PIONEER IRON AND STEEL GROUP CO LTD (in provisional liquidation) v. PIONEER METALS CO LTD AND OTHERS

HCMP 2643/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

MISCELLANEOUS PROCEEDINGS NO. 2643 OF 2013

(ON AN INTENDED APPEAL FROM HCMP NO. 1974 OF 2011)

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D E C I S I O N

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Hon Kwan JA (giving the decision of the Court):

1.  This is an application of the 1^st defendant for leave against an order made by Harris J in HCMP 1974/2011 on 15 July 2013. By his order, the judge gave leave to the plaintiff, acting by its provisional liquidators, to use, disclose and refer to the documents disclosed in discovery by the 1^st defendant in HCMP 1974/2011 as set out in the schedule thereto (“the Item 16 Documents”) in and for the purpose of HCCW 322/2010. Specifically, the purpose for which the provisional liquidators sought to be released from their implied undertaking in respect of the documents disclosed by the 1^st defendant in discovery is to use them in the resumed private examination of Ms Chen Ningning in the winding-up proceedings of the plaintiff.

2.  Ms Chen is the sole shareholder of the plaintiff, she had been its sole director for much of the material time, and she is the majority shareholder of the 1^st defendant.

3.  The judge refused leave to appeal to this court on 26 September 2013.  The 1^st defendant renewed its application to this court by a summons issued on 10 October 2013.  We note that the same draft grounds of appeal advanced before the judge are placed before us.

4.  The 1^st defendant’s solicitors wrote to the court on 10 October 2013 seeking an oral hearing of its summons to be listed before two justices of appeal, contending that the decision being the subject of the intended appeal has important ramifications on the further progress of HCMP 1974/2011.  We have considered the skeleton submissions lodged on both sides for this application, as well as the written submissions placed before the judge.  As the arguments on both sides have been set out comprehensively in all the written submissions lodged in court, we do not think any useful purpose would be served by holding an oral hearing.  We therefore exercise our power under Order 59 rule 2A(5) of the Rules of the High Court to determine this application without an oral hearing.

5.  The requirement for granting leave to appeal for an interlocutory appeal is laid down in section 14AA(4) of the High Court Ordinance, Cap 4.  Leave shall not be granted unless the court is satisfied that the appeal has a reasonable prospect of success or that there is some other reason in the interests of justice why the appeal should be heard.  Reasonable prospect of success involves the notion that the prospect of succeeding must be “reasonable” and therefore more than “fanciful”, without having to be “probable” (SMSE v KL [2009] 4 HKLRD 125 at §17).

6.  The decision under appeal involved an exercise of the discretion of the court to release a party from the implied undertaking not to use a document disclosed in discovery for a collateral or ulterior purpose.  It is well established that an appeal court will not interfere with a judge’s exercise of discretion unless the judge has misunderstood the law or the evidence or the exercise of his discretion was plainly wrong such that it was outside the generous ambit within which a reasonable disagreement is possible (Cheung Kam Wah v Cheung Hon Wah [2005] 1 HKC 136 at 142F to G, §17).

7.  The order for private examination against Ms Chen was made by the judge on 16 June 2011.  On 15 December 2011, the Court of Appeal (Fok JA and Sakhrani J; HCMP 1362/2011, Reasons for Judgment on 21 December 2011) dismissed her application for leave to appeal against this order.  The private examination of Ms Chen took place before Master Lai on 16 July 2012.  It was adjourned by the Master on the fifth day of the examination to the judge and is due to resume before the judge on a date to be fixed with three days reserved.  Pursuant to the directions given by the judge on 4 January 2012, the provisional liquidators have served a supplemental questionnaire on Ms Chen for the resumed examination hearing.

8.  There can be no appeal against the order for private examination.  Ms Rachel Lam for the plaintiff contended that the intended appeal of the 1^st defendant against the subsequent order of the judge releasing the plaintiff from its implied undertaking is an attempt to re-litigate the ambit of the order for private examination granted and upheld by the Court of Appeal.  This is something we bear in mind.

9.  HCMP 1974/2011 was brought by the plaintiff in October 2011, four months after the order for private examination was made.  The nature of the claim against the 1^st defendant in HCMP 1974/2011 and the 1^st defendant’s defence has been summarised in the decision of the judge on 15 July 2013 (“the Decision), §§4 and 5.  It is unnecessary to repeat this summary.  We have read the pleadings and the witness statements filed in the proceedings in the core bundle.

10.  Pleadings in the proceedings were closed in May 2012 and discovery took place in June 2012.  On 13 July 2012, the plaintiff issued the subject summons seeking leave to be released from its implied undertaking so that it would be at liberty to refer to the documents disclosed by the 1^st defendant in the private examination of Ms Chen.  This summons was adjourned by Master Lai to the judge on the fifth day of the examination.  A year later, the Decision was given by the judge with leave to the plaintiff.  This formed the subject of the 1^st defendant’s intended appeal.

11.  The transaction which is the subject matter of HCMP 1974/2011 is dealt with in the first section of the supplemental questionnaire for the resumed examination.  As noted by the judge, “the large majority of the questions are directed to the transaction with the 2^nd Defendant and involve asking questions of the sort that Ms Chen is likely to be asked in cross-examination at trial” (the Decision, §14).

12.  The judge reminded himself of the relevant principles on the exercise of discretion to release a party from the implied undertaking given on discovery, citing, among other cases, Crest Homes plc v Marks & Ors [1987] 1 AC 829 (the Decision, §9).  He referred to authorities which laid down the principle that a private examination is not intended to give the liquidator advantages over and above an ordinary litigant, and that the court should always take into account all the circumstances to see if a private examination would offend against fairness, noting in particular pertinent statements in Shierson v Rastogi [2003] 1 WLR 586 at §§46, 48, 50 and 62 (the Decision, §§11 and 12).

13.  The judge then proceeded to carry out the balancing exercise in §§13 to 19 of the Decision, balancing “the legitimate need of liquidators to understand the relevant part of a company’s affairs and the right of the examinee not to be subject to an examination, which will put him at a disadvantage that he would not normally be under in the course of litigation”.

14.  Ms Janet Ho for the 1^st defendant sought to argue that the judge was in error in the exercise of his discretion in the manner he carried out the balancing exercise.

15.  Firstly, it was submitted that although the judge was correct in his understanding of the applicable legal principles as set out in the Decision at §9, he failed to apply the principles to the facts of the case.  Specifically, counsel’s criticism was that the plaintiff failed to demonstrate there were special circumstances which justified the release from its implied undertaking.  It was contended that the resistance met by the provisional liquidators in their investigation of the plaintiff’s affairs and the concealment of documents (as the Item 16 Documents were not produced earlier but were disclosed only when discovery was given in HCMP 1974/2011) would not constitute special circumstances for this purpose, in that even if there was concealment and a civil contempt, that would not outweigh the importance of ensuring the continued observance of the implied undertaking.  In support of this contention, Ms Ho referred to the statements of Lord Oliver of Aylmerton in Crest Homes plc at 859H to 860A.

16.  We do not accept Ms Ho’s submission for the following reasons:

(1)     As rightly pointed out by Ms Lam, concealment of documents was but one of the factors the judge took into account in his balancing exercise. In the plaintiff’s written submission before the judge, it was clearly stated “whether or not there has been concealment by Ms Chen is not the primary issue.  The [provisional liquidators’] aim is to reconstitute the knowledge of [the plaintiff] and to gather in assets.  The [documents in question] are relevant and important for this purpose.”  This submission was accepted by the judge.

(2)     The judge had regard to the fact that the provisional liquidators are at a disadvantage in advancing claims on behalf of the plaintiff in that the company’s records were incomplete and unsatisfactory and Ms Chen has no genuine interest in assisting them (the Decision, §13).  He found there is reason for the provisional liquidators to want to understand more fully how the plaintiff apparently came to sign a contract with the 2^nd defendant and to advance a substantial sum to it, noting that Ms Chen has not provided a “comprehensive explanation for what, even on her own case, is a strange situation” (the Decision, §17).  These are clearly factors the judge is entitled to take into account in his balancing exercise.

(3)     Ms Ho’s reliance on the statements of Lord Oliver in Crest Homes plc is misconceived.  When Lord Oliver opined that “the continued observance of an undertaking given to the court by the party obtaining discovery” outweighed “the importance of ensuring obedience to the court’s orders”, he was referring to the situation of a civil contempt in “some wholly unrelated proceeding”.  In a subsequent passage at 860E to F, Lord Oliver rejected the submission that proceedings for contempt of court are to be regarded as “collateral” for the purpose of the implied undertaking on discovery, and emphasised that the “proper policing and enforcement or observance of orders made and undertakings given to the court in an action are … as much an integral part of the action as any other step taken by a plaintiff in the proper prosecution of his claim”.  It is also pertinent to note that on the facts in Crest Homes plc, the release of the plaintiffs from the implied undertaking was upheld on appeal as it was purely adventitious that there were two actions, brought about partly by the defendants’ failure to make full and frank disclosure under the order made in the first action.

(4)     As for the submission that serious prejudice would be occasioned to the 1^st defendant if the plaintiff were to be released from its implied undertaking, this submission was made before the judge (the Decision, §15) and he had clearly taken it into account when he balanced the 1^st defendant’s rights against the provisional liquidators’ needs.  Nor do we accept Ms Ho’s contention that there was absence of critical examination of the supplemental questionnaire and consideration of whether the proposed questions are legitimate.  It was accepted by the provisional liquidators that “there may be individual questions that are impermissible” and “if Ms Chen objects to any particular question and the use of any particular documents to support it the objection can be dealt with during her examination” (the Decision, §16).  The judge accepted “there may be questions that intrude too directly into the issues to be determined in the trial” of HCMP 1974/2011 and as the examination will be carried out before him, he took the view that “the risk of the examination becoming oppressive can be kept within acceptable parameters” (the Decision, §18).  We do not think his approach and the exercise of his discretion can be faulted.

17.  Secondly, Ms Ho submitted there was an error in law in that once it was accepted by the provisional liquidators that “part of the purpose of examining Ms Chen on matters concerning the transaction is to be better able to advance the [plaintiff’s] case” (the Decision, §16), it would be wrong to permit the examination as this is contrary to the principle that private examination may only be used for the purpose of enabling liquidators to fulfil their statutory duties, not for the purpose of improving their position as litigants in subsisting litigation against an examinee or a party of which the examinee is a representative or material witness.

18.  There is nothing of substance in this submission.  As stated by the judge at §12 of the Decision, the relevant passages in Shierson v Rastogi as mentioned earlier demonstrate that the fact that proceedings have been commenced which concern matters proposed to be the subject of examination is not necessarily a bar to the examination.  That there are factual differences between the present situation and Shierson v Rastogi is nothing to the point.  The judge was entitled to take the view that in the balancing exercise, notwithstanding part of the purpose of examining Ms Chen is to be “better able to advance the [plaintiff’s] case”, the provisional liquidators do have a genuine need to recreate the knowledge that the plaintiff should have.

19.  Lastly, it was submitted by Ms Ho that the judge failed to take into account or give sufficient weight to these relevant considerations: (1) the “rule of thumb” against permitting examination where litigation is proposed, or a fortiori, where litigation has already been commenced; (2) an oral examination is much more likely to be oppressive as compared to an application for production of documents; (3) HCMP 1974/2011 is well advanced, Ms Chen is the sole factual witness for the 1^st defendant, all the potential wrongdoers have been joined in the proceedings, and there is no prospect of the provisional liquidators recovering assets arising from the disputed transactions outside the scope of HCMP 1974/2011.  It was also submitted that the judge had given undue weight to the disadvantage of the provisional liquidators in their lack of prior knowledge of the plaintiff’s affairs as this is irrelevant.

20.  We do not think the judge had failed to take into account any of the matters as submitted by counsel.  He was clearly alive to those matters as they were the subject of the submissions made below.  What weight should be given to a particular factor in the balancing exercise is plainly a matter for the judge.  Unless he is plainly wrong in the weight he attached to a relevant factor such that it is outside the ambit of reasonable disagreement, there is no basis for this court to interfere.

21.  We do not agree with the submission that the lack of prior knowledge of the provisional liquidators of the plaintiff’s affairs is an irrelevant consideration.

22.  We are not persuaded that the judge had erred in any way in the exercise of his discretion.  As the judge had observed, “it may be that the documents which have been disclosed will have a limited role to play in the examination” and that is a “matter that can be best addressed during the examination” (the Decision, §19).  We see no ground to impugn his discretion in allowing the plaintiff to be released from its implied undertaking.  We have no reason to think that any potential oppression to Ms Chen cannot be properly circumscribed during the examination before the judge.

23.  We do not think any of the grounds of appeal advanced by the 1^st defendant are reasonably arguable.  Nor do we think there is any other reason in the interests of justice why the intended appeal should be heard.  We therefore dismiss the 1^st defendant’s application for leave to appeal.  As the application is wholly without merit, we make a further order pursuant to Order 59 rule 2A(8) that no party may under rule 2A(7) request the determination to be reconsidered at an oral hearing inter partes.

24.  We make an order nisi that the 1^st defendant is to pay the plaintiff’s costs of this application, which we assess summarily on a gross sum basis at $40,000.  Any party who seeks to vary the order nisi shall lodge a written submission within seven days hereof, failing which the order shall become absolute.  The other party may serve a response thereto within seven days thereafter.