CHINA FORESTRY HOLDINGS CO LTD (IN OFFICIAL LIQUIDATION)AND OTHERS v. KPMG (a firm)

HCCL 9/2019

[2020] HKCFI 2615

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO 9 OF 2019

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R E A S O N S   F O R   D E C I S I O N

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1.  There were 2 applications to adduce expert evidence at the trial. The parties had respectively taken out their Summons on 11 September 2020. There was urgency in dealing with the applications in light of the fact that the 50-day trial of this action was due to commence on 28 June 2021. Any further delay in putting in train the expert evidence might put the trial at risk. Accordingly, the applications were determined at the end of the hearing. There were my reasons for the determination.

2.  There is another Decision in this action which is to be handed down at the same time as this Reasons for Decision.  A summary of the background of this case can be found in that Decision (“Discovery Decision”). 

3.  There were potentially 5 areas of expert evidence, namely, (1) Audit; (2) Mainland Forestry Law and Practice; (3) Mainland Commercial Law and Practice; (4) Forensic Accounting; and (5) Cayman Islands Law.  There was substantial agreement between the parties on the expert evidence. 

4.  The need for such evidence in the fields of (1) to (3) was agreed.  Such agreement met with the court’s approval. 

5.  The Plaintiffs were in favour of appointing a Single Joint Expert (“SJE”) for all areas.  That was not agreeable by KPMG in respect of (1), (2) and (4). 

6.  The Plaintiffs disagreed with the introduction of expert evidence for (4) and (5), and maintained that SJEs should be appointed if ordered by the court.

7.  Much of the issues for the expert(s) in the 5 fields were agreed.  The issues were helpfully set out in a table attached to KPMG’s skeleton arguments (“Table”) with appropriate mark-ups to illustrate what was not agreed.  At the hearing, further agreement was reached by the parties on the issues.

Applicable principles

8.  The court was referred to the recent authority of Shenzhen Futaihong v BYD [2019] 2 HKC 175, at §§4-5, in which can be found the principles that guided the court in determining if expert evidence should be admitted and the directions for the same. 

9.  Paragraphs 8 and 9 of Shenzhen Futaihong were also important.  The Court of Appeal highlighted the duty of the court to manage this aspect of the case in accordance with the Underlying Objectives contained in O 1A, r 1.  Such dicta resonated with the observation by the court in Galleria v DBS [2018] HKCFI 773, §17, that the court should be more assiduous in controlling the admission of expert evidence.

10.  In Peace Mark v Chau Cham Wong Patrick [2017] HKCFI 1934, §§35-49, the court had set out the reasons for preferring SJE over separate experts (“SEs”).  In particular, the instruction of SJE served to avoid partiality and thus enhanced the quality of assistance to the court and to narrow down the issues (§§44-45). 

11.  In Chang Pui Yin v Bank of Singapore [2017] HKCFI 605, at §11, the court referred to the trend to rely on SJE with the confidence that he/she would be able to give all the necessary assistance required in order to address the concerns of both parties.

12.  O 38, r 4A(5) contained a non-exhaustive list of factors which the court might take into account in deciding whether to appoint SJE.  This court was also referred to the commentaries at Hong Kong Civil Procedure 2020, vol 1, [38/4A/2]. 

Mainland Commercial Law and Practice

13.  There was controversy over the need for evidence regarding reflective loss (C2 of the Table).  At the hearing, Mr Karas, who appeared for the Plaintiffs, quite fairly recognised that the law on the viability of this defence was not settled (see Topping Chance v CCIF CPA [2020] HKCA 478, §§35-42).  It would therefore not be right to exclude expert evidence on this issue. 

Forensic accounting

14.  At the hearing, Mr Karas agreed to the need to have expert evidence on the alleged loss represented by the “KUB Prepayments” and “2010 Guizhou and Yunnan Sham Transactions”. 

15.  However, Mr Karas proposed that, with its expertise, KPMG could agree to the fund tracing compiled by the Plaintiffs or to indicate the areas of dispute with the view to have the matters resolved by agreement or considerably narrowed down without incurring the costs of expert evidence.  To some degree, KPMG was receptive to the proposition subject to a number of conditions.     

16.  The court would certainly encourage the parties to take whatever course mutually agreeable which would be conducive to an expeditious and costs effective resolution of the issues.  On the other hand, bearing in mind that there was no time to waste, it was appropriate to grant the directions needed for the expert evidence in question.  Should the parties be able to come to agreement on the fund tracing, the directions would become redundant. 

17.  However, I disagreed with KPMG that part of Mr Borrelli’s evidence should be expunged.  I am unable to see how such evidence would constitute real unfairness to KPMG or why the expert would be unduly influenced by the same (see also paras 31 and 32 below). 

18.  As regards the need for forensic accounting evidence on the “true financial position” of the Group in 2009, the issue was argued at length in KPMG’s discovery application (see the Discovery Decision).  At best, the “true financial position” was of marginal relevance.  Further, the court agreed with the Plaintiffs that it was practically impossible to find out the “true financial position” due to, inter alia, the missing books[1]. The proposed expert evidence in this area was disallowed.

Cayman Islands Law

19.  The court agreed with the relevance of the 2 issues set out in the Table (E1 and E2).  Mr Karas complained that KPMG had produced no evidence on the availability of a defence akin to s. 903 of the Companies Ordinance, Cap 622 under Cayman Islands law to support its application.  There was merit in the criticism but the court was prepared to overlook the deficiency in light of the need to resolve the applications without delay.  In the event that it turned out to be a pointless exercise, the Plaintiffs might have an argument on costs. 

20.  I was satisfied that on the pleadings the construction of the indemnity provisions of the 1^st Plaintiff’s Articles of Association was in issue and such construction involved Cayman Islands law.  Accordingly, the Cayman Islands law evidence was approved by the court. 

SJE or SEs

21.  The Plaintiffs submitted that the appointment of SJEs would save time, enormous amount of costs and the court resources both before and at trial.  KPMG did not take issue with the saving of costs and time if SJEs were appointed[2].

22.  It was further submitted that the appointment of SJEs would serve to ensure the orderly and proportionate preparation of the trial.  I was inclined to agree given the complexity of this case, not least the number of experts involved.   

23.  Mr Yu, who appeared for KPMG, in his detailed skeleton arguments had taken every conceivable point on this issue.  Much of the arguments were focused on the Audit field.  The main argument was the need for the court to sample a range of different opinions. 

24.  Although the court was not altogether convinced that a SJE would be less capable than SEs to assist the court on the range of opinions (see Peace Mark, §46), it needed to take into consideration the likely degree of controversy, the value of the claim (US$115 million plus interest) and the importance of the issue (audit evidence would have a critical bearing on the issue of liability): see O 38, r 4A(5). 

25.  If KPMG, dissatisfied with the evidence of the SJE, applied to adduce their own evidence on the issue(s) which they did not accept, that might well put the trial in jeopardy.

26.  Further, Mr Yu had proposed directions for the SEs (including limitation on the size of the reports) which would mitigate the additional time and costs required for their evidence (as compared with SJE). 

27.  In these circumstances, and not without considerable reluctance, the court agreed with the appointment of SEs in Audit.

28.  As regards Mainland Forestry Law and Practice, KPMG seemed to suggest that the expert they had instructed was unique or rare in terms of his experience in Forestry Practice.  That was not accepted by the Plaintiffs and had given rise to concern on the Plaintiffs’ part on having a level playing field.  I was not convinced on the evidence that KPMG’s expert was not replaceable with a suitably qualified SJE. 

29.  I took the view that KPMG’s suggestion that the variation of practice of the Mainland forestry authorities required the court to sample a range of opinions was overstated.  I saw no reason why a suitably qualified SJE would not be in a position to advise the court on the variation of practice. It might just be a matter of strictness with which the rules and regulations were enforced in difference areas. 

30.  In respect of the costs already incurred by KPMG on instructing experts.  There was no evidence of the amount of such costs.  KPMG should be well aware that no expert evidence could be adduced without the approval of the court.  Pursuant to the order of M Chan J dated 16 July 2019, the issue of expert evidence would be considered at the 2^nd CMC[3]. If KPMG had decided to instruct their experts without the leave of the court, they had taken a risk with their eyes open (see Galleria, §10).

31.  Turning to Forensic Accounting, KPMG complained that the evidence of Mr Borrelli and Ms Deng were tantamount to expert evidence, and therefore constituted an unfair advantage to the Plaintiffs unless KPMG had their own expert.  I did not believe that the complaint was well-founded.  Neither Mr Borrelli nor Ms Deng was put forward as expert witness.  I was unable to see why the court would attach special weight to their evidence. 

32.  It should not be overlooked that KPMG had enormous expertise in accounting (including forensic accounting).  A SJE would be as much its expert as that of the Plaintiffs.  KPMG would be able to participate in giving instructions to the SJE and to comment on his/her draft report before finalisation, and if they saw any oversight or deficiency in the draft no doubt that would be pointed out. 

33.  Guided by the principles identified above as well as the Underlying Objectives, and taking a holistic view of the best way forward, I was in no doubt that SJEs were appropriate in all fields, with the exception of Audit. 

Expert issues

34.  The remaining disagreements were minor and resolved at the hearing. 

35.  In respect of issue D3 of the Table, it was noted by the court that the parties would endeavour to agree the quantum of the wasted notes issuance costs given that the majority of the constituents of such costs were documented.  Should they fail to do so, the specific disagreement(s) could be dealt with by the SJE. 

[1] See Discovery Decision, §§18-32.

[2] See its skeleton arguments, §59.

[3] The 2^nd CMC was held on 7 September 2020.  The court did not deal with the expert evidence at that hearing due to the scope of dispute.