CLUB ACE LTD AND ANOTHER v. PANG KIN SHING, MICHAEL AND OTHERS

HCA342/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 342 OF 2006

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J U D G M E N T

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1. This is an appeal by the plaintiffs against the decision and order of Master Wong given in chambers on 20 April 2007 whereby the master declined the plaintiffs’ application for specific discovery against the defendants, which application was by Summons dated 6 December 2006.

Background

2. Both plaintiffs are BVI companies incorporated in 1999.

3. Initially both plaintiffs entered into two separate subscription agreements (“the Subscription Deeds”) dated 3 April 2000 whereby they subscribed to totally 20% of the enlarged capital in New Digital Technology Holdings Ltd (“NDTHL”), a company incorporated in Hong Kong on 1 March 2000, for a total subscription price of HK$60 million.  The defendants were parties to the Subscription Deeds as covenantors.

4. However, due to corporate restructuring, NDT (BVI) Trading Limited (“NDTBVI”) became the holding company of the NDT group of companies and NDTHL became a wholly owned subsidiary of NDTBVI.

5. As a result of such restructuring, both plaintiffs entered into two separate Supplemental Deeds both dated 27 June 2000 with NDTHL and NDTBVI and with the defendants as covenantors whereby both plaintiffs agreed to purchase totally 20% of the enlarged capital of NDTBVI (in lieu of NDTHL) for the same total amount of $60 million.

6. Under clause 11 of the Subscription Deeds, the defendants as covenantors, jointly and severally agreed to pay to both plaintiffs :

(a)   If the 2000 Net Profit (as defined in the Subscription Deeds) was less than US$3.24 million, totally 20% of twice the amount of the shortfall;

(b)   If the 2001 Net Profit (as defined in the Subscription Deeds) was less than US$3.24 million, totally 20% of twice the amount of the shortfall; and

(c)   If the Net Assets (as defined in the Subscription Deeds) was less than HK$20 million, totally 20% of the amount of such shortfall.

7. It is the plaintiffs’ case that :

(a)   the audited 2000 Net Profit was HK$8,947,000;

(b)   the unaudited 2001 Net Profit was HK$9,237,000 and no audited account thereof has been completed; and

(c)   the Net Assets were stated to have a negative value, namely “minus HK$29,727,000” only.

8. Accordingly, the plaintiffs issued letters of demand on 31 October 2002.  Failing payment and the provision of audited accounts, the plaintiffs commenced the present proceedings on 17 February 2006 claiming for the payment as due to them under clause 11 of the Subscription Deeds.

9. The plaintiffs’ claim was contested by the defendants.  Firstly, the defendants denied and/or did not admit the breaches alleged.  In the alternative, the defendants plead that the claim by the plaintiffs had been settled by three hand written agreements all dated 7 November 2002 (collectively “the Settlement Agreements”) entered into on the one hand by one Paul Tse on behalf of the plaintiffs, and on the other hand, by the defendants respectively.

10. It was pleaded that under the Settlement Agreements, in consideration of the defendants transferring to the plaintiffs all their beneficial interests, in terms of shareholdings, directly or indirectly, held in NDTBVI, the plaintiffs confirmed that they would waive and withdraw all claims against the respective defendants in respect of the Subscription Deeds, the Supplemental Deeds and the Shareholders Deed in full and final settlement of all the plaintiffs’ claims.

11. It was also pleaded by the defendants that pursuant thereto :

(a)   on or about 24 July 2003, the 1^st and 2^nd defendants had duly transferred all their beneficial interests, in terms of shareholdings, in NDTBVI to the plaintiffs; and

(b)   in or about early 2006, the 3^rd defendant had duly transferred all his beneficial interests, in terms of shareholdings in NDTBVI to the plaintiffs.

12. By their reply filed on 17 April 2007 (which therefore was not a pleading before the master when he dealt with this application now being appealed from), the plaintiffs admit that Paul Tse, since February 2002 became an employee and executive director of Global Tech (Holdings) Ltd (“Global Tech”), a public listed company in Hong Kong and which was, at all material times, the parent company of the 1^st plaintiff.  It is also admitted in the reply that from 2 July 1999 until 20 August 2003, Paul Tse was a director of the 2^nd plaintiff.

13. However, it is pleaded by the plaintiffs in their reply that Paul Tse, not being a director of the 1^st plaintiff at any time, was not authorized to execute any documents on behalf of the 1^st plaintiff.

14. As for the 2^nd plaintiff, it is pleaded that Paul Tse was only authorized to sign and execute the Subscription Deeds on behalf of the 2^nd plaintiff.

15. It is further pleaded that neither the 1^st nor 2^nd plaintiffs had at any time authorized Paul Tse (or anyone else) to enter the Settlement Agreements with any of the defendants in November 2002 or any other time, and that was known to the defendants.  In so doing, Paul Tse was in breach of his fiduciary duties owed to the 2^nd plaintiff and to Global Tech.

16. It is also the plaintiffs’ pleaded case, in the alternative, that if Paul Tse had purported to enter the Settlement Agreements on behalf of the plaintiffs with the defendants, that was done by Paul Tse and the defendants to defraud the plaintiffs.

17. The plaintiffs seek to rescind the Settlement Agreements by the service of the writ herein or by the service of the reply.

The application for specific discovery

18. At the outset, the application was for specific discovery of two classes of documents as stated in the schedule to the plaintiffs’ summons for discovery.

19. However, nothing in this appeal turns on the first of the two classes of documents contained in the schedule since those documents have been discovered by the defendants.

20. As for the second of the two classes of documents sought, that class of documents in the schedule reads as follows :

“2.Board resolutions, memoranda, correspondence between NDTBVI and/or NDTHL and its Solicitors (Messrs Or, Ng & Chan), Counsel’s advice, pleadings, affidavits and affirmation, documents in relation to all matters related to HCA Nos. 2030 of 2006, 2031 of 2006, 2032 of 2006, 2033 of 2006, 2034 of 2006 and 2035 of 2006.”

21. In this respect, the six High Court actions referred to in the schedule to the summons were termed as “the Lo Actions” collectively and in this judgment I will continue so to refer to them for convenience.

22. In all the Lo Actions, the plaintiffs were either NDTHL or NDTBVI, and Lo Chi Sum, the 3^rd defendant herein, was effectively the defendant in all six of the Lo Actions.  All the writs in the Lo Actions were issued on 14 September 2006.

23. All the claims in the Lo Actions (as can be seen from each of the respective Indorsement of Claim) were effectively against the present 3^rd defendant either for misappropriation of funds belonging to the respective plaintiff therein or for misfeasance and/or breach of duties or breach of trust alleged against the present 3^rd defendant.

24. All six of the Lo Actions were settled by way of consent orders all dated 19 October 2006 in which the respective plaintiff discontinued the action against the defendant therein with no order as to costs.

The appeal from the master

25. The master having declined to grant the order sought by the plaintiffs for specific discovery on the second class of documents sought, this present appeal was taken out.

26. Whilst the initial application for discovery by the plaintiffs were against all three defendants herein, the wording of the notice of appeal is such that the plaintiffs now seek an order for specific discovery only against the 1^st and 3^rd defendant.  Mr Barlow SC, appearing for the plaintiffs at the hearing before me has confirmed that to be the position.

Decision

27. It is not disputed by the parties that there is no jurisdiction to make an order under the RHC Order 24, rule 7 for the production of documents unless :

(a)   there is sufficient evidence that the documents exist which the other party has not disclosed;

(b)   the document or documents relate to a matter in issue in the action; and

(c)   there is sufficient evidence that the document is in the possession, custody or power of the other party.

28. In so far as the second of these three pre-requisites are concerned, the submission made on behalf of the plaintiffs is not that the second category of documents sought by the plaintiffs relating to the Lo Action has any bearing upon the settlement agreement or the authority of Paul Tse in signing the settlement agreement, being the issue in dispute in this matter.

29. Rather, the documents sought by the plaintiffs are to generally impinge upon the credibility of the defendants in this case.

30. It comes about in this way.  The plaintiffs say that it is the case of the defendants that the defendants claimed to have transferred all their beneficial interests in NDTBVI, by the latest in early 2006 to the plaintiffs pursuant to the Settlement Agreements, yet they, the plaintiffs, have no knowledge whatsoever of the claims brought by NDTBVI in the Lo Actions which were all issued in mid-September 2006.

31. Moreover, it is not in dispute that the word-processing reference given in each of the backsheets of the six writs in the Lo Actions bear the name of “Michael Pang”, being the name of the 1^st defendant herein.  The inference therefore must be that the 1^st defendant had given instructions to Messrs Or Ng & Chan, the solicitors acting for the plaintiffs in the Lo Actions, for his name to appear on their word-processing reference.

32. It is therefore submitted by Mr Barlow that if these documents sought can damage the case of the defendant by showing the defendants to be not credible, those documents must be relevant, relying on the test of relevancy laid down in the Peruvian Guano case.

33. In my view, that does not necessarily follow.  To simply say that the documents sought by the plaintiffs can damage the case of the defendants would be oversimplistic.

34. The relevant wording used in Order 24, rule 7 is that the document sought “relates to one or more of the matters in question in the cause or matter.”

35. Where, as here, the documents sought merely relate to or can impinge upon the credibility of the defendants, they do not come within those wordings.

36. Furthermore, even if it can be established from the documents sought that the 1^st defendant was instrumental in giving instructions to Messrs Or Ng & Chan for the institution of the Lo Actions, I do not see how that can be used by the defendant that therefore the 1^st defendant could not have transferred his beneficial interests to the plaintiffs under the settlement agreements since the 1^st defendant could still have been a director of NDTBVI, even if no longer a shareholder, at the time the Lo’s Actions were instituted.

37. On this one point alone, the appeal must be dismissed.

38. I should also briefly add that the 3^rd defendant herein, being the defendant in the Lo Actions, would not in any way, be privy to any communication or correspondence between NDTBVI and/or NDTHL and its solicitors, Messrs Or Ng & Chan, nor would he be privy to any Counsel’s Advice for the plaintiffs in the Lo Actions.

39. The remaining documents sought are all court documents and it has been acknowledged by the plaintiffs that when the parties were before the master in the hearing below, by special arrangements requested by the plaintiffs, the plaintiffs were allowed to search all the six court files of the Lo Actions.

40. In the circumstances, these would be further reasons for refusing the plaintiffs’ application in so far as it relates to the 3^rd defendant herein.

41. For the reasons given above, the plaintiff’s appeal is dismissed with costs, the costs order being an order nisi.