WING FAI CONSTRUCTION CO LTD (IN LIQIUDATION) v. BENEFIT HOLDINGS INTERNATIONAL LTD AND OTHERS

HCA 810/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 810 OF 2003

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JUDGMENT

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1.  This is an appeal from a decision of the Master given on 3 December 2004, in which the plaintiff was ordered to give further and better discovery of documents in certain classes which were described in a Schedule to the Summons for Further and Better Discovery.  I heard the parties on the matter on 29 June 2005, when I indicated that I was satisfied that the Master had been wrong to order discovery of certain of the documents sought, and I allowed the appeal to that extent, indicating that I would give my reasons later, which I now do.

2.  The claim by the plaintiff against the defendants arises in the following way.  The plaintiff, (Wing Fai), was a wholly owned subsidiary of the 1^st defendant, (Benefit), which itself is a wholly owned subsidiary of China Rich Holdings Limited.  The 2^nd, 3^rd, and 4^th defendants are directors of Benefit and China Rich.  In April 2002, Benefit entered into an agreement for sale and purchase with Wing Fai, Sino Glister International Investments Ltd, (Sino Glister), and the sole shareholder in Sino Glister, Eric Chim Kam Fai, (Mr Chim), to sell shares in Wing Fai to Sino Glister for a consideration of HK$5 million.

3.  Wing Fai subsequently went into liquidation, and it is the liquidator’s case that the sum of HK$5 million used by Sino Glister and Mr Chim to fund the purchase of Wing Fai shares came from funds of Wing Fai, contrary to s 47A Companies Ordinance.  The liquidator now proceeds against the defendants contending a breach of section 47A, a breach of duty by the 2^nd 3^rd and 4^th defendants in continuing to act as directors of Wing Fai following the sale of shares, and conspiracy, and seeks to recover a sum of HK$5 million.

4.  The case is somewhat unusual in that the liquidator does not plead specific payments of a sum totalling $5 million from Wing Fai either directly or indirectly to the defendants.  Instead the liquidator pleads, first a specifically identifiable sum of HK$2 million, and second a series of admissions of payment to Benefit of a total of HK$5 million, from which the liquidator will ask the court to infer, first that the further HK$3 million has been paid, and second that it had come from Wing Fai.

5.  In previous interlocutory proceedings the liquidator has acknowledged the limitations upon which his claim is based and it is clear that he does not, and could not without leave, rely upon any specific payments in relation to the balance of HK$3 million.  Mr Maurellet, frankly acknowledges this position, and accepts that if the admissions upon which he relies are found to be insufficient the claim will fail.

6.  It is against this background that the discovery issue arises.  Not surprisingly the defendants initially asserted that if it was the case for the liquidator that payment of HK$5 million had been made, the liquidator must identify the payments.  If the liquidator's case was based upon specific payments that would be right.  But it is not, it is based upon admissions.

7.  I approach the question of discovery bearing in mind two matters.  First, it is clear from Peruvian Guano, (1882) 11 QBD 55, that a plaintiff is required to discover documents which may not only advance his own case or may damage the case of the defendants, but also those which would advance the defendants’ case and damage his own.  It is for a defendant to determine which of the relevant documents may advance his case or damage that of the plaintiff, not the plaintiff.  Second, as pointed out by Coleman J. in O Co v M Co, [1996] 2 Lloyd’s Rep 347, the Peruvian Guano principles do not justify demands for disclosure of documents at the far end of the spectrum of materiality which on the face of it are unrelated to the pleaded case of the plaintiff or defendant and which were required purely for speculative investigation.

8.  It is convenient to set out the Schedule that was attached to the Summons; (note that when it was prepared the Schedule omitted an item 4, and throughout the parties have maintained the numbering system in all correspondence and submissions):

“Schedule

1.	Bank statements of Sino Glister International Ltd in respect of its accounts at Hongkong Bank for the period from May 2002 to July 2002 (inclusive).
2.	Copies of all correspondence passing between the liquidators of the Plaintiff and Sino Glister International Investments Ltd and/or Sino Glister International Investments Ltd’s director dealing with or referring directly or indirectly to:-
	(i)	payments from the Plaintiff to Sino Glister International Investments Ltd;
	(ii)	payments from Sino Glister International Investments Ltd to any third party utilising monies received from the Plaintiff;
	(iii)	repayments of moneys from Sino Glister International Investments Ltd to the Plaintiff.
3.	Records of interviews (in any form) with all persons including but not limited to Mr Eric Chim Kam Fai concerning the matters listed in 2(i), (ii), and (iii) above.
4.	(Omitted)
5.	Correspondence and other communications passing between the liquidators of the Plaintiff and members of the Committee of Inspection of the Plaintiff, the Official Receiver, the Hong Kong Police and/or Office of the Secretary for Justice in relation to the matters listed in 2(i), (ii), and (iii) above.
6.	Records (in any form) of meetings of the Committee of Inspection of the Plaintiff containing references to the matters listed in 2(i), (ii), and (iii) above.”

9.  Although the liquidator does not accept that the documents in items 1, 2 and 3 are discoverable, he has agreed to supply them.  In this respect the appeal is not pursued.  It is not at all clear to me why or how the liquidator comes to be in possession of banking documents belonging to Sino Glister, but that does not matter as the documents are to be supplied.  I am satisfied that all documents in the possession or power of the liquidator set out in categories 1, 2 and 3 are properly discoverable, and had agreement not been reached to supply them, I would have made the appropriate order.  For that reason, in this respect, the Master’s order remains.

10.  It is open to the defendants to assert as part of their defence that any money received by Benefit in payment for the shares did not in fact come from Wing Fai.  I am told by Mr Maurellet that not all of the accounting documents of Wing Fai have been located by the liquidator, but that he has made discovery of those documents which he has, that discovery being the subject of an affidavit from a solicitor to the liquidator.  Mr Smith has correctly taken the point that the affidavit should come from the liquidator, and Mr Maurellet has agreed to supply an appropriate affidavit.

11.  It is clear that those documents are discoverable because there may be accounting documents in those documents that the defendants can point to in order to demonstrate that payments made by Wing Fai have neither gone to Sino Glister in order to pay Benefit, nor indirectly to either Benefit or its directors.  They may even be able to say that all payments made by Wing Fai to Sino Glister or indirectly to Benefit or the three directors were perfectly proper payments.  That is a conclusion that must be reached on the face of the accounting documents, and any other admissible evidence as to the circumstances of the payments.

12.  The argument between the parties is as to the items in clauses 5 and 6 of the Schedule.  Mr Smith’s argument drew my attention to the fact that, on the face of it, Sino Glister and Mr Chim would be equally liable to the liquidator under the provisions of s47A of the Companies Ordinance.  However the liquidator has not proceeded against either, a situation which Mr Smith says was inevitably as a result of a decision made by the liquidator and approved by the Committee of Inspection.  Mr Smith says that that decision can only have come after consideration.  He says that in the correspondence, communications and records sought there may be information as to the basis upon which that decision has been made, which may lead to the defendants to be able to say that in fact no recoverable payments were made.  Mr Smith points to the situation that while the liquidator may be able to prove an admission of a fact, (in this case payment of HK$3 million), he must also prove that fact, i.e. that not only is it admitted that the sum was paid but also that it was in fact paid.

13.  By making available to the defendants the documentation in clauses 1, 2 and 3 of the schedule, (and of course any other discoverable accounting documents of Wing Fai for the relevant period which would include bank statements and paid cheques), the liquidator has put the defendants in the same position as he was when he made his decision not to proceed against Sino Glister and Mr Chim.  In my view any correspondence communications and records of the liquidator and the Committee of Inspection in relation to this decision are not properly discoverable.  They are documents which have all arisen after the event, and are not documents which are relevant to the issue as to whether or not Wing Fai funds were used by Sino Glister or Mr Chim to pay for the purchase of shares.  It may well be that the defendants will come to some other conclusion on the same information that was available to the liquidator, and they have all of that information.

14.  Just as the liquidator has been able to reach a conclusion as to the steps he would take in relation to Mr Chim and Sino Glister, so can the defendants, upon the same information, reach whatever conclusion they think appropriate as to any payments made at the relevant time, and in the course of these proceedings use whatever documents they have obtained in discovery to support their position in the trial.  The reasoning of the liquidator as to the status of those payments is plainly not admissible in this trial in establishing why any particular payments were made, that reasoning being merely his own conclusion.  The basis upon which the liquidator reached his decision is simply not relevant.  There is no evidence that there may be any documents, not included in clauses 1, 2 and 3, that may be found by an examination of the documents in clauses 5 and 6.  Mr Smith did not cite any authority which demonstrated that the liquidator would be required to justify his decision not to proceed against Sino Glister or Mr Chim, in these proceedings.  It may well be that he may be required to justify his decision in the Companies Court in the plaintiff’s winding up proceedings.  Benefit is a creditor of Wing Fai and is free to make such applications as it thinks appropriate to that court in relation to the conduct of the liquidator or the Committee of Inspection.

15.  As to the demand for copies of correspondence and communication with the Official Receiver, the Hong Kong Police, or the Office of the Secretary for Justice, Mr Maurellet’s complaint that there is no evidence that any such documents exist is well made.  In any event for the same reasons as set out above I am not satisfied that such documents, if they exist, are relevant.  Relevance for discovery purposes, it must be remembered, is determined with regard the pleaded case of both parties.  In the present case I am satisfied the documents sought under clauses 5 and 6 of the Schedule are sought purely for speculative investigation.

16.  For the foregoing reasons the order of the Master that the liquidator must give further and better discovery of the items set forth in clauses 5 and 6 of the Schedule to the Summons is set aside.

17.  As to costs, it must have been plain to the defendants following the liquidator’s agreement to supply the items in clauses 1, 2 and 3 of the Schedule that those matters were not being pursued on appeal.  All of those items were supplied as long ago as November 2004.  That there had been no formal amendment of the appeal restricting it to items 5 and 6 is beside the point.  The appeal has succeeded and there appears to me to be no reason why the usual order should not be made and costs follow the event.

18.  There will be in order nisi, to be made absolute in 14 days, that the defendants must pay the plaintiff's costs of and occasioned by the appeal.