TELINGS INTERNATIONAL HONG KONG LTD v. JOHN HO AND OTHERS

HCA 2114/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2114 OF 2005

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J U D G M E N T

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Introduction

1.  This is an appeal from an order by Master de Souza dated 20 September last year [D/53] on a summons by the Plaintiff [A/91] applying for an order in the following terms:

“

Each of the 1st and 2nd Defendants do within 14 days from the date hereof swear and file an affidavit stating whether he has at any time had in his possession custody or power the classes of documents stated in the Schedule hereto and insofar as any such documents are no longer within his possession custody or power when he parted with those documents and what has become of them.”

The Schedule at A/93 then sets out the four classes of documents.

2.  Having heard the argument on the summons, the learned Master made an order in terms of the summons save that in respect of paragraph 1 of the Schedule he removed the words “but not limited to” appearing on the 4^th line of this paragraph immediately after the word “including” and before the word “all”, taking the view that this expression placed an imprecise obligation on the Defendants to comply with this part of the order.  Apart from that the Plaintiff had succeeded in full from which order the Defendants now appeal on a broad range of issues which I will have to deal with in the course of this judgment.

An Overview of the Action and the Issues Involved

3.  The Plaintiff makes concurrent claims against the three Defendants in the sum of $136,240,000.  It is based on a sale and purchase agreement in writing dated 15 December 2003 under which the Plaintiff agreed to sell to the 3^rd Defendant all the share capital in a company called Uniplan Assets Limited (“Uniplan”) for $141,000,000.  The 1^st and 2^nd Defendants are guarantors for the 3^rd Defendant’s obligation to pay the Plaintiff the purchase price.

4.  Part of the terms of the agreement stipulated a completion date on 27 February 2004.  A sum of $10,000,000 was to be paid on the signing of the Agreement.  The balance of $131,000,000 was to be paid on the Payment Date being 24 months from the Completion Date.  Interest was to be payable by the 3^rd Defendant on the $131,000,000 from the Completion Date up to the date of payment at the annual rate of 4% and in the event of default of an interest payment, payable half yearly in arrears, the balance of $131,000,000 would become due and payable.

5.  The 1^st and 2^nd Defendants assumed joint and several liability as guarantors of the 3^rd Defendant, expressed to be in consideration of the Plaintiff entering into the sale and purchase agreement with the 3^rd Defendant.

6.  By a letter dated 19 February 2004, the Completion Date was extended to 27 months from the Completion Date with the interest chargeable for the extended three-month period increased from 4% to 5%.

7.  Purportedly pursuant to the said Agreement, the share capital of Uniplan was transferred by the Plaintiff to the 3^rd Defendant on 27 February 2004.

8.  Save for an interest payment of $26,200 to cover the period of the three-month extension on the original payment date, the 3^rd Defendant has failed to pay two six-month interest payments being the second, on 28 February 2005 and the third, on 27 August 2005 resulting in the balance of $131,000,000 being payable forthwith.  The claim of $136,240,000 is for the outstanding balance and the two outstanding interest payments, against the 3^rd Defendant as principal debtor, and the 1^st and 2^nd Defendants as guarantors.

9.  That rather simple exposition of the way that the debt is said to arise does no credit to the convoluted background as to how this has all come about.  I propose to set out this background, in as brief a way as possible, in order to provide an understanding as to how the issues are said to lie, which in turn inform the application for discovery, in a case where the Defendants have already made a substantial amount of discovery.

The Defences and Counterclaim

10.  Principally, the basis of the Defendants’ case is that the agreement under which the Defendants are sued is a sham and that it has never been the intention of the contracting parties that the Defendants, and for these purposes I am referring to the 1^st and 2^nd Defendants, should assume personal liability under it.  The Defendants’ case is that what this is all about is an attempt by Mr George Tan Soon Gin (he being the Malaysian businessman who had been convicted of massive fraud connected to the Carrian case in the then Supreme Court of Hong Kong in the early 1990s) and his family to have listed on the London Stock Exchange (“LSE”) a Mainland Chinese property holding company which they had bought into.  The suggestion is that because of Mr Tan’s antecedents any attempt at listing a company on the LSE in which he and his family were seen to be connected with was bound to fail.  This being the case, elaborate arrangements had to be devised for the Mainland company, Lanzhou International Trade and Building Company Limited (“Lanzhou”) to carry out a “reverse listing” by using a company which apparently had no Tan connection to achieve that result.

11.  For the purpose of this explanation, I will take the following summary from the skeleton of Mr K M Chong, who appears for the Defendants, which whilst strongly contested by the Plaintiff does, at least, have the merit of establishing the issues that will require resolution at the trial.

12.  Lanzhou’s shares were held as to 75% by Uniplan, Mr Tan’s daughters being its only shareholders and directors, they, according to the Defendants, there to do their father’s bidding.  The 2^nd Defendant held 24% of Lanzhou, with the remaining 1% held by a Chinese corporation.  Because Mr Tan refused to disclose that his daughters and himself had an interest in Lanzhou through Uniplan which would have been necessary under the LSE listing rules, a direct listing by Lanzhou could not be pursued.  Another scheme which was devised with the assistance of Mr Desmond Bloom, a London-based property developer, who in the past had been connected with Mr Tan through business, was for Mr Bloom to use a British company, Eurocity plc which was already listed on the LSE, to acquire Uniplan’s shares in Lanzhou and so achieve a “reverse-listing”.  That also could not proceed because of the disclosure rules which required the Tan family to reveal themselves as being beneficially interested in Uniplan.

13.  A revised scheme was attempted, again with Mr Bloom’s participation, by using another listed company called Hemisphere Properties plc (“Hemisphere”).  This involved the Plaintiff, a company which is a wholly-owned subsidiary of another company called Windway Enterprises Limited (“Windway”) which is controlled by Mr Tan’s three daughters who own 90% of Windway’s shares.  The mechanics of this scheme was that the Plaintiff, which in turn owned Uniplan’s shares, would sell its interest in Uniplan to a company controlled by the 1^st and 2^nd Defendants against the issue of “Consideration Shares in Hemisphere to the value of GBP10.666 million to the Plaintiff or its nominee.  This was to take place on 19 November 2002, being carried into effect by an agreement between the Plaintiff and a company called International Operations Limited (“IOL” and the “IOL Agreement”).  Suffice to say that this scheme as well could not proceed because the advisor to Hemisphere, who was to arrange the flotation on the LSE, refused to continue acting unless the ultimate beneficial interest of Mr Tan and his daughters in Hemisphere was disclosed, which they were unwilling to do.

14.  In view of this impasse, it became necessary to construct another arrangement which found its expression in the agreement which is the subject of the action.

15.  It was decided that to avoid having to disclose the Tan family’s involvement and ultimate control of Hemisphere, the Plaintiff would enter into the Agreement which it now sues on, to sell its share capital in Uniplan for GBP10.666 million without making any reference to the “Consideration Shares” these being 213,333,320 Hemisphere shares.  In order to achieve the “reverse listing” of Lanzhou it was necessary, according to the 1^st and 2^nd Defendants, to give the appearance that this was an arms length transaction.  This was done by making the 1^st and 2^nd Defendants guarantors of the 3^rd Defendant’s obligations under the Agreement, which conveniently can be referred to as the Ho King Agreement and is the subject matter of this action.

16.  I should briefly recount how the 1^st and 2^nd Defendants say that this was to be done.  Firstly, in order to provide the 3^rd Defendant with sufficient funds to pay the initial deposit of $10 million under the Ho King Agreement, Mr Tan and his daughters arranged for a Mr Ng Kin Wah (an associate of Mr Tan) to lend the deposit to the 3^rd Defendant for it to pay the Plaintiff.  Then, in order to protect the 1^st and 2^nd Defendants from incurring any risk of having to pay this amount themselves in the future, Mr Bloom entered into an indemnity to indemnify all three Defendants under the Ho King Agreement.  The effect of all of this, say the 1^st and 2^nd Defendants, was that the 3^rd Defendant company owned Lanzhou, and the other two Defendants, rather than the Tans, would appear to be ultimate beneficial owners of Lanzhou.  Hemisphere’s listing prospectus then showed that 90% of its shares were held by the 3^rd Defendant on trust for Mr Bloom and the remaining 10% by the 1^st Defendant also for Mr Bloom.  Finally, it showed Mr Bloom as owning 35,974,667 ordinary shares in Hemisphere, these being Uniplan’s shares in Lanzhou, in his own right.  And thus, by using nominees in this way, the Tan presence was erased from the corporate structures.

17.  By this means, the 1^st and 2^nd Defendants say that the Tan family, with the vital assistance of Mr Bloom, would have achieved its purpose to list Lanzhou by another corporate persona in London, whilst the 1^st and 2^nd Defendants would incur no personal liability under the Ho King Agreement.

18.  Unfortunately, after having achieved a listing, Hemisphere’s share price on the LSE fell below its initial listed price.  The investment by the Tans’, who had expected to make a substantial profit on a rising share price, failed and now, submits Mr Chong, Mr Tan and his daughters are using the sham Ho King Agreement, by falsely putting it forward at face value and as genuine to recover their failed investment from the 1^st and 2^nd Defendants.

The Central Issue

19.  From this summary, it will be seen that the real question at issue is whether things are as they appear to be on the face of the Ho King Agreement or whether this is a mere device in pursuit of a greater scheme to brush out the Tan family from the listing of Lanzhou.

20.  Stated in this way, the issue is both stark and straightforward.  Nevertheless, a matter of this sort involving the putting together of a listing on the LSE and its financing creates a very substantial paper trail.  The appeal has involved my considering six lever-arch files, most of it being the discovery to date, and hearing detailed argument over the course of two days. 

21.  I think that Mr Ronny Wong SC, who appears for the Plaintiff, has correctly analysed the matter by saying that in deciding whether the 1^st and 2^nd Defendants assumed personal liability under the Ho King Agreement and therefore, that it is not a sham, will principally fall to be decided in the light of their conduct consequent upon the making of that agreement, whilst not forgetting of course that the court will wish to consider all the relevant evidence in the case.

The Law on Discovery

22.  Usually on a hearing such as this a court would take the principles, so well known, as read.  On this occasion, Mr Chong has sought to go back to first principles and thereby demonstrate that no further discovery order is available to the Plaintiff having regard to the discovery already made but if it is, that the discretion should be exercised against further discovery.

23.  He has started by citing the three requirements to be satisfied under O.24 r.7 before discovery will be ordered.  Firstly, evidence of the existence of the document which has not been discovered secondly, its relevance to the issues and thirdly, that it is within the possession, custody or power of the opposing party.

24.  Where the discovery sought is for a class of documents, as in this case, the class he says must not be described so widely as to include documents which are not relevant to the issue.  For this he relies on Re the Estate of Ng Chan Wah [2003] HKEC 317.  In this regard, he submits that the summons offends this principle.

25.  Secondly, where the two Defendants have gone on affidavit to say that they do not have possession, custody or control of a particular document or class of document then the affidavit is to be taken as conclusive.  See for example the Peruvian Guano case itself [1882] 11 QBD 55AC and Cardinal Wu v Tsoi Kung & Ans [1992] 1 HKC 475.  Thirdly, he submits that in such circumstances a party is not entitled to adduce further evidence with a view to show that his opponent’s affidavit on the matter is insufficient or untrue.  And lastly, he makes the very general case that discovery must be limited to what is necessary for the fair disposal of the case [Hong Kong Civil Procedure, para. 24/7/1].

26.  Mr Wong, whilst accepting the general principles put forward by Mr Chong, has I think more correctly set out the position as to whether an opponent’s affidavit is to be treated as conclusive.  He has put forward two qualifications to this general rule.  Firstly, that a party is entitled to a further and better affidavit of documents if on the face of the original affidavit, or from admissions in other documents, the court has reasonable grounds to be certain that there are other relevant documents which ought to be disclosed.  And, in any event, the court retains to itself the general discretion under Order 24 [see 24/7/1].  That this is so was established as long ago as the case of British Association of Glass Bottle Manufacturers v Nettlefold [1912] 1 KB 369 in the Court of Appeal and upheld in the House of Lords at [1912] AC 709.  Mr Wong has cited extensively from the judgment in the Court of Appeal by Farwell LJ at pages 366-367 as approved in the House of Lords by the Lord Chancellor at 714 of the report.  I do not propose to repeat these citations again here — the principle being as I have stated it in the earlier part of this paragraph.

A Consideration of the Further Disclosure That is Asked for

27.  All of this needs to be approached with the issue in the trial in mind as I have already stated it to be.  In terms of the trial process, it seems to me that the judge will wish to examine with great care the antecedent discussions and documents that passed between the parties’ witnesses prior to the conclusion of the Agreement and thereafter, he will need to have regard to the behaviour of the parties.  This he will need to do by examining the documents that came into existence after the Agreement had been signed and what each witness says about any document that he or she can properly be said to be involved with.

28.  As appears in the Schedule to the summons, four classes of documents are asked for [see A/93].  As to classes 1 and 2 both of these are referable to the Defendants’ relationship with Mr Bloom and the litigation between them that followed the collapse of Hemisphere’s share price.  Class 3 relates to the dealings by the 1^st and 2^nd Defendants with Hemisphere.  This of course refers to correspondence passing between them upon the signing of their Agreement with the Plaintiff and following that.  This is further particularised to include the appointment of the 1^st and 2^nd Defendants as Chief Executive and Executive Director respectively of Hemisphere.  It is right to say that the Defendants have gone someway to providing relevant discovery under this class.

29.  Unsurprisingly, much documentation was generated in the course of that relationship.  It is notable that in objecting to further disclosure the Defendants do not take the stance that these documents fail to pass on the test of relevance.  That is a correct position to adopt because, in my judgment, there can be no question that all of this category of document will be relevant.  Whilst all of it may not necessarily be shown to the judge or relied on by either party at the trial, the fact remains that the Plaintiff is entitled to disclosure of all of this class.  Mr Wong in a comprehensive written argument has identified with great particularity the documents that are in existence, are relevant and should be produced.  I will come to the Defendants’ objections presently.

30.  Class 4 in the Schedule refers to the documents including, but not limited to, correspondence between the 1^st and/or 2^nd Defendants and Hemisphere in respect of share dealing in Hemisphere by the two Defendants and/or members of their family or others on their behalf.  In this regard too this goes to how the Defendants disposed themselves in relation to their apparent ownership of Hemisphere’s shares and clearly passes muster in terms of relevance.

31.  In respect of all of these classes, I am satisfied and, this is not seriously contested by Mr Chong, that the documentation sought is relevant.  As to the existence of the documents that are asked for this too is not contested by the Defendants certainly as to the first 3 classes.  As to class 4, Mr Wong has noted a certain ambivalence on the part of the Defendants about the existence of such documents.  Nevertheless, it strikes me that the defendants’ true position on this aspect is that they do exist which is to be derived from the Defendants’ letter of 25 May 2007 and paragraph 17 of the 1^st Defendant’s third affidavit.  The real objection to disclosure appears to be based on a lack of possession due to the documents being misplaced during the 1^st Defendant’s office move.

The Defendant’s Objections

32.  Their final overall position really appears in their affidavits of 12 September 2007 which was before the hearing of the summons before the Master.  What one gets from these affidavits is that over and above the disclosure that has already been made other relevant documents are in existence.  The real objections from the Defendants is that such outstanding documentation as there may be, is beyond their possession, power and control and for this reliance is placed by Mr Chong on Lonhro Ltd & Anr v Shell Petroleum (1980) 1 WLR 627.  The expression “power” refers to a presently enforceable legal right to obtain inspection of a document from whoever held it without the need to obtain the consent of anyone else.  This test is also reflected in Hong Kong Civil Procedure at 24/2/7.

33.  In regard to the missing documents, Mr Wong has helpfully prepared a list of them.  The helpfulness of this is that in two pages it has isolated under each class what documents are in existence, relevant and as yet not disclosed.  I gratefully reproduce this list here.

“	CLASSES I & II
	1.	There was no disclosure of all documents pertaining to the legal proceedings instituted by Desmond Bloom in the United Kingdom including in particular documents pertaining to the settlement of those proceedings.
	CLASS III
	2.	Final engrossed Share Sale Agreement dated 19th May, 2004;
	3.	Transaction Documents : These are defined in the 17th May, 2004 draft of the Share Sale Agreement to include the following :
		(a)	the Share Sale Agreement;
		(b)	the Disclosure Letter;
		(c)	the Service Agreements; and
		(d)	all the agreements entered into pursuant to the terms of the Share Sale Agreement or any such other agreement.
	4.	Lock-in Undertakings dated 19th May, 2004;
	5.	The completion documents referred to in Clause 8 of the Share Sale Agreement at C2/807 [items 3 – 5 are all documents referred to in Item 2].
	6.	Position of John Ho :
		(a)	Service Agreement dated 18th May, 2004.
		(b)	Service Agreement appointing him as chief Executive.
	7.	Position of Chan Yim Sang :
		(a)	Letter of appointment dated 18th May, 2004;
		(b)	Letter of appointment appointing him as Executive Director of Hemisphere.
	8.	Document in relation to the provision of interest free loan up to £500,000.
	CLASS IV
	9.	Documents evidencing acquisition and/or disposal of shares by John Ho/Chan Yim Sang and their family members and associates.
	10.	Documents evidencing the transfer of beneficial ownership of Ho King Assets Corp. from Desmond Bloom and Ng Kin Wah to John Ho/Chan Yim Sang.
	11.	Documents evidencing the disposal of shares held by Kenneth Chung in favour of employees of John Ho’s firm.
	12.	the waiver referred to at p. 13-14 of the Admission Document.”

34.  It seems to me that one only needs to read this list to realise the obvious relevance of all the documents asked for.

35.  In terms of “power” to call for these documents, I am satisfied that as to all of the Hemisphere documents, given their position as Chief Executive and Executive Director respectively it is fatuous of the Defendants to suggest that the Plaintiff’s solicitors should write to an address in the English Lake District, which is where Hemisphere’s registered offices are, to obtain the documentation that refers to this company.  I find as a fact that all the documentation relating to Hemisphere is in the Defendants’ possession, power and control.  The other point of objection under this head relates to the settlement of the litigation between the Defendants and Mr Bloom.  These two Defendants were parties to that litigation and its subsequent settlement and I have no doubt that they must be able to call for the production of all the papers relating to that litigation after which they must disclose it to the Plaintiff.

Conclusion

36.  I regret that in a case where the Defendants have already disclosed so much that they should now have taken such an obtuse stance on what are after all a fairly limited number of highly relevant documents.  I am satisfied that Mr Wong’s detailed submissions correctly represent the position.  In any event, although Mr Chong had rather presented a broad front of objections, closer analysis shows that the only real ground worth pausing over has been the issue of possession, power and control of the documents asked for and on a proper analysis of those documents and the defendants’ status in relation to them, there is no doubt that they are in a position to direct that these documents should be handed over to them.  Overwhelmingly, the Master was correct in his view of this summons with the result that his order must stand and the appeal will be dismissed with an order nisi that costs should be to the Plaintiff in any event with certificate for two counsel.  The material which required consideration was substantial and the outstanding discovery of sufficient importance to justify the instruction of a leader.

37.  As to the Plaintiff’s “unless” summons, if I can so describe it, I propose to adjourn that generally with liberty to restore, to await the Defendants’ affidavits and disclosure under the Master’s now upheld order.