KITAHARA HONG KONG CO, LTD v. CHENG KAM WAH GRACE (鄭金華) (ALSO KNOWN AS CHENG GRACE OR 鄭詠騰)

DCCJ 1088/2019 & 139/2022 (Consolidated)

[2025] HKDC 1483

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NOS 1088 OF 2019 & 139 OF 2022

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BETWEEN

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DECISION

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1.  There are three summonses before me:

(1) By Summons dated 19 February 2025, D’s application seeking security for costs against P in the sum of HK$2,230,000 up to the conclusion of trial (“D’s Summons for Security for Costs”);

(2) By Summons dated 19 February 2025, D’s application for specific discovery for 4 items of documents set out in the Schedule (“D’s Summons for Specific Discovery”);

(3) By Summons dated 20 February 2025, P’s application for specific discovery for the bank statements and transaction records of all of D’s bank accounts held by D solely or jointly with other persons, for the period from July 2016 to June 2018, excluding periods already disclosed (“P’s Summons for Specific Discovery”).

2.  I deal first with P’s Summons for Specific Discovery.

A. P’S SUMMONS FOR SPECIFIC DISCOVERY

3.  In the submissions of Ms Liu, counsel for P, states that P, having perused the bank accounts disclosed by D in purported compliance with the disclosure order ancillary to the Mareva injunction granted by HHJ Harold Leong, narrows the scope of P’s specific discovery application to the following:

(1) D’s HKD Account with Bank of Communications (HK) Limited, Account No 382-544-9-300229-4 (formerly 027-544-9-300229-4) (“D’s BOCOM HKD Account”) from 15 January 2017 to June 2018;

(2) D’s Account with Hang Seng Bank Ltd, Account No 2294038449, from July 2016 to June 2018;

(3) D’s Account with Bank of China (HK) Ltd, Account No 01288810035345, from July 2016 to June 2018;

(4) D’s USD and HKD Accounts with the Hong Kong and Shanghai Bank Corporation Ltd 027518539833 (allegedly in joint name with D’s brother), from July 2016 to June 2018;

(“the Revised Requested Bank Statements”)

4.  In the underlying action, according to P, P commenced this claim to recover allegedly unauthorized payments totalling HK$989,398.50 in the form of pre-signed blank cheques belonging to P (the “Unauthorised Payments”), which D (being the only employee of P in Hong Kong at the time) had, without P’s authorization, paid into her own bank account or withdrawn by her in cash and siphoned off without accounting for the same to-date: RASOC at §§9-10. D does not dispute that the unauthorised payments were either deposited into her bank or withdrawn by her as cash. Rather she alleges that the Unauthorised Payments were made for the cash loans to P’s related entity in the PRC (ie Kitahara Zhongshan) and for paying P’s expenses. D alleges that purported contemporaneous or supporting documents referable to such alleged application must exist but were deliberately discarded, destroyed or withheld by P’s PRC lawyer and Mr Kawai/Mr Kobayashi of P and another Hong Kong solicitor so as to “frame” D in order to conceal the losses incurred by Kitahara Zhongshan and alleged “fraud” perpetrated by its financial personnel.

5.  It is not disputed by D that the Revised Requested Bank Statements are in her possession, custody or power. Her objections are limited to claims of irrelevance and that the discovery is unnecessary for fairly disposing of the case or saving costs.

The relevant legal principles

6.  As stated in Hong Kong Civil Procedure, 2025 ed, §§24/2/11, 24/7/1, 24/7/2 the Peruvian Guano test remains the test of relevance. A document is relevant if:

(1) It is reasonable to suppose that it contains information which may, not must, either directly or indirectly enable the party requiring the same either to advance his own case or to damage the case of his adversary; or it is a document which may fairly lead the party to a train of inquiry which may have either of those two consequences.

(2) For the purpose of discovery, the pleadings have to be looked at broadly.

(3) The order must identify with precision the documents or categories of documents which are required to be disclosed, for otherwise the person giving discovery may find himself in serious trouble for swearing to a false affidavit, even though doing his best to give an honest disclosure.

(4) Notwithstanding the Peruvian Guano test, ‘fishing’ is not allowed, and discovery should not be oppressive.

(5) The respondent may answer an application for specific discovery by an affidavit stating that he does not have the documents, and this will be conclusive at the interlocutory stage.

7.  The Peruvian Guano test also covers documents which, it is reasonable to suppose, contains information which may - not must- either directly or indirectly enable the party seeking discovery to advance his own case or to damage the case of his adversary. It also covers documents which may fairly lead the party seeking discovery to a train of enquiry which may (again may, not must) lead to either of the above consequences. HKCP 2025 ed, §24/2/11.

8.  Ms Liu, counsel for the Plaintiff, submits that the Requested Bank Statements are necessary and relevant to the issues in dispute between the parties; that they were necessary because D had given no account and failed to produce any contemporaneous documents or particulars supporting her alleged use of the payments, and that they were relevant to the issue of whether the allegedly unauthorized payments were made to herself or used for the purposes alleged by D. Further, Ms Liu says that the requested bank statements for the period February 2017 to June 2018 is relevant to determining whether funds in D’s RMB account belong to her or her brother, which is a live issue at trial. Mr Lo, counsel for D, submits that the demand for discovery is fishing and that they are sought with no basis. I agree with Ms Liu that the bank statements sought are relevant to the live issues at trial, and are not impermissibly wide, especially after narrowed down to the Revised Requested Bank Statements.

9.  I therefore allow P’s specific discovery application in relation to the Revised Requested Bank Statements.

B. D’S SUMMONS FOR SPECIFIC DISCOVERY

10.  D sought four categories of documents from P, namely:

(1) Accounting documents including all vouchers prepared by the Defendant and receipts of the Zhongshan Entity/Suzhou Entity (defined in paragraph 2(b)(vi) of the Re-Amended Defence and Counterclaim filed on 10 February 2025) relating to the purported Unauthorised Payments (defined in paragraph 9 of the Re-Amended Statement of Claim filed on 13 January 2025) (“Item 1”).

(2) All written instructions including emails and fax messages issued by Mr Kawai Takezo, director of the Plaintiff, requesting the Defendant to bring cash to the mainland China and/or the Zhongshan Entity, including but not limited to his instructions given in the period from June 2016 to January 2017 (“Item 2”).

(3) Accounting documents including all vouchers and receipts relating to the Plaintiff's funds received by the Zhongshan Entity from 1 January 2013 to 31 December 2017 (other than those already disclosed under paragraph 1 of D’s Summons for Specific Discovery) (“Item 3”).

(4) Accounting documents including all vouchers and receipts relating to payment of expenses of the Plaintiff from 1 January 2013 to 31 December 2017 (other than those already disclosed under paragraph 1 of D’s Summons for Specific Discovery) (“Item 4”).

11.  D subsequently agreed to narrow the scope of her application to, in relation to item 2, the period 1 April 2016 to 31 March 2017; in relation to item 3 and 4, to the period 1 December 2015 to 31 July 2016.[1]

12.  D’s counsel Mr Lo submitted that the documents are necessary and relevant as it is a disputed issue whether D misappropriated P’s monies by transferring them into D’s own bank account. D’s case was that the practice of filling in cheques and depositing the same to her personal bank account for the purposes of P, namely to make loans in the form of cash to the Zhongshan entity or for paying P’s expenses, were authorized by P. This was disputed by P.

13.  P’s counsel Ms Liu submits that in relation to item 1, P had already filed an affirmation, namely Mr Kawai’s 2^nd Affirmation[2] that apart from the receipt already produced including that marked “KT-5(1)”, P does not have any other similar receipts and/or records of any cash allegedly brought by D to Kitahara Zhongshan from 4 July 2016 to 9 January 2018 (the period when the Unauthorised Payments were made) (“the Relevant Period”). She also referred to evidence of P’s solicitor where the solicitor deposed that he was informed by Mr Kawai that P has already disclosed all documents falling within this class.

14.  It seems to me that the scope of item 1 is not exactly coterminous with the scope of documents referred to by Mr Kawai in his second affirmation, and I do not accept that Mr Kawai’s evidence that he was informed by P that P had already disclosed all documents within this class was sufficient to render to discovery application unnecessary.

15.  Ms Liu also says that item 1 refers to receipts of the Suzhou entity while it has never been D’s case that any of the Unauthorised Payments had been paid to the Suzhou Entity. I agree that the request insofar as it relates to the Suzhou entity is not connected to the issues in dispute and is not relevant.

16.  For item 1, I will allow discovery of Accounting documents including all vouchers prepared by the Defendant and receipts of the Zhongshan Entity (defined in paragraph 2(b)(vi) of the Re-Amended Defence and Counterclaim filed on 10 February 2025) relating to the purported Unauthorised Payments (defined in paragraph 9 of the Re-Amended Statement of Claim filed on 13 January 2025).

17.  For item 2, while the request, as narrowed, also related to a period beyond the relevant period, the documents sought may fairly lead D to a train of inquiry which may bolster D’s case that there was a practice where D was authorised to deposit funds to her account before using it for P’s purposes. There is no evidence from P itself that such a category of documents did not exist.

18.  I allow discovery of item 2, narrowed down to the period 1 April 2016 to 31 March 2017.

19.  For item 3, similarly, while the request, as narrowed, also related to a period beyond the relevant period, I consider that these documents are relevant as they may fairly lead D to a train of inquiry which may bolster D’s case that there was the practice D alleged.

20.  For item 4, I am also of the view that these documents are relevant.

21.  Accordingly I will also order discovery of items 3 and 4 narrowed down to the period 1 December 2015 to 31 July 2016.

C. D’S APPLICATON FOR SECURITY FOR COSTS

22.  D applies for security for costs against P in the sum of HK$2,230,000, subsequently reduced by HK$221,147[3], up to the conclusion of trial.

23.  D says that at all material times the location of P’s central management and control is ordinarily resident abroad in Japan. D also adduced evidence that showed that P ceased its operation on or around 30 June 2017[4] and that according to P’s 2018 Tax Return, P’s adjusted loss was HK$475,125 (page 1) and the turnover was only HK$32,276 (page 4). [5]

24.  P on the other hand opposes the application primarily on what P says is inexcusable delay in applying for security, causing significant prejudice to P; and (ii) D’s substantial indebtedness to P. P also refers to the fact that the counterclaim significantly overlaps with D’s defence.

The relevant legal principles to security for costs applications

25.  The principles are trite. There is no inflexible rule or practice that a plaintiff resident abroad will be ordered to give security for costs; the power to make such order is entirely discretionary under O 23 r 1(1). One of the main factors which courts will take into account when exercising their discretion is the financial position of a foreign plaintiff. See HKCP 2025 ed, §23/3/4.

26.  For the question of delay, Ms Liu directed my attention to Tri-Tech Metals Co Ltd v YKK AP Hong Kong Ltd, (Unreported, HCCT 60/2004, 30.4.2009). In Tri-Tech Metals Co Ltd Burrell J outlined the fundamental questions at §23 to be (i) has there been delay? (ii) if so, is there an explanation? (iii) if so, has the plaintiff been prejudiced? Ms Liu also referred to para 22 of the decision in which Burrell J considered that to award costs already incurred would prejudice the plaintiff because it has incurred considerable costs itself already without any indication that an order for security would be made and, given his finding that there is a reasonable likelihood that such an order would stifle the plaintiff’s claim, the expenditure wasted would be considerable.

27.  Ms Liu also relied on XY LLC v Jesse Zhu [2023] HKCFI 1317 for the proposition that the Court is entitled to take into account costs awarded in favour of P in offsetting the quantum of security in favour of D.

28.  Ms Liu also referred me to Ai Zhong and Another v Metrofond Ltd [2010] 1 HKLRD 213 [P#8], where Yam J summarized principles where D with a counterclaim seeks security for costs. Application for security for cost should be refused if it will prevent the plaintiff from pursuing its claim but in the course of defending the counterclaim all the same matters would be canvassed as would be canvassed if the plaintiff were to pursue its claim. Application should also be refused when the cost incurred by the defendant for the purposes of the defence might equally and perhaps preferably be regarded as costs necessary to prosecute the counterclaim.

Discussion

29.  The action commenced on 5 March 2019.[6] D itself acknowledged that the case is at an advanced stage[7], with pleadings complete, witness statements exchanged, and the case ready for trial pending these applications.

30.  P says that D’s delay in seeking security for costs is undeniable: (1) five years elapsed before indicating an intention to seek security; (2) six months passed between the indication and a letter seeking security; (3) another six months passed before the application was filed.

31.  D’s reply is that delay is irrelevant, and gave no explanation for the delay.[8]

32.  P says that it had suffered prejudice in that P had already poured in significant resources in prosecuting its bona fide claim and have been allowed to do so by D in the absence of any intimation of any application for security for costs until a late stage. In D’s own words, P had ceased business in 2017 and the adjusted loss of P according to the 2018 Profit Tax Return was HK$475,125. It would therefore amount to serious prejudice to P if it is forced to put up with a significant amount of security in the sum of over HK$2 million as D requested, which would impose a crippling financial burden, in order to be allowed to continue to pursue its bona fide claim so as not to let all the previous efforts go to waste.

33.  D is indebted to P for costs of the application for the Mareva injunction[9] (which on P’s calculation amounts to HK$746,000[10] , D’s Summons to be released from an implied undertaking[11] and D’s Summons for leave to adduce D’s 5^th Affidavit[12]. These costs orders establish a substantial debt. D’s response is that she is entitled to protection from s. 16C of the Legal Aid Ordinance (“LAO”) (Cap 91) [P#12] to avoid liability to pay the costs owed to P. However, as pointed out by Ms Liu, D’s entitlement to legal aid was apparently made on the basis that the funds in two of her BOCOM accounts belongs entirely to her brother, which is a live and disputed issue in the proceedings.

34.  I agree with P that the quantum of HK$2 million being sought by D is manifestly excessive given the simplicity of the claim and the defence. Looking at the matter in the round, and taking a broad brush approach, I find that it would be just to order P to give security for HK$250,000.

D. DISPOSITION

35.  I therefore make the following orders:

(1) For P’s application for specific discovery, an order in terms of para 1 and 2 of P’s summons dated 20 February 2025, save that the schedule referred thereto be amended to refer to the Revised Requested Bank Statements, as stated in para 5 of P’s skeleton submissions dated 23 July 2025.

(2) For D’s application for specific discovery, an order in terms of para 1 and 2 of D’s summons dated 19 February 2025, save that the schedule referred thereto be narrowed to the following: for item 1, the reference to the Suzhou entity be deleted; for item 2, the scope is narrowed to the documents from the period 1 April 2016 to 31 March 2017. For items 3 and 4, the scope is narrowed to the documents in the period from 1 December 2015 to 31 July 2016.

(3) For D’s application for security for costs, an order in terms of para 1 and 2 of D’s summons dated 19 February 2025 for security for costs, save that the amount stated in para 1 be amended to HK$250,000.

E. COSTS

36.  I make the following costs order nisi:

(1) For P’s application for specific discovery, I have found against D on the question of relevance. I consider that it should be clear to D that the requested items are relevant and should be disclosed especially in light of the pleaded issues and the disclosure order. I make a costs order nisi that costs of and occasioned by P’s application for specific discovery be to P.

(2) For D’s application for specific discovery, for two of the items P’s opposition is on the basis that there was no such document in the class sought. While I also found against P on the question of relevance, P also opposed on the basis that the documents sought were impermissibly wide in scope. All four items were narrowed in scope only in 9 July 2025. I make a costs order nisi that costs of and occasioned by D’s application for specific discovery to be reserved.

(3) For the security for costs application, while D had succeeded in obtaining security for costs, the quantum sought is that asked for by P and not D. Looking at the matter in the round, I find that a just costs order would be for D to bear P’s costs for the security for costs summons. I make a costs order nisi that costs of and occasioned by D’s application for security for costs be borne by D.

37.  If there is no application to vary the costs order nisi within 14 days after the date appearing on this Decision, the following directions shall apply:

(1) The parties should seek to agree the quantum of costs;

(2) If the parties are unable to agree the quantum of costs within 28 days after the date appearing on this Decision,

(3) P may lodge within 14 days thereafter a skeleton bill of costs for the purpose of a summary assessment of costs;

(4) D may within 14 days thereafter lodge written submissions in opposition to the skeleton bill;

(5) The court will then make a summary assessment of costs.