THE JOINT & SEVERAL LIQUIDATORS OF CHINA MEDICAL TECHNOLOGIES, INC. v. THE BANK OF CHINA (HONG KONG) LTD AND OTHERS

HCCW 435/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO 435 OF 2012

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D E C I S I O N

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The Application

1.  On 10 March 2015 the Liquidators of China Medical Technologies, Inc. (“Company”) issued a summons pursuant to section 221 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance, cap. 32, seeking:

1.1 production of documents by the Bank of East Asia Limited (“BEA”) and Bank of China (Hong Kong) Limited (“BOC”); and

1.2 orders for the examination of C, anex‑employee of BEA and A and B of BOC.

2.  There was a certain amount of refinement of the description of the documents in the summons sought during the course of the hearing.  The orders for production that the Liquidators sought from BOC at the end of the hearing are the following:

2.1 Documents in respect of the accounts referred to in paragraphs 2.2 to 2.4 below pursuant to any of BOC’s obligations under the Hong Kong Monetary Authority Guideline 3.3 – Prevention of Money Laundering and the Supplement thereto dated March 2003, or any BOC policy or procedure relating thereto, in respect of payment, a payor or a payee, including but not limited to:

(a) Assess, verify or monitor the legitimacy of the payment;

(b) Records or reports from the management information systems used by BOC to detect patterns of unusual or suspicious activity in respect of the accounts of the payor or payee;

(c) Any internal communications amongst BOC officers or employees; and

(d) Any communication between BOC and the payer or payee (or their respective representatives) in relation to the payment.

(“Payment Approval Documentation”)

2.2 Payment Approval Documentation relating to all payments made between 28 June 2005 until 31 December 2008 by the Company from the specified bank account with BOC to Supreme Well Investments Limited (“Supreme Well”).

2.3 All payments made between 17 September 2006 until 1 December 2011 from Supreme Well to the accounts of 10 specified companies and persons (“Supreme Well Payees”).

2.4 All payments made by the Supreme Well Payees between 7 November 2006 until those accounts were closed and all payments during that period to specified bank accounts with BEA of X Limited (“X”) and of Y Limited (“Y”).

2.5 All account opening and closing documents and operating mandates created by BOC in respect of those accounts specified in a document.

2.6 All account statements and all bank vouchers, forms, instructions, transaction advices, cheques and correspondence (“Transaction Documents”) created by BOC in respect of the BOC bank accounts listed in a document.

2.7 All client, credit and risk assessment documentation in respect of the Company, Supreme Well, East Hope International Limited, Kam Hing Trading Co, Innovative Technology Limited, Mr Chong Wing Hip, Mr Zhu Feng, Mr Chen Zhong, and the BOC bank accounts listed in a document created by BOC from the date the relevant bank accounts were opened until 27 July 2012.

2.8 All internal policy documents in place during the period from 28 June 2005 to 27 July 2012 concerning BOC’s policies regarding the treatment of suspicious transactions and its policies for ensuring compliance with the laws and regulations concerning the monitoring and reporting of suspicious transactions, including the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance (Cap. 615).

2.9 Following production of the documents referred to in paragraphs 2.2 to 2.4, and upon written notice(s) being given by the Liquidators (“Notice(s)”), BOC shall produce to the Liquidators within a reasonable period of receipt of a Notice:

a. Payment Approval Documentation which pertain to payment transactions on the Further Supreme Well Payee accounts to be specified by the Liquidators in the Notices;

b. Transaction Documents which pertain to bank accounts in respect of the BOC bank accounts listed in a document to be specified by the Liquidators in the Notices;

c. Client, credit and risk assessment documentation in respect of the BOC bank accounts listed in a document to be specified by the Liquidators in the Notices;

d. Documents falling within paragraph 2.8 dated after 27 July 2012 to be specified by the Liquidators in the Notices; and

e. Payment Approval Documentation which pertains to payments from the Supreme Well Payees to entities and persons who do not hold accounts at BOC or BEA.

The Liquidators shall serve any Notice within four months from the production of the documents referred to in paragraphs 2.5 to 2.7.

2.10 The Liquidators be at liberty to examine orally A, the 3^rd Respondent, on oath before a Master on the earliest date available in the Court’s diary with one day reserved and a further one day reserved approximately six weeks thereafter.

2.11 The Liquidators be at liberty to examine orally B, the 4^th Respondent, on oath before a Master on the earliest date available in the Court’s diary with one day reserved and a further one day reserved approximately six weeks thereafter.

3.  The Liquidators seek a very similar order against BEA, although in the case of payments by the Supreme Well Payees the request is more extensive as it also includes a document.  Theequivalent order to that sought in respect of BOC referred to in paragraph 2.4 above reads:

“All payments made by the Supreme Well Payees between 7 November 2006 until those accounts were closed and all payments during that period to specified bank accounts with BEA of X and of Y.”

4.  The other material differences are that rather than orders in the terms referred to in paragraphs 2.5 and 2.6 the following are sought:

4.1 All account opening and closing documents and account operating mandates, account statements and all bank vouchers, forms, instructions, transaction advices, cheques and correspondence created by BEA in respect of the bank accounts of X and Y.

4.2 All client, credit and risk assessment documentation in respect of Supreme Well, East Hope International Limited, Cheer Link International Limited, Dynamic Sense Limited, X and Y created by BEA from the date the relevant bank accounts were opened until 27 July 2012.

4.3 The Liquidators be at liberty to examine orally the 5^th Respondent, C on oath before a Master on the earliest date available in the Court’s diary with one day reserved and a further one day reserved approximately six weeks thereafter.

5.  Self-evidently the Liquidators seek production of potentially a very large quantity of documents from both banks.  The documents are related to a suspected misappropriation of funds from the Company.

Background

6.  The circumstances in which the Company came to be wound up are explained in detail in 2 of my earlier judgments in these proceedings[1]. The first judgment dismissed the Petition to wind up the Company, which is incorporated in the Cayman Islands where it was already in liquidation.  In the second judgment I considered new evidence that had come to light concerning the connection between the Company and Hong Kong, an issue which was relevant to my determination of whether or not the Company had sufficient connection with Hong Kong to justify winding it up in Hong Kong, which indicated that Hong Kong had been central to what prima facie appeared to be a substantial fraud involving the misappropriation of some US$355,500,000 of the Company’s funds by its Chief Financial Officer and Chairman and major shareholder.  I will quote from paragraphs 8 to 14 and 22 of my August 2014 judgment as it sets out background matters directly relevant to the present applications.  In addition I append to this judgment as Appendix A a chart prepared by the Liquidators showing the flow of funds, which they have been able to compile as a result of the documents received to date from the banks.

“8. I found in my earlier decision that the first and second criteria which I refer to in paragraph 2 above had been met. In other words I was satisfied that there was a substantial connection with Hong Kong and that there were tangible benefits in making a winding-up order. The reason I thought that there was a substantial connection are explained in paragraphs 14 to 20 and 56 and 58. The reasons I thought that there would be a tangible benefit in making a winding‑up order are explained in paragraph 62. The reason why I was not satisfied that the connection and the benefits were sufficiently great to justify making a winding-up order in the absence of creditors with claims of sufficient value in Hong Kong are explained in paragraphs 58 to 60. At that time of the trial it appeared that the Company’s principle business activities had been carried out outside Hong Kong. The liquidators were particularly concerned to investigate the matters referred to in paragraphs 29 to 34 of the Re‑Amended Petition, which are quoted in paragraph 22 and their import summarised in paragraph 23. Essentially what was being suggested was that the circumstances in which approximately US$355,000,000 of the Company’s funds raised through its initial public offering and 2 subsequent bond issues, came to be paid in Hong Kong to a company called Supreme Well Investments Limited (‘Supreme Well’) in exchange for the acquisition of medical technology, known by the acronyms FISH and SPR, from Supreme Well and its wholly owned subsidiary Molecular Diagnostics Technologies Limited (‘Molecular’) (paragraph 12), were highly suspicious as the liquidators can find no evidence of anything of substantial value having been transferred to the Company. The liquidators wished to investigate the transaction and, in particular, examine the Company’s former director and chief financial officer, Mr. Tsang. I did not think that the fact that the transaction was substantially completed in Hong Kong was enough to lift this case into the exceptional category discussed in paragraphs 50 to 52.

9. The new evidence relates to how the money received by Supreme Well came to be dealt with. It is suggested that the new evidence indicates that the acquisitions of the FISH and SPR were indeed bogus and that the payment of US$355,000,000 to Supreme Well by a series of 55 cashier orders between November 2006 and December 2009 was part of a massive fraud a significant part of which can now be seen to have been conducted in Hong Kong and involved Hong Kong parties. It is suggested that this represents such a significant part of the affairs of the Company that it elevates this case into the type which justifies making a winding‑up order even if the third criteria is not satisfied.

10. The transaction between the Company and Supreme Well and Molecular was, according to public announcements made by the Company at the time, an arm’s length transaction. However, the new documents obtained by the liquidators show that the 2 accounts into which US$355,000,000 was deposited with Bank of China Hong Kong and the Bank of East Asia respectively, had as their sole authorised signatory Mr. Tsang. The shareholder of the account opening documents is a Mr. Chen Zhong, who was allegedly the developer of the technology sold to the Company. However, through a series of transfers made initially out of the Supreme Well accounts to various other accounts the large majority of the proceeds, US$294,500,000, ended up in accounts controlled by Mr. Tsang and the Company’s former Chairman and Chief Executive Officer Mr. Wu. Mr. Chen seems to have received US$3,000,000.

11. For the purposes of the application the liquidators prepared a funds flow chart showing what was known at the time of the trial and what the liquidators have come to know subsequently. I have had this chart divided into pages and they are appended to this decision as it is the most convenient way of summarising the relevant information. As can be seen it was known last July that the net fund raising of the IPO and 2 note issues was US$631,000,000 of which, after redeeming some of the notes, US$515,000,000 was available to the Company. US$63,390,000 was transferred to China Medical Technologies Inc in Beijing. The balance of US$451,000,000 was transferred to the Company’s account with Bank of China in Hong Kong and the signatories of that account were Mr. Tsang and Mr. Wu. As I have mentioned a total of US$355,500,000 was transferred to Supreme Well by December 2009 of which US$150,500,000 went into a Bank of East Asia account and US$205,000,000 went into a Bank of China account. This was known to the liquidators at the time of the trial of the Petition.

12. On the second page of the funds flow chart is shown what the liquidators have discovered since July 2013. I will explain how they came to discover it later in this decision. What can be readily seen is that by a series of transactions involving Hong Kong bank accounts opened in the name of companies incorporated in the British Virgin Islands, which were purportedly owned by persons who had some connection with the Company, all of which, other than Kam Hing Trading Co, had Mr. Tsang as one of the signatories, US$294,500,000 was transferred ultimately into accounts controlled by Mr. Wu or Mr. Tsang. The individual transactions all appear to have taken place physically in Hong Kong. None were made electronically and in fact in the case of each account it can be seen from the account opening forms that the applicant crossed out those sections requesting electronic banking services. This is inconsistent with the Company’s assertion that the sale of FISH and SPR by Supreme Well and Molecular to the Company was an arm’s length transaction.

13. The way in which the accounts were opened and operated is also suspicious. I will take the East Hope accounts with both Bank of East Asia and Bank of China as an example. The Bank of East Asia account is described in the account opening documents as a private banking account and the documents indicate that it was to be used for investing in a balanced portfolio of equities and bonds. In the forms Mr. Kwan Po Ming is said to be the beneficial owner of East Hope. Mr. Kwan is a Hong Kong certified public accountant with an office in Kowloon. Mr. Wu and Mr. Tsang, however, were the account’s only signatories, not Mr. Kwan, who I note has declined to provide any information voluntarily about the account. Between 2 February and 23 December 2009 the account received US$60,000,000 from Supreme Well’s Bank of East Asia account. There is no evidence of this money being invested. The account seems to have been simply a conduit for the onward transfer of money. One would have expected the Bank of East Asia to have asked questions about the source of the very substantial sums being transferred to Supreme Well and then to East Hope. If they had been told it was the proceeds of the sale of FISH and SPR to the Company one might have expected them to be suspicious about the fact that Mr. Tsang and Mr. Wu were signatories to the Supreme Well and East Hope accounts given their connection with the Company and its public statements that the sale was an arm’s length transaction. It may be that the Bank of East Asia made a report pursuant to section 25A of the Organised and Serious Crimes Ordinance, Cap. 455; about that there is no evidence. What is clear is that there is good reason to be very suspicious about the genuineness of the sale of FISH and SPR and that the way in which the proceeds of sale were dealt with subsequently require investigation.

14. There is now reason to think that a very large part of the Company’s assets has been misappropriated through a scheme operated in Hong Kong involving various persons who themselves are normally resident here (Mr. Tsang, Mr. Kwan and Mr. Chong Wing Hip) and using bank accounts in Hong Kong which were operated personally by Mr. Tsang in Hong Kong. Mr. Karas in his submissions suggested that it can now be seen that the Company’s principal activity was probably conducting a large scale fraud and that, therefore, Hong Kong is properly characterised as the location of its principal activities. I disagree with that characterisation which I think was driven by an assumption arising from the language that I use in paragraph 58 that in order to convince me that the Company’s connection with Hong Kong was sufficiently great to justify winding up the Company, although there are no material creditors in Hong Kong, it would have to be demonstrated that the Company’s ‘principal activities’ took place here. In a normal case that would be probably be so, but this type of description is not apposite in characterising a case such as the present one. What is important is that the evidence demonstrates that something of great significance has occurred in Hong Kong so that it can fairly be concluded that not only does the Company have a substantial connection with this jurisdiction but that the connection is in a relevant way central to the liquidation of the Company. In this regard it is relevant that the process of liquidation of an insolvent company involves not just the realisation of assets for ultimate distribution to creditors, but a broader investigation into its affairs. Such an investigation serves two purposes. The first is the identification of possible wrong doing that has caused loss to a company and which gives rise to a right to recover that loss from a third party. The obvious example is a claim against a director for breach of fiduciary duty or misfeasance giving rise to a statutory claim under section 277 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance. As Vaughan Williams J observed in Re Krasnapolsky Restaurant and Winter Garden Co [2]:

‘…if the circumstances appearing by affidavit are sufficient to shew, prima facie, that an investigation into the formation or promotion of the company or the issuing of debentures or shares is required, that alone is an advantage to the unsecured creditors.’

Similar statements can be found in subsequent authorities including a number in Hong Kong[3]. As Morritt LJ explained when considering whether or not the second core requirement had been satisfied in the Court of Appeal’s judgment in Stocznia Gdanska SA v Latreefers Inc (No. 2 [4]):

‘…potential claims for misfeasance and wrongful and fraudulent trading do provide a reasonable possibility of benefit to the Yard and other creditors of Latreefers so as to comply with the second core requirement.’

….

22.    It also seems to me that the problem with this case is not so much that the evidence was obtained late as that the petition was issued before the liquidators had obtained all the evidence necessary to address properly the jurisdiction issue.  Mr. Karas argued that whilst with the benefit of hindsight this might appear to be the case it was not in fact so. At this juncture it is necessary to explain how the new evidence came to be obtained.  Having been notified on 5 September 2013 of my decision the liquidators issued a subpoena in New York to obtain documents from Bank of East Asia’s New York branch containing information about Supreme Well’s bank account.  They considered this to be a speculative application and initially it was opposed.  To their surprise shortly before Christmas the Bank of East Asia voluntarily provided documents which demonstrated that Mr. Tsang was a signatory to the bank account.  Encouraged by this they sought further documents from the Police in Hong Kong.  This resulted in an application to the Court which the Police, after initially opposing it, did not contest.  This also produced further helpful documents.  The decision was then made to apply to this court for an order that Bank of East Asia and Bank of China Hong Kong provide documents concerning the accounts of the recipients of funds from Supreme Well.  This was done by seeking a letter of request from the Grand Court of Cayman Islands for recognition of the appointment of the liquidators in Hong Kong and for an order for the production of those documents[5].  Mr. Karas accepted that it might be said that this latter step could have been taken much earlier, but he argued that just as prior to the handing down of my decisions in Re Yung Kee Holdings Ltd [6] and Pioneer Iron and Steel Group Co Ltd [7] the law in Hong Kong on the circumstances in which the Court would order the winding up of an unregistered company was not well developed, it was unclear until my decision in In re A company [8] to what extent the Companies Court considered itself able to provide assistance to a foreign liquidator.  I accept that viewed from the perspective of practitioners in November 2012, when the Petition was issued, perhaps the jurisdiction issue appeared less controversial than I considered it to be and that the proceedings were approached in what at the time was a fairly conventional way.  In any event it does not seem to me that on the facts of this case their ability or otherwise to obtain the evidence earlier is an important factor.”

7.  Neither BOC nor BEA opposed the application pursuant to the letter of request from the Grand Court of the Cayman Islands and on 10 April 2014 I made an order for production by the banks of account opening documents, account operating mandates, know your client documentation, account statements and all bank vouchers, forms, instructions, transaction advices, cheques and correspondence relating to 8 accounts and 3 accounts, other than Supreme Well, with BOC and BEA respectively.  As is apparent from my earlier judgment and Appendix A a significant part of  the details of the transfers referred to in the passages that I have quoted came from the documents produced by BOC and BEA pursuant to the April 2014 order.

8.  The Liquidators say that the additional production and examination now sought is necessary in order for them to investigate the flow of funds and the circumstances of the transfers in order to identify those responsible for the misappropriations and the ultimate destination of the Company’s property with a view to recovering the property of the Company for the benefit of its creditors. 

9.  BEA does not object to producing the documents referred to in paragraph 4.1 above other than those which come within the definition of Payment Approval Documentation.  BOC objects to production of all the documents sought by the Liquidators.  Both banks oppose the applications for examination.

Grounds of Opposition

10.  In broad terms the grounds of opposition to the contested parts of the applications can be summarised as follows:

10.1       The documents that are sought are not “relating to the Company” and production cannot be ordered under section 221.

10.2       On 2 December 2014, which was subsequent to the production of documents by the banks, the Liquidators issued writs against BOC and BEA.  It would be oppressive to require further production of documents and examination of the banks’ staff both of which would have little, if any, relevance to tracing the flow of funds and identifying their ultimate recipients and are clearly directed to obtaining documents and information that might assist the Liquidators in pursuing claims against the banks.

Documents relating to the Company

11.  Section 221(1) and (3) provide that:

“(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.

…

(3)     The court may require him to produce any books and papers in his custody or power relating to the company, but, where he claims any lien on books or papers produced by him, the production shall be without prejudice to that lien, and the court shall have jurisdiction in the winding up to determine all questions relating to that lien.”

12.  In China Medical Technologies Inc. (No 2) [9] I consider the ambit of section 221(3) and whether the expression “relating to the company”should be given the meaning adopted by Kwan J (as she then was) in Weihong Petroleum Co Ltd (No 2) [10] or, as the Liquidators argued, “relating to the Company” should be given the same meaning as “concerning the promotion, formation, trade, dealings, affairs or property of the company”; the language that appears in section 221(1).  I agreed with Kwan J’s decision.  In my view in order to come within section 221(3) a document must be demonstrated to relate to the Company and in assessing whether or not it does (to quote from Lord Millett in Kong Wah) “The test is essentially a commercial one, which a layman will normally be able to understand.”[11]  Mr. Karas invited me to allow this question to be reargued, which I declined.

13.  I do not understand it to be in dispute that some of the documents might contain information concerning the fraud suspected to have been perpetrated on the Company, but that, say the banks, is not the test as China Medical Technologies Inc (No 2) makes clear.  I also do not understand it to be in dispute that if section 221(3) used the same language as section 221(1), it would be sufficiently broad to include documents of the type sought by the Liquidators as there is sufficient evidence to establish that the funds flowing from Supreme Well to the Supreme Well Payees and X and Y were the proceeds of fraud and that the transfers probably formed part of a scheme for misappropriating the Company’s assets.  If it had been in dispute I would have so found and also found that the Liquidators reasonably required the documents to carry out their functions.

14.  Similarly, I do not understand it to be suggested by the banks that the Payment Approval Documentation might not contain information that would assist the Liquidators in understanding how it was possible for the transfer of monies derived from the payments made by the Company to Supreme Well to be made and also to identify possible claims that might be advanced by the Company for recovery of property derived from the initial transfer or damages for loss caused by the suspected misappropriation of its assets.

15.  The expression “relating to the Company” needs to be interpreted and applied in a practical, commercial manner.  It assumes some knowledge of the circumstances in which the documents come to be sought.  Necessarily, given my decision in China Medical Technologies Inc (No 2), it requires an understanding that it does not mean relating to the affairs or property of the company, although conversely a document “relating to the company” will relate to its affairs, and may, depending on its subject matter, relate to its property.

16.  In my view the documents sought by the Liquidators do not relate to the Company.  This is most obvious in the case of the documents referred to in paragraph 2.8 above.  Documents produced by the banks containing internal guidelines and protocols dealing with monitoring suspicious transactions of clients generally do not relate to the Company. They relate to the internal affairs of the two banks.  The Payment Approval Documentation in respect of the Supreme Well Payees relate to the banks and each of the Supreme Well Payees.  They do not relate to the Company.  Similarly the documents referred to in paragraph 2.5 above relate to the entities referred to not to the Company. 

17.  The summons seeks documents that go beyond what is obtainable pursuant to section 221(3).  The only category of documents that in my view can fairly be said to be “relating to the company” are those I have referred to in paragraph 2.2 above.  Except for that category of documents, and to the extent that BEA has agreed to provide particular categories of documents, in my view the Liquidators are not entitled to the order they seek.

Oppression

18.  The banks also object to the production of documents on the grounds of oppression, although as I understand it this objection is mainly directed at the Payment Approval Documentation and the documents sought in paragraphs 2.7 and 2.8 referred to above rather than any outstanding documents that simply record transfers and bank account details.  The banks say that these documents are relevant to the claims against them in the writs that have been issued.  Before turning to consider those claims I will deal with the relevant legal principles.

19.  Section 221 gives the court a discretion to order the examination of persons whom the court deems capable of giving information about a company and its affairs and require the production of documents relating to a company that is in liquidation.  As Lord Millett explains in paragraphs 29 and 30 of his judgment in Kong Wah Holdings ibid:

“29. In exercising its discretion, the court must endeavour to strike a balance between the liquidator’s reasonable requirements and the need to avoid making an order that is unreasonable, unnecessary or oppressive to the party from whom the documents or information are sought: see for example British & Commonwealth Holdings Plc v Spicer & Oppenheim [1992] Ch 342 at p.370 per Ralph Gibson LJ, and at p.384 per Woolf LJ; British & Commonwealth Holdings Plc v Spicer & Oppenheim [1993] AC 426 at p.439; Re Bank of Credit and Commerce International SA (No 12) [1997] 1 BCLC 526 at p.537 per Robert Walker J. These cases have been consistently followed in Hong Kong: see for example the Joint Liquidators of Chark Fung Securities Co Ltd & Others v Chan Kwong Hung [2001] 1 HKLRD 772 case.

30. Over the years the courts have laid down general principles governing the balancing exercise which the court is called upon to undertake. They are conveniently set out in the Cloverbay Ltd (Joint Administrators) v Bank of Credit and Commerce International SA [1991] Ch 90 at pp.102-103 per Sir Nicolas Browne-Wilkinson V-C and British & Commonwealth Holdings Plc v Spicer & Oppenheim [1992] Ch 342 at p.372 per Ralph Gibson LJ and at p.392 per Woolf LJ. They can be summarised as follows:

(1) The liquidator must show that the documents are reasonably required to enable him to carry out his functions, not that they are necessary to enable him to do so;

(2) the case for making an order under the section in respect of a former officer is usually stronger than in respect of a stranger who owes no fiduciary duties to the company and who is not under a statutory duty to assist the liquidator;

(3) there is an element of oppression in requiring a party to provide information which exposes him to potential liability;

(4) an order for oral examination is likely to be more oppressive than an order to produce documents;

(5) it is oppressive to require a person suspected of wrongdoing to prove the case against himself on oath prior to proceedings being brought;

(6) an order is not necessarily oppressive because it is inconvenient for the party subject to it or causes him a lot of work or may make him vulnerable to future claims;

(7) in the light of the summary nature of the procedure and the need for expedition, the court cannot be expected to indulge in fine judgments as to the precise width of the order which should be made; and

(8)     the court must take care not to cut down the width of the order sought by the liquidator in a way which would risk making it ineffective.”

20.  As Lord Millett makes clear in sub-paragraph 30(3) and (5) there is an element of oppression in requiring a person to provide information or documents that may expose him to liability. Consistent with this in assessing an application for production or examination a relevant consideration is the existence of litigation, or its contemplation, and the prospect of liquidators obtaining an advantage that the company would not otherwise have in prosecuting a claim.

21.  For the reasons explained by Sir Nicolas Browne Wilkinson V‑C in Cloverbay Ltd v BCCI Ltd (CA [12].) whether or not litigation has been commenced, or the subjective state of mind of the liquidator as to whether or not he has enough information to proceed with an action, cannot be the determining factor in deciding whether or not it would be unfairly oppressive to make an order.  The Vice Chancellor goes onto explain:

“Nor do I think that there is any other simple test that can be substituted. The words of the Insolvency Act 1986 do not fetter the court’s discretion in any way. Circumstances may vary infinitely. It is clear that in exercising the discretion the court has to balance the requirements of the liquidator against any possible oppression to the person to be examined. Such balancing depends on the relationship between the importance to the liquidator of obtaining the information on the one hand and the degree of oppression to the person sought to be examined on the other. If the information required is fundamental to any assessment of whether or not there is a cause of action and the degree of oppression is small (for example in the case of ordering premature discovery of documents) the balance will manifestly come down in favour of making the order. Conversely, if the liquidator is seeking merely to dot the i’s and cross the t’s of a fairly clear claim by examining the proposed defendant to discover his defence, the balance would come down against making the order. Of course, few cases will be so clear: it will be for the judge in each case to reach his own conclusion.

That said there are a number of points which in my judgment should be borne in mind in exercising the discretion. First, the reason for the inquisitorial jurisdiction contained in section 236 of the Act of 1986 is that a liquidator or administrator comes into the company with no previous knowledge and frequently finds that the company’s records are missing or defective. The purpose of section 236 is to enable him to get sufficient information to reconstitute the state of knowledge that the company should possess. In my judgment its purpose is not to put the company in a better position than it would have enjoyed if liquidation or administration had not supervened. In many cases an order under section 236 may have the result that the company is in such improved position e.g. an order for discovery of documents made against a third party in order to reconstitute the company’s own trading records may disclose the existence of claims which would otherwise remain hidden. But that is the result of the order not the purpose for which it is made.

Second, as a corollary to the first point, I do not think that the test of absolute “need” as opposed to a reasonable requirement for the information is a workable or appropriate test. This was the determinative distinction relied upon by the judge. But if the applicant has to show an absolute ‘need’ this would lead to endless argument about whether the circumstances of each case disclose such need and would lead to the order being refused even in cases where the information would be of great utility to the applicant (short of absolute need) and could be obtained (e.g., by discovery of documents) without any great oppression to the person sought to be examined.

Third, in my judgment the case for making an order against an officer or former officer of the company will usually be stronger than it would be against a third party. Officers owe the company fiduciary duties and will often be in possession of information to which the company is entitled under the general law. Their special position as officers of the company is emphasised by section 235 of the Insolvency Act 1986 which imposes on them a statutory obligation to assist the liquidator or administrator. The enforcement of these duties owed by its officers to the company may require an order under section 236 of the Act of 1986 even though it exposes such officers to the risk of personal liability. No such considerations apply when an order is sought against a third party. He owes no duty to the company. In an otherwise proper case he may be required to disclose documents or answer questions so as to provide the liquidator with the information necessary to carry out his functions even though this may have unfortunate repercussions for him. But he owes no general duty to give such information (apart from an order under section 236) and if by giving the information he risks exposing himself to liability this involves an element of oppression. That is not to say that an order cannot or should not be made against a third party. But it should be borne in mind that the degree of possible oppression is greater in his case.”

22.  Mr. Karas suggested that this did not reflect the current approved approach in Hong Kong.  That, he suggested, is to be found illustrated by my decision in Pioneer Iron and Steel Group Co Ltd v Pioneer Metals Co Ltd [13] in which I refer to the judgment of Sir Peter Gibson LJ in Shierson v Rastogi [14] and then say this:

“12. However, as Shierson v Rastogi ibid demonstrates the fact that proceedings have already been commenced which concern matters, which it is proposed are the subject of examination is not necessarily a bar to such an examination being ordered. The Court of Appeal explained this in the following terms:

‘46. I accept that an order for examination is not indispensable in relation to some matters indicated in the statement of grounds in view of Mr Rastogi's and Mr Jain's limited offer to co-operate. But I have no doubt that considerable areas remain, questions on which will only be answered in the near future if the examination order stands, in particular relating to missing moneys and the trading system. I do not accept that when the liquidators sought an order for examination knowing that the answers obtained may go to issues in the litigation, they did so for a collateral purpose. The liquidators, acting in good faith as is conceded, seek the information for the purposes of the liquidation and in particular to get in the assets of the company. Nor do I accept that the liquidators, having opted for court proceedings against Mr Rastogi and Mr Jain are thereby precluded from obtaining a s 236 order against them. ... for the reasons given in Cloverbay I accept that to require defendants accused in civil proceedings of serious wrongdoings to give answers to questions, from those bringing those proceedings, which go to issues in the proceedings is oppressive.

…

48. As against those factors must be set the following. First, Mr Rastogi as the chief executive officer and Mr Jain as an executive director with particular responsibility for trading not only owed fiduciary duties to the company but, as the judge aptly said, are ‘the most crucial sources of information relating to what went on inside [the company]’ and were ‘its brains’. They are obliged to co-operate with the liquidators, who are accountants with no prior knowledge of the company. Secondly, the estimated deficit is very large, some US$350 million, the crash occurring with remarkable suddenness. Thirdly, the liquidators want the answers to their questions as soon as possible so that they can act quickly, for example, in respect of outstanding receivables and missing moneys.

…

50. On conducting the balancing exercise I have no doubt but that the scales come down in favour of making the order. This is a case where the legitimate requirements of the liquidators to obtain speedy information from those who have run the company and the other considerations set out in para 48 above outweigh the oppression to Mr Rastogi and Mr Jain in being required to submit to a private examination. Like the judge I conclude that the need for making the order is overwhelming.’[15]

‘There is no justification for any suggestion that the purpose of the examination under s 236 [in that case] is to obtain any advantage in the current civil proceedings. That is also to view the matter from the wrong perspective. The nature of the application and the evidence in its support shows that its purposes are both more fundamental and more wide-ranging. They are to reconstitute the company's records, to understand its affairs and, with that understanding, to identify its assets wherever they may be, including any causes of action against anyone whoever they may be. It is true that, inthe course of any examination on these matters, information may well be forthcoming that will bear on, or expand the scope of, the current civil proceedings against the directors. But that will be an incidental consequence or effect of an examination which is needed in order to enable the liquidators to perform their functions generally: see Re Brook Martin & Co [1993] BCLC 328 at 335. While any effect on the civil proceedings should be taken into consideration when deciding whether to make an order for examination, I have no doubt that in this case the need to have an examination, if the liquidators are to fulfil their functions generally, outweighs any such consideration.’[16]

13.    The Court is, therefore, required to balance the legitimate need of liquidators to understand the relevant part of a company’s affairs and the right of the examinee not to be subject to an examination, which will put him at a disadvantage that he would not normally be under in the course of litigation or, approaching the matter from the opposite direction, will not give a company in liquidation an advantage not available to other litigants.  In approaching this balancing exercise the Court has regard to the fact that the liquidators of an insolvent company are commonly at a disadvantage in advancing claims on behalf of an insolvent company with a view to ensuring recovery of assets for the benefit of creditors, namely, that they are appointed normally with no prior knowledge of a company’s affairs and by the very nature of insolvency commonly find the company’s records incomplete and unsatisfactory and its officers unhelpful.  This in my view is the position in this case.  The liquidators have had considerable difficulty in obtaining documents and, despite the endless protestations to the contrary by Ms Chen and the lawyers who she has instructed during the course of the winding‑up proceedings, it seems clear to me that she has no genuine interest in assisting the liquidators; quite the contrary.”

23.  I do not consider that Sir Peter Gibson LJ is saying anything inconsistent with what is said in Cloverbay, a decision referred to with apparent approval by Lord Millett in paragraph 29 of Kong Wah.  What is necessary is a consideration of the extent to which the Liquidators require the documents and information they seek through an examination and the extent to which so ordering will prejudice the banks. 

24.  As the Vice-Chancellor observes in the passage from Cloverbay that I have quoted, seeking information that goes to a possible defence is more likely to be oppressive than information reasonably required to assess whether or not a company has a viable cause of action.  Similarly, if a liquidator has in the view of the court enough information to decide to proceed with an action it is more likely that the court will take the view that it is oppressive to require a prospective defendant to provide more information about the claim.

25.  In the present case the banks say that the Liquidators clearly have enough information to decide whether or not to proceed with the actions that they have issued.  The claims in the 2 writs are identical except for the inclusion in paragraph 2.1 of the indorsement in respect of BOC of a claim for damages for breach of contract. 

“1. The Plaintiff’s claims against the Defendant arise from the following circumstances:

….

1.6 All of the transfers of Funds were made by certain directors and/or executives of the Plaintiff to misappropriate the Funds for their personal benefit and without proper authority, in breach of their fiduciary and other duties to the Plaintiff, including their duties not to act in conflict of interest and not to profit from their position; and

1.7 The Defendant had knowledge, being either actual knowledge or knowledge which is to be inferred from willful blindness or reckless indifference, or alternatively was put on enquiry and failed to make necessary enquiries, that the transfers of Funds were made in breach of fiduciary duty by certain directors and/or executives of the Plaintiff as set out above.

2. The Plaintiff’s claim against the Defendant is for the following:

2.1 Damages for breach of contract; and/or

2.2 A declaration that the Defendant held the Funds as constructive trustee; and/or

2.3 Equitable compensation and/or damages for dishonest assistance, knowing receipt, breach of duty (contractual, tortious, equitable, fiduciary, statutory, regulatory and other duties), conspiracy, breaches of trust and/or duty of care and skill by, negligence by an/or unjust enrichment of, the Defendant; and/or

2.4 Repayment or restitution of the Funds; and

2.5 Compound interest on the value of the Funds (or a portion thereof) accountable to the Plaintiff at such rates and for such period as the Court thinks fit, or alternatively, interest pursuant to section 48 of the High Court Ordinance (Cap. 4) at such rate and for such period as the Court sees fit; and

2.6 All further or other orders, accounts, enquiries, directions as may be necessary; and

2.7 Costs; and

2.8    Further and/or other relief.”

26.  Towards the end of the hearing before me a dispute arose as to whether or not it was necessary for the Company to prove knowledge, actual or inferred, of breach of duty by directors of the Company in order for the Company to succeed in a proprietary claim against the banks.  Mr. Man argued that it was not.  The question of knowledge, he said, was relevant to the defence.  And if it is relevant to the defence the court should be slower to order production of documents and examination of witnesses as is explained in the first paragraph of Sir Nicolas Browne Wilkinson’s judgment in Cloverbay which I have quoted in paragraph 21.  His argument was as follows.

27.  If the banks received money directly from the Company as a result of a breach of trust then the Company has a proprietary claim for recovery of that money.  It is not necessary in order to prove that claim for the Liquidators to establish that the banks knew or should have known of the breach of trust.  If the banks have parted with the money they may be able to defend such a claim on the basis of a bona fide change of position.  It is at that stage that the extent to which the banks adequately investigated the source of the money becomes relevant.  The Liquidators dispute this.  Mr. Karas argued that it is a necessary component of any claim that the Company may have against the banks in respect of monies that has been transferred on to the Supreme Well Payees, they had knowledge either actual, or to be inferred from the banks willful indifference or failure to make appropriate enquiries in respect of the transfers, of the breach of trust.

28.  I agree with Mr. Karas.  The Liquidators are not advancing a claim in respect of monies in Supreme Well’s bank accounts.  In substance any claim is for knowing assistance or knowing receipt arising from the transfer to the Supreme Well Payees and beyond.

29.  In my view, however, the most significant consideration is the amount of information that the Liquidators have already obtained from the banks.  The Liquidators say that they have not yet made up their minds whether or not there is a sufficiently strong claim against the banks to justify proceeding with the actions that they have commenced to stop the limitation periods running.  I accept that the Liquidators would prefer to obtain further information if possible before deciding how to proceed, but  in my view it is not necessary.  They have such information as they reasonably need to make an informed decision.

30.  As I have already explained the Liquidators have been provided with considerable information by the banks about the transfer of funds to the Supreme Well Payees.  They have been provided with the account opening forms and related documents, which has allowed them to establish the flow of money which has its origin in the transfers to the Supreme Well bank accounts.  The extent of the information they have about the transfers and the identity of the alleged beneficial owners of the Supreme Well Payees and account signatories is conveniently illustrated by Appendix A to this decision.  From the account opening documents that I have seen in the evidence in support of the Petition I would also have thought that they have sufficient information to make an informed assessment, sufficient for the purposes of deciding whether or not to proceed, of the prospects of the banks being able to assert credibly that they took reasonable steps to comply with the HKMA Guidelines and their own internal protocols intended to ensure that so far as possible the banks are not used as a conduit for unlawful money transfers.  The extent of the information that the Liquidators have received relevant to a consideration of the provenance of funds received by the various accounts is illustrated by paragraph 13 of my 28 August 2014 judgment in respect of the East Hope account opened with BEA.

31.  The Liquidators do not need any more information in order to decide whether or not they have a viable claim.  To provide them with the level of information they seek and, in particular, to allow them to examine the banks’ staff about the steps they took to ensure that the monies received to the credit of Supreme Well’s banks accounts and the onward transfers were not improper, would be to enable them to assess in a very direct way the strength of any defence and potentially put the banks at a considerable disadvantage that they would not otherwise be under in defending the claims.

32.  It seems to me that the potential oppression to the banks outweighs the Liquidators need for the further documents and information that they seek.

33.  The final objection is advanced only by BOC, which suggests that it is not practicable to obtain the Payment Approval Documentation generated 7 years before any search for them was commenced.  The  Liquidators are seeking Payment Approval Documentation back to 2005.  Tiffany Leung, a senior operations manager with BOC, explains in paragraphs 16 and 17 of her first affirmation:

“16. As of May 2014, in accordance with the 1^st Respondent’s policy and practice, it generally does not retain a client’s transaction history (‘Record of Transaction’) for more than 7 years. The Record of Transaction acts as an index for locating the relevant documents relating to each particular transaction, and contains very brief information such as the (i) date of the transaction; (ii) time of the transaction; and (iii) (most importantly) workstation number. The documents themselves are retained by the Bank for a period of 15 years. However, without the Record of Transaction or more particularly, the work station number, it is impossible to locate the relevant documents.

17.    For this reason, although the 1^st Respondent may have in its possession documents going back to 2000, it is only able to retrieve documents from 12 March 2008 (calculated as from the date of the Summons). This applies to all categories of Documents sought under the Summons including §1.1(a).”

34.  As I understand it, what Ms. Leung is saying is that there is no record, which would enable BOC to locate a particular document generated more than 7 years prior to the time it is decided to locate a document.  I do not find Ms. Leung’s evidence in this regard very convincing.  If BOC keeps records back to 2000, it must do so for a reason and have some way of identifying what those retained records are.  I  appreciate that BOC may have decided not to check prior to the determination of this application whether they can, in fact, find documents generated before 2007 (it seems to me that BOC should have at least kept the most recent transaction history when notified of the Liquidators’ request), but at this stage if I had been inclined to make an order I would have required them to produce documents for the entire periods sought by the Liquidators with liberty to apply in the event of them encountering insuperable problems in locating any of the documents.

Examinations

35.  It follows from what I have said above that in my view it would be oppressive to order the banks’ staff to answer questions about compliance with the HKMA guidelines and internal protocols intended to minimise the risk of the banks facilitating unlawful transfers of monies generally and in relation to the particular transfers to and from the accounts referred to in the draft orders.

36.  Examination can be ordered in respect of matters that go beyond those “relating to the Company”.  I accept that it is reasonable for the Liquidators to want to ensure that they have obtained, so far as possible, all information concerning the propriety of the acquisition by the Company of the FISH and SPR technology and to trace the proceeds of the acquisition.  I will direct that C, A and B answer interrogatories about these matters.  It seems to me that this is more likely to produce information, if they have any, about matters which took place many years ago than an oral examination.  I will also give general liberty to apply.  The Liquidators should produce a draft order and in the first instance circulate it to the banks’ solicitors for their comments.

37.  As the banks have been very substantially successful in opposing the applications I will make an order nisi that their costs are paid out of the assets of the Company.