THE JOINT AND SEVERAL PROVISIONAL LIQUIDATORS OF CHINA MEDICAL TECHNOLOGIES INC. v. KPMG (A FIRM) AND OTHERS

HCCW 435/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO 435 OF 2012

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REASONS FOR DECISION

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1.  There are two summonses before the Court. A summons issued on 28 April 2017 by the Liquidators seeking an order for cross-examination of Chung Kam Ming and Bruce Zirlen of KPMG Hong Kong at a hearing before me to commence on 6 July 2017. A summons issued on 5 May 2017 by KPMG Hong Kong seeking effectively to stay an order requiring them to produce copies of documents to the Liquidators in the Mainland. I deal with them in turn.

Cross-examination

2.  The hearing in July is to consider the Liquidators’ application by summons issued on 31 October 2016 principally for orders that:

“1. … within 14 days of the service of this Order, the 1^st Respondent comply with paragraph 2 of the Order made by the Honourable Justice Harris on 24 February 2016 (‘February Order’) by:

1.1 the 1^st Respondent accessing all documents identified in paragraph 1 of the February Order (‘Documents’) located on servers in the Mainland through any of the available methods of electronic access to the Documents set out in the Affirmation of Chung Kam Ming (‘Chung 1’) and the Sixth Affirmation of Jacqueline Wong (‘Wong 6’), both filed on 23 September 2016; and

1.2 every partner of the 1^st Respondent who is also a partner of KPMG Huazhen (‘Common Partners’), including but not limited to the 9^th to 17^th Respondents, in their capacity as partners of KPMG Huazhen, take all necessary steps to ensure that paragraph 1 hereof is complied with;”

3.  Paragraph 2 of my order of 24 February 2016 ordered that:

“Insofar as the aforesaid Documents or copies thereof are located in Hong Kong or a jurisdiction other than the Mainland of the People’s Republic of China (‘Mainland’), or they are stored in a form as at 24 February 2016, which allows them to be accessed outside the Mainland, the Documents, or copies thereof, shall be produced by the 1^st Respondent to the Liquidators in Hong Kong on or before 23 March 2016 or such other date as the parties agree or the Court directs.”

4.  In short the Liquidators are not satisfied that the Respondents have complied with [2].  They complain that the various affirmations the Respondents have filed purporting to address the access issue leave it unclear precisely what the position is.

5.  When the October summons first came on before me I made directions for KPMG Hong Kong to file further evidence.  I explained that it seemed to me that if it is KPMG Hong Kong’s position that they have complied with [2] of the 24 February 2016 order it should be possible for this to be stated very clearly and avoid a forensic analysis of the discursive evidence filed to date. 

6.  KPMG Hong Kong filed a number of further affirmations, which touch on this subject.  The two most important in my view are the 9^th affidavit of Jacqueline Wong, who is a partner in KPMG Hong Kong and in the Quality and Risk Management Department, and the 3^rd affirmation of Chung Kam Ming who is a director in KPMG Hong Kong’s IT Department.  Ms Wong’s 9^th affidavit summarises her evidence in [7]:

“7. However, save for those Documents which have already been produced to the Liquidators pursuant to paragraph 2 of the February Order, there are no further Documents to be produced thereunder. In particular, for the reasons explained below:

7.1 as at 24 February 2016, there were no Documents located on servers in the Mainland which were accessible by the Respondents from Hong Kong;

7.2 as of now, there are no Documents located on servers in the Mainland which are accessible by the Respondents from Hong Kong.”

7.  Ms Wong then goes on to explain at some length her reasons for holding that view.  Mr Chung says something similar in [10] of his 3^rd affirmation and explains rather more succinctly his reasons for so stating.  Mr Shieh who appeared for KPMG Hong Kong, confirmed that it was his instructions that at the material times none of the Respondents could access the relevant stored documents on KPMG Huazhen’s server in the Mainland. 

8.  I asked Mr Manzoni if it was the Liquidators’ case that KPMG Hong Kong did have access to the documents stored on KPMG Huazhen’s server.  He replied that it was the Liquidators’ case that they had not been provided with confirmations that [7] of the February order and [6] of a subsequent order of 2 September 2016 required. Paragraph 6 provides:

“Within 21 days hereof, the 1^st Respondent is to file and serve corrective evidence to comply with paragraph 7 of the Order of the Honourable Mr Justice Harris of 24 February 2016 (‘February Order’). The deponent of the evidence shall have direct knowledge of the matters deposed to therein and in the evidence shall (a) provide full particulars of the steps taken by the 1^st Respondent for the purpose of compliance with paragraph 2 of the February Order; and (b) provide full particulars of the information technology systems of ‘KPMG China’ and the ability to access information stored in the Mainland from outside of the Mainland, including by way of addressing each of the matters set out in Annexure A.”

9.  As I understand it, it is the Liquidators’ position that if one scrutinises the various affirmations that have been filed one can find inconsistencies and evidence that raises questions that are unanswered.

10.  I do not understand there to be any material dispute between the parties as to the relevant principles.  They are summarised by Fuad JA (as he then was) in Wendy Wenta Seng Yuen v Philip Pak-yiu Yuen [1].  He says this:

“… the true rule must be that the court has an unfettered discretion to permit cross-examination on an affidavit but the applicant is not entitled to this right as of course. He has to establish that in all the circumstances of the case there is a good and sufficient reason for the application. He will not find this difficult where the evidence on the affidavits will result in what I might call a final order. He will find it more difficult in interlocutory matters, perhaps, for, as the judge below had in mind, great delay and expense might be entailed. It seems to me that what is essential for the applicant to show is that the proposed cross-examination might be productive of a useful result at the stage that the application is made. If no reason can be suggested for supposing that the cross-examination will then be helpful, the application will be refused in the discretion of the court, indeed, in certain circumstances it might be regarded as oppressive and, as such, an abuse of the process of the court.”

11.  The relevant question is whether cross-examination might be helpful in resolving the issues to be determined at the hearing in July.  Mr Manzoni suggested that the cross-examination would be helpful in establishing whether or not the documents on the servers in the Mainland could be accessed at the relevant times.  I disagree.

12.  KPMG Hong Kong’s position it seems to me is quite clear.  The documents could not be accessed.  Mr Manzoni did not point to any evidence to suggest that this was in some respect wrong.  What it seems to me the Liquidators have done is carry out a careful forensic analysis of the evidence and identified various paragraphs of various of the affirmations that they suggest leave in doubt whether KPMG Hong Kong’s position is strictly correct.  Even assuming, and I tend to the view that Mr Manzoni’s reading of much of the evidence is excessively pedantic, there are matters about which questions can be asked, the fact is that I can see no reason at all to think that either Mr Zirlen or Mr Chung are likely to be able to give anything other than fairly general answers that will be consistent with KPMG Hong Kong’s case.  For example, the Liquidators point to the evidence of Ms Wong in [26] of her 6^th affidavit, which reads:

“The hard copy files which have been produced for the Liquidators’ inspection in Mainland China have been scanned and stored in electronic form on a Mainland China server. This was done in anticipation of the need to produce these documents to the MOF for review of state secrets and sensitive information which did not occur. These scanned documents are subject to the same MOF direction as the physical files so that inspection of the scanned copies of the audit files can only take place within Mainland China.”

13.  The Liquidators complain that these documents are not referred to in Ms Wong’s 9^th affidavit and that the evidence filed to date only addresses access to those documents by KPMG’s audit engagement team and does not expressly state that no other partner or employee of KPMG Hong Kong could access them from overseas.  It seems to me that [7] of Ms Wong’s 9^th affidavit must be read as applying to all documents including those referred to in [26] of her 6^th affidavit.  The Liquidators do not point to any evidence that suggests that the scanned documents are not covered by [7].  Further no reason has been identified for thinking that either Mr Zirlen or Mr Chung would be able to say anything other than that they are not aware of any partner or employee of KPMG Hong Kong having access to the scanned documents.  I cannot see any sensible reason for reading Mr Chung’s 3^rd affirmation as leading to any other conclusion.

14.  In my view cross-examination is unlikely to assist in the determination of the summons in July and I dismiss the Liquidators’ summons and make a costs order nisi that the Liquidators and the Respondent’s costs of the summons be paid out of the assets of the company.

Production of Documents

15.  On Friday 5 May 2017 the Respondents sought leave to issue a summons returnable on Monday 8 May 2017 seeking an order that paragraph 3(1) of my order dated 24 February 2016 be varied and paragraph 3(2) be stayed.

16.  Paragraphs 3(1) and (2) provide:

“3. …

(1) the 1^st Respondent shall within 35 clear calendar days produce copies of the Documents to the Liquidators in the Mainland after redacting the information identified by Zhong Lun Law Firm as ‘sensitive information’;

(2) the Liquidators shall retain, maintain and keep safe the copies of the Documents provided to the Liquidators and any further copies whether in physical or digital form taken by the Liquidators in the Mainland until further order;”

17.  These paragraphs were introduced into the Order by a variation to its original terms made on the application of the Liquidators on 12 January 2017.  I shall refer to the February 2016 order as varied on 12 January 2017 as the “Order”.  The decision to make that variation was unsuccessfully appealed.  The appeal was held on 3 April 2017 and judgment handed down on 12 April 2017. 

18.  Paragraph 3(8) of the Order gave the Respondents liberty to apply specifically to allow them to seek a variation of the Order in the event that the Ministry of Finance took steps to prohibit provision of copy documents to the Liquidators in the Mainland as paragraph 3(1) required.  By the time the appeal came on for hearing the Supervision and Inspect Bureau of the Ministry of Finance had written a letter to KPMG Hangzhou, which is dated 6 March 2017, the material parts of which read as follows:

“We acknowledge receipt of your request for instructions on matters relating to the High Court of Hong Kong’s order to provide audit work papers of China Medical Technologies Inc. We will consult the relevant authorities and carry out the approval formalities in accordance with the working procedures, and revert to you with an opinion afterwards. Before obtaining any opinion in reply, you should strictly comply with the relevant laws and regulations. You shall not provide paper and electronic audit work papers overseas. You shall not allow access to and download of electronic audit work papers stored on a server in Mainland China from overseas.”

19.  The Court of Appeal took this development into account in reaching their decision.

20.  When the Respondents’ application came on before me on 8 May 2017 I asked Mr Manzoni whether he accepted that I should hear the application rather than the Court of Appeal as it seemed at least arguably to be seeking an alteration in the decision reached by the Court of Appeal.  Mr Manzoni said, fairly I think as the matter had come on quickly, that he was not sure, but did not object to me hearing it.  Having subsequent to the hearing given the matter further thought it seems to me unclear whether it is appropriate for me to deal with the application, but be that as it may having heard the application and the time for compliance with paragraph 3(1) expiring on 17 May it seems to be expedient for me to determine it.

21.  Paragraphs 35 to 39 of the Court of Appeal’s judgment addressed the MOF letter of 6 March 2017 and its impact on the conclusion that I had reached, namely, that no real risk of the MOF imposing a serious sanction against KPMG Hong Kong or KPMG Hangzhou had been demonstrated and that in the absence of a real risk the need for the Liquidators to have meaningful and effective access to the documents prevailed and justified paragraph 3(1) of the Order:

“35. The judge did not have the benefit of the latest evidence as we did. Even taking such evidence into account, we come to same conclusion as the judge: as the evidence stands, there is no real risk of the Ministry of Finance imposing serious sanctions against KPMG or KPMG Huazhen for complying with the January Order.

36. All the written responses from the Ministry of Finance (the letters of 6 March 2017 and 24 March 2016) referred to the written rules and regulations and there was no suggestion that any additional oral protocol has to be complied with.

37. As invited by Mr Coleman, we read these letters in the context of the oral discussions between the parties. At the same time, the Ministry of Finance was clearly aware of the judgment of Harris J and His Lordship’s analysis of lack of written laws or regulations which prohibit KPMG from complying with the January Order. Against such background, though we see no reason to doubt the veracity of the evidence on what had been said by the officials of Ministry of Finance orally in telephone conversations or meetings, we do not accept that those intimations would have the force of law or regulatory directives to back up any sanctions against KPMG in case of non-compliance.

38. In this connection, we have not lost sight of the evidence of Mr Wagner on soft law or directives in the PRC. However, with due respect, we find the evidence of Professor Yao to be more persuasive. If the Ministry of Finance has really intended to impose sanctions against KPMG or KPMG Huazhen in case of any breach of the terms communicated orally, we believe they would have set it out in writing.

39. As we said above, on the evidence before us, it seems that the main concern of the Ministry of Finance is that the papers or copies are not to be removed out of Mainland. Though (as discussed earlier) the January Order obliged the Liquidators to keep the copies in the Mainland, we accept that the Ministry of Finance may have a legitimate concern that it has no authority over the Liquidators.”

22.  Consequently the Court of Appeal dismissed the Appeal, but extended the time for compliance.

23.  It is understandable that following this decision KPMG Huazhen might have thought it appropriate to send a copy of the decision to the MOF and informing them that that they and KPMG Hong Kong intended to comply with it.  KPMG Hong Kong, however went further than this.

24.  KPMG Hong Kong drafted a letter, which is dated 26 April 2017 referring to the MOF’s letter of 6 March 2017, reporting on the progress of the Appeal.  The letter says this:

“The appeal was heard on 3 April 2017. It was heard in open court but subject to an order that there should be no reporting of the hearing without the leave of the Court of Appeal. On 12 April 2017 the Court of Appeal handed down its judgment of which a copy and a Chinese translation are enclosed. The Court of Appeal dismissed the appeal, on the basis that:

1. It did not see any risk of non-compliance with any written laws or regulations of the PRC if KPMG Huazhen were to provide copies of the Documents to the Liquidators, given that no state secrets had been identified therein and any ‘sensitive information’ had been redacted;

2. On its reading, the Notice does not prohibit the provision of copies of the Documents to the Liquidators in Mainland China;

3. It took the view that, while the MOF may prefer that copies of the Documents should not be given to the Liquidators, if the MOF really intended to impose sanctions upon KPMG Huazhen or KPMG HK, its instruction not to provide copies to the Liquidators would have been set out in writing; and

4. It did not perceive any real risk that the MOF would impose serious sanctions on KPMG Huazhen or KPMG HK for providing copies of the Documents to the Liquidators in Mainland China.

The Court of Appeal extended the time for compliance with the January 2017 Order for a further 35 days until 17 May 2017, by which date KPMG HK is obliged to provide copies of the Documents to the Liquidators in Mainland China.

Further to item 2 above, the Court of Appeal is of the view that the Notice stipulates that, before obtaining any opinion in reply from the MOF, KPMG Huazhen shall not provide paper and electronic audit work papers ‘overseas’.  We respectfully seek your clarification as to whether, as interpreted by the justices of appeal, copies of the Documents may be provided to the Liquidators in Mainland China and the only restriction on the provision of copies is that no paper and electronic audit work papers shall be sent ‘overseas’ or outside of Mainland China.  The accurate interpretation of this stipulation is critical.  If the Court of Appeal’s interpretation above is incorrect, we should inform the Hong Kong Court immediately and seek to vary the January 2017 Order.”

25.  The letter seeks “clarification” of whether the interpretation of the Court of Appeal was right or wrong.  It seems to me that this was not a legitimate way to proceed.  The matter had been determined and it was inappropriate for KPMG Hong Kong to try and, as they now do, reopen the matter by getting something new from the MOF.

26.  The letter was delivered to Director Wang of the MOF on 26 April 2017 by Len Jui, who is a partner in KPMG Huazhen familiar with the matter, and his colleague Priscilla Miao.  Mr Len explains that he took Director Wang through the letter.  He then says this in [12] to [15] of his affirmation.

“12. Director Wang responded that, after the MOF’s consultation with the Ministry of Justice and other relevant government bodies has been completed, a written direction would be issued to all CPA firms, which would not be a direct response to these proceedings but would be of general application. He said that the direction would take into account the memorandum of understanding, entered into between the Supreme People’s Court and the Hong Kong government in December 2016, which became effective on 1 March 2017.

13. A copy of the memorandum of understanding to which Director Wang referred, the ‘Supreme People’s Court Mutual Evidence Collection Arrangements Concerning Civil and Commercial Cases Between Courts in the Mainland and in Hong Kong Special Administrative Region’ (Fa Shi [2017] No. 4), is exhibited at ‘LJ-10’.

14. Director Wang stated that the focus in the present case should not be upon whether or not production of the Documents may be permitted take place within Mainland China. He stated that production of the Documents should follow the written direction, upon it being issued.

15. My clear understanding from the meeting with Director Wang, therefore, is that the MOF’s position is that copies of the Documents should only be provided to the Liquidators in compliance with the written direction and should not be provided until the written direction is issued.”

27.  Director Wang does not say that provision of copies of documents would infringe any law or regulation in the Mainland.  He seems to have said that he would like the matter to be left until the direction referred to in [12] had been issued. 

28.  In [38] of their judgment the Court of Appeal state that if the MOF really intended to impose sanctions for any breach of an instruction, they would have set this out in writing.  The present position is no different in that regard from when the matter was before the Court of Appeal on 3 April 2017.  There is no written instruction or statement from the MOF stating that copies of the documents should not be provided and that if they are the MOF may instigate some form of disciplinary action against KPMG Huazhen.  All the Court has been provided with is Mr Jen’s apparent understanding of what Director Wang would like to happen.

29.  It seems to me that in order for KPMG Hong Kong to succeed in the present application it is necessary for them to demonstrate that something has taken place since the hearing of the appeal, which materially alters the position that was before the Court of Appeal.  It does not seem to me that it has.  I, therefore, dismiss the application and make an order nisi that the Respondents pay the Liquidators costs.