Introduction

The former section 221 application (now replaced by sections 286B and 286C after the Companies (Winding Up and Miscellaneous Provisions) (Amendment) Ordinance has come into effect) under the Companies (Winding Up and Miscellaneous Provisions) Ordinance (the “CWUMPO”) is a powerful tool which provides assistance to the liquidators to investigate into pre-liquidation dealings of a company expeditiously and economically by seeking production of information and/or documents. 

In cross-border insolvency situations, documents sought to be produced may be in the possession of parties not within Hong Kong.  Can the liquidators apply for production of such documents? How should the Court likely handle such applications?  The recent Court of Appeal case The Joint & Several Liquidators of China Medical Technologies, Inc. v KPMG (a firm) and others [2017] HKEC 894 provides an illustration.

Background of the case

The company in liquidation was China Medical Technologies, Inc. (the “Company”).  The Liquidators sought an order under the former section 221 of CWUMPO to have access to some documents in the possession of KPMG, the former auditor of the Company.  KPMG opposed the Liquidators’ application on the ground that some documents were in the possession of their associated firm in the PRC and were subject to the regime of the PRC regulating disclosure of audit work papers.  KPMG argued that releasing such documents could occasion sanctions against their associated firm as such documents allegedly contained state secrets and sensitive information. 

Orders made by the judge

The Liquidators’ application was granted by the Honourable Mr. Justice Harris.  The judge ordered KPMG to produce to the Liquidators the relevant documents with a special provision which enabled KPMG to apply to court for variation “in the event that any matter occurring subsequent to the court order which in the view of KPMG inhibits or prevents them from complying with any part of the order”.

Application for variation of orders

Pursuant to that special provision, KPMG applied for variation, inter alia, that there should be inspection of the relevant documents in the PRC only and no copy of the same should be made.  State secret and sensitive information should also be redacted prior to the Liquidators’ access.  Subsequently, the Liquidators also sought variation of the order, inter alia, that KPMG should make application as is required to determine whether any document contained state secrets and to authorize production of copies to the Liquidators. 

Prior to the hearing of the summons for variation, a vetting of the documents in question was conducted by a PRC law firm (the “PRC Law Firm”) and the parties accepted that there was no more concern about state secrets being contained in the documents.  In respect of the two applications for variation of the order, the judge ordered that KPMG should produce copies of the documents to the Liquidators in the PRC and the Liquidators should retain, maintain and keep safe the copies in the PRC.  Further, information identified by the PRC Law Firm as sensitive information should be redacted.  KPMG should also apply for a determination as to whether or not there is any restriction under the Laws of the PRC on copies of the documents without redactions being provided to the Liquidators.

KPMG’s appeal

KPMG sought leave to appeal on the ground that it was oppressive to grant the order for production of copies as it would expose KPMG Huazhen to potential sanction in the PRC.  It was their submissions that it was not for the Court to decide how the laws are to be interpreted or administered in the PRC.

In approaching the balancing exercise in respect of the Court’s discretion, the Court of Appeal made reference to the legal principles in Kong Wah Holdings Ltd v Grande Holdings Ltd (2006) HKCFAR 766 and Re Mid East Trading Inc [1998] 1 BCLC 240.  In gist, it is an exercise of discretion balancing the liquidator’s reasonable requirements against the need to avoid making an order that is unreasonable unnecessary or oppressive to the party from whom the documents are sought, and the risk that a party will be exposed to liability is an important factor to be weighed with others when considering whether to order production. 

Since there was no challenge on the Liquidators’ reasonable requirements in the appeal, the focus was whether it was oppressive in requiring KPMG to provide information which exposes it to potential liability.

The Court of Appeal ruled that, given the provision for redaction of the sensitive information in the documents in question, there was no real risk regarding dissemination of the same to the Liquidator, and thus no real risk of KPMG or their associated firm acting in breach of the relevant laws of the PRC.  The Court also expressly stated that it had not lost sight of the evidence on soft law or directives in the PRC when arriving at this decision.  In the circumstances, the appeal was dismissed, but extension of time was granted to KPMG to comply with the order.

Implication on cross border insolvency regime

This case shows the Court’s inclination to order production of documents in the PRC reasonably required by the Liquidators, albeit with redaction of sensitive information.  On the other hand, this case portrays a difficult situation parties in cross-border insolvency matters may face in the absence of any official protocol or memorandum of understanding between the PRC and the Hong Kong authorities. 

 

For enquiries, please contact our Litigation & Dispute Resolution Department:

E: insolvency@onc.hk                                   T: (852) 2810 1212 W: www.onc.hk                                             F: (852) 2804 6311 19th Floor, Three Exchange Square, 8 Connaught Place, Central, Hong Kong

Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.

Published by ONC Lawyers © 2017