Hong Kong's highest court has recently considered the extent of the court's sweeping jurisdiction under section 221 of the Companies Ordinance, which enables it (amongst other things) to compel companies in liquidation to produce documents and for individuals to be examined on oath. The case will be welcomed by liquidators given that the court unanimously confirmed that it has jurisdiction to make such orders under this "extraordinary" section.

Background

The Joint & Several Liquidators of Kong Wah Holdings Limited (in compulsory liquidation) v The Grande Holdings Limited and others [2006] HKEC 2294 case concerned the liquidation of two subsidiaries of the Akai Group (the Companies). Readers will be aware that the collapse of the Akai Group has been widely acknowledged as the largest corporate insolvency in Hong Kong's history. The liquidators faced a massive insolvency and the apparent disappearance of substantial assets in a relatively short time, in suspicious circumstances. In order to assist the liquidators in their investigations, applications were made under section 221 of the Companies Ordinance (the Ordinance) for orders compelling the production of documents in relation to the Companies' affairs, and to provide certain information designed to elicit the whereabouts of missing documents. The liquidators also requested that various individuals attend court for examination on oath.

The orders were granted at first instance, a decision upheld by the Court of Appeal. The Companies subsequently tried to find success with the Court of Final Appeal where they challenged the court's jurisdiction to grant orders under section 221 as a matter of principle. The Court of Final Appeal unanimously dismissed the appeal, holding that the court does have jurisdiction.

Court of Final Appeal decision

The Companies challenged the jurisdiction of the court on a number of grounds, deploying (amongst other things) the common objections to orders for discovery, witnesses summons and subpoenas. However, the court rejected the challenges. The court noted that whilst the court's powers under section 221 are "extraordinary", given that liquidators are usually strangers to the affairs of companies, they are justified in engaging in speculative expeditions so as to understand companies' affairs, recover assets and generally to enable them to carry out their duties as effectively and as economically as possible. As such, a liquidator had to identify, at an early stage, what 'promising path' he could pursue. Orders as to document production and examination under section 221 were vital in this respect.

The court acknowledged that its jurisdiction under section 221 was wide and inquisitorial in nature, capable of working with great severity against third parties. However, the potentially oppressive nature of the jurisdiction was tempered by the fact that the court had ultimate discretion to make, refuse or modify any order sought. In exercising its discretion, the court confirmed it will seek to strike a balance between the liquidator's reasonable requirements and the need to avoid making an order that is unreasonable, unnecessary or oppressive to the party from whom the documents or information are sought.

The court also provided some useful guidance on the scope of its jurisdiction. It stated that:

  • Liquidators are not required specifically to identify the requested documents. The court acknowledged that it may difficult for liquidators to do so, and therefore to require specificity would impose a burden which may be impossible to discharge. Liquidators need to show that they are reasonably entitled to require production of the documents whilst the court would "do what it could" to define them as closely as possible consistently with making the order effective.
  • Liquidators are entitled to enquire as to the whereabouts of missing documents. The court's view was that this was necessary so that liquidators can seek document production, if necessary by applying to the court.

There is no requirement for liquidators to establish that documents actually exist before the court grants an order for production under section 221.

Comment

Liquidators will be relieved by this decision given that the court's wide powers under section 221 are a vital part of the statutory insolvency regime, designed to meet the difficulties faced by liquidators when searching for the truth about company failures and the location of assets.

Those who follow company law developments in general will be interested to know that a 'Companies Bill Team' has recently been appointed comprising of officers from the Financial Services and the Treasury Bureau and the Companies Registry. The team has commenced a comprehensive review of the Ordinance with a view to producing a White Bill for public consultation in mid-2009 and introducing a new Companies Bill into the Legislative Council by the third quarter of 2010. We are actively participating in the review process and will keep you informed of any developments.