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HCMP 3891/2002
IN THE HIGH COURT OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
COURT OF FIRST INSTANCE
MISCELLANEOUS PROCEEDINGS NO. 3891 OF 2002
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| IN THE MATTER of THE NEW CHINA HONG KONG GROUP LIMITED (In Creditor's Voluntary Liquidation), THE NEW CHINA HONG KONG CAPITAL LIMITED (In Creditor's Voluntary Liquidation) and THE NEW CHINA HONG KONG FINANCE LIMITED (In Creditor's Voluntary Liquidation) |
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AND
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| IN THE MATTER of sections 221 and 225 of the Companies Ordinance, Cap. 32 |
| BETWEEN |
| THE JOINT AND SEVERAL LIQUIDATORS OF THE NEW CHINA HONG KONG GROUP LIMITED, THE NEW CHINA HONG KONG CAPITAL LIMITED AND THE NEW CHINA HONG KONG FINANCE LIMITED (All in Creditor's Voluntary Liquidation) |
Applicants |
| AND |
| ERNST & YOUNG |
1st Respondent |
| ANTHONY WU TING YUK |
2nd Respondent |
| CATHERINE YEN |
3rd Respondent |
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Coram: Hon Kwan J in Chambers
Date of Hearing: 9 April 2003
Date of Handing Down of Decision: 28 April 2003
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D E C I S I O N
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The application
1. This is the hearing of an originating summons issued on 24 September 2002 by the joint and several liquidators of New China Hong Kong Group Limited ("NCHK Group"), New China Hong Kong Capital Limited ("NCHK Capital") and New China Hong Kong Finance Limited ("NCHK Finance") (collectively "the Companies"). The Companies are all in creditors' voluntary liquidation. The application is made under sections 221 and 255 of the Companies Ordinance, Cap. 32, the latter provision enables the court to exercise in a voluntary winding up all or any of the powers which the court might exercise in a compulsory winding up. The respondents are Ernst & Young ("E&Y"), a firm of accountants, Mr Anthony Wu Ting Yuk and Miss Catherine Yen. Mr Wu and Miss Yen are partners with E&Y.
2. The liquidators seek the following orders in this application:
(1) E&Y do make available to the liquidators all its working papers and supporting documents relating to the audits of the Companies for the years ended 31 December 1993 to 31 December 1997 inclusive;
(2) E&Y do make available to the liquidators all its documents relating to the provision of financial advice by E&Y and/or Mr Wu to the Companies and other documents created by E&Y and/or Mr Wu in their capacity as the financial adviser to the Companies;
(3) the documents sought in (1) and (2) be kept at the office of E&Y for safe custody until the inspection and taking copies of the same by the liquidators; and
(4) Mr Wu and Miss Yen be examined on oath concerning the affairs of the Companies.
3. The application is opposed in its entirety by the respondents on the grounds that the liquidators have failed to establish that the orders sought for production of documents and oral examination are reasonably required for them to carry out their functions, and that it would be oppressive to grant the application which is nothing more than an attempt to conduct a roving commission or a fishing expedition for materials to bolster a case which the liquidators might pursue against E&Y and/or Mr Wu.
4. Before I deal with the objections raised by Mr Burns on behalf of the respondents, I set out the background matters relevant to the application.
The Companies
5. The Companies were all placed into voluntary liquidation in March 1999, pursuant to section 228A of Cap. 32. They are part of a larger group of related companies ("the New China Group of Companies"). The liquidators were appointed liquidators of 36 companies comprised in the New China Group of Companies.
6. NCHK Group is the parent or holding company. It was incorporated in Hong Kong on 8 September 1992 and became a public company in May 1993. It was a very substantial company with a paid up capital of HK$282,800,000.00 as at 31 December 1997. It is the 100% shareholder of NCHK Capital, which used to carry on the business of trading and dealing in marketable securities, financial products such as share options and equity derivatives. NCHK Finance is a wholly owned subsidiary of NCHK Capital. Prior to its liquidation, NCHK Finance was involved in, inter alia, providing margin finance to clients trading with the New China Hong Kong Securities Limited ("NCHK Securities"), also a wholly owned subsidiary in the New China Group of Companies and one of Hong Kong's largest stockbrokers.
The respondents
7. From their respective dates of incorporation until their liquidation, E&Y was the auditor of the Companies and 33 other companies in the New China Group of Companies. It was also the tax representative and the provider of company secretarial services to the Companies. It also provided the same services to some of the other companies in the New China Group of Companies.
8. Mr Wu is the current chairman of E&Y. He was an audit partner in 1994. On 20 November 1992, he was appointed a director of NCHK Group, when NCHK Group was nothing more than a shelf company. Prior to and just after NCHK Group was set up, Mr Wu, in his capacity as a partner of E&Y, did considerable work on behalf of NCHK Group in raising funds for the launch of that company and HK$500 million was raised. He resigned as a director on 18 February 1993, at the third meeting of the board of directors. It was also resolved at that meeting that Mr Wu was to be appointed as the financial adviser of NCHK Group and that he was to be invited to join the Executive Committee of the company in his capacity as financial adviser. The directors further resolved that five of the directors (NCHK Group had 43 additional directors appointed by mid 1993), the financial adviser (being Mr Wu) and the legal adviser were to be appointed members of the Executive Committee.
9. In accepting the appointment as financial adviser to NCHK Group, Mr Wu did so as a representative of E&Y and E&Y was formally appointed at a retainer fee of HK$100,000.00 per month pursuant to an engagement letter, which it has not been able to locate despite a detailed search. E&Y billed NCHK Group on a monthly basis in respect of the service provided. Mr Wu has claimed that the retainer fee largely reflected the work he had carried out prior to the launch of NCHK Group for which E&Y was not paid an "upfront fee", and that his involvement once the initial fundraising had been completed and the company was up and running by mid 1993 was "significantly reduced".
10. Notwithstanding this, it would appear from the minutes of the meetings of the Executive Committee of NCHK Group that Mr Wu had attended 164 out of 206 meetings between 18 February 1993 to 7 November 1998 (about 80%). Further, Mr Wu was an authorised signatory in respect of the bank accounts maintained by NCHK Group with 12 banks and from 1 December 1994 onwards, he was a group A signatory empowered to sign cheques jointly for unlimited amounts.
11. As for Miss Yen, she is an audit partner and was the partner of E&Y responsible for the audits of NCHK Group and its subsidiaries, including NCHK Capital and NCHK Finance, for the years ended 31 December 1995 and 1996. Mr Wu has claimed that he had never been involved in the audit of the Companies or any of the subsidiaries save that for the audit reports for the years ended 31 December 1994 and 1995, he had signed these reports because the engagement partner (who has not been identified by Mr Wu) was out of town and as all substantive work had been completed and cleared by the engagement team and the engagement partner, Mr Wu has regarded his signature to the auditor's report as "nothing more than a matter of administrative expedience".
12. The Executive Committee of NCHK Group, of which Mr Wu was a member, was responsible for the management of the affairs of the company. The minutes of the meetings showed that the affairs dealt with had included the arrangement of loans and banking facilities for the companies within the New China Group of Companies, the granting of securities to the lenders, the allotment and transfer of shares, the acquisition and disposal of assets and investments, the declaration of dividends, and from November 1997 onwards the consideration and approval of debt restructuring proposal for the company and its subsidiaries including NCHK Capital.
13. I should mention that notwithstanding he was a member of the Executive Committee, it is asserted by Mr Wu that he had no executive powers and no voting rights and his role, which was merely advisory, was "responsive, not proactive" in that he would give advice only if the Executive Committee had specifically sought his advice. As for the meetings for which minutes were prepared, many of these meetings were done on paper.
The financial position of the Companies
14. Consolidated financial statements of NCHK Group and its subsidiaries were prepared. The financial position as revealed from the audited financial statements for the years ended 31 December 1993 to 1997 may be summarised as follows:
Year ended
31 December |
Profit/(Loss) HK$ |
Net Assets/
(Liabilities)
HK$ |
Net Current
Assets/(Liabilities)
HK$ |
Auditors'
Opinion |
| 1993 |
-15,845,425.00 |
388,730,637.00 |
221,579,232.00 |
True & fair view |
| 1994 |
70,265,921.00 |
449,546,564.00 |
149,818,225.00 |
True & fair view |
| 1995 |
74,935,542.00 |
459,390,990.00 |
-37,642,533.00 |
True & fair view |
| 1996 |
-366,016,215.00 |
155,108,517.00 |
-590,733,215.00 |
Fundamental uncertainty, save for non-consolidation & non-disclosure on 2 subsidiaries, true & fair view |
| 1997 |
-63,688,180 |
118,063,680.00 |
-764,113,607.00 |
Fundamental uncertainty, disclaimer of opinion |
15. Thus, it could be seen from the above that massive losses were suffered by...
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