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10 March 2015
In an important judgment handed down recently by the Court of First Instance in Hong Kong, the companies judge ruled on the ambit of the power to order a person to produce documents to a provisional liquidator pursuant to Section 221(3) of the Companies (Winding-Up and Miscellaneous Provisions) Ordinance (referred to as the 'Winding-Up Ordinance').(1) For now and pending any appeal, the judgment confirms that the scope of documents "relating to the company" that have to be produced to a liquidator (pursuant to Section 221(3) of the Winding-Up Ordinance) is narrower than the matters in respect of which a person can be examined on oath concerning the "affairs of the company" (Sections 221(1) and (2)). In so doing, the judgment gives a more literal interpretation of the power to order production pursuant to Section 221(3) without reference to Section 221(1).
Going forward, the judgment suggests that liquidators that seek to push the parameters of Section 221(3) will invite greater challenge from those on the receiving end of applications for production and further judicial scrutiny.
The insolvency regime in Hong Kong did not change on the introduction of the new Companies Ordinance (Cap 622) in March 2014, save that the winding-up legislation and rules were hived off into the Winding-Up Ordinance.
In order to assist provisional liquidators in Hong Kong, Sections 221(1) and (2) of the Winding-Up Ordinance give the court the power to summons and examine on oath an officer of the company or any other person who has (among other things) information concerning the "dealings, affairs, or property of the company". In contrast, the related but distinct power to order the production of "any books and papers in his custody" is stated to be by reference to those books and papers "relating to the company" (Section 221(3)).
Section 221 of the Winding-Up Ordinance has its origins in old English companies legislation.(2) Similar, but not identical, statutory provisions exist in other common law jurisdictions (eg, Canada, New Zealand, Australia and Singapore).
Section 221 is well known to insolvency practitioners in Hong Kong and to those who regularly represent respondents to applications for request for assistance from liquidators (eg, former officers of the company and auditors).
In practice, liquidators seeking documents pursuant to Section 221(3) of the Winding-Up Ordinance often seek wide-ranging orders for production to assist them in the winding-up. This has generated quite a bit of case law in Hong Kong, with respondents (often unsuccessfully) trying to rein in liquidators' attempts to push the scope of production of documents.
China Medical Technologies Inc was incorporated in the Cayman Islands and listed on NASDAQ, before being wound up and delisted in 2012. In Hong Kong, the company operated as an unregistered foreign company with a number of businesses. The principal purpose of the winding-up proceedings in Hong Kong was to enable the provisional liquidators to examine persons said to have knowledge of the company's affairs – in particular, the company's former chief financial officer (the defendant).(3)
In this particular case, the liquidators sought orders under Section 221(3) of the Winding-Up Ordinance requiring the defendant to produce documents for the purpose of assisting in recovery of the company's property – primarily the proceeds of an initial public offering and two subsequent bond issues. In the main, these orders were granted because the documents sought related to the company and would assist the liquidators in establishing claims to recover the company's assets.
The liquidators also produced evidence that a significant part of the company's assets had been misappropriated using a number of bank accounts in Hong Kong allegedly operated by the defendant or his associates (and possibly also involving his wife or ex-wife). Therefore, the liquidators sought wider-ranging orders that (among other things) the defendant be examined and produce documents relating to certain of his personal affairs, such as his purported divorce and his financial dealings with identified third parties.
The liquidators argued that such wider production and examination would assist in the recovery of the company's property and, as such, Section 221(3) of the Winding-Up Ordinance should be interpreted with reference to the wider scope to allow the examination of a person concerning "the dealings, affairs or property of the company" (Section 221(1) of the Winding-Up Ordinance). In essence, the liquidators argued for an expansive interpretation of Section 221(3) focusing on the recovery of claims and the meaning of the company's 'property'.
The problem with such an interpretation is that it contradicts case law in Hong Kong which holds that the meaning of the words "relating to the company" in Section 221(3) should not be interpreted by reference to the wider purpose to permit examination on oath (Section 221(1)); namely, the two powers are not coextensive.(4)
The liquidators sought to get around this difficulty by reference to similar powers that exist in English and Australian legislation.(5) However, those provisions are not identical and they provide for wider coextensive powers (ie, examination and production) relating to the company's affairs – the very thing missing in Section 221(3) of the Winding-Up Ordinance.
The judge declined to order that the defendant give production (under Section 221(3) of the Winding-Up Ordinance) of his private papers such as his bank accounts and divorce documents, while accepting that (under Sections 221(1) and (2)) the defendant could be asked questions as to the company's assets in his or his wife's (or ex-wife's) control.
The judgment notes that the wording of Section 221 is different from similar provisions in English and Australian legislation and that, in any event, the English and Australian cases cited by the liquidators' lawyers were in the main to do with claims against creditors or contributories.
In short, the judgment holds that it is a stretch too far to interpret the legislation in Hong Kong by reference to similar, but not identical, powers in English and Australian legislation. Indeed, as the judgment notes, the different wording in Section 221(3) of the Winding-Up Ordinance (without reference to Section 221(1)) is deliberate and reflects the fact that Hong Kong's insolvency legislation has not been revised.(6)
As a result of the judgment, the liquidators can examine the defendant as to the value and recovery of any actual or contingent claims that the company may have and as to its assets, but they cannot require the defendant (or his wife or ex-wife) to produce documents that relate to his (or her) personal affairs.
In balancing the interests of the liquidators against any possible oppression to the defendant, it remains the case that the court is likely to consider that an order for examination under Section 221(2) of the Winding-Up Ordinance is more oppressive than an order for production of documents under Section 221(3), provided that the latter does not include the defendant's private papers.(7)
The judgment is important but not surprising. The wording of Section 221(3) of the Winding-Up Ordinance is clear. Although frustrating for the liquidators when dealing with a defendant determined not to assist the court (and against whom serious allegations are made), the outcome in the case suggests an attempt to obtain too wide a range of documents. On the wording of Section 221(3) of the Winding-Up Ordinance, the judgment is correct.
That said, it will not be a surprise if the liquidators seek permission to appeal to the Court of Appeal, arguing for a purposive interpretation of Section 221(3). Such an interpretation is not supported by the actual language of that section.
For further information on this topic please contact David Smyth or Samuel Hung at Smyth & Co in association with RPC by telephone (+852 2216 7100) or email (email@example.com or firstname.lastname@example.org). The RPC website can be accessed at www.rpc.co.uk
(1) Provisional Liquidators of China Medical Technologies Inc v Samson Tsang Tak Yung  HKEC 224, HCCW 435/2012.
(2) English Companies Act 1862.
(3)  2 HKLRD 997 and  HKEC 1438 (HCCW 435/2012).
(4) Re Weihong Petroleum Co Ltd (No 2)  2 HKLRD 747.
(5) Section 236 of the Insolvency Act (England and Wales) and Section 596B of the Corporations Act 2001 (Australia).
(6) See Paragraphs 48 and 52 of the judgment. At Paragraph 52, the judgment notes that if the scope of production under Section 221(3) of the Winding-Up Ordinance is to be extended, that is a matter for legislative reform in Hong Kong.
(7) Re Kong Wah Holdings Ltd v Grande Holdings Ltd (2006) 9 HKCFAR 766, at 782H; Provisional Liquidators of China Medical Technologies Inc v Samson Tsang Tak Yung (supra note 1), at Paragraph 52.
Warren Ganesh assisted with the preparation of this article.
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