While the high profile collapses of US corporate giants Enron, Worldcom and Tyco dominated the business news internationally in recent years and caused a major shift in the way auditors conduct their business, Hong Kong’s largest liquidation, that of the former high flying Akai Holdings Limited ("Akai"), is also providing some interesting insights into the complex issues faced by professional advisers in the current climate of public interest increasingly overriding traditional rights of confidentiality. As previous legal advisers to Akai (prior to its liquidation), we have also had to face some of the issues which came to light in the recent reported case between the liquidators of Akai and Ernst & Young.
Liquidators’ powers generally
When liquidators assume their duty in a liquidation, they always have to obtain information from those previously involved in the conduct of the company’s business including the former directors, officers and professional advisers. In appropriate cases, the liquidators may also apply to the Court under Section 221 of the Companies Ordinance (Cap.32) to summons unwilling persons suspected of having property of the company or capable of giving information to produce any books and papers in their custody or power relating to the company. When granting an order under Section 221, it is incumbent upon the Court to ensure that the order of discovery is not oppressive, vexatious or an abuse of process of the Court.
The liquidators of Akai and Ernst & Young Case
As revealed in the judgment handed down on 11 November 2003, Akai’s liquidators have been investigating the causes of Akai’s failure and various major assets which had become worthless or untraceable and six major transactions which required further investigation. The liquidators, however, faced the difficulty of a serious lack of documentation and the refusal of former directors to provide any meaningful assistance. After many months of negotiations with the liquidators and their lawyers which were further complicated by the fact many of the relevant documents had been seized by and were then in the custody of the Commercial Crime Bureau, Akai’s former auditors Ernst & Young agreed after taking legal advice to deliver certain papers but not those prepared for the firm’s internal review purposes. This forced the liquidators to apply to the Court for an Order directing Ernst & Young to hand over all audit, restructuring and "internal review" documents relating to Akai. It was believed that the contents of those documents would disclose information relating to the management and affairs of Akai which was available at the time of the audits and would have become apparent in the answers to queries raised by the auditors.
In her Judgment allowing the liquidators’ application, the High Court Judge Madam Justice Susan Kwan indicated her view that the fact these were internal documents did not necessarily mean they should be excluded from production but was merely a factor to be taken into account in the balancing exercise. She was also mindful that the disclosure of the internal review documents might expose the auditors to the risk of a negligence action by the liquidators if these documents should reveal any breach of duty on their part. However, the public interest in requiring the auditors to give assistance to the liquidators in Akai’s situation was regarded as an overwhelming consideration which outweighed the risk of oppression to the auditors.
It was also reported that Ernst & Young intends to appeal the decision. Whether the appeal will be lodged and succeed remains to be seen. However, the above decision demonstrates the judicial inclination that public interest should definitely prevail over the self-incriminating prejudice in such circumstances.
While every case will turn on its own facts, it is anticipated that the same view and rationale of the above judgment would extend to scenarios in which directors and/or professional advisers of a company in liquidation are required to disclose confidential or internal documentation and information to the liquidators. Lawyers in our Litigation Department have experience in this particular field as well as insolvency matters generally and will be happy to provide professional advice in this specialist area.
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