Re China Medical Technologies, Inc.

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

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DECISION

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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.

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