The Joint and Several Liquidators of China Medical Technologies, Inc v. Kpmg (A Firm) and Others

HCCW 435/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO 435 OF 2012

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D E C I S I O N

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1.On 24 February 2016 (“2016 Order”) I made an order that required KPMG HK to produce to the Liquidators Documents, as defined in the order, and in particular in para 2 that:

“Insofar as the aforesaid Documents or copies thereof are located in Hong Kong or a jurisdiction other than the Mainland of the People’s Republic of China (‘Mainland’), or they are stored in a form as at 24 February 2016, which allows them to be accessed outside the Mainland, the Documents, or copies thereof, shall be produced by the 1^st Respondent to the Liquidators in Hong Kong on or before 23 March 2016 or such other date as the parties agree or the Court directs.”

2.On 12 January 2017 I made a further order amending para 3 of the 2016 Order.  That order was appealed.  It was upheld by the Court of Appeal, although certain necessary changes to the time periods for compliance were made.  The order in the form made by the Court of Appeal was as follows (“2017 Order”):

“Insofar as the Documents referred to in paragraph 1 of the February Order or copies thereof are located in the Mainland or stored in a form which allows them, as at 24 February 2016, to be accessed only in the Mainland:

(1) the 1st Respondent shall within 35 clear calendar days produce copies of the Documents to the Liquidators in the Mainland after redacting the information identified by Zhong Lun Law Firm as ‘sensitive information’;

…”

3.KPMG HK’s case in respect of its ability to produce the Documents or access them from Hong Kong has evolved over time.  This has given rise to a series of decisions.  The most recent of which is the Court of Appeal’s decision of 12 April 2017, which led to the 2017 Order and my decision of 15 May 2017 dealing with, amongst other things, an unsuccessful application by KPMG HK seeking effectively to stay the 2017 Order. 

4.KPMG HK have advanced over time the following different reasons why they should not be required to produce the Documents:

(1) The Documents might contain State Secrets;

(2) They might contain sensitive information, which the Ministry of Finance (“MOF”) wanted assessed before access to the Documents be given;

(3) The MOF objected to copies of the Documents, as opposed to the opportunity to inspect them in KPMG’s offices in the Mainland, being provided to the Liquidators in the Mainland.

5.The court has rejected these arguments, although orders have been framed to take into account the MOF’s sensitivities including not making the court’s various decisions public.  The position has now been reached that this court and the Court of Appeal have ordered KPMG HK to provide copies of the Documents to the Liquidators in the Mainland.  KPMG HK have not done so because they say they are held by KPMG’s Mainland entity, KPMG Huazhen, and they refuse to provide them because KPMG Huazhen take the view that whatever the courts of Hong Kong have concluded to do so would be inconsistent with what KPMG Huazhen believe the MOF have directed.  KPMG Huazhen have also refused to provide the necessary access to their servers to allow access to Documents stored on them to be accessed in Hong Kong.  The Liquidators say that KPMG HK have de facto control of KPMG Huazhen and suggest that KPMG Huazhen’s refusal to assist in providing copies of the Documents or remote access to them is not genuine and is a contrived excuse to hamper the Liquidators’ attempts to review the Documents effectively and is in breach of the 2016 and 2017 Orders.

6.The Liquidators have issued summons seeking orders intended to require remote access to be given and copies of the Documents provided respectively. In respect of remote access, a summons was issued on 31 October 2016 seeking orders:

“1. that within 14 days of the service of this Order, the 1^st Respondent comply with paragraph 2 of the Order made by the Honourable Justice Harris on 24 February 2016 (‘February Order’) by:

1.1 the 1^st Respondent accessing all documents identified in paragraph 1 of the February Order (‘Documents’) located on servers in the Mainland through any of the available methods of electronic access to the Documents set out in the Affirmation of Chung Kam Ming (‘Chung 1’) and the Sixth Affirmation of Jacqueline Wong (‘Wong 6’), both filed on 23 September 2016; and

1.2 every partner of the 1^st Respondent who is also a partner of KPMG Huazhen (‘Common Parners’), including but not limited to the 9^th to 17^th Respondents, in their capacity as partners of KPMG Huazhen, take all necessary steps to ensure that paragraph 1 hereof is complied with;

…”

7.Appended to Mr Manzoni’s submissions was a reformulation of the order that the Liquidators seek:

“Within 14 days of the service of this Order, KPMG comply with paragraph 2 of the February 2016 Order by accessing all the Documents identified in paragraphs 1.1 to 1.3 and 1.5 to 1.11 of the February 2016 Order located on servers in the Mainland through any of the methods of electronic access to the Documents including those set out in Chung 1, Wong 6, Chung 2, Yan 5 and Wong 9.”

8.By a summons filed on 6 June 2017 dated 2 June 2017 the Liquidators seek the following order in respect of the provision of copy Documents: 

“1. The obligation of the 1^st Respondent to comply with paragraph 3(1) of the Order of this Court dated 24 February 2016 (‘February 2016 Order’), as varied by the Order of this Court dated 12 January 2017 (‘January 2017 Order’) and upheld by the Order of the Court of Appeal dated 12 April 2017 which has not been the subject of any further appeal or variation, and paragraph 2 hereof, is not contingent upon cooperation, approval or any other action by any person who is a partner or employee of the firm called KPMG Huazhen (also known as KPMG Huazhen LLP).

2. Without limitation to the generality of the February 2016 Order as varied by the January 2017 Order, the 1^st Respondent shall comply with the February 2016 Order by producing the Documents referred to therein within three (3) business days of the date of this order to the Liquidators at Borrelli Walsh, Room 3706, Fortune Plaza Building A, No.7 East Third Ring Middle Road, Chaoyang District, Beijing, Peoples [sic] Republic of China, 100020.”

9.Mr Manzoni argued that I had in my Decision of 24 February 2016 (“February Decision”) already determined that KPMG HK had de facto control of KPMG Huazhen, that all relevant evidence had been filed and I should make these new orders to make the position clear and to require KPMG HK to cease avoiding compliance and produce copies of the Documents and remote access to them.  The particular paragraphs of my February Decision the Liquidators rely on are:

“27. It seems to me clear from the evidence that so far as possible KPMG China operates as one commercial entity and, so far as permissible by law, is managed as such by a panel of partners very largely drawn from the Hong Kong partnership. Subject to any specific legal restriction KPMG HK is, therefore, in practice able to direct that KPMG Huazhen comply with its directions. I did not understand this to be disputed by KPMG HK in the present application. However, I note that in a letter from KPMG HK to the Liquidators’ solicitors dated 21 December 2012 and also a letter from Smyth & Co dated 12 August 2013, KPMG HK suggested that in respect of papers held by KPMG Huazhen the [Liquidators’] ‘enquiries may be best served if they are made by your client’ to [KPMG] Huazhen. It seems to me that this was disingenuous given what has become clear as a result of my request for information was the substantive nature of the relationship between KPMG HK and KPMG Huazhen.

28. It seems to me also to be clear that those behind the formation of KPMG China, largely partners in KPMG HK, choose to represent themselves as operating one, integrated operation in the Mainland and Hong Kong. It seems to me that this representation sits uncomfortably with KPMG HK’s evidence, which I address in detail later, seeking to explain the regulatory environment in which it operated in the Mainland and the restrictions on its ability to produce to the Liquidators the documents that they seek. If KPMG HK’s assertions contained in the evidence of Jacqueline Wong about the relationship between KPMG HK and KPMG Huazhen and the restrictions on the transfer of documents out of the Mainland are correct KPMG China cannot fairly hold itself out as one business entity.

…

90. I am satisfied for the reasons explained earlier that the Liquidators do reasonably require the documents that they seek.  I am also satisfied as a result of the evidence filed by Mr. Weir that the fact that KPMG HK and KPMG Huazhen are separate legal entities does not prevent KPMG HK obtaining the documents to the extent that they are in the possession or control of KPMG Huazhen.”

10.KPMG HK have raised a number of objections to the course advanced by the Liquidators.  The principal ones are that whether or not KPMG HK are prevented from providing copies of the Documents or remote access goes to KPMG HK’s likely defence to any contempt proceedings brought by the Liquidators and that the issue should be resolved in contempt proceedings if the Liquidators take the view that KPMG HK have no lawful excuse for non-compliance with the orders and in accordance with the procedural safeguards and standard of proof contempt proceedings involve.  Secondly, it is wrong for the Liquidators to suggest that the issue of control has been resolved and, if it is so argued, issue estoppel arises, because the conclusions reached in the February Decision were not central to the issues in the application and are made more by way of background.  I agree with both submissions.

11.It is not suggested that either the 2016 or 2017 Orders are unclear or that there is much room for argument about what KPMG HK have done, or not as the case may be, by way of compliance with them.  If the Liquidators, consider KPMG HK do not have a legitimate excuse for non-compliance the appropriate course is to commence contempt proceedings.

12.I also have another more practical objection to the way in which the Liquidators wish to progress the matter.  If I have to decide the summonses on the basis of the evidence filed to date, which is Mr Manzoni’s preferred course, I cannot see how I could be expected to do other than make an order substantially in the terms of the first part of paragraph 27 of the February Decision, which would not advance the matter very far; although I note in passing that there may be a material difference in the position in respect of the audit working papers for the financial years up to and including 2007, when the audit was done by the KPMG HK and from 2008, when as I understand the position, KPMG Huazhen carried out the audit on the Mainland as a component auditor.  If the question of KPMG HK’s ability to direct KPMG Huazhen to take such steps as are necessary for KPMG HK to comply with the 2016 and 2017 Orders is going to have to be resolved by further evidence and possibly cross-examination, particularly, having regard to the importance of the Liquidators having access to the Documents and the nature of KPMG HK’s reasons for failure to comply, this should be by way of contempt proceedings.

13.In conclusion I will dismiss the two summonses.  I will make a costs order nisi that the costs are paid out of the assets of the Company with a certificate for two counsel.

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

Mr Paul Shieh SC and Mr Wilson Leung, instructed by Reynolds Porter Chamberlain, for the 1^st to 17^th respondents