China Medical Technologies, Inc. (in Liquidation) v. Kpmg (A Firm)
Read the full judgment text of HCA 1822/2013 on BabelCite. This High Court CFI judgment was delivered on 23 March 2018.
1. There are three summonses before me, all filed by the defendant (“KPMG”) in these three actions, pursuant to Order 12, rule 8A seeking orders to require the plaintiff (“CMED”) to serve three protective writs issued by CMED.
Cited by 6 cases · Cites 3 cases
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HCA 1822/2013 and HCA 1138/2014 and HCA 2276/2016 (Heard Together) [2018] HKCFI 655 HCA 1822/2013 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ACTION NO 1822 OF 2013 __________________
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ACTION NO 1138 OF 2014 __________________
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ACTION NO 2276 OF 2016 __________________
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________________ DECISION ________________ Introduction 1.There are three summonses before me, all filed by the defendant (“KPMG”) in these three actions, pursuant to Order 12, rule 8A seeking orders to require the plaintiff (“CMED”) to serve three protective writs issued by CMED. 2.CMED, now in liquidation, was a company incorporated under the laws of the Cayman Islands traded on the NASDAQ from August 2005 to March 2012. On 27 July 2012, it was placed into liquidation by the order of the Grand Court of the Cayman Islands. On 29 November 2012, Harris J appointed provisional liquidators to CMED. After a heavily contested winding up petition, Harris J made an ancillary winding up order in respect of CMED appointing liquidators in Hong Kong (the “Liquidators”). 3.CMED is hopelessly insolvent with provable claims in excess of US$400 million, but the Liquidators could only locate tangible assets of nominal value. During the course of their investigation, the Liquidators revealed prima facie evidence that the former management of CMED had stolen at least US$355 million from CMED through the FISH and SPR Technology acquisitions. The Liquidators have identified potential causes of action against a number of entities and individuals connected with CMED and its former management. 4.The Hong Kong office of KPMG was CMED’s auditor from August 2005 to August 2009 and provided unqualified audit opinions in respect of the financial statements of CMED and its subsidiaries for the financial years ended 31 March 2004 to 2008. It also provided other advice and services to the CMED group for the financial years ended 31 March 2004 to 2010. The Liquidators also identified possible causes of action against KPMG as outlined in the protective writs which may provide a source of recovery to CMED and its creditors. These causes of action comprise claims for, inter alia, loss and damage for breach of contractual, tortious and/or equitable duties arising from KPMG’s audit of CMED group’s financial statements and its provision of other advice and services. 5.However, the Liquidators have not been in a position to determine whether pursuit of these possible causes of action is appropriate. To preserve these potential causes of action, CMED filed the protective writs in these three actions. Because of the difficulties facing the Liquidators in their investigation of CMED’s affairs, the Liquidators are unable to determine at this point in time whether it is in the best interest of CMED to pursue the claims which are the subject of the protective writs. Hence the protective writs have not yet been served. CMED has accordingly sought and obtained extensions of the validity of the protective writs. The protective writs will now expire on 19 June 2018 pursuant to the order of Lok J (the “Extension Order”). By these summonses KPMG seek orders requiring CMED to serve the protective writs before their expiry. Section 221 Orders 6.The Liquidators first contacted KPMG in July 2012 three days after their appointment in the Cayman Islands seeking certain documents. KPMG refused for reasons which the Liquidators considered were without any basis. That led to the Liquidators commencing proceedings pursuant to section 221 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance in February 2015 (the “section 221 proceedings”) soon after their appointment in Hong Kong. These proceedings have been protracted and resulted in no less than nine hearings before and six orders by Harris J (collectively, the “Section 221 Orders”), as well as an appeal to the Court of Appeal. 7.In a nutshell, the resistance offered by KPMG was based on its stance that the defendant which is the Hong Kong office of KPMG is a Hong Kong partnership and a member firm of the KPMG global network including KPMG Huazhen in the People’s Republic of China (“PRC”). KPMG and KPMG Huazhen are separate entities over which KPMG has no control. Although KPMG was officially the auditor of CMED, the field work in the PRC in respect of the audit work in 2008 and 2009 was done by KPMG Huazhen as “component auditor”. Many of the documents sought by the Liquidators are held in the offices of KPMG Huazhen in Beijing. KPMG resisted production of those documents on the ground that production of documents held by KPMG Huazhen to the Liquidators entailed a serious risk of breach of certain PRC laws and regulations, including those laid down by the PRC Ministry of Finance (“MOF”), the regulator of accounting firms in the PRC. 8.In the section 221 proceedings, Harris J was not satisfied that that KPMG had shown that PRC laws and regulations would be breached if the documents were produced to the Liquidators and he largely acceded to the Liquidators’ application. On 24 February 2016, Harris J made the first Section 221 Orders in the following terms:
9.There were several variations and extensions of that order. By a variation dated 12 January 2017, KPMG was ordered to provide copies of the Mainland documents, not merely to give access, to the Liquidators in the PRC after redacting any sensitive information, but the Liquidators were not allowed to take any copies out of the PRC. The deadline for compliance was extended to 31 May 2017. 10.KPMG has complied with the above order insofar as documents located or accessible in Hong Kong are concerned. However, in respect of the Mainland documents, the Liquidators have been given access in the office of KPMG Huazhen but have not been provided with redacted copies. The reason proffered by KPMG is that by its letter dated 15 May 2017 KPMG Huazhen expressly refused to provide copies unless and until a written direction is given by the relevant PRC authorities. 11.On 26 May 2017, KPMG and KPMG Huazhen received an opinion issued by MOF dated 22 May 2017 (the “MOF Opinion”). It stated as follows:
12.KPMG relied heavily on the MOF Opinion as evidence of MOF’s disapproval of KPMG Huazhen’s production of audit documents and MOF’s suggestion to adopt the alternative route via the Arrangement on Mutual Taking of Evidence in Civil and Commercial Matters between the Courts of the Mainland and the Hong Kong Special Administrative Region (the “Mutual Arrangement”). KPMG argued that the MOF Opinion did not amount to the“written direction” required by KPMG Huazhen in its letter dated 15 May 2017. 13.The Liquidators took the view that KPMG had de facto control over KPMG Huazhen and applied by summons filed on 6 June 2017 seeking certain orders which were purportedly to enforce KPMG’s compliance with the Section 221 Orders. That summons was dismissed as Harris J took the view that the issue of control had not been resolved and that if the Liquidators took the view that KPMG had no legitimate excuse for failing to comply with the order and wished to enforce compliance, the appropriate course was to commence contempt proceedings against KPMG. Thus, the matter is presently at an impasse in relation to the documents located in the PRC. The law 14.Pursuant to Order 12, rule 8A, a person named as a defendant in a writ which has not been served on him may by notice served on the plaintiff require him to either serve the writ on the defendant or to discontinue the action against him. If the plaintiff fails to comply with the notice, the court may on the application of the defendant by summons order the action to be dismissed or make such order as it thinks fit. There is a dearth of authorities on the court’s discretion under Order 12, rule 8A. Both parties referred me to Grande Holdings Ltd v Christopher Ho Wing On [1]. However, counsel are divided as to the test to be applied in an application under this rule. 15.Mr Hollander, leading counsel for KPMG, submits that the test is same as that for an application to extend the validity of a writ. His argument revolves around the need to observe and maintain the statutory time limit for the validity period of a writ, finality and discipline in litigation. He quoted the following dicta of Godfrey Lam J in Sealegend Holdings Ltd v China Taiping Insurance (HK) Co Ltd [2]:
His argument is that an extension of the validity of the writ provides an extension of the statutory limitation period without the consent of the defendant which creates an obvious unfairness. The mechanism under Order 12, rule 8A provides a means of alleviating that unfairness. Thus as a matter of logic, similar considerations would be relevant to an application under Order 12 rule 8A as an application to extend the validity of a writ. He distinguishes Grande Holdings on the basis that the writ in that case had not been previously extended. He argues that the learned judge in Grande Holdings was only expressing himself in general terms. Thus, adopting the test for extending the validity of a writ in Chow Ching Man v Sun Wah Ornament Manufactory Ltd[3] to forcing its service before the expiry of the period, the test would be whether there are good reasons for abridging the period and whether in all circumstances, including balance of hardship, the writ ought to be extended. In addition, probably tailor-made for this case, he suggests the court should consider:
16.On the other hand, Mr Manzoni SC, counsel for the Liquidators, submits that there is a distinction between an application for extension of the validity of a writ under Order 6, rule 8(2) and an application to dismiss a writ before service or compel its service before expiry. He submits, rightly in my view, that it is wrong for Mr Hollander to argue that the defendant has no opportunity to challenge an ex parte application to extend the validity of a writ and hence the same test should be applied in an application to force its service before expiry. This is because upon service of the writ on the defendant, the defendant may apply to have it set aside. All the issues required to be considered under the test in Chow Ching Man v Sun Wah Ornament Manufactory Ltd can then be ventilated in an inter parte hearing. The defendant will in no way be prejudiced. 17.A writ is valid in the first instance for twelve months but the court has jurisdiction to extend its validity from time to time for such period not exceeding twelve months at any one time: Order 6, rule 8(1) and (2). In an application to extend the validity, the test is that as set out in Chow Ching Man v Sun Wah Ornament Manufactory Ltd. But once that stage has passed, the argument about the need to maintain the limitation period must fall away. The period of validity of a writ, whether during the initial twelve-month period or during any subsequently extended period as allowed by the court, must be prima facie appropriate. How a plaintiff would wish to conduct his litigation is a matter entirely for the plaintiff. He may decide to issue and when to issue the writ or not to issue it at all. This right of the plaintiff must be highly respected. This must be the starting point of consideration of any application seeking to accelerate the legal process. Thus in an application to compel service before expiry of the writ, the question must be whether there are good reasons why the proceedings should not be allowed to run its natural course. 18.The applicant who seeks to accelerate this legal process must bear the burden of proof. What he has to prove could not be the usual elements as suggested by Mr Hollander in the case of an application for extension of the validity period because the starting point is different. He must advance some more compelling grounds over and above those required to resist an application for extension of the validity period. The usual considerations such as delay or prejudice would not suffice. He must, in my view, prove that it would be unjust if the proceedings are allowed to run its natural course, or put it in another way, that the plaintiff’s reliance on the period of validity is unjust. 19.What amounts to unjustness is difficult to define. Delay and prejudice may constitute elements of unjustness, but they cannot be viewed in isolation. They must be considered against the background and the parties’ conduct. Unjustness to the applicant alone is insufficient. It must be balanced against the unjustness to the plaintiff as well. Like equity, an applicant must come with clean hands. It all depends on the circumstances of the case and the court’s notion of justice. One thing which is certain is that the threshold in proving unjustness must be very high and far surpasses that in proving prejudice in an application to extend the validity period of a writ or an application to set aside an extension previously granted. This is because the applicant is seeking to circumvent Order 6, rule 8(1) in the case of the original limitation period or an order of the court to extend the limitation period pursuant to Order 6, rule 8(2) if the writ already been extended. Not only that the standard of proof is high, the court will approach any application to circumvent its orders with extreme caution. Basically, this is the test and standard of proof required for an application under Order 12, rule 8A. With these considerations in the background, it would not be difficult to deduce the following principles. 20.First, the burden is on the defendant as the applicant to satisfy the court that the discretion should be exercised in his favour for the very reason of the plaintiff’s refusal to serve the writ despite the plaintiff’s notice. 21.Second, the court has discretion to dismissed an action or to make such order as it thinks fit; but, as always, the exercise of discretion in each case must be decided in its own circumstances. The court takes into account the plaintiff’s explanation for not having yet served the writ. The most obvious of such explanation includes the complex affairs of the plaintiff and the difficulties it faces in investigating the claims and his readiness to engage in the litigation. 22.Third, to discharge that burden, the defendant has to satisfy the court that the circumstances of the case call for the court’s intervention, notwithstanding that the time for service of the writ is yet to expire. The test is that it is not just for the plaintiff to withhold the service of the writ or to do so any further. 23.Fourth, where prejudice or hardship is relied on as an element of unfairness, it must be over and above that “which could well be said to somehow arise in any given case”. Prejudice that arises merely from the existence of the writ will not generally suffice to make an order because “short of dismissal of the action, the direction for the service of the writ, even if acceded to, will not meaningfully address such complaint”. Prejudice or hardship could be actual or potential; but if it is the latter, it must be imminent or likely instead of merely possible. The prejudice or hardship suffered or likely to be suffered must be weighed against that suffered or likely to be suffered by the plaintiff. 24.The sole question this court has to decide in these applications is whether KPMG has discharged the burden of proving that it is unjust to allow the protective writs to remain valid to the end of their natural expiry. Grounds for the application 25.KPMG’s original and only ground for seeking early service of the protective writs is set out in Jacqueline Wong’s affirmation dated 3 July 2017 (“Wong/1”) which was served with the summonses. The ground stated that it was desirable to force early service because once service has been effected, KPMG would be in a better position to make an application to obtain the documents held in KPMG Huazhen’s offices by letters of request under the Mutual Arrangement (the “Mutual Arrangement Ground”). KPMG has foreshadowed that it intends to make such an application because it is currently in breach of the Section 221 Orders. This ground must be based on the MOF Opinion dated 22 May 2017. 26.However, after the deadline for evidence had passed, KPMG filed a further affirmation by Jacqueline Wong (“Wong/2”) advancing an entirely new ground. KPMG now asserts for the first time that it would be unfair for KPMG to have to wait any longer for service because the Liquidators have been reviewing the documents for an extended period of time, and delay may cause difficulties in obtaining evidence due to the effluxion of time (the “Unfairness Ground”). The delay in investigation: difficulties facing the Liquidators 27.A special feature of this case is the extraordinarily long time taken by the Liquidators in their investigation into CMED’s affairs. Five years lapsed since the issue of the protective writs and the Liquidators’ investigation is yet to conclude. The Liquidators’ case is that the delay was due to the obstructive and uncooperative attitude of KPMG. KPMG’s case is that it is due to refusal to comply with court orders on the part of their associate member of the KPMG global network which is beyond KPMG’s control. The cause of the delay is in hot dispute and is the single most important background fact which dictates the outcome of this application. Though this hearing should not be turned into a miniature trial on affidavit, a reliable provisional finding could be reached on the basis of the affidavit evidence filed by the parties, the incontrovertible factual background and most importantly, the decisions of the Companies Court and the Court of Appeal. 28.As result of the Section 221 Orders, the Liquidators were given access to the Mainland documents on 17 May 2016. KPMG produced 7,359 electronic documents in an unworkable manner to the Liquidators. It also unilaterally insisted on having its personnel and lawyers supervise the Liquidators’ inspection of the documents. KPMG explained that the supervision is a requirement of the PRC authorities as understood by KPMG Huazhen. Such explanation is wholly devoid of particulars and lacks conviction. In an attempt to legitimise such supervision, KPMG made an application to Harris J, but the application was dismissed. This demonstrates that the explanation is an unsustainable excuse and was not accepted by Harris J. This is an impediment created by KPMG. Despite that, KPMG and its lawyers continued to be in the room with the Liquidators’ staff during the inspection. This is a wilful refusal to comply with the Section 221 Orders. As result of inadequate method of production and inspection conditions, KPMG have caused significant difficulties for, and delays to, the Liquidators’ investigation, particularly where the Liquidators’ assessment of the potential claims against KPMG is concerned. KPMG or KPMG Huazhen was the cause of the slow progress. 29.The audit work papers held by KPMG Huazhen consists of hard copy files, emails and electronic documents. KPMG Huazhen refuses to provide copies of these work papers. KPMG’s answer is that it is due to PRC authorities’ requirement as understood by KPMG Huazhen. Again, this is a bare assertion which is devoid of particulars. 30.KPMG Huazhen’s refusal to provide copies of work papers prevented the Liquidators from using analytical software to conduct key word searches, highlights and annotations on the work papers. This caused significant delay to the Liquidators’ review of the documents. 31.KPMG Huazhen’s refusal to provide copies of their work papers made it necessary for the Liquidators to manually take notes of important documents in order to maintain a record of the document content and use the information to further investigation. This requires the Liquidators among other things to review and replicate the formula and content contained in numerous documents. 32.The lack of copies of the work papers made it difficult for the Liquidators to review them in conjunction with other documents available to them, in particular, the files produced by CMED’s former service providers which conducted the valuations of the FISH and SPR Technologies/businesses acquired by CMED. 33.As result of the supervision and uncooperative attitude of KPMG Huazhen, the Liquidators had difficulties obtaining expert and legal advice on KPMG Huazhen’s accounting treatment and audit procedure in respect of many complex transactions in order to properly assess the viability of CMED’s potential claims against KPMG. Briefs comprising copies of KPMG’s relevant audit work papers need to be collated in order to obtain the necessary external advice. KPMG’s refusal to provide copies of its audit work papers made it extremely difficult for the Liquidators to obtain the advice required for them to determine whether or not to commence proceedings against KPMG. 34.KPMG Huazhen’s refusal to provide copies of its audit work papers made it impossible for the Liquidators to enquire from CMED’s customers and suppliers regarding the authenticity of their signatures or chops on documents to enable the Liquidators to assess whether KPMG’s audit confirmation procedures were sufficient and properly carried out. 35.KPMG Huazhen’s supervision of the inspection made it impossible for the Liquidators to discuss their findings arising from their review of KPMG’s audit work papers. Such discussions are clearly privileged and strictly confidential and could not be meaningfully conducted in the presence of KPMG Huazhen’s staff or lawyers. This impediment is not cured by providing the Liquidators with a separate room for discussion as KPMG Huazhen refuses to allow them to take with them copies of any of the relevant audit work papers for discussion. This a clear and acute impediment to the Liquidators’ ability to properly assess CMED’s potential claims. 36.Because of these difficulties, the Liquidators sought and obtained a variation order requiring KPMG to produce copies of the Mainland documents to the Liquidators at the Liquidators’ offices in Beijing. In his decision dated 12 January 2017 in allowing the Liquidators’ application (the “January 2017 Order”), Harris J held that it is inefficient for the Liquidators to be forced to inspect the documents rather than to be provided with copies “because they are forced to work from notes of what staff thought were relevant parts of documents at the time they inspected the documents rather than use analytical software and storage capabilities to deal with the very large number of documents”. 37.KPMG appealed. In dismissing its appeal on 12 April 2017, the Court of Appeal held that “the existing mode of inspection (implemented since 17 May 2016) is not wholly effective and there is a real need to order production of copies”. 38.KPMG subsequently sought to reverse the January 2017 Order by a variation summons requiring only inspection of the Mainland documents. The application was refused by Harris J in May 2017. 39.Despite all these court orders, KPMG has not produced copies of any of the Mainland documents and continued to supervise the Liquidators’ inspection at KPMG Huazhen’s office. 40.It is disingenuous for KPMG to argue that it cannot comply with the court orders because its associate KPMG Huazhen will not comply with KPMG’s request. In his judgment dated 24 February 2016, Harris J held:
41.The Liquidators’ complaints are substantially unanswered by KPMG. In the light of these orders and judgment, I have no difficulties to accept the Liquidators’ case that they have real difficulties in conducting their investigation into CMED’s affairs and are prevented from assessing the viability of CMED’s potential claims against KPMG. These difficulties are caused by impediments created by KPMG and its wilful ignorance of the various court orders. The lack of progress in the Liquidators’ investigation is due to factors beyond their control. The Liquidators are not in a position to determine whether the claims the subject of the protective writs should be pursued. KPMG is responsible for this state of affairs. MUTUAL ARRANGEMENT GROUND Background 42.I have set out in paragraphs 11 and 12 the background based on which KPMG considers it necessary to obtain a letter of request in order to compel KPMG Huazhen to produce the Mainland documents. KPMG says that it is highly desirous of resolving the impasse regarding production of the Mainland documents. It intends to make an application itself or jointly with the Liquidators under Order 39, rules 1 – 3 to court for the issuance of a letter of request to the PRC courts. It is hopeful that the letter of request will be issued by the Hong Kong court and executed by the PRC court. KPMG Huazhen will then release the Mainland documents and relieve KPMG of its obligation under the Section 221 Orders. KPMG argues that to proceed by that route would require the protective writs to be served. 43.Insofar as KPMG seeks to place reliance on the MOP Opinion that a letter of request is necessary, I am not satisfied that such necessity is proved as I have strong reservation about the reliance which may be placed on the MOP Opinion. Like Harris J, I am not satisfied that KPMG has shown that PRC laws and regulations would be breached if the documents were produced to the Liquidators. While KPMG did request KPMG Huazhen to produce the document, the “written direction” was a self-imposed requirement without any basis. The senior partner of KPMG Huazhen simply replied that it is:
Despite what was said in the MOF Opinion, what is significant lies in what was not said. It is not known what opinion was KPMG Huazhen seeking from MOF. The tone of the MOF Opinion suggests that the request was for the authority to direct (actually to compel on an involuntary basis) KPMG Huazhen to produce the documents and not about whether voluntary production is permissible as a matter of law. It seemed that KPMG Huazhen was adopting an antagonistic stance and sought MOF’s blessing. It appears to me that MOF therefore did not deal with the issue whether such documents may be produced voluntarily but how their production could be compelled. Hence MOF suggested that the administrative supervision cooperation agreement was not applicable and advised KPMG Huazhen that the Mutual Arrangement might be invoked to compel KPMG Huazhen to produce the document. In my view, the MOF Opinion cannot be treated as evidence that a letter of request is necessary to compel the production of the Mainland documents. What is necessary is KPMG’s will to produce the documents. On this basis, KPMG’s application cannot even get off the ground. In the following discussion, I proceed on the assumption that a letter of request is necessary. The question, then, is whether service of the protective writ is a necessary or desirable condition precedent. Whether service of the protective writs is necessary or relevant 44.Mr Hollander’s argument that service of the protective writs is necessary is premised on two grounds. First, relying on the Court of Final Appeal case of Joint & Several Liquidators of Kong Wah Holdings Ltd v Grande Holdings Ltd [4]he argues that a letter of request is designed for use in existing proceedings. Second, relying on the case of Panayiotou v Sony Music Entertainment (UK) Ltd [5] and Re Q [6], he argues that the court will refuse to issue a letter of request unless the documents requested are directly material to an issue in the action. Thus until the writs have been served, there are technically no defendants who can join in any inter partes procedures. 45.In reply, Mr Manzoni SC submits that the cases quoted are not authorities for the proposition that service is necessary to obtain a letter of request. In fact, KPMG has itself brought the present application which is itself an inter partes procedure prior to service. Furthermore, according to Order 5, rule 1, proceedings are begun by issue the writ and not by its service on the defendant. There is no reason why a writ that has been filed cannot constitute “existing proceedings” for the purposes of obtaining a letter of request. I agree with Mr Manzoni SC. KPMG has just failed to show that the service of a writ is necessary to support an application for letter of request. The above conclusion takes away much of the steam in KPMG’s application. 46.KPMG’s alternative argument is that its chances of being successful in obtaining the letter of request are highest if the protective writs have been served. It is apparent that KPMG’s primary argument for forcing service of the protective writ is that it wishes to obtain some advantage in its proposed Mutual Arrangement application. The chances of success of such application with or without service of the protective writ is only of secondary importance. My concern, rather, is the certainty that the Mainland documents can be obtained by the mechanism under the Mutual Arrangement. Certainty as to whether the Mainland Documents can be obtained 47.There are two issues to be addressed here: first, whether a letter of request will be issued by the Hong Kong court; and second, whether, if issued, it will be executed by the Mainland court. 48.On the first issue, Mr Hollander suggests that the test is just a reasonable chance test, quoting Saunders J’s decision in Chan Mei Yiu Paddy v Secretary for Justice (No 2) [7]. In that case, the court was faced with conflicting expert evidence on whether the foreign jurisdiction would execute the intended letter of request if issued. It was under those circumstances that Saunders J decided in favour of issue of the letter of request and to leave it to the foreign jurisdiction to decide whether to execute the letter of request. 49.Here, KPMG’s evidence suggests that it intends to apply for a production order before the close of pleading. As Mr Manzoni SC pointed out, production orders before close of pleadings are only made in exceptional circumstances and KPMG has stopped short of showing such exceptional circumstances. 50.Another difficulty facing KPMG is that the subject of the proposed production order is KPMG Huazhen which, according to KPMG, is a separate non-party in a foreign jurisdiction. KPMG would have to satisfy the Hong Kong court that production by what it claims is a non-party is appropriate in such circumstances. Again, there is no such evidence. 51.Next, as KPMG indicates in its skeleton submission, an order for production must relate to specific documents which are shown to be directly material to an issue in the action, it is not clear if KPMG would be able to obtain an order for production of all the Mainland documents covered by the Section 221 Orders. 52.Taking all these considerations into account, this is not a case of conflicting expert opinion on foreign law which the court feels uncomfortable to come to a decision one way or the other. The evidence shows it is not likely that the application for letter of request will be allowed. 53.As for the second issue, there are differences between the PRC law experts of both parties. One opinion which is in common is that both experts agree that the Mutual Arrangement is a new procedure and its operation is in many respects uncertain. On this limited issue, it may, as in the case of Chan Mei Yiu, be left to the PRC courts. But, if KPMG could not even pass the first hurdle, this issue does not arise for consideration. Whether Mutual Arrangement can achieve compliance with the Section 211 Orders 54.The thrust of KPMG’s submission is that it is serious in complying with the Section 221 Orders and is doing all that is lawful to achieve that end. It is therefore KPMG’s case that through the use of the Mutual Arrangement mechanism the impasse will somehow be solved. This is obviously not the case. As the Court of Final Appeal explained in Joint & Several Liquidators of Kong Wah Holdings Ltd v Grande Holdings Ltd [8], letters of request are:
The purposes for which the Liquidators obtained the Section 221 Orders are far broader than merely to use the Mainland documents in potential proceedings against KPMG. Besides, both experts agree that the Mainland documents obtained through the Mutual Arrangement may only be used as evidence in the present proceedings. They could not be used in the broader investigation of CMED’s affairs. Obtaining the Mainland documents through the Mutual Arrangement mechanism is therefore inadequate for the Liquidators’ purposes and will not “provide a means for substantially complying with the Section 221 Orders, but by a different route” as asserted by KPMG in its oral submission. Despite this point has been communicated to KPMG, this issue has never been addressed by KPMG skeleton submissions. Conclusion 55.In summary, first, the Mainland documents, if obtained under the Mutual Arrangement mechanism, may not cover the scope of the Mainland documents required to be produced under the Section 221 Orders and it may not be used as evidence in any proceedings other than the present ones against KPMG. They may not serve the far greater purposes for which they were sought under the Section 221 Orders. Second, there is no certainty that the letters of request sought will be issued by the Hong Kong court and enforced by the PRC courts. Third, KPMG has not shown that the service of the protective writs is a necessary requirement for the issue of the letters of request. In a nutshell, KPMG has failed to show that the service of the protective writs is necessary in the first place; that it stands a good chance in obtaining the letter of request in the second; and lastly that the Mainland documents obtained under the Mutual Arrangement mechanism meet the purposes for which they were granted under the Section 221 Orders. 56.With that conclusion in mind, I consider the impact of the court’s decision on KPMG’s application to the parties first one way and then the other. Under the first scenario, if KPMG’s application is allowed, CMED will be forced into litigation before the Liquidators are satisfied that it is the proper course to take or to abandon it altogether. It would be forced to file statements of claim when it is not ready to do so and will stand a great risk that its statements of claim may be struck out. It will stand a great risk of losing the actions against KPMG. Under this scenario, the effect to CMED is fatal while the benefit to KPMG is obvious. 57.Under the second scenario, if KPMG’s application is refused, things will run its natural course. Come June, the Liquidators will have to serve the protective writs or apply for another extension or abandon the claim against KPMG. If the Liquidators are ready to serve the protective writes, litigation will take its course. If they have to seek another extension, the court will make a fair and just decision in accordance with the law and the circumstances. KPMG cannot be said to have suffered any prejudice. It is KPMG’s obligation to produce the Mainland documents. If contempt proceedings are commenced, they will take their course. KPMP will be found not liable if its defence that it is prevented from complying with the order by KPMG Huazhen is accepted. If they are found liable, it does not lie in their mouths to argue that they suffer any prejudice. 58.When balancing the first scenario against the second, there is no reason why this court should force the issue of the protective writ with the result of giving to KPMG such an advantage which is grossly out of proportion with the prejudice to be suffered by CMED. This is particularly so when the issue of the writ is not a necessity for invoking the Mutual Arrangement mechanism; the uncertainty that the letter of request will be issued by the Hong Kong courts and executed by the PRC courts; and the certainty that the Mainland documents, if so obtained, will not meet the requirement under the Section 221 Orders. KPMG has failed to discharge the burden of showing that it would be unjust to allow the validity period of the protective writs to run its course. THE UNFAIRNESS GROUND Introduction 59.As already outlined in paragraphs 25 and 26, this new ground was advanced at the eleventh hour. It is contained in Wong/2 for which KPMG sought leave for it to be filed out of time. Wong/2 cannot be characterised as a reply affirmation as it contains a new ground and new assertions. It should have been served together with the summonses pursuant to Order 12, rule 8A(3). Nevertheless, Mr Manzoni SC took a pragmatic approach to consent to its filing, but argues that the failure to raise this ground at the proper or earlier stage demonstrates that is not genuine but an afterthought. I agree. Raising such a ground at such a late stage takes away all the thrust of KPMG’s argument on unfairness based on delay. Be that as it may, I shall put aside this observation and consider this ground on its merits. Effluxion of time 60.The thrust of KPMG’s argument under this ground is effluxion of time. KPMG sets out the following background. KPMG was first engaged as CMED’s auditor in 2005. Twelve years have passed since and eight years have lapsed since KPMG resigned as its auditor in August 2009. The first protective writ relates to matters going back to the year ended March 2004, more than 13 years ago. The second protective writ relates to matters going back to the year ended March 2008, more than nine years ago. The third protective writ relates to matters going back to the year ended March 2009, more than eight years ago. 61.Mr Hollander submits that by any measure, the potential claims involve highly complicated and expensive litigation, in which the professional conduct of KPMG over a significant period of time, will be intensively scrutinised by the court. Even after the protective writs are served, the actions will not, given their complexity, come on for trial for a considerable time thereafter. He therefore argues that it is unfair for KPMG to have such litigation hanging over its head for such a long period of time. 62.His argument is a double edge sword. Time, not only has an impact on KPMG. It also has an impact on the Liquidators and, in my view, more adversely. KPMG was CMED’s auditor. It has a team of professionals,who were on the job. In short, KPMG knows CMED well and has possession of the relevant documents. On the other hand, the Liquidators are total strangers. They took over CMED after its collapse and when it was in a mess. They need more time to investigate and understand what KPMG had done. Anything which is complicated to KPMG must be more complicated to the Liquidators. Unfairness has to be balanced between one another. 63.Next, Mr Hollander says that staff members who worked on the subject audit have left and more would have left and it would be difficult to procure their attendance as witnesses. Of those whose cooperation can be procured, their memories would have faded. It would be difficult to collect and collate relevant documents to prompt and corroborate witnesses’ recollection. Overall, he submits, that lowers the chance of a fair trial for KPMG. 64.The above is true as a general proposition. However, Wong/2 only provided a schedule of individuals who worked on the CMED audit and the dates which individuals left KPMG’s employment in Hong Kong. The schedule showed that of 47 engagement team members, only three remain in KPMG and five remain in KPMG Huazhen. It appeared as though the entire generation of audit team members has left KPMG. However, there is no explanation of the importance of the role played by those individuals who had left, or the actual difficulties experienced in contacting them. Besides, the Liquidators were appointed on 27 July 2012 and had almost immediately requested documents from KPMG. The first protective writ was filed on 26 September 2013. It is inconceivable, as experienced and respectable accountants, that KPMG would not have started taking steps to preserve documents, taking witness statements from potential witnesses, keeping track of their movements and obtaining their contact details and taking witness statements from them (if that had not been done before) if they should leave KPMG’s employment. KPMG’s evidence is not sufficient to demonstrate actual prejudice and risk of KPMG not having a fair trial. 65.Mr Hollander submits that while the above prejudice cannot be completely reversed, it can be ameliorated if CMED is now ordered to serve the protective writs. Once the actions have commenced and the issues been identified, KPMG can start taking steps to procure evidence from witnesses. But Mr Hollander has failed to show how seven months can make any difference. 66.Next, Mr Hollander argues that the prejudice here is entirely one way against KPMG as the Liquidators will in all likelihood rely heavily on documents and KPMG will be called to explain why its staff did what they did. He repeats his argument that memories will fail with time. 67.He argues that the unfairness of the delay is exacerbated by the fact that KPMG is being deprived of the benefits of the normal limitation period. But for the multiple extensions, the limitation period for nearly all of the causes of action would probably have expired. 68.Be that as it may, as I have found above, KPMG is largely responsible for the present state of affairs by reason of their obstructive and uncooperative conduct, in particular, their refusal to comply with the Section 221 Orders. The Liquidators are forced to accept the unlawful restriction in their investigation imposed on them and to progress at snail pace. KPMG’s conduct is inviting the multiple extensions. KPMG now wishes to take advantage of its own wrong to seek to abridge the current validity period of the protective writs and force service of the protective writs seven months before their expiry. The net result would be to force CMED into litigation before the Liquidators are satisfied that it is the proper course to take and to stand the risk of losing the actions or to abandon them altogether. I can in no way find it would be just to abridge the validity of the protective writs. 69.Mr Hollander also criticised the Liquidators’ change of stance. He said that initially the Liquidators were receptive to KPMG’s suggestion for the parties to invoke the Mutual Arrangement mechanism, but later rejected the suggestion and insisted on enforcing the Section 221 Orders. I can see nothing wrong with the change of stance. The express purpose of KPMG’s invoking the Mutual Arrangement mechanism, as the Liquidators now appreciate, is to circumvent the Section 221 Orders and Lok J’s Extension Order. Given the history in this case, particularly that the Liquidators are investigating into potential claims against KPMG and KPMG’s attitude in obstructing the investigation, it is not unreasonable to surmise that the real purpose of the exercise is to cause or force service of the protective writs and then filing of statements of claim before the Liquidators are able to present a proper case and then strike them out altogether. There are good reasons for the Liquidators to be cautious. Conclusion 70.For the above reasons, I dismiss KPMG’s application with costs to CMED and to be paid forthwith.
Mr Charles Manzoni SC, instructed by Lipman Karas, for the plaintiff Mr Charles Hollander and Mr Wilson Leung, instructed by Reynolds Porter Chamberlain, for the defendant [1] HCA 565/2013 (unreported) 9 October 2013 [2] [2013] 4 HKLRD 508, para 29 [3] [1996] 2 HKLR 338 at 341B–C [4] (2006) 9 HKCFAR 766 at paras 38 – 39, 47, per Lord Millett NPJ [5] [1994] Ch 142, at 151E–G, 153H, per Nicholls VC [6] [1997] 4 HKC 439, at 443I, 444A–B, 445A, per Woo J (as he then was) [7] [2008] 3 HKC 182 [8] (2006) 9 HKCFAR 766, at para 31 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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