XCHRX ROSSLYN SERVICES LTD. v. MILIBOW ASSETS LTD. AND OTHERS

HCA 3994/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 3994 OF 2000

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REASONS FOR JUDGMENT

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Introduction

1. This application grew out of the interlocutory injunction proceedings between the parties.

2. The plaintiff and the 1st defendant are the shareholders of the 2nd defendant formed pursuant to a joint venture agreement dated 31 May 1993 ("the Agreement"). The 3rd to 5th defendants are the 1st defendant's nominee directors of the 2nd defendant. On 17 April 2000, the plaintiff obtained an ex parte injunction prohibiting the 1st defendant's forcible acquisition of its shares in the 2nd defendant. On 28 April, Deputy Judge Wong ordered, inter alia, that the plaintiff do have access to all books and records relating to the 2nd defendant and that the plaintiff's evidence in reply to be filed within 28 days after the filing of the defendants'.

3. By a summons dated 19 June 2000, the plaintiff sought:

"(1) to extend the time to file the evidence in reply to 77 days ("the time application");

(2) to vary the order of 28 April so that the plaintiff would have access to the books and records of the 2nd defendant and two of its related companies up to 31 December 1999 ("the variation application"); and

(3) to examine the factory premises of one Donnguan Welko Shoes Factory and to obtain copies of certain documents relating thereto as more particularized in paragraph 3 of the summons ("the disclosure application")."

The Shoe Factory is the business interest under the Agreement. It is managed by the 2nd defendant.

On 9 November 2000, I dismissed the variation and disclosure applications and extended the time to file the reply evidence to 14 days from that date. I also ordered costs to the 1st and 2nd defendants with certificate for senior counsel. These are my reasons.

Variation application

4. Initially, the plaintiff sought to rely on Order 20 rule 11. However, Mr Carolan, counsel for the plaintiff, does not pursue it any further. Presumably, counsel recognizes that the plaintiff cannot possibly invoke the slip rule to vary the order. The variation application is therefore dismissed.

Disclosure application

5. The parties agree that the time application would be very much dependent on the determination of the disclosure application. I will therefore deal with the latter first.

6. At the heart of the parties' contentions for the substantive hearing on the injunction is a report prepared by Deloittes dated 24 March 2000 ("the Deloittes report"). It valued the shares of the plaintiff's shares in the 2nd defendant and was relied on by the 1st defendant in the forcible acquisition. The plaintiff disputes its validity, methodology and the value of the plaintiff's shares it arrived at. The plaintiff complains that despite the order of the Deputy Judge, it has been denied access to the relevant documents and its preparation for the injunction hearing was unduly inhibited. The disclosure application is therefore taken out so that the plaintiff can properly prepare for the injunction proceedings.

7. Mr Carolan submits that, in order to enable the plaintiff's experts to provide a meaningful commentary on the methodology of the Deloittes report and to express a view on its valuation, it is essential to allow them to have access to the documents sought, which are the same materials that Deloittes had considered when preparing its report. He stresses that the plaintiff does not seek the documents for the purpose of "re-auditing" the 2nd defendant. This is a material change in the plaintiff's case. The plaintiff initially wished to re-audit the 2nd defendant and the documents were necessary to enable its experts to complete the re-auditing: see paragraph 11 of the 2nd affidavit of Lee Hai Hung.

8. Mr Carolan further submits that the plaintiff has a contractual right to the documents under Clause 11 of the Agreement and that such a right is justified by section 67 of the BVI International Business Corporation Ordinance ("the BVI Ordinance"). The BVI Ordinance is applicable because the 2nd defendant was incorporated in BVI. Counsel, however, concedes that section 67 itself does not give the plaintiff the right asserted. Further, he relies on the general power of the court to order discovery under its inherent jurisdiction and Order 24. In brief, counsel submits that the court has the power to make the disclosure sought. He also relies on Order 29 rule 7(2).

9. In summary, Mr Bleach, QC, SC, counsel for the 1st and 2nd defendants, submits that:

(1) The BVI Ordinance does not confer the right to those documents and the plaintiff cannot rely on it indirectly.

(2) Clause 11 of the Agreement does not give the plaintiff right to those documents.

(3) The only rule that the plaintiff may be able to rely on is Order 24 is rule 7. But it has failed to comply with the requirements there.

(4) Order 29 rule 7 does not confer the jurisdiction on the court to make the order sought.

I will deal with these points in turn.

BVI Ordinance

10. Section 67(1) of the Ordinance provides that a member of the company incorporated thereunder may, in the furtherance of a purpose reasonably related to the member's interest as a member, request to inspect, inter alia, the books and records kept by the company.

11. There is simply no evidence before me that the documents sought are books and records kept by the 2nd defendant within the meaning of section 67(1). The plaintiff cannot invoke this section. Whether it justifies the plaintiff's contractual right is, in my view, immaterial. What matters is the relevant provisions in the Agreement, to which I now turn.

Contractual right

12. Clause 19(e)(ii) of the Agreement, in essence, provides that for the purpose of the forcible acquisition, the price of the plaintiff's shares, in the absence of agreement, is to be calculated by the 2nd defendant's Auditor, Deloittes.

13. Mr Bleach first submits that the plaintiff is bound by the Deloittes report, unless there is fraud or collusion on the part of Deloittes or it had departed from its instructions in a material respect, of which there is no evidence. In this connection, counsel relies on Jones v. Sherwood Computer Services Plc [1992] 1 WLR 277 and Nikko Hotels v. MEPC [1991] 1 EGLR 103. Since the plaintiff is bound the Deloittes report, it is not entitled to have the documents for the purpose of disputing its validity or re-auditing the 2nd defendant.

14. For the purpose of the present application, which is very limited, I would leave open this important question if the plaintiff is bound by the report. It will certainly emerge later in the course of these proceedings and should be resolved only after fuller debate and mature consideration. More importantly, I do not think I have to resolve it in order to come to a determination on the disclosure application. For even if I were to accept that the plaintiff is not bound, it does not necessarily follow that it is entitled to the documents.

15. The right of the plaintiff, as a member, to the documents of the 2nd defendant is found in clause 11(a)(i) of the Agreement, which provides:

"the Shareholders shall each be entitled to examine the books and accounts to be kept by the Company and to be supplied with all relevant information, including monthly management accounts and operating statistics and such other trading and financial information prepared by the Company in such form as each of the Shareholder may reasonably require to keep each of them properly informed about the Business and generally to protect their common interest."

16. Mr Bleach takes a number of points. First, there is no evidence to suggest that the documents sought are kept or prepared by the 2nd defendant. Secondly, the documents are not sought so as to keep the plaintiff properly informed of the 2nd defendant's business or to protect the common interest of the plaintiff and the 1st defendant in the 2nd defendant. I entirely agree. I therefore hold that clause 11(a)(i) is of no avail to the plaintiff.

17. A further point taken by Mr Carolan is this. Deloittes was not the Auditor within the meaning of the Agreement because the 2nd defendant did not call any annual general meeting in 1999 to make the necessary appointment. Thus the Deloittes report is invalid. This argument does not assist the plaintiff because it can be advanced without the documents.

Juridical basis of the application

18. Although Mr Carolan refers to Order 24, he fails to pinpoint any particular rule that lends support to this application. Mr Bleach submits that the only rule the plaintiff may be able to rely on is rule 7 but it has not complied with the requirements there. I accept this submission. Before the plaintiff can invoke the jurisdiction of the court under any particular rule for discovery, it must first comply with all the pre-requisites. In default, the court will not exercise its jurisdiction to order discovery.

19. I also accept Mr Bleach's submission that Order 29 rule 7 does not assist the plaintiff. The court is there empowered to give directions regarding the further proceedings in the cause where any application is made under the preceding rules. However, it does not give the court the jurisdiction to make the disclosure as sought.

20. For the above reasons, the disclosure application must fail.

Time application

21. Turing to the time application, the original time extension sought had already expired. Mr Carolan informs me that the plaintiff's experts have prepared a draft report. Now that they will not have access to the documents sought, they will finalize the draft soon. In the circumstances, 14 days should be sufficient for the plaintiff to file the evidence in reply.

Costs

22. Costs of the application should follow the events. The parties do not submit otherwise. I therefore order costs be to the 1st and 2nd defendants in any event. Mr Bleach asks for certificate for two counsel, which is opposed. Having taken into account all the circumstances, I will only allow a certificate for senior counsel.