AKAI HOLDINGS LTD (IN COMPULSORY LIQUIDATION) v. ERNST & YOUNG (A HONG KONG FIRM)

HCCL 29/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO. 29 OF 2004

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D E C I S I O N

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The application and the action

1.  This is a summons for discovery under Order 24 rule 7 of the Rules of the High Court taken out by Ernst & Young, the defendant herein (“EYHK”).  EYHK was the former auditor of Akai Holdings Limited (“Akai”), which was ordered to be wound up by the court on 23 August 2000.  This action was commenced by the liquidators in the name of Akai.  The writ was served on 21 November 2005 with a Points of Claim running to 457 pages.  Akai alleges that EYHK had breached its retainer and duties and was negligent in connection with its statutory audits of Akai for each of the years ended 31 January 1997, 31 January 1998 and 31 January 1999, and, in consequence thereof, Akai has suffered loss and damage exceeding US$500 million.  EYHK served its Points of Defence a year later; this runs to 527 pages.  The Points of Reply was served in April 2007.  The trial of this action is to commence in September 2009, with six months estimated.  This is very substantial litigation on any view.

2.  EYHK took out the discovery summons on 22 October 2007.  This came before Stone J at a case management hearing on 10 and 11 December 2007.  He acceded to Akai’s suggestion and adjourned the summons to this court, on the basis that it might be appropriate for this court, in the exercise of its jurisdiction in winding up, to consider its discretion under rule 62(2) of the Companies (Winding-up) Rules whether to order the disclosure of transcripts of examinations conducted under section 221 of the Companies Ordinance, Cap. 32.

3.  This application seeks discovery of transcripts or notes of interview conducted by the liquidators under section 221 and any documents produced by those interviewed in the process.  The persons interviewed and named in the summons are:

(1) Philomena (or Filomena) Lee also known as Lee Yin Yin, the personal secretary and assistant of James Ting;

(2) Domine (or Dominic) Ko, an accountant employed by Akai;

(3) Simon Fung, the financial controller of Akai;

(4) Miranda Hung, an accountant employed by Akai;

(5) Frank Holmes, a director of Akai;

(6) James Ting, the chairman and chief executive officer of Akai;

(7) Chuck Tam, the chief financial officer of Akai;

(8) Christopher Ho, an executive director of Grande Holdings Limited;

(9) Ruby Lee, the director of legal for Grande Holdings Limited; and

(10)   Sheryl Simmons, an American lawyer employed by the Grande group of companies.

4.  Apart from the above named persons, EYHK seeks the transcripts or notes of interview of other persons interviewed by the liquidators under section 221, the identities of which are not known to it, insofar as these persons have provided evidence relevant to this action.

5.  Of the ten named persons, an order under section 221 was made for their examination in respect of Simon Fung, Frank Holmes, James Ting, Chuck Tam, Christopher Ho, Ruby Lee and Sheryl Simmons.  The others were interviewed without an order for examination.  Extracts of the transcripts of the interviews with Domine Ko, Simon Fung and Miranda Hung, and the entire transcript of the interview with Philomena Lee, were provided by the liquidators to the prosecution and the defence in the criminal trial of James Ting on 13 May 2005.  They became exhibits and parts were read out at the trial.  So there was already a measure of disclosure to the public.  The transcripts of James Ting’s private examination have been passed to the Department of Justice in 2007 pursuant to a court order on the application of the Secretary for Justice under rule 62(2). 

6.  Unlike the liquidators, EYHK has no power to compel any one to assist and provide information.  Although EYHK can subpoena the named examinees to give evidence or produce documents at the trial, it would not have the benefit of obtaining information from them in advance for the preparation of its defence.  Besides, not all of those interviewed by the liquidators are in Hong Kong or have known whereabouts.  Chuck Tam suffers from an aortic aneurism and resides in Canada.  The liquidators have no information on the present whereabouts of James Ting, so it may not be possible for EYHK to serve him with a subpoena.  Furthermore, the liquidators have not indicated which, if any, of the examinees may be called as witnesses at the trial.

The liquidators’ position

7.  The liquidators opposed the application for discovery of transcripts or notes of interview conducted by them under section 221.  As for discovery of documents produced by those interviewed, the liquidators stated that to the extent the documents obtained by them are relevant to issues in dispute in the action, such documents have already been disclosed to EYHK.

8.  Their position was that the transcripts of examinations or notes of interviews (where they were conducted without an order under section 221) are a special class of documents produced under a unique statutory process in the insolvency regime, and should not be treated as if they were part of or equivalent to company documents and subject to discovery in the ordinary way.  They invoked rule 62 of the Companies (Winding-up) Rules, which provides the court with the discretion how to deal with the records of examinations.  It was submitted that in the exercise of the discretion whether to order discovery, the court would need to consider and balance the paramount interests of the winding up, the interests of the examinees, and the private interest of EYHK in seeking discovery.  EYHK would need to show discovery is for the purposes of the winding up of Akai and that release of the records would be beneficial to or advance in any way the purposes of the winding up.

9.  Furthermore, the liquidators claimed that the records of examinations are covered by both litigation privilege and legal advice privilege.  They were obtained in circumstances which attracted one or both heads of privilege and disclosure should not be ordered.

10.  Last but not least, the liquidators contended that the relevance of the records of examinations is not made out.  They are not admissible as evidence either for or against EYHK; they are not necessary for disposing fairly of the cause or matter or for saving costs.

11.  The liquidators described this application as a “wholesale disclosure” of all the records of examinations conducted under section 221 by them.  They said that if the application were granted, this would have far reaching ramifications in respect of all liquidations in Hong Kong and the use of the power to conduct examinations under section 221.  Disclosure of the records of examinations would have widespread ramifications for the examinees, who had given their answers in private in circumstances where no application for discovery was ever envisaged.  The liquidators castigated this as an attempt to undermine the established process of information gathering and investigation by the liquidator in a winding up and it amounted to an attack on the statutory scheme of information gathering and investigation used by the liquidator.  They cautioned against giving discovery as this would pose a danger to and undermine the effectiveness of the power given to liquidators in the insolvency regime. 

The issues

12.  There are five broad issues in this application.  I will consider them in the following order:

(1) whether the records of examinations are relevant and necessary for the fair disposal of the cause or matter;

(2) if the privilege claimed exists in fact;

(3) if the privilege claimed exists in law;

(4) if leave is required under rule 62 for disclosure of the records of examinations in a civil litigation brought by the company in liquidation; and

(5) if the answer to (4) is in the affirmative, is this a proper case to exercise discretion to order disclosure.

Relevance and necessity for fair disposal of cause or matter

13.  I am satisfied that EYHK has made out a prima facie case that the transcripts of examinations and notes of interviews are likely to be relevant to the issues in the action.  The liquidators said it would be necessary to review the transcripts “page by page, line by line” to determine their relevance.  That is beside the point, as EYHK is not required to establish the whole of a transcript is relevant.  The liquidators would only be required to disclose such parts of the transcripts as are relevant to the action.  They could seal up or redact those parts that are irrelevant and deal with confidential matters.

14.  In the examinations, the liquidators were concerned to investigate the impugned transactions and defalcations, how Akai operated internally, the roles played by the directors and key officers of Akai, the control of companies alleged to have received very substantial funds from Akai, the nature and workings of an internal ledger account maintained by Akai known as the BT Deposit account which is of great importance in this action.  These matters were explained in paragraphs 22 to 26 of the 4^th affidavit of the solicitor for EYHK.  His observations and inferences on the relevance of the transcripts have not been seriously challenged. 

15.  Mr. Kosmin, QC submitted for the liquidators that disclosure is not necessary for disposing fairly of the cause or matter or for saving costs, as a deposition taken at a private examination under section 221 is admissible against the person who was examined, but not against any third party (section 296(2A) of Cap. 32; Re Weihong Petroleum Co. Ltd., HCCW No. 19 of 1998, 29 June 2006, Kwan J, para. 13).  I agree with Mr. Lam, SC for EYHK that any objection to discovery on the ground that the transcripts are not admissible is flawed, as discovery in civil proceedings is not limited to documents that can be put in as evidence, on the well-known test in Compagnie Financiere du Pacifique v. Peruvian Guano Co. (1882) 11 QBD 55 at 62 to 63.

16.  It was also contended for the liquidators that as EYHK had been the auditor of Akai for over ten years, it should have extensive knowledge of the impugned transactions and would not require the assistance of the liquidators’ investigation to learn about the activities of Akai which are the subject matter of this action.  I do not agree with this.  One of the principal issues in the action is whether the impugned transactions were in fact improper or fraudulent.  It might transpire that the auditor was deceived.  On Akai’s own case, EYHK was not aware of the various defalcations which Akai alleges EYHK should have detected.  James Ting was charged and initially convicted of falsifying documents made or required for an accounting purpose.  His conviction was on the premise that the auditor was deceived. 

17.  As for the argument that substantial time and costs would be incurred by the liquidators in going through the transcripts to identify the relevant parts for disclosure, I am not persuaded that the time and costs spent in the exercise would be disproportionate, given the context of this action and the size of the claim.

18.  Subject to the submissions on privilege and the discretion whether to order disclosure under rule 62, I am satisfied that discovery of the transcripts is necessary for the fair disposal of the cause or matter in this action and for saving costs.  

If privilege exists in fact

19.  The liquidators have asserted that notes or transcript of notes made under section 221 are privileged documents in the same way that witness proofs taken by or on behalf of a company are privileged.  The comparison between a witness proof and a transcript of examination under section 221 is not well chosen.  A company has no power to compel a witness to give a proof or statement before trial, and an examination under section 221 is not taken by or on behalf of a company, it is “held under the auspices of the court, insolvency being ‘a process conducted by, or under the control of, the court acting through its officers, the liquidators’” (Re Wing Fai Construction Co. Ltd. [2006] 4 HKLRD 58 at 74H, para. 65, per Yuen JA, citing Hamilton & Ors. v. Naviede [1995] 2 AC 75 at 104G).

20.  Transcripts of examination under section 221 are not privileged unless they meet the necessary requirements of legal professional privilege.  Privilege does not, without more, extend to records of examinations conducted under this provision.  The decisions cited by Mr. Kosmin – The Palermo (1883) LR 9 PD 6; Learoyd v. Halifax Joint Stock Banking Co. [1893] 1 Ch 686; North Australian Territory Co. v. Goldsborough, Mort & Co. [1893] 2 Ch 381; Goldstone v. Williams, Deacon & Co. [1899] 1 Ch 47 – should be read in the light of the principle adopted by the House of Lords in Waugh v. British Railways Board [1980] AC 521 that for litigation privilege to attach to the depositions, they must be obtained for the dominant purpose of existing or contemplated litigation. 

21.  As mentioned earlier, the liquidators claimed both categories of legal professional privilege – litigation privilege and legal advice privilege.  Legal advice privilege applies whether or not litigation is contemplated or pending, but covers communications between lawyers and their clients whereby legal advice is sought or given.  Litigation privilege applies only where litigation is contemplated or pending, but covers all documents brought into being for the purposes of litigation (Three Rivers District Council v. Bank of England (No. 6) [2005] 1 AC 610 at 642C and 677C, paras.10 and 105).

22.  Legal advice privilege has no application to the transcripts of examination, as they are clearly not communications between the client and the lawyer seeking or giving legal advice.  This category of privilege applies only to communications between a client and his legal adviser, to documents evidencing such communications, and to documents that were intended to be such communications even if not in fact communicated.  The privilege does not extend to preparatory materials, even if prepared for the purpose of being shown to the lawyer or prepared at the lawyer’s request, and even if subsequently sent to the lawyer (Three Rivers District Council v. Bank of England (No. 5) [2003] QB 1556 at 1562D to 1563C, 1575H, 1577C to E, 1578E to 1579B and 1580H, paras. 4 to 6, 21, 24, 26 and 31; leave to appeal was refused by the House of Lords, see 1583G; see also Three Rivers District Council v. Bank of England (No. 6), supra. at 642C to 643F, paras. 10 to 13).

23.  In this instance, I need only be concerned with litigation privilege.  Barwick CJ’s statement of the principle in Grant v. Downs (1976) 135 CLR 674 at 677, which was adopted by the House of Lords in Waugh v. British Railways Board, supra. at 532G to 533D, 537G to H and 543H to 544B and by the High Court of Australia in Esso Australia Resources Ltd. v. Federal Commissioner of Taxation (1999) 168 ALR 123, is as follows:

“A document which was produced or brought into existence either with the dominant purpose of its author, or of the person or authority under whose direction, whether particular or general, it was produced or brought into existence, of using it or its contents in order to obtain legal advice or to conduct or aid in the conduct of litigation, at the time of its production in reasonable prospect, should be privileged and excluded from inspection.”

24.  In the context of a transcript of examination under section 221, this raises the question of whose purpose is the relevant purpose in the application of the principle.  Mr. Lam submitted it was not the purpose of the company or the liquidator, but the statutory purpose of section 221.  Even if it were otherwise, he contended there is no evidential basis to conclude that the dominant purpose of the examinations and interviews was to obtain legal advice or to conduct or aid in the conduct of litigation in reasonable prospect.  The onus is on the party refusing disclosure to establish his right to refuse (Waugh v. British Railways Board, supra. at 541G).

25.  I leave aside for the time being whether the relevant purpose should be the statutory purpose of section 221 and come back to this point when I consider if the privilege claimed does exist in law.  Assuming the relevant purpose to be the purpose of the liquidators, I turn to consider the evidence adduced by Akai.  The question of dominant purpose is a matter for the court to determine after consideration of the relevant evidence (Three Rivers District Council v. Bank of England (No. 5), supra. at 1583A, para. 35).  An assertion of the dominant purpose made by the solicitor is not conclusive (USA v. Philip Morris Inc. [2004] 1 CLC 839 at 849F, para. 44).

26.  The liquidators’ solicitor said in his affidavit that the interviews were all “conducted with a view to investigating and ascertaining whether [Akai] may have available to it valuable and recoverable causes of action including through legal proceedings”.  This would seem to suggest that investigating the possibility of bringing proceedings was but one of several purposes.  He did not put forward any basis for regarding it as the dominant purpose.  Nor did he indicate that the legal proceedings referred to were reasonably in prospect.  The prospect of litigation did not have to be greater than 50% for privilege to apply, but a mere possibility of litigation would not suffice (USA v. Philip Morris Inc., supra. at 856A to H, paras. 66 to 68).

27.  In the affidavit made by one of the liquidators, he stated that the examination “has been undertaken to enable the liquidators to discover information and documents which may be relevant to the identification and recovery of the assets of Akai through potential claims against third parties”.  He went on to state that “there is also an important public interest in liquidators obtaining information to understand the company’s affairs and to identify those guilty of misconduct”, that is not a purpose which would attract litigation privilege.  He confirmed that each of the examinations or interviews “has been conducted as part of investigations to determine whether or not there may be recoverable assets available to Akai through litigation”, and “a principal or dominant purpose of conducting the examinations and/or interviews is to submit the transcripts thereof to the liquidators’ legal advisers, to obtain advice and, subject to that advice, to pursue the recovery of assets through litigation, in the proper discharge of the liquidators’ duties.” 

28.  Mr. Lam has criticised the statements in this affidavit as heavily hedged and not in any way showing the dominant purpose of the examinations.  I am inclined to agree.  It is not sufficient for the relevant purpose to be “a principal or dominant purpose”, as this may suggest there are other principal or dominant purposes, and “the element of clear paramountcy which should … be the touchstone” (Waugh v. British Railways Board, supra. at 543H) would be lacking.  Furthermore, it does not appear from the above statements that at the time the examinations or interviews were conducted, legal proceedings were reasonably in prospect.  “A mere vague apprehension of litigation generally is not sufficient” (Jarman v. Lambert & Cooke Contractors Ltd. [1951] 2 KB 937 at 946, cited in USA v. Philip Morris Inc., supra. at 854H, para. 63).

29.  In Dubai Bank Ltd. v. Galadari [1990] BCLC 90, the liquidators claimed that the examination conducted under the equivalent of our section 221 was sought in order that they might be advised whether to institute the proceedings which they in fact instituted (at 95h).  On that evidence, Vinelott J held that the transcripts were privileged.

30.  In contrast, in Re Arrows Ltd. (No. 4) [1993] BCLC 424, the liquidators said their examination had the threefold purpose of enabling them to carry out their duties, to obtain information which would assist in protecting or tracing the assets of the company, and to form a view with the benefit of legal advice whether proceedings should be brought against any person, including the person who was examined.  Vinelott J applied the test of dominant purpose in Waugh v. British Railways Board and held that it could not be said the purpose of preparing for litigation was the dominant purpose.  The judge declined to direct the liquidators to assert legal professional privilege (at 429c to i; and on appeal in [1993] Ch 452 at 464F to H and 474G to 475A).

31.  I hold that the factual basis to establish a claim for litigation privilege has not been made out.

If privilege exists in law

32.  Mr. Lam further submitted that irrespective of whether the factual basis for claiming litigation privilege is established, as a matter of law and principle, transcripts of an examination under section 221 are not privileged, as the dominant purpose test cannot be met or does not apply for examinations conducted under this provision.  He advanced two broad reasons for this.  Firstly, it is the statutory purpose of section 221 rather than the liquidators’ purpose of conducting the interviews that should be regarded as relevant.  Secondly, proceedings under section 221 are inquisitorial in nature and litigation privilege, which is an essential component of adversarial procedure, has no place in relation to transcripts of examination obtained in investigative and non-adversarial proceedings. 

33.  In support of the first broad reason, he cited Secretary of State for Trade and Industry v. Baker [1998] Ch 356, in which Sir Richard Scott VC (as he then was) held that a report prepared under section 7(3) of the Company Directors Disqualification Act 1986 was not privileged as the report was statutory, notwithstanding it was brought into existence for the dominant purpose of litigation.  The material part of the judgment at 372D to F read as follows:

“But in the case of a statutory report the maker has no choice.  He is obliged by law to make the report.  The report is not procured by anyone.  The only relevant purpose, in my opinion, is a statutory purpose.  I would accept that the obvious statutory purpose underlying section 7(3), and also underlying section 7(4) for that matter, is that the report, or additional information, be made available to the Secretary of State for the purpose of his deciding whether or not to commence disqualification proceedings.  And I would accept that Parliament must have expected that in reaching his decision the Secretary of State would place the statutory report before his legal advisers in order to receive their advice.  But I do not accept that the question whether section 7(3) reports, or section 7(4) information, are to be protected by legal professional privilege is to be determined by reference to the purposes of the administrators who make the reports or by their expectations as to the use that will be made of the reports.  Nor do I accept that the question whether statutory reports are protected by legal professional privilege can be answered by reference to the ‘dominant purpose’ dicta expressed in cases where statutory reports were not in point and were not being considered.”

34.  Thus, the question whether the statutory reports could be withheld from discovery on the ground of legal professional privilege did not depend on the intentions or state of mind of the administrators who made the reports, or on the intention of the Secretary of State as to the use that would be made of the reports.  Whether the reports were privileged depended on “whether there is a public interest requiring disclosure to be afforded to these reports that is sufficient to override the administration of justice reasons that are reflected in the discovery rights given to litigants” (at 372H to 373A).  It was held there was no other public interest that required privilege to be accorded to the statutory reports, in the absence of any public interest immunity claim (at 376E).

35.  The above aspect of the judgment in Baker was cited with approval by Aldous LJ in Visx Inc. v. Nidex Co. [1999] FSR 91 at 104.

36.  Mr. Lam argued that by analogy the reasoning in Baker applies to information obtained by a person from a third party under statutory compulsion for use in litigation.  He relied on two Australian decisions – Southern Cross Airlines Holdings Ltd. v. Arthur Andersen & Co. (1998) 28 ACSR 455; and Trade Practices Commission v. Ampol Petroleum (Victoria) Pty. Ltd. (1994) 127 ALR 533.

37.  In Southern Cross, a party sued by a company in liquidation sought disclosure by the liquidator of the transcripts of examination of former directors and officers under section 596A of the Corporations Law.  The liquidator stated that the sole purpose for conducting the examinations was to obtain evidence for use by the company in prosecuting the action against that party and to determine whether the directors ought to be joined as defendants.  Drummond J approached the application by stating the general principle as follows:

“As a general principle, where a person obtains a document under statutory compulsion for the purpose of using it in litigation in which that person is, or is about to be, involved, it is the statute, not the person’s motive or purpose for procuring the document by invoking the statutory process, that governs whether that person can deny access to opposing parties in the litigation.” (at 457, lines 7 to 14)

38.  Under the statutory provisions considered in Southern Cross, the transcript could be used in evidence in legal proceedings brought by any person against the examinee; the court could give direction restricting access to the transcript, but no such direction was made in that case.  Confidentiality in respect of the transcripts was not present by virtue of the statutory provisions.  The judge further had this to say at 460 lines 44 to 49:

“The statute does not empower the liquidator to invoke the mandatory examination provisions of the Act solely for the purpose of conducting litigation in the course of his administration.  He cannot, because of acting with such a motive, divest himself of the other statutory obligations which may operate to impose on him duties which have nothing to do with the conduct of litigation, but which can arise from the information he obtains from such an examination.”

39.  Trade Practices Commission v. Ampol Petroleum was concerned with the applicability of legal professional privilege to the transcript of an examination conducted by the Trade Practices Commission pursuant to section 155 of the Trade Practices Act 1974 (Cth).  Likewise, it was held that the element of confidential communication was absent from an examination under this provision and the incidents of such an examination were to be implied from statute and did not give rise to legal professional privilege.  Davies J had this to say at 538 line 45 to 539 line 7 and lines 16 to 20 and 39 to 45:

“The TPC does not conduct such an examination solely to obtain legal advice but in pursuance of its statutory purposes.  It does so as a statutory authority established under the Trade Practices Act to undertake functions which the Act reposes in it.  One of those functions is to gather information and evidence with respect to contraventions or possible contraventions of the Act.  As the examination is conducted in the exercise of a statutory power and as the examination is coercive, the element of a confidential communication made for the purposes of the giving or receiving legal advice or the furtherance of anticipated existing or contemplated judicial proceedings is lacking.  The person who is examined is not in the position of a witness or a potential witness who, by voluntarily making a statement for use in legal proceedings, may, perhaps if the circumstances are appropriate, impliedly accept a duty of confidentiality with respect to the statement given.”

“In my opinion, a s 155 examination is an occasion of the exercise of statutory power, the incidents of which are to be implied from the statute.  It is not an occasion which gives rise to legal professional privilege.  I say nothing as to public interest immunity which stands in a different position or as to the power of the court, in the exercise of its discretionary power, to restrict discovery or production of such documents.”

“It follows that the motive which the TPC had in conducting the examinations did not determine the incidents of the examinations themselves.  They were examinations pursuant to a statutory power.  The communications made in the course of the examinations were subject to such duties as were to be implied from the grant of the statutory power, not from principles of common law and equity developed with respect to communications made in confidence by one person to another.” 

40.  Under sections 221(1) and (2), the court is empowered to summon a person and examine him on oath concerning the affairs of the company in liquidation.  The examination is a proceeding by the court and the liquidator whom the court allows to be active in the proceedings only does so by leave of the court; each question to the examinee is put by the leave of the court and on behalf of the court (In re North Australian Territory Co. (1890) 45 Ch D 87 at 95 to 96, per Fry LJ).

41.  Applying by analogy the reasoning in Baker and the Australian decisions, Mr. Lam argued that if any purpose is to be ascribed to an examination under section 221, it is not the purpose of the liquidator that matters, but the purpose of the court in ordering and conducting the examination, as it is the court who summons and examines the witness.  And as it is impossible to ascribe to the court a purpose independent from that of the legislation it is applying, the only relevant purpose must be the statutory purpose.

42.  An examination under this provision may be ordered upon the application of the liquidator, the Official Receiver, a creditor or a contributory, or upon the court’s own motion.  There may be a myriad of applicants each having his own purpose for applying for an order.  Mr. Lam submitted that the disclosure of the transcripts should not depend on the fortuitous motives of those parties.  Rather, it is the court’s decision as to whether or not the examination should be carried out and it is the court’s reasons that are material.

43.  Furthermore, it cannot be said that the statutory purpose of section 221 is dominantly connected with litigation.  It is a general investigative provision mainly to enable the court to reconstitute the state of knowledge that the company should possess, so as to carry out the liquidation in all its various aspects, of which litigation is just one possibility.

44.  As to the second broad reason premised on the inquisitorial nature of the jurisdiction in section 221, Mr. Lam cited the decision of the House of Lords in In re L (A Minor) [1997] AC 16, in which the distinction between adversarial and inquisitorial proceedings as regards privilege was first made.  There, the court was concerned with an assertion of litigation privilege in relation to a report prepared in the course of care proceedings under the Children Act 1989.  It was held that proceedings under the Act are investigative and non-adversarial, and as litigation privilege is a component of the courts’ adversarial procedure, it was by necessary implication excluded and did not extend to a report obtained by a party to care proceedings.  Lord Jauncey of Tullichettle said at 27D:

“Thus the court is seeking to reach a decision which will be in the best interests of someone who is not a direct party and is granted investigative powers to achieve that end.  In these circumstances I consider that care proceedings under Part IV of the Act are so far removed from normal actions that litigation privilege has no place in relation to reports obtained by a party thereto which could not have been prepared without the leave of the court to disclose documents already filed or to examine the child.”

45.  In re L was considered by Lord Scott of Foscote in Three Rivers District Council v. Bank of England (No. 6), supra. at 642C to D, para. 10:

“In In re L (A Minor) (Police Investigation: Privilege) [1997] AC 16, 26 Lord Jauncey of Tullichettle described litigation privilege as ‘essentially a creature of adversarial proceedings’ and held that the privilege could not be claimed in order to protect from disclosure a report prepared for use in non-adversarial proceedings.  Lord Lloyd of Berwick and Lord Steyn, at pp 30 and 37, expressed their agreement.  The Bingham Inquiry could not have been described as adversarial.  It was, as inquiries invariably are, an inquisitorial proceeding.  It was no doubt with In re L in mind that the Bank did not claim that the documents of which disclosure was being sought were entitled to litigation privilege.”

46.  Mr. Lam submitted that once the proper nature of the proceeding under section 221 is appreciated, that it is inquisitorial in nature, documents prepared or obtained by liquidators in the course of section 221 examinations are not covered by litigation privilege.  It is irrelevant that information obtained during the examinations may subsequently be used to obtain legal advice for adversarial proceedings.

47.  I am in agreement with Mr. Lam on his submissions.  Notwithstanding that the context and the statutes considered in Baker and the Australian decisions are different, I consider that they provide useful analogy on the right approach.  What is in common with section 221 is that information is obtained from an examinee under statutory compulsion.  It is the court’s purpose in ordering the examination, not the avowed purpose of the liquidators (or any other applicant) in invoking the procedure, which should constitute the relevant purpose for the dominant purpose test.  It may be that in the case where the application for examination is granted, the court’s purpose would coincide with the applicant’s purpose or purposes.  But that may not invariably be so.  The incidents of such an examination are to be implied from statute.  The communications made in the course of the examination are subject to such duties as are to be implied from the grant of the statutory power.

48.  In any event, as the proceedings under section 221 are inquisitorial, litigation privilege does not extend to protect the documents and information obtained in the course of the non-adversarial proceedings.

49.  I hold that the litigation privilege claimed for the transcripts of examination does not exist as a matter of law.  That leaves the question whether there is any overriding public interest preventing the disclosure of the transcripts, to be dealt with when I come to consider the exercise of the discretion under rule 62.

50.  Insofar as interviews were conducted informally, instead of examinations in court pursuant to an order under section 221, and records were made of the interviews, the above considerations would not apply.  Nevertheless, for the reasons set out earlier, the claim for litigation privilege fails as the factual basis for such a claim is not established.

If leave for disclosure is required under rule 62

51.  In Re Wing Fai Construction Co. Ltd. [2004] 3 HKLRD 357, the liquidators disclosed the transcripts in civil actions in which they or the companies were involved, including discovery by filing a list of documents.  I held that the contents of the transcripts were relevant to the issues in the proceedings concerned, that the use of the transcripts came within the terms of rule 62, consequently no leave of the court was required for the liquidators to disclose the transcripts in the civil actions (at 389J to 390A, para. 77).  This part of the judgment was upheld on appeal ([2006] 4 HKLRD 58 at 70J and 75E to J, paras. 38, 69 to 73).

52.  Rule 62(1) allows a liquidator to attend an examination of a witness under section 221 and to make notes of the examination for his “own use”.  This refers to use by the liquidator in that capacity in the course of administering the estate and would include civil proceedings in which the company is involved (see the decision of the Court of Appeal in Re Wing Fai Construction Co. Ltd., supra. at 75L, para. 69). 

53.  Disclosure of the transcripts by the liquidator in civil litigation he has brought in the name of the company for recovery of assets is to assist the beneficial winding up of the company, and is plainly a use within the purpose of the statutory procedure.  It is not for a purpose collateral to the liquidation and foreign to the purposes for which the transcript was obtained, as in the situation where depositions were supplied to the police, for which purpose leave to disclose was required under rule 62, as the Court of Appeal had held in Re Wing Fai Construction Co. Ltd., supra. at 70J, 73F, 74G, paras. 38, 56 and 64.  Dicta at In re Arrows (No. 4) [1993] Ch 452 at 495A that “the process of private examination does not leave the Court with a pool of information to be made available to any third party who may want to go fishing to see what he can find that might be helpful in civil or criminal proceedings” do not apply to the factual situation here.

54.  I have ruled earlier EYHK has made out a prima facie case that the transcripts are likely to be relevant to the issues in this action.  I hold that it is not obligatory for leave to be given for the liquidators to disclose the transcripts of examination in this action, although it may be prudent for liquidators, in the light of the judgment of the Court of Appeal in Re Wing Fai Construction Co. Ltd., supra. at 79H to 80A, paras. 94 to 96, to seek direction from the court under rule 62 before making disclosure.

Is this a proper case to exercise discretion under rule 62

55.  If, contrary to my ruling that no leave is required for disclosure of the transcripts of examination in a civil litigation brought by the company in liquidation, is this a proper case for the exercise of my discretion under rule 62(2) to order disclosure?

56.  Mr. Kosmin laid emphasis on an obligation of confidentiality owed by liquidators to examinees who supplied the information and documents in confidence.  He cited In re Barlow Clowes Gilt Managers Ltd. [1992] Ch 208 in which Millet J (as he then was) said at 217C to E there were powerful reasons for not permitting the voluntary disclosure of the transcripts by the liquidators, quite apart from public interest immunity, as “the information was obtained in circumstances of confidentiality and by assurances, express or implied, that it would be used only for the purpose of the liquidation.” In that case, the transcript was sought to be disclosed to defendants in criminal proceedings, for purposes “collateral to the liquidation and foreign to those for which it was obtained”.  Hence, it was unthinkable that the court should authorise its own officer, who had given assurances that the transcript would be used only for the purpose of the liquidation, to renege on their assurances.  This is distinguishable from the present situation; as the Court of Appeal had held in Re Wing Fai Construction Co. Ltd., use of the depositions in civil proceedings brought by the company is for the liquidator to discharge his functions in the winding up and is within the use covered by rule 62.

57.  Next, Mr. Kosmin submitted that EYHK has not demonstrated that disclosure of the transcripts of examination would benefit the liquidation of Akai.  He relied on the dicta in Re Esal (Commodities) Ltd. (No. 2) [1990] BCC 708 at 723H, in which Millet J said:

“In my judgment, that case [Re Esal (Commodities) Ltd. (1988) 4 BCC 475] is authority for the proposition that where leave is sought to make use of material obtained by the use or under the threat of sec. 268 proceedings, then, save in exceptional circumstances, leave should be granted only if the use proposed to be made is within the purpose of the statutory procedure, that is to say, that the use proposed to be made of the material is to assist the beneficial winding-up of the company.”

58.  In In re Barlow Clowes Gilt Managers Ltd., supra. and Macmillan Inc. v. Bishopsgate Investment Trust Plc. [1993] 1 WLR 837 at 841A to B, Millet J again spoke of the power to order disclosure under the equivalent of our rule 62 that it was exercisable for the benefit of the liquidation.

59.  Both the English Court of Appeal in In re Arrows (No. 4), supra. and the House of Lords in Hamilton v. Naviede, supra. had cast doubt on the principle formulated by Millet J in In re Esal (Commodities) (No. 2) and restated in In re Barlow Clowes Gilt Managers Ltd.  In the Court of Appeal, Dillon LJ said at 468B to C that the principle which Millet J deduced could not be regarded as a “valid universal test because it overlooks the fact that office-holders are by statute subject to obligations which are part of the statutory regulatory process over companies and company directors” and “these are obligations imposed in the public interest and are not ancillary to the supposedly overriding purpose of assisting the beneficial winding up of the individual company”.  On appeal to the House of Lords, Lord Browne-Wilkinson agreed with Dillon LJ and Steyn LJ that the remarks of Millet J were too wide and he said at 102F to G:

“Although the primary purpose of a section 236 examination is to assist the beneficial winding up of the company, it is not its only purpose.  In my view, where information has been obtained under statutory powers the duty of confidence owed on the Marcel principle [Marcel v. Commissioner of Police of the Metropolis [1992] Ch 225] cannot operate so as to prevent the person obtaining the information from disclosing it to those persons to whom the statutory provisions either require or authorise him to make disclosure.”

60.  Even if the beneficial winding up of the company were the only criterion or overriding purpose, I would consider that disclosure of the transcripts by way of fulfilling the company’s obligation to give discovery in an action brought by the company for the purpose of recovering assets is conducive to the beneficial winding up of the company.

61.  It was contended for the liquidators that disclosure of the transcripts is likely to prejudice the beneficial winding up of Akai and it would be contrary to the wider public interest in investigating the cause of Akai’s collapse, due to a number of reasons.  Once the transcripts are disclosed to EYHK, other parties engaging in litigation with Akai would follow suit and seek discovery in the same way, thus further eroding the liquidators’ right to keep the transcripts confidential.  As the transcripts would reveal the ongoing investigations, their status and the actions taken by the liquidators, disclosure would impede investigations and potential defendants may take steps to pre-empt or frustrate any proceedings which may be brought by Akai against them.  Other persons who were prepared to co-operate with the liquidators would be less inclined to do so, once they learned that any documents and information provided to the liquidators may be supplied to other parties, whose conduct would not be subject to the control of the court.  Similar applications for disclosure may be made in other liquidations and prejudice would likewise be caused, so this would have far reaching ramifications on liquidations generally.

62.  I am not persuaded by these arguments.  There is a public interest in requiring a party to litigation to make available all relevant documents to other litigants, as that would best serve the interests of justice and would assist and make more likely the achieving of a just result in litigation (Secretary of State for Trade and Industry v. Baker, supra. at 362G to H; Ventouris v. Mountain [1991] 1 WLR 607 at 611H to 612C).  I do not regard this as a private interest of EYHK in seeking disclosure, as contended by Mr. Kosmin.  If relevant evidence is not to be made available, it must be shown that there is another counter-availing public interest which necessitates the exclusion and that such counter-availing public interest outweighs the public interest in having all relevant evidence before the court (London & County Securities Ltd. v. Nicholson [1980] 1 WLR 948 at 956C).

63.  Mr. Kosmin submitted that the transcript obtained in an examination under section 221 is not evidence, just information which may be of use to the liquidator, in that the person examined is not examined as a witness, and the evidence obtained is not evidence against anybody else, citing In re Norwich Equitable Fire Insurance Co. (1884) 27 Ch D 515 at 521; Learoyd v. Halifax Joint Stock Banking Co., supra. at 692 to 693; North Australian Territory Co. v. Goldsborough, Mort & Co., supra. at 386 to 388; In re Poulson (A Bankrupt) [1976] 1 WLR 1023 at 1032E to 1034F.

64.  This is but a variation of the argument that transcripts of examination are a special class of documents and are protected by a claim of privilege, without more, an argument I have rejected.  The fact that the transcript is not admissible evidence against any third party is not a reason for refusing discovery.  I note also that in Poulson, complete strangers in a libel action in which the bankrupt was not a party had sought disclosure of transcripts.  This is a far cry from the present case.  

65.  Any discovery made by the liquidators in this action will be subject to the usual implied undertaking binding upon EYHK.  I have no reason to think that the undertaking would not be strictly observed.  Ongoing investigations would not be revealed and their progress impeded.  As for the need to maintain confidentiality, the liquidator cannot give absolute assurance to an examinee that any information provided would not be given to third parties.  Clearly, the liquidator can, of his own choice, use the information obtained in civil litigation brought in the name of the company for the recovery of assets.  In this instance, the liquidators had also provided extracts of the transcripts of some of the interviews to the prosecution and defence in the criminal trial of James Ting, and the transcript of examination of James Ting was supplied to the Department of Justice on an application made under rule 62(2).  The co-operation and candour of examinees would be procured effectively by the sanctions of the law, not by an expectation of confidentiality (In re Arrows Ltd. (No. 4), supra. at 476C, per Steyn LJ). 

66.  I am not persuaded that in ordering the liquidators to disclose to EYHK the transcripts of examination relevant to this action, the use of section 221 examinations would be inhibited or that the process of liquidation would be undermined.  I am satisfied this is an appropriate case to order disclosure of transcripts, if leave is indeed required under rule 62(2).

67.  Mr. Kosmin also raised the question of possible oppression to the examinees in providing their transcripts of examination to EYHK without notice to them.  I will deal with this in the next part of this decision.

The position of examinees

68.  Mr. Kosmin submitted that the position of examinees should be protected in that they should be notified of the application to seek disclosure of the transcripts of examination so that they could decide whether or not they would consent to the application and if they do not consent, they should be joined as respondents to the application to give them an opportunity to be heard.  He referred to Morris v. Director of the Serious Fraud Office [1993] Ch 372 at 384B to E, 385B to D and 387F; Soden v. Burns [1996] 1 WLR 1512 at 1529B to E, 1531E to F; Re Zhu Kuan Group Co. Ltd., HCCW No. 874 of 2003, 3 November 2004, Barma J, para. 61(3); Joint & Several Liquidators of Kong Wah Holdings Ltd. v. Herbert Tsoi & Partners, HCCW Nos. 49 & 50 of 2000, 19 November 2004, Kwan J, paras. 31 to 36.

69.  This point should have been taken by the liquidators long ago, bearing in mind that the summons was issued on 22 October 2007.  Had they done so, the position of the examinees could have been ascertained before this hearing.

70.  I will make an order along the lines in London & County Securities Ltd. v. Nicholson, supra. at 952A to E, which was followed in Soden v. Burns, supra. at 1529C to D, 1531F to G and 1533F.  This form of order should give adequate protection to the examinees.  The transcripts of examination should be disclosed, but only after prior notification to the examinees and subject to any application by any of them to set aside the order for disclosure within a specified period.

Orders

71.  I make the following orders:

(1) the plaintiff do within 21 days hereof make and file and serve on the defendant an affidavit or affirmation stating whether the documents or classes of documents specified in the schedule to the summons are, or have at any time been, in its possession, custody or power, and if not then in its possession, custody or power when it parted with them and what has become of them;

(2) subject to paragraphs (2) to (4) hereof, the plaintiff do within 14 days thereafter make available for inspection the documents or classes of documents specified in the said schedule;

(3) the plaintiff do forthwith notify the persons interviewed or examined whose transcripts and/or notes of interviews are to be disclosed of the terms of this order, by writing to them at their last known address or to the solicitors who represented them at the interview or examination; and

(4) unless an application to discharge paragraph (2) of this order is to be made within 21 days of the notification in paragraph (3), the documents in paragraph (1) will be made available for inspection.

72.  I make an order nisi that the plaintiff is to pay the defendant’s costs of the hearing before me in any event.