Introduction

In the recent case of Akai Holdings Ltd (in compulsory liquidation) v Ernst & Young (a Hong Kong firm) [2009] HKCU 255, the Court of Final Appeal (“CFA”) determined that the notes and transcripts of the depositions of persons examined pursuant to or under threat of section 221 of the Companies Ordinance (Cap. 32) (“CO”) may attract legal professional privilege (“LPP”), meaning that they would not be subject to disclosure.

Section 221 CO provides for certain persons to be examined in private under oath, those persons being, “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” – section 221(1) CO. 

The CFA, in an earlier judgment in Joint & Several Liquidators of Kong Wah Holdings Ltd v Grande Holdings Ltd (2006) 9 HKCFAR 766, observed that:

“The broad purpose of provisions like s.221 … 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.”

Background of the Case

The Plaintiff Akai Holdings Ltd (“Akai”) was an electronics multi-national company incorporated in Bermuda and listed on the stock exchange in Hong Kong, which went into liquidation on 23 August 2000. By May 2004, it became apparent to Akai’s liquidators that the only significant source of “assets” of Akai was a potential claim against Akai’s former auditor Ernst & Young (“E&Y”) in negligence. With a view to preventing the claim from being time barred, Akai issued a protective writ against E&Y on 24 May 2004. During the period between the issuance of the protective writ and the service of the Points of Claim on 21 November 2005, the liquidators examined a number of people, including former officers and managers of Akai, pursuant to section 221 CO.

In October 2007, E&Y issued a summons for specific discovery under Order 24 rule 7 of the Rules of the High Court in the audit negligence action (which was commenced in the Commercial Court) for the notes and transcripts of the depositions of the persons examined by the liquidators under section 221 CO.  The summons was then transferred by the judge in the Commercial Court to the Companies Court on the basis that the discretion to grant or withhold disclosure of section 221 CO depositions under Rule 62 of the Companies (Winding-up) Rules (“CWUR Rule 62”) was the discretion of the Companies Judge.

The liquidators opposed the discovery application, arguing, among other things, that such notes and transcripts were brought into existence in contemplation of litigation (thus, attracting litigation privilege) and for the sole or at least dominant purpose of seeking legal advice (thus, attracting legal advice privilege). Therefore, such notes and transcripts were covered by 2 categories of LPP, that is, legal advice privilege and litigation privilege, and thus did not have to be disclosed.

Findings of the Courts Below

In the decision at first instance, Kwan J ruled that the notes and transcripts of examinations were relevant and necessary to the fair disposal of Akai’s action against E&Y and found that Akai had not made out a factual basis to claim LPP for the said notes and transcripts. By adopting (at its narrowest) the English case of Three Rivers District Council v Bank of England (No. 5) [2003] QB 1556, Kwan J was of the view that legal advice privilege had no application to the notes and transcripts, as they were documents created preparatory to seeking legal advice and were clearly not communications between client and lawyer seeking or giving legal advice.

Further, for litigation privilege to attach to the depositions, they must have been obtained for the dominant purpose of existing or contemplated litigation. On the facts of the case, Kwan J ruled that the factual basis for a claim of litigation privilege had not been made out. She further added that the proceedings under section 221 CO were inquisitorial in nature and that litigation privilege, which is an essential component of adversarial procedure, did not extend to protect the documents and information obtained in the course of private examination which were inquisitorial or non-adversarial proceedings. Hence, litigation privilege did not exist as a matter of fact and as a matter of law.

As to CWUR Rule 62, Kwan J held that disclosure by way of discovery of the said notes and transcripts does not require leave under CWUR Rule 62.

The liquidators appealed to the Court of Appeal, which affirmed the first instance decision.

The Decision of the Court of Final Appeal

The decision of the Court of Appeal has now been overturned by the CFA. The CFA reviewed the fundamental nature and policy rationale of LPP and recognized that the right to confidential legal advice is a constitutional right enshrined in Chapter III of the Basic Law. Such right should be given a “generous interpretation” in order to give all persons in Hong Kong (that is, Hong Kong residents and persons in Hong Kong other than Hong Kong residents) “the full measure of fundamental rights and freedoms so constitutionally guaranteed”, citing the judgment in Ng Ka Ling v Director of Immigration (1999) 2 HKCFAR 4. The protection the right affords should not be confined to what lawyers and clients say or write to each other and may extend to information gathered or generated in certain circumstances and under certain conditions.

In his judgment, Bokhary PJ added that information could be acquired for the dominant purpose of :-

(a)   seeking confidential legal advice in connection with litigation that was in real prospect; or

(b)   seeking confidential legal advice on whether a cause of action exists.

In either case, the right to confidential legal advice can protect the information from disclosure.

The judgment in Three Rivers District Council v Bank of England (No. 6) [2005] 1 AC 610, involving both legal advice privilege and litigation privilege, was also cited:

“legal advice privilege has an undoubted relationship with litigation privilege.  Legal advice is frequented sought or given in connection with current or contemplated litigation.  But it may equally well be sought or given in circumstances and for purposes that have nothing to do with litigation.  If it is sought or given in connection with litigation, then the advice would fall into both of the two categories.  But it is long settled that a connection with litigation is not a necessary condition for privilege to be attracted.”

Upon close examination of the evidence, the CFA was convinced that on the evidence, the liquidators resorted to private examinations and interviews pursuant to or under threat of section 221 CO examinations for the dominant purpose of bringing the notes and transcripts of those examinations and interviews into existence so that they could be placed before the company’s legal advisers in order to obtain legal advice in connection with litigation that was in active contemplation and therefore in real prospect at the time.

Reversing the findings of facts of Kwan J, the CFA concluded that litigation was in real prospect and that the dominant purpose test was satisfied so as to bring the notes and transcripts under the protection of litigation privilege and shield them from disclosure.  In the circumstances, there was no need for the CFA to decide the issue of legal advice privilege.  However, Bokhary PJ noted it was suffice to say that future cases requiring a decision on an issue of legal advice privilege, being a category of LPP, are to be approached in a manner appropriate to a fundamental right.

As to nature of the proceedings under section 221 CO not being adversarial, the CFA found that fact to be irrelevant. Instead, the CFA held that the Court should look at the nature of the contemplated proceedings against E&Y, which were necessarily adversarial.

Are the Notes and Transcripts Not Covered by LPP Subject to Automatic Disclosure?

The CFA acknowledged that in cases where the notes and transcripts of examinations did not attract LPP, disclosure of the same is subject to the discovery regime of Order 24 of the Rules of the High Court as well as the insolvency regime under section 221 CO and CWUR Rule 62.  Disclosure to any person other than the Official Receiver, liquidator, or any provisional liquidator other than the Official Receiver still requires the leave of the Court under CWUR Rule 62.

In the present case, as the CFA had already ruled that the notes and transcripts were covered by LPP, the CFA did not regard this as an appropriate occasion on which to pronounce how the Court’s discretion under CWUR Rule 62 might be exercised.