A A

B HCA 1822/2013 and HCA 1138/2014 B

and HCA 2276/2016 (Heard Together)
C [2018] HKCFI 655 C

D D
HCA 1822/2013

E IN THE HIGH COURT OF THE E

HONG KONG SPECIAL ADMINISTRATIVE REGION
F COURT OF FIRST INSTANCE F

G ACTION NO 1822 OF 2013 G

__________________
H BETWEEN H

I CHINA MEDICAL TECHNOLOGIES, INC. Plaintiff I

(in liquidation)
J J
and
K K
KPMG (a firm) Defendant

L __________________ L

AND HCA 1138/2014

M M
ACTION NO 1138 OF 2014
N __________________ N
BETWEEN
O O
CHINA MEDICAL TECHNOLOGIES, INC. Plaintiff
P (in liquidation) P

and
Q Q

KPMG (a firm) Defendant

R R
__________________
S S
AND HCA 2276/2016

T ACTION NO 2276 OF 2016 T

__________________
U U

V V
A - 2 - A

B
BETWEEN B

CHINA MEDICAL TECHNOLOGIES, INC. Plaintiff

C C
(in liquidation)

D and D

E KPMG (a firm) Defendant E

__________________
F F
(Heard Together)
G G

Before: Deputy High Court Judge To in Chambers

H H
Date of Hearing: 1 November 2017
I I
Date of Decision: 23 March 2018
J J
________________

K DECISION K
________________
L L

Introduction
M M

1. There are three summonses before me, all filed by the defendant
N N
(“KPMG”) in these three actions, pursuant to Order 12, rule 8A seeking
O orders to require the plaintiff (“CMED”) to serve three protective writs O

issued by CMED.
P P

Q
2. CMED, now in liquidation, was a company incorporated under Q
the laws of the Cayman Islands traded on the NASDAQ from August 2005
R R
to March 2012. On 27 July 2012, it was placed into liquidation by the order

S of the Grand Court of the Cayman Islands. On 29 November 2012, Harris J S

appointed provisional liquidators to CMED. After a heavily contested
T T
winding up petition, Harris J made an ancillary winding up order in respect
U of CMED appointing liquidators in Hong Kong (the “Liquidators”). U

V V
A - 3 - A

B
3. CMED is hopelessly insolvent with provable claims in excess B
of US$400 million, but the Liquidators could only locate tangible assets of
C C
nominal value. During the course of their investigation, the Liquidators

D revealed prima facie evidence that the former management of CMED had D

stolen at least US$355 million from CMED through the FISH and SPR
E E
Technology acquisitions. The Liquidators have identified potential causes
F of action against a number of entities and individuals connected with CMED F

and its former management.

G G

4. The Hong Kong office of KPMG was CMED’s auditor from

H H
August 2005 to August 2009 and provided unqualified audit opinions in
I respect of the financial statements of CMED and its subsidiaries for the I

J
financial years ended 31 March 2004 to 2008. It also provided other advice J
and services to the CMED group for the financial years ended 31 March 2004
K K
to 2010. The Liquidators also identified possible causes of action against

L
KPMG as outlined in the protective writs which may provide a source of L
recovery to CMED and its creditors. These causes of action comprise claims
M M
for, inter alia, loss and damage for breach of contractual, tortious and/or

N equitable duties arising from KPMG’s audit of CMED group’s financial N

statements and its provision of other advice and services.
O O

5. However, the Liquidators have not been in a position to determine

P P
whether pursuit of these possible causes of action is appropriate. To preserve
Q these potential causes of action, CMED filed the protective writs in these Q

three actions. Because of the difficulties facing the Liquidators in their

R R
investigation of CMED’s affairs, the Liquidators are unable to determine at
S this point in time whether it is in the best interest of CMED to pursue the claims S

which are the subject of the protective writs. Hence the protective writs have
T T
not yet been served. CMED has accordingly sought and obtained extensions
U U

V V
A - 4 - A

B
of the validity of the protective writs. The protective writs will now expire B
on 19 June 2018 pursuant to the order of Lok J (the “Extension Order”). By
C C
these summonses KPMG seek orders requiring CMED to serve the protective

D writs before their expiry. D

E E
Section 221 Orders

F F
6. The Liquidators first contacted KPMG in July 2012 three days

G after their appointment in the Cayman Islands seeking certain documents. G

KPMG refused for reasons which the Liquidators considered were without
H H
any basis. That led to the Liquidators commencing proceedings pursuant
I to section 221 of the Companies (Winding Up and Miscellaneous Provisions) I

Ordinance in February 2015 (the “section 221 proceedings”) soon after their
J J
appointment in Hong Kong. These proceedings have been protracted and
K resulted in no less than nine hearings before and six orders by Harris J K

(collectively, the “Section 221 Orders”), as well as an appeal to the Court of

L L
Appeal.
M M
7. In a nutshell, the resistance offered by KPMG was based on its
N
stance that the defendant which is the Hong Kong office of KPMG is a Hong N

O
Kong partnership and a member firm of the KPMG global network including O
KPMG Huazhen in the People’s Republic of China (“PRC”). KPMG and
P P
KPMG Huazhen are separate entities over which KPMG has no control.

Q
Although KPMG was officially the auditor of CMED, the field work in the Q
PRC in respect of the audit work in 2008 and 2009 was done by KPMG
R R
Huazhen as “component auditor”. Many of the documents sought by the

S Liquidators are held in the offices of KPMG Huazhen in Beijing. KPMG S

resisted production of those documents on the ground that production of

T T
documents held by KPMG Huazhen to the Liquidators entailed a serious risk
U of breach of certain PRC laws and regulations, including those laid down by U

V V
A - 5 - A

B
the PRC Ministry of Finance (“MOF”), the regulator of accounting firms in B
the PRC.
C C

8. In the section 221 proceedings, Harris J was not satisfied that

D D
that KPMG had shown that PRC laws and regulations would be breached if
E the documents were produced to the Liquidators and he largely acceded to E

the Liquidators’ application. On 24 February 2016, Harris J made the first

F F
Section 221 Orders in the following terms:
G G
(1) For documents located in or accessible from Hong Kong (or
H another place outside the PRC), KPMG was required to provide H

copies to the Liquidators; and

I I
(2) For documents located in or accessible only from the PRC (the
J
“Mainland documents”), KPMG was required to give access to J

K
the Liquidators. K

L 9. There were several variations and extensions of that order. By L

a variation dated 12 January 2017, KPMG was ordered to provide copies of

M M
the Mainland documents, not merely to give access, to the Liquidators in the
N PRC after redacting any sensitive information, but the Liquidators were not N

allowed to take any copies out of the PRC. The deadline for compliance
O O
was extended to 31 May 2017.
P P

10. KPMG has complied with the above order insofar as documents
Q Q
located or accessible in Hong Kong are concerned. However, in respect of
R the Mainland documents, the Liquidators have been given access in the R

office of KPMG Huazhen but have not been provided with redacted copies.
S S
The reason proffered by KPMG is that by its letter dated 15 May 2017
T KPMG Huazhen expressly refused to provide copies unless and until a T

written direction is given by the relevant PRC authorities.

U U

V V
A - 6 - A

B
11. On 26 May 2017, KPMG and KPMG Huazhen received an B
opinion issued by MOF dated 22 May 2017 (the “MOF Opinion”). It stated
C C
as follows:

D “ We acknowledge receipt of your request for instructions on whether D

audit work papers can be produced to the Hong Kong appointed
E
Liquidators. After consultation with relevant authorities in charge, E
the matters concerning the Hong Kong High Court’s judgment on
production of audit work papers to the Hong Kong appointed
F Liquidators fall under the judicial scope. The administrative F
supervision cooperation agreement between the Mainland and the
Hong Kong Special Administrative Region is not applicable. There
G G
is no basis for us to approve the production of audit work papers to
the Hong Kong appointed Liquidators.
H H
The Hong Kong courts, if necessary during hearing of civil and
commercial matters, can request the courts of the Mainland to
I provide assistance in obtaining audit work papers in accordance I
with the Arrangement on Mutual Taking of Evidence in Civil and
Commercial Matters between the Courts of the Mainland and the
J Hong Kong Special Administrative Region.” J

(Emphasis underlined by KPMG)

K K

L 12. KPMG relied heavily on the MOF Opinion as evidence of MOF’s L

disapproval of KPMG Huazhen’s production of audit documents and MOF’s

M M
suggestion to adopt the alternative route via the Arrangement on Mutual Taking
N of Evidence in Civil and Commercial Matters between the Courts of the N

Mainland and the Hong Kong Special Administrative Region (the “Mutual
O O
Arrangement”). KPMG argued that the MOF Opinion did not amount to the
P “written direction” required by KPMG Huazhen in its letter dated 15 May 2017. P

Q
13. The Liquidators took the view that KPMG had de facto control Q

R
over KPMG Huazhen and applied by summons filed on 6 June 2017 seeking R
certain orders which were purportedly to enforce KPMG’s compliance with
S S
the Section 221 Orders. That summons was dismissed as Harris J took the

T
view that the issue of control had not been resolved and that if the Liquidators T
took the view that KPMG had no legitimate excuse for failing to comply with
U U

V V
A - 7 - A

B
the order and wished to enforce compliance, the appropriate course was to B
commence contempt proceedings against KPMG. Thus, the matter is
C C
presently at an impasse in relation to the documents located in the PRC.

D D
The law
E E
14. Pursuant to Order 12, rule 8A, a person named as a defendant in
F F
a writ which has not been served on him may by notice served on the plaintiff

G require him to either serve the writ on the defendant or to discontinue the G
action against him. If the plaintiff fails to comply with the notice, the court
H H
may on the application of the defendant by summons order the action to be
I dismissed or make such order as it thinks fit. There is a dearth of authorities I

on the court’s discretion under Order 12, rule 8A. Both parties referred me
J J
to Grande Holdings Ltd v Christopher Ho Wing On 1. However, counsel
K are divided as to the test to be applied in an application under this rule. K

L 15. Mr Hollander, leading counsel for KPMG, submits that the test L

is same as that for an application to extend the validity of a writ. His

M M
argument revolves around the need to observe and maintain the statutory
N
time limit for the validity period of a writ, finality and discipline in litigation. N

O
He quoted the following dicta of Godfrey Lam J in Sealegend Holdings Ltd O
v China Taiping Insurance (HK) Co Ltd : 2

P P
“ The law concerning the validity of a writ and its extension is no
mere formal procedural rule. Underlying it is the policy of the law
Q Q
that promotes finality to litigation, the prevention of stale claims,
and the protection of a defendant from having a claim hanging over
R his head indefinitely. Inasmuch as a plaintiff with a reasonable R
cause of action has a right to bring and serve proceedings within
prescribed periods, a (potential) defendant has a right not to be
S vexed by actions that are time-barred or writs that have expired, S
unless they are extended by the Court in accordance with the law.
T
It was open for six years, after the vessel was damaged, in this case T

1
HCA 565/2013 (unreported) 9 October 2013
U 2
[2013] 4 HKLRD 508, para 29 U

V V
A - 8 - A

for the plaintiff to issue a writ and then open for another year for
B B
the plaintiff to serve it. These are generous time limits. The
present application concerns whether the plaintiff should be granted
C an indulgence where it has not served the proceedings on the C
3rd defendant within these limits. I am not persuaded that, post-
Civil Justice Reform, the court should more readily grant applications
D for extension of the validity of writs. In Hashtroodi v Hancock D
[2004] 1 WLR 3206, which was decided after the Civil Procedure
E Reform in England took effect in 1999, the English Court of Appeal E
said at [20]:

F … One of the important aims of the Woolf reforms was to F

introduce more discipline into the conduct of civil litigation.
One of the ways of achieving this is to insist that time limits
G be adhered to unless there is good reason for a departure.” G

(Emphasis underlined by Mr Hollander)

H H

I
His argument is that an extension of the validity of the writ provides an I
extension of the statutory limitation period without the consent of the
J J
defendant which creates an obvious unfairness. The mechanism under

K Order 12, rule 8A provides a means of alleviating that unfairness. Thus as K

a matter of logic, similar considerations would be relevant to an application
L L
under Order 12 rule 8A as an application to extend the validity of a writ. He
M distinguishes Grande Holdings on the basis that the writ in that case had not M

been previously extended. He argues that the learned judge in Grande

N N
Holdings was only expressing himself in general terms. Thus, adopting the
O test for extending the validity of a writ in Chow Ching Man v Sun Wah O

Ornament Manufactory Ltd 3 to forcing its service before the expiry of the
P P
period, the test would be whether there are good reasons for abridging the
Q period and whether in all circumstances, including balance of hardship, the Q

writ ought to be extended. In addition, probably tailor-made for this case,

R R
he suggests the court should consider:
S S
(1) whether there has previously been an extension of the validity

T
of the writ and in particular more than one extension of the writ; T

U 3
[1996] 2 HKLR 338 at 341B–C U

V V
A - 9 - A

B
(2) whether the limitation period has (or is likely to have) passed; B

(3) whether the issues in the case have been crystallised, ie by an

C C
exchange of pre-action correspondence, a full letter before
D action, or otherwise; for service of the writ. D

E E
16. On the other hand, Mr Manzoni SC, counsel for the Liquidators,
F submits that there is a distinction between an application for extension of the F

validity of a writ under Order 6, rule 8(2) and an application to dismiss a writ
G G
before service or compel its service before expiry. He submits, rightly in
H my view, that it is wrong for Mr Hollander to argue that the defendant has no H

opportunity to challenge an ex parte application to extend the validity of a

I I
writ and hence the same test should be applied in an application to force its
J service before expiry. This is because upon service of the writ on the J

defendant, the defendant may apply to have it set aside. All the issues
K K
required to be considered under the test in Chow Ching Man v Sun Wah
L Ornament Manufactory Ltd can then be ventilated in an inter parte hearing. L

The defendant will in no way be prejudiced.

M M

N 17. A writ is valid in the first instance for twelve months but the N
court has jurisdiction to extend its validity from time to time for such period
O O
not exceeding twelve months at any one time: Order 6, rule 8(1) and (2). In
P an application to extend the validity, the test is that as set out in Chow Ching P

Man v Sun Wah Ornament Manufactory Ltd. But once that stage has passed,
Q Q
the argument about the need to maintain the limitation period must fall away.
R The period of validity of a writ, whether during the initial twelve-month R

period or during any subsequently extended period as allowed by the court,

S S
must be prima facie appropriate. How a plaintiff would wish to conduct his
T litigation is a matter entirely for the plaintiff. He may decide to issue and T

when to issue the writ or not to issue it at all. This right of the plaintiff must
U U

V V
A - 10 - A

B
be highly respected. This must be the starting point of consideration of any B
application seeking to accelerate the legal process. Thus in an application
C C
to compel service before expiry of the writ, the question must be whether

D there are good reasons why the proceedings should not be allowed to run its D

natural course.
E E

18. The applicant who seeks to accelerate this legal process must
F F
bear the burden of proof. What he has to prove could not be the usual
G elements as suggested by Mr Hollander in the case of an application for G

extension of the validity period because the starting point is different. He

H H
must advance some more compelling grounds over and above those required
I to resist an application for extension of the validity period. The usual I

J
considerations such as delay or prejudice would not suffice. He must, in J
my view, prove that it would be unjust if the proceedings are allowed to run
K K
its natural course, or put it in another way, that the plaintiff’s reliance on the

L
period of validity is unjust. L

M 19. What amounts to unjustness is difficult to define. Delay and M

prejudice may constitute elements of unjustness, but they cannot be viewed

N N
in isolation. They must be considered against the background and the parties’
O conduct. Unjustness to the applicant alone is insufficient. It must be O

balanced against the unjustness to the plaintiff as well. Like equity, an

P P
applicant must come with clean hands. It all depends on the circumstances
Q of the case and the court’s notion of justice. One thing which is certain is Q

that the threshold in proving unjustness must be very high and far surpasses
R R
that in proving prejudice in an application to extend the validity period of a
S writ or an application to set aside an extension previously granted. This is S

because the applicant is seeking to circumvent Order 6, rule 8(1) in the case
T T
of the original limitation period or an order of the court to extend the
U U

V V
A - 11 - A

B
limitation period pursuant to Order 6, rule 8(2) if the writ already been B
extended. Not only that the standard of proof is high, the court will approach
C C
any application to circumvent its orders with extreme caution. Basically, this

D is the test and standard of proof required for an application under Order 12, D

rule 8A. With these considerations in the background, it would not be

E E
difficult to deduce the following principles.
F F
20. First, the burden is on the defendant as the applicant to satisfy
G the court that the discretion should be exercised in his favour for the very G

reason of the plaintiff’s refusal to serve the writ despite the plaintiff’s notice.
H H

I 21. Second, the court has discretion to dismissed an action or to I

make such order as it thinks fit; but, as always, the exercise of discretion in
J J
each case must be decided in its own circumstances. The court takes into
K account the plaintiff’s explanation for not having yet served the writ. The K

most obvious of such explanation includes the complex affairs of the plaintiff
L L
and the difficulties it faces in investigating the claims and his readiness to
M engage in the litigation. M

N N
22. Third, to discharge that burden, the defendant has to satisfy the

O court that the circumstances of the case call for the court’s intervention, O
notwithstanding that the time for service of the writ is yet to expire. The
P P
test is that it is not just for the plaintiff to withhold the service of the writ or
Q to do so any further. Q

R 23. Fourth, where prejudice or hardship is relied on as an element R

of unfairness, it must be over and above that “which could well be said to
S S
somehow arise in any given case”. Prejudice that arises merely from the
T existence of the writ will not generally suffice to make an order because T

U
“short of dismissal of the action, the direction for the service of the writ, even U

V V
A - 12 - A

B
if acceded to, will not meaningfully address such complaint”. Prejudice or B
hardship could be actual or potential; but if it is the latter, it must be imminent
C C
or likely instead of merely possible. The prejudice or hardship suffered or

D likely to be suffered must be weighed against that suffered or likely to be D

suffered by the plaintiff.

E E

24. The sole question this court has to decide in these applications
F F
is whether KPMG has discharged the burden of proving that it is unjust to
G allow the protective writs to remain valid to the end of their natural expiry. G

H H
Grounds for the application
I I
25. KPMG’s original and only ground for seeking early service of the
J protective writs is set out in Jacqueline Wong’s affirmation dated 3 July 2017 J

(“Wong/1”) which was served with the summonses. The ground stated that
K K
it was desirable to force early service because once service has been effected,
L KPMG would be in a better position to make an application to obtain the L

documents held in KPMG Huazhen’s offices by letters of request under the

M M
Mutual Arrangement (the “Mutual Arrangement Ground”). KPMG has
N
foreshadowed that it intends to make such an application because it is currently N

O
in breach of the Section 221 Orders. This ground must be based on the O
MOF Opinion dated 22 May 2017.
P P

26. However, after the deadline for evidence had passed, KPMG filed
Q Q
a further affirmation by Jacqueline Wong (“Wong/2”) advancing an entirely
R new ground. KPMG now asserts for the first time that it would be unfair R

for KPMG to have to wait any longer for service because the Liquidators
S S
have been reviewing the documents for an extended period of time, and delay
T may cause difficulties in obtaining evidence due to the effluxion of time (the T

“Unfairness Ground”).
U U

V V
A - 13 - A

B The delay in investigation: difficulties facing the Liquidators B

C 27. A special feature of this case is the extraordinarily long time taken C

by the Liquidators in their investigation into CMED’s affairs. Five years

D D
lapsed since the issue of the protective writs and the Liquidators’ investigation
E is yet to conclude. The Liquidators’ case is that the delay was due to the E

obstructive and uncooperative attitude of KPMG. KPMG’s case is that it

F F
is due to refusal to comply with court orders on the part of their associate
G member of the KPMG global network which is beyond KPMG’s control. G

The cause of the delay is in hot dispute and is the single most important
H H
background fact which dictates the outcome of this application. Though
I this hearing should not be turned into a miniature trial on affidavit, a reliable I

provisional finding could be reached on the basis of the affidavit evidence

J J
filed by the parties, the incontrovertible factual background and most
K importantly, the decisions of the Companies Court and the Court of Appeal. K

L L
28. As result of the Section 221 Orders, the Liquidators were given
M access to the Mainland documents on 17 May 2016. KPMG produced M

7,359 electronic documents in an unworkable manner to the Liquidators. It

N N
also unilaterally insisted on having its personnel and lawyers supervise the
O Liquidators’ inspection of the documents. KPMG explained that the O

supervision is a requirement of the PRC authorities as understood by KPMG

P P
Huazhen. Such explanation is wholly devoid of particulars and lacks
Q conviction. In an attempt to legitimise such supervision, KPMG made an Q

application to Harris J, but the application was dismissed. This demonstrates

R R
that the explanation is an unsustainable excuse and was not accepted by
S Harris J. This is an impediment created by KPMG. Despite that, KPMG and S

its lawyers continued to be in the room with the Liquidators’ staff during the
T T
inspection. This is a wilful refusal to comply with the Section 221 Orders.
U U

V V
A - 14 - A

B
As result of inadequate method of production and inspection conditions, B
KPMG have caused significant difficulties for, and delays to, the Liquidators’
C C
investigation, particularly where the Liquidators’ assessment of the potential

D claims against KPMG is concerned. KPMG or KPMG Huazhen was the D

cause of the slow progress.

E E

29. The audit work papers held by KPMG Huazhen consists of

F F
hard copy files, emails and electronic documents. KPMG Huazhen refuses
G to provide copies of these work papers. KPMG’s answer is that it is due to G

PRC authorities’ requirement as understood by KPMG Huazhen. Again,

H H
this is a bare assertion which is devoid of particulars.
I I

30. KPMG Huazhen’s refusal to provide copies of work papers

J J
prevented the Liquidators from using analytical software to conduct key
K word searches, highlights and annotations on the work papers. This caused K

significant delay to the Liquidators’ review of the documents.

L L

M
31. KPMG Huazhen’s refusal to provide copies of their work papers M
made it necessary for the Liquidators to manually take notes of important
N N
documents in order to maintain a record of the document content and use the

O information to further investigation. This requires the Liquidators among O

other things to review and replicate the formula and content contained in
P P
numerous documents.
Q Q
32. The lack of copies of the work papers made it difficult for the
R Liquidators to review them in conjunction with other documents available to R

them, in particular, the files produced by CMED’s former service providers

S S
which conducted the valuations of the FISH and SPR Technologies/businesses
T acquired by CMED. T

U U

V V
A - 15 - A

B
33. As result of the supervision and uncooperative attitude of KPMG B
Huazhen, the Liquidators had difficulties obtaining expert and legal advice
C C
on KPMG Huazhen’s accounting treatment and audit procedure in respect of

D many complex transactions in order to properly assess the viability of CMED’s D

potential claims against KPMG. Briefs comprising copies of KPMG’s

E E
relevant audit work papers need to be collated in order to obtain the necessary
F external advice. KPMG’s refusal to provide copies of its audit work papers F

made it extremely difficult for the Liquidators to obtain the advice required for
G G
them to determine whether or not to commence proceedings against KPMG.
H H
34. KPMG Huazhen’s refusal to provide copies of its audit work
I papers made it impossible for the Liquidators to enquire from CMED’s I

J
customers and suppliers regarding the authenticity of their signatures or J
chops on documents to enable the Liquidators to assess whether KPMG’s
K K
audit confirmation procedures were sufficient and properly carried out.

L L
35. KPMG Huazhen’s supervision of the inspection made it
M impossible for the Liquidators to discuss their findings arising from their review M

of KPMG’s audit work papers. Such discussions are clearly privileged and
N N
strictly confidential and could not be meaningfully conducted in the presence
O of KPMG Huazhen’s staff or lawyers. This impediment is not cured by O

providing the Liquidators with a separate room for discussion as KPMG

P P
Huazhen refuses to allow them to take with them copies of any of the relevant
Q audit work papers for discussion. This a clear and acute impediment to the Q

Liquidators’ ability to properly assess CMED’s potential claims.

R R

S 36. Because of these difficulties, the Liquidators sought and obtained S

a variation order requiring KPMG to produce copies of the Mainland

T T
documents to the Liquidators at the Liquidators’ offices in Beijing. In his
U decision dated 12 January 2017 in allowing the Liquidators’ application (the U

V V
A - 16 - A

B
“January 2017 Order”), Harris J held that it is inefficient for the Liquidators B
to be forced to inspect the documents rather than to be provided with copies
C C
“because they are forced to work from notes of what staff thought were

D relevant parts of documents at the time they inspected the documents rather D

than use analytical software and storage capabilities to deal with the very
E E
large number of documents”.
F F
37. KPMG appealed. In dismissing its appeal on 12 April 2017,
G the Court of Appeal held that “the existing mode of inspection (implemented G

since 17 May 2016) is not wholly effective and there is a real need to order
H H
production of copies”.
I I

38. KPMG subsequently sought to reverse the January 2017 Order

J J
by a variation summons requiring only inspection of the Mainland
K documents. The application was refused by Harris J in May 2017. K

L L
39. Despite all these court orders, KPMG has not produced copies

M
of any of the Mainland documents and continued to supervise the Liquidators’ M
inspection at KPMG Huazhen’s office.
N N

40. It is disingenuous for KPMG to argue that it cannot comply with

O O
the court orders because its associate KPMG Huazhen will not comply with
P KPMG’s request. In his judgment dated 24 February 2016, Harris J held: P

Q “ 25. I accept that KPMG China’s executive committee may not Q

exercise direct management control over KPMG Huazhen’s general
operations, but its membership indicates that KPMG HK’s partners
R exercise, or purport to exercise, ultimate de facto control over R
KPMG Huazhen’s affairs.
S 26. This is further demonstrated by the fact that when it was S
decided to engage KPMG Huazhen as component auditor to audit
the Mainland subsidiaries the engagement team was led by
T Mr. Bruce Zirlen, who is the 4th Respondent. Ms. Jacqueline Wong T
describes him in paragraph 31 of her affirmation as ‘Lead Audit
U
Engagement Partner. Mr. Zirlen was a partner in KPMG HK who U

V V
A - 17 - A

was based in Beijing. He is an US-qualified CPA, with experience

B B
of auditing SEC issuers and their affiliates. Mr. Zirlen was
designated a ‘partner’ in KPMG Huazhen, although, as a joint
C venture, strictly speaking KPMG Huazhen did not have partners C
and only had employees.’ She goes on in paragraphs 32 to 34:

D ‘ 32. While the engagement of KPMG Huazhen to carry D

out the audit field work in the PRC was not recorded in any
written contract, it was regarded by KPMG HK as a
E sub-contracting arrangement, in line with the arrangements E
that KPMG HK usually has with its component auditors
(including other KPMG member firms and non-KPMG
F firms) to whom it delegates performance of specific elements F
of the audit. In this case KPMG Huazhen invoiced the
G
Company directly in respect of the work which it carried G
out on the audit for year ended 31 Mar 2008 onwards, as
recorded in the Affirmation of Isaac Yan Kei Yan of KPMG
H Huazhen, of even date. H

33. Consistently with the provisions of AU543

I promulgated by the US Public Company Accounting I
Oversight Board established under the Sarbanes-Oxley Act
of 2002, KPMG HK issued the auditor’s report as principal
J auditor in respect of the Company’s consolidated financial J
statements for year ended 31 Mar 2008, without making
reference to the fact that the audit work had been carried
K K
out by a component auditor, namely KPMG Huazhen. As
can be seen from AU543, this is acceptable practice in the
L industry. A copy of AU543 can be found at ‘JW-1’ tab 1. L
34. I am advised by Mr Zirlen that the relevant audit
M engagement team at KPMG Huazhen reported to him in M
Beijing, in his capacity as a partner of KPMG HK, such
that KPMG HK was able to discharge its duty as principal
N auditor and issue an auditor’s report for the year ended N
31 March 2008.’
O 27. It seems to me clear from the evidence that so far as possible O
KPMG China operates as one commercial entity and, so far as
permissible by law, is managed as such by a panel of partners very
P P
largely drawn from the Hong Kong partnership. Subject to any
specific legal restriction KPMG HK is, therefore, in practice able to
Q direct that KPMG Huazhen comply with its directions. I did not Q
understand this to be disputed by KPMG HK in the present
application. However, I note that in a letter from KPMG HK to
R the Liquidators’ solicitors dated 21 December 2012 and also a letter R
from Smyth & Co dated 12 August 2013, KPMG HK suggested
S that in respect of papers held by KPMG Huazhen the Liquidators S
‘enquiries may be best served if they are made by your client’ to
KPMG Huazhen. It seems to me that this was disingenuous given
T what has become clear as a result of my request for information T
was the substantive nature of the relationship between KPMG HK
U
and KPMG Huazhen.” U

V V
A - 18 - A

B
41. The Liquidators’ complaints are substantially unanswered by B
KPMG. In the light of these orders and judgment, I have no difficulties to
C C
accept the Liquidators’ case that they have real difficulties in conducting

D their investigation into CMED’s affairs and are prevented from assessing the D

viability of CMED’s potential claims against KPMG. These difficulties are

E E
caused by impediments created by KPMG and its wilful ignorance of the
F various court orders. The lack of progress in the Liquidators’ investigation F

is due to factors beyond their control. The Liquidators are not in a position
G G
to determine whether the claims the subject of the protective writs should be
H pursued. KPMG is responsible for this state of affairs. H

I I
MUTUAL ARRANGEMENT GROUND
J J
Background
K K
42. I have set out in paragraphs 11 and 12 the background based on
L which KPMG considers it necessary to obtain a letter of request in order to L

compel KPMG Huazhen to produce the Mainland documents. KPMG says

M M
that it is highly desirous of resolving the impasse regarding production of the
N Mainland documents. It intends to make an application itself or jointly with N

the Liquidators under Order 39, rules 1 – 3 to court for the issuance of a letter
O O
of request to the PRC courts. It is hopeful that the letter of request will be
P issued by the Hong Kong court and executed by the PRC court. KPMG P

Huazhen will then release the Mainland documents and relieve KPMG of its
Q Q
obligation under the Section 221 Orders. KPMG argues that to proceed by
R
that route would require the protective writs to be served. R

S S
43. Insofar as KPMG seeks to place reliance on the MOP Opinion
T that a letter of request is necessary, I am not satisfied that such necessity is T

proved as I have strong reservation about the reliance which may be placed
U U

V V
A - 19 - A

B
on the MOP Opinion. Like Harris J, I am not satisfied that KPMG has B
shown that PRC laws and regulations would be breached if the documents
C C
were produced to the Liquidators. While KPMG did request KPMG

D Huazhen to produce the document, the “written direction” was a self-imposed D

requirement without any basis. The senior partner of KPMG Huazhen simply
E E
replied that it is:
F “ … not prepared to produce copies of the Documents to the F
Liquidators until the written direction is issued by the relevant
G Mainland authority and full compliance with the same is ensured.” G

H
Despite what was said in the MOF Opinion, what is significant lies in what H
was not said. It is not known what opinion was KPMG Huazhen seeking
I I
from MOF. The tone of the MOF Opinion suggests that the request was for

J the authority to direct (actually to compel on an involuntary basis) KPMG J

Huazhen to produce the documents and not about whether voluntary
K K
production is permissible as a matter of law. It seemed that KPMG Huazhen
L was adopting an antagonistic stance and sought MOF’s blessing. It appears L

to me that MOF therefore did not deal with the issue whether such documents
M M
may be produced voluntarily but how their production could be compelled.
N Hence MOF suggested that the administrative supervision cooperation N

agreement was not applicable and advised KPMG Huazhen that the Mutual
O O
Arrangement might be invoked to compel KPMG Huazhen to produce the
P document. In my view, the MOF Opinion cannot be treated as evidence P

that a letter of request is necessary to compel the production of the Mainland

Q Q
documents. What is necessary is KPMG’s will to produce the documents.
R On this basis, KPMG’s application cannot even get off the ground. In the R

following discussion, I proceed on the assumption that a letter of request is

S S
necessary. The question, then, is whether service of the protective writ is a
T necessary or desirable condition precedent. T

U U

V V
A - 20 - A

B Whether service of the protective writs is necessary or relevant B

C 44. Mr Hollander’s argument that service of the protective writs is C

necessary is premised on two grounds. First, relying on the Court of Final

D D
Appeal case of Joint & Several Liquidators of Kong Wah Holdings Ltd v
E Grande Holdings Ltd 4 he argues that a letter of request is designed for use E

in existing proceedings. Second, relying on the case of Panayiotou v Sony

F F
Music Entertainment (UK) Ltd and Re Q , he argues that the court will
5 6

G refuse to issue a letter of request unless the documents requested are directly G

material to an issue in the action. Thus until the writs have been served, there
H H
are technically no defendants who can join in any inter partes procedures.
I I

45. In reply, Mr Manzoni SC submits that the cases quoted are not
J J
authorities for the proposition that service is necessary to obtain a letter of
K request. In fact, KPMG has itself brought the present application which is K

itself an inter partes procedure prior to service. Furthermore, according to

L L
Order 5, rule 1, proceedings are begun by issue the writ and not by its service
M on the defendant. There is no reason why a writ that has been filed cannot M

constitute “existing proceedings” for the purposes of obtaining a letter of

N N
request. I agree with Mr Manzoni SC. KPMG has just failed to show that
O the service of a writ is necessary to support an application for letter of request. O

The above conclusion takes away much of the steam in KPMG’s application.
P P

Q
46. KPMG’s alternative argument is that its chances of being Q
successful in obtaining the letter of request are highest if the protective writs
R R
have been served. It is apparent that KPMG’s primary argument for forcing

S service of the protective writ is that it wishes to obtain some advantage in its S

T T
4
(2006) 9 HKCFAR 766 at paras 38 – 39, 47, per Lord Millett NPJ
5
[1994] Ch 142, at 151E–G, 153H, per Nicholls VC
U 6
[1997] 4 HKC 439, at 443I, 444A–B, 445A, per Woo J (as he then was) U

V V
A - 21 - A

B
proposed Mutual Arrangement application. The chances of success of such B
application with or without service of the protective writ is only of secondary
C C
importance. My concern, rather, is the certainty that the Mainland documents

D can be obtained by the mechanism under the Mutual Arrangement. D

E E
Certainty as to whether the Mainland Documents can be obtained

F F
47. There are two issues to be addressed here: first, whether a letter

G of request will be issued by the Hong Kong court; and second, whether, if G
issued, it will be executed by the Mainland court.
H H

48. On the first issue, Mr Hollander suggests that the test is just a
I I
reasonable chance test, quoting Saunders J’s decision in Chan Mei Yiu Paddy
J v Secretary for Justice (No 2) 7 . In that case, the court was faced with J

conflicting expert evidence on whether the foreign jurisdiction would execute

K K
the intended letter of request if issued. It was under those circumstances
L that Saunders J decided in favour of issue of the letter of request and to leave L

it to the foreign jurisdiction to decide whether to execute the letter of request.

M M

N 49. Here, KPMG’s evidence suggests that it intends to apply for a N

production order before the close of pleading. As Mr Manzoni SC pointed

O O
out, production orders before close of pleadings are only made in exceptional
P circumstances and KPMG has stopped short of showing such exceptional P

circumstances.
Q Q

R 50. Another difficulty facing KPMG is that the subject of the R

proposed production order is KPMG Huazhen which, according to KPMG,
S S
is a separate non-party in a foreign jurisdiction. KPMG would have to
T T

U 7
[2008] 3 HKC 182 U

V V
A - 22 - A

B
satisfy the Hong Kong court that production by what it claims is a non-party B
is appropriate in such circumstances. Again, there is no such evidence.
C C

51. Next, as KPMG indicates in its skeleton submission, an order for

D D
production must relate to specific documents which are shown to be directly
E material to an issue in the action, it is not clear if KPMG would be able to E

obtain an order for production of all the Mainland documents covered by the
F F
Section 221 Orders.
G G

52. Taking all these considerations into account, this is not a case of
H H
conflicting expert opinion on foreign law which the court feels uncomfortable
I to come to a decision one way or the other. The evidence shows it is not I

likely that the application for letter of request will be allowed.

J J

K
53. As for the second issue, there are differences between the PRC K
law experts of both parties. One opinion which is in common is that both
L L
experts agree that the Mutual Arrangement is a new procedure and its operation

M
is in many respects uncertain. On this limited issue, it may, as in the case of M
Chan Mei Yiu, be left to the PRC courts. But, if KPMG could not even pass
N N
the first hurdle, this issue does not arise for consideration.

O O
Whether Mutual Arrangement can achieve compliance with the Section 211
P
Orders P

Q 54. The thrust of KPMG’s submission is that it is serious in complying Q

R
with the Section 221 Orders and is doing all that is lawful to achieve that end. R
It is therefore KPMG’s case that through the use of the Mutual Arrangement
S
mechanism the impasse will somehow be solved. This is obviously not the S

T T

U U

V V
A - 23 - A

B
case. As the Court of Final Appeal explained in Joint & Several Liquidators B
of Kong Wah Holdings Ltd v Grande Holdings Ltd , letters of request are:
8

C C
“ … concerned with adversarial litigation or arbitration, and are
designed to ensure that the court or tribunal is seized of all relevant
D D
material to enable it to determine the dispute which has been referred
to it for decision. They are concerned with obtaining evidence for
E resolving an existing dispute, not with the gathering of information E
as part of a continuing process of investigation.”
F F
The purposes for which the Liquidators obtained the Section 221 Orders are
G far broader than merely to use the Mainland documents in potential G

proceedings against KPMG. Besides, both experts agree that the Mainland
H H
documents obtained through the Mutual Arrangement may only be used as
I evidence in the present proceedings. They could not be used in the broader I

investigation of CMED’s affairs. Obtaining the Mainland documents

J J
through the Mutual Arrangement mechanism is therefore inadequate for the
K Liquidators’ purposes and will not “provide a means for substantially K

complying with the Section 221 Orders, but by a different route” as asserted
L L
by KPMG in its oral submission. Despite this point has been communicated
M to KPMG, this issue has never been addressed by KPMG skeleton M

submissions.
N N

O Conclusion O

P 55. In summary, first, the Mainland documents, if obtained under P

the Mutual Arrangement mechanism, may not cover the scope of the
Q Q
Mainland documents required to be produced under the Section 221 Orders
R and it may not be used as evidence in any proceedings other than the present R

ones against KPMG. They may not serve the far greater purposes for which
S S
they were sought under the Section 221 Orders. Second, there is no
T certainty that the letters of request sought will be issued by the Hong Kong T

U 8
(2006) 9 HKCFAR 766, at para 31 U

V V
A - 24 - A

B
court and enforced by the PRC courts. Third, KPMG has not shown that B
the service of the protective writs is a necessary requirement for the issue of
C C
the letters of request. In a nutshell, KPMG has failed to show that the

D service of the protective writs is necessary in the first place; that it stands a D

good chance in obtaining the letter of request in the second; and lastly that
E E
the Mainland documents obtained under the Mutual Arrangement mechanism
F meet the purposes for which they were granted under the Section 221 Orders. F

G 56. With that conclusion in mind, I consider the impact of the court’s G

decision on KPMG’s application to the parties first one way and then the other.
H H
Under the first scenario, if KPMG’s application is allowed, CMED will be
I forced into litigation before the Liquidators are satisfied that it is the proper I

J
course to take or to abandon it altogether. It would be forced to file J
statements of claim when it is not ready to do so and will stand a great risk
K K
that its statements of claim may be struck out. It will stand a great risk of

L
losing the actions against KPMG. Under this scenario, the effect to CMED L
is fatal while the benefit to KPMG is obvious.
M M

57. Under the second scenario, if KPMG’s application is refused,

N N
things will run its natural course. Come June, the Liquidators will have to
O serve the protective writs or apply for another extension or abandon the claim O

against KPMG. If the Liquidators are ready to serve the protective writes,
P P
litigation will take its course. If they have to seek another extension, the
Q court will make a fair and just decision in accordance with the law and the Q

circumstances. KPMG cannot be said to have suffered any prejudice. It

R R
is KPMG’s obligation to produce the Mainland documents. If contempt
S proceedings are commenced, they will take their course. KPMP will be S

found not liable if its defence that it is prevented from complying with the
T T

U U

V V
A - 25 - A

B
order by KPMG Huazhen is accepted. If they are found liable, it does not B
lie in their mouths to argue that they suffer any prejudice.
C C

58. When balancing the first scenario against the second, there is
D D
no reason why this court should force the issue of the protective writ with
E the result of giving to KPMG such an advantage which is grossly out of E

proportion with the prejudice to be suffered by CMED. This is particularly

F F
so when the issue of the writ is not a necessity for invoking the Mutual
G Arrangement mechanism; the uncertainty that the letter of request will be G

issued by the Hong Kong courts and executed by the PRC courts; and the
H H
certainty that the Mainland documents, if so obtained, will not meet the
I requirement under the Section 221 Orders. KPMG has failed to discharge I

J
the burden of showing that it would be unjust to allow the validity period of J
the protective writs to run its course.
K K

THE UNFAIRNESS GROUND

L L

Introduction
M M

59. As already outlined in paragraphs 25 and 26, this new ground was
N N
advanced at the eleventh hour. It is contained in Wong/2 for which KPMG
O sought leave for it to be filed out of time. Wong/2 cannot be characterised O

as a reply affirmation as it contains a new ground and new assertions. It

P P
should have been served together with the summonses pursuant to Order 12,
Q rule 8A(3). Nevertheless, Mr Manzoni SC took a pragmatic approach to Q

consent to its filing, but argues that the failure to raise this ground at the
R R
proper or earlier stage demonstrates that is not genuine but an afterthought.
S I agree. Raising such a ground at such a late stage takes away all the thrust S

of KPMG’s argument on unfairness based on delay. Be that as it may, I shall

T T
put aside this observation and consider this ground on its merits.
U U

V V
A - 26 - A

B Effluxion of time B

C 60. The thrust of KPMG’s argument under this ground is effluxion of C

time. KPMG sets out the following background. KPMG was first engaged
D D
as CMED’s auditor in 2005. Twelve years have passed since and eight years
E have lapsed since KPMG resigned as its auditor in August 2009. The first E

protective writ relates to matters going back to the year ended March 2004,
F F
more than 13 years ago. The second protective writ relates to matters going
G back to the year ended March 2008, more than nine years ago. The third G

protective writ relates to matters going back to the year ended March 2009,
H H
more than eight years ago.
I I

61. Mr Hollander submits that by any measure, the potential claims

J J
involve highly complicated and expensive litigation, in which the professional
K conduct of KPMG over a significant period of time, will be intensively K

scrutinised by the court. Even after the protective writs are served, the
L L
actions will not, given their complexity, come on for trial for a considerable
M time thereafter. He therefore argues that it is unfair for KPMG to have such M

litigation hanging over its head for such a long period of time.
N N

O
62. His argument is a double edge sword. Time, not only has an O
impact on KPMG. It also has an impact on the Liquidators and, in my view,
P P
more adversely. KPMG was CMED’s auditor. It has a team of professionals,

Q
who were on the job. In short, KPMG knows CMED well and has possession Q
of the relevant documents. On the other hand, the Liquidators are total
R R
strangers. They took over CMED after its collapse and when it was in a mess.

S They need more time to investigate and understand what KPMG had done. S

Anything which is complicated to KPMG must be more complicated to the

T T
Liquidators. Unfairness has to be balanced between one another.
U U

V V
A - 27 - A

B
63. Next, Mr Hollander says that staff members who worked on the B
subject audit have left and more would have left and it would be difficult to
C C
procure their attendance as witnesses. Of those whose cooperation can be

D procured, their memories would have faded. It would be difficult to collect D

and collate relevant documents to prompt and corroborate witnesses’

E E
recollection. Overall, he submits, that lowers the chance of a fair trial for KPMG.
F F
64. The above is true as a general proposition. However, Wong/2
G only provided a schedule of individuals who worked on the CMED audit and G

the dates which individuals left KPMG’s employment in Hong Kong. The
H H
schedule showed that of 47 engagement team members, only three remain in
I KPMG and five remain in KPMG Huazhen. It appeared as though the I

J
entire generation of audit team members has left KPMG. However, there J
is no explanation of the importance of the role played by those individuals
K K
who had left, or the actual difficulties experienced in contacting them.

L
Besides, the Liquidators were appointed on 27 July 2012 and had almost L
immediately requested documents from KPMG. The first protective writ
M M
was filed on 26 September 2013. It is inconceivable, as experienced and

N respectable accountants, that KPMG would not have started taking steps to N
preserve documents, taking witness statements from potential witnesses,
O O
keeping track of their movements and obtaining their contact details and
P taking witness statements from them (if that had not been done before) if they P

should leave KPMG’s employment. KPMG’s evidence is not sufficient to

Q Q
demonstrate actual prejudice and risk of KPMG not having a fair trial.
R R
65. Mr Hollander submits that while the above prejudice cannot be
S completely reversed, it can be ameliorated if CMED is now ordered to serve S

the protective writs. Once the actions have commenced and the issues been
T T
identified, KPMG can start taking steps to procure evidence from witnesses.
U U

V V
A - 28 - A

B
But Mr Hollander has failed to show how seven months can make any B
difference.
C C

66. Next, Mr Hollander argues that the prejudice here is entirely one
D D
way against KPMG as the Liquidators will in all likelihood rely heavily on
E documents and KPMG will be called to explain why its staff did what they E

did. He repeats his argument that memories will fail with time.
F F

G 67. He argues that the unfairness of the delay is exacerbated by the G

fact that KPMG is being deprived of the benefits of the normal limitation
H H
period. But for the multiple extensions, the limitation period for nearly all
I of the causes of action would probably have expired. I

J 68. Be that as it may, as I have found above, KPMG is largely J

K
responsible for the present state of affairs by reason of their obstructive and K
uncooperative conduct, in particular, their refusal to comply with the Section
L L
221 Orders. The Liquidators are forced to accept the unlawful restriction

M
in their investigation imposed on them and to progress at snail pace. KPMG’s M
conduct is inviting the multiple extensions. KPMG now wishes to take
N N
advantage of its own wrong to seek to abridge the current validity period of

O the protective writs and force service of the protective writs seven months O
before their expiry. The net result would be to force CMED into litigation
P P
before the Liquidators are satisfied that it is the proper course to take and to
Q stand the risk of losing the actions or to abandon them altogether. I can in Q

no way find it would be just to abridge the validity of the protective writs.
R R

69. Mr Hollander also criticised the Liquidators’ change of stance.

S S
He said that initially the Liquidators were receptive to KPMG’s suggestion for
T the parties to invoke the Mutual Arrangement mechanism, but later rejected T

U
the suggestion and insisted on enforcing the Section 221 Orders. I can see U

V V
A - 29 - A

B
nothing wrong with the change of stance. The express purpose of KPMG’s B
invoking the Mutual Arrangement mechanism, as the Liquidators now
C C
appreciate, is to circumvent the Section 221 Orders and Lok J’s Extension

D Order. Given the history in this case, particularly that the Liquidators are D

investigating into potential claims against KPMG and KPMG’s attitude in

E E
obstructing the investigation, it is not unreasonable to surmise that the real
F purpose of the exercise is to cause or force service of the protective writs and F

then filing of statements of claim before the Liquidators are able to present
G G
a proper case and then strike them out altogether. There are good reasons
H for the Liquidators to be cautious. H

I I
Conclusion
J J
70. For the above reasons, I dismiss KPMG’s application with costs
K to CMED and to be paid forthwith. K

L L

M M

(Anthony To)
N Deputy High Court Judge N

O O
Mr Charles Manzoni SC, instructed by Lipman Karas, for the plaintiff

P Mr Charles Hollander and Mr Wilson Leung, instructed by P

Reynolds Porter Chamberlain, for the defendant
Q Q

R R

S S

T T

U U

V V