Are liquidators' communications with experts subject to litigation privilege?

In the recent judgment of Liquidators of China Medical Technologies Inc & Ors v Wu, Tsang & Ors [2023] HKCFI 1892, the Court of First Instance has clarified whether liquidators’ communications with experts are subject to litigation privilege and whether liquidators have waived the litigation privilege by using experts’ advice in documents filed in support of court applications.

 

Facts

The first Plaintiff was a holding company of a group which develops and manufactures surgical and medical equipment in the PRC (Company). The Company was involved in a fraud scheme allegedly devised by the first and second Defendants who were senior executives of the Company. The Company later became insolvent and winding up proceedings were commenced in 2012. The third Plaintiff was appointed as Liquidators of the Company (Liquidators) and issued a protective writ against the Defendants in 2013. After legal proceedings commenced, the Liquidators engaged 6 experts (Experts) to advise on the true nature and value of the Company’s assets.

The second Defendant applied for discovery against the Plaintiffs of all documents or correspondence or notes of meetings or conversation between the Liquidators and the Experts (Subject Materials). The Plaintiffs opposed to the application on the ground that the Subject Materials were protected by litigation privilege as they were created for the sole purpose of specific litigation. The second Defendant alleged that the Plaintiffs were unable to adduce sufficient evidence to prove so, and in any event, the litigation privilege had been waived because the Liquidators had already deployed the Subject Materials in documents to support their previous court applications.

 

Issues

There are two main issues before the Court：

1. Whether the Subject Materials were protected by litigation privilege (ie whether the materials were created for the “sole purpose” of specific litigation) (Litigation Privilege); and
2. If the Subject Materials were subject to litigation privilege, whether the Liquidators had waived such privilege when the contents had been deployed in court applications (Waiver).

The Court ruled in favour of the Plaintiffs and dismissed the Defendants’ application with costs.

 

Litigation Privilege

To claim litigation privilege for correspondence with experts and proofs, reports or documents generated by them, the Plaintiffs must prove the following two points:

1. The liquidators conducted their investigations for the sole purpose of obtaining advice from their legal representatives in order to commence or conduct legal proceedings.
2. The proceedings were reasonably anticipated at that time.

In this regard, the Court had no doubt in holding that the Liquidators’ communications with the Experts were subject to litigation privilege, primarily because of the following reasons:

• All communications of the Liquidators with the Experts took place after the protective writ was issued against the Defendants. Legal proceedings must have been anticipated when the Subject Materials came into existence.
• Liquidators made clear that the Experts were engaged in order to understand the true value and purported assets of the Company.
• The Company’s assets only had a nominal value and its creditors had claims in excess of USD400 million. With only few assets to be realized, the Liquidators’ primary focus at that time must have been to investigate available claims to recover money for distribution to creditors.
• The Defendants were unable to explain what else could be the purpose of the Liquidators’ investigation and communication with Experts after lawyers had been engaged and the protective writ had been issued if it were not for the purpose of obtaining or providing legal advice in relation to bringing or conducting legal proceedings.

In the circumstances, the Court held that the Subject Materials were clearly produced and brought into existence for the sole purpose of either obtaining or providing legal advice as to bringing or conducting these proceedings. Therefore, the Subject Materials were subject to litigation privilege.

 

Waiver

Even if the Subject Materials were protected by litigation privilege, Defendant argued that the Liquidators had waived the litigation privilege attached to the Subject Materials because the materials had already been deployed in documents filed in support of Plaintiff’s applications.

However, the Court rejected this argument and clarified that the test for waiver should focus on whether the contents of privileged materials were being “deployed”, rather than the effect of the document. If the party was not quoting or summarizing the content, but simply referring to or relying on the effect of the document (eg to show merits of the case), there would be no waiver of privilege. In our case, after communicating and considering the experts’ advice, the Liquidators were merely stating the conclusion that the assets of the Company in fact had no, or no significant, commercial value. Therefore, the Liquidators could not be said to have “deployed” the content of the expert advice and they had not waived the litigation privilege attached to it.

 

Takeaway

This decision helpfully clarifies the application of the principles on litigation privilege and waiver in liquidation context. It is interesting to note that the Court is willing to accept that the Subject Materials were produced for the sole purpose of this litigation even though prior to the communications between the Liquidators and the Experts, the Liquidators had only issued a protective writ against the Defendants and had not proceeded to a further stage.

In addition, the Court’s findings that the Liquidators had not waived the litigation privilege by merely referring to the expert advice in court documents are also good news to liquidators. That being said, the distinction of merely relying on the conclusion of the privileged documents and “deploying” the contents of the privileged document may not always be clear in practice, it is vital for the parties to consider carefully before adopting the content of the privileged communication or materials to prevent waiving the litigation privilege attached to the document.