Hong Kong's highest court has considered for the second time in recent years the conduct of examinations under section 221 of the Companies Ordinance. That section enables (amongst other things) a court to compel any persons whom it believes may have information concerning the affairs or dealings of a company in liquidation to be examined in private under oath. The court has determined that notes and transcripts of such examinations may attract legal professional privilege, meaning that those notes may not be subject to an order for production in litigation subsequently conducted by the liquidator, a decision which no doubt will be welcomed by liquidators.

Background

The Court of Final Appeal's decision in Akai Holdings Ltd (in compulsory liquidation) v Ernst & Young (a Hong Kong firm) (FACV 28 of 2008, 24 February 2009) arises out of the collapse of the Akai Group ("Akai"). We wrote about the liquidation and the court's previous decision regarding section 221 in our e-bulletin of 15 January 2007.

In May 2004, the liquidators issued a writ against the former auditors of Akai, alleging negligence in the conduct of its audit of Akai and claiming damages exceeding US$500 million. In the meantime, the liquidators have examined a number of persons, including former officers and managers of Akai, either using, or under the threat of using, section 221. Readers familiar with insolvencies will be aware that the liquidators are allowed to attend such section 221 examinations and to put questions to the summonsed examinees.

This decision concerns an application by the former auditors for specific discovery of notes and transcripts of some of the section 221 examinations. Most of the examinations took place after the issue of the liquidators' writ. The liquidators sought to resist discovery on a number of grounds, including that the examinations attracted legal professional privilege and therefore did not have to be disclosed. An order for discovery was granted by the High Court (Kwan J). That order was upheld on appeal in September 2008 by the Court of Appeal. The order has now been overturned by the Court of Final Appeal.

Court of Final Appeal decision

The court reached its decision on the basis that, in the circumstances of the case, the examinations attracted legal professional privilege because the examinations took place for the sole or dominant purpose of obtaining legal advice or collecting evidence regarding contemplated or anticipated litigation (the "sole or dominant purpose test"). In doing so, the court rejected a number of arguments by the former auditors, including an argument that the privilege could not attach to the examinations because that would be inconsistent with the statutory purpose of section 221, taking the view that what mattered was whether the examinations met the sole or dominant purpose test, not the statutory purpose of the section.

It should be noted that the court did not say that all section 221 examinations would necessarily attract legal professional privilege. However, it did observe that in cases where examinations did not attract legal professional privilege, the disclosure of notes and transcripts of examinations would still require the court's permission under rule 62 of the Companies (Winding-Up) Rules.

Comment

The ruling must be read in its context. The only potentially recoverable "asset" in the liquidation is the pending claim against the auditors, and most of the examinations (which were of the company's officers and employees rather than the auditors' partners and staff) took place after the writ against the auditors had been issued. The court found that, in the circumstances, there was litigation privilege. It remains to be seen whether legal professional privilege can be established in cases where section 221 examinations take place at a much earlier stage of a liquidation, when tangible asset recovery and realisation would normally be the main focus.

Practically, liquidators seeking the protection of legal professional privilege over the examination process may now cast their affidavits in support of section 221 applications in terms of seeking legal advice and/or contemplating litigation. However, courts have traditionally been reluctant to allow section 221 examinations or documents production to be used explicitly to obtain early discovery/interrogatories against a potential or actual defendant (as opposed to such applications being couched in terms of information gathering but may incidentally be of use in future litigation). It is not yet clear as to what impact an explicit "litigation-focused" approach may have on the granting of examination orders against parties who may be or are defendants in any future legal action by the liquidators.

From a broader perspective, liquidators will welcome this judgment both as a further buttress for the use of section 221, as well as it serving to continue the trend in the last 5-10 years of Hong Kong courts interpreting section 221 powers increasingly "liquidator friendly" manner. However, for those who regularly defend proceedings from liquidators, this trend means that it may be quite some time before there would be a successful attempt to limit the scope and use of section 221.

For readers concerned with the question of privilege outside the litigation context, it is worth noting that there was an argument as to whether the well-known (if controversial) English Court of Appeal decision in Three Rivers DC v Bank of England (No. 5) [2003] QB 1556 on the scope of legal advice privilege should be followed. In the event, the court decided did not have to deal with the point, but signalled that, if the question arose in a future case, the issue should be approached in a manner appropriate to a fundamental right.