically as possible … to identify, at an early stage, what promising paths they can pursue and … what blind alleys they had best avoid so as not to throw good money after bad ”. A purpose which Lord Millett similarly emphasises in paragraph 25 of his own judgment. The Provisional Liquidators says that this emphasises the practical issues that section 221 is designed to address including the desirability of liquidators completing their task quickly and cost effectively. This must include, they say, enabling a liquidator to assess the value and recoverability of a legal claim.

The English Statute and Case Law

19. The Provisional Liquidators say that their construction of section 221(3) is also consistent with 19^th century English cases which address the ambit of the English legislation from which Section 221 is ultimately derived, namely, the Companies Ordinance 1865, which was modelled on the English Companies Act 1862. Its terms have changed little in almost 143 years.[5] The equivalent provision in the Companies Act 1862 was section 115, which was in almost identical terms to section 221. Section 115 provided:

“The court may, after it has made an order for winding up the company, summon before it any officer of the company or person known or suspected to have in his possession any of the estate or effects of the company, or supposed to be indebted to the company, or any person whom the court may deem capable of giving information concerning the trade, dealings, estate, or effects of the company; and the court may require any such officer or person to produce any books, papers, deeds, writings, or other documents in his custody or power relating to the company; and if any person so summoned, after being tendered a reasonable sum for his expenses, refuses to come before the court at the time appointed, having no lawful impediment (made known to the court at the time of its sitting, and allowed by it), the court may cause such person to be apprehended, and brought before the court for examination; nevertheless, in cases where any person claims any lien on papers, deeds, or writings or documents produced by him, such production shall be without prejudice to such lien, and the court shall have jurisdiction in the winding up to determine all questions relating to such lien. ”

20. There is long standing authority in England, consisting of a line of cases decided under section 115 between 1867 and 1872, establishing that the court may order an examination to ascertain the worth of a contributory as a matter incidental to making a decision to pursue the contributory for the amount due to the company by way of contribution, with a view to realising the property of the company and increasing the assets available in the winding up. A number of these cases concern examination, not only of the contributory, but of a third party such as a banker or debtor of the contributory, expected to have information regarding the financial affairs of the contributory. In Re Financial Insurance Co Ltd (Bloxam’s Case)[6] at 688-689 Sir John Stuart VC ordered examination of the managing clerk of a bank who was also the contributory’s brother. The Vice Chancellor stated: “It is difficult to conceive what species of information could be of greater importance to the creditors and others interested in the winding up of a company, than the means at the disposal of the members who compose the company”. In Re Bank of Hindustan, China & Japan (Swan’s Case) [7] at 677 the Vice Chancellor in ordering the sister and nephew of contributories to be examined as to the contributories’ financial affairs, similarly explained that “any person who possesses any means of information which may enable the liquidator to recover the company’s money may be examined”. In Re Bank of Hindustan, China & Japan (Fricker’s Case)[8] an order was made for the examination of the son-in-law of a contributory as to the contributory’s financial affairs, so that his means could be ascertained. In Re Contract Corporation (Druitt’s Case)[9] (at 7) Lord Romilly MR made an order for the examination of and production of bank account documents by a bank manager, so that the liquidators could determine the means of the contributory explaining that “This is just one of those cases for which the 115^th section of the Act was intended to provide. An order must be made for the attendance of the manager, and for the production of the books and papers required so far as they relate to Forbes’s account; but he is not bound to disclose anything that may affect the other account. I will make no order as to costs, except that the official liquidators may have his costs out of the estate.”. Similarly, in Re Land Credit Company of Ireland (Trower and Lawson’s Case [10]) the Master of the Rolls ordered a former partner of the contributory, who had left the firm and was residing abroad, to attend for examination and produce the ledger, cash book and cheque book of the firm, as the firm was indebted to the contributory explaining that: “Any person who is indebted to a contributory is liable to be summoned under sect. 115 of the Companies Act, 1862, and to give information respecting the means of such contributory. The witnesses must, therefore, attend and produce the documents. I will make no order against them as to the costs of this case; but as the rule is now established I shall in future give costs against recalcitrant witnesses”.

21. I accept that these cases demonstrate that the courts have concluded that provisions very similar to section 221 can properly be used to facilitate the investigation, by way of examination and production of documents of the financial position of a contributory who has not paid for his shares in an insolvent company.

22. Thesecases do not appear to have been applied recently by English courts in any reported decisions, but the rule that they establish is treated by the authors of Buckley on the Companies Acts (14^th ed) as remaining good law:

“A debt due to the company upon shares forms part of the effects of the company, and the circumstances under which shares have been entered on the register form part of the dealings of the company[11]; and, therefore, any persons who possess any means of information on these subjects may be examined. Information which relates to the property of a contributory is information concerning the estate or effects of the company[12].
…
Any person indebted to a contributory is liable to be summoned to give information respecting the means of such contributory. Thus former partners of a contributory were compelled to attend to give evidence and to produce the ledger, cash-book, and cheque-book of the firm[13].”

23. The current equivalent provision in England is section 236 of the Insolvency Act 1986, which is more comprehensive than section 115. I am told by Mr. Karas, who appeared for the Provisional Liquidators, that there are no reported cases in England on the subject of examination and production of documents to aid recovery from contributories or creditors. I think it reasonable to assume in the case of the former that this is explained by the existence of the very clear 19^thcentury authorities to which I have referred. In the case of the latter Mr. Karas suggested that it was explained by a general acceptance by practitioners in England that the same principle applied to the recovery of sums owed to insolvent companies by its debtors.

The Australian position

24. In Australia various authorities do address the issue in the context of claims against creditors. The principles that they establish are explained in McPherson’s Law of Company Liquidation, 3^rded, 2013 at [15-048]:

“It has been held in Australia that the affairs of a company covers the company’s choses in action. [fn Grosvenor Hill (Qld) Pty Ltd v Barber (1994) 120 ALR 262] Hence, information about whether a judgment resulting from a liquidator’s action has any worth, that is whether damages awarded under the judgment will be met, can be sought; such information is about the company’s property and can be the subject of examination. [fn Re Interchase Corp Ltd (1996) 21 ACSR 375] Certainly the concern of a liquidator as to whether a judgment could be satisfied is a practical and realistic one given the fact that the liquidator would have to expend substantial costs to obtain judgment. [fn Re Interchase Corp Ltd (1994) 12 ACSR 405; (1994) 12 ACLC 97] This is well illustrated by the decision of the Full Court of the Supreme Court of South Australia in Gerah Imports Pty Ltd v The Duke Group Ltd (in liq). …”

25. In order to understand how the Australian courts have reached these conclusions it is necessary to consider the Australian legislation. The Australian equivalent of section 221 is section 596B of the Australian Corporations Act 2001. The Australian statutory scheme is more comprehensive than section 221:

“(1) The Court may summon a person for examination about a corporation’s examinable affairs if:
(a) an eligible applicant applies for the summons; and
(b) the Court is satisfied that the person:
(i) has taken part or been concerned in examinable affairs of the corporation and has been, or may have been, guilty of misconduct in relation to the corporation; or
(ii) may be able to give information about examinable affairs of the corporation.”

26. Section 596D provides for examination on oath about the corporation’s examinable affairs (section 596D(1)) and production at the examination of specified books (section 596D(2)) that:

“(1) are in the person's possession; and
(2) relate to the corporation or to any of its examinable affairs.”

27. Section 597(9) states:

“The Court may direct a person to produce, at an examination of that or any other person, books that are in the first‑mentioned person's possession and are relevant to matters to which the examination relates or will relate.”

28. The term “examinable affairs” is defined in section 9 of the Corporations Act, as follows:

“examinable affairs, in relation to a corporation means:
(a) the promotion, formation, management, administration or winding up of the corporation; or
(b) any other affairs of the corporation (including anything that is included in the corporation’s affairs because of section 53); or
(c) the business affairs of a connected entity of the corporation, in so far as they are, or appear to be, relevant to the corporation or to anything that is included in the corporation’s examinable affairs because of paragraph (a) or (b).”

29. The “corporation’s affairs” are defined in section 53, which provides:

“For the purposes of the definition of examinable affairs in section 9 … the affairs of a body corporate include:
(a) the promotion, formation, membership, control, business, trading, transactions and dealings (whether alone or jointly with any other person or persons and including transactions and dealings as agent, bailee or trustee), property (whether held alone or jointly with any other person or persons and including property held as agent, bailee or trustee), liabilities (including liabilities owed jointly with any other person or persons and liabilities as trustee), profits and other income, receipts, losses, outgoings and expenditure of the body.”

30. The word “property” in section 53 is further defined in section 9 to mean:

“any legal or equitable estate or interest (whether present or future and whether vested or contingent) in real or personal property of any description and includes a thing in action”.

31. It can readily be seen, says Mr. Karas, that, although more elaborate, the ambit of the Australian legislation is very similar to section 221. In particular:

(1) a person may be examined and required to produce documents about the affairs of the company;
(2) the affairs of the company include its property; and
(3) the property of the company includes a thing in action, such as a cause of action and its value, whether present or future, vested or contingent.

I accept that in broad terms this is correct.

32. The position in Australia in respect of the examination and production of documents as to the value and recoverability of a company’s property in the form of a chose in action has been considered in a number of cases.

33. In Gerah Imports Pty Ltd v Duke Group Ltd (in liq)[14] Olsson J (with whom King CJ and Millhouse J agreed) permitted examination of the financial affairs of defendant accountants, specifically as to their professional indemnity insurance, because it was necessary for the liquidator to determine whether any judgment obtained against the firm could be satisfied.

“This being so it seems to me to be beyond question that the chose in action comprising a potential liability of the relevant defendants to Kia Ora and the ancillary aspect of facilitating the available means of getting in that property by first obtaining a declaration of liability against an insurer of the defendants are clearly matters falling within the phrase ‘examinable affairs’ of Kia Ora. So also those aspects are relevant to the liquidator's administration in the winding up, because they bear upon the assessment which he needs to make as to what steps are, in commercial terms, proper and desirable to take in discharging his duties. The commercial reality of pursuing long and expensive legal proceedings for a very large sum of money against individuals of finite resources is clearly a matter as to which he needs to make a judgment, based upon the likelihood, or otherwise, of potential ultimate recovery from a relevant insurer. (As to this, what fell from Mason CJ in Hamilton v Oades at 497 is pertinent.)”[15]

34. In Re The Duke Group Ltd (in liq)[16] the matter came back before the High Court of Australia, on an application by the examinees for a stay of the examination orders, pending an application for special leave to appeal. The application was determined by Dawson J who declined the stay on the basis that he had not been satisfied that the leave application enjoyed a substantial prospect of success. He stated:

“The section of the Corporations Law which is critical is s 596B. That confers power upon the court to summon a person for examination about a corporation's examinable affairs. With regard is had to the definitions of “examinable affairs”, “affairs” and “property” contained in ss 9 and 53, “examinable affairs” include any legal or equitable estate or interest (whether present or future and whether vested or contingent) in real or personal property of any description and include a thing in action.
Clearly the rights of action, if any, of the corporation against the applicants are examinable affairs within the meaning of the legislation. The Full Court concluded that an examination of those rights under the relevant provisions was not confined to their existence but extended to their extent and value. Plainly the latter are matters of considerable moment to the liquidator of a corporation in pursuing the assets of the corporation in an economical and efficient manner. And as was pointed out in Hamilton v Oades (1989) 166 CLR 486 at 496; 85 ALR 1, a liquidator performs a public function in which one of his duties is to protect the interests of the creditors.
It is not contended before me by the applicants that the examination ordered by the master is oppressive. What is said is that it extends beyond the affairs of the corporation to the affairs of other persons and is merely for the purpose of ascertaining their potential liability and their capacity to satisfy any judgment against them. However, as I have said, these are matters of importance to a liquidator, going in a practical way as they do to the value of the property of the corporation.”
…The power conferred by s 596B is wide and I am not persuaded that the conclusion reached by the Full Court involves any error either in construction of the provision or otherwise.”

35. The issue was next considered in Grosvenor Hill (Qld) Pty Ltd v Barber[17], four days after the decision in Re The Duke Group Ltd, but without reference to it, where the Full Federal Court dismissed an appeal against an order for examination and production of insurance policies and related documents of potential defendants.

36. The decision in Grosvenor Hillis the most comprehensive of the three judgments. The Federal Court’s relevant findings were as follows:

(1) The Court rejected submissions that the insurance cover, whilst of commercial interest, had no legal relevance to the potential causes of action[18].
(2) The Court concluded that the order made was within the scope of the relevant provisions and the insurance policy was “relevant” to matters to which the examination related, and treated “relevant” as meaning “bearing upon or connected with the matter in hand; to the purpose; pertinent.”[19].
(3) The definition of “examinable affairs” includes the property of Interchase (the company in liquidation), such that “A cause of action which vests in Interchase by reason of breach of a professional duty owed to it by a valuer would, if established, be a chose in action possessed by Interchase and, in that sense, would be property of Interchase.”[20]
(4) It is well settled that “information with respect to the probability or otherwise of success in litigation contemplated by the corporation would be information with respect to the “examinable affairs” of the corporation in question. This information would be “relevant”, that is to say, it would bear upon or be connected with, the question whether the corporation possessed a cause of action, that is, a chose in action, as its property. It is not, and could not be, seriously disputed that an inquiry as to the existence, and value, of any property that the corporation may possess would be a “relevant” inquiry for the purpose of s597(9).”[21]
(5) The seeking of information to make decisions as to whether or not litigation ought to be embarked upon or continued in itself is no more than “an exercise of his duties and the fulfilment of his responsibilities as liquidator”[22]
(6) The central question was whether the Court had power to order an examination, “the purpose of which is to ascertain the likelihood of any judgment being satisfied; that is, whether it is a permitted purpose to inquire as to the worth of a potential defendant so as to be able to make a practical assessment as to the likelihood of a return to the company of the fruits of any favourable judgment and the necessary legal costs expended in obtaining it.”[23]
(7) In other words, “Is the Court empowered under the section to order an examination or the production of documents to test the likelihood of the creditors in the winding up receiving a tangible benefit from the satisfaction of any judgment obtained and to enable the liquidator to determine whether it is prudent to commence or maintain litigation with knowledge as to the real likelihood of obtaining any tangible benefit beyond a mere judgment, including a judgment for costs, at the conclusion of the litigation?”[24]
(8) The Court concluded that it has such a broad power and that it is “a power of long standing”, citing the early English cases to which I have referred earlier in this decision[25].

37. It is, however, at 311D‑G that the court explains with precision how the Corporations Act provides the power to make an order for a potential defendant to provide details of his assets:

“In our view, the ambit of the power is sufficiently wide to enable information to be sought from a defendant or potential defendant as to the ability of that person to satisfy any reasonable judgment which may be obtained in litigation instituted by the liquidator. In that context it is within power to order production of relevant documents, including insurance policies, to ascertain whether or not the person has an enforceable right to indemnity from an insurer or other person. The obtaining of such information by the liquidator in the course of the winding up is to facilitate the realisation of the chose in action to the best advantage of the company and its creditors. Realisation of the chose in action is an “examinable affair” within the meaning of ss 596B(1)(6)(ii) and 9 of the Law. Any policy of professional indemnity insurance containing the terms of the indemnity, including any exclusions and excesses and the amount of cover is, we think, a document “relevant to matters to which the examination relates or will relate” (s 597(9) of the Law).”

38. It is clear from this passage that the court took the view that the term “examinable affairs” in section 596D, which is defined in section 9 to include “corporations affairs” as defined in section 53, was sufficiently broad to include realisation of a chose in action and, this being so, the prospects of recovering anything of value by asserting the chose in action is thus relevant to “examinable affairs” and comes within section 597(9), which I have quoted above, and provides that the court may direct a person to produce documents that are relevant to the matter on which a person is to be examined, in other words the “examinable affairs”. The language of section 221(3) is not amenable to a similar analysis and I agree with Kwan J that the Australian authorities are thus of little assistance in interpreting it. They are, I accept, of assistance in interpreting the much more generally worded sub‑section (1) and, in particular, the meaning of “property”.

The Criticism of Weihong

39. I now turn to consider the Provisional Liquidators’ critique of Kwan J’s judgment in Weihong. First it is said to be inconsistent with the decision of the Court of Final Appeal in Kong Wah, in that the CFA affirmed unequivocally that the language and purpose of section 221 “call for a wide interpretation of the court’s power thereunder” (at [2]) and “that the powers conferred on the court by the section or its overseas equivalents are wide, general and unlimited”[26]. It is said that Kwan J in paragraphs 29 and 30 of her judgment took a “narrow construction” of “affairs or property of the company”. I disagree. Kwan J identified, in my view correctly, the different language used in subsections (1) and (2) on the one hand and subsection (3) on the other and took the view that even on a liberal interpretation of the meaning of “relating to the Company” the documents sought did not relate to the Company.

40. Secondly, the Provisional Liquidators say that Kwan J’s judgment means that the permissible scope of an oral examination is broader in Hong Kong than the permissible scope of a document production order and that this would be out of line with similar jurisdictions and would not allow liquidators in Hong Kong the same powers found to exist and be desirable in Australia. This is a non‑sequitur. The legislation is very different in the two jurisdictions, which is largely the result of the fact that Hong Kong’s insolvency legislation has not been revised. This may be inconvenient, but it provides no basis for imposing on the language that we do have a meaning which it cannot fairly be said to bear.

41. Thirdly, the Provisional Liquidators pointto paragraphs 33 and 34 of Lord Millett’s judgment in Kong Wah in which he contrasts production of documents under section 221(3) with discovery and concludes that the scope of production under section 221(3) is much broader than under the rules of practice and procedure for discovery, noting that the liquidator is “necessarily engaged” in a “fishing” or “speculative expedition” and emphasising the “extraordinary and sui generis nature of the power conferred by section 221.”. However, what is apparent from these paragraphs is that the point Lord Millett is making is that a party seeking discovery is not entitled to disclosure of documents that may help him discover if he has claims not covered by his pleadings, whereas as a liquidator can seek production under section 221(3) of documents to advance his knowledge of the affairs of a company, and this may involve a “speculative expedition”. This does not, however, tell us what “relates to the Company” encompasses. What it tells us is that a liquidator is entitled to documents that relate to a company without having to demonstrate that he has a claim which they may support.

42. Fourthly, the Provisional Liquidators suggest that paragraph 37 of Lord Millett’s judgment which explains that the test of whether “a document relates to the company” is “essentially a commercial one, which a layman will normally be able to understand”, confirms that section 221(3) is not to be construed narrowly, technically or literally. It is instructive to quote the whole of paragraph 37.

“37. The cases on discovery, properly considered, do not help the appellants. As under s.221, the potentially burdensome task of going through the documents and identifying those which must be disclosed falls on the party who is in possession of the documents, not on the party who seeks their production. In the case of discovery the task may not be an easy one, since it calls for an analysis of the issues in the action and consideration of the relevance of documents to the issues. Both require a legal judgment to be formed and may well require the assistance of a lawyer. The identification of the documents to be produced pursuant to an order under s.221, on the other hand, though often burdensome because of the sheer quantity of the documentation to be considered, rarely calls for the exercise of a legal judgment. There are no issues to be analysed and no questions of relevance arise. If a document relates to the company in liquidation and is within any narrower definition in the order it must be produced. The test is essentially a commercial one, which a layman will normally be able to understand.”

It seems to me highly doubtful, for example, that a layman would think that Mr. Tsang’s divorce papers or bank accounts statements relate to the Company. He would only be likely to reach the conclusion that they do if he knew their alleged relevance and had the benefit of the exposition of the law advanced by Mr. Karas.

43. Fifthly, it is argued that Kwan J’s narrow construction of section 221(3) also failed to take into consideration section 19 of the Interpretation and General Clauses Ordinance,Cap 1, which requires statutory provisions to be given a fair, large and liberal construction to best ensure the attainment of their objects according to their true intent, meaning and spirit. I disagree. Although Kwan J did not address this argument directly, it not appearing to have been advanced, it is clear from the judgment that Kwan J took the view that even adopting a liberal interpretation what was sought could not be brought within the language of the section.

44. Sixthly, the Provisional Liquidators saythat Kwan J’s view that section 221 was materially narrower than the Australian equivalent, is for the reasons I have considered above, incorrect. Again I disagree. It seems to me to be quite clear that in relation to production of documents the Australian legislation is much wider.

45. Seventhly, the Provisional Liquidators saythat Kwan J’s conclusion as to the narrower scope of section 221(3) is also inconsistent with the approach of the Court of Appeal in Re Nardu Co Ltd [27]. In that case, disclosure was permitted of documents concerning the activities of a subsidiary. Mr. Karas argues that it is apparent from paragraph 16 of Tang VP’s (as he then was) judgment that section 221(3) extends to documents that concern a company’s “dealings” and “affairs”, which is wider than the narrower interpretation that Kwan J gave to the expression “relating to the Company”. It is necessary to consider precisely what was said by Tang VP in his judgment:

“12. The liquidators issued their application under s.221of the Companies Ordinance (Cap.32), on 27 September 2006 against seven individual respondents, and sought, as against each of them, orders for (1) the production of certain categories of documents that are said to relate to the company; (2) the making of affirmations to explain what has become of such documents where they were previously, but are no longer, in their possession, custody or control; and (3) their oral examination in relation to the affairs of the company.
13. Mr Jonathan Chang, counsel for the first to the third respondents, submitted that s.221 was inapplicable, since, essentially, the application related to documents and information concerning the settlement agreement and hence PLR, and not the company.
14. He submitted Joint & Several Liquidators of Kong Wah Holdings Ltd v Grande Holdings Ltd (2006) 9 HKCFAR 766 is authority that it cannot be assumed that documents relating to subsidiaries would ipso facto relate to the company in liquidation, and this must be established by evidence of the facts of the particular case or else it falls outside s.221 of the Companies Ordinance.
15. But as the learned Judge said in para.37 of the judgment:
“37. I also note that in the Joint & Several Liquidators of Kong Wah Holdings Ltd v Grande Holdings Ltd case itself, the application related not only to the companies in liquidation, but also to documents and information concerning subsidiaries of those companies (see para.16 of the judgment). As was held in para.62 of the judgment, while it could not be assumed that documents relating to a subsidiary would ipso facto relate to the parent company in liquidation, the judge was entitled, in that case, to take the view that the documents sought (which were limited, as is the case here, to documents relating to particular matters) related to the companies in liquidation, whether or not they also related to other entities.”
16. With respect, we agree with the learned Judge’s conclusion that under s.221 the information that can be ordered to be provided includes any information concerning the “dealings” or “affairs” of the company and that these words are wide enough to cover, in an appropriate case, information concerning the activities of a subsidiary of the company concerned.
17. Here, we believe it is legitimate for the liquidators to try to find out whether and if so why its principal asset, namely the shares of PLR, are now valueless. It is the affairs of the company to learn whether and if so why its investment has gone so terribly wrong.”

46. It can be seen that Tang VP is not addressing section 221(3). In paragraph 16 Tang VP refers to “information” being ordered not the production of documents. I think on a fair reading of these passages what is being said is that the liquidators were entitled to examine the respondent on one of its subsidiaries’ transactions as, on the facts of the case, it constituted part of its affairs. It does not shed any light on the issue before me, namely, whether sub-section (3) is narrower in scope than sub‑section (1).

47. Finally, the Provisional Liquidators argue that assessing the value of a cause of action has been found to be a proper reason to order production of documents in the analogous context of section 29 of the Bankruptcy Ordinance,Cap 6, by Recorder Anderson Chow SC (as he then was) in Re Lee Priscilla Hwang (bankrupt)[28]. That is correct, but section 29 is worded very differently to section 221(3). Section 29 provides:

“(1) The court may, on the application of the official Receiver or trustee, at any time after a bankruptcy order has been made against a bankrupt summon before it the bankrupt or his spouse, or any person known or suspected to have in his possession any of the estate or effects belonging to the bankrupt or supposed to be indebted to the bankrupt, or any person whom the court may deem capable of giving information respecting the bankrupt, his dealings or property, and the court may require any such person to produce any documents in his custody or power relating to the bankrupt, his dealings or property.”

It can be seen that this section is very broad and allows the court to order that any person provide documents “relating to the bankrupt, his dealing or property”. It is unsurprising that Recorder Chow concluded that this was wide enough to cover documents recording a bankrupt’s source of income and debts owed to him, but the decision is of little assistance in construing section 221(3).

Conclusion

48. It seems to me that in determining whether sub-section (3) extends to the categories of documents sought in the present case regard must be given to the fact that in Hong Kong the legislature chose to use different language in sub-sections (1), (2) and (3). I do not think this fact can be treated as an unfortunate inconvenience which is to be glossed over as the Provisional Liquidators’ approach would have me do. For reasons that I have already explained in my view the Australian authorities, which are decided on very differently worded legislation, provide limited assistance in determining what sub-section (3) means.

49. The principle authority in Hong Kong on section 221, Kong Wah, provides rather less assistance to the Provisional Liquidators than they suggest. I agree that sub-section (1), as explained in Kong Wah, can properly be given a broad enough meaning to permit questioning on the subjects in respect of which production of documents is sought. However, the judgment does not explain the meaning of sub-section (3) in the same way as it explains the meaning of sub-section (1). Lord Millet in paragraph 37 of his judgment suggests a common sense approach to the assessment of whether a document is one “relating to a company”. The Provisional Liquidators are advocating an approach which is wider. They contend that any document that relates to the “promotion, formation, trade, dealings, affairs or property of the company” comes within sub-section (3). This is not supported by the language of the section or, in my view, the decision of the Court of Final Appeal in Kong Wah.

50. The Provisional Liquidators are able to point to 2 decisions of Lord Romilly MR, Re Contract Corporation (Druitt’s case)[29] and Re Land Creditor Company of Ireland (Trower and Lawson’s case)[30], to which I have referred earlier, in which the court ordered production of documents pursuant to section 115 of the Companies Act 1862, concerning the assets of contributories who had not paid for their shares. Both judgments were extremely short and I have quoted them in full in paragraph 20. The other cases to which I refer in paragraph 20 dealt only with the scope of examination. Lord Romilly MR appears to have decided the cases before him on the basis that the ability of a contributory to pay sums due in respect of unpaid shares was a matter on which anybody with knowledge of it could be examined and, his Lordship seems to have assumed, it followed it was a matter in respect of which he could be required to produce documents. The oral examination of person with relevant information about a company and the production of documents are dealt with in one section in the 1862 Act. The language used in respect of each is clearly different but that difference and its significance is not as immediately obvious as it is in section 221, which perhaps explains why there is no discussion in these cases of the distinction that the drafter seems to have drawn between examination and production. Despite these authorities it remains my view that the Provisional Liquidators’interpretation of section 221(3) goes beyond that which the language bears and does not permit an order for the extensive production of personal papers that the Provisional Liquidators seek in paragraphs 2 to 4 of the draft order in Appendix 2 to this decision.

51. It is also important to note that the Provisional Liquidators have already obtained a very widely drawn order for the production of documents as can be seen from Appendix 1. Paragraphs 3.2, 4.4, 5.1 and 5.2 of that order require Mr. Tsang to produce all documents recording the transfer and use of the proceeds of the two acquisitions by the Company referred to in paragraphs 3 and 4 of this Decision. This includes transfers into or out of accounts owned or controlled by Mr. Tsang. The order that the Provisional Liquidators now seek would seem to be directed exclusively, or almost so, at assets that are not derived from the proceeds of the two acquisitions which it is suspected involved impropriety on the part of those in control of the Company including Mr. Tsang. It does not seem to me that Mr. Tsang’s assets which are derived from a source other than the Company can fairly be said to relate to the Company.

52. I appreciate that it might be thought odd that the Provisional Liquidators can examine Mr. Tsang on this subject, but not obtain documents relating to it. However, it seems to me that an order for production of private papers is more intrusive than an examination at which Mr. Tsang can be asked questions about his financial circumstances. It is also, in my view, simply a consequence of the way in which section 221 is framed. If it is thought appropriate that the scope of production should be extended this is a matter that can be raised with the Standing Committee on Company Law Reform which is currently revising Hong Kong’s insolvency legislation.

53. The Provisional Liquidators also seek a direction to the Master that the scope of the oral examination extends to (1) the value and recoverability of any actual or contingent causes of action and (2) the assets of the Company under the control of Mr. Tsang, his former Wife and person or entities associated with them including the subsequent use of those assets. This is far narrower in scope than the information sought in the production application as can be seen from the draft order. Mr. Karas says that even if section 221(3) does not extend to production of documents relating to those matters for these reasons already considered earlier in this decision they are matters that concern the property of the Company. In my view section 221(1) does allow the court to order examination on matters concerning what has happened to the Company’s assets and the value and recoverability of actual or contingent causes of action. It does seem to me that given Mr. Tsang’s extensive involvement in the FISH and SPR transactions and the use of the proceeds of those transactions more fully described in my Reasons of 28 August 2014 and the unsatisfactory evidence that he filed in opposition to the winding-up petition, it isnecessary for him to explain the way in which the proceeds of the transactions were dealt with. It will also be of assistance to the Provisional Liquidators if they are able to assess the prospects of their recovery. It does not seem to me that given he was an officer of the Company this would be unduly oppressive.

54. I will make the following order:

(1) Samson Tsang Tak Yung may be examined at the examination fixed to commence on 11 February 2015 on:
(i) the value and recoverability of any actual or contingent causes of actions that may be available to China Medical Technologies, Inc.;
(ii) the assets of China Medical Technologies Inc. under the control of Mr. Tsang, his Wife or other persons or entities.
(2) The costs of the Provisional Liquidators’ application heard on 6 January 2015 be paid by the Provisional Liquidators to Samson Tsang Tak Yung on a party and party basis such costs to be taxed if not agreed.

	(Jonathan Harris) Judge of the Court of First Instance
	High Court

Mr Jason Karas, instructed by Lipman Karas, for the applicants

Mr Tsui Ming Lun, of Angela Wang & Co, for the respondent

Appendix 1
3. The Respondent deliver up and produce to the Applicants within fourteen (14) days hereof the following documents, whether in printed or documentary form or any other form including computer generated records and information inscribed on, stored in or otherwise fixed in a tangible medium or that are retrievable in a perceivable form, including those stored, in particular, on computer hard drive, floppy disk, compact disk, USB flash drive, memory card and/or zip storage device, in the Respondent's possession, custody or control:
3.1 all books, records, correspondence, emails and other documents of or relating to the Company and/or its subsidiaries and former subsidiaries, including all documents of or relating to the Company's negotiations with Supreme Well Investments Limited ("Supreme Well'') concerning the Company's purported acquisition of fluorescent in situ hybridization ("FISH'') and surface plasma resonance ("SPR") technology from Supreme Well;
3.2 all books, records, correspondence, emails and other documents, including all correspondence between the Company, Bank of China (Hong Kong) Limited ("BOCHK") and/or The Bank of East Asia Limited ("BEAHK"), in respect of the payments or transfers by the Company to Supreme Well and all other entities and individuals of cash or other assets belonging or once belonging to the Company;
3.3 all documents relating to all past or present offices held by or employment of the Respondent with the Company or its subsidiaries and former subsidiaries, including all service and/or employment contracts, payroll receipts and all correspondence including email between the Respondent and the Company or its subsidiaries and former subsidiaries relating to all such offices and/or employment; and
3.4 all documents relating to the Respondent's resignation from all offices held by or employment with the Company or its subsidiaries and former subsidiaries, including all resignation letter(s), documents regarding his payment(s) in lieu of notice and annual leave pay together with supporting documentation.
4. The Respondent deliver up and produce to the Applicants within seven (7) days from the date of this Order the following documents, whether in printed or documentary form or any other form including computer generated records and information inscribed on, stored in or otherwise fixed in a tangible medium or that are retrievable in a perceivable form, including those stored, in particular, on computer hard drive, floppy disk, compact disk, USB flash drive, memory card and/or zip storage device, in the Respondent's possession, custody or control:
4.1 all documents showing the relationship between the Company and Supreme well and the Respondent and Supreme Well;
4.2 all documents showing the legal and/or beneficial ownership of Supreme well and its direct and indirect shareholders;
4.3 all books, corporate records, correspondence, emails and other documents of or relating to Supreme Well, including all documents of or relating to Supreme Well's negotiations with the Company concerning Supreme Well's purported sale of FISH and SPR technology to the Company and the payments made by the Company to Supreme Well as purported consideration for the FISH and SPR technology; and
4.4 all books, records, correspondence, emails and other documents showing payments or transfers by Supreme Well to all entities and individuals of cash or other assets belonging or once belonging to the Company, including all correspondence between Supreme Well, BOCHK and/or BEAHK.
5.   The Respondent deliver up and produce to the Applicants within seven (7) days from the date of this Order the following documents, whether in printed or documentary form or any other form including computer generated records and information inscribed on, stored in or otherwise fixed in a tangible medium or that are retrievable in a perceivable form, including those stored, in particular, on computer hard drive, floppy disk, compact disk, USB flash drive, memory card and/or zip storage device, in the Respondent's possession, custody or control:
5.1 all books, records, correspondence, emails and other documents of or relating to all entities and individuals which received payments or transfers from Supreme Well, whether directly or indirectly, of cash or other assets belonging or once belonging to the Company (collectively, "Supreme Well Payees"), including the following entitles and individuals:
5.1.1   Cheer Link International Limited ("Cheer Link");
5.1.2   Chong Wing Hip;
5.1.3   Chen Zheng;
5.1.4   East Hope International Limited ("East Hope'');
5.1.5   Zhu Feng;
5.1.6   Kam Hing Trading Co;
5.1.7   Dynamic Sense Limited;
5.1.8   Innovative Technology Investment Limited ("Innovative");
5.1.9   Time Region Holdings Limited; and
5.1.10 Allan Xiaoqing Hao; and
5.2 all books, records, correspondence, emails and other documents showing payments or transfers by the Supreme Well Payees (including the entities and individuals listed in 5.1 above) of cash or other assets belonging or once belonging to the Company, including all correspondence between the Supreme Well Payees and all banks.
6.   To the extent that the documents described in paragraphs 3 to 5 are not within the Respondent's custody:
6.1 within seven (7) days hereof, the Respondent shall write to the branches of all banks in respect of accounts in which he has or has had a beneficial interest or is or was a signatory and any other entities or individuals (wherever located) holding any such documents to request copies of the documents, such letter to be copied to the Applicants' solicitors. Such banks and other entities or individuals shall include without limitation BOCHK, BEAHK, Standard Chartered Bank (Hong Kong) Limited and Fubon Bank (Hong Kong) Limited; and
6.2 the Respondent shall disclose to the Applicants' solicitors all replies to the letters referred to in paragraph 6.1 within 24 hours of receiving the same.

Appendix 2
1. The permissible scope of the oral examination of Mr Tsang ordered on 15 September 2014 includes:
1.1 the value and recoverability of any actual or contingent causes of action available to China Medical Technologies, Inc. ("Company"); and
1.2 the assets of the Company under the control Mr Tsang, his wife or former wife, Ms Chui Sai Kuen ("Ms Chui"), or other persons or entities associated with them, including the subsequent use of those assets.
2. Mr Tsang produce to the Provisional Liquidators of the Company ("PLs") within twenty one (21) days from the date of this Order every document in his possession or control evidencing or referring to:
2.1 any ownership interest, legal or equitable, direct or indirect, in any real or personal property including money and choses in action;
2.2 any trust arrangement pursuant to which Mr Tsang may exercise any power of disposition or distribution;
2.3 any trust arrangement pursuant to which Mr Tsang or any member of his family (including Ms Chui) will or may obtain a benefit;
2.4 any disposal of property by Mr Tsang or any member of his family since 3 November 2006 otherwise than in the ordinary course of business or in the ordinary course of management of Mr Tsang's family or domestic affairs; and
2.5 any agreement by which Mr Tsang may be indemnified against liability to the Company wither directly or indirectly.
3. Without limitation to paragraph 2 above, Mr Tsang produce to the PLs within twenty one (21) days from the date of this Order every document in his possession or control evidencing or referring to:
3.1 the purported divorce between Mr Tsang and Ms Chui including all documents filed with this Honourable Court in connection therewith, any relevant Orders issued by this Honourable Court including any decree nisi and / or decree absolute, and any settlement agreement entered into between Mr Tsang and Ms Chui;
3.2 all bank statements for the past eight (8) years for all bank accounts wherever located which are held or were formerly held in the name of Mr Tsang whether individually or jointly with any other person or which are held or were formally held in the name of any companies or other entities controlled or formerly controlled by Mr Tsang including, without limitation, Bright Field (China) Limited ("Bright Field"), Eastwood International Investment Limited ("Eastwood"), Sino Merit Corporation Limited ("Sino Merit"); and
3.3 all documents relating to Bright Field, Eastwood and Sino Merit including all books, records, correspondence and / or papers.
4. Without limitation to paragraph 2 or 3 above, Mr Tsang produce to the PLs within twenty one (21) days from the date of this Order every document in his possession or control evidencing or referring to:
4.1 companies or other entities which are controlled or were formerly controlled by Mr Tsang or whose bank account(s) were controlled or formerly controlled by Mr Tsang (whether individually or jointly with any other person) and which received, whether directly or indirectly, cash or other assets belonging or once belonging to the Company or its subsidiaries and former subsidiaries including, without limitation, Bright Field, Eastwood, Sino Merit, Supreme Well Investments Limited ("Supreme Well"), East Hope International Limited ("East Hope"), Cheer Link International Limited ("Cheer Link") and Innovative Technology Investment Limited ("Innovative");
4.2 payments or transfers of cash belonging or once belonging to the Company or its subsidiaries or former subsidiaries into or out of bank accounts (wherever located):
4.2.1 held or formerly held in the name of Mr Tsang and / or Ms Chui, whether individually or jointly with any other person; or
4.2.2 under the control of or formerly controlled by Mr Tsang and / or Ms Chui, whether individually or jointly with any other person, including, without limitation, bank accounts in the name of Bright Field, Eastwood, Sino Merit, Supreme Well, East Hope, Cheer Link and Innovative;
4.3 Mr Tsang's appointment as an authorized signatory to bank accounts which received, whether directly or indirectly, cash or other assets belonging or once belonging to the Company or its subsidiaries, including, without limitation, the bank accounts of Supreme Well, East Hope, Cheer Link and Innovative;
4.4 payments or transfers, whether directly or indirectly, by Mr Tsang and / or Ms Chui of any cash or other assets belonging or once belonging to the Company or its subsidiaries and former subsidiaries, including all documents relating to the purported divorce between Mr Tsang and Ms Chui showing this information such as any divorce settlement agreement entered into between Mr Tsang and Ms Chui; and
4.5 the acquisition by Mr Tsang and / or Ms Chui, whether directly or indirectly, of any assets with cash or other assets belonging or once belonging to the Company or its subsidiaries and former subsidiaries, including the properties located at the following addresses to the extent that the properties were purchased with cash or other assets belonging or once belonging to the Company or its subsidiaries and former subsidiaries:
4.5.1 Flat G, 10/F, One Island Place, Island Place, No. 51 Tanner Road, Hong Kong;
4.5.2 Unit C, 51/F, Tower 1, Les Saisons, No. 28 Tai On Street, Hong Kong;
4.5.3 Flat G, Block 6, Kenswood Court Kingswood Villas, No. 2 Tin Lung Road, Tin Shui Wai, New Territories;
4.5.4   Flat A, 10/F, One Island Place, Island Place, No. 51 Tanner Road, Hong Kong;
4.5.5   Flat E, 19/F, Tower M7, Yoho Midtown, No. 9 Yuen Long Street, Yuen Long, New Territories;
4.5.6   Flat D, 5/F, Block 6, Kenwood Court, Kingswood Villas, No. 2 Tin Lung Road, Tin Shui Wai, New Territories;
4.5.7   Flat H, 5/F, Block 6, Kenswood Court Kingswood Villas, No. 2 Tin Lung Road, Tin Shui Wai, New Territories;
4.5.8   Flat B, 10/F, One Island Place, Island Place, No. 51 Tanner Road, Hong Kong; and
4.5.9   Car Park No. 320 at Basement, Kenswood Court of Kingswood Villas, No. 2 Tin Lung Road, Tin Shui Wai, Yuen Long, New Territories.
5. Costs of this application be paid by Mr Tsang to the PLs, such costs to be taxed if not agreed.

[1] [2003] 2 HKLRD 747

[2] (1836) 5 LJ Ch 87

[3][2010] 2 HKLRD 1137

[4] (2006) 9 HKCFAR 766

[5]Kong Wah supra at paragraph 20

[6] (1867) 36 LJ Ch 687

[7] (1870) LR 10 Eq 675

[8] (1871) LR 13 Eq 178

[9] (1872) LR 14 Eq 6

[10] (1872) LR 14 Eq 8

[11]Clement’s Case (1868) LR 13 Eq 179n; Swan’s Case (1870) LR 10 Eq 675.

[12]Re Financial Insurance Co (1867) 36 LJ (Ch) 687; Trower and Lawson’s Case (1872) LR 14

Eq 8.

[13] p 648

[14] (1993) 61 SASR 557; (1994) 12 ACSR 513

[15] 564

[16] (1994) 119 ALR 401

[17] (1994) 48 FCR 301; 120 ALR 262

[18] 305C‑D

[19] 305E‑G

[20] 305G

[21] 305G–306A

[22] 306C‑D

[23] 307C

[24] 307D

[25] 307D – 308G

[26] §27

[27] [2008] 4 HKLRD 165

[28] [2012] 4 HKLRD 581

[29]Supra footnote 9

[30]Supra footnote 10

HCCW 435 /2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINGING-UP) NO 435 OF 2012

____________

	IN THE MATTER OF CHINA MEDICAL TECHNOLOGIES, INC.
	and
	IN THE MATTER OF THE COMPANIES ORDINANCE, CAP. 32

____________

Before: Hon Harris J in Chambers

Dates of Hearing: 21 - 23 July 2014

Date of Decision: 28 August 2014

_________________________

D E C I S I O N

_________________________

Introduction

1. On 9 April 2014 I delivered my reasons for dismissing the Petition presented by the liquidators of China Medical Technologies Inc (“Company”) to wind up the Company in Hong Kong[1]. Where I refer to paragraphs in this decision unless otherwise stated I refer to paragraphs in my 9^th April 2014 Reasons for Decision (“decision”).

2. The Company was incorporated in the Cayman Islands where it was wound up on the grounds of insolvency on 27 July 2012. On 26 November 2012 a petition was presented in Hong Kong by the liquidators of the Company in the Cayman Islands. The substantive hearing of the Petition took place before me on 11 June and 26 and 27 August 2013. On 5 September 2013 my Clerk wrote to the parties informing them that I would make an order dismissing the Petition and that the reasons would follow. The order was not drawn up and before my Reasons were handed down the Petitioner wrote to the Court requesting the Court not to do so and indicating that they would apply to reopen the trial. How matters then progressed is described in more detail in paragraphs 4 and 5. In short an application was issued to adduce fresh evidence and re-open the trial. This is my decision in respect of that application.

3. It is not necessary for me to repeat the circumstances in which the Petition came to be issued. The contentious issue was whether or not the criteria by reference to which the Court determines a petition to wind up in Hong Kong a company incorporated in another jurisdiction had been met. These criteria are:

(1) There is sufficient connection with Hong Kong. In the context of insolvency there is commonly the presence of assets, but this is not essential;
(2) There is a reasonable possibility that the winding-up order would benefit those applying for it; and
(3) The court must be able to exercise jurisdiction over one or more persons interested in the distribution of the company’s assets.

4. I concluded that the first two criteria had been met but not the latter. I also concluded that this was not necessarily fatal if the Court were satisfied that “the connection with Hong Kong was sufficiently strong and the benefits of a winding-up order were sufficiently substantial that a court considers it a proper case in which to exercise its discretion despite the third core requirement not being satisfied. The core requirements constitute guidance as to the circumstances in which the discretion should be exercised and their application can be moderated if the circumstances clearly call for it”: paragraph 50 of the decision. I was not satisfied that this was the case and dismissed the Petition.

5. In the circumstances described in paragraphs 4 and 5 of the decision the Company issued the present application to adduce new evidence and reopen the trial. The Company, or more accurately its liquidators, argue that they have since the trial of the Petition obtained new documents which reveal information, which demonstrates a stronger connection between the Company and Hong Kong than I concluded was demonstrated by the evidence before me at trial and that the benefits of a winding up in Hong Kong can now also be seen to be greater.

6. As I explain in paragraph 6 of the decision I allowed evidence to be filed and submissions made on behalf of an opposing contributory, Mr. Tsang, who was a former director and chief financial officer of the Company. I also allowed evidence and submissions to be filed on his behalf for the present application. At the hearing Mr. Tsang was represented by Mr. William Wong SC. The Company was represented by Mr. Jason Karas. On this occasion I informed Mr. Wong at the outset of his oral submissions that given the contents of the new evidence, and the fact that his client had no tangible interest in the liquidation, he should restrict his submissions to dealing with legal points. I did so because in the light of the new evidence it was quite clear that Mr. Tsang’s evidence was self‑serving, could not be relied on and that Mr. Tsang, as opposed to his lawyers, was intent not on assisting the Court determine the jurisdiction issue properly, but avoiding his conduct being investigated.

Circumstances in which new evidence may be adduced

7. The Court will allow a party to adduce further evidence after a trial has finished in restricted circumstances. The general guidelines are identified in Ladd v Marshall[2]. They are: (1) that the evidence would probably have an important influence on the result of the case; (2) that the evidence could not have been obtained at trial with reasonable diligence; and (3) that the evidence is credible. Subsequent authorities have considered how these principles are to be applied in different kinds of situations. I will consider these later in this decision, which it is best in my view to approach by considering first the new evidence and its importance.

The issue to which the evidence relates

8. I found in my earlier decision that the first and second criteria which I refer to in paragraph 2 above had been met. In other words I was satisfied that there was a substantial connection with Hong Kong and that there were tangible benefits in making a winding-up order. The reason I thought that there was a substantial connection are explained in paragraphs 14 to 20 and 56 and 58. The reasons I thought that there would be a tangible benefit in making a winding‑up order are explained in paragraph 62. The reason why I was not satisfied that the connection and the benefits were sufficiently great to justify making a winding-up order in the absence of creditors with claims of sufficient value in Hong Kong are explained in paragraphs 58 to 60. At that time of the trial it appeared that the Company’s principle business activities had been carried out outside Hong Kong. The liquidators were particularly concerned to investigate the matters referred to in paragraphs 29 to 34 of the Re-Amended Petition, which are quoted in paragraph 22 and their import summarised in paragraph 23. Essentially what was being suggested was that the circumstances in which approximately US$355,000,000 of the Company’s funds raised through its initial public offering and 2 subsequent bond issues, came to be paid in Hong Kong to a company called Supreme Well Investments Limited (“Supreme Well”) in exchange for the acquisition of medical technology, known by the acronyms FISH and SPR, from Supreme Well and its wholly owned subsidiary Molecular Diagnostics Technologies Limited (“Molecular”) (paragraph 12), were highly suspicious as the liquidators can find no evidence of anything of substantial value having been transferred to the Company. The liquidators wished to investigate the transaction and, in particular, examine the Company’s former director and chief financial officer, Mr. Tsang. I did not think that the fact that the transaction was substantially completed in Hong Kong was enough to lift this case into the exceptional category discussed in paragraphs 50 to 52.

9. The new evidence relates to how the money received by Supreme Well came to be dealt with. It is suggested that the new evidence indicates that the acquisitions of the FISH and SPR were indeed bogus and that the payment of US$355,000,000 to Supreme Well by a series of 55 cashier orders between November 2006 and December 2009 was part of a massive fraud a significant part of which can now be seen to have been conducted in Hong Kong and involved Hong Kong parties. It is suggested that this represents such a significant part of the affairs of the Company that it elevates this case into the type which justifies making a winding‑up order even if the third criteria is not satisfied.

10. The transaction between the Company and Supreme Well and Molecular was, according to public announcements made by the Company at the time, an arm’s length transaction. However, the new documents obtained by the liquidators show that the 2 accounts into which US$355,000,000 was deposited with Bank of China Hong Kong and the Bank of East Asia respectively, had as their sole authorised signatory Mr. Tsang. The shareholder of the account opening documents is a Mr. Chen Zhong, who was allegedly the developer of the technology sold to the Company. However, through a series of transfers made initially out of the Supreme Well accounts to various other accounts the large majority of the proceeds, US$294,500,000, ended up in accounts controlled by Mr. Tsang and the Company’s former Chairman and Chief Executive Officer Mr. Wu. Mr. Chen seems to have received US$3,000,000.

11. For the purposes of the application the liquidators prepared a funds flow chart showing what was known at the time of the trial and what the liquidators have come to know subsequently. I have had this chart divided into pages and they are appended to this decision as it is the most convenient way of summarising the relevant information. As can be seen it was known last July that the net fund raising of the IPO and 2 note issues was US$631,000,000 of which, after redeeming some of the notes, US$515,000,000 was available to the Company. US$63,390,000 was transferred to China Medical Technologies Inc in Beijing. The balance of US$451,000,000 was transferred to the Company’s account with Bank of China in Hong Kong and the signatories of that account were Mr. Tsang and Mr. Wu. As I have mentioned a total of US$355,500,000 was transferred to Supreme Well by December 2009 of which US$150,500,000 went into a Bank of East Asia account and US$205,000,000 went into a Bank of China account. This was known to the liquidators at the time of the trial of the Petition.

12. On the second page of the funds flow chart is shown what the liquidators have discovered since July 2013. I will explain how they came to discover it later in this decision. What can be readily seen is that by a series of transactions involving Hong Kong bank accounts opened in the name of companies incorporated in the British Virgin Islands, which were purportedly owned by persons who had some connection with the Company, all of which, other than Kam Hing Trading Co, had Mr. Tsang as one of the signatories, US$294,500,000 was transferred ultimately into accounts controlled by Mr. Wu or Mr. Tsang. The individual transactions all appear to have taken place physically in Hong Kong. None were made electronically and in fact in the case of each account it can be seen from the account opening forms that the applicant crossed out those sections requesting electronic banking services. This is inconsistent with the Company’s assertion that the sale of FISH and SPR by Supreme Well and Molecular to the Company was an arm’s length transaction.

13. The way in which the accounts were opened and operated is also suspicious. I will take the East Hope accounts with both Bank of East Asia and Bank of China as an example. The Bank of East Asia account is described in the account opening documents as a private banking account and the documents indicate that it was to be used for investing in a balanced portfolio of equities and bonds. In the forms Mr. Kwan Po Ming is said to be the beneficial owner of East Hope. Mr. Kwan is a Hong Kong certified public accountant with an office in Kowloon. Mr. Wu and Mr. Tsang, however, were the account’s only signatories, not Mr. Kwan, who I note has declined to provide any information voluntarily about the account. Between 2 February and 23 December 2009 the account received US$60,000,000 from Supreme Well’s Bank of East Asia account. There is no evidence of this money being invested. The account seems to have been simply a conduit for the onward transfer of money. One would have expected the Bank of East Asia to have asked questions about the source of the very substantial sums being transferred to Supreme Well and then to East Hope. If they had been told it was the proceeds of the sale of FISH and SPR to the Company one might have expected them to be suspicious about the fact that Mr. Tsang and Mr. Wu were signatories to the Supreme Well and East Hope accounts given their connection with the Company and its public statements that the sale was an arm’s length transaction. It may be that the Bank of East Asia made a report pursuant to section 25A of the Organised and Serious Crimes Ordinance, Cap. 455; about that there is no evidence. What is clear is that there is good reason to be very suspicious about the genuineness of the sale of FISH and SPR and that the way in which the proceeds of sale were dealt with subsequently require investigation.

14. There is now reason to think that a very large part of the Company’s assets has been misappropriated through a scheme operated in Hong Kong involving various persons who themselves are normally resident here (Mr. Tsang, Mr. Kwan and Mr. Chong Wing Hip) and using bank accounts in Hong Kong which were operated personally by Mr. Tsang in Hong Kong. Mr. Karas in his submissions suggested that it can now be seen that the Company’s principal activity was probably conducting a large scale fraud and that, therefore, Hong Kong is properly characterised as the location of its principal activities. I disagree with that characterisation which I think was driven by an assumption arising from the language that I use in paragraph 58 that in order to convince me that the Company’s connection with Hong Kong was sufficiently great to justify winding up the Company, although there are no material creditors in Hong Kong, it would have to be demonstrated that the Company’s “principal activities” took place here. In a normal case that would be probably be so, but this type of description is not apposite in characterising a case such as the present one. What is important is that the evidence demonstrates that something of great significance has occurred in Hong Kong so that it can fairly be concluded that not only does the Company have a substantial connection with this jurisdiction but that the connection is in a relevant way central to the liquidation of the Company. In this regard it is relevant that the process of liquidation of an insolvent company involves not just the realisation of assets for ultimate distribution to creditors, but a broader investigation into its affairs. Such an investigation serves two purposes. The first is the identification of possible wrong doing that has caused loss to a company and which gives rise to a right to recover that loss from a third party. The obvious example is a claim against a director for breach of fiduciary duty or misfeasance giving rise to a statutory claim under section 277 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance. As Vaughan Williams J observed in Re Krasnapolsky Restaurant and Winter Garden Co[3]:

“…if the circumstances appearing by affidavit are sufficient to shew, prima facie, that an investigation into the formation or promotion of the company or the issuing of debentures or shares is required, that alone is an advantage to the unsecured creditors.”

Similar statements can be found in subsequent authorities including a number in Hong Kong[4]. As Morritt LJ explained when considering whether or not the second core requirement had been satisfied in the Court of Appeal’s judgment in Stocznia Gdanska SA v Latreefers Inc (No. 2 [5]):

“…potential claims for misfeasance and wrongful and fraudulent trading do provide a reasonable possibility of benefit to the Yard and other creditors of Latreefers so as to comply with the second core requirement.”

15. The second is the public interest in ensuring that the reasons for insolvency and the commission of possible offences are identified. This was explained by Lord Walker in Re Pantmaenog Timber Co Ltd[6] when considering the purpose of a liquidation:

“One purpose is the orderly settlement of a company's liabilities and the distribution of any surplus funds…. The other is the investigation and the imposition of criminal or civil sanctions in respect of misconduct …. The first function is primarily a concern of the company’s creditors and shareholders; the second function serves a wider public interest.”
“Ever since the 1862 Act the court has made clear that these [misfeasance and disqualification] procedures exist for the protection of the general public, not in the interests of the creditors or shareholders of the particular company which is in liquidation.”

16. In the present case the evidence that has come to light since July of last year makes it clear there are strong prima facie grounds for suspecting that a very significant part of the Company’s assets have been misappropriated in Hong Kong using a number of Hong Kong bank accounts operated by persons in Hong Kong. It is now clear that there is a very strong connection between Hong Kong and the affairs of the Company and that the events that took place in Hong Kong are central to the liquidation both in the sense that they need to be investigated in order that liquidators can determine whether claims are available against third parties and also in order to determine whether offences have occurred.

17. Mr. Karas drew to my attention that one advantage of ordering a winding up in Hong Kong is that it would potentially enable the liquidators to bring a claim under section 276 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance and the Cayman Islands does not have a similar remedy. Mr. Wong suggested during his submissions that it was not permissible for the Court to have regard to the availability of claims in Hong Kong which are not available in the place of incorporation. The duties and obligations of the Company’s directors were properly determined by reference to the regime that applies in the place of incorporation he argued. Allowing liquidators to wind up a foreign company in Hong Kong in order to avail its creditors of claims not available in the place of incorporation was to allow forum shopping. I disagree and the reason why illustrates the significance of the three core requirements by reference to which the Court determines whether or not to exercise its discretion to wind up a company incorporated in a foreign jurisdiction. The Court will not wind up an unregistered company unless the core requirements are satisfied or, if the third requirement is not satisfied, the connection with Hong Kong is so strong and the benefits of a winding‑up order so clear that the Court considers it an appropriate case in which to exercise its discretion notwithstanding the inability to satisfy the third core requirement. The fact that one of the benefits to be obtained may be the availability of additional remedies is irrelevant. If the connection with Hong Kong is strong enough to justify to making a winding-up order this indicates that it is an appropriate case in which to engage the Hong Kong insolvency regime, which includes a range of remedies and penalties which our legislature considers appropriate for dealing with the liquidation of companies, wherever they have been incorporated, who have sufficient connection with Hong Kong to justify winding them up here. If it were to be established that the liquidators’ suspicions are well founded and that a Hong Kong resident has had a major role to play in the implementation in Hong Kong of a major fraud, which has resulted in, or contributed to, the insolvency of the Company in my view there is no reason in principle why that person should not be subject to any claims that our insolvency regime provides. I would also note that section 276 is a discretionary remedy and any person subject to a claim under it can advance the kind of arguments identified by Mr. Wong in the misfeasance proceedings, which in my view would be the proceedings to which they might be relevant.

18. In my view the new evidence has demonstrated that there is sufficient connection with Hong Kong and sufficient benefit in making a winding‑up order to justify making such an order notwithstanding the Company’s inability to satisfy the third core requirement. It follows that I consider that the evidence that the liquidators wish to adduce is credible and important; in fact it is determinative of the relevant issues.

The reasons for the delay in adducing the evidence

19. The second component of the guidelines identified in Ladd v Marshall is that the evidence could not without reasonable diligence have been obtained before trial. In most cases there will be a party to the proceedings in which it is sought to adduce the new evidence who has been successful at trial and who, viewed from that party’s perspective, will be prejudiced if the trial is re‑opened. The prejudice will take the form of additional time, costs and the stress which litigation by its nature generates. However, this is not such a case. There is no party with a tangible interest in the outcome of the application who will be prejudiced by it. The only persons with a tangible interest are the Company’s creditors. None of them are objecting to the application, which on the evidence before me would appear to be clearly in their interests.

20. Another reason why a court will not normally allow evidence to be adduced after trial unless it can be shown that the delay was not the fault of the party seeking leave is because it interferes with the efficient and proper use of the judiciary’s resources and process. This, along with the first factor, has to be balanced against the need to ensure that justice is done and justice will not normally be served by the court allowing a judgment to stand, which it has been shown is probably wrong. The three factors identified in Ladd v Marshall are guidelines not strict rules and as Rix LJ observed in Voaden v Champion (‘The Baltic Surveyor’)[7] they “need to be applied as guidelines rather than rules and subject to the overriding objective of dealing with cases fairly”. Consistent with this in my view where the evidence is sought to be adduced on an application to reopen a trial, as distinct from an appeal, the Court will apply a more flexible test: see Townsend v Achilleas[8].

21. It seems to me that on the unusual facts of this case, namely that there is nobody with a relevant, tangible interest objecting to it or who will be prejudiced by it, the second guideline is of little significance.

22. It also seems to me that the problem with this case is not so much that the evidence was obtained late as that the petition was issued before the liquidators had obtained all the evidence necessary to address properly the jurisdiction issue. Mr. Karas argued that whilst with the benefit of hindsight this might appear to be the case it was not in fact so. At this juncture it is necessary to explain how the new evidence came to be obtained. Having been notified on 5 September 2013 of my decision the liquidators issued a subpoena in New York to obtain documents from Bank of East Asia’s New York branch containing information about Supreme Well’s bank account. They considered this to be a speculative application and initially it was opposed. To their surprise shortly before Christmas the Bank of East Asia voluntarily provided documents which demonstrated that Mr. Tsang was a signatory to the bank account. Encouraged by this they sought further documents from the Police in Hong Kong. This resulted in an application to the Court which the Police, after initially opposing it, did not contest. This also produced further helpful documents. The decision was then made to apply to this court for an order that Bank of East Asia and Bank of China Hong Kong provide documents concerning the accounts of the recipients of funds from Supreme Well. This was done by seeking a letter of request from the Grand Court of Cayman Islands for recognition of the appointment of the liquidators in Hong Kong and for an order for the production of those documents[9]. Mr. Karas accepted that it might be said that this latter step could have been taken much earlier, but he argued that just as prior to the handing down of my decisions in Re Yung Kee Holdings Ltd[10] and Pioneer Iron and Steel Group Co Ltd[11] the law in Hong Kong on the circumstances in which the Court would order the winding up of an unregistered company was not well developed, it was unclear until my decision in In re A company[12] to what extent the Companies Court considered itself able to provide assistance to a foreign liquidator. I accept that viewed from the perspective of practitioners in November 2012, when the Petition was issued, perhaps the jurisdiction issue appeared less controversial than I considered it to be and that the proceedings were approached in what at the time was a fairly conventional way. In any event it does not seem to me that on the facts of this case their ability or otherwise to obtain the evidence earlier is an important factor.

Conclusion

23. I grant the application for leave to re-re-amend the Petition in the form attached to the summons and adduce the further evidence of Mr. Borrelli. I direct that the Petition be listed for hearing the Monday after the handing down of this decision at which I will deal with costs.

	(Jonathan Harris)
	Judge of the Court of First Instance
	High Court

Mr Jason Karas, Solicitor Advocate of Lipman Karas, for the applicants

Mr William Wong SC, Mr Jose Maurellet and Mr Justin Ho, instructed by Angela Wang & Co, for the respondent

Attendance of the Official Receiver was excused

[1] [2014] 2 HKLRD 1001

[2] [1954] 1 WLR 1489

[3] [1892] 3 Ch 174 at 178

[4]Re China International Business Development (Hong Kong) Ltd (unrep., HKCA, 8 Nov. 2005)at [21]-[23]

[5] [2001] 2 BCLC 116 at §40

[6] [2004] 1 AC 158 at §77 & 79

[7] [2002] CLC 666

[8][2000] CPLR 490 at 499 per Mummery LJ

[9]In re A company, HCMP 902/2014, 21/7/2014, Harris J

[10] [2012] 6 HKC 246

[11] Unrep., HCCW 322/2010, [2013] HKEC 317

[12] ibid

THE JOINT AND SEVERAL PROVISIONAL LIQUIDATORS OF CHINA MEDICAL TECHNOLOGIES INC. v. KPMG (A FIRM) AND OTHERS

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No.	Date of document	Author	Receipt(s)	Email subject	Pages of blackout	Nature of information redacted	Extent of blackout
1	2008-05-29T00:46:36.3 57+0800	Jin, Grace (Beijing/A11)	Zirlen, Bruce (HK/PTR) CC: Lin, Michelle (BJ/A11); Seah, Meng Teow (Beijing/A11); Zhu, Diane (Beijing/A11)	CMED draft AR memo	1	Name of government body	Name