CHINA CONSTRUCTION REALTY LTD v. LUCKY DRAGON LTD AND OTHERS

HCA 1237/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1237 OF 2012

______________________

______________________

_____________

D E C I S I O N

_____________

1.  There are four appeals against a decision of Registrar Lung made on 8 July 2014. Two appeals are launched by the plaintiff and two by the 4^th defendant.

2.  The decision was given on an application by the plaintiff for specific discovery of documents by the 4^th defendant and an application by the 4^th defendant for withdrawal of some interrogatories served by the plaintiff on the 4^th defendant.  The Registrar also extended time for the 4^th defendant to make its application.

BACKGROUND

3.  The background of this case has been summarised by Poon J in a decision dated 12 April 2013 which dismissed the 4^th defendant’s application to discharge an injunction granted to the plaintiff.   I do not wish to repeat the background here.

4.  The gist is that the plaintiff used to hold 90 per cent of the shares of a company (“GPB”) that held, through intermediaries, the shares of two companies (“the Dalian companies”) which in turn held a piece of land in Dalian, China.

5.  The plaintiff sold the GPB shares to a company, SBS for AUD46,500,760.  The sum was to be paid in instalments.  SBS got the GPB shares but only paid AUD500,760.  The plaintiff sued SBS in Australia and got judgment for AUD46 million.  SBS did not pay up and was wound up.  However, SBS had already sold its shares of the intermediaries that held the shares of the Dalian companies to the 1^st defendant herein.

6.  The plaintiff then sued SBS, the 1^st defendant and other relevant companies to set aside the sale of shares to the 1^st defendant.  The plaintiff obtained judgment on 25 March 2011.  However, two companies which together had held 60 per cent of the shares of the Dalian companies had sold these shares to the 4^th defendant in January 2010.  The plaintiff then brought this action to set aside the sales of these shares under section 60 of the Conveyancing and Properties Ordinance, Cap 219 on the ground that the sales are voidable as they were entered into with intent to defraud the plaintiff as a creditor and are part of a conspiracy and fraudulent scheme to put the Dalian land out of the plaintiff’s reach.

7.  Only the 4^th defendant defends this action.  The 4^th defendant’s defence is that the two sales of shares of the Dalian companies to it were bona fide transactions done for valuable consideration in good faith and without notice of any intent to defraud the plaintiff.  This defence is based on section 60(3) of the Conveyancing and Properties Ordinance. 

THE INJUNCTION

8.  The plaintiff obtained an ex parte injunction from Deputy Judge Sakhrani on 17 July 2012.  The injunction enjoined the 4^th defendant from the transferring or encumbering the shares of the Dalian companies or their assets, or to change the registered shareholders, directors or legal representatives of these two companies or registering such change.

BREACHES OF THE INJUNCTION

9.  It later transpired that the following matters had happened.  On 13 July 2012, the Dalian companies under the management of the 4^th defendant had borrowed RMB600 million from a Sheng Jing Bank (“SJB”). The loan was secured by a mortgage on the Dalian land held by the two Dalian companies.

10.  On 13 July 2012, the Dalian companies borrowed another sum of RMB100 million from SJB.  This loan is also secured by mortgages on the Dalian land and building works thereon.  Earlier on 12 July 2012, the 4^th defendant also charged the shares of one of the two Dalian companies to secure this loan.

11.  On 20 July 2012, Deputy Judge Sakhrani granted the injunction to the plaintiff.

12.  On 13 November 2012, the Dalian companies borrowed a further sum of RMB40 million from SJB which is also secured by a mortgage on the land and by guarantees by the 4^th defendant, one of the Dalian companies, and Mr Zhang Xi, a director of the 4^th defendant.  This was a breach of the injunction. 

13.  The 4^th defendant alleged that there were repayments to SJB between 30 January 2012 to 26 February 2013 totalling RMB83 million.

14.  On 22 February 2013, the Dalian companies again borrowed RMB650 million from SJB.  This loan was again secured by mortgages on the Dalian land and/or land use rights, and a mortgage on the shares of one of the two Dalian companies.  This is another breach of the injunction.

15.  Furthermore, the 4^th defendant had on 6 August 2012 appointed Zhang Xi and his sister Ms Zhang Yu as directors of the Dalian companies.  This is yet another breach of the injunction.

PURPORTED EXPLANATIONS OF THE BREACHES

16.  The 4^th defendant admitted all the breaches.  Zhang Xi said on its behalf that the first three loans were borrowed for the purposes of developing the Dalian land and they had been so used.  The last loan was a rollover of the first three loans. Regarding appointment of directors, it was because the previous directors, who were nominees of Zhang Xi, had resigned.  Hence, Zhang allowed himself and his sister to be appointed as directors of the companies as the companies needed directors to function.

17.  The 4^th defendant’s solicitors also advised the plaintiff’s solicitors in the beginning of this year that the 4^th defendant would apply to vary the injunction so as to legitimise these acts.  But no such application has been made till now.

THE APPLICATIONS

18.  The plaintiff on 11 March 2014 served 14 interrogatories on the 4^th defendant.  These are all in relation to the 4^th defendant’s breaches of the injunction.  The 4^th defendant issued a summons on 3 April 2014 seeking an order for the withdrawal of these interrogatories and for an extension of time for the issuance of this summons.

19.  The plaintiff also issued a summons on 17 March 2014 for specific discovery of documents by the 4^th defendant.  Those items of documents relevant to these appeals are items 1, 2, 3, 4, 6, 7 and 10 in the schedule of documents annexed to the summons for specific discovery.

THE DECISION OF THE REGISTRAR

20.  At the hearing before the Registrar, the plaintiff also took the point that the 4^th defendant was in contempt of court and had not purged its breaches of the injunction.  Hence, the plaintiff submitted that the Registrar should exercise his discretion not to hear the 4^th defendant on the applications (see Hadkinson v Hadkinson [1952] P 285 and para 52/0/14 of HKCP [2015] vol. 1).  The Registrar did not agree with the plaintiff.  He heard the summonses and gave a decision on 8 July 2014. 

21.  The Registrar in his decision ordered the 4^th defendant to make specific discovery of items 1, 2, 3, 4, 6 and 7 in the schedule of documents.  These documents relate to the matters pleaded in the 4^th defendant’s defence.  The Registrar also allowed the 4^th defendant’s application and ordered the withdrawal of the plaintiff’s interrogatories.  He also treated the plaintiff’s application for the Hadkinson order as a discrete issue and made no order as to costs for it.

THE APPEALS

22.  Both sides appealed.  The plaintiff appealed against the dismissal of specific discovery of item 10 of the schedule of documents and the order for withdrawal of its interrogatories. The documents described in item 10 of the schedule relate to the breaches of the injunction.

23.  The 4^th defendant appealed against the order for specific discovery of items 1, 2, 3, 4, 6 and 7 in the schedule and the costs order of no order as to costs for the Hadkinson application.  The documents sought in items 1, 2, 3, 4, 6 and 7 relate to the matters pleaded in the 4^th defendant’s defence.

THE DEFENCE OF THE 4^TH DEFENDANT

24.  It is necessary to go into the substance of the 4^th defendant’s defence in order to understand the plaintiff’s application for specific discovery of items 1, 2, 3, 4, 6 and 7 in the schedule.

25.  The 4^th defendant pleaded that it had entered into a framework agreement dated 14 December 2012 with a company in Jinan, Shandong Province (“the Jinan Company”) to purchase 60 per cent shares in each of the two Dalian companies.  The purchase price was RMB540 million.  This sum was mainly for use in paying off the debts and liabilities of the two Dalian companies which were said to be in excess of RMB510 million.  The RMB540 million was allegedly funded by three companies which are herein called the Xiamen Company, Chongqing Company, and Guangxi Company.

26.  Of this sum, RMB530 million had been paid to a law firm in Liaoning Province, the Liaoning East Asia Law Office (“LEA”).  A lawyer, Mr Ma of LEA applied this sum to pay off various debts of the two Dalian companies.  These debts included judgment debts as well as potential legal suits.

THE DOCUMENTS SOUGHT BY THE PLAINTIFF

27.  I now deal with the items of documents relevant to this appeal.  Item 1 is for invoices, demands, judgments, court orders, correspondence and all documents evidencing the alleged debts and liabilities owed by the two Dalian companies in December 2009 when the framework agreement was entered into.

28.  Items 2 and 3 overlap.  They relate to the payments of the debts of the Dalian companies.  Item 2 refers to all bank transfer forms, receipts, debit/credit notes and all accounting documents and records evidencing payments of the alleged debts from December 2009 to date.

29.  Item 3 refers to all bank transfer forms, receipts, debit/credit notes and all accounting documents and records evidencing the alleged payment of RMB430 million from the account of LEA from 21 December 2009 to 30 September 2013 as stated in the witness statement of the lawyer, Mr Ma.  Mr Ma said in his witness statement that he had been engaged by the Jinan Company to make repayments to the creditors of the Dalian companies.

30.  Item 4 refers to documents evidencing potential legal actions against the Dalian companies as at November 2009, which have been pleaded in schedule 2 of the Amended Defence of the 4^thdefendant.

31.  Items 6 and 7 relate to the funding of the RMB540 million for the 4^th defendant’s purchase of the 60 per cent shares of the Dalian companies.  Item 6 refers to all bank, financial and accounting records of the Xiamen, Chongqing, and Guangxi Companies showing the payments allegedly made by these entities in the total sum of RMB530 million to the account of LEA between December 2009 and February 2010 as pleaded in schedule 1 of the Amended Defence.

32.  Item 7 refers to all receipts and/or written acknowledgements issued to the 4^th defendant, the Xiamen, Chongqing, and Guangxi Companies, and/or other entities for the RMB530 million referred to in item 6 above.

33.  The plaintiff has filed a supporting affidavit by its solicitor, Mr Li Kit-wai for its application on 17 March 2014. The 4^th defendant filed the 4^th affirmation of Mr Zhang Xi on 13 May 2014 to oppose the application.  In addition, the 4^th defendant also placed before the Registrar the 5^th affirmation of Zhang at the hearing to supplement his 4^th affirmation.

34.  Zhang, in his 4^th and 5^th affirmations, made a number of assertions, including that the documents requested by the plaintiff in the six items above are irrelevant to the issues in this action.  But Mr Yan SC, leading Mr Ling for the 4^th defendant rightly chose not to argue this point.  They focused their arguments on the 4^th defendant’s possession, custody and power of the requested documents in the past and present.

POSSESSION, CUSTODY AND POWER OF THE DOCUMENTS

Item 1

35.  For the item 1 documents, Mr Li, on behalf of the plaintiff referred to the 4^th defendant’s Amended Defence.  It pleaded that the Dalian companies had debts and liabilities in excess of RMB510 million which rendered the deal not clinched at an undervalue.  But Mr Li said the 4^th defendant had failed to produce the underlying documents evidencing such debts save a due diligence report prepared by Deloitte dated 31 December 2009. Mr Li further said that the 4^th defendant, being the major shareholder of the Dalian companies, should have the possession, custody and power of the documents under this item.  These documents should also have been reviewed by the 4^th defendant and/or its advisers at the time of its acquisition of the shares of the Dalian companies and by Deloitte in the due diligence exercise.

36.  Mr Zhang, in opposition, said that the 4^th defendant never had the item 1 documents in its possession, custody or power.  He further explained that Deloitte did the due diligence report, not as the agent or on the instructions of the 4^th defendant, but for another company, Fulbond Holding Company Limited (“Fulbond”) which had been invited to consider purchasing the shares of the Dalian companies before the 4^th defendant was invited into the picture.  Hence, Deloitte did not owe any duty to the 4^th defendant to disclose to it any document that Deloitte had reviewed in the course of preparing the due diligence report.

37.  This assertion has factual support as Deloitte’s due diligence report did say that it was prepared pursuant to Fulbond’s engagement and it was submitted to the board of Fulbond.

38.  Mr Zhang further said that the 4^th defendant only held 60 per cent of the shares of the Dalian companies.  The other shareholder is a Qingdao Company which holds the other 40 per cent shares.  The Qingdao Company is a mainland company and unrelated to the 4^th defendant.  Hence, the 4^th defendant does not have sole control of the boards of the Dalian companies.

39.  It is a matter of fact that the Qingdao Company is the registered holder of 40 per cent of the shares of the Dalian companies, and one Mr Wong is directly appointed by this company to sit on the boards of the Dalian companies.  The plaintiff also does not allege that the 4^th defendant holds anything more than 60 per cent of the shares of the Dalian companies.

40.  Mr Zhang also said that the debts and liabilities in question were incurred prior to the 4^th defendant having acquired the 60 per cent shares of the Dalian companies.

41.  He also alleged that his sister, who is also a director of the Dalian companies, had between November 2013 and April 2014 requested Mr Wong of the Qingdao Company for these documents but Mr Wong said he could not locate them.

42.  Finally, Mr Zhang said that the 4^th defendant and the Jinan Company had a mutual understanding that the 4^th defendant would not interfere with phase 1 of the development on the Dalian land and the sale of that part of the development, or to bear any responsibility thereof.  Hence, the Jinan Company had not provided any document relating to phase 1 to the 4^th defendant.  The documents under item 1 relate to phase 1.  Hence, the 4^th defendant never had the possession, custody or power of them.

Item 2

43.  Mr Li referred to the witness statement of Mr Ma the lawyer, which stated that Mr Ma was responsible for arranging repayments of the debts of the Dalian companies to the tune of approximately RMB500 million.  The 4^th defendant has also disclosed a table of repayments and outstanding debts.  But the 4^th defendant had not produced any document to evidence the actual repayments and the source of funds for the alleged repayments.  Mr Li again relied on the fact that the 4^th defendant is a 60 per cent shareholder of the Dalian companies.

44.  Mr Zhang, in opposition, said that the table was supplied by Mr Ma who was responsible for arranging the repayments. He also said that the 4^th defendant did not have and never had the item 2 documents.  He also said that Mr Ma had represented the Jinan Company in negotiating for the framework agreement, and the framework agreement provided that the Jinan Company had the responsibility to repay the debts.  Mr Ma’s firm, LEA received the RMB530 million in such capacity.  It represented the Jinan Company and not the 4^th defendant in making the repayments.

45.  Regarding the provisions in the framework agreement that the Jinan Company had the responsibility to make the repayments, Mr Zhang is factually correct. The provisions are in clauses 4 and 5.2 of the framework agreement.

Item 3

46.  Regarding the documents in item 3, Mr Li referred to schedule 1 of the 4^th defendant’s Amended Defence.  It pleaded that RMB530 million had been paid out of the account of LEA from 21 December 2009 to 23 February 2010 for discharge of the debts of the Dalian companies.  But the 4^th defendant produced no document to prove such payments out of the account of LEA.  Mr Li further said that the 4^th defendant should have these documents in its possession, custody or power given that Mr Ma, who was responsible for making the repayments, was the lawyer of the Dalian companies, and the 4^th defendant was their major shareholder. 

47.  I have already referred to Mr Zhang’s ground of opposition above.  He also said that the documents under item 3 belonged to LEA or its client the Jinan Company and Mr Ma did not provide them to the 4^th defendant despite repeated request by Mr Zhang’s sister, Zhang Yu, and the 4^th defendant’s solicitor Mr Robert Yip between mid October 2013 and April 2014.  He also said that the 4^th defendant did not have and never had these documents in its possession, custody or power.

Item 4

48.  Mr Li referred to schedule 2 of the Amended Defence.  It pleaded that there were potential legal actions against the Dalian companies and these were their liabilities.  He said there must be written correspondence and/or demands from the claimants evidencing the dispute, and that such documents in the normal course of events should have been reviewed by the 4^th defendant and/or its advisers when the 4^th defendant acquired the shares of the two companies.  They should thus be in the possession, custody or power of the 4^th defendant.

49.  Mr Zhang said in opposition that these documents, if they should exist, would be related to potential legal actions regarding phase 1 of the development.  He further said that the 4^th defendant did not have and never had them in its possession, custody or power.

Item 6

50.  Mr Li referred to the schedule of the Amended Defence which pleaded that RMB530 million out of the purchase price at RMB540 million had been paid by the Xiamen, Chongqing and Guangxi Companies to the account of LEA.  But the 4^th defendant had only provided the remittance slips which do not show the ultimate source of funds used by the three companies to pay LEA.

51.  He further said that such documents should be in the 4^th defendant’s possession, custody or power as the Xiamen and Chongqing Companies were owned and controlled by Mr Zhang.  He also said that Mr Weng Ming, who owned indirectly 70 per cent of the 4^th defendant, also had the majority beneficial interest (63 per cent) in the shares of the Guangxi Company.

52.  Mr Zhang’s only ground for disagreeing with Mr Li is that these three companies and the 4^th defendant are different legal personalities.

Item 7

53.  Mr Li said that the RMB530 million was paid to LEA as part of the purchase price for the shares of the Dalian companies. There must therefore be receipts issued presumably by the Jinan Company acknowledging payment of these sums and the receipts should be in the possession, custody or power of the 4^th defendant being the purchaser and the entity on whose behalf the payments were made. 

54.  Mr Zhang replied that his sister, Zhang Yu and the 4^th defendant’s solicitor Mr Robert Yip had between October 2013 and April 2014 repeatedly asked Mr Ma for such documents, but Mr Ma had refused on the ground of commercial secrecy.  He further said that if the 4^th defendant should be able to obtain such documents, he would produce them as soon as possible. 

THE APPLICABLE LAW

55.  There is no dispute on the law of discovery.  The parties, however, argued on whether the documents in question are in the power of the 4^th defendant.  Miss Eu, leading Miss Tong for the plaintiff also stressed in reply submissions that the 4^th defendant should have and/or have had the documents in its custody.

56.  Custody is mere corporal holding and does not leave much room for legal arguments. The expression “power” has, however, necessitated some judicial analyses and pronouncements.  In the present case, the question is whether the 4^th defendant, being the 60 per cent shareholder of the two Dalian companies, has the documents in its power.  Lord Diplock said in Lonrho Ltd & Anor v Shell Petroleum Co Ltd & Anor [1980] 1 WLR 627 at 6535E to 636A:

“Your Lordships are not concerned with any other consequences of the relationship between parent and subsidiary companies than those which affect the duty of a parent company of a multi-national group, whose company structure is that of the Shell or B.P. groups, to give discovery of documents under RSC, Ord. 24; and this, as I have pointed out, depends upon the true construction of the word ‘power’ in the phrase ‘the documents which are or have been in his possession, custody or power.’

The phrase, as the Court of Appeal pointed out, looks to the present and the past, not to the future.  As a first stage in discovery, which is the stage with which the subsidiaries appeal is concerned, it requires a party to provide a list, identifying documents relating to any matter in question in the cause or matter in which discovery is ordered.  Identification of documents requires that they must be or have at one time been available to be looked by the person upon whom the duty lies to provide the list.  Such is the case when they are or have been in the possession or custody of that person; and in the context of the phrase ‘possession, custody or power’ the expression ‘power’ must, in my view, mean a presently enforceable legal right to obtain from whoever actually holds the document inspection of it without the need to obtain the consent of anyone else.  Provided that the right is presently enforceable, the fact that for physical reasons it may not be possible for the person entitled to it to obtain immediate inspection would not prevent a document from being within his power; but in the absence of a presently enforceable right there is, in my view, nothing in Order 24 to compel a party to a cause or matter to take steps that will enable him to acquire one in the future.”

Mr Yan has also referred me to the statements of Denning LJ in Re Tecnion Investments Limited [1985] BCLC 434 at 437 g-h, and 439 c-e:

“…  In particular, it is not suggested and, in my view, rightly not suggested that the mere fact that a party to litigation is a director of a company and has, as a director, a right to inspect the documents of the company for the purposes of the company’s business makes those documents of the company documents in the power of the director for purposes of general discovery in litigation to which the director in his personal capacity happens to be a party.”

“The same point on one-man companies was canvassed in the Court of Appeal in the case of Lonrho v Shell Petroleum Co Ltd and there is one short paragraph in the judgment of Shaw LJ ([1980] QB 358 at 376, [1980] 2 WLR 367 at 378:

‘There are no doubt situations, such as existed in B v B … where on the established facts a company is so utterly subservient or subordinated to the will and the wishes of some other person (whether an individual or a parent company) that compliance with that other person’s demands can be regarded as assured. Each case much depends upon its own facts and also upon the nature, degree and context of the control it is sought to exercise.’

So the basic question is whether the other companies are under the unfettered control of the respondents so as to be their alter egos in accordance with the exception to the general rule as possibly envisaged by Lord Diplock.  …”

Both Lonrho v Shell and Tecnion have been applied in Hong Kong in Innovisions Limited v Chan Sing Chuk Charles & Ors [1992] 2 HKLR 306.

57.  Miss Eu also relied on an Australian case Schlumberger Holdings Ltd v Electromagnetic Geoservices ASA [2008] EWHC 56 and Linfa Pty Ltd v Citibank Ltd [1995] VR 643 which are cases where the parent company was ordered to make discovery of documents of its subsidiaries. These cases were rightly decided on the basis of the legal principles abovementioned. The observation of Mr Floyd J in para 21 of his judgment in Schlumberger should also be noted:

“21.     I accept that the mere fact that a party to a litigation may be able to obtain documents by seeking the consent of a third party will not on its own be sufficient to make that third party’s documents disclosable by the party to the litigation.  They are not within his present or past control precisely because it is conceivable that the third party may refuse to give consent.  But what happens where the evidence reveals that the party has already enjoyed, and continues to enjoy, the cooperation and consent of the third party to inspect his documents and take copies and has already produced a list of documents based on the consent that has been given and where there is no reason to suppose that that position may change?  Because that is the factual situation with which I am confronted here.  In my judgment, the evidence in this case sufficiently establishes that relevant documents are and have been within the control of the claimant.  I should emphasise that my decision does not turn in any way on the existence of a common corporate structure.  My decision depends on the fact that it appears from the evidence that a general consent has in fact been given to the claimant to search for documents properly disclosable in this litigation, subject only to the caveats contained in paragraph 4 of Mr Griffins’s witness statement concerning corporate acquisition documents and unreasonably onerous requests.”

58.  The reasoning of Hedigan J in Linfa has however been strongly disapproved of in another Australian decision of the Supreme Court of South Australia in Taylor v Santos Ltd [1998] SASC 6838.  The Full Court applied Lonrho v Shell.

59.  Another issue is the conclusiveness of Mr Zhang’s 4^th and 5^th affirmations where he said that the 4^th defendant did not have and never had the documents requested in its possession, custody or power.  Miss Eu referred me to Disclosure, 4^th edition by Matthews and Mallek at para 6.543:

“Whilst the affidavit of discovery was normally regarded as exclusive, it would not be so where it could be shown that there had been an insufficiency of discovery.  This insufficiency could be established from:

(a)    the pleadings, the list and affidavit of documents themselves or documents referred to therein;

(b)    any other source that constitutes an admission of the existence of a discoverable document not so far discovered;

(c)    an apparent exclusion of documents from discovery by a party under a misconception of the case.”

ANALYSES AND DECISIONS ON THE DISCOVERY APPEAL

Item 1

60.  The documents evidencing the debts shouldhave indeed come into existence before the 4^th defendantacquired the shares of the Dalian companies.  I cannot go behind Mr Zhang’s assertion that these debtswere the concerns of the Jinan Company and that his sister had asked Mr Wong, who represented the Qingdao Company for these documents but to no avail.  There is also insufficient material in Mr Li’s affidavitfor me to conclude that the Dalian companies were or are in the unfettered control of the 4^th defendant, or the 4^th defendant’salter egos.

61.  The Deloittedue diligence report was also not prepared on the instructions of or for the 4^th defendant.  It of course seems odd, as I have remarked in the course of the hearing, that the 4^th defendant,as the purchaser, would not have verified the debts before committing to the purchases.  But I cannot go behind Mr Zhang’s affirmations.

62.  In the premises, I have no basis to require the 4^th defendantto make discovery of the item 1 documents.  I therefore allow the 4^th defendant’s appeal in relation to discovery of the documents under item 1.

Items 2 and 3

63.  These two items overlap and are covered by more or less the same grounds. They deal with documents evidencing the repayment of the debts referred to in item 1 above.  Mr Zhang said that it was the responsibility of the Jinan Company to make the repayments, and Mr Ma’s firm represented the Jinan Company in discharging this task.

64.  The framework agreement does say that it is for the Jinan Company to make the repayments, but the 4^thdefendant also has the right to have the first-hand information to apprise itself of the status of the repayments of the debts.  Clauses 4 and 5.2 of the framework agreement, which Mr Zhang referred to and the 4^thdefendant relied on, provided that it was for the Jinan Company to make the repayments.  But clause 5.2 provided more than that.  The 4^thdefendant has pleaded this clause in para 12(7) of its Amended Defence as follows:

“(7) Empire Star was to pay the balance of the purchase price, namely, RMB440,000,000 on or before 30 December 2009. The Jinan Company must pay the sum to the court imposing the confiscation orders and creditors of DIEC and DIFEC, in order to repay their debts and to discharge the confiscation orders and the mortgage.  Empire Star was entitled to monitor the process of debt repayment by setting up an independent bank account and being provided with receipts and proofs by the Jinan Company.  …  (Clause 5.2)”

65.  It is unfortunate that Mr Zhang and those advising him had overlooked the latter part of clause 5.2 which has been fully and accurately pleaded in the Amended Defence.  If they should have read the whole of clause 5.2, they would have realised that the 4^th defendant has a presently enforceable right to obtain from the Jinan Company (and its agent LEA) the receipts and proofs of repayments obtained by the Jinan Company (or LEA on its behalf) in undertaking the process of debt repayment.

66.  Though Mr Li did not particularly mention clause 5.2 of the framework agreement in his supporting affidavit, had Mr Zhang and those advising him exercised due care when reading clauses 4 and 5.2 of the agreement, I see no reason why they would not have been aware of the 4^th defendant’s presently enforceable rights to obtain the documents in question.  The 4^th defendant, in refusing to make discovery of these documents, had thus laboured under a misconception of the effect of the framework agreement.  The 4^th defendant should exercise its presently enforceable right by referring the Jinan Company (and Mr Ma) to Clause 5.2 as a whole and ask the Jinan Company to perform this clause by providing or procuring LEA to provide to it the receipts and proofs of repayments.

67.  In the premises, I dismiss the 4^th defendant’s appeal against the discovery order for items 2 and 3.

Item 4

68.  For the documents evidencing the potential legal actions, Mr Zhang said that they related to phase 1 of a development which was the concern of the Jinan Company to the exclusion of the 4^th defendant and the 4^th defendant never had possession, custody or power of these documents.  I cannot go behind this statement.

69.  If the potential legal actions should have been paid off, the receipts and proofs of payments would be disclosable under items 2 and 3, otherwise the 4^th defendant would have no power to make discovery of them.

70.  In the premises I allow the 4^th defendant’s appeal against discovery of the item 4 documents. 

Item 6

71.  Regarding the bank, financial and accounting records of the Xiamen and Chongqing Companies, Mr Zhang did not deny Mr Li’s assertion that he owned and controlled these two companies.  His only disagreement for the 4^th defendant to make discovery is because of the different legal personalities between the 4^th defendant and his two companies.

72.  Though Mr Zhang has already sold his 10 per cent interest in the 4^th defendant to another person, he is still a director of the 4^th defendant.  He has done his best to assist the 4^th defendant in defending this action.  He has also filed two witness statements for the 4^th defendant and will testify for it at the trial.  He has also made two affirmations to oppose this application of the plaintiff.

73.  Given all the goodwill and willingness on his part to assist the 4^th defendant in this action, I see no reason why he would not procure his two companies to provide the item 6 documents as these two companies are under his undisputed ownership and control.  His refusal to assist in disclosing these documents of his companies is obviously because of his misconception that different legal personalities is a bar.  It is not.  He has every liberty to assist and to continue to assist the 4^th defendant in this action (see Schlumberger as cited above).

74.  I therefore dismiss the 4^th defendant’s appeal against the discovery of the item 6 documents insofar as they are the documents of the Xiamen and Chongqing Companies. 

75.  Regarding the item 6 documents that belong to the Guangxi Company, Mr Weng Ming is the owner of 90 per cent of the 4^th defendant and 63 per cent of the Guangxi Company.  There is no information as to the identity or attitude of the 37 per cent owner of the Guangxi Company. The plaintiff has not demonstrated a presently enforceable right of the 4^th defendant to documents owned by Guangxi Company.

76.  I therefore allow the 4^th defendant’s appeal against the order for discovery of the item 6 documents insofar as they are the documents of the Guangxi Company.

Item 7

77.  This item is for receipts and/or written acknowledgements issued by the Jinan Company or LEA on its behalf to the 4^th defendant or the three source of funds companies.  Mr Zhang’s opposition is that Mr Ma had refused to provide him these documents because of commercial secrecy.  However, I think Mr Zhang is again labouring under a misconception as to who should be approached for such documents. Mr Ma and/or the Jinan Company may only have copies as the originals should have been given to the 4^th defendant or to the Xiamen, Chongqing and Guangxi Companies.

78.  I therefore dismiss the appeal of item 7 to the extent of the documents that belong to the 4^th defendant and the Xiamen and Chongqing Companies and allow the rest of the appeal of this item.

79.  The plaintiff has also made some points purportedly in support of the contention that the 4^th defendant has an unfettered control over the two Dalian companies and that these two companies, the Jinan Company and the three source of funds companies had all consented to provide documents to the 4^th defendant for discovery purpose.  This is to rely on the Schlumberger decision.

80.  The Schlumberger decision can no doubt support my decision in relation to the item 6 documents above, but it cannot apply to these facts because they were raised only in the reply submissions before the Registrar.  The 4^th defendant was not given a chance to deal with them.  I therefore would not take these facts into consideration.

COST OF THE APPEAL ON SPECIFIC DISCOVERY

81.  In the light of the partial success and partial failure on both sides in this appeal, I would make a cost order nisi that there be no order as to costs for this appeal.

THE PLAINTIFF’S APPEAL AGAINST THE WITHDRAWAL OF INTERROGATORIES

82.  I should mention that the withdrawal of interrogatories is in tandem with the Registrar’s dismissal of discovery for the item 10 documents as these documents relate to the breaches of injunction.

83.  One more matter under the item 10 specific discovery application is the plaintiff’s request for clearer copies of certain documents supplied by the 4^th defendant.  Mr Zhang has said in his affirmations that he has already given the best possible copies and he could provide no better ones.  I cannot go behind this statement.  I therefore would not require the 4^th defendant to provide any better copy pursuant to that request. 

84.  The interrogatories seek information in respect of Zhang’s explanation in paragraphs 28 to 29 of his supplemental witness statement on the 4^th defendant’s breaches of injunction. They are summarised in the plaintiff’s written submissions as follows:

Interrogatory 1 - Information as to the purpose of the four loans.

Interrogatory 2 - Information as to the payment and whereabouts of the proceeds of the four loans.

Interrogatory 3 - Information as to the use of the proceeds of the four loans.

Interrogatory 4 - Information as to the purported application by the 4^th defendant for the alleged RMB800 million facility and the alleged grant/approval of such facility by SJB.

Interrogatory 5 - Information as to SJB’s alleged proposal for “renewal” and “restructuring” of the 2011 loan, the July 2012 loan and the November 2012 loan, and the alleged replacement by the 2013 loan.

Interrogatories 6, 7 and 8 - Information as to the security agreements entered into in respect of each of the four loans, which ones are still valid and whether any of them have been released/terminated.

Interrogatories 9 and 10 - Information as to any repayments of the four loans and the amounts outstanding under each of them.

Interrogatories 11 to 14 - Information as to the purpose of the 2012 share charge and the 2013 share charge and whether they are still valid or otherwise have been released/terminated.

85.  The crux of the matter is the relevance of the interrogatories to the issues in this action.  The 4^th defendant says that the breaches have no bearing on the issues, but the plaintiff argues otherwise.  The plaintiff says that the breaches are a continuation of the scheme to frustrate the judgments obtained by the plaintiff.  The breaches are to milk the cow by extracting the worth of the two Dalian companies by mortgaging the land they held and the shares of one of them.  These breaches are not pleaded, but can be pleaded by the plaintiff as a continuation of the fraudulent scheme.

86.  Ms Eu submitted that the fact that the breaches are a process of the milking which can prove that the sale of shares of the two Dalian companies to the 4^th defendant was a dishonest deal.

87.  I agree that the proving of milking may provide additional support to the plaintiff’s claim, but the conclusion of dishonesty in the sale of shares is not a must.  Hence, the proving of the existence or otherwise of milking may or may not prove the existence of dishonesty in the sale of shares.

88.  Furthermore, the breaches of the injunction are a discrete episode and can be made a relevant issue in the action by the plaintiff pleading it.  I do not agree that the plaintiff can rely on it at the trial without pleading it.  Otherwise the plaintiff may refer to anything at the trial which may impinge on the 4^th defendant’s integrity and rely on the same to impinge on the sale of the shares.  That will be unfair to the 4^th defendant as it may not be able to prepare for such unpleaded attacks.

89.  Ms Eu also referred to paragraphs 28 to 29 of Mr Zhang’s supplemental witness statement where he had tried to explain and justify the 4^th defendant’s breaches of the injunction. I think such explanation is useless.  The proper way is to purge the breaches and contempt by applying for a variation of the injunction, which the 4^th defendant had intimated in early 2014 that it would do but has not done so far.  The 4^th defendant cannot use Mr Zhang’s explanation to replace the proposed application for variation.  I also do not think that such explanation can purge the breaches.  The explanation is also irrelevant to the issues at the trial and Mr Zhang may not be allowed to adopt it in his oral evidence at the trial.

90.  In the premises, I dismiss the plaintiff’s appeal against the Registrar’s order for withdrawal of the interrogatories and his dismissal of specific discovery of the item 10 documents.

91.  I also make a costs order nisi that the plaintiff do pay the 4^th defendant the costs of this appeal to be taxed and paid forthwith, with certificate for two counsel.

THE 4^THDEFENDANT’S APPEAL AGAINST THE COSTS ORDER FOR THE HADKINSON APPLICATION

92.  The Hadkinson application was only raised for the first time in Ms Tong’s skeleton submissions for the plaintiff for use at hearing before the Registrar.  In any case, it was fully argued and dismissed by the Registrar by way of a preliminary ruling.

93.  The Registrar did not make any order of costs for this discrete matter.  He drew an analogy of this application with an application to strike out for delay.

94.  Mr Yan submitted that an application to strike out for delay is to remedy the prejudice to the defendant because of the impossibility of a fair trial as may be occasioned by inordinate delay.  Hence, even if the application should fail, the court may still deprive the successful respondent of its cost because of its delay. 

95.  However, the Hadkinson principle does not exist simply to punish a contemnor and punishment is for contempt proceedings.  Therefore the Registrar should not have penalised the 4^th defendant on costs for the Hadkinson issue because of the 4^th defendant’s breaches of the injunction.  It is open to the plaintiff to launch contempt proceedings to punish the 4^th defendant for those breaches.  Hence, Mr Yan submitted that the Registrar should have ordered costs in favour of the 4^th defendant as costs in this instance should follow the event.  I agree with Mr Yan’s reasoning.  I agree that the Registrar has erred in law in this instance by drawing the said analogy and made no order as to costs.

96.  I therefore allow the 4^th defendant’s appeal and order that the costs before the Registrar for the Hadkinson issue be to the 4^th defendant to be taxed and paid forthwith.  I also make a costs order nisi that the 4^th defendant should have the costs of this appeal to be taxed and paid forthwith with certificate for two counsel.

THE COSTS ORDER FOR STAY OF EXECUTION OF THE ORDER FOR DISCOVERY

97.  I now deal with the costs of the 4^th defendant’s application for stay of execution of the Registrar’s order for specific discovery pending the 4^th defendant’s appeal.

98.  The plaintiff did not agree that such costs should follow the event though the plaintiff eventually consented to the stay.  Before consent was given by the plaintiff, the 4^th defendant had already issued the summons.  The 4^th defendant’s explanation for issuing the summons is that the time given to the 4^th defendant to perform the order for discovery was short and for the sake of prudence it had to issue the summons at the time that it did.

99.  I agree with the 4^th defendant and I order that the costs of that application be in the cause of the appeal.  Since I have made no order as to costs for the appeal on specific discovery, that would also be the order for the application to stay.