SHANGHAI MERCHANTS HOLDINGS LTD (IN RECEIVERSHIP) AND ANOTHER v. GREAT CENTER LTD AND OTHERS

HCA2433/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2433 OF 2003

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DECISION

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Background

1.  The 1^st plaintiff (P1) is a listed company.  The 2^nd plaintiff (P2) is its wholly owned subsidiary.  Mr Chau Ching Ngai is the controlling shareholder of P1.  The 7^th defendant (D7) and the 8^th defendant (D8) are the directors of P1 and P2.  D7 is the wife of Chau and the chairman of the board of directors of P1.

2.  Shortly after the arrests of Chau in the Mainland and D8 in Hong Kong, Mr Alan Tang and Ms Alison Wong (“the Receivers”) were appointed as receivers to P1 on 17 June 2003.  The duties of the Receivers include, inter alia, to take possession of and protect the assets of P1 and its subsidiaries.  

3.  The enquiries and investigations of the Receivers reveal that various sums of money totalling approximately HK$ 70 million had gone missing from P1 and P2.  The Writ in these proceedings was issued on 2 July 2003.  Prior to that and on 30 June 2003, the Receivers obtained ex parte a Mareva injunction restraining the 1^st defendant from dealing with and disposing of certain assets in Hong Kong. 

4.  The plaintiffs’ claim against the 1^st and 2^nd defendants is in trust and conversion in relation to several sums of money deposited in accounts with the 3^rd defendant.  It would appear from the Amended Indorsement of Claim that the claim against all the other defendants is for a Norwich Pharmacal type of discovery in connection with the subject matter of the claim against the 1^st and 2^nd defendants.

5.  On 19 July 2003, P1 and P2 applied by summons against the 3^rd to 11^th defendants for discovery of the information and documents described in the schedules thereto.

The 18 July 2003 orders

6.  At the hearing before Sakhrani J on 18 July 2003, three orders were made.  The first is a consent order against the 3^rd defendant, the second is against the 1^st, 2^nd, 7^th, 10^th and 11^th defendants, and the third is also a consent order directing at the 4^th, 5^th, 8^th and 9^th defendants.  The 1^st, 2^nd, 7^th, 10^th and 11^th defendants were absent at the hearing.  The present applications are only concerned with the second and third orders (collectively “the Orders”). 

7.  The contents of the Orders are substantially similar, but with minor variations.  They both require the defendants affected by the orders to:

(1)    carry out a diligent search for the documents listed in Schedule 1 to the Orders;

(2)    forthwith inform the plaintiffs in writing whether they have at any time had in their possession, custody or power any of the documents specified in Schedule 1 to the Orders, and if the said documents or any of them have been but are not now in their possession, custody or power, when they parted with the documents and what has become of them;

(3)    provide in writing full details of the information set out in Schedule 2 to the Orders, which is within their knowledge; and

(4)    use their best endeavours to comply with the orders as quickly as possible, and in any event, in the case of D7, within 7 days and, in the case of D8, within 14 days.

8.  Paragraph 6 of each of the Orders provides that the plaintiffs shall reimburse the defendants their reasonable costs of complying with the Orders on a full indemnity basis.  In the case of  D8, the order further provides for the costs to be taxed, if not agreed, and to be paid forthwith.  Additionally, D8 was granted the costs of the application including the hearing before Sakhrani J and an earlier hearing on the summons on indemnity basis and to be paid forthwith (“the costs of the application’).

The present summonses

9.  Pursuant to the Orders, the Receivers had received information and documents from the defendants, including D7 and D8.  D7 had by her solicitors’ letter dated 15 September 2003 sought reimbursement of her costs in the sum of $44,000.  As for D8, she had also by her solicitors’ letter dated 30 October 2003 sent in a bill of costs seeking payment of $348,641.

10.  Upon a review of the information and documents provided by D7 and D8 and having regard to other information available to them, the Receivers have reservations whether D7 and D8 had satisfactorily complied with the Orders and whether they should pay out of the companies’ assets the costs claimed by D7 and D8.

11.  Consequently on 15 December 2003, the Receivers caused the plaintiffs to issue two summonses directed against D7 and D8 respectively.  In both summonses, the plaintiffs seek an order that unless and until D7 and D8 have complied with the relevant 18 July 2003 order, the plaintiffs are not obliged to reimburse them in respect of the costs of complying with the order.  Additionally, in the summons against D8, an order is sought relieving the plaintiffs from the obligation to pay D8 the costs of the application unless and until D8 had complied with the 18 July 2003 order.  

12.  At the hearing, Mr Colin clarified that despite the wordings of the summonses, the applications were not directed at an “unless order” or variations of the Orders, but were to seek directions of the court under Order 30 rule 8 of Rules of the High Court.  In due course, with no objections from D7 and D8, the summonses were amended to include an application under Order 30 rule 8 for a direction that the plaintiffs shall not pay the costs claimed by D7 and D8 in their respective solicitors’ letters dated 15 September and 30 October 2003. 

The application against D7

          (1)    The information and documents provided by D7

13.  By a letter dated 25 July 2003, D7 through her solicitors provided the following information:

(1)    She was only a nominee director and an authorized signatory of P1 and its subsidiaries and was not involved in the decision-making, administration or the daily operation of these companies.

(2)    The ICAC had on 1 June 2003 seized certain documents from her home, the office of P1 and a vehicle registration no. JF6186 (“the Vehicle”).

(3)    She was unable to ascertain the relevance of the documents seized from her home to the transactions, fund transfers, the individuals and companies referred to in the 18 July 2003 order.

(4)    She did not know the contents of the documents seized by the ICAC from the office of P1 and the Vehicle.

(5)    She had carried out a diligent search of her home for the documents stated in Schedule 1 of the 18 July 2003 order.  Other than documents obtained from the ICAC, she did not have in her possession custody or power any other documents specified in Schedule 1.

(6)    Other than the basic corporate information on P1 set out in the letter, she did not have any knowledge or information referred to in Schedule 2 of the 18 July 2003 order.

(7)    In relation to five documents obtained from company searches that the plaintiffs’ solicitors referred to in the letter of 21 July 2003, she acknowledged the signatures on them to be hers.  But she did not know the contents of these documents, which were prepared by the staff of the companies.

          (2)    The receivers’ reservations

14.  So far as D7 is concerned, the discovery made by other defendants suggests:

(1)    The 10^th defendant became a director and the sole shareholder of the 1^st defendant (“Great Center”) at D7’s request, a matter that D7 does not dispute in her affirmation.  D7 had also arranged for her to sign various documents for that purpose.   

(2)    Subsequently, the 10^th defendant had also signed other documents, including cheques, for Great Center that were produced to her by D7 personally or through Ms Anna Yu, the 6^th defendant.  If the 10^th defendant had signed any document for the transfer of the missing funds, she did so at the instructions given by D7 personally or through Ms Anna Yu.  

(3)    Sometime in 2001, D7 asked the 11^th defendant to sign certain documents at D7’s home, which D7 said were for forming a company.  D7 informed the 11^th defendant that she was borrowing his name and the 11^th defendant’s signatures were required as a matter of formality. 

(4)    On several occasions since 2002, the 11^th defendant had received through the mail letters sent to his residence addressed to the 2^nd defendant (“Modern Shine”).  In late 2002, D7’s secretary asked the 11^th defendant whether he had received any correspondence addressed to Modern Shine and requested him to pass them to D7’s office.

15.  Great Center and Modern Shine are among the companies included in Schedule 1 to the Orders.

16.  By a letter dated 13 August 2003, the plaintiffs’ solicitors drew to D7’s attention statements made by other defendants indicating that D7 was well aware of the affairs of Great Center and Modern Shine.  D7’s solicitors replied on 20 August 2003 denying that D7 had knowledge of the particulars of the shareholdings and directorship of these BVI companies, and of any transfers of the missing funds.  

17.  In her affirmation contesting the present application, D7 accepts that she had asked the 10^th defendant to be the shareholder and director of a BVI company, but it was at the request of D8.  As to the other matters in paragraph 14 above, D7 either denies them or attributes them to D8.

18.  Additionally, the information available to the Receivers reveal that:

(1)    Apart from being the executive director and the chairman of the board of directors, D7 is the sole signatory of P1 for bank transfers of amounts exceeding HK$100,000.

(2)    D7 is the executive director of P2 and is the sole signatory in respect of all its bank accounts.

(3)    D7 is also the executive director of Gold (Hong Kong) Limited, a company referred to in Schedule 1 of the Orders.

(4)    On 23 June 2003, D7 had met with the Receivers and the solicitor acting for the 10^th defendant and Great Center in relation to the return of US$4.5 million that P2 had paid to Great Center.  At the meeting, D7 confirmed that she had signed the remittance applications instructing P2 to transfer the funds.  Subsequent to the meeting, D7 provided to the Receivers a copy of a customer account balance dated 24 June 2003 in respect of Great Center’s account with the 3^rd defendant.                

19.   In her affirmation contesting the present application, D7 explained that she was merely assisting the Receivers to obtain the return of US$4.5 million and she did so at the Receivers’ request.  Although she had confirmed the signatures on some documents shown to her by the Receivers, she could not recall that they were remittance applications.  As to the customer account balance, she obtained it through her secretary and was for the purpose of co-operating with the Receivers.

The application against D8

          (1)    The information and documents provided by D8

20.  On 1 August 2003, D8 through her solicitors provided a reply said to be in compliance with the 18 July 2003 order.  In the reply, D8 indicated that:

(1)    She did not have in her possession custody or power any of the documents listed in Schedule 1 to the 18 July 2003 order.

(2)    She had conducted a diligent search by instructing her solicitors to send letters to various parties to seek the information required by the order.  Specifically, her solicitors had written 4 letters to the 3^rd defendant, 2 letters each to the individual defendants and the Receivers.  Letters were also sent to Mr Chau at his Hong Kong address and the two banks with which P2 has maintained accounts and also to the ICAC.

(3)    Other than P1 and P2, she had no knowledge of the companies referred to in the 18 July 2003 order.

(4)    She had no knowledge of any of the transfers of the missing funds.

21.  Other than the letters from the parties in reply to D8’s solicitors’ letters mentioned in paragraph 20(2) above, D8 had not provided any document listed under Schedule 1 to the 18 July 2003 order.  As for the information required under Schedule 2, D8 had provided some information about P1 and P2.

          (2)    The Receivers’ reservations

22.  In so far as D8 is concerned, the discovery by the other defendants show that:

(1)    D8 used to give instructions to the 4^th defendant in respect of the secretarial work for the BVI companies.

(2)    On 29 May 2003, D8 instructed the 4^th defendant, who was the company secretary of P1 at the material time, to take out all the documentation of the BVI companies in which D7 and/or Mr Chau are not the registered shareholders or directors.  Acting also on D8’s instruction, the 4^th defendant assisted by other staff removed the relevant files and statutory records of the BVI companies, including Great Center and Modern Shine, from the office of Shanghai Lands Holdings Limited to a van.  The 5^th defendant had also brought other documents to the van.  D8 left in the van.

(3)    D8 was given, on a monthly basis, the consolidated financial statements for the Shanghai group of companies, which includes P1, P2 and Gold (Hong Kong) Limited.

(4)    The 5^th defendant, who was the financial controller of P1 at the material time, would in the course of her day-to-day duties report to and seek instructions from D8.

(5)    The 9^th defendant, the general manager of P1, was assigned to work for P2 by D8.  In the course of his duties, the 9^th defendant had to submit for D8’s approval his claims for reimbursement of expenses.       

23.  The other information available to the Receivers also reveal that D8 was a signatory of P1 and the executive director responsible for the overall financial planning of the Shanghai group of companies.

24.  On 11 August 2003, the solicitors for the plaintiffs wrote to D8’s solicitors drawing attention to the matters set out in paragraphs 22 and 23 above and requested a proper compliance with the court order.

25.  On 13 August 2003, D8’s solicitors replied as follows:

(1)    The removal of the documents on 29 May 2003 was on D7’s instructions and not D8’s.  D8 has no personal knowledge of the whereabouts of the documents, but believes they were seized by ICAC.

(2)    D8 has no recollection of giving instructions on the company secretarial works for the BVI companies.

(3)    D8 had received monthly consolidated financial statements in her capacity as executive director of P1, but they were kept in the company.

(4)    D8 did not give instructions in respect of the business of P2.

(5)    D8 had approved some company expenses.

(6)    D8 had duly complied with the court order and her reply should not be described as incredible.  

D7’s entitlement to costs

26.  D7’s entitlement to be paid her costs stems from the 18 July 200 order, which provides that the plaintiffs are to pay her reasonable costs of complying with the order.  It must therefore be shown that the costs she now claims are incurred for the compliance of the order.  In this application, there is no issue between the plaintiffs and D7 on the reasonableness of the amount of the costs claimed.

27.  The parties are in agreement that in order to comply with an order for specific discovery, the discovery must be made in good faith and the documents or information provided must not be illusory: Reiss v. Woolf [1952] 2 QB 557 at 559-560; see also Lau Chi Wang v. Ip Fook Chuen [2003] 1HKLRD 485.

28.  In the case of D7, the reservations that the Receivers have over the discovery made by her is, in my view, understandable.  The discovery made by D7, when viewed against the other information available to the Receivers, is clearly limited and likely to be incomplete. To say the least, her assertions that she was a mere nominee and knew nothing about the operations and administrations of the companies named in the Schedules to the order does not sit well with the undisputed objective facts that she is the chairman of the board of P1, the director of P2 and Gold (Hong Kong) Limited and the sole authorised signatory for the accounts of P1 and P2.  After all, very substantial sums of funds had passed in and out of these bank accounts.

29.  Similarly, it is hard to accept that she knows nothing about the missing funds that had been transferred out of the accounts of the plaintiffs, given that she was the sole signatory for P1’s accounts for transactions over $100,000 and for P2’s accounts.  Although she said in her affirmation she could not recall she had confirmed the signatures on the remittance applications to be hers, she was not denying that she had signed the remittance applications. The explanations D7 gave in her affirmation about her involvement in the return of the US$ 4.5 million are also not convincing.

30.  D7 argues that it is inappropriate to compare her discovery with the discovery made by the other defendants and to conclude that she had not complied with the court order.  While accepting that the statements made by the other defendants were not made under oath, and noting the possibility that the other defendants may have their own interests to serve, the Receivers are entitled to have regard to the discovery made by the other defendants.   D7, for instance, accepts that she had asked the 10^th defendant to act as shareholder and director of a BVI company, though she said this was on D8’s instruction.   Again, this is at odds with her assertion that she had no actual involvement in the companies named in the Schedules to the Orders.  The Receivers’ doubts as to whether D7 had disclosed all the required information that is within her knowledge are not entirely without justifications.

31.  In my view, the information disclosed by D7 in purported compliance with the 18 July 2003 order is clearly illusory and falls short of complying with the order.  D7 has not brought herself within the costs entitlement under the 18 July 2003 order, and the Receivers should not pay out of the companies assets the costs claimed by D7.

D8’s entitlement to costs

32.  As in the case of D8, her entitlement to be reimbursed for her costs stems from the 18 July 2003 order.  In considering D8’s costs entitlement, a distinction has to be drawn between the costs of the application leading to the 18 July 2003 order, and the costs claimed to have been incurred for complying with the discovery obligations.  In respect of the costs of the application, it is not condition upon compliance with her discovery obligations under the 18 July 2003 order.  Short of a variation of the 18 July 2003 order, the Receivers are obliged to pay the costs of the application irrespective of whether D8 has complied with her discovery obligations.  I have reservations whether it is permissible to vary the order with regard to the costs of the application based purely on the subsequent conduct of D8 with regard to making discovery.

33.  In respect of the costs claimed to be incurred for complying with the discovery obligations, the position of D8 is the same as D7 in that it has to be shown that the discovery made are made in good faith and the documents and information disclosed are not illusory in order that it can be said that the costs are for complying with the order.

34.  In my view, the steps that D8 had carried out in purported compliance with the 18 July 2003 Order and the Reply she provided to the Receivers are plainly illusory and justifiably described as incredible.   As pointed out by the Receivers’ solicitors in their letter dated 24 July 2003, the purpose of the order is to obtain documents that the Receivers did not then have.  It is a waste of time and costs to write to the Receivers and the other defendants, reciting in full the terms of the order and asking whether they had any of the documents mentioned in the order.  Not only does this go to show the unreasonableness of the costs claimed, but it also demonstrates the disingenuous attitude of D8 towards compliance with the discovery obligation.  It also casts doubt on the good faith of D8.

35.  Secondly, while she claimed that it was at D7’s instructions that the documents were removed from the office to the van on 29 May 2003, D8 did not deny that she had travelled in the van with the documents.  Further, while she said she believed the documents to have been seized by ICAC, she had not disclosed what had happened to the documents in the period before the seizure by the ICAC, which only took place a few days later.  Prima facie, the documents were once in her possession custody or power.  It is therefore incumbent upon her to make disclosure of the incident on 29 May 2003 and the whereabouts of the documents until the seizure by the ICAC.  However, she made no mention at all in her Reply.  It was only upon specific enquiry by the Receivers that she gave the limited answer.  This is a clear instance of non-compliance with paragraph 2 of the 18 July 2003 order.  And short of a proper explanation, it amounts to a deliberate failure to comply with the order.

36.  Mr Lam argues that because D8 now faces a criminal charge in relation to the events on 29 May 2003, she has a right to remain silent.  Her non-disclosure of the events should not be construed as an act of non-compliance.  He draws assistance from Hong Kong Civil Procedure 2004 volume 1 para.24/5/33 which states that a party cannot be compelled to give discovery that tend to incriminate or expose himself to proceedings for a penalty. 

37.  Three things need to be said about this argument.  Firstly, there is nothing in the evidence before the court to suggest that this was the reason for D8’s failure to mention the events on 29 May 2003.  D had not said so in her affirmation filed in opposition to the present application. The claim of privilege against self-incrimination has to be made on oath and by the person seeking to rely on it.  A claim by the legal representative is not good enough: Hong Kong Civil Procedure 2004 volume 1 para.24/5/33.  Secondly, the privilege against self-incrimination is only relevant to production of documents: see Order 24 rule 5(2), and is not relevant to compliance with paragraph 2 of the 18 July 2003 order. Thirdly, this point has never been raised with the Receivers.  The concern about the potential criminal prosecution had not been raised when the 18 July 2003 order, including the costs order, was made by consent.  There must be grave doubts whether the Receivers would have agreed to bear D8’s costs had they been alerted to the possibility that they would not be getting proper or full discovery from D8.   

38.  Thirdly, the objective evidence of D8 being a director of P1 and P2, the signatory of P2’s account and had been described in the company documents to be responsible for the overall financial planning of the Shanghai group of companies also suggest that the discovery made by D8 in her Reply to be limited and unreliable.

39.  In short, D8 has clearly not complied with the discovery obligations under the 18 July 2003 order.  Additionally, it is to be noted that the amount of costs claimed in the bill of costs is unreasonably high.  The incurrence of 20 minutes by a senior fee earner charging $6000 per hour for each of the letters to the Receivers and other defendants for information and documents is one of the clear instances.  The Receivers ought not to pay out of the companies’ assets the costs claimed by D8 purportedly in compliance with her discovery obligations.

Conclusion

40.  For the reasons indicated above, I make an order in terms of paragraph 2 of the Amended summons against D7.  In the case of D8, the plaintiffs are directed not to pay the part of the costs claimed by D8 in her solicitors’ letter dated 30 October 2003 insofar as they relate to costs incurred in purported compliance with the 18 July 2003 order.  Costs should follow event.  I also make an order nisi that D7 and D8 pay the plaintiffs the costs of their respective summonses to be taxed if not agreed.