CHUNG PUI TAK AND ANOTHER v. TAM CHI LEUNG NOLAN AND OTHERS

HCA 1439/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 1439 OF 2012

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D E C I S I O N
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THE APPLICATIONS

1. The plaintiffs have taken out two summonses, one for leave to adduce expert evidence, the other for amending the summons for expert evidence.

2. The defendants have no objection to the summons for amending the expert evidence summons.  An order in terms will be granted, with costs of the application to the defendants to be assessed at the end of this hearing.

3. The remaining summons on expert evidence is contested.

4. The parties are legally represented.[1]

5. The factual background has been set out in my Decision delivered on 4 March 2016 in respect of other interlocutory applications between the parties.  For brevity of this Decision, I shall not repeat it here.

THE PROPOSED ISSUES IN DISPUTE

6. In the Re-Amended summons, the plaintiffs have suggested two broad issues on which expert evidence should be adduced at trial.  They are categorized as paragraph 1(a) and (b) respectively.

7. The defendants have no objection that expert evidence should be adduced at trial.  They also have no dispute on paragraph 1(a). They only dispute the proposed paragraph 1(b).

8. Paragraph 1(a) as agreed is as follows:

“(a) In connection with the 2^nd Plaintiff’s claims against the 1^st Defendant (who was the director of the 2^nd Plaintiff at the material time) for an account of the 2^nd Plaintiff and for breach of director’s duty, and on the basis of the “Accounting Documents” being documents so far obtained by the Plaintiffs in respect of the financial affairs of the 2^nd Plaintiff and Guangzhou City Hui Guang Packaging Materials Company Limited, to express a view on the following:-

(i) Why are various accounting items, namely management fees, transportation expenses, sub-contracting fee, supplier invoices, cash withdrawal, cheque payments to the 2^nd Defendant and certain journal entries irregular and/or baseless according to the professional accountancy practice and/or standard?

(ii) In the light of the professional accountancy practice and/or standard, the Defendants’ version and/or justification of the state of account of the 2^nd Plaintiff over the aforesaid accounting items as pleaded in the Defendants’ Re-Amended Defence and Counterclaim filed on 28 October 2015 and their Answers to the Plaintiffs’ Request for Further & Better Particulars of their Defence and Counterclaim filed on 12 November 2012.

(iii) How did the aforesaid accounting item of sub-contracting fee adversely affect the financial interest of the 2^nd Plaintiff in the period when the 1^st Defendant was the director of the 2^nd Plaintiff?”[2]

9. The discussion today will focus on the disputed paragraph 1(b) only.

10. The plaintiffs’ proposal is:

“In connection with the allegations of the 1^st Defendant (raised in support of the 1^st Defendant’s case that there was an agreement in October 2003 of an option to the 1^st Plaintiff to purchase 40% of the shares of the 2^nd Defendant by paying the 1^st Defendant a sum of HK$520,000) that the 1^st Defendant and/or the 3^rd Defendant had incurred HK$2.8 million to acquire two machines from Fine Arts Offset Printing Co. Ltd. (indirectly through the previous shareholders of the 2^nd Defendant to whom Fine Arts allegedly assigned those 2 machines) at the same time as the acquisition of the entire shares of the 2^nd Defendant through the 3^rd Defendant (with alleged breakdown of the sources of funds), and later assigned the two sets of machines to the use of the 2^nd Defendant, whether the relevant accounting documents produced by the Defendants (including the sale and purchase agreement, invoices, receipts and a loan agreement generated in the purchase of the 2 machines and the 2^nd Defendant, and the audited accounts of the 2^nd Defendant and/or the 3^rd Defendants for the financial years 2003 to 2007) are, on their proper accounting interpretation based on professional accountancy practice, supportive or inconsistent with that allegation.”[3]

11. The defendants’ proposal is:

“In connection with the case of the 1^st Defendant (raised in support of the 1^st Defendant’s case that there was an agreement in October 2003 of an option to the 1^st Plaintiff to purchase 40% of the shares of the 2^nd Defendant by paying the 1^st Defendant a sum of HK$520,000.00) that the 1^st Defendant paid HK$2.8 million to purchase via the 3^rd Defendant 21,000 shares of the 2^nd Defendant from Madam Fung and Mr. Tang (both were then the shareholders of the 2^nd Defendant) together with some printing machines (including Two colour offset對開雙色RZF 3B 1929OB/646 and Four-Colour 對開4色 R604 3BD 23173B/656) assigned by Madam Fung and Mr. Tang to the 3^rd Defendant, and later by the 3^rd Defendant to the 2^nd Defendant for the latter’s use, whether the printing machines acquired should, as a matter of proper auditing practice, have been recorded in the audited financial statements of the 2^nd and 3^rd Defendants for the financial year ended 31^st March 2004 or their subsequent financial statements because the printing machines being newly acquired by the 1^st Defendant (via the 3^rd Defendant) were eligible for capital depreciation allowance.”

DISCUSSION

The live issues for the expert evidence

12. The expert evidence, as according to the plaintiffs, will serve the purposes of showing that the money paid by the 1^st plaintiff to the 1^st defendant of HK$400,000 was not for the purpose of investment in the acquisition of the shares in the 2^nd defendant.  As such, the 1^st plaintiff was not the business partner with the 1^st defendant in the acquisition of the 2^nd defendant’s shares.  The 1^st defendant received the money from the 1^st plaintiff and held the position of a trustee of the 1^st plaintiff.  The 1^st defendant was not honest in the handling of the accounts by not entering the value of the two off-set printing machines into the financial statements of the 2^nd and 3^rd defendants and the 1^st defendant, being the sole director of Hui Guang, had been in breach of trust as a director of the Hui Guang. If the court accepts the plaintiffs’ allegations above, the court will find that the 1^st defendant is the trustee, holding 40% of the 2^nd defendant’s shares for the 1^st plaintiff.  The 1^st plaintiff therefore requires the 1^st defendant to hold such shares in the 2^nd defendant to his order. In a nutshell, the plaintiffs rely upon the expert evidence to establish the fact that the 1^st defendant is the 1^st plaintiff’s trustee holding the 2^nd defendant’s shares on trust for him.

13. According to the 1^st defendant, he admits that the value of the two off-set printing machines was not entered in the financial accounts of the 2^nd and 3^rd defendants.  He has Mr. To, his auditor responsible for entering the financial entries for the 2^nd and 3^rd defendants to explain the reasons why such value of the two off-set printing machines should not be entered according to the accounting practice.

14. The main purposes of the defendants for the expert evidence are to explain Mr. To’s treatment of the financial accounts of the 2^nd and 3^rd defendants; that the 1^st defendant had not been in breach of his duty as director of the 2^nd plaintiff and that the 1^st plaintiff was his business partner in the acquisition of the 2^nd defendant’s shares and therefore the 1^st plaintiff was only entitled to exercise his right under an option agreement to pay for the 40% shareholding of the 2^nd defendant.

The relevant legal principles

15. It is important to note the function of expert evidence for the trial.  The evidence is relevant if it is helpful to the court in arriving at its decision on one or more of the issues to be resolved.  Wong Hoi Fung v American International Assurance Company (Bermuda) Limited & Shrila Chan [2002] 3 HKLRD 507.

16. However, evidence meeting the test could still be excluded if the court took the view that calling it would not be helpful to the court in resolving any issue in the case justly.  The ultimate decision must be for the court to determine whether the evidence can be of assistance for the trial. Barings plc (in liquidation) and another v Coopers & Lybrand (a firm) and Others v Mattar and Others [2001] All ER (D) 110 by Evans-Lombe J.  See also §8 of Li Xiao Yun & Another v China Gas Holdings Ltd (unrep. HCCL 18/2011, M Chan J, 8 March 2013), which emphasized that the court has complete control in determining whether and what expert evidence should be adduced at the trial.

17. Expert evidence must be confined to the live issues of dispute between the parties, which must be sought from the pleadings China Gold Finance Limited v CIL Holdings Limited & Ors (unreported, HCA 2900/2001, 25 September 2012, at paras. 17-18).  See also §21 of the Court of Final Appeal’s Decision in Kwok Chin Wing v 21 Holdings Ltd (formerly known as GFT Holdings Ltd, Capital Prosper Ltd and Rockapetta Holdings Ltd and Another) (2013) 16 HKCFAR 663, per the CJ.

18. It will be helpful to bear in mind the factors of real issues of dispute between the parties; the burden of proof; fair trial and proportionality for the determination of the scope of expert evidence.  See paragraph 10 of Pak Ko Batteries Factory Ltd & Others v New Leader Battery Industry Ltd (unreported, HCA1139/2007, 14 January 2014).

19. Having identified the live issues of dispute between the parties, it will be quite clear that their disputes over paragraph 1(b) of the Re-Amended summons can be resolved quite easily.

20. The fundamental principle for the court to exercise its discretion as the Court of Final Appeal in Poon Hau Kei v Hsin Chong Construction Co Ltd Taylor Woodrow International Ltd Joint Venture (2004) 7 HKCFAR 148 at §21, citing Bank of America v Chai Yen [1980] 1 WLR 350 at p353 D, Lord Lane, delivering the advice of the Privy Council: “ ‘the essence of any rule of procedure must be fairness’.  The same is true of any rule of practice.”

Procedural fairness

21. This morning, there has been a meaningful discussion over the difference between the plaintiffs’ proposed instructions and those of the defendants’ for expert evidence.  The difference between these versions is really small.  This may be viewed differently by the experts.  However, the instructions must be fair to all parties at the trial.

22. In this matter, fairness means that each party should be given the opportunity of advancing his case or defeating the other’s case.

23. In the circumstances, both versions of the plaintiffs’ and of the defendants’ should be set out in the instructions to the experts.  Bearing in mind the purposes of the expert evidence in this matter, the burden is on the plaintiffs to prove their case against the defendants.  The plaintiffs should be given the first opportunity of adducing their expert evidence.  Those two sets of issues mentioned above should be given to the plaintiffs’ expert to give his expert opinion.  The defendants will be given the liberty to produce expert evidence in response to the plaintiffs’ expert evidence.  Finally, the plaintiffs will have the last chance to reply to the defendants’ expert evidence, if so advised.  The court will be in a position to understand the expert evidence and may be able to come to the finding of the facts at the end of the trial.

24. As to the costs of this application, including the hearing today, I agree with the defendants that the costs for the preparation of the affidavits should be disallowed, following the decision of Madam Registrar Au-Yeung ( as she then was) in Kam Hing Trading (HK) Ltd v The People’s Insurance Company of China (HK) Ltd & Another [2009] 4 HKC 531. Yesterday afternoon, the plaintiffs’ solicitors sent me two missing pages of counsel’s written submissions, in which counsel submits that the Fan’s 3^rd affirmation had explained the reasons for the inference that he had drawn of the defendants’ case from the pleadings.  This, however, will not assist the plaintiffs as they had not obtained leave from the court for adopting affidavit evidence for the application as provided under the said Decision.  This set of costs is disallowed.

25. The parties have been trying to agree the expert evidence, which they were unable to do so by way of consent summons.  Master Ho had made comments that the proposed terms were too general and that the trial judge should not have to make cross references to the pleadings.  Because of the master’s comments, the parties reviewed their agreed instructions to the expert and they had created wider gap between themselves.  Since this is a case management conference hearing and neither party has won the argument, the costs of the application, including the costs of this hearing (with counsel’s certificates) should be in the cause.  As I have heard the argument and seen the preparation for the hearing today, I am in a better position to assess the amount of costs myself here.  In order to save the costs for taxation, I shall assess the costs summarily under O.62 r.9A. I have had the benefit of considering the costs schedules of both parties before me today.  I shall assess the costs of this application to be $ 140,000, to which the successful party of the trial will be entitled.

26. This Court should make some remarks on the written submissions of the defendants where counsel submits that the defendants are entitled to put the dispute over paragraph 1(b) discussed today to the trial judge at the pre-trial review.[4]  This is wrong as pointed out by Lam J. (as he then was) in Chok Yick Interior Design & Engineering Co Ltd v Lai Chi Lun t/a Chi Hung Construction Eng Co (unreported, HCA 1480/2008, 5 May 2010).  The learned judge had said that before the expert evidence had been decided, the matter should not be given leave to set down for trial.

ORDER

27. I shall make an order in terms as follows:

(a) By consent, an order in terms as per paragraph 8 above;

(b) Paragraph 1(b) of the Re-Amended summons be as per paragraph 23, supra;

(c) The plaintiffs’ expert shall within 42 days from the date hereof serve upon the defendants the expert report in accordance with the directions of this Order;

(d) The defendants be at liberty to serve their expert reports in response to the plaintiffs’ expert report within 42 days thereafter;

(e) The plaintiffs be at liberty to serve upon the defendants the expert report in reply within 42 days thereafter;

(f) Costs of this application, including the costs reserved and the costs for today’s hearing as assessed in paragraphs 24 and 25 supra be in the cause.

CASE MANAGEMENT DIRECTIONS

28. The matter is adjourned to 11:30 am on 5 October 2016 for the Case Management Conference.

29. The parties shall file and serve the Listing Questionnaires to inform this Court whether they are ready for trial.

30. The costs of this Case Management Conference be in the cause (15 minutes).