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) PROCEEDINGS NO 435 OF 2012

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D E C I S I O N

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1.  On 24 February 2016 I made an order (“Order”) for the production by the 1^st respondent, KPMG, of documents to the Liquidators and handed down lengthy reasons for so doing. On 26 April 2016 KPMG issued a summons seeking an order which would provide for the way in which the documents to be produced pursuant to paragraph 3 of the Order should be made available to the Liquidators. They also sought an order that, to the extent that paragraph 2 of the Order covered back‑up tapes in Hong Kong, provided a protocol for determining the parameters by reference to which KPMG would decide which back‑up tapes needed reconstructing.

2.  For present purposes paragraph 3 of the Order can be divided into two parts.  The first are those sub‑paragraphs that do not relate to audit working papers, namely, sub‑paragraphs 1.1 to 1.3 and 1.5 to 1.11 and those that do, namely, sub‑paragraph 1.4.  KPMG’s first application is premised on the assumption that for reasons discussed in my reasons for the Order there are restrictions on their freedom to make available to the Liquidators audit working papers.  It seems to me, as I explained in my earlier reasons, that KPMG have not advanced any reason why they should not give production of documents, which do not fall within sub-paragraph 1.4 and none of the evidence that has been filed for the present application changes this in my view.  Accordingly, KPMG should give the Liquidators access to those documents and they should do so within 7 clear days or such other period as the parties agree or the court directs.  KPMG wish to impose some conditions on access, primarily that a representative of KPMG is present.  It seems to me that this is unnecessary and I agree with the Liquidators that they should be free to inspect the documents and discuss amongst themselves what they find whilst doing so without a representative of KPMG in the room. I consider this reasonable as in the normal course they would have been given copies if they wished them and would have been able to read them in private.  The current arrangement results from KPMG’s concerns about the removal of documents from the Mainland.  I will, therefore, order that access is given to the documents between the hours of 9:30 am to 5 pm Monday to Friday, other than public holidays, or as otherwise agreed by the parties and that production takes place in a room without the presence of a representative of KPMG or their legal or other advisers unless agreed by the Liquidators.

3.  So far as the audit working papers are concerned, sub‑paragraph 1.4, KPMG say that the current position is this, and I summarise, the Ministry of Finance has agreed to inspection subject to certain conditions, which are contained in paragraph 1 of the summons before me:

“i) The fact that the Liquidators have been permitted access to the Documents in Beijing shall remain confidential;

ii) Documents assessed by KPMG Huazhen’s external PRC Counsel to contain information which amounts to a state secret or is otherwise sensitive and whose passing to an overseas institution or individual would be prohibited by Article 6 of the PRC’s Provisions on Strengthening Confidentiality and Archives Administration of Overseas Issuance and Listing of Securities of 2009 shall be redacted prior to access being provided to the Liquidators;

iii) Staff from KPMG Huazhen and from their external PRC counsel shall be present when access to the Documents is provided to the Liquidators;

iv) No copies of the Documents may be made by the Liquidators; and

(v) The Documents must not be removed by the Liquidators from KPMG Huazhen’s premises in Beijing.”

The documents have already been inspected by external counsel who have identified 50 documents as containing sensitive information but no State secrets.  In respect of those documents KPMG wish to file further evidence including opinion evidence from a lawyer in the Mainland and for there to be a further hearing to consider whether the Order should be varied in respect of those documents.  This I indicated at the hearing I would permit and adjourn the summons insofar as it is concerned with those documents with one day reserved, the date to be fixed in consultation with counsels’ diaries.  I order that KPMG file such further evidence as they wish to rely on by 5 pm on 21 June 2016. The Liquidators have leave to file evidence in reply by 5 pm on 12 July 2016.

4.  So far as the balance of the audit working papers are concerned I order that KPMG give access to them at KPMG’s Huazhen office in Beijing on the terms referred to above pending substantive determination of KPMG’s application for amendment of paragraph 3 of the Order.  It is a matter for the Liquidators whether they wish to access the documents on that basis pending the determination of KPMG’s application.

5.  Paragraph 1 of the Order applies to KPMG’s back‑up tapes in Hong Kong.  I appreciate KPMG’s desire to limit reconstruction of the back‑up tapes to those that include only documents caught by paragraph 1. However, I accept the Liquidators’ argument that it is difficult for them to agree any particular parameters for limiting reconstruction other than those that arise naturally from the terms of paragraph 1.  KPMG are better placed to assess how to determine what tapes to reconstruct.  I do not intend to vary the Order to introduce a protocol for agreeing parameters.  It does seem to me sensible for KPMG to send to the Liquidators their parameters for reconstructing and searching the back‑up tapes and inviting comments, if any, and I would expect that Liquidators to deal with this constructively. What is not clear to me is how long it will take to reconstruct the back‑up tapes.  I direct that KPMG inform the court in writing within 7 days how long the process will take to complete and for a list of documents obtained from the back‑up tapes or copies of those documents to be available to the Liquidators in Hong Kong.

6.  I adjourn the question of who should pay the costs of reconstructing the back‑up tapes until after production of the documents obtained from the tapes are available.

7.  So far as the costs of the hearing on 10 May 2016 is concerned I order that the costs are paid by KPMG to the Liquidators.  KPMG has not provided access to the majority of the documents covered by paragraphs 1 and 3 despite the fact that their reasons for applying to vary the Order only applied to audit working papers and the back‑up tapes in Hong Kong.