RE CHINA MEDICAL TECHNOLOGIES, INC.

HCCW 435 /2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINGING-UP) NO 435 OF 2012

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D E C I S I O N

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Introduction

1. On 9 April 2014 I delivered my reasons for dismissing the Petition presented by the liquidators of China Medical Technologies Inc (“Company”) to wind up the Company in Hong Kong[1]. Where I refer to paragraphs in this decision unless otherwise stated I refer to paragraphs in my 9^th April 2014 Reasons for Decision (“decision”).

2. The Company was incorporated in the Cayman Islands where it was wound up on the grounds of insolvency on 27 July 2012.  On 26 November 2012 a petition was presented in Hong Kong by the liquidators of the Company in the Cayman Islands.  The substantive hearing of the Petition took place before me on 11 June and 26 and 27 August 2013.  On 5 September 2013 my Clerk wrote to the parties informing them that I would make an order dismissing the Petition and that the reasons would follow.  The order was not drawn up and before my Reasons were handed down the Petitioner wrote to the Court requesting the Court not to do so and indicating that they would apply to reopen the trial.  How matters then progressed is described in more detail in paragraphs 4 and 5.  In short an application was issued to adduce fresh evidence and re-open the trial.  This is my decision in respect of that application.

3. It is not necessary for me to repeat the circumstances in which the Petition came to be issued.  The contentious issue was whether or not the criteria by reference to which the Court determines a petition to wind up in Hong Kong a company incorporated in another jurisdiction had been met.  These criteria are:

(1) There is sufficient connection with Hong Kong.  In the context of insolvency there is commonly the presence of assets, but this is not essential;

(2) There is a reasonable possibility that the winding-up order would benefit those applying for it; and

(3) The court must be able to exercise jurisdiction over one or more persons interested in the distribution of the company’s assets.

4. I concluded that the first two criteria had been met but not the latter.  I also concluded that this was not necessarily fatal if the Court were satisfied that “the connection with Hong Kong was sufficiently strong and the benefits of a winding-up order were sufficiently substantial that a court considers it a proper case in which to exercise its discretion despite the third core requirement not being satisfied. The core requirements constitute guidance as to the circumstances in which the discretion should be exercised and their application can be moderated if the circumstances clearly call for it”: paragraph 50 of the decision.  I was not satisfied that this was the case and dismissed the Petition.

5. In the circumstances described in paragraphs 4 and 5 of the decision the Company issued the present application to adduce new evidence and reopen the trial.  The Company, or more accurately its liquidators, argue that they have since the trial of the Petition obtained new documents which reveal information, which demonstrates a stronger connection between the Company and Hong Kong than I concluded was demonstrated by the evidence before me at trial and that the benefits of a winding up in Hong Kong can now also be seen to be greater.

6. As I explain in paragraph 6 of the decision I allowed evidence to be filed and submissions made on behalf of an opposing contributory, Mr. Tsang, who was a former director and chief financial officer of the Company.  I also allowed evidence and submissions to be filed on his behalf for the present application.  At the hearing Mr. Tsang was represented by Mr. William Wong SC.  The Company was represented by Mr. Jason Karas.  On this occasion I informed Mr. Wong at the outset of his oral submissions that given the contents of the new evidence, and the fact that his client had no tangible interest in the liquidation, he should restrict his submissions to dealing with legal points.  I did so because in the light of the new evidence it was quite clear that Mr. Tsang’s evidence was self‑serving, could not be relied on and that Mr. Tsang, as opposed to his lawyers, was intent not on assisting the Court determine the jurisdiction issue properly, but avoiding his conduct being investigated.

Circumstances in which new evidence may be adduced

7. The Court will allow a party to adduce further evidence after a trial has finished in restricted circumstances.  The general guidelines are identified in Ladd v Marshall [2]. They are: (1) that the evidence would probably have an important influence on the result of the case; (2) that the evidence could not have been obtained at trial with reasonable diligence; and (3) that the evidence is credible.  Subsequent authorities have considered how these principles are to be applied in different kinds of situations.  I will consider these later in this decision, which it is best in my view to approach by considering first the new evidence and its importance.

The issue to which the evidence relates

8. I found in my earlier decision that the first and second criteria which I refer to in paragraph 2 above had been met.  In other words I was satisfied that there was a substantial connection with Hong Kong and that there were tangible benefits in making a winding-up order.  The reason I thought that there was a substantial connection are explained in paragraphs 14 to 20 and 56 and 58.  The reasons I thought that there would be a tangible benefit in making a winding‑up order are explained in paragraph 62.  The reason why I was not satisfied that the connection and the benefits were sufficiently great to justify making a winding-up order in the absence of creditors with claims of sufficient value in Hong Kong are explained in paragraphs 58 to 60.  At that time of the trial it appeared that the Company’s principle business activities had been carried out outside Hong Kong.  The liquidators were particularly concerned to investigate the matters referred to in paragraphs 29 to 34 of the Re-Amended Petition, which are quoted in paragraph 22 and their import summarised in paragraph 23. Essentially what was being suggested was that the circumstances in which approximately US$355,000,000 of the Company’s funds raised through its initial public offering and 2 subsequent bond issues, came to be paid in Hong Kong to a company called Supreme Well Investments Limited (“Supreme Well”) in exchange for the acquisition of medical technology, known by the acronyms FISH and SPR, from Supreme Well and its wholly owned subsidiary Molecular Diagnostics Technologies Limited (“Molecular”) (paragraph 12), were highly suspicious as the liquidators can find no evidence of anything of substantial value having been transferred to the Company.  The liquidators wished to investigate the transaction and, in particular, examine the Company’s former director and chief financial officer, Mr. Tsang.  I did not think that the fact that the transaction was substantially completed in Hong Kong was enough to lift this case into the exceptional category discussed in paragraphs 50 to 52. 

9. The new evidence relates to how the money received by Supreme Well came to be dealt with.  It is suggested that the new evidence indicates that the acquisitions of the FISH and SPR were indeed bogus and that the payment of US$355,000,000 to Supreme Well by a series of 55 cashier orders between November 2006 and December 2009 was part of a massive fraud a significant part of which can now be seen to have been conducted in Hong Kong and involved Hong Kong parties.  It is suggested that this represents such a significant part of the affairs of the Company that it elevates this case into the type which justifies making a winding‑up order even if the third criteria is not satisfied.

10. The transaction between the Company and Supreme Well and Molecular was, according to public announcements made by the Company at the time, an arm’s length transaction.  However, the new documents obtained by the liquidators show that the 2 accounts into which US$355,000,000 was deposited with Bank of China Hong Kong and the Bank of East Asia respectively, had as their sole authorised signatory Mr. Tsang.  The shareholder of the account opening documents is a Mr. Chen Zhong, who was allegedly the developer of the technology sold to the Company.  However, through a series of transfers made initially out of the Supreme Well accounts to various other accounts the large majority of the proceeds, US$294,500,000, ended up in accounts controlled by Mr. Tsang and the Company’s former Chairman and Chief Executive Officer Mr. Wu.  Mr. Chen seems to have received US$3,000,000.

11. For the purposes of the application the liquidators prepared a funds flow chart showing what was known at the time of the trial and what the liquidators have come to know subsequently. I have had this chart divided into pages and they are appended to this decision as it is the most convenient way of summarising the relevant information.  As can be seen it was known last July that the net fund raising of the IPO and 2 note issues was US$631,000,000 of which, after redeeming some of the notes, US$515,000,000 was available to the Company.  US$63,390,000 was transferred to China Medical Technologies Inc in Beijing.  The balance of US$451,000,000 was transferred to the Company’s account with Bank of China in Hong Kong and the signatories of that account were Mr. Tsang and Mr. Wu.  As I have mentioned a total of US$355,500,000 was transferred to Supreme Well by December 2009 of which US$150,500,000 went into a Bank of East Asia account and US$205,000,000 went into a Bank of China account.  This was known to the liquidators at the time of the trial of the Petition.

12. On the second page of the funds flow chart is shown what the liquidators have discovered since July 2013.  I will explain how they came to discover it later in this decision.  What can be readily seen is that by a series of transactions involving Hong Kong bank accounts opened in the name of companies incorporated in the British Virgin Islands, which were purportedly owned by persons who had some connection with the Company, all of which, other than Kam Hing Trading Co, had Mr. Tsang as one of the signatories, US$294,500,000 was transferred ultimately into accounts controlled by Mr. Wu or Mr. Tsang.  The individual transactions all appear to have taken place physically in Hong Kong.  None were made electronically and in fact in the case of each account it can be seen from the account opening forms that the applicant crossed out those sections requesting electronic banking services.  This is inconsistent with the Company’s assertion that the sale of FISH and SPR by Supreme Well and Molecular to the Company was an arm’s length transaction.

13. The way in which the accounts were opened and operated is also suspicious.  I will take the East Hope accounts with both Bank of East Asia and Bank of China as an example.  The Bank of East Asia account is described in the account opening documents as a private banking account and the documents indicate that it was to be used for investing in a balanced portfolio of equities and bonds.  In the forms Mr. Kwan Po Ming is said to be the beneficial owner of East Hope.  Mr. Kwan is a Hong Kong certified public accountant with an office in Kowloon.  Mr. Wu and Mr. Tsang, however, were the account’s only signatories, not Mr. Kwan, who I note has declined to provide any information voluntarily about the account.  Between 2 February and 23 December 2009 the account received US$60,000,000 from Supreme Well’s Bank of East Asia account.  There is no evidence of this money being invested. The account seems to have been simply a conduit for the onward transfer of money.  One would have expected the Bank of East Asia to have asked questions about the source of the very substantial sums being transferred to Supreme Well and then to East Hope.  If they had been told it was the proceeds of the sale of FISH and SPR to the Company one might have expected them to be suspicious about the fact that Mr. Tsang and Mr. Wu were signatories to the Supreme Well and East Hope accounts given their connection with the Company and its public statements that the sale was an arm’s length transaction.  It may be that the Bank of East Asia made a report pursuant to section 25A of the Organised and Serious Crimes Ordinance, Cap. 455; about that there is no evidence.  What is clear is that there is good reason to be very suspicious about the genuineness of the sale of FISH and SPR and that the way in which the proceeds of sale were dealt with subsequently require investigation.

14. There is now reason to think that a very large part of the Company’s assets has been misappropriated through a scheme operated in Hong Kong involving various persons who themselves are normally resident here (Mr. Tsang, Mr. Kwan and Mr. Chong Wing Hip) and using bank accounts in Hong Kong which were operated personally by Mr. Tsang in Hong Kong.  Mr. Karas in his submissions suggested that it can now be seen that the Company’s principal activity was probably conducting a large scale fraud and that, therefore, Hong Kong is properly characterised as the location of its principal activities.  I disagree with that characterisation which I think was driven by an assumption arising from the language that I use in paragraph 58 that in order to convince me that the Company’s connection with Hong Kong was sufficiently great to justify winding up the Company, although there are no material creditors in Hong Kong, it would have to be demonstrated that the Company’s “principal activities” took place here.  In a normal case that would be probably be so, but this type of description is not apposite in characterising a case such as the present one.  What is important is that the evidence demonstrates that something of great significance has occurred in Hong Kong so that it can fairly be concluded that not only does the Company have a substantial connection with this jurisdiction but that the connection is in a relevant way central to the liquidation of the Company.  In this regard it is relevant that the process of liquidation of an insolvent company involves not just the realisation of assets for ultimate distribution to creditors, but a broader investigation into its affairs.  Such an investigation serves two purposes.  The first is the identification of possible wrong doing that has caused loss to a company and which gives rise to a right to recover that loss from a third party.  The obvious example is a claim against a director for breach of fiduciary duty or misfeasance giving rise to a statutory claim under section 277 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance.  As Vaughan Williams J observed in Re Krasnapolsky Restaurant and Winter Garden Co [3]:

“…if the circumstances appearing by affidavit are sufficient to shew, prima facie, that an investigation into the formation or promotion of the company or the issuing of debentures or shares is required, that alone is an advantage to the unsecured creditors.”

Similar statements can be found in subsequent authorities including a number in Hong Kong[4]. As Morritt LJ explained when considering whether or not the second core requirement had been satisfied in the Court of Appeal’s judgment in Stocznia Gdanska SA v Latreefers Inc (No. 2 [5]):

“…potential claims for misfeasance and wrongful and fraudulent trading do provide a reasonable possibility of benefit to the Yard and other creditors of Latreefers so as to comply with the second core requirement.”

15. The second is the public interest in ensuring that the reasons for insolvency and the commission of possible offences are identified.  This was explained by Lord Walker in Re Pantmaenog Timber Co Ltd [6] when considering the purpose of a liquidation:

“One purpose is the orderly settlement of a company's liabilities and the distribution of any surplus funds…. The other is the investigation and the imposition of criminal or civil sanctions in respect of misconduct …. The first function is primarily a concern of the company’s creditors and shareholders; the second function serves a wider public interest.”

“Ever since the 1862 Act the court has made clear that these [misfeasance and disqualification] procedures exist for the protection of the general public, not in the interests of the creditors or shareholders of the particular company which is in liquidation.”

16. In the present case the evidence that has come to light since July of last year makes it clear there are strong prima facie grounds for suspecting that a very significant part of the Company’s assets have been misappropriated in Hong Kong using a number of Hong Kong bank accounts operated by persons in Hong Kong.  It is now clear that there is a very strong connection between Hong Kong and the affairs of the Company and that the events that took place in Hong Kong are central to the liquidation both in the sense that they need to be investigated in order that liquidators can determine whether claims are available against third parties and also in order to determine whether offences have occurred.

17. Mr. Karas drew to my attention that one advantage of ordering a winding up in Hong Kong is that it would potentially enable the liquidators to bring a claim under section 276 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance and the Cayman Islands does not have a similar remedy.  Mr. Wong suggested during his submissions that it was not permissible for the Court to have regard to the availability of claims in Hong Kong which are not available in the place of incorporation. The duties and obligations of the Company’s directors were properly determined by reference to the regime that applies in the place of incorporation he argued.  Allowing liquidators to wind up a foreign company in Hong Kong in order to avail its creditors of claims not available in the place of incorporation was to allow forum shopping.  I disagree and the reason why illustrates the significance of the three core requirements by reference to which the Court determines whether or not to exercise its discretion to wind up a company incorporated in a foreign jurisdiction.  The Court will not wind up an unregistered company unless the core requirements are satisfied or, if the third requirement is not satisfied, the connection with Hong Kong is so strong and the benefits of a winding‑up order so clear that the Court considers it an appropriate case in which to exercise its discretion notwithstanding the inability to satisfy the third core requirement.  The fact that one of the benefits to be obtained may be the availability of additional remedies is irrelevant.  If the connection with Hong Kong is strong enough to justify to making a winding-up order this indicates that it is an appropriate case in which to engage the Hong Kong insolvency regime, which includes a range of remedies and penalties which our legislature considers appropriate for dealing with the liquidation of companies, wherever they have been incorporated, who have sufficient connection with Hong Kong to justify winding them up here.  If it were to be established that the liquidators’ suspicions are well founded and that a Hong Kong resident has had a major role to play in the implementation in Hong Kong of a major fraud, which has resulted in, or contributed to, the insolvency of the Company in my view there is no reason in principle why that person should not be subject to any claims that our insolvency regime provides.  I would also note that section 276 is a discretionary remedy and any person subject to a claim under it can advance the kind of arguments identified by Mr. Wong in the misfeasance proceedings, which in my view would be the proceedings to which they might be relevant.

18. In my view the new evidence has demonstrated that there is sufficient connection with Hong Kong and sufficient benefit in making a winding‑up order to justify making such an order notwithstanding the Company’s inability to satisfy the third core requirement.  It follows that I consider that the evidence that the liquidators wish to adduce is credible and important; in fact it is determinative of the relevant issues.

The reasons for the delay in adducing the evidence

19. The second component of the guidelines identified in Ladd v Marshall is that the evidence could not without reasonable diligence have been obtained before trial.  In most cases there will be a party to the proceedings in which it is sought to adduce the new evidence who has been successful at trial and who, viewed from that party’s perspective, will be prejudiced if the trial is re‑opened.  The prejudice will take the form of additional time, costs and the stress which litigation by its nature generates.  However, this is not such a case.  There is no party with a tangible interest in the outcome of the application who will be prejudiced by it.  The only persons with a tangible interest are the Company’s creditors.  None of them are objecting to the application, which on the evidence before me would appear to be clearly in their interests.

20. Another reason why a court will not normally allow evidence to be adduced after trial unless it can be shown that the delay was not the fault of the party seeking leave is because it interferes with the efficient and proper use of the judiciary’s resources and process. This, along with the first factor, has to be balanced against the need to ensure that justice is done and justice will not normally be served by the court allowing a judgment to stand, which it has been shown is probably wrong.  The three factors identified in Ladd v Marshall are guidelines not strict rules and as Rix LJ observed in Voaden v Champion (‘The Baltic Surveyor’) [7] they “need to be applied as guidelines rather than rules and subject to the overriding objective of dealing with cases fairly”.  Consistent with this in my view where the evidence is sought to be adduced on an application to reopen a trial, as distinct from an appeal, the Court will apply a more flexible test: see Townsend v Achilleas [8].

21. It seems to me that on the unusual facts of this case, namely that there is nobody with a relevant, tangible interest objecting to it or who will be prejudiced by it, the second guideline is of little significance.

22. It also seems to me that the problem with this case is not so much that the evidence was obtained late as that the petition was issued before the liquidators had obtained all the evidence necessary to address properly the jurisdiction issue.  Mr. Karas argued that whilst with the benefit of hindsight this might appear to be the case it was not in fact so.  At this juncture it is necessary to explain how the new evidence came to be obtained.  Having been notified on 5 September 2013 of my decision the liquidators issued a subpoena in New York to obtain documents from Bank of East Asia’s New York branch containing information about Supreme Well’s bank account.  They considered this to be a speculative application and initially it was opposed.  To their surprise shortly before Christmas the Bank of East Asia voluntarily provided documents which demonstrated that Mr. Tsang was a signatory to the bank account.  Encouraged by this they sought further documents from the Police in Hong Kong.  This resulted in an application to the Court which the Police, after initially opposing it, did not contest. This also produced further helpful documents.  The decision was then made to apply to this court for an order that Bank of East Asia and Bank of China Hong Kong provide documents concerning the accounts of the recipients of funds from Supreme Well.  This was done by seeking a letter of request from the Grand Court of Cayman Islands for recognition of the appointment of the liquidators in Hong Kong and for an order for the production of those documents[9]. Mr. Karas accepted that it might be said that this latter step could have been taken much earlier, but he argued that just as prior to the handing down of my decisions in Re Yung Kee Holdings Ltd [10] and Pioneer Iron and Steel Group Co Ltd [11] the law in Hong Kong on the circumstances in which the Court would order the winding up of an unregistered company was not well developed, it was unclear until my decision in In re A company [12] to what extent the Companies Court considered itself able to provide assistance to a foreign liquidator.  I accept that viewed from the perspective of practitioners in November 2012, when the Petition was issued, perhaps the jurisdiction issue appeared less controversial than I considered it to be and that the proceedings were approached in what at the time was a fairly conventional way.  In any event it does not seem to me that on the facts of this case their ability or otherwise to obtain the evidence earlier is an important factor.

Conclusion

23. I grant the application for leave to re-re-amend the Petition in the form attached to the summons and adduce the further evidence of Mr. Borrelli.  I direct that the Petition be listed for hearing the Monday after the handing down of this decision at which I will deal with costs.