CHINA MEDICAL TECHNOLOGIES, INC. (In liquidation) v. SAMSON TSANG TAK YUNG

CACV 197/2014

[2018] HKCA 112

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 197 OF 2014

(ON APPEAL FROM HCCW 435 OF 2012)

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REASONS FOR JUDGMENT
AND DECISION ON COSTS

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Hon Barma JA (giving the Reasons for Judgment and Decision on Costs of the Court):

1.  On 1 September 2014, Harris J ordered that China Medical Technologies, Inc. (“the Company”), a company incorporated in the Cayman Islands, should be wound up by the court. The order was made on a petition presented by the Company itself, which had earlier been placed into liquidation in the Cayman Islands on 27 July 2012, acting through its Joint Official Liquidators appointed by the Cayman Islands courts. The petition was opposed by Mr Samson Tsang Tak Yung (“Mr Tsang”), who says that he is a contributory of the Company, holding a small number of shares in it. On 29 September 2014, Mr Tsang lodged a Notice of Appeal against Harris J’s order winding up the Company.

2.  By this application, made by an Amended Summons dated 16 March 2015, the Company, by now acting through its Hong Kong provisional liquidators (continuing in office after the making of the winding up order), seeks to strike out Mr Tsang’s Notice of Appeal.  The application is based on two grounds:

(1)   Mr Tsang has no standing to appeal against the making of the winding up order, so that the appeal amounts to an abuse of process; and

(2)   Further or alternatively, the appeal should be dismissed as Mr Tsang should not be heard in relation to it so long as he fails to comply with, and remains in contempt of, an order made by Harris J on 15 September 2014 requiring him to attend at court to be examined in relation to his knowledge of the affairs of the Company (pursuant to section 221 of the Companies Ordinance (Cap 32)).

3.  At the end of the hearing, we dismissed the application, and indicated that we would hand down our reasons for doing so in due course.  These are those reasons.  Having heard argument on the costs of the application, we reserved our decision as to costs, and now give that decision as well.  The delay in doing so is regretted.

4.  For present purposes, the following matters may be noted by way of general background:

(1) The Company was incorporated in the Cayman Islands in 2004.  It was not registered in Hong Kong.  Prior to its winding up, it was the holding company of a group of companies carrying on the business of developing, manufacturing and marketing surgical and medical equipment in China, through subsidiaries and sub-subsidiaries in Hong Kong and on the Mainland.  From 2005 until 2012, the Company was listed on the NASDAQ Stock Exchange in New York.  It was delisted in February 2012, wound up in the Cayman Islands in July 2012, and placed into bankruptcy in New York in August 2012.

(2) The Company appears to be massively insolvent, with a deficiency of in excess of US$400 million.

(3) The Company’s main beneficial shareholder was a Mr Wu Xiaodong, a Chinese national, who was also its Chairman and Chief Executive Officer.  Mr Tsang, who is a Hong Kong permanent resident, was a director between June 2007 and December 2011, and was the Chief Financial Officer of the Company.

(4) At the time of the presentation of the petition, the Company had one known creditor in Hong Kong, holding a debt of slightly over US$4,000.

(5) A stated purpose of seeking a winding up of the Company in Hong Kong was to obtain orders for examination against various persons and entities (including Mr Tsang) pursuant to section 221 of the Companies Ordinance, as the Joint Official Liquidators considered that the Company appeared to have dissipated its assets through the sale of its interest in some of its Mainland subsidiaries for little or no consideration to parties connected with Mr Wu, and by the acquisition of another Mainland subsidiary at an overvalue from a party related to Mr Wu, and were of the view that a winding up order in Hong Kong might improve the prospects of making some meaningful recoveries for the Company so as to reduce the shortfall in its assets.

5.  The procedural history of the winding up proceedings was not straightforward.  The following matters are of relevance to the application to strike out the appeal on the basis that Mr Tsang has no standing to appeal against the winding up order:

(1) After the presentation of the petition on 26 November 2012, Mr Tsang requested a copy of the petition pursuant to Rule 27 of the Companies (Winding-Up) Rules (Cap 32H) (“the Rules”), relying on his status as a contributory of the Company, by two letters from his solicitors respectively dated 3 and 11 January 2013.  A copy of the petition was eventually supplied to Mr Tsang on 15 February by the Joint Official Liquidators (although they reserved their position as to whether or not Mr Tsang was in fact a contributory).

(2) On 1 February 2013, Mr Tsang filed and served on the Company a notice of his intention to appear on the hearing of the petition to oppose it, as required by Rule 30 of the Rules.  The notice was in the prescribed form (i.e. Form 10 under the [Rules]) and identified Mr Tsang as a contributory.

(3) On 6 February 2013, the Company, as petitioner, served on Mr Tsang its list of persons who had given notice of intention to appear at the hearing of the petition pursuant to Rule 31 of the Rules.  The list was similarly in the prescribed form (i.e. Form 11 under the [Rules]).  It included Mr Tsang’s name and described him as an Opposing Contributory, while qualifying that description with the observation that he had “less than 1% shareholding”.

(4) Mr Tsang appeared through counsel at the hearings of the petition on 18 February 2013, 25 February 2013, 20 March 2013, 11 June 2013, 26-27 August 2013, 21 February 2014, 28 August 2014, and 1 September 2014.  It is apparent from the transcript that Harris J considered that although Mr Tsang was a contributory, the fact that he had no financial interest in the liquidation as he would not benefit from it (the Company being heavily insolvent) meant that his views as to whether or not a winding up order should be made would carry no weight with the court.  However, as Harris J considered that there were serious questions to be considered as to whether or not the court had jurisdiction to wind up the Company (which was an unregistered foreign company), and if so, whether the court should exercise its discretion to make a winding up order, he permitted Mr Tsang’s counsel to address him on these matters.

(5) Initially, by a judgment dated 9 April 2014, Harris J dismissed the petition, concluding that while the court had jurisdiction under section 327(3) of the Companies Ordinance to wind up the Company, the court should not do so, because there were no persons with a sufficient economic interest in the winding up and a sufficient connection with the jurisdiction (other than by virtue of being the petitioner or a creditor who could submit a proof of debt if the company were wound up), and the company’s other connections with Hong Kong were not so strong as to overcome the lack of such persons.

(6) Thereafter, the Company applied to Harris J to re-open the trial of the petition, and to allow it to adduce further evidence, which it said was not previously available to it, to show that there was in fact a sufficiently strong connection with Hong Kong.  The further evidence sought to be relied on consisted mainly of evidence which had come to light that appeared to show that many movements of funds by which the Company’s assets were allegedly dissipated had taken place in Hong Kong, on the basis of instructions given by persons in Hong Kong (including, in particular, Mr Tsang).  The application was heard on 21‑23 July 2014.  By his decision of 28 August 2014, Harris J acceded to the application to re-open the trial of the petition and to admit such further evidence, which he considered to be determinative of the petition in favour of making the winding up order sought.  On 1 September 2014, Harris J made an order winding up the Company, and appointed Mr Cosimo Borrelli and Ms Yuen Lai Yee Liz (who had earlier been appointed as provisional liquidators pursuant to section 193 of the Ordinance) to continue as provisional liquidators pursuant to section 194(1)(aa) of the Ordinance until liquidators were appointed.

(7) As at the earlier trial of the petition, Harris J confined submissions made by Mr Tsang’s counsel during the subsequent hearings to matters going to the issue of whether or not the court had and (if it did) should exercise jurisdiction to make a winding up order in respect of the Company by reference to the connections with Hong Kong.

(8) So far as the costs of the petition were concerned, Mr Tsang was ordered to pay the Company’s costs after 26 August 2013, up to and including the hearing on 1 September 2014, with part of such costs being ordered to be taxed on the indemnity basis.

6.  On 29 September 2014, Mr Tsang filed his Notice of Appeal against Harris J’s order of 1 September 2014.  On 31 October 2014, the Company took out this summons, which was subsequently amended (to add the alternative ground based on Mr Tsang’s alleged contempt) on 16 March 2015.

7.  It is also necessary to take note of the steps taken in relation to the examination of Mr Tsang pursuant to section 221 for the purposes of the alternative application for a stay of the appeal.  These can be summarised as follows:

(1) Following the making of the winding up order, on 15 September 2014 Harris J ordered Mr Tsang to be orally examined pursuant to section 221 on the earliest dates available to the court.

(2) On 16 September 2014, the Provisional Liquidators’ solicitors informed Mr Tsang’s solicitors that his examination had been fixed for 11-13 February 2015 and 13-14 April 2015.

(3) On 16 January 2015, Mr Tsang’s solicitors informed the Provisional Liquidators’ solicitors that he would not attend for examination on 11 February 2015.  In subsequent correspondence, they offered dates through 2015 on which Mr Tsang was prepared to be examined via video link, it being said that he was working on the Mainland and was not planning to be in Hong Kong at all this year.  This was not acceptable to the Provisional Liquidators, who insisted on oral examination before a master in Hong Kong.

(4) On 11 February 2015, Mr Tsang did not appear for examination.  Harris J found him to be in contempt and ordered that a warrant be issued for his arrest.

(5) Mr Tsang also failed to appear for examination on 13 April 2015.

(6) At one stage, Mr Tsang applied for leave to appeal against the making of the section 221 order.  However, he subsequently withdrew that application.  He did not at any time seek a stay of the section 221 order pending the outcome of this appeal.

8.  It is not necessary for the purposes of this application to express any views on the merits of the appeal, and we therefore refrain from doing so in what follows.

9.  We shall deal first with the contention that Mr Tsang has no standing or tangible interest to permit him to appeal against the winding up order, and that this renders his appeal an abuse of process so that it should be struck out.

10.  Mr Karas, appearing for the Company submitted that:

(1) Mr Tsang’s involvement in the winding up proceedings, as disclosed in the court records and transcripts of hearings at which he was represented demonstrated that he was never a party to the petition proceedings, and was only permitted to participate in them to assist the court as an amicus curiae on the limited question of whether or not the court had jurisdiction to wind up the Company, and if so whether or not it should exercise it by making a winding up order.

(2) This was made clear by the various occasions on which Harris J observed that Mr Tsang had no tangible interest in the winding up so as to make his views on whether or not the Company should be wound up relevant for the court to take into consideration, an observation which was not dissented from by any of the various counsel appearing for Mr Tsang, leading the judge to confine their submissions to the legal points in relation to the jurisdiction issue.

(3) It was further made clear by the fact that Mr Tsang and his counsel had not challenged the judge’s treatment of him as not being a party to the proceedings.

(4) Not being a party to the proceedings, but being in the position of amicus curiae, it was not open to Mr Tsang to appeal against the court’s decision: see Re Bradford Navigation Co (1870) LR 5 Ch App 600 at 603 per James LJ; Re Mid East Trading Ltd [1998] BCC 726 at 732A-C per Evans-Lombe J; PricewaterhouseCoopers v Saad Investments Co Ltd [2014] 1 WLR 4482 at [30]-[37] per Lord Neuberger.

(5) The making of costs orders against Mr Tsang did not make him a party to the proceedings so as to give him standing to appeal against the substantive decision: see To Pui Kui v Ng Oi Che (unreported, CA, CACV 156/2014, 27 February 2015 at paragraph 31 of the judgment).

(6) Further, the lack of any tangible interest in the Company’s liquidation on Mr Tsang’s part as a contributory means that he could not be joined as a party to the winding up proceedings, and could not be heard as such on the question of whether a winding up order should be made, and thus could not appeal against the making of the winding up order. For this proposition, reliance was placed on Re Rica Gold Washing Co (1879) 11 Ch D 36 at pp 42-43 per Jessel MR and Re Greenhaven Motors Ltd [1997] BCC 547 at p.551.  In this case, there was no dispute that Mr Tsang did not have such a tangible interest given that the Company was heavily insolvent.

(7) Thus, as a stranger to the petition, Mr Tsang should not be allowed to appeal against the order made on it, or to be joined as a party on an appeal.  A stranger to a petition should only be allowed to appeal against it in exceptional circumstances: see PricewaterhouseCoopers v Saad (supra), where it was held that auditors of a company could exceptionally be permitted to appeal against the making of a winding up order against it where the order was clearly made without jurisdiction, the auditors had no notice of the petition and could not have appeared on it, and the purpose of the petition was to enable an order for examination to be obtained against the auditors.

11.  Mr Bleach SC, appearing for Mr Tsang, disagreed. He submitted that:

(1) As a shareholder of the Company, Mr Tsang is a contributory, and as such has the necessary locus to appear on the petition, and having appeared and been heard on it, to appeal against the winding up order, the making of which he opposed.  He was a party to the proceedings, and is and was neither an amicus curiae, nor a stranger to the winding up or to the appeal.  He was in fact regarded as a party to the proceedings in the court below, both in terms of the procedure, and in terms of how he was regarded by the judge.

(2) Further, having regard to the fact that he had an interest in the outcome of the petition (by reason of his opposition to it, and the potential order that might be made against him pursuant to section 221), Mr Tsang was not in any sense neutral and could not be considered to be an amicus curiae for that reason also.

(3) The making of a costs order against Mr Tsang was also a clear indication that he was a party to the proceedings and not an amicus curiae.

(4) Having been permitted to appear and oppose the petition at his own expense, and having had a costs order made against him, with part of the costs being ordered to be taxed on an indemnity basis (with an exposure to a claim of some HK$10 million in costs), it would be grossly unfair and unjust not to permit him to appeal.

(5) Even if he were not to be regarded as a party to the winding up proceedings, Mr Tsang would be in the same position as the auditors in PricewaterhouseCoopers v Saad, raising a question as to the court’s jurisdiction to make a winding up order, and being at risk of being examined and required to produce documents under section 221, so that there was no basis for refusing to permit him to bring an appeal against the order below.

12.  We shall deal first with the suggestion that Mr Tsang was not a party to the winding up proceedings.  With respect, it seems to us to be plain that he was.  There does not seem to be any serious suggestion that he is not in fact a shareholder of the Company, and thus a contributory.  Being a contributory of the Company, he was, in our view, entitled to appear on the winding up petition.  This would appear to follow from the provisions of Form 4, Rule 27, Form 10 and Form 11 of the Rules. Moreover, as Mr Bleach pointed out, Mr Tsang was described by Harris J in his first judgment as an “opposing contributory”.  Having given the necessary notice of his intention to appear on hearing of the petition to oppose it, and having appeared at the actual hearing of the petition for that purpose, it does not seem to us that he can be regarded as other than being a party to it, so as to be entitled to appeal against the order made if aggrieved by it.

13.  We do not think that the fact that Mr Tsang did not have a “tangible interest” in the outcome of the petition, in the sense of not standing to benefit in an economic sense from a winding up order being made or not made (given the Company’s massive insolvency) detracts from his entitlement to be heard, at least in relation to matters not dependent on his having such an interest, such as whether or not the court had jurisdiction to make a winding up order at all, or whether, assuming the court had jurisdiction in the strict sense of having the power to do so, the situation was one which fell within the settled practices of the court in deciding whether or not a winding up order should be made (in this case, by reference to the three well-known criteria identified by Harris J in his judgments).  It was in relation to these matters that Harris J received submissions from counsel appearing for Mr Tsang, and there does not appear to have been any suggestion that he should not have done so.

14.  We do not think that Re Rica or Re Greenhaven Motors assist the Company in relation to this argument.  Re Rica involved a petitioning contributory.  It decided that where the contributory had no tangible interest in the outcome of the petition, no winding up order would be made.  But this would be because the court has developed a settled practice to this effect, and not because of an absence of jurisdiction in the strict sense.  As a matter of jurisdiction in the strict sense, the court has power to make a winding up order on the basis of a petition that is presented by someone with the ability to do so – i.e. a creditor or a contributory.  But where the winding up order would not benefit the contributory, the court’s settled practice is not to accede to such a petition.  That does not mean that the contributory is not a party to the petition, or that he cannot appeal against the refusal to make a winding up order (Re Rica itself was an appeal by an unsuccessful petitioner).  Re Greenhaven Motors did not involve a winding up petition, but raised the question of whether a contributory who had no tangible interest was entitled to challenge a liquidator’s decision in the course of the winding up.  Here, Mr Tsang’s lack of a tangible interest was regarded by Harris J not as a reason for refusing to hear him at all, but as a reason for restricting his submissions to matters that he could properly deal with.  Having been allowed to appear on the petition and to make submissions on it, it seems to us that Mr Tsang cannot be regarded as being other than a party to it.

15.  Further, while we would accept that an amicus curiae cannot appeal from a decision in which he had acted as such (see Re Bradford Navigation Co and PricewaterhouseCoopers v Saad Investments Co Ltd (supra)), it seems to us to be clear that Mr Tsang was in no sense an amicus curiae.  Although Harris J indicated that he would be assisted by hearing submissions on behalf of Mr Tsang in relation to the questions of “jurisdiction” (in both senses), this did not render Mr Tsang, or his counsel, amicus curiae.  Mr Tsang throughout opposed the petition, and resisted the making of a winding up order, in his own interest.  He did not put forward his contentions in some neutral capacity, as an amicus would have done.  This is so notwithstanding that Mr Tsang’s interest, i.e. to avoid a situation arising in which he might be subjected to an order for examination under section 221, was not a matter which could have influenced the outcome of the petition.  As Mr Tsang was not, in our view, an amicus curiae, the Provisional Liquidators, arguments based on the authorities concerning the inability of an amicus curiae to appeal do not take matters any further.

16.  So far as the making of a costs order against Mr Tsang is concerned, we agree with Mr Bleach that this is a clear indication that he was a party to the proceedings and not an amicus curiae.  I do not think that the To Pui Kui case is relevant in this context.  That case concerned a true non-party, against whom costs had been ordered pursuant to section 52A of the High Court Ordinance.  In this case, section 52A was never invoked.  Had it been, it would have been necessary for a separate hearing to have been held, at which Mr Tsang could have appeared to make submissions as to whether or not costs should be ordered against him as a non-party.  No such procedure was ever adopted.  On the contrary, the approach adopted, of making a costs order against Mr Tsang at the end of the proceedings, was entirely consistent with his being a party to the proceedings all along.

17.  Given that we are satisfied, for the reasons explained above, that Mr Tsang was a party to the winding up petition, and is entitled to appeal against it, it is not necessary for him to rely on PricewaterhouseCoopers v Saad.  However, had it been necessary for him to do so, it seems to us that the situation here is not distinguishable.  In both cases, a non-party to a winding up petition would be seeking to intervene on appeal to have the order set aside, where the making of the order directly affected the intending appellant (and in the same way, by rendering them liable to examination under section 221).

18.  Mr Karas sought to argue that the present case was distinguishable from PricewaterhouseCoopers v Saad in a number of respects:

(1) Mr Tsang was (unlike PricewaterhouseCoopers) not the only target of possible examination under section 221.  This does not seem to us to be a relevant distinction.  We cannot see that the decision in PricewaterhouseCoopers v Saad would have been any different had there been other targets for potential examination.

(2) The court’s lack of jurisdiction in that case was patent on the face of the legislation, whereas in this case the question was one of how the court’s discretion to make a winding up order should be exercised.  However, this does not strike us as a persuasive distinction either – whether or not the lack of jurisdiction is obvious on its face, or only apparent after fuller argument, jurisdiction or the lack of it is a matter which the court must deal with.

(3) Mr Tsang had had an opportunity to be heard in the court below, and so had not been denied natural justice.  This too is not, to our mind, a valid distinction.  Indeed, as appears from paragraph 37 of the judgment in PricewaterhouseCoopers v Saad the lack of natural justice lies in the denial of the opportunity to challenge the order as a party to the proceedings with the right of appeal, so that merely having the opportunity to appear and present arguments as an informal amicus curiae, without a right of appeal, would not meet the objection.

19.  Further, we do not think that the point made in paragraph 38 of the Company’s submissions, which emphasises the Privy Council’s statement (in paragraph 36 of its judgment) that an anticipation that there will be a detrimental effect on one’s rights is not normally of itself sufficient to justify being added as a party to proceedings, is well founded – it is clear from the next paragraph of the Privy Council’s judgment that the situation they were faced with was one which fell outside the normal case, having regard to the lack of jurisdiction to make the winding up order, and the fact that obtaining an order for examination against PricewaterhouseCoopers was an object of the winding up.  In the present case, there is similarly an argument based on jurisdiction and a targeting (even if not exclusively) of Mr Tsang for examination.

20.  For all of the foregoing reasons, it seems to us that Mr Tsang is entitled to appeal against the decision of Harris J to wind up the Company.

21.  Turning to the question of whether the appeal should be dismissed as a result of Mr Tsang’s alleged contempt of court, we are satisfied that it should not.

22.  Mr Karas submitted that as Mr Tsang was in contempt of the examination order of 15 September 2014, and had neither appealed against that order, or sought a stay of it, the court should decline to hear his appeal.

23.  In our view, the modern approach to the question of whether or not a party in contempt should be heard by the court is as set out in Motorola Credit Corporation v Uzan [No 2] [2004] 1 WLR 113 at paragraphs 47 to 53.  In particular, the appropriate approach is to ask whether the interests of justice in the particular case are best served by hearing the party in contempt or refusing to do so, rather than to seek to apply a general rule that the court will not hear a party in contempt save in specified exceptional circumstances.

24.  That said, as the English Court of Appeal observed in paragraph 50 of its judgment:

“… , the proposition that the court will hear a person in contempt when the purpose of his application is to appeal against the order disobedience to which has put him in contempt, has the merit not only of good sense; it seems to us necessary to satisfy considerations of fairness. Whether or not a party is in contempt of court by refusing to obey an order irregularly made, or one consequent upon and/or ancillary to an order so made, the circumstances will be rare indeed where it can be right to shut him out from arguing an appeal or application to appeal against that order made in due time.”

25.  Here, Mr Tsang does not seek to appeal against the order made under section 221.  But he is appealing against the winding up order in respect of the Company, absent which the order in respect of which he is said to be in contempt could not have been made. Thus, while he does not appear to be disputing his non-compliance with the order to attend for examination, or that this could (or even would) be contumelious if that order had been justifiably made, he is saying that the order should never have been made as the Company should not have been wound up in the first place.  In our view, the interests of justice do not require that he should be shut out from prosecuting his appeal against the winding up order.  We do not think he should be criticised for failing to prosecute what would seem to be a hopeless appeal against the making of the examination order.  Similarly, while he might have applied for a stay of the examination order (the outcome of which application would have been uncertain), we do not think that the failure to make such an application should prevent him from being heard in the present appeal.  We therefore would not dismiss the appeal on this ground either.

26.  For the foregoing reasons, we dismissed the application.

27.  So far as costs are concerned, Mr Karas submitted that we should order that costs should be in the cause of the appeal.  Mr Bleach sought an order for costs in favour of Mr Tsang.  In our view, this was a stand-alone application brought by the Company which has failed.  In determining it, no consideration has been given to the merits of the appeal.  In these circumstances, we consider that the normal costs consequences should follow.  We therefore make an order that the costs of this application should be paid by the Company to Mr Tsang, to be taxed on the party and party basis if not agreed.  Mr Bleach did not seek a certificate for two counsel, and in any event we would not have been inclined to grant such a certificate.