24 January 2007
JSM recently acted for the Joint and Several Liquidators of Kong Wah Holdings Limited (In Compulsory Liquidation) ("Kong Wah") and Akai Holdings Limited (In Compulsory Liquidation) ("Akai") in successfully opposing appeals brought by The Grande Holdings Limited ("Grande Holdings") and others before the Court of Final Appeal ("CFA"). In its Judgment dated 15 December 2006, the CFA confirmed that the language and purpose of section 221 of the Companies Ordinance (Cap.32) ("s221 CO"), relating to the examination of persons by liquidators and production of documents to assist liquidators in the discharge of their duties, should be given a wide interpretation so as to enable liquidators to carry out their duties as effectively, quickly and economically as possible.
As stated in the Judgment of Mr. Justice Bokhary PJ and Mr Justice Chan PJ:
"Quite simply [the broad purpose of s221 CO] is to help liquidators carry out their duties as effectively, quickly and economically as possible. To that end, liquidators need to identify, at an early stage, what promising paths they can pursue and, let it never be forgotten, what blind alleys they had best avoid so as not to throw good money after bad."
In dismissing the appeals, the CFA noted that authorities in relation to discovery and other processes related to adversarial litigation (for example subpoenas) are so different in nature that they do not aid in the construction of s221 CO.
Akai (formerly listed on the Stock Exchange of Hong Kong) together with Kong Wah (the "Companies") were formerly part of the very substantial Akai group of companies which included some 300 subsidiary and associated companies. The Akai group collapsed in 2000, leading to the largest corporate insolvency in the history of Hong Kong. During the winding-up of the Companies, substantial assets were found to be missing in unusual or suspicious circumstances. The Liquidators' investigations into the numerous complex and substantial transactions had historically been hampered by a lack of records and information and the lack of assistance from former directors and executives of the Companies.
In the months prior to presentation of petitions, investigations revealed the substantive involvement of Grande Holdings, The Grande Group Limited (a wholly owned subsidiary of Grande Holdings) and others in the affairs and dealings of the Akai Group.
In order to pursue their investigations into Grande Holdings and others' involvement in the affairs and dealings of the Companies and various specific transactions, the Liquidators of the Companies applied for orders under s221 CO against Grande Holdings and the other Appellants. The application, as it related to the Appellants, was confined to the production of documents and information in respect of five specified matters or areas of investigation. At first instance, orders were made in terms of the Liquidators' application for the production of the requested documentation.
To assist liquidators in the discharge of their statutory duties, s221 CO gives the court various powers after the appointment of a provisional liquidator or the making of a winding-up order. The court may summon before it officers of the company, persons known or suspected of having property of the company or being indebted to the company, or any person deemed capable of giving information concerning the company. Such a person may be examined on oath and/or required to produce books and papers relating to the company under this section.
The Courts Below
At first instance, the Honourable Madam Justice Kwan granted all orders sought by the Liquidators of the Companies for production of documents (and the oral examination of other individual respondents, which was not the subject matter of any of the appeals). The corporate respondents appealed the orders for production to the Court of Appeal, which made one minor, clarificatory amendment to one paragraph of the orders. The appeals were otherwise dismissed.
The Appellants' challenge to the orders was confined to the Court's jurisdiction under s221 CO, including its jurisdiction in the secondary sense, meaning the Court's settled practice. The Appellants did not contend that the learned Judge at first instance had wrongly exercised her discretion in making the orders she did nor was there any evidence that compliance with the orders would be oppressive or unduly burdensome.
The Appellants' appeals to the CFA involved the following main objections to the orders of the Courts below:
(i) the orders amounted, in practice, to orders for discovery not production;
(ii) the documents sought by the orders had not been sufficiently identified (so as to leave the complying party in no doubt as to what documents they were required to produce);
(iii) the orders required a body corporate to produce information;
(iv) there was insufficient evidence to demonstrate the documents sought existed and were in the complying party's possession; and
(v) the orders assumed, without sufficient evidence, that documents 'relating to' current and former subsidiaries also, without more, 'related to' the company in liquidation.
In support of their appeal, the Appellants relied heavily on authorities relating to discovery, subpoenas duces tecum or witness summonses and letters of request.
Chief Justice Li, Mr Justice Bokhary PJ, Mr Justice Chan PJ, Mr Justice Ribeiro PJ and Lord Millett NPJ unanimously dismissed the appeals.
Lord Millett, who gave the leading judgment, and with whom the other Judges agreed, affirmed a wealth of local and overseas case law regarding the purpose, scope and application of s221 CO and its overseas equivalents.
Lord Millet in the course of his Judgment observed that the purposes of the section were to enable a liquidator to carry out his functions of (i) collecting in the assets of the company, settling its liabilities and distributing surplus funds to creditors; and (ii) investigation as to the causes of a company's failure including the conduct of those involved in the company's affairs in an as efficient, expeditious and cost effective manner as possible. The purpose of s221 CO was not limited to merely reconstituting the knowledge of the company; the section could also be used to discover facts and documents relating to potential claims which may be available to the company against third parties. In this regard, Lord Millet noted the important public interest in ensuring a liquidator obtains the information he needs to understand the company's affairs and the reasons for its failure.
Although the powers conferred on the court under s221 CO are necessarily wide, general and unlimited, their exercise is safeguarded by the fact that the court has a discretion to make or refuse the order sought or to modify or limit its terms. In the exercise of its discretion the Court endeavours to strike a balance between the reasonable need of the liquidator and the need to avoid making an order which is unnecessarily burdensome or oppressive.
In considering and dismissing the Appellants' objections to the orders, Lord Millett concluded that the Appellants' reliance on cases concerning discovery, subpoenas and letters of request were misplaced because they were concerned with obtaining evidence for resolving an existing dispute (i.e. ongoing litigation proceedings) and not with the gathering of information as part of a continuing process of investigation. In rejecting the Appellants' objections to the orders made below, Lord Millett notably observed:
1. "Fishing" or speculative expeditions for documents whilst not permitted in civil litigation discovery (where the issues in dispute are defined by the pleadings filed by the parties) are permissible under s221 CO where the liquidator is necessarily engaged in such an expedition to pursue his investigations;
2. Under s221 CO, the potentially burdensome task of going through and identifying documents which must be disclosed under the order falls on the party who possesses the documents, not on the liquidator who seeks their production. As a liquidator is usually a stranger to the affairs of the company, it would often be impossible for him to specify, in advance, the particular documents sought to be produced.
3. For the purposes of s221 CO, a body corporate can be required to give information by its proper officer by way of sworn answers to interrogatories.
4. It would not be sensible for the court to require a liquidator to first establish the existence of the documents before ordering their production. The respondent will know what documents exist, but the liquidator does not. It is therefore for the respondent to satisfy the court that the documents do not exist.
The CFA's decision in the Akai case is the first involving our top court's consideration of s221 CO which is described by Lord Millet in his judgment as "a vital part of the statutory insolvency regime." The CFA's decision is one of general importance and applicability to liquidators in Hong Kong (as well as other common law jurisdictions having the same or equivalent provisions) as it conclusively addresses many of the substantive issues often raised in contested s221 CO applications. For further information, please contact:
Name: Ian R.D. Chapman
Phone: +852 2843 2212
Fax: +852 2103 5031
Name: Nicholas D. Hunsworth
Phone: +852 2843 4417
Fax: +852 2103 5036
Name: Richard M. Tollan
Phone: +852 2843 4551
Fax: +852 2103 5197