INNOVISIONS LTD v. CHAN SING CHUK CHARLES AND OTHERS

HEADNOTE

Practice and Procedure - Discovery - Distinction between listing and production - meaning of "power".

1990 No. A 4517

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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BETWEEN

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J U D G M E N T

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1. I have before me the Plaintiffs summons dated 29th November 1991 which seeks an order that the Defendants do file an affidavit stating whether any documents described in the schedule to the summons is or has been in their possession, custody or power and further that such documents should be produced. The marginal note to the summons shows that it is made under the provisions of 0.24, R.7.

2. Practitioners seem to have some difficulty in distinguishing between disclosure of documents and their production. Different rules apply to each stage. The rules set out different considerations for the Court to take into account. In the circumstances it may be helpful, yet again, to set out the relevant rules to indicate the differences.

0.24, R.3 of the Rules of Supreme Court provides:

"(1)     Subject to the provisions of this rule and Rules 4 and 8, the Court may order any party to a cause or matter .... to make and serve on any other party, a list of the documents which are or have been in his possession, custody, or power relating to any matter in question in the cause or matter, and may at the same time or subsequently also order him to make and file an affidavit verifying such a list and to serve a copy thereof on the other party."

0.24, R.7 of the Rules of Supreme Court provides as follows:

"(1)     Subject to Rule 8, the Court may, at any time, on the application of any party to a cause or matter, make an order requiring any other party to make an affidavit stating whether any documents specified or described in the application or any class of document so specified or described is or has at any time been, in his possession, custody or power, and if not then in his possession, custody or power when he parted with it and what has become of it.

(2)     An order may be made against a party under this rule notwithstanding that he may have already made or been required to make a list of documents or affidavits under Rule 2 or Rule 3.

(3)    An application for an order under this rule must be supported by an affidavit stating the belief of the deponent that the party from whom discovery is sought under this rule has, or at some time had, in his possession, custody or power of the document, or class of document, specified or described in the application and that it relates to one or more of the matters in question in the cause or matter."

0.24, R.8 provides as follows:

"On the hearing of an application for an order under Rule 3, 7 or 7A the Court, if satisfied that discovery is not necessary, or not necessary at that stage of the cause or matter, may dismiss, or as the case may be, adjourn the application and shall in any case refuse to make such an order if and so far as it is of opinion that discovery is not necessary either for disposing fairly of the cause or matter or for saving costs."

0.24, R.13 of the Rules of Supreme Court provides:

"(1)    No order for the production of any documents for inspection or to the Court, or for the supply of a copy of any document, shall be made under any of the foregoing rules unless the Court is of opinion that the Order is necessary either for disposing fairly of the cause or matter or for saving costs." (my emphasis]

3. It must be noted that unlike under Rule 8 the party applying for an order under R.13 has the burden of satisfying the Court that the order for production is necessary for the purposes mentioned in the rule. In Dolling-Baker v. Merrett (1990) 1 WLR 1205 Parker L.J. explained the importance of the distinction etween listing documents and producing documents. He said at p.1209;

"It is to be noted that in contrast with Rule 8, which provides that the order is not to be made if and in so far as the Court is of opinion that it is not necessary either for disposing fairly of the cause or matter or for saving costs, under Rule 13(1) the provision is that no order is to be made unless the Court is of opinion that the order is necessary either for disposing fairly of the cause or matter or for saving costs.

It is submitted on behalf of the 1st Defendant that the effect of Rule 13(1) is that the burden of satisfying the Court that production and inspection is necessary is squarely upon the party applying whereas under Rule 8 it is for the party who is objecting to any such order to satisfy the Court that discovery by list or affidavit is not necessary. It appears to me that that approach and submission are correct, and there is a perfectly sensible reason for it. If one is merely at the stage of discovery, it does no harm in most cases for the party against whom discovery is sought merely to list his documents.

That discloses that he has them or has power over them. But he can object to produce them on the ground of privilege or, indeed, on any other grounds. At that stage not very much has occurred except that the applying party will be enabled to know what document the objecting party has, and it is right that the burden should be upon the objector in such a case. When, however, one gets to the stage of production and the document is to be produced to the Court or the other side, the position is different, and it should be, and the rules appear to me to state with complete clarity that it is for the party seeking production to satisfy the Court that such production is necessary for the purposes specified in Rule 13(1), namely, for disposing fairly of the cause or matter or for saving costs."

4. I was not prepared to treat this application as .one under 0.24 R.13 despite the reference to production in the summons and therefore the question of production was not considered by me at this stage. If an application is made for production at a later stage, I will consider it on its merits.

5. So I am left with an application for an order that an affidavit be filed covering the documents scheduled. What does the Plaintiffs have to establish before I can make such an order?

6. Firstly he must satisfy me that the documents claimed are relevant to the matters in question and by that I mean relevant in the Peruvian Guano Case sense (see (1882) 11 QBD 55). Secondly, the application has to be supported by an affidavit stating that in the belief of the deponent the other party has or has had certain documents which relate to the matter in question. He has to make out the case on relevance and as to possession, custody or power. As the note to 0.24 R.7 in the White Book makes clear, "This case may be based merely on the probability arising from the surrounding circumstances or in part on specific facts deposed to".

7. It, of course, by no means follows that an order under 0.24 R.13 will be made in respect of documents disclosed in the list under 0.24, R.7.

8. This matter came before me in May and June 1991 when I refused the Defendants leave to amend their defence to plead illegality based upon insider dealings. That decision was affirmed by the Court of Appeal. I refer to my judgment dated 7th June 1991 which sets out the facts which the Plaintiffs seek to establish in this action.

9. A lot of the submissions made to me extended to the issue of production with which I am not at present dealing.

10. The first set of documents sought are from Tamar and Winburg. They are the 2nd and 3rd Defendants respectively. During the course of the hearing Mr. Robert Tang Q.C. sought and was granted leave to amend the terms of the summons because I pointed out to him that certain of the documents sought were far too wide. This judgment is based upon the amended summons.

11. Items 1 to 6 against Tamar & Winburg are clearly relevant documents in the Peruvian Guano sense. It is no answer to a request for an affidavit that the Plaintiffs have pleaded their case and thus do not need the documents. That may be relevant to the question of production but it cannot, in my judgment, be relevant to this application under 0.24, R.7. I am satisfied that Mr. Stokes' affidavit on behalf of the Plaintiffs is sufficient to justify an order under all 6 categories and I so order.

The next 14 categories of documents are sought from Mr. Chan.

Item 1 is as follows:

"All correspondence with Continental regarding the financial performance of Continental during the period between 1st July 1988 and 30th June 1990".

12. Mr. Barlow for the Defendants castigates this category as fishing. I disagree. This is clearly a most relevant category of documents and I am entitled to and do base the existence of this category of documents on the probability arising from the circumstances of the case. I make an order in relation to Item 1 against Mr. Chan.

The original Item 2 has been abandoned.

The new Item 2 relates to:

"All documents relating to share transactions involving shares in
Continental purchased or sold by Mr. Chan or on his behalf from 1st July 1988 to 30th June 1990."

13. Again this category is clearly relevant and I make an order in respect of it.

14. Items 3 to 13 (which during the hearing were referred to as 4 to 14 before 2 was deleted) are strongly contested. The best way of describing all of these categories is that they relate to the order books of all customers of Continental, correspondence files of the customers of Continental, internal filenotes on the customers of Continental, sales budgets for Continental prepared in November and December 1988 for the calendar year 1989 plus revisions, sales records of Continental from July 1988 to June 1990, copies of all overhead and/or profit and loss account budgets during the relevant period, working papers connected with the last item, copies of all profit and loss account forecasts in working papers, monthly management accounts and working papers associated with the 1989 to 1990 annual reports. It is quite clear to me that these are most relevant documents. Clearly what the Plaintiffs are hoping to find are some documents which show that Mr. Chan must have known that what he was telling Mr. Poon at the relevant meeting, if indeed he did say these things, was not true. If documents in these categories show that Continental could not conceivably have achieved profit for the year end of 30th June 1989 of not less than $83m and would not achieve profit of a $100m in the year 1st July 1989 to 30th June 1990, the Plaintiffs case will be greatly strengthened.

15. In relation to these Items 3 to 13 Mr. Barlow says that I have no jurisdiction to make the order, because the documents which are being sought are those of Continental and Continental is not the party to these proceedings, and evidence have been placed before me that Continental objects to the production of these documents and fears they will be used by Mr. Poon, who is considered to be a trade competitor, to its disadvantage. Mr. Robert Tang Q.C. for the Plaintiffs submits that these documents are vital. A lot of the arguments centred around whether or not, in relation to production, these documents were within Mr. Chan's power. As I have already said I am not dealing with that aspect of the case at the moment. All I have to decide is whether or not Mr. Chan should make an affidavit stating whether any of these documents is or has been at any time in his possession, custody or power and if not when he parted with them and what has become of them.

16. Insofar as these documents or any of them are or have been in the physical possession of Mr. Chan, it seems clear to me that he ought to file an affidavit as requested. Again, I emphasize that production is not being dealt with at this stage.

17. The more difficult question is whether Mr. Chan should be required to file this affidavit on the additional basis that if the documents are not in his physical custody nor ever have been in his physical custody nevertheless they are in his "power" by virtue of his shareholding in Continental. As re Tecnion Investments Limited [1985] B.C.L.R. 434 shows dominance in the running of a company's, business does not prove the requisite degree of control; it has to be shown that the company is under the unfettered control of the shareholder. Mr. Barlow denies that control has been made out. The Plaintiffs own 20% of the shares in Continental. Some 30% are held by the public and it is suggested that Mr. Chan, whether through his wife or companies controlled by him, owns another 50%. Mr. Barlow takes issue with the fact that Mr. Tang treats Mrs. Chan and the discretionary trusts and companies as if they were Mr. Chan. He submits that it has not been shown that Continental is the alter ego of Mr. Chan and he does not accept Mr. Stokes' evidence in relation to 50%. Mr. Barlow submits that Mr. Chan is not a one man company. He referred me to certain passages in the speech of Lord Diplock in Lonrho Ltd. v. Shell Petroleum [19181 1 WLR 627. The following two passages were relied upon by Mr. Barlow. At p.634 Lord Diplock said this:

"The articles of association of all these subsidiaries vest the management of the company in its board of directors. It is the board that has control of the company's documents on its behalf; the shareholders as such have no legal right to inspect or to take copies of them. If requested to allow inspection of the company's documents, whether by a shareholder or by a third party, it is the duty of the board to consider whether to accede to the request would be in the best interest of the company. These are not exclusively those of its shareholders but may include those of its creditors."

18. At p.635 in relation to the word "power" in the phrase "the documents which are or have been in his possession, custody or power" Lord Diplock said this:

"The phrase, as the Court of Appeal pointed out, looks to the present and the past not to the future. As a first stage in discovery, which is the stage with which the subsidiaries appeal is concerned, it requires a party to provide a list, identifying documents relating to any matter in question in the cause of (sic) matter in which discovery is ordered. Identification of documents requires that they must be or have at one time been available to be looked at by the person upon whom the duty lies to provide the list. Such is the case when they are or have been in the possession or custody of that person; and in the context of the phrase "possession, custody or power" the expression "power" must, in my view, mean a presently enforceable legal. right to obtain from whoever actually holds the documents inspection of it without the need to obtain the consent of anyone else. Provided that the right is presently enforceable, the fact that for physical reasons it may not be possible for the person entitled to it to obtain immediate inspection would not prevent the document from being within his power; but in the absence of a presently enforceable right there is, in my view, nothing in Order 24 to compel a party to a cause or matter to take steps that would enable him to acquire one in the future."

19. I agree with Mr. Barlow's contention that Continental is not the alter ego of Mr. Chan. I find that it is impossible to say that Continental is under the unfettered control of Mr. Chan. Mr. Tang relied upon a decision of the British Columbia Court of Appeal in Dallas v. Dallas 24 DLR 746. But that was clearly a one man company and the Court there held that he was in effective control of the company which was his alter ego and there were no minority shareholders in whose interests the company might assert control over the documents and thus they had to be produced. Mr. Tang also relied upon B v. B (1978] FAM. 1.8. In that case the board of an "operating company" consisted of the husband who was chairman and managing director and six directors. A holding company owned 75% and a public company owned the remaining 25% of the operating company's issued shares. The husband owned 51% of the holding company shares, and the majority of the remaining shares in that company were held by members of his family. In ancillary proceedings the wife applied for discovery. The Registrar made an order under 0.24 and the husband appealed and his appeal was successful in part. At p.193 Dunn J. (as he then was) said:

"I will conclude this part of my judgment by summarising my conclusion as to the law. (1) a party to a suit must disclose all. the documents in his possession, custody or power which are relevant to the matter in issue. The Court has a discretion whether or not to order him to make such disclosure, and also has a discretion whether or not to order him to produce the document for inspection by the other party or the Court. (2) the documents of a company are in the legal possession of the company. If they are or have been in the actual physical possession of a director who is a party to litigation they must be disclosed by that director, if relevant to the litigation, even though he holds them as servant or agent of the company in his capacity as an officer of the company. (3) whether or not documents of a company are in the power of a director who is a party to the litigation is a question of fact in each case. "Power" in this context means "the enforceable right to inspect or obtain possession or control of the document". If the company is the alter ego of such a director so that he has unfettered control of the company's affairs he must disclose and produce all relevant documents in the possession of the company. (4) where relevant documents in the possession of a company are disclosed by a director as being in his custody or power, the Court has a discretion whether or not to order production of them. (5) the discretion is a judicial discretion, and in exercising it the Court would have regard to all the circumstances. The Court will balance the relative importance of the documents and the hardship likely to be caused to the wife by non production against prejudice to the husband and third parties likely to be caused by production. It has not hitherto been a practice of the Court to order production of company documents to which the board of directors object on affidavit, provided that the Court is satisfied that the objection is not contrived for the purpose of frustrating the powers of the Court. The Court will not in the exercise of its discretion order parties to do that which they had no power to do. The Court will not order production unless it is satisfied that production is necessary either for disposing fairly of the issue between the parties or for saving costs."

20. During the course of the argument reference was also made to some observations of Shaw L.J. in Lonrho v. Shell Petroleum [1980] Q.B. 3.58 at 376. This was in the Court of Appeal and I have already referred to certain observations of Lord Diplock when the matter went to the House of Lord. But at p.376 Shaw L.J. said this:

"There are no doubt situations, such as existed in B v. B ... where on the established facts a company is so utterly subservient or subordinated to the will and the wishes of some other person (whether an individual or parent company) that compliance with that other person's demand can be regarded as assured. Each case must depend upon its own facts and also upon the nature, degree and context of the control it is sought to exercise."

21. I do not propose to go through the voluminous evidence in this case. I am not prepared to hold on the evidence placed before the Court that Continental is the alter ego of Mr. Chan or that it is under his unfettered control. Clearly, he has an important role to play and has had an important role to play in the affairs of Continental but to equate this case with the frequently found case of a sole trader who turns himself into a limited company which can justifiably be called his alter ego, is stretching the matter too far. I am confident that a Board Meeting of Continental would resolve not to make these documents available for the purposes of this litigation. In my judgment, therefore, these categories of documents are not in Mr. Chan's power. It follows therefore that when Mr. Chan makes and files the affidavit which I order him to do he has to specify whether the documents described in the application are or have been at any time in his possession, custody or power and if not in his possession, custody or power when he parted with them and what has become of them. As I am satisfied that the documents (3-13) are not within his power he only has to list those documents which are or have been in his actual possession or custody. If none of these documents have ever been in his custody or possession then all he needs to do is to say so. If they have been, he must say accordingly.

22. It follows therefore that the order I make is the order sought by the Plaintiffs save that I delete all reference to production of documents and Mr. Chan will make his affidavit in the light of my ruling on the question of "power".

23. As to the question of costs, I propose to make a costs order nisi being costs in cause. I come to that conclusion provisionally because although I have made the order sought in relation to the filing of an affidavit I have not dealt with production because that would have been premature and I also concluded that some of the documents are not in Mr. Chan's "power". It seems to me that a just view of the matter is that costs should be in cause and I make that order nisi.