The Joint and Several Liquidators of China Medical Technologies, Inc. v. Bank of China (Hong Kong) Ltd and Others

HCMP 576/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

MISCELLANEOUS PROCEEDINGS NO 576 OF 2016

(ON AN INTENDED APPEAL FROM HCCW 435/2012)

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D E C I S I O N

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Hon Barma JA (giving the Decision of the Court):

1.This was an application by the Joint and Several Liquidators of China Medical Technologies, Inc., seeking leave to appeal on two additional grounds against the decision of Harris J dated 15 December 2015 dealing with an application made by the liquidators under section 221 of the Companies Ordinance (leave to appeal was granted by the judge in relation to two other grounds of appeal relied on by the liquidators). The application sought orders requiring production of documents by the Bank of East Asia, Limited (“BEA”) and the Bank of China (Hong Kong) Limited (“BOCHK”) and for the oral examination of Yuen Chun Man Manny, a former employee of BEA and Loman Lo Kin Man and Jackie Chiu Chi Pang, both employees of BOCHK.

2.By his decision, the judge ordered production of certain of the documents sought from BOCHK, but made no order for production against BEA.  He also refused to make the orders for examination sought against the individuals, ordering instead that the liquidators could administer interrogatories in writing to the individuals, which they would be required to answer on oath.

3.The liquidators’ application under section 221 was made in the context of their investigations into a substantial fraud that had been practised on the Company, involving the alleged misappropriation of some US$355 million of the Company’s funds by its Chief Financial Officer, Chairman and major shareholder.  The misappropriation was effected by causing these funds to be paid by the Company to Supreme Well Investments Limited (“Supreme Well”), ostensibly for the purchase of two forms of medical technology.  Such technologies are said by the liquidators to have been bogus, so that the Company received nothing of value for the monies paid out by it. The monies were paid into accounts maintained by Supreme Well with BOCHK and BEA, from which they were subsequently paid out to a large number of companies and persons (in excess of one hundred). 

4.The nature of the documentation sought includes account opening and closing information of Supreme Well and its many payees, transaction documentation in respect of payments made in and out of certain of these bank accounts, and payment approval documentation (being internal documentation of the banks which would cast light on the steps taken by them to assess the legitimacy of the payments being made), as between the Company and Supreme Well and Supreme Well and its payees.  Client, credit and risk assessment documentation in respect of the Company, Supreme Well and a number of other companies and individuals were also sought, as were documents recording the banks’ policies and practices in relation to the treatment of suspicious transactions.  Finally, the application provided for notices to be served by the liquidators after production of these documents requiring the production of further documentation relating to companies, individuals and matters to be specified by the liquidators in their notices.

5.In addition, as has been noted, there were also applications for the oral examination of the bank employees mentioned in paragraph 1 above.

6.BEA and BOCHK resisted the applications for production of documents on the grounds that: first, most of the documents sought did not relate to the company within the meaning of section 221(3) of the Companies Ordinance; and second, that the scope and extent of the order, coupled with the fact that the liquidators had commenced proceedings against the banks (principally on the basis that the banks were liable to the Company as constructive trustees as they had knowingly assisted in the perpetration of the frauds), meant that it would be oppressive to require the production of the documents in question.

7.The judge was of the view that section 221(3), which enables the court to order the production of documents “relating to the company”, is narrower in scope than the basis for oral examination identified in section 221(1), which is expressed in terms of “information concerning the promotion, formation, trade, dealings, affairs or property of the company”.  He considered that documents containing information of the nature mentioned in section 221(1) might not necessarily relate to the Company within the meaning of section 221(3).  He was further of the view that insofar as the documents sought concerned the accounts of entities or persons other than the Company, they could not be regarded as relating to the Company.  Finally, he considered that the requests for production were oppressive in certain respects, and particularly in relation to the disclosure of documents that would be likely to bear on the information available to the banks as a result of steps taken by them to comply with internal and regulatory requirements regarding the purposes of transactions that might be thought to be unusual or questionable.  He therefore made a limited order for production against BEA (essentially limited to documents relating to accounts of the Company), and refused to make any order against BOCHK.

8.So far as the applications for oral examination of the bank’s employees were concerned, the judge took the view that while section 221(1) went beyond matters that strictly related to the Company, it would be oppressive to require questions concerning compliance with regulatory guidelines and internal protocols of the banks relating to risk control in respect of possibly fraudulent transfers to be answered, having regard to the fact that proceedings were already on foot. However, he considered that questions relating to the propriety of the acquisition of the medical technologies that were the subject of the US$355 million payments and tracing such payments should be answered, although he considered that this was more appropriately done by way of written interrogatories rather than oral examination.

9.Dissatisfied with this outcome, the liquidators sought leave to appeal from the judge, relying on four grounds, namely:

(1)  That the judge erred in law in construing section 221(3) more narrowly than section 221(1).

(2)  That the judge erred in holding that the documents sought by the liquidators were not documents “relating to” the Company, as he wrongly held that documents that related to the Company’s affairs or property did not necessarily relate to the Company for the purposes of section 221(3), and he further wrongly held that because a document related to other entities, it thereby could not relate to the Company.

(3)  That the judge erred in concluding that the potential oppression to the banks outweighed the liquidators reasonable need for the documents sought, in that he failed to give sufficient, or any, weight to a number of factors.

(4)  That the judge erred in refusing to order the oral examination of the banks’ employees, in that he failed to give sufficient, or any, regard to a number of matters.

10.The judge gave leave to appeal limited to the first two of these grounds.  By this application, the liquidators seek this court’s leave to appeal on the third and fourth grounds also.  In support of their application, the liquidators contend that not only do those grounds have the necessary reasonable prospects of success on appeal, but that there are other reasons in the interests of justice why leave to appeal should be granted, in that these additional grounds raise important questions as to the scope of section 221, and impact on the ability of liquidators to obtain documents relevant to potentially available causes of action.

11.We do not think that the proposed grounds have reasonable prospects of success, and therefore do not grant leave to appeal in respect of them.

12.It is well established that the exercise of the powers under section 221 is a matter for the court’s discretion.  As such, the liquidators face a substantial hurdle in seeking to overcome the judge’s exercise of his discretion.  It is not enough to suggest that the judge assigned inappropriate weight to one (or several factors) in the balancing exercise that led him to exercise his discretion as he did.  It is trite that questions of the weight to be given to particular factors in that process are for the judge hearing the application to determine, and an appellate court will not interfere simply because it might take a different view from the judge as to the weight to be assigned to any given factor.  Absent a relevant error of law, or a demonstrated misunderstanding of the evidence, or it being shown that the judge failed to have regard to relevant factors or took into account irrelevant matters, the court will only intervene in the exercise of discretion if it is satisfied that the judge’s decision was plainly wrong ‑ that it fell outside the generous ambit within which reasonable disagreement is possible.

13.In the present case, each of the nine matters identified under proposed ground 3 are prefaced with the contention that the judge erred in failing to give “any or any sufficient weight” to them.  The complaints are therefore, on their face, as to the weight given by the judge to the various matters identified.  For the reasons just explained, this is not promising ground for an appeal against the judge’s exercise of discretion.

14.The judge, in our view correctly, identified the balancing exercise he was required to carry out as being one in which he balanced the liquidators’ reasonable need for the information sought against the potential oppression that might be caused to the respondents by the making of the orders applied for.  We did not understand Mr Manzoni SC, appearing for the liquidators, to suggest that this approach was otherwise than the correct one.

15.Mr Manzoni’s focussed on the nature of the liquidators’ potential claims against the banks (in respect of which protective writs had been issued), and the elements of those claims that would need to be established in order for them to succeed.  He pointed out that the judge rightly identified such claims as being “dishonest assistance” claims, which would involve the liquidators in having to show that the behaviour of the banks in relation to the transactions by which the Company’s funds were misapplied and moved through various layers of recipient entities was not just dishonest in an objective sense, but also subjectively, by reference to the knowledge that the banks had as to the transactions by which the Company’s funds were transferred from one entity to another, and the circumstances of those transfers.  Mr Manzoni submitted that the payment approval documentation that was sought was needed by the liquidators not just to ascertain whether the banks had complied with both their own internal requirements and those of external regulators in respect of considering and ascertaining the purposes of apparently questionable funds transfers, but also to ascertain what the banks learned as a result of such steps as they may have taken in order to comply with such requirements.  This latter material, Mr Manzoni submitted, was only likely to be available from the banks, and was what was needed by the liquidators to be able to assess the likelihood of being able to establish the subjective element of dishonesty necessary to fix the banks with liability.  It was this, said Mr Manzoni, that the judge had left out of consideration when seeking to strike the balance between the liquidators’ reasonable requirements and the need to avoid undue oppression to the banks.  Mr Manzoni suggested that these points were encapsulated in proposed grounds 3.5 and 3.6 of the liquidators’ draft notice of appeal.  It seems to us that it is a point that is also reflected in proposed ground 3.2.

16.Despite Mr Manzoni’s able submissions, we are unable to agree that the judge overlooked this aspect of the matter.  It is clear from paragraph 28 of the judgment that the judge was well aware of the nature of the claims that would be advanced against the banks.  And it seems to us to be clear from paragraphs 30 and 31 of the judgment that the judge was also alive to the need for both the objective and subjective elements of dishonesty that needed to be established.  What the judge said in those two paragraphs makes it clear that he gave consideration to the material that the liquidators had already obtained, and had come to the view that the material was sufficient to enable the liquidators to make a sufficiently informed decision as to whether or not to commence proceedings (or, in this case, to press forward with the protective writs that had been issued).

17.While the liquidators might well prefer to have more information, so as to be able to assess with greater accuracy the prospects of succeeding in such claims before finally deciding whether or not to launch them, it does not seem to us to be possible to say that the judge was clearly wrong in his assessment of the position in this respect.

18.Similarly, we do not think that it can be said that any of the other matters adverted to under proposed ground 3 are matters in respect of which it can be said that the judge had erred to such an extent as to make his exercise of discretion one which was plainly wrong, or to which no reasonable judge could have come.

19.The complaints at paragraphs 3.1 and 3.8 of ground 3 refer to a suggested failure by the judge to give sufficient weight to the liquidators’ reasonable requirement for the documents sought.  However, it is clear from the judgment that the judge accepted that the documents were reasonably required, but considered that, when weighed against the oppression that would be caused to the banks by an order for disclosure of such documents, such requirement was not of sufficient strength to justify the making of an order.

20.The complaint at paragraph 3.3 of ground 3 suggests that the judge failed to have regard to the purposes for which an order under section 221(3) may be made, and in particular that one such purpose is to enable liquidators’ to assess the viability of potential claims by the Company so as not to waste funds on claims that cannot succeed.  This complaint is also reflected in paragraph 3.5.  However, the judge clearly had this purpose in mind.  He concluded that this did not mean that the liquidators had to be provided with all the documents necessary to make a definitive assessment as to the prospects of success of a proposed claim, but that they should be entitled to sufficient information to enable them to make a reasonably informed decision, short of certainty one way or another, as to whether or not they should commence proceedings.  We do not consider that he was in error in taking this approach.

21.Paragraph 3.4 highlights the judge’s views as to the nature of the fraud and the steps that the banks might have been expected to take in relation to the suspicious payments from the Company to Supreme Well and onward payments from Supreme Well to other entities.  However, the fact that the judge had expressed these views in his earlier judgment of 28 August 2014, from which he quoted extensively in paragraph 6 of the judgment below, demonstrates clearly that the judge was well aware of these matters, and could not have overlooked them in coming to his decision as to how his discretion should be exercised.

22.As to the point made in paragraph 3.7, that the writs that had been issued were protective writs issued because of the impending expiry of the relevant limitation periods, this does not take matters further.  The judge gave careful consideration to the material that the liquidators already had, and formed a view as to whether or not such material should suffice to enable them whether or not to pursue their proposed claims against the bank.

23.Finally, in relation to paragraph 3.9, we do not consider that the judge can be said to have gone wrong in principle in the way in which he approached the matter.  He clearly had the correct test in mind, and was concerned to decide whether or not the materials sought were really necessary to enable the liquidators to decide whether or not to proceed against the banks.  We do not think that it can be said that he came to a plainly wrong conclusion in this regard.

24.As it does not appear to us that the judge approached the matter on the basis of some misapprehension as to the law, or that his decision can be said to be plainly wrong, we do not consider that ground 3 has reasonable prospects of success such as would call for leave to appeal to be given.

25.So far as ground 4 is concerned, insofar as it repeats points made under ground 3, we do not consider that it has reasonable prospects of success for the reasons already given.  However, a number of further points are made under ground 4, and in our view these take the matter no further.  The fact that the bank employees are not defendants to the writs that have been issued does reduce the extent of the oppression that would be caused to them to some extent.  However, it seems to us that the judge was quite entitled to consider, drawing upon his own considerable experience, that an oral examination would be likely to be more oppressive and less productive than an examination by way of written answers to interrogatories, regardless of whether or not this had been suggested by those representing the employees.  We therefore do not think that this ground has reasonable prospects of success either.

26.For the foregoing reasons, we dismiss the liquidators’ application.

27.So far as costs are concerned, these should follow the event, and we therefore make an order nisi that the liquidators should pay the costs of the Banks and their employees in relation to this application.  Having considered the statements of costs and supplemental statements of costs lodged on behalf of the Banks and their employees, we assess the costs of BOCHK and its employees (the 1^st, 3^rd and 4^th respondents) on a gross sum basis at HK$130,892 and the costs of BEA and its employee (the 2^nd and 5^th respondents) on a gross sum basis at HK$155,480.

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

Mr Leo Remedios, instructed by KW Ng & Co, for the 1^st, 3^rd and 4^th respondents

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

Attendance excused for Official Receiver