The Joint & Several Liquidators of Kong Wah Holdings Ltd and Another v. Ernst & Young (A Firm) and Another
Read the full judgment text of CACV 356/2003 on BabelCite. This Court of Appeal judgment was delivered on 9 March 2004.
1. We dismissed the appeal at the conclusion of the hearing. These are my reasons for the judgment.
Cited by 2 cases · Cites 3 cases
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CACV000356/2003 CACV 356/2003 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF APPEAL CIVIL APPEAL NO. 356 OF 2003 (ON APPEAL FROM HCCW 49/2000 & HCCW 50/2000)
Coram: Hon Cheung JA, Hon Gal1 J and Hon Hartmann J in Court Date of Hearing: 9 March 2004 Date of Judgment: 9 March 2004 Date of Reasons for Judgment: 17 March 2004 __________________________ REASONS FOR JUDGMENT __________________________ Hon Cheung JA : The appeal 1.We dismissed the appeal at the conclusion of the hearing. These are my reasons for the judgment. 2.The liquidators of two companies now under liquidation, namely, Akai Holdings Limited ('Akai') and 'Kong Wah Holdings Limited' ("Kong Wah') ('the companies') applied for orders under section 221 of the Companies Ordinance ('the Ordinance') against Ernst and Young ('E & Y') and Ms Choi Bik Hok ('Ms Choi'). E & Y is the former auditors of the companies while Ms Choi is a partner of E & Y. 3.The order sought against E & Y is for the inspection of documents relating to
4.The order sought against Ms Choi was for an examination concerning the affairs of the company. 5.Shortly before the hearing of the application, E & Y proposed to the liquidators to allow them to inspect the following documents, namely,
6.E & Y imposed the condition that a representative of E & Y must be present at the inspection. He would be charging $2,000 per hour for his work and further there should be no order as to the costs of the application. 7.The proposals were not accepted by the liquidators and the application proceeded. At the hearing the only live issues were in respect of the inspection of the internal review documents and the costs of the application. E & Y agreed that the other documents would be disclosed. Ms Choi further agreed to be examined. The liquidators did not proceed against Ms Choi. 8.Kwan J. ordered all the documents sought by the liquidators including the internal review documents should be disclosed by E & Y without the requirement of the liquidators paying any charge to E & Y for the inspection other than photocopying charges which they had agreed to pay. She further ordered E & Y to bear the costs of the liquidators in respect of the application. E & Y appealed. Section 221 9.Under section 221(1) of the Ordinance the court may summon a person known or suspected to have in his possession any property of the company in liquidation or would be able to provide information concerning the affairs of the company. The court may examine this person on oath (section 221(2)) and may require him to produce 'any books and papers in his custody or power relating to the company' (section 221(3)). The ambit 10.The ambit of section 221(1), which is the equivalent of section 236(2) of the English Insolvency Act 1986, had been considered by the English Court of Appeal and the House of Lords in British and Commonwealth Holdings plc v. Spicer & Oppenheim [1992] Ch. 342 (C.A.) and [1993] A.C. 426 (H.L.) and also by this Court (Rogers VP and Le Pichon JA) in Chark Fung Securities Co. Ltd (Joint Liquidators) v. Chan Kwong Hung [2001] 2 HKC 335. Kwan J had also dealt with a similar application in Re New China Hong Kong Group Ltd (In liquidation) [2003] 3 HKC 252. The principles 11.In my view the outlining principle is for the applicant seeking the disclosure of the documents to satisfy the court that the disclosure is reasonably required. Documents relating to the operation of the company which may shed light on its financial position and assist the liquidators in a speedy completion of the liquidation process would satisfy the reasonable requirement test. The court is not concerned with whether the disclosure is exceptionally wide or not. The consideration at this stage is simply whether the documents are reasonably required. 12.Having decided that there is a reasonable requirement for the documents, the court will then have to balance this requirement against the possible oppression to the person who is required to make the disclosure. Among the factors to be considered is whether that person is not an officer of the company but a third party and whether he would expose himself to liability by the disclosure. If in the balancing exercise, the importance of disclosure outweighs these other factors, the judge could well exercise the discretion in favour of disclosure. 13.When a third party has documents which satisfied the reasonable requirement test, I see no distinction in principle whether the documents are generated by the company or separately by the third party. The latter category of documents cannot be treated as a separate and distinct category if the documents are 'related' to the company and has a direct impact on the operation of the company. Ultimately the question that has to be decided is whether it would amount to oppression if the third party is required to disclose these documents. Orders against third parties 14.Orders had been made in the past against third parties who had documents relating to the company under liquidation. British and Commonwealth Holdings plc is a case where a firm of auditors was required to produce documents relating to the audit of a company. The documents include the auditor's private working papers. 15.Joint Liquidators of Sasea Finance Limited v. KPMG [1998] BCC 216 is another case in which a well known firm of accountants, KPMG of England was required to disclose documents relating to the audit of a company under liquidation. 16.That case does not support the argument of Mr. Coleman, counsel for E & Y, that the Court will not make discovery orders of a wide ambit. The court there merely excluded those documents under the control of KPMG Switzerland which was a separate entity from KPMG England. 17.Mr. Coleman also referred to Re Maxwell Communications Corp plc (No. 3) [1995] 1 BCLC 521. Again that case does not support the proposition that the court will not make discovery of a wide ambit. In that case the court refused to order discovery against a firm of solicitors who had not acted for the company under liquidation in respect of all the transactions relied upon by the liquidators in the application for disclosure. STC group of companies 18.In this case the two companies under liquidation were members of the Semi-Tech Corporation Limited ('STC') group of companies. STC was said to have market capitalization of US$4.5 billion and sales turnover of US$5 billion in the annual report of Akai for 1996. Akai had interest in at least 160 subsidiaries and Kong Wah was the largest television manufacturer in Asia outside Japan. 19.The two companies were wound up by their creditor banks in August and September 2000 in Hong Kong and Bermuda respectively. The liquidators discovered that in the two years before the liquidation, Akai had recorded exceptional losses in the sums of US$100.5 million and US$1,751 million respectively. There was a substantial decrease in the assets (both total and net) of Akai in the 12 months before the liquidation by way of writing off of accounts receivable, investments and provision for loss of trade mark and patents. 20.At the end of 1999 Akai transferred the management of itself and its subsidiary to third parties which now controlled some of the major assets of the companies. 21.Major assets identified in the financial statements of the two companies have either become worthless, or are not traceable or identifiable. 22.There are six major transactions which required further investigation. These transactions involved the loss of investment, transfer of interest in substantial investment to third parties, writing off of debts owing to Akai, the transfer of management control by Akai to third parties and Akai incurring liability to make repayment to third parties. The liquidators' efforts 23.The liquidators only managed to identify or take control of about $2.39 million worth of assets, the majority of which are subject to claims by third parties. The liquidators were hampered in their task by the lack of documentation or information of the companies and the refusal of the chief executive officer of STC and the former directors of the companies to provide any meaningful assistance. Criminal investigation 24.The Commercial Crime Bureau ('CCB') of the Hong Kong Police had also stepped in and investigated the affairs of the companies. Role of E & Y and Ms Choi 25.E & Y were the auditors of Akai from 1992 and of Kong Wah from 1997 to 31 January 1999. They audited the accounts of Akai for the years ended 31 January 1996 to 31 January 1999 and the accounts of Kong Wah for the years ended 31 March 1996 to 31 January 1999. They had also provided tax, accounting and other business advisory services to the companies and their subsidiaries including the attempts to rescue the companies in 1999 and 2000. In respect of each of the accounts audited, E & Y gave an unqualified opinion on the financial statement. 26.Ms Choi was involved in the corporate finance services to the companies between 1999 - 2000. She had presented rescue proposals and attended meetings with the creditors as a representative of Akai. For the rescue proposal, E & Y had conducted due diligence exercise and prepared three information memoranda for the creditors in December 1999, January 2000 and April 2000. Reasonable requirement of documents 27.Clearly the liquidators have established through E & Y's involvements with the companies that it had possession of documents relating to the two companies which are reasonably required by them to complete the investigation of the affairs of the companies and the tracing of their assets. In respect of the internal review documents the judge accepted the view of the liquidators on these documents. She held that,
28.In my view these clearly are matters that support the reasonable requirement of these documents. The fact that the internal review documents were generated by E & Y does not mean that they have no bearing on the operation of the companies. Balancing exercise 29.The judge had considered the opinion of E & Y who claimed that the information contained in the internal review documents were already available in the underlying audit working papers. She had reservation about the accuracy of this statement in view of the large quantity of documents involved. 30.This is a view she was entitled to take. I do not consider that she had reversed the burden of proof. In any event the fact that the information contained in the internal review documents may already be available in the other documents that E & Y was willing to disclose does not mean that the internal review documents are not documents that are related to the companies. By their nature, these documents must be related to the company. One of the main purpose of section 221 is to enable the company's knowledge to be reconstituted. The internal review documents are reasonably required to deal with this task. The liquidators had clearly satisfied this test. Further as pointed out by this court in Chark Fung Securities Co. Ltd., it is no objection to the making of the order even if there may have been other people who would have relevant knowledge of the facts sought by the liquidator. 31.The judge had also taken into account the risk of a claim by the liquidators against E & Y if these documents should reveal negligence on the part of E & Y in the performance of its duties towards the two companies. She was entitled to hold that the risk of oppression to E & Y was outweighed by the reasonable requirement of the liquidators to have access to the internal review documents. 32.The concern at this stage is to enable the liquidators to carry out the task of investigation into the affairs of the companies rather than whether the liquidators would pursue a possible claim against E & Y or not. Hence the court is not dealing with the situation of the liquidators gaining an advantage over and above what they can achieve by way of normal civil litigation in the event of a possible claim against E & Y. Position of Mr. Ting 33.In the course of counsel's submission, Mr. Coleman referred to the statement made by the liquidators that they were not able to receive assistance from Mr. Ting. Mr. Coleman stated that the liquidators had in fact reached an agreement with Mr. Ting that they would not pursue against him. Mr. Ting then decided not to co-operate because of this agreement. Mr. Coleman submitted that the liquidators had not dealt with this background information. He only obtained permission to disclose this information on the day of the hearing of the appeal. 34.Ms Linda Chan, counsel for the liquidators, objected to the information being disclosed in such a manner. She further explained that the liquidators had also issued section 221 proceedings against Mr. Ting at about the same time of the present application. However, Mr. Ting had obtained injunctions from another jurisdiction to prevent the liquidators from pursuing against him. Hence there was delay in this matter. 35.We had not been provided with sufficient information for us to comment on this matter. However, the fact remains that the liquidators were unable to obtain assistance from Mr. Ting. The underlining information provided to the judge remains unchanged and this new information does not affect the order at all. 36.As the judge was required to balance the conflicting interest of the parties in the exercise of her discretion, she had properly taken the objections of E & Y into account. Nonetheless she chose to exercise the discretion by requiring disclosure. In my view she had not erred in principle or taken improper matter into account. In the circumstance this court should not interfere with the exercise of the discretion. Costs of E & Y 37.I fail to see why in a court ordered inspection, E & Y is entitled to charge for the presence of an officer during the inspection. All that E & Y is required to do is to make the documents available for inspection. The liquidators will not be entitled to question anyone from E & Y during the inspection. After all it is not an examination on oath of the representative of E & Y. If the liquidators are not satisfied with the disclosure, the matter has to be dealt with by way of correspondence in view of the large quantity of documents involved. 38.The fact that E & Y may be assisting the liquidators to reconstitute the knowledge of the companies does not mean that they are entitled to charge for the inspection. Obviously E & Y and the liquidators have different roles to play. The latter has statutory obligations to deal with the winding up of companies and hence are entitled to be reimbursed from the recovered assets of the companies. E & Y is not in such a position. 39.The judge was right in refusing to order payment by liquidators to E & Y other than the photocopying charges. Costs of the application 40.The provisional liquidators of the companies had first sought discovery under section 197 of the Ordinance in August 2000 from E & Y. It was refused. 41.In June 2001, the liquidators sought discovery and examination pursuant to section 221. E & Y refused. The request was repeated in March 2002. Thereafter there was discussion between the parties and the summons was issued on 21 July 2003. 42.E & Y claimed that CCB had issued a warrant on the documents which would preclude it from disclosing the documents to the liquidators. There was correspondence made separately by E & Y and the liquidators with CCB on the release of the documents. Initially CCB informed E & Y that the documents would not be released. By 21 July 2003, E & Y was aware that CCB had agreed with the liquidators' solicitor to the release of the documents to the liquidators. E & Y obtained the confirmation from CCB on 11 August 2003. Nonetheless it still opposed the application when it filed the affirmation on 20 September 2003. 43.E & Y's offer to disclose the bulk of the documents in October 2003 was subject to the condition of payment of charges. The liquidators were clearly entitled not to accept the offer with this condition. 44.In any event the liquidators succeeded in obtaining an order for inspection of the internal review documents which E & Y had refused to disclose. This being the case the judge was clearly right to order costs of the application against E & Y. Conclusion 45.The appeal was accordingly dismissed with costs to the liquidators. Hon Gall J : 46.I have read the judgment of Cheung JA and I agree. Hon Hartmann J : 47.I agree.
Representation: Ms Linda Chan, instructed by Messrs Johnson, Stokes & Master, for the applicants Mr. Russell Coleman, instructed by Messrs Kennedys, for the 1st respondent |
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