BILLION LEAD INVESTMENT LTD v. UNION JOYCE LTD AND OTHERS

HCMP 2145/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 2145 OF 2011

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D E C I S I O N

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Background

1.  The Petitioner (“Billion”) seeks specific discovery of invoices and associated documents concerning purported sale and purchase transactions between Winner Link Limited (“Winner”) and Ming Yuen Textiles Limited (“Ming”). The documents are claimed to be relevant to the matters in question between Billion and the respondents in these proceedings.  The proceedings are Billion’s petition under section 168A (“Petition”) of the Companies Ordinance (“Ordinance”), for relief against Union Joyce Limited (“Union”), Chau Kwai Cheong (“Chau”) and Yiu Fung Kuen (“Clara”) in respect of the affairs of Talent Weaving Dyeing & Printing Limited (“Company”).  The directors of the Company were at the material times Chau, Clara and Fu Ka Fai (“Ben”, who is the sole shareholder and director of Billion).  Chau is Clara’s husband.

2.  Billion as the 20% shareholder of the Company complains that Chau and Clara have themselves and through Union, their corporate vehicle, engaged in a series of unfairly prejudicial conduct in their control of the activities of the Company.  Such conduct includes their alleged misuse of credit facilities which had been granted by banks to the Company and to Ming jointly (“Facilities”). Ming is a company beneficially owned by Chau and Clara, and controlled by Clara. The Facilities include letters of credit and other forms of trade finance.  They were secured by charges on deposits, mortgages, personal guarantees executed by shareholders and directors of the Company, cross guarantees executed by Ming and the Company, and properties provided by the shareholders of the Company.

3.  Billion’s complaint is that in around November 2010, it was discovered that Chau and Clara had, without Ben’s knowledge or consent, presented to the banks fictitious invoices issued by Winner to Ming, purportedly for fabrics sold and supplied by Winner to Ming, and caused the banks to allow Ming to draw on the Facilities by making payments to Winner.  Winner is admitted to be a company owned and controlled by Clara.  Upon receiving payments, Winner would on the same day or shortly afterwards pay the whole or substantial parts of the amounts back to Ming and/or Clara.  Billion refers in its Petition to transfers made from Winner’s bank account with the Bank of Communications Limited in May 2008 and October 2008.  There were 8 payments made by Ming to Winner, with corresponding payments back to Ming and Clara, with specific references made in 4 of such payments to 4 invoices issued by Winner to Ming.  The Petition states that these payments were examples of the fictitious transactions and the misuse of the Facilities complained of by Billion.

4.  It is claimed that the misuse of the Facilities caused Ming to commit an event of default and rendered the Facilities to be cancelled or terminated by the banks, which could damage the Company and deprive it of the use of the Facilities for its business.  The misuse of the Facilities by Chau and Clara also caused the liability of the Company and of Billion or Ben to be increased, and was a breach of the agreement made between the shareholders of the Company, as well as breach of their duties owed to the Company.

5.  By its summons issued on 30 July 2012 (“Summons”), Billion seeks discovery of :

(a)  all invoices issued by Winner to Ming, including but not limited to 26 specific invoices;

(b)  all documents concerning all purported sale and purchase or other transactions between Winner and Ming represented by the invoices, including purchase orders, delivery notes, applications made by Ming to its banks for financing for payment of the invoices, etc; and

(c)  all cheques and credit advice slips for payments made by Winner to Ming and Clara.

6.  By way of opposition to Billion’s application, the respondents argue that the application is a fishing exercise, that Billion’s claim of alleged misuse of the Facilities by fictitious invoices is a claim of fraud, and that the claim of fraud has not been sufficiently established.  The respondents further claim that the request for discovery is too wide and is unnecessary. 

Applicable legal principles

7.  The legal principles applicable to the determination of an application for discovery are not in dispute.  In relation to specific discovery, the party seeking the order for discovery must make out a prima facie case that a specified document or class of documents exists; that the party against whom the order is sought has or had the documents in his possession, custody or control; that the documents relate to a matter in question in the action; and that discovery is necessary either for disposing fairly of the cause or matter or for saving costs.  It is for the party resisting the order for discovery to show that discovery is not necessary. 

8.  It is also clear that post CJR, the Court should give effect to the underlying objectives of the rules and procedures when it exercises its powers under Order 24 and when it interprets the provisions of Order 24.  In deciding whether any document relates to a matter in question in the action, whether any document is or has been in the possession, custody or power of a party, and whether discovery of a document sought is necessary either for disposing fairly of the cause or matter or for saving costs, the Court should always bear in mind the objectives of cost effectiveness, expeditious disposal of cases, proportionality, procedural economy and ensurance of fairness between the parties.

Whether claim of fraud sufficiently and adequately pleaded

9.  Billion’s claim of misuse of the Facilities is made in paragraph 44 of the Petition:

“Upon investigation, it was discovered that Chau and Clara had, without Ben’s knowledge or consent, misused the Credit Facilities by presenting to the banks certain fictitious invoices issued by Winner Link to Ming Yuen Textiles purportedly for fabrics sold and supplied, and causing the banks to allow Ming Yuen Textiles to draw on the Credit Facilities by making payments to Winner Link. The amounts paid to Winner Link were then repaid back to Ming Yuen Textiles and/or Clara.”

10.  Particulars were given of the claim made in paragraph 44.  After setting out the particulars of Chau’s and Clara’s ownership and control of Winner, the following particulars of the claim of misuse of the Facilities are set out in the Petition:

“44.2 Winner Link issued invoices to Ming Yuen purportedly for fabrics sold and supplied when no such fabrics were in fact sold or supplied by Winner Link. The invoices together with other banking documentation were presented by Ming Yuen Textiles to the banks for payment.

44.3 Acting upon the documents supplied, the banks approved the payments and authorized Ming Yuen Textiles to draw on the Credit Facilities by making payments to Winner Link.

44.4 Upon receiving the amounts paid by Ming Yuen Textiles into its bank account at Bank of Communications Limited, no. 027-565-0-291475-9, Winner Link would pay most, if not all, the amounts received to Ming Yuen Textiles and Clara on the same day or shortly afterwards. Details of the payments from Ming Yuen Textiles to Winner Link and the repayments from Winner Link to Ming Yuen Textiles and Clara in May 2008 and October 2008 (by way of examples) are set out in Schedule 2. The Petitioner do not have the complete set of banking documents of Winner Link’s account and will provide further details upon completion of discovery.

44.5 As a result, Chau and Clara were able to withdraw substantial amount of funds from the Credit Facilities and used such funds for their own purposes.”

11.  The respondents argue that Billion has not given particulars of the allegation of fraud by the use of fictitious invoices.  They further claim that Billion has produced no direct evidence to establish its case of fraud.

12.  It cannot be disputed that allegations of fraud must be pleaded distinctly and with the utmost particularity (Aktieselskabet Dansk v Wheelock Marden & Co Ltd [1994] 2 HKC 264, 270).  As was emphasized in Aktieselskabet Dansk v Wheelock Marden & Co Ltd itself, this is premised on the function and purpose of pleadings and particulars, which is to inform the other side of the nature of the case they have to meet as distinguished from the mode in which that case is to be proved, to prevent the other side from being taken by surprise at trial, to limit the generality of the pleadings, the claim and the evidence, and to limit and define the issues to be tried, and as to which discovery is required. 

13.  Having considered paragraph 44 of the Petition and the particulars furnished thereunder, I consider that Billion has sufficiently pleaded and particularized its case of the alleged misuse by Chau and Clara of the Facilities: that they had caused Winner to issue invoices to Ming, then caused Ming to make payments on the invoices by drawing on the Facilities, and thereafter caused Winner to make corresponding payments back to Ming and/or Clara.  The particulars of the invoices, payments and repayments set out in paragraph 44.4 and Schedule 2 of the Petition are sufficient, in my view, to raise an inference of fictitious invoices or transactions having been used.  If Winner had supplied fabrics or other goods to Ming, and had invoiced Ming for such goods to seek payment, there is no commercial reason for Winner, after receiving payment from Ming under the invoices, to make repayment of the same amount back to Winner.  There is a pattern of such payment and repayment between Winner and Ming in May and October 2008 (as particularized in paragraph 44.4 of the Petition), and between March 2008 and January 2009, between October 2010 and November 2010, and in January 2011 (as shown in the documents exhibited to the affirmation filed by Billion in support of the Petition).  Billion claims that these are the only particulars and documents that have been made available to Billion prior to discovery by the respondents.  No explanation has been given by the respondents for any of the “repayments” made by Ming to Winner.

14.  Given the nature of what is already pleaded and particularized in paragraph 44 of the Petition, Chau and Clara should be left in little doubt as to Billion’s case of the use of fictitious invoices and the misuse of the Facilities shared by Ming and the Company, bearing in mind in particular that the affairs of Winner and Ming are peculiarly within their own knowledge, as opposed to being within the knowledge of Ben or Billion.  Further particulars may be amplified by Billion after discovery, which is not ruled out in an appropriate case even when fraud is claimed (Deak Perera Far East Ltd v Deak & Ors [1995] 2 HKC 28), so long as justice is served for both parties in that, on the one hand, the defendant knows of the nature of the case it has to meet, and on the other hand, the plaintiff has evidence of fraud and has given sufficient particulars such that he should be allowed to proceed even if his case is to be augmented after discovery.

15.  No issue has been raised that the documents sought do not exist or are not in the possession, custody or control of the respondents.  I am satisfied that they are relevant in the Peruvian Guano sense to the issue of the respondents’ misuse of the Company’s Facilities.  Whether there is evidence, direct or indirect, to establish Billion’s case of fraud or misuse of the Facilities to the prejudice of either Billion as shareholder, or to the prejudice of the Company, are matters for determination at trial.  All that Billion has to establish at this stage is that the document “contains information which may enable the party (applying for discovery) either to advance its case or to damage that of his adversary”, or is a document “which may fairly lead him to a train of inquiry which may have either of these two consequences”, and I am so satisfied.

16.  In determining the relevance of the documents sought by Billion, I have also borne in mind the comments of Colman J in O Company v M Company [1996] 2 Lloyd’s Law Rep 347, at p 350, which were quoted with approval by Deputy High Court Judge H Wong SC in Chan Hung v Yung Kwong Chung HCA 216 & 271/2004:

“The “case” of the plaintiffs or the defendants respectively can be defined only by looking at the pleadings.  It must be defined by reference to the plaintiffs’ pleaded claim in its general sense, as distinct from its detailed exposition and by the defendants’ pleaded defence in the sense of its general refutation of the plaintiffs’ claim.  What matters for discovery purposes is the claim and defence to it in the broadest sense and not to the detailed particulars of either claim or defence.”

At paragraph 27 of the judgment of Deputy High Court Judge H Wong SC, he commented:

“With respect, I agree with Colman J.  For the purpose of discovery, the relevance of a document should not be solely tested against the detailed particulars pleaded by the parties.  It is the pleaded case of the parties in the broad sense that one should be concerned with.  A document may be generally relevant to a party’s case as pleaded (many so-called “background documents” are of this nature) although its relevance cannot be specifically pinned to some pleaded particulars.  For discovery purpose, the pleadings have to be looked at broadly.”

I have little to add to what has been clearly stated by Colman J and Deputy High Court Judge H Wong SC.

Whether discovery is necessary

17.  Since the Civil Justice Reform, no order for discovery shall be made 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.  The Court must take a proportionate approach, balancing the interests of the fair disposal of the cause or matter in accordance with the parties’ substantive rights against effectiveness, expeditious disposal of cases, and procedural economy.

18.  For the reasons set out in paragraphs 13 and 14 above, I am satisfied that Billion’s request is not a pure fishing expedition.  However, as Burrell J emphasized in Mariner International Hotels Limited v Atlas Limited [2002] HKEC 186, the task of the Court is to determine when doing justice to the claim stops, and “fishing” starts, when “the onerous nature of the discovery exercise passes from the necessary and permissible to the unnecessary and impermissible”.

19.  Questions of relevance, necessity and proportionality should be considered by reference to the issues for determination at trial.  I bear in mind that the claim of the respondents’ misuse of the Company’s Facilities is only one of the matters relied upon by Billion to establish its case of unfair prejudice under section 168A of the Ordinance.  Counsel for Billion has pointed out that the relief sought by Billion under the Petition includes an account of the loss and damage suffered by the Company as a result of the respondents’ alleged misconduct (including the alleged misuse of the Facilities).  Billion also seeks an order that it and Ben should be indemnified under their guarantees and mortgages in respect of any liability arising out of the respondents’ misuse of the Facilities.  Discovery of the documents supporting Ming’s use of the Facilities is necessary for the proper determination of Billion’s claims for damages and indemnity.

20.  In any case, discovery should be sensibly controlled, and not allowed to be used as an oppressive weapon, to be pursued without sufficient regard to economy and efficiency in terms of the usefulness of the information which is likely to be obtained from the documents.  It would be oppressive and unnecessary to order discovery of documents for each and every transaction entered into by Ming, and every payment made by Ming, irrespective of their importance or marginal relevance to the matters in dispute.

21.  Adopting a proportionate approach on the question of necessity, I will allow the discovery sought by Billion, but the categories of the documents sought should be restricted to those related to the Facilities, or Billion’s claim of the respondents’ misuse of the Facilities. 

22.  The invoices referred to in item 1 of the Schedule to the Summons (“Schedule”) should be confined to invoices issued by Winner to Ming, payment of which was made by use of the Credit Facilities defined in paragraph 39 of the Petition (“Winner Link Invoices”).  Discovery of the Winner Link Invoices should also be confined in terms of time.  On the materials so far available, the earliest date by which the Facilities were granted to the Company and to Ming is 23 June 2009, as evidenced by the facility letter from the Bank of China (Hong Kong) Ltd.  Any alleged misuse of the Facilities could not have been prior to that date.  At the present stage of these proceedings, I will only confine discovery of the Winner Link Invoices to those issued between 23 June 2009 and the date of the Petition, ie 27 October 2011.  If necessary and appropriate at a later stage, the Court may make further orders for discovery for the purpose of the account sought by Billion under the Petition. 

23.  The documents sought under Item 2 of the Schedule should also be confined.  The reference to Winner Link Invoices in Item 2 should bear the meaning defined in the preceding paragraph 21 of this Decision.  I will order discovery, in respect of each Winner Link Invoice ordered to be disclosed, of:

(1)  purchase orders, pro-forma invoices, delivery notes, packing lists, certificates of inspection (if any) for each transaction covered by the invoice; and

(2)  the application made by Ming to its bank for any form of financing for payment of the invoice, together with any letter of credit issued by the bank on such application, and the documents presented under such letter of credit.

24.  I will also order discovery of the documents referred to in item 3 of the Schedule, save that it is to be confined to “all cheques or credit slips for payments made by Winner Link to Ming Yuen Textiles and the 3^rd Respondent from or out of amounts received from the Winner Link Invoices”.

Conclusion

25.  I make the orders for discovery in terms of the Schedule, as revised above.  The 1^st to 3^rd respondents are to make the affirmations referred to in paragraph 1 of the Summons within 21 days of the handing down of this Decision.  I make an order nisi that the costs of and occasioned by the Summons are to be awarded to Billion in any event, with certificate to counsel.