DELCO PARTICIPATION B.V. v. CHIHO TIANDE GROUP LTD AND ANOTHER

HCA 3040/2015

[2019] HKCFI 1852

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 3040 OF 2015

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REASONS FOR DECISION
AND
DECISION ON COSTS

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1.  This is an application by the plaintiff against a third party for discovery of documents pursuant to RHC Order 24 rule 7A.  At the end of the hearing I granted the application, made an order (whose terms were largely agreed between counsel after my decision), and reserved the question of costs. I now give my reasons for allowing the application, as well as my decision on costs.

2.  In very broad terms, in this action the plaintiff claims against the two defendants, on an alternative basis, the remainder of certain shareholder’s loans due to Delco Asia Co Ltd (“Delco Asia”) (the plaintiff’s predecessor-in-title) which were not capitalised into shares in the 1^st defendant when it became a listed company in mid-2010. 

3.  The defendants’ case was essentially that the 2^nd defendant had taken up the 1^st defendant’s liability to pay the uncapitalised portion of the shareholder’s loans, but the 2^nd defendant was entitled to set off against such liability certain debts which Delco Asia owed the 2^nd defendant and HKM Metal Ltd, a company controlled by the 2^nd defendant.  The 2^nd defendant relies in particular on two audit confirmations dated 15 August 2011 bearing Delco Asia’s company chop as evidence of the existence of those debts.

4.  In reply, the plaintiff contends that those alleged debts did not in fact exist, but were mere book entries made in Delco Asia’s accounts in order to balance the liabilities booked as shareholders’ loans which had arisen from unreported profits generated by the trading activities between the Delco group and the Mainland operating subsidiaries of the 1^st defendant.  Accordingly, Delco Asia’s financial statements and audit confirmations did not reflect the true state of affairs.

5.  There are two other actions brought by the plaintiff raising similar issues about those alleged debts, namely, HCA 2943/2015 and HCA 2939/2016.

6.  The respondent to the present summons, Morison Heng (“MH”), is an accountants firm.  It was involved in an advisory role in relation to a restructuring within the Delco group in 2001 and was also the audit and tax representative of Delco Asia in Hong Kong from the outset until it was deregistered in 2012.  MH was also one of the reporting accountants and auditors in relation to the IPO of the 1^st defendant in 2010.  In addition, Chartac Secretaries Ltd, an affiliate of MH, was the company secretary of Delco Asia from the outset until deregistration. 

7.  By this application the plaintiff sought from MH three main categories of documents: (1) documents in MH’s audit files, working papers and working files in connection with the preparation of the accounts of Delco Asia from 2001 to 2011 relating to a number of matters including the alleged debts owed to the 2^nd defendant and HKM Metal Ltd, the receivables that constituted the shareholder’s loans, certain adjustments to Delco Asia’s accounts, and the audit confirmations dated 15 August 2011 bearing Delco Asia’s company chop; (2) communications between MH and Delco Asia or other parties between 2001 and 2011 in relation to the documents under item (1) above; and (3) documents relating to the setting up of the joint venture scrap metal recycling business with the 2^nd defendant, the capital contribution history to the joint venture, and Delco Asia’s profits tax returns.

8.  There is no dispute that at least some of the documents sought by the plaintiff (subject to further searches and enquiries) are in the possession of MH.

9.  There is evidence to show that the documents sought are not in the possession, custody or power of the plaintiff or Delco Asia.  Nor are they documents that can be expected to be obtained from the defendants in the normal course of discovery in the action.

10.  Mr Peter Chiu, who appeared for MH, understandably did not seriously seek to impugn the plaintiff’s case that the documents were relevant to the issues in the action, since MH is not itself a party to that action and not familiar to the issues there.  He did query the probative value of any documents retrieved but it is pertinent to note that the application was, eventually, not opposed by either defendant.  I am satisfied, for the reasons set out in the skeleton argument of Mr Dawes SC and Mr Man, who appeared for the plaintiff, and in the supporting affidavit of Mr Erik Hammerstein, a director of the plaintiff, that they are relevant and that their discovery is necessary for the fair disposal of the action as between the plaintiff and the defendants.  I do not think Mr Chiu’s suggestion for the plaintiff to serve interrogatories on the 2^nd defendant is a valid answer to the need for the documents in question.

11.  Mr Chiu submitted that it would be oppressive to make the order in question.  However, while compliance will inevitably involve some work on the part of MH, I am not satisfied, in the absence of specific evidence about MH’s resources, the burdens likely to be created and the effects they may have on MH, that an order for discovery will lead to oppression and hardship.  It should be noted there is no dispute that MH’s expense in the exercise will be reimbursed by the plaintiff and also that the burden of the exercise was considerably reduced by the arrangement, confirmed at the hearing, for the plaintiff to provide MH with keywords for the computer searches that would need to be made.

12.  As to MH’s concerns about confidentiality, it seems to me they go no further than a general concern on the part of a third party about its own documents being divulged, but that is not an absolute bar to discovery and MH’s privacy will be protected to some extent by the implied undertaking deemed to be given by the plaintiff as regards the use of any documents disclosed.  The documents sought are primarily not about MH but about Delco Asia and the joint venture.

13.  For the above reasons, I granted the application.

14.  As to the costs of the application, the plaintiff does not dissent from the proposition that a third party from whom discovery is sought is ordinarily entitled to his costs.  The mere fact that the opposition to the application for third-party discovery has failed is not enough to justify departure from that starting point.  It has been said that the court may be justified in exercising its discretion otherwise where it is clearly unreasonable for the third party to oppose the application, or the manner of his opposition was unreasonable, or there has been misconduct on the part of the third party: see Lau Tsz Hung Ringo v First Refrigeration Engineering Ltd (unrep, HCMP 1166/2013, 4 July 2013), §§21-42, per Deputy Judge Marlene Ng (as she then was).

15.  In the present case it is to be noted that the documents sought were wide-ranging, they go back a very long time indeed, and they fall within the class of MH’s own working papers and correspondence.  It is not unreasonable for MH to wish to maintain its privacy over such papers. There was also at one stage a debate as to security for the plaintiff’s undertaking to reimburse MH, given that the plaintiff is a foreign company. MH’s opposition, albeit eventually overcome by the plaintiff, has in my view not reflected anything more than the usual reluctance on the part of an accountant to disclose his own working papers where it is said that the accounts in question contain fictitious entries.  I do not think that in raising the arguments as it did against the application, MH has crossed the line.

16.  In all the circumstances, in my view the appropriate order is for the plaintiff to pay MH’s costs of and relating to the summons, but without prejudice to the plaintiff’s ability to attempt to recover them as part of its costs in the actions against the defendants if it is eventually successful.