INNOVISIONS LTD. v. CHAN SING CHUK, CHARLES AND OTHERS

HEADNOTE

Application for discovery. Extent to which a Chairman and Managing Director of a company could properly be said to have had control of company documents. Relevancy and discoverability of company documents outside the immediate period of the transactions during which alleged misrepresentation were made.

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J UD G M E N T

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Power, J.A.:

This is the judgment of the court.

1. The Plaintiff Innovisions Limited ("Innovisions") is suing Charles Chan (Mr. Chan), Tamar Investments Limited and Winburg Limited seeking recission of a share purchase agreement, return of the sum of $79,800,000, being payment made for certain shares, and damages. Mr. Chan is Chairman and Managing Director of Continental Holdings, Ltd. ("Continental"), the holding company of a group of companies involved in the design, manufacturing and marketing of jewellery.

2. The following allegations are set out in the Statement of Claim:

3. The 2nd and 3rd defendants are the registered shareholders of 200,000,125 and 124,999,875 shares respectively in Continental.

4. As at the 30th of June, 1989 Mr. Chan was the beneficial shareholder of 11,970,025 in Continental.

5. Mr. Chan was, at that date, the discretionary beneficiary together with his wife of several discretionary trusts which entitled them to the benefit of the shares owned by the 2nd and 3rd defendants.

6. Mr. Chan and his wife were consequentially, as at that date, beneficial owners of 72% of the issued share capital of Continental.

7. On about 9th May 1989, as alleged in the Statement of Claim, Mr. Chan represented to Mr. Dickson Poon, the Executive Chairman of Innovisions, that Continental would positively and certainly achieve profit for the year ended 30th June 1989 ("the trading year 1988/89") of not less than $88,000,000 and that it would achieve a profit of not less than $100,000,000 in the financial year 1st July 1989 to 30th June 1990 ("the trading year 1989/90) (Paragraph 8).

8. It is likewise alleged that on or about 7th July Mr. Chan represented to Mr. Poon that on the basis of orders already received, Continental would achieve a profit of not less than $100,000,000 for the year 1st July 1989 to 30th June 1990. Mr. Chan made these representations on his behalf and on behalf of the 2nd and 3rd defendants (Paragraph 9).

9. On 8th August, Mr. Poon agreed to purchase 70,000,000 at the price of $1.14 per share from Mr. Chan on the basis of the aforesaid representations and to purchase a further 30,000,000 shares on the open market, and Mr. Poon did in fact make such purchases. He paid $79,800,000 in respect of the 70,000,000 shares and that he purchased 31,250,000 on the open market at a total price of $37,958,930.

10. In paragraph 16 of the Statement of Claim it is alleged that "the Representations" (this appears to refer to the representations in paragraphs 8 and 9 but this is not expressly stated) were "untrue and made fraudulently in that (Mr. Chan) knew that they and each of them were false or made recklessly, not caring whether the same were true or false".

11. The "Particulars of Knowledge" state that Mr. Chan, "as Director of Continental at the date of the representations, i.e. 9th May 1989 and 7th July 1989, was in possession of budget projections of Continental which disclosed that there was no basis in fact for the representations."

12. It was further particularized that Mr. Chan "well knew that the period between a customer's order and delivery of the jewellery was approximately 3 months. During the time covered by the representations (Mr. Chan) as Director of Continental and cognizant of its day to day affairs, would have known the level of outstanding orders upon which any profit would have to be earned by Continental." It is not clear what exactly is meant by this final sentence. The time covered by the representations was to 30th June 1990. It is not easy to understand how it could be suggested that Mr. Chan's knowledge after, at latest, 8th August 1989 could be relevant to the claim.

13. The third particular of knowledge alleges that Mr. Chan knew that the business cycle of Continental was such that the bulk of its sales were in the period July to December of each year and this being so he "knew or was reckless as to the diminution in Continental's business volume and its profits for the coming financial accounting periods".

14. The particulars appear, in short, to be alleging that Mr. Chan would, from budget projections, from customers orders and from the fact that the busy period of each year is from July to December, have known the real state of the company's business at the time when he made the representations.

15. The "Particulars of Falsity" set out that an interim report of Continental issued under the name of Mr. Chan's wife for the six month period ended 31st December 1989, i.e. the first six months of the representations relating to the financial year 1st July 1989 to 30th June 1990, demonstrated a reduction of $70,000,000 in turnover and of $25,000,000 in profit against the equivalent six month period ending 31st December 1988, and that this indicated that the representation as to the profit of $100,000,000 for the trading year 1989/90 could not have been true or accurate.

16. It is to be noted that the "Particulars of Falsity" have application only to the representation relating to the the trading year 1988/89 There is nothing therein to suggest that the representation that Continental would achieve a profit of not less than $88,000,000 for the trading year 1988/89 was untrue.

17. It was pleaded, in the alternative, that Mr. Chan made the representations negligently in that he knew or should have known that "on the basis of the budget of Continental for the period 1st January to 31st December 1989 and the level of the orders, the resulting profitability of Continental could not, alternatively could not reasonably, have resulted in the Representations being true or accurate." The particulars of the allegation of negligence are a repetition of those given to support the allegation of fraud.

18. The pleading goes on, in the further alternative, to plead that the representations were made deceitfully with the intention that Innovisions should act thereon and again repeats the particulars given to support the allegation of fraud.

19. Innovisions by a summons dated 29th November 1991 sought from Mr. Chan, under 0.24 r.3 of the Rules of the Supreme Court, a list of documents.

20. The Summons, which stated in the margin that it was issued pursuant to the provisions of 0.24 r.7, sought, insofar as it related to Mr. Chan, an affidavit from him listing any of the documents set out in the schedule thereto which were or had been in his possession, custody or power and, surprisingly given that the Summons stated itself to have been brought under r.7, for a further order that such documents be produced. Rule 7, which deals only with affidavits disclosing whether documents have been in the possession, custody or power of the party, is to be contrasted with 0.24 r.13 which requires the production of such documents. As Kaplan J. pointed out, it is an important distinction as, under r.7, it is for the party who objects to the order that he list the documents to establish that discovery is not necessary whereas, under r.3, it is for the party seeking production to satisfy the court that the production is necessary for the purposes of the action. (see Dolling-Baker v. Merrett ((1990) 1 WLR 1205). Kaplan, J. stated that he was dealing with the matter upon the basis that the application was brought under 0.24 r.7 and was not, therefore, required to deal with the issues that might have arisen if production were being sought.

21. Kaplan J., rightly in our view, held that the applicant/plaintiff had to satisfy him that the documents claimed were relevant to the matters in question and that the application had to be supported by an affidavit stating that in the belief of the deponent the other party had had in his possession documents which related to the matter in question. He bore in mind the note in the White Book under 0.24 r.7 that the applicant's case, "may be based merely on the probability arising from the surrounding circumstances or in part on specific facts deposed to".

22. During the course of argument below, the original Item 2 of the schedule was deleted and the items which were previously Items 4 to 14 became Items 3 to 13. The amended Schedule was as follows:

"1. All correspondence with Continental regarding the financial performance of Continental during the period between 1st July 1988 and 30th June 1990.

2. All documents relating to share transactions involving shares in Continental purchased or sold by Mr. Chan or on his behalf from 1st July 1988 to 30th June 1990.

3. The order book(s) of all customers of Continental Holdings Limited ("Continental"), especially those relating to Zale Corporation, CEI Inc., Helzberg's Diamond, Peoples Jewellers, Zales Ltd. and Miki Corporation for the period from March 1988 to June 1990.

4. Correspondence files of the customers of Continental mentioned in point 3 above during the period specified above.

5. Internal filenotes on the customers of Continental mentioned in point 3 above during th period specified above, including any reports or attendance notes, etc., sent from the USA and Canadian subsidiaries of Continental to the head office in Hong Kong.

6. Sales budgets for Continental prepared in November and December 1988 for th ^"calendar^" year 1989, plus any revised budgets made and any additional sales budgets prepared during 1989.

7. Sales records of Continental for the period from July 1988 to June 1990.

8. Copies of all overhead and/or profit and loss account budgets (whether prepared on a group or an individual company basis) or Continental prepared in November or December 1988 for the "calendar" year 1989 and any subsequent revisions thereto, plus any overhead and/or profit and loss account budgets prepared during 1989 and any subsequent revisions to them.

9. All working papers associated with point 8 above.

10. Copies of all profit and loss account forecasts for Continental prepared for the years ended 30th June 1989 and 1990 and any subsequent revisions thereto, plus any other profit and loss account forecasts prepared during 1989.

11. All working papers associated with point 10 above.

12. Monthly management accounts for Continental on a consolidated and/or by individual company basis for the period from July 1988 to June 1990.

13. Working papers associated with the preparation of the 1989 and 1990 annual reports and 1988/89 and 1989/90 interim reports."

23. As to Items 3 to 13, it was argued that the judge had no jurisdiction to make an order because the documents were those of Continental, which was not a party to the proceedings, and they had not been within Mr. Chan's power. The judge had no doubt that he could properly order Mr. Chan to make an affidavit as to documents that had been in his possession or custody. He went on to say: "The more difficult question is whether Mr. Chan should be required to file this affidavit on the additional basis that if the documents are not in his physical custody nor ever have been in his physical custody nevertheless they are in his "power" by virtue of his shareholding in Continental". The judge was, in the outcome, satisfied that it was not established that, by virtue of his shareholding, Continental was "the alter ego of Mr. Chan or that it is under his unfettered control".

24. The judge held that Item 1 was "clearly a most relevant category of documents and I am entitled to and do base the existence of this category of documents on the probability arising from the circumstances of the case". He was also satisfied that Item 2 was clearly relevant. He held with regard to the remaining documents: "As I am satisfied that the documents (3-13) are not within his power he only has to list those documents which are or have been in his possession or custody".

25. The decision as to whether the documents were or had been in the power of Mr. Chan seems to have been determined by considering only the extent of his shareholding. Whether he could properly have been held to have had power over the documents by virtue of his position as "Chairman and Managing Director" of Continental does not, as far as the judge's ruling reveals, appear to have been canvassed. The pleadings referred to Mr. Chan only as "director and chairman" but in the course of the hearing before us Mr. Bunting agreed that he was properly described as "Chairman and Managing Director". This was, moreover, clearly apparent from the third affidavit of Mr. David Adrian Stokes filed in support of the application and the annexed report of Peat Marwick. We would have thought it strongly arguable that as Chairman and Managing Director he had all of the company's business documents in his power in the period during which he occupied those positions. This matter has, however, not been raised by way of cross appeal and we need, therefore, concern ourselves with it no further.

26. Mr. Chan in his appeal against this order has, through Mr. Bunting, urged two grounds:

"1. The learned judge erred in not finding that (save for the documents referred to in items 2, 6 and 12 of the Order respecting the 1st Defendant) the Plaintiff had failed to establish a prima facie case that the 13 classes of document's are now, or have been in the past, in the possession or custody of the 1st Defendant.

2. Save in respect of the classes of the documents set out in the Schedule hereto (the relevance of which is accepted),the learned Judge erred in finding that the documents relate to the matters in question in the action, and he ought to have dismissed the application as a fishing expedition."

The items in the Schedule as to which relevance was accepted was as follows:

"1.    As to item 3 in the Order dated 6th March 1992, order books for the period 1st July 1988 to 7th July 1989.

2.     As to item 6 in the Order, sales budgets and any revisions or additions thereto prepared prior to 8th July 1989 for the calendar year 1989.

3.      As to item 7 in the order, sales records for the period 1st July 1988 to 7th July 1989,

4.       As to items 8 and 9 in the Order, overhead and profit and loss account budgets and any revisions or additions thereto prepared prior to 7th July 1989 for the calendar year 1989, and all working papers prepared therefor,"

Mr. Bunting submitted, when dealing with his first ground, that the trial judge had never addressed himself to the fundamental issue which was whether or not there was prima facie evidence that Mr. Chan had ever had in his possession the documents set out in items 3 to 13. He submitted that these documents are not of a kind which it could be taken would automatically have come into possession or custody of the chairman of a company. It was at this point in the argument that Mr. Bunting acknowledged that Mr. Chan was, in fact, also the Managing Director of the company. Mr. Bunting submitted, referring to the third affidavit of Mr. Stokes and in particular to paragraph 9, that there was no evidence which would provide a basis for concluding that Mr. Chan ever had any of the documents, other than the conceded document, in his possession. We are unable to agree. The relevant paragraph in Mr. Stokes' affidavit is not para.9, to which Mr. Bunting referred, but para.3 which deals with Mr. Chan's position and role in the company. This points to the role of Mr. Chan in the company. It sets out that he was founder, chairman, managing director and substantial shareholder had "a dominant role in the executive and management functions of the company ....". Whether or not it could be properly said that the company was his alter ego we are satisfied that there was prima facie evidence which indicated a real likelihood that the contested documents would have come into his possession or custody during the relevant period.

27. It was the contention of Mr. Bunting in his second ground, that, save for the conceded documents, the application was an attempt to embark on a fishing expedition that ranged well beyond the matters put in issue by the pleadings. He submitted that the question of Mr. Chan's knowledge was not at large but was strictly limited to those issues. He appeared at one point in his argument to be submitting that the issues were so narrowed by the particulars as to involve only Mr. Chan's knowledge as to budget projections for 1st July 1989 to 30th June 1990. If this was his contention it, in our view, states the matter much too narrowly. What the pleading places in issue is the knowledge which Mr. Chan had of the business operations of Continental on 7th July 1989 in so far as they were indicative of its profit potential for the trading year 1989/90.

28. Mr. Bunting's contention that the application was a fishing expedition which should be rejected in toto, except for the conceded documents, is rejected.

29. We are, however, satisfied that the period in relation to which discovery is sought which extends until June 1990 covers documents which are not relevant to the issues.

30. All of the documents up to 7th July 1989 are clearly relevant. Mr Scott, who appeared for Innovisions submits that documents submits that documents which came into existence after that date might be relevant as they may indicate what was in the mind of Mr. Chan prior to 7th July. He submits that, at the very least, documents in existence prior to the purchase of the shares on 8th August 1989 should be ordered to be discovered as it is Innovisions contention that the representations were operative and were meant to be acted upon until that date. We are satisfied as to the correctness of this submission but consider that the possibility that documents which came into existence after 8th August 1989 could be relevant is so remote that it can properly be disregarded. We are satisfied that the order in relation to each item, 3 to 13, should be limited to documents which had come into existence by that date.

31. Parties are ordered to file an agreed minute of judgment.

32. We made an order nisi as to costs that the Appellant is ordered to have 50% of the costs of this appeal to be taxed. The order below that costs be costs in the cause would be understood.