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

CACV 233/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 233 OF 2008

(ON APPEAL FROM HCCL NO. 29 OF 2004)

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J U D G M E N T

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Hon Rogers VP:

1.  This was an appeal from a judgment of Kwan J given on 30 July 2008.  The matter before the judge was a summons for discovery under Order 24 rule 7 of the Rules of the High Court.  The summons had previously come before Stone J but was adjourned to the Companies Judge on the basis that it would be appropriate for the Companies Judge to consider whether to exercise the discretion under rule 62(2) of the Companies (Winding-up) Rules to order the disclosure of transcripts of examinations conducted under section 221 of the Companies Ordinance, Cap. 32 (“the Ordinance”).

2.  The judge made an order that the plaintiff should disclose documents consisting of transcripts or notes of interviews conducted pursuant to section 221 of the Ordinance in respect of some 10 named individuals, as well as other interviewees who had provided relevant evidence pursuant to section 221 procedures and that the plaintiff should make available those documents for inspection subject to redaction of those parts that were “both irrelevant and deal with matters confidential to the plaintiff.”  The judge also made an order that those who had given interviews should be notified of the order and given an opportunity to object if they saw fit.

3.  At the conclusion of the hearing of this appeal, judgment was reserved which we now give.

Background

4.  The plaintiff was ordered to be wound up on 23 August 2000.  On 24 May 2004 the writ in this action naming some 69 plaintiffs was issued.  Although there were some 41 defendants there is now only one defendant in this action.  The writ was served on 21 November 2005 apparently with a points of claim running to 457 pages.  It was not considered necessary for the purposes of this application to draw this court’s attention to the terms of those points of claim, it is sufficient to say that the claim arises as a result of the audits carried out in respect of the plaintiff for each of the years ending 31 January 1997, 31 January 1998 and 31 January 1999.  It is alleged that the damages exceed US$500 million.  There have been points of defence which are no less extensive than the points of claim.  The action has been set down for hearing in September 2009 with six months estimated.

5.  As the judge recorded in paragraph 8 of the decision, the liquidators objected to the transcripts and notes of interviews being disclosed because it was said that they were a special class of documents which, because they came into existence in accordance with the provisions of section 221, should not be treated as if they were part of or equivalent to company documents and that they should not be subject to discovery in the ordinary way.  The liquidators also objected to discovery on the basis that the records of the examinations were subject to litigation and legal advice privilege.  There was also dispute as to the relevance.

6.  In paragraph 12 of the judgment the judge referred to what she described as five broad issues which arose on the application.  They were as follows:

“(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 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.”

7.  In a careful and detailed judgment the judge considered first whether the records of examinations were relevant and were necessary for a fair disposal of the action.  The judge came to the conclusion, without very much difficulty, that subject to the question of privilege and discretion the documents sought on discovery were relevant and necessary for the fair disposal of the action.

8.  The judge then turned to the question of whether privilege existed in fact.  In this respect the judge considered a large number of authorities, particularly those in respect of the question of litigation privilege.  With reference to the decision of the House of Lords in Waugh v British Railways Board [1980] AC 521 the judge approached the matter on the basis that litigation privilege attached to documents which are obtained for the dominant purpose of existing or contemplated litigation.  The judge held that the factual basis to establish a claim for litigation privilege had not been made out.

9.  The judge rejected any notion that consideration of legal advice privilege was relevant, simply on the basis that the documents concerned were not communications between the client and the legal adviser.

10.  The judge then went on to consider the question as to whether privilege existed in law.  The argument that had been raised on behalf of the defendant was that it was necessary to consider the statutory purpose of section 221 rather than any purpose that the liquidators may have had in seeking and conducting any examination.  Secondly it was said that section 221 examinations were inquisitorial and not adversarial.  In those circumstances it was said that litigation privilege did not arise.  The judge accepted the defendant’s argument and said that what had to be considered was the court’s purpose in ordering the examination not only the purpose the liquidators avowed had been the reason for invoking the procedure.  Having held that the section 221 proceedings were inquisitorial and that litigation privilege did not extend to protect documents and information obtained in the course of non-adversarial proceedings, the judge considered that litigation privilege did not exist as a matter of law.  That lead to the question which had to be answered namely whether there was an overriding public interest in preventing the disclosure of transcripts.  That, the judge held, would fall to be considered as a matter of the exercise of the court’s discretion.

11.  In that respect the judge considered that there was a public interest in requiring a party to litigation to make available all relevant documents to other litigants.  That was the course that would best serve the interests of justice and would assist and make more likely the achieving of a just result in the litigation.  It would appear that the judge had no difficulty in exercising the discretion so as to enable discovery to be given of the relevant documents.

This appeal

12.  On this appeal, Mr Scott SC, who appeared on behalf of the plaintiff, approached the matter on the basis that as a matter of general principle disclosure of transcripts of private examination, in the face of objections from the liquidator was inconsistent with the statutory purpose of section 221.  It was said that the defendant’s application amounted to an attempt to undermine the statutory scheme.  The first point taken was that disclosure would not assist the beneficial winding up of the company, which was the primary purpose of section 221.  It was said that disclosure ignored the confidentiality that attached to the transcripts and it facilitated impermissible use of the transcripts by third parties for their own private interests.  Counsel went further in indicating that if the judgment were left undisturbed it would have a profound affect on the status of section 221 proceedings.

13.  In my view, the starting point of consideration must be a determination of the purpose of the section 221 examinations.  There have been many cases in which the purpose of the statutory provisions enabling the court to order section 221 examinations has been considered.  It would appear that one of the most comprehensive was by Sir Nicolas Browne-Wilkinson V.-C. in the case of Cloverbay Ltd v Bank of Credit and Commerce International S.A. [1991] Ch. 90 at page 102.  He said the purpose of the corresponding section in the English Legislation was to enable the liquidator or administrator to get sufficient information to reconstitute the state of knowledge that the company should possess.  That was often necessary because, as he explained, liquidators may frequently find that company records are missing or defective.  He went on to say that the purpose was not to put the company in a better position than it would have enjoyed if liquidation or administration had not supervened.  His analysis of the statutory purpose of the court’s inquisitorial jurisdiction echoed many other cases.  In the course of argument, Mr Scott did not dissent from that analysis.

14.  On that analysis it would appear that the notes and transcripts of the examinations in the hands of the liquidators constitute what are, in effect, company records.  They would not, of themselves, attract legal professional privilege because they came about as a result of an inquisitorial process conducted by the court.

15.  In order for the liquidators to establish that any such notes or transcripts are covered by legal professional privilege it seems to me that they have to establish, at the very least, that the documents came into existence in circumstances which, as the judge said in paragraph 20, would meet the necessary requirements of legal professional privilege.  As the judge went on to say, adopting what had been said by the House of Lords in Waugh v British Railways Board, they must have been obtained for the dominant purpose of existing or contemplated litigation.  Such a case appears to have been Learoyd v Halifax Joint Stock Banking Company [1893] 1 Ch 686.

16.  In paragraphs 26-28 of the decision, the judge considered the evidence from the plaintiff and reached the conclusion that the plaintiff’s evidence was heavily hedged and did not show the dominant purpose of the examinations as being in relation to existing or contemplated litigation.  I would agree with the judge’s view of this aspect.  In this respect it may be noted that both in the court below and in this court the defendant pointed out that nowhere had the plaintiff revealed how it had put its applications for the examinations when those applications had been made.

17.  In those circumstances, it appears to me that there is nothing which takes the notes and transcripts of the examinations out of the position where they constitute notes and transcripts of an inquisitorial process conducted by the court.  There is no doubt that under rule 62 of the Companies (Winding-up) Rules the court has a discretion “as it shall think expedient as to the custody and inspection of such notes and the furnishing of copies of or extracts therefrom.”

18.  The judge below clearly exercised that discretion.  She came to the conclusion that it was a correct exercise of the court’s discretion to allow discovery of the notes and transcripts.  She went further and said that she considered that it was conducive to the beneficial winding up of the company that the company should fulfil its obligations to give discovery.  In my view, the judge was clearly justified in coming to that conclusion.  On the basis that it had not been established that the examinations had been conducted in circumstances which would otherwise have attracted legal professional privilege, it was open to the court in control of what were documents created as part of its own inquisitorial process to order release of the documents for the purpose of discovery.  The court did so because it considered that it was appropriate to do so in the circumstances of the litigation.  That it was clearly entitled to do.

19.  Litigation must be directed to achieving the ends of justice.  As was pointed out in the course of argument, litigation is now conducted on the basis that each party’s evidence is revealed well before the trial takes place so that the parties can present the full picture and, hopefully, a just result can be achieved.  The previous theory that one party was not entitled to “look it into its opponents brief” has lost much of its force because the court procedure of the old days, which might have been termed trial by ambush, has given way to a more open regime.

20.  Furthermore, there does not seem to me to be any difficulty as regards confidentiality.  All documents disclosed on discovery are subject to the rule that use can only be made of them for the purposes of the litigation.

21.  I would therefore dismiss this appeal and make an order nisi of costs in favour of the defendant.

Hon Le Pichon JA:

22.  I agree with the judgment of Rogers VP and the order he proposes.