CHINA MEDICAL TECHNOLOGIES, INC. (In liquidation) v. SAMSON TSANG TAK YUNG

CACV 197/2014

[2021] HKCA 1039

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 197 OF 2014

(ON APPEAL FROM HCCW 435/2012)

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JUDGMENT ON COSTS

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The Court:

1.  In this appeal, we dismissed an application for the striking out of the appeal on 28 April 2015 and handed down our reasons for such dismissal on 28 February 2018. We also gave our decision on the costs of the strike out application on 28 February 2018.

2.  The appeal was heard and dismissed with costs on 13 May 2016. Our reasons were also handed down on 28 February 2018.

3.  The Respondent, Mr Tsang, who was successful in the strike out application but unsuccessful in the appeal, filed a summons on 14 March 2018 seeking to vary the costs orders:

(a)  To antedate the effect of the costs order in his favour in the striking out application to 28 April 2015 or alternatively 21 January 2016; and

(b)  To vary the costs order against him in the appeal to let him have the costs attributable to the Respondent’s Notice of 20 October 2014 (which was filed by the Petitioner), or alternatively reduction of 20% of the costs payable by him or other reduction as this Court shall deem appropriate.

4.  Having read the written submissions lodged in respect of the summons of 14 March 2018, we rule that:

(a)  The costs order in the strike out application is antedated to take effect from 28 April 2015 carrying interests at different interest rates for the period prior to 28 February 2018 and the period thereafter; and

(b)  The costs order in the appeal will not be varied and our original costs order is made absolute.

5.  As for the costs of the summons of 14 March 2018, as Mr Tsang is successful on one part but fails on the other part of the application, we will order each party to bear his or their own costs.

6.  Our reasons for the ruling are as follows.

7.  First, we disagree with the Petitioner that the non-compliance with the order for examination by Mr Tsang had any bearing on the present application.

8.  Second, on the costs of the striking out application, it was basically costs following the event. In view of the unsuccessful attempt on the part of the Petitioner to strike out the appeal, there was no reason why they should not bear the costs of that application. The delay in the handing down of the reasons for that decision and the decision on costs should not work in favour of the Petitioner concerning their liability as to costs. We accept the submissions of Mr Tsang that it would be unjust if the twist of events leading to the costs order for the unsuccessful strike out application should carry interests from a later date than the order for costs in the appeal.

9.  As explained by Lord Ackner in Hunt v Douglas [1990] 1 AC 398 at p.415, as it is likely a party has paid his lawyers prior to taxation, there is no injustice in having liability for costs to carry interests even before the amount is fixed by taxation. It was held in that case that the incipitur rule should apply instead of the allocatur rule. This principle has been followed in Hong Kong: see Wong Wai Chun v Lewin [2000] 2 HKC 271.

10.  The Court has the power to antedate its order if justice so required: see Order 42 Rule 3(2). The Petitioner did not dispute that the court can do so. It was argued however that doing so would enable Mr Tsang to obtain costs “on a higher basis”. We do not see how this would be so bearing in mind that costs are only awarded to compensate what Mr Tsang had actually incurred and what we shall say with regard to interest rates.

11.  Whilst it is correct that the time lapse between the dismissal of the strike out application and the handing down of the reasons for decision and the decision on costs was not within the Petitioner’s control, we do not see any unfairness arising from interests on such costs starting to run from the dismissal of the striking out application as such costs should already have been incurred by Mr Tsang by that stage.

12.  At the same time, we do not think the Petitioner should bear interest on such costs at judgment rate before the handing down of the decision on costs on 28 February 2018. Hence, we would also order that the Petitioner shall only pay interest at prime plus 1%, the usual commercial rate, from 28 April 2015 to 28 February 2018 and thereafter at judgment rates.

13.  In respect of the costs of the appeal, we are not persuaded by Mr Tsang’s submissions that this is a proper case for ordering costs by adopting the issue-based approach. We do not find the costs on the Respondent’s Notice to have significantly increased the costs of the appeal and in the present circumstances we do not see a strong ground to support the exercise of discretion to reduce Mr Tsang’s liability for costs of the appeal by reason of the Respondent’s Notice.

14.  Lastly, we regret the delay in having this decision handed down in respect of the summons.

CACV 197/2014

[2018] HKCA 111

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 197 OF 2014

(ON APPEAL FROM HCCW 435 OF 2012)

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REASONS FOR JUDGMENT

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Hon Lam VP:

1.  I agree with the Reasons for Judgment given by Barma JA.

Hon Yuen JA:

2.  I agree with the Reasons for Judgment of Barma JA.

Hon Barma JA:

3.  This was an appeal by Mr Samson Tsang Tak Yung, an alleged contributory of China Medical Technologies, Inc. (“the Company”), a Cayman Islands company, against the winding up order made against the Company by Harris J on 1 September 2014. At the conclusion of the hearing, the appeal was dismissed with costs to the Company, which (acting through its Joint Official Liquidators appointed in the Cayman Islands) had petitioned for its own winding up in Hong Kong.  We also ordered that the liquidators’ own costs be costs in the liquidation.  These are our reasons for doing so.

4.  At an earlier stage of the appeal, the Company had sought to strike out Mr Tsang’s appeal.  That application was unsuccessful.  The reasons for that decision are, pursuant to a direction made earlier by this court, handed down at the same time as these reasons for judgment, in separate Reasons for Decision. 

5.  The relevant background to the appeal is as follows.  The Company, incorporated in the Cayman Islands, was not registered in Hong Kong.  It was the holding company of a group of companies which developed, manufactured and marketed surgical and medical equipment in China.  It was wound up in the Cayman Islands in July 2012 and placed into bankruptcy in New York in August 2012.  It appears to be massively insolvent – the deficiency in its assets exceeds US$400 million.  When the petition was presented there was only one Hong Kong creditor, with a debt of just over US$4,000.  Mr Tsang, the opposing contributory, was a director of the Company between 2007 and 2011, and was also its Chief Financial Officer.

6.  The petition to wind up the Company in Hong Kong was, as noted above, brought by the Company itself, acting through its Cayman Islands Joint Official Liquidators.  This was with a view to seeking orders for examination in Hong Kong pursuant to section 221 of the Companies Ordinance (now the Companies (Winding Up and Miscellaneous Provisions) Ordinance) (“the Ordinance”) against Mr Tsang and others.  According to the Joint Official Liquidators the company appeared to have dissipated its assets by entering into various transactions with entities connected with its main beneficial shareholder, Chairman and Chief Executive Officer, a Mr Wu Xiaodong. Information obtained by Joint Official Liquidators after the presentation of the petition (referred to further below) suggested that two major acquisitions of technology known as FISH and SPR were bogus and resulted in the extraction from the Company of some US$355 million.

7.  As a contributory of the Company, Mr Tsang’s views on the appropriateness of making a winding up order could be of no weight, given the extent of the Company’s insolvency.  He clearly could have no interest in the liquidation qua contributory. However, he just as clearly did have an interest (as the judge found) in avoiding an investigation into his involvement in the transactions which appeared to have been the substantial cause of the Company’s insolvency. Although mindful of Mr Tsang’s likely motivation for seeking to resist the Company’s winding up in Hong Kong, the judge took the view that Mr Tsang should be allowed to appear and make submissions, limited to the question of whether or not the court had jurisdiction to wind up the country, and if it did, whether it should exercise its discretion to do so, having regard to the strength (or lack of strength) of the relevant connections to Hong Kong.

8.  Having heard the petition in June and August 2013, the judge dismissed the petition on 5 September 2013, handing down his reasons for doing so on 9 April 2014.  The judge held that the court had jurisdiction to wind up the Company pursuant to section 327(3) of the Ordinance, but that it should not exercise its discretion to do so.  In coming to this view as to how the discretion should be exercised, the judge referred to the three “core requirements” identified in Re Real Estate Development Company [1991] BCLC 210 at 217c, namely:

(1) that there must be a sufficient connection with [Hong Kong] which may, but does not necessarily have to, consist of assets within the jurisdiction;

(2) that there must be a reasonable possibility if a winding-up order is made, of benefit to those applying for the winding-up order; and

(3) one or more persons interested in the distribution of the assets of the company must be persons over whom the court can exercise a jurisdiction.

The judge regarded these as going to the exercise of discretion rather than the jurisdiction to wind up, but held that the third core requirement was not, in his view, satisfied, and that the strength of the first two core requirements was not so overwhelming as to justify the making of a winding-up order notwithstanding the absence of the third.  The order dismissing the petition had however not been sealed.

9.  Before the judge handed down the reasons for his decision to dismiss the petition, the Company drew his attention to further evidence that it had obtained after the hearing of the petition, which it said demonstrated that the connection with Hong Kong was in fact much stronger than appeared from the originally available evidence.  This led to an application by the Company (made in June 2014, after the handing down of the reasons for dismissal of the petition) for the trial to be re-opened and permission to be given to the Company to adduce the further evidence.

10.  The evidence appeared to show that a large number of fund movements by which the Company’s assets were allegedly dissipated had taken place in Hong Kong, and that these movements had been based on instructions given by persons in Hong Kong (including Mr Tsang).  Having considered the additional evidence, the judge decided on 28 August 2014 that the trial should be re-opened and the new evidence allowed to be deployed as it would have a decisive effect on the outcome of the proceedings by strengthening the first two core requirements to such an extent as to justify the making of a winding up order notwithstanding that the third core requirement remained unsatisfied.  In essence, the judge considered that the evidence now showed that Hong Kong was central to the way in which the Company had been operated, making the connection of the Company to Hong Kong very significantly more substantial than previously had been appreciated.

11.  Having decided to re-open the proceedings, the judge restored the winding up petition for hearing on 1 September 2014, when he made the winding up order which is the subject of this appeal.

12.  Aggrieved with that decision, Mr Tsang brought this appeal.  Mr Anson Wong SC, appearing for Mr Tsang before us (but not in the proceedings below) relied on two grounds of appeal:

(1) That the judge had erred in principle in winding up the Company when (as the judge accepted) the third core requirement had not been satisfied.

(2) That the judge had erred in holding that the benefits of making an ancillary winding up order in Hong Kong were so great as to justify the winding up of the Company here when it had already been wound up in its place of incorporation, and the court had extensive common law powers, which it had actually exercised, to recognise and give assistance to the Joint Official Liquidators.

13.  The Company has filed a respondent’s notice seeking to affirm the decision below on two additional or alternative grounds:

(1) that the judge was wrong to conclude that the third core requirement needed to be satisfied before the court could wind up an unregistered company; and

(2) that the judge was wrong in concluding (in the original reasons for dismissing the petition) that the third core requirement was not satisfied, by holding that a creditor in Hong Kong who was owed US$4,139 was “too small” and a fund manager in Hong Kong with an interest in the outcome of the liquidation was “too remote” to satisfy that requirement.

14.  Mr Wong’s principal contention was that the judge was wrong to have made the winding up order notwithstanding that he had concluded that the third core requirement was not satisfied.  In other words, each of the three core requirements was a necessary condition that had to be met before the court would (or could) make a winding up order in respect of an unregistered company.  Mr Wong submitted that the judge had erred in concluding that the court’s jurisdiction to make a winding up order in respect of an unregistered company was defined solely in section 327 of the Ordinance, and that the three core requirements were simply guidance as to the circumstances in which the court could exercise that jurisdiction, so that their application could be moderated where the situation called for that to be done, for example (as in this case) by not insisting on the third core requirement where the first two were satisfied in a way which demonstrated very strong connections between the Company and Hong Kong, and very clear benefits to be gained from the making of a winding up order.

15.  Mr Wong submitted that the overwhelming weight of authority was to the effect that the three core requirements were more than mere guidance, and had to be satisfied in every case before the court could make a winding up order in respect of an unregistered company incorporated overseas.  He submitted that jurisdiction should be understood in two senses.  The first was the narrow or strict sense, in which it connotes the limits placed on the court’s power to hear and determine issues: here, that was defined by the terms of section 327. The second was the wider sense, which extends to the settled practice of the court as to how it will exercise the powers, or grant the relief, falling within its jurisdiction in the first, strict, sense to exercise or grant: here, that was represented by the three core requirements, which acted as constraints adopted by the court itself to limit the circumstances in which it would exercise its power to wind up in the case of unregistered overseas companies.

16.  It is fair to say that different views have been expressed in the English authorities as to whether the three core requirements should be regarded as going to the jurisdiction of the court to make a winding up order in respect of an unregistered overseas company, or as going to the exercise of its discretion whether or not to do so.  The judge, for the reasons he explained in his judgment, preferred the view that they were discretionary, rather than jurisdictional, in nature.  In Hong Kong, it seems to me that the matter must be regarded as being settled in favour of the view that the three core requirements go to discretion, in the light of the judgment of the Court of Final Appeal in Kam Leung Sui Kwan v Kam Kwan Lai (2015) 18 HKCFAR 501, a shareholder’s petition in respect of Yung Kee Holdings Limited, a BVI company, which through subsidiaries operated a well-known restaurant in Hong Kong.  There, Ma CJ and Lord Millett NPJ said, at paragraph 21 of their joint judgment (with which the other members of the court agreed):

“21. Some courts have treated these core requirements as going to the jurisdiction of the court under s.327(3)(c). In our view, it is better to treat them as going to the court’s discretion. …”

17.  While acknowledging this, Mr Wong maintained that the three core requirements should be regarded as necessary conditions which must be satisfied before the court would exercise its discretion under section 327.  In support of this, he relied on the statement of Ma CJ and Millett NPJ at paragraph 20 of Kam v Kam that:

“… the courts have adopted some necessary self-imposed constraints on the making of a winding up order against a foreign company. …As the law has developed … the courts have laid down three so-called core requirements which must be satisfied before the court will exercise its statutory jurisdiction to wind up a foreign company. …”

Mr Wong suggested that the statement that the core requirements “must be satisfied” indicated that the Court of Final Appeal was of the view that even if properly regarded as going to discretion, the requirements were nonetheless conditions that had to be met before a winding up order could properly be made in respect of a foreign company.

18.  With respect, placing that degree of emphasis on this part of paragraph 20 is a misreading of the judgment.  Paragraph 20 is introductory in nature, setting out the current state of the law as the background to the discussion that follows, in which the Court of Final Appeal restates the approach to the winding up of foreign companies to make it clear not just that the core requirements are matters that go to the court’s discretion, but also that it is not strictly necessary for every one of them to be satisfied in every case in which a winding up order is to be made against a foreign company.  That this is so appears from other parts of the judgment, which are considered below.

19.  Having explained, in paragraphs 22 and 23 of the judgment that in creditors’ petitions to wind up on the ground of insolvency, there is likely to be an overlap between the core requirements (particularly where the company has assets in Hong Kong which will be available for distribution to its creditors), and reiterating that presence of assets within the jurisdiction is not essential, Ma CJ and Millett NPJ say, at paragraph 24, that:

“24. In our view, the question in the case of a creditor’s petition is whether there is a sufficient connection between the company and this jurisdiction to justify the court in ordering a company to be wound up despite the fact that it is incorporated elsewhere; and that in deciding that question the fact that there is a reasonable prospect that the petitioner will derive a sufficient benefit from the making of a winding up order, whether by the distribution of its assets or otherwise, will always be necessary and will often be sufficient.”

20.  This passage indicates that, when considering a creditor’s petition to wind up a foreign company, the court should approach the exercise of its discretion to do so by reference to a single overarching question – whether there is a sufficient connection between the company and Hong Kong that would justify the winding up of the company in Hong Kong, thereby putting in motion the full machinery of winding up in respect of it, notwithstanding that the company was incorporated elsewhere.  The three core requirements may thus, I suggest, be best understood as aspects of the enquiry into the sufficiency of the connection between the company and this jurisdiction.  In that context, it is notable that the second requirement, that of likelihood of benefit to the petitioner from the making of a winding up order in Hong Kong, is described as a condition that is always necessary, and often sufficient.  This indicates, to my mind, that there can, as the judge held, be cases in which the failure to satisfy the third condition will not be fatal to the making of a winding up order.

21.  This point is reiterated by paragraph 36 of the judgment, where it is said that:

“36. It must be remembered that the so-called core requirements are not statutory but self-imposed constraints adopted by the courts. In elucidating their meaning no question of statutory interpretation arises. The question is whether the connection of a company with Hong Kong is sufficient to justify the Hong Kong court in exercising its jurisdiction to wind that company up, and that is a question of degree. The nature of the connection will vary from case to case and is always a matter for the court. …”

22.  Kam v Kam was not, of course, concerned with a creditor’s petition to wind up on the ground of insolvency.  It was a petition by a shareholder to wind up on the just and equitable ground.  Not surprisingly, the Court of Final Appeal expressed the view (in paragraphs 26 and 27 of the judgment) that the factors that would be relevant to establish the connection required to justify the making of a winding up order in respect of the foreign company subject to the petition would be different, because the nature of the dispute and purpose for which the winding up order is sought are different.  In the case of a creditor’s petition, it is usually to recover a debt owed by the company to the creditor by the distribution of the company’s assets to its creditors through the winding up process, while in the case of a shareholder’s petition, it is usually to extricate the shareholder from his relationship with and release his investment in the company back to him through the winding up.  However, what is, to my mind, important is that the broad question to be asked when considering whether or not to wind up an overseas company remains the same – are the connections with Hong Kong sufficient to justify the making of a winding up order against it.

23.  Mr Wong sought to suggest that the discussion in the Court of Final Appeal judgment after paragraph 20 was concerned only with the first of the core requirements, as it had been noted at the end of that paragraph that the parties in Kam v Kam had focused on only the first of those requirements.  I do not think that this is right.  It is clear from the discussion between paragraphs 21 to 30 and paragraphs 35 and 36, that the court was concerned with the wider question of how the discretion to wind up a foreign incorporated company should be exercised, looked at this from the point of view of both creditor’s and shareholder’s petitions, and expressed itself in terms apt and intended to provide general guidance going forward.  It is also evident from the discussion of creditor’s petitions that the court was examining other core requirements as well.  Paragraph 22 of the judgment illustrates this, by observing that the various requirements to some extent overlap, and paragraph 24 does the same by focusing on the second core requirement of benefit to the petitioner, which was regarded as always necessary and often sufficient.

24.  In the present case, it is pertinent to note that while the winding up order sought is in respect of an insolvent company, the petition is not in fact brought by a creditor, but by the Company itself, acting through its liquidators appointed in its home jurisdiction, by the courts of its place of incorporation.  In such a case, the considerations which the Hong Kong court should bear in mind when enquiring whether the company has a sufficient connection with Hong Kong to justify the making of a winding up order, may well be to some extent different from those in the case of an ordinary creditor’s petition based on insolvency.  What the connections required may be will depend on the circumstances, and the purpose for which the foreign liquidators seek a winding up order in Hong Kong.  For example, if a substantial portion of the company’s assets are located here, it may well be thought to be more convenient for there to be a liquidation here, as well as in the place of incorporation. The same may be true if the company has a large number of creditors in Hong Kong.  But even where the company has neither significant assets or creditors here, there may still be good reason for thinking that it would be desirable for there to be a winding up in Hong Kong, if (as the judge has found to be the case here) there are significant inquiries to be made which are centred on the Company’s activities in Hong Kong, which will involve the examination of a potentially large number of persons or entities in Hong Kong, that may lead to the identification of avenues of recovery (by the bringing of misfeasance or or other claims, or otherwise) for the benefit of the Company’s creditors, wherever they may be.

25.  I am therefore of the view that the judge was correct to come to the conclusion that it was, in an appropriate case, not necessary to insist that all three of the core requirements had to be satisfied, and in particular, that it was open to him to make a winding up order in respect of the Company if the Company’s connection with Hong Kong was sufficiently strong, and the benefit of making a Hong Kong winding up order was sufficiently significant, to justify that course being taken notwithstanding that there were no creditors of significance located here, or over whom the court had jurisdiction.  I would also agree with the judge that this was such a case.  This is not to say that the three core requirements will not generally need to be satisfied – in the typical creditor’s petition they will still be factors that need to be present, as they all bear on the closeness of a company’s connection with Hong Kong, and it is, as the judge said, likely only to be in exceptional cases that the third requirement may be dispensed with.  

26.  This leads on to the second ground of appeal advanced by Mr Wong on behalf of Mr Tsang, namely that the benefits of a Hong Kong liquidation were not sufficiently great to justify the making of a winding up order, particularly when it was borne in mind that the Hong Kong court could assist the Company’s foreign liquidators in their investigation of the Company’s affairs here, and had in fact already made some orders for that purpose.

27.  This ground of appeal seeks to challenge the judge’s assessment of the strength of this particular factor, and his consequent exercise of discretion based upon it.  That is not fertile ground for an appeal.  It is trite that an appellate court will be slow to interfere with a judge’s assessment of the strength of factors that go into the discretionary balance, and with the striking of the balance thereafter.  It will only be in cases where the assessment, or balancing exercise, can be seen to be plainly wrong that this court would intervene.

28.  In the present case, I am unable to see any error in the judge’s assessment and exercise of discretion.  The judge was well aware of his powers to afford assistance to the Company’s liquidators appointed by the Cayman Island court, not least because he had already done so.  However, the fresh evidence placed before him on the re-opened hearing of the petition satisfied him that the Company’s connections with Hong Kong, particularly in relation to the events and transactions by which a substantial part of its assets were lost to it, were very much more significant than he had appreciated on the basis of the earlier evidence at the first hearing of the petition.  The liquidators’ evidence also explained why they considered that it was worthwhile to proceed by way of a Hong Kong liquidation, rather than seek assistance on an ad hoc basis for every investigation that needed to be carried out in Hong Kong.  The alternative to a Hong Kong liquidation would have involved the making of multiple applications to the Cayman courts for letters of request, with a separate application for each occasion on which it was desired to enlist the assistance of the Hong Kong court to facilitate the examination of a particular person or entity.  It was considered substantially more convenient to avoid the need for this process to be gone through each time by putting the Company into liquidation here, and making direct use of the section 221 examination procedure.  The judge accepted this argument, and in my view it was clearly open to him to do so.  I would therefore reject this ground of appeal.

29.  For the foregoing reasons, both grounds of appeal raised by the appellant failed.

30.  In these circumstances, it is not strictly necessary to deal with the points raised in the respondent’s notice, and I shall therefore do so only briefly.

31.  I do not think that the first ground, that the judge erred in concluding that the third core requirement needed to be satisfied, is made out.  In fact, in all of his decisions, having concluded that the debt of US$4,000 odd of the only Hong Kong creditor was too insignificant to be regarded as satisfying the third requirement, the judge proceeded on the basis that there could be exceptional cases in which the connection of the Company with Hong Kong was so strong, and the benefit to be gained from making a winding up order was so substantial, that the third requirement could be dispensed with.  The difficulty was that the judge did not regard the evidence placed before him on the initial hearing of the petition as being sufficient to make out a case for dispensing with the third requirement.  I do not think that he could be said to have been wrong to do so.  As for the suggestion that the third requirement should simply be dispensed with, I would agree with the judge that there is, in the majority of creditor’s petitions, good reason for seeking a real connection with Hong Kong both on the part of the company the subject matter of the petition, and in terms of creditors who would benefit from a winding up order, when considering whether or not a winding up order should be made in respect of a foreign company.

32.  As to the second point, when it is appreciated that the overall inquiry is directed at the question of whether the connections with Hong Kong are such as to justify the making of a winding up order over a foreign company, it must follow that the exercise is not of a “tick box” nature, so that any connection, however small, will satisfy the relevant requirement.  This is evident from the first core requirement, which speaks of a “sufficient connection” between the Company and Hong Kong.  It is also implicit in the need for a reasonable prospect of benefit that the benefit should be sufficiently significant to justify the making of a winding up order.  In the same way, it seems to me that the existence of creditors or other persons over whom the court has jurisdiction must similarly import a threshold of significance that should be met.  What that threshold might be in any particular case will depend on the circumstances, and at the end of the day, it seems to me that all that the judge was saying (in my view, correctly) was that in this case, the existence of a single creditor within the jurisdiction (and one other party whose interest was at best indirect) was not sufficient to justify the making of a winding up order when it would not otherwise have been appropriate to do so.

33.  In my view, therefore, neither of the points made in the respondent’s notice assists the Company.  However, as neither of the appellant’s grounds of appeal were successful, it followed that the appeal should be dismissed with costs.

CACV 197/2014

[2018] HKCA 112

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 197 OF 2014

(ON APPEAL FROM HCCW 435 OF 2012)

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REASONS FOR JUDGMENT
AND DECISION ON COSTS

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Hon Barma JA (giving the Reasons for Judgment and Decision on Costs of the Court):

1.  On 1 September 2014, Harris J ordered that China Medical Technologies, Inc. (“the Company”), a company incorporated in the Cayman Islands, should be wound up by the court. The order was made on a petition presented by the Company itself, which had earlier been placed into liquidation in the Cayman Islands on 27 July 2012, acting through its Joint Official Liquidators appointed by the Cayman Islands courts. The petition was opposed by Mr Samson Tsang Tak Yung (“Mr Tsang”), who says that he is a contributory of the Company, holding a small number of shares in it. On 29 September 2014, Mr Tsang lodged a Notice of Appeal against Harris J’s order winding up the Company.

2.  By this application, made by an Amended Summons dated 16 March 2015, the Company, by now acting through its Hong Kong provisional liquidators (continuing in office after the making of the winding up order), seeks to strike out Mr Tsang’s Notice of Appeal.  The application is based on two grounds:

(1)   Mr Tsang has no standing to appeal against the making of the winding up order, so that the appeal amounts to an abuse of process; and

(2)   Further or alternatively, the appeal should be dismissed as Mr Tsang should not be heard in relation to it so long as he fails to comply with, and remains in contempt of, an order made by Harris J on 15 September 2014 requiring him to attend at court to be examined in relation to his knowledge of the affairs of the Company (pursuant to section 221 of the Companies Ordinance (Cap 32)).

3.  At the end of the hearing, we dismissed the application, and indicated that we would hand down our reasons for doing so in due course.  These are those reasons.  Having heard argument on the costs of the application, we reserved our decision as to costs, and now give that decision as well.  The delay in doing so is regretted.

4.  For present purposes, the following matters may be noted by way of general background:

(1) The Company was incorporated in the Cayman Islands in 2004.  It was not registered in Hong Kong.  Prior to its winding up, it was the holding company of a group of companies carrying on the business of developing, manufacturing and marketing surgical and medical equipment in China, through subsidiaries and sub-subsidiaries in Hong Kong and on the Mainland.  From 2005 until 2012, the Company was listed on the NASDAQ Stock Exchange in New York.  It was delisted in February 2012, wound up in the Cayman Islands in July 2012, and placed into bankruptcy in New York in August 2012.

(2) The Company appears to be massively insolvent, with a deficiency of in excess of US$400 million.

(3) The Company’s main beneficial shareholder was a Mr Wu Xiaodong, a Chinese national, who was also its Chairman and Chief Executive Officer.  Mr Tsang, who is a Hong Kong permanent resident, was a director between June 2007 and December 2011, and was the Chief Financial Officer of the Company.

(4) At the time of the presentation of the petition, the Company had one known creditor in Hong Kong, holding a debt of slightly over US$4,000.

(5) A stated purpose of seeking a winding up of the Company in Hong Kong was to obtain orders for examination against various persons and entities (including Mr Tsang) pursuant to section 221 of the Companies Ordinance, as the Joint Official Liquidators considered that the Company appeared to have dissipated its assets through the sale of its interest in some of its Mainland subsidiaries for little or no consideration to parties connected with Mr Wu, and by the acquisition of another Mainland subsidiary at an overvalue from a party related to Mr Wu, and were of the view that a winding up order in Hong Kong might improve the prospects of making some meaningful recoveries for the Company so as to reduce the shortfall in its assets.

5.  The procedural history of the winding up proceedings was not straightforward.  The following matters are of relevance to the application to strike out the appeal on the basis that Mr Tsang has no standing to appeal against the winding up order:

(1) After the presentation of the petition on 26 November 2012, Mr Tsang requested a copy of the petition pursuant to Rule 27 of the Companies (Winding-Up) Rules (Cap 32H) (“the Rules”), relying on his status as a contributory of the Company, by two letters from his solicitors respectively dated 3 and 11 January 2013.  A copy of the petition was eventually supplied to Mr Tsang on 15 February by the Joint Official Liquidators (although they reserved their position as to whether or not Mr Tsang was in fact a contributory).

(2) On 1 February 2013, Mr Tsang filed and served on the Company a notice of his intention to appear on the hearing of the petition to oppose it, as required by Rule 30 of the Rules.  The notice was in the prescribed form (i.e. Form 10 under the [Rules]) and identified Mr Tsang as a contributory.

(3) On 6 February 2013, the Company, as petitioner, served on Mr Tsang its list of persons who had given notice of intention to appear at the hearing of the petition pursuant to Rule 31 of the Rules.  The list was similarly in the prescribed form (i.e. Form 11 under the [Rules]).  It included Mr Tsang’s name and described him as an Opposing Contributory, while qualifying that description with the observation that he had “less than 1% shareholding”.

(4) Mr Tsang appeared through counsel at the hearings of the petition on 18 February 2013, 25 February 2013, 20 March 2013, 11 June 2013, 26-27 August 2013, 21 February 2014, 28 August 2014, and 1 September 2014.  It is apparent from the transcript that Harris J considered that although Mr Tsang was a contributory, the fact that he had no financial interest in the liquidation as he would not benefit from it (the Company being heavily insolvent) meant that his views as to whether or not a winding up order should be made would carry no weight with the court.  However, as Harris J considered that there were serious questions to be considered as to whether or not the court had jurisdiction to wind up the Company (which was an unregistered foreign company), and if so, whether the court should exercise its discretion to make a winding up order, he permitted Mr Tsang’s counsel to address him on these matters.

(5) Initially, by a judgment dated 9 April 2014, Harris J dismissed the petition, concluding that while the court had jurisdiction under section 327(3) of the Companies Ordinance to wind up the Company, the court should not do so, because there were no persons with a sufficient economic interest in the winding up and a sufficient connection with the jurisdiction (other than by virtue of being the petitioner or a creditor who could submit a proof of debt if the company were wound up), and the company’s other connections with Hong Kong were not so strong as to overcome the lack of such persons.

(6) Thereafter, the Company applied to Harris J to re-open the trial of the petition, and to allow it to adduce further evidence, which it said was not previously available to it, to show that there was in fact a sufficiently strong connection with Hong Kong.  The further evidence sought to be relied on consisted mainly of evidence which had come to light that appeared to show that many movements of funds by which the Company’s assets were allegedly dissipated had taken place in Hong Kong, on the basis of instructions given by persons in Hong Kong (including, in particular, Mr Tsang).  The application was heard on 21‑23 July 2014.  By his decision of 28 August 2014, Harris J acceded to the application to re-open the trial of the petition and to admit such further evidence, which he considered to be determinative of the petition in favour of making the winding up order sought.  On 1 September 2014, Harris J made an order winding up the Company, and appointed Mr Cosimo Borrelli and Ms Yuen Lai Yee Liz (who had earlier been appointed as provisional liquidators pursuant to section 193 of the Ordinance) to continue as provisional liquidators pursuant to section 194(1)(aa) of the Ordinance until liquidators were appointed.

(7) As at the earlier trial of the petition, Harris J confined submissions made by Mr Tsang’s counsel during the subsequent hearings to matters going to the issue of whether or not the court had and (if it did) should exercise jurisdiction to make a winding up order in respect of the Company by reference to the connections with Hong Kong.

(8) So far as the costs of the petition were concerned, Mr Tsang was ordered to pay the Company’s costs after 26 August 2013, up to and including the hearing on 1 September 2014, with part of such costs being ordered to be taxed on the indemnity basis.

6.  On 29 September 2014, Mr Tsang filed his Notice of Appeal against Harris J’s order of 1 September 2014.  On 31 October 2014, the Company took out this summons, which was subsequently amended (to add the alternative ground based on Mr Tsang’s alleged contempt) on 16 March 2015.

7.  It is also necessary to take note of the steps taken in relation to the examination of Mr Tsang pursuant to section 221 for the purposes of the alternative application for a stay of the appeal.  These can be summarised as follows:

(1) Following the making of the winding up order, on 15 September 2014 Harris J ordered Mr Tsang to be orally examined pursuant to section 221 on the earliest dates available to the court.

(2) On 16 September 2014, the Provisional Liquidators’ solicitors informed Mr Tsang’s solicitors that his examination had been fixed for 11-13 February 2015 and 13-14 April 2015.

(3) On 16 January 2015, Mr Tsang’s solicitors informed the Provisional Liquidators’ solicitors that he would not attend for examination on 11 February 2015.  In subsequent correspondence, they offered dates through 2015 on which Mr Tsang was prepared to be examined via video link, it being said that he was working on the Mainland and was not planning to be in Hong Kong at all this year.  This was not acceptable to the Provisional Liquidators, who insisted on oral examination before a master in Hong Kong.

(4) On 11 February 2015, Mr Tsang did not appear for examination.  Harris J found him to be in contempt and ordered that a warrant be issued for his arrest.

(5) Mr Tsang also failed to appear for examination on 13 April 2015.

(6) At one stage, Mr Tsang applied for leave to appeal against the making of the section 221 order.  However, he subsequently withdrew that application.  He did not at any time seek a stay of the section 221 order pending the outcome of this appeal.

8.  It is not necessary for the purposes of this application to express any views on the merits of the appeal, and we therefore refrain from doing so in what follows.

9.  We shall deal first with the contention that Mr Tsang has no standing or tangible interest to permit him to appeal against the winding up order, and that this renders his appeal an abuse of process so that it should be struck out.

10.  Mr Karas, appearing for the Company submitted that:

(1) Mr Tsang’s involvement in the winding up proceedings, as disclosed in the court records and transcripts of hearings at which he was represented demonstrated that he was never a party to the petition proceedings, and was only permitted to participate in them to assist the court as an amicus curiae on the limited question of whether or not the court had jurisdiction to wind up the Company, and if so whether or not it should exercise it by making a winding up order.

(2) This was made clear by the various occasions on which Harris J observed that Mr Tsang had no tangible interest in the winding up so as to make his views on whether or not the Company should be wound up relevant for the court to take into consideration, an observation which was not dissented from by any of the various counsel appearing for Mr Tsang, leading the judge to confine their submissions to the legal points in relation to the jurisdiction issue.

(3) It was further made clear by the fact that Mr Tsang and his counsel had not challenged the judge’s treatment of him as not being a party to the proceedings.

(4) Not being a party to the proceedings, but being in the position of amicus curiae, it was not open to Mr Tsang to appeal against the court’s decision: see Re Bradford Navigation Co (1870) LR 5 Ch App 600 at 603 per James LJ; Re Mid East Trading Ltd [1998] BCC 726 at 732A-C per Evans-Lombe J; PricewaterhouseCoopers v Saad Investments Co Ltd [2014] 1 WLR 4482 at [30]-[37] per Lord Neuberger.

(5) The making of costs orders against Mr Tsang did not make him a party to the proceedings so as to give him standing to appeal against the substantive decision: see To Pui Kui v Ng Oi Che (unreported, CA, CACV 156/2014, 27 February 2015 at paragraph 31 of the judgment).

(6) Further, the lack of any tangible interest in the Company’s liquidation on Mr Tsang’s part as a contributory means that he could not be joined as a party to the winding up proceedings, and could not be heard as such on the question of whether a winding up order should be made, and thus could not appeal against the making of the winding up order. For this proposition, reliance was placed on Re Rica Gold Washing Co (1879) 11 Ch D 36 at pp 42-43 per Jessel MR and Re Greenhaven Motors Ltd [1997] BCC 547 at p.551.  In this case, there was no dispute that Mr Tsang did not have such a tangible interest given that the Company was heavily insolvent.

(7) Thus, as a stranger to the petition, Mr Tsang should not be allowed to appeal against the order made on it, or to be joined as a party on an appeal.  A stranger to a petition should only be allowed to appeal against it in exceptional circumstances: see PricewaterhouseCoopers v Saad (supra), where it was held that auditors of a company could exceptionally be permitted to appeal against the making of a winding up order against it where the order was clearly made without jurisdiction, the auditors had no notice of the petition and could not have appeared on it, and the purpose of the petition was to enable an order for examination to be obtained against the auditors.

11.  Mr Bleach SC, appearing for Mr Tsang, disagreed. He submitted that:

(1) As a shareholder of the Company, Mr Tsang is a contributory, and as such has the necessary locus to appear on the petition, and having appeared and been heard on it, to appeal against the winding up order, the making of which he opposed.  He was a party to the proceedings, and is and was neither an amicus curiae, nor a stranger to the winding up or to the appeal.  He was in fact regarded as a party to the proceedings in the court below, both in terms of the procedure, and in terms of how he was regarded by the judge.

(2) Further, having regard to the fact that he had an interest in the outcome of the petition (by reason of his opposition to it, and the potential order that might be made against him pursuant to section 221), Mr Tsang was not in any sense neutral and could not be considered to be an amicus curiae for that reason also.

(3) The making of a costs order against Mr Tsang was also a clear indication that he was a party to the proceedings and not an amicus curiae.

(4) Having been permitted to appear and oppose the petition at his own expense, and having had a costs order made against him, with part of the costs being ordered to be taxed on an indemnity basis (with an exposure to a claim of some HK$10 million in costs), it would be grossly unfair and unjust not to permit him to appeal.

(5) Even if he were not to be regarded as a party to the winding up proceedings, Mr Tsang would be in the same position as the auditors in PricewaterhouseCoopers v Saad, raising a question as to the court’s jurisdiction to make a winding up order, and being at risk of being examined and required to produce documents under section 221, so that there was no basis for refusing to permit him to bring an appeal against the order below.

12.  We shall deal first with the suggestion that Mr Tsang was not a party to the winding up proceedings.  With respect, it seems to us to be plain that he was.  There does not seem to be any serious suggestion that he is not in fact a shareholder of the Company, and thus a contributory.  Being a contributory of the Company, he was, in our view, entitled to appear on the winding up petition.  This would appear to follow from the provisions of Form 4, Rule 27, Form 10 and Form 11 of the Rules. Moreover, as Mr Bleach pointed out, Mr Tsang was described by Harris J in his first judgment as an “opposing contributory”.  Having given the necessary notice of his intention to appear on hearing of the petition to oppose it, and having appeared at the actual hearing of the petition for that purpose, it does not seem to us that he can be regarded as other than being a party to it, so as to be entitled to appeal against the order made if aggrieved by it.

13.  We do not think that the fact that Mr Tsang did not have a “tangible interest” in the outcome of the petition, in the sense of not standing to benefit in an economic sense from a winding up order being made or not made (given the Company’s massive insolvency) detracts from his entitlement to be heard, at least in relation to matters not dependent on his having such an interest, such as whether or not the court had jurisdiction to make a winding up order at all, or whether, assuming the court had jurisdiction in the strict sense of having the power to do so, the situation was one which fell within the settled practices of the court in deciding whether or not a winding up order should be made (in this case, by reference to the three well-known criteria identified by Harris J in his judgments).  It was in relation to these matters that Harris J received submissions from counsel appearing for Mr Tsang, and there does not appear to have been any suggestion that he should not have done so.

14.  We do not think that Re Rica or Re Greenhaven Motors assist the Company in relation to this argument.  Re Rica involved a petitioning contributory.  It decided that where the contributory had no tangible interest in the outcome of the petition, no winding up order would be made.  But this would be because the court has developed a settled practice to this effect, and not because of an absence of jurisdiction in the strict sense.  As a matter of jurisdiction in the strict sense, the court has power to make a winding up order on the basis of a petition that is presented by someone with the ability to do so – i.e. a creditor or a contributory.  But where the winding up order would not benefit the contributory, the court’s settled practice is not to accede to such a petition.  That does not mean that the contributory is not a party to the petition, or that he cannot appeal against the refusal to make a winding up order (Re Rica itself was an appeal by an unsuccessful petitioner).  Re Greenhaven Motors did not involve a winding up petition, but raised the question of whether a contributory who had no tangible interest was entitled to challenge a liquidator’s decision in the course of the winding up.  Here, Mr Tsang’s lack of a tangible interest was regarded by Harris J not as a reason for refusing to hear him at all, but as a reason for restricting his submissions to matters that he could properly deal with.  Having been allowed to appear on the petition and to make submissions on it, it seems to us that Mr Tsang cannot be regarded as being other than a party to it.

15.  Further, while we would accept that an amicus curiae cannot appeal from a decision in which he had acted as such (see Re Bradford Navigation Co and PricewaterhouseCoopers v Saad Investments Co Ltd (supra)), it seems to us to be clear that Mr Tsang was in no sense an amicus curiae.  Although Harris J indicated that he would be assisted by hearing submissions on behalf of Mr Tsang in relation to the questions of “jurisdiction” (in both senses), this did not render Mr Tsang, or his counsel, amicus curiae.  Mr Tsang throughout opposed the petition, and resisted the making of a winding up order, in his own interest.  He did not put forward his contentions in some neutral capacity, as an amicus would have done.  This is so notwithstanding that Mr Tsang’s interest, i.e. to avoid a situation arising in which he might be subjected to an order for examination under section 221, was not a matter which could have influenced the outcome of the petition.  As Mr Tsang was not, in our view, an amicus curiae, the Provisional Liquidators, arguments based on the authorities concerning the inability of an amicus curiae to appeal do not take matters any further.

16.  So far as the making of a costs order against Mr Tsang is concerned, we agree with Mr Bleach that this is a clear indication that he was a party to the proceedings and not an amicuscuriae.  I do not think that the To Pui Kui case is relevant in this context.  That case concerned a true non-party, against whom costs had been ordered pursuant to section 52A of the High Court Ordinance.  In this case, section 52A was never invoked.  Had it been, it would have been necessary for a separate hearing to have been held, at which Mr Tsang could have appeared to make submissions as to whether or not costs should be ordered against him as a non-party.  No such procedure was ever adopted.  On the contrary, the approach adopted, of making a costs order against Mr Tsang at the end of the proceedings, was entirely consistent with his being a party to the proceedings all along.

17.  Given that we are satisfied, for the reasons explained above, that Mr Tsang was a party to the winding up petition, and is entitled to appeal against it, it is not necessary for him to rely on PricewaterhouseCoopers v Saad.  However, had it been necessary for him to do so, it seems to us that the situation here is not distinguishable.  In both cases, a non-party to a winding up petition would be seeking to intervene on appeal to have the order set aside, where the making of the order directly affected the intending appellant (and in the same way, by rendering them liable to examination under section 221).

18.  Mr Karas sought to argue that the present case was distinguishable from PricewaterhouseCoopers v Saad in a number of respects:

(1) Mr Tsang was (unlike PricewaterhouseCoopers) not the only target of possible examination under section 221.  This does not seem to us to be a relevant distinction.  We cannot see that the decision in PricewaterhouseCoopers v Saad would have been any different had there been other targets for potential examination.

(2) The court’s lack of jurisdiction in that case was patent on the face of the legislation, whereas in this case the question was one of how the court’s discretion to make a winding up order should be exercised.  However, this does not strike us as a persuasive distinction either – whether or not the lack of jurisdiction is obvious on its face, or only apparent after fuller argument, jurisdiction or the lack of it is a matter which the court must deal with.

(3) Mr Tsang had had an opportunity to be heard in the court below, and so had not been denied natural justice.  This too is not, to our mind, a valid distinction.  Indeed, as appears from paragraph 37 of the judgment in PricewaterhouseCoopers v Saad the lack of natural justice lies in the denial of the opportunity to challenge the order as a party to the proceedings with the right of appeal, so that merely having the opportunity to appear and present arguments as an informal amicus curiae, without a right of appeal, would not meet the objection.

19.  Further, we do not think that the point made in paragraph 38 of the Company’s submissions, which emphasises the Privy Council’s statement (in paragraph 36 of its judgment) that an anticipation that there will be a detrimental effect on one’s rights is not normally of itself sufficient to justify being added as a party to proceedings, is well founded – it is clear from the next paragraph of the Privy Council’s judgment that the situation they were faced with was one which fell outside the normal case, having regard to the lack of jurisdiction to make the winding up order, and the fact that obtaining an order for examination against PricewaterhouseCoopers was an object of the winding up.  In the present case, there is similarly an argument based on jurisdiction and a targeting (even if not exclusively) of Mr Tsang for examination.

20.  For all of the foregoing reasons, it seems to us that Mr Tsang is entitled to appeal against the decision of Harris J to wind up the Company.

21.  Turning to the question of whether the appeal should be dismissed as a result of Mr Tsang’s alleged contempt of court, we are satisfied that it should not.

22.  Mr Karas submitted that as Mr Tsang was in contempt of the examination order of 15 September 2014, and had neither appealed against that order, or sought a stay of it, the court should decline to hear his appeal.

23.  In our view, the modern approach to the question of whether or not a party in contempt should be heard by the court is as set out in Motorola Credit Corporation v Uzan [No 2] [2004] 1 WLR 113 at paragraphs 47 to 53.  In particular, the appropriate approach is to ask whether the interests of justice in the particular case are best served by hearing the party in contempt or refusing to do so, rather than to seek to apply a general rule that the court will not hear a party in contempt save in specified exceptional circumstances.

24.  That said, as the English Court of Appeal observed in paragraph 50 of its judgment:

“… , the proposition that the court will hear a person in contempt when the purpose of his application is to appeal against the order disobedience to which has put him in contempt, has the merit not only of good sense; it seems to us necessary to satisfy considerations of fairness. Whether or not a party is in contempt of court by refusing to obey an order irregularly made, or one consequent upon and/or ancillary to an order so made, the circumstances will be rare indeed where it can be right to shut him out from arguing an appeal or application to appeal against that order made in due time.”

25.  Here, Mr Tsang does not seek to appeal against the order made under section 221.  But he is appealing against the winding up order in respect of the Company, absent which the order in respect of which he is said to be in contempt could not have been made. Thus, while he does not appear to be disputing his non-compliance with the order to attend for examination, or that this could (or even would) be contumelious if that order had been justifiably made, he is saying that the order should never have been made as the Company should not have been wound up in the first place.  In our view, the interests of justice do not require that he should be shut out from prosecuting his appeal against the winding up order.  We do not think he should be criticised for failing to prosecute what would seem to be a hopeless appeal against the making of the examination order.  Similarly, while he might have applied for a stay of the examination order (the outcome of which application would have been uncertain), we do not think that the failure to make such an application should prevent him from being heard in the present appeal.  We therefore would not dismiss the appeal on this ground either.

26.  For the foregoing reasons, we dismissed the application.

27.  So far as costs are concerned, Mr Karas submitted that we should order that costs should be in the cause of the appeal.  Mr Bleach sought an order for costs in favour of Mr Tsang.  In our view, this was a stand-alone application brought by the Company which has failed.  In determining it, no consideration has been given to the merits of the appeal.  In these circumstances, we consider that the normal costs consequences should follow.  We therefore make an order that the costs of this application should be paid by the Company to Mr Tsang, to be taxed on the party and party basis if not agreed.  Mr Bleach did not seek a certificate for two counsel, and in any event we would not have been inclined to grant such a certificate.