ASIALAND LTD AND ANOTHER v. LAM YIU CHO AND OTHERS

HCA 1944/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1944 OF 2005

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BETWEEN

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(By Original Action)

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(By Counterclaim)

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J U D G M E N T

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1.  This action concerns the purchase of shares in a pharmaceutical company, as to give total ownership to those in control of the purchaser.  The 2^nd plaintiff (Advance Pharmaceutical) is that company.  The 1^st plaintiff (Asialand) is the purchaser.  The defendants variously are or were owners of the shares being bought and sold, or owned and controlled the shareholders.

2.  Most of the sales were completed forthwith on the date the parties committed themselves, being 17 September 2002.  The sale of the remaining shares, being parcels held by the 1^st and 2^nd defendants, were by agreement deferred for three years; completion for this part of the sale was scheduled for 16 September 2005.

3.  But there has been no completion.  By this time Asialand through its owners had formed the view that Asialand and Advance Pharmaceutical were the victims of fraudulent or reckless misrepresentation by the former shareholders of Advance Pharmaceutical.  This caused them to be paid prior to the sale of the shares more than their proper entitlement in dividends, and inflated the purchase price to a higher figure than Asialand would have otherwise paid.

4.  Advance Pharmaceutical sues to recover the overpaid dividends and interest; Asialand sues in damages for the overpaid purchase price.  As against the 1^st and 2^nd defendants it seeks a declaration that it be entitled to set-off the loss against the purchase price of the shares still to be transferred; alternatively damages.

5.  The writ having issued in October 2005, only the 1^st and 2^nd defendants have been served.  They have filed a defence refuting the allegations of fraudulent misrepresentation and any liability, and counterclaim (inter alia) for specific performance against Asialand in respect of the overdue remaining transaction.

6.  There are two matters before me, both brought by the 1^st and 2^nd defendants. 

7.  The first is for specific discovery of certain documents.  By the date of this hearing the plaintiffs had volunteered all but one set of the documents called for; that matter remains at large, as does the issue of costs.

8.  The second matter is by way of summons an application to strike out certain claims in the statement of claim upon the grounds that they are scandalous, frivolous or vexatious, or may prejudice, embarrass or delay a fair trial, or are an abuse of process.  Those claims which offend are those in which the 1^st and 2^nd defendants:

(a)     are alleged to have fraudulently or recklessly made misrepresentations to Asialand said to have been relied upon by it in committing to the purchase of the shares, which allegations are not adequately or properly supported by particulars;

(b)    are said to be liable for loss suffered by Asialand in respect of those agreements for the sale and purchase of shares in which they were not parties;

(c)     are liable by set-off for losses which include those arising from the sale and purchase of shares in which they were not parties.

9.  Consequential upon this application being granted, the 1^st and 2^nd defendants seek summarily an order for specific performance in respect of the yet to be completed sale and purchase of the remaining shares in Advance Pharmaceutical.

Background

10.  Advance Pharmaceutical was up to 16 July 2001 (the first material date) owned and run by members of three families.  The paid up capital was $3 million divided into 3,000 $1,000 shares.  The 1^st defendant (Mr Lam) and his wholly owned company the 2^nd defendant (New Rainbow) together held 1,000 shares.  The 3^rd defendant (Mr Lee) and his wholly owned company the 4^th defendant (Vigor) together held 1,000 shares.  Brothers Chang Iok Meng and Chang Iok Wai (the 5^th and 6^th defendants) together owned the 7^th defendant (Master Sum) which held 1,000 shares.

11.  The directors comprised Mr Lam who was chairman, Mr Lee and the brothers Chang.  Also on the board were Mr Lam’s son, Michael Lam and Mr Lee’s daughter, Karen Lee.

12.  Prior to the 1^st material date, the three groups of shareholders resolved to introduce into the enterprise two businessmen called Ting Siu Yin and Cheng Chi Heng.  This was achieved by each group selling 4% of Advance Pharmaceutical to a company wholly owned by Messrs Ting and Cheng called Koon Hay Development Limited.  The total consideration was $21.6 million.

13.  This was by agreement (one agreement only, involving all parties) of the 1^st material date.  It provided for appointment to the board of Messrs Ting and Cheng.  It is said both thereafter played active roles in the management of Advance Pharmaceutical, although only Mr Ting joined the board.

14.  Following completion of the share transfers the shareholding of Advance Pharmaceutical was as follows:

Mr Lam	-  580 shares
New Rainbow	-  300 shares (together 29.33%)
Mr Lee	-  580 shares
Vigor	-  300 shares (together 29.33%)
Master Sum	-  880 shares (29.33%)
Koon Hay	-  360 shares (12%)

15.  The next development began in the lead up to 17 September 2002 (the 2^nd material date).

16.  It came to be agreed that the original shareholders of the Advance Pharmaceutical would dispose of their remaining shares to Messrs Ting and Cheng and thereby give up their interests in Advance Pharmaceutical.

17.  The first step, undertaken on the 2^nd material date, was to increase the capital by allotting 39,100 new shares of $1,000 each to the existing shareholders on a pro rata basis.  The original shareholders paid for these by set-off from shareholders’ loans due to them by Advance Pharmaceutical.

18.  Thus the shareholding of Advance Pharmaceutical was as follows:

Mr Lam	-  6,650 shares
New Rainbow	-  5,699 shares (together 29.33%)
Mr Lee	-  6,580 shares
Vigor	-  5,769 shares (together 29.33%)
Master Sum	-  12,350 shares (29.33%)
Koon Hay	-  5,052 shares (12%)

19.  On the same day each set of original shareholders entered into three separate agreements to sell all of their shares to the vehicle of choice of Messrs Ting and Cheng, Asialand. 

20.  The 2^nd Agreement, entered into by Mr Lee and Vigor as vendors, was for the sale of all their shares for the consideration of $47 million with immediate completion.  Thus the shares were transferred forthwith and the full purchase price was paid forthwith.  Mr Lee and his daughter Karen resigned from the board.

21.  The 3^rd Agreement entered into by Master Sum as vendor was on the same terms, and completion was immediate.  The brothers Chang resigned also. 

22.  The 1^st Agreement from Mr Lam and New Rainbow was structured differently.  By its terms their joint shareholding was to be transferred in two tranches.  Shares representing 14.33% of the company, that is 4,545 owned by Mr Lam and 1,489 by New Rainbow (in all 6,034 shares) were transferred and paid for forthwith at a total consideration of $32 million.  The remaining shares, that is 2,105 of Mr Lam and 4,210 of New Rainbow, were to be transferred at a further consideration of $33.5 million with completion on or by three years’ hence; that is, 16 September 2005.

23.  The 1^st Agreement provided further for the immediate retirement from the board of Michael Lam, but for Mr Lam’s appointment as chairman for the further three years, thence for him to resign.

The 1^st Agreement

24.  Given the allegations of fraudulent or reckless misrepresentation Mr Lam and New Rainbow now face, it is appropriate to examine some of the terms of their agreement with Asialand.  The following are pertinent:

“3.  WARRANTIES AND UNDERTAKINGS

3.1  Each Seller Party warrants to the Buyer that each event set forth in Appendix II, III and IV are true and correct as of today.

3.2  The Buyer represents that in executing this Agreement, he does not rely and has not relied upon any warranty or undertaking previously made by the Seller other than those expressly set forth or referred to herein.”

Appendix II set out the capital, shareholding and board of directors of Advance Pharmaceutical and particulars of its subsidiaries.

Appendix III, headed “warranties and undertakings”, incorporated a number of these given by the vendors concerning Advance Pharmaceutical and its subsidiaries.  Only one is pertinent, under the sub-heading “Management of Business etc”:

“3.2     Document ‘A’ attached to this Appendix is the unaudited financial report (Unaudited Management Accounts) of AP up to 31^st March 2002.”

Appendix IV dealt with remuneration of directors and is not relevant.

“6.  SELLERS’ OBLIGATIONS

6.1     The Buyer declares that the Seller has prior to this Agreement invited the Buyer to examine all books of account and records of the Companies made until the date hereof.

6.2      Prior to this Agreement, the Buyer has under the Seller’s consent examined all books of account, assets, invoices, list of employees, payroll slips, operation records, purchase orders, stock, finished products, liabilities, contracts, bank accounts, memorandums and all relevant documents (hereinafter referred to as ‘the said Documents’) of the Companies and the Buyer is satisfied with and has agreed to the said Documents and records before signing this Agreement.  Unless otherwise expressly stated hereof, the Buyer agrees and warrants that after signing this Agreement the Buyer and the Companies will not assert against the Seller or other current or former shareholders, current or former directors, current or former company secretaries of the Companies (hereinafter referred to as ‘the said Personnel’) any claims resulting from any problems in the said Documents and records, or asset against the said Personnel any personal claims in relation to any loss of the Companies (if any) before signing of this Agreement, and the Buyer will not assert against the Seller any claims notwithstanding the discovery of any payment or other benefits not disclosed in the books of account, current or at the time, of the Companies, received by the Seller or the Personnel during their term of office as the shareholders or directors or company secretaries of the Companies prior to 19^th July 2001, and the said payment or benefits (if any) will be treated as reward given by the Companies to them.  This clause shall still be effective after the transaction is completed.” (The emphasis is mine, for ease of reference)

…

6.4     There are no warranties and undertakings made by the Seller to the Buyer other than those expressly set forth or referred to herein.

…

9.    GUARANTEE AND UNDERTAKINGS OF LAM YIU CHO

9.1     Lam Yiu Cho unconditionally guarantees that New Rainbow Overseas Inc. will comply with all terms of this Agreement.  If there is any breach, Lam Yiu Cho and New Rainbow Overseas Inc. shall be jointly or severally liable for all consequences and losses of the Buyer.  Lam Yiu Cho’s obligation will not be affected by any time, indulgence, extension, or renunciation of rights, or consent, modification, waiver of obligation given by the Buyer to New Rainbow Overseas Inc.

…

12.  OTHER TERMS

12.1   After the completion of the 1^st Sale Shares, Buyer shall procure and warrant:

(a)   Koon Hay will execute a termination agreement with Lam Yiu Cho, specifying that the Contract signed between Koon Hay and Lam Yiu Cho and others dated 19^th July 2001 (‘the said Contract’) shall as of today terminate and be of no effect immediately, Koon Hay and Lam Yiu Cho shall also from today not pursue or claim against the other party for breach of the said Contract, both parties shall not be under any obligation to execute all terms of the said Agreement hereafter, save that the transfer and sale and purchase of shares already carried out shall not be affected by this Clause;

…

12.2   After the completion of the 1^st Sale Shares, Buyer will also procure and warrant that the director Mr Ting Siu Yin Patrick will immediately withdraw his action brought at the Hong Kong High Court action number HCMP 1852/2002 against the Seller and all parties to the said action shall not be required to pay any costs.”

25.  With these terms and conditions to be borne in mind, I now come to Asialand’s allegations of fraud as pleaded.

The Allegations of Fraud

26.  These are pleaded in this way:

“March 2001 Entries

30.    Unbeknown to Asialand, Ting or Cheng, certain amounts stated in the 2001 Accounts and the 2002 Management Accounts were false as a result of the following false entries procured or caused by Lam to be made in the books of account of Advance Pharmaceutical on or about 31 March 2001 (‘March 2001 Entries’):

‘Account name	Debit (HK$)	Credit (HK$)
Account Receivable	3,560,227.00
Promotion expenses-Macau	300,000.00
Sales		3,260.227.00
	____________	____________
Being backpay by King Wai Hong 7/99 to 3/01.’

31.    At no material time did Advance Pharmaceutical enter into any transactions which would result in its account receivable, promotion expenses or sales turnover to be debited and credited in the manner pleaded in the preceding paragraph.  King Wai Hong has since confirmed that Advance Pharmaceutical had not made the alleged sale to it, whether on 31 March 2001 or at all.”

27.  It is Asialand’s pleaded case and as advanced by Mr Tang in his affidavit in opposition to the strike out application that the purchase price to be paid by Asialand for the 88% shares in Advance Pharmaceutical bought and sold under the 1^st, 2^nd and 3^rd Agreements was determined by the accounts, audited and otherwise, for the year ending March 31 2001, the four months ending July 31 2001, and the year ending March 2002. 

28.  It is so pleaded thus:

“19.   The purchase price of the 37,048 shares was agreed between the parties based on the profit before tax of Advance Pharmaceutical stated in the following financial statements:

(1)     the audited accounts of Advance Pharmaceutical for the year ended 31 March 2001 (‘2001 Accounts’);

(2)     the audited accounts of Advance Pharmaceutical for the period from 1 April 2001 to 31 July 2001 (‘July 2001 Accounts’); and

(3)     the unaudited management accounts for the year ended 31 March 2002 in which the results of the 2001 Accounts and the July 2001 Accounts were incorporated (‘2002 Management Accounts’).”

29.  It is pertinent to note however that when further particulars of the so-called ‘agreement’ referred to in the first line of paragraph 19 were sought, the response was to refer to the terms of the 1^st, 2^nd and 3^rd Agreements, thus:

“The request is misconceived.  As pleaded in paragraph 19 of the Statement of Claim, the purchase price under the 1^st Agreement, 2^nd Agreement and 3^rd Agreement was agreed between the parties based on the profit before tax of Advance Pharmaceutical as stated in the 2001 Accounts, July 2001 Accounts and 2002 Management Accounts.”

30.  But none of the 1^st, 2^nd or 3^rd Agreements include reference to the purchase price having been assessed upon the profit before tax as determined by the accounts.  Further, the only accounts exhibited were the management accounts for 2002, not the audited accounts for the previous year, or the audited accounts to 31 July 2001.

31.  This is significant, because it is further pleaded at paragraph 21 of the statement of claim that all of the vendors under the 1^st, 2^nd and 3^rd Agreements “represented to Asialand that the accounts stated in the 2001 Accounts, the July 2001 Accounts and hence the 2002 Management Accounts were true and accurate”.

32.  In his affidavit, Mr Ting deposed:

“14.     Lam, New Rainbow, Lee, Vigor Overseas, Chang Iok Meng, Chang Iok Wai and Master Sum and each of them, has represented to Asialand that the amounts stated in the 2001 Accounts, the July 2001 accounts and hence the 2002 Management Accounts were true and correct.

15.    Relying on the Representations as stated in paragraph 21 of the Statement of Claim, Asialand has entered into the 1^st Agreement, the 2^nd Agreement, and the 3^rd Agreement.”

33.  Mr Ting then takes up his account leading to the allegation of fraud:

“16.   On the same date when the 3 Agreements were made, i.e. on 17 September 2002, I discovered that in the accounts of Advance Pharmaceutical, an amount of HK$1,959,000 was due and owing to Advance Pharmaceutical.  I raised my concern with Lee about the recoverability of the said amount.  On this occasion, Lee and Master Sum respectively issued a cheque of HK$653,000 to Advance Pharmaceutical purportedly in repayment of such debt.  Lam said that he did not bring his cheque and he agreed to repay his share of HK$653,000 later.

…

18.    In or about early 2004, I asked Ms Joan Kwok (郭四儀) (‘Kwok’), the account officer of Advance Pharmaceutical, whether Lam had repaid his share of HK$653,000.  Kwok told me that Lam had not yet repaid the said amount.

19.    I also made enquiry on the background which led to the sum of HK$1,959,000 being owed to Advance Pharmaceutical.  Kwok told me and I verily believe that the amount of HK$3,560,227 which was originally owed to Advance Pharmaceutical related to certain purchase by King Wai Hong, the exclusive agent of Advance Pharmaceutical in Macau.  She also told me that King Wai Hong had already repaid a sum of HK$1,600,423, leaving an unpaid balance of HK$1,959,000.

20.    As Lam did not repay his share of the debt as agreed, I caused Advance Pharmaceutical to issue a demand notice to him. …

21.    In or about October 2002, as Lam did not pay up his share of the debt, I asked Kwok to provide me with the relevant papers and accounts in relation to the ‘account receivable’ of HK$3,560,227.  Kwok then showed me a transfer voucher dated 31 March 2001, which contains the following entries (‘the March 2001 Entries’):

‘Account name	Debit (HK$)	Credit (HK$)
Account Receivable	3,560,227.00
Promotion expenses-Macau	300,000.00
Sales		3,260.227.00
	____________	____________
Being backpay by King Wai Hong 7/99 to 3/01.’

…

23.    Kwok told me that Lam had instructed her to issue the Transfer Voucher in order to record that the amounts of HK$3,260,227 and HK$300,000 being ‘sales’ and ‘promotional expenses’ respectively, were owed by King Wai Hong to Advance Pharmaceutical.  The Transfer Voucher was issued between March to July 2001, and the exact date was not known.  Kwok told me that I verily believe that Lam did not provide her with any relevant supporting documents to those amounts.

24.    After the inspection of the Transfer Voucher and the investigation into the transactions entered into between Advance Pharmaceutical and King Wai Hong, I verily believe that transaction represented (by) the March 2001 Entries does not exist at all.  In order to assist my solicitors for the purpose of issuing legal proceedings against the Defendants herein, in or about December 2004, I procured Advance Pharmaceutical to instruct Deloitte & Touche Forensic Services Limited (‘Deloitte’) to prepare a report in relation to the ‘account receivable’ to HK$3,560,227.

25.    In or about early April 2005, I went (to) the office of King Wai Hong in Macau to enquire about the alleged purchase of HK$3,260,227.  King Wai Hong provided me with a reply by way of letter dated 8 April 2005. …

26.    In the said letter, it is stated that:

(1)   from the period of July 1999 to March 2001, the amount payable by King Wai Hong to Advance Pharmaceutical was HK$900,893.73.  Such amount was settled respectively on 21 May 2001; 9 July 2001; 27 September 2001 and 7 February 2002;

(2)   King Wai Hong has no record of an amount of HK$3,560,227 payable to Advance Pharmaceutical; and

(3)   King Wai Hong has issued 3 cheques in total of HK$1,600,423 to Advance Pharmaceutical between September and November 2001.  The said amount was payable in connection with the purchase between July and September 2001, and was not related to the account receivable HK$3,560,227.

27.    I verily believe that Advance Pharmaceutical did not enter into any transaction as recorded in the Transfer Voucher.”

34.  He then goes on depose that there having been no such transaction, no receivables in the sum of $3,260,227, there had been an over-calculation of dividends payable and paid to the former shareholders in this amount.

35.  Further, that by virtue of the profit before tax having been over imflated by 16.53%, the purchase price paid and payable by Asialand was too high by this amount, causing losses of over $20 million, not counting interest.

36.  The fraud and consequential loss is pleaded thus:

“42.   The Misrepresentations were made:

(1)     by Lam and New Rainbow fraudulently or recklessly, Lam and New Rainbow not caring whether they were true or false in that, as they well knew, certain amounts stated in the 2001 Accounts, the July 2001 Accounts and the 2002 Management Accounts were false; and

(2)     by Lee, Vigor Overseas, Chang Iok Meng, Chang Iok Wai and Master Sum negligently or were made in breach of duty of care owing to Asialand.

43.    As a result of the inflation of the profit before tax as pleaded in paragraph 41(4) above, the purchase price paid and payable by Asialand under the 1^st, 2^nd and 3^rd Agreements was inflation by 16.53%.

44.    By reason of the Misrepresentations of Lam, New Rainbow, Lee, Vigor Overseas, Chang Iok Meng, Chang Iok Wai and Master Sum, Asialand has suffered loss and damage.

PARTICULARS

Difference between the purchase price paid by Asialand in purchasing the 30,733 shares of and in Advance Pharmaceutical in the sum of HK$20,827,800, being 16.53% of HK$126,000,000, together with interest at the rate of 3% above the prime lending rate quoted by The Hong Kong and Shanghai Banking Corporation Limited from 17 September 2002 until judgment or sooner payment.

45.   Further or alternatively, by reason of the matters pleaded in paragraphs 30 to 44 above, Lam, New Rainbow, Lee, Vigor Overseas and Master Sum were in breach of clause 3.1 of the 1^st, 2^nd and 3^rd Agreements in that the 2002 Management Accounts were, contrary to their warranties, untrue and inaccurate.

46.    By reason of the matters pleaded in the preceding paragraph, Lam, New Rainbow, Lee, Vigor Overseas, Chang Iok Meng and Chang Iok Wai and Master Sum are liable to compensate Asialand to the same extent as pleaded in paragraph 44 above.

47.    Further, by reason of the matters pleaded in paragraphs 30 to 44 above, Asialand is entitled to set off a sum of HK$20,827,800 together with the interest accrued thereon from the price payable to Lam and New Rainbow for the purchase of the 2^nd Sale Shares under the 1^st Agreement.”

The Response

37.  This emerges first in the statement of defence.

38.  King Wai Hong is described as a long established client, based in Macau.  As a means of encouraging enhanced sales, it was proposed that as from July 1999 products bought by King Wai Hong would be invoiced at half-price, leaving the balance to be paid in whole or part or forgiven altogether, depending on the level of purchases made by King Wai Hong over a trial period.  In the event, enhanced sales were not achieved; this resulted in the special arrangement being terminated as at 31 March 2001.  The decision was made then to invoice King Wai Hong for the balance due, discounted by 35%.  Michael Lam instructed the Accounts Department to calculate the amount, which came to the sum of $3,260,227, being the amount depicted in the voucher complained of by Mr Ting.  In the pleadings this is backed up by an appendix recording at least 300 invoices for particular amounts added up and then discounted to get to a precise amount.  The reference ‘backpay’ is to show that it concerns purchases already made and invoices already rendered.

39.  Demand thus having been made from King Wai Hong, the sum of $1,600,423 was paid, leaving outstanding the sum of $1,959,804. 

40.  It is further pleaded that Messrs Ting and Cheng complained of the inherent improbability of Advance Pharmaceutical being able to recover this, and sought $653,000 from each of the three sets of vendors in the 1^st to 3^rd Agreements.  The pleading confirms Mr Ting’s account; that two out of the three did pay, Mr Lam declining to do so.

41.  To complete the picture, it is indisputable that the March 2001 accounts were certified by the auditors on 14 November 2001, and were approved by the board at a meeting of the same day.

My Determination

42.  It is not for me to resolve disputes of fact on the affidavits before me.  If the issue boils down to determining disputed matters of fact, or the outcome is sensitive to findings of fact, then the action must proceed to trial, with the pleadings undisturbed.

43.  But are the pleadings alleging fraudulent or reckless misrepresentation sustainable?

44.  I come to deal with that next.  First, the legal principles.

Striking Out

45.  It is only in plain and obvious cases that the court should exercise its summary powers to strike out a pleading.  The claim must be obviously unsustainable, the pleadings unarguably bad and it must be impossible, not just improbable, for the claim to succeed before the court will strike it out.

46.  It is for the party seeking to strike out a pleading to demonstrate that the case is a plain and obvious one in which the other party’s claim is bound to fail; see the White Book, 18/19/4.

47.  Allegations of fraud should not be lightly made, and must be pleaded distinctly and with utmost particularity, failing which such allegations should be struck out; see ADS v Wheelock Marden & Co. Ltd [1994] 2 HKC 264, per Bokhary JA (as he then was) at pp.269, 270.

48.  Where misrepresentation is pleaded, particulars must be contained in the pleading.  The statement of claim must show the nature and extent of each misrepresentation, by whom and to whom it was made and whether verbally or in writing — in the latter case identifying the document; see the White Book, 18/12/25.

49.  For an action of fraudulent or reckless misrepresentation to succeed, the following must be established; that is, pleaded and proved:

(1)     there must be a representation of fact made by words or by conduct and mere silence is not enough;

(2)     the representation must be made with knowledge that it is false, i.e. it must be wilfully false or at least made in the absence of any genuine belief that it is true or recklessly, i.e. without caring whether the representation is true or false;

(3)     the representation must be made with the intention that it should be acted upon by the claimant, or by a class of persons which will include the claimant, in a manner which resulted in damage to him;

(4)     it must be proved that the claimant acted upon the false statements; and

(5)     it must be proved that the claimant has sustained damage by so doing;

per Bullen v Leake & Jacob’s Precedents of Pleadings, 49-01.

Application of the Legal Principles

50.  What is the representation of fact, made by words or by conduct?

51.  This can only emerge in the agreements, in the case of Mr Lam and New Rainbow, the 1^st Agreement.  This is because clauses 3.2 and 6.4 preclude reliance by the purchaser on any previous warranty or undertaking.  Clause 3.1 provides a warranty by New Rainbow that each event set forth in Appendices II, III and IV “are true and correct as of today”.  By clause 9.1, Mr Lam committed to honour these terms.  Only one warranty is relevant; that in Appendix III which states:  “Document ‘A’ attached to this Appendix is the unaudited financial report … of [Advance Pharmaceutical] up to 31 March 2002”.

52.  There is no reference at all to the earlier accounts which covered the period of the alleged fraud.  Moreover, this is not a warranty of correctness or accuracy, only that they are the accounts in question.

53.  Clauses 6.1 and 6.2 reveal that the buyer had had every opportunity to examine the books of account and all other records of Advance Pharmaceutical, and thereafter had no right to assert any claim against the vendors, including New Rainbow and Mr Lam.

54.  It follows, as I find, that there was no representation of fact made by Mr Lam or New Rainbow by words or conduct, as pleaded in clause 21 of the statement of claim; thus, no representation made known to be false, with the intention that it be acted on, that it was acted on and that the claimant purchaser sustained loss by so doing.

55.  There are further matters that render the pleadings going to fraudulent misrepresentation inherently bad.  Mr Ting prior to the 2^nd material date was aware that there was a question mark over the recoverability of some or all of the amounts in question; the auditors had made reference to this when certifying the accounts.  On the 2^nd material date, being the date of commitment by Asialand to the purchase, Mr Ting raised the matter again, and was able to persuade two out of the three vendors to pay the same out of their own pockets.  Mr Lam was the one who refused to comply. 

56.  If it could be said that the accounts for 2001 were false and that amounted to a representation, then it was made to Advance Pharmaceutical and its board of directors at the time the accounts were prepared, not to Asialand; after all, Asialand as purchaser was not on the scene and would not be so for another 18 months.

57.  At the time in question, Mr Ting was a director of Advance Pharmaceutical with full access to the accounts and records of Advance Pharmaceutical, and a working knowledge of how Advance Pharmaceutical operated. 

58.  Furthermore, as is revealed by clauses 12.1 and 12.2, the relationships between Koon Hay and Mr Ting on the one hand and Mr Lam and others on the other were decidedly rocky, with actions pending or underway.  It is apparent that clauses 12.1 and 12.2 were for the purpose of putting a line under these differences.  But they are also a graphic illustration that the alter ego of Messrs Ting and Cheng, Asialand, was certainly not a buyer coming cold into Advance Pharmaceutical.

59.  There are further irregularities. 

60.  The claim in damages is extravagant, for it includes losses of arising from the 2^nd Agreement and 3^rd Agreement.  This is misconceived.

61.  The 1^st, 2^nd and 3^rd Agreements may have been connected as giving rise to the sale of all the remaining shares in Advance Pharmaceutical, but they were and are separate legal documents.  Mr Lam and New Rainbow cannot be held liable for breaches in agreements in which they were and are not parties. 

62.  Clause 9.1 does not, as was submitted for Asialand, assist its cause.  By its terms, Mr Lam and New Rainbow are liable only for losses arising from breach of “this Agreement”; the 1^st Agreement.  This may be distinguishable from the single agreement in which Koon Hay bought its 12% interest, which incorporated all three sets of vendors.

63.  The allegations of fraudulent and/or reckless misrepresentation made against Mr Lam and New Rainbow are obviously unsustainable; the pleadings relating thereto are bad.  As I find it is impossible that such claim should succeed.

64.  The same goes for the claims against them for breaches of the 2^nd and 3^rd Agreements.

The Result

65.  There will be an order in terms of clauses 1(a)(b) and (c) of the application of 3 October 2006.

Discovery

66.  The application made in August 2006 was made in these terms:

“1.     The 1^st and 2^nd Plaintiffs (by original action) do within 7 days from the date of the Order make specific discovery of the documents or class of documents specified below:

(a)   Report issued by Deloitte & Touche Forensic Services Limited in or around February 2005 in respect of its investigation of certain sales records of the 2^nd Plaintiff (by original action) with its Macau agent King Wai Hong which resulted in the disputed account receivables of HK$3,560,227.00 (‘Report’);

(b)   Correspondence between the 2^nd Plaintiff (by original action) and Deloitte & Touche Forensic Services Limited in connection with the Report;

(c)   Enquiry letter from the 2^nd Plaintiff (by original action) to King Wai Hong dated 7^th April 2005; and

(d)   All invoices, purchase orders, receipts, ledger entires, accounting journals, vouchers, sales returns and other applicable accounting records of all transactions between King Wai Hong’s purchase of the 2^nd Plaintiff’s (by original action) products for the following periods:

(i)      from July 1998 to June 1999;

(ii)     from July 1999 to March 2001; and

(iii)     from April 2001 to March 2002.”

67.  The ‘Report’, is a report commissioned by Advance Pharmaceutical at the instigation of Mr Ting following a meeting of the board of directors of 24 May 2004.  A translation of the board’s minute on the matter is as follows:

“(2)  Mr Ting Siu Yin recently has discovered some figures concerning the sales problems in Macau, and he had been making enquiries from the Macau agent.  The Macau agent had indicated that at the time representatives from our company had demanded to invoice them HK$0.50 for every $1.00 product; but when making payments, such were to be settled with HK$1.00.  To find out the truth, Mr Ting Siu Yin proposed a resolution to the Board that Mr Cheng Chi Heng was to be authorised to instruct an accountant firm to check the figures and lawyers to handle this matter; Mr Cheng Chi Heng seconded the motion.  Mr Lam Yun Sum agreed.  Mr Lam Yiu Cho and Lam Sau Shan did not express any opinion; and the result was a pass with majority.

(Before the end of the meeting, Mr Ting Siu Yin suggested to instruct Deloitte Accountant Firm to perform audit in respect of this matter.  All directors did not make objections.  As regards the lawyers to be instructed, there was no decision, and every one would be informed after Mr Cheng Chi Heng had handled the matter.)”

68.  It is the case of the plaintiffs that the Report was withheld because it and related documents fall outside the ambit of discoverable documents because it amounted to an expert report, to be relied on in the trial, to be part of the exchange of expert reports already ordered in a directions order of 15 June 2006.  Thus it was inappropriate for it to be sought in a discovery application.

69.  In the event the documents sought to be discovered at 1(c) and (d) were forthcoming by a consent order of 11 September 2006, with costs in the cause, and the Report was made available a few days before the hearing, but without prejudice to costs.

70.  It is submitted for the plaintiffs that the Report and thus the correspondence between Deloittes and Advance Pharmaceutical are privileged documents and not amenable to discovery.

71.  I disagree.  The directions order envisaged reports to be sought from experts, one for each side, to be used in the forthcoming trial of the issues between the parties.  Such reports and related communication would undoubtedly be privileged; see the White Book, 24/5/13.

72.  But the Report was not sought after litigation was contemplated or commenced and with a view to such litigation.  It was called for at the instigation of Advance Pharmaceutical’s board and falls into the category and is and at all times was discoverable.  The same goes for correspondence entered into in connection with the Report.

The Result

73.  There will be discovery in terms of clause 1(b) of the application of 23 August 2006.

Specific Performance

74.  The claims by Asialand against Mr Lam and New Rainbow for fraudulent or reckless misrepresentation having fallen away, there is now no defence to the counterclaim for specific performance, and no outstanding issue in dispute to be determined.

The Result

75.  There will be an order in terms of clause 2 of the application of 3 October 2006.

Costs

76.  These are nisi; they are to Mr Lam and New Rainbow on both applications.