WILLWIN DEVELOPMENT (ASIA) CO LTD AND ANOTHER v. WEI XING AND OTHERS

HCA 797/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 797 OF 2012

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D E C I S I O N

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1.  On 8 March 2016, Judgment was handed down in relation to the claims made by the Plaintiffs against the Defendants in this action. The 1^st Defendant (“Xing”), 2^nd Defendant (“ESL”) and the 3^rd Defendant (“Ying”) were ordered (inter alia) to account to the 1^st Plaintiff (“WW”) for profits in respect of the breach of fiduciary duties and breach of confidence owed by Xing to WW, ESL’s and Ying’s dishonest assistance, passing off by Xing and ESL, and sums received by Xing and Ying for and on behalf of WW.

2.  On 25 July 2016, directions were ordered for the accounts to be taken (“July 16 Directions”), whereby (inter alia) affidavits were to be filed by Xing in relation to the accounts, and for the actual hearing in respect of the accounts to be held before a Master.

3.  Various affirmations have since been filed by Xing, including his affirmation of 15 September 2016 (“Xing 18”), whereby Xing purported to give the accounts in attempted compliance with the orders made under the Judgment.  Pursuant to the July 16 Directions, Wei Wen (“Wen”) on behalf of WW filed and served a Notice of Alleged Omissions (“Notice”) in respect of Xing’s accounts, claiming that Xing had failed to render any accounts at all in compliance with the Judgment and the July 16 Directions.

4.  On 6 December 2016, Xing applied by summons (“Summons”) for an order that the WW and the 2^nd Plaintiff (“SWT”) provide to him the financial information or documents of WW and SWT, including their invoices, receipts and financial records for 2011 to 2012.  In his affirmation made on 6 December 2016 in support of the Summons, Xing explained that he could not deal with the Notice or comply with the orders made under the Judgment without the documents sought in the Summons, making reference to paragraph 153 of the Judgment.  Paragraph 153 of the Judgment states that Xing “has to give a full and detailed account, by reference to SWT’s and WW’s finance records and ledgers, as to how the sums received from ICS had been dealt with”, and that in default of such full account, the amount of US$12,678 and RMB 3,000 paid by ICS in cash to Xi (Xing’s subordinate at SWT) between March and July 2011 should be repaid to WW.

5.  In his affirmation made on 6 February 17 (“Xing 19”), Xing further explained the basis of and the reason for his request for discovery by the Summons.  In Xing 19, he referred to the need for financial and other documents, including documents relating to the subcontracting relationship between WW and SWT, in order to deal with the Judgment and the accounts to be rendered by him under the Judgment.  I accept that Xing 19 seeks to justify the Summons by reference not just to paragraph 153, but to the general orders for accounts made under the Judgment. 

6.  Just before the commencement of the hearing of the Summons on 2 August 2017, Xing sought to amend the Summons, to seek discovery of a whole detailed range of financial documents of WW and SWT.  He further sought to clarify that the Summons was not intended to confine the scope of the discovery to serve the purposes of paragraph 153 of the Judgment only, but that he seeks discovery for the purposes of paragraphs 153 and 155 of the Judgment.  Under paragraph 155, orders were made in terms of the prayer for relief in the Re-amended Statement of claim, and for accounts to be taken of the sums received by Xing and Ying, as particularized in Annexure B to the Re-amended Statement of Claim (“Annexure B”), and pursuant to the claim for misappropriation of funds of WW by Xing and by Ying.

7.  Prior to the hearing, there had been no summons filed or served for amendment of the Summons.  In view of the lack of proper application and the lack of the necessary and proper notice served on the Plaintiffs of the alleged need for amendment, I made it clear to the parties at the hearing that I will not be entertaining Xing’s late application for amendment, although I will consider the merits of the Summons as supported by Xing’s affirmations, including Xing 18 and Xing 19 served in time prior to the hearing.

8.  The Summons was issued on 6 December 2016 and served on both WW and SWT.  On 1August 2017, prior to the hearing of the Summons, this Court made an order staying the proceedings against SWT, on the basis of a liquidation order which was made against SWT.  At the hearing on 2 August 2017, the Summons was considered as an application made for discovery and production to be made by WW of the documents of WW and of SWT in the possession, custody or control of WW.

9.  I accept the submissions made by Counsel for WW, that insofar as Xing seeks, by the discovery application or for the accounting exercise, to challenge the findings made in the Judgment, or to reargue his case on the subcontracting arrangement or relationship between WW and SWT, or on whether the clients of WW were in fact clients of SWT, or whether WW had a business at all, that is all impermissible and has no place in the account taking exercise which remains after the Judgment.  Discovery of documents for these purposes is unwarranted, lacks any basis whatsoever, and will not be permitted.

10.  In relation to the misappropriation claim, what Xing has to do is to explain, by reference to documents and evidence, what he has done with the sums of money admitted to have been withdrawn by him from the Hong Kong bank accounts of WW, or withdrawn by Ying and given to him under the misappropriation claim made in the Re-Amended Statement of Claim, and dealt with in paragraphs 138 to 151 of the Judgment (“Misappropriation Claim”). In relation to the ICS Receivables, Xing should explain, by reference to documents and evidence, how he has dealt with the sums received from ICS and dealt with in paragraphs 152 to 153 of the Judgment (“ICS Receivables Claim”).  This includes Xing having to explain whether he had received the sums from Xi, or how he had instructed Xi to deal with the cash received from ICS.

11.  Bearing in mind the fact that the withdrawals of the money comprising the Misappropriation Claim took place in 2008 to 2011, it is inconceivable that Xing would be able, and should be expected, to give an account of each and every withdrawal and how each sum withdrawn and/or received by him had been spent, all from memory, and without reference to any documents from WW and SWT.  Any accounting exercise, to be meaningful, must be done by reference to supporting and accounting documents, and it has been Xing’s case throughout the action, up to trial and until now, that since his departure from WW in about December 2011 and his departure from SWT by 2012, he had not had access to the documents of WW and SWT, and that it was Wen who had all along been in charge of the accounting information and documents of the businesses.

12.  Instead of giving his own account of the funds received by him and the uses he had made of the funds, Xing repeated in Xing 18 assertions of the case maintained by WW and Wen, which is irrelevant for Xing’s accounting exercise.  However, Xing did state in Xing 18 that he had used at least part of the funds withdrawn from WW’s accounts as payment of wages for SWT’s employees, or as loans of SWT, and as payment of the daily operating expenses of SWT.  He claims (in paragraph 32 of Xing 18) that he cannot confirm this without the financial information and documents of SWT, to which he has no access.  In paragraph 33 of Xing 18, he further claims to have used part of the funds withdrawn for entertaining a US client.

13.  An account taking exercise requires the cooperation of, and often input from, both sides.  In this case, I accept that for Xing to be able to give any meaningful account in relation to the Misappropriation Claim, he requires the aid of the accounting and financial documents of SWT for the purpose of tracing the use of the funds withdrawn from WW (the withdrawals of which are not disputed).  I agree that in considering whether discovery should be ordered, the Court should consider the relevance and necessity of the documents, and the proportionality of the discovery sought.

14.  In relation to the Misappropriation Claim and on the evidence now contained in Xing 18 and Xing 19, I am satisfied that it is relevant, necessary and proportionate to order the production of the financial records of SWT for the period between 1 April 2008 and 30 April 2010.  These “financial records” should include books, payment and cash vouchers, management accounts, profit and loss accounts (audited and unaudited), bank transaction statements, and general ledgers compiled by the accounts staff of SWT for the relevant accounting years ending 31 March 2009, 31 March 2010 and 31 March 2011.  The withdrawals made from WW’s bank accounts, and in respect of which Xing has to account for, were made between 8 April 2008 and 18 February 2011 (according to Annexure B).  As recorded in paragraph 134 of the Judgment, Ying claimed that some of the cash she withdrew had been paid over to Xing.

15.  As for the ICS Receivables, Xing claims in paragraph 47 of Xing 18 that SWT had received the amounts, and that he requires the financial documents and statements of SWT to confirm this.

16.  On behalf of WW, it is claimed that WW has already supplied to Xing copies of the purchase orders, invoices, and payment vouchers prepared by ICS in relation to the 7 payments made by ICS to Xi (between March and July 2011).  WW further claims that copies of the bank statements of SWT in respect of its account in Shenzhen with 中國工商銀行 (“Bank”), for the period between May 2011 to October 2011, have also been supplied to Xing, and that neither WW nor SWT has any other financial records relating to the ICS Receivables.

17.  In relation to the ICS Receivables Claim, I will order Wen to state on affidavit (pursuant to O 24 r 7 (1) RHC) whether WW is in possession, custody or control of (i) any payment and cash vouchers and general account ledgers of SWT for the period between 1 March 2011 and 31 July 2011; and (ii) any bank transaction statements for any bank account of SWT (other than from the Bank) for the period from 1 March 2011 to 31 July 2011; and if so, to produce copies of the same to Xing. 

18.  In relation to the account for the profits made by Xing as a result of the acts which constitute breach of fiduciary duties, breach of confidence, and passing off, Xing has to explain the transactions entered into by him or in the name of ESL and the profits he had made under such transactions, with reference to documents in his possession, custody or power.  I do not accept at this stage that he needs to review the accounts and business records of WW or SWT for this accounting exercise.

19.  The costs of the Summons and the application for discovery are to be in the cause of the taking of accounts.

20.  Any further applications relating to the conduct of the taking of accounts should be applied to and dealt with by the Master hearing the accounts taking exercise.