AWK also known as AWK, Y v. MLTH also known as MTH

FCMC 2454/2014

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

MATRIMONIAL CAUSES

NUMBER 2454 OF 2014

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RULING
(Leave to file an affidavit, Discovery and costs)

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Introduction

1.  There are three applications before me that now require adjudication as follows:

a)  An application by the wife that the order on costs arising out of my Ruling on the 17 August 2015 be varied. On that occasion I made an order nisi that the Respondent husband do pay the wife a 50% contribution towards her costs on the premise that notwithstanding the fact that neither party had been wholly successful the wife had been more successful than the husband. This was originally challenged by both sides;

b)   a second application by the wife for further discovery and

c)  an application by the husband that leave be granted for the husband’s forensic accountant, Mr T to file and serve his 4^th affirmation in reply to the 4^th affirmation from the wife’s forensic accountant.  

I intend to deal with these applications in reverse order.

Background to the litigation

2. However before doing so I wish to put this application into its proper context. In my first Ruling of the 17 August 2015 I set out briefly the background to the litigation as follows:

4.  By way of background this is a big money case. The husband is a private equity investor and by all accounts a very successful one. He has historically done a lot of business with a previous employer who subsequently became a close personal friend and business mentor, a Mr PVK (P) and other family members, particularly his eldest and youngest brothers (Mr MTK his eldest brother otherwise known as K and Mr MTY his youngest brother otherwise known as M). Much of the difficulty in this case lies in the financial relationship between these four people and their respective shareholdings in various companies. We are told that a lot of the business done between them appears to have been conducted without any formal documentation making it difficult to ascertain the truth or otherwise of what is asserted. The husband maintains that he often holds very large sums of money on trust for each of these three people. The husband’s case is that much business is done on the basis of verbal agreements only. P, K and M have each filed affidavit evidence in support of the husband’s basic position. The wife for her part, perhaps understandably in the circumstances, is somewhat sceptical.

5.  Mr Coleman SC for the wife has spent a long time in his written submission setting out what he says are the deficiencies in the husband’s disclosure to date. I do not intend to go through those submissions point by point in this Ruling. Much of the argument strictly speaking lies outside the ambit of this application in any event. In a nut shell however it seems that the wife’s main concerns centre on two things:

a)  The whereabouts of HK$945 million deposited into the husband’s account in 2007 and b) his involvement or otherwise in a large infra structure project in Macau. 

Background to the marriage

3.   I should add that the parties married on the XX February 2003 and had two children – twins, a boy and a girl who are now just over 6 years of age. It is the husband’s case that the wife’s decision to apply for a divorce came as a complete surprise to him. That be as it may, the divorce petition was filed by the wife on the 4 March 2014 and the decree nisi was pronounced on the 19 May of the same year. An order was also made for joint custody of the twins with care and control to the wife and reasonable access to the husband. There has been some satellite litigation concerning the twins but the main focus is now on discovery and the ancillary relief process. The matter is listed for a Financial Dispute Resolution hearing on the 20 May 2016 with one day reserved.  

4.  On the 17 August 2015 I handed down my Ruling in relation to the wife’s first application for discovery. The wife at that stage wished to have sight of the statements for two USB accounts from 2007 to date. As a result of my Ruling she now has the accounts for 2007 and 2008 and for 2012 onwards. This was in part so that both accountants should have sight of the same raw material with respect to a report filed by the husband’s forensic accountant. There were also related issues concerning the redaction of documents. 

Leave to file Mr T’s 4^th affirmation

5.  This was the husband’s application. He sought leave to file an affirmation in response to Mr A’s 4^th affirmation, on the basis that on his case new issues had been raised by the wife which he should then be given an opportunity to respond to. Having now had the opportunity to read all of the affidavits filed I would agree with that analysis of the situation and on that basis I will make an order in terms of paragraph 1 of the husband’s summons dated the 2 March 2016. I accept in the circumstances that it is not sufficient to say that ‘as it was the wife’s application that she should have the last word’. Costs shall follow the event and therefore the costs of this application shall be to the husband to be taxed on a party and party basis if not agreed. 

The discovery application

6.  The wife original summons dated the 20 November 2015 stated as follows:

1.  All the information and documentation of the Respondent to which the Respondent’s expert, Mr. MT, has had access and/or sighted and/or reviewed in preparation of all his reports and opinions including but not limited to the Expert Report dated 13 January 2015 [P15/3738-3739] and his 2 Affirmations dated 1 December 2014 [P14/3413-3418] and 20 April 2015 [P17/4072-4081] be provided forthwith to the Petitioner and her expert.

[In this context, the Petitioner will rely on that fact that, in her Ruling dated 17 August, 2015 HHJ Melloy stated in relation to expert reports that “in order for any Judge to attach any weight to a report of this nature, both sides must have access to the same information”.]

2.  The Respondent do provide copies of the following UBS Statements since 2007 to date, save for those already provided), namely:

(i)  UBS account no. XXXXXX in the name of MTH;

(ii)  UBS account no. XXXXXX in the name of U International Inc.

(collectively referred to as “UBS Accounts”)

3.  The Respondent do answer fully as to Questions B5, B8, B9, B10 and B11 of the Petitioner’s 4^th Supplemental Questionnaires with supporting documentation and explain all the subsequent movement of funds that is equivalent to HK$15,000,000 or above flowing from the UBS Accounts into the Respondent’s various different bank accounts or otherwise, so as to reconcile the figures through to the Respondent’s Form E.  For the avoidance of doubt, the Petitioner requires the Respondent to explain all the subsequent movement of funds that is equivalent to HK$15,000,000 or above and not just those referenced to in Questions B5 to B11.

4.  The Respondent do answer the following three questions in relation to the C share deal, namely:

(i)  The opening number of shares held by USI in C RH according to public records and as shown in the Schedule in Annexe A was 7,2000,000,000 shares.  However, according to the Respondent’s statement in Section 5.5 of his Form E USI in July 2000 agreed to subscribe for 8,179,946,667 shares in L Industries Holdings Limited (“L”) for HK$122,699,200.  It would appear that USI must have sold/placed 979,946,667 shares.  Please provide a reconciliation with full particulars and relevant supporting documents in this regard.

(ii)  We refer to the Announcement dated 19 January 2004 by C Resources Holdings Limited (C RH) advising that USI had agreed to sell 500,000,000 shares to E.  This share movement has been reflected in the movement in USI’s holdings in C RH in the attached Schedule.  However, the price at which these shares were sold was not publicly announced.  Please advise the actual date and price of the sale of these 500 million shares and provide relevant supporting documents.

(iii)  KMTK affirmed (paragraph 10) [P15/3776] that he transferred HK$70mn to USI in 2007 for 18,750,000 C RH shares and that they were held in trust by the Respondent.  According to the public records and as shown in Annex A, the Respondent transferred out all his remaining shares totalling 130 million shares on 29 July 2008 to EK said to be as part settlement of the alleged overpayment of $247mn of profit on the C RH deal.  Please provide an explanation with relevant supporting documents as to how these 18,750,000 shares have been accounted for in regards to the realised profit on the C RH deal and how the Respondent accounted for these shares when he held no shares in USI as at 29 July 2008.

[In this context, the Petitioner will rely on the facts that:

(i) there was an outflow of significant funds of some HK$3.1 billion in 2007 and 2008 from the UBS Accounts;

(ii) the Respondent avers that was, and the fund flow was due to, an alleged oral agreement between the Respondent and Mr. EK of a 75/25 C RH profit share deal, as stated in the Affirmation of PVK dated 9 January 2015 [P15/3661-3669];

(iii) the Respondent suggested in his 5^th Affirmation dated 21 April 2015 [P17/4062-4071] that rather than he providing the information directly that the Petitioner could make enquiries from sources of information publicly available;

(iv)  the Petitioner has discovered from relevant Announcements and Annual Reports pertaining to the C RH deal that the formal and public information in respect of the shares indicated a 50/50 sharing.]

7.  In a letter dated the 24 February 2016 the wife further clarified her position and said that she was seeking the following:

Now that you have received the 4^th Affirmation of Mr. SA together with his two exhibits in reply relating to our client’s Summons, we wish to utilize the hearing time effectively and, therefore, set out our client’s latest position in respect of her Summons using the same paragraph numbers contained therein as follows:-

1.  Your client was ordered to comply with this request pursuant to the Order dated 15^th December 2015.

2.  Our client continues to pursue this request for all the UBS bank statements from 2007 to date, save for those already provided.

3.  Our client continues to pursue this request for your client to explain all the subsequent movement of funds that are equivalent to HK$15,000,000 and above flowing from the UBS accounts in your client’s various bank accounts or otherwise, save for B8.

4.  Our client does not pursue this request as Mr. A has been able to answer the 3 questions raised regarding the C RH share reconciliation following a review of the information and documents provided, upon which he has expanded in his 4^th Affirmation.

Consequently the first request is no longer in issue, as I made an order in those terms on the15 December 2015. Further the wife is no longer pursuing the very detailed fourth request as she says that those questions have now been answered in any event.

Each party’s case on discovery

The wife’s case

8.  The wife’s case is that there is approximately HK$733 million missing from the husband’s disclosure. This is based on her accountant’s analysis of the publicly listed documents and the disclosure provided to date. Although she is no longer pursuing her line of enquiry with respect to the Macau project she says that she simply cannot get to the husband’s figures as disclosed, based on the facts and figures provided. In so far as the verbal agreement between the husband and P is concerned she challenges their assertion (made on oath) that there would be a 75:25 split of the profit on the original “C” deal, plus all future deals going forward. The wife believes that they split the profit 50:50. Much flows from this with the wife’s forensic accountant putting forward a number of theoretical assertions based on the argument that the husband is entitled to a 50% share of the profits. In the 4^th affirmation of Mr A dated the 19 February 2016 he states as follows:

8.  EK’s Affirmation of 9^th January 2015 [P15/3661-3669] sought to substantiate this debt due to him, and EK affirmed that:

(a)   He had set up USI jointly with the Respondent and had provided all the funding, being US$18 million, for USI’s investment in O.

(b)  He had a verbal arrangement to split profits on the C RH deal 75% in his favour and 25% in favour of the Respondent.

(c)   The profit on the deal, based on the calculations set out in his exhibit PVK-4 [P15/3701], was HK$2,790,740,220 and, based on the 75/25% verbal deal, the Respondent’s profit share was HK$697,685,055.  In reconciling the debt due to him of HK$ 116,037,109, EK deducted from the Respondent’s profit share the HK$945,192,327 cash that USI paid to the Respondent in October 2007 resulting in an excess payment of HK$247,507,272 (the alleged overpayment of HK$247 million).

(d)  This “overpayment” together with an opening balance of HK$32,375,000, for which there are no supporting documents, totalling say HK$280 million is the opening debt said to be due to EK with subsequent cash transactions and various expenses paid for and on behalf of each other resulting in a net debt due to EK of approximately HK$116 million.

9.  I will demonstrate in this Affirmation the following:

(a)   USI should have made a profit on the C RH transaction of nearly HK$4 billion of which HK$938 million was earned prior to 2005, but with only HK$27 million of this earned prior to the parties’ marriage, with the balance of HK$3 billion earned from 2005 to 2007 (refer to Appendix 1 of my Report, Exhibit SJA4-2).

(b)  The Respondent’s share of 50% of the C RH share profit still to be taken into account when considering his net worth is approximately a net amount of HK$733 million, being the $2 billion 50% share of the C RH shares profits less cash and shares distributed to the Respondent by USI (refer to Table 1 under paragraph 22 of this Affirmation).

(c)   Having calculated the profits that USI should have made on the C RH deal and having regard to substantial evidence that EK and the Respondent would have shares the profits on a 50/50 basis, the stated net worth of the Respondent of HK$600 million, excluding the investment in VCGL, is significantly understated and should be closer to HK$1.9 billion excluding the investment VCGL (refer to Table 2 under paragraph 24 of this Affirmation).

(d)  The Respondent ought to be ordered to provided all his UBS bank statements save for those already provided, which would mainly be for the period from years 2009 to 2011, and provide supporting documents for all subsequent transactions of HK$15,000,000 and above.

9.  Mr Coleman made the same point, although he put it somewhat differently, when he said in his oral submissions that husband’s case that the profit was split on a 75:25 basis needed to be tested against contemporaneous documents that will go to either prove or disprove the assertion made.

The husband’s case

10. The husband argues that the wife’s latest request is excessive, unnecessary, time consuming and disproportionate to the length of marriage; he strenuously denies that he has not made full and frank disclosure of his assets although he accepts that there may have been some inconsistencies with respect to some of the explanations given to date. He has since sought to clarify those inconsistencies. He accuses the wife and her team of undergoing an expensive and detailed audit of his finances going back to 2007 – i.e. 9 years. In his affirmation of the 15 January 2015 he goes through the discovery given to date. In particular he points out that he has already answered questions B5, B8, B9, B10 and B11. As will be seen having perused these documents I accept what the husband says in this respect.  He may not have answered the questions as fully as the wife would have liked – but I accept that answers have been given and that it may not be possible for him to answer more fully in any event, given the length of time involved. He also points out that many of the queries relate to a period of time when the parties were happily married.

11. Mr Todd for the husband says that the wife is not simply embarking on a fishing expedition but on a ‘trawl’. He points out that if what the wife maintains is true then she is making a very dark assertion, which borders on accusing the husband and his business partners of fraud. He also points out that the party’s are still awaiting a valuation of the husband’s company where funds have clearly been invested and that going through the exercise proposed by the wife will not assist the court prior to FDR in any event. I accept what he says in this respect. He further points out that by simply looking at the USB accounts for 2007 and 2008, if I were to grant the wife her application, the husband would be obliged to identify the movement of 281 transactions all of which are in relation to sums of money of over HK$15 million. This figure would increase dramatically if it were to include all the missing UBS accounts for the period from 2009 – 2011 inclusive. (The wife already has the accounts for 2007 – 2008 and 2012 – 2014).

The law

Discovery

12.  I summarized the law on discovery in my previous judgment, as follows:

9.  The law is relatively straight forward and does not appear to be in dispute. It is of course correct that disclosure in ancillary relief proceedings should be both “proportionate and relevant” as pointed out by Mr Shieh SC in his written submission. Reference was also made to the general rules for discovery set out in Order 24 of the Rules of the High Court and to Practice Direction 15:11 which governs the general approach taken by the Family Court to discovery prior to and at a Financial Dispute Resolution hearing. The objective, again as rightly pointed out by Mr Shieh, is to define the issues and to save costs. 

10.  The 18^th edition of Rayden is of some assistance as to the correct approach to be taken and a summary can be found at paragraph 17:30 where it is stated as follows:

Discovery of documents: questionnaire

17.30  In ancillary relief proceedings discovery begins with service of the Form E and the documents which are required to be attached to the Form E, and any other documents necessary to explain or clarify any of the information contained in the Form E.  Thereafter discovery is by mutual request by means of a questionnaire served in advance of the first appointment, and by further questionnaire at a later stage of the proceedings with the court’s permission. Questionnaires can, like interrogatories, request information as well as seeking production of documents.  As part of its case management role, the court should regulate the extent of the disclosure of documents so that the exercise is proportionate to the issues in question, and to ensure that the discovery process does not become a fishing expedition approved by the court. An order for discovery can only be made against a party to the application.  Discovery encompasses all documents which are or have been in a party’s possession, custody or power relating to matters in question in the application for ancillary relief; it is a two-stage process: where objection is taken to production of a document in the possession or power of a party, the proper course is for the existence of the document to be disclosed and objection then taken to its production.  A party giving discovery is not obliged to disclose any part of a document which is irrelevant to the issues, and it is established practice to redact irrelevant parts of the document provided that the irrelevant part could be covered without destroying the sense of the rest of the document or make it misleading.

13.  Suffice it to say that the objective is for there to be appropriate and proportionate disclosure so that an effective FDR can take place. As a matter of good case management therefore the court will often try to limit the discovery process prior to the FDR, as to do otherwise will often simply lead to an increase in legal costs and often for no good reason. It is of course always open for the parties to revisit issues pertaining to the questionnaires and discovery generally if settlement is not achieved and the case proceeds to trial.

14. In this instance it is of note that over HK$8.7 million has now been spent on legal fees, much of which will be related to the discovery process.

Discussion

15.  At the end of the day in order for me to conduct an effective FDR it is necessary for there to be a schedule of assets. In an ideal world the schedule of assets should be agreed. However it is normally possible to proceed even where there is not agreement on all the items under discussion. The issue then is what level of disclosure is necessary in order for an effective FDR to take place? My concern is that the wife’s request does seem excessive in light of the extensive disclosure given to date. I also agree with Mr Todd in that there is a danger that even if all of the UBS accounts are produced and even if the husband answers all of the questions posed with respect to transactions of HK$15 million or above, it is unlikely that the matter will end there. I accept that the wife is “fishing”. She is looking for a “smoking gun”. If the wife does not accept what the husband and those who support him have said on oath, then it seems to me that there may be no alternative but for this matter to proceed to trial, so that the evidence can be properly tested and appropriate findings made. In that event the issue of disclosure may need to be looked at again. However both parties need to be aware the possible cost implications of this approach.

16. Consequently I will dismiss paragraphs 2 and 3 of the wife’s summons dated the 20 November 2015. As indicated above I am satisfied that the husband has answered questions B5, B8 – B11 as previously ordered. The wife shall pay the husband the costs of and occasioned by paragraphs 2 and 3 of her summons dated the 20 November 2015 on a party and party basis to be taxed if not agreed. There shall be certificate for all counsel involved.   

Costs arising out of the Ruling dated the 17 August 2015.

17.  Both sides filed written submissions in relation to this costs point. In Mr Coleman’s written submission dated the 16 November 2015 he proposed that a more appropriate order might be that the wife should be awarded no less than 80% of her costs. Ms Tong, then for the wife, argued that the more appropriate order is that there should be no order as to costs. (Please see Ms Tong’s submission dated the 30 November 2015). This was reiterated by Mr Todd during the hearing, whereas Mr Coleman confirmed that his client would now be content for the original order to be made absolute.  There was also some discussion about the possibility of reserving costs. In the circumstances however it seems to me that it would be more appropriate for an order to be made now given that I may not be the judge dealing with this matter at trial (if indeed the matter proceeds to trial). In the circumstances I remain of the view that the appropriate order is that the husband do make a 50% contribution towards the wife’s costs of and occasioned by the original discovery application, to be taxed if not agreed on a party and party basis. There shall again be certificate for all counsel involved. I should add that in making that order I am cognizant of the fact that the wife was generally more successful on the discovery point at that time and that the husband had been more successful with respect to the arguments on redaction. I have considered making an order that there be no order as to costs but it seems to me that that does not fully recognise the fact that the husband was not prepared to make any concessions at all on the discovery application and that the wife had no alternative but to make the application at that time. There were significant costs consequences that arose as a result.

18.  The costs of this application shall therefore follow the event and shall be to the wife in any event to again be taxed on a party and party basis if not agreed. There shall be certificate for counsel.