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

_________________

_________________

_________________

_________________

D E C I S I O N

_________________

Application

1.  I have before me a summons issued by the Respondents (“KPMG”) seeking leave to appeal my order of 12 January 2017 (“Order”) varying the terms of earlier orders that I have made requiring KPMG to allow inspection of documents identified in the earlier orders to the Applicants, who are the provisional liquidators of China Medical Technologies Inc (“Provisional Liquidators”). 

Background

2.  The first order in the series leading to the Order was made by me on 24 February 2016.  The reasons for making the order, that was contested, are set out in my comprehensive decision of the same date. In short I ordered that KPMG allow inspection of primarily audit working papers located in the Mainland.  I rejected arguments that KPMG should not be required to do so because the documents might contain State secrets and KPMG would be in breach of various laws and directions from Mainland Regulators if they did so. I did, however, expressly provide in [5] of the order that “In the event of any matter occurring subsequent to the Order, which in the view of the Respondents or any of them inhibits or prevents them from complying with any part of this Order, there be liberty to apply for the terms of the Order to be varied.”  As is apparent from [93] of my decision the reasons for including [5] was to give KPMG the opportunity to return to court to have the order varied in the event that the authorities in the Mainland took a different view to the one I had reached on the impact of the laws and regulations brought to my attention by KPMG and as a result KPMG could not comply with the order without risk of becoming subject to some adverse action by Mainland authorities.

3.  On 3 June 2016 I made limited variations to the order of 24 February 2016 for the reasons explained in my decision of the same date.

4.  The Order arose from an application by the Liquidators to vary the existing order to require KPMG to provide copies of the documents to the Liquidators in the Mainland of which they had been ordered to allow inspection on the terms set out in the order.  My reasons for so ordering are explained in my decision of 12 January 2017.

5.  Paragraph 2 of the Order amends [3] of the 24 February 2016 order to provide in [3(1)] that KPMG produce copies of the relevant documents to the Liquidators in a redacted form (the reasons for the redactions are not relevant) within 35 days.  Paragraph 3(6)‑(8) directed that KPMG inform the Ministry of Finance (“MOF” the authority who were dealing with the regulatory aspect of the matter in the Mainland) of the Order, my decision and provide translations and gave KPMG liberty to apply.  As I explain in [16] of my decision of 12 January 2017 the reason for so ordering was to allow the MOF the opportunity to take steps to prohibit KPMG from producing copies of the documents and, if this happened, to give KPMG the opportunity to come back before me and to seek a variation of the Order.

Circumstances in which leave to appeal will be granted

6.  The principles by reference to which the court determines an application for leave to appeal an interlocutory order, which involves the exercise of a discretion are not in dispute.  It is convenient to quote from the written submissions of Mr Wilson Leung who appeared on behalf of KPMG:

“2. Leave to appeal will be granted only if the applicant can show that there is reasonable prospect of success. This involves the notion that the prospects of succeeding must be ‘reasonable’ and therefore more than ‘fanciful’, but without having to be ‘probable’: SMSE v KL [2009] 4 HKLRD 125, §17 (Le Pichon JA).

3. In the Judgment, this Court exercised its discretion to vary its order dated 24 February 2016 (‘February 2016 Order’) in substantially the way sought by the Liquidators but not in the way sought by the Respondents.  In an appropriate case, the Court of Appeal can overturn such an exercise of discretion.  This can be done if the exercise of discretion was plainly wrong; based on a misapprehension of the facts; and/or failed to take into account relevant matters: see e.g. Topwell Corp Ltd v Kwan Kam Kee [2014] 5 HKLRD 1 (CA), §§4, 38.”

Grounds of Appeal

7.  The relevant paragraphs of the grounds of appeal attached to the summons read as follows:

“2. In deciding whether to vary the February 2016 Order, and if so in what manner, the Judge needed to take into account and balance the following factors:

(1) The real and serious risk that KPMG Huazhen would be exposed to severe sanctions, penalties, and other regulatory punishments from the PRC government authorities (especially the PRC Ministry of Finance (‘MOF’)) if KPMG Huazhen: (i) provided copies of the subject documents to the Applicants (as opposed to allowing the Applicants to inspect the documents at KPMG Huazhen’s premises); or (ii) allowed the Applicants to inspect the subject documents in a manner which did not meet the conditions expressly laid down by the MOF in discussions between the MOF and KPMG Huazhen on 18 April 2016 (the Respondents’ evidence of such discussions not having been contradicted by any evidence from the Applicants); versus

(2) The alleged convenience to the Applicants of being provided with copies of the subject documents rather than being given access to inspect the documents at KPMG Huazhen’s premises.

3. In the premises, the balance lay between:

(1) On the one hand, making an order which had the potential of exposing KPMG Huazhen to severe sanctions, penalties, and other regulatory punishments from the PRC government authorities; and

(2) On the other hand, the convenience of the Applicants (given that the Applicants already had access to the documents in question and continued to have such access).

4. In the premises, the Judge’s starting point should have been that:

(1) the risks set out in paragraph 2 above were not in any sense equal in nature;

(2) the balance lay in making an order which did not give rise to the risks in paragraph 2(1) above, save in exceptional circumstances.

The Judge erred in failing to approach the matter on this basis or with this starting point.

5. Further, by varying the February 2016 Order in the way sought by the Applicants but rejecting the proposed variations sought by the Respondents, the Judge was in effect ordering the Respondents to flout the express conditions laid down by the MOF against KPMG Huazhen, for the mere purpose of enabling the Applicants to access the subject documents in a more convenient manner.”

8.  The main thrust of the grounds of appeal would appear to be that I did not give sufficient weight to the risks of ordering provision of copy documents in the Mainland and, in particular, [5] I ordered KPMG to flout conditions laid down by the MOF in agreeing to the Liquidators being given access to documents.  Before me Mr Leung put the case, as it seems to me, differently.  He submitted that the court had approached the matter from the wrong starting point, which was, he argued, that the court should not require KPMG to flout terms of the protocol approved by the MOF, which allowed the Liquidators access to the documents, but which expressly prohibited provision of documents, unless genuinely exceptional circumstances had been demonstrated by the Liquidators.  He further submitted that where a risk had been demonstrated it was not permissible for the court to address it by putting in place, as I have done in the present case, a mechanism for managing the risk.

9.  This was not the way the matter was argued before me, but more importantly it is inconsistent with what I understand to be the relevant authorities.  In [93] of my decision of 24 February 2016 I explain the relevant principle as explained by Chadwick LJ in Re Mid East Trading Ltd [1998] 1 BCLC 240, 257A-C, which was not in dispute at the October 2015 hearing, namely, that in deciding whether or not to grant an order for production the court had regard to “any risk that compliance with an order would or might expose the [respondents] to claims for breach of confidence, or to criminal penalties in the jurisdiction in which the documents are.” In other words the court undertakes a balancing exercise that takes into account the risk that any order may expose the respondent to some risk of being accused of breaching a contract, law or possibly a regulation.  Mr Leung has cited no authority suggesting that this is wrong and that if such a risk is demonstrated an order should not be made unless exceptional circumstances can be shown and it is impermissible for the court to address the risk by putting in place a mechanism for managing it.

10.  I am not satisfied that it has been demonstrated that there is a reasonable prospect of the Court of Appeal concluding that I applied the wrong principle in assessing the application. 

11.  It seems to me that the correct approach is to undertake a balancing exercise taking into account the risks identified by KPMG and if appropriate structure any order to provide a mechanism to manage the risks.   I do not understand KPMG to suggest that the Order does not do this. The Order envisages and requires KPMG to inform the MOF of the new Order and the reasons it has been granted and gives KPMG the opportunity to return to court and ask for it to be varied if the MOF objects to KPMG complying with it.  It seems to me that in so ordering I was giving weight to the possible difficulties the order might cause to KPMG and expressly providing a mechanism of which the MOF would be informed, which would enable the Order to be changed if the MOF took the view that provision of copy documents was unacceptable.  Therefore, if the correct approach is to undertake the kind of balancing exercise to which I have referred it seems to me that KPMG has not demonstrated a reasonable prospect of establishing that the balancing exercise failed to take into account relevant matters or was plainly wrong.

12.  I therefore dismiss the application for leave.

13.  Mr Leung asked me to order a stay of the Order pending determination of an application to the Court of Appeal for leave to appeal.  This was opposed by Mr Manzoni who appeared for the Provisional Liquidators principally on the grounds that KPMG are seeking to stay the Order in order to avoid the MOF’s position becoming clear rather than because unless it is stayed the appeal will be rendered nugatory.

14.  I am not satisfied that the Order should be stayed.  What I will do of my own motion is to extend the date for production of documents until 12 noon on 10 March 2017.  That way the Order remains in force.  If the circumstances justify it KPMG can always apply for a further extension.

15.  KPMG will pay the Provisional Liquidators costs of the application for leave to appeal and the application for a stay.