HIND INTERNATIONAL INVESTMENT LTD v. K & L GATES (A FIRM OF SOLICITORS)

HCA 1325/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1325 OF 2011

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J U D G M E N T

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Introduction

1. The present applications concern specific discovery of certain documents relating to the fraud of a partner in a firm of solicitors and the related client account.

2. I shall refer to the parties by the following in this judgment:

(i) The plaintiff by Main Action and the 1^st defendant by Counterclaim – “Hind”

(ii) The defendant by Main Action and plaintiff by Counterclaim – “KLG”

(iii) 2^nd defendant by Counterclaim – “MKJ”

(iv) 3^rd defendant by Counterclaim – “SJ”

(v) 4^th defendant by Counterclaim – “SKJ”

(vi) Hind, MKJ, SJ, and SKJ – collectively “Hind Parties”

3. The relevant summonses were:

(i) The Hind Parties’ summons dated 15 November 2013 (“1^st SD Summons”);

(ii) The Hind Parties’ summons dated 25 February 2014 (“2^nd SD Summons”);

(iii) Hind’s summons dated 20 March 2014 for an Unless Order in respect of complete and unredacted copies of KLG’s accountant’s reports prepared by external accountant (“Accountant’s Reports”) for the years 2010 and 2011 (“Unless Order Summons”);

4. In the 1^st SD Summons, the Hind Parties had sought leave for them to take out the application notwithstanding that the time limited therefore had expired[1].  There was no objection taken by KLG to leave being granted.

5. There was also a summons taken out by KLG for leave to file an affidavit from one of its partners, Michael Chan Kwok Shung (“Chan”) of 7 April 2014, and there was no objection from the Hind Parties to this application.

Background

6. Hind is and was at all material times a private limited company incorporated in Hong Kong owned by the Jhunjhnuwala family members and carrying on business of watch manufacturing, trading and investments.  It claimed to be a victim of a fraud committed by one Navin Kumar Aggarwal (“Aggarwal”), a former senior equity partner of KLG.

7. MKJ is and was at all material times one of Hind’s shareholders and directors.  MKJ and Aggarwal were classmates at Island School before they went abroad for further education.  They later came into contact again after Aggarwal started to practise as a solicitor. 

8. According to MKJ, in about mid 2010, Aggarwal informed him that one of KLG’s PRC clients (“PRC Client”) intended to do a merger and acquisition deal and asked KLG to line up potential investors or financiers (“Investors”) who could back the PRC Client for such deal, and that all funds provided by the Investors would be placed in escrow in KLG’s client account for that purpose.  MKJ was further informed by Aggarwal, among other things, that (i) no details as to the deal including the name of the PRC Client could be given as the deal was strictly confidential; (ii) the funds would not be used save for the purpose of backing up the financial strength of the PRC Client for the proposed deal; (iii) the funds would be secure as they would be placed in KLG’s client account; (iv) Hind would be entitled to call back the funds on short notice and to earn returns as offered by the PRC Client in the event that the deal was successful (“Proof of Fund Arrangement”).  Further, whether the deal was successful or not, MKJ was told that Hind would get interest of 1% per month from the PRC Client. 

9. Relying on the above advice and representations made by Aggarwal (“Representations”), Hind then entered into escrow agreements dated respectively 25 May 2010, 9 March 2011 (two agreements of this date), and 3 September 2010 (later replaced by a subsequent escrow agreement dated 27 May 2011) ( collectively referred to as “Escrow Agreements”).  Hind’s case was that the Escrow Agreements were signed and entered into by Aggarwal in his capacity as partner and on behalf of KLG.

10. Pursuant to the Escrow Agreements, funds were transferred by Hind and/or other Hind Parties to KLG (“Escrow Sums”) between 25 May 2010 and 27 May 2011 under the Escrow Agreements and during that period, Aggarwal had also caused certain amounts to be paid to the Hind Parties.  

11. In June 2011, Hind learnt that Aggarwal was charged with theft and forgery for stealing money from KLG’s client accounts. Hind started the Main Action on 4 August 2011 against KLG and claimed, among other things, for the return of the alleged balance of the Escrow Sums totalling HK$31,407,500 held by KLG.

12. Aggarwal subsequently pleaded guilty to criminal charges brought against him and was sentenced to 12 years imprisonment in HCCC 57 of 2013 on 23 August 2013 (“Criminal Hearing”).

13. Hind’s claim against KLG was based on contract, restitution, implied trust and negligence.  It was their case that KLG had knowledge of the Escrow Agreements, and that Aggarwal’s Representations of the Proof of Fund Arrangement were further confirmed by KLG’s continued receipt of payments from the Hind Parties into KLG’s client account and payments to the Hind Parties from KLG’s client account, such payment cheques being signed by Aggarwal and another authorized signatory of KLG. 

14. KLG’s case was, however, that each of the Escrow Agreements was a sham which was never intended to take effect in accordance with its written terms, and that the sums paid by the Hind Parties were loans made by them to Aggarwal personally.

15. KLG’s primary defence in the Main Action was that its business being provision of legal services, it was no part of its business to provide stand-alone escrow services which were not incidental to the provision of legal services, and that the Escrow Sums were loans advanced to Aggarwal in his personal capacity, and KLG had no knowledge of the misconduct or malfeasance on the part of Aggarwal in relation to matters alleged by Hind. KLG then counterclaimed against the Hind Parties on the basis that they were complicit in Aggarwal’s fraud against KLG, namely that they had conspired with Aggarwal to defraud KLG and/or assisted him in his breach of trust.

16. It was further KLG’s defence that Aggarwal had no actual or apparent authority to enter into the Escrow Agreements on behalf of KLG, which were standalone escrow services and not incidental to provision of legal service.

17. KLG had sued Aggarwal in HCA 1061/2011 for wilful breach of trust and obtained default judgment against him.  KLG said it had made restitution to its genuine clients who suffered loss due to Aggarwal’s breach, but it was KLG’s case that the Hind Parties were not its clients at the time of the Escrow Agreements.

18. I understand that the main disputed issues between the parties included the following:

(i) whether the Escrow Sums were in fact personal loans advanced by the Hind Parties to Aggarwal, and whether the Escrow Agreements were sham documents created in an attempt to impose liability on KLG for such personal loans to Aggarwal;

(ii) If Escrow Agreements were not sham documents, whether Aggarwal had actual or ostensible authority to bind KLG in respect of the Escrow Agreements and in this respect, whether KLG had knowledge of Aggarwal entering into the Escrow Agreements, and had ratified it, and thus estopped from denying Aggarwal’s authority;

(iii) whether the Escrow Sums were monies had and received by KLG which was liable to return and/or refund to Hind;

(iv) whether KLG held the Escrow Sums on an implied trust for the Hind Parties and thus liable to account for the same;

(v) whether KLG owed a duty to Hind to take reasonable care with respect of the Escrow Sums and in this respect, whether:

(a) KLG had acted negligently ;

(b) KLG had failed to comply with it obligations under rules 10 and 10A of the Solicitors’ Accounts Rules in failing to keep proper books and accounts,or reconciliation of its client accounts.

Hind’s applications

19. As can be seen from those documents disclosed by KLG[2], Aggarwal had caused the Escrow Sums to be deposited into KLG’s client account under the ledger and internal file reference number 4045645.002/NKA (“Reference Number 404”) of one of KLG’s clients RIM China Co Ltd (“RIM”).  Thereafter, Aggarwal had also caused monies to be paid from KLG’s client account under Reference Number 404 to the Hind Parties by forging payment instructions by a “Chris Chen” of RIM.

20. Briefly, under the 1^st SD Summons, the Hind Parties sought specific discovery of :

(i) Class A.1: RIM’s file opening records and any continuing checks, reviews or updates thereafter;

(ii) Class A.2: Records of communication between KLG and RIM relating to the Payment Records[3] from March 2010 to June 2011 (the “Period”);

(iii) Class A.3: Invoices issued by KLG to RIM for services rendered in the Period;

(iv) Class A.4: Internal correspondence and file notes of KLG relating to the Payment Records in the Period;

(v) Class A.5: Books and accounts in respect of RIM relating to the Payment Records in the Period;

(vi) Class B: Accounting vouchers, cheques and payment authorizations in respect of payments from RIM’s client account to payers listed in an annexure marked “A”[4] (“Annexure A”) and to entities listed in an annexure marked “B”[5] (“Annexure B”); and

(vii) Class C:  KLG’s partnership deed or minutes dealing with the authority of partners to sign agreements or cheques drawn from client accounts (with appropriate redaction in respect of any irrelevant information).

21. Under the 2^nd SD Summons, the Hind Parties sought specific discovery of:

(i) Class D: statements made to the police or the Commercial Crime Bureau (“CCB”) by KLG’s representatives, partners or staff in relation to the criminal investigation of Aggarwal; and

(ii) Class E: Accountant’s Reports from 2007 to 2011.

(The 1^st and 2^nd SD Summonses are together referred to as “SD Summonses”)

22. Hind’s Unless Order Summons sought an order requiring KLG to serve un-redacted copies of the Accountant’s Reports for 2010 and 2011, which were ordered by Master K Lo to be disclosed in her Order dated 6.3.2014[6].

23. The 3 summonses above were supported by an affidavit from the Hind Parties’ handling solicitor, Kwan To Pui (“Kwan”), and two affirmations from MKJ.  In opposition to the summonses, KLG’s partner Tso Shiu Kei, Vincent (“Tso”) filed two affidavits on behalf of KLG, in addition to Chan’s affidavit filed with leave of court.

General legal principles on specific discovery

24. Order 24 rule 7 of RHC sets out as follows:

“(1) Subject to rule 8, the Court may at any time, on the application of any party to a cause or matter, make an order requiring any other party to make an affidavit stating whether any document specified or described in the application or any class of document so specified or described is, or has at any time been, in his possession, custody or power, and if not then in his possession, custody or power when he parted with it and what has become of it.

(2) An order may be made against a party under this rule notwithstanding that he may already have made or been required to make a list of documents or affidavit under rule 2 or rule 3.

(3) An application for an order under this rule must be supported by an affidavit stating the belief of the deponent that the party from whom discovery is sought under this rule has, or at some time had, in his possession, custody or power the document, or class of document, specified or described in the application and that it relates to one or more of the matters in question in the cause or matter.”

25. There was no dispute on the general legal principles on applications for specific discovery under Order 24 rule 7 of RHC.  These principles had also been conveniently summarised by the then Cheung J in Lee Nui Foon v Ocean Park [1995] 2 HKC 390:

“1. The party seeking the order has to make out a prima facie case that:

(i) there is in existence a specific document or class of documents ;

(ii) the party against the order is sought has or had the document in his possession, custody or power;

(iii) the document or class of documents relates to a matter in question in the action; and

(iv) discovery is necessary either for disposing fairly of the cause or matter or for saving costs…

2. The prima facie case may be based on probability arising out of the circumstances or specific facts deposed to…

3. ‘Relevance’ means something that contains information directly or indirectly enabling the party seeking discovery either to advance his own case or to damage that of his adversary, or which may fairly lead to a train of inquiry which may have either of these consequences…

4. A document may be relevant either by reason of its character – for instance, the mere fact that it is a document of a particular kind – or it may be relevant by reason of its contents, and, if the applicant is relying upon a particular class of documents because they may have certain contents, it is not enough for him to say ‘there must be this particular class of documents’ unless the mere fact that they belong to the class is sufficient to constitute relevancy. If the mere fact that they belong to the class is not sufficient to constitute relevancy, but the relevancy has to depend upon the particular contents, then there must be a prima facie case for particular contents made, before discovery can be granted. …

5. Where a claim to see a class is made, the class must not be defined or described so widely as to include documents which are not relevant to the issue. …[7]”

26. What is relevant must be ascertained from the pleadings, ie the claim and defence in the broadest sense and not their detailed particulars.  The document sought to be disclosed must be one which ordinarily can be expected to yield information of substantial evidential materiality to the pleadings in the broad sense[8].

27. Further, under Order 24 rule 8 of RHC, the court must be satisfied that discovery is necessary for disposing fairly of the cause or matter or for saving costs.

28. As explained by DHCJ Horace Wong SC in Chan Hung v Yung Kwong Chung HCA 216 & 217/2004 (unrep, 15 January 2009) :

“32. … The Court is entitled to take the view that although relevance in the Peruvian Guano sense has been established, it is not necessary for them to be disclosed. The power to refuse unnecessary discovery of documents is expressly conferred by the rules of court.

33. Indeed in the O Company v M Company case mentioned above, after dealing with the question of relevance, Colman J further held at 352:

‘I would only add that if I had held that the applicable analysis of relevance derived from [Peruvian Guano] was wide enough to include as relevant those documents in respect of which I have refused to make an order for discovery, I should in each case have held that discovery was not necessary either for disposing fairly of the matters in issue or for saving costs under O24, r8. Documents of which discovery is necessary for the fair disposal of a matter in issue must at least have a demonstrable evidential materiality…’ ”[9]

29. KLG’s Senior Counsel Mr Sussex had referred this court to Re Estate of Ng Chan Wah HCAP 5/2003 (unrep, 5 March 2003).  As said by Chu J, as she then was, where the applicant seeks discovery of a class of document, the class must not be defined so widely as to include documents which are not relevant to the issue.  The prerequisites must be established in respect of the class described as a class, not as regard some in the class.  As seen from Re Estate of Ng Chan Wah, discovery will not be ordered for the purpose of “fishing” or to enable a party to turn a non-issue into an issue[10].

30. Mr Maurellet, Counsel for the Hind Parties, referred this court to Mahbubani v Motis Exports (unreported, HCA9124/1992, 26 March 1997) where Stone J had said that in general discovery would be regarded as beneficial in commercial cases and in cases of doubt he would more likely to lean in favour of it rather than against it[11].  Stone J, however, then went on to mention that there were specific rules covering an application pursuant to Order 24 rule 7 regarding specific discovery.

31. The post-CJR approach had been set out by M Chan J in Billion Lead Investment Limited v Union Joyce Limited HKMP 2145/2011 ( unreported; 14 December 2012)  as follows:

“It is also clear that post CJR, the Court should give effect to the underlying objectives of the rules and procedures when it exercises its powers under Order 24 and when it interprets the provisions of Order 24. In deciding whether any document relates to a matter in question in the action, whether any document is or has been in the possession, custody or power of a party, and whether discovery of a document sought is necessary either for disposing fairly of the cause or matter or for saving costs, the Court should always bear in mind the objectives of costs effectiveness, expeditious disposal of cases, proportionality, procedural economy and ensure fairness between the parties.”[12]

(emphasis added)

32. The above approach was also echoed by DHCJ Lok in HSBC Private Bank (Suisse) SA v Mission Bridge Limited & Anor HCA 406/2008 & HCA 212/2012 (unrep; 18 June 2012) :

“… following the CJR, the increasing emphasis is for the court to limit discovery in the context of its duty actively to manage the case[13]”

33. With the above principles in mind, I now turn to the present applications.

Generally

34. Mr Maurellet submitted the following:

(i) The documents sought under the SD Summonses were relevant to the extent of KLG’s knowledge of Aggarwal’s acts vis-à-vis victims such as Hind, and more specifically, the documents would be relevant to KLG’s knowledge of the Escrow Agreements and their underlying transactions with Hind or other victims. Further, these matters, if proved, meant that it was likely that KLG had conferred actual authority on Aggarwal to enter into the Escrow Agreements, ratified the same or estopped from denying his authority;

(ii) Further, the documents sought under the SD Summonses would go to show whether each of the Escrow Agreements was a sham, as the Hind Parties denied KLG’s allegation that there was no underlying transaction to the Escrow Agreements.

35. Mr Sussex, on the other hand, opposed the SD Summonses on the grounds that :-

(i) The Hind Parties failed to prove the existence of some of the documents sought, or that they were/are in the possession, custody or power of KL, namely the Class A.2-A.4 and Class C documents;

(ii) The documents sought were too widely defined as a class, and irrelevant to the present case by reference to the pleaded issues, and the discovery application was a fishing expedition;

(iii) The documents sought were voluminous, and their production would involve an expensive and time consuming redaction exercise. They would unnecessarily prolong the trial and escalate costs.  To require their production would be oppressive, disproportionate and unnecessary for the fair disposal of this action.

Class A.1-A.5 documents

36. Class A.1 documents were all file opening records concerning RIM under Reference Number 404 and any continuing checks, reviews or updates thereunder.  

37. Class A.2-A.5 documents were in effect all the file records concerning RIM under the Reference Number 404 during the Period, A.2 being correspondence, A.3 being invoices for services, A.4 being file notes and A.5 being books and accounts kept by KLG.

Hind Parties’ reasons for seeking discovery

38. Mr Maurellet submitted that for the following reasons there should be discovery of the Class A documents :

(i) KLG said it had no knowledge of entering into and/or performance of the Escrow Agreements at the time, and the Class A records would all be relevant to KLG’s knowledge;

(ii) It was KLG’s positive case that the escrow services were stand alone escrow services that were not incidental to the provision of legal services and the Class A documents would be relevant in assessing whether KLG had provided any legal services to RIM, and for rebutting KLG’s case ;

(iii) The Class A records could also “buttress the justification” of the Hind Parties in believing that the sums paid under the Escrow Agreements were being paid into KLG’s client account for the benefit of a PRC client becauseRIM might well be the PRC Client;

(iv) Class A.1 and A.5 documents should relate to or record the circumstances in which the payments under the Escrow Agreements were made to KLG’s client account with RIM and the manner in which such money was kept and accounted for, including whether proper checks were made by KLG in accordance with its statutory or regulatory duties.  This would be highly relevant to Hind’s claim against KLG in negligenceby its failure to properly supervise and manage its client accounts and/or preventing unauthorised withdrawals from the same.

Discussion

Class A.1 Documents

39. Kwan had deposed that the Class A documents were general client files which KLG had a legal obligation to create or record during the course of its dealings with their client and KLG had a duty to keep such files and records in their safe custody.

40. Class A.1 documents, prima facie, existed/exist and that KLG had or has the documents in its possession, custody or power.  The main issue over the A.1 documents was relevance.

41. It was never pleaded by Hind that the alleged PRC Client referred to Aggarwal’s Representations was RIM.  According to Hind, the identity of the PRC Client was kept confidential.  Although it was stated in KLG’s solicitors’ letter to the Hind Parties’ solicitors dated 16 July 2013 that RIM was its client at the material times, it was all along KLG’s case that the RIM ledger account under the Reference Number 404 was “hijacked” by Aggarwal in his transactions with the Hind Parties.  

42. That RIM had been dormant can also be seen from the Summary of Facts produced and read out during the Criminal Hearing and agreed by Aggarwal[14].  It was stated in the Summary of Facts that RIM, a company engaged in the business of retailing in Shanghai, had been a corporate client of KLG since 2001 and Aggarwal had performed legal services for RIM when required.  It was further stated therein that RIM had not carried out any business transactions in Hong Kong since 2006 and had not given any instructions to KLG or Aggarwal to deal with any legal matters since that date[15].

43. There was some dispute between the parties over the extent to which KLG agreed/disagreed with the contents of the Summary of Fact and I will deal with this matter again later in this judgment.  Suffice to say at this stage, Mr Sussex himself had also referred to the above part of the Summary of Facts regarding RIM in his submissions during the hearing, and it seemed at least this part of the Summary of Facts was not really disputed by KLG.

44. Kwan had filed an affidavit in support of the 1^st SD Summons, stating, among other things, that the Class A documents would be relevant to the issues raised in paragraphs 17(1) to (4) of the Amended Defence and Counterclaim in which KLG had pleaded that no retainer had existed in respect of the Escrow Agreements, no chargeable hours were ever recorded in respect of the Escrow Agreements, and no fee note or invoice was ever issued to Hind[16].

45. What KLG pleaded was not in relation to KLG and RIM, but in relation to KLG and Hind, as KLG said it was never instructed by Hind to provide legal services in connection with the Escrow Agreements, and that the Escrow Agreements represented escrow services not incidental to the provision of any legal services.

46. As RIM was a bona fide client of KLG was never in issue, a retainer must therefore have existed between RIM and KLG.  According to the Summary of Facts, KLG had performed legal services when required for RIM between 2001 and 2006, but no instructions had been given by RIM to Aggarwal/KLG since 2006 to deal with any legal matters. In this case, there would not have been any legal services provided by Aggarwal/KLG to RIM during the Period in relation to the Escrow Agreements.

47. The documents in Class A.1 in so far as they relate to the real RIM cannot have any relevance to the disputed issues between the parties.

48. However, the evidence showed that Aggarwal had forged instructions from RIM during the Period.  KLG’s case was that it had no knowledge of the Escrow Agreements at the material time and thus it would not know at that time that RIM’s ledger account under Reference Number 404 was hijacked.

49. There were frequent and large amounts of receipts and withdrawals under Reference Number 404 during the Period, and purported instructions from RIM, which was after the real RIM became a dormant client.  It was not clear when the file with the Reference Number 404 was opened, whether after the real RIM had became dormant or not.  Having considered the disputed issues between the parties, I accept the Class A.1 documents are relevant and necessary in that they will show whether there had been proper checks made by KLG in accordance with its statutory or regulatory duties and whether KLG had knowledge of the Escrow Agreements. However, Class A.1 documents as sought, with no time specified, was too wide.

50. I am of the view that only those documents under the Reference File Number 404 which fall within the Period will be relevant to the disputed issues.  The Hind Parties’ application in respect of Class A.1 documents will be allowed only to this extent.

Class A.2- A.4 documents 

51. Class A.2 documents were all correspondence and communications etc between KLG and RIM during the Period relating to the Payment Records.  Class A.3 documents were in relation to all invoices issued by KLG to RIM during the Period relating to the Payment Records. Class A.4 documents were in relation to all internal correspondence and file notes of KLG in relation to RIM during the Period relating to the Payment Records.

52. Mr Sussex submitted that the Hind Parties had failed to show prima facie existence of the documents in Class A.2-A.4, or that they were/are in KLG’s possession, custody and power.  The main reason for his submission was that the RIM ledger account was hijacked and the payment instructions from Chris Chen of RIM were forged by Aggarwal without the firm’s and RIM’s knowledge.

53. Mr Sussex further submitted that for the same reasons as the Class A.1 documents, the Class A.2-A.4 documents were also irrelevant.

54. Kwan had stated in his affidavit that KLG never once denied that the Class A documents existed or were in their possession, custody or power.  In response, Tso in his 2^nd affidavit only stated that it was unnecessary and irrelevant for RIM’s file papers to be disclosed.

55. Based on KLG’s own case, it would not have known the RIM ledger account was hijacked during the Period.  So far as the Class A.2 documents were concerned, one can see from the Summary of Facts[17], and documents disclosed by KLG in their 1^st List of Documents[18], there were many forged payment instructions/memoranda purported to be from RIM in relation to the Payment Records.  As mentioned earlier, although the real RIM was said not to have given instructions to KLG after 2006, there were forged communications purported to be from RIM to KLG.

56. As for Class A.4, one can see from KLG’s 1^st List of Documents that there were various internal emails within KLG during the Period which appeared to be in relation to the Payment Records.

57. Having considered the above, I am of the view that prima facie Class A.2-A.4 documents purported to be between RIM and KLG under the Reference Number 404 existed/exist, and KLG had/has these documents in its possession, custody or power.  I am further of the view that such documents are relevant to the issue whether the other partners of KLG knew or should have known about the Escrow Agreements and transactions in the KLG’s client account under Reference Number 404.  The issue of the other partners’ knowledge, actual or constructive, is relevant to the question of authority.  I am also of the view that it is necessary for these documents to be produced.

58. I will allow the Hind Parties’ application for the Class A.2-A.4 documents purportedly to be in relation to RIM.

Class A.5 documents

59. Class A.5 documents were books and accounts of RIM during the Period relating to the Payment Records required to be kept under the Solicitors’ Accounts Rules.

60. The issue over Class A.5 documents was over their relevance, and whether they were necessary.  They prima facie existed and KLG had /has these documents in its possession, custody or power.

61. In paragraph 9(b) of the amended statement of claim, Hind pleaded its reliance on Rule 2 of the Solicitors’ Practice Rules, Rules 7, 7A, 8, 9, 10 and 10A of the Solicitors’ Accounts Rules, and Rule 2.3 of Volume 1 of the Law Society’s Guide to Professional Conduct in support of its claim based on KLG;s alleged common law duty to take reasonable care for the sums paid under the Escrow Agreements in its client account[19].

62. Further in paragraph 13(b), Hind pleaded that KLG was liable to pay damages to Hind for alleged breach of its duty owed to Hind with respect of the sums paid under the Escrow Agreements, and if such sums were totally unrelated to the usual business of KLG, Hind would rely on Rules 10 and 10 A of the Solicitors Accounts Rules that KLG had the duty to keep and make reconciliation of the client’s accounts from time to time[20].

63. Kwan had said Class A.5 documents would be relevant in relation to the above issues, namely whether KLG had kept proper client accounts and complied with the relevant rules in the Solicitors’ Practice Rules and whether KLG had properly supervised and maintained its clients accounts and to make reconciliation.  In reply, Tso stated that the disclosed Accountant’s Reports for 2010 and 2011 would resolve such issues conclusively.

64. The obligations of a solicitor under Rule 10 of the Solicitors Accounts Rules to keep properly written up books and accounts to show all his dealings are not only in respect of clients’ money, but also “any other money dealt with by the solicitor through a client account”.  Further under Rule 10A, the obligations of a solicitor to prepare a reconciliation statement extend to any money paid into client accounts.

65. The duties of an accountant who signs an accountant’s report are set out in rule 4 of the Accountant’s Report Rules, Cap 159A.  The examinations required to be made by the accountant of the books of account of the firm of solicitors under rule 4 are “general test examinations” and the comparison required to be made by the accountant of the liabilities of the firm to its clients and the balances standing to the credit of the client account is to be made on selected dates not fewer than 2.

66. In the above circumstances, the two Accountant’s Reports produced by KLG may not be conclusive as to whether KLG had in fact complied with its obligations under the Solicitors’ Accounts Rules.

67. Further, I am of the view that the new Class A.5 documents are relevant in that they contain information directly or indirectly enabling Hind either to advance its case or to damage that of KLG, in respect of the issue as to whether KLG had kept proper client accounts and complied with the relevant rules in the Solicitors’ Practice Rules and whether KLG had properly supervised and maintained its client accounts and to make reconciliation.

68. Mr Sussex had further submitted that the relevance would be marginal, compared with the costs and expenses involved in their production.  

69. The Period covered 16 months, and there seemed to be 8 payments in and 58 payments out.  The documents were required to be kept by KLG under the Solicitors’ Accounts Rules.  There was no sufficient evidence as to the extent of costs and expenses involved in the production of the same.

70. Having considered the parties’ submissions, I am of the view that the discovery sought is necessary for disposing fairly of the present action.  I will allow the discovery of the Class A.5 documents purportedly to be in respect of RIM.

Class B documents

71. Class B documents were accounting vouchers in respect of all payers listed in Annexure A and all remittance of monies from KLG’s client account to the persons/entities in Annexure B, save for the Payment Records already disclosed.

72. Annexure A was the annex B attached to the Summary of Facts.  Annexure A disclosed that Aggarwal had committed fraud against at least 92 Investors (non-clients) who had deposited a total of about HK$8.1 billion with KLG using escrow arrangements.  Annexure B was the combination of annexes C and D attached to the Summary of Facts and disclosed a total of 333 persons/entities to which sums had been transferred out of the RIM client ledger account.  The persons/entities listed in Annexures A and B included the Hind Parties.

73. Aggarwal’s frauds against other investors had not been pleaded by Hind/Hind Parties.  Mr Maurellet submitted that the fraud perpetrated by Aggarwal should be considered in the totality, and that the Class B documents would throw light on the scale of Aggarwal’s fraud and whether other victims entered into similar escrow agreements, and that such matters would clearly be relevant to the issue of KLG’s knowledge of the escrow agreements similar to the ones entered into by Hind, and also relevant to KLG’s negligence, as pleaded.

74. Mr Maurellet referred this court to the case of Moulin Global and others v KPMG (unreported, HCA 118/2007, 8 June 2010) which concerned fictitious sales that caused overpayment of tax.  In that case, the plaintiff pleaded a number of fictitious sales and Barma J, as he then was, following the approach laid down by Colman J in O Company v M Company [1996] 2 Lloyds LR 347, held that if there was evidence suggesting that there were other ways, not as yet pleaded, in which the fictitious sales were disguised, these would be of sufficient evidential materiality to justify an order for discovery[21].

75. Annexure A and Annexure B were prepared by the Department of Justice for the Criminal Hearing.

76. KLG pointed out that the Summary of Facts was agreed between the Department of Justice and Aggarwal without full investigation, nor a trial, nor KLG’s control over its contents. KLG’s case was that it did not know and had no idea how or why or on what basis the annexures had been compiled by DOJ.  As a result, the Hind Parties’ solicitors Messrs Deacons did write to the Department of Justice to make the necessary enquiry, but no reply had been received by the time of the hearing. 

77. Anyway, as seen from Tso’s 2^nd affidavit, it appears that KLG did not accept that Aggarwal’s wrongdoing was confined to his guilty pleas to charges of fraud and dealing with property known to be the proceeds of an indictable offence as set out in the Summary of Facts[22].  Further, KLG did not accept that the non-client entities (including the Hind Parties) were “innocent victims” without complicity in Aggarwal’s fraud[23]. 

78. At this stage, the above seemed to be the main extent of KLG’s disagreement with the Summary of Facts. 

79. It was not disputed by KLG that there were/are a total of 17 civil litigations concerning the fraud perpetrated by Aggarwal including the present one.  According to KLG, these all involved non-clients.

80. Mr Sussex submitted that even if the Hind Parties were to run a case, which was not pleaded, that they and each of those entities in Annexures A and B were “victims” of Aggarwal, they could rely on the Summary of Facts agreed by Aggarwal.  The Class B documents, namely accounting vouchers, cheques and payment authorizations in respect of payments from RIM’s client account to entities in Annexures A and B would not assist them in their case. Further, as submitted by Mr Sussex whether KLG was negligent vis-à-vis Hind would be a question between KLG and Hind, and not the other non-clients, and even if Hind were to run such argument, it could again rely on the Summary of Facts and the existence of the other actions by the non-clients for that purpose.  Further, the writs in the other actions are public records.  I accept Mr Sussex’s submissions, and I am of the view that Class B documents are not relevant.

81. In any event, what was sought by the Hind Parties were not confined to the other 16 actions, but in relation to over 300 entities in total. There was also no time period stipulated.  Given the number of entities, size and volume of the documents involved, the exercise involved in reviewing all the documents and making proper redactions, I am further of the view that the discovery sought was oppressive, disproportionate and unnecessary for the fair disposal for this action.

Class C documents

82. These documents were in relation to KLG’s partnership agreement/deed or any addendum or internal minutes of partners’ meetings dealing with and/or defining the respective authority or power (including any limitation imposed thereon) of the partners on the signing of agreements on behalf of KLG and signing of cheques drawn from client accounts (with appropriate redaction in respect of any irrelevant information).

83. KLG’s position in response to the discovery of the above documents was that the issue of authority on the part of Aggarwal vis a vis the Hind Parties had nothing to do with the partnership deed. 

84. KLG did not dispute that generally partners of a solicitors firm had the authority to sign correspondence, agreements or cheques on behalf of the firm for its ordinary business and KLG said that this did not need to be evidenced in writing.  Further, KLG also did not deny that its protocol was that for any payment by KLG of over HK$40,000, the accounting voucher had to be signed by 2 partners and the cheque or electronic transfer instructions also had to be signed by 2 partners. 

85. KLG’s defence in the Main Action was that the facts and matters arising out of the transactions between the Hind Parties and Aggarwal were so extraordinary that they fell outside the usual course of business of KLG, and that the Hind Parties knew or ought or have known that Aggarwal was not authorised by KLG to carry out those transactions.

86. Mr Sussex submitted that the Hind Parties had failed to prove that, apart from the partnership deed, the prima facie existence of the Class C documents relating to authority of partner.

87. In response to the request for discovery for Class C documents, Tso had said in his affidavit filed on behalf of KLG that he was surprised that being a partner of a Hong Kong law firm, Kwan “would seem to think that documents setting out the authority of partner would exist”.

88. Mr Maurellet complained that this statement was “no more than a riddle wrapped in a mystery answering a legitimate query with a question and not an answer”.  Although Tso chose to respond in rather an indirect manner, my understanding from what Tso had said indicated that there was no provision in the KLG partnership deed setting out the authority of a partner, nor were there any other documents in this respect.  I find there was no sufficient prima facie evidence that such documents existed, or were in KLG’s possession, custody or power.  I will not grant the application in respect of the Class C documents.

Class D documents

89. These related to all police or CCB statements made by KLG’s representatives, partners or staff and any other police or CCB statements in KLG’s possession, custody or power in connection with the criminal investigation of Aggarwal.

90. There was no issue as to the existence of Class D documents and they were in KLG’s possession, custody or power.  The issue was whether they were relevant.

91. The application for specific discovery of the Class D documents arose out of KLG’s comments and disagreement with certain parts of the Summary of Facts.

92. Although KLG’s position seemed to be that the Summary of Facts as a whole was irrelevant to the issues between the parties, and it was not necessary for the fair disposal of this action, as mentioned earlier, both parties had in fact referred to and/or relied on at least part/s of it. 

93. I do not find that the Summary of Facts “irrelevant”.  Having said this, I do not see the relevance of all the statements given by representatives, partners or staff in KLG to the police or CCB in relation to their criminal investigation. 

94. Such criminal investigation covered over 300 entities, including clients and non-clients.  In my view, the documents sought are also not necessary for the fair disposal of this action.

Class E documents

95. The Hind Parties sought copies of the Accountant’s Reports from 2007 to 2011 in the 2^nd SD Summons.  As mentioned earlier, KLG had already provided redacted copies for 2010 and 2011.

96. Mr Maurellet submitted that the 2007 to 2009 Accountant’s Reports were relevant as the fraudulent scheme perpetrated by Aggarwal started in 2007 and should be viewed in its entirety.

97. The Summary of Facts indicated that Aggarwal’s fraud started in May 2007[24]. However, so far as the Hind Parties were concerned, the payments from and to them started only in 2010.

98. Mr Maurellet submitted that the Accountant’s Reports for the earlier 3 years would show whether at that time the accountant had picked up something, and this would go to the state of KLG’s knowledge and would prima facie throw light on KLG’s awareness of the fraud and measures, or lack thereof to prevent defalcations and frauds from occurring. The state of KLG’s knowledge will be relevant to the issue of KLG’s negligence, as pleaded by Hind.

99. MKJ had stated in his affirmation that had KLG detected the fraud in 2007, the fraud perpetrated against Hind would not have happened[25].

100. Mr Sussex submitted what MKJ stated was pure speculation and not pleaded, and that was based on the Hind Parties being innocent victims, which was denied by KLG.  Further, even if something was detected in 2009 by KLG, this had nothing to do with the alleged negligent claim against Hind.  Thus, the Accountant’s Reports for 2007 to 2009 were irrelevant.

101. Mr Sussex further submitted that the Hind Parties could, had they wanted to, obtain copies of the writs, and any judgments, and with leave ex parte, any other documents in the other actions against KLG under Order 63 rule 4 of RHC, and that the Class D documents the Hind Parties were seeking was disproportionate and unnecessary.

102. What was stated in the 2010 and 2011 Accountant’s Reports in relation to “a defalcation in respect of client monies by a partner…” was not “discovered” by the accountant Mr Ng, but the matter was advised to him by KLG.  It was stated by Mr Ng in the 2010 Accountant’s Report that KLG had advised him that subsequent to the year ended 31 December 2010 the firm had discovered the defalcation[26].  The 2010 Accountant’s Report was in fact signed by Mr Ng on 14 October 2011. 

103. It appears from the above the defalcation would not be reflected in the earlier Accountant’s reports.  I accept Mr Sussex’s submissions that the 2007 to 2009 Accountant’s Reports cannot be relevant to the issues between the Hind Parties and KLG, nor are they necessary for the fair disposal of this action.

Unless Order Summons

104. On 6 March 2014, Master K Lo ordered, among other things, that KLG to serve copies of Accountants Reports for the years 2010 and 2011 within 5 days.

105. KLG complied with the order, but the copies they served were redacted.

106. The main issue was whether the Accountants’ Reports produced by KLG should have been redacted.

107. When KLG solicitors served the redacted copies of the Accountants Reports pursuant to Master Lo’s order, in their covering letter of 12 March 2014[27], they stated that KLG maintained privilege over the investigation referred to in the Accountants’ Reports as well as other matters referred to therein, and that they granted a limited waiver of privilege to the Law Society primarily due to section 8B of the Legal Practitioners Ordinance.

108. About a week before the hearing, KLG issued a summons for leave to file Chan’s Affidavit.  In Chan’s affidavit, he confirmed that KLG redacted the portion of the Accountants’ Reports as the “redacted parts” relate to matters which are privileged and are subject to s 8B of the Legal Practitioners Ordinance. Chan further stated that he verily believed that the redacted parts were irrelevant to the issues in dispute in this action, and further the redaction did not destroy the sense of the rest of the documents disclosed or make them misleading.

109. As it was not specified in Chan’s affidavit as to what privilege he was referring to, this and KLG’s solicitors’ earlier letter of 12 March 2014 led the Hind Parties’ solicitors and Counsel to believe that KLG was at that time relying on “Legal Professional Privilege” for the reason of redaction.

110. Mr Maurellet thus prepared his skeleton submissions and authorities on Legal Professional Privilege, and on the “fraud exception”. 

111. It subsequently appeared from Mr Sussex’s submissions during the hearing before this court that KLG was referring to other aspects of privilege, such as accountants’ advice.  Anyway, the main point made by Mr Sussex in relation to the redaction was that the reasons for redaction having been given by Chan, Chan’s evidence made on oath should be prima facie conclusive.

112. Mr Sussex referred this court to GE Capital Corporate Finance Group Ltd v Bankers Trust Co and Others [1995] 1 WLR 172 (CA) in which the blanked out passages were solely on grounds of irrelevance. The other defendants included Arthur Anderson.  The action arose out of a what was described as a disastrous transaction called the “Magnet transaction”.  All the blanked-out passages contained the names, amounts or other details of other financing transactions undertaken by GE which it said did not relate to any matter in question between the parties in the action.  Arthur Anderson applied for an order for inspection of the complete documents.  The judge granted the order on the ground that in a case in which the whole document was said to be irrelevant, the oath of the party giving discovery was prima facie conclusive, but in the case where the “documents themselves” were agreed to be relevant, prima facie, the other party was entitled to see the whole.

113. The Court of Appeal allowed the appeal.  Hoffman LJ found the basic distinction from which the judge began, namely, the distinction between a claim on affidavit that a document was wholly irrelevant and that only part was irrelevant, was wrong.  He pointed out that it had long been the practice that a party was entitled to seal up or cover up parts of a document which he claimed to be irrelevant, and went on to say the oath of the party giving discovery was conclusive.  In this respect, he had quoted a passage from what was said by Cotton LJ in Jones v Andrews (1888) 58 LT 601 that:

“unless the court can be satisfied- not on a conflict of affidavits, but either from the documents produced or from anything in the affidavit made by the defendant, or by any admission by him in the pleadings, or necessarily from the circumstances of the case – that the affidavit does not truly state that which it ought to state.[28]”

114. What was said by Hoffmann LJ above was applied in Hong Kong by our Court of Appeal in SMSE v KL (No 2) [2009] 5 HKLRD 770 and more recently in Wong Kar Gee Mimi v Severn Villa Ltd [2012] 1 HKLRD 887.  Further, these principles also apply to documents produced under compulsion of a specific discovery order, as can be seen in Mega Yield International Holdings Ltd v Fonfair Co Ltd [2011] HKEC 1241 (16 September 2011)[29].

115. Mr Maurellet referred this court to the test stated by Kwan JA in the Mimi Wong case, namely whether it is not unreasonable to suppose that the parts redacted do contain information which may, either directly or indirectly, enable the plaintiff in that case to advance her own case or to damage the defendants’ case.  However, Kwan JA went on to state that:-

“A heavy burden lies on a party who seeks to challenge the veracity of the other party’s oath regarding redaction.[30]”

116. In my view, the Hind Parties had not been able to discharge the heavy burden on them, and in the circumstances, I allow the redactions.

117. Further, there was plainly no breach of Master K Lo’s order and the Unless Summons must be dismissed.

Orders

118. In light of what was said above, the orders I make are to the following effect :

1. Leave be granted to KLG to file Chan’s affidavit sworn on 7 April 2014;

2. Leave granted to the Hind Parties to issue their summonses of 15 November 2013 and 25 February 2014.

3. KLG do within 14 days from the service of this order do file an affidavit stating whether it has the documents and class of documents specified or described as in the Schedule attached to this order, or has at any time been, in its possession, custody or power, and if not then in its possession, custody or power, when KLG parted with it and what has become of it;

4. KLG do within 14 days from the service of this order to file a supplemental list of documents to disclose the documents and class of documents specified or described in the Schedule, which are in its possession, custody or power;

5. There be inspection within 7 days thereafter.

6. The Hind Parties’ summons filed on 25 February 2014 be dismissed;

7. Hind’s summons filed on20 March 2014 be dismissed.

119. The Schedule is to the following effect:-

1. Class A.1 documents, but only limited to those documents purportedly to be in relation to RIM which fall within the Period under the Reference Number 404.

2. Class A.2-A.5 documents purportedly in relation to RIM during the Period under the Reference Number 404 relating to the Payments Records.

Costs

120. The Hind Parties was overall the successful party in relation to the 1^st SD Summons and should be entitled to the costs of their summons.  As KLG was the successful party in relation to the 2^nd SD Summons and the Unless Order Summons, they should be entitled to the costs of those two summonses.  There be certificate for 2 Counsel for all three summonses.

121. As for costs of KLG’s summons for leave to file Chan’s affidavit, I make no order as to costs.

122. The above are costs orders nisi, which shall be final after 21 days.

123. Lastly, I would like to thank all Counsel for their helpful submissions.