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The Joint And Several Provisional Liquidators Of China Medical Technologies Inc. v Kpmg (A Firm) And Others

Judgment Cited authorities 11 Cited in Precedent Map Related
Vincent
Judgment Date24 February 2016
Year2016
Judgement NumberHCCW435/2012
Subject MatterCompanies Winding-up Proceedings
CourtHigh Court (Hong Kong)
HCCW435G/2012 THE JOINT AND SEVERAL PROVISIONAL LIQUIDATORS OF CHINA MEDICAL TECHNOLOGIES INC. v. KPMG (A FIRM) AND OTHERS

HCCW 435/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO 435 OF 2012

____________

THE JOINT & SEVERAL LIQUIDATORS OF CHINA MEDICAL TECHNOLOGIES, INC. Applicants
and
KPMG (A FIRM) 1st Respondent
JACK CHOW 2nd Respondent
JANETTE YU 3rd Respondent
BRUCE ZIRLEN 4th Respondent
JANET CHEUNG 5th Respondent
PAUL LAU 6th Respondent
FRANCIS CHING 7th Respondent
IAN PARKER 8th Respondent
STEPHEN YIU 9th Respondent

____________

Before: Hon Harris J in Chambers
Dates of Hearing: 6 and 7 October 2015
Date of Decision: 24 February 2016

_________________________

D E C I S I O N

_________________________

The Application

1. I have before me an application[1] by Mr. Cosimo Borrelli and Ms. Yuen Lai Yee Liz, who were appointed by me as provisional liquidators (“Liquidators) of China Medical Technologies, Inc. (“Company”) on 29 November 2012. The Liquidators seek the production of documents by the 1st Respondent[2] (“KPMG HK”) and the examination of a number of the Firm’s partners, employees and people from other KPMG entities in connection with the affairs of the Company and, in particular, the audit of its subsidiaries in the Mainland[3]. The scope of the application for production of documents is very wide. For all practical purposes the Liquidators seek every document that KPMG HK and other associated KPMG entities have in their possession concerning the Company and its subsidiaries. The Liquidators are particularly concerned to obtain access to KPMG HK’s audit working papers. The precise categories of documents that the Liquidators request in their summons are set out in the Appendix to this Decision.

2. Prior to issue of the application KPMG HK provided the Liquidators with copies of a limited amount of documents: the Company’s audited accounts for the year ending 31 March 2008, management accounts prepared by the Company for the year also ending 31 March 2008, invoices, information on properties, deposits, accounts receivables, bank accounts, documents supplied by the Company regarding its future plans, strategies and proposals, certain engagement letters and ten boxes of largely draft and superseded working papers.

3. The application raises an issue of considerable importance. The principal ground for opposing it is that taking audit working papers currently in the possession of by KPMG affiliates in the Mainland out of the Mainland would be unlawful as would allowing inspection of them by the Liquidators at a location in the Mainland. The significance of this issue will become apparent as I describe the Company and the circumstances in which it came to be wound up in more detail.

Background

4. The Company was incorporated in the Cayman Islands in 2004. On 10 August 2005 it was listed on the NASDAQ and its shares traded until it was delisted on 28 February 2012.

5. The Company was purportedly carrying on business developing, manufacturing and marketing advanced surgical and medical equipment in Mainland China, using in-vitro diagnostic products such as FISH and SPR Technology.

6. The Company carried on its business through its corporate group which included:

6.1 three wholly-owned indirect holding companies incorporated under the laws of Hong Kong, namely CMED Diagnostics (Hong Kong) Limited, East Crest Enterprises Limited and CMED ECLIA Diagnostic Technology (Hong Kong) Limited; and

6.2 three wholly-owned indirect operating subsidiaries incorporated under the laws of the Mainland, namely Beijing GP Medical Technologies Company, Limited, Beijing Bio‑Ekon Biotechnology Company, Limited and Beijing Yuande Bio-Medical Engineering Company, Limited.

7. Prior to the purported disposal of the Company’s Mainland China incorporated operating subsidiaries on 9 February 2012, the structure of the Company’s corporate group was as follows:

8. On 9 February 2012, 60% of the equity interests of the Company’s Mainland China incorporated operating subsidiaries were transferred by the Company’s management to two Mainland China companies, which the Liquidators believe are connected to the Company’s management. To date, the Liquidators have not found any evidence that any consideration was actually received by the Company for the sale of the equity interests and the transfers are the subject of further investigations and legal proceedings brought by the Liquidators in the Mainland. The information available to the Liquidators to date indicates that these purported transfers were not bona fide.

9. Between August 2005 and December 2010, the Company raised net debt and equity capital of US$631 million, including by issuing various senior unsecured convertible notes. The Company had US$515 million of funds available to it following the repayment of amounts due to Deutsche Bank Trust and Bank of America totalling US$116 million.

10. On 15 December 2011, the Company failed to make an interest payment of US$4,687,500 on its 6.25% senior unsecured convertible notes. Two months later, on 15 February 2012, the Company failed to make an interest payment of US$4,930,000 on its 4% senior unsecured convertible notes. These two interest payment defaults formed the basis of a petition to the Grand Court on 15 June 2012 for the winding up of the Company in the Cayman Islands and the appointment of Mr Krys and Mr. Borrelli as liquidators (“Cayman Liquidators”) on 27 July 2012.

11. On 11 October 2012, the Cayman Liquidators obtained an Order under Chapter 15 of the United States Bankruptcy Code. Pursuant to that Order, Judge Robert E. Gerber of the United States Bankruptcy Court for the Southern District of New York ordered that the Company’s winding‑up proceedings in the Cayman Islands be recognised as “foreign main proceedings” and that Mr Krys be recognised as the “foreign representative” for the purposes of Chapter 15 of the US Bankruptcy Code.

12. On 26 November 2012, the Company, acting at the direction of the Cayman Liquidators filed a petition for an ancillary winding-up in Hong Kong (“Hong Kong Petition”). As I have already explained the Liquidators were appointed provisionally on 29 November 2012.

13. On 1 September 2014 I made an order winding up the Company in Hong Kong. The grounds for so doing are explained in 2 decisions[4], which describe in detail what would appear to be the principal cause of the Company’s being unable to pay interest on the 2 tranches of senior unsecured convertible notes, namely, the misappropriation of at least the US$355,000,000 of US$631,000,000 raised through the share offerings and issue of senior unsecured convertible notes. In summary, the Liquidators believe for credible reasons that the misappropriation was achieved by the bogus acquisition of technology and intellectual property rights from two companies: Molecular Diagnostics Technologies Ltd and Supreme Well Investments Limited (“Supreme Well”). They also believe, once again for credible reasons, that the misappropriation was orchestrated by, and for the benefit of, the former Chairman, Chief Executive Officer and major shareholder of the Company, Mr. Wu Xiaodong, and its Chief Financial Officer, Mr. Samson Tsang Tak Yung.

14. The Liquidators have been able to obtain few of the Company’s documents or those of its subsidiaries. Those they have obtained have principally come from production by the Bank of China and Bank of East Asia, which, as I explain in my August 2014 decision, has allowed the Liquidators to identify how the sums received by Supreme Well have been channeled through bank accounts of which Mr. Tsang is a signatory and to accounts in which he and Mr. Wu would appear to have a beneficial interest. It is in these circumstances that they seek from KPMG HK, at one time the Company’s auditor, extensive production of documents and examination of partners and staff of KPMG HK with involvement in the engagement.

KPMG

15. KPMG HK was initially engaged by the Company to perform the audit of the Company’s financial statements and act as the reporting accountant for the purposes of its initial public offering. KPMG HK performed a review of the Company’s unaudited quarterly financial statements prior to the Company’s filings with the United States Securities and Exchange Commission (“SEC”). KPMG HK was then appointed the auditor of the Company for the audit years ending 31 March 2006 to 2008. KPMG HK commenced the audit for the year ending 31 March 2009, but they were replaced by PwC Zhong Tian CPAs Limited Company in August 2009. In addition KPMG HK reviewed an offering memorandum and interim financial statements for 6 months ending 30 September 2005 and 30 September 2006 in respect of the filing by the Company of Form F3 with the SEC in connection with a share repurchase and convertible bond offering in 2006. KPMG HK also reviewed an offering memorandum and quarterly financial statements for three months ending 30 June 2007 and 30 June 2008 in respect of another Form F3 filing with the SEC in connection with a bond offering in 2008.

16. KPMG HK says that it does not have the first engagement letter it signed. It has produced the engagement letter in its final form for the audit years ending 31 March 2006 and 2007, which is dated 23 March 2007 and was signed by Mr. Wu and Mr. Iain Bruce, the Chairman of the audit committee, on behalf of the Company. The engagement letter is comprehensive and runs to 9 pages it provides, amongst other things, that:

“We will issue a written report upon our audit of the consolidated balance...

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