ASCOBA CO LTD v. SAFCO EXPRESS SERVICES (HK) LTD

DCCJ6161/2003

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 6161 OF 2003

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REASONS FOR DECISION

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Introduction

1.  The Plaintiff (“P”) is a company that carries on the business of inter alia importing and exporting telephones. Safco Logistics (H.K.) Limited formerly known as Safco International Freight (H.K.) Limited (“Safco”) was a company that carried on the business of inter alia international carriage of goods for reward.

2.  There is no dispute that the Defendant (“D”) was incorporated on 30^th October 2002 and that it operated in Hong Kong and carried on the business of inter alia international carriage of goods for reward.

3.  P claimed that :

(a)	Safco by its bill of lading dated 29th July 1999 (“Bill of Lading”) acknowledged receipt of a shipment of 1,501 cartons containing about 18,000 telephones (“Goods”) from P on 29th July 1999 and shipped Goods aboard the vessel named therein on/about 31st July 1999 from Hong Kong to Jordan.
(b)	It was an express and/or implied term of the contract of carriage evidenced by Bill of Lading that delivery of Goods would only take place upon production or surrender of an original Bill of Lading.
(c)	Further or alternatively, Safco was under a duty as carrier for reward and/or bailee of Goods to release Goods only to P or P’s order.
(d)	P is/was the owner of Goods and/or the lawful holder of Bill of Lading. P was therefore entitled to receive immediate delivery of Goods from Safco or its agent or to direct that Goods be delivered to P’s order.
(e)	Safco and/or its agent wrongfully and in breach of contract/duty failed to deliver Goods to P or its order and released Goods without the production or surrender of an original Bill of Lading. Safco thereby converted Goods and/or deprived P of its security in Goods and was negligent in effecting such release or had failed to exercise reasonable care of Goods.
(f)	P claimed it thereby suffered a loss of US$74,700.00.
(g)	P issued proceedings in HCA No.8419/2000 (“HC Action”) against Safco to claim for loss and damages in respect of the above matters.
(h)	On/after 30th October 2002, Safco transferred its business to D but failed to give notice of transfer of business pursuant to section 5 of the Transfer of Business (Protection of Creditors) Ordinance Cap.49 (“Ordinance”).
(i)	D was therefore liable for all debts and obligations arising out of the carrying on of business by Safco, including its liabilities arising out of the matters referred to above and claimed by P in HC Action.

4.  D in its Defence dated 25^th November 2003 denied P’s claim. D averred inter alia that :

(a)	D had no relationship with Safco. The directors/shareholders of D and Safco were different. D had no business with Safco and was not aware of any transfer of business to D from Safco.
(b)	D used its best endeavours to secure logistics business in the local and worldwide markets despite severe competition and to create its own customer profile based on the expertise and knowledge of its directors.
(c)	P was not entitled to rely on section 5 of Ordinance as it had not been able to show a valid and conclusive claim against Safco.

Amendment Summons

5.  By a summons dated 26^th July 2005 (“Amendment Summons”), P applied to amend its Statement of Claim to plead the results of HC Action which had been concluded recently. It appeared from the draft amendments that HC Action had been transferred to the District Court as DCCJ No.1463/2004. On 20^th June and 18^th July 2005, it was adjudged after trial that Safco was liable to P for the sum of US$74,700.00 with interest thereon at 2% pa from the date of the issuance of the writ until judgment and thereafter at judgment rate with costs to be taxed if not agreed with certificate for counsel. P wished to recover such judgment debt against D.

6.  Mr Lau, counsel for D, did not object to the proposed amendments. Consequently at the hearing I granted an order in terms of paragraphs 1 and 2 of Amendment Summons. I also ordered that (a) leave be granted to D to file and serve an amended Defence if so desired within 14 days from the date thereof and (b) P do pay D costs of and incidental to Amendment Summons to be taxed if not agreed.

Interrogatories Summons

7.  On 3^rd February 2005, P filed a request for interrogatories in relation to D’s customers and D’s resources (“Interrogatories”). P issued a summons dated 3^rd June 2005 for leave to serve Interrogatories on D and D’s director Ms Sophia Mei Chu Lang (“Lang”) forthwith and for an order that D do answer Interrogatories by affidavit within 28 days of the service of such Interrogatories (“Interrogatories Summons”).

8.  After hearing argument at the hearing, I made the following orders :

(a)	Interrogatory 2 be amended to limit the time period in sub-paragraph (c) to “from October 2003 to December 2003 (both months inclusive)” and Interrogatory 5 be amended to replace sub-paragraph (c) with “as at 31st December 2003”;
(b)	leave be granted to P to serve Interrogatories amended as aforesaid on D and its director Lang forthwith;
(c)	D do answer such amended Interrogatories by way of affidavit and to file and serve such affidavit within 28 days of the service of the amended Interrogatories;
(d)	D do pay to P costs of the application by Interrogatories Summons to be taxed if not agreed with certificate for counsel.

9.  I have informed the parties that I will hand down detailed reasons for decision and this I now do.

Background

10.  Before dealing with the specific Interrogatories sought, it is necessary to set out briefly some further background matters.

(a) Discovery

11.  Part 1 of Schedule 1 of D’s List of Documents only disclosed 1 document, namely, D’s annual return dated 30^th October 2003.

(b) Further and better particulars (“FBP”) of the Statement of Claim

12.  D issued request for FBP of P’s Statement of Claim dated 19^th April 2004 in respect of P’s pleas that Safco transferred its business to D and that such transfer was a transfer under Ordinance. The request was directed at inter alia the nature, the date, the turnover and the identities of the customers of the alleged transferred business, and the identities of Safco’s and D’s representatives who procured/arranged/performed the alleged transfer of business. In FBP filed on 31^st December 2004, P largely stated that it was unable to provide further particulars pending discovery and/or interrogatories and that the particulars sought were within the exclusive knowledge of D and Safco.

(c) P’s witness statement

13.  P had filed the witness statement of its director Gopal Nathur Malkani (“GNM”) on 10^th January 2005. GNM stated that P’s legal advisers advised him that the court would objectively consider all the surrounding circumstances in determining whether there had been a transfer of business within the meaning of Ordinance. He pointed out that D had not disclosed any documents that would arguably show there had been no transfer of business, especially on matters that were exclusively within D’s knowledge. GNM noted that D had not disclosed the names of its customers or staff and had not provided any information on whether its customers/staff were the same as or different from those of Safco.

(d) D’s witness statement

14.  D filed the witness statement of Lang on 7^th January 2005. She confirmed she was D’s director and the former general manager of Safco overseeing its business in Hong Kong. Because of her senior position with Safco, Lang was also one of Safco’s authorised signatories as authorised by its board of directors.

15.  Lang said that because of the downturn in Safco’s business in September 2002, she planned to set up her own business and in preparation thereof D was incorporated in October 2002. However, D did not commence business until late July/August 2003 after Lang’s resignation from Safco following a failed rescue attempt in June 2003. A few weeks after her departure, Safco closed its business in Hong Kong and Lang through D commenced business in July 2003. Lang had the idea of using Safco’s business office and telephone line as it would be quicker and more cost effective than starting afresh. D used Safco’s business office and telephone line for a few weeks until it moved to a new registered and business address (“New Address”).

16.  Lang used her own personal experience, knowledge and connections in the logistics and freight forwarding industry to secure orders. Under her management, D’s business began to pick up and D maintained a competitive position in the market. D developed its own business and customer base by itself.

17.  Although D and Safco were in the same line of business, Lang said there was no business or corporate relationship between D and Safco. D and Safco did not share any common director/shareholder and Lang was not Safco’s director or shareholder. There was no agreement for and in actual fact no transfer of business. Lang engaged Safco’s corporate secretarial company to perform corporate secretarial services for D since it was the only company she knew at that time. Lang denied D and Safco used the same trade name since “Safco Express” was different from “Safco Logistics”. Further, as “Safco” was not a registered trademark, Lang was free to use such word as D’s name.

The law on interrogatories

18.  Under Order 26 rule 1(1) of the Rules of the District Court, a party to a cause or matter may apply to the court for an order (a) giving him leave to serve on the other party interrogatories relating to any matter in question between the applicant and that other party in the cause or matter, and (b) requiring that other party to answer the interrogatories on affidavit within such period as may be specified in the order.

19.  Order 26 rule 1(2A) goes on to provide that on the hearing of an application under this rule, the court shall give leave as to such only of the interrogatories as it considers necessary either for disposing fairly of the cause or matter or for saving costs; and in deciding whether to give leave the court shall take into account any offer made by the party to be interrogated or to give particulars, make admissions or produce documents relating to any matter in question. Both Mr Lau and Mr Wong, counsel for P, agreed there was no evidence before me of any such offer from D.

20.  Both counsel agreed on the following principles :

(a)	In civil claims, parties have the obligation to give documentary discovery that falls within the ambit of the Peruvian Guano criterion. Interrogatories under Order 26 of the Rules of the District Court seek discovery of facts (Hong Kong Civil Procedure 2004 Vol.1 para.26/0/02 at p.465).
(b)	Interrogatories must be relevant. It is an important function of interrogatories to gain information not within the knowledge of the requesting party.
(c)	The right to interrogate is not confined to the facts directly in issue. It is enough that they should have some bearing on the question at issue and that they might form a step in establishing liability. “In short, interrogatories which go to support the applicant’s case or to impeach or destroy the opponent’s case are admissible ……” (Hong Kong Civil Procedure 2004 (supra) para.26/4/7 at p.468).
(d)	Nevertheless, only such interrogatories will be allowed as shall be considered necessary either for disposing fairly of the cause or matter or for saving costs.
(e)	Interrogatories will not generally be allowed where the object is to obtain an admission of fact which can be proved by a witness who will in any case be called at the trial, and therefore the interrogatory will not save but add to costs. Furthermore, interrogatories of matters which could be elicited during cross-examination at trial without causing prejudice to the party requesting for interrogatories are not allowed (Hong Kong Civil Procedure 2004 (supra) para.26/4/12 at p.470).
(f)	Interrogatories that solely relate to credit may not be administered notwithstanding that they may be admissible in oral examination of a witness (Hong Kong Civil Procedure 2004 (supra) para.26/4/6 at p.468).
(g)	“Objections to interrogatories based on lack of necessity take various forms such as (1) the question can be put to the witness in cross-examination, (2) the question is a dry-run of the cross-examination, (3) the answer to the question is obvious or can be found in the document or various documents, (4) the question will not result in any admission. The validity of the objection must be judged in the context of the particular interrogatory and all the surrounding circumstances ……” (Esquire (Electronics) Limited v The Hong Kong and Shanghai Banking Corporation limited & anor HCA11077/1994 Waung J (unreported, 2nd September 2003)).
(h)	Fishing, oppressive, prolix or imprecise interrogatories that do not relate to any matter in question in the cause or matter are not allowed.
(i)	Oppressive interrogatories that exceed the legitimate requirements of a particular occasion or put on the other side a burden out of all proportion to the benefit to be gained by the applicant are not allowed (Hong Kong Civil Procedure 2004 (supra) para.26/4/12 at p.471).
(j)	“Interrogatories are said to be “fishing” if they seek to gather facts to establish a line of attack not already pleaded, or which seek to ascertain whether a fact exists where the interrogating party had no reasonable grounds for belief in the existence of the fact ……” (Zhu Kuan Company of Zhuhai SEZ v Brickell Limited (in liquidation) & ors HCCL42/1995, Findlay J (unreported, 5th December 1995)). Interrogatories should be confined to facts of which there is some reason to think are true.
(k)	In Lee Nui Foon v Ocean Park Corp (No.2) [1995] 2 HKC 395, Cheung J (as he then was) added that interrogatories must not be inter alia (1) questions which went to the evidence the opposing party intended to adduce, (2) questions which required an answer which was not a matter of opinion or for an expert, (3) questions which went to the facts which would assist in establishing the case of the opposing party as opposed to the case of the party seeking to interrogate, or (4) effectively asking for documents of discovery.

The law on transfer of business

21.  It is also common ground between both counsel that Deputy High Court Judge Reyes SC (as he then was) summarised the relevant legal principles in BNP Paribas (formerly known as Banque National de Paris) v G C Luckmate Trading Limited [2002] 2 HKLRD 156, 165 (which judgment was upheld on appeal) :

“	(1)	In deciding whether there has been a transfer of business under [Ordinance], the court objectively considers all the surrounding circumstances.  The fact that there is no document formally evidencing a transfer is not conclusive.
	(2)	A transfer of assets may indicate a transfer of business. But a transfer of assets does not of itself mean that there has been a transfer of business within [Ordinance].
	(3)	There may be a transfer whether the alleged transferee can be shown to have gained some advantage from taking over the purported transferor’s business.  Such advantage will often arise because the alleged transferee is shown to have taken over a “going concern”.  But even where an entity is on the verge of bankruptcy, an alleged transferee may perceive a real benefit to be gained from assuming some or all aspects of that entity’s business.
	(4)	Factors indicating that a business has been transferred from one person to another include the following :
		(a)	Use of the same or similar name.
		(b)	Assignment of goodwill.
		(c)	Use of the same premises.
		(d)	Use of the same fixtures, fittings and equipment.
		(e)	Use of the same personnel.
		(f)	Use of the same stock-in-trade.
		(g)	Conduct of the same or similar type of business.
		(h)	Conduct of business in the same or similar manner.
		(i)	Servicing the same customers.
	Although the above may not be conclusive individually, the cumulative presence of a number of the foregoing factors can establish a transfer.”

22.  I have applied the above principles in Flynt International Forwarders v CMC International (China) Limited DCCJ842/2003 (unreported, 7^th September 2004), which was also concerned with the transfer of business of a freight forwarder.

Interrogatories

23.  It is evident from paragraphs 4 and 14-17 above that D alluded to some of the factors referred to by Deputy High Court Judge Reyes SC (as he then was). But D’s List of Documents and witness statement do not deal with whether D and Safco serviced the same customers (“Customer Factor”) and used the same personnel (“Staff Factor”). GNM in his witness statement had complained of such omission by D. P also pointed out in its FBP that it was unable to provide further particulars pending discovery and/or interrogatories and that the particulars sought were within the exclusive knowledge of D and Safco. Here, Interrogatories are mainly targeted at Customer and Staff Factors.

24.  Mr Lau informed me that it was not D’s case that Interrogatories were oppressive. However, he submitted that some Interrogatories were “fishing” (although Mr Lau did not expand on this argument in his submissions).

25.  In this respect I bear in mind that Hong Kong Civil Procedure 2004 (supra) para.26/4/7 at p.468 states that “[interrogatories] are not limited to giving the plaintiff a knowledge of that which he does not already know, but include the getting of an admission of anything which he has to prove on any issue which is raised between him and the defendant”. In this context and as discussed below, I do not see Interrogatories as “fishing”.

26.  Although Mr Lau in his submissions did not expressly argue that there is no reason to think the facts being the subject matter of Interrogatories are true, for the avoidance of doubt I find there is sufficient basis for Interrogatories and no ground for arguing that there is no reason to think the facts sought are true.

27.  D admitted that prior to 16^th August 2003 it operated out of Safco’s business address and used its business telephone line. GNM’s witness statement stated that on 16^th August 2003 (according to Lang’s witness statement, such time period was after she had left Safco and D had commenced business), Safco and D moved their registered offices to New Address, which was a trading address. Thereafter, Safco’s registered office was changed to the address of its company secretary, which, Mr Wong submitted, indicated that Safco was then no longer actively trading. Mr Wong also pointed out that Lang had held a senior position at Safco and was held out on the website of Safco Logistics (Taiwan) Corp (“Safco Taiwan”) as the contact person for its Hong Kong branch (ie Safco). Lang was at the same time D’s controlling shareholder/director. In my view, there is sufficient material to satisfy the criterion that there be some reason to think that the subject matter of Interrogatories are true. However, I hasten to add that it is unnecessary and I have not formed any final view on this matter.

28.  Mr Wong laid strong emphasis on the fact that Safco was not a party to the present proceedings from whom P could seek discovery. He further argued that Interrogatories presently sought were not amenable to specific discovery. These contentions are not disputed and I agree with Mr Wong that such handicap can appropriately be remedied by Interrogatories presently requested.

29.  Interrogatories 1-4 relate to Customer Factor. Mr Wong explained that Interrogatories 1-2 were directed at clarifying whether D traded with Safco customers and if so, the percentage of D’s business that was accountable by non-Safco customers during 3 periods, namely, from (a) October 2002 to June 2003 (D’s incorporation to Lang’s resignation from Safco), (b) June to September 2003 (the commencement of Lang’s involvement in D to the end of the period when Safco maintained an active business address) and (c) October 2003 to the present (when Safco became dormant by moving its registered office to its company secretary’s address).

30.  In my view, Interrogatories 1-2 are plainly relevant to Customer Factor. In determining whether there has been a transfer of business from Safco to D, there can be no escape from considering Customer Factor in all the circumstances. That Customer Factor is a relevant issue in these proceedings can also been seen from D’s own request for FBP on this topic. At the hearing, Mr Lau conceded that Customer Factor was a substantive issue for trial. On such basis, I cannot accept his submission that Interrogatories went only to the issue of credit. I bear in mind that Lang has not committed herself on this issue in her witness statement. All she said was that she used her endeavours to build up D’s customer base, which falls shy of the heart of Customer Factor being whether D had taken advantage of Safco’s established customer base. I am satisfied that Interrogatories 1-2 should be served and answered.

31.  Mr Lau submitted that the matters raised in Interrogatories 1-2 could be elicited under cross-examination of D’s witness, Lang, at the trial and therefore they were not proper interrogatories. These matters are plainly within the knowledge of D and not P. I see no reason why because D does not make discovery of documents on Customer Factor and D’s witness fails to descend into the facts of such issue that P should be left to the mercy of eliciting such information by cross-examination with no opportunity to investigate the evidence then elicited or to call rebuttal evidence. As a matter of case management, such approach to modern civil litigation cannot be supported.

32.  I further bear in mind that P bears the burden of proof in establishing a transfer of business within the meaning of Ordinance although D bears the evidential burden in establishing the positive averments of its Defence. That being the case, without the aid of Interrogatories, P will be unable to elicit the information that it requires to sufficiently and properly plead the material facts of its case. Without proper pleadings, it is doubtful whether P will be entitled to elicit the relevant evidence at trial to support its case and there may be a risk that cross-examination directed to elicit such evidence may be challenged as “fishing”. Even if these matters may be canvassed in cross-examination at trial, I am satisfied that by disallowing Interrogatories P will still be prejudiced. I am not with Mr Lau on this ground of objection.

33.  Mr Lau next suggested that D had denied any transfer of business in its pleadings and its witness had supplied her witness statement in support of D’s contentions. He argued that they provided sufficient material for the court to draw inferences as to the true situation and Interrogatories 1-2 were unnecessary. I do not see why, when the subject matter is a relevant substantive issue between the parties, P should be limited to drawing inferences from what D chooses to present to the court instead of being able to ascertain the primary facts that go to the relevant issue. I reject this argument.

34.  Mr Lau alternatively submitted that if I were not within him in respect of Interrogatory 1, P’s adoption of the meaning of “trade” in such Interrogatory was too wide. He submitted that any disclosure of trade dealings between D and Safco’s customers should be restricted to actual business transactions. I am again not with Mr Lau on this submission. Here the issue is not about the transfer of business transactions but the transfer of business. The question is whether D had made use of Safco’s goodwill and customer base to give it a kick-start in establishing its business. Apart from actual business transactions, the solicitation of custom by D from Safco’s customers in the guise of a continuation of Safco’s business (if any) cannot be said to be irrelevant.

35.  Whilst I have no difficulty in allowing Interrogatory 1 and Interrogatory 2 in respect of the first 2 time periods sought, the length of the 3^rd time period in sub-paragraph (c) of Interrogatory 2 has given me pause. The present proceedings were commenced in October 2003. P’s cause of action on the claimed transfer of business from Safco to D should be established by that time. I consider it is only appropriate to grant Interrogatory 2 up to a reasonable time after Safco moved its registered office to the address of its company secretary, ie up to 31^st December 2003.

36.  Mr Wong submitted that Interrogatories 3 and 4 were aimed at clarifying the relationship between D and Safco Taiwan. Mr Lau, on the other hand, submitted that the subject matter was irrelevant.

37.  I note that Safco Taiwan’s website named Safco as its Hong Kong branch and described Safco as a transportation and trade agent “connecting Taiwan, Hong Kong and Mainland China. We are the company providing two coasts and three places service for triangular traders among Hong Kong, Taiwan and China”. Plainly, Safco Taiwan’s website suggested it did “triangular trading” business with inter alia Safco. In my view, it is legitimate in light of Customer Factor to interrogate D as to whether it did business with Safco Taiwan.

38.  Interrogatories 5-8 relate to Staff Factor and are pertinent to the issue whether D took over Safco’s staff. Briefly, they seek information on the total number of D’s employees at various periods and the number of those employees who had been Safco’s employees. As a corollary to such general enquiry, P wanted to ascertain specifically (a) whether Sandy Chung, Safco’s staff who had liaised with P, had joined D and (b) the time when Safco’s employees (if any) joined D.

39.  As pointed out by Mr Wong, these Interrogatories were not amenable to specific discovery but were clearly relevant to Staff Factor as discussed in BNP Paribas case. Mr Lau argued that such information should be elicited in cross-examination of D’s witness. As explained above and for the same reasons applied mutatis mutandis, I am not with Mr Lau on this argument.

40.  In respect of Interrogatory 5, Mr Lau submitted that the total number of D’s employees was irrelevant. I disagree. The issue here is whether D took over Safco’s employees in the context of considering whether there has been a transfer of business or not. If D did take over Safco’s employees, it is plainly pertinent to consider the percentage such employees constitute in relation to the entirety of D’s staff.

41.  Mr Lau next argued that there was an overlap between Interrogatory 6 and 7. Interrogatory 7 relates to a specific request to clarify whether Sandy Chung was employed by D. Mr Wong explained that such Interrogatory would enable P to decide whether it would be necessary or appropriate to issue a subpoena to Sandy Chung requiring her to give evidence at the trial. I agree that such Interrogatory is useful and relevant.

42.  I am satisfied that Interrogatories 5-8 should be served and answered. However, in respect of Interrogatory 5, there is no justification to require D to state the number of D’s employees “[as] at the date of the request”. I have in my order amended the date to as at 31^st December 2003 which I consider to be a reasonable time and in line with the change I have made to Interrogatory 2.

43.  Interrogatories 9-10 are relevant to the issue of whether D used “the same fixtures, fittings and equipment”, a factor identified by Deputy High Court Judge Reyes SC (as he then was) in BNP Paribas case.

44.  Interrogatory 11 relates to the circumstances in which D used “the same or similar name” as Safco or Safco Taiwan (of which Safco was said to be its branch), another factor identified by Deputy High Court Judge Reyes SC (as he then was) in BNP Paribas case. Although Lang stated in her witness statement that D’s name was different from Safco’s name and that she was free to choose a name for D, she did not specifically address the pertinent issue of whether there had been any liaison with Safco or Safco Taiwn in relation to the use of the word “Safco” for D’s name. It is apparent from Safco Taiwan’s website that it operated as a group with branches in Taiwan, Hong Kong, China and Thailand. Whether D adopted the goodwill generated by the “Safco” name is clearly a relevant issue.

45.  The subject matter of Interrogatories 9-11 is not amenable to specific discovery but they are certainly matters within the knowledge of D and not P. Mr Lau opposed such Interrogatories on the basis that the information should have been elicited under cross-examination. For the reasons explained above and applied mutatis mutandis to Interrogatories 9-11, I reject such argument. I consider that Interrogatories 9-11 should be served and answered.

46.  I therefore conclude that Interrogatories are necessary for fairly disposing of the present proceedings. I do not regard them as a dry-run of the anticipated cross-examination. In my view, the answers should be forthcoming before trial so that proper preparations (including appropriate amendment of pleadings) can be made with greater efficiency. In such circumstances, there will be savings in costs. Further, Interrogatories are neither fishing nor oppressive. They do not attempt to overreach and I see no particular inconvenience and hardship in answering them. I have therefore made the order set out above at the hearing.