SMSE v. KL

CACV 111/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 111 OF 2009

(ON APPEAL FROM HCMC NO. 2 OF 2006)

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REASONS FOR JUDGMENT

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Hon Le Pichon JA:

1.  This was the adjourned hearing of a renewed application by the applicant for a stay of orders made by Hartmann JA (sitting as an additional judge of the Court of First Instance) on 9 and 30 April 2009 (“the orders”).  By the orders, the judge dismissed the applicant’s summons to set aside a subpoena duces tecum served on him by the respondent (“the husband”) in matrimonial proceedings for ancillary relief between the petitioner (“the wife”) and the husband and ordering that there be production by the applicant pursuant to the subpoena of the documents identified in the judge’s ex tempore ruling of 30 April 2009.

2.  The renewed stay application to this court was made in the context of the following circumstances.  At the hearing on 30 April 2009, the judge granted the applicant leave to appeal the orders but refused a stay pending appeal because of “time constraints”, that being a clear reference to the fact that the trial for ancillary relief has been fixed to commence on 1 June 2009.  The applicant, being a non-party to those proceedings, had played no part in the fixing of the trial dates.

3.  At the conclusion of the hearing, this court granted a stay pending appeal for reasons to be handed down which we now do.

Background

4.  The ancillary proceedings are between the wife and husband.

5.  The applicant is the wife’s brother and a director of the principal company (“the Company”) in a group of companies owned by the wife’s family engaged in the business of manufacturing leather goods.  The business was founded by the wife’s father in the 1970s and specialises in the manufacture of handbags.

6.  The applicant was served in his capacity as a representative of the Company and also in his personal capacity as the person authorised to produce the documents of the Company specified in the subpoena.  Neither the applicant nor the Company is a party in the ancillary relief proceedings.

7.  In outline, the applicant and the Company’s involvement in the ancillary relief proceedings was not of their own volition but arose from the following circumstances.

8.  The wife (who and whose family are from Hong Kong) met the husband who is a US citizen in the United States.  They married there in 1987 and came to live in Hong Kong in 1988 when they joined the family business which, at the time, was a sole proprietorship.  At the end of 1990, the Company was incorporated to take over the family business.  The Company remained under the control of the wife’s immediate family although the husband and wife were given shares in the Company amounting to 15% of the issued shares and became directors.  The husband and wife were responsible for marketing.

9.  According to the husband, it was due to his efforts and ability to develop relationships with a number of highly prestigious brand name companies in the United States that the business moved into the luxury end of the handbag market and was transformed from a relatively small-scale enterprise into a significant business.

10.  Both the husband and wife are US citizens.  In about 2002, apparently for US tax reasons, the husband and the wife surrendered their shares in the Company and acquired two companies (“X” and “Y”) (of which they were the sole directors and shareholders) through which they conducted a marketing business.  They acted as sales agents for the Company and charged commissions.

11.  The husband and the wife separated in July 2004.  The husband continued marketing for the Company until about August 2005.  A decree nisi was pronounced on 28 April 2006.

12.  In § 17 of the judgment of 9 April 2009,

“17.  In addition to these ‘formal’ commissions [to X and Y] – and of central importance to the husband’s case in the ancillary relief proceedings – is his contention that, with the business doing so well, in or about 1990 an arrangement was set up in terms of which the husband and wife and other family members received further regular payments, effectively ‘informal’ commissions known as ‘family gifts’.  It is the husband’s case – which is denied by the wife and her brother, [the applicant] – that these payments can accurately be described as commissions because they were calculated by reference to the sale price of [the Company’s] handbags.”

That additional fictional cost was said to range between 5 % and 8% of the price of each handbag but the husband’s case as to the apportionment of this additional fictional cost as between the husband and wife on the one hand and the other members of the wife’s family is somewhat opaque.

13.  Based on information available to him, the husband’s forensic accountant has concluded that in the five years from 2002 to 2006, the husband and wife have received some US$20.28 million by way of commissions and ‘family gifts’.

14.  As regards the reference to ‘time constraints’ by the judge in his ruling of 30 April 2009, it is relevant to note that the subpoena which the applicant seeks to set aside was served on the eve of the original trial dates fixed to commence on 17 November 2008 causing those dates to be vacated.  They were subsequently refixed to commence on 1 June 2009, seemingly, with a view to keeping “impetus” in the proceedings.  As noted above, the current trial dates were fixed without reference to the applicant.

15.  The application to set aside the subpoena was made promptly, within a few days of service of the subpoena, but could not be heard until late January 2009.  The judge’s order of 9 April 2009, while dismissing the application, left the scope of the subpoena (which the judge plainly considered to be too broad) to be resolved by agreement (which had to comply with the restriction outlined in paragraph 73 of the judgment of 9 April 2009) within 21 days or, failing agreement, by a further hearing.  In the event, the further hearing took place on 30 April 2009 and substantially narrowed the scope of the subpoena.

Stay pending appeal

16.  Under the new rules recently introduced, there is no longer any automatic right of appeal to this court in interlocutory matters.  But, as earlier noted, the applicant did obtain leave to appeal (conditional on the filing of a Notice of Appeal by 4 p.m., 6 May 2009) from the judge at the hearing on 30 April 2009 under Order 59, r.2B of the Rules of the High Court.  In granting leave, the judge observed that he “would have real difficulty saying no to a leave application”. (Tr. 11S)

17.  Leave to appeal under Order 59 rule 2B is not lightly granted.  The relevant test appears in section 14AA(4) of the High Court Ordinance.  In granting leave, the judge must have considered that the test set out in section 14AA(4) had been met.  The section requires that the court be satisfied that the appeal has a reasonable prospect of success or there is some other reason in the interests of justice why the appeal should be heard before granting leave.  Reasonable prospects of success involves the notion that the prospects of succeeding must be ‘reasonable’ and therefore more than ‘fanciful’, without having to be ‘probable’.

18.  Mr Coleman SC who appeared for the husband submitted that that could not have been the case because at the time of the application for leave to appeal, the grounds of appeal had not yet been formulated.  I do not agree. Having heard the application over two days and handing down a 20-page judgment, the judge would have been very familiar with the issues involved.  How the judge viewed the matter is apparent from his observation cited in § 16above.  That the judge had no hesitation in granting leave is apparent from a reading of the transcript.  That is not without significance.  It reflects a recognition or acknowledgement of the weight of the applicant’s submissions although they did not prevail in the court below.

19.  The present case affects the substantive rights of non-parties.  The information sought consists of confidential and commercially sensitive information relating to the financial affairs, operations and management of the Company which is a private family company.  Undeniably, that information would be of considerable value to the Company’s competitors in what is a small and competitive industry.

20.  The theory presently espoused and advanced by the husband is of an ‘entitlement’ of the husband and/or the wife to secret commission income, calculated by reference to the Company’s sales revenue.  The contention is that it constitutes an income stream that should be capitalised for the purposes of ascertaining the family assets available for division on divorce.  The husband’s forensic accountant has been unable to correlate the amount of ‘family gifts’ with the sales revenues between 2001 and 2004 recorded in the Company’s business (being information already in the husband’s possession) on the basis of the husband’s theory and the purpose of the subpoena is to enable the husband’s forensic accountant to ‘refine’ his report made, inter alia, to support the husband’s theory.

21.  There is also the fact that that theory would appear to be of recent vintage or, at the very least, there would appear to be some inconsistency or contradiction in the husband’s position over the years.  In May 2006, the husband’s tax advisers wrote to the US Internal Revenue Service to address “a recently discovered issue regarding foreign gift reporting” and reported the receipt of cash gifts from a non-US person amounting to US$5.55 million for the years 2002-2005.  There is no explanation from the husband for the inconsistency/contradiction.  While the letter was purportedly also sent on behalf of the wife, it is her case that she had neither seen nor authorized the letter.

22.  The applicant has also raised the question as to the husband’s true motives in issuing the subpoena. In § 60 of his judgment of 9 April 2009, the judge set out the terms of a letter dated 21 November 2006 from the husband’s solicitors on which the applicant relies as evidencing improper motives.  This letter had led directly to the issue of an earlier subpoena (in March 2008) in substantially the same terms as the present subpoena and which was set aside by the judge in May 2008.  Whether the judge’s conclusion on motive is sustainable is another matter that is likely to feature in the appeal.

23.  Mr Coleman sought to demonstrate, by reference to grounds appearing in the notice of appeal filed on 5 May 2009, that none of them has any merit.  In my view, it is not the role of this court to second-guess the judge’s implicit conclusion that the appeal has reasonable prospects of success.

24.  In any event, the difficulties Mr Coleman has to overcome in this application for a stay are twofold.  First, absent a stay, the appeal would be rendered nugatory.  That is self-evident.  Second, the loss the Company would suffer through having to disclose confidential and commercially sensitive information and having its privacy infringed can not be compensated in damages.  In my view, those obstacles are insuperable.

25.  For all those reasons, I considered that a stay pending appeal was warranted.

Hon Poon J:

26.  I agree.