FBC CONSTRUCTION CO LTD v. BIG ISLAND CONSTRUCTION (HK) LTD

HCA1363/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1363 OF 2008

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D E C I S I O N

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Introduction

1.  By summons dated 27 May 2010, the defendant applied for specific discovery of all ledgers, books and accounts of the plaintiff and the supporting documents thereto during the period between 1 January 1996 and 31 December 2006.  The plaintiff opposed the application. 

2.  By an earlier summons dated 19 May 2010, the defendant applied to strike out paragraph 4 of the Statement of Claim (“SOC”).  The plaintiff had then amended paragraph 4, whereupon the defendant withdrew the summons.  What remains to be decided is the question of costs. 

Background circumstances

3.  In the Decision dated 28 December 2009, I summarised the background circumstances of the parties’ disputes thus :

“2. This is a derivative action brought by Wu Yi Construction Company Limited (“Wu Yi”) in the name of the plaintiff. Wu Yi owns 60% of the plaintiff’s shares. The remaining 40% is owned by Big Island Asia Limited, which is beneficially owned by Mr Ben Lee (“Mr Lee”). Mr Lee is also a director of the plaintiff.

3. The defendant is beneficially owned by Mr Lee as well.

4. The plaintiff’s claim is based on a loan agreement made between the parties in or about January 1996. Pursuant to the loan agreement, the plaintiff advanced loans to the defendant between January 1996 and July 2001. After certain credits being given to the defendant, the outstanding sum amounted to HK$2,698,102.17, which the defendant had failed to repay.

5. The defendant alleged that the Wu Yi Group and the Big Island Group had since 1991 used the plaintiff as a corporate vehicle for the purpose of conducting a joint venture business. It denied that it had entered into the alleged loan agreement. The joint venture parties were entitled to withdraw monies from the plaintiff from time to time. Those withdrawals were to be off set against the expenses incurred by the parties for the plaintiff. As the Wu Yi Group refused to provide funding to the plaintiff, the defendant had financed the operational expenses of the plaintiff and had issued debit notes to the plaintiff for reimbursement since September 2001. The plaintiff had failed to take into account and off set the expenses and management fees incurred by the defendant on its behalf since 2002, totalling some HK$2.9 million.

6. The defendant also relied on the limitation defence. The plaintiff purportedly advanced the loans to the defendant between 3 January 1996 and 17 January 2001. They all preceded the date of writ for more than six years and were all time-barred.

7. The defendant further counterclaimed against the plaintiff for the operational expenses and management fees of HK$2.9 million.

8.    In reply to the limitation defence, the plaintiff alleged that the loans were payable on demand.  And the plaintiff demanded repayment of the outstanding sum on 13 May 2008.  The cause of action therefore accrued on that date.  Alternatively, the plaintiff alleged that the defendant had repeatedly admitted and acknowledged the loans since 2003.”

Since that Decision, the pleadings had been amended.  To complete the narrative quoted above, the following additional points are noted. 

4.  Instead of a single loan agreement, the plaintiff is now suing on a series of loan agreements made between January 1996 and January 2001.  See paragraph 4 of the Amended Statement of Claim (“ASOC”). 

5.  In the Amended Defence and Counterclaim (“ADCC”), the defendant pleaded the following matters. 

6.  First, the joint venture parties were accustomed to withdrawing money from the plaintiff as dividend payments in advance prior to the declaration of the same at its financial year-end, which would be offset with any dividend payable and would not need to be repaid.  The monies withdrawn by the defendant from the plaintiff were thus not need to be repaid.  See paragraph 6(1) and (1A) of the ADCC. 

7.  Second, in order for the defendant to withdraw money from the plaintiff, the Wu Yi Group required the defendant to set out the request for withdrawal in writing and to regard the money withdrawn as “loan” for accounting purpose.  But the “loan” withdrawn would be offset with any dividend payable to the Big Island Group and would not need to be repaid.  See paragraph 6(1A) of the ADCC. 

8.  Third, the plaintiff had failed to account for the substantial profits made in a number of projects as particularized, including the Pingtan Project.  See paragraph 6(2) to (2F) of the ADCC.

9.  Fourth, since September 2002, the Wu Yi Group had only provided 3 sums totaling HK$500,000 to the plaintiff for its use.  See paragraph 6(4) of the ADCC. 

10.  Fifth, the total sum that the plaintiff had failed to provide to settle the operational expenses incurred by the defendant since September 2002 amounting to HK$4,503,845.51, which forms the subject matter of its counterclaim. 

11.  The plaintiff countered the defendant’s case in the Amended Reply and Defence to Counterclaim (“ARDCC”).  It first denied that the monies received by the defendant from the plaintiff were withdrawals of monies as dividend payments in advance prior to the declaration of the same at its financial year-end or that the same would be set off against dividend payable. The plaintiff further pleaded that the matters referred to in paragraph 6(2A) to (2F) of the ADCC are irrelevant.  As to the operational expenses allegedly incurred by the defendant on its behalf, the plaintiff pleaded that it had approved HK$567,359.50 as per its Transfer Voucher No. J03/12005 dated 31 December 2003 and HK$500,133.09 save and except 3 invoices as per its Transfer Voucher No. 04/034 dated 30 June 2004.  The 3 invoices were not approved because by then the plaintiff did not have any business activity.  The expenses approved were reimbursed by offsetting the debt owed by the defendant to the plaintiff.  As to the balance of the operational expenses, the plaintiff alleged that it had not received the debit notes and disputed their authenticity. 

12.  I now come to the discovery application. 

Discovery

13.  It is trite that specific discovery will only be ordered if :

(1)     The party against whom discovery is sought is in possession of the documents.

(2)     The documents are relevant.

See Order 24 rule 7 of the Rules of the High Court. 

14.  Further, the court will not order specific discovery if it is not necessary either for the disposing fairly of the cause or matter or for saving costs.  See Order 24, rule 8. 

15.  Here, it is not disputed that the plaintiff is in possession of the documents sought. 

16.  The parties hotly disputed if the documents sought are relevant. 

17.  As a preliminary point, Mr Fung, SC, for the defendant, argued that the plaintiff had initially consented to disclose the documents but later made an astonishing volte face when asked by the defendant if it would set out the documents in a supplemental list of documents and verify the same by affirmation.  However, it is clear from the plaintiff’s solicitors’ letters dated 22 April and 5 May 2010 that they considered the documents irrelevant but were willing to allow inspection to avoid any unnecessary disputes.  They had not conceded that the documents ought to be disclosed.  So I do not think the plaintiff had through its solicitors behaved in the manner as complained of by Mr Fung. 

18.  It is trite that relevance is to be determined by pleadings. I have already summarized the parties’ pleaded case above.  In my view, two main issues that are pertinent to the discovery application arose. 

19.  The first main issue is whether on the plaintiff’s claim, the purported loans to the defendant were withdrawals of monies as dividends payable in advance prior to the declaration of the same at its financial year-end such that they would be set off against dividends to be declared, thus rendering them not be repayable. 

20.  Mr Fung submitted that the documents sought were highly relevant as to showing whether the so-called practice alleged in paragraph 6(1) of the ADCC existed and if so, whether further set-offs should be credited in favour of the defendant throughout the relevant period. With respect, I disagree.  

21.  On the materials before me, the plaintiff had declared dividends once.  That took place on 31 August 1998.  The dividends had already been set off against the purported loans made to the defendant on the following day.  One single incident of declaration is of course not sufficient to support the alleged practice.  More importantly, the thrust of the defendant’s pleaded case, properly understood, is not dependent on the alleged practice at all.  What the defendant is alleging is simply this : the withdrawals were not repayable because they were in substance dividends in advance.  It is the true nature of the withdrawals, rather than the alleged practice, that matters.  But the defendant has failed to demonstrate how the documents sought will shed any light on the true nature of the withdrawals. 

22.  Mr Fung next submitted that Schedule 1 of the ASOC, being compiled from the plaintiff’s partially disclosed accounts, which contained glaring omissions including proceeds generated from the projects referred to in paragraph 6(2) to (2F) of the ADCC.  The documents sought will shed light on the accuracy of the plaintiff’s accounts and of Schedule 1, which the defendant disputed.

23.  Mr Fung’s submission is misconceived. For as rightly pointed out by Mr Ng, for the plaintiff, Schedule 1 was in fact compiled from various letters issued by the defendant requesting for loans and the corresponding cheques and records of payments.  Whether there is any inaccuracy in the plaintiff’s other accounting records is irrelevant to the accuracy of Schedule 1.

24.  Mr Fung finally submitted that the documents sought were precisely the due diligence that the defendant has been pressing for but has been unreasonably stonewalled.  It is not necessary for me to decide if the defendant is entitled to the due diligence.  But it is plainly not right to utilize the discovery application for such purpose. 

25.  The second main issue arising from the pleadings is that whether on the defendant’s counterclaim, the defendant had incurred the operational expenses for and on behalf of the plaintiff.  The defendant has already produced all necessary documents to support its counterclaim.  It is not its case that it needs the documents sought for the counterclaim. 

26.  For the above reasons, the discovery application must fail. I accordingly dismiss it and order the defendant to pay the plaintiff costs, to be taxed if not agreed. 

27.  I then turn to the costs of the defendant’s striking out summons. 

Costs of the defendant’s striking out summons

28.  When the defendant took out the summons, the plaintiff’s pleaded case in paragraph 4 of the SOC was that there was a single agreement for the loans.  However in the answers to further and better particulars, reference was made to a series of loan agreements.   Paragraph 4 was plainly embarrassing and liable to be struck out.  The defendant was wholly justified in taking out the summons.  When the defect was cured by subsequent amendment which rendered the summons academic, the defendant was right in withdrawing the summons.  Since the summons was occasioned by the plaintiff’s defective plea in the first place, it has to bear the costs. I therefore order the plaintiff to pay the costs of the defendant’s striking out summons, including all costs reserved, to be taxed if not agreed.

29.  To assist the taxing master, I will say this.  The argument on costs is simple and straightforward.  It is not necessary to instruct two counsel or senior counsel to argue the matter.  So although the defendant shall have the costs, it is only entitled to recover counsel fees on the basis that a reasonably competent junior counsel had been instructed notionally.