JOSE MIRANDA DA COSTA JUNIOR AND ANOTHER v. LORENZO YIH AND OTHERS

HCA 156/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 156 OF 2010

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D E C I S I O N

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1.  This is an appeal by the 1^st plaintiff from the master’s refusal on 24 October 2012 to order specific discovery against the 1^st defendant in respect of three classes of documents, the master having ordered discovery in respect of four out of nine classes of items originally sought. 

The action

2.  The 1^st plaintiff is a Brazilian merchant engaged in the business of supplying high end gemstones and is the founder and owner of the 2^nd plaintiff, a Brazilian company.  This action arises from the 1^st plaintiff’s claim that in or around September 2003 he and the 1^st defendant orally agreed to jointly set up and operate in partnership a wholesale business of gemstones in Hong Kong through a Hong Kong company to be formed.  The 1^st plaintiff would manage and develop the business and its goodwill by making use of his expertise and experience and the 1^st defendant would provide financial and local support in Hong Kong including office premises and staff.

3.  The 1^st defendant is the major beneficial owner, the Chairman and CEO of LJ International Inc (“LJI”), a NASDAQ listed company engaged in the manufacture and marketing of jewellery.

4.  Pursuant to the agreement, the 3^rd defendant was incorporated in Hong Kong on 7 January 2004.  Two shares were issued: one was issued to Li Fung Ying, Cam and the other to Wan Po Ming, Flora.  They were employees of LJI and held the same on trust for the 1^st plaintiff and the 1^st defendant.

5.  On 31 December 2006, the two issued shares in the 3^rd defendant were transferred to a BVI company beneficially owned by the 1^st defendant called Oceandrift Group Ltd (“Oceandrift”) and on 6 November 2008, Oceandrift transferred those shares to the 2^nd defendant. The 1^st plaintiff’s case is that those shares continued to be held on trust for the 1^st plaintiff and the 1^st defendant.

6.  The 1^st plaintiff actively participated in the business of the 3^rd defendant from 2004 onwards until his exclusion from the 3^rd defendant’s office on 5 November 2009.  The 1^st plaintiff gave instructions to staff who took orders from him and was treated as one of two bosses.  He was also a director from August 2007 until 10 November 2009.  He and the 1^st defendant were each paid a monthly shareholder’s bonus of $120,000 until December 2008 when the 3^rd defendant’s cash flow situation no longer permitted that.

7.  At all material times the 1^st defendant controlled a company called Goldleaves Trading Ltd (“Goldleaves”) which had an office at Unit C, LG/F, Phase 3, Kaiser Estate, 18 Man Lok Street, Hunghom (“the premises”).  The 3^rd defendant operated from the premises and staff of Goldleaves was seconded to and placed under the payroll of the 3^rd defendant. Rental for the use of the premises, office furniture and supplies were paid to a subsidiary of LJI at the request of the 1^st defendant.

8.  It is the 1^st plaintiff’s case that on 5 November 2009, the 1^st defendant repudiated the agreement.  When the 1^st plaintiff returned from Shenzhen that day he found out that Mr Osorio Mendes Quintino Neto who had worked with the 1^st defendant for many years caused the 3^rd defendant’s office to close and compelled all staff to leave.  The 1^st plaintiff was thus excluded from the 3^rd defendant’s office.  He was also denied access to the 3^rd defendant’s computer system and was no longer able to access his e-mail accounts or the 3^rd defendant’s server.

9.  The relief the 1^st plaintiff seeks includes:

(1)  declarations that the 1^st defendant had repudiated the agreement, that the 1^st plaintiff and the 1^st defendant were at all material times the beneficial owners of the 3^rd defendant, that the 2^nd defendant holds one of the two shares in the 3^rd defendant on trust for the 1^st plaintiff;

(2)  an account; and

(3)  payment of the fair value of a 50% interest in 3^rd defendant and consequential relief.

10.  The 1^st defendant denies the agreement or any business partnership between himself and the 1^st plaintiff but advances no positive case as to the beneficial ownership of the 3^rd defendant. Mr Manzoni SC (counsel for the 1^st defendant) characterized the 1^st plaintiff’s claim as a claim by a disgruntled ex‑employee.  The 2^nd defendant who was the sole registered shareholder of the 3^rd defendant has not appeared in these proceedings.

The classes of documents

11.  Specific discovery (including a further list of documents verified by affidavit) is sought in respect of the following classes of documents relevant to the issue of the beneficial ownership and control of the 3^rd defendant.

(1) Item B

E-mails sent to and from the 1^st defendant, the 1^st defendant’s subordinates (namely, Alfonsa Au, King Leung, Cam Li, Ringo Ng, Vincent Tang, Iris Tsang and Elsa Yue (“the subordinates”)) and the 1^st plaintiff between 7 January 2004 and 5 November 2009 (the “relevant period”) and the attachments thereto insofar as they relate to the shareholding of the 3^rd defendant, the beneficial ownership of the shares in the 3^rd defendant, the control of the 3^rd defendant, the distribution of profits of the 3^rd defendant and the partnership between the 1^st plaintiff and the 1^st defendant during the relevant period.

(2) Item C

Board minutes evidencing the authorised signatories of the 3^rd defendant’s bank accounts.

(3) Item H

Register of shareholders and register of directors of the 2^nd defendant and the declaration of trust in respect thereof.

12.  According to the 1^st plaintiff, the subordinates held the following positions:

Alfonsa Au (“Alfonsa”)—executive director and COO of LJI;

King Leung (“King”)—financial controller of LJI;

Cam Li (“Cam”)—staff of the 1^st defendant and/or LJI who oversaw the business of LJI;

Ringo Ng (“Ringo”)—executive director and CFO of LJI;

Vincent Tang (“Vincent”)—in charge of finance and accounting at LJI;

Iris Tsang (“Iris”)—in charge of secretarial matters at LJI; and

Elsa Yue (“Elsa”)—independent non-executive director of LJI until 2007; administrator of the 1^st defendant’s companies and projects.

13.  Each of LJI and the 3^rd defendant had its own domain name being respectively “ljintl.com” and “mghk.net”.  The 1^st plaintiff and the subordinates each had e-mail addresses at one if not both of those domain names.

14.  One of the central issues in the present action is the beneficial ownership and control of the 3^rd defendant which involves the following questions:

(1) whether there was an agreement between the 1^st plaintiff in the 1^st defendant to form a business partnership;

(2) whether that agreement was carried out;

(3) whether the 1^st plaintiff and the 1^st defendant were at all material times the beneficial owner of one share each in the 3^rd defendant; and

(4) who had control over the 3^rd defendant on 5 November 2009.

15.  In passing, it should be mentioned that the 1^st defendant’s list of documents consists of no more than four documents even after the order for discovery made by the master.

The applicable principles

16.  It is common ground that the 1^st plaintiff has to establish a prima facie case that the documents exist, that they relate to matters in issue in the action and that they are in the possession, custody or power of the other party.  When it is established that those three prerequisites for jurisdiction exist, the court may exercise its discretion whether or not to order disclosure.

17.  Mr Manzoni objected to the discovery sought.  I will deal with his objections under each of the three classes of documents sought.

Item B

18.  This category consists of e-mails spanning a period of almost six years to and from (A) the 1^st defendant, (B) his subordinates and (C) the 1^st plaintiff during the relevant period and the attachments to the e-mails insofar as they relate to:

(1) the shareholding of the 3^rd defendant,

(2) the beneficial ownership of shares in the 3^rd defendant,

(3) the control of the 3^rd defendant,

(4) the distribution of profits, and

(5) the partnership between the 1^st plaintiff and the 1^st defendant during the relevant period.

19.  Ms Cheung, counsel for the 1^st plaintiff, referred the court to various e-mails passing between the 1^st defendant, the 1^st defendant’s subordinates and the 1^st plaintiff during the relevant period discovered by the 1^st plaintiff which relate to the issues in this action.

20.  In this connection, mention might be made of the following e-mails arranged in chronological order:

(1) In a PowerPoint presentation about the 3^rd defendant dated 18 April 2005 (seemingly prepared at the behest of Elsa) and circulated among the subordinates including Elsa and Cam in October 2006, it was stated that the 1^st defendant and the 1^st plaintiff were “Partners” of the 3^rd defendant, each being entitled to 50% of the net profit from the sale of stones.

(2) An e-mail dated 4 August 2006 from the 1^st defendant to Alfonsa but copied to the 1^st plaintiff and Cam which, in pertinent part, read:

“Miranda you are my partner and old friend pls take care of, you know I am trust you more than 100%, never ask any thing since we start 3 years ago, always support whatever you ask for. also I and Board high appriciate an recognized all your contribution and your integrity.”

(3) E-mail exchanges dated 7 and 8 November 2006 among Iris, Vincent, Ringo and King concerning the acquisition of a new BVI company namely Oceandrift which made references to existing declarations of trust concerning the shares of the 3^rd defendant, with Vincent suggesting that the shareholder of Oceandrift should sign a declaration of trust in favour of the 1^st plaintiff and the 1^st defendant.

(4) An e-mail dated 20 August 2007 from King to the 1^st plaintiff concerning a request from LJI’s auditors for the year ended 31 December 2006 made to the 1^st plaintiff “as the beneficiary owner” of the 3^rd defendant. This was followed up by an e-mail from Ringo to the 1^st plaintiff (copied to the 1^st defendant and Cam) concerning the need to reply to King’s e-mail.

21.  As regards the third of the prerequisites, Ms Cheung relied on the fact that insofar as they were in the possession of the 1^st defendant’s subordinates, they were within the 1^st defendant’s control.

22.  Mr Manzoni submitted that the 1^st defendant was merely the Chairman of LJI and that did not mean that he had possession, custody or control of the e-mails of the eight subordinates named who were staff of LJI which is a NASDAQ listed company.  (In fact, only seven and not eight subordinates were named.)  It was said that discovery if ordered would require the 1^st defendant to obtain permission from LJI.  It is to be noted that this was not a point taken in the 1^st defendant’s affidavit which said little about his role and interest in LJI.

23.  While Mr Manzoni accepted that the subordinates were staff of LJI, the 1^st defendant’s affidavit made no comment as to the subordinates’ employer(s).  Nevertheless, it is clear from the documents that the 1^st defendant had a free hand in deploying or seconding the subordinates to work for the 3^rd defendant when required during the relevant period.  For example, there is an e-mail dated 14 July 2006 from the 1^st defendant to LJI staff including several of the subordinates giving them instructions to provide reports on a weekly/monthly basis.  The 1^st defendant was clearly in a position to give orders to the subordinates and deploy them as he wished.

24.  In those circumstances, I do not consider that there is any substance in the point taken by Mr Manzoni which, as earlier noted, was not even made in the 1^st defendant’s affidavit.  I accept that the 1^st plaintiff has shown a prima facie case that the three prerequisites do exist.

25.  The question then is whether the discretion should be exercised.

26.  Mr Manzoni submitted that the scope is too broad and oppressive.  First, it was said that the period is far too long.  But it commences with the date of incorporation of the 3^rd defendant and ends with the date the 1^st plaintiff was excluded from its office and denied access to its computer system, server and e-mail accounts.  While the period is almost six years, the denial of access to the 1^st plaintiff’s accounts justifies its length.  The 1^st plaintiff cannot be expected to recall all the e‑mails he received over this period relating to the five topics.

27.  Second, it was said that notwithstanding denial of access to the e-mail accounts, the discovery relates to e-mails the 1^st plaintiff has already seen and, in any event, the 1^st plaintiff was able to produce some of the e-mails.  In this connection, the court was shown a copy of the 1^st plaintiff’s 5^th affidavit filed on 5 March 2013 in opposition to the 3^rd defendant’s application against, inter alia, the 1^st plaintiff pursuant to Order 24, rule 3.  In §10 the 1^st plaintiff explained why he was able to discover a small part of the e-mails exchanged at the material time.  The 1^st plaintiff explained that he had a backup copy of a small part of the e-mail exchanges in his notebook computer and a small amount of e-mails had been provided by Cam.

28.  Third, in relation to the e-mail dated 4 August 2006 (see §20(2) above), the 1^st defendant sought to explain it away on the basis that his command of English is poor, English being his third language, ranking after Portuguese and Mandarin such that “partner” used in that e-mail should be construed as “colleague” or “friend”.  Yet, I note that his affidavit dated 22 August 2012 which was written in fluent English does not contain any interpretation clause.

29.  Since the 1^st defendant’s objections have no substance, I consider that it would be appropriate to exercise my discretion to order specific discovery of the documents under Item B.

Item C

30.  This seeks discovery of board minutes evidencing the authorised signatories of the 3^rd defendant’s bank accounts.

31.  It is common ground that prior to November 2009 the 3^rd defendant maintained bank accounts with HSBC and Hang Seng Bank.  In his 3^rd affidavit, the 1^st plaintiff stated that to the best of his knowledge, the 1^st defendant, Alfonsa, Ringo and Elsa were the bank signatories.  The 1^st plaintiff has exhibited board minutes dated 31 October 2006 signed by Cam as chairman recording that Ringo was added as one of the authorised signatories of all the 3^rd defendant’s accounts maintained with Hang Seng Bank.  The 1^st defendant did not dispute those matters in his reply affidavit.

32.  Ringo was one of the 1^st defendant’s subordinates and from the documents I have seen, the 1^st defendant gave instructions to the subordinates who would act as directed.  In the circumstances of this case, it is difficult to conceive of anyone other than the 1^st defendant in a position to add the CFO of LJI (that being Ringo’s position in LJI) to the pool of signatories for the 3^rd defendant’s accounts maintained with Hang Seng Bank.  I am satisfied that a prima facie case has been shown that documents evidencing the identity of the other authorised signatories exist.

33.  Mr Manzoni’s objection was not that these documents do not exist but that they are not relevant to the issues in this action.  He submitted that being a signatory is different from being the owner of the bank account.  That may be so but in my view the identity of the signatories would go to the issue of beneficial ownership and/or control of the 3^rd defendant during the Relevant Period.

34.  Citing from Hong Kong Civil Procedure 2013 at 24/2/7, Mr Manzoni submitted that there is no jurisdiction to make an order against a party to use all reasonable means to obtain possession of documents so that an order for the discovery of those documents, which at the time was not possible, might then be made.  He submitted that as these documents belong to the 3^rd defendant, his client should not be ordered to obtain those documents so that they could be passed on.  He also cited the following passage from the same annotation which reads:

“Documents of a company are not necessarily ‘in the power’ of its majority shareholder; dominance in the running of the company’s business does not prove the requisite degree of control; it must be shown that the company is under the unfettered control of the shareholder (Re Tecnion Investments Ltd [1985] BCLC 434, CA; but a less restrictive approach is evident in Innovisions Ltd v Chan Sing Chuk, Charles & Others [1992] 2 HKLR 306, CACV 55/1992 (Cons VP, Power JA & Sears J; 4 August 1992).”

35.  Notwithstanding his reliance on those statements, the court was not referred to the case law.  Mr Manzoni’s emphasis was that “unfettered control” had to be shown. In the Court of Appeal decision in Innovisions, unreported, at §26, Power JA who gave the judgment of the court referred to the role and position of Mr Chan (the defendant in that case) where he was described as founder, chairman, managing director and substantial shareholder and had “a dominant role in the executive and management functions of the company ...”.  Power JA considered that whether or not it could be properly said that the company was Mr Chan’s alter ego the court was satisfied that there was prima facie evidence which indicated a real likelihood that the contested documents would have come into his possession or custody during the relevant period.

36.  In the course of Mr Manzoni’s submissions, in the context of his client not challenging the modus operandi of the 3^rd defendant as stated in §12 of the amended statement of claim, almost as an aside, it was suggested that “there must have been an agreement between LJI and the 3^rd defendant” that led to that state of affairs.  There has been no mention of any such agreement in the defence, the 1^st defendant’s affidavit and the 1^st defendant’s skeleton arguments.  As chairman and CEO of LJI, presumably the 1^st defendant would have known about the existence or otherwise of such a document.  In the absence of evidence in support, Mr Manzoni’s suggestion cannot be taken seriously.

37.  On the facts of the present case, I am satisfied that there is prima facie evidence that indicated a real likelihood that the 1^st defendant has possession, custody or control over the documents sought.

Item H

38.  The 1^st defendant does not dispute the 1^st plaintiff’s evidence that the 2^nd defendant, like Oceandrift, is a corporate vehicle wholly owned and controlled by him.  In §70 of his 3^rd affidavit, the 1^st plaintiff stated:

“In around the 2^nd half of 2007, [the 1^st defendant] and I met at his office. Ms Eliza Wu of ICS Trust (Asia) Ltd (‘ICS’) was also present at the meeting. [The 1^st defendant] told me that LJI had some problems with KPMG, LJI’s auditors. [The 1^st defendant] asked me to do him a favour to accept appointment as registered director of Sinobras and [the 3^rd defendant]. He said he would also use [the 2^nd defendant], which was owned by him, to hold his private businesses. [The 2^nd defendant] would also be appointed as a director of Sinobras and [the 3^rd defendant], along with me. My understanding was that [the 1^st defendant], through [the 2^nd defendant], would effectively be a director of [the 3^rd defendant] and Sinobras. He said Ms Eliza Wu would handle the paperwork for us.”

39.  The e-mail exchanges referred to earlier concerning the 3^rd defendant show that the initial registered shareholders of the 3^rd defendant including Cam were nominees.  Cam had in fact executed a declaration of trust in favour of the 1^st defendant.  At the end of 2006, Cam transferred one of the two issued shares in the 3^rd defendant to Oceandrift but a month or so earlier, she had been allotted one registered share in Oceandrift and on the same day she had executed a declaration of trust stating that the share belonged to the 1^st defendant.

40.  There are documents that show Oceandrift as having two issued shares.  There is no evidence of any consideration passing from the 2^nd defendant to Oceandrift.  I am satisfied that a prima facie case has been established of existence of trust arrangements in respect of the issued shares of the 2^nd defendant and, it being a corporate entity, must also have a register of shareholders and a register of directors.

41.  Again Mr Manzoni does not dispute the existence of the documents.  His objection is that the fact that such documents exist is not equivalent to those documents being in the 1^st defendant’s custody and control.  He repeated his submissions based on the passages set out in §34 above that I have already addressed.

Order

42.  The appeal is allowed.  There is to be an order in terms of paragraphs 1 to 3 of the Notice of Appeal dated 7 November 2012 with an order nisi of costs in favour of the 1^st plaintiff.