LUEN TAT WATCH BAND MANUFACTURER LTD v. STEPHEN LIU YIU KEUNG DAVID YEN CHING WAI

HCMP 1071/2018

[2021] HKCFI 835

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1071 OF 2018

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D E C I S I O N

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Introduction

1.  The present application is brought the former liquidators of the plaintiff company (“the Former Liquidators”) by a Summons filed on 4/11/2020 (“the Summons”).  The Former Liquidators seek a stay of the Judgment of DHCJ Le Pichon dated 7 October 2020 (“the Judgment”) pending an intended appeal from the Judgment.  The parties were directed to serve written submissions as to the application, and the summons has been heard and determined therefore on the papers.

2.  By her Judgment, the learned Deputy Judge granted a mandatory injunction by which the Former Liquidators were directed to hand over to the Plaintiff certain documents (“the Schedule 1 Documents”) within 28 days of the date of the Order.  In addition, the Former Liquidators were required to make an affidavit confirming that all the Schedule 1 Documents had been handed over to the Company. 

3.  The Former Liquidators say that the Schedule 1 Documents which they were ordered to produce were defined in very wide terms so that an extensive volume of documents is involved.  The Order required the “return” of the so-called “Schedule 1 Documents”, (the documents identified in Schedule 1 to the Amended Originating Summons filed on 26 September 2018). These include both documents and records belonging to the plaintiff, and/or those that were generated in the course of the plaintiff’s liquidation but which have been retained by the Former Liquidators.

4.  There seems to be no dispute between the parties as to the relevant principles regarding stay applications such as this.  As formulated by counsel on behalf of the Former Liquidators, the principles[1] governing an application for stay pending appeal are that:

(1)  It is for the applicant for a stay to show an arguable ground of appeal (one with reasonable prospect of success) before any discretion to grant a stay arises.

(2)  If arguable grounds exist, and the discretion arises, it is to be exercised having regard to such other circumstances as may have been shown to justify depriving the successful party the fruits of the judgment.

(3)  An applicant may do so by demonstrating the existence of a strong ground of appeal, or by showing that the appeal would be rendered nugatory if the stay is not granted.

(4)  In assessing the strength of the appeal for the purpose of a stay application, it is impracticable and undesirable to go deeply into the merits. A broad brush approach is appropriate.

(5)  The reasons in favour of the grant of a stay are to balanced by the Court against the fact that the successful party has a judgment in its favour, and the prejudice that could be suffered by the successful party if a stay is granted.

The Basis for the Application

5.  The Former Liquidators contend that the stay pending appeal should be granted on two grounds, that is because there are strong grounds of appeal, and because the appeal would be rendered nugatory without a stay.

Strong Grounds of Appeal

6.  The basis upon which the Plaintiff Company asserted an entitlement to the handing over of the Schedule 1 Documents is the existence of a principal-agent relationship between the Company and the Former Liquidators. The Deputy Judge agreed that such a relationship existed as between the plaintiff and the Former Liquidators - see the Judgment at paragraph 18.

7.  The Former Liquidators do not appear to challenge that conclusion as to the existence of an agency relationship.  What is challenged, and is said to be “the question in the appeal” is whether the principal-agent relationship entitled the plaintiff to the delivery up of all documents generated in the course of the liquidation of the plaintiff and/or in the course of acting as the liquidators of the plaintiff.  In other words, there is no challenge in principle to the conclusion that the plaintiff is entitled to some documents.  The challenge is (in reality) whether the formulation of the Order is “too wide” in encompassing some documents to which the plaintiff is not, in truth, entitled.

8.  The basis for the argument to be heard on the appeal is said by the Former Liquidators to be that, as a matter of law:-

(1)  A liquidator does not always act as an agent for the Company.

(2)  The return of some documents by the Former Liquidators to the Plaintiff Company ought not to have been taken to be an admission of an obligation to return documents of a similar nature by the learned judge.

(3)  Even in a principal-agent relationship, the principal is not entitled to all documents brought into existence in connection with such relationship.

(4)  To determine which documents the principal might be entitled to recover, it is necessary to understand the purpose for which the documents were created.

Agency

9.  The underpinning to these submissions is the proposition that a liquidator is appointed by the Court to perform statutory functions, and in doing so may act as the company’s agent in carrying out the liquidation, but may also perform functions in where the liquidator acts otherwise than as the agent of the company.

10.  The above proposition is said to be supported by firstly the judgment of Cohen J in Tanning Research Laboratories Inc v O’Brien [1987] 11 ACLR 778 and the judgment of David Richards J in Re Southern Pacific Personal Loans Ltd [2014] Ch 426 (Ch).

11.  The judge is said to have fallen into error in accepting, in effect, the proposition that everything done by the Former Liquidators in the course of the liquidation (as far as the creation of documents is concerned at least) was done qua agents of the Company. It was, say the Former Liquidators, for the plaintiff to establish this.

Documents previously returned

12.  The Former Liquidators’ contend that the learned deputy judge was wrong to have placed reliance on the inclusion, amongst the boxes of documents previously returned by the Former Liquidators, of proofs of debts and some draft liquidators’ reports as an admission that the plaintiff is entitled to documents of a similar nature.

13.  The Former Liquidators submit that if the plaintiff is not in fact entitled to such documents as a matter of law, then the earlier provision of similar documents does not provide a basis on which the Court should order the provision of further documents.  Neither a party nor the court is bound by a concession on a question of law: Paquito Lima Buton v Rainbow Joy Shipping Ltd Inc [2008] 11 HKCFAR 464.  

The “Created” Documents

14.  As far as the entitlement, or otherwise, of a principal to documents produced by an agent, the Former Liquidators’ argument is that it is necessary to determine the purpose(s) for which the documents were brought into existence in order to be able to determine the principal’s entitlement, if any.  The Former Liquidators’ rely on, among others, the decision in Gomba Holdings UK Ltd v Minories Finance Ltd [1988] 1 WLR 1231 (CA); and Bowstead & Reynolds on Agency (21^st Ed), para. 6-093. 

15.  In Bowstead §6-093, the authors note the “prima facie” position that the principal is entitled to have delivered up to him at the termination of the agency relationship all documents concerning his affairs which have been prepared by the agent.  However, “[i]n each case it is necessary (unless, as may be the case, the right to the documents is settled by the contract between the parties) to decide whether the document in question came into existence for the purpose of the agency relationship or for some other purpose, e.g. in pursuance of a duty to give professional advice.”. Examples of circumstances in which documents produced by an agent fall outside the “prima facie” obligation to deliver up documents are given. 

16.  The decision in Gomba is illustrative. In that case, the agents in question were receivers of property, owing duties to the mortgagor as well as the debenture holders.  The “issue” was described by Fox LJ (see 1235F) as requiring the identification of the party for which the documents were created: “were the documents brought into being in discharge of a duty to the debenture holders or to the companies?”  That principle is perhaps of limited assistance in the context of a liquidation however, where there cannot be said to be adverse parties to whom the liquidator owes a duty.

Strength of Appeal

17.  As stated above, no discretion to order a stay arises unless there are arguable grounds for the appeal itself.  I accept that there are such arguable grounds in regard to the 2^nd and 3^rd grounds of appeal summarised above.

18.  I am however wholly unable to agree with the Former Liquidators that these grounds are “strong”.  The mere fact that, in principle, some documents may have been created by the Former Liquidators in the course of the liquidation to which the plaintiff may have no entitlement does not establish that there are such documents.  That is a question of fact or a question involving factual considerations.

19.  Moreover, it is a question in respect to which, in my judgment, the onus lies on the Former Liquidators to adduce appropriate evidence.  It is they who assert that documents exist which fall outside the prima facie duty to provide documents referred to above.  They were the only party responsible for the preparation of the documents in question, and they have sole possession of these documents.

20.  The plaintiff submit that they have repeatedly sought identification from the Former Liquidators of the specific types or categories of document in respect of which the duty to disclose is said not to arise.  The judge concluded, on the evidence, that “apart from a reference to working papers in the 15^th May 2018 letter, at no stage did the Defendants specify or list the categories of documents withheld”.  See para.13 of the judgment.

21.  On the evidence, it appears to me, the Former Liquidators have raised hypothetical issues as to the entitlement to retain some documents, but without any significant evidential foundation to show “merit” in the argument.

22.  The theoretical entitlement to not hand over certain documents is of little relevance to the validity of the order made by the judge absent evidence identifying specific documents to be considered.  For present purposes it suffices for me to conclude that the Former Liquidators have failed to demonstrate a sufficiently strong ground of appeal as to cause me to exercise my discretion in favour of granting the stay.

Appeal Nugatory Without Stay

23.  On the question as to whether or not an appeal would be rendered nugatory, the Former Liquidators highlight the following observations of Ma J (as he then was) in Star Play Development Ltd v Bess Fashion Management Co Ltd [2007] 5 HKC 84 (at 87):

“In determining the question whether or not an appeal would be rendered nugatory, the court must of course first have regard to nature of the order that is the subject matter of the appeal… Sometime, though, the nature of the order will by itself almost be determinative of the question. Where the relevant order is, for example, an injunction (and particularly so if it is a mandatory injunction), it may well be that, without a stay, an appeal would be rendered nugatory in the event of a successful appeal” (at §9(1)).

“An appeal being rendered nugatory does not mean in all cases that without a stay, the appellant faces financial ruin or the loss of all his property. Demonstrating that the failure to grant a stay would have a serious deleterious effect is enough” (at §9(4)).

24.  The Former Liquidators submit that they have been ordered to deliver the Schedule 1 Documents, which include, they say, documents to which the plaintiff is not entitled.  It is submitted that viewed in this light the appeal would be nugatory without a stay since the plaintiff would receive and see the contents of documents to which it is not entitled.  The process cannot be reversed even if the plaintiff was ordered to return such documents in the event of the appeal being successful.

25.  This, of course, suffers from the same evidential difficulty as is referred to above, namely the non-identification of the “relevant” documents or categories of documents.  Moreover, it cannot be said that the appeal will rendered nugatory “merely” because (ex hypothesi) the principal may be provided with documents in respect of which it has no “true” entitlement.  As observed in Equitas Ltd v Horace Holman & Co. Ltd [2007] Lloyd's Rep. I.T. 567, at para 27, if the agent's means for extracting the irrelevant materials "cannot be devised with sufficient expedition, the principal will have to see the irrelevant material in so far as it is inseparable from the relevant".  As is noted above, and below, the Former Liquidators have had considerable time to identify documents which they say should not be “returned” but have not done so.

26.  Further, the Former Liquidators contend that the appeal would be rendered nugatory without a stay in the sense that the failure to grant a stay would have a serious deleterious effect.  If the appeal turns out to be successful, the substantial time, resources and costs involved in complying with the Judgment would be completely wasted. Further, there would be an issue as to whether the Former Liquidators would be able to recover such costs from the Company in the event of the appeal being successful.

27.  For my part I am not persuaded that the appeal would be rendered nugatory in the event that the stay is not ordered. The Former Liquidators have not established what documents will be disclosed that should not be disclosed, nor is it clear what damage would be suffered.

28.  So far as that “prejudice” is concerned, three matters are canvassed by the Former Liquidators.  First, the Company has already been given 95 boxes of documents, so there is “little prejudice that would be caused to the Company if the handing over of the Schedule 1 Documents” were to be deferred until after the determination of the appeal.

29.  Second, since “the process required for the handing over of the Schedule 1 Documents is extremely time consuming, costly and burdensome and that the Former Liquidators would be required to state on oath that all documents have been handed over, the balancing exercise is clearly in favour of granting a stay pending appeal”.

30.  Third, with a view to increase the efficiency and cost effectiveness of compliance with the Judgment, the Former Liquidators have invited the plaintiff to agree on a set of search terms to be applied to their email inboxes for the period covering the liquidation so as to avoid a full review of the so-called Category B and Category C Documents. The plaintiff has, however, rejected the same and the Former Liquidators submit that “In light of the Company’s unreasonable refusal to the constructive proposal put forward by the Former Liquidators, the balance is also tilted in favour of granting stay pending appeal.”.

31.  The plaintiff submits that the successful party is "entitled to expect the Order to be complied with by [Ds] within the time limit stipulated".[2] Moreover, it is trite that "the risk of wasted or irrecoverable costs is inherent in our system of litigation and cannot by itself justify a stay of execution pending appeal".[3]

32.  The plaintiff naturally also draws attention to the fact that it is now more than 3 years since the Former Liquidators’ removal as liquidators, in which time they have had ample time to collate and process the relevant documents.

33.  In addition, it is submitted that the Former Liquidators have failed to put forward any evidence to show that compliance would result in a "serious deleterious effect", and I think it to be reasonable for me to take judicial notice of the Former Liquidators status as respectively managing director, and former managing director, of Ernst & Young, a firm of considerable size and stature.  They have considerable resources at their disposal.  The judge found, as a fact that the Former Liquidators were "handsomely remunerated" for their work (including the handling or maintaining the documents), and in respect of which the fees were in excess of $18 million[4]. In that context, I agree with the submission that "D’s recent allegations that "the emails are scattered across Ernst & Young's employees' computers and email inboxes", and that the process for processing such emails would cost HK$980,000 over 5 to 6 weeks” give rise to an inference that “the present shambolic state of affairs are entirely self-induced."

34.  I reject the suggestion that the proposed appeal would be rendered nugatory in the absence of a stay.  In light of the above, I have no hesitation in concluding that the balancing exercise leans heavily against the grant of a stay.

Time

35.  In the event that this Court refuses to grant such stay, the Former Liquidators for an extension of time of 56 days for them to comply with the Judgment.

36.  The exercise required of the Former Liquidators is clearly substantial, but equally clearly should have been in progress since the Order was made.  It appears to me that the documents should be handed over within a period not longer than was originally ordered, that is, within 28 days of the date of this Decision.

Costs

37.  The costs order made by the deputy judge was an order for the Former Liquidators to pay the costs of the Amended Originating Summons on an indemnity basis.  The plaintiff seeks indemnity costs in respect of the stay application also, on the footing that the application is “wholly unmeritorious” and that the Former Liquidators have previously been held to have conducted themselves “disgracefully”. 

38.  A Statement of Costs for Summary Assessment is provided by the plaintiff.

39.  The Former Liquidators do not accept the premise that the application is unmeritorious, and submit therefore that no order for indemnity costs should be made.  No submission is made as to the Statement of Costs.

40.  In my judgment there is no basis on which to award indemnity costs in respect of this discrete application.  The Former Liquidators have shown, in my view, arguable, but certainly not strong, grounds of appeal.  I do not accept that the conduct held to have taken place in other stages of the litigation is automatically to be held against the Former Liquidators in the context of this application, and I decline to order the higher scale of costs.

41.  As regards the Summary Assessment, I have had regard to the time taken in attendances, perusal, and the involvement of counsel.  The assessment I make is that the plaintiff’s recoverable costs shall be in the sum of $180,000.00.