CHINA CONSTRUCTION REALTY LTD v. LUCKY DRAGON LTD AND OTHERS

HCA 1237/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1237 OF 2012

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HCMP 159/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 159 OF 2015

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(Heard together)

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D E C I S I O N

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1.  This is a summons issued on 30 June 2015 by Empire Star Holdings Limited (“Empire Star”) the 4th defendant in HCA 1237/2012, Zhang Xi (“Zhang”), the 1st respondent, and Empire Star, the 2nd respondent in contempt proceedings HCMP 159/2015 for:

(1) Empire Star do have leave to file and serve a supplemental witness statement of Zhang Yu as per the copy annexed thereto; and

(2) Zhang and Empire Star do have leave to file and serve the second affirmation of Zhang Yu as per the copy annexed thereto within three days from the order to be made.

2.  Mr David Vrijmoed (the principal of the present solicitors for Empire Star and Zhang) filed an affidavit on 30 June 2015 in support of the summons.

3.  The background of this case has been summarised by Poon J in a decision dated 12 April 2013 which dismissed Empire Star’s application to discharge an in injunction granted to the plaintiff.

4.  I have also mentioned about the background briefly in my decision on 19 December 2014 dealing with some appeals on discovery and interrogatories.

5.  In gist, the plaintiff used to hold 90 per cent of the shares of a company (“GPB”).  GPB, through intermediaries held the shares of two companies (“the Dalian companies”).  The Dalian companies held a piece of land in Dalian, China.

6.  The plaintiff sold the GPB shares to a company, SBS for AUD46,500,760.  The sum was to be paid in instalments. SBS got the GPB shares but only paid AUD500,760.  The plaintiff sued and obtained judgment against SBS in Australia for AUD46 million.  SBS did not pay up and was wound up.  It had, however, sold to the 1st defendant herein the shares of its intermediaries that held the shares of the Dalian companies.

7.  The plaintiff then sued SBS, the 1st defendant and other relevant companies and obtained judgment on 25 March 2011 which set aside the sale of shares by SBS to the 1st defendant.  However, two companies owned by GBP which together ultimately held 60 per cent of the shares of the Dalian companies had sold these shares to the Empire Star in January 2010. The plaintiff then brought this action to set aside the sales of these shares under section 60 of the Conveyancing and Properties Ordinance, Cap 219.  The plaintiff says that the sales are voidable as they were entered into with intent to defraud the plaintiff as a creditor and are part of a conspiracy and fraudulent scheme to put the Dalian land out of the plaintiff’s reach.

8.  Only Empire Star defends this action.  It says that the two sales of shares of the Dalian companies to it were bona fide transactions done for valuable consideration in good faith and without notice of any intent to defraud the plaintiff.  The defence is based on section 60(3) of the Conveyancing and Properties Ordinance. 

9.  The plaintiff obtained an ex parte injunction from Deputy Judge Sakhrani on 17 July 2012.  The injunction enjoined Empire Star from transferring or encumbering the shares or assets of the Dalian companies, or to change the registered shareholders, directors or legal representatives of these two companies or registering such change. 

10.  In fact the Dalian companies had on 13 July 2012 and under the management of Empire Star borrowed RMB600 million from a Sheng Jing Bank (“SJB”).  The first loan was secured by a mortgage on the Dalian land held by the two Dalian companies.

11.  On 13 July 2012, the Dalian companies as managed by Empire Star borrowed a further sum of RMB100 million from SJB.  This second loan is also secured by mortgages on the Dalian land and building works thereon.  Earlier on 12 July 2012, Empire Star also charged the shares of one of the two Dalian companies to secure this loan.

12.  As I have said above, Deputy Judge Sakhrani granted the injunction to the plaintiff on 20 July 2012.

13.  On 13 November 2012, the Dalian companies as managed by Empire Star borrowed a third loan of RMB40 million from SJB which is also secured by a mortgage on the land and by guarantees by Empire Star, one of the Dalian companies, and Zhang.  This was the first breach of the injunction. 

14.  Empire Star alleged that there were repayments to SJB between 30 January 2012 to 26 February 2013 totalling RMB83 million. 

15.  Empire Star had on 6 August 2012 appointed Zhang and his sister Zhang Yu as directors of the Dalian companies. This is the second breach of the injunction.

16.  On 22 February 2013, the Dalian companies as managed by Empire Star borrowed a fourth loan of RMB650 million from SJB.  This loan was also secured by mortgages on the Dalian land and/or land use rights, and a mortgage on the shares of one of the two Dalian companies.  This is another breach of the injunction.

17.  Empire Star admitted all the breaches.  Zhang said that the first three loans were borrowed for the purposes of developing the Dalian land and they had been so used.  The fourth loan was a rollover of the first three loans. 

18.  Regarding appointment of directors, Zhang said that it was because the previous directors, who were his nominees, had resigned.  Hence, he allowed himself and his sister to be appointed as directors of the companies because the companies needed directors to function.

19.  Empire Star’s solicitors also advised the plaintiff’s solicitors in the beginning of 2014 that Empire Star would apply to vary the injunction so as to purge these breaches.  But no such application had been made until January this year.

20.  On 20 Januarythis year, leave was given for the plaintiff to amend the Statement of Claim to incorporate the breaches of the injunctionby Empire Star and Zhang as steps in further perpetration of the conspiracy and fraudulent scheme to put the Dalian land or its worth out of the plaintiff’s reach.  

21.  On 21 January this year, the plaintiff also commenced HCMP 159/2015 to commit Empire Star and Zhang for contempt of court by reason of the breaches of the injunction. 

22.  On 28 January this year, Empire Star applied retrospectively for variation of the injunctionorder so as to purge its contempt. 

23.  By the summons of 30 June this year, Empire Star seeks leave to make use of the supplementalwitness statement of Zhang Yu to adduce evidence at the trial of the action to purportedly explain how the four loansborrowed from SJB were used in the developmentof the land owned by the Dalian companies. 

24.  Empire Star and Zhang also applied by this summons to rely on the second affirmation of Zhang Yu in the contempt proceedings for the same purpose.  The second affirmation merely repeated the supplementalwitness statement.

25.  The plaintiff opposes this application.  Zhang Yu’s supplementalwitness statement and second affirmation are purportedly for explaining some documents contained in 10 three-inch Lever Arch files. The explanations are supposedly contained in 10 groups of tables running to some 190 pages with some in small prints that are exhibited in Zhang Yu’s supplementalwitness statement.  

26.  The entries in the bundles of tables are references to and explanations of the copy documents and the 10 Lever Arch files. Zhang Yu said in her supplemental witness statement that these documents evidenced transactions that took place between 1 March 2010 and 31 December 2014.  Hence, these documents were all in the possession of Empire Star at all material times. 

27.  In fact, the tables and documents disclosed do not represent all the transactions conducted with the use of the loans from SJB.  Mr Ling, counsel for Empire Star and Zhang confirmed to me this morning that the 10 Lever Arch files contained documents of a general nature such as yearly audited accounts and bank statements.  But the bulk of documents in the files are vouchers of expenses.  They covered the four years of operation of the Dalian companies.  They should show where the loans from SJB had been applied.  But they are only a selective demonstration of the expenditures. 

28.  Miss Zhang Yu also pointed out in paragraph 47 of her supplemental witness statement that there had been several thousand transactions in those years.  For land development and other development costs which are said to be covered in tables 3 and 4 respectively, they are only the transactions of a worth of RMB500,000 or above.  For the development costs as shown in tale 5, they are only for the transactions of RMB200,000 or above. The copy documents evidencing these transactions are in the 10 files.  For those transactions that are not referred to in the tables exhibited in her supplemental witness statement, the related documents are likewise not included in the 10 files. 

29.  Furthermore, all original documents, including those the copies of which are in the 10 files, are in the office of the Dalian companies in Dalian.  Mr Ling said that all these originaldocuments can be shipped to Hong Kong within four working days if the plaintiff should require them for the purpose of inspection. 

30.  Mr Ling’s main ground in support of the summons is that the documents were asked for by the plaintiff.  He said the supplemental witness statement of Miss Zhang Yu and the copy documents in the 10 files are said to satisfy the plaintiff’s request.

31.  In fact, the plaintiff’s request stemmed from the 7th affirmation of Zhang.  This affirmation was filed on 28 January 2015 in support of the application by Empire Star and Zhang to vary the injunction so as to purge the contempt. 

32.  The 7th affirmation of Zhang exhibited two audit reports prepared by one Liaoning Tianhe United Accounting Affairs Agency (“Tianhe”).  One report was on the borrowing of loans by the Dalian companies.  The other report was a special audit report dealing with the spending of the loans.  The documents that Tianhe had considered in compiling the two reports were, however, not produced. 

33.  Furthermore, the former solicitors of Empire Star and Zhang advised the solicitors of the plaintiff by a letter dated 25 February 2015 that the special audit report prepared by Tianhe had some invalid entries or arithmetical errors although the overall conclusion was not materially affected.  The plaintiff’s solicitors were further advised that Tianhe was re-examining that report to ensure accuracy and the corrected report would be furnished to the plaintiff when it was prepared.  However, the corrected report was never provided and no explanation was ever given on why not. 

34.  On 31 March, the plaintiff’s solicitors asked the former solicitors of Empire Star and Zhang to produce 22 categories of documents.  They included the documents that Tianhe had considered when compiling the two reports abovementioned.  I would say that this letter is just a reminder to Empire Star and Zhang of their discovery obligation, at least to the extent of the documents considered by Tianhe, as these documents are relevant to the breaches of the injunction which have been incorporated in the cause of action by amendment on 20 January. 

35.  They are also relevant to the application by Empire Star and Zhang to vary the injunction to purge the contempt of court.  Hence, Empire Star and Zhang cannot say that their late discovery was because of a late request by the plaintiff.  In fact, the deadline for filing of witness statements was 25 March 2015.  They should, therefore, have been disclosed before that date.

36.  Though the plaintiff’s request for specific discovery was made on 31 March, the former solicitors for Empire Star and Zhang only made a substantive reply on 22 April bearing in mind the commencement of a trial on Monday 13 July 2015.

37.  In the reply of 22 April the solicitors refused to disclose a number of categories of documents on various grounds.  For those documents that they agreed to disclose, including those considered by Tianhe, they said that copies of the documents would be disclosed within 14 days which was on or before 6 May.  However, on 6 May the solicitors again asked for a seven day extension.

38.  On 14 May, the former solicitors of Empire Star and Zhang provided the 10 Lever Arch files of copy documents to the plaintiff’s solicitors, together with some bank statements and audit reports.  There was, however, no index or description to accompany the documents.  These documents were also not accompanied by any list of documents.  They are also not of good quality but are just legible with many small prints.  They are accounting documents, but they cannot be understood without the aid of description or explanation.  I do not think this is proper discovery.  

39.  On 16 June, the present solicitors of Empire Star and Zhang produced a sixth supplemental list of documents.  The plaintiff’s solicitors asked on the same day for copies of documents on the list.  The solicitors of Empire Star and Zhang then replied on 19 June that the copies of items 3 to 30 in the sixth supplemental list were the documents in the 10 files.

40.  Then Empire Star and Zhang suddenly on 30 June issued the said summons for leave to put in the supplemental witness statementand second affirmation of Zhang Yu at the trial.

41.  I have already mentioned that Zhang Yu seeks to introduce in her supplemental witness statement10 groups of tables running up to 190 pages with a lot of contents in small print.  They also do not show all of the purported transactions, but only those of larger values. 

42.  These tables were in fact prepared by a Hong Kong accountant, Mr Poon, of MCF CPA Limited.  Mr Poon only started work in mid-May this year.  If the plaintiff should have considered it necessary to have these tables for use at the trial, they should have been prepared months ago and produced before the deadline for filing of witness statements. 

43.  Empire Star and Zhang made the excuse the officer in charge of the accounting department was on maternity leave and could only come back to assist Mr Poon in mid-May.  But there is no explanation of why other staff in the department could not have assisted Mr Poon.

44.  To make things worse, Mr Poon had finished his work at the end of May, but the summons was not issued until 30 June resulting in further delay.  There is no explanation for this further delay either. 

45.  If I should allow this summons, the plaintiff will be placed in a most difficult situation having to grapple with these tables and the copy documents in the 10 files, and to prepare for the trial at the same time.  I have already mentioned that the trial will commence on next Monday, 13 July.  I do not think it fair for me to allow the summons. 

46.  Mr Ling suggested that the trial may not take up the 18 days allotted, and perhaps commencement can be deferred for a few days for the plaintiff to consider the tables and documents, and also to check the originals if the plaintiff should decide to do so. 

47.  Though this amounts to moving a milestone day, I would not dismiss Mr Ling’s suggestion on this ground as the trial will still be conducted within the allotted time, but I do not think I can at this stage consider it safe to defer the commencement of the trial for a few days as there are more issues to be canvassed at the trial than at the time of setting down because the breaches of injunction are now incorporated as part of the cause of action. 

48.  Finally, there is an unless order made by consent fixing the time at 9.30 am on 20 April 2015 for all supplemental witness statements to be filed and served.  This summons cannot be allowed unless relief can be given from the sanction of the deadline in theunless order.  

49.  Mr Ling applied verbally this morning for relief from the sanction.  However, I consider it not in the interests of the administration of justice to allow the summons as it will be most unfair to the plaintiff.  I also do not consider that Empire Star or Zhanghas a good explanation for the failure to comply with the unless order.  I would highlight their delay until mid-May this year to compile the tables and their failure to take out the summons at the end of May or early June but waited until 30 June to do so.  Hence, I would not grant relief under Order 2 rule 5(1)of the Rules of the High Court.

50.  Mr Lui, counsel for the plaintiff, also relied on the cases of Liu Chen v Chan Poon Wing & Anor HCPI 779/2006 and dated 7 October 2009; Kinetics Medical Health Group Company Ltd & Ors v Dr Tse Ivan Cheong Yau HCA 1115/2010, dated 8 May 2013; Hongkong Changyi Real Estate Development v Neo China (Group) Infrastructure Investment Limited & Ors HCA 1576/2011 dated 25 February 2014.These cases show that belated discovery of documents that may prejudice the other side in the conduct of a trial or assessment of damages is not permitted.

51.  Mr Ling said that there was no request for discovery in those cases, but the plaintiff here made a request for specific discovery on 31 March. I have already said that this request was only a reminder of the discovery obligation of Empire Star and Zhang, and they should have discharged the obligation in mid-March.

52.  In any case, Empire Star and Zhang had failed to respond to the plaintiff’s request with a reasonable sense of dispatch bearing in mind the imminent trial date.  To allow them now to rely on the 190 pages of tables and several thousand pages of accounting documents at the trial will prejudice the plaintiff’s conduct of the trial. 

53.  I therefore dismiss this summons with a costs order nisi that Empire Star and Zhang do pay the plaintiff the costs of this summons to be taxed.