The Joint and Several Liquidators of the New China Hong Kong Group Ltd and Others v. Ernst & Young (A Firm)
Read the full judgment text of HCMP 1725/2004 on BabelCite. This High Court CFI judgment was delivered on 14 January 2005.
1. By an originating summons issued on 9 July 2004, the liquidators of New China Hong Kong Group Limited (“NCHK Group”), New China Hong Kong Capital Limited (“NCHK Capital”) and New China Hong Kong Finance Limited (“NCHK Finance”) (collectively “the Companies”) seek an order under sections 221 and 255 of the Companies Ordinance, Cap. 32 that Ernst & Young (“E & Y”) do forthwith supply or make available to them the following documents:
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HCMP 1725/2004 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE MISCELLANEOUS PROCEEDINGS NO. 1725 OF 2004
____________ BETWEEN
____________ Before: Hon Kwan J in Chambers Date of Hearing: 7 January 2005 Date of Handing Down of Decision : 14 January 2005 ______________ D E C I S I O N ______________ The present application 1.By an originating summons issued on 9 July 2004, the liquidators of New China Hong Kong Group Limited (“NCHK Group”), New China Hong Kong Capital Limited (“NCHK Capital”) and New China Hong Kong Finance Limited (“NCHK Finance”) (collectively “the Companies”) seek an order under sections 221 and 255 of the Companies Ordinance, Cap. 32 that Ernst & Young (“E & Y”) do forthwith supply or make available to them the following documents:
The previous application and decision 2.In earlier proceedings taken out by the liquidators in HCMP No. 3891 of 2002 on 24 September 2002, they had sought, inter alia, an order for production of these documents against E & Y under the same provisions of Cap. 32:
3.On 28 April 2003, I gave a decision (“the Decision”; reported at [2003] 3 HKC 252) in which I made an order (“the Production Order”) in terms as sought by the liquidators, save that the documents sought in item (1) above are limited to those for the years ended 31 December 1995 to 31 December 1997 inclusive, as I accepted the evidence filed on behalf of E & Y that the audit files for the previous years had been destroyed (paragraph 85 of the Decision). 4.At the hearing of the previous application, it was recognised by every one that the scope of the documents sought to be produced is “very wide indeed” (paragraph 56 of the Decision). On the part of the liquidators, it was stated in their supporting affidavit that not only was E & Y the auditors of the Companies, it was also the tax adviser, the provider of company secretarial services, and the financial adviser to the Companies. Further, E & Y had also provided the same services to approximately 33 other companies forming part of a larger group of related companies (“the New China group of companies”). For E & Y, it was asserted in its affidavits in opposition that the liquidators “in effect … simply seek a blanket order permitting them to trawl through all of E & Y’s files relating to the services performed by E & Y for the Companies”, that the documents sought in the application “amount to nothing more than requesting sight of all E & Y’s working papers”, and that the liquidators were requesting “the totality of E & Y’s audit files” (emphasis supplied). 5.That was how I had perceived the scope of the documents sought in the previous application when I made an order in terms, save to the extent that I have mentioned. I dealt with the question whether there was a proper case for the production of documents in paragraphs 56 to 66 of the Decision. I decided that in the particular circumstances, it was not necessary for the liquidators to identify specific transactions to which the production of documents should be restricted. I considered a “proper basis” was made out for “the general review of transactions” such that the liquidators would “reasonably require access to all the audit working papers and all the documents relating to the provision of financial advice” and did not “think it practical or necessary to cut down the width of the documents sought”. I also referred to extracts in the judgment of Woolf LJ (as he then was) in In re British and Commonwealth Holdings Plc (Nos. 1 and 2) [1992] Ch. 342 at 384B to G, 392D to 393B, for the observation that “in an ordinary situation the court cannot be expected to indulge in fine judgments as to the precise width of the order which is to be made” and that “it would be inconsistent with the summary nature of the power [under section 221] for there to be successive applications and successive orders if the respondent is required to make disclosure stage by stage”. I can do no better than echo the words of Woolf LJ at 393A to B:
6.E & Y lodged an appeal against the Decision and later decided not to pursue the appeal two weeks before the appeal was due to be heard. The stance taken by E & Y 7.From November 2003 (when the stay of the Production Order was lifted after the dismissal of the appeal) to May 2004, the liquidators’ solicitors were engaged in further protracted correspondence with E & Y’s solicitors regarding the documents that should be produced in compliance with the Production Order and further documents and information sought by the liquidators as a result of the information made available. 8.The stark fact is that in respect of the documents in item (1) of the Production Order, only 28 files were produced by E & Y initially, and five additional bundles belatedly in December 2004, notwithstanding there are in existence a total of 300 other files in its possession. As for the documents in item (2) relating to the provision of financial advice, only 54 fee notes were produced to the liquidators. 9.E & Y has repeatedly maintained in correspondence and on affidavit that it had provided to the liquidators all documents in its possession, custody or control that “fall within” the Production Order. Notwithstanding such repeated assertion, E & Y had on 27 January 2004 and 28 December 2004 (this was three months after the liquidators had served an affidavit in reply in the present application in September 2004, in which they identified a number of examples where documents in existence were not produced) provided further documents which it identified to be within the scope of the Production Order. E & Y accepted by the letter of its solicitors dated 16 December 2004 that there was “oversight” in not retrieving certain files. 10.Mr. Chan Wing Fai, a senior manager of E & Y, initially reviewed approximately 160 files to identify documents that should be disclosed pursuant to the Production Order. In July 2004 and subsequently, with two of his assistants he reviewed a total of 300 files in a further attempt to look for documents that should be produced, but he did not think he had come across any document within the scope of the Production Order other than what E & Y had already produced. The 300 files held by E & Y related to services provided by E & Y to the Companies and other companies in the New China group of companies and comprise the following:
11.In summary, the documents produced by E & Y are limited because of its interpretation of the Production Order, which is along these lines:
12.As a result of E & Y’s stance, the liquidators issued the present application seeking production of the four categories of documents in the originating summons, taking the view that it would be a waste of time and costs to continue to debate with E & Y’s solicitors on the interpretation of the Production Order. The expanded disclosure 13.The liquidators do not accept the interpretation of E & Y restricting the scope of the Production Order. Miss Linda Chan for the liquidators submitted that the scope of production in the present application is wider than the Production Order in only two respects in that these additional documents are sought relating to or connected with the audits of E & Y:
14.E & Y estimated that if it were ordered to produce the documents in the present application, being all documents relating to or connected with the audits, whether completed or uncompleted, of the subsidiaries and associated companies, this would add between 86 to 114 companies, as between 1995 to 1997, the number of subsidiaries and/or associated companies on which E & Y had performed audit work ranged from 86 to 114. And if it were ordered to produce the documents relating to or connected with the provision of tax, accounting, business advisory, and any other advice, services or assistance to the Companies apart from “financial advice”, its preliminary assessment of the additional number of files that might be disclosed could be in excess of 200 files. 15.I will consider the documents sought in the present application under various separate heads. Documents relating to audits 16.In my judgment, E & Y is not justified in its restrictive interpretation of the Production Order, as I have summarised in (1) to (5) of paragraph 11 above. Mr. Burns for E & Y did not appear to take such an unmeritorious approach, although he too sought to confine the scope of the Production Order by referring to and emphasising certain passages in the Decision. I do not agree with this approach either, the Decision and the Production Order made under it must be read as a whole, not emphasising or isolating certain parts at the expense of others. Nor do I think it helpful, as Mr. Burns has asked me to do, to go over the correspondence exchanged ever since the liquidators first requested information and documents from E & Y more than four years ago (something I had already done when I made the Decision). The submission that the liquidators in this particular situation must show reasonable requirement in that they have a “particular purpose” for the documents sought or that the documents are relevant to a “specific question or questions” is similar to the submission made by Mr. Burns in the previous application that the liquidators must identify specific transactions requiring investigation, which I had rejected. 17.Quite apart from the fact that there is no justification for E & Y’s restrictive interpretation of the Production Order, the process in which E & Y had caused three of its staff to review such a large number of files to identify various documents that should be produced is plainly unsatisfactory, as mistakes and oversight are inevitable. I do not think an assertion on affidavit made by the staff concerned that all the documents relating to or connected with the audits of the Companies have been disclosed should be accepted as “conclusive” in these circumstances. In the affidavit in reply of the liquidators, they have shown that various documents relating to the audits of the Companies have been omitted from the documents produced by E & Y. These include:
18.I agree with Miss Chan that the documents sought in the present application are necessary and material to the statutory duties of investigation of the liquidators, and in particular to fill important gaps in their knowledge about the Companies and their affairs, given the massive insolvency of the Companies. There is no justification to limit the liquidators’ inquiries to annual audits only and to exclude special audits and reviews. There is clearly a need to extend the documents relating to audits to those of the subsidiaries and associated companies of the Companies, in view of the fact that the audited accounts prepared by E & Y for NCHK Group and NCHK Capital were all consolidated accounts. An audit partner of E & Y, Miss Catherine Yen, confirmed in her examination that for the purpose of auditing the accounts of the Companies, E & Y would have to review and consolidate the accounts of individual subsidiaries and associated companies, including the evidence and explanation provided by such entities to E & Y. The liquidators would need to have access to and review the documents relating to audits of the subsidiaries and associated companies as they formed the basis on which the consolidated accounts of the Companies were prepared. The fact that the liquidators do not hold office in respect of some of these companies is not relevant. 19.As for the documents relating to audits in respect of the financial years of 1993 and 1994, they were excluded from the Production Order as Miss Yen had deposed that the audit files for these financial years were destroyed in accordance with the normal practice of E & Y. It was acknowledged belatedly by E & Y on 16 December 2004 that some of the documents relating to the audits of these financial years have escaped destruction as they were kept in other files. There is no reason why the production of documents should not now be extended to include the previous financial years. An order for production should be made for the documents of the previous years, in case any further documents should turn up; I am not prepared to accept E & Y’s latest assertion it has produced all such documents as necessarily correct. Documents relating to financial advice 20.E & Y contended that item (2) in the Production Order only related to specific advice provided by E & Y and/or Mr. Wu as a consequence of Mr. Wu’s appointment as financial adviser to NCHK Group. I reject this contention. The Production Order is not limited to documents created by Mr. Wu specifically in his capacity as financial adviser to NCHK Group. There is no reason to think that the liquidators’ inquiries should be limited to an understanding of Mr. Wu’s role in the affairs of NCHK Group and the compatibility of that role with the role of E & Y as auditors and that the scope of the Production Order should be curtailed in that light. 21.In paragraphs 7 to 13 of the Decision, I set out the information then known to the court of E & Y’s involvement in the affairs of the New China group of companies. In the evidence filed in this application on behalf of E & Y, it was deposed that E &Y were auditors to or had performed audit work on a number of subsidiaries and associated companies of the Companies ranging from 86 in 1995 to 114 in 1997 and that for certain of these companies (the number was not mentioned but it may be inferred this would not be a small number as the files involved were estimated to exceed 200) E & Y also provided “financial advisory, secretarial, tax and/or accounting services”. 22.On any view, the advice and professional services rendered by E & Y to the Companies in relation to a proposed financial restructuring plan presented to the financial creditors in September 1998 must be relevant in assisting the liquidators to acquire further and better understanding of the affairs of the Companies. Similarly, “files relating to the preparation of financial due diligence reviews for companies in the group and the preparation of accountancy reports in the context of contemplated acquisitions by companies in the group”, also deposed by E & Y to be in existence, must be pertinent to the ongoing investigations of the liquidators. 23.As mentioned earlier, I reached the view in the Decision that the liquidators do reasonably require a general review of transactions and documents and did not think it practical or necessary to cut down the width of the documents sought. I am not persuaded I should now take a different approach. Documents relating to destruction of the 1994 audit files 24.E & Y contended that it is not shown how the documents sought would have assisted the liquidators in the discharge of their statutory duties, quite apart from the fact that the documents in respect of their recent internal inquiries are privileged from production. 25.The liquidators wish to pursue an inquiry as to the circumstances in which the audit files of 1994 were destroyed. They pointed out that on the information made available by E & Y’s solicitors since the previous application, these audit files were not destroyed after six years in accordance with the normal practice of E & Y, as asserted in Miss Yen’s affidavit. The audited accounts of NCHK Capital were signed off by Mr. Wu on 28 April 1995, so six years from that date would be April 2001. However, the file destruction process was twice suspended in 2001 and 2002 and were destroyed by the godown only in late October 2002, some six months after E & Y had given instructions to resume the file destruction process. The liquidators had sought the audit documents of 1994 from E & Y as early as July 2001 and the originating summons for the previous application was issued on 24 September 2002. 26.I am satisfied this is a proper inquiry to be pursued. I do not agree with Mr. Burns that this is outside any legitimate inquiry that may be pursued by a liquidator. 27.As for the claim of legal professional privilege in respect of the documents generated as a result of the recent internal inquiries conducted by E & Y at the direction of its solicitors for the purpose of obtaining legal advice, I would accept that there is a valid basis to claim such privilege here (Balabel v. Air India [1988] 1 Ch 317 at 329H to 332G; Three Rivers District Council & Ors v. Governor and Company of Bank of England (No. 6) [2004] 3 WLR 1274). I do not think this privilege has been waived by E & Y, as contended by Miss Chan, as there was no reference to any of the privileged documents, let alone reliance upon the contents thereof, in the letters of E & Y’s solicitors (Bourns Inc. v. Raychem Corp [1999] 3 All ER 154, citing Marubeni Corp v. Alafouzos [1986] CA Transcript 996 at 164e to 167a). 28.I will order production of documents relating to destruction of the 1994 audit files, save and except the documents generated as a result of the internal inquiries conducted by E & Y in 2003 at the direction of its solicitors. The recent writ 29.On 30 July 2004, the liquidators issued a generally indorsed writ on behalf of the Companies against E & Y, claiming damages and/or equitable compensation for breach of contract, breach of statutory, fiduciary or other duties and negligence. The writ has not been served. The writ was issued as a protective writ, prompted by the fact that in respect of the audit of NCHK Group’s accounts for the year ended 31 December 1996, the six-year limitation period might otherwise have expired on 31 July 2004. The liquidators have stated on affidavit that no decision has been taken whether to proceed with the writ, and they do not intend to proceed until their investigations are completed such that they are in a position to decide if there are good and substantial causes of action against E & Y. 30.As I have mentioned in the Decision (paragraphs 23 and 65), the mere fact that the liquidators have commenced proceedings against the persons against whom information is sought is in itself no bar to making an order under section 221 (In re Castle New Homes Ltd. [1979] 1 WLR 1075 at 1080E; In re British & Commonwealth Plc, supra. at 371D), particularly where the writ was issued as a precaution because of limitation considerations (Joint Liquidators of Sasea Finance Ltd. v. KPMG [1998] BCC 216 at 221G to 222A). Conclusion and orders 31.I am satisfied that the liquidators have discharged the onus of showing a reasonable requirement for the documents sought in the present application. I have no difficulty in deciding that the balancing exercise should be resolved in their favour. Any prejudice or oppression that E & Y may suffer in having to disclose a vast amount of documents at this stage would be outweighed by the public interest after the massive insolvency of the Companies in having E & Y to disclose to the liquidators documents which may fill important gaps in their knowledge in deciding if claims should be pursued against any party. The only way forward, and to put an end to this drawn out process, is to make a comprehensive order of production of documents against E & Y. 32.I make an order in terms of paragraphs 1 to 4 and 6 of the originating summons, with changes to be made to paragraphs 1(b) and (d), and they are to read as follows:
33.I make an order nisi that the costs of and occasioned by this application are to be paid by E & Y to the Companies.
Miss Linda Chan, instructed by Messrs. Johnson, Stokes & Master, for the Applicants Mr Ashley Burns, instructed by Linklaters, for the Respondents |