DAIMLER AG (FORMERLY KNOWN AS MERCEDES-BENZ AG) v. HELGE HERBERT LEIDUCK, APPOINTED BY ORDER TO REPRESENT THE ESTATE OF HERBERT HEINZ HORST LEIDUCK, DECEASED

HCA 4089/1994

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.4089 OF 1994

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D E C I S I O N

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Overview

1.  By an order made herein on 30 November 2012, Mr Justice L Chan gave the parties leave to adduce expert evidence on “Russian company law and on the Russian company registration system in relation to the issue as to the date on which a Russian company called Stern-Stroy Limited (“Stern-Stroy”) with the Individual Taxpayer Identification Number 7725214235 (“Number”) was first established in Moscow and whether it was an existing company in Moscow as at 25 February 1994 and 1 July 1994” (“Issue”), which issue arose in the circumstances to be described in paragraphs 8 to 17 below.

2.  His Lordship further directed the filing and mutual exchange of expert reports on the Issue, to be followed by a without prejudice joint meeting of the experts and then a signed joint expert report from the joint meeting identifying (1) the issue(s) on which the experts have reached a common opinion and the common opinion in respect of each such issue; (2) the issue(s) on which the experts have failed to reach a common opinion and the competing views on each such issue and the reasons for the opposing views.

3.  Pursuant to such directions, the parties exchanged the Expert Report dated 20 December 2012 by Mr Andrei Donstov (“Mr Donstov”), a partner in the Moscow Office of White & Case LLP (“W&C Moscow”), for the plaintiff and the Expert Report dated 20 December 2012 by Mr Karl Heinz Klenke (“Mr Klenke”).

4.  Thereafter, an issue arose as to whether Mr Donstov could give expert evidence for the plaintiff with the defendants demanding for his withdrawal on the ground that their solicitors, Messrs Robrtsons, had approached a partner (not Mr Donstov) in W&C Moscow with regard to the Issue through a series of privileged and confidential communications, which put W&C Moscow in a position of conflict in then acting as the plaintiff’s expert witness.  Such issue culminated in the defendants’ application to strike out Mr Donstov’s said report, which I dismissed on 5 February 2013 on the grounds set out in my Reasons for Decision dated 12 March 2013.

5.  In the meantime, neither party had taken any steps to comply with the directions for a joint expert meeting or joint expert report.  Instead, on 2 February 2013, the plaintiff, having come to the view that there was virtually nothing in common between Mr Klenke and Mr Dontsov so that it would not be fruitful for them to meet or try to issue a joint report, served Mr Dontsov’s Supplemental Expert Report dated 1 February 2013 on the defendants.  This was objected to as being very late and without prior notice to the defendants or leave of the court.  On 5 February 2013, I gave leave to the plaintiff to adduce and rely on Mr Dontsov’s supplemental expert report.  I further gave leave to the defendants to file and serve a supplemental expert report by Mr Klenke in response to Mr Dontsov’s 2 reports, which the defendants complied with by filing and serving Mr Klenke’s Supplemental Expert Report dated 25 February 2013.

6.  Now before the court is the defendants’ application (“Application”) by summons dated 15 December 2015 for leave to appoint one Mr Vladimir Yurievich Durasov (“Mr Durasov”) in place of Mr Klende as the defendants’ expert on the Issue.

7.  In support of the Application, the defendants have placed before the court Mr Durasov’s Expert Report dated 28 November 2015 on the Issue.

Relevance of the Issue

8.  By way of background, on 29 April 1994, the plaintiff applied for and obtained a Mareva injunction (“Injunction”) against both defendants upon the usual cross undertaking as to damages (“Undertaking”).

9.  The Injunction was subsequently discharged and the action discontinued as against the 2^nd defendant (“IRC”) on 17 May 1994 and 22 August 1994 respectively as the matter relied upon by the plaintiff to attach IRC with liability as a constructive trustee of its money was wrong.  As for the 1^st defendant, the late Mr Herbert Leiduck (“Mr Leiduck”),[1] the service of the writ of summons on him in Monaco was, after the plaintiff’s unsuccessful appeals to the Court of Appeal and the Privy Council, finally set aside and the Injunction against him discharged on 26 July 1995 for want of jurisdiction over him by the Hong Kong courts.

10.  By a summons issued on 23 July 2007, in enforcement of the Undertaking, the defendants apply for an inquiry as to the damages suffered by them by reason of the Injunction and for payment of the sum(s) found due upon such inquiry.  The trial of the question whether an inquiry should be ordered (“Trial”) commenced before me on 4 February 2013 and is, for various reasons that I need not go into at this point, still continuing.

11.  Insofar as it is material to the Application, it is part of the defendants’ case that the Injunction ruined IRC.  IRC claims damages for loss of the value of its business.  Alternatively, Mr Leiduck, holding 99,998 out of the 100,000 shares of and in IRC, claimed to have lost the opportunity to sell his IRC shares.  With regard to the latter claim, Mr Leiduck’s son, Mr Helge Leiduck (“Mr Leiduck Jr”), gave evidence that he started to negotiate with Stern-Stroy’s representatives in November 1993; that he had prior to the Injunction secured Stern-Stroy’s agreement in principle to purchase 70% of the shares of and in IRC and to invest in IRC; and that Stern-Stroy backed out of the transaction due to the Injunction.

12.  In support, Mr Leiduck Jr produced, inter alia, what appear to be:

(1) Stern-Stroy’s letter dated 25 February 1994 confirming its interest in purchasing all of Mr Leiduck’s shares in IRC at US$40 million; and

(2) Stern-Stroy’s letter dated 1 July 1994 withdrawing from the purchase for the reason that the value of IRC had become negligible and its reputation damaged beyond repair due to the Injunction against both Mr Leiduck and IRC.

The Number appeared in the letterhead.

13.  The plaintiff takes the position that this is a bogus claim.  More particularly, it is the plaintiff’s case that Stern-Stroy could not have existed on 25 February 1994 or 1 July 1994 and that it was not formed until December 2002.

Existing factual evidence on the Issue

14.  The plaintiff so asserts because the searches that its legal representatives and expert conducted on the public records of Stern-Stroy revealed only the following:

(1) a resolution dated 25 November 2002 (“Resolution”) signed by one Alexander Dmitrievich Klechkovsky (“Mr Klechkovsky”) as the founder of Stern-Stroy resolving to, inter alia, incorporate Stern-Stroy and to approve its articles of association;

(2) the articles of association of Stern-Stroy approved by the Resolution (“Articles”);

(3) an extract from the Unified State Register of Legal Entities (“USRLE”) with regard to Stern-Story on which 10 December 2002 was entered as Stern-Stroy’s date of first registration as both a legal entity and a taxpayer; and

(4) a list of all the documents contained in the USRLE registration file of Stern-Stroy, listing only the Resolution and the Articles.

15.  In answer, Mr Leiduck Jr claimed to have been informed by Mr Klechkovsky at a meeting in Kiev, Ukraine in January 2012 to the effect that:

(1) Stern-Stroy was first registered in August 1992 in Moscow but was dissolved in December 2000.

(2) The Number was used by Stern-Stroy all along.

(3) Stern-Stroy was registered anew in 2002 under the same name and kept using the Number.

16.  The defendants also called one Ms Mitsie Johnson and one Dr Olga Salman (“Dr Salman”) who claimed to work respectively for Mr Leiduck Jr and Stern-Stroy at the material time to testify as to the existence of Stern-Stroy and the negotiations between Mr Leiduck Jr and Stern-Stroy for the sale and purchase of IRC shares in 1993 and 1994.  In particular, Dr Salman recalled that she was employed by Stern-Stroy from September 1992 to January 1995; that Stern-Stroy was founded in the second half of 1992 under the Number which was printed on all company documents; that she remembered preparing Stern-Stroy’s letter of intent to purchase IRC shares; that the private company registration systems of the 1990’s were confusing and chaotic; and that the Number was simply re-used after the introduction of a new registration system in 2002.

17.  Further, Mr Klenke annexed to his first report a one-page document bearing the emblem of the Russian Federation, the date of 23 June 1993 and the caption “Certificate” with just this line: “The limited partnership “STERN-STROY” is legally registered in Russia under the number of 7725214235.” (“23.6.1993 Document”). This document was said by Mr Klenke to have been shown to him.  He described it as an official confirmation by an official body, most probably the “ministry of interior”.

Existing expert evidence on the Issue

The experts

18.  As stated above, Mr Donstov is partner of W&C Moscow.  As at the dates of his reports, he had been practising in Russian law particularly Russian corporate law for over 18 years.  He has experience in providing legal support for the registration of companies in Russia during the period from 1993 to 1997.

19.  In contrast:

(1) Mr Klenke studied politics.

(2) He had worked, inter alia, as a trade representative of the former German Democratic Republic stationed in Russia, a consultant to various Russian and international companies between 1989 and 2004 and the president of a Russian investment company between 2004 and 2010.

(3) He had set up and registered hundreds of companies in Russia since about 1992.

(4) He witnessed the establishment of the new social and economic systems in Russia and the changes brought thereby, including those to the company registration system in the early 1990s.

20.  I agree with Mr Horace Wong SC (leading Mr Clark Wang), counsel for the defendants, that Mr Klenke’s knowledge and experience with the Russian company registration system is that of a user.  He does not in fact possess any particular professional expertise.  What he has is at best general and second-hand knowledge that he acquired as an user in the course of his said career.

Mr Donstov’s opinion

21.  Mr Donstov’s 2 reports run to over 20 pages in substantive text and produce altogether 1,358 pages of supporting materials including relevant laws, regulations and official records and documents.

22.  In summary, Mr Donstov is of the view that Stern-Stroy could not have existed between February and July 1994 because:

(1) A company is deemed to be existing from the date of registration with the Taxation Ministry prior to 1 July 2002 and under the USRLE from 1 July 2002.

(2) The company search documents of Stern-Stroy, as set out in paragraph 14 above, show that it was incorporated in 2002, with nothing to suggest that it had a prior existence at all.

(3) Had Stern-Stroy been first registered in 1992, its registration file would have eventually been transferred to the Federal Tax Service in 2002, which would have kept copies of all registration and foundation documents of the company from 1992 to 2002.

(4) Prior to July 2002, a Moscow company was assigned a registration number in the format of xxx.xxx or xxx.xxx.xxx by the Moscow Registration Chamber (which was responsible for the registration or legal entities in Moscow) when it was established. 

(5) When the USRLE was implemented on 1 July 2002, all pre-existing companies were required to re-register and were assigned by the registration authority with a new 13 digit Main State Registration Number (“MSRN”) in place of their said old state registration numbers.

(6) The Number was however a unique taxpayer identification number (“INN”).  It was a supplemental number that was assigned by the tax authorities to a company after registration as a taxpayer with the tax authorities had taken place.  Such numbers, in 10 digits, only started to be assigned from September 1994 pursuant to the Procedure for Implementation of the Provisions of the Russian Federation President’s Decree No.1006 dated 23 May 1994 and approved by the State Tax Service, the Ministry of Finance and the Central Bank of the Russian Federation in August 1994.

(7) The first 4 digits of an INN reflect the code of the tax inspectorate that registered the taxpayer.  The 5^th to 9^th digits, assigned by the tax inspectorate, is the sequential number of the particular taxpayer and reflect the order in which it was registered in a particular locality by a particular tax inspectorate.  The last digit is a control number generated by a calculation algorithm.

(8) Before August 1994, taxpayers were not assigned any special numbers, except for the use of the sequential numbers in the registration books kept by the tax authorities to record information on the taxpayers who were legal entities registered in a certain region, city or city district.  If the whole of the Number were a sequential number, it would mean that by the time of the registration of Stern-Stroy, the relevant tax authority had already registered 7,725,214,234 legal entities in the City of Moscow.  However, as of 1 December 2002, the USRLE listed a total of only 4,555,490 legal entities registered in the whole of the Russian Federation, out of which 1,060,993 legal entities were registered before 1 July 2002.  Therefore, it is extremely unlikely for more than 7 billion companies or legal entities to be registered in Moscow alone in 1992 when private businesses were only starting to develop in Russia.

(9) The INN assigned to a particular taxpayer company remains unchanged during its life. Once a taxpayer company is liquidated, the INN that belongs to it cannot be assigned again to another company.

Mr Klenke’s opinion and Mr Donstov’s criticisms thereof

23.  Mr Klenke’s 2 reports are less than 10 pages long altogether in substantive text.  In addition to the 23.6.1993 Document, he produced only one other exhibit, which was an article entitled “Economic Reform in Russia in 1992: The Government Battles Labor Collectives” by Victor M Polterovich published in the Journal of International and Comparative Economics in 1995.  It dealt with the transfer of the state-orientated Russian economy into a capitalistic one, and not the company registration system in Russia at the material time.

24.  In short, Mr Klenke spoke of the following:

(1) President Boris Yeltsin issued a decree regarding the registration of private companies in 1992, without identifying or producing such decree.

(2) There was however an inherent disregard by civil servants of new rules and their implementation because of lack of experience and corruption.  This applied very much to the company and tax registration systems too.

(3) The Russian company registration system changed about 3 times in the decade leading up to 2002 when companies were made to re-register a final time.  A lot of the companies were just given the same INNs they had before.  The “evraz group” which was founded in 1992 was given as an example.  Although several companies in that group under the holding company (not specifically identified) were formed before 2002, they “are highlighted to have been registered at or after 2002 with the same registration number than (sic) it had in 1992”.

(4) Information was omitted or deleted for various reasons including corruption.

(5) The allocation of the INN was and still is not in practice arbitrary as one could and can still obtain a certain INN with “the right contacts and/or reasons and/or bribes”.

(6) He knew from his own experience that “companies were registered under a certain number in for example 1992 and that number was allocated to them in the big reform of the registration system in 2002 under for example the INN number”.

25.  For these reasons, Mr Klenke believed that Stern-Stroy could have existed under a certain registration number in 1993 and was re-registered in 2002 with the same registration number without leaving a trace of its previous registration under the new registration system.

26.  I think it is not unfair for me to say that all of Mr Klenke’s said observations were no more than bare assertions.  He spoke in the most general and imprecise terms.  What he said was not backed by any authorities, not to mention any rules or regulations.  The only basis for his views seem to be his personal experience, the true nature and extent of which is unclear.  I find it hard to imagine that any court would feel able to attach any weight to his opinion. 

27.  Not surprisingly, Mr Donstov was critical in his comments on the views expressed by Mr Klenke in his supplemental expert report.  In particular, Mr Donstov pointed out that:

(1) Mr Klenke was incorrect in his statement that companies in Russia were registered with an INN.  Since 1 July 2002, companies were assigned with 13-digit MSRNs by the registration authority upon registration or re-registration as a legal entity whereas INNs were assigned by the tax authorities to a company after it had registered as a taxpayer with the tax authorities.  The assignment of INNs to companies was first implemented in August/September 1994. The introduction and implementation of the USRLE in 2002 did not affect the INNs.

(2) With regard to the suggestion that many companies registered prior to 1 July 2002 kept their pre-USRLE “number”, which was the INN, Mr Klenke had confused a company’s MSRN with its INN, which numbers are in different formats and are assigned to companies for different purposes by different authorities.

(3) If a company was established before 1 July 2002, its prior existence would be reflected in the records kept by the USRLE.  The example of the Evraz Group was unparticularised and unsupported to be of any use.

(4) As for the suggestion that companies that existed prior to July 2002 could through bribery and corrupt means obtain a particular INN after July 2002:

(a) First, the computerisation of the assignment of INNs in 1994-1995 would make it difficult, if not impossible, for anyone to choose a particular INN. 

(b) Second, it was difficult to understand why a company would want to bribe a government official just to obtain a particular INN because all it meant was that the company would have to pay taxes and be controlled by the tax authority.

(c) Third, a company registered prior to 1 July 2002 kept the INN already assigned to it in any event.

(5) The 23.6.1993 Document is not a genuine document as it did not conform with any of the requirements applicable to official documents issued in around June 1993.  The word “certificate” is unknown to Russian official documentation.  It bears no resemblance to a document issued by the Ministry of Interior Affairs in 1993 that Mr Donstov caused to be obtained.  Such ministry has nothing to do with the registration of companies and therefore could not have issued a “Certificate” proving the registration of any company.

28.  Although Mr Klenke produced a supplemental expert report after having sight of Mr Donstov’s second report, he made no new point, other than that the fact that only the Resolution and the Articles could be found in the public registration records of Stern-Stroy is evidence of manipulations as other documents had to be submitted during registration since the 1990’s.

Defendants’ reasons for switching expert

29.  According to the 7^th Affidavit of Mr Leiduck Jr and the 28^th Affidavit of Mr Jeremy David Levy (“Mr Levy”) of Robertsons:

(1) After Mr Leiduck Jr took over the conduct of these proceedings in 2014 after Mr Leiduck’s death, he was advised by his lawyers of their view that they did not consider Mr Klenke to be a satisfactory expert who would be able to provide the necessary assistance that the court requires for the determination of the Issue.  He started to search for a more suitable expert.  After much effort, he located Mr Durasov as a potential expert in about November 2014.

(2) Coincidentally, in about August 2014, Mr Klenke (whose evidence was originally expected in early 2013) indicated to Mr Leiduck Jr that he might no longer be able to attend court in Hong Kong to give evidence due to the unexpected delay of the Trial and the change of his personal circumstances (as he had taken on new business commitments and had become very busy).  At that time, Mr Klenke was still unsure whether he would be able to come to Hong Kong to give evidence when his evidence was required.  Mr Klenke confirmed with Mr Leiduck Jr in about October 2015 that he was no longer available to act as the defendants’ expert.  The defendants informed the plaintiff of this by letter on 14 October 2015. 

(3) After Mr Leiduck Jr located Mr Durasov as a potential expert on the Issue, Mr Levy as the person having the conduct of these proceedings for the defendants started to contact Mr Durasov at the end of 2014 and the beginning of 2015.  However, the progress was slow due to various difficulties encountered.  Mr Durasov speaks no English.  He had to travel long distance to come to Hong Kong to meet with the defendants’ legal team on several occasions.  The identification and location of the relevant legal authorities and other documents relating to the Issue (concerning the operation of the registration system more than 20 years ago in Russia) was time consuming.  It was not until November 2015 that some of the key documents produced by Mr Durasov were located and the report of Mr Durasov was finalised on 28 November 2015.

(4) The summons by which the Application was made was issued shortly after Mr Durasov’s report was ready.

30.  Mr Wong SC has however made it clear in the course of his submissions in court that, in making the Application, the defendants rely on Mr Klenke’s inability, and not unavailability, to deal with the Issue.

Mr Durasov’s expertise and opinion

31.  Unlike Mr Klenke, Mr Durasov has direct first-hand knowledge and working experience in the assignment and recording of registration numbers and maintenance of registration information of companies during the material time (i.e. 1993-1994).  In this regard:

(1) Mr Durasov joined the Russian tax authority in May 1993 and had worked in tax inspectorates in Moscow (firstly in Inspectorate No.12 and then in Inspectorate No.43) until he left the government in 2010, hence having over 17 years of experience in the tax inspectorate rising from the rank of Tax Inspector to Senior and subsequently the Chief State Tax Inspector.  When he left the Federal Tax Inspectorate in 2010, he was the Director of Desk Audit Department No.1.

(2) More particularly, between May 1993 and October 1994, Mr Durasov worked with the Legal Department in Tax Inspectorate No.12 for the Northern Administrative District of the City of Moscow, which was responsible for creating and maintaining a database for organisations.  In October 1994, he was transferred to the State Register Maintenance and Taxpayers Registration Department, upon its establishment to take over such responsibilities from the Legal Department.

(3) His personal responsibilities in these departments covered all aspects of registration of companies including compiling registration files of enterprises; entering and recording the registration data in the relevant databases; the maintenance of a database; reporting and forwarding such data and the underlying documents to the relevant authorities; and most importantly, assigning State Register numbers (later known as Taxpayer’s Identification Numbers or INNs) to companies that were newly registered or existing enterprises that were re-registered.

(4) He had also acted as a witness for the tax authorities in matters concerning the application of tax laws in Russia.

(5) He left the tax service in 2010 and has since been working as an auditor.

32.  Mr Durasov’s report runs to over 15 pages in substantive text with close to 500 pages of supporting materials.

33.  It addressed 6 sub-questions under the Issue:

(1) When were INNs first started to be assigned to enterprises, whether officially or unofficially?  Were any INNs assigned in around February or July 1994?

(2) Are the 5^th to 9^th digits of an INN always strictly assigned in sequential order?  Could there be exceptions in practice?

(3) Does the USRLE system contain a full and complete collection of all the files and information of all companies that have registered, including those established in the early 1990’s?

(4) Is it possible for information of a company stored in the USRLE system or its predeceasing registration system to be altered or amended at the request of people and entities with special means and powers?

(5) Is it possible, or has there been any occasion, in practice for the INN of a previously dissolved company to be reused by a later incorporated company whether of the same name or not?

(6) Is it possible for a company which had existed for some years before 2002 to have been wound up some time before 2002 and then re-incorporated and registered in or after 2002, using the same name and the same INN as were used before its winding up?

34.  Mr Wong SC has in his written submissions highlighted the following 4 points made by Mr Durasov that are pertinent to the determination of the Issue but were not covered in the reports of either Mr Klenke or Mr Dontsov.

35.  First, in relation to the time when the 10-digit INNs first started to be assigned in Russia:

(1) Whilst agreeing that a number in the name of INN only started to be assigned in 1994, a number in the same format but under a different name called “Number in the State Register” (“State Register Number”) had started to be assigned from mid-1993 to new enterprises.  Enterprises already registered were re-registered and assigned a State Register Number during the period from 1 July 1993 to 1 October 1994. The State Register Number was later adopted as the INN of the company.  Hence, for companies registered (or re-registered) before August 1994, the INN would be the same as its State Register Number.

(2) In support, Mr Durasov produced the Order of the State Tax Service of Russia No. VG-3-12/41 dated 24 May 1993 (“Letter 41”) (which was not produced by Mr Donstov), showing that the State Register Number had started to be assigned during the re-registration process starting from 1 July 1993.  Letter 41 further specified the format of the first 9 digits of this number at appendix 1 thereto.

(3) Mr Durasov further produced the Task Statement of Automated Maintenance of the State Register of Enterprises (functional part, Phase 1, for the local level) attached to the Letter of the State Tax Service No.12-2-07/219 dated 4 October 1993 (“Task Statement Phase 1”) and the Task Statement of Automated Maintenance of the State Register of Enterprises (functional part, Phase 2 regional and federal levels) attached to the Letter of the State Tax Service No.VP-6-12/31 dated 1 February 1994 (“Task Statement Phase 2”).  These two Task Statements (which were not produced by Mr Donstov) were statements on the same system at different stages and showed that the State Register Number was a 10-digit number and provided the algorithm upon which the 10^th digit (being a control number) was calculated according to the value of the previous 9 digits.

(4) If one applies the algorithm provided in these Task Statements to the first 9 digits of the Number, i.e. 772521423, one would arrive at the last number “5” as the control number, which tallies with the 10^th digit of the Number.

(5) Mr Durasov then cross-referenced section 14.1 of the Company’s Registration Card/Chart in Schedule 1 to the Regulation n the Procedure for Keeping of the State Register of Companies No.YuU-4-12/65N registered with the Ministry of Justice as No.250 (“Regulation 250”), which Mr Donstov also produced.  Regulation 250 was the primary legislation pursuant to which the said Task Statements were prepared. Mr Durasov confirmed that the State Register Number referred to in section 14.1 was the State Register Number that the two Task Statements referred to.

(6) Mr Durasov also referred to the Procedure for Implementation of the Provisions of the Russian Federation Presidential Decree No.1006 “On Comprehensive Measures for Timely and Full Collection of Taxes and Other Mandatory Payments No.VG-4-13/94n/104/104 (approved by the Russian State Tax Service, the Russian Ministry of Finance and the Central Bank of Russia on 13 August 1994) cited by Mr Donstov and pointed out that this document for the first time officially termed the 10-digit number assigned to an enterprise upon registration or re-registration as the INN.  Previously, this number was officially called the State Register Number, although internally (e.g. in Task Statement Phase 2), the State Tax Service had already been referring to the number as the INN (see Task Statement Phase 2 and also Addendum 1 to the Task Statements).

(7) Mr Durasov further referred to an article in the 7 July 1995 issue of the established newspaper “Kommersant” which described the said re-registration process and the assignment of the State Register Number.  

36.  Second, in relation to the 5^th – 9^th digits of the Number:

(1) In normal circumstances, the 5^th – 9^th digits of an INN (and its predeceasing State Register Number) should be a sequential number.

(2) However, the paper records (in a paper logbook and company card/chart) were copied by duty inspectors and manually input into a computer system, which was then newly introduced and fraught with problems.  Different database softwares developed by different developers in different programming languages with mismatched software architectures and varying degrees of automation were used.  When tax inspectorates using different softwares sent their data (of registered or re-registered enterprises) to the data centre of the State Tax Service, because of the incompatibility of the formats, conversion was required and during the process many different types of error occurred.  Further, during the system migration in 2000 many more errors occurred when the different registration databases were merged into a unified information system.  In fact, Mr Durasov had been personally involved in the checking and identification of errors and data correction.

(3) Overall, Mr Durasov identified 4 problematic areas where errors (including loss of information, assignment of duplicate numbers to one company, the same number to different companies, changes in company status indices etc.) often occurred:

(a) manual recording of data;

(b) manual inputting of data to the electronic database;

(c) conversion of data format during the transfer between a local tax inspectorate and the unified data centre; and

(d) the merger of databases in 2000.

(4) Accordingly, given the fact that in reality many errors often occurred, the 5^th – 9^th digits may not always be sequential, and hence are not reliable for the determination of the time of the incorporation of a company. 

37.  Third, Mr Durasov drew a different inference from the fact that only the Resolution and the Articles were kept in respect of Stern-Stroy by Inspectorate No.25:

(1) According to the relevant regulations, some of which were not previously provided, if a company had indeed been incorporated in 2002, it would have submitted, and the corresponding tax inspectorate would have retained, many more documents than the only two that could be found in the files of Stern-Stroy.

(2) Mr Durasov further provided a sample set of documents of a company that was established in 2002 to demonstrate the types of document that a tax inspectorate would have kept for a company incorporated in 2002 so as to make the point that there should have been other documents if Stern-Stroy had been incorporated in 2002.

(3) In addition, Mr Durasov referred to the facts (a) that from 1 July 2002, when the incorporation registration duties were transferred from the Moscow Registration Chamber to the tax service, all documents previously held by the Moscow Registration Chamber were transferred over to the archive of the Directorate of the Federal Tax Service for the City of Moscow”; (b) that “the registration documents of local tax inspectorates were routinely transferred to the said archive on a regular basis”; and (c) that currently all the hard copies of the incorporation registration documents and documents related to registration with the tax inspectorates dating back to 1990s would not be kept by the local tax inspectorates, but in a central archive.

(4) Thus, unlike Mr Dontsov, Mr Durasov reasoned that the fact that documents which one would expect would have been kept by the tax inspectorate (if Stern-Stroy had indeed been incorporated in 2002) are missing is indicative of the unlikelihood (even impossibility) that Stern-Stroy was incorporated in 2002.  This also points to the unreliability of the extract containing just the 2 documents found.  It is likely that Stern-Stroy was an “older” company and there should have been earlier documents in its registration file, which would have been archived after the change in the law in 2002.

(5) Moreover, according to Mr Durasov:

“Making unlawful amendments into the URSLE at the initial stage of its existence was possible, because all local tax inspectorates had the opportunity to introduce amendments into the URSLE database … and a corrupt officer of the inspectorate could use this opportunity and make unlawful amendments into the URSLE system …The information on intentional amendments of Stern-Stroy records in the USRLE, for the purposes of covering up some of its business activities by a corrupt officer on the tax inspectorate No. 25, is possible.”

In support, Mr Durasov referred to a news report of the deliberate tinkering with the USRLE system through corruptive means.

38.  Fourth, Mr Durasov also explained how Stern-Stroy could be “dormant” for a couple of years and resume commercial operations later, which could simply be done by voluntary suspension of commercial operations without the necessity of any liquidation, so long as it continued to submit tax returns.

Principles for grant or refusal of leave to substitute expert

39.  The relevant principles governing the grant or refusal of leave to substitute an expert witness have been summarised by Mr Justice Johnson Lam (as he then was) in Chinachem Charitable Foundation Ltd v Chan Chun Chuen[2009] 5 HKC 190[2] at [19]-[27] and restated by Mr Justice Bharwaney in Law Chung Fai v Lam Ming Kuen, HCPI 96/2008, unreported, 13 September 2010, at [9].

40.  For present purposes, Bharwaney J’s restatement bears repeating:  

“The principles that have to be applied in determining an application to change an expert witness may be summarised as follows:-

(a) The court’s discretion, whether or not to allow a party to change his expert, is exercised within the ambit of the court’s management powers. These powers must be exercised in the light of the underlying objectives of the recent civil justice reform, including the need to ensure the cost effectiveness of the proceedings; to ensure that the case is dealt with expeditiously; to ensure reasonable proportionality having regard to the amount of money involved, the importance of the case, the complexity of the issues, and the financial position of each party; to ensure procedural economy in the conduct of the proceedings; and to ensure fairness between the parties.

(b) In the exercise of its powers of case management, the court recognises that the primary aim is to secure the just resolution of the dispute in accordance with the substantive rights of the parties.

(c) Expert shopping is undesirable and, whenever possible, the court will use its powers to prevent it.  It can lead to potential unfairness between those who can afford to shop around for the opinions of more than one expert and those who cannot.  Expert shopping is not conducive to cost effectiveness of the proceedings and the expeditious disposal of a case.

(d) The disclosure of the original expert’s report, and the waiver of the privilege that would normally be attached to it, would usually be imposed as a condition for granting permission to call a substitute expert.  However, the disclosure of the original expert’s report per se does not guarantee that the court would permit a substitute expert to be called.

(e) To curtail expert shopping, the court may refuse to grant leave if the only reason for calling a substitute expert is that his opinion is more favourable to the party calling him than the opinion of the original expert.

(f) However, if the court is satisfied that the just resolution of a dispute requires leave to be granted for a substitute expert to be called, it should not refuse leave simply because the opinion of the substitute expert is more favourable than that of the original expert. 

(g) In every case, the court should examine the grounds put forward by the substitute expert and make a preliminary assessment of the cogency of those grounds as compared with those set out in the report of the original expert and the report of the expert engaged by the other side.  If the court is satisfied that there are relevant matters canvassed by the substitute expert which may be important to the just resolution of the dispute which was omitted from the reports of the original expert, or which was outside the expertise of the original expert, a prima facie case would be made up for the admission of the substitute expert report in the interests of the just resolution of the dispute.

(h) In every case, however, the court must also have regard to other relevant circumstances, such as the potential disruption to the trial, the prejudice to the other parties, and the explanation offered by the applicant for the change of experts.  All these matters have to be considered and weighed in the light of and against the underlying objectives of the civil justice reform: to ensure cost effectiveness and economy, expedition, proportionality, and fairness between the parties.

(i) It is not possible to lay down definitive and exhaustive guidelines to cover and cater for every possible situation that may arise and which prompts an application by a party to change his expert.

(j) Ultimately, the court strives to do justice between the parties and, in cases where the court permits the parties to call expert evidence, the court strives to ensure a level playing field which fair access to proper experts for all parties.”

41.  Mr John Yan SC (leading Ms Sara Tong), counsel for the plaintiff, has also referred to the decision of Deputy High Court Judge L Chan (as he then was) in Wing Ming Garment Factory Limited v The Incorporated Owners of Wing Ming Industrial Centre, HCCT 60/2006, unreported, 15 February 2011; Master Leong’s decision in Tanang Padam Raj v Shek Chi Yau & Wong Ching Yi trading as Pak Tsun Company, HCPI 613/2011, unreported, 26 April 2013; and HH Judge Andrew Li’s decision in Yip Kwok Sun v Poly-style Limited, DCMP 2891/2011, unreported, 31 October 2013, in which an application for leave to change expert was refused.  I shall deal with these cases at appropriate points below.

Discussion

42.  Applying these principles, I am persuaded that the defendants should, subject to condition securing the payment of the costs to be ordered in favour of the plaintiff in consequence of the Application, be permitted to replace Mr Klenke with Mr Durasov.  My reasons are as follows.

43.  First, I have been strongly cautioned by Mr Yan SC on the need to guard against expert shopping by the defendants. 

44.  However, this is not how I would characterise the Application or the defendants’ motive behind it.  At this point, I see no evidence of the defendants shopping around for expert opinions on the Issue to the extent of expert shopping as we understand that term.  In this regard, I have deliberately set out above the opinions of Mr Donstov, Mr Klenke and Mr Durasov in some detail.  This is not a case where the defendants seek to replace expert because Mr Durasov’s conclusions are more favourable than Mr Klenke’s (see Chinachem Charitable Foundation Ltd v Chan Chun Chuen at [34]).  They are the same.  However, as said earlier, I personally find it hard to imagine that any court would feel able to attach any weight to Mr Klenke’s opinion.  His 2 reports (which I have read a number of times) are so inadequate and unhelpful that I have no difficulty in understanding the defendants’ desire to replace Mr Klenke.  Any party who is properly advised would want to do so.  While the defendants may be blamed for putting Mr Klenke forward as their expert in the first place, given that the court exercises its case management power primarily to secure the just resolution of disputes, they should not be penalised to the extent of being deprived of the chance to remedy such error if it can be done without prejudice to the plaintiff.

45.  On this, having regard to Mr Klenke’s qualification and experience, I do not see this to be a case in which the defects in Mr Klenke’s reports can be remedied by further communications with the expert (e.g. by providing him with additional evidence, seeking clarifications on matters not understood, seeking opinion on points not addressed in the original report, or, in general, by commissioning supplemental reports), which Mr Yan SC has suggested with reference to Tanang Padam Raj v Shek Chi Yau & Wong Ching Yi trading as Pak Tsun Company at [36]-[38]. Even if Mr Klenke could theoretically learn Mr Durasov’s report and its appendices by heart, any knowledge that he would thereby gain would be second-hand and would not equip him for cross-examination in court.

46.  I accept the defendants’ reason for wanting to change expert on the Issue.

47.  This brings me to my second ground for granting leave subject to condition.  I trust it is apparent from the above outlines of the opinions of the 3 experts that Mr Durasov has canvassed different facets of the Issue from angles and with reference to supporting materials which were not covered or included in the reports of either Mr Donstov or Mr Klenke and which would be conducive to a just resolution of the Issue.  It is not necessary to, and I do not, put the cogency of Mr Durasov’s report any higher than this, especially pending Mr Donstov’s full response thereto.  In this regard, Mr Donstov has by a 3-page letter dated 13 April 2016 to the plaintiff’s solicitors, Messrs Dechert, given some preliminary comments on Mr Durasov’s report.  Mr Wong SC has, on the basis of Mr Durasov’s report, made various criticisms of Mr Donstov in relation to both his 2 reports and comments by letter, including failing to provide the court with a complete picture of, or all relevant authorities on, the Russian company registration system at the material time.  I have no wish to pre-judge the Issue or pre-empt the experts’ evidence or counsel’s submissions thereon. Mr Donstov should be given a full opportunity to further explain his analysis and conclusions on the Issue.

48.  Third, the replacement of Mr Klenke by Mr Durasov and the admission of the latter’s report at this stage would not cause any prejudice to the plaintiff that cannot be adequately compensated by an appropriate order for costs.

49.  There is no date in sight for the resumption of the Trial.

50.  On costs thrown away, the defendants have, by Robertsons’ letter dated 25 January 2016 to Dechert, offered to pay the costs of Mr Donstov in reviewing Mr Klenke’s report and preparing a supplemental report in response thereto and in reviewing Mr Durasov’s report and responding with a fresh supplemental report.  Mr Wong SC has also indicated at the hearing on 25 April 2016 his clients’ willingness to pay the costs of their summons dated 15 December 2015 and to secure the liability for all such wasted costs by, for example, a payment into court.  Security is called for given that there is no general order for security for costs and the 1^st defendant is ordinarily resident out of the jurisdiction while the 2^nd defendant IRC is admittedly valueless.  Further, I think the security should extend to cover Dechert’s costs wasted by the change of expert and, depending on the outcome of the argument over the costs of the 25 April 2016 hearing, the costs of such hearing if awarded to the plaintiff.

51.  The plaintiff is further unhappy with the fact that Mr Durasov had Mr Donstov’s reports when he prepared his, thereby defeating the purpose of the protocol for the exchange of expert reports as ordered by L Chan J on 30 November 2012.  In support, Mr Yan SC referred to Yip Kwok Sun v Poly-style Limited, supra, in which it was said at [57] that this was tantamount to allowing the applicant “a second bite at the cherry”.  On the other hand, the same argument was made in Chinachem Charitable Foundation Ltd v Chan Chun Chuen, supra, and dismissed by Mr Justice Johnson Lam at [37] as not carrying too much weight in the circumstances: “The experts act independently in offering their opinions to the court.  There is nothing to suggest that either expert would have given a different opinion in their reports if they were to be exchanged as opposed to what actually happened.”  I respectfully agree and would adopt the same reasoning.

52.  The plaintiff also considers it unfair that Mr Durasov could take 1 year to produce his report while Mr Donstov would have to provide a response to the matters raised therein within a considerably shorter time.  This can be addressed by giving Mr Donstov a generous period to compile a fresh supplemental report.  As I said earlier, the Trial is not due to resume for a long time.

53.  Lastly, the plaintiff has criticised the defendants for securing the service of Mr Durasov first and then presenting the court with a fait accompli before making the Application.  Reliance is placed on Wing Ming Garment Factory Limited v. The Incorporated Owners of Wing Ming Industrial Centre, supra, at [33] and Yip Kwok Sun v Poly-style Limited, supra, at [56].  In the latter case, the court expressed the view that once a party sees the need for a new expert, instead of obtaining a report from the proposed new expert or meeting with him with a view to procuring a report (without the leave of the court), that party should ask the court for leave to do so first.

54.  With respect, I am puzzled by this suggested approach.  The cogency of the grounds put forward by the substitute expert as compared with those set out in the report of the original expert and the report of the expert engaged by the other side is material to the court’s exercise of case management powers in an application to change expert witness.  That being the case, how else can an applicant demonstrate to the court that the opinions of the proposed new expert are likely to facilitate the just resolution of the dispute if he is disallowed from first obtaining a report, or at least the preliminary views, of such expert?  See Chinachem Charitable Foundation Ltd v Chan Chun Chuen, supra, at [26] & [40] and Law Chung Fai v Lam Ming Kuen, supra, at [9(g)], [27]-[28].  In the latter case, Bharwaney J had to twice adjourn the hearing of the defendant’s application to change his medical liability expert to, inter alia, enable the defendant to place before the court the gist of the proposed new expert’s opinions.  His Lordship further ordered the defendant to pay the costs of the 2 wasted hearings as he should have properly supported his application by exhibiting the opinion or, at least, the gist of the opinion of the new expert.  In this connection, I note that the judge who decided Yip Kwok Sun v Poly-style Limited also ruled (rather inconsistently, if I may say so) in Ehsanul Haq Bajwa v Hospital Authority, HCPI 1040/2004, unreported, 24 May 2013 at [16], [18], [61] & [70] that the plaintiff should pay the costs of a hearing wasted due to his failure to adduce the gist of his proposed replacement liability and quantum experts’ opinions.

55.  I attach no blame to the defendants for having procured Mr Durasov’s report and prepared an English translation thereof first.  This also softens the plaintiff’s complaint of delay by the defendants in making the Application.

Disposition

56.  For the above reasons, I am inclined to allow the Application subject to condition of payment into court by the defendants.

57.  As for costs, I repeat paragraph 50 above.  As I understand from Mr Wong SC, while the defendants accept that they are seeking the court’s indulgence and should bear the costs of the summons and the costs of and occasioned to the plaintiff by the change of expert, they would ask for the costs of the contentious hearing on 25 April 2016 which became necessary only because the plaintiff did not accept the offer contained in Robertsons’ letter of 25 January 2016. 

58.  As I have not heard detailed argument on the incidence of the costs of the hearing on 25 April 2016, I direct the defendants to file and serve written submissions thereon within 7 days, to be followed by the plaintiff’s written submissions within 7 days thereafter with leave to the defendants to make written reply submissions within 7 days thereafter.

59.  To enable me to decide the term of the condition for leave to the defendants to replace expert, the plaintiff shall within 7 days from today file and serve an estimate of the costs of and occasioned to it by the defendants’ change of expert and summons dated 15 December 2015.  This should include the costs of the hearing on 25 April 2016 (in case it is awarded to the plaintiff).  I should however make it clear that I do not expect anything like a taxation bill, nor do I intend to assess the plaintiff’s costs.  What I intend to do is to arrive at a figure that the defendants should pay into court.  I will take a broad brush approach so the costs estimate may take the form that is usually produced in support of a security for costs application.  The defendants shall have 7 days to comment on the plaintiff’s costs estimate.

60.  I will give further expert evidence directions once I deal with the costs of the 25 April 2016 hearing and finalise the condition.  However, I can indicate at this stage that, given that both Mr Donstov and Mr Durasov live in Moscow, I am minded to resurrect the directions for a joint expert meeting and joint expert report after the filing and service of Mr Donstov’s new supplemental report.