The Joint and Several Liquidators of China Medical Technologies, Inc v. Christopher Barry Abbiss and Others

HCMP 2590/2017

[2019] HKCFI 67

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 2590 OF 2017

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Before: Hon Harris J in Chambers

Date of Hearing: 25 July 2018

Date of Decision: 9 January 2019

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D E C I S I O N

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1.By summonses dated 11 December 2017 and 16 April 2018 the Defendants seek to strike out as against certain Defendants the present contempt proceedings.  By further summonses dated 9 March 2018 and 16 April 2018 the Defendants seek the determination of a preliminary issue in respect of the contempt proceedings.

2.The contempt proceedings arise from orders made pursuant to section 221 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance, (“Orders”).  These Orders were obtained by the Plaintiffs who are the Joint and Several Liquidators of China Medical Technologies Inc.  The Respondents to the Orders were KPMG (1^st Respondent) and 16 individuals at the time assumed to be partners in KPMG (2^nd to 17^th Respondents).  The precise terms of the Orders and the circumstances in which they came to be made and varied do not matter for present purposes, but are described in detail in my decisions in HCCW 435/2012 and in one decision of the Court of Appeal in CACV 65/2017.  For present purposes what is relevant is who the Orders were made against and, arguably, the persons named as the Respondents to the Orders.  Each of the Orders directed the 1^st Respondent, KPMG, to do what was specified in the Orders.  None of the Orders required the 2^nd to 17^th Respondents to do anything although it did provide for them to return to court in the event that they believed that there was a problem which inhibited compliance with the Orders.

3.The originating summons dated 22 November 2017 commencing the contempt proceedings, which was amended on 21 December 2017, names 91 Defendants, who are listed in the schedule to the originating summons.  The 91 Defendants are said in the heading to the schedule to be partners of KPMG at all times from 5 February 2015.  Paragraph 6 of the originating summons asserts that KPMG is a partnership under the laws of Hong Kong (which is not in dispute) and comprises of or is owned by the Defendants each of whom was a partner of KPMG throughout the section 221 proceedings and remains so at the date of the statement dated 25 October 2017 in support of the application for leave to commence the contempt proceedings.

4.The strike out application is based on the premise that there are two categories of Defendants who should not be joined as parties to the contempt proceedings.  The 1^st category consists of eight partners who had retired at the date of issue of the contempt proceedings: 22 November 2017.  An order has been agreed in respect of this application except costs.

5.The 2^nd category are those Defendants who were not named as Respondents to the Orders, did not file evidence in the section 221 proceedings and have filed evidence stating that they had no involvement in, nor knowledge of, the section 221 proceedings.  In the period prior to the hearing of the application, the parties managed to agree amendments to the Defendants to the amended originating summons deleting partners who the Liquidators are prepared to agree should not be defendants to the contempt proceedings.  However, costs remain in issue.

6.It seems to me that in respect of both categories the Liquidators should pay the costs.  There was never any realistic prospect of the court making substantive orders, including adverse costs orders, against partners who were not Respondents to the Orders and in respect of whom there was no reason to believe they were in some way culpable for any contempt that is established.  The Liquidators in deciding to commence the contempt proceedings against all KPMG’s partners took the risk of facing the kind of objections that led to the strike out application.

7.The claims against the category 2 Defendants were always likely to be problematic.  In respect of the category 1 Defendants only two partners were Respondents to the Orders, Edwin Fung (D28) and Isaac Yan (D87), who were respectively the 13^th and 10^th Respondents.  The other six also fell within category 2.  It seems to me that it was perfectly reasonable for the relevant Defendants to seek to have themselves removed as Defendants, and the fact that to do so the applications were structured depending on the precise circumstances of each Defendant in one of the two ways that I have described is immaterial.  The applications were properly brought and successful and it cannot in my view sensibly be said that the way they have behaved has in some way resulted in them being joined, as it turns out, unnecessarily.

8.The more substantive matter for my determination is the preliminary issue. The parties have tried unsuccessfully to agree the formulation of the point of law to be decided without success.

9.The Defendants argue that the following is the appropriate formulation:  Whether the Rules of the High Court (Cap 4A) O 81, r 1 is applicable to an order made pursuant to section 221 of the former Companies Ordinance, Cap 32 (or pursuant to section 286B of the present Companies (Winding Up and Miscellaneous Provisions) Ordinance, Cap 32), such that the Court can make an order pursuant to the said section 221 (or pursuant to the said section 286B) binding on all the individual partners of a firm by merely naming the firm, but without naming any of the partners, in the order.

10.The Liquidators argue that it should be formulated as follows:

(1)  Is an order pursuant to section 221 (now repealed) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance, Cap 32 made in the name of a firm valid and enforceable?

(2)  If such an order is enforceable, may such an order by enforced by an application for committal for contempt pursuant to O 52 of the Rules of the High Court in the name of the partners of the firm, subject to the obligation to obtain leave to commence proceedings against those partners, or is such application to be brought against the firm itself?

11.The inability to agree the formulation of the preliminary issue arises in large part I suspect, because the Defendants have not made it clear what they say the consequence would be if I answer their formulation of it, as the Defendants argue I should, in the negative.  The argument itself is straightforward.  The Defendants do not argue that an order pursuant to section 221 cannot be made against a partnership.  The Defendants argue that if an order is made against a partnership the respondents, for reasons explained below, should be each partner in the partnership at the relevant time, namely, when the claim arose.  RHC O 81 does not apply to an application under section 221 and, therefore the Respondent cannot be the name of the firm as is the case in the relevant proceedings.

12.Section 221(1)  is in the following terms:

“221. Power to summon persons suspected of having property of company

(1) The court may, at any time after the appointment of a provisional liquidator or the making of a winding-up order, summon before it 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.”

13.“Person” is defined in section 3 of the Interpretation and General Clauses Ordinance, Cap 1, as including “any body of persons, corporate or unincorporated….”  An order can, therefore, be made against a partnership and this, as I have already noted, is uncontroversial. 

14.Mr Joffe argued that a partnership is not a separate legal entity and, therefore, a partnership can only be sued in the name of individual partners.  RHC O 81 is a procedural device which avoids the necessity of naming all partners and permits the partnership to be sued in the firm’s name.  It does not alter substantive partnership law.[1]  The Defendants argue, O 81 does not apply to all applications brought against a partnership in the High Court.  Order 81, r 1 is in the following terms:

“1. Actions by and against firms within jurisdiction (O. 81, r. 1)

Subject to the provisions of any written law, any 2 or more persons claiming to be entitled, or alleged to be liable, as partners in respect of a cause of action and carrying on business within the jurisdiction may sue, or be sued, in the name of the firm (if any) of which they were partners at the time when the cause of action accrued.”

15.The reminder of the order is framed in such language, says Mr Joffe, as to be only apposite to writ actions, which is consistent with the reference to causes of action and parties being sued being sued in r 1.  I accept that the drafter seems to have been focused on partnerships, which either as plaintiffs or defendants become parties to writ actions or other proceedings, which require acknowledgement of service and commonly produce final judgments.  It does, however, seem strange that what, as Mr Joffe accepts, is a procedural device intended to avoid the necessity of listing all the partners in the firm in the court documents, does not apply to all applications in the High Court in which an order is sought against a partnership.  Mr Manzoni cited a number of final appellate authorities in which it would appear that section 221 type orders had been made against partnerships in the firm’s name in various jurisdictions with similar rules to O 81 without this point ever being raised.[2]

16.Counsel did not cite any authorities in which contempt proceedings has been brought against a partnership in a firm’s name. My own research has identified two.  The first is Re A Solicitor (Disclosure of Confidential Records)[3] in which a firm of solicitors was held liable for contempt of court.  The court said “I impose a fine upon the firm of solicitors collectively of £1,000.  I order the firm to pay the costs of the Official Solicitor of the committal proceedings, those costs, if not agreed, to be taxed on an indemnity basis.”  The consequence for individual partners was that they became liable to contribute to the payment of the fine.

17.In Grand Union Insurance Co Ltd v Clyde & Co (A Firm),[4] there was an application for contempt of court against Clyde & Co.  Although the court found that the applicant had failed to prove beyond a reasonable doubt that the firm was guilty of contempt, there is nothing in the report to indicate that the defendants or the court doubted that Clyde & Co as a partnership could be liable for contempt of court.

18.These authorities do not consider whether O 81 or its foreign equivalent applied to the proceedings before the court and are not authorities for the construction advanced by Mr Manzoni, although they do appear to demonstrate that in various cases it has been assumed that applications, including contempt proceedings, which are not commenced by writ or involve proceedings that might conventionally described as “suits”, can be issued with the partnership being described by the use of the firm’s name rather than listing each partner.

19.It seems to me that the answer to the question is this.  Order 81, r 1 refers to claims in respect of a cause of action.  As Diplock LJ explained in the Court of Appeal in Letang v Cooper[5] a cause of action can be defined as “simply a factual situation the existence of which entitles one person to obtain from the court a remedy against another person.”  This is wide enough to cover a liquidator seeking an order for production pursuant to section 221.  This being the case is there any particular reason why the rule should be read as restrictively as Mr Joffe contends?  Mr Joffe’s argument for so doing turns on the assumption that O 81, r 1 is to be read as applying only to partnerships suing or being sued; a reading which is supported he says by the tenor of the subsequent rules.  This seems to be unnecessarily restrictive.  I note that r 8, which was introduced after a similar amendment in England in 1962, provides that rr 2–7 apply to actions commenced to actions begun by originating summons.  This is relevant in two ways.  First, it indicates that r 1 applies to claims against a partnership that can be begun by originating summons such as an application for an order under section 221.  Secondly, all that r 8 does is to apply the procedures in rr2–7 to originating summons proceedings, which indicates in my view that r 1 applied to applications begun by originating summons even before the introduction of r 8.  It follows that rr 2–7 are not to be read as defining what kind of action r1 applies to.

20.It seems to me that there is no reason to read O 81, r 1 in the restrictive way in which the Defendants contend.  I, therefore, answer the question posed in the summons in the affirmative.

21.This would seem to leave open the question of who, given the agreement to delete various partners, are the defendants.  It would appear that it is no longer the partnership as a whole, but the remaining individual partners.  Whether or not orders against particular partners should be made in the event that contempt is proved, as opposed to an order against the partnership, will depend on whether or not RHC O 45, r 7(2)(a) has been complied with.[6] The effect of the Orders was to require KPMG to do certain things.  Any individual partner of KPMG served in accordance with r 7(2)(a) became under a personal obligation to takes steps to facilitate compliance.  This is a consequence of the characteristics of a partnership, which imposes joint liability for the obligations on the partnership on each partner.[7]  Precisely what has happened in terms of service and its consequences are not matters I have to consider at this stage.

22.I will make a costs order nisi that the Defendants pay the Liquidators costs of the preliminary issues, such costs to be taxed if not agreed, and paid forthwith.

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

Mr Victor Joffe and Mr Wilson Leung, instructed by Reynolds Porter Chamberlain, for the 1^st to 91^st defendants

Schedule

Defendants

Partners of KPMG who were Partners at all times from 5 February 2015