In Tenwow International Holdings Limited (In Liquidation) and Anor v PricewaterhouseCoopers (a Firm) and PricewaterhouseCoopers Zhong Tian LLP [2024] HKCA 1193, the Court of Appeal (“CA“) ordered a letter of request to be issued by the High Court of Hong Kong to the Shanghai High People’s Court.  This request seeks the transfer of audit working papers from the Mainland to Hong Kong pursuant to the Arrangement on Mutual Taking of Evidence in Civil and Commercial Matters between the Courts of the Mainland and the Hong Kong Special Administrative Region (《關於內地與香港特別行政區法院就民商事案件相互委託提取證據的安排》) (“Mutual Arrangement“).

The case involves an audit negligence claim filed by the liquidators of the Tenwow group and one of its subsidiaries against PwC and PwC Zhong Tian (an accounting firm incorporated in the Mainland).  The liquidators alleged that PwC Zhong Tian had breached its duties by failing to detect defalcations by way of prepayments made to three supplies and illegitimate financial assistance given to a non-group company related to a director and his associates.

In respect of the audit working papers, the liquidators requested PwC Zhong Tian to provide, inter alia, its working papers; however, PwC Zhong Tian contested that Mainland laws and regulations imposed a blanket prohibition on the unauthorised transfer of audit working papers outside of the Mainland.

Mutual Arrangement

Pursuant to Article 6 of the Mutual Arrangement, the scope of assistance that may be requested by a Hong Kong court in seeking the taking of evidence by a Mainland court under the Mutual Arrangement includes:

(a) obtaining of statements from parties concerned and testimonies from witnesses;

(b) provision of documentary evidence, real evidence, audio-visual information and electronic data; and

(c) conduct of site examination and authentication.

The Court’s Ruling

Pursuant to the Mutual Arrangement, PwC Zhong Tian applied to the Court of First Instance for a letter of request to be issued by the High Court of Hong Kong to the Shanghai High People’s Court.  However, such application was rejected by Anthony Chan J on the basis that letters of request were normally issued for obtaining evidence from non-parties, or at most for taking the evidence of a party overseas, rather than for the production of documents and discovery.  Further, Anthony Chan J held that obtaining approval from the Mainland authorities did not fall within the categories referred to in Article 6, rendering the Mutual Arrangement inapplicable.

In the appeal, the CA allowed the appeal and ordered a letter of request to be issued for the following reasons, among others:

(a) In a broad sense a letter of request is a formal written document through which a court seeks assistance from a court in another jurisdiction, either under a convention or out of comity and reciprocity. While typically used to obtain evidence from third parties, it does not preclude their issuance to aid a party in fulfilling its own discovery obligations.  Therefore, it is not inappropriate in principle to use a court-to-court request procedure in aid of the production of a party’s own documents in light of a legal impediment in the foreign jurisdiction;

(b) A letter of request is only a request. Issuing a letter of request does not necessarily subordinate the court’s power to the penal laws of another jurisdiction.  It is a matter of discretion based on the case’s specifics, with no requirement to disregard or prioritise foreign law.  The court retains full control over its processes even after a request is issued;

(c) After reviewing the relevant Mainland law and regulations, the CA was cautious about making any firm findings of Mainland law due to absence of oral examination of the experts and a lack of expert evidence regarding the latest Mainland regulation. Nevertheless, the CA concluded that PwC Zhong Tian had demonstrated a real risk that it would be penalised in the Mainland if it simply handed over copies of the audit working papers to the liquidators in Hong Kong without prior approval from the Mainland authorities;

(d) The use of court-to-court procedure is justified, as any requisite approval for the transmission of audit working papers for judicial proceedings should be sought pursuant to the applicable mutual judicial assistance protocol;

(e) The Mutual Arrangement is intended to facilitate the efficient and certain acquisition of evidence for civil and commercial matters by litigants in both jurisdictions. Therefore, there is no reason to interpret the Mutual Arrangement so restrictively as to exclude the present application for approval from the Mainland authorities.  The assistance sought through the letter of request falls within the scope of the Mutual Arrangement, and aligns with the policy of Mainland law; and

(f) Concerning the objection based on the submission of futility, the CA determined that, in the absence of any evidence detailing what transpired with the letters of request in previous cases or the reasons for their non-execution, the Court would not infer that a letter of request in the present case would be futile.

Takeaways

Audit working papers are essential documents for the fair disposal of a claim alleging auditors’ negligence.  This case marks the first successful application for a letter of request to transfer the audit working papers in a contentious context, serving as a precedent for future cases involving the transfer of such documents from the Mainland to Hong Kong, particularly in audit negligence claims.  The CA’s rulings indicate a more flexible interpretation of the Mutual Arrangement, which may foster enhanced cooperation in taking of evidence in civil and commercial matters between Hong Kong and the Mainland in future cases.

The full judgment can be accessed here.