XCHRX ACTIVE PROFIT LTD. v. NISSHO IWAI HONG KONG CORPORATION LTD. AND OTHERS

HCCL47/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO.47 OF 1998

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J U D G M E N T

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The summons

1. This is a disputed specific discovery application. It is brought by summons dated 30 March 2000 taken out by the plaintiff herein, Active Profit, against the 3rd and 4th defendants, Mr Kodera and Mr Cho, pursuant to Order 24 rule 7, RHC.

2. This summons originally sought relief against the 1st defendant also, but that application was dealt with by a Consent Order entered into with the agreement of Mr Louis Chan, counsel for the 1st defendant, on the first of the two hearing days. Thereafter, the outstanding relief against the 3rd and 4th defendants was stood over for further argument subsequent to such additional discovery as was agreed to be made by the 1st defendant.

The background

3. This specific discovery application takes place against a complex factual background which involves the redevelopment of a parcel of land in the New Territories. In his skeleton argument, Mr Mok, counsel for the plaintiff, has provided the court with a helpful summary of the factual sequence, which I will not here repeat in full. Suffice to say that the scope of the original development venture between the parties to these proceedings underwent a significant change in 1994 with the entry onto the scene of Sun Hung Kai Properties ("SHKP"). SHKP proposed to extend the scope of the existing redevelopment by the inclusion of other pieces of land owned by SHKP, which in turn led to the original redevelopment joint venture company, Mainplaza, thereafter becoming a 50/50 joint venture partner with SHKP in terms of the extended project (phase 1 of which mirrored the original redevelopment plan, and phase 2 the extension).

4. Perhaps the starting point for this case is the defendants' position that as from 31 August 1994 the original venture involving the plaintiff had lapsed, and had been replaced by a new structure pursuant to a new share subscription agreement whereby Mainplaza subscribed to new shares issued in the land holding company, Beachshore (which held the land on behalf of the owners, Messrs Kodera and Cho), so that it is argued that the plaintiff, Active Profit, neither retained an interest in the redevelopment project nor the complex inter-corporate transactions which followed involving, inter alia, three BVI companies, Time Essence Ltd, Beautipower Ltd and Royking Ltd. In outline, what happened was that after the new share subscription agreement had been entered into, wherein Mainplaza had taken an increased stake in Beachshore's increased capitalization, there was subsequently a purported cancellation of that agreement by Mainplaza together with the re-transfer of some 39,000 shares to Mr Kodera and Mr Cho and the sale of the land in question to SHKP for some $378 million. The result was that Mainplaza - and hence the plaintiff, Active Profit, as a shareholder thereof - was cut out from the fruits of this deal, which is the plaintiff's fundamental complaint in these proceedings.

The application

5. Against such a complex factual background, Mr Mok mounted his application against the 3rd and 4th defendants by submitting that certain documents already discovered (for example, the 1st defendant's Letter of Undertaking dated 10 July 1997 in favour of SHKP in relation to the sale of the land, and the two Letters of Warranty of the same date) ineluctably demonstrate that the 1st defendant was as involved in the land sale to SHKP as were the 3rd and 4th defendants, that the latter knew of the 1st defendant's involvement - he asserts a "cosy relationship" between the 3rd and 4th defendants (who are directors of the 2nd defendant) and the 1st and 2nd defendants - and that the categories of document now sought were "critical" to the plaintiff's investigation of the precise role of the 1st defendant in the SHKP deal in that they would be likely to underpin the plaintiff's case for restitutionary relief against the 1st, 3rd and 4th defendants, and at the very least would lead to a train of inquiry. The questions to be answered in this action, maintained Mr Mok, involved not only whether the share submission cancellation was done wrongfully and in breach of fiduciary duty on the part of the 3rd and 4th defendants, which in itself led to a claim in damages as well as declaratory relief and an account of profits, but also, where did the sale proceeds go? In this connection, Mr Mok suggested that the classes of documents as set out in the Schedule annexed to the summons could conveniently be placed under two broad heads - he did not pursue item 7, which had already been given in correspondence - namely, those documents relating to what he termed the 'money trail', and secondly, those documents which must have been exchanged between the parties relating to the SHKP deal.

6. Mr Alan Leong SC, on behalf of the 3rd and 4th defendants, in a moderate and balanced address, opposed across the board the discovery now sought by the plaintiff. He observed at the outset that in 1999 his clients had already filed extensive Lists, both Lists running to 18 pages with 262 items discovered - in particular, he said, all documents pertinent to the SHKP transaction had been discovered - and he submitted that in no area had the plaintiff made out its case for the ambit of the order now sought in light of the principles and requirements of Order 24 rule 7. Mr Leong submitted that each of the 3rd and 4th defendants had "fully complied" with the Order of this court of 23 November 1999, and asked that the application to be dismissed with costs.

7. I turn now to the argument involving the two broad categories of discovery in question.

Schedule items 3, 5, and 6

"3. All cheques and other banking instruments and documents, statements of bank accounts, company books and accounts, ledgers and journals relating to:

(i) the payment of the Shares Consideration and the Shares Deposit as defined in the Agreement relating to the sale and purchase of the entire issued share capital of Time Essence Limited dated 10th day of July 1997 or any part thereof being the consideration for the SHK transaction paid by or on behalf of Royking to Beautipower, Kodera or Cho; and

(ii) all payments out of the said Shares Consideration and the Shares Deposit or any part thereof by Beautipower, Kodera or Cho or on their respective behalf

...

5. All cheques and other banking instruments and documents, statements of bank accounts, company books and accounts, ledgers and journals relating to the payment of the Loan Consideration and the Loan Deposit as defined in the Agreement relating to the assignment of loans dated 10th July 1997 or any part thereof.

6. All cheques and other banking instruments and documents, statements of bank accounts, company books and accounts, ledger and journals relating to the payments by Nissho HK and/or Kodera and payments to Kodera referred to in the confirmation letter dated 1st August 1997, which is listed in 4(e) above."

8. Items 3, 5 and 6, said Mr Mok, were without exception about documents concerning the whereabouts of the monies relating to the SHKP transaction : item 3 being documents relevant to payment of the sale proceeds themselves, item 5 payments relating to transactions auxiliary to the SHKP sale agreement, and item 6 going to payments confirmed to be made one day after the sale proceeds had been paid over.

9. Mr Leong's objection to this category was, at bottom, one of irrelevance, in that such discovery was, he said, unnecessary at this stage. This material was no more than surrounding evidence going to a fact not in dispute - namely, that the sale of the land to SHKP had been completed and a sum in excess of $370 million paid over. Moreover, submitted Mr Leong, in the existing Lists filed by the 3rd and 4th defendants over 86 documents pertaining to the SHKP transaction had been identified, and at this stage at least there was no reason why the court should be interested in the mechanics of the transaction, particularly in light of the prayers for relief against the 3rd and 4th defendants. The plaintiff clearly did not anticipate any assessment of damages at trial, and should appropriate relief on liability ultimately be granted the court then and there could order accounts and inquiries, which relief would trigger precisely such a 'money trail'. In the meantime, however, the request pursuant to item 3(i) should be refused.

10. So far as item 3(ii) was concerned, there was, he said, no doubt that Beautipower had received money from Royking, and the payment out phase had no relevance to his clients. It followed therefore that the discovery here against the 3rd and 4th defendants should stop at the Beautipower stage, albeit the plaintiff may want to seek discovery in this regard from the 1st and 2nd defendants.

11. Turning to item 5, Mr Leong maintained that this transaction was incidental to the whole package wherein Nissho (HK) and Kodera would assign accounts receivable from Beachshore to a SHKP subsidiary for certain incidental debts to be sorted out, so that this exercise would inevitably be irrelevant and a waste of money given that it was nothing to do with the case against the 3rd and 4th defendants, and how much money had been received by them.

12. Whilst so far as item 6 was concerned, Mr Leong again maintained that this was not relevant to the case against his clients, since the "confirmation letter" in question was merely a document providing for reimbursement to Beachshore of funds expended in the joint venture by the shareholders of Mainplaza, and the extent to which each of the four shareholders would bear on the reimbursement. As such, therefore, these underlying details had no moment either.

13. In response, Mr Mok submitted that on analysis these objections had little substance : the discovery sought under both heads of item 3 was clearly relevant to liability, in that if the money could be demonstrated to have ended up partly in the pockets of the 1st and 2nd defendants, it proved the plaintiff's case, and the tracing of the money flow went to establish the intention and modus operandi of the directors. Moreover, his clients not only sought an account of profits as against a trustee, but further sought claims for breach of fiduciary duty as against Mr Leong's clients, so that whilst there may be no formal damages assessment to trial, a split of the money between the two groups of defendants could not fairly be 'hived off' as a pure quantum exercise; to the contrary, this was an intrinsic part of the liability analysis. What Mr Leong was effectively seeking to do, submitted Mr Mok, was to protect his clients from discovering any information relevant to the real transaction that had gone on "behind our backs", and without the documents now sought under this head it would be difficult for the plaintiff to assemble a complete picture as to what was the intended purpose of the convoluted structure culminating in the sale transaction and its aftermath. Moreover, it was clear that the existence of the class of documents now sought within these items was not disputed, and the requirement of relevance must, in the circumstances, be satisfied.

14. I agree with Mr Mok's contentions. Having reflected upon the arguments, I am firmly inclined, in the exercise of my discretion, to order discovery under items 3, 5 and 6, persuasively though Mr Leong argued his position. I am unattracted to Mr Leong's submission, in effect, of "let them win first" prior to such discovery being made, and I can see why the plaintiff pursues the documentary evidence under item 3 in a bid to establish payment of part of the proceeds to the 1st defendant, and consequently to establish a conspiracy with the 1st defendant.

15. Items 5 and 6 in my view are less clear cut than item 3, but once again, particularly in light of the fact that the plaintiff is presently in the dark as to what precisely occurred and why, I am minded similarly to exercise my discretion in favour of the plaintiff. Under none of these heads do I doubt that the requirements of Order 24 rule 7 are met, and it seems to me that this is precisely the type of case wherein the discovery process is of particular import, even though, on occasion, the discovery sought may arguably lie within the outer limits of the relevance requirement. I am satisfied, however, that these classes of documents fall inside the perimeter fence, and not outside it.

Items 1, 2 and 4

"1. All the correspondence and other documents (which are not privileged) passing between the parties to the SHK transaction and between their respective legal advisors relating to the SHK transaction. For the avoidance of doubt, particularly, all the correspondence and other documents which came into existence between January 1997 and June 1997.

2. All notes and minutes of meetings and discussion, memoranda, file notes and solicitors' attendance notes relating to the SHK transaction.

...

4. Communications in writing, meeting notes, internal documents and company documents relating to the entry into :

(a) letters of undertaking, indemnities, counter indemnities provided as part of the SHK transaction;

(b) agreement relating to the assignment of loans dated 10th July 1997 between Nissho HK, Kodera, Kose Top, Ever Gain, Cho and SHK together with the assignment dated 31st July 1997;

(c) option agreement relating to the sale and purchase of 40,000 5% non-voting deferred shares of Beachshore dated 10th July 1997 between Kodera, Cho, Alfra Investments and Royking;

(d) memorandum of release dated 31st July 1997 between Tsuen Kwong, Penta-Ocean and Ever Gain;

(e) confirmation letter dated 1st August 1997 between Nissho HK, Nissho, Highs Development and Milemore; and

(f) cash deposit (HK$3 million) or pledge of the cash deposit certificate referred to in the letter dated 1st August 1997 from Nissho HK to Messrs Hastings & Co."

16. Items 1, 2 and 4 represented the second broad category of documentation the plaintiff now sought covering all correspondence, minutes, notes and associated documents concerned with the SHKP transaction.

17. Item 1 (as amended to clarify the privilege point) and item 2 were obviously related, said Mr Mok, and were clearly relevant in the context of this case. It was notable, he said, that under these heads there was, at least on the basis of the presently discovered material, but one set of minutes only relating to one meeting. No attendance notes of any solicitor of any meeting had ever been produced, and this is the context of a transaction in excess of $370 million. This fact in itself, maintained Mr Mok, rendered the absence of such documents highly unlikely - to the contrary, it was inherently probable that there were indeed such records - although Mr Mok made it clear that there was here no question of seeking to infringe upon solicitors' communications to clients within the normal rules governing legal privilege. However, such non-privileged records were clearly germane to the plaintiff's case, submitted Mr Mok. Whilst the other side's position was that the core transaction had been cancelled, and that what had happened thereafter was no business of the plaintiff, the plaintiff's position was that that cancellation could not be taken at face-value, and that such post-transaction events would be a central feature of the case.

18. As to items 1 and 2, Mr Leong observed that this application was based upon nothing more than the plaintiff's conjecture, together with the hypothesis that if there was a deal of this magnitude then it must have taken some time to negotiate. As to this, the defendants' case was that the initial approach from SHKP for a deal to sell the land had taken place no earlier than 28 May; moreover, his clients had already verified their existing Lists on oath. If a prima facie case was made out under Order 24 rule 7 - which Mr Leong disputed - his clients would have to respond, and as presently instructed he did not know what that response would be. But he maintained that the way the case had been put forward by the plaintiff fell short of justifying a case for specific discovery under Order 24 rule 7.

19. In terms of item 4, Mr Leong suggested that what the plaintiff was here doing was to assume the existence of a documentary record leading up to the transaction; however, a case had not been made out as to the existence of these documents, which, had they existed, would already have been disclosed. Moreover, he said, since the "end product", so to speak, had been discovered, he questioned the relevance of disclosing records of discussions leading up to such end product.

20. In response, Mr Mok argued strongly that since Messrs Hastings had acted both for the 1st defendant and also for the 3rd and 4th defendants, it followed that, unless privileged, communications between solicitor and one party and between solicitor and the other would constitute communications between co-conspirators, and as such documents of this ilk would be germane to establish the conspiracy alleged in the pleadings. There was no escaping the hard fact, stressed Mr Mok, that save for one instance, not a single minute, memo nor attendance note had been disclosed, and that was precisely why the defendants had been at pains to verify the validity of their Lists "to the best of [their] knowledge, information and belief" as at that date, 22 December 1999, and the fact remained that there had been no confirmation after that date. Communications between Messrs Hastings and SHKP would undoubtedly constitute materials relevant for discovery, and there had been no suggestion from counsel that Messrs Hastings had not kept any notes, memos or attendance notes; indeed, Mr Leong had said that he would take instructions on the point. Privileged material obviously was not sought, said Mr Mok, but since Messrs Hastings had been acting for both parties, the overwhelming probability was that there would be discoverable communications in existence. The present affidavits sworn by the 3rd and 4th defendants did not cover the situation, albeit he accepted the possibility that these affidavits as sworn on 22 December 1999 may have been sworn in ignorance of the fact that at the relevant time Messrs Hastings were also acting for the 1st defendant, and consequently there may have been a genuine error.

21. After considering the submissions of counsel, I have concluded that in the circumstances the jurisdictional benchmark under Order 24 rule 7 has been attained, and that the applications under items 1, 2 and 4 have resolved once more into an exercise of the court's discretion. And once again, in terms of this second broad category of documents, I am minded to exercise my discretion across the board in favour of the plaintiff. The Commercial Court (which is not usually exercised about discovery matters) is here faced with a claim by a plaintiff who says, rightly or wrongly I know not, that it has been wrongfully cut out from its share in the profits of a significant transaction in which it had once legitimately been part. The allegations in the pleadings are wide ranging, including allegations of conspiracy, and the relief sought is both restitutionary and compensatory. On the material presently before the court, this patently is not a frivolous claim. Whether it will succeed remains to be seen, but it is apparent to me that the fullest permissible discovery is essential in a case which, on the basis of its record to-date, is likely to culminate in a hotly disputed and difficult trial.

22. Accordingly, I order the discovery now sought by the plaintiff. If indeed there are further documents, so be it; in my view, they are justifiably and legitimately discoverable and must be verified on oath. If, on the other hand, and notwithstanding the inherent probabilities, there are no further documents falling within the ambit of the items in the Schedule, I can discern no difficulty in the 3rd and 4th defendants complying with the requirements of paragraph 3 of the summons, and of swearing an affidavit in such terms.

Order

23. The result of the foregoing, therefore, is that I make an order in terms of paragraphs 3 and 4 of the plaintiff's summons, save that I amend the time period from 14 days to 21, and save that the ambit of the order is in terms of paragraphs 1 to 6 of the Schedule only. There is to be liberty to apply.

24. As to the costs of the application, I make an order nisi in terms of paragraph 5 of the summons, with the addition of the words "to be taxed if not agreed".

25. I venture to express the hope that this application marks the conclusion of the various interlocutory disputes in this case, and that henceforth the parties will work together to take this dispute to trial as soon as may be possible.

26. I thank both counsel for their assistance.