ACROPOLIS LTD v. W&Q INVESTMENT LTD AND OTHERS

HCCW 218/2017
[2018] HKCFI 37

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING‑UP PROCEEDINGS NO 218 OF 2017

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D E C I S I O N

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1.  On 10 July 2017, the petitioner issued the present petition against the respondents seeking relief relating to the circumstances in which the 14^th respondent (“Company”) came to be listed on the GEM Board of the Stock Exchange of Hong Kong Ltd in January 2017 and in particular the placement of 50 million new shares by which the listing was achieved which constituted 25% of the enlarged capital of the Company.

2.  The petitioner alleges that a significant proportion of the placed shares were placed with persons associated with and acting in concert with Mr Liu Chang Kien and other persons named in the petition.  The reasons for so alleging are summarised in paras 19 to 21 of the petition:

“19. Further study shows that the distribution of the 50,000,000 shares was in fact highly concentrated.

(1) The distribution to the top 1, 5, 10, and 25 Placees was as follows.

	# of Shares	% in Company
Top Placee	6,400,000	3.20%
Top 5 Placees	27,685,000	13.84%
Top 10 Placees	41,635,000	20.82%
Top 25 Placees	49,160,000	24.58%

(2)   Of the 137 Placees, 83 were allotted only 1 board lot of shares each, i.e., 5,000 shares (at the placing price of $0.84 per share = $4,200); 17 were allotted 2 board lots, i.e., 100,000 shares (= $8,400).

(3)   Public information reveals that the 4 distributors had very unequal distributions.

	# of Shares	% in Company
Cinda	49,500,000	24.75%
Rifa	200,000	0.1%
Qianhai	200,000	0.1%
BMI	100,000	0.05%

20.   By any measure, the shareholdings were highly concentrated.  The top 7 shareholders (Acropolis, W&Q, and the top 5 Placees) already accounted for 88.84% of the total issued shares.  Moreover, immediately after the listing, 24.75% of the 25% of shares ostensibly in public hands were in fact under the watch of one securities firm, namely Cinda.

21.   Trading in the shares of the Company was illiquid and minimal.”

3.  On 13 July 2017, the petitioner issued a summons against Cinda International Securities Ltd (“Cinda”), a third party, who as can be seen from para 19(3) of the petition which I have quoted above, was one of the securities firms involved in the placement and, in particular, the placement of 49,500,000 shares.  The documents sought are identified in the schedule to the summons (“Schedule”) which I have appended as Schedule 1 to these reasons.  The petitioner is seeking documents, as can be seen from the Schedule, which identify the placees, and also would be likely to demonstrate whether or not the placees were taking the shares as part of their normal securities trading activities or whether they indicate that they may have been one‑off acquisitions which have been retained by persons who would act at the direction of Mr Liu or persons associated with him.

4.  The summons first came on before Mr Justice Anthony Chan on 19 September 2017 for a 15‑minute hearing.  By that time, Cinda had already agreed the terms of an order which is now contained in a letter that both parties have signed dated 2 January 2018, the material parts of which read as follows:

“(1) The Third Party (‘Cinda’), shall file and serve on the Petitioner an affirmation by one of its officers (the ‘Affirmation’) within 14 days stating whether it had and has in its possession, custody or power the documents and/or classes of documents as set out in Schedule 1 to the Summons (the ‘Documents’);

(2) For any Documents that Cinda has in its possession, custody or power, it shall through its solicitors, provide to the Petitioner’s solicitors copies of the same as soon as possible, but in any event within 21 days from the service of the Affirmation;

(3) For any Documents that Cinda had but no longer has in its possession, custody or power, it shall explain in the Affirmation how the Documents left its possession, custody or power;

(4) Any further or other consequential or incidental orders or directions be made as the Court considers appropriate;

(5) Costs of and incidental to this application and reasonable and necessary costs for complying with paragraphs (1) to (3) herein (including but not limited to the charges for retrieving and producing the Documents) be paid by the Petitioner to Cinda, to be taxed if not agreed.”

5.  At the hearing before Chan J, the 1^st to 4^th respondents were represented by counsel Mr Richard Yip, who informed the court that his clients’ position in respect of the application was neutral.  The 5^th to 16^th respondents were not represented, although they had been served with the summons and supporting affirmations. 

6.  At the hearing before me, the 5^th to 12^th respondents were represented by Mr Ian Chau, who opposed the application on broadly the following grounds:

(1) In the case of document categories 3, 6, 7 and 8 of the Schedule, the order was not necessary because the documents will be disclosed during the course of general discovery in a related High Court Action (“HCA”) in February 2018. 

(2) The application sought documents in respect of all placees, and the appropriate course was to first order the disclosure of documents which reveal their names and contact details in order that the placees could be informed of the application and given the opportunity to be heard if they so wished. 

A similar submission was made by Mr Yip.

7.  The relevant principles which govern applications for what is commonly referred to as Norwich Pharmacal relief is summariesd by Mr Justice Ma (as the Chief Justice then was) in paras 10 to 13 of his judgment in A Co v B Co:[1]

“10. Where innocent parties are caught up or have become involved in the tortious or wrongful activities of others, thus facilitating the perpetration (or continuation) of such activities, justice may require (and therefore the court may order) that such innocent persons come under a duty to assist the victim of the tort or wrongful activities, by the provision of full information even though such innocent persons cannot be shown to incur any personal liability at that stage. The foundation of the court’s jurisdiction here is its equitable jurisdiction. The court’s ability to make such orders was confirmed by the House of Lord’s decision in Norwich Pharmacal Co v Customs and Excise Commissioners [1974] AC 133: see in particular the speech of Lord Reid at pp.173F–175E. The principles and approach established by that decision have consistently been applied in Hong Kong.

11. The jurisdiction is a wide one. It is not restricted, as was at one time thought, to the disclosure of the names of wrongdoers only. In particular, where a plaintiff wishes to investigate the passage of monies in and out of bank accounts in aid of a tracing claim, discovery can be ordered of a bank’s books and documents: see Bankers Trust Co v Shapira [1980] 1 WLR 1274 at pp.1281F–1282F.

12. Though founded ultimately on notions of justice, nevertheless, it is important to emphasise the extraordinary nature of this relief because it is not a usual order and is not one that a court would lightly grant in the absence of powerful factors. I emphasise the following characteristics of this type of order:

(1) It is made against an innocent party whose only involvement is to become mixed up in the tortious or wrongful activities of others. There is, at that stage, no evidence of any wrongdoing on the part of the innocent party.

(2) Instead, whatever wrongdoing there is, exists only on the part of a person or persons against whom no relief may be sought at that stage and indeed against whom there is probably insufficient evidence to found an action. In other words, this person or these persons will most probably not be before the court and would not be able to answer what are often very serious allegations made against them.

(3) Usually, there will, moreover, exist a legal relationship between the innocent person against whom a discovery order is sought and the alleged wrongdoer and this relationship may involve strict duties to be observed on the innocent party’s part. The present case offers what is a common scenario: the innocent defendant is a bank and the alleged wrongdoers its customers. In this situation, any discovery to be made by the innocent party may well, apart from a court order, expose that innocent party to liability, both civil and possibly even criminal. At the very least, a breach of confidentiality is involved.

(4) The court, accordingly, in applications for Norwich Pharmacal relief must, in its discretion, balance the competing interests of the victim of the alleged wrongdoing and an innocent party caught up in the wrongdoing.

13. Given these characteristics as I have outlined, such orders are therefore not lightly made as I have said. In my view, it is essential for the court to bear the following in mind before a Norwich Pharmacal order is made:

(1) There must be cogent and compelling evidence to demonstrate that serious tortious or wrongful activities have taken place. And where fraud or similar serious allegations are made, the degree of proof must correspondingly be high: see Re H (Minors) (Sexual Abuse: Standard of Proof) [1996] AC 563 at p.586C–H. All the more so when the alleged wrongdoer is not and will not likely be before the court.

(2) It must also be clearly demonstrated that the order will or will very likely reap substantial and worthwhile benefits for the plaintiff. Where, as in the present case, the plaintiff is likely to make a tracing claim, there must be a serious possibility that the discovery sought must either allow the plaintiff to preserve what may well be his assets or realistically lead to the discovery of such assets: see Arab Monetary Fund v Hashim (No 5) [1992] 2 All ER 911 at pp.916D–E, 918J–919A.

(3) The discovery sought must not be unduly wide. There is no entitlement to general discovery (by general discovery is meant discovery in the Compagnie Financière et Commerciale du Pacifique v Peruvian Guano Co (1882–83) LR 11 QBD 55 sense): see Arab Monetary Fund v Hashim (No 5) [1992] 2 All ER 911 at pp.918D–E, 919H. It follows therefore that not only must any order be specific, it must also be restricted to those or those classes of documents that are necessary to enable the plaintiff to preserve or discover assets. This is not to say that discovery orders cannot be wide; what is important is that the discovery, whether wide or narrow, is necessary.”

8.  There is no dispute in the present case that the documents of which discovery is sought from the third party are relevant to the issues in the petition.  The issues arising from the submissions made by counsel for the respondents represented at the hearing focus on the way in which those documents should be obtained. 

9.  As I have already mentioned, in the case of the 5^th to 9^th respondents for which Mr Chau acts, and two other placees, it is suggested not all the documents need be disclosed by way of third‑party order because they will become available very shortly through general discovery in the related HCA.  As I understand the position of the 5^th to 9^th respondents having heard Mr Chau’s submission, there is no dispute that the documents in the four categories are relevant to the matters in dispute in the HCA, or currently any reason to think that the 5^th to 9^th respondents do not have either the originals or copies of those documents and will not be providing them in February to the petitioner.  This being the case, I accept that it is not necessary for those four categories of documents to be the subject of a third‑party order.

10.  The more difficult issue is whether the placees who are not respondents should be notified of this application because the documents that are sought may well contain information they consider confidential about their investments, and be given the opportunity to make submissions to the court if they see fit.

11.  Mr Chau took me to two authorities which he suggested demonstrated that the parties whose documents it is sought to obtain by applications of this sort are entitled to be notified of the application and be given the opportunity to be heard: Waddington Ltd v Chan Chun Hoo Thomas [2] and Bruce James Stinson v Gu Ming Gao.[3]

12.  I accept that there will be cases where it is appropriate to notify a person whose documents will be disclosed by a third-party order.  But it does not seem to me, as Mr Chau seemed to submit, that this is a hard-and-fast rule.  It will depend on the facts of each case, and involve balancing the interests of the interested party and the impact notifying the third party will have on the disclosure process in terms of time, efficiency, and costs. 

13.  In the present case this will involve, for example, balancing the interests of shareholders who only have one or two board lots of shares of small value against the cost and inconvenience not only to the petitioner and Cinda, but also the placees themselves of having to deal with invitations to agree disclosure of the documents that are sought.  It is certainly difficult to see the benefit of inviting placees who have one board lot, worth, I am told, approximately HK$10,000, as doing so is only likely to put the placees to inconvenience, expense, and possibly unnecessary anxiety for no material benefit.

14.  As Ma J explains in sub‑para 12(4) of his judgment quoted above, the court determining an application of this sort is exercising a discretion which necessitates balancing the competing interests of the victim of the alleged wrongdoing and an innocent party caught up in the wrongdoing. 

15.  In the present case the innocent party, I assume, is Cinda and quite possibly some of the placees who are genuine independent shareholders in the Company.  It seems to me that balancing the interests of the three interested groups, namely, the petitioner, Cinda, and the placees, the order that is sought is justified.  The documents subject to the application are, as I have already recorded, accepted as being relevant and indeed it can fairly be said central, to a resolution of the dispute.  The sooner they are produced and this petition and the related HCA can be brought to conclusion, and the affairs of the listed Company returned to normality (the Company’s shares are currently suspended), the better, and in the interests of the shareholders of the Company.

16.  It seems to me that disclosure of the documents, the use of which will be protected by the normal implied undertaking limiting their use by the petitioner, is in a case of this sort sufficient to protect the interests of the placees, and that nothing of materially greater benefit is likely to be achieved in terms of protecting those interests by introducing into this application an additional and possibly time‑consuming and expensive stage, namely, notifying the various placees of the application, explaining to them what it involves, and giving them the opportunity to address the court.

17.  As I understand it, subject to the qualification to which I have already referred, none of the parties object to the language of the order agreed by the petitioner and Cinda in the letter which I have quoted from.  I will therefore make an order in those terms subject to the insertion of a qualification into the Schedule excluding the four categories of documents to which I have referred in the case of the 5^th to 9^th respondents. 

18.  So far as the costs of the application are concerned, I will make a costs order nisi that the costs are costs in the cause.

Schedule 1: The Documents

In relation to the placing of shares (the “Shares”) in the 14^th Respondent (the “Company”) which took place on or around 12 January 2017 (the “Placing”):

Form D

(1)    The Form D (together with any annexures, attachments, enclosures, and supplements) which Cinda signed and lodged with the Stock Exchange of Hong Kong (“SEHK”) pursuant to Rule 10.12 of the Rules Governing the Listing of Securities on the Growth Enterprise Market (“GEM Listing Rules”).

List of Placees

(2)    The list settling [setting] out the names, addresses, and identity card or passport numbers (in the case of individuals) or registration numbers (in the case of companies) of all placees (the “Placees”), the names and addresses of the beneficial owners (in the case of nominee companies), and the amounts taken up by each such placee which Cinda supplied to SEHK pursuant to Rule 10.12 of the GEM Listing Rules and Note 7 to Form D.

Account Opening Documents of the Placees

(3)    Account opening documents for the accounts which the Placees had or have with Cinda (the “Placee Accounts”).

Marketing Communications for the Placing

(4)    Communications, including but not limited to emails, which Cinda made to its customers or some of its customers to inform them of the Placing and/or to solicit interest in subscription for Shares in the Placing. (For the avoidance of doubt, each communication and/or the description of it should show who sent it, to whom, and when it was sent.)

List of Interested Persons

(5)    A list setting out the names of persons who indicated an interest to Cinda to subscribe for Shares in the Placing (the “Interested Persons”) and the amount each person indicated to be interested in subscribing for.

Contract Notes for the Subscriptions

(6)    The contract notes relating to the Placees’ subscription of Shares in the Placing, as Cinda must prepare and provide to the Placees under Rule 5 of the Securities and Futures [(]Contract Notes, Statements of Account and Receipt[s]) Rules (Cap. 571Q) (the “Contract Notes Rules”).

Daily Statements if Margined Subscriptions

(7)    The daily statements of account for Placees who subscribed for Shares in the Placing by margined transactions, for the period from the Placing to date, as Cinda must prepare and provide to the Placees under Rule 8 of the Contract Notes Rules.

Monthly Statements of Account

(8)    The monthly statements of account for the Placees, for the period from December 2016 to June 2017, as Cinda must prepare and provide to the Placees under Rule 11 of the Contract Notes Rules.

Bank Statements

(9)    Bank statements for Cinda’s bank accounts showing deposits of funds into the accounts and the sources of the deposits for credit to the Placee Accounts during the period of December 2016 to January 2017.