FOK HING INTERNATIONAL CO LTD v. LIU HSIAO CHENG

HCA 97/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 97 OF 2013

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D E C I S I O N

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THE APPLICATION

1.  The Plaintiff (“P”) claims against the defendant (“D”) for repayment of a loan of one million Hong Kong Dollars.  D admits receipt of the money, but argues that the money was not a loan from P, but was in fact pre‑payment of 50% of the profit of a joint venture between Wong Shu Wai (“Wong”), the 2^nd defendant in the Counterclaim being a director and shareholder of P and D.  Wong and D agreed to use P as their agent for the joint venture.[1] In the Counterclaim, D also claims against P as the joint venture agent for breach of fiduciary duties and against Wong as his partner for his share of the profits held by P and controlled by Wong.  It should be noted here that D in the Counterclaim denies any joint venture agreement between him and themselves, Wong or P being the agent of the joint venture between D and Wong.

2.  By summons dated 16 November 2016, D applies for specific discovery of 7 classes of documents under O.24 r.7 RHC.  The application is contested and the parties are legally represented.[2]

THE SCOPE OF DISCOVERY

3.  The scope of discovery has subsequently been narrowed down.  As indicated in D’s skeleton §2, this hearing is only concerned with the following:

a.   Class 1 documents – FHI’s [P’s] audited financial statements (“AFS”) for the financial years ended 31.3.2004, 31.3.2005 and 31.3.2006;

b.   Class 5 documents;

c.   Class 6 documents; and

d.   Class 7 documents.

4.  D submits that the parties are in broad agreement as to the issues which would require determination at trial[3]:

a.   Whether the JV Agreement existed and if so, what are its terms;

b.   Whether the Trading JV existed and if so, whether D is entitled to share any profits arising therefrom;

c.   If so, what was D’s shares from inception to date;

d.   Whether the HK$1 million payment was in the nature of a loan or pre‑payment for profit sharing.

SIGNIFICANT ISSUES RELATING TO THE APPLICATION

The pleaded case

5.  It will be relevant to note the prayers in D’s Counterclaim here.  They are, among others:

a.   An order for repayment of HK$6,455,443 or any sums found to be due to Mr. Liu (D), being his profit share of the Trading JV’s profits for the period from May 2000 to March 2008 as pleaded in paragraph 33 (emphasis added);

b.   An account of the cumulative profits of the Trading JV from 1 April 2008 to date and D’s profit share thereof;

c.   An account of all moneys belonging to D wrongfully retained and/or converted by WSW (Wong) or Fok Hing (P) to their own use or otherwise.

The significant issues

6.  After perusal of the pleadings, the following issues are significant for the determination of this application:

a.   D has not pleaded the nature of the business of the joint venture, the time for the sharing of the profits, the reasons for not sharing the profits between 2000 and 2008 and it was only in 2008 D had asked for accounts of the joint venture.  D admits that the pleadings have to be reviewed.

b.   D has not set out the particulars for his claim of HK$6,455,443 in paragraph 34 of the Counterclaim.  Counsel has today referred to the bundle of documents [Bundle II pp. 466-507], which show the sales records.  However, D admits that those particulars were not pleaded in the Counterclaim and they are disputed by P.  The figures in the sales records comprise other businesses of P.  Therefore, it is clear that the pleaded liquidated amounts in the Counterclaim are not correct.

c.   D has not pleaded the way P has been acting as the agent of the joint venture other than saying in paragraph 19 of the Defence that it will first collect payment from customers (by way of cheques, remittances or letters of credit) before paying supplies and releasing merchandises. There are no pleadings as to whether P is keeping the accounts of the joint venture and how it should keep such accounts, separate from P’s own accounts or otherwise.  D refers ths Court to the financial summaries of P. Page 542 of Bundle II shows the accounts of P.  There are separate accounts for three business, including the GDIL, another joint venture between D and Wong. But there is no separate account for this joint venture in this financial summary.

d.   D admits that he is neither a director nor a shareholder of P.

THE RELEVANT LEGAL PRINCIPLES

7.  The legal principles for this application are trite.  The parties have referred me to the following authorities:

a.   Billion Lead Investment Ltd v Union Joyce Ltd. and others (unreported, HCMP 2145/2011, 14 December 2012).  It clarifies the proportionate approach in exercising the court’s discretion [17].  But it also defines the parameter of discovery, which should not be narrowed down to the particulars of the pleadings, but should cover the general issues.

b.   Disclosure, the 5^th edition by Paul Matthews and Hodge M. Malek Q.C., Sweet & Maxwell;

c.   Chan Yee Kit v Chan Yee Man (unrep., HCA 1743/2014, 10 June 2016) It sets out the statutory requirements for the application [11] and even if the documents are pleaded, they are not discoverable if they are irrelevant to the allegations and could not affect the result of the action.  [19]

DISCUSSION

8.  I have had the benefit of reading the Decision of Deputy High Court Judge Lok (as he then was) Lok’s Decision delivered on 20 August 2014, in which the learned Judge had set out the factual background of this matter.  The Court decided that the business relationships between D and Wong should be investigated by the court.[4]

9.  P raises the objections by saying that in D’s case, he claims to be entitled to 50% profit of the joint venture, not that of P, therefore the financial position of P is irrelevant to the issue in dispute unless P’s business contains the joint venture only.  But there is common ground that this is not the case as D has another joint venture with Wong of tobacco run by P. Secondly, the Sales and Payment Records only bear P’s name, not the joint venture’s name.  These records are irrelevant to the issues in dispute.

10.  D’s argument is that P is the agent for the joint venture.  As such, P is keeping the business accounts for the joint venture.  Given the fact that P is also running business of other joint venture(s), the documents to be disclosed will shed light on the joint venture as alleged, which P denies.

The fundamental burden of the pleadings

11.  Despite those questions which called for explanation as found by Deputy Judge Lok (as he then was) in his Decision, the fundamental burden is on D to establish his defence and his case in the Counterclaim against P.  The Court of Appeal commented: “It is for the plaintiff in an action to formulate his claim in an intelligible form and it does not lie in his mouth to assert that it is impossible for him to formulate it and that it should, therefore, be allowed to continue unspecified in the hope that, when it comes to trial, he may be able to reconstitute his case and make good what he then feels able to plead and substantiate.” adopting Lord Oliver in Wharf Properties v Eric Cumine Associates [1991] 2 HKLR 154 at 166F, Sunny Tadjudin v Bank of America, National Association (unreported, HCMP 691/2012 29 June 2012 per Kwan JA at paras. 14 & 15)

12.  Under Order 1A r.1(c) & (d), the Court must, in the exercise of its discretion, “promote a sense of reasonable proportion and procedural economy in the conduct of proceedings” and “ensure fairness between parties”.

13.  It is therefore incumbent upon D to set out the business of the joint venture such that the scope of the discovery of P’s accounts can be narrowed down to those information and documents relevant to the issues in dispute between the parties.  As mentioned in paragraph 5a, D counterclaims a liquidated sum without giving any particulars as to the constituents of the liquidated sum.  But he also counterclaims any other sum that might be found by the court without telling the court in the Counterclaim the ground on which the court would find other than the liquidated sum.  D’s reference to the sales records in Bundle II do not explain that the amounts claimed in the Counterclaim is the correct amount because Wong or P made no admission and D admits that P had other businesses as well.  These records belong to P as a whole.

The unusual features of the partnership agreement

14.  It is not in dispute that D had not requested for the accounts of P since April 2000, not until 2008 when the dispute arose.  This is rather unusual for a partnership for not sharing the profits for such a long period of time.  The terms of the joint venture agreement are therefore important for the court’s consideration, not least as to whether such a joint venture agreement exists.  This issue is now being contested by P in the Counterclaim.  One of the grounds of objection is that the scope of the request is too wide.

15.  Bearing in mind the above, I shall now consider each of the classes of documents.

The classes of documents

16.  In respect of Class one documents, P’s grounds of objection are: “Even with the disclosure of FHI’s (P’s) AFS for the financial years ended 31.3.2004, 31.3.2005 and 31.3.2006, and assuming that the Court finds at trial that the alleged JV exists, the Court will still not be able to determine the profits generated by the alleged JV and Liu’s (D’s) 50% share by reading FHI’s (P’s) AFS.”  This is because P has other accounts and D is unable to identify which parts of the AFS relate to the joint venture business.  On this basis, P argues that such documents are irrelevant.

17.  The purpose of having the documents is to ascertain whether the joint venture agreement exists between D and Wong and if so, the amount due to D.  D has counterclaimed for liquidated sum.  If D has set out the particulars in support of the amounts claimed, the parameter of the documents can be defined. However, since D has not done so, which, coupled with the fact that D admits that P’s accounts have other businesses, I agree with P that the documents required may not be relevant to the issue in dispute.  In any event, the scope is too wide for this matter.  Such discovery will not be saving costs or for the just resolution of the disputes.  As such, I reject D’s request.

18.  In respect of Class 5 and Class 6 documents, P’s objection seems to be saying that such documents are summaries of internal accounting documents of another joint venture, GDIL (a joint venture between Liu (D) and WSW (Wong) carrying out business in Zimbabwe), not FHI (P) nor the alleged JV.  They are irrelevant to the joint venture between D and Wong, even if P was their agent. P further submits today that the information required by D is in the audited account of P ended 2012, which has been disclosed.  D does not dispute this fact.

19.  If D is a partner of GDIL, D is entitled to the documents relating to the joint venture concerned.  This action has noting to do with the GDIL joint venture.  For the same reasons as for Class one documents, since D has not set out the particulars relating to D’s profits as counterclaimed by D, there is simply no evidence to define the scope of the documents relating to the joint venture in this action.  Such requests will not be saving costs for a fair disposal of the matter.  This request should also be rejected.

20.  In relation to Class 7 documents, P’s argument is that it and Wong had made affirmations that they were not in possession, custody and control of the documents.  In the matter of Prudential Enterprise, Ltd. Chu J. (as she then was) (unreported, HCCW 594/1999, 24 October 2003) held “…At this interlocutory stage, this affidavit has to be accepted as conclusive, and the petitioners cannot seek to challenge the affidavit of documents made”.  Under O.24, r.10 could only be made “if it can be shown by admissions in pleadings or the contents of the affidavit itself or documents referred thereto that the affidavit is insufficient: Jones v. Monte Video Co. (1880) 5 QBD 556 at 558.”  See paragraphs 16 & 18.  The burden is on D to show the deficiency of the affirmations or other materials evidential of such deficiency, see Lee Sai Nam v. Li Shu Chung & Ors (unreported, HCA 1711/2009, DHCJ M. Ng, 10 January 2014), §§55-57.  See also §24/7/1 of HKCP 2017, Vol.1.

21.  D submits that the records were reported in P’s audited financial statements for the financial year ended 31 March 2008, which is more than 7 years to date.  This provides a prima facie reason for the loss of those documents.  D submits that P is only obliged to maintain the financial statements for 7 years.  This may be for the cross-examination at the trial. But for the present purpose, the court will not go into a mini trial of the matter.  See Hong Kong Niiroku Ltd v Kyokuto Securities (Asia) Ltd (unrep., HCA 4122/2000, 18 March 2002).

22.  D’s summons is dismissed.

COSTS AND ORDER

23.  On the question of costs for this application, including the hearing today, D admits liability (with counsel’s certificate), but disputes the quantum as shown in the schedule of costs.  The costs are assessed summarily under O.62, r.9A to be $140,000, to be paid by D to P within 14 days from the date hereof.

24.  I shall now make an order in terms as follows:

a.   D’s summons is dismissed;

b.   The costs for this application and today’s hearing are as per paragraph 23.