JOE ZHIXIONG ZHOU v. SAIF PARTNERS II L.P. AND ANOTHER

HCCL 16/2016

[2018] HKCFI 1448

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO 16 OF 2016

(TRANSFERRED FROM HIGH COURT ACTION NO 1551 OF 2010)

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RULING ON HOW THE TAKING OF
AN ACCOUNT OF THE PROFIT MADE
BY THE PLAINTIFF ON THE KPCB
CHINA FUND LP IN XINRU (KEYGATE)
SHOULD BE TAKEN

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INTRODUCTION

1.  In paragraph 198 of the judgment, the Court held that D1 was entitled to an order that the Plaintiff (“P”) disgorge the profit he made personally as a result of the investment made by KPCB China Fund LLP (“CPCB-CF”) under the Xinrui investment agreement of 24 August 2007  .

2.  P has served an affirmation in which he deposes that the sum invested in Xinrui by KPCP-CF was US$8 million on which no profit was made since KPCB- CF sold this investment to Keystone for US$8 million in July 2008, the investment not having gone well. In fact, P adds, when the costs associated with the transaction and other operational costs are taken into account, KPCB-CF actually made a loss on the investment.

3.  P then goes on to depose that in December 2009, Xinrui’s (Keygate’s) business failed and its registration was cancelled. Thereafter, by an Asset Purchase Agreement between Keystone and MicroMedia Ltd dated 13 July 2011, the remaining assets of Xinrui were sold for US$ 3.5 million, producing a loss on the original investment of over US$4.5 million. 

4.  It is argued on behalf of P that by serving the aforementioned  affirmation he has satisfied the requirement of the judgment that he account for any personal profit made as a result of the investment made by KPCB China Fund LLP (“CPCB-CF”) under the Xinrui investment agreement of 24 August 2007 and that the court has no further jurisdiction to give directions as to the taking of the account ordered in the judgment. I reject this misconceived argument. It is for the court, not P, to determine the manner of the taking of the account

5.  Relying on paragraph 198, D1 and D2 (“the Ds”) seek in their reply submissions dated 7 May 2018 the following wide range of sub-accounts and supporting documents and associated directions (as judicially amended for editorial reasons) in aid of the overall account ordered in the judgment.

(1)the following accounts duly verified by affidavit identifying and attaching all vouchers and documents that are relied upon in producing the accounts:

(i) an account of all wages, income, salaries, fees, remunerations, benefits, privileges, bonus, dividends, other moneys and moneys’ worth (including but not limited to all “Capital Distribution” and “Carried Interest” or similar payments) received by P and/or entities owned and/or controlled by P from (1) KPCB-CF and its subsidiaries, affiliates and related entities (KPCB); and (2) Keytone Ventures LP and its subsidiaries, affiliates and related entities (“KV”), and all receivables of P vis-à-vis KPCB and KV but not yet received by P (the Monies), supported by documents that he possesses, or are within his power and/or control, including at least the following:

(I) a copy of the relevant partnership agreements amongst inter alia P on the one hand and KPCB and/or KV on the other;

(II) a copy of any consulting or employment agreements amongst inter alia P on the one hand and KPCB and/or KVon the other;

(III) a copy of the distribution letters and notices issued by KPCB and/or KV to P;

(IV) a copy of bank records showing payments received by P from KPCB and/or KV;

(V) The whole package of sale and purchase agreements relating to the alleged transfer from KPCB to KV at US$8 million;

(VI) A full list of assets of Kegate/Xinrui/Neogrid immediately prior to the alleged disposition in July 2011;

(VII) A full package of agreements covering the disposal of all assets of Kegate/Xinrui/Neogrid from KV to any entity including Micromedia Ltd.

(ii) if P contends that any part of the Monies are not attributable to the investment by KPCB under the Xinrui investment agreement of 24 August 2007 (the Xinrui Investment), an account for the apportionment of the Monies amongst the various investments that KPCB and KV had made (including the Xinrui Investment), together with detailed reasons and supporting documents which he possesses or are under his power and/or control.

(2)Ds shall be at liberty to serve notice on P within 28 days after service of the aforesaid accounts requiring P to produce for Ds’ inspection any documents or class of documents specified in and/or relating to the aforesaid accounts and any other documents produced and/or referred to by P in his affidavit or affirmation, and to produce photocopies thereof to Ds upon Ds’ request and payment of reasonable photocopying charges;

(3)P do, within 7 days after the service of any notice upon him pursuant to paragraph (2) above, serve notice on Ds stating a time within 14 days after the service thereof at which the said documents may be inspected at a place specified in the notice;

(4)Ds shall be at liberty to serve notice of objection to the said accounts produced and verified by P within 63 days after service of the aforesaid accounts;

(5)Ds shall be at liberty to file and serve any affidavit or affirmation evidence in reply to the affidavit or affirmation of P within 63 days after service of the aforesaid affidavit or affirmation;

(6)the parties do file and serve on each other a Scott Schedule summarizing their respective contentions at least 28 days before the date fixed for the pre-trial review for the taking of accounts;

(7)the hearing of the taking of the said accounts be fixed before a Master in consultation with counsel diaries, with 2 days reserved and a pre-trial review shall be fixed for a date at least 10 weeks before the taking of accounts hearing, with half-day reserved;

(8)Ds be at liberty to cross-examine P on the affidavit affirmed by him verifying the said accounts and the deponents of any other affidavits served by P on their affidavits;

(9)there be liberty to apply for further directions.

6.  Much of the above was set out in the Ds first round of submissions dated 12 March 2018. Responding to those earlier submissions, P argued that: (i)  the Court has no jurisdiction to make such hugely invasive orders against or in respect of absent  (offshore) non-parties whom D 1 has not served; (ii) P is no longer associated with KPCB-CF which is not a HK entity and P has no access to KPCB-CF’s accounts, records, or other documents, which are clearly not in his power, custody and or control; (iii) the accounts sought in paragraph 4 (1) above are unrelated to the account ordered and inconsistent with that part of the Separation Agreement that provided that P “was to be free of the non-complete covenants to which he was subject under the ALPA and other agreements and would become an “Inactive Partner”); (iv) the Ds’suggested accounts include claims or matters that have not been pleaded or tried in the Action; and (v) the directions proposed go beyond the bounds of the judgment and the order for an account.

7.  P further proposed in his reply submissions dated 27 March 2018 that the D s should have 14 days in which to serve a notice of grounds on which it sought to surcharge the account contained in P’s affirmation, P have 14 days to reply and thereafter either of the parties was to be at liberty to request a hearing dated for a Master to rule on the Ds’ notice and make pre-hearing directions.

Ruling

8.  The entitlement to recover any profit made by P from the investment made by CPCB-CF under the Xinrui investment agreement of 24 August 2007 conferred by the Court’s judgment is an entitlement conferred on D1 alone. That said, D2 will be well aware of the contents of P’s affirmation and it is inevitable that D2 will become privy to further information and documents provided by P pursuant to the order that I make herein. I have therefore concluded that both Defendants should be required to provide an express written undertaking that any further information provided by P pursuant to the said order will be kept confidential save for its use in these proceedings, which use shall be the sole use to which the information will be put.

9.  In my judgment, given P’s untruthful account of when he began to discuss a possible investment in Xinrui and the relative scarcity of the discovery he provided for the trial, D1 is entitled to an order that goes wider than might have been conventionally appropriate in setting the modalities for an account of secret profits to be given by a fiduciary. It is also the case that, since P did not himself provide the alleged US$ 8million invested in Xinrui, the absence of any profit for CPCB-CF on the US$ 8 million investment does not necessarily mean that P personally did not benefit financially in one way or another from the investment.

10.  With the considerations identified in paragraphs 7 and 8 above, I order as follows:

A.   Upon each of the Defendants each serving on the Plaintiff (“P”) a written undertaking signed by an appropriate senior officer undertaking to keep confidential any documents or other information produced by P by reason of this order and in the case of the First Defendant (“D1”) undertaking to use the said documents only for the purpose of seeking any secret profit made P by reason of the Xinrui investment of 24 August 2007, P must, within 36 days of the date hereof, provide an account duly verified by affidavit identifying and attaching all vouchers and documents that are relied upon of all income, including salary, fees, dividends and other remuneration whether by way of “Capital Distribution” and/or “Carried Interest” or similar payments received by P and/or entities owned and/or controlled by P down to 31 December 2012 (“the end date”) from (i) KPCB-CF and its subsidiaries, affiliates and related entities (KPCB); and (2) Keytone Ventures LP and its subsidiaries, affiliates and related entities (“KV”), identifying the entitlement under which the said income or other remuneration was received, the aforesaid account to be supported by documents that P possesses, or are within his power and/or control, including at least the following:

 (a) a copy of the relevant partnership agreements amongst inter alios P on the one hand and KPCB and/or KV on the other, current down to the end date;

 (b) a copy of any consulting or employment agreements amongst inter alia P on the one hand and KPCB and/or KVon the other, current down to the end date;

 (c) a copy of the distribution letters and notices issued by KPCB and/or KV to P down to the end date;

 (d) The whole package of sale and purchase agreements relating to the alleged transfer from KPCB to KV at US$8 million;

 (e) A full list of assets of Kegate/Xinrui/Neogrid immediately prior to the alleged disposition in July 2011;

B.  

i. Save to the extent that documents have been produced by P in providing the account ordered above, D1 shall be at liberty to serve notice on P within 21 days after service of the aforesaid accounts requiring P to produce for D1’s inspection any documents or class of documents specified in and/or relating to the aforesaid accounts and any other documents referred to by P in his affidavit or affirmation, and to produce photocopies thereof to D1 upon D1’s request and payment of reasonable photocopying charges;

ii. P must, within 7 days after the service of any notice upon him pursuant to paragraph (i) above, serve notice on D1 stating a time within 14 days after the service thereof at which the said documents may be inspected at a place specified in the notice;

iii. D1 shall be at liberty to serve notice of objection to the said account produced and verified by P within 36 days after service of the aforesaid account;

iv. D1 shall be at liberty to file and serve any affidavit or affirmation evidence in reply to the affidavit or affirmation of P within 36 days after service of the aforesaid affidavit or affirmation;

v. the parties must file and serve on each other a Scott Schedule summarizing their respective contentions at least 14 days before the date fixed by the Master for the pre-trial review for the taking of accounts;

vi. the hearing of the taking of the said account shall be fixed before a Master in consultation with counsels’ diaries, with 2 days reserved and a pre-trial review shall be fixed for a date at least 8 weeks before the taking of accounts hearing, with half-day reserved;

vii. at the said hearing, D1 shall be at liberty to cross-examine P on the affidavit affirmed by him verifying the said accounts and the deponents of any other affidavits served by P on their affidavits;

viii. there shall be liberty to apply for amendment of this order for good cause or for further directions.