WADDINGTON LTD v. CHAN CHUN HOO THOMAS AND OTHERS

HCA 3291/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 329 OF 2003

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REASONS  FOR  DECISION

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Background

1.  This is a double derivative action in which minority shareholders sue majority shareholders and other relevant parties in relation to certain steps taken by majority shareholders in a number of complex commercial transactions which are alleged to be to the ultimate disadvantage of the company, and consequently the minority shareholders, and the ultimate benefit of the majority shareholders, the first and second defendants.

2.  I have had the advantage of being able to read the decision of Barma J. delivered on 29 April 2005, on an application by the first and second defendants to strike out the proceedings, and an application by the plaintiff for leave to proceed.  I have also the advantage of having been able to read the decision in the subsequent appeal from that decision to the Court of Appeal, delivered on 30 May 2006.

3.  A compact factual description of the transactions at issue are contained in paragraphs 6-18 of the judgement of Rogers VP delivered on 30 May 2006.  The proceedings have been said, by the Court of Appeal, to be the first case in which a double derivative action is likely to go ahead to trial in Hong Kong.

The application:

4.  The plaintiff minority shareholders have sought discovery against the first, second, and the third defendant, (the company).  The company is the parent company of the company in which the transactions complained of have taken place. 

5.  The Master made an order that the first and second defendants must give discovery.  He declined to make an order against the company.  The plaintiffs now appeal against that decision.  They seek an order for discovery against the company.

6.  I heard the application on 4 April 2007, and allowed the appeal against the decision of the Master, and ordered discovery against the company.  I now give my reasons for that decision.

7.  The application is opposed on five grounds.  First it is asserted that it is not yet established that the company is a proper and necessary party to the proceedings.  Second, it is said that in the circumstances, the company being merely a nominal party, it should not be called upon to give discovery.  Third it is argued that it is irrelevant whether the company has documents to produce.  Fourth it is argued that the cost of discovery would not be reasonable and proper.  Fifth it is said that the appeal is misconceived.  Unfortunately it is necessary to deal with each of these grounds.

Is the company a proper party to the proceedings:

8.  Mr Ismail relies upon statements in a decision of Barma J. in a further judgement in these proceedings, delivered on 23 October 2006, in which the learned judge indicated that the issue as to whether or not the company would be the proper nominal party was a matter was before the Court of Appeal and may go to the Court of Final Appeal.  But the matter has now gone to the Court of Appeal under number CACV 220 of 2006.  Judgement was delivered on 30 May 2006, and it is plain from the content of the judgement, at paras 31-22, and the judgement of the same Court under number CACV 134 of 2006, that the Court of Appeal is plainly of the view that, at least at this stage of the proceedings, before factual decisions are made, that the company is a proper and necessary party to the proceedings.

9.  Leave has been sought from the Court of Appeal to appeal the decision in CACV 220 of 2006 to the Court of Final Appeal, and leave was refused.  I am told that the application for leave is to be renewed before the Court of Final Appeal, but is a matter presently stands I am of the view that I may take it that the Court of Appeal considers the company to be a necessary and proper party to the proceedings.  There is no reason now why I should depart from that view.  This ground of opposition fails.

A nominal party should not be called upon to give discovery:

10.  The company is a nominal party to the action, and would normally not take an active or partisan part in the proceedings.  However in derivative proceedings the nominal party will usually be called upon to give discovery, the rationale being that the minority shareholders are, in most cases, and here, outsiders.  Consequently the minority shareholders will not have access to the relevant documents of the company which is under the control of the alleged wrongdoer: see Minority Shareholders: Law, Practice and Procedure, 2^nd Ed, Joffe § 1.134. 

11.  Mr Ismail argued that on the present facts it would not be proper to order discovery against the company.  That the Court of Appeal has permitted the action to proceed is of itself sufficient to indicate that there is an arguable case.  Mr Ismail was unable to point me to any particular facts which would indicate that discovery in this case is not appropriate.

12.  Ms Sit relied upon the judgement of Chitty J. in Spoke v Grosvenor Hotel Co [1987] 2 QB 124 at 130, where he said that to refuse the discovery would tend to defeat actions of a derivative nature, or to impair their efficiency to a considerable extent.  That must be right.  In my view it will be rarely that a nominal defendant in a derivative action will not be required to give appropriate discovery.

Irrelevant whether company has documents to produce:

13.  Mr Ismail argued that it was irrelevant whether the company had documents to produce.  Rather he said, the documents must be relevant and necessary either for disposing fairly of the cause or matter, or for saving costs: see Full Range Electronics Co Ltd v General-Tech Industrial Ltd & Anor, unreported, CA 59/1997.  As a proposition of law that is of course quite correct.

14.  But that does not absolve a nominal defendant from giving discovery.  The nominal defendant, at this stage being presumed to be a proper party to the action, the starting point must be that discovery is automatic: see RHC O 24 r 2.  It is right that the court retains a discretion to order limited discovery or no discovery, but that discretion should only be exercised with the court is satisfied that discovery is not necessary, either for disposing fairly of the action, or for saving costs.  Nothing Mr Ismail put to me persuaded me that discovery should be refused for those reasons.

15.  Mr Ismail relied upon O 24 r 8, to contend that discovery should be ordered only if it was necessary.  That rule however applies to applications for discovery under rules 3, 7 or 7A.  The plaintiffs application and these proceedings was for an order under r 2(5), to which r 8 does not apply.  In any event, I have not the slightest doubt that on the factual circumstances of this case, discovery by the company is both necessary and proper.

The cost of discovery against company would not be reasonable or proper:

16.  Mr Ismail argued that the cost of discovery would not be reasonable or proper.  The basis of the argument appears to be a contention that as the company is only a nominal party, against whom no allegation of wrong doing is alleged, and no relief claimed, the company’s money should not be expended on a dispute between shareholders.

17.  The submission is based upon a mis-application of the principles in Re a Company No 004502 of 1998 ex parte Johnson [1991] BCC 234 and Re CGL Investment Ltd and Wyatt Estates Ltd [1992] 1 HKC 78.  The principles in those cases apply to winding up petitions, and not to derivative actions.  For the reasons given by Chitty J. in Spoke, to refuse discovery in a derivative action would be to seriously impair the efficiency of such an action.

The appeal is misconceived:

18.  Mr Ismail argued that the appeal was misconceived because many of the company’s documents have already been disclosed by the plaintiff and the first defendant in their lists documents.  While it is right that those parties undoubtedly do hold some documents also held, and properly discoverable, by the company, that cannot be a ground to refuse discovery. 

19.  The right to discovery against a proper party is automatic.  The obligation on that party is to provide a list of documents.  The plaintiff is entitled to the list and have the assurance of the list, and if necessary a verifying affidavit, that all relevant documents have been made available to it.  To refuse discovery upon the ground argued, namely that the plaintiff already has “many documents held by the company”, would be to give a charter to a defendant to conceal relevant documents, the existence of which were not known to the other side.  That cannot be right.

20.  I can only think that it must have been disingenuous on the part of Mr Ismail to rely upon statements by both Rogers VP, and Barma J. that it is time to get on with the action, as a basis for arguing that there should be no discovery but that the action should be brought on for trial.  The preparation of a list of documents on the part of the company could not in any way be considered to be an onerous task, or a particularly expensive one.  The extent of the documents required to be disclosed is defined by the terms of the pleadings. 

21.  It is time for the company to cooperate with the procedural matters required to be disposed of, in order that the action may be brought as quickly as possible to a stage where it may be set down for trial.  As the proceedings presently stand the company appears to be taking a partisan position, and actively taking steps which have the effect of continually delaying the resolution of the proceedings.

22.  The appeal was allowed.  The company must give discovery pursuant to O 24 r 2.  The list of documents must be supplied within 28 days of the date of this judgement.

23.  There will be an order nisi that the costs of the appeal, and the argument before the Master, will be plaintiffs costs in the cause.