THE JOINT AND SEVERAL LIQUIDATORS OF CHINA MEDICAL TECHNOLOGIES, INC v. CHRISTOPHER BARRY ABBISS AND OTHERS

HCMP 2590/2017

[2019] HKCFI 501

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 2590 OF 2017

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D E C I S I O N

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1.   By a summons dated 16 April 2018 the defendants applied to set aside the ex-parte leave granted on 10 November 2017 to the liquidators of China Medical Technologies, Inc (“the Liquidators”) to issue contempt proceedings against them on the grounds of material non‑disclosure. In previous decisions I have explained the circumstances leading up to the commencement of contempt proceedings, most recently in my decision on 9 January 2019.  It is not necessary to repeat the background to the application.  I will simply start by explaining the alleged non-disclosure.

2.   On 24 February 2016, I made an order that KPMG Hong Kong (“KPMG HK”) disclose to the Liquidators various of the Company’s documents (“the Order”).[1] A proportion has been produced by KPMG HK in the course of the audit of the Company’s financial statements, others have been produced by KPMG Huazhen when assisting KPMG HK in the audits.  The Order was subsequently amended both by me and also the Court of Appeal, although in the case of the latter only to the extent of extending time for compliance.  There has been substantial failure by KPMG HK to comply with the Order.  In summary, KPMG HK say that it is because KPMG Huazhen refused to produce the documents to the Liquidators that they have been unable to comply with the Order.  I note in passing that the Order does not direct KPMG Huazhen to do anything, and KPMG HK have failed in any evidence to explain why they have not obtained at least their documents from KPMG Huazhen.  Be that as it may, it is the case of the defendants that by the middle of May 2017, KPMG Huazhen had made it clear that it would not provide copies of the documents to the Liquidators and this, say KPMG HK, has prevented further compliance with the Order. 

3.  On 26 May 2017, KPMG Huazhen and KMPMG HK received a letter which KPMG HK characterised, in their evidence, as an opinion issued by the General Office of the Ministry of Finance.  The relevant part of the opinion in translation says this:

“We acknowledge receipt of your request for instructions on whether audit work papers can be produced to the Hong Kong appointed liquidators. After consultation with relevant authorities in charge, the matters concerning the Hong Kong High Court’s judgment on production of audit work papers to the Hong Kong appointed liquidators fall under the judicial scope. The administrative supervision cooperation agreement between the Mainland and the Hong Kong Special Administrative Region is not applicable. There is no basis for us to approve the production of audit work papers to the Hong Kong appointed liquidators.

The Hong Kong courts, if necessary during hearing of civil and commercial matters, can request the courts of the Mainland to provide assistance in obtaining audit work papers in accordance with the Arrangement on Mutual Taking of Evidence in Civil and Commercial Matters between the Courts of the Mainland and the Hong Kong Special Administrative Region.”

KPMG HK’s solicitor Mr Smyth says this in [48] of his affidavit in support of his client’s application:

“On the basis of the MOF Reply Opinion, there was a route of procuring the Documents in the Mainland to be produced to the Liquidators, namely, by a request made by the Hong Kong court to the courts of the Mainland to provide assistance in accordance with The Arrangement on Mutual Taking of Evidence in Civil and Commercial Matters between the Courts of the Mainland and the Hong Kong Special Administrative Region (the ‘Arrangement’), which came into force on 1 March 2017.”

4.  It would appear that KPMG HK have interpreted the Ministry of Finance’s letter as a statement that the documents could be procured by use of a letter of request issued by the Hong Kong High Court to a court of competent jurisdiction in the Mainland, as a result of the provisions of the protocol referred to in the Ministry of Finance’s letter.  On this assumption KPMG HK’s lawyers apparently decided they should try and use this process, but in order to do so, there needs to be civil proceedings in Hong Kong in which the letter of request could be issued. 

5.  Three protective writs have been issued since 2013 by the Liquidators on behalf of the Company: HCA 1822/2013, HCA 1138/2014, and HCA 2276/2016.  They have not been served.  KPMG HK were advised that they would need to be served before letters of request could be issued.  KPMG HK’s solicitors wrote to the Liquidators proposing that this take place, and then a joint application be made for issue of the letter of request.  The Liquidators declined.

6.  On 21 June 2017, the Liquidators’ solicitors Lipman Karas wrote a lengthy letter to my clerk, which was intended for me and which I read, dealing with the hearing of further summonses relating to KPMG HK’s non-compliance with the Order and also the extension of the three writs to which I have referred.  The letter refers in detail on pp 2 and 3 to the 10^th affidavit of Ms Jacqueline Wong, and KPMG HK’s apparent intention to try and obtain production of the documents through the protocol to which I have referred earlier, and the service on 9 June 2017 by KPMG HK of notices under Order 12 requiring service of the protective writs for this purpose.  The letter explains why the Liquidators did not agree.  My clerk replied on my behalf on 28 June 2017 informing the parties that my diary could not accommodate additional applications in the period required.

7.  On 4 July 2017, KPMG HK issued summonses pursuant to Order 12 seeking orders that the writs be served in order that it could make an application for letters of request.  KPMG HK’s solicitors wrote to my clerk asking if I could hear the application, but my diary prevented this and it was fixed before Deputy High Court Judge To on 1 November 2017 who heard the application and dismissed it on 23 March 2018.[2]

8.  The statement in support of the ex-parte application to me for leave to commence contempt proceedings is dated 24 October 2017 (“the Statement”).  It is 20 pages long.  I was familiar with the background to the application and I was also aware of the application under Order 12 for an order that writs should be served at the time of the application.  At [29] of the Statement, the Liquidators referred to the matters that I have described in the previous paragraphs.  It is appropriate to quote them:

“29. On 31 May 2017 at or around 5:30pm, one hour after the time limit for compliance with the January 2017 Order, KPMG served on the Liquidators the Tenth Affidavit of Ms Wong dated 31 May 2017, which:

29.1. exhibited a letter from the Ministry of Finance (‘MOF’) dated 22 May 2017 (‘MOF Reply Letter’) apparently in response to KPMG Huazhen’s further ‘request for instructions on whether audit work papers can be produced to the [Liquidators]’, in which the MOF stated that ‘the matters concerning the Hong Kong High Court’s judgment on production of audit work papers to the [Liquidators] fall under the judicial scope’ and ‘[t]here is no basis for [MOF] to approve the production of audit work papers to the [Liquidators]’;

29.2. asserted that the MOF has in the MOF Reply Letter stated that the parties could utilise the Arrangement on Mutual Taking of Evidence in Civil and Commercial Matters between the Court of the Mainland and the Hong Kong Special Administrative Region (‘Mutual Arrangement’) to obtain the Mainland Documents (at [12]);

29.3. asserted that the Liquidators would need to serve the Protective Writs on KPMG in order to use the Mutual Arrangement, and stated that an application would be made to compel service (KPMG subsequently filed applications to compel the Company to serve the Writs on 4 July 2017) (at [16]–[18]);

29.4. referred to the letter from KPMG Huazhen to KPMG of 15 May 2017, in which KPMG Huazhen purportedly refused to produce the Documents to the Liquidators until a ‘written direction is issued by the relevant Mainland authority’ (at [13]); and

29.5. asserted that she had ‘no reason to believe’ that ‘KPMG Huazhen’ would be prepared to produce copies of the Mainland Documents to the Liquidators following the MOF Reply Letter, ‘[s]ince the MOF did not, in the MOF Reply [Letter], give any approval for copies of the Documents to be provided to the Liquidators’ (at [13]).”

9.  KPMG HK say that there were key admissions from the Statement that constitute material non-disclosure and, as a result, the leave should be set aside.  The suggested admissions are in short:

(1)   The failure to explain that the Order 12 application was fixed to be heard by DHCJ To on 1 November 2017, only about a week after the leave application was filed.  Mr Joffe, on behalf of KPMG HK, submitted that the Liquidators should have disclosed that the application was to be heard imminently, as this was relevant to whether leave should be granted, because I might take the view (and it was not, which I agree, for the Liquidators to assess whether I would or would not) that determination of the leave application should await the outcome of the Order 12 application.

(2)   The Statement fails to properly explain the context of the Order 12 application, which was relevant because KPMG HK’s attempts to find a way to comply with the Order was relevant to the consideration by the court of whether or not to grant leave.  If, argued Mr Joffe, KPMG HK had made the efforts to comply, they needed to be properly explained: China Metal Recycling (Holdings) Ltd v Chun Hei Man.[3] Mr Joffe said that the Statement fails properly to explain the context and in particular the following facts:

(i)   KPMG HK’s intention to apply for letters of request as explained in [18] of Jacqueline Wong’s 10^th affidavit filed in the section 221 proceedings.

(ii)  The Liquidators’ initially receptive attitude to the proposal to use a letter of request, which subsequently changed and became opposition to the Order 12 application.  Mr Joffe argued that this initial response and the Liquidators’ change of mind and opposition to the Order 12 application should have been disclosed, because it went to the issue of whether the Liquidators had acted reasonably which, if the court took the view they had not, was a factor weighing against committal. 

10.  Paragraph 18 of Ms Wong’s 10^th affidavit simply states:

“Once the writs have been served, KPMG HK can (and indeed, the Liquidators could) apply (pursuant to RHC O.39 rr.1-3) for letters of request to be issued by the Hong Kong courts to the relevant court in Mainland China seeking assistance (pursuant to the Mutual Arrangement) in obtaining evidence in the form of the Documents.”

I was aware that this was KPMG HK’s proposal from the 21 June 2017 letter and reading [18] at the time of reading the Statement.  I was also aware, when reading the Statement, that the Liquidators opposed the Order 12 application.  It seems to me that this is implicit in the Statement, but I knew it anyway, and the reasons why they did so because of the letter of 21 June 2017.  It was a matter that I did not think justified declining leave. 

11.  As is apparent from my previous decisions, I have dealt with all the applications in these proceedings and I am very familiar with the background to the application for leave to commence contempt proceedings.  It seems to me that KPMG HK’s complaints are nitpicking.  It is apparent from [29] of the Statement, particularly given my background knowledge, that KPMG HK proposed to use the Mutual Arrangement to obtain an order that would give KPMG Huazhen the comfort they demanded before releasing the documents.  I knew that the application had been issued in July 2017: [29] expressly states this.  The fact that the hearing was shortly to be heard, in my view, is neither here nor there.  I can see no reason why a decision by DHCJ To that the writs should be served would have altered my decision to grant leave. The fact was, as is clear from my earlier decisions, I had taken the view that KPMG HK have repeatedly failed to comply with the Order and leave was legitimately to be granted. 

12.  I will, therefore, dismiss the application.  I take it there is no dispute that the defendants should pay the Liquidators’ costs of the application and I will make that order.

Schedule

Defendants

Partners of KPMG who were Partners at all times from 5 February 2015