THE JOINT AND SEVERAL LIQUIDATORS OF THE NEW CHINA HONG KONG GROUP LTD AND OTHERS v. ERNST & YOUNG AND OTHERS

HCMP 3891/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 3891 OF 2002

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D E C I S I O N

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The application

1. This is the hearing of an originating summons issued on 24 September 2002 by the joint and several 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"). The Companies are all in creditors' voluntary liquidation. The application is made under sections 221 and 255 of the Companies Ordinance, Cap. 32, the latter provision enables the court to exercise in a voluntary winding up all or any of the powers which the court might exercise in a compulsory winding up. The respondents are Ernst & Young ("E&Y"), a firm of accountants, Mr Anthony Wu Ting Yuk and Miss Catherine Yen. Mr Wu and Miss Yen are partners with E&Y.

2. The liquidators seek the following orders in this application:

(1) E&Y do make available to the liquidators all its working papers and supporting documents relating to the audits of the Companies for the years ended 31 December 1993 to 31 December 1997 inclusive;

(2) E&Y do make available to the liquidators all its documents relating to the provision of financial advice by E&Y and/or Mr Wu to the Companies and other documents created by E&Y and/or Mr Wu in their capacity as the financial adviser to the Companies;

(3) the documents sought in (1) and (2) be kept at the office of E&Y for safe custody until the inspection and taking copies of the same by the liquidators; and

(4) Mr Wu and Miss Yen be examined on oath concerning the affairs of the Companies.

3. The application is opposed in its entirety by the respondents on the grounds that the liquidators have failed to establish that the orders sought for production of documents and oral examination are reasonably required for them to carry out their functions, and that it would be oppressive to grant the application which is nothing more than an attempt to conduct a roving commission or a fishing expedition for materials to bolster a case which the liquidators might pursue against E&Y and/or Mr Wu.

4. Before I deal with the objections raised by Mr Burns on behalf of the respondents, I set out the background matters relevant to the application.

The Companies

5. The Companies were all placed into voluntary liquidation in March 1999, pursuant to section 228A of Cap. 32. They are part of a larger group of related companies ("the New China Group of Companies"). The liquidators were appointed liquidators of 36 companies comprised in the New China Group of Companies.

6. NCHK Group is the parent or holding company. It was incorporated in Hong Kong on 8 September 1992 and became a public company in May 1993. It was a very substantial company with a paid up capital of HK$282,800,000.00 as at 31 December 1997. It is the 100% shareholder of NCHK Capital, which used to carry on the business of trading and dealing in marketable securities, financial products such as share options and equity derivatives. NCHK Finance is a wholly owned subsidiary of NCHK Capital. Prior to its liquidation, NCHK Finance was involved in, inter alia, providing margin finance to clients trading with the New China Hong Kong Securities Limited ("NCHK Securities"), also a wholly owned subsidiary in the New China Group of Companies and one of Hong Kong's largest stockbrokers.

The respondents

7. From their respective dates of incorporation until their liquidation, E&Y was the auditor of the Companies and 33 other companies in the New China Group of Companies. It was also the tax representative and the provider of company secretarial services to the Companies. It also provided the same services to some of the other companies in the New China Group of Companies.

8. Mr Wu is the current chairman of E&Y. He was an audit partner in 1994. On 20 November 1992, he was appointed a director of NCHK Group, when NCHK Group was nothing more than a shelf company. Prior to and just after NCHK Group was set up, Mr Wu, in his capacity as a partner of E&Y, did considerable work on behalf of NCHK Group in raising funds for the launch of that company and HK$500 million was raised. He resigned as a director on 18 February 1993, at the third meeting of the board of directors. It was also resolved at that meeting that Mr Wu was to be appointed as the financial adviser of NCHK Group and that he was to be invited to join the Executive Committee of the company in his capacity as financial adviser. The directors further resolved that five of the directors (NCHK Group had 43 additional directors appointed by mid 1993), the financial adviser (being Mr Wu) and the legal adviser were to be appointed members of the Executive Committee.

9. In accepting the appointment as financial adviser to NCHK Group, Mr Wu did so as a representative of E&Y and E&Y was formally appointed at a retainer fee of HK$100,000.00 per month pursuant to an engagement letter, which it has not been able to locate despite a detailed search. E&Y billed NCHK Group on a monthly basis in respect of the service provided. Mr Wu has claimed that the retainer fee largely reflected the work he had carried out prior to the launch of NCHK Group for which E&Y was not paid an "upfront fee", and that his involvement once the initial fundraising had been completed and the company was up and running by mid 1993 was "significantly reduced".

10. Notwithstanding this, it would appear from the minutes of the meetings of the Executive Committee of NCHK Group that Mr Wu had attended 164 out of 206 meetings between 18 February 1993 to 7 November 1998 (about 80%). Further, Mr Wu was an authorised signatory in respect of the bank accounts maintained by NCHK Group with 12 banks and from 1 December 1994 onwards, he was a group A signatory empowered to sign cheques jointly for unlimited amounts.

11. As for Miss Yen, she is an audit partner and was the partner of E&Y responsible for the audits of NCHK Group and its subsidiaries, including NCHK Capital and NCHK Finance, for the years ended 31 December 1995 and 1996. Mr Wu has claimed that he had never been involved in the audit of the Companies or any of the subsidiaries save that for the audit reports for the years ended 31 December 1994 and 1995, he had signed these reports because the engagement partner (who has not been identified by Mr Wu) was out of town and as all substantive work had been completed and cleared by the engagement team and the engagement partner, Mr Wu has regarded his signature to the auditor's report as "nothing more than a matter of administrative expedience".

12. The Executive Committee of NCHK Group, of which Mr Wu was a member, was responsible for the management of the affairs of the company. The minutes of the meetings showed that the affairs dealt with had included the arrangement of loans and banking facilities for the companies within the New China Group of Companies, the granting of securities to the lenders, the allotment and transfer of shares, the acquisition and disposal of assets and investments, the declaration of dividends, and from November 1997 onwards the consideration and approval of debt restructuring proposal for the company and its subsidiaries including NCHK Capital.

13. I should mention that notwithstanding he was a member of the Executive Committee, it is asserted by Mr Wu that he had no executive powers and no voting rights and his role, which was merely advisory, was "responsive, not proactive" in that he would give advice only if the Executive Committee had specifically sought his advice. As for the meetings for which minutes were prepared, many of these meetings were done on paper.

The financial position of the Companies

14. Consolidated financial statements of NCHK Group and its subsidiaries were prepared. The financial position as revealed from the audited financial statements for the years ended 31 December 1993 to 1997 may be summarised as follows:

15. Thus, it could be seen from the above that massive losses were suffered by NCHK Group and its subsidiaries by the time the last audited accounts were prepared for the year ended 31 December 1997, over a year before it was put into liquidation.

16. As for NCHK Capital, it had a paid up capital of HK$50 million as at 31 December 1997 and substantial profits were made in the five years of its operation. Its financial position, as appeared from the audited financial statements, may be summarised as follows:

* Accounts marked as "in draft form" and "incomplete".
# Accounts marked as "in draft form" and "incomplete", have not incorporated losses of HK$252,433,781.00 arising from the OTC contracts as NCHK Group was stated to be willing to take up the contracts and the losses arisen.

17. For NCHK Finance, which had a paid up capital of HK$200,000.00 as at 31 December 1997, the financial position as appeared from the audited financial statements may be summarised as follows:

*Accounts marked as "in draft form" and "incomplete".

The applicable legal principles

18. I turn to the principles applicable to the exercise of the court's discretion under section 221. The factors relating to the exercise of this discretion have been considered by the English Court of Appeal in Re British and Commonwealth plc v. Spicer & Oppenheim [1992] Ch. 342 at 370 to 372, per Ralph Gibson LJ, whose dicta were approved by the House of Lords, per Lord Slynn in [1993] AC 426 at 435C to F, and applied by the Court of Appeal in Chark Fung Securities Co. Ltd v. Chan Kwok Hung [2001] 2 HKC 335 at 339D to 340A. The applicable principles may be summarised as follows.

19. Firstly, section 221(1) (equivalent to section 236(2) of the Insolvency Act 1986) confers a general discretion on the court in that the wording of the provision does not fetter its discretion in any way (British and Commonwealth, per Ralph Gibson LJ, at 370H to 371A).

20. Secondly, the power given to the court is an extraordinary and inquisitorial power. It may work to great severity against third persons and ought to be used with the greatest care (British and Commonwealth, per Lord Slynn, at 439E to F).

21. Thirdly, the essential condition which must be satisfied by an applicant for an order under this provision is that the information or documents are reasonably required in order to permit the applicant to carry out his functions (British and Commonwealth, per Lord Slynn, at 439G to H; Joint Liquidators of Sasea Finance Ltd v. KPMG [1998] BCC 216 at 220F; In re Galileo Group Ltd [1999] Ch 100 at 114E).

22. Fourthly, if the applicant overcomes the hurdle of satisfying the court that the information or documents sought are reasonably required in order to carry out his functions, the court in the exercise of its discretion must then carefully strike a balance between the applicant's reasonable requirements and the need to avoid making an order which is wholly unreasonable, unnecessary or oppressive to the person concerned. The burden is on the applicant to satisfy the court, after balancing all the relevant factors, there is a proper case for such an order to be made (British and Commonwealth, per Lord Slynn at 439D and G to H; Sasea Finance Ltd, supra. at 220F; In re Galileo Group Ltd, supra. at 114E).

23. Fifthly, it is now settled that while one of the purposes of section 221 is to enable the company's knowledge to be reconstituted, it is not the sole purpose of the provision (British and Commonwealth, per Lord Slynn at 437B to D; Chark Fung Securities Co. Ltd, supra. at 339B). The provision may be used to discover facts and documents relating to specific claims against specific persons which the applicant has in contemplation and it is in itself no bar that the applicant may have commenced or may be about to commence proceedings against the proposed witness or someone connected with him (British and Commonwealth, per Ralph Gibson LJ at 371D).

24. Sixthly, in determining what were the reasonable requirements of the office-holder who is seeking the order, and whether the order should be made, great weight should be given to his views as he would have detailed knowledge of the problems which exist in relation to the affairs of the company and the information required (British and Commonwealth, per Ralph Gibson LJ at 371H to 372A; Chark Fung Securities Co. Ltd, supra. at 339G to H).

25. Seventhly, the matters relevant to the balancing of the reasonable requirements of the office-holder against the risk of oppression include the following: (1) the case for making an order against an officer or former officer of the company will usually be stronger than it would against a third party; (2) if, by giving the information sought, a third party risks exposing himself to liability, that involves an element of oppression; (3) an order for oral examination is more likely to be oppressive than an order for the production of documents; and (4) if someone is suspected of wrongdoing, and in particular fraud, it is oppressive to require him to prove the case against himself on oath before any proceedings are brought (British and Commonwealth, per Ralph Gibson LJ at 372B to D).

26. Eighthly, although the prospect of litigation against the examinee is no longer decisive against making the order (Re Cloverbay Ltd (No. 2) [1991] Ch 90), there is still a germ of truth in the rule of thumb against ordering the private examination of an examinee against whom litigation is proposed. The purpose of the provision is to assist the liquidator to carry out his duties as liquidator, but not, once he is or is about to become a litigant, to give him a special advantage as litigant over what ordinary parties would have under the normal rules of civil procedure (Re Bishopsgate Investment Management Ltd (No. 2) [1994] BCC 732 at 739B to F; Re James McHale Automobiles Ltd [1997] 1 BCLC 273 at 278c and g to h; Re Atlantic Computers plc [1998] BCC 200 at 208E to 209A; Re JN Taylor Finance Pty. Ltd [1999] 2 BCLC 256 at 280i to 281f).

The auditor as an officer of the company

27. It would be convenient to dispose of one other point of law before I turn to the facts. This relates to the question if E&Y, as the auditor of each of the Companies, should be regarded as an "officer of the company" within section 221(1). As stated earlier, in balancing the reasonable requirements of the applicant against the risk of oppression, the case for making an order against an officer of the company will usually be stronger than against a third party.

28. Miss Linda Chan, who appeared for the liquidators, has taken me to various provisions in Cap. 32 showing that where a company in general meeting appoints an auditor, reference is made to such an auditor as holding "office" (sections 131(1), (3), (11), 132(1)(d), 140A(1)). It was submitted that these provisions would imply that the auditor so appointed is an officer of the company whilst he holds office.

29. Miss Chan also referred to In re Kingston Cotton Mill Company [1896] 1 Ch. 6, in which it was held that for the purpose of a misfeasance summons in a liquidation (the equivalent provision in Cap. 32 is section 276), an auditor appointed under the articles of association is an officer of the company. A closer case is Sasea Finance Ltd, supra. at 222H, in which Robert Walker J, having considered the decision of Hobhouse LJ in Mutual Reinsurance Co. Ltd v. Peat Marwick Mitchell & Co. (a Firm) & Anr. [1996] BCC 1010, expressed the view that the auditors of the company in the case he was concerned with were "most probably officers of the company within the meaning of section 236(2)(a)" (the equivalent provision in Cap. 32 is section 221(1)).

30. In deciding this question, one ought to draw a distinction between auditors appointed by the company to report upon the balance sheet and accounts presented to them by the officers of the company and persons asked, ad hoc, to carry out a particular audit exercise (In re London and General Bank [1895] 2 Ch. 166 at 173, per Kay LJ; Re Western Counties Steam Bakeries and Milling Company [1897] 1 Ch 617 at 627, per Lindley LJ; Mutual Reinsurance Co. Ltd, supra.). There is no dispute that E&Y should come under the former category.

31. The definition of "officer" in Cap. 32 (as is also the case in section 744 of the Companies Act 1985) is an inclusive one, in that it includes "a director, manager or secretary". Whilst some provisions in Cap. 32 may appear to draw a distinction between "officers" on the one hand and "auditors" on the other (such as sections 140(2), 145(5), 165, 358(4)), these terms are not mutually exclusive and they do no more but recognise the fact that a person carrying out an auditing function may or may not be an officer of the company because of the distinction stated above (Mutual Reinsurance Co. Ltd, supra.).

32. An auditor appointed to the office of an auditor has duties to perform under sections 141(1) to (4). He has to report to the members on the accounts examined by him, and on every balance sheet, profit and loss account and all group accounts laid before the company in general meeting. He has to state whether, in his opinion, the company's balance sheet, profit and loss account and group accounts have been properly prepared in accordance with the provisions of the Ordinance. He has to carry out such investigations as will enable him to form an opinion whether proper books of account have been kept and whether the balance sheet and profit and loss account are in agreement with the books of accounts and returns.

33. Where an auditor is appointed to hold office as auditor, which is a recognised position with rights and duties attached to it under the statute, it seems fairly clear to me that they ought to be regarded as officers of the company, for the purpose of section 221(1). Mr Burns has not sought to challenge this in his submissions. It is not necessary, for present purpose, to hold whether E&Y owes a fiduciary duty to the Companies in its office as the auditor. It is apparent that E&Y has had a long and continuing relationship with the Companies since their incorporation, that it had performed various other functions for the Companies as mentioned above apart from carrying out the auditing function, and these are clearly relevant matters to be taken into account in deciding whether it would be oppressive for E&Y to assist with the investigations of the liquidators in these circumstances (Re Bishopsgate Investment Management Ltd (No. 2), supra. at 738B to D).

The previous requests

34. Mr Burns submitted that in deciding whether the liquidators have made out a case of reasonable requirement for the present application, their reasons for seeking the orders should be examined in the context of their previous attempts to obtain access to the audit working papers of E&Y and the reasons previously given, as seen from extensive correspondence between solicitors on both sides. It was submitted that where the liquidators have properly formulated their requests for information and documents with reference to specific transactions, these requests have been complied with by E&Y and that the previous requests had shown that a wholesale production of the audit working papers was neither reasonable nor necessary. So to these previous requests I now turn.

35. Prior to this application, the liquidators had issued an originating summons against E&Y on 13 March 2000 in HCMP No. 1325 of 2000 seeking an order that a representative partner be examined on oath respecting the affairs and dealings of NCHK Capital and to produce "any books and papers in the custody or power of [E&Y] relating to [NCHK Capital] and its associates". Only one short affidavit was filed in support of the application and this had merely stated that the liquidators' investigations into the affairs of NCHK Capital "have been hampered by a number of factors" and "a number of the transactions conducted by [NCHK Capital] require investigation as they appear to lack genuine commercial substance and/or proper background papers to support their terms". No particulars of the hampering factors or the transactions requiring investigation were given in that affirmation. Mr Burns pointed out that similar wording was used in the 1st affidavit of Mr Wardell filed in support of the present application.

36. A letter was sent by the liquidators to E&Y dated 30 November 1999, before the above originating summons was issued. In that letter, the liquidators had stated that they were investigating "the options transactions carried out by [NCHK Capital and NCHK Finance] in the past few years" and requested E&Y to arrange for its "working paper files regarding the audits of [NCHK Capital and NCHK Finance] for the years from 1995 to 1998 inclusive" to be made available to them. No written reply was given by E&Y to that request before the originating summons was issued in March 2000.

37. Correspondence was exchanged between the solicitors for the respective parties after the originating summons, with E&Y asking the liquidators to explain what areas the liquidators would need to investigate and how they believed the audit working papers could give material information about the affairs of the companies concerned. On 23 May 2000, the liquidators' solicitors informed the solicitors for E&Y that the liquidators were investigating "share option contracts entered into by [NCHK Capital] and various merchant banks" and that the request for information was limited to all papers generated by E&Y in respect of such contracts during the completed audits for 1995 and 1996 and the uncompleted audits for 1997 and 1998. Upon further clarification sought by the solicitors for E&Y as to "which particular share option contracts" the liquidators were investigating, the liquidators' solicitors replied on 23 June 2000 that "for present purposes, the focus has been on those contracts entered into with Credit Suisse First Products" and provided the details of four contracts. It took another several months for E&Y to sign a consent summons and provide the documents relating to the four contracts on 27 November 2000. The order by consent to stay the originating summons was made on 11 December 2000.

38. The second request by the liquidators was made by a letter of their solicitors to the solicitors for E&Y dated 21 February 2001. They referred to a letter of E&Y dated 18 March 1998 to the board of directors of NCHK Capital in which E&Y stated that it had reviewed the amounts funded by this company on behalf of NCHK Securities for the year ended 31 December 1997 in the total amount of HK$48.1 million. The liquidators stated that in order for them to complete their investigation into this funding and "a related transaction" (which was not identified), E&Y was requested to provide its "working papers and any supporting documents relied upon by [it] when calculating the total operating expenses and preparation of the detailed breakdown sent with the letter".

39. E&Y gave a response to this request on 22 March 2001 to the effect that it does not in fact have any of the documents requested as it had not performed any review of the amounts of funding or made any calculations of the total operating expenses. There was no follow up to that request from the liquidators.

40. The third request was made by a letter of the liquidators' solicitors dated 16 March 2001 seeking copies of all the working papers of E&Y generated during the 1995/96 audit in respect of "put and call option contracts entered into by any company in the [New China Group of Companies] but particularly [NCHK Capital]" and the reason for the request was because the Inland Revenue Department had raised a number of queries into these option contracts as a result of an application for a tax refund by the liquidators. As mentioned earlier, E&Y was the tax representative of the Companies. By a further letter of the liquidators' solicitors to the solicitors for E&Y dated 2 May 2001, a copy of the relevant letter from the Inland Revenue Department dated 5 March 2001 was enclosed, to assist E&Y to locate the relevant documentation.

41. In response to this third request, a representative of E&Y met with the liquidators in June 2001 and on 27 July 2001 provided comments to the enquiries of the Inland Revenue Department and two relevant files on the option contracts. There was no follow up request from the liquidators regarding this.

42. I would accept that where specific transactions were identified as the subject of investigation by the liquidators, E&Y had co-operated with the liquidators in providing information and documents from its working papers.

The present request

43. The present request commenced with a letter of the liquidators' solicitors to the solicitors for E&Y dated 9 July 2001. There was protracted correspondence for a year or so until the originating summons in the present proceedings was issued in September 2002.

44. In the first letter, it was stated that in the extensive investigation into the affairs of NCHK Group and its subsidiaries, one matter that raises particular concern is the role of Mr Wu (who had apparent involvement in the affairs in the capacities that I have mentioned earlier) and the liquidators wish to "understand further Mr Wu's role in the affairs of [NCHK Group] and the compatibility of that role with the role of [E&Y] as auditors of [NCHK Group] and its subsidiaries". It was further stated that "given the substantial insolvency of [NCHK Group] and its subsidiaries, questions inevitably arise as to the management and control procedures in place at the time that [E&Y] conducted their various audits". The liquidators believed that they can only reach "meaningful conclusion" on the above matters after an inspection of the audit working papers of E&Y for the years ended 31 December 1993 to 1997 for the Companies.

45. The solicitors for E&Y responded on 20 July 2001 asserting inter alia that Mr Wu had declined the invitation to join the Executive Committee although he had attended meetings of the committee as financial adviser (this is not strictly accurate). It was stated that the liquidators would appear to have a misconceived role played by Mr Wu and an offer was made for Mr Wu to meet the liquidators to discuss his role in NCHK Group.

46. In a further letter of the solicitors for E&Y dated 27 July 2001, they reiterated that they cannot see how the audit files can be of any use to the liquidators in resolving the question of Mr Wu's role and that the best way forward was for the liquidators to interview Mr Wu.

47. The liquidators' solicitors sought to provide further explanation for the request in their letter dated 31 July 2001. The liquidators wish to ascertain from a review of the audit working papers what investigations were made by E&Y in reviewing the control systems of NCHK Group and its subsidiaries, including "management control, physical control, etc.". Additionally, as there are various transactions where NCHK Group and its subsidiaries have suffered substantial losses, they want to review the "audit treatment" by E&Y of these transactions specifically as well as its review of transactions generally. The liquidators see no purpose in trying to isolate specific transactions, as "it is only possible to obtain a proper overview of what an auditor has done if access is provided to all the audit working papers". They also consider it would become apparent from the audit working papers the extent to which Mr Wu imparted information as to the affairs of NCHK Group and its subsidiaries to the audit team. Further, as Mr Wu was privy to decision making on behalf of NCHK Group at the highest level even though the liquidators have not come to "firm conclusions as to the management role of Mr Wu", the liquidators want to "ensure by a review of [E&Y's] working papers that there was no conflict of interest between Mr Wu's apparent role and [E&Y's] duties as auditors". I do not accept the submission made on behalf of E&Y that entirely different reasons for the request were put forward in this letter.

48. E&Y replied to this by a letter of their solicitors dated 3 August 2001, in which they made the point as they had done for the previous requests, that the liquidators have refused to identify the particular transactions in respect of which they require documentation and this has driven E&Y to the conclusion that the request is little more than a fishing exercise. The solicitors for E&Y also claimed to be puzzled by some of the language used in the letter of the liquidators' solicitors dated 31 July 2001, and sought clarification for the phrases such as "audit treatment", "management control, physical control, etc." They maintained that if the liquidators are to state specific transactions in respect of which documents are required, E&Y is prepared to co-operate as it has done for previous requests. E&Y repeated its offer for Mr Wu to meet the liquidators to answer queries concerning issues as to Mr Wu's involvement in NCHK Group and made an offer for its technical partner to meet the liquidators to discuss "specific auditing issues".

49. In their letter dated 14 September 2001, the liquidators' solicitors gave an explanation of what they meant regarding the various expressions queried by the solicitors for E&Y and declined the offer to hold a general discussion with the technical partner. They reiterated that the purpose of a review of the audit papers is to help them to understand fully the way the audit work was undertaken and the interaction between officers, employees and advisers of NCHK Group, particularly Mr Wu, and E&Y.

50. The liquidators had a meeting with Mr Wu and the technical partner of E&Y on 22 October 2001, in the presence of solicitors for both sides. After that meeting, the liquidators' solicitors wrote to the solicitors for E&Y on 29 November 2001 giving further details of the documentation sought. For the audit working papers of the Companies, they have identified nine categories of documents, being audit programmes, planning memoranda, management letters, system notes, any risk analysis or assessment notes/reports, audit adjustments, any late client adjustment, any written communications or notes of meetings with the financial adviser, and copy of all billings made whether by the auditors or any other special work. For NCHK Finance and NCHK Capital, they would like to see working papers relating to the substantial debtors and a list of those debtors would be identified. For NCHK Group, they would like to see all audit working papers in relation to entering into the Procurement Agreement dated 9 April 1998 with Maxigold Resources Limited and Mr Tsui Tsin Tong. As for Mr Wu, twelve questions were set out in the letter for him to answer.

51. The solicitors for E&Y are not satisfied with the nine categories of documents identified for the audit working papers, as these are "general categories" and the width of these categories would mean that they cover the "vast majority" of the papers of E&Y. In their letter dated 10 December 2001, they stated that they would take instructions regarding the specific transaction identified, namely, the Procurement Agreement dated 9 April 1998, and on the list of questions for Mr Wu. However, no reply has been given to date regarding the audit working papers relating to the Procurement Agreement.

52. The reply of Mr Wu to the twelve questions was given two months later, by a letter of the solicitors for E&Y dated 31 January 2002. Mr Wu claims he did not issue any report or letters as the financial adviser, nor did he as the financial adviser communicate with the audit staff in relation to any audits of NCHK Group or its subsidiaries.

53. The liquidators' solicitors provided a list of the substantial debtors of NCHK Finance in their letter dated 28 March 2002. There are nine debtors and the total outstanding balance as at 28 February 1998 amounted to HK$921,601,149.05. They repeated their position that the request is not in relation to individual transactions but to the overall picture generated by the audits.

54. The solicitors for E&Y do not consider this to be much of an attempt at specificity, pointing out in their letter dated 17 April 2002 that the liquidators are in effect asking for all documents relating to over 90% of the losses incurred in the insolvency. They stated in their letter dated 26 April 2002 that the liquidators should identify and ask specific questions on specific matters for E&Y to deal with them.

55. Having set out the gist of the relevant correspondence at some length, it is unnecessary for me to dwell on the grounds for the present request as stated in the supporting affidavits of the liquidators or the opposing affidavits filed on behalf of E&Y, as the affidavits have largely repeated the points made in correspondence. I would only say that I do not attach significance to a vague assertion in paragraph 8 of the 1st affidavit of Mr Wardell that many transactions appear to lack genuine commercial substance or otherwise were not supported by proper documentation, as I consider that particulars of such transactions, if there are other substantial ones apart from the four option contracts which formed the subject of the first request, could and should have been identified.

Whether there is a proper case for production of documents

56. The ambit of the documents sought by the liquidators is very wide indeed. E&Y has resisted production on the basis that the liquidators have not identified specific transactions which require investigation to show that the documents sought are necessary to the investigation. It has pointed to the previous requests to show that specific transactions can and should be identified.

57. In my view, it is not a must in every instance that specific transactions should be identified. Whether this ought to be done would depend on the nature and subject of the investigation. In respect of the previous requests, one can readily see why it was appropriate for E&Y to insist on being provided with particulars of the transactions being investigated, and I think both sides have sensibly proceeded on the basis that it would not have been necessarily for E&Y to produce all or virtually all of its audit papers for the liquidators to carry out their investigation into the matters concerned.

58. The present request, in my view, is on a different footing. The nature and the subject of the enquiry are such that it would not have been practicable for the liquidators to go into further details other than what they have already supplied. The test whether an order for production of documents should be made under section 221 remains the same. It is for the liquidators to make out a case of reasonable requirement. In assessing reasonable requirement in this instance, one should of course consider the grounds carefully to ascertain if there is indeed a proper basis for the general review of transactions having regard to the wide ambit of the documents sought.

59. I also bear in mind that the procedure under section 221 is of a summary nature to enable the applicant, who is usually the liquidator, to perform his functions in an effective and expeditious manner. This has two consequences. 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. Further, it would be inconsistent with the summary nature of the power for there to be successive applications and successive orders if the respondent is required to make disclosure stage by stage (see British and Commonwealth, supra. at 384B to G, 392D to 393B, per Woolf LJ).

60. Miss Chan has submitted for the liquidators that the general review of transactions and documents is necessary for the liquidators to properly discharge their statutory duty of investigation. Firstly, there is the massive insolvency and questions inevitably arise as to the audit treatment of the substantial debtors, whose debts related to over 90% of the losses. Given the duties of an auditor to carry out investigations so as to ascertain the true financial position of the company at the time of the audit, E&Y would have made inquiries into these transactions which resulted in substantial losses and its audit working papers might have provided information on the review control systems of the Companies. Secondly, E&Y has been acting as the financial adviser of NCHK Group (through Mr Wu, who admitted in his affirmation that he had given financial advice to NCHK Group) apart from holding office as the auditor and tax representative of the Companies and other companies in the New China Group of Companies. Mr Wu was at least privy to decision making by the highest level of authority in NCHK Group even though he might not have exercised executive power. The liquidators need to review the audit working papers and the documents relating to the provision of financial advice to understand further Mr Wu's role in the affairs of the Companies and to ensure that there was no conflict of interest with the duties of E&Y as the auditor of the Companies.

61. I am satisfied that such a general review is called for in the circumstances for which the liquidators would reasonably require access to all the audit working papers and all the documents relating to the provision of financial advice. I do not think it practical or necessary to cut down the width of the documents sought. I see no reason not to give considerable weight to the views of the liquidators in determining what are their reasonable requirements. The liquidators should be trusted by the court in their assessment of their need to see the documentation requested. To paraphrase Ralph Gibson LJ in British and Commonwealth, supra. at 381E to F, to require from the liquidators a demonstration of an analysis of all available material of the extent and nature which would meet the criticism of E&Y is to confuse this stage of the investigation by the liquidators with the advancing of a claim in negligence against particular parties. Similarly, in Sasea Finance Ltd, supra. at 223H to 224A, it is stated that the liquidators are not under a duty to make out their reasonable requirement in as much detail as, for instance, they would be required to do on an application for discovery where issues have already been defined by pleadings.

62. I turn to consider the risk of oppression to E&Y in ordering production of documents.

63. In the affirmation of Miss Yen filed on 4 December 2002, she has disclosed for the first time that the files relating to the audit of the Companies for the accounting periods ending 31 December 1993 and 31 December 1994 have been destroyed, in accordance with E&Y's normal practice of destroying files after six years. In a letter of the solicitors for E&Y dated 25 March 2003, it was stated that all such files were destroyed on or shortly after the 6th anniversary of the audit report to which the file relates, and that the dates of the audit reports had all preceded the present request first made by letter dated 9 July 2001. As for the audit working papers for the subsequent years, Miss Yen has confirmed that the remaining files in relation to NCHK Group and its various subsidiaries have been put into a safe room under lock and key. What the liquidators have proposed for these remaining files is simply for E&Y to make available to the liquidators all the documents relating to the audits and the provision of financial advice without having to go through all the documents and decide which are relevant. Insofar as the costs of producing the documents are concerned, the liquidators have given an undertaking to meet any reasonable costs incurred by E&Y in providing the documents.

64. The burden of complying with the order to give production of documents must be viewed in the context that E&Y is not a stranger but an officer of the Companies for the purpose of section 221.

65. Mr Burns submitted that it would be oppressive to E&Y to require them to produce documents as the object of the exercise is for the liquidators to find material which could bolster a case against E&Y. There is nothing on the available evidence to indicate clearly that the liquidators have come to a firm view whether there was indeed any conflict of interest in the different roles of E&Y. This is not a case of the liquidators seeking to dot the i's and cross the t's of a fairly clear claim. I may add that here the liquidators are concerned not just with discovering facts which may show that they have a claim against E&Y but also with finding out facts before embarking on litigation so as to avoid the expense of an ultimately unsuccessful action (Re Gold Company (1879) 12 ChD 77 at 85).

66. In my judgment, the balance comes down in favour of the liquidators in ordering production. Any prejudice suffered by E&Y is outweighed by the public interest in requiring E&Y to disclose documents to the liquidators that may fill important gaps in the latter's knowledge of the affairs of the Companies.

Whether there is a proper case for the oral examination of Mr Wu

67. I first consider if there is a case of reasonable requirement to examine Mr Wu orally.

68. Much the same matters are relied on as in the application for production of documents. The liquidators emphasised that on face of the documents, it would appear that Mr Wu had a heavy involvement in the affairs of NCHK Group. Notwithstanding his assertion that his signing off the auditor's reports of NCHK Capital and NCHK Finance for the years ended 31 December 1994 and 1995 was "a matter of administrative expedience", he was deemed by the provisions of section 131(9) of Cap. 32 to be the auditor.

69. As for Mr Wu's claim that it is "common practice" for accountants to act as authorised signatories on their clients' accounts if requested to do so, this is disputed by Mr Wardell who is not aware that there is such a common practice where the accountant is also the auditor of the company. In a letter of the solicitors for E&Y dated 20 July 2001, it was stated that Mr Wu has "no recollection of ever signing any cheques" notwithstanding that he was a signatory to the bank accounts of NCHK Group. In his opposing affidavit, he deposed however that his recollection is that there were "only two or three cheques in any one year" which he was asked to countersign and that there was "always back up documentation" sent with the cheque where his signature was required.

70. The documents available to the liquidators also show that Mr Wu had personal dealings with NCHK Securities, NCHK Finance and had maintained an account with NCHK Capital. As to the latter, it was stated by Mr Wu in his answer to the questions of the liquidators by the letter of the solicitors for E&Y dated 26 April 2002 that he does not recall he has had an account with NCHK Capital. The liquidators have exhibited to their supporting affidavits a copy of the ledger printout from NCHK Capital's computer system showing details of Mr Wu's account transactions and the voucher copies of each of the transactions listed in the ledger printout.

71. Mr Wu has explained in his opposing affirmation that his dealings with NCHK Finance and NCHK Securities were for the purpose of conducting securities trading on his own behalf. As for the ledger printout, he still has no recollection of having had such an account with NCHK Capital or any direct personal dealings with that entity and he no longer has his personal records of his dealings with NCHK Finance and NCHK Securities, which were more than eight years ago, to comment with any great certainty on most of the transactions in the ledger printout. Nevertheless, Mr Wu proceeded to give a detailed line by line analysis and explanation of each of the 44 transaction entries in the ledger printout, having considered the voucher copies of the transactions supplied by the liquidators on 12 November 2002 at the request of the solicitors for E&Y.

72. In summary, Mr Wu's explanation is that at all times he believes he was dealing with NCHK Securities, NCHK Finance and/or NCHK Futures to conduct his own investment affairs or those of parties for whom he "may have provided nominee/signatory services". He is unable to explain why the entries should be attributed to him as his personal dealings with NCHK Capital and recorded in the books and records of NCHK Capital.

73. Mr Wu has stated in his answers to the liquidators' questions by the letter of the solicitors for E&Y dated 31 January 2002 that he was a signatory of a number of bank accounts of Galvanic Limited but had no ownership of this company ("Galvanic"; this is not registered as a Hong Kong company or an oversea company and the liquidators are unable to say who stands behind it); that he had provided nominee and signatory services to CN Marketing Research Limited ("CN Marketing"), although he does not believe there was any business relationship between CN Marketing and NCHK Group; and that he had no business relationship with Enkson Enterprises Limited ("Enkson").

74. The liquidators have pointed to the previous answers of Mr Wu, which do not appear to tally with the evidence contained in the ledger entries and the transaction vouchers. The description of the account in the books of NCHK Capital was "Short Term Loan - Anthony Wu". It had a debit balance of HK$11,190,783.01 as at 31 December 1994. As at 1 January 1995, the name of this account was changed to "Short Term Loan - Galvanic Limited", with an opening balance identical to the closing balance of the account in Mr Wu's name. There were various transactions in the account relating to CN Marketing and Enkson, with whom Mr Wu did not have any business relationship as he had claimed. It was recorded that loans were made from CN Marketing and the amounts were credited into the account in Mr Wu's name. There were also debit entries recording repayment of Mr Wu to CN Marketing. A debit entry of HK$11 million was recorded in this account as a withdrawal to Enkson, supported by a payment requisition form to NCHK Securities that Mr Wu had given instructions for this withdrawal from his account.

75. Mr Wu has sought to explain that for some of the "loans" from CN Marketing, payment was made directly to NCHK Securities and NCHK Futures by Galvanic for investment purposes in those entities. He could not however explain why the entries should be accounted for as loans from CN Marketing in the books of NCHK Capital and in an account under his name, nor could he explain the debit entries for repayment as his instructions were issued to NCHK Securities. He has no knowledge why the entries relating to Enkson should be attributable to him. Further, as he had funds to his credit in his securities account with NCHK Securities, he had from time to time requested this company to make payments to third parties or to remit funds to himself. Notwithstanding that some of the payments received by him were drawn on bank accounts in the name of NCHK Capital, this did not strike him as odd at the time because within large groups, entities may often act in a treasury capacity for other group companies.

76. The liquidators do not regard Mr Wu's previous answers or his further explanations on affirmation as satisfactory and believe that an oral examination of Mr Wu is necessary to investigate fully his role as financial adviser, any conflict between the roles of financial adviser and auditor, and his involvement in the various transactions relating to NCHK Securities, NCHK Finance and NCHK Capital, which were made during the time when he was the financial adviser of NCHK Group and an audit partner of E&Y. Even if Mr Wu had no knowledge of the account with NCHK Capital as claimed and could not explain why entries were attributable to him, E&Y would have knowledge as the audit staff had apparently carried out investigations and I was referred to an available extract of the audit working papers of E&Y showing that enquiries were made of some of the entries in the ledger printout. Although the liquidators have not alleged at this stage that any money is owing from Mr Wu to the Companies, they take the view that further explanation is required from Mr Wu on the above transactions and an oral examination is the most economical, expeditious and effective mode to elicit this information.

77. I do not think the liquidators have brought in the personal transactions of Mr Wu in support of their application merely for the sake of prejudice, as submitted by Mr Burns. I have considered the letters of the liquidators' solicitors dated 18 November 2002, 5 December 2002 and 29 January 2003, in which they stated that the present application is "not about any potential liability of [Mr Wu] in respect of his personal dealings with the companies". On a fair reading of these letters, it seems to me that the liquidators genuinely wish to pursue enquiries with Mr Wu in view of his apparently close personal involvement with the Companies, as revealed in the ledger printout, an involvement which Mr Wu did not previously disclose, and they have not ruled out potential liability on the part of Mr Wu.

78. As for the case of Re Westmead Consultants Ltd [2002] 1 BCLC 384 relied on by Mr Burns, I do not think there is any similarity with the present situation. In that case, a full witness statement had been furnished by the bank officer (not an officer of the company) sought to be orally examined. Further, it was held that the enquiry which the liquidator wished to pursue with the witness was irrelevant to his investigations as to the collapse of the company and if he was considering a claim for breach of contract against the bank, the oral examination of the witness would not be essential or even of assistance for the purpose of determining whether there was a valid claim.

79. I am satisfied that the liquidators have made out a case of reasonable requirement to examine Mr Wu orally.

80. I bear in mind that an oral examination is more intrusive than the production of documents and is potentially more oppressive. As I have stated earlier, I do not think the liquidators have reached a firm view whether there was indeed any conflict of interest of Mr Wu or any wrongdoing on his part. And one of the objectives of the examination is to ascertain if the enquiry against Mr Wu is worth pursuing so that time and effort would not be wasted in fruitless litigation. Having looked at the history of how E&Y has responded to requests for information and documents through its solicitors, and that the interview with Mr Wu and subsequent answers provided to a list of questions have not taken matters much further, I think there is justification on the part of the liquidators that the best way forward is an oral examination. Balancing the reasonable requirement of the liquidators against the risk of oppression to Mr Wu, I rule that the balance should come down in favour of the liquidators in ordering oral examination.

Whether there is a proper case for the oral examination of Miss Yen

81. Miss Yen was the audit partner in charge of the Companies' audits for the year ended 31 December 1995 up to the liquidation of the Companies. Neither Miss Yen nor Mr Wu has mentioned on affidavit who was the audit partner in charge of the audits for the previous years because they have not been specifically asked about this.

82. The liquidators have asked to examine Miss Yen orally on the audit treatment of the substantial debtors and the investigations made by the auditor of the management controls then in place in the Companies. Given that the files of E&Y relating to the audit of the Companies for the years ended 31 December 1993 and 1994 have been destroyed, the liquidators say that it is all the more important that Miss Yen should be orally examined to assist them to reconstitute the state of knowledge of the Companies, as in conducting the 1995 audits Miss Yen must have reviewed or have regard to what was done in the audits of the previous years to ensure that consistent standards were applied.

83. I am satisfied that the liquidators have established a case of reasonable requirement for the oral examination of Miss Yen.

84. In opposing this application, Miss Yen stated that no questions have been asked of her in correspondence, nor have the liquidators sought an interview with her. For the reasons given earlier, it does not seem to me that a questionnaire or an interview would be an effective and expeditious mode to elicit information in this instance. I am also satisfied that the reasonable requirement of the liquidators has outweighed the risk of prejudice to Miss Yen to be orally examined.

The Orders

85. For the above reasons, I grant the orders sought by the liquidators in paragraphs 1 to 4 of the originating summons with the following alterations. The undertaking given by the liquidators to pay E&Y reasonable costs in providing the documents sought should be recorded in the order. Further, the documents sought in paragraph 1 of the originating summons should be limited to those for the years ended 31 December 1995 to 31 December 1997 inclusive, as the audit files for the previous years have been destroyed.

86. As for the oral examination of Mr Wu and Miss Yen, there is no reason why the examination should not be conducted before a Master in chambers. I will give liberty to apply for directions on the conduct of the oral examination.

87. Regarding the costs of this application, it seems to me that costs should follow the event. I make an order nisi that the liquidators' costs of this application should be borne by the respondents.