Liquidators’ rights to documents
Under Hong Kong insolvency law, a liquidator can apply to the court to require the production of documents relating to the company and also the examination of any persons for giving information about the company in liquidation. It is becoming increasingly common that banks, with which the insolvent company has had accounts, have become the target of such application.
In the recent Hong Kong case of Re China Medical Technologies, the Hong Kong Court clarified the criteria which constitutes the term ‘relates to the company’ in order to justify the production of the documents sought. In this case, the court noted that it needs to undertake a balancing exercise between the oppression posed to the banks by such applications and the liquidators’ need to conduct a reasonable investigation into the company’s assets.
The liquidators in this case sought a large quantity of documents from the banks because they were suspicious of a large scale fraud, since US$355 million had been transferred from the insolvent company to third party companies without any apparent value being derived by the insolvent company. The fact that the signatories of the bank accounts of these third parties recipient companies were the insolvent company’s CEO and Chairman had cast further doubt on this transaction.
In determining whether the documents sought in fact ‘related to the company’, the court stressed that a commercial and practical approach had to be taken. It said that these words did not necessarily mean ‘relating to any affairs of property of the company’. Indeed, the court thought that the majority of documents sought only related to the bank or the third party companies but not the insolvent company itself. For instance, the banks’ internal anti-money laundering guidelines and payment approval documentation of the third party companies could only relate to the banks’ internal affairs and the payees of third party companies, instead of the insolvent company.
The court also rejected the liquidators’ argument that they needed the documents for assessing the strength of the claim. The court stated the further documents were not necessary because the liquidators had already been provided with sufficient accounting forms and bank statements earlier to establish the flow of money, which enabled them to make an informed assessment whether to proceed with this claim.
The court ruled in favour of the banks, meaning that the liquidators’ application to produce the documents failed. On a side point, examination of the banks’ staff was granted but it was only limited to matters to trace the proceeds but not the banks’ internal policies.
This case illustrates the banks’ concern on duty of confidentiality owed to their customers as well as the court’s concern not to use these applications for “fishing” expeditions. Moreover, the case shows that even if fraud were suspected, the court’s approach is to strike a balance between the need to avoid oppression posed to banks and the liquidators’ need for a reasonable investigation.