VTB DC LLC AND ANOTHER v. TOP FUEL CORPORATION LTD AND ANOTHER

HCMP 1543/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1543 OF 2013

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BETWEEN

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Introduction

1.  This is an application for pre-action disclosure.  It arises in the context of allegations against a Russian corporate conglomeration that it fraudulently obtained loans from a Russian bank and siphoned off its assets to nominees and associates to the prejudice of its creditors.

Legislative provisions

2.  The power to order pre-action disclosure arises out of s 41 of the High Court Ordinance, Cap 4.  

3.  Section 41 provides:

“(1) On the application, in accordance with rules of court, of a person who appears to the Court of First Instance to be likely to be a party to subsequent proceedings in that Court in which a claim is likely to be made, the Court of First Instance shall, in such circumstances as may be specified in the rules, have power to order a person who appears to the Court of First Instance to be likely to be a party to the proceedings and to be likely to have or to have had in his possession, custody or power any documents which are directly relevant to an issue arising or likely to arise out of that claim-

(a) to disclose whether those documents are in his possession, custody or power; and

(b) to produce such of those documents as are in his possession, custody or power to the applicant or, on such conditions as may be specified in the order-

(i) to the applicant's legal advisers;

(ii) to the applicant's legal advisers and any medical or other professional adviser of the applicant; or

(iii) if the applicant has no legal adviser, to any medical or other professional adviser of the applicant.

(2) For the purposes of subsection (1), a document is only to be regarded as directly relevant to an issue arising or likely to arise out of a claim in the anticipated proceedings if—

(a) the document would be likely to be relied on in evidence by any party in the proceedings; or

(b) the document supports or adversely affects any party’s case.”

4.  The section refers to the rules of court.  They are contained in O 24, r 7A and r 8(2) of the Rules of the High Court which prescribe the procedure to be followed.

5.  So far as material O 24 r 7A provides:

“(1) An application for an order under section 41 of the Ordinance for the disclosure of documents before the commencement of proceedings shall be made by originating summons (in Form No. 10 in Appendix A) and the person against whom the order is sought shall be made defendant to the summons.

(2) …

(3) A summons under paragraph (1) or (2) shall be supported by an affidavit which must-

(a) in the case of a summons under paragraph (1), state the grounds on which it is alleged that the applicant and the person against whom the order is sought are likely to be parties to subsequent proceedings in the Court of First Instance;

(b) in any case, specify or describe the documents in respect of which the order is sought and show, if practicable by reference to any pleading served or intended to be served in the proceedings, that the documents are relevant to an issue arising or likely to arise in the proceedings and that the person against whom the order is sought is likely to have or have had them in his possession, custody or power.

(3A) In the case of a summons under paragraph (1), paragraph (3)(b) shall be construed as if for the word “relevant”, there were substituted the words “directly relevant (within the meaning of section 41 of the Ordinance)”.

(4) A copy of the supporting affidavit shall be served with the summons on every person on whom the summons is required to be served.

(5) An order under section 41 or 42(1) for the disclosure of documents may be made conditional on the applicant's giving security for the costs of the person against whom it is made or on such other terms, if any, as the Court thinks just, and shall require the person against whom the order is made to make an affidavit stating whether any documents specified or described in the order are, or at any time have been, in his possession, custody or power and, if not then in his possession, custody or power, when he parted with them and what has become of them.

(6) No person shall be compelled by virtue of such an order to produce any documents which he could not be compelled to produce-

(a) in the case of a summons under paragraph (1), if the subsequent proceedings had already been begun; or

(b) in the case of a summons under paragraph (2), if he had been served with a writ of subpoena duces tecum to produce the documents at the trial.

 (8) For the purposes of rules 10 and 11 an application for an order under section 41 or 42(1) shall be treated as a cause or matter between the applicant and the person against whom the order is sought.”

6.  Order 24 r 8(2) provides:

“No order for the disclosure of documents shall be made under section 41 or 42 of the Ordinance, unless the Court is of opinion that the order is necessary either for disposing fairly of the cause or matter or for saving costs.”

Procedural history

7.  Before I commence my discussion on this case, I need to briefly explain the types of corporate entities that can be established in Russia.  Under Russian law a limited liability company can be established by a maximum of 50 shareholders with a minimum share capital of 10,000 rubles.  It is usually signified by the initials of “limited liability company” in Russian “OOO” or in English “LLC”.  Under Russian commercial law there are two forms of joint stock company, one is an open joint stock company where the shares are freely transferrable to the public and the minimum share capital required is 100,000 rubles, and the other is a closed joint stock company where the shares are transferrable only between the shareholders in the company and the required minimum share capital is 10,000 rubles.  A limited liability company with a number of shareholders above 50 is recognized as a joint stock company. It is usually signified by the initials “JSC”.

8.  By way of originating summons dated 21 June 2013, the then plaintiff, VTB DC LLC (its full name is VTB Debt Centre LLC but I will refer to it as “VTB DC”), made application for pre-action disclosure against the 1^st and 2^nd defendants.  The affidavit dated 16 July 2013 in support of the application was from Ms Yee Ling Wan, a consultant to the solicitors for the plaintiff.   The hearing of the application was fixed for 31 July 2013.  The two defendants had acknowledged service of the summons through their solicitors.

9.  At the hearing on 31 July 2013, the application was adjourned to 18 December 2013.  In the meantime on 8 October 2013 both defendants sought and obtained leave to file evidence in opposition.   At the adjourned hearing on 18 December 2013, both the 1^st and 2^nd defendants sought and were given an extension until 24 January 2014 and 4 February 2014 respectively to file any evidence.  The application was adjourned to 12 March 2014. 

10.  On 17 January 2014, upon an order of the court the solicitors for the 2^nd defendant ceased to act, and no evidence has been filed by the 2^nd defendant.  On 25 January 2014, the 1^st defendant filed an affirmation by its attorney Mr Pushkin Nikolay Mikhailovich.

11.  Ms Yee for the plaintiff filed a 2^nd affidavit on 5 November 2013 and a 3^rd affidavit on 7 February 2014. 

12.  At the third adjourned hearing of the application on 12 March 2014, there was no appearance by the 2^nd defendant.  The 1^st defendant on the other hand was legally represented and took a last minute issue on whether the plaintiff had standing to bring the present proceedings.   Mr Laurence L K Ngai, counsel for the 1^st defendant, questioned the legal capacity of the plaintiff to make a claim with respect to the loans made by another corporate entity.  The loans were made by the open joint-stock company VTB Bank and VTB North-West Bank which on a restructuring in March 2011 acceded to VTB Bank (“VTB Bank”).  VTB DC is the collecting agency of VTB Bank.  An agency agreement dated 1 February 2009 was executed between them and later supplemented but depending on the terms of the agency agreement, there was an issue as to whether VTB DC had the legal capacity to sue in relation to the loan agreements in question.  The application was adjourned to 4 April 2014 for the plaintiff to address this preliminary issue.

4 April hearing

13.  At the resumed hearing on 4 April 2014, there was still no appearance by the 2^nd defendant.  The plaintiff made application for it to be substituted by VTB Bank.  Ms Yee filed a 4^th affidavit dated 24 March 2014 in which she confirmed her instructions to substitute the plaintiff with VTB Bank.  This application was made under O 15, r 6 (2) of the Rules of the High Court.  I granted the application and gave leave to substitute VTB DC with VTB Bank as the plaintiff in the action.   I also gave leave to the plaintiff to amend the originating summons in the action to reflect the substitution and I ordered that service of the amended originating summons on the 1^st and 2^nd defendants be dispensed with and that the original acknowledgments of service by the 1^st and 2^nd defendants stand.  I made these orders as there was clearly no prejudice to the defendants and the substitution was a matter of formality.

14.  The 1^st defendant raised three points in opposition to the application. The first was whether VTB Bank had any interest in the matter.  I found this an odd argument considering the 1^st defendant raised the point in the first place that VTB DC may not have an interest in any future claim against the 1^st defendant as it was the collecting agency of the bank and that any claim in relation to the loans lay with the bank itself.  It was clear on the material before me that VTB Bank would be the proper plaintiff to an action in relation to the default of the loans and by making the substitution this would “ensure that all matters in dispute in the cause or matter may be effectively and completely determined and adjudicated upon.”[1]

15.  The second was that VTB Bank had to consent to be the plaintiff.  This requirement could and was satisfied by the solicitor for the bank confirming in writing that the bank consented.[2] An affidavit to this effect had been filed by a solicitor for the bank. 

16.  The third was a rather technical point and sought to make an issue out of the fact that affidavits previously filed were done so on behalf of VTB DC, and that as it was no longer the plaintiff, there was no affidavit in support of the present proceedings by the new plaintiff.  The argument stemmed from the requirement in s 41 that the applicant is a person who appears to be likely to be a party to subsequent proceedings in which a claim is likely to be made and in O 24, r 7A that an affidavit addressing this requirement be filed in support.  Ms Yee in her 4^th affidavit stated she had been authorized by both VTB DC and VTB Bank to make the substitution and that it had been previously deposed that the creditor of the loan agreements was the bank.  It was clear from the contents of the affidavits of Ms Yee that she was representing the interest of the VTB Bank and that VTB DC was its subsidiary.  I considered it appropriate in the circumstances of this case to make the order of substitution where the agent is replaced by the principal and there is no prejudice to the parties.

Background facts

17.  From 2007 to 2009, the plaintiff entered into a number of loan agreements with various affiliated companies under the Faeton Group for a sum of about 1 billion rubles.  The Faeton Group was one of the largest fuel operators in various regions of Russia. The ultimate beneficial owners of the group were Mr Sergei Ivanovich Snopok and Mr Mikhail Ivanovich Snopok.  All the borrowers failed to comply with the terms of the loan agreements and to repay the loans, and thereafter the Faeton Group and its entities progressively went into liquidation.

18.  The documents sought by this application cover the period of the loan agreements from 2007 to 2013.  They encompass internal company records and dealings or transactions with any subsidiary or associated company or officers of the 1^st and 2^nd defendants.

19.  The plaintiff entered into eight loan agreements [3] with various affiliated companies under the Faeton Group, including the limited liability companies, Faeton-Aero (“Faeton Aero”), Faeton Set Nomer 1 (“Faeton Set Nomer 1”) and Ostrogovitsy.  The loan agreements amounted to 987 million rubles which were purportedly secured by real estate and equipment of the companies. 

20.  According to Ms Yee’s evidence for the plaintiff, [4] all of the borrowers failed to comply with the terms of the loan agreements and to repay the loans in question, and Faeton Aero, described as the major holding company of the Faeton Group, entered into voluntary liquidation on 3 June 2009 at the St Petersburg Commercial Court (“the Russian Court”).

21.  The plaintiff successfully obtained judgment from the Russian Court on 30 October 2009 against Faeton Aero in relation to two loan agreements dated 19 July 2007 and 21 August 2008.[5] The ruling recorded that Faeton Aero was due to repay the loans in January and February 2009 but only a very small portion of the amount due was repaid.  The plaintiff also made claims against the surety of the loans and was registered as a creditor against two limited liability companies, Faeton Development Group and Faeton Holding Company.[6]

22.  On 28 July 2010, the Russian Court upheld the plaintiff’s claims in relation to four loan agreements against Faeton Set Nomer 1.[7] This company applied to the Russian Court for voluntary liquidation which was granted on 4 March 2011.  The plaintiff’s claims under the four loan agreements, together with an additional claim under a 5^th  agreement,[8] were registered as claims of creditors against Faeton Set Nomer 1 on 2 September 2011. Prior to this on 14 February 2011, the Russian Court registered a claim by the plaintiff against Faeton Aero as the surety of the loans.

23.  On 13 December 2011, the Russian Court registered the plaintiff’s claim against Ostrogovitsy in relation to a loan agreement dated 26 June 2008 [9] and against three other companies as sureties, Udarnik, Faeton Agro and Faeton Aero on 30 May 2013, 5 July 2013 and 14 November 2011 respectively.

24.  The plaintiff now alleges that the Faeton entities entered into the loan agreements fraudulently and have siphoned off their ongoing business proceeds to the prejudice of creditors, including the plaintiff.  The plaintiff makes this application to ascertain whether any such proceeds were siphoned off and transferred to the defendants and, depending on the documents disclosed, to institute recovery proceedings against the defendants.  This suggests that the plaintiff is making this application more for the purpose of inquiry, rather than pursuing a likely claim through the disclosure of documents.  I will comment more about this later.

25.  It is not in dispute that the 1^st defendant owns a 99% shareholding of a Russian company named Faeton-Toplivnaya Set Nomer 1 (“FTS No1”) which it has held since its incorporation on 10 June 2010.  In the present application, the plaintiff primarily relies on three links between the 1^st defendant and the Faeton entities through FTS No1.

26.  First, FTS No1 is the sole shareholder of a limited liability company named Piligrim-II (“Piligrim-II”).  Mr Sergei Snopok had owned 49% of Piligrim-II’s shareholding until sometime between November 2002 and July 2003[10] when Faeton Aero became the sole shareholder of it.  Piligrim-II was further transferred to Faeton-Invest and Faeton Set Nomer 1 as the sole shareholder on 26 March 2009 and 24 December 2010 respectively before it was later transferred to FTS No 1.  These dates were taken from a company search which was somewhat confusing, as the date mentioned may be the date of the event or of the update, and in the case of an appointment of an officer it would not necessarily provide the dates of duration of office.[11]

27.  Secondly, FTS No 1 is also the sole shareholder of a limited liability company known as Sekret Zdorovya (“Sekret Zdorovya”).  Sekret Zdorvya was owned by Faeton Aero and Faeton Set Nomer 1 on 26 March 2009 and 24 December 2010 respectively before it was later transferred to FTS No 1.  Again, these dates were taken from a company search which was somewhat confusing.[12]  Mr Alexey Igorevich Dreyzin is the common general director of FTS No 1 and Sekret Zdorovya, and Mr Mikhail Snopok was the former general director of Sekret Zdorovya from 30 June 2009 to a date that I have not been able to ascertain clearly.

28.  I should point out that in relation to the transfer to FTS No 1 of Piligrim-II and Sekret Zdorovya on the material before me it is unclear as to when this occurred but it seems it would have been on a date after 24 December 2010.

29.  Thirdly, under a Russian police report entitled “order for opening of a criminal case” dated 6 February 2013,[13] a company named Faeton-Fuel Network No1 LLC is being investigated for the receipt of payables in the amount of 600 million rubles from Faeton Aero during its insolvency.  Ms Yee has exhibited newspaper reports of a criminal investigation into the collapse of Faeton Aero and its default of loans with VTB Bank.  Mr Julian Lam, for the plaintiff, sought to illustrate, by referring to their identical Russian name, that “Faeton-Fuel Network No 1 LLC” and “Faeton-Toplivnaya Set Nomer 1” are the different English translations of the same company owned by the 1^st defendant.  It seems clear to me that appears to be the case. However, the police report and the newspaper articles say no more than there is a criminal investigation into the collapse of the Faeton Group entities.  

30.  As I have already mentioned, Mr Mikhailovich has filed an affirmation on behalf of the 1^st defendant. He does so in the capacity as its attorney under a general power of attorney. He stated, amongst other things, that:

“Since the incorporation of Top Fuel [the 1^st defendant],

(a) The only asset held by Top Fuel has been the 99% shareholding of a limited liability company in Russia in the name of “Faeton-Toplivnaya Set Nomer 1”. Top Fuel became the owner of the aforesaid 99% shareholding on 10th June 2010, the date when “Faeton-Toplivnaya Set Nomer 1” was established;

(b) Top Fuel has not opened, maintained, or closed any bank accounts, whether in Hong Kong or elsewhere;

(c) Top Fuel has not entered into any transaction with any other person or entity, whether in Hong Kong or elsewhere, whereby any asset, whether in Hong Kong or elsewhere, is purchased, received, or acquired howsoever by Top Fuel;

(d) Top Fuel has not entered into any transaction with any other person or entity, whether in Hong Kong or elsewhere, whereby any asset, whether in Hong Kong or elsewhere, is sold, parted with, or disposed of howsoever by Top Fuel; and

(e) Top Fuel has not entered into any loan transaction, where in Hong Kong or elsewhere, with any other person or entity, whether in Hong Kong or elsewhere.”[14]

31.  In response to this affirmation, the plaintiff submits that it is inconceivable that the 1^st defendant would own a 99% shareholding in FTS No 1 and not have any bank account or conduct any business.  It is pointed out by the plaintiff that the 1^st defendant was incorporated on 14 May 2009 and given its shareholding in FTS No1 there must have been transactions between them, including the acquisition by the 1^st defendant of the shareholding in FTS No1.  It is also pointed out by the plaintiff that there should have been a payment from the 1^st defendant to acquire FTS No 1 which has a share capital of 495,000 rubles.  The plaintiff notes that the sole director of the 1^st defendant is a professional service provider and that the address of the 1^st defendant is not that of the service provider. This, it is submitted, would indicate in both instances that fees or costs are being incurred for which the 1^st defendant would be liable to pay.  The plaintiff further notes that FTS No 1 would have had substantial revenue from Faeton Aero and observes that it would be most unlikely that the 1^st defendant as a shareholder did not receive any dividend or profit.  It is finally submitted by the plaintiff that this all stands in stark contradiction with the assertions made by Mr Mikhailovich in his affirmation.

32.  It appears from about May or June 2009, the 2^nd defendant was the sole shareholder of Faeton Set Nomer 1.[15]   The date is not precise because of the nature of the company search updates that have been obtained.  According to the search, its former general director was Mr Mikhail Snopok, from 30 June 2009 to 6 August 2010, and the former owners were Faeton Aero and Faeton Invest.  Its business was in petroleum chemicals.  It was a party to five loan agreements with VTB Bank and defaulted on all of them. It went into voluntary liquidation on 4 March 2011.  It was at this time it was being pursued by the plaintiff through the Russian courts for default of the five loans. The share capital of Faeton Set Nomer 1 was 295,104,126 rubles (the equivalent of nearly $63 million Hong Kong currency).  

The legal principles

33.  Whilst this application may appear to be fairly straightforward on its face, there is a difficulty as to how the merits of the potential cause of action should be established on an application for pre-action disclosure.  It is a fundamental principle that discovery in litigation should only be allowed in appropriate circumstances. With that in mind, it is also important to appreciate that pre-action disclosure provides a means by which an applicant with a potentially meritorious claim can access documents to assist in determining the nature and terms of such a claim.  

34.  Whilst the current provision in England and Wales is at variance with the provision in Hong Kong, English authority does provide a useful discussion on pre-action disclosure and the interpretation of common phrases.  I should stress, however, that the English caselaw has followed a different course because of the differences in the language and application of the provision.  The English provision is also governed by pre-action protocols which have not been adopted in Hong Kong.[16] As part of the Civil Justice Reform, s 41 was amended to extend the power from cases in respect of personal injury or death to all cases and for such jurisdiction to be exercised where it is shown that the plaintiff and the potential defendant are both likely to be parties to anticipated proceedings and that disclosure before the proceedings have been started is necessary to dispose fairly of the proceedings or to save costs.[17]  It was also required that an order granted should relate to disclosure and production of documents which are directly relevant to the issues in the proceedings.  

35.  When the original English provision was enacted, the English Court of Appeal in Dunning v United Liverpool Hospitals’ Board of Governors [1973] 1 WLR 586 had to consider what was meant by the phrase “likely to be made”.  Whilst this phrase has been removed from the current English provision, it remains in the Hong Kong provision and the decision in Dunning is of relevance.  Lord Denning MR in his analysis of the provision said: “…I think that we should construe “likely to be made” as meaning “may” or “may well be made” dependent on the outcome of the discovery.  One of the objects of the section is to enable a plaintiff to find out – before he starts proceedings – whether he has good cause of action or not. This object would be defeated if he had to show – in advance – that he had already got a good cause of action before he saw the documents.” [18]  James LJ thought that a claim was “likely” if there was a “reasonable prospect” of one and he stressed that: “In order to take advantage of the section the applicant for relief must disclose the nature of the claim he intends to make and show not only the intention of making it but also that there is reasonable basis for making it. Ill-founded, irresponsible and speculative allegations or allegations based merely on hope would not provide a reasonable basis for an intended claim in subsequent proceedings.” Even though, Stamp LJ dissented, he did on factual grounds, and he added that “hope or suspicion” is not enough to support an application under this provision.

36.  The origins of the English equivalent provision of s 41 were considered by Rix LJ in Black and Ors v Sumitomo Corpn and Ors [2002] 1 WLR 1562 and he examined the construction of the phrase “likely to be made”. He noted the construction given by Lord Denning MR in Dunning’s case who thought that “likely to be made” merely meant “may” or “may well be” dependent on the outcome of the disclosure and compared it to the construction given by Stuart-Smith LJ (with the approval of the other members of the court) in Burns v Shuttlehurst Ltd [1999] 1 WLR 1449 who held that in deciding whether a claim was “likely to be made”, the question is whether there is “a worthwhile action or a reasonable basis for the intended action”.  Rix LJ agreed with the interpretation given by Lord Denning MR and disagreed with the one given by Stuart-Smith LJ.  Rix LJ in his judgment placed emphasis on the distinction between the jurisdictional thresholds that had to be satisfied and a statement of principle as to the exercise of the court’s discretion.  He considered Lord Denning MR’s interpretation to be the correct jurisdictional test whereas he considered Stuart-Smith LJ’s interpretation to be a statement of principle as to the exercise of the court’s discretion.  These comments were made in the context of an analysis on the English authorities on the unamended s 32(2) of the Supreme Court Act 1981. 

37.  I think it is important, for the purpose of this analysis, to focus more on the requirements of the provision, in particular on the need to show that a claim may well be made.  I agree with the decision in Dunning that the word “likely” in the phrase “likely to be made” meant “may” or “may well” or “reasonable prospect” if disclosure was granted.  The level and extent to which an applicant needs to satisfy the court that a claim is likely to be made is a vexed issue.  The whole purpose of the provision is for an applicant to have another party disclose and produce documents in order to ascertain the nature and ambit of any claim he may have against such party.  It is therefore a means by which a plaintiff can access documents in order to assist him in mounting a potentially meritorious claim.  However, to borrow the words of James LJ in Dunning’s case, there must be a reasonable basis for an intended claim in subsequent proceedings and ill founded, irresponsible and speculative allegations or allegations based merely on hope will not suffice. This brings us to the question as to what an applicant needs to provide to satisfy this requirement.  Under O 24 r 7A an affidavit in support of an application must, amongst other things, specify or describe the documents in respect of which the order is sought, and show “if practicable by reference to any pleading served or intended to be served in the proceedings, that the documents are relevant to an issue arising or likely to arise in the proceedings”.[19] An applicant, therefore, is expected to have some understanding of and justification for the case he has against a potential defendant when applying for pre-action disclosure, and this needs to be sufficiently particularized to avoid any unwarranted or fishing applications.  The burden of persuasion rests with the applicant to show the nature of the claim that he intends to make, that he and the potential defendant are likely to be parties to the claim and that the potential defendant is likely to have documents that are directly relevant to issues in the claim.  This will depend on the clarity and particularization of the issues submitted by the applicant that are likely to arise out of the claim that may be made. 

38.  Accordingly, an applicant should set out the nature of the claim he intends to make and show not only the intention of making it but also that there is a reasonable basis for making it, and specify the document or class of documents for which pre-action disclosure is sought and as much as practicable detail the grounds and facts relied on in the supporting evidence.

39.  In Black’s case Rix LJ had to deal with an application for pre-action disclosure in a case based on various allegations including fraud.  On this issue he observed that:

“At a general level, there are clearly concerns that allegations of dishonesty are not lightly made, that a defendant to an allegation of dishonesty knows plainly what it is that is alleged against him, and also that dishonesty does not spread its cloak over the means by which it can be detected and revealed. It is not plain how these concerns are to be reconciled in any particular case in the context of pre-action disclosure, but it would seem to me that a court which is asked to grant such disclosure should be careful to pay proper regard to each of them. In any event it cannot be right that an allegation of fraud should assist the potential claimant to obtain pre-action disclosure, unless his allegations carry both some specificity and some conviction and his request for disclosure is appropriately focused.”[20]

40.  He went on to further explain that:

“…, unless there is some real evidence of dishonesty or abuse which only early disclosure can properly reveal and which may, in the absence of such disclosure, escape the probing eye of the litigation process and thus possibly all detection, I think that the court should be slow to allow a merely prospective litigant to conduct a review of the documents of another party, replacing focused allegation by a roving inquisition.” [21]

41.  This highlights the problems that may arise for both a plaintiff and a potential defendant in an application for pre-action disclosure where the likely claim is based on fraud.  To some extent, it also highlights why a court should pay particular regard to the nature of the claim in evaluating the application.  In a case where allegations of fraud are being mounted, and there is a reasonable basis for such allegations, a court should bear in mind that the alleged dishonesty against the potential defendant is the principal issue of the claim and is a factor to be taken into account when considering the application and the documents or class of documents to be disclosed if the application is granted.  In such a case, it would not be unsurprising that the task of a plaintiff in making good his claim would be fraught with difficulties which may not be overcome without pre-action disclosure.  The nature of the claim likely to be made is a matter that needs appropriate regard when considering the requirements under this provision.  I tend to think that in cases involving allegations of fraud, a degree of inquiry should be permitted to a prospective plaintiff where they show a reasonable basis for the allegations against the potential defendant.

42.  As provided under s 41 an application must be made in accordance with the rules of court. The relevant rules are contained in O 24, r 7A and r 8(2) which I have set out in full at the commencement of my judgment. Under O 24 r 7A it is required that an application for pre-action disclosure be made by originating summons with an affidavit in support. The supporting affidavit must address the following requirements:

(1) state the grounds on which it is alleged that the applicant and the person against whom the order is sought are likely to be parties to subsequent proceedings in the Court of First Instance (r 7A(3)(a));

(2) in any case, specify or describe the documents in respect of which the order is sought and show, if practicable by reference to any pleading served or intended to be served in the proceedings, that:

(a) the documents are relevant to an issue arising or likely to arise in the proceedings; and

(b)the person against whom the order is sought is likely to have or have had them in his possession, custody or power. (r 7A(3)(b)).

(‘Relevant’ means ‘directly relevant’ within the meaning of s 41 (r 7A(3A).)

43.  The rules also impose additional limitations to the power to order pre-action disclosure:

(1) Under O 24, r 7A(6), no person shall be compelled by virtue a s 41 order to produce any documents which he could not be compelled to produce if the subsequent proceedings had already been begun.

(2) Under O 24, r 8(2), no order for the disclosure of documents shall be made under s 41 unless the court is of the opinion that the order is necessary either for disposing fairly of the cause or matter or for saving costs.

44.  To summarise, a court has power to make an order for pre-action disclosure where the following conditions are satisfied:

(a) The applicant appears likely to be a party to subsequent proceedings in the Court of First Instance in which a claim is likely to be made.  In order to satisfy the requirement that a claim is likely to be made, the applicant must show a claim “may” or “may well” be made if discovery is granted. [22]

(b) The respondent appears likely to be a party to such proceedings.

(c) The respondent appears likely to have or have had documents in his possession which are directly relevant to an issue arising or likely to arise out of such claim in that the documents would be likely to be relied on in evidence by any party in such proceedings or support or adversely affect any party’s case.

(d) No order shall be made unless the court is of the opinion that it is necessary either for disposing fairly of the cause or matter or for saving costs.[23]

The likely claim

45.  With the principles as stated above in mind, it is necessary to stand back and look to see what is the likely claim and who are likely parties to it.  The bank claims it has been the victim of a massive fraud.  It is claimed that loans were obtained from the bank with the intention of never repaying them and that the assets of the borrowers were then siphoned off to nominees and associates of the fraudsters in order to defeat creditors.

46.  The plaintiff may have a claim against the 1^st and 2^nd defendants if it can be shown that they received monies from the Faeton entities in circumstances where it appears there was no underlying commercial transaction and the object was to defeat the creditors of the Faeton entities.  It is argued that the 1^st and 2^nd defendants are likely to have or have had documents relating to their dealings and association with the Faeton entities which would be directly relevant to an issue or likely issue in a claim of fraud.

47.  Under the originating summons, the plaintiff seeks discovery of (a) statutory records, (b) minutes of all general meetings and directors meetings, (c) books of accounts, (d) all contractual documents and correspondence in relation to any transactions between the defendants and any of their subsidiaries, holding companies or any other companies within their group of companies or any shareholders or directors of those companies, and (e) all loan documentation of the defendants for the period from 2007 to 2013.

48.  The plaintiff submits that the documents sought are all restricted to the period from 2007 to 2013 when the loan agreements were entered into. That is not entirely correct. The loan agreements were entered into from 2007 to 2009 and soon thereafter the borrowers began to default. It appears that this period has been selected by the plaintiff to cover the occasions when the loan advances were made and the subsequent dealings of the Faeton entities. From an examination of the description of the documents sought, it is clear that they are general and broad.  This immediately raises concern that the documents requested are too wide and lack appropriate specificity as required by the rule. 

49.  The plaintiff submits that it satisfies the requirements of the rule.  The first requirement is that the plaintiff may well bring an action against the defendants if the documents are disclosed.  The first observation I make is that the documents sought to be disclosed are fairly general and do not relate specifically to commercial or financial dealings or transactions. The plaintiff argues that if the documents show that the defendants received monies from the Faeton entities during the period from 2007 to 2013, it may well bring an action to set aside the transfer of the funds.  But this is based on the assumption that there has been a transfer of funds with no genuine commercial transaction underlying it.  Whilst the plaintiff points to a number of causes of action relating to the recovery of fraudulently obtained monies, it must be specifically shown that there has been or likely to have been dealings between the Faeton entities and the defendants during the relevant time, involving the transfer of funds, to have at least the basis of a claim.  This may be evidenced by the interrelationship between them through cross-ownership or past dealings. The plaintiff’s submissions place considerable emphasis on the loans having been fraudulently obtained by Faeton entities and that assets having been deliberately siphoned off, but the question is whether sufficient information or material has been provided to show dealings or a connection between the defendants and the Faeton entities that would have resulted in the defendants having received funds or assets from Faeton entities in order to cheat their creditors.

Application against the 1^st defendant

50.  In the case of the 1^st defendant, I am not satisfied that VTB Bank may well bring an action against the 1^st defendant if the documents sought are disclosed.  The plaintiff’s application relies solely on the fact that the 1^st defendant owns 99% of FTS No 1 which it acquired on 10 June 2010, after the default of the loans.  That is simply not enough.  There must be a likelihood of proceedings and that the 1^st defendant is likely to be a party to such proceedings.  As required, the plaintiff should not only set out the nature of the claim it intends to make and show an intention to make it, but also that there is a reasonable basis for doing so.  An application relying on hope or speculation will not suffice.   I agree with the observation of Rix LJ in Black’s case where he said: “… the more focused the complaint and the more limited the disclosure sought in that connection, the easier it is for the court to exercise its discretion in favour of pre-action disclosure, even where the complaint might seem somewhat speculative or the request might be argued to constitute a mere fishing exercise.  In appropriate circumstances, where the jurisdictional thresholds have been crossed, the court might be entitled to take the view that transparency was what the interests of justice and proportionality most required.  The more diffuse the allegations, however, and the wider the disclosure sought, the more sceptical the court is entitled to be about the merit of the exercise.” [24]

51.  The next requirement is that the defendants are likely to have or have had the documents sought.  As already noted the documents sought are general and broad even though they are the type of documents a company would be expected to have in its possession.  Again the plaintiff's submission relies on an assumption that there had been dealings between the Faeton entities and the defendants.  The plaintiff has expressed incredulity in relation to the statements made by the attorney of the 1^st defendant in his affirmation.  I can understand the plaintiff’s reaction and find it extraordinary that the 1^st defendant which owns a corporate entity in Russia has no bank accounts and has never transacted or had any dealings.  It is also stated on behalf of the 1^st defendant that it does not have, nor has had, any documents whatsoever which are related to or concerned with the Faeton entities.  The plaintiff submits that the contents of the affirmation are unbelievable and should not be treated as conclusive.  Whilst there are good grounds to doubt the contents of the affirmation, the suspicion it elicits is not enough at this stage to satisfy the conditions that must be met.

52.  I am not convinced that if the documents sought were disclosed that VTB Bank may well bring an action against the 1^st defendant. The documents sought are general and broad, and the basis of the claim lacks specificity and substance. The plaintiff relies on the fact that the 1^st defendant owns FTS No1 which owns two companies that were previously connected to failed Faeton companies.  Two points are made by the 1^st defendant in response. The first point is that the 1^st defendant owned FTS No1 since its incorporation on 10 June 2010.  This was after the Faeton Group entities had defaulted on their loans and gone into liquidation. In other words, the 1^st defendant submits that there is no connection with individuals or entities of the Faeton Group during the period it defaulted under the loans with VTB Bank.  The second point is that the 1^st defendant has not engaged in any commercial or financial transaction and in particular with Faeton Group entities.  Mr Mikhailovich in his affirmation states: “…Top Fuel does not have, and has not had, in its possession, power or custody any documents whatsoever which are howsoever related to or concerned with, any assets whatsoever of the Faeton Entities and/or the Plaintiff. Besides, Top Fuel does not have, and has not had, in its possession, power or custody any documents whatsoever which are howsoever related to or concerned with, any transaction whatsoever between Top Fuel and the Faeton Entities.”[25]  

53.  It is not clear whether any action has been instituted by VTB Bank against FTS No1 in Russia in relation to the claim it has suggested it will make against the 1^st defendant here in Hong Kong. It seems to me that the plaintiff has initiated this application, not for the purpose of making a claim against the 1^st defendant but for the purpose of finding out if there were any dealings between Faeton Group entities and the 1^st defendant which involved the transfer of funds in circumstances where there was no supporting commercial transaction.

54.  I am not unsympathetic to the plaintiff, and whilst there is an element of suspicion in the information and material submitted of possible dealings between Faeton entities and the 1^st defendant, it falls short at this stage of satisfying the conditions under s 41. 

Application against the 2^nd defendant

55.  The 2^nd defendant owns one of the entities of the Faeton Group that took out loans with the VTB Bank.  That entity Faeton Set Nomer 1 was an active petroleum chemicals company operated by Faeton-Aero until it was transferred to the 2^nd defendant in about May or June 2009.[26]  Faeton Set Nomer 1 had a very substantial share capital and there would be documentary records evidencing the transfer of ownership to the 2^nd defendant.  The 2^nd defendant occupies substantial office premises in Hong Kong where it appears to be operating and conducting business.  It has not resisted this application even though it was initially legally represented in the proceedings. 

56.  Given that the 2^nd defendant owns Faeton Set Nomer 1 which was one of the entities that defaulted in its loans with the VTB Bank and that the 2^nd defendant is incurring expenses and conducting business in Hong Kong, I am satisfied that a claim may well be made by the VTB Bank against the 2^nd defendant on the grounds of fraud and conspiracy in relation to the loans to Faeton Set Nomer 1 and the non payment of them to the bank and the receipt of monies or property from Faeton Set Nomer 1 to it in order to defeat any claim by creditors of Faeton Set Nomer 1. There is clearly a close connection between the two. The 2^nd defendant owned Faeton Set Nomer 1 during the time that it took out the loans with VTB Bank and defaulted under them. There is a high likelihood there would have been transactions between them during this relevant time. It appears that the 2^nd defendant is a company of reasonable financial standing and that it may have derived funds or profit from its ownership of Faeton Set Nomer 1.  I am also satisfied that the 2^nd defendant may have or have had in its possession documents which are directly relevant to any issue arising or likely to arise out of  a claim by the plaintiff.  It seems to me therefore that the disclosure of documents is necessary in order to dispose fairly of any subsequent proceedings between the parties. There is one qualification to my decision. I am of the view that the documents sought are too general and broad. They need to be more specific and tailored to the terms and scope of the likely claim by the plaintiff.

Conclusion

57.  For the foregoing reasons, I refuse the plaintiff’s application against the 1^st defendant and make an order nisi that the plaintiff pay the 1^st defendant costs, to be taxed if not agreed, and I grant the plaintiff’s application against the 2^nd defendant but I wish to be addressed on the terms and scope of the order as currently framed.  I make no order as to costs. I should explain that normally in an application for pre-action disclosure costs will be awarded to the person against whom the order is made.[27]