XCHRX CHAN CHIU CHIK EDDY AND ANOTHER v. FONG MAN KAM

HCA 14389/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 14389 OF 1998

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J U D G M E N T

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Introduction

1. This is an appeal from the master's order dated 27 November 2000 whereby pursuant to Order 24 rule 11, he ordered the defendant to produce for the plaintiffs' inspection of the following documents relating to the estate of Fong Muk Kwan ("Fong") who died on 22 July 1996:

(1) letters of administration with schedule of property annexed for the estate of Fong, dated 22 July 1999 ("the Letters of Administration");

(2) affirmation of administrator dated 16 July 1998 ("the Affirmation"); and

(3) photocopy of certificate of exemption from estate duty ("the Certificate").

These documents are collectively referred to as the Estate Duty Documents below. The order has been stayed pending the outcome of this appeal.

2. The circumstances giving rise to the application for discovery before the learned master may be summarised as follows.

3. The 1st plaintiff is the personal representative of Chan Tsat Sum ("Chan"), who died in November 1999 after the commencement of these proceedings. The plaintiffs allege that Chan, the 2nd plaintiff and Fong were de facto partners in equal shares in the business of two noodle shops, namely, Tak Shing Noodle Shop in Wong Tai Sin ("Tak Shing") and Fu Shing Noodle Shop in Mongkok ("Fu Shing"). The 2nd plaintiff and Fong's wife are now the registered sole proprietor of Tak Shing and Fu Shing respectively.

4. The plaintiffs' claim is for $1,463,043.56, a debt owed by Fong to the partnership consisting of (1) $1,038,469.00, which represents the unauthorized drawings by Fong between 19 August 1994 and 27 December 1995; (2) $223,295.00, which is part of the income of the business misappropriated by Fong and/or his representative between 1 January and 20 September 1996; and (3) $201,270.56, which is the cash balance remained in the bank account of the noodle shops as at 22 July 1996: see paragraph 3 of the amended statement of claim.

5. The defendant is the son of Fong, also the personal representative of his estate. He denies that there was such a partnership. Fong was in fact at all material times the sole proprietor of the two noodle shops. The defendant alleges that he had paid on behalf of the noodle shops business profit tax in the total sum of $575,766.00 for the years between 1990 and 1997. Such tax were levied and paid after the death of Fong. If the court finds that there was a partnership as alleged, he counterclaims against the plaintiffs as partners their contribution towards the profit tax.

6. In Part 2 of his list of documents filed on 18 April 2000, the defendant sets out a number of documents which he objects to produce on the ground, inter alia, that they are irrelevant. Included in those documents are the Estate Duty Documents. The plaintiffs' request for inspection having been turned down, they took out the Order 24 rule 11 application.

Parties' submissions

7. The defendant opposes the application purely on the ground of relevance. The application therefore turns on whether the Estate Duty Documents are relevant.

8. It is the plaintiffs' case that prior to the present proceedings, they were not aware of the alleged profit tax. They had not received the profits on which the tax was levied. Thus the Estate Duty Documents, given their nature, are relevant to the question (1) whether there was in fact such profit tax; and (2) whether Fong had concealed the profits generated from the noodle shops business from the plaintiffs: see paragraphs 3 & 4 of the 1st plaintiff's affirmation filed on 14 August 2000.

9. The nature of the Estate Duty Documents is explained by the plaintiffs' solicitors in his 2nd affirmation filed on 4 December 2000 in connection with the stay application. In paragraph 17, after referring to his own experience in handling probate matters, he says that the Letters of Administration would contain a schedule of the property, including joint property, disclosed on the death of deceased in respect of which death, estate duty exemption has been granted/has been paid; that the Affirmation would contain a comprehensive disclosure by the personal representative under oath to the Commissioner of Estate Duty of all property passing on the death (whether it devolves on the personal representative or not) and property of which the deceased was a trustee for another person; and that the Certificate issued by the Commissioner would certify that no duty or interest is payable in respect of the estate of the deceased, including the deceased's interest in joint property because (i) it is under the value of certain amount, or (ii) duty has been paid on a prior affidavit. Usually a schedule showing details of the estate is annexed.

10. At the hearing before me, Mr. Lam, counsel for the plaintiffs, makes some further points. He submits that the Estate Duty Documents may contain information on the profit tax, which may fall under the liability of the estate and to calculate the net estate, the liability of the estate had to be taken in account. Secondly, the documents may contain information that if there were such profit tax, they were paid for the noodle shops business or some other business of Fong. Thirdly, the documents may contain information of the bank accounts of Fong. If the bank account information is known to the plaintiffs, then the plaintiffs may be able to trace whether the moneys flowed from the noodle shops business account to the accounts of Fong, thus strengthening their case on unauthorized drawings and misappropriation by Fong. (This point had not been advance before the learned master.) Lastly, if the Estate Duty Documents show that the profit tax is purely in connection with the noodle shops business, the plaintiffs are prepared to accept that. This issue will be disposed of fairly and costs will be saved.

11. The defendant dispute the relevance of the Estate Duty Documents. In his 2nd affirmation filed on 9 September 2000, the defendant exhibits the documents in connection with the payment of the profit tax for the years between 1990 and 1997 in the total sum of $575,766.00 ("the Tax Documents"). He explains that he paid the tax on behalf of Fong because Fong had failed to submit any tax returns in the past prior to his death. He further complains that there is no basis for the plaintiffs to allege that Fong had misappropriated sums from the noodle business. The application is a mere fishing exercise.

12. Mr. Mui, counsel for the defendant, further submits that mere payment of the profit tax dose not necessarily mean that Fong had misappropriated money from the noodle shops business. Further, the Estate Duty Documents do not contain information to show if any of Fong's property had been acquired by the funds he had allegedly misappropriated.

13. Both parties had filed evidence in connection with the stay application on certain events happened right after the hearing before the learned master. I do not think I need to deal with them. In my view, they are immaterial for present purposes.

Tax Documents

14. The Tax Documents have already been disclosed in the defendant's list of documents. No issue on their production is taken. Since they give some important particulars relating to the payment of tax, it is necessary to examine them in greater detail.

15. The Tax Documents can be put into the following categories:

(1) 3 Letters from the Inland Revenue Department to the Bank of Communications, authorizing the bank to pay from the accounts of Fong certain sums to satisfy Fong's tax liability.

(2) Various notices of personal assessment for Fong for the years between 1990 and 1997.

(3) Various notices of additional profit tax on the business of the noodle shops for the years between 1990 and 1996.

(4) 2 notices of profit tax for Tak Shing for the years 1994/95 and 1995/96 in the sum of $43,200.00 and $6,480.00 respectively and 1 notice of profit tax for Fu Shing for the year 1995/96 in the sum of $810.00.

16. The first letter from the Inland Revenue Department to the bank is dated 19 August 1997 in respect of $105,000.00. It is not clear from the letter itself or the rest of the Tax Documents whether it is in fact the profit tax of the noodle shops business.

17. The second letter is dated 12 January 1998 in respect of a total sum of $328,627.00 for tax payable after personal assessment for the years between 1990 and 1997. The various notices of personal assessment (the 2nd category) correspond with the second letter except that in the notice for the year 1996/97, the tax due is said to be $2,200.00 whereas the amount for the same item, according to the letter, is $22,000.00.

18. The third letter is dated 2 March 1998 in respect of $130,000.00 which is the additional profit tax for the noodle shops business for the years between 1990 and 1996. The supporting notices for profit tax (the 3rd category) correspond with the particulars in the letter.

19. When the Tax Documents are examined more closely, one can readily discover discrepancies between them and the defendant's case on the payment of tax. First, the sum total the Inland Revenue Department had agreed to be released from Fong's estate to meet his tax liability, as evidenced from the 3 letters above, is $563,627.00, and not $575,766.00 as alleged. Secondly, the additional profit tax is $130,000.00, and not 62,000.00 as alleged. Thirdly, a total sum of $328,627.00 was assessed under personal assessment, which is employed when the person whose tax liability is assessed has various sources of income. According to the notice of personal assessment for the year 1992/93, Fong's assessable profits and income was $519,900.00, consisting of salary ($60,100.00) and sole proprietorship business ($519,900.00). Tax payable for that year was therefore not purely profit tax. For other years, it would appear from the notices of personal assessment that the only assessable profits and income were derived from Fong's sole proprietorship business. Fourthly, the notice of personal assessment for the year 1995/95 shows that the assessable profits of Fong's sole proprietorship were $630,000.00. But according to the notices of profit tax for the same year, the total amount of assessable profits of Tak Shing and Fu Shing was $210,400.00. One possible implication is Fong might have carried on other sole proprietorship business in the year 1995/96. For other years, there is insufficient material to verify if the total assessable profits for the noodle shops business correspond with the result of personal assessment.

20. Thus, the Tax Documents are inconclusive on the question whether the noodle shops business was the only sole proprietorship business carried on by Fong before his death. This naturally casts doubt if the tax paid by the defendant was wholly for the profit tax of the noodle shops business or was partly or wholly related to some other sole proprietorship business of Fong.

21. The above matters certainly warrant further inquiry and indeed, an application for further or specific discovery in connection with the Tax Documents, which may achieve some if not all of the legitimate objects of the present exercise. However, instead of mounting such an application, the plaintiffs pursue the present one. Mr. Lam submits that it is justified so long as the Estate Duty Documents are relevant.

22. I now return to examine if the Estate Duty Documents are relevant and hence ought to be produced. I will proceed on the basis that the nature of the Estate Duty Documents, as stated above, is not in dispute. In fact, in the course of submissions, I have been shown a blank standard form of the Affirmation.

Are the Estate Duty Documents relevant?

23. Documents relating to any matter in question between the parties have to be disclosed: Order 24 rule 2(1). Such documents are not limited to document which would be admissible in evidence nor to those which would prove or disprove any matter in question: any document which, it is reasonable to suppose, contains information which may enable the party applying for discovery either to advance his own case or to damage that of his adversary, if it is a document which may fairly lead him to a train of inquiry which may have either of these two consequences must be disclosed: Compagnie Financiere, etc. v. Peruvian Guano Co. (1882) 11 QB D 55 per Brett LJ at 63. Mr. Lam has repeatedly submitted that documents are relevant if they throw some light on the matters in question. In my view, this is too loose a formulation of the proper test and may result in unnecessarily wide application thereof. For my part, I will prefer to follow the classic statement of Brett L.J. in Peruvian Guano.

24. The question of tax arises out of the counterclaim. The primary issues are:

(1) Whether the defendant did make the payment of $575,766.00 to discharge Fong's tax liability?

(2) If so, whether it was wholly or partly the profit tax for the noodle shops business or whether it was wholly or partly for some other sole proprietorship business carried on by him? In this connection, I refer to my observations on the Tax Documents above.

25. The Estate Duty Documents, if relevant at all, would only be relevant to issue (2). They will not show if the defendant did make the payment of tax as alleged. One has to look at the Tax Documents instead.

26. However, the schedule of property annexed to the Letters of Administration would be relevant to issue (2) in the Peruvian Guano sense. For all the property of Fong, including all his sole proprietorship businesses, will be set out there. It will therefore show if he had before his death in July 1996 any sole proprietorship business other than the two noodle shops. Whether the tax paid by the defendant related partly or wholly to any of such business remains to be seen pending, perhaps, further discovery. (In any event, it seems that in order to prove his locus in the proceedings, the defendant needs to produce the Letters of Administration.)

27. For the same reason, the Affirmation is also partly relevant in the Peruvian Guano sense because it would also contain information on Fong's business: see item 8 - Business in Account 1 of the standard form. I have carefully examined the standard form. I do think the rest of the Affirmation would give any further information on Fong's sole proprietorship business. Accordingly, the rest of the Affirmation would be irrelevant. They need to be blanked out if the Affirmation is to be produced: Guess? Inc. & Others v. Lee Seck Mon & Others [1989] 1 HKLR 399, CA.

28. On the materials before me, I fail to see the relevance of the Certificate in the Peruvian Guano sense at all. Whether there was exemption on estate duty is irrelevant to the matters in question.

29. I do not accept the plaintiffs' submission that they are entitled to the Estate Duty Documents because they may contain information if Fong had concealed profits from the plaintiffs. As the matter now stands, whether Fong had concealed any profit is not an issue, and indeed not the basis of the plaintiffs' claim at all. Their claim is for a debt consisting of, inter alia, unauthorized drawings and misappropriated funds by Fong. Whether any profit had been concealed remains speculative. It appears that the plaintiffs,u in seeking discovery, hope to find something useful in the Estate Duty Documents so as to confirm their speculation. In my view, this is a fishing expedition and cannot be allowed. In any event, the plaintiffs have failed to show that the documents may contain such information or would fairly lead them to an inquiry in that respect. Nor do I accept that the plaintiffs are entitled to discovery because the Estate Duty Documents may contain Fong's bank account information. The plaintiffs fail to demonstrate how the documents may show or lead them fairly to a train of inquiry as to how the money in Fong's bank accounts might have come from the unauthorized drawings or misappropriated funds from the noodle shops business. In my view, this is also a fishing expedition and should not be allowed.

30. Lastly, I fail to see how the net value of Fong's estate is relevant. Justification for discovery of the Estate Duty Documents on this ground must fail.

Conclusion

31. For the above reasons, I would allow this appeal in part. I will not disturb the order of the learned master on the Letters of Administration. In respect of the Affirmation, I will vary his order to the extent that only the part relating to item 8 - Business in Account 1 needs to be produced. The rest of the Affirmation will be blanked out. His order on the Certificate is set aside. In light of my ruling, the appropriate costs order for the proceedings before the learned master should have been costs in the cause. I will therefore set aside his costs order and substitute it by an order that the costs of the application be in the cause.

32. The defendant has succeeded substantially in this appeal. In the circumstances, I will make an order nisi that the defendant shall have the costs of this appeal, to be taxed if not agreed, to be made absolute within 14 days after handing down.