LEHMAN & CO MANAGEMENT LTD v. EFFISCIENT LTD AND ANOTHER

HCCW377/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP NO.377 of 2010

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JUDGMENT

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Introduction

1.  Each of the petitions identifies a dispute in which the two equal shareholders in LehmanBrown Ltd ("the Company") have fallen out. The two actions were consolidated by order of Harris J dated 17 January 2011.

2.  Directions were also given for the exchange of pleadings, by which the petitioner and the cross-petitioner should plead their respective cases. It might be said that that opportunity has been enthusiastically embraced by the filing of the petitioner's Points of Claim (21 pages), the cross-petitioner's Points of Defence and Counterclaim (44 pages), and the petitioner's Amended Points of Reply and Defence to Counterclaim (45 pages).

3.  It is fair to say from a review of the pleadings and other documents in the hearing bundle that there is precious little that the parties (or, more accurately, the natural persons who speak act for them) can agree upon. They are, however, agreed on one important feature, namely that there should be an order requiring one of the shareholders to buy out the other.

4.  It is, therefore, accepted by the petitioner and the cross-petitioner that the Court will almost certainly make an order compelling one party or the other to sell its shares to the other party at the fair market value to be fixed by some valuation process to be identified by the Court.

5.  It would be unfortunate if the Court has to descend into and determine issues between the parties at the level of detail of the complaints identified in the pleadings, simply to decide which party should buy out the other. Nevertheless, a trial has been fixed for seven days in October 2011, to deal with that decision only (ie. the price at which the shares should be bought and sold will be left for a separate hearing).

6.  By order dated 11 April 2011, Harris J gave a direction, amongst others, that the parties should take out any interlocutory application as it was advised to make within 21 days after the exchange of witness statements. I am now dealing with the cross-applications for discovery which have been made.

7.  The petitioner's summons is dated 13 May 2011 and bears the margin note reference to sections 152FA and 152FB of the Companies Ordinance Cap 32 ("the Ordinance"), and RHC Order 24 rule 7. The petitioner has emphasized that its main application is under section 152FA, which is not strictly an application for discovery but rather one for inspection under the Ordinance regime, and the further specific discovery application is very much a secondary alternative.

8.  The summons is supported by the 2nd and 4th affidavits of Mr Edward Eugene Lehman ("Lehman") – who is neither a shareholder nor director of the petitioner, but who describes himself as the authorised representative of it – and is opposed by the 2nd affidavit of Russell Peter Brown ("Brown") – who is the 50% owner of the cross-petitioner, and whose wife Zhou Han owns the other 50%.

9.  The cross-petitioner's summons is dated 1 June 2011 (strictly out of time, but no point is taken on this) and bears the margin note reference to Order 24 rules 3, 7, 10 and 11A, as well as the inherent jurisdiction.

10.  It is supported by the 5th affidavit of Louise Anne Greene, and is opposed by the 3rd affidavit of Lehman (which produces the petitioner’s supplemental list of documents).

11.  The petitioner was represented on this application by Mr Barrie Barlow SC and Mr Anson Wong of Counsel. The cross-petitioner was represented by Mr Charles Manzoni of Counsel.

Background

12.  Though I hope not at any great length, it may be helpful to set out some of the background to provide some context for these consolidated proceedings, and the applications which now fall to be determined.

13.  Lehman is a partner in a firm of lawyers called Lehman, Lee and Xu ("LLX").

14.  The petitioner is a company incorporated in the British Virgin Islands and is beneficially owned by Lehman's wife, Karolina ("Karolina"). Notwithstanding that beneficial ownership, and that Lehman is also not a director of the petitioner, he is plainly considered to be the person behind it and acts as its "authorised representative". Though, when it suits, Lehman is happy to draw the distinction between himself and the petitioner, it is Lehman who speaks on behalf of the petitioner, and he apparently speaks bluntly.

15.  The cross-petitioner is a company incorporated in Hong Kong and is owned 50% each by Brown and his wife Zhou Han. They are its two directors. It is generally Brown who speaks on behalf of the cross-petitioner.

16.  The Company is a professional services firm, operating an accounting, management book-keeping and consultancy enterprise in China through a ‘wholly foreign owned enterprise’, with various branch offices, and it is at least associated also with accounting businesses in Hong Kong and elsewhere.

17.  The Company was originally incorporated in October 2000, but changed its name to its current name on 28 December 2001. Its existence was to facilitate a business venture between Lehman and Brown, but though at bottom it was their ‘partnership’ that gave rise to the Company, the way each of them chose to set up the arrangements colours the approach that can be taken to it.

18.  Each of the petitioner and cross-petitioner holds one of the two paid-up shares of nominal value of HK$1 issued by the Company.

19.  The original directors of the Company were Brown and Million Strong International Ltd ("Million Strong"), a nominee company acting for the petitioner. (Lehman says the reason for appointing a nominee director was because he and Karolina felt it "more appropriate", as they were both non-residents of Hong Kong; Brown says it was simply to provide an opaque shield between them and their asset.) Subsequently, in late 2010, Million Strong was de-registered, and the remaining director Brown appointed Zhou Han as the second director.

20.  It appears to be common ground that the business venture operated relatively harmoniously until around 2004, when the relationship between Lehman and Brown began to sour and after only deteriorated. Nevertheless, Million Strong signed as director approving the financial statements of the company until 2006.

21.  By 2008, as is also common ground, the relationship of trust and confidence had broken down irretrievably, and the directors and shareholders of the Company were in deadlock.

22.  The pleadings identify the competing cases as to the reason for the irretrievable breakdown. In short, the petitioner complains of unilateral decision-making by Brown; the failure to pay proper dividends; over payment of salaries to Brown, Zhou Han and other staff; the failure to provide financial information to which the petitioner and/or Lehman is entitled; and other unfairly prejudicial conduct.

23.  On the other hand, the cross-petitioner complains of the breach of an agreement by Lehman to pay rent; misappropriation of funds from the Company by Karolina; damage caused to the office premises, operating an accounting firm in competition with the Company; misappropriation of the Company's trademark; demands for unreasonable dividends; the prevention of the ability to file proper accounts and tax returns; the making by Lehman of unfounded and misguided complaints to regulatory bodies and organisations; and the making by Lehman of defamatory statements.

24.  These consolidated actions are not the only sets of proceedings arising out of the fundamental dispute between Lehman and Brown. A number of other actions have been brought, and they are referred to in some detail in the pleadings.

25.  For example, Brown and others have sued Lehman for defamation in his publication of thousands of e-mails to members of the accountancy profession. An interlocutory injunction was made preventing Lehman from further publication of the defamatory materials, but Lehman acted in breach of that injunction and has subsequently been held by A To J to have been in contempt of court.

26.  Further, in addition to matters by way of court proceedings, Lehman has made or given notification of numerous complaints about Brown to various professional, business, regulatory or government bodies including the International Group of Accounting Firms, the Chartered Institute of Management Accountants, the Association of Chartered Certified Accountants, the British Chambers of Commerce in China, The International Accounting Group, the Hong Kong Inland Revenue Department, and the Commercial Crime Bureau of the Hong Kong Police.

Applicable principles: section 152FA

27.  Section 152FA of the Ordinance materially provides, under the heading "Order for inspection":

(1) Subject to sections 152FD and 152FE, on application by such number of members of a specified corporation as is specified in subsection (2) (in this section referred to as "applicant"), the court may make an order –

(a) authorizing the applicant or any one or more of such members applying as applicant to inspect any records of the specified corporation; or

(b) authorizing a person (whether or not a member of the specified corporation) other than the applicant to inspect any such records on behalf of the applicant.

(2) …

(3) The court may only make an order under subsection (1) if it is satisfied that –

(a) the application is made in good faith; and

(b) the inspection applied for is for a proper purpose.

(4) Any person who is authorised by the court to inspect the records of a specified corporation may make copies of the records unless the court orders otherwise.

(5) …

28.  Section 152FB makes provisions for various ancillary orders that can be made if the court makes an order under section 152FA, including orders for production of records to the person authorized to inspect them, and orders specifying the records that may be inspected by that person.

29.  As to the inspection of records, a "record" is defined in section 2(8A) of the Ordinance to include "book and paper", which is in turn defined under section 2(1) to include "accounts, deeds, writings and documents".

30.  Sections 152FA to 152FE were added to the Companies Ordinance by an amendment made in 2004. The sections were adopted from counterpart sections in the Australian companies legislation (the genesis of which appears, in turn, to have been American companies legislation). It is, therefore, possible to look to the Australian authorities for assistance with the relevant legal propositions.

31.  It is perhaps helpful to start with the fact that the court's jurisdiction to exercise discretion under section 152FA is only triggered if the court is satisfied that the application is made in good faith and the inspection applied for is for a proper purpose. The way in which the subsection is structured would suggest that these are two separate and distinct concepts, but the Australian authorities identify that there is probably one composite consideration.

32.  In Knightswood Nominees Pty Ltd v. Sherwin Pastoral Company Ltd (1989) 15 ACLR151, Brooking J held that the reference to good faith colours and so reinforces the requirement of proper purpose. By reference to the equivalent of our section 152 FA, he said, at 156:

"If s256B used the words "acting in good faith for a proper purpose", or even the words "acting in good faith and for a proper purpose", it would perhaps be easier to say that the section expressed at composite motion rather than to distinct requirements. The language actually used in para (b) does suggest that there are two distinct matters to be considered: the court must be satisfied that the member is acting in good faith and that the inspection is to be made for a proper purpose. No doubt the purpose set up by an applicant must be a genuine, not a pretended purpose, quite apart from the express mention of good faith. Once it is accepted that one can up to a point go on asking "Why do you want to do that?" In ascertaining purpose, I do find it hard to see how anything could be investigated in relation to good faith could not also be investigated in relation to proper purpose. I am disposed to think that, notwithstanding the way in which para (b) of s 265(1) is constructed, all that the reference to good faith does is to remind us, first, that the proper purpose set up must not be a mere pretence, and, secondly, that in considering purpose it will be necessary to go beyond the mere desire to obtain information by the inspection of books and ask what the applicant wishes to achieve as a result. Putting the matter and other way, I am disposed to think that the section requires the court is satisfied that the applicant is acting, or that the inspection is to be made (there being no distinction here), "in good faith for a proper purpose" and that this expression is at composite one, it being artificial to assign some consideration to good faith rather than purpose or vice versa. If, for example, a member seeking inspection is motivated by idle curiosity, or has in mind harassment, or even blackmail, or wishes to obtain confidential information for the benefit of one of the company's competitors, it seems to me to be unnecessary and fruitless to consider whether the case is one of the absence of good faith or absence of a proper purpose. On the approach which I am inclined to favour, the reference to good faith colours and so reinforces the requirement of proper purpose. Acting in good faith and inspecting for a proper purpose means acting and inspecting for a bona fide proper purpose. It is as if the case was one of hendiadys [a reference to the use of two words linked by a conjunction to express a single complex idea]."

33.  I accept that I am required to treat the two parts of subsection 152FA(3) as in reality a composite expression. But I do not think that that is equivalent to saying that once one has proved a proper purpose, good faith has also been established; that would be to break the composite expression back into its component parts and then to ignore one of them.

34.  In Barrack Mines v. Grants Patch (1987) 12 ACLR 630, at 637, it was held that good faith means "honestly and with no ulterior motive" and that a proper purpose must be the primary or dominant purpose actuating the inspection.

35.  Whether or not an applicant is acting in good faith and for a proper purpose is a question of fact to be determined in each case. Hostility between the parties is of itself no bar to the application (and, it seems to me, hostility may often be the explanation for the application). If the court is satisfied that the applicant is acting in good faith and for a proper purpose, a factor of that nature has little relevance: see Unity Apa v. Humes (No. 2) [1987] VR 474, at 479.

36.  Mr Barlow suggested that the section is intended to provide to a shareholder rights analogous to, or parallel to, the common law right of directors to inspect company documents. I accept that the rights of inspection might be similar, but I am not sure that the analogy is quite apposite. First, the directors' common law right to inspect documents is a corollary to, and to facilitate, the directors' obligation properly to manage the company. Secondly, the statute provides jurisdiction to the court to permit a shareholder certain rights of inspection, the precise scope of which (if granted at all) can be tailored to suit the particular circumstances of the individual situation. It seems to me that the grant of any rights of inspection to a shareholder, subject to the control of the court, is likely to be very much the exception rather than the norm.

37.  Indeed, in the Unity Apa case, Beach J accepted as a principle, at 478, that an order would ordinarily only be made where the applicant member had some specific and/or personal right which could only be protected by the making of such an order.

38.  I agree. This identifies the likely rarity of orders under the section. For example, if the shareholder can obtain appropriate protection under the discovery process in ongoing litigation, it is unlikely that an order under the section is the only means of protection. Also, if the shareholder had, but failed to utilise, other options or remedies open to him to protect or have protected his specific or personal rights, it will unlikely be said that an order under the section is the only means of protection.

39.  As to the purpose of the application, once a single valid primary or dominant purpose is proved, that is sufficient to satisfy the statutory requirement of proper purpose. Hence, any further or secondary purpose is irrelevant: see the Unity Apa case at 480.  See also Barrack Mines v. Grants Patch (1987) 12 ACLR 357, at 366, where it was held that once the primary purpose for which the inspection was sought was a proper purpose and that the applicant was acting in good faith, the court was not precluded from making the order sought, or should not do so, simply because the inspection may also be used for an improper purpose.

40.  This decision was upheld on appeal: see (1987) 12 ACLR 630, at 635-636. In the same case, at 637, it was held that provided that the judge who is called upon to exercise his discretion finds on the evidence before him that the application is based upon a proper purpose, for example to protect a right or interest which is personal to the applicant, the judge may then regard the application as being made in good faith.

41.  If an application is made by a substantial shareholder of long-standing, these facts in themselves may well be sufficient to discharge the onus of establishing good faith and proper purpose: see Barrack Mines v. Grants Patch (1987) 12 ACLR 357, at 366.

42.  If a shareholder is entitled to an order for inspection, it is no answer to say that at some specified or unspecified time in the future the company will provide him with the materials selected by the managers of the company: see the Unity Apa case at 479.

43.  A claim to confidentiality in the material sought to be inspected is unlikely to be sufficient justification for denying an order for inspection, but each case will depend on its own facts.

44.  The Knightswood case is also of assistance in consideration of what is the appropriate evidence to be put forward as identifying the proper purpose for the inspection sought. For example, if the intended inspection is a case of investigation, there must be proper express explanation of how that question arises. Brooking J explained, at 157:

"The explanation, obvious enough, is this: an application must show that the inspection is to be made for a proper purpose. Often the applicant's case will be that he wishes to inspect the books because something wrongful or untoward has occurred or is going to occur in relation to the company's affairs, or because he believes that there has been or will be such an occurrence. As part of his proof in establishing a proper purpose the applicant seeks to show that there is at least a case for investigation as regards past or future wrongful or other undesirable conduct. If he is unable to show that he has some reasonable grounds for believing that misconduct or maladministration (or whatever else is suggested) has taken place, or is going to take place, he may well fail to establish the prerequisite to the making of an order, namely, that he is acting in good faith and that the inspection is to be made for a proper purpose. And even if he establishes the prerequisites, the court may, as a matter of discretion, consider that not enough is shown to warrant its intervention, there not being sufficient prospect that anything useful will come out of the proposed inspection. The American cases show, as one would expect, that the shareholder may fail to obtain inspection where he fails to make out on his own material some kind of case for investigation, or where the corporation is able by leading evidence to dispel whatever suspicion has reasonably been aroused."

45.  Hence, not only does the applicant have to make out a case for investigation, the court must assess the stated purpose by going beyond the mere desire to obtain documents and to look at what the applicant actually wants to achieve.

46.  The timing of, or the delay in making, an application may be relevant to the consideration of good faith, particularly if there has been a failure to ask relevant questions at an earlier time: see, for example, Lau Chak Chuen v. Laredo Pty Ltd [2005] WASC 58, at [77-78]. In that case, it was pointed out that the "remarkable thing" about the application was that at the time when the transactions the plaintiff now wished to investigate had occurred, he was a director of the relevant company, and he offered no explanation as to why he did not investigate matters at the time, or at least a reasonable time thereafter.

47.  Lastly, it seems to me to be important to recognise – as, indeed, Mr Barlow wishes to emphasise – the distinction between an order for inspection under section 152FA and discovery in civil litigation. The section is intended to enable a member of a company to inspect its books in order to obtain information about matters that, as member or shareholder in the company, he ought to be informed of by the company. The procedure under the section is not intended as a form of or substitute for inspection of documents after discovery on affidavit or answers to interrogatories in pending litigation: see, for example, Re Claremont Petroleum NL (no. 2) [1990] 2 Qd R 310, at 314.

48.  Thus, it seems to me, that a court will almost necessarily view with some caution an application made under section 152FA by a summons within existing litigation in which the discovery process has been completed, or is ongoing.  This is perhaps a fortiori so when the same summons seeks Order 24 discovery as well, even if only in the alternative.

Applicable principles: specific discovery

49.  Again, the principles applicable on the discovery application are well settled and need not be set out at any length.

50.  The effect of RHC O. 24 r. 3 includes enabling a party to apply for discovery by list, or for an affidavit verifying a list, against a party who has not fulfilled his obligations under O. 24 r. 2.

51.  Ordinarily, a list of documents verified by affidavit is conclusive, subject to two qualifications. One is that an application may be made for a further and better list of documents where it appears (a) from the list itself, or (b) from the documents referred to in it, or (c) from admissions made either in the pleadings of the party making discovery or otherwise, that the party making discovery has or has had other relevant documents in its possession, custody or power.

52.  The other qualification is that an application may be made under O. 24 r. 7 for an affidavit in regard to specific documents or classes of documents, where the facts fall within that rule.  An application under that rule must be supported by an affidavit stating that in the belief of the deponent the other party has or has had certain specific documents which relate to the matter in question.

53.  There is no jurisdiction to make an order unless (a) there is sufficient evidence that the documents exist which the other party has not disclosed; (b) the document or documents relate to matters in issue in the action; and (c) there is sufficient evidence that the document is or was in the possession, custody or power of the other party.  If those matters are established, the court has a discretion whether or not to order disclosure.

54.  Where documents are sought by class or category, the class or category must not be defined or described so widely as to include documents which are not relevant to the issue. The prerequisites for the existence of the jurisdiction to make an order must be established in respect of the class described as a class, not as regards only some documents in the class.

55.  It is, of course, trite that the court will only make a discovery order if to do so is necessary for disposing fairly of the cause or matter.

56.  Specifically in the context of an application for discovery, but by way of analogy or appropriate approach to the exercise of discretion also under section 152FA, Mr Manzoni referred me to a recent decision of McWalters J in Toeca National Resources BV v. Baron Capital Ltd (unreported, HCA 1913/2009, 31 May 2011), where he emphasised that it is not just the interests of the parties that the judge has to consider. As he put it, at [31-32]:

"[31] … Notwithstanding that he is presiding over an adversarial process, the judge cannot ignore the reality that ultimately he is the arbiter of the rights and liabilities of the parties. Whilst the parties to the action will be focusing on their narrow interests the judge, standing above it all, will be focused on the wider interests of uncovering the truth so that when he comes to discharging his duty of determining the rights and liabilities of the parties he can be confident he is truly dispensing justice in the case. [32] But that is not the only interest that the judge has in the outcome of the application as part of the just and fair disposal of litigation is the efficient disposal of the litigation. The efficient disposal of the litigation is a matter which may or may not be of concern to the parties but it must be of concern to the charge. Excessive delay or excessive cost in achieving justice impinges anniversary on the outcome of the litigation process and may prevent the party to whom justice has finally granted from fully enjoying that to which the process had determined he is entitled. Consequently the judge must always be alert to the possibility that, in seeking to advance his case or undermine his opponent's case, the party is employing the discovery process as a tactical weapon to achieve delay in, or increase the cost of, the litigation. But being alert to these negative uses to which the discovery process may be put is only one half of the case management coin. The other half is to pro-actively maximise the case management benefits that the discovery process can provide, such as clarifying and narrowing the issues that will have to be resolved at trial, controlling the length of the trial and minimising the risk of factual surprises are rising at trial and thereby causing interruptions to it.

57.  Hence, McWalters J considered the determination of whether discovery is necessary in civil litigation involves "a triangulation of interests" – the interests of the plaintiff, the interests of the defendant, and the interests of the judge. These interests are accommodated by a balancing exercise taking into account the likely value of materials to the person seeking discovery, the interests of the opposing parties, and the interests of the court including keeping the need for the efficient disposal of litigation and the application of the underlying objectives of the procedural rules to be found in Order 1A rule 1.

The petitioner's summons: section 152FA

58.  Mr Barlow submits that if there is a substantial shareholder of long-standing, he has a substantial interest in the company and one can therefore expect him to want to protect his interests. Therefore, in this case, because the petitioner is an equal 50% shareholder in the Company, that is sufficient to demonstrate the proper purpose in this application, and also good faith.

59.  He also points out that here, unusually, the petitioner does not have director's access to the books and records of the Company. This submission is presumably to identify that the current application is the only means by which this shareholder can now obtain access to the Company's books and records. He asks me, therefore, to look at the current position only, and take no account of the fact that the petitioner's nominee director did not exercise its rights as a director when it had the rights of access to the books and records of the Company.

60.  This seems to me to be an unrealistic approach. On the basis of the authorities, as well as by reason of common sense, the assertion of a proper purpose and good faith must be tested against the proper context of the application. It is obvious that a shareholder who has never enjoyed the rights of access available to a director is in quite a different position from a shareholder who has enjoyed such rights previously. Similarly, a shareholder who has enjoyed and exercised those rights is in a different position from a shareholder who has enjoyed, but has chosen not to exercise, those rights.

61.  I confess I also find it impossible to reconcile the suggestion that this application is necessitated because the petitioner (and its nominee) have been excluded from the management company with the suggestion made by Lehman in his 4th affidavit that neither he nor his representatives have ever spoken to the accountant or secretarial services person who provided the nominee director Million Strong. If he has never tried to be included, because he has never even spoken to his nominee, how can he possibly say that he has been excluded?

62.  I also take into account the facts that Million Strong signed off on the financial statements of the Company both before and after 2004, when the relationship between Brown and Lehman turned sour, and that Million Strong remained as director of the Company until November 2010, even after the commencement of both these consolidated petitions.

63.  These points seem to me to provide the real context within which to consider Mr Barlow's suggestion that the cross-petitioner seeks to justify the unjustifiable in stopping the co-owner from seeing the records of his own company.

64.  Mr Barlow asked rhetorically why it would be that the cross-petitioner is so concerned with showing the books and records of the Company to its only other and equal co-shareholder unless it had something to hide. First, I am not sure that is the right question to pose. The burden is on the applicant for inspection to demonstrate that it has a proper purpose and is acting in good faith, and that burden is not satisfied simply by suggesting that an inference can be drawn that the company resisting inspection must have something to hide.

65.  Secondly, Brown has offered a number of answers to the question, including that Lehman simply wishes to cause disruption to the Company, and because he is running a business in competition, and because he is fishing for further information which he might add to the complaints he is already pursuing.

66.  I do not think I need to decide once and for all the merit in these answers, not least as some of the points are issues to be resolved at the trial of the petitions. I have well in mind Mr Barlow's reminder that the cross-petitioner should not be able to justify its stance by any "bootstrap" repetition of its allegations which will only be determined in any trial of these proceedings. (In passing, I might also point out that it must also be recognised that the petitioner equally should not be able to justify its stance by reference to matters stated as incontrovertible fact when they are at this stage just allegations to be tested and determined at any trial. What is sauce for the goose is sauce for the gander.)

67.  But I can at least identify the following points in relation to the various answers offered to the rhetorical question.

68.  The allegation of a simple desire by Lehman to cause disruption to the Company (and to Brown) is at least consistent with the scope and breadth of material sought to be inspected, comprising (without limitation) around 28 categories of documents, perhaps amounting to virtually all documentation ever produced to or by the Company (and its subsidiaries) in its 10 years of operation. It is also consistent with the sheer volume of defamatory material as sent by Lehman. Mr Manzoni's submission that the demonstrated purpose of the application is harassment is not without some basis.

69.  The allegation of a competing business has some support in the content of the various web pages produced in evidence, which does not sit happily with a blank denial by Lehman of anything to do with a CPA firm competing with the Company under a similar name.

70.  (In this context, I do not think there is much to be gained from the argument that Lehman is in any event entitled to operate a competing business, as there is no agreement between him and Brown that they would not compete. Mr Barlow's point that Lehman owes no fiduciary duty to the Company, because he is neither a shareholder nor director of it, also rather smacks of trying to have his cake and eat it, in the circumstances that it is asserted that it is Lehman and Brown who formed the quasi-partnership reflected in the Company.)

71.  The allegation of the late "fishing expedition" is consistent with the chronology of the application against the previous failure to exercise rights of the nominee director (which rights, if blocked, could if necessary have been enforced by action at common law). It is also consistent with the fact that the real thrust of the complaints made in the petition relate to the remuneration paid to Brown and others, which are in effect alleged to be shadow dividends paid, in circumstances where dividends were not paid to the petitioner, yet no attempt has been made to narrow down any request for inspection to the already alleged areas of concern. I also take into account again that inspection is sought of documentation going back even to the years when there was no apparent discord, and where the petitioner's nominee director approved and signed off on the Company's financial statements.

72.  There is also some force in Mr Manzoni's point that there is a mismatch between Lehman's original desire to distance himself from the Company and his now stated desire to be the very person who conducts the examination or inspection of the Company's books and records (though perhaps some of the sting of this point is drawn by Mr Barlow's acceptance that any inspection could properly take place at the cross-petitioner's solicitors office, rather than at the Company premises).

73.  Mr Barlow has submitted that the petitioner's good faith is also further demonstrated by the undertakings offered to the Court not to use or disclose any documents inspected save and except for the purposes of: conducting legal proceedings, including conducting settlement negotiations relating to such legal proceedings; making report or giving assistance to public authorities; exercising the petitioner's rights as a shareholder; enforcing the petitioner's rights as against its former nominee director, Million Strong; and/or seeking advice from professionals in connection with the above.

74.  The point is made that these offered undertakings are essentially the same as those accepted by the cross-petitioner in connection with the discovery process in these proceedings. However, it seems to me that these undertakings are offered in a different context, and they are broadly drawn. Further, the undertakings are offered by the petitioner, and they would apparently not bind Lehman.

75.  I take into account the point made by Mr Barlow that it would facilitate settlement discussions if the petitioner were given access to inspect the Company's records, because that is the only way which it can appropriately estimate a fair value of the shareholder. Reference was made to O'Neill v. Phillips [1999] 1 WLR 1092, as followed in Hong Kong in Re Prudential Enterprises Ltd (2002) 5 HKCFAR 375, which cases identify the requirement that the parties should have the same right of access to the Company’s books and records for the purposes of carrying out the valuation exercise.

76.  On its own, this might appear to be a point of some force. However, I reject any suggestion that the only way that the petitioner can begin a valuation exercise is by having inspection to the totality of the materials ever generated by the Company. There are audited accounts, and they can be reviewed for the purposes of the consideration of value. In this context, I note that, in the requests for documents made in correspondence, the petitioner itself emphasized that the information was “routine and standard ... when conducting an audit for the purpose of verifying the accuracy and completeness of financial information”. One would expect, therefore, for that material already to have been considered for audit purposes.

77.  Further, the criticisms levelled against the cross-petitioner essentially relate to the allegations of shadow dividends arising from the suggested unreasonably high level of remuneration paid to Brown and other members of management. Those matters probably do not significantly affect valuation of a business providing accounting services, the real value of which lies not in any capital base but in the staff abilities and contacts.

78.  (Incidentally, it might be noted that Lehman's and the petitioner's complaints do not suggest that there should be greater capital in the company than there is presently; their complaint is that payments made from the Company ought to have been made not just to Brown and his ‘side’, but equally to the petitioner.)

79.  Further, I accept Mr Manzoni's submission that the relevant valuation process will essentially be forward-looking, rather than requiring any trawl through historical documents generated by the Company over the last 10 years.

80.  I recognise that the petitioner does not necessarily accept the evidential value of the audited accounts, and Mr Barlow made repeated reference to the fact that the accounts had been audited by a small, not well-known firm. But the accounts are audited (see point made above), and they clearly provide a proper starting point for a valuation process of a company providing professional services.

81.  Further, Brown and the cross-petitioner have also provided various schedules of information relating to remuneration in response to enquiries made by the petitioner through its solicitors. Of course, I also note that those schedules (unfairly, in my view, derided as "home-made") are also not necessarily accepted by the petitioner. But I do not accept there is any positive evidence that the remuneration packages are other than has been disclosed to the auditors, and indeed to another accountant who has provided a valuation report for the purposes of the defamation proceedings. In any event, whether or not the remuneration was "excessive" is not a matter that would have concerned the auditors, but remains an argument open to the petitioner supported by whatever comparative evidence it might seek to adduce.

82.  I do not think that the stated desire to achieve some valuation for the purposes of settlement discussions has been demonstrated to be a primary or dominant purpose of the intended inspection. Nor do I think this is a point in any event tipping the balance against the other factors that I have already described as relevant to purpose and good faith.

83.  In conclusion, on the facts as presented and as I find them, I am not satisfied that the application is made in good faith and the inspection applied for is for a proper purpose. The jurisdiction to make an order under this section is, therefore, not triggered.

84.  In any event, even were the jurisdiction to be triggered, I do not think that in the exercise of my discretion I would make the order as sought in the summons.

The petitioner summons: specific discovery

85.  Of the 12 classes of documents sought by the schedule to the petitioner's summons, Mr Barlow accepts that classes 3, 8 and 12 have been dealt with or met by the affidavit evidence filed by Brown.

86.  I can deal with the remaining nine classes of documents sought as follows, but by way of introduction I can point out that the battleground on this part of the summons has not really been in relation to the establishment of the prerequisites as might ground the jurisdiction for the exercise of discretion. Rather, the argument has focused on the description of classes of documents sought, and the necessity or otherwise of the disclosure sought, in the light of such disclosure as has already been given.

87.  I can also at this stage express my view that some of the classes are plainly unnecessarily and inappropriately broad, and some seek documentation which has been previously provided by the cross-petitioner (a point which the petitioner has not really tried to meet head-on).

88.  Class 1 seeks "copies of all bank statements relating to all bank accounts solely or jointly held by the Company or its subsidiaries (the "relevant Bank Accounts") from 2001 to present". The sheer breadth of this category, and the period of time identified (which includes several years when there was no discord between the parties) smacks of a "fishing expedition". As I have stated by reference to the applicable principles (see above), where a claim to see a class is made, the class must not be defined or described so widely as to include documents which are not relevant to the issue. In my view, simply to ask for every bank statement of every bank account of the Company and all of its subsidiaries is bound to include a request for sight of at least many documents which cannot conceivably be relevant to the issues to be determined on these consolidated petitions. I disallow this class.

89.  The same points can be made in relation to class 2, which seeks "copies of payment slips or instructions to the banks for all outgoing transfer or wire of funds from the relevant Bank Accounts in respect of all payments made by the Company or its subsidiaries to or on behalf of [Brown, Zhou Han, Dickson Leung, Lehman and/or Karolina] from 2001 to present". I disallow this class.

90.  Class 4 seeks "copies of the employees' payrolls and directors' emoluments and benefits records of the Company or its subsidiaries from 2001 to present". This material has already been provided in the audited financial statements already disclosed, as well as the consolidated accounts and the further schedules provided by Brown in his evidence. I disallow this class.

91.  Class 5 seeks "copies of all documents and payment records of the Company or its subsidiary relating to the payments of school tuition fees or other educational expenses for the children of Mr and Mrs Brown and/or the children of any other employees from 2001 to present". This material, insofar as it is necessary and appropriate, has also previously been provided. I disallow this class.

92.  Class 6 seeks "copies of all documents (including payment records, insurance policies and calculation documentation) relating to all insurance policies (whether medical, life or otherwise) paid by the Company or its subsidiaries for the benefits of Mr Brown, Mrs Brown and/or their family members or dependents". This material, insofar as it is necessary and appropriate, has also previously been provided. I disallow this class.

93.  Class 7 seeks "copies of all documents (including payment records, bonus policies and calculation documentation) of the Company or its subsidiaries relating to all bonus payments made to Mr Brown, Mrs Brown and/or Mr Leung from 2001 to present". The relevant information, insofar as it is necessary and appropriate, has also previously been provided. I disallow this class.

94.  Class 9 seeks "copies of all payments made by the Company or its subsidiary for club dues, membership fees, association fees on behalf of Mr Brown, Mrs Brown and Mr Leung". This material has been previously provided. I disallow this class.

95.  Class 10 seeks "copies of all the Company's expense reports of Mr Brown, Mrs Brown and Mr Leung from 2001 to present". Some of the individual documentation has already been provided, but I do not think any further material is necessary in the light of the audited financial statements which include reference to entertainment and travelling expenses. I disallow this class.

96.  Class 11 seeks "copies of the contracts and payment records of the Company relating to the purchase of two automobiles by the Company". This material has already been provided, and details are included in various years' audited financial statements already disclosed. I disallow this class.

97.  The disproportionate amount of documentation sought is also obvious. I do not think that these requests for discovery could ever reasonably satisfy the test of necessity.

98.  In the circumstances, I do not make any further order for specific discovery on the petitioner's summons.

The cross-petitioner's summons: specific discovery

99.  Mr Manzoni accepted in the schedule to his skeleton argument that in the light of Lehman's 3rd affidavit, he can no longer pursue classes 4, 5, 6, 7 and 8 on the schedule to the cross petitioner summons. I think he also accepted orally that he could not pursue class 1, in the face of Lehman's affidavit which states that the relevant documentation was in the form of e-mails, which can no longer be retrieved from the computer backup system because of the lapse of time since 2001.

100.  On the other hand, Mr Manzoni criticises Lehman's 3rd affidavit as having been carefully crafted in such a way as does not in fact meet the points which are raised by the application for specific discovery. Therefore, he asks for an order on the terms of the summons so that the petitioner and/or Lehman will have to address directly what is asked. I shall look at each class in turn.

101.  Class 2 seeks “All documentation (including, but not limited to, corporate documents, agreements, contracts, webpages, letters, emails and other correspondence) relating to and evidencing the setting up and operation of a competing accountancy firm by Lehman between 2001 and the present, including but not limited to documents relating to the following: (1) Lehman & Co.; (2) Lehman Tax & Accounting; (3) www.lehmanbrown.biz; (4) LehmanBowen; and (5) LehmanJones and Partners (HK) Limited.” (Mr Manzoni accepts that documents for (5) have been provided, but pursues the rest.) I accept there is evidence showing prima facie existence of documents relating to these various possibly competing entities, and that the question of any such competition is relevant. As to possession, Lehman has sworn in his 3rd affidavit that he is not a partner of any competing firm, none of his employees work for any such firm, neither he nor his firm have any control over or derive any benefit from or have any agreements with any such firm, so that the petitioner has never had possession custody or power over any of the documents sought. On the other hand, I note the petitioner describes Lehman in its pleadings as its representative in a number of respects, so it would appear to assert power and control over documents he has (also evidenced by the disclosure already given). Nevertheless, the affidavit seems to me conclusive at this stage.  I disallow this class.

102.  Class 3 seeks “All agreement(s) between the petitioner / Lehman / LLX and the nominee shareholders of LehmanBowen (formerly Lehman Tax & Accounting and Lehman & Co.)”. In correspondence, it has been said for the petitioner that there is no such agreement, but in light of the evidence in an email of 30 January 2007 of LLX to Lehman which refers at least to a draft of an agreement, this is a class to which there must be an affidavit under rule 7.

103.  Class 9 seeks “All documentation (including, but not limited to, letters, faxes, emails and other correspondence) relating to Lehman’s complaints about Brown, Dickson Leung and/or the Company to Brown’s, Dickson Leung’s and the Company’s regulatory bodies / organizations between 2008 and the present, including but not limited to [certain listed bodies]”. Some complaints have already been provided, but in light of the volume of materials of which there is already knowledge, I am not persuaded that it is necessary for the purposes of these proceedings for any further materials to be provided. I disallow this class.

104.  A similar point can be made as to Class 10 which seeks “All emails, letters, press releases and web postings published by Lehman in relation to Brown, [Zhou Han] and the Company between January 2010 and the present”. There is no doubt of the fact of defamation, as a judgment has already been obtained in another action, and Lehman refers in his 3rd affidavit to around 2011 emails containing substantially the same elements as in the emails already disclosed. I am not persuaded of the necessity of further material for this action. I disallow this class.

105.  Class 11 seeks “All documentation (including, but not limited to, deposit slips, remittance advices, receipts, emails and other correspondence) relating to the petitioner’s / Lehman’s payment of the Company’s rental payments between 2001 and 2004”. Lehman says in his 3rd affidavit that such documents have never been in his or the petitioner’s possession, but this seems impossible to reconcile with the pleaded case that such payments were made, so I will require an affidavit for this class as will allow Lehman an opportunity to consider this point again.

106.  Class 12 seeks “All documentation (including, but not limited to, deposit slips, remittance advices, receipts, emails and other correspondence) relating to [Karolina] withdrawing the sum of US$118,335 from the bank accounts of the Company in 2004”. Lehman says in his 3rd affidavit that no such documents are in his or the petitioner’s possession, custody, or power, but that they are likely to be in the Company’s power. I accept that such documents as the Company might have generated should have been within its possession, and in the face of the affidavit, I disallow this class.

107.  Class 13 seeks “All documentation (including, but not limited to, notices, photographs, letters, emails and other correspondence) relating to [LLX] causing damage to the office premises of the Comapny in November 2004”. Lehman says in his 3rd affidavit that no such documents are in his or the petitioner’s possession, custody, or power, but that is predicated on his case that no “damage” was ever caused. That is of course in issue, at least as to whether or not such damage was innocent or malicious, and there must be documents relating to the work on moving as caused the “damage” (viewing that term for these purposes as neutral). I allow this class.

108.  Class 14 seeks “All letters, faxes, memorandums, emails and other communications between Lehman / Lehman’s representatives and Million Strong between 2001 and the present”. Lehman says in his 3rd affidavit that no such documents exist as neither he nor his representatives have ever communicated with Million Strong.  Whilst difficult to reconcile with other averments (including being excluded from management – see above), this appears to be conclusive at this stage. I disallow this class.

The cross-petitioner's summons: Order 24 rules 10, 11A

109.  This part of the summons seeks documents referred to in paragraphs 2 and 3 of the witness statement of Scott Charles Garner ("Garner"), filed on behalf of the petitioner.

110.  In those paragraphs, Garner makes reference to the notes that  he took when he inspected some documents provided by the Company in December 2007. The summons seeks copies of those notes.

111.  However, in Lehman's 3rd affidavit, he deposes to the fact that he has been informed by Garner that he did not keep his handwritten notes as mentioned in those paragraphs of the witness statement after he had typed those notes into the form of an e-mail to Brown dated 10 April 2008, as was annexed to the witness statement.

112.  Mr Manzoni suggests that he would be entitled to an affidavit from Garner on this point, rather than simply an affidavit from Lehman on information and belief. I disagree. It seems to me that the discovery of material is by the petitioner, and it is for the petitioner to choose the deponent to verify, or to deal with, matters of discovery.

113.  Insofar as the cross-petitioner wishes to pursue this any further, that will have to wait cross examination of Garner at trial.

Costs

114.  I have dismissed the petitioner's summons, both as to the application under section 152FA of the Ordinance and the application for specific discovery. I note that three of the classes sought by way of specific discovery were dealt with by an affidavit filed in response to the application, but I do not think that matter should prevent the costs following the event. Therefore, in the exercise of my discretion, I order that the costs of the petitioner's summons shall be paid by the petitioner in any event, to be taxed if not agreed.

115.  The cross-petitioner's summons was partly met by an affidavit filed in response to the application, and has otherwise only partly succeeded. I note that the application under Order 24 rule 10 did not succeed, on the basis of an affidavit filed in response to it. In those circumstances, in the exercise of my discretion, I order the costs of the cross-petitioner's summons to be the cross-petitioner’s costs in the cause.

116.  I make these costs orders in the first instance on a nisi basis, and the orders will become absolute unless the parties, within seven days of the handing down of this judgment, make application to me by letter to vary the costs order(s) nisi. If any such application is made, I shall deal with it on paper. Therefore, the party making the application will identify in the letter the varied order as is sought, and the basis for it; and the other party shall provide any response by letter within seven days thereafter. I do not think I am likely to be assisted by any further submission, and I make no provision for any reply submissions as to any proposed variation costs order(s).