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Hong Kong – High Court Considers The Scope Of Exception To A Provisional Liquidators’ Implied Duty Of Non-Disclosure.

29 October, 2013

 

Legal News & Analysis – Asia Pacific – Hong Kong – Dispute Resolution

 

The High Court in Hong Kong recently examined the circumstances in which a liquidator was able to depart from their implied duty not to disclose documents obtained from third parties under statute or in the furtherance of their legal duty.

 

The case of Kayne Creditors v Roderick John Sutton and others [2013] HKCU 2285concerned an application to the Hong Kong Court for the disclosure of documents in the context of ongoing US proceedings. In 2011, Kayne Creditors (“Kayne“) instigated proceedings against MTC, and obtained a judgment for approximately US$47.6m. However, by this point MTC had been stripped of its assets by Grande Holdings Ltd (“Grande“), which Kayne alleged had in turn then been stripped of its assets by Mr Ho, Grande’s controlling shareholder.  As a result, Kayne issued further proceedings in the US to seek “alter ego” relief from Mr Ho and Grande for the judgment sum. Meanwhile, another creditor of Grande, Sino Bright, had commenced Hong Kong winding-up proceedings against Grande.

 

In addition to the alter ego claim, Kayne’s proceedings involved two other claims: one against Sino Bright and an intentional interference claim. In October 2012, the California Court issued a letter of request to the Hong Kong Court to obtain papers from the provisional liquidators of Grande in relation to the three claims. The documents requested included documents provided to Grande by Sino Bright in relation to the liquidation. Following an ex parte application in the Hong Kong Court in March 2013, an order was made in April 2013 for the provisional liquidators to provide the documents to Kayne. 

 

In the period between the issue of the letter in California and the ex parte hearing in Hong Kong, the claim against Sino Bright and the intentional interference claim were struck out, leaving only the alter ego claim remaining. Although Sino Bright were no longer party to the proceedings, they learnt of the Order and immediately challenged it on the basis that the provisional liquidators were under an implied undertaking not to use the documents for purposes beyond the liquidation. Sino Bright argued that (i) the documents requested in relation to Sino Bright were no longer relevant to the US proceedings, (ii) the documents were not properly identified (iii) the application was essentially an impermissible application for non-party discovery and a fishing exercise and (iv) there was material non-disclosure at the ex parte hearing.

 

The Court considered whether the implied undertaking not to use the documents for purposes beyond the liquidation prohibited the liquidators from disclosing documents to assist in foreign proceedings. The judge held that the Court could authorise the disclosure but it would have to be justified, on the balance of considerations, in the interest of obtaining proper justice.

 

In this case, the judge did not believe it was part of the provisional liquidator’s duty to assist a foreign court in litigation to which the liquidated company was not a party. However, he held that the public interest in bringing the Defendants to justice outweighed the strict adherence to the implied undertaking, and went on to consider whether the Hong Kong Court could comply with the request.

 

Under section 76(1) of the Evidence Ordinance (Cap 8), the High Court can make an order for obtaining evidence to assist foreign proceedings. This provision states that such an order must be for documents to be used as evidence in the proceedings and must be in relation to ‘particular documents’.  The judge examined the case law in this area, noting that (i) the evidence requested must be for use at a trial, (ii) the wording of the request must specify precise documents rather than classes of documents, and (iii) fishing expeditions to obtain discovery from third parties would not be tolerated by the Court. In light of this, the judge examined the letter of request and held that only four documents were sufficiently identified to form the basis of an order and the request was in part a fishing exercise for third party discovery.

 

In addition, the judge found that there had been material non-disclosure sufficient to discharge the original Order. Kayne had failed to notify the ex parte judge of the dismissal of Sino Bright’s claim and the intentional interference claim, which clearly affected the scope of the documents requested. Kayne had also neglected to inform the judge that the deadline for discovery in the US proceedings had passed in February, meaning that no further evidence as to facts was to be introduced by the parties. The judge discharged the Order and held that the Court would not exercise its discretion to re-grant it, given Kayne’s delay in bringing the request.

 

The case confirms that, although a provisional liquidator is under an implied duty not to use documents obtained from a third party other than for the purposes of the liquidation, the Court may in appropriate circumstances use its discretion to order disclosure of documents by a provisional liquidator pursuant to a letter of request in order to assist foreign proceedings. Although the applicant was unsuccessful in this instance, the case indicates that the Court will be willing to order the production of documents where (i) it is in the public interest to do so and (ii) the applicant meets the relevant requirements under section 76(1) of the Evidence Ordinance for such disclosure.

 

herbert smith Freehills

 

For further information, please contact:

 

Gareth Thomas, Partner, Herbert Smith Freehills
[email protected]

 

Dominic Geiser, Herbert Smith Freehills
[email protected]


Herbert Smith Freehills Dispute Resolution Practice Profile in Hong Kong

 

 

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