KWOK TAK MING JOSEPH v. COSMO-TECHNOLOGY LTD AND OTHERS

HCCW 42/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 42 OF 2008

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D E C I S I O N

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The applications

1.  There are 2 summonses before me, both issued by the petitioner, Kwok Tak Ming Joseph, in a petition for the winding up of Cosmo-Technology Limited (“the Company”) under section 177(1)(f) of the Companies Ordinance, Cap. 32 and for alternative relief under section 168A.

2.  The summons issued earlier in time, on 19 September 2008, seeks an order that the respondents do within 14 days produce for inspection by the petitioner the documents mentioned in the schedule to that summons.  This summons was made under Order 24 rule 7 (where the court may order a party to make an affidavit as to the specified documents sought in the application) and rule 11(2) (where the court may order production for inspection of any documents in the possession, custody or power of the other party relating to any matter in issue).

3.  The other summons, issued only on 23 January 2009, is for amendment of the petition with a draft amendment annexed.  This is patently a last-minute attempt to answer the objection made by the respondents, as early as October 2008, that the documents sought are irrelevant to the issues in the petition as many of the relevant complaints for which discovery is sought are mentioned only in the affirmations filed by the petitioner.  After receiving the written submission of the respondents, the petitioner has come up with a new draft amended petition yesterday, in an attempt to address the criticism made by the respondents that the amendments are lacking in material particulars.

4.  Both summonses are opposed by the respondents.

The background

5.  For the purpose of the present applications, it is necessary only to set out these background matters.

6.  The petitioner holds 20% of the shares of the Company.  The 2^nd respondent Mr Manabu Kinoshita holds 60%, and the 3^rd respondent Mr Fumio Iijima holds 20%.  The Company is the 1^st respondent.

7.  Other than the Company, the petitioner, the 2^nd respondent and the 3^rd respondent are shareholders in a company incorporated in Japan known as Cosmo-Tech Inc.  The petitioner is again a minority shareholder in that company holding 20% of the shares.  Seiko Clock used to be the major customer of Cosmo-Tech Inc.

8.  At all material times the petitioner also operated a company incorporated in Hong Kong known as Moneray International Limited (“Moneray”), owned by the petitioner and his wife.  Moneray was a supplier of clocks, at first to Cosmo-Tech Inc. and later to the Company.

9.  The Company was dormant until 2002 when Seiko Clock requested Cosmo-Tech Inc. to set up a buying office in Hong Kong and a quality control factory in China, and the 2^nd respondent decided to use the Company for such purpose.

10.  The Company occupies a small office space in Hong Kong.  Most of its business and operations are carried on by the 2^nd respondent in Japan, where he lives, through the office of Cosmo-Tech Inc.  The 2^nd respondent has been the person running the business of the Company and of Cosmo-Tech Inc.

11.  The relationship between the petitioner and the 2^nd respondent broke down in 2007.  In March 2007, the agency arrangement between Moneray, Cosmo-Tech Inc. and the Company was terminated.  The petitioner appointed a new agent to contact the Company’s customers, including Seiko Clock, directly.  Moneray has become a competitor of the Company.

The allegations in the petition

12.  The allegations of unfairly prejudicial and oppressive conduct of the 2^nd respondent as stated in paragraphs 33 to 37 of the petition are as follows:

(1)  the 2^nd respondent sought to remove the petitioner as a director of the Company to prevent him from investigating into the affairs of the Company and to force him to sell his shares cheaply to the 2^nd respondent (paras. 35 and 37; the petitioner was removed as a director after the presentation of the petition);

(2)  the petitioner was obstructed from inspecting the Company’s books and records (para. 34);

(3)  the petitioner discovered six items in the financial statements of the Company for the years of 2002 to 2006, which he found alarming, being staff costs excluding directors’ remuneration, key management personnel remuneration, other staff costs, directors’ remuneration, rental on leased premises, and the commitment under operating lease not later than 1 year (para. 36); and

(4)  it was unreasonable for the Company to incur the expense under the item “Japan office expenses”, as the Company had no office in Japan (para. 36).

13.  A number of complaints in the petition up to paragraph 32 are wholly irrelevant to the resolution of the dispute in this petition, as they relate to the affairs of Cosmo-Tech Inc. and the grievances of Moneray.

The affirmations filed

14.  Rounds of affirmations have been filed.  The petitioner has filed 11 affirmations, the respondents 6 affirmations.  Documents exhibited are voluminous.  As in the petition, a lot of the evidence adduced by the petitioner is quite simply irrelevant.  These proceedings are not concerned with the rights of Moneray or the rights of the petitioner as a shareholder in Cosmo-Tech Inc.

15.  In his affirmations, the petitioner has raised a number of allegations not mentioned in the petition.  The respondents could and should have refused to deal with them in their affirmations in answer, as a petitioner must state a sufficient case in the petition.  The court will not travel beyond the allegations in the petition and any defect or omission cannot be cured by affidavit (Re Tourmaline Limited [2004] 4 HKC 348 at 354C to D; Re Linea Trading Company Limited, HCCW No. 350 of 2004, 7 December 2005, Barma J, para. 9).

16.  Having responded to these allegations in a substantive way, not just in one round of evidence but several rounds of evidence filed by the respondents, I think it is unrealistic for the respondents to ask the court to refuse discovery on, among other grounds, that the documents sought are not relevant to the issues in the petition, particularly as there is now an application to amend the petition so as to raise the allegations made in the various affirmations of the petitioner.  So I am going to take a robust approach.  Provided sufficient particulars are given of an allegation in the affirmations filed by the petitioner, and I am satisfied it is not a bare or groundless allegation made with the view to fish for supporting evidence in the discovery application, I will treat the allegation as in issue in the proceedings notwithstanding this has not been raised in the petition, and leave to amend has yet to be given.

17.  I will of course consider separately whether it is appropriate to give leave to amend to bring in a particular allegation and upon what terms leave to amend may be given.  I will first deal with the application to amend the petition.

The amendments sought

18.  Miss Sara Tong for the respondents has emphasised the importance of clarity and particularity in the allegations made in a petition of this kind.  This is clearly right, see Re Tourmaline Limited and Re Linea Trading Company Limited cited earlier.  A particularly aggravating factor in the present case is that the material particulars of a complaint are found not in one affirmation but are contained in several affirmations made by the petitioner.  This is wholly undesirable.  The material particulars of the petitioner’s allegations should be contained in one document, namely, the petition.

19.  Miss Tong also submitted that the petitioner should not be allowed to raise unfounded and baseless allegations in the amendments so as to provide a justification to fish for evidence in the summons for specific discovery.  As stated by J Chan J in Allington Investments Corporation & Others v. First Pacific Bancshares Holdings Limited & Another, CACV No. 179 of 1994, 8 February 1995, the relevance of an issue is not dictated by a party unilaterally by placing it in his pleadings, and the court is not bound to take account of any immaterial or irrelevant averment improperly inserted into the pleadings.  This is a valid point.  Having filed 11 affirmations, the petitioner has had more than sufficient opportunity to give particulars of an allegation he made in his affirmations, if particulars could be given.  So in respect of an allegation that is unparticularised or not sufficiently particularised in the latest amendments put forward or in the many affirmations filed by the petitioner, one is driven to conclude that no particulars can be given.

20.  With the above considerations in mind, I turn to the latest draft amendments the petitioner has come up with to see if the allegations are set out with precision and sufficient particulars are given of the matters complained of or relied upon.

21.  The amendments are in paragraph 37A.  It is alleged that the respondents have acted improperly and wrongfully in the payment of, and/or have failed to keep proper books, accounts and records of the Company, for the expenses or other sums paid by the Company.  Particulars of this allegation are set out in sub-paragraphs (i) to (vi).

22.  Sub-paragraph (i) alleges improper or wrongful inflation of the amounts of purchases to the extent of HK$5,695,069 made by the Company from Moneray for the financial years of 2004 to 2006.  I consider sufficient particulars of this allegation are given in the petitioner’s 8^th affirmation paragraph 7, his 9^th affirmation paragraph 30 and his 10^th affirmation paragraph 13 as to the basis on which this allegation is made.  The material particulars, not the evidence, should be set out in the petition.  This has not been done in the draft amendments.

23.  Sub-paragraph (ii) alleges improper or excessive or arbitrarily apportioned office expenses of Cosmo-Tech Inc. incurred in Japan (“Japan Office Expenses”) being charged in the accounts of the Company in the years of 2002 to 2007 and paid by the Company upon the arbitrary apportionment made by the 2^nd respondent and without demand notes, invoices, vouchers and receipts, verifying liability and payment; and the Japan Office Expenses being entered in duplicate in the accounts of the Company and in the accounts of Cosmo-Tech Inc.  Again, I consider material particulars of the basis for this allegation have been provided in the petitioner’s 6^th, 9^th, 10^th and 11^th affirmations, but not in the draft amendments.  They are found all over the place.  They should be contained in one document.

24.  Sub-paragraph (iii) alleges that the sum of HK$991,206 for the setting up of the quality control operation of Mr Goto in China being improperly entered into the accounts of and paid by the Company as “development costs”.  As I understand paragraph 12 of the petitioner’s 10^th affirmation and paragraph 14 of his 11^th affirmation, the basis of this allegation is that the expenses incurred in this independent quality control operation of Mr Goto should be borne by Mr Goto’s company which is a separate entity from the Company.  I think sufficient particulars for the basis of this allegation appeared in the affirmations although not in the draft amendments.

25.  Sub-paragraph (iv) alleges improper or excessive payments of salaries and/or employees and/or directors’ remuneration by the Company and/or other expenses of the Company including arbitrary amounts of salaries and/or employees’ and/or directors’ remuneration paid by the Company to the 2^nd respondent and his wife in the years 2002 to 2007.  I have no idea what “other expenses” referred to.  I will not allow an amendment to bring in an allegation regarding “other expenses”.  I consider sufficient particulars of this allegation appeared in the petitioner’s 10^th and 11^th affirmations.  They should be set out in an orderly manner in the draft amendments.

26.  Sub-paragraph (v) alleges improper or wrongful payment of “the aforesaid expenses or sums to recipients of such payments including improper or wrongful payment to the 2^nd respondent”.  I have no idea what this refers to, and what this allegation is meant to include other than the payment to the 2^nd respondent.  If this is not a new allegation and is not meant to add anything to sub-paragraphs (i) to (iv), it is otiose.  I will not allow an amendment to bring in the allegation in this sub-paragraph.

27.  Sub-paragraph (vi) alleges improper or wrongful payment of “the aforesaid expenses or sums without demand notes, invoices, vouchers and receipts, verifying liability and payment.”  This seems to be a repetition of the allegation in sub-paragraph (ii).  It is otiose and I will not allow an amendment to bring in the allegation in this sub-paragraph.

28.  I have indicated those parts of the draft amendments for which leave to amend will not be given.  As to the rest, I do not propose to give leave to amend at this hearing, notwithstanding I am satisfied sufficient particulars of the allegations have been provided in the affirmations.  The petitioner is required to place before the court a new draft amended petition, to incorporate the particulars that are found all over the place in his various affirmations.  Until there is a satisfactory draft amended petition that answers the requirements of clarity and particularity as to the allegations made, no leave to amend will be given.  This is not a cut and paste exercise by simply copying the relevant paragraphs in the affirmations.  The petition should contain material facts and particulars, not evidence.  I will hear the petitioner’s counsel, Mr Paul Wu, as to the time he would require to come up with a proper draft amended petition.  On that basis, I will adjourn the summons to amend the petition to a date to be fixed, with leave to fix a hearing date after the petitioner has produced a revised draft amended petition and the respondents have had the opportunity to consider the new draft.

The discovery summons

29.  I could have refused to deal with this summons until the petitioner has obtained leave to amend his petition.  But as it is likely I will give leave to amend, subject to a proper draft amended petition to be produced by the petitioner, I will consider the discovery application on the basis that the allegations made in the petitioner’s affirmations, for which leave to amend is likely to be given, are issues in dispute in these proceedings.

30.  The legal principles as to specific discovery are well known.  I have been reminded of them in the submissions and authorities cited on both sides.  It is not necessary to set them out.  Even if I am satisfied of the possible existence of the documents sought, that they are relevant to the issues in dispute, and they are in the possession, custody or power of the respondents, I still have a discretion to exercise whether to order discovery.  Discovery will only be ordered if it is necessary for disposing fairly of the cause or matter or for saving costs (Order 24 rules 8 and 13(1)).

31.  I turn to consider each of the 10 categories of documents sought in the schedule to the summons.

Category 1

32.  Category 1 relates to the Japan Office Expenses.  It is sub-divided into 9 items.

33.  I will first state those items for which I refuse discovery and the reasons therefor.

34.  Items 1.1 and 1.2 – there is no evidence any written agreement existed between Cosmo-Tech Inc. and the Company or between the Company and the 2^nd respondent regarding the Japan Office Expenses.  No mention was made as to the existence of any such written agreement in the 17 affirmations filed on both sides.

35.  Items 1.3 and 1.5 – there is no evidence to suppose any invoices or receipts were issued to the Company for the Japan Office Expenses for the years of 2002 to 2007.  The evidence is to the contrary, as the expenses were incurred by Cosmo-Tech Inc. and were apportioned by the 2^nd respondent as expenses attributed to the business and operations of the Company.

36.  Item 1.8 – there is no evidence to suppose any minutes of meetings of shareholders and directors existed for the approval of the payment of the Japan Office Expenses by the Company.  It is the petitioner’s case no approval of shareholders or directors was given.  The respondents have not asserted to the contrary in any of the 6 affirmations filed on their behalf.

37.  I have borne in mind the documents already disclosed by the respondents regarding the Japan Office Expenses, being items 65 (supporting schedules for 2004 to 2006), 66 (monthly breakdown sheets for 2004 to 2007), and the ledgers of the Company relating to the Japan Office Expenses from 2002 to 2007.  These documents must have been prepared from primary source documents, such as invoices, vouchers and receipts issued to Cosmo-Tech Inc.  They have not been disclosed.  So the petitioner is not in a position to verify if expenses were actually incurred, if they were reasonably incurred, and whether the apportionment allegedly made by the 2^nd respondent was fair and proper.  The petitioner has produced such financial statements of Cosmo-Tech Inc. that are in his possession and they do not show any credit or reimbursement or receipt items in respect of that part of the Japan Office Expenses attributed to and paid by the Company.

38.  Furthermore, in the 4^thaffirmation of the 2^nd respondent, he acknowledged that he found out recently that a part of the item of “commission” in the Japan Office Expenses for the years 2002 to 2007 was wrongly attributed to the Company and that the Company should make adjustments in the figures set out in paragraph 31 of that affirmation.  He did not, however, explain why the error was made or the figures for which adjustments would be made.  As for other items of the Japan Office Expenses, he stated that “insofar as there is any duplication of expenses, it is due to an error made in Cosmo-Tech Inc.’s accounts which it would consider rectifying in due course”.  No further answer was made to the petitioner’s allegation there was duplicity of charges in respect of the Japan Office Expenses in the books of the Company and the books of Cosmo-Tech Inc.

39.  In these circumstances, I think it right discovery should be given of some of the documents sought in the remaining items.

40.  I am aware some of the documents sought may not be in the possession or custody of the respondents, such as item 1.9 (being the original supporting vouchers supplied to the Inland Revenue Department (“IRD”) in October 2004 and for which the Company did not retain a copy), and the documents issued to or prepared by Cosmo-Tech Inc.  In respect of the former, I consider the original supporting vouchers supplied to the IRD to be within the power of the respondents as they can request the IRD to release the original to them or allow them to obtain a copy.  In respect of Cosmo-Tech Inc.’s documents, it is not in dispute that Cosmo-Tech Inc. is and was at all material times controlled and operated by the 2^nd respondent.  He would appear to have unfettered control over it and may be regarded as having power over the documents in the possession of Cosmo-Tech Inc.

41.  I will narrow down the ambit of the discovery so that this exercise will not be wider than is necessary for the fair disposal of the issues in dispute and the description of the documents to be disclosed would be clearer and more precise.

42.  In respect of items 1.4, 1.6 and 1.7, I will order instead discovery to be given of invoices, vouchers and receipts issued to Cosmo-Tech Inc. of the Japan Office Expenses for which all or part had been attributed to the Company during 2002 to 2007.  I will also order discovery to be given of the ledgers of Cosmo-Tech Inc. relating to the Japan Office Expenses in the years of 2002 to 2007.

43.  In respect of item 1.9, I will order discovery to be given only of the supporting vouchers sent on behalf of the Company to the IRD on 2 October 2004.

44.  The respondents are required to give discovery by making an affirmation deposing to the matters required in Order 24 rule 7 and to permit inspection of such documents in their possession, custody or power.  I will hear counsel on the time for the filing of the affirmation and for inspection.

Categories 2 and 3

45.  Category 2 relates to directors’ current accounts of the Company and category 3 relates to directors’ fees and salaries paid by the Company.

46.  As I understand it, the reason for the disclosure of directors’ current accounts is to ascertain whether apart from his salaries and remuneration, the 2^nd respondent had received other sums from the Company, such as the Japan Office Expenses.  This is pure surmise, with no sufficient basis to back it up.  The petitioner also surmised that the directors’ current accounts might reveal the identity of the recipient to whom commission, which had been wrongly attributed to the Company, was paid.  This is wholly speculative.  I refuse to order discovery of any of the items in category 2.

47.  As for item 3.1 in category 3, the ledgers of the Company in respect of the salary paid to the 2^nd respondent from 2002 to 2007 have been disclosed.  I decline to order discovery of any of the other items.  I do not think discovery of these items is required for the fair disposal of any issue in dispute.

48.  No discovery is ordered for item 3.2, as there is no evidence to suppose any minutes of meetings of shareholders or directors of the Company existed for the approval of directors’ fees and salaries.  It is the petitioner’s case no shareholders’ or directors’ approval was given in any meeting, the respondents have not asserted to the contrary.

49.  The respondents have already disclosed employer’s returns of remuneration for the 2^nd respondent from 2002/03 to 2007/08 in their list of documents.

Categories 4, 5, 6 and 7

50.  Category 4 relates to rent, category 5 is electricity, gas and water charges, category 6 is entertainment expenses and category 7 is commission.  These expenses in the documents sought include such items of expenses in the Japan Office Expenses.

51.  In respect of rent, the respondents have already disclosed receipts issued to the Company in respect of rent incurred in Hong Kong.  What they have not disclosed is documents relating to the payment of rent in the Japan Office Expenses.  It is not necessary to make any order in this respect, as this is already covered by the order I make in relation to items 1.4, 1.6 and 1.7 mentioned above.

52.  The same applies to categories 5, 6 and 7.  No order is required for the same reason.

Categories 8 and 9

53.  Category 8 relates to quality control expenses paid by the Company in the years of 2002 to 2005.  I fail to see how this category of documents could properly be said to relate to a matter in dispute, even taking into account the amendments proposed to be made to the petition.  Discovery is refused.

54.  Category 9 is in relation to “development costs” in the accounts of the Company for 2002 in the sum of HK$991,206, being the subject of sub-paragraph (iii) of the particulars to the draft amendments.  No proper dispute has been raised to the amount of the expenses incurred in this respect, or that such expenses were actually incurred.  The suggestion of the petitioner that this amount might have been entered twice in the books of the Company and in the books of Mr Goto is pure speculation.  The only question is whether the said sum entered as “development costs” in the Company’s accounts should have been borne by Mr Goto’s company for the independent quality control operation of Mr Goto.  I decline to order discovery of any of the items sought in category 9, as it does not appear to me any of these documents are necessary for the fair disposal of the issue in dispute.

Category 10

55.  The last category, category 10, relates to the Company’s purchases of Moneray’s products and the development costs payable by the Company to the petitioner’s factory in Shenzhen called Monex Electronics in the years of 2002 to 2007.  This would appear to be the subject of sub-paragraph (i) of the draft amendments which alleges improper or wrongful inflation of the amounts of purchases to the extent of HK$5,695,069 made by the Company from Moneray for the financial years of 2004 to 2006.

56.  For one thing, the discovery sought is unduly wide.  Even taking the allegations in the draft amendments at face value, the wrongful inflation of purchases was for the years of 2004 to 2006 only.  There is no basis for discovery to be given of the other years.

57.  I have considered the evidence filed by the respondents to answer the alleged discrepancies in this respect.  It is clear from the audited reports of the Company there was no discrepancy in the figures of “Related Party Transactions” for the years of 2005 and 2006.  The only discrepancy occurred in the financial year of 2004, and it is contended by the respondents that the discrepancy was only HK$86,332.94, not a figure of HK$5.6 million odd as alleged by the petitioner.

58.  The petitioner has filed further affirmations to dispute the respondents’ explanation.  Even so, he has only disputed the discrepancy in the financial year of 2004.

59.  I see no reason to order discovery of the documents sought for the financial years of 2005 and 2006.

60.  I will order discovery to be given in respect of the Company’s purchases of Moneray’s products and the development costs payable by the Company to the petitioner’s factory in Shenzhen for the financial year of 2004 only.  The documents for which disclosure is required are the ledgers of the Company, and the invoices and receipts issued to the Company.

61.  I will hear counsel on the time for compliance of the various orders and directions made in this hearing and on the costs of the summonses.

62.  Mr Wu seeks an order that the costs of the application be to the petitioner in any event on the basis that although the court has refused to order discovery for a number of items, he did succeed in getting some disclosure.

63.  Miss Tong resisted that and submitted costs of the application should be to the respondents instead.  Alternatively, costs should be reserved to a later occasion after the disclosure affidavit has been filed as it is not certain that documents ordered to be disclosed are in the respondents’ possession, custody or power.

64.  I appreciate that the petitioner’s application for discovery was not initiated under the correct provisions of the Rules of the High Court and this was rectified at the last minute, and that the court has granted an indulgence to the petitioner in dealing with this application today, notwithstanding that the petition is not in order.  Nevertheless, looking at the matter realistically, the petitioner had some justification to seek discovery of some of the documents from the respondents and this was refused outright, so he had to come to court to seek relief.

65.  In the circumstances, I think it is right that the petitioner should have the costs of this application in any event, but restricted to half of the costs incurred to reflect his lack of success on all items.

66.  The orders I make on the discovery summons are as follows:

(1)  the respondents are to file and serve within 28 days hereof an affirmation stating whether any documents specified in the schedule to the order or any class of documents so specified is, or has at any time been, in their possession, custody or power, and if not then in their possession, custody or power when they parted with it and what has become of it;

(2)  the respondents are to permit the petitioner to inspect and take copies on payment of proper charges of any documents in their possession, custody or power disclosed in the affirmation in paragraph (1) hereof within 21 days of the filing of the said affirmation; and

(3)  the respondents are to pay the petitioner half of the petitioner’s costs of this application in any event.