CHINA MEDICAL TECHNOLOGIES, INC (IN LIQUIDATION) AND OTHERS v. WU XIAODONG AND OTHERS

HCA 3391/2016 & HCA 1417/2013

[2023] HKCFI 1181

HCA 3391/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 3391 OF 2016

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HCA 1417/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1417 OF 2013

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(Consolidated by Order of Master Chow dated the 23^rd day of July 2018)

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J U D G M E N T

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Introduction

1.  By summons dated 20 August 2021, as amended at the hearing (“Amended Summons”), the Plaintiffs apply for leave to adduce expert evidence at the trial on 3 subjects viz:

a.  The nature of the fluorescent in situ hybridization technology (“FISH”) acquired by the 1^st Plaintiff and the 2^nd Plaintiff in 2007, to address the questions more particularly specified in Appendix 1 thereof including inter alia the size of the market for this technology and the likely future growth of the technology in the Mainland China (“FISH Issue”).

b.  The nature of the surface plasma resonance technology (“SPR”) acquired by the 1^st Plaintiff and the 2^nd Plaintiff in 2008, to address the questions more particularly specified in Appendix 2 thereof, which are similar to the questions in Appendix 1 (“SPR Issue”).

c.  The valuation of FISH as at 1 March 2007 and that of SPR as at 4 December 2008 (“Valuation Issue”).

2.  The application is opposed only by the 2^nd Defendant. The affidavit in opposition (“Tang 3”) is not made by him but by his solicitor Tang Shu Pui Simon (“Tang”). All the other active Defendants viz the 3^rd Defendant, the 5^th Defendant, the 6^th Defendant and the 13^th Defendant did not oppose the application and their attendance was excused[1].

3.  Originally, the 2^nd Defendant did not seek to adduce expert evidence in this case - he is in effect opposing the Plaintiffs’ application to adduce evidence which they consider necessary to prove their case. Mr Lung, in reply to a question from the bench, indicated that if this court were to grant the application, the 2^nd Defendant intends to adduce expert evidence on the Valuation Issue.

Background

4.  The 1^st Plaintiff was incorporated in the Cayman Islands in July 2004. Its shares were listed on NASDAQ in August 2005 and were delisted in February 2012. It was the holding company of a group whose principal business was said to be developing, manufacturing and marketing advanced surgical and medical equipment in the PRC. The 1^st Plaintiff was grossly insolvent with provable claims of over US$400 million. In July 2012, it was wound up by the Grand Court of the Cayman Islands. On 1 September 2014, Harris J made an ancillary winding up Order against it in HCCW 435 of 2012.

5.  The 2^nd Plaintiff is the 1^st Plaintiff’s wholly‑owned subsidiary.

6.  The 3^rd Plaintiffs were appointed as the provisional liquidators of the 1^st Plaintiff by Order of Harris J in November 2012. On 5 February 2015, they became the Liquidators of the 1^st Plaintiff (“Liquidators”).

7.  The 1^st Defendant (“Mr Wu”) was at all material times the founder, Chairman, CEO, director and the largest shareholder of the 1^st Plaintiff. From January 2006 to July 2012, he was a director of the 2^nd Plaintiff.

8.  The 2^nd Defendant (“Mr Tsang”) was the 1^st Plaintiff’s director from June 2007 to December 2011 as well as its CFO from January 2005 to January 2012. He was also a director of the 2^nd Plaintiff from January 2006 to December 2011. He was the second most senior executive of the 1^st Plaintiff after Mr Wu. Mr Tsang is in contempt of a High Court Order that he should attend Court in person for examination, has absconded from Hong Kong and is subject to an outstanding warrant for his arrest. Mr Tsang is also said to be a fugitive from the United States criminal justice system.

9.  The Plaintiffs claim that the former senior management of the 1^st and 2^nd Plaintiffs, assisted by their associates, perpetrated, participated in and/or benefited from the fraudulent misappropriation of US$521.8 million in cash (“Fraud”) through purported acquisitions (“Acquisitions”) from the 7^th Defendant, Supreme Well Investments Limited (“Supreme Well”), and its subsidiaries, of the following alleged medical technologies:

a.  FISH, acquired pursuant to a contract dated 6 February 2007 for US$176.8 million; and

b.  SPR, acquired pursuant to a contract dated on or around 5 October 2008 for US$345 million.

10.  It is the Plaintiffs’ case that:

a.  FISH and SPR were worthless (or of no significant value) in that they were not new technologies;

b.  Supreme Well, the counter‑party to the Acquisitions, was in fact controlled by Mr Tsang, who was the sole authorised signatory of its bank accounts with Bank of China (Hong Kong) Limited (“BOC”) and The Bank of East Asia, Limited (“BEA”) into which US$355.5 million of the consideration paid by the 1^st and 2^nd Plaintiffs were deposited. The balance was paid to Supreme Well by other means;

c.  Mr Tsang authorised the transfer of funds from Supreme Well to the bank accounts of other persons and entities (“Supreme Well Payees”) all of whom were associated with or controlled by Mr Wu, Mr Tsang and/or their associates; and

d.  the Supreme Well Payees subsequently transferred all or some of the funds to the bank accounts of other persons and entities (“Further Supreme Well Payees”), some of whom were associated with or controlled by Mr Wu, Mr Tsang and/or their associates, and thereafter to further recipients.

11.  The 1^st Defendant orchestrated, participated and conspired in the Fraud.

12.  Mr Tsang acted on both sides of the Acquisitions and directed payment of the consideration received by Supreme Well to the Supreme Well Payees. He received US$7.47 million directly and over US$379 million through entities controlled by him. The Plaintiffs claim US$524.7 million against Mr Tsang:

a.  US$521.8 million misappropriated from the 1^st and 2^nd Plaintiffs by reason of, inter alia, his breaches of duty and trust and unlawful conspiracy; and

b.  US$2.9 million, being salary and bonuses paid to him from January 2006.

13.  Further background information can be found in this court’s Judgment in the present Action dated 21 October 2022 in relation to Mr Tsang’s security for costs application.

Deliberation

14.  It is trite that the giving of expert directions is very much a matter of case management: Shenzhen Futaihong Precision Industry Co Ltd v BYD Co Ltd [2019] 2 HKC 175 at [9] and [13].

15.  As a preliminary observation, it can be seen from the background of this case summarised above that the nature and value of FISH and SPR is at the very heart of this action. The Plaintiffs claim FISH and SPR were worthless. Yet the senior management of the 1^st Plaintiff and the 2^nd Plaintiff, in particular Mr Wu and Mr Tsang, fraudulently spent hundreds of millions of dollars in acquiring them. Hence, the objective and fair value of FISH and SPR at the time of their acquisition is central to the Plaintiffs’ claim against the Defendants.

16.  Any valuation must start with a proper understanding of the nature of the technology being valued, its application, and the market for it. Purely from a case management point of view, it is difficult, if not impossible, for the trial judge to properly adjudicate on the Plaintiffs’ claim or the Defendants’ defence, without the assistance of some expert evidence.

17.  As a matter of law, the relevant principles which guide the Court in determining if expert evidence should be admitted have been laid down out by the Court of Appeal in Shenzhen Futaihong Precision Industry Co Ltd v BYD Co Ltd at [4] and more recently re-stated by Keith Yeung J in Lei Shing Hong Credit Limited v Accufast Limited & Ors [2021] HKCFI 853 at [22]. The 3 substantive conditions for admissibility of expert evidence are:

a.  The subject matter of the opinion must fall within an area in which expert evidence may properly be given (“Subject Matter Condition”).

b.  The witness must be qualified as an expert to give the evidence of the type in question (“Expertise Condition”).

c.  The evidence must be relevant to the issues being litigated (“Relevance Condition”).

18.  On condition (c), the Court of Appeal in Shenzhen Futaihong Precision Industry Co Ltd at [6] further cited with approval the following observations of Evans-Lombe J in Barings plc v Coopers & Lybrand [2001] PNLR 22 at [45]:

“… Evidence meeting [condition (a)] can still be excluded by the Court if the Court takes the view that calling it will not be helpful to the Court in resolving any issue in the case justly. Such evidence will not be helpful where the issue to be decided is … one on which the Court is able to come to a fully informed decision without hearing such evidence.”

19.  On the Subject Matter Condition, Mr Karas submits and this court agrees that FISH and SPR are medical technologies involving specialised medical knowledge as well as medical-related technical knowhow. Further, valuation is well-recognised as a field of expertise and in the present case is clearly required to enable the Court to reach an informed judgment on the fair value of FISH and SPR. It should be self-evident that the trial judge, with or without some basic medical knowledge, will not be able to form a sound judgment on these issues without the assistance of the appropriate experts.

20.  On the Expertise Condition, this is really a matter which can and should only be determined once expert directions are given and the expert reports, including no doubt the experts’ CV, are disclosed. As a matter of practice, very often, the experts’ expertise is challenged, if at all, at trial (or at least closer to trial eg at the PTR), when admissibility of evidence, factual or expert, is normally dealt with.

21.  Of course, if at the expert directions stage, a party proposes to call as an expert witness someone who obviously has no or no relevant expertise, that is a different matter. But in the present case, the Plaintiffs intend to call Mr Yang Yi Ming (an expert in the Mainland life science and medical tech industry) as to the nature and market for FISH and SPR and Mr Ian Coleman (an expert valuer) on the value of FISH and SPR[2]. According to Mr Karas, both of them have given expert evidence at the trial of a related action in China Medical Technologies Inc (In Liquidation) v KPMG in HCCL 7 of 2020 before Mimmie Chan J[3]. There is no evidence from the 2^nd Defendant to challenge their expertise. In these circumstances, and to his credit, Mr Lung has not suggested the Expertise Condition is not satisfied.

22.  On the relevance Condition, as this court observed earlier, the nature and value of FISH and SPR is at the very heart of this action and the objective and fair value of FISH and SPR at the time of their acquisition is central to the Plaintiffs’ claim against the Defendants. It is difficult to see how the trial judge would be able to come to a fully informed decision without hearing such expert evidence.

23.  In his skeleton submissions, Mr Lung raises a number of “substantive” points as to why the application is unmeritorious. In this court’s view, none of the objections are valid.

24.  First, there are numerous documents from various sources shedding light on each of the FISH Issue, the SPR Issue and the Valuation Issue. By way of example, Mr Lung submits that information about FISH and SPR and related businesses was disclosed in the 1^st Plaintiff’s annual report for the fiscal year ended 31 March 2011. Other relevant documents include the 2010 convertible note Offering Memorandum and certain Morgan Stanley research reports.

25.  In paras 14 and 15 of Tang 3, Tang said this:

“14. There are over 77,000 documents disclosed in the discovery process and over 95% of the documents were disclosed by the Plaintiffs in their 11 Lists of Documents. Among these documents, some of them contain useful and material information about the FISH and SPR Technologies acquired and their related businesses operated by the China Medical Group. Such information can assist this Court in understanding the nature of the FISH and SPR Technologies and the valuation thereof. The Plaintiffs have not explained to this Court why the available documents still cannot fully explain the nature of the FISH and SPR Technologies and valuation thereof and the reasons of necessity to adduce further expert evidence on these matters.

15. Among the disclosed documents, there are 4 different categories of documents containing information on the FISH and SPR Technologies, namely, (a) company external documents, (b) company internal documents, (c) other independent third party documents and (d) the Liquidators’ own documents.”

26.  In addition, Tang also referred to, at para 35 of Tang 3, the existence of certain contemporaneous valuations on FISH and/or SPR conducted by A.T. Kearney, Credit Suisse, PwC, BMI and Deloitte.

27.  Mr Karas’s reply is that none of these existing documents are appropriate to assist the Court in determining whether the FISH and SPR Transactions were at a gross overvalue. In particular, the corporate documents were prepared by, or on the instructions of, the 1^st Plaintiff’s former management, including Mr Tsang. The contemporaneous valuation reports were prepared for different purposes and were based on assumptions provided by the former management. As for the Liquidators’ own documents, they have not yet been disclosed as privilege is being claimed. In any event, Mr Karas has indicated to this court the Plaintiffs do not intend to call the experts from the US and Sweden whom the Liquidators have previously worked with but to call Mr Yang instead who is experienced in the Mainland China market.

28.  This court does not find it necessary to examine the minute details of Mr Karas’s reply.

29.  What is clear to this court is that it is absurd to suggest this is the occasion to examine the alleged 77,000 documents disclosed by the parties in order to determine whether expert evidence is still necessary in light of those documents. What is also reasonably clear is that those documents were not prepared by their authors as expert reports under the Rules of the High Court for the purpose of the trial of this Action. Expert evidence is there to assist the Court in understanding and adjudicating on specialised issues ie the 3 issues suggested by the Plaintiffs in a disciplined manner. The whole point of the requirement of expert directions is to subject the adducing of expert evidence to the control of the Court under the mechanism set down in section IV Expert Evidence of RHC O 38. Assuming some of the 77,000 documents do contain information about FISH and SPR or their valuation, the trial judge will still require the assistance of experts to digest those documents and to understand the validity of their contents, if and in so far as they are relied upon by any parties.

30.  Second, none of the FISH Issue, the SPR Issue and the Valuation Issue is relevant to the matters to be resolved at trial.

31.  For reasons already explained above, this argument is hopeless.

32.  Third, specifically in relation to the Valuation Issue, it is not at all clear that there are indeed experts who are capable of providing a fair valuation of the 2 technologies at a specific moment in time which is more than 15 years ago.

33.  As explained above, this is really a matter which can and should only be determined after expert directions are given and the expert reports are disclosed. The occasion for this is the trial, or closer to the trial.

34.  Fourth, it would appear that expert evidence is sought to be adduced on the FISH Issue and the SPR Issue, not to assist the Court in understanding the technologies but to assist the proposed valuation expert to come to a proper valuation of them. On any view, if the valuation expert requires assistance from another expert to inform him of the nature and details of FISH and SPR, it fundamentally begs the question of the expertise of the valuation expert in the first place.

35.  The answer to this objection is two-fold. First, the trial judge would need to properly understand the nature of the technologies, irrespective of whether the valuation expert also need to. Second, questions on the expertise of the valuation expert is not something that can or should be determined at this stage. Indeed, this is accepted by Mr Lung at the hearing in relation to the valuation expert Mr Coleman.

36.  Apart from the “substantive” objections, Mr Lung has also raised a number of “procedural” objections.

37.  First, for both the FISH Issue and the SPR Issue, the Plaintiffs have wholly failed to identify the field of expertise to which the intended expert evidence relates, in total disregard of Practice Direction 5.2 at para 20(1). The formulation of the proposed expert issues in Appendices 1 and 2 to the Amended Summons is too vague and general to be meaningful.

38.  This court does not agree. Appendices 1 and 2 are perfectly comprehensible and would not lead to confusion. In any event, Mr Lung does not propose to adduce expert evidence in relation to the FISH or SPR Issue on behalf of the 2^nd Defendant so the the formulation of the proposed expert issues in Appendices 1 and 2 should not unduly concern his client.

39.  Second, there was no reference to specific geographical market concerning regulatory approval (para 1.3 of Appendices 1 and 2) or the market size and/or future growth (para 1.4 of Appendices 1 and 2). This is true but by way of the amendment to the Summons, the geographical aspect in Appendices 1 and 2 in relation to the FISH and SPR Issues has now been confined to the Mainland China. So the issue is resolved.

40.  Third, the Plaintiffs have not identified the experts they propose to call, contrary to Practice Direction 5.2 at para 20(1). This has been rectified. In the Reply Note, it is clearly stated that they intend to adduce expert evidence from Mr Yang Yi Ming (an expert in the Mainland life science and medical tech industry) as to the nature and market for FISH and SPR and Mr Ian Coleman (an expert valuer) as the value of FISH and SPR, with their CVs attached.

41.  To conclude, for all these reasons, this court is in principle prepared to give leave to the Plaintiffs to adduce expert evidence at the trial on the 3 issues in question.

42.  Presently, the consequential directions proposed in the Amended Summons are premised on the basis that only the Plaintiffs will adduce expert evidence at trial. This is understandable since none of the active Defendants have indicated any interest in adducing expert evidence on any the 3 issues. However, in view of Mr Lung’s indication at the hearing, the consequential directions have to factor in the 2^nd Defendant’s intention to adduce expert evidence on valuation of FISH and SPR.

43.  As far as the appointment of a single joint expert by the Plaintiffs and the 2^nd Defendant on valuation is concerned, Mr Karas submits that, given the nature of the allegations against Mr Tsang and the history of these proceedings as a whole, appointing a single joint expert on valuation is going to be fraught with difficulties and is unlikely to save time and costs. This court agrees.

44.  In the circumstances, many of the usual consequential directions e.g. the timetable for the filing and exchange of expert reports on valuation, the holding of without prejudice experts meeting, the subsequent filing of a joint expert report and so on will have to be re-considered by the parties and submitted to this court for approval.

45.  As far as the length of the expert report on the FISH and SPR issues are concerned, Mr Karas has fairly informed this court that Mimmie Chan J has imposed a 50-page limit in China Medical Technologies Inc (In Liquidation) v KPMG and he is prepared to consent to the same. This is obviously sensible in view of the objectives of the CJR in promoting a sense of reasonable proportion and procedural economy in the conduct of proceedings and given that Mr Yang is effectively the only expert on the 2 issues. This page limit should therefore be included in the consequential directions in this case.

46.  To conclude, as for consequential directions as a whole, the Plaintiffs and the 2^nd Defendant are hereby directed to lodge a set of agreed, failing agreement their own, draft consequential directions for the court’s consideration within 14 days. In this respect, the parties should give serious thoughts to the appropriateness of the consequential directions given by Mimmie Chan J in China Medical Technologies Inc (In Liquidation) v KPMG. The matter will then be disposed of on paper unless a hearing is directed.

47.  Lastly, the Plaintiffs seek at para 7 of the Amended Summons, as clarified by para 12 of the Reply Note, an Order that no further interlocutory applications shall be made by Mr Tsang hereafter without leave of the Court. The basis of seeking para 7 is that, in his more recent attempts to delay and obfuscate, the 2^nd Defendant has taken out a number of further interlocutory applications which were clearly part of his tactics to delay the proceedings and any judgment against him.

48.  In this court’s view, an application of this nature by way of an amendment to an expert directions summons 5 days before the hearing and without a supporting affidavit setting out Mr Tsang’s alleged delaying tactics is wholly inappropriate. For this reason, this court is not minded to make an Order in terms of para 7 of the Amended Summons.

49.  If any party has taken out or takes out unnecessary and unmeritorious interlocutory applications for no useful purpose other than delay, such applications will no doubt be met with the appropriate costs sanctions, including indemnity costs. But each application has to be decided in light of its own circumstances. If, after fully considering the history of these proceedings, the Plaintiffs consider such an application is justified, they are at liberty to apply, if so advised, again and the court will decide on the application on the available evidence.

Disposition and costs order nisi

50.  There shall be an Order in terms of paras 1, 2 and 3 of the Amended Summons. In relation to para 1.3 of the Amended Summons, leave is also granted to the 2^nd Defendant to adduce expert evidence at trial on the same.

51.  As for other consequential directions, they shall be adjourned until after the Plaintiffs and the 2^nd Defendant have lodged a set of agreed, failing agreement their own, draft consequential directions as directed above.

52.  Para 7 of the Amended Summons is dismissed.

53.  On a nisi basis, costs of the Amended Summons be to the Plaintiffs, to be taxed if not agreed and paid by the 2^nd Defendant forthwith, certificate for counsel.

54.  For the avoidance of doubt, this court certifies that the assistance of Mr Karas, solicitor advocate, to be the equivalent to that of counsel.