XCHRX Re The Prudential Enterprise, Ltd.

HCCW594/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO.594 OF 1999

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D E C I S I O N

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1. There are before the court two applications for specific discovery made pursuant to Order 24, rule 7, Rules of the High Court. The first is the petitioners' application against the 1st respondent contained in the summons filed on 15 February 2001. The second is the 1st respondent's application by way of two summonses issued on 15 February and 30 June 2001 against the petitioners.

2. In these proceedings, the petitioners seek a winding-up order be made in respect of The Prudential Enterprises, Limited ("the Company") on just and equitable ground and alternatively relief under section 168A of the Companies Ordinance. The background of the Company and of these proceedings have been set out in my earlier Decision on the 1st respondent's application to strike out the petition, which was handed down on 3 May 2001. I will not repeat them here.

Principles applicable to Order 24, rule 7 applications

3. Before dealing with the applications, it will be helpful to summarize the principles applicable to Order 24, rule 7 applications. The starting point is to recognize that while the entire Order 24 relates to discovery, the different rules under it deal with different aspects of discovery and set out different considerations for the court to take into account : Innovisions Ltd v. Chan Sing Chuk & Ors [1992] 1 HKC 348.

4. Order 24, rule 7 is fairly narrow in its scope. It only covers an order requiring the making of an affidavit to cover the documents or class of documents specified in the application. It does not, for instance, deals with the production of documents, which is covered by section 13.

5. In an Order 24, rule 7 application, the applying party has to prove by affidavit evidence that the documents claimed are, firstly, relevant to the matters in question and that, secondly, in the opinion of the deponent, the other party has or has had in his possession, custody or power, the documents claimed. The other party may object the application by establishing to the court's satisfaction that the discovery sought is unnecessary : Order 24, rule 8.

6. The court may grant the order upon a prima facie case as to relevance and possession is being made out and upon being satisfied that the discovery sought is necessary. The making of the order does not preclude the other party from deposing in the affidavit that he in fact does not have the documents in his possession, custody or power. The affidavit in answer is conclusive at the interlocutory stage so that the applying party cannot seek to contravene the statements or assertions made in the affidavit either by way of a further contentious affidavit or by applying to cross-examine the deponent : Hong Kong Civil Procedure 2001, para.24/7/1.

7. In the old case of Jones v. Monte Video Co. (1880) 5 QBD 556 at 558, Brett CJ laid down the rule as follows :

"Either party to an action has a right to take out a summons that the opposite party shall make an affidavit of documents : When the affidavit has been sworn, if from the affidavit itself, or from the documents therein referred to, or from an admission in the pleadings of the party from whom discovery is sought, the master or judge is of opinion that the affidavit is insufficient, he ought to make an order for a further affidavit; but except in cases of this description no right to a further affidavit exists in favour of the party seeking production. It cannot be shewn by a contentious affidavit that the affidavit of documents is insufficient. This was the practice observed in the Court of Chancery, and the orders and rules under the Judicature Acts were made in imitation of it. It may be urged that a party seeking production may be injured by the wrongful withholding of the document, and that an affidavit in contradiction ought to be admitted under supervision. But this mode of proceeding cannot be allowed : the affidavit of documents must be accepted as conclusive. Another remedy, however, may be used by the party seeking production. He can administer interrogatories; and interrogatories properly framed may force a person to disclose what documents he has in his possession, and the party requiring the production will thereby avoid committing any breach of the practice as to affidavits of documents."

8. The rule and the passage of Brett LT were considered and adopted by Kaplan J. in John Baptist Wu v. Tsoi Kay & Anor. (unreported) HCA 4983/1987. In the latter case, Kaplau J. set aside an order of the master directing for cross-examination of the deponent of an affidavit made pursuant to Order 24, rule 7.

9. As to when a party is regarded as having a document in his "power", it was held in Lonrho Ltd v. Shell Petroleum [1980] 1WLR 627 that a document is within a person's power if he has a presently enforceable legal right to obtain inspection of the documents from these companies or from whoever actually holding them without the need to obtain the consent of anyone else.

10. In the context of corporate documents, normally dominance in the running of a company's business does not necessarily mean that the person has the requisite degree of control so that he can access the corporate documents without obtaining the consent of anyone else: Innovisions Ltd v. Chan Sing Chuk & Ors at p.354. On the other hand, if the company is the alter ego of such a person so that he has unfettered control of the company's affairs, he may be regarded as having power over the documents in the possession of the company: B v. B [1978] Fam. 18. Each case, however, must depend upon its own facts.

11. Having stated the applicable principles, I now turn to look at the applications.

The petitioners' application

12. Broadly speaking, the documents sought by the petitioners fall into two categories:

(1) Documents relating to the Guernsey Companies involved in the "Interstitial Scheme", namely, Mount Eden Land Limited ("MEL"), Mount Cook Land Limited ("MCL") and Interstitial Holdings Limited ("Interstitial"), and

(2) Documents relating to the Rights Issue exercise in October 1998.

13. The relevance of these documents to these proceedings is not disputed. What the 1st respondent has done to meet the application is to file an affidavit and also served a supplementary list of documents consisting of 703 documents on 29 June 2001. In this 10th affidavit, the 1st respondent exhibited also a Schedule of Replies to the request for specific discovery. Essentially, the 1st respondent says that he has, with the supplemental list, made full discovery with respect to the Interstitial Scheme and the Rights Issue exercise. In relation to the documents concerning the Guernsey companies involved in the Interstitial Scheme, the 1st respondent's replies are that he is not a shareholder of MEL and MCL and that after his resignation as director of these companies on 27 January 2001, he no longer has entitlement to access the documents of these companies, and he does not now have them or copies of them in his possession, custody or power. As for some of the other documentation on the loans and acquisition of properties and the accounts of these companies, and the documentation of the Guernsey registered trust companies holding the ordinary shares in Interstitial, the 1st respondent says that they are the documents of these companies and he has no entitlement over them.

14. The petitioners do not accept the 1st respondent's assertions that it is not within his power to access the documents of the offshore companies involved in the Interstitial Scheme. The petitioners point to the fact that the 1st respondent's resignations as directors were made just two weeks after the petitioners made requests for discovery of documents. It is submitted that the resignations are mere attempts to thwart their effort to seek discovery from him. The petitioners also refer to the various affidavits filed in these proceedings to show that the 1st respondent is both the "originator or promoter" and the person in control of the Interstitial Scheme. In particular, the petitioners point out that the 1st respondent had stated in his 1st affidavit that he is able to control the board of Interstitial, a statement which he subsequently sought to correct on oath.

15. For the 1st respondent, it is argued that given the replies to the requests as verified in the 10th affidavit, there has been a sufficient compliance with the relief sought in the petitioners' summons such that there is no room for an order under Order 24, rule 7.

16. It is a permissible way of dealing with an Order 24, rule 7 application to file an affidavit in answer such as the 1st respondent's 10th affidavit, although the usual practice is to argue the matter without an affidavit: Hong Kong Civil Procedure 2001, para.24/7/1. At this interlocutory stage, the 1st respondent's 10th affidavit will be conclusive as to whether or not he has or has had any of the documents specified in the schedule to the petitioners' summons, other than those already disclosed, unless it is shown to be insufficient by its content or by admissions made in these proceedings. In such a case, a further affidavit may be ordered.

17. The 1st respondent says that he is neither a shareholder nor a director of Interstitial, MEL and MCL. I accept that it does not necessarily follow from this that the 1st respondent has no power to access the documents of these companies or that the documents sought are not within his power. It depends on whether it can be said that the affairs of these companies are controlled by the 1st respondent to the extent that the companies can be regarded as his alter ego.

18. In the case of Interstitial, the 1st respondent had stated in his 1st affidavit that "Interstitial is owned by entities in which members of my family and I are interested", and that "the Company and I are able to control the board of Interstitial." On the strength of this, it would appear that the documents of Interstitial are within his power. However, in his 5th affidavit filed on 25 September 2000, the 1st respondent stated that "this statement was not completely correct", that by January 1994, he had already disposed of his entire interest in Interstitial and he had also ceased to be a director as from 17 January 1994. He had, therefore, stated on oath that he no longer controls the board of Interstitial. As for MEL and MCL, the evidence filed in these proceedings shows that the 1st respondent was a director of the companies at their incorporations in 1993 and 1998. The 1st respondent has, however, stated both in his 9th and 10th affidavits that he ceases to be a director of the two companies after 2 January 2001. On the other hand, there are other parts of the 1st respondent's previous affidavits which suggest that his family is beneficially interested in the Interstitial Scheme and the companies involved in it.

19. I have no difficulty agreeing with the submission that the 1st respondent's current assertion that he has no control over Interstitial, MEL and MCL, and that he is unable to access their documents does not sit well with some of his assertions made in the affidavits hitherto filed. I can also see the force of the comment on the timing of the 1st respondent's resignations as directors, that it came just two weeks after the petitioners' request for discovery. But it must be borne in mind that in considering whether the 10th affidavit is insufficient having regard to the other affidavits filed so far, this court is not conducting a mini-trial on the affidavits. The court must also not lose sight of the fact that the issues of whether there is a failure to make full disclosure and of whether the 1st respondent is the person in control of Interstitial, MEL and MCL are not only issues at this interlocutory stage, but are also part of the complaints on which the petition is based. The court should, therefore, refrain from making any interlocutory finding which may or may be seen to pre-judge these issues. The court should not conclude that the 1st respondent was untruthful and that these companies are indeed his alter ego by just comparing the affidavits and before the evidence may be completed.

20. Therefore, notwithstanding the submissions made by Mr Fung SC and his observations on the apparent contradictions between the 1st respondent's assertions in the 10th affidavit and his earlier affidavits, I am not prepared to conclude that 1st respondent's 10th affidavit is insufficient to answer the petitioners' Order 24, rule 7 application. Accordingly, the petitioners' summons is dismissed.

The 1st respondent's applications

21. The documents of which specific discovery is sought from the petitioners can be categorized into eight groups, namely,

(1) Documents relating to the formation of the Company (Item 1 of the 1st summons)

(2) Documents relating to the business of the Company (Items 2 - 4 of the 1st summons) and (the Schedule to the 2nd summons)

(3) Documents relating to an investigation by the ICAC against the Company in about 1984 or 1985 (Items 5 - 8 of the 1st summons)

(4) Documents relating to the resignations of T.Y. Lee and C.C. Lee as directors of the Company (Items 9 - 12 of the 1st summons)

(5) Documents relating to the 1995 Blue Pool Road Settlement (Items 13 - 17 of the 1st summons)

(6) Documents relating to the Rights Issue (Items 18 - 23 of the 1st summons)

(7) Documents relating to the communication passing between the 1st respondent and the petitioners, particularly the 1st petitioner, on the entreaties to the 1st respondent on resolving the differences between him and other family members (item 24 of the 1st summons)

(8) Documents relating to the communications between the C.C. Lee branch of the Company and its advisers on the loan made by the Company to Wyatt Estates Limited (Schedule to the 2nd summons).

22. Save in relation to a few of the items that are directed to some of the petitioners only, the discovery is sought against all the petitioners.

23. The petitioners dispute the relevance of items 16, 20 and 21 of the 1st summons. Item 16 concerns the financial position of the shareholders of Greenhill Enterprises Limited ("Greenhill") and the sources of income and liabilities of the 8th to 11th, 13th and 14th petitioners in the period between November 1989 and September 1995. Items 20 and 21 relate to the tax liabilities of the 1st to 4th petitioners in USA arising from the payment of the Special Dividend in 1998. Items 20 and 21 are further objected to on the basis that the discovery sought is unnecessary and oppressive.

24. The petitioners also dispute the existence of such classes of documents as notes, records and memoranda of meetings and discussions. For documents relating to the formation of the Company, the petitioners say that no prima facie case has been made out as to possession, custody or power. With respect to item 19 of the 1st summons, the petitioners say that it is privileged.

25. Similar to what the 1st respondent had done in the petitioners' application, the 1st and 8th petitioners had also filed affidavits deposing that the 1st to 6th , 8th to 14th petitioners had made full discovery of the relevant documents. Mr Lee Hon Fai, one of the executors of the estate of C.C Lee and one of the 7th petitioners, had also filed an affidavit to the effect that the executors have recently come into possession some old papers of C.C. Lee, who died last year, and that further disclosure will be made. On this basis, Mr Coleman indicated that the 1st respondent would be prepared to adjourn the applications in so far as they relate to the 7th petitioner. I agree that this is a prudent course to take and I shall deal with the 1st respondent's applications on that basis.

26. Item 16 arises out of paragraphs 50 to 58 of the 3rd affirmation of C.C. Lee made herein before his death. The paragraphs refer to an oral agreement for the demolition of the building on Nos.5 and 7, Blue Pool Road and partition of the land. There, C.C. Lee stated that the 1st respondent's failure to honour the agreement resulted in considerable hardship to some members of Greenhill, who depended on dividend incomes for their living. Since the building had been left vacant attracting no income since 1989, it was said that "the situation for shareholders of Greenhill was very grim" by 1995 and that "they had been starved of income from Greenhill for over six years." Under item 16, the 1st respondent seeks discovery of documents relating to the financial position and the sources of income and liabilities of the shareholders of Greenhill for the years between 1989 and 1995.

27. In my view, the expressions used in C.C. Lee's 3rd affirmation may have been exaggerating. However, reading the several paragraphs therein, the point that was made is simply that for some shareholders who depended indirectly on the rental income received by Greenhill, the non-availability of such income in the years after 1989 had brought hardship to them. This aspect of the case has been made clear by the 5th affidavit of Lee Chai Kwong. What is in issue is not so much the financial position or means of the shareholders of Greenhill, but rather whether it is prejudicial conduct by not demolishing the building and partitioning the land resulting in no rental income for Greenhill, which in return, affects the dividend incomes of its shareholders. The discovery sought is therefore not relevant to the matters in issue. At any rate, the disclosure of the audited accounts of Greenhill and its rental income for the relevant period are sufficient to deal with the matter. Further discovery is not necessary.

28. As to items 20 and 21, they arise out of paragraph 3 of the 2nd affidavit of T.Y. Lee, which stated that the 1st respondent was aware that the 1st to 4th petitioners, being residents of the USA, were liable to pay tax on the amount of Special Dividend received. The points made are that, firstly, the 1st respondent himself was not subject to such tax liability and, secondly, he knew that the 1st to 4th petitioners were not in a position to apply the full amount of the Special Dividend to subscribe for the Rights Issue. In the 3rd affidavit of Eleanor Sin Chee Lam filed in support of the discovery application, the request for items 20 and 21 is justified on the basis that the tax liabilities of the petitioners in the USA is in issue. Mr Coleman in his submissions explained the relevance on the basis that the petition has averred that the petitioners were precluded from taking up the Open Offer to subscribe for the 8126 new Ordinary Shares of the Company by reason of their financial position.

29. I accept that the tax liability on the Special Dividends is prima facie relevant as to whether the 1st to 4th petitioners could have made use of the entire amount of the Special Dividends to subscribe for the new shares. But the 1st to 4th petitioners had made discovery of the US tax advice they received from Casner & Edwards which confirms such liability. The correctness of the tax advice is not disputed. Although the tax advice indicates that the precise extent of tax liability varies, depending on the individual's filing status and other tax position, that does not put the extent of the tax liability of the 1st to 4th petitioners in issue. What is relevant is their tax liability, and not the extent of such liability. The discovery sought is further unnecessary for determining the issue as to whether the petitioners could have applied the Special Dividends to subscribe for new shares or whether they were financially constrained and could not take up the Open Offer.

30. Turning to item 19, it concerns communications passing between the petitioners and/or their advisers on the Special Dividends and the Rights Issue. The petitioners had disclosed a report on the valuation of the shares of the Company as at October 1998. The petitioners object to the disclosure of communications between them and their legal advisers on the basis that they were connected with and in contemplation of legal proceedings to be instituted against the Company and/or its directors' and are therefore privilege. T.Y. Lee has confirmed this in his 5th affidavit and his assertion is conclusive on an Order 24, rule 7 application.

31. I turn then to the requests for attendance notes, memoranda and records of various meetings and discussions. I do not consider that the 1st respondent has made out a prima facie case that such documents exist. It is apparent from the 3rd and 10th affidavits of Eleanor Sin Chee Lam in support of the applications that the belief as to existence of such documents is largely premised upon the 1st respondent's own habit of writing up attendance notes and memoranda. Such habit of the 1st respondent and the fact that he is very meticulous have been commented upon by Le Pichon J (as she then was) in HCCW 275/98 and HCCW 467/98. There is no evidence that the petitioners are meticulous persons like the 1st respondent. Nor is there evidence to show that the petitioners share the habit of taking notes, writing attendance notes and records and making out memoranda of meetings and discussions, whether formal or purely personal ones. In my view, the belief as to the existence of such documents held in the supporting affidavits have no proper basis and are no more than conjectures and speculations.

32. As for documents relating to the formation of the Company, it was said in the 3rd affidavit of Eleanor Sin Chee Lam that the 1st respondent believed that other than the documents that were kept by the Company, there were further relevant documents held by M.W. Lee and C.C. Lee, hence their executors. Apart from pointing out that M.W. Lee had spent considerable time deliberating over the Memorandum and Articles of Association of the Company, the basis for such belief was not in any way substantiated. It has not been made out that the petitioners have these documents in their possession, custody or power.

33. Finally, as to the remaining items, the affidavits made by T.Y. Lee and Lee Chai Kwong make it plain that full discovery had been made. At this interlocutory stage, the affidavits are conclusive. For the 1st respondent, it has been argued that not every petitioner has gone on oath to depose that full discovery had been made, and that the number of documents disclosed by the petitioners thus far is much less than that disclosed by the 1st respondent. I am unable to agree with the submission that each of the 14 petitioners should file a list of document and be required to make an affidavit as to documents. In my view, a collective list of documents suffices. On the strength of the affidavits made by T.Y. Lee and Lee Chai Kwong, I also see no necessity to require each petitioner to make an affidavit to depose to or to verify the positions stated in T.Y. Lee and Lee Chai Kwong's affidavits.

34. In short, I do not accept that the affidavits filed in answer to the applications to be insufficient so that an order under Order 24, rule 7 is required. For these reasons, the 1st respondent's summonses, save in relation to the 7th petitioner, are dismissed.

Conclusion

35. In the premises, the petitioners' summons and the 1st respondent's summonses, save in relation to the 7th petitioner, are dismissed. The 1st respondent's summonses, as against the 7th petitioner are adjourned sine dine with liberty to restore. I do not consider that any of the summonses was issued improperly, although requests on some items of documents could not be justified. An order under the summons was rendered unnecessary as a result of the affidavits filed by the opposing parties. I therefore consider that an appropriate costs order is for the costs to be in the cause. Accordingly, there will be an order nisi that the costs of and incidental to the summonses be in the cause, save that as between the 1st respondent and the 7th petitioner, the costs of the 1st respondent's summonses is reserved.