WING FAI CONSTRUCTION CO LTD v. BENEFIT HOLDINGS INTERNATIONAL LTD AND OTHERS

HCA 810/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 810 OF 2003

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Dates of Hearing: 16 September 2004

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J U D G M E N T

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I.       Introduction

1.  I have to decide whether the defendants have waived legal professional privilege (LPP) in respect of certain instructions to their former solicitors (JSM).  If I find that there has been waiver, Wing Fai's liquidators ask for discovery relating to those instructions.

II.      Background

2.  Companies Ordinance s.47A forbids a company from providing financial assistance for the acquisition of its own shares.  Wing Fai's liquidators claim that in breach of s.47A Yip, Cheng and Kam caused Wing Fai to provide $5 million to facilitate the purchase by Sino Glister of Wing Fai shares belonging to Benefit Holdings.

3.  In support of their case the liquidators rely in §15 of the Statement of Claim on a letter to them dated 24 October 2002 from JSM.  The letter (marked “cc: client”) reads:-

“We refer to your letter dated 15 October 2002 marked ‘3rd Letter’.

We are instructed by our client that the payment by Wing Fai of HK$5 million which features in the proof of debt of Benefit Holdings was, from the perspective of our clients, entirely proper and bona fide.

As you will be aware, under the terms of the sale and purchase agreement by which Wing Fai was sold by Benefit Holdings to Sino Glister, payment was required to be made in the sum of HK$5 million by Sino Glister to Benefit Holdings.  We are informed that the cheque drawn by Sino Glister for payment in this regard was dishonoured as was a subsequent cheque drawn by way of replacement.

The decision to repay HK$5 million from the account of Wing Fai was a decision which emanated from Eric Chim, a director of Wing Fai.  Our clients were informed in advance of the payment that the board of directors of Wing Fai had approved the payment in order to settle the Sino Glister debt due o Benefit Holdings and that, in addition, Sino Glister itself, in its capacity as sole shareholder of Wing Fai, also approved this method of payment.

Whether or not this payment represents a payment by Wing Fai by way of financial assistance for the purchase of its shares or what arrangement may have existed between Wing Fai and its shareholders and management as to the financial accounting treatment of this payment is of no concern to our clients.  Section 47A of the Companies Ordinance is a prohibition aimed at a company who provides financial assistance and the officers of a company, not third parties to the financial transaction.”

4. The Defence admits JSM's letter but denies its “relevance or import”.  The defendants also deny that Wing Fai “made any payment to [Benefit Holding] which had the result of directly or indirectly discharging Sino Glister's liability to pay the Consideration [of $5 million]”.

5.  In his witness statement filed for the forthcoming trial, Yip states (at §46):-

“At the time Kelly Cheng was dealing with [JSM] on these issues...  The liaison with and instructions given to JSM were deficient because instead of asking Kennedy [a liquidator] to back up his allegation that Wing Fai had paid $5 million to Benefit, JSM wrote a letter asserting that this payment had been made and that it was all the responsibility of Eric Chim.  I had never given any such instructions to JSM and I have no knowledge of Kelly Cheng or Kam Shing ever giving such instructions.”

6.  In his witness statement, Kam states (at §8):-

“I deny that I have been part of any conspiracy to defraud Wing Fai by procuring the transfer of Wing Fai’s money to Benefit as settlement of the purchase price for the sale of its shares....  I was not also involved in giving instructions to [JSM] and therefore cannot comment on the circumstances under which their letter dated 24th October 2002 was issued.  What I do know is that apart from a cheque for HK$2 million paid by Sino Glister to Benefit in early May 2002, the balance of the purchase price of HK$3 million was never paid by Sino Glister to Benefit.”

7.  Cheng’s witness statement reads (at §20):-

“At the time I was dealing with our former lawyers [JSM] on these issues,...  The liaison with and instruction given to JSM were deficient.  I would ask the Court to bear in mind that since these liquidators were appointed as provisional liquidators of Wing Fai in July 2002, I was placed under extreme psychological pressure and stress by their various acts of harassment....  As a result of this pressure and stress my thinking and approach towards dealing with the threats and demands of the liquidators was not as clear as it could have been....  I do not recall ever seeing a draft of the letter dated 24th October 2002 which JSM sent to the liquidators before it was issued.  The letter was clearly wrong because it is quite obvious from the bank statements of Benefit, the simple fact was that Benefit never received HK$5 million from Wing Fai or Sino Glister.  Had I seen the draft letter and checked the bank statements I would have corrected JSM and that letter would never have been issued in those terms.”

III.     Discussion

8.  Mr. Smith SC (appearing for the defendants) submits that on a fair reading of the witness statements it is not possible to contend that there has been waiver of LPP.  I disagree.

9.  The defendants say that the letter cannot be taken at face value.  They allege that there has been defective communication with JSM and JSM somehow misunderstood matters.  Considering the witness statements in the context of the Defence, the defendants disavow that JSM was entitled to write what JSM purported to write on their behalf.

10.  Accordingly, the defendants squarely raise the issue whether the letter truly reflected their instructions.  In raising such issue the defendants must be deemed to have waived LPP.  The issue cannot be fairly explored at trial unless the liquidators are allowed access to relevant material to enable them to deal in cross-examination with the defendants’ case of an alleged mismatch between instructions and the contents of the letter.  The defendants cannot both assert that JSM did not act on instructions and refuse discovery of those instructions.

11.  The issue which I have highlighted is one that will have to be canvassed regardless of the outcome of the defendants' pending application to strike out §15 of the Statement of Claim.  I am not persuaded by Mr. Smith's argument that discovery should be different depending upon whether or not an issue arises out of the pleadings.  In any event, it seems to me that in denying the import and relevance of the letter the Defence itself raises the issue which I have identified.

12.  Mr. Smith says that mere service of a witness statement does not amount to waiver of privilege.  He cites Hong Kong Civil Procedure 2004, Note 38/2A/12 (p.600) in support of this proposition.  However, this matter involves more than just mere service of a witness statements.  The defendants are expressly challenging the obvious meaning of their own agent's letter.  The defendants are saying that the letter should be ignored because it was written in error.  They may be right that there is a perfectly innocent explanation for how the alleged error came about.  That explanation needs to be tested at trial and fairness demands that the liquidators should be given discovery in relation to the defendants' contentions.

13.  Mr. Smith argues that at best only some, but not all, of the defendants have waived LPP.  Since the instructions to JSM would have been joint, the waiver by only some defendants (Mr. Smith argues) cannot constitute waiver of LPP by the whole.  Mr. Smith reasons that the non-waiving parties can still assert privilege over the same material.

14.  In my view, for the reasons already mentioned, all defendants challenging JSM's letter and querying whether it truly reflected their instructions, there has been a waiver of LPP by all.

15.  Given that I am in principle prepared to order discovery, I now propose to work out an appropriate order for the ambit of discovery with the assistance of counsel.