SHINE GRACE INVESTMENT LTD v. CITIBANK, N.A. AND ANOTHER

CACV 266/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 266 OF 2011

(ON APPEAL FROM HCCL 28 OF 2008)

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Hon Lunn JA :

1.  This is the defendants’ interlocutory appeal, with leave granted by Tang VP and Fok JA, against the refusal of Reyes J on 12 July 2011 to make an order for specific discovery in respect of various items sought in the defendant’s summons, pursuant to Order 24, rule 7 of the Rules of the High Court, of 20 June 2011. By a Respondent’s Notice dated 22 December 2011 the plaintiff contends that the judge’s refusal to order specific discovery should be affirmed by this Court on additional or alternative grounds, in particular that there was no evidence that the documents sought lay within the plaintiff’s possession, custody or power.

Background

2.  The plaintiff company was a private investment company beneficially owned by Mrs Anita Chan until her death on 17 October 2007.  There is no dispute that she controlled the plaintiff, at least until the period when it is said that she became incapacitated through illness, about 10 days before her death.  She was one of two directors of the plaintiff.  The action brought by the plaintiff is in respect of 9 Accumulator Contracts with Citibank NA, the 1^st defendant, made on 15 and 16 October 2007 between Ms Haley Mak, the 2^nd defendant, acting on behalf of her employer, the 1^st defendant, and Mrs Anita Chan, acting on behalf of the plaintiff.  The plaintiff had been a customer of the 1^st defendant since 2003 and since that date the 2^nd defendant had acted as her employer’s relationship manager with the plaintiff.  Mrs Anita Chan had been a customer of the 1^st defendant since 1999 and had dealt with the 2^nd defendant as her relationship manager throughout that period.

3.  The nub of the plaintiff’s case is that, knowing her to be incapacitated and not competent to make decisions in the best interests of the plaintiff, the 2^nd defendant had inveigled Mrs Anita Chan to enter into the 9 Accumulator Contracts on behalf of the plaintiff, which were “massively imprudent and contrary to the best interests” of the plaintiff in breach of various duties owed to the plaintiff by both the 1^st and 2^nd defendants.  The amount of initial marginal security required of the plaintiff was in excess of its net asset value and its liability on the contracts many times greater than that value.  Conversely, it is contended that those contracts were “massively advantageous” to the 1^st defendant.  The plaintiff contends, inter alia, that the defendants were in breach of statutory and contractual duties owed to the plaintiff and, inter alia, seeks a declaration that the plaintiff has not entered into the 9 Accumulator Contracts or alternatively that they are unenforceable against the plaintiff.

4.  At issue between the parties is Mrs Anita Chan’s experience in investing in structured financial products, in particular highly leveraged structured derivative products, of which the Accumulator Contracts are but one example.

5.  It is the defendants’ case that Mrs Anita Chan had experience in investing in various options and derivative products and was aware of the level of risk associated with accumulator contracts and that in trading in the latter she was highly successful.  Further, that she relied on her own investment strategy and experience.  It is the plaintiff’s case that although Mrs Anita Chan had investment experience, in the period 2003 until her death in October 2007, including investments in Equity-Linked Notes, Exchange-traded options and warrants she had “...less experience in investing in structured financial products and, in particular, in highly leveraged structured derivative products such as Citibank’s Accumulator Contracts”.

6.  There is no dispute that in the period 2004 to 2007, Mrs Anita Chan caused the plaintiff to enter into 271 Accumulator Contracts with the 1^st defendant and 50 Accumulator Contracts with the Bank of East Asia.  Furthermore, in consequence of statements made in an affirmation by Ms Agatha Lai, filed on behalf of the plaintiff on 22 December 2011, it is accepted that the plaintiff did not enter into any Accumulator Contracts with any bank other than Citibank and Bank of East Asia.  Further, that of the 56 companies the defendants contended were controlled by Mrs Anita Chan, other than the plaintiff, the only companies that entered into accumulator contracts were Bonds & Sons International Limited and Yinrex Limited.  The former did not enter into Accumulator Contracts with any bank other than Citibank.  After the hearing the plaintiff’s solicitors informed the court, at its request, that the last Accumulator Contract entered into with the 1^st defendant by Bonds & Sons International Limited was on 14 March 2007. Yinrex Limited is a company beneficially owned by Mrs Anita Chan’s eldest son who, not Mrs Anita Chan, placed orders for Accumulator Contracts for that company.  In Further and Better Particulars of the Defence, filed on 22 December 2011, the 56 companies were identified as being companies of which it was known to the defendants that Mrs Anita Chan was a director.

GROUNDS OF APPEAL

7.  Of the grounds of appeal that remain a live issue before this court, it is contended that the judge erred in law, in failing to find the documents in question relevant to issues disclosed in the pleadings, namely in respect of Mrs Anita Chan’s:

(i)  investment experience;

(ii)  risk appetite;

(iii)  ability to use other private investment companies;

(iv)  trading strategy.

8.  Also, it is submitted that the judge failed to make any finding, as he should have done, that the plaintiff should be regarded as having in its possession, custody or power the documents in question.  In particular, it is said that regard is to be had to the fact that it is accepted by the plaintiff that since November 2007 its four directors are Mrs Anita Chan’s four children.  They are administering her estate.  Accordingly, they have within their possession, custody or power all the documents relating to the plaintiff’s investment activities and those of investment vehicle controlled by Mrs Anita Chan or in which she had an interest.  The companies were the alter ego of Mrs Anita Chan (see the judgment of the Court of Appeal of British Columbia in Dallas v Dallas (1960) 24 DLR (2d) 746 at 747).  A “presently enforceable legal right” (see the judgment of Lord Diplock in the House of Lords in Lonrho Ltd. v Shell Petroleum Co. Ltd. [1980] 1 WLR 627 at 635 F) does not imply instantaneous right of inspection.  Rather, it “refers to the right to gain inspection through the courts on the basis of the position then prevailing” (see the judgment of Hedigan J in the Supreme Court of Victoria in Linfa Pty. v Citibank Ltd. [1995] 1 VR 643 at 647 line 45).

Discussion

9.  It is clear from the transcript of the proceedings before the judge that the judge’s decisions to refuse to order specific discovery, save in two instances, were based on a consideration of relevance only.  In only one instance, did he advert to the issue of whether or not the documents in question lay within the possession, control or power of the plaintiff, namely in respect of the coroner’s report and whether the plaintiff, “can be said, qua company, to have custody and control of the report”.

The judge’s order

10.  In the event, the judge ordered specific discovery in favour of the defendants only in respect of  :

(i)  50 Accumulator Contracts entered into by the plaintiff with the Bank of East Asia, which had been referred to in the plaintiff’s Amended Reply; and

(ii)  the plaintiff’s internal calculations for the period 15 to 18 October 2009 in respect of Accumulator Contracts, with reference to payables, margins and credit position.

Specific discovery: the documents sought

11.  The documents of which the defendants seek an order of specific discovery are the records of the plaintiff and 55 other companies, said to be private investment companies controlled by Ms Anita Chan of:

(i)  trades by the plaintiff and the 55 companies in structured products with 11 stipulated banks;

(ii)  calculations made on behalf of the plaintiff and the other 55 companies in respect of tables, margins and/or credit positions relating to trade in accumulator contracts either plaintiff and the other 55 companies.

As to (i)

12.  The defendants submit that the records of trades by the plaintiff and the 55 companies in structured products will reflect Mrs Anita Chan’s experience in investing in those products.  Also, it will reveal whether or not she had an investment strategy.

13.  The plaintiff responds that the trial concerns specific disputed Accumulator Contracts executed by the plaintiff with the 1^st defendant in mid-October 2007.  It is the prevailing market conditions of that time that are relevant.  It is submitted that the material sought by the defendants is not relevant to the issue, given that it covers an unlimited time period and encompasses “...a wide array of different financial products marketed and sold by different financial institutions at different times and under different market conditions, with different risk disclosures made to different companies.”

The 55 companies

14.  As noted earlier the starting point for the defendants’ case that Mrs Anita Chan controlled all 56 companies, including the plaintiff, is the fact that she was a director of each of the companies.  Then, it is asserted that she operated the companies as “a group of investment companies, the assets of which could be used to support each other company.”  In support of that sweeping assertion, the defendants point only to the fact that on a total of four occasions two of those companies, Shining and Bonds & Sons, gave specific limited guarantees in amounts in millions of United States dollars to the 1^st defendant for the plaintiff’s dealings with it.  The last of those guarantees was given in June 2006.  Also, the defendants rely on the plaintiff’s admission that Mrs Anita Chan was the sole beneficial owner of Shining, Sunbroad and Sun Rays together with the evidence of Mr David Morrison, a partner of the plaintiff’s solicitors, that 15 unidentified companies were controlled by Mrs Anita Chan.  Of the business activities of those 15 companies there is no other specific evidence save the plaintiff’s admission that Bonds and Sons International entered into accumulator contracts, but did so only with the 1^st defendant.

15.  For its part, the plaintiff denies that the assets of the companies within the stipulated 56 companies were used interchangeably, other than in respect of the guarantees given by Shining and Bonds & Sons.  It is Mr David Morrison’s evidence that 24 of the companies, the ‘Bonds Group’, have been controlled by a company as trustee of a Chan Family Trust, of which Mrs Anita Chan had only a minority interest as an ultimate beneficiary together with others, and that the remaining companies, other than four companies which had been dissolved, are controlled by members of Mrs Anita Chan’s family.

16.  It is the plaintiff’s case that it does not have a presently enforceable legal right to obtain the documents as against the other companies.  The necessity to demonstrate such a right has been acknowledged in judgments in this jurisdiction in which the dicta of Lord Diplock in Lonrho has been followed (see the judgment of Kwan J in Re Comsec Travel Limited (unreported; 12 March 2009, paragraphs 13 and 14).  Acknowledging the possible exception in respect of one-man companies, it is contended on behalf of the plaintiff that in those circumstances it has to be demonstrated that the company is under the unfettered control of a person, so as to be his alter ego.  The mere fact that that a person is a director of a company, does not mean that the documents of that company are in his “power” (see the judgment of Dillon LJ in the Court of Appeal of England and Wales in Re Technicon [1985] BCLC 434 at 437 g-h). Whilst it is acknowledged on behalf of the plaintiff that the four children of Mrs Anita Chan are its directors, it is contended that there is no evidence that they have unfettered control over the companies over which Mrs Anita Chan had control, let alone those that were controlled by others.

17.  Given the paucity of evidence of the business activities of such of the companies that have been identified as having been controlled by Mrs Anita Chan in my judgment the defendants have failed to establish a prima facie case that the documents that they seek exist.  Further, the defendants have failed to undermine the evidence given on behalf of the plaintiff that it does not exercise control over the companies as contended by the defendants and that it does not have “possession, custody or control” of the documents relating to those companies sought by the defendants.  The fact that the plaintiff has been able to obtain and provide to the defendants material relating to the Coroner’s Inquest is nothing to the point as to its power to obtain business records from the other companies. The observations of Floyd J in Schlumberger Holdings Ltd v Electromagnetic Geoservices [2008] EWHC 56 (Pat) at paragraph 21 are irrelevant to the facts of this case.

As to (ii) : records of trades

18.  There is no doubt that important issues at trial are very likely to be Mrs Anita Chan’s experience in dealing in complex structured financial products and her related appetite/tolerance of risk.  As counsel for the defendants pointed out, at the outset the plaintiff’s case was pleaded (paragraph 7 (f)) on the basis that the 2^nd defendant knew by 12 March 2003 that, whilst Mrs Anita Chan had investment knowledge and experience in securities, she “had little or no investment knowledge or experience in the far more complex field of investment in derivative securities instruments.”  In that context, it is contended that in the period January 2004 to October 2007 the 2^nd defendant had “induced or persuaded” Mrs Anita Chan to enter into various Accumulator Contracts.  As noted earlier, the Amended Reply refined the plaintiff’s position as to Mrs Anita Chan’s experience. Now, it was conceded that in the period 2004 to 2007 she had experience in investing in not only Exchange-traded securities but also closed-end funds, Equity-Linked Notes and some Exchange-traded options and warrants.  Of investing in structured financial products, in particular highly-leveraged structured derivative products, such as Accumulator Contracts, it is said that she had “less experience”.

19.  As noted earlier, the plaintiff has confirmed since the hearing before the judge, in an affirmation made by Ms Agatha Lai, that it did not enter into any stock (equity) accumulator contracts…. with any bank other than Citibank and Bank of East Asia”. However, given that the plaintiff itself described accumulator contracts as an example only of structured financial products the statement made on behalf the plaintiff begs the question as to trading in other types of structured financial products by the plaintiff.  However, when Mr Wong was asked in the course of argument if he could identify any such structured financial product, other than an accumulator contract, he was unable to do so.  In the result, I am satisfied that the judge did not err in the exercise of his discretion in this respect in limiting the specific discovery to accumulator contracts.

Internal calculations

20.  In the course of argument, Mr Jin Pao indicated that he would have no objection to the court ordering an expanded time period in respect of which the plaintiff was required to deliver its internal calculations in respect of accumulator contracts from the period 15 to 18 October 2007 to commence at the earlier date of 1 October 2007.  He was sensible to do so, and I would allow the appeal to that extent only and make an order nisi that the plaintiff is to have the costs of the appeal.

Hon Bharwaney J:

21.  I agree with the judgment of Lunn JA and with the proposed orders.