HONG JING CO LTD v. ZHUHAI KWOK YUEN INVESTMENT CO LTD

HCA 156/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 156 OF 2006

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D E C I S I O N

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1.  This is the plaintiff’s application for specific discovery by affidavit made pursuant to Order 24 rule 7 of Rules of the High Court.  The application is contained in paragraph 3 of the summons dated 4 July 2008.

2.  The plaintiff’s present claim arises out of a Memorandum of Understanding (MOU) dated 11 November 2005 entered into between the plaintiff and the defendant.  The MOU relates to the plaintiff’s intended purchase of the debts (“the Debts”) owed to the Bank of China Group Investment Ltd (“BOCGI”) by two “window” companies of the Zhuhai Municipal Government, one in Hong Kong and the other one in Macau, which were in liquidation.  The Debts were no less than HK$ 800 million and were secured on three properties (“the Properties”), one of which is in Macau and the other two are in Zhuhai.

3.  The defendant is a company incorporated in Mainland China.  It is common ground that it was set up by the Zhuhai Government.  The plaintiff’s case is that the defendant was set up for the purpose of rescuing or facilitating the rescue of the two collapsed window companies from their liquidation. 

4.  The plaintiff was ultimately unsuccessful in the purchase of the Debts and the Properties. The successful purchaser was a company incorporated in Macau called Sea Good Real Estate Development Limited (also known as “Sei Pou”), with which the defendant had entered into a MOU dated 2 December 2005.  

5.  The issues in this action centre around whether the defendant was in breach of its various duties and obligations under the MOU it made with the plaintiff.  It is the plaintiff’s case that the defendant was under a duty, inter alia, to use its best endeavours to carry out negotiations with Bank of China (BOC) for the purchase of the Debts and the Properties by the plaintiff and was further under an exclusivity obligation not to enter into negotiation with another party during the Exclusivity Period (i.e. prior to 30 November 2005) and the extended Exclusivity Period.

The application

6.  The present application relates to two categories of documents, particulars of which are set out in two paragraphs in Schedule B to the plaintiff’s summons.  Paragraph 1 concerns documents relating to the application made by Sei Pou for the purchase of the Debts and Properties.  Paragraph 2 concerns documents relating to the negotiations between the BOC Group and the Zhuhai Government, FSD (which is a department or branch of the Zhuhai Government), the defendant and the defendant’s solicitors (“PH”) on the purchase of the Debts and the Properties. 

7.  The plaintiff says the documents sought are relevant to whether the defendant was in breach of its duties and obligations under the MOU, in particular, the duty and obligation mentioned in paragraph 5 above. 

8.  The defendant does not take issue on the relevance of the documents sought.

9.  The defendant resists the application on the ground that the plaintiff has failed to show a prima facie case that the documents are documents in existence which are in its possession, custody or power and which the defendant has not disclosed.

Do the documents exist?

10.  On the first category of documents sought, the starting point is the application document that Sei Pou submitted to the Zhuhai Government for the purchase. It was dated 25 November 2005 and the bank reference letters enclosed in it were dated 24 and 25 November 2005.  This, the plaintiff says, indicates that before the expiration of the Exclusivity Period, Sei Pou or its promoters were already engaged in activities for the purchase of the Debts and Properties.

11.  The plaintiff further points out that there are differences between the MOU signed with the plaintiff and that signed with Sei Pou in terms of the arrangement for the purchase of the Debts and Properties. The plaintiff says that this suggest that there had been discussions and communications with BOCGI in this regard.  Reliance is also placed on a letter dated 26 November 2005 that PH wrote to the Bank of China, which stated that the defendant had already liaised with a third party.  The plaintiff contends that the third party referred to therein is not the plaintiff but is Sei Pou, having regard to the content of the letter and the fact it was written just one day after Sei Pou submitted the application.  Hence, the plaintiff says that there should have been communications between the defendant and Sei Pou and some internal records on the part of the defendant.  

12.  The defendant, on the other hand, says that it only received Sei Pou’s application letter on 1 December 2005 and that the third party referred to in PH’s letter is the plaintiff and not Sei Pou.  The defendant’s List of Documents has disclosed three documents relating to the negotiations with Sei Pou, namely, the application letter dated 25 November 2005, the draft and signed copy of the MOU signed with Sei Pou).  The defendant says that other than these three documents, there are no other documents in its possession, custody or power.

13.  Whether the defendant was already in communication and negotiation with Sei Pou during the Exclusivity Period is a matter for the trial.  Likewise, whether Sei Pou is the third party referred to in PH’s letter to Bank of China is an issue to be adjudicated upon at the trial.  At this interlocutory stage, I am not persuaded that the plaintiff’s contention that the third party referred to in the letter is not the plaintiff is plainly unsustainable. For the purpose of the present discovery application, I am prepared to accept, on the plaintiff’s analysis and contention, that there is a basis to believe that there are in existence other documents falling within the first category of documents sought by the plaintiff.

14.  As to the second category, they are documents relating to negotiations conducted with the BOC Group.  The defendant’s List of Document had disclosed two documents relevant to the negotiations with the BOC Group. The first is letter from the Zhuhai Government to Bank of China dated 30 November 2005.  The second is an agreement dated 31 December 2005 made between the Zhuhai Government and several members of the BOC Group letter regarding the framework or principles for resolving the Debts.  

15.  The plaintiff contends, and I agree, that a number of events and happenings were mentioned in these two documents.  For instance, the letter mentioned that an understanding was reached between the Zhuhai Government and BOCGI in October 2005, but BOCGI later changed its position.  And in the agreement, it was recorded that another understanding was reached in a meeting on 6 December 2005.  I accept that there is proper basis for believing that, other than these two documents, there are correspondence and communications passing between the BOC Group on the one hand and the Zhuhai Government, FSD, the defendant and PH on the other hand as well as documents of the kind particularized in paragraph 2 of Schedule B to the summons.   

Are the documents in the defendant’s possession custody or power?

16.  As identified by Mr Chang SC, the central plank in the defendant’s objection is that Zhuhai Government (and also the FSD) and the defendant are separate and distinct entities and that the defendant does not have control over the former.   Hence, the defendant argues, even if there are documents falling within the categories of documents sought by the plaintiff that are in the possession of the Zhuhai Government or the FSD, they are not discoverable documents in the possession, custody or power of the defendant.

17.  There is no doubt that the defendant and the Zhuhai Government or FSD are different legal entities.  However, it would appear from the materials before the Court in this application that they are not wholly unrelated parties.  Indeed, in the Defence, it is admitted that the defendant is a company established by the Zhuhai Government. Although the defendant did not accept that it was established for the purpose of the corporate rescue, there can be no serious dispute that the defendant had taken active part and worked closely with the Zhuhai Government in this regard.     

18.  More specifically, in meeting the plaintiff’s allegation that the defendant was in breach of its duty to use best endeavours to negotiate with BOC, it was pleaded in the Amended Defence that the defendant did attempt to purchase the Debts from BOCGI.  And in response to the plaintiff’s request for further and better particulars of the plea, the defendant relied on: (i) the letter written by PH on behalf of the Zhuhai Government to BOCGI, (ii) a visit by two officials of the Zhuhai Government and FSD (Mr Zhang and Miss Chen), and (iii) a letter written by the Zhuhai Government to the Bank of China as particulars of the defendant’s attempts. 

19.  In the witness statement of the defendant’s director (權力), it was also said that after signing the MOU with the plaintiff, the defendant had through the relevant departments of the Zhuhai Government (透過珠海市相關部門) endeavoured to discuss the purchase with BOCGI (para.15), and also that the defendant had through FSD (我們透過金融辦) contacted corporations interested in purchasing the Debts, which included Sei Pou, to find out their intentions (para.22).    

20.  Mr Shieh SC argued that what was stated in the further and better particulars and the witness statements have to be viewed in the context.  Reference was made to paragraphs 29(b) and (d) of the Amended Defence where it was pleaded that the two officials of the Zhuhai Government and FSD (Mr Zhang and Miss Chen) did not act on behalf of the defendant.  This is in response to the plaintiff’s averments in paragraph 20 of the Amended Statement of Claim, namely, Mr Zhang and Miss Chen had made representation on the extension of the Exclusivity Period and Mr. Zhang had said that he would notify the plaintiff of any progress made in the negotiations with BOCGI.  While denying the averments, the defendant pleaded further that even if the representation or statement had been made, Mr Zhang and Miss Chen did not at the time of the representation or communication act on behalf of the defendant.  Plainly the plea in paragraph 29 of the Amended Defence is referring to the specific occasions in question.  It does not detract from the fact that the defendant relies on and regarded the acts done by the Zhuhai Government and FSD as its attempts to discharge its duties under the MOU with the plaintiff.

21.  Reference was also made to other parts of the witness statement of Mr 權力, which show that the defendant is only one of the investment vehicles of the Zhuhai Government and is one among several other vehicles of the Zhuhai Government that had participated in the corporate rescue.  Accordingly, it was said that when the witness statement states that the defendant had made endeavours and contacts through the Zhuhai Government, it does not denote any agency relationship. 

22.  It was further pointed out that the defendant is not a contracting party to the agreement that was reached with Bank of China, for instance, the 31 December 2005 agreement.  It is said that this demonstrates that the defendant and the Zhuhai Government are separate distinct entities because if it were otherwise, the defendant could have concluded the deal.

23.  In Mr Shieh’s submissions, there is no evidence or material before the court to support any agency relationship between the defendant and the Zhuhai Government such that the defendant can be said to have (as principal) a right to compel access to or inspection of documents maintained or kept by the Zhuhai Government (as its agent): see the principle in Yasuda Fire & Marine Insurance Co of Europe Ltd v. Orion Marine Insurance Underwriting Agency Ltd [1995] QB 174, 184G-186B.

24.  In my view, for the purpose of this application, the issue does not turn on whether there is any agency relationship between the defendant and the Zhuhai Government or whether the latter was the agent of the defendant.  Surely, if the Zhuhai Government was the defendant’s agent, then documents in the possession, custody or power of the Zhuhai Government will be discoverable by the defendant.   However, the plaintiff does not have to go so far as showing agency or that the defendant is able to control the Zhuhai Government or to compel it to make available documents or records.  The plaintiff needs only show a prima facie case based on probability arising from the surrounding circumstances of the case: Hong Kong Civil Procedure 2009 vol. 1 at p.477, para.24/7/1.

25.  On the materials present before the Court, it is not difficult to see that the defendant, being a company set up by the Zhuhai Government, had worked closely with the Zhuhai Government and the FSD in the activities associated with the rescue of the two “window” companies.  It is also not difficult to see that the defendant had or was given access to documents relevant to the corporate purchase and the purchase of the Debts and Properties.  For instance, the defendant has disclosed in its List of Documents the letter dated 30 November 2005 from the Zhuhai Government to the Bank of China and also the 31 December 2005 agreement that was made between the Zhuhai Government and members of the BOC Group.  The letter was not copied to the defendant while the defendant was not a contracting party to the agreement. Despite this, the defendant did have access to and copies of the documents.  

26.  The relationship between the defendant on the one hand and the Zhuhai Government and the FSD on the other hand, especially in connection with the purchase of the Debts and the Properties, and the manner in which they had worked together to bring about the corporate rescue, are such that the plaintiff is justified in saying that there are prima facie relevant documents in the possession, custody or power of the defendant.

Conclusion

27.  For the reasons above, I grant the plaintiff’s application.  There is an order that the defendant do within 14 days of the date of this Decision make an affidavit/ affirmation stating whether it has in its possession, custody or power the documents listed in Schedule B to the summons dated 4 July 2008.  Applying the normal rule of costs follow event, the costs of this application shall be paid by the defendant to the plaintiff in any event, to be taxed if not agreed.