COMMERZBANK AKTIENGESELLSCHAFT v. PEREGRINE FIXED INCOME LTD.

CACV 875/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 875 OF 2001

(ON APPEAL FROM HCA 8033 OF 1998)

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J U D G M E N T

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Hon Mayo VP (giving the judgment of the Court):

1. This is an appeal from a decision of Deputy High Court Judge Woolley. He was hearing an application for directions in relation to two subpoenas which had been issued by the plaintiff. His order was simply to set aside the subpoena dated 20 February 2001.

2. So far as the first subpoena was concerned the parties were able to strike an agreement in respect of it and the terms of the agreement were reduced into a consent order which was duly made an order of the court. However even in respect of this order there were problems concerning the construction of the order and the Judge was requested to give directions thereon. The Judge did not do so in a manner which accorded with the satisfaction of the plaintiff. The present appeal relates to both the consent order and the second subpoena and is pursued by the plaintiff.

3. For an understanding of this appeal it is necessary to consider very shortly the nature of this litigation.

4. The plaintiff's claim is made pursuant to an agreement dated 8 January 1998 which was concluded with the defendant which is a subsidiary company of Peregrine Investment Holdings Ltd ("PIHL"). By the agreement the parties concluded a foreign exchange swap transaction whereby the plaintiff would sell to the defendant for value on 9 January 1998 a sum of DM73,226,599.97 at a price payable by the defendant of US$40,117,130.13.

5. The plaintiff remitted the moneys payable by them to the defendant's account with the Deutsche Bank in Frankfurt on 9 January. The defendant failed to effect payment of the amount payable by it to the plaintiff's account in New York.

6. At the relevant time the Peregrine Group of companies were conducting a series of negotiations with various banks and finance houses in an attempt to continue trading.

7. These negotiations were unavailing. On 9 January 1998 the Securities and Futures Commission issued notices pursuant to sections 39 and 40 of the Securities and Futures Commission Ordinance Cap. 24 to companies in the Peregrine Group.

8. The claim which is being made by the plaintiff is that having regard to the overall situation the legal position was that the defendant was a constructive trustee of the plaintiff when they received the moneys earlier referred to.

9. It will be appreciated from this very brief summary of a complex situation that it is a matter of critical importance in this litigation to be able to determine exactly what transpired during 8 and 9 January 1999 and the extent (if any) to which the directors of the defendant were aware that at the time when the funds were received that the defendant was insolvent.

10. It is perhaps true to say that the main problem which has arisen in connection with these subpoenas is the fact that PIHL or more accurately the liquidators of the company hold many of the documents which are relevant to these proceedings.

11. A further point which has arisen is that a number of the liquidators of PIHL including Mr Hague the recipient of the subpoenas are also liquidators of the defendant. During the course of the proceedings reference was made to the different "hats" being held by Mr Hague and what almost amounts to a dual personality.

12. This has led to numerous difficulties as the documents of the defendant and PIHL are physically being held in most cases in the same premises.

13. It is also the case that the documentation of the whole group is voluminous. Reference has been made to 30,000 box files. However many of the documents have been made the subject of rationalization by the utilization of computers.

14. What amounts to a most helpful starting point is that the consent order appears to accept and acknowledge that the plaintiff is entitled to have access to PIHL's documents.

15. This is not surprising as it is clearly the case that an independent party is required to produce documents if a subpoena is served on the person holding them. While it is true to state that the production of documents by a third party is less onerous than the obligations which have to be assumed by a party to litigation making discovery the principles relating to production are clearly set out in the relevant cases on the subject.

16. At the hearing before us the parties had encountered something of an impasse in connection with the implementation of the terms of the consent order.

17. After a series of exchanges Mr Harris for the defendant was able to obtain instructions that his clients were prepared to make available the relevant documents in their possession. However Mr Harris pointed out that no useful purpose would be achieved by producing the defendant's documents which had already been the subject of the discovery exercise. Mr Potts QC for the plaintiff agreed with this.

18. Even with this concession there are still difficulties. Mr Harris contended that as the subpoena had been addressed to Mr Hague in his capacity as liquidator of PHIL he need only concern himself with the defendant's documents which happen to be in the files of PHIL. He suggested that Mr Hague was not obliged to look into the defendant's files for the relevant documents under the terms of the consent order. We do not think that this is realistic in the circumstances of this case. In our view where the subpoena refers to the defendant's documents the reference is all embracing subject to the concession made by Mr Potts that the subpoena should not be deemed to extend to the defendant's documents which had already been the subject of the discovery.

19. There have been further problems. There seems to be a dispute over what documents have already been produced. However all of this would appear to be outside the four corners of the subject matter of this appeal. The principle of the matter is that subject to the reservation concerning documents already the subject of discovery the consent order must be complied with as above indicated.

20. That then leaves the question of the second subpoena.

21. Mr Potts informed us that the plaintiff was abandoning its claim in respect of some of the documents requested. Particulars of these have been noted by the parties and it is not necessary for us to specify them here.

22. What does however have to be considered are the objections which have been made by Mr Harris.

23. As earlier stated the law on this subject is fairly clear. There is a particularly helpful commentary in the judgment of Nicholls V.C. in Panayiotou and Others v Sony Music Entertainment (U.K.) Ltd. [1994] Ch 142.

24. One of the more controversial issues between the parties is the extent to which it is necessary to particularize the documents which have to be produced.

25. The passage at p. 153 of Nicholls V.C.'s judgment is of some assistance in this connection:

"The documents sought

I approach this application, therefore, on the footing that the plaintiffs are not entitled to seek what is in substance discovery. The letter of request must be confined to particular documents, although these may be described compendiously, as with the letters in Lee v Angas, L.R. 2 Eq. 59, 63.

I preface consideration of the documents sought by noting that particularity of identification or description is a matter of degree. The description used, moreover, may be important in another way: it may throw light on the purpose for which the documents in question are sought. The court should be astute to see that what is essentially a discovery exercise, whereby the applicant is seeking production of documents with a view to ascertaining whether they may be useful rather than with a view to adducing them in evidence as proof of some fact, is not disguised as an application to produce particular documents. Where an applicant has not seen the documents sought and does not know what they contain, the application can the more readily be characterized as a discovery exercise. Further, to be the subject of a letter of request a document must be admissible in evidence; it must be directly material to an issue in the action; and the court must be satisfied the document does exist or did exist, and that it is likely to be in the possession of the person from whom production is being sought. Actual documents are to be contrasted with conjectural documents, which may or may not exist: see Lord Fraser in the Asbestos case [1985] 1 W.L.R. 331, 338."

It would appear from this passage that in many situations a compendious description of the documents required is permissible.

26. Mr Harris' answer to this was that the classes of document referred to in the second subpoena were far too wide and in effect amounted to an order for discovery in disguise. He placed particular reliance upon the case of To Kan Chi & Ors v Pui Man Yau & Ors [1998] 3 HKC 371 where both the Court of Appeal and the Court of Final Appeal appear to have adopted a much more restrictive approach to the problem.

27. With respect we consider that very limited assistance can be derived from this case on account of the fact that the subpoena in that case required the production of a number of Government files when there was little indication as to the contents of the documents in the files. Not surprisingly both the Court of Appeal and the Court of Final Appeal held that the subpoena should be set aside.

28. The main distinction between the requests made for documents in the respective subpoenas is that the documents required in the second subpoena relate to a more extended period of time namely from 1 September 1997 to 15 January 1998.

29. Mr Harris submitted that there was no justification for producing documents relating to this period. We do not think that this is right. Mr Potts drew our attention to affidavit evidence from his instructing solicitor which clearly indicated that the Peregrine Group were indeed experiencing critical financial difficulties at this time and that the documents which were being requested would undoubtedly shed light on the issues which would be before the court.

30. However Mr Harris also drew attention to the very considerable practical difficulties which would be encountered if the subpoena was allowed to remain in its present form. There were 7,500 files containing documents which may come within the ambit of the subpoena. Just the physical problems relating to producing the documents in court would be considerable to say nothing of the amount of time which would need to be taken to comply with the order.

31. Mr Potts did not provide any compelling reason why it was necessary for the period of time to extend back to the beginning of September. We are of the view that if the subpoena were to be blue-penciled and the date was to be brought forward to 1 December 1997 there would still be sufficient material for the court to be able to ventilate the main issues arising in this litigation. Such a modification would also substantially reduce the burden imposed upon Mr Hague. In our view such an amendment should be made.

32. So far as the overall appeal is concerned we are satisfied that what is required is a balancing exercise. The main question which has to be determined is whether the production of the documents referred to in the second subpoena as amended is necessary in the interests of justice to resolve the disputes between the parties. We think that it is essential that the court has before it the relevant documentation which will enable it to resolve the central issue which is the state of mind of the directors of the defendant at the relevant time. We are also of the view that the compendious description of the documents meets the tests outlined by Nicholls V.C. and that it cannot validly be contended that the plaintiff has embarked upon anything which could be characterized as a "fishing expedition".

33. In our view this appeal should be allowed. The directions earlier referred to in this judgment should be given in relation to the consent order and the second subpoena should be reinstated in the amended form we have indicated. As the plaintiff has substantially succeeded on this appeal we consider that an order nisi should be made for them to have the costs of this appeal and the costs before the Judge.