AKAI HOLDINGS LTD (in Compulsory Liquidation) v. ERNST & YOUNG (a Hong Kong firm)

HCCL 29/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO. 29 OF 2004

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JUDGMENT ON DISCOVERY

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The applications

1.  There are three discovery applications before the court, two by the defendant, by summonses dated 26 June 2009 (‘the main summons’) and 8 July 2009, and one by the plaintiff, also by summons dated 8 July 2009.

2.  Argument upon these applications has taken place between leading counsel, Mr Kosmin QC for the plaintiff and Mr Hapgood QC for the defendant, over one and a half days, and time now is of the essence in producing a result.

3.  This is because the trial of this action, which is scheduled to last for some 6 months commencing on 15 September 2009, is fast approaching, and the trial bundles are currently in the process of being prepared.  Hence, it is essential that all outstanding discovery issues are resolved as soon as possible.

4.  The proximity of the commencement of this considerable litigation – wherein the plaintiff liquidators are suing the defendant accountants for negligent auditing, with a claim running into the hundreds of millions of dollars – when taken together with the vast amount of documentation already discovered, means that in principle this court has considerable hesitation in ordering significant additional discovery at this relatively late stage unless it is satisfied that any such discovery clearly is germane, and will not be oppressive, since it is necessary for both sides now to be in position to focus exclusively on preparation for trial, and not otherwise to be diverted by the task of assembling/classifying/listing further documentation which may prove to be only of peripheral relevance, if indeed relevant at all.

5.  It is with this guideline firmly in mind that I turn briefly to consider the three summonses.

(a)  Defendant’s summons dated 26 June 2009

6.  This has been referred to by Mr Hapgood as the ‘main summons’; it replaces the defendant’s earlier applications for discovery in the summons of 12 May 2009, and a residual part of the summons of 27 November 2008, and usefully attempts now to ‘sweep up’ all matters which, for one reason or another, had been left outstanding at earlier hearings.

7.  It has as its focus the defendant’s request for documentation which it believes will shed light upon that which has become known as the ‘limitation issue’, which is whether the plaintiff’s claim for the allegedly negligent audit which it conducted in 1997 is, or is not, time-barred.

8.  In this regard, the defendant auditor gave its audit opinion on 12 May 1997, and the writ in this action was issued only on 24 May 2004, so that at the date of the writ the primary limitation period had expired for a claim in respect of the 1997 audit. 

9.  This ‘1997 claim’ was added by amendment to the writ on 19 November 2005, and served on 21 November 2005, and although the defendant sought to strike out that amendment introducing the 1997 claim, it was accepted that because matters of a factual nature were involved which were not susceptible to being decided on affidavit, the question as to whether this particular claim is time-barred should be decided at trial.

10.  Hence the current emphasis upon discovery in terms of that which the plaintiff liquidators knew or should have known prior to 19 November 2002, which for present purposes is accepted to be the ‘critical date’ for this claim (although Mr Kosmin for the plaintiff ultimately will say that upon correct analysis the relevant date in fact should be 24 May 2001).

11.  This ‘main summons’ has two schedules:  Schedule I seeks discovery of 10 classes of documents (A-J); and Schedule II seeks discovery of specified documents referred to elsewhere.

12.  This summons is supported by the 8^th affidavit of Mr Fyfe, of Barlow Lyde & Gilbert, which is dated 26 June 2009, and is the subject of the 9^th affidavit dated 10 July 2009, of Mr Dobby, of M/s Lovells, the solicitors for the plaintiff, who provides his own commentary upon the requests.

13.  At this stage it is appropriate to record that the joint efforts of counsel, and indeed the good sense of the parties, has resulted in a measure of agreement upon this discovery application, and Mr Kosmin usefully has annotated the ambit of such agreement – or, more accurately in some cases, his non-objection – to certain categories in two Schedules appended to his skeleton argument, thereby making it apparent that which remains in dispute.

14.  I take these Schedules in turn.

Schedule 1

A.  Internal notes, emails, memoranda, working papers or other documents relating to the examination of the BT-Deposit Account in Akai’s general ledger, for the period up to 19 November 2005

15.  During argument, in fact not until his reply to Mr Kosmin’s submissions, Mr Hapgood amended this date to 19 November 2004 as being the date when “the penny in fact dropped in the liquidator’s mind” regarding the existence of a cause of action maintainable against the defendant auditor, and he has strongly submitted that it is necessary to go past the agreed ‘critical date’ of 19 November 2002. 

16.  He says that in principle the way in which something was discovered/discerned at a later date “may cast considerable light” on the way it should thus have been discovered/discerned at an earlier date, and that a cut-off date later than 19 November 1992 is necessary in order to establish when the liquidators acquired the relevant knowledge, having regard to their assertion that such was acquired only after June 2005.

17.  I am unconvinced by this rationale.

18.  In this regard I agree with Mr Kosmin that so long as everything relevant is discovered by the plaintiff up to 19 November 2002 – which Mr Kosmin insists that it now has been – that this is sufficient for the purpose of evaluating the ‘limitation debate’, and I am not minded, under this or indeed any other head, to extend the period by two or even three years.

19.  Accordingly, since I am told that there remains nothing further to discover under this head up to 19 November 2002, this request, even in its subsequently amended terms, is refused.

B.  Documents relating to and/or showing the liquidators’ enquiries made with banks to check matters relating to the BT-Deposit Account or any of the 8 transactions pleaded in the Amended Points of Claim against those shown in the general ledger created during the period from 23 August 2000 to 19 November 2002 (‘the Specified Period’)

20.  This formulation is not as it appears in the Schedule to the summons, but it is agreed that there will be no objection to this category which – per paragraph 63 of Mr Fyfe’s 8^th affidavit – now has been amended in the terms quoted above.

21.  Accordingly, I make an order in these amended terms.

C.  Internal notes, emails, memoranda, working papers or other documents relating to Akai’s/the liquidators’ decisions (i) not to include the 1997 audit in the Protective Writ issued herein on 24 May 2004; and (ii) to amend the writ to include the 1997 audit on 19 November 2005

22.  Mr Kosmin says that these documents are privileged, and that in any event documents post-19 November 2002 are irrelevant.

23.  For his part Mr Hapgood does not press this, save that he says that he is dissatisfied with Mr Borelli’s opinion as to privilege, and says that if Mr Dobby, qua the plaintiff’s solicitor, were to write a letter/swear an affidavit saying that personally he has reviewed these documents, and that in his judgment they are privileged, he is content to leave the issue there.

24.  This seems to me to be eminently sensible, and I anticipate that Mr Dobby will perform this task, to which I am told there is no objection, in the near future.

D.  Communications with creditors of Akai or their representatives relating to the viability of any potential claim or claims against the defendant for the period from 23 August 2000 to 19 November 2005.

25.  Once again I see no reason in terms of relevance to go further than 19 November 2002, and I repeat that I am told, and naturally accept, that discovery of pre-19/11/02 documents is complete.

26.  Accordingly, I reject this request.

E.  Communications with prospective funders other than creditors relating to the viability of any potential claim or claims against the defendant

F.  Internal notes, emails, memoranda or working papers relating to categories D and E above for the period from 23 August 2000 to 19 November 2005

27.  As to Category E Mr Hapgood notes that it is Akai’s case that a lack of funding made it impossible to undertake detailed investigations into a potential claim against the defendant until 2003, and whilst in principle he does not accept that availability of funding is relevant to limitation, the liquidators nevertheless will have to show that they could not reasonably have done more in the early stages to attract funding, which in turn would have involved them in demonstrating to potential funders the viability of potential claims.

28.  He submits that no disclosure has been made thus far of any documents relating to ‘third party funding’, and that Akai appears to be contending that such funding did not become available until after November 1992; thus, he says, the defendant is entitled to disclosure of any communications with prospective funders relating to the viability of claims for the period up to November 2005.  He does stress, however, that for obvious forensic reasons he is not seeking disclosure of the precise terms of any specific funding agreement(s).

29.  Mr Kosmin firmly resists this.  He submits that such communications are privileged, and that in any event documents post-1992 are irrelevant.  He also says, I think correctly, that this category was previously raised, but then dropped, upon a previous discovery application, and that it is unclear why it now has been resurrected.

30.  Be that as it may.  Whilst at trial Mr Hapgood will be able to investigate with Mr Borelli the dates upon which third party funding was both requested and obtained – and I am assuming that when giving evidence Mr Borelli will be in a position to respond with this information at least, since this aspect strikes me as unexceptional – I am disinclined to open this particular Pandora’s box at this late stage.  I cannot represent that I am happy about the ‘funding situation’, but I recognize that in this regard there is a strong privilege argument, and accordingly I reject Category E.

31.  As to Category F, Mr Hapgood asked that I strike this out, since he is withdrawing this request.

G.  Internal notes, emails, memoranda, working papers or other documents relating to the liquidators’ investigations into the 8 transactions pleaded in the Amended Points of Claim dated 5 September 2008 in the Specified Period.

32.  The 8 pleaded transactions are Singer Furniture, Podolsk, German land, Japanese land, Fu Tak, Merrywide, MicroMain and Digiconic.

There is no objection on the part of the liquidators to providing this material, and accordingly I so order.

H.  Documents showing the time spent, and costs of, preparing for and pursuing s.221 applications against the defendant in the High Court

33.  Mr Hapgood has withdrawn this category, and accepts that this information, at least in cumulative form, is known and previously has been disclosed to his solicitors or to their predecessors, M/s Kennedys.

(I)  Time sheets and/or (2) summaries of time sheets and/or (3) bills and supporting schedules of the liquidators and the provisional liquidators (‘PL’s’) (including as agents of the PL’s/the liquidators appointed by the Bermuda Court) in the Specified Period.

34.  Mr Hapgood says that this is an important category of documents in view of Akai’s alleged inability to pursue the claims against the defendant in the material period by reason of lack of funding, and that this professed inability to conduct investigations to enable the claims to be pursued needs to be examined in the light of the fact that the total fees and disbursements incurred in the liquidation up to 31 August 2001 was some HK$27.53 million, of which HK$16.636 million comprised the fees of the liquidators and of Nelson Wheeler – and that at this stage there was still one more year to run before the expiry of the extended limitation period on 19 November 2002.

35.  Thus, leading counsel says, in order to justify fees of that magnitude a huge amount of work must have been done, and therefore the time sheets and other documents in this class will demonstrate the extent to which that work related to investigations that would have given Akai relevant knowledge for the purposes of section 31 of the Limitation Ordinance; in this context I think that Mr Hapgood has his eye upon such narrative description as appears upon the time sheets in order to ‘fill in the blanks’ as it were, and to endeavour to provide some idea of the broad shape of the work which was going on – a necessity, he maintains, given the relative paucity of other available internal liquidators’ documentation such as emails.

36.  For his part Mr Kosmin strongly opposes this request upon two bases: irrelevance and oppression, of which perhaps the latter is his strongest suit.  He says that there are 8 full box files of such documentation, consisting perhaps of some 300 pages in each, and within those pages exist “masses” of small entries, all of which would have to be scrutinized, at this late stage, for relevance and privilege, a task which he estimated would take about 1 weeks’ work for 1 to 2 people on the liquidators’ staff.

37.  He also submits that this is part of a “concerted plan” on the part of the defendant to make as the focus of this trial the conduct of the liquidation, and that the core limitation issue of the liquidators’ knowledge, actual or constructive, as to the existence of a claim against the defendant will not be informed by huge amounts of detail as to what was, or was not, being done at any particular time on any particular day; in a nutshell, he said, this represented an unacceptable “scattergun” approach, with little or no redeeming probative merit when set against the certainty of an enormously time-consuming exercise at a stage when all hands should be concentrated upon preparation for trial.  In fact, he said, this request had been raised before, only to be dropped, and now had been resurrected for no apparent good reason.

38.  On balance I agree with Mr Kosmin.  In my view this is too much, too late, and on the basis of proportionality and oppression alone I reject this request.

J.  Internal notes, emails, memoranda or working papers relating to the liquidators’ decision to pursue a restructuring (by way of a sale of Akai’s listing) created during the period from 23 August 2000 to 28 January 2002.

39.  Mr Hapgood says that the sale of Akai’s listing status had been identified as a potential asset as early as September 2000, but that apparently it was not until September 2001 that the liquidators began to explore the possibility of selling the listing on the alleged basis of “obstacles”.  Given that the value of the listing status was in the region of US$5-8 million, clearly an earlier appreciation of the value of this asset would mitigate against the allegation that lack of funds had made it difficult, if not impossible, to confront the issue of a potential claim against the defendant, and that these documents are necessary to test that assertion.

40.  Mr Kosmin points out that there is nothing pleaded in this regard, but that in any event this represented yet another example of a request which earlier had been raised and dropped, only to reappear: in this connection he referred to Mr Hapgood’s note handed to the court on 22 May 2009, wherein para 9 of that document indicated that “in the interests of meeting Akai’s concerns about oppression” the defendant was prepared, inter alia, to drop this category (then within categories K and L).

41.  Quite apart from this historical fact, I am unconvinced that in the event that this volume of materiel will be of sufficient probative assistance to overcome the strong ‘oppression’ argument, and thus this request also is rejected.

Schedule 2

42.  Schedule 2 consists of 41 categories of documents or specific items of documentation.

43.  Most usefully, the plaintiff has taken the view that where possible, it will accommodate rather than object, and thus in similar fashion to the 1^st Schedule, this 2^nd Schedule is annotated at the end of Mr Kosmin’s skeleton argument.

44.  Such annotation takes several forms, which are indicated under the heads below.

Items to be discovered

45.  I take this to be agreement/non-objection on the part of the plaintiff towards these requests.

46.  Accordingly, Items 5, 6, 7, 8, 9, 12, 13, 14, 18, 21, 22, 23, 31, 32, 33, 34, 35, 37 and 38 will be produced.

47.  I so order.

Items already discovered

48.  Clearly no order is required in this regard, since the annotation, to the content of which Mr Hapgood does not, I think, demur, is that the items requested already have been discovered.

49.  These are: Items 3, 11, 19, 28, 30, 36.

Items to be discovered if they exist

50.  Again, there is no dispute if these items exist.  I cannot recall being addressed upon this category, but presumably if further investigation by Mr Dobby or an assisting solicitor reveals that they do not exist, this formally can be clarified to the defendant by affidavit or letter.

51.  So far as I can see, there is one item only under this head: Item 4.

Items which do not exist

52.  Once again, I do not think that this ‘non-existence status’ is challenged.

53.  These are: Items 10, 15, 16, 17, 20, 24, 25, 26, 27, 29, 39, 40, 41.

Disputed items [as to which there was argument]

54.  There remain two items under this head.

Item 1:  The list of documents seized by the Commercial Crimes Bureau (‘CCB’) (referred to in paragraphs 48 and 241 of the witness statement of Cosimo Borrelli dated 4 May 2009) [and the documents set out in that list (which documents are referred to in paragraph 246 of the witness statement of Cosimo Borrelli dated 4 May 2009).]

55.  That part of this request appearing within square brackets above was withdrawn by Mr Hapgood after it was pointed out that the documents set out in that list bore the Code number 0038, and thus readily could be identified.

56.  However, Mr Hapgood did make it clear to the court that this list of documents as seized by the CCB was his “number one target” in this application.  He also pointed out that this list was both pleaded and was referred to in the witness statement of Mr Borrelli, and thus, other considerations apart, that it was discoverable under the provisions of Order 24, rule 10.

57.  While he did not, I think, concede the point, Mr Kosmin clearly saw the force of this argument, and for my part I can see no good reason why in the circumstances that this list itself – as opposed to the documents listed therein, some of which have been disclosed and some of which are confidential and privileged – should not be disclosed.

58.  Accordingly, I so order.

Item 2:  The documents as set out in the lists of accounting records and documents enclosed in the fax dated 31 August 2000 from the Official Receiver (‘OR’) to Nelson Wheeler (including payments instructions and vouchers, bank statements, debit notes, journal/payment vouchers and general ledger).

59.  Mr Kosmin castigated this request as “irrelevant and oppressive”, but Mr Hapgood saw a way out: it was this.  He pointed out that in a letter dated 4 September 2000 [B1, 110] from the then Provisional Liquidators to Mr O’Connell, then the Official Receiver, the following paragraph appears:

“Books and Records

On the afternoon of 1 September 2000, we received 42 boxes of books and records for [Akai Holdings and Kong Wah].  These books and records were immediately re-boxed and a detailed archive listing prepared of their contents.  Re-boxing of these records was necessary in order to place them in Crown Pacific boxes so that they can be stored at a later date.  I attach copies of the box listings prepared for each of [these] two companies…”  (emphasis added)

60.  Thus, Mr Hapgood suggested that if he could be given the “archive listing” referred to in this letter that this would be of considerable assistance, and to this course Mr Kosmin raised no objection, it apparently being thought on his side that this document remains in existence.

61.  Thus, I order that this “archive listing” only be discovered under this head.

(b)  Defendant’s summons dated 8 July 2009

62.  In terms of the defendant’s applications, there remains only its summons of 8 July 2009, which is an entirely new application, and which seeks discovery of the documents specified in the Schedule thereto; this Schedule reads:

“The affidavits filed by the liquidators of the Plaintiff and by the Commercial Crime Bureau, together with their exhibits, in support of or in opposition to the applications made by the said liquidators in HCCW 49 and 50 of 2000 under section 221 of the Companies Ordinance on 28 October 2004 and 9 May 2005.”

63.  Once again this summons is supported by the 9^th affidavit of Mr Fyfe.

64.  Mr Hapgood puts this request in the following way: he says that in the Amended Points of Reply it is pleaded (at para 39C.11) that the liquidators discovered the systematic appropriation of funds by Mr Ting when they had obtained documents under section 221 from the CCB, and that Mr Borrelli’s witness statement asserts that the new information as thus obtained gave rise to a “quantum leap” in the liquidators’ state of knowledge, so that June 2005 was the first time at which they were aware of Ting’s defalcations.

65.  Accordingly, he submitted, it was important that the defendant be given these affidavits so that Akai’s allegations can be properly tested, and that this material obviously is relevant even though the affidavits themselves postdate 19 November 2002.

66.  Mr Kosmin opposes. 

67.  He has referred the court to the principles regarding litigation privilege which can be distilled from the judgments of their Lordships in Akai Holdings Ltd v Ernst & Young [2009] HKEC 286, wherein Akai’s litigation privilege claim was upheld with regard to the s 221 transcripts, and says that the like principle should apply to the affidavits leading the relevant s 221 applications, that is, these are documents prepared for the dominant purpose of litigation which was in reasonable contemplation at the time that the document was prepared.

68.  He submitted that no section 221 materiel ever has been discovered, and in any event, and apart from the issue of privilege, these affidavits had come into existence after May 2004, and in terms of the liquidators’ state of knowledge during the critical period clearly were irrelevant.

69.  I have reflected on the argument, and I have decided not to grant the discovery sought.

70.  Accordingly, this summons is dismissed.  No doubt costs should follow the event, and thus I make an order nisi, such order to become absolute unless application be made to vary the same within 28 days from the date hereof, that the costs thereof be to the plaintiff in any event, such costs to be taxed if not agreed.

71.  I so order.

(c)  The plaintiff’s summons dated 8 July 2009

72.  This summons seeks specific discovery of but one document, namely the Settlement Agreement, dated 30 October 2006, in respect of the Semi-Tech Corporation litigation which had taken place in the United States.

73.  Mr Kosmin told the court that this summons had been brought on at short notice, the significance of the US proceedings, culminating in the Settlement Agreement, having been highlighted by the recent proceedings in Bermuda, wherein the defendant had sought urgent adjudication of a Proof of Debt emanating from these American proceedings.

74.  He pointed out that by reference to the heading in the US proceedings, the parties to the US to this settlement agreement are likely to include former Akai directors Mr James Ting, Mr Frank Holmes, Mr Chuck Tam and Ms Clara Loh, as well as other Ernst & Young entities around the world; he also noted the resignations of Ernst & Young USA as auditors of Singer, and of Ernst & Young Canada as auditors of Semi-Tech, and that the meeting attended by worldwide representatives of Ernst & Young, including Messrs Kwok, Stevenson and Sun (the latter being someone who will be giving evidence for the defendant in this case) in New York on 14 October 1997 is pleaded in Akai’s Amended Points of Claim (at paras 86-117, and in particular at para 112).

75.  Although the defendant had declined in correspondence some years ago to discover this Settlement Agreement on the grounds of relevance, as a result of the recent Bermuda proceedings, in which Ernst & Young had sought to recover in the Akai liquidation their American legal and other costs, it was now apparent, counsel said, that the document was highly relevant to the issues in this action, the US proceedings involving substantially the like facts and the like persons as are involved in the present case.  Moreover, Mr Kosmin asserted, the terms of settlement are relevant with regard to any admission of liability or payment to the plaintiff in those proceedings, whether in terms of damages or costs, and also as to the terms of any release or indemnity as may have been given to Mr Ting by Ernst & Young, which in turn would (or might) affect the case now being run by the defendant based on contributory negligence on the part of Ting.

76.  Mr Hapgood submitted that this request was an old chestnut which had come up in the earlier inter-solicitor correspondence, and simply that the Settlement Agreement was not relevant. He emphasized that the action in the US never had got past the pleading stage, and that all that had been adjudicated was whether there was a sufficiently pleadable case prior to the settlement.  He said that he had seen the Settlement Agreement and that it was not relevant, and that the present case was sufficiently complex without introducing another (and wholly irrelevant) variable which would constitute no more than an irrelevant side-track.

77.  Moreover, he noted that a complicating factor would be a contractual obligation on his client, as a party to the agreement, to notify all other parties thereto prior to disclosing it, and that in any event there was no admission of liability therein.

78.  Mr Kosmin replied that this document “cried out” for disclosure in the present circumstances, and that in particular his client wished to see, if at all, how this agreement had treated Mr Ting – whom, he stressed, was said by the defendant to have been primarily responsible for the travails of Akai.

79.  I do not consider this an easy decision, but on balance I think that this document should be disclosed, if only for the avoidance of all legitimate doubt on the part of the plaintiff.  I also bear in mind that the liquidators’ own Settlement Agreement with Mr Ting – the issue as to the enforceability of which has been considered in Bermuda, and is soon to go to the Privy Council – has been disclosed to the defendant

80.  I thus order disclosure of the US Settlement Agreement.

81.  However, such disclosure is to be conditional first, upon any relevant notification to third parties thereto, who must have the opportunity to make representations to this court as to why the document should not be disclosed, and second, such disclosure in principle should be subject to practical restrictions, so that it is not simply at large within the documents, but is to be seen by the court and by certain specified persons only within the plaintiff’s team; no doubt I can leave this aspect to counsel to work out a sensible approach.

82.  As to costs of this summons, I see no reason why once more they should not follow the event, and thus I make an order nisi, to become absolute unless within 28 days of the date hereof application be made to vary such order, that the costs of this application are to be to the plaintiff in any event, to be taxed if not agreed.

Order

83.  Mr Kosmin and his team have prepared a draft Order, and no doubt this draft can be amended to cater for the content of this judgment.

84.  There is, however, one matter outstanding upon which I should be grateful for assistance.

85.  Whilst I have made an order nisi as to costs in the two discrete summonses, I have essayed no such costs’ order nisi upon the ‘main summons’, as Mr Hapgood aptly termed it.

86.  Absent agreement between counsel as to the appropriate order in light of this judgment, I will entertain brief written submissions (of no more than 2 pages in length) on the costs to be attributed to this summons prior to ruling thereon.

Finally

87.  I am grateful to both sets of counsel for the considerable assistance they have rendered to the court upon these applications.

88.  I take the opportunity to observe that in my view there is now sufficient documentation – running, I understand, into the many thousands of documents – upon which fairly to adjudicate this case, and I trust that it is not unduly optimistic to express the hope that there will be no further applications for discovery by either side, and that the parties now will be able to devote themselves exclusively to preparation for trial – as to which I confirm that another CMC is scheduled for 31 July 2009.