GARWIN ENTERPRISES LTD AND ANOTHER v. HO KAI CHEUNG AND ANOTHER

HCA2145/2006

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2145 OF 2006

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BETWEEN

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(Heard Together)

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R U L I N G

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1.  This is an application by Mr Ho Kai Cheung to exclude a witness statement by a Hong Kong accountant, Mr T C Ng, and a witness statement by a Mainland accountant, Mr M K Liu.

2.  The witness statements were filed by Garwin Enterprises Limited and Mr Koichiro Takahashi (“Garwin” and “Takahashi”).  Mr T.C. Ng’s statement was filed very recently on 23 February 2010. He seeks to produce three reports prepared by him and dated 20 November 2007(the “first report”), 6 February 2008 (the “second report”) and 18 February 2008 (the “third report”). Mr Liu’s statement was filed on 25 February 2010.  He seeks to produce a report prepared by him dated 9 August 2007 and numbered 11547. Garwin and Takahashi intend to rely on these reports at the trial of these two actions.

3.  The first action HCA2145/2006 is by Garwin and Takahashi against Ho Kai Cheung and Ng Mei Fa (“Ho” and “Ng”).  The second action HCA2418/2006 is by Hypermax Limited (“Hypermax”) against Garwin. Hypermax claims the repayment from Garwin of three loans totalling $10 million.  Garwin denies that it had borrowed any money from Hypermax.  It further claims that the loans were advanced by Hypermax to Ho or Ho and Ng. Garwin has also brought in Ho and Ng as third parties.

4.  Takahashi and Ho are the registered shareholders of Garwin with Takahashi holding 80% of the shares and Ho holding the remaining 20%.  The first claim in the first action is by Takahashi against Ho for capital contribution to Garwin.  Takahashi claims that he had through his company, Jolly Hope Limited (“Jolly Hope”), advanced capital on behalf of himself and Ho for the operation of Garwin which carried on a watchband manufacturing business.

5.  The total capital advanced to Garwin from 1994 to August 2006 was $90,045,085.81.  Of this sum, $1,750,000 was channelled to one, Apex (CJI) Limited (“Apex”), for use as its capital.  Of the balance, $17,659,071 was the 20% contribution from Ho to Garwin.  Takahashi said this sum was due from Ho to him as he had advanced it through Jolly Hope on Ho’s behalf.

6.  Garwin and Takahashi now seek to re-amend the figures by extending the end of the period from August 2006 to November 2006 and increasing the purported contribution of Ho’s 20% to $18,677,618.  He gave Ho credit for $10,200,000 and claims the balance of $8,477,618.  Of the credit of $10,200,000, the bulk of it at $10,000,000 is the subject matter of the second action.

7.  The second claim in the first action is by Takahashi against Ho for $192,500 as Ho’s capital contribution to Apex in respect of his 11% shareholding therein.  Takahashi said he had advanced this to Apex through Garwin also on Ho’s behalf.

8.  The third claim relates to alleged misappropriation of part of the funds injected into Garwin.  Garwin has a wholly-owned subsidiary in the Mainland which operates a factory in Panyu county, Guangdong Province to make watch bands.  It is the case of Garwin and Takahashi that the capital for running the factory came from Takahashi and Ho. That is the subject matter of the first claim above.

9.  Garwin and Takahashi further claimed that the capital contribution was paid every month by Takahashi drawing on the funds of Jolly Hope upon the production of a budget statement by Ng.  They further claimed that Ng had wrongly inflated the monthly budgets and obtained from Takahashi and paid into Garwin’s bank account more money than was required by the Panyu factory.  Ng then remitted part of the money to the factory by telegraphic transfer and part in the form of cash.

10.  Garwin and Takahashi claimed that for the period from 2003 to August 2006, there was a discrepancy of $18,318,929.30 between the cash cheques drawn on Garwin’s bank account and the cash received by the Panyu factory as recorded in the records of the factory.  They say that this discrepant sum had been misappropriated by Ho and Ng.

11.  For the years between 1995 and 2002, the records of cash received in the factory have gone missing.  Garwin and Takahashi found that there was a discrepancy between the total sum paid to the factory by telegraphic transfer plus the cash drawn from Garwin’s account and the expenses spent by the factory at $37,391,346.02.

12.  Garwin and Takahashi also allege that between 31 December 2000 to 31 August 2006, many cash cheques had been paid into the personal bank accounts of Ho, Ng and others.  The total sum paid into Ho’s account during this period was $27,553,929.30.  The total sum paid into Madam Ng’s account was $9,870,000.

13.  Garwin and Takahashi further traced into the immediate usage by Ho and Ng of the funds drawn from Garwin and paid into their bank accounts.  For the period from 2001 to August 2006, a total of $9,283,451.43 had been withdrawn as cash or transferred to other bank accounts by Ho.  Regarding Ng, the total sum for the same period was $18,621,108.23. Garwin and Takahashi want to rely on the three reports of T C Ng and the report of Liu Man Kin to prove the above figures.

14.  T. C. Ng said in his first report that he had examined the books and accounts of Jolly Hope and ascertained the total amount advanced to Garwin up to 31 August 2006 at $98,045,085.51 which included the $1,750,000 for Apex.  T. C. Ng also apportioned 20% of the net sum advanced to Garwin at $17,659,017 and 11% of the advance to Apex at $192,500 as the capital contributions due from Ho.

15.  T. C. Ng further examined the books and accounts of Garwin on the amounts of money paid to the factory by telegraphic transfer and in cash.  He also consulted the report by Liu numbered 11507 on the amounts of cash received and recorded in the factory’s records.  He found a discrepancy between the cash as drawn out from Garwin’s bank account and the cash as received by the factory between 2003 to 31 August 2006 at $18,318,929.30.

16.  For the years of 1995 to 2002, the factory’s cash received records were lost.  He then considered the discrepancy between the money drawn from Garwin for the factory and the expenses of the factory for this period and ascertained the same at $37,391,346.02.

17.  He also performed a tracing of the cash cheques drawn on Garwin’s account and found that a total of $27,553,929.30 had been deposited into Ho’s personal account and a total of $9,870,000 had been deposited into Ng’s account.  These figures in T. C. Ng’s first report have been pleaded by Garwin and Takahashi in the statement of claim of the first action which have been referred to above.

18.  T. C. Ng in his second report updated the capital contribution by including the further contributions from September 2006 class="heading">to November 2006.  The figures in this report are now pleaded in the latest draft Re‑amended Statement of Claim.

19.  T. C. Ng in his third report ascertained the cash withdrawals and transfers to other bank accounts by Ho and Ng of the monies withdrawn from Garwin and deposited into their personal accounts.  These sums are also pleaded in the latest draft Re-amended Statement of Claim.

20.  T. C. Ng’s first report which incorporated Liu’s report numbered 11507 was disclosed in a List of Document dated 9 August 2007. His second report was disclosed in a Further List of Document dated 6 February 2008.  The third report was disclosed in another List of Document dated 18 February 2008.  However, the witness statements by T.C. Ng and Liu to introduce them were only filed respectively on 23 and 25 February this year.

21.  Ho, on 2 March 2010, filed a summons seeking to exclude these two witness statements and the reports referred to therein.  They are the five reports abovementioned.  He also seeks an order that there be an appointment of a joint expert witness to prepare an updated accountant’s report on Garwin and the factory or, alternatively, leave be to him to appoint an expert witness to give evidence for him.  Hypermax and Madam Ng support this application.

22.  Mr Wong, leading counsel for Hypermax, made the first submissions and referred to the latest draft Amended Defence of Garwin in the second action.  The draft pleads for the first time in paragraph 7 that Hypermax knew that Ho was indebted to Takahashi for Ho’s share of capital contribution into Garwin.  It further pleads for the first time in paragraph 8(c) that the $10 million loan from Hypermax was advanced to Ho and Ho used the same to repay Takahashi as part of Ho’s capital contribution.

23.  Mr Wong further referred to the checklist filed by the parties which all say that no expert evidence would be required and Garwin did not indicate that it would be calling the accountants as witnesses.  If these reports are relevant, Mr Wong submitted that they should have been produced earlier, but they were only introduced by the witness statements of T.C. Ng and Liu one week before the trial.  He said the belated introduction of these reports is not something that Hypermax could encounter head on.

24.  The Jolly Hope accounting documents which T. C.Ng had studied and utilised in compiling his report had also not been disclosed by Garwin or Takahashi.  Takahashi’s allegation is that he and Ho had to contribute the required capital, overheads and operating expenses of Garwin. The accountants’ approach in selecting the sums paid by Jolly Hope as capital contribution would involve the accountants’ expertise, but T. C. Ng seemed to have treated all payments by Jolly Hope to Garwin as capital contributions.

25.  Hypermax wants to investigate this claim of Ho being indebted to Takahashi, which was brought in by the latest draft amendment.  If Takahashi cannot prove Ho’s indebtedness to him for the capital contribution, there would have been no basis for Ho to seek the loans from Hypermax to repay Takahashi.  In that event, the $10 million loans should have been advanced by Hypermax to Garwin.

26.  Mr Jenkyn-Jones, counsel for Ho, adopts Mr Wong’s submissions.  He further submitted that despite Ho was aware of the existence of these reports and some earlier versions of them, Garwin and Takahashi never said that they would rely on them.  Now that they are relying on them by the witness statements of T. C. Ng and Liu, Ho is therefore surprised.  Ho also wants to have discovery by Garwin and Takahashi of the books and accounts of Jolly Hope.

27.  Before dealing with the submissions in reply by Miss Wu, counsel for Garwin and Takahashi, I would first deal with the question of whether these reports of T. C. Ng and Liu constitute expert evidence.  For the reports by T. C. Ng, they contain the results of additions and subtractions of money due from Garwin to Jolly Hope and vice versa.  The results were obtained by the additions and subtractions of figures contained in bank statements, copy cheques, other banking documents and accounting documents.

28.  I am sure that a lot of care was required in the perusal of the documents and in ensuring the accuracy of the arithmetic. However, I have not been able to detect from the contents of the reports any employment of expertise that can be regarded as expert evidence.  The same applies to the report by Liu.  I do not think these reports constitute expert evidence.  I take this view despite a reference to the contrary by Mr Barlow, counsel for Garwin and Takahashi, at a hearing before Chu J for consolidation of the two actions on 18 December 2007.

29.  I now deal with the other issues.  The solicitors for Garwin and Takahashi have in November 2006 already indicated that they had engaged accountants in Hong Kong and the Mainland to go through the books of Garwin and the Panyu factory.  Mr Nie, the solicitor conducting the case for Garwin and Takahashi, also in affidavit filed on 14 December 2007 exhibited and relied on the first report of T. C. Ng, which incorporated the report of Liu for the purpose of opposing the application by Ho and Ng to vary a Mareva injunction.

30.  The second report was disclosed in a List of Document dated 19 February 2008.  This report merely updated the capital contributions to November 2006.  It is obviously to be read together with the first report.

31.  The third report on usage of funds by Ho and Ng was also disclosed on 5 June 2008.

32.  Takahashi also exhibited and relied on the first report of T. C. Ng and the report of Liu in Mareva injunction proceedings on 14 December 2007.  Furthermore, Takahashi in the second action also relied on an earlier version of T. C. Ng’s first report to oppose Hypermax’s application for summary judgment.

33.  In the application for consolidation, Mr Nie in his affirmation filed on 11 September 2007 also exhibited and relied on an earlier version of the first report of T. C. Ng.

34.  All these show that Garwin and Takahashi are going to rely on the three reports of T. C. Ng and the report of Liu for pursuing the claims in the first action and for opposing Hypermax’s claim in the second action.

35.  Mr Jenkyn-Jones said that he had every reason to expect that these reports would not be relied upon.  I take the contrary view. I think it is just an oversight that the witness statements from T. C. Ng and Liu were only prepared and filed very lately.  In fact, at a hearing before Chu J on 18 December 2007, counsel for Garwin and Takahashi and counsel for Ho and Ng both acknowledged the need for evidence by accountants on the books and records of Garwin and the Panyu factory and also the books of Jolly Hope though they mistakenly referred to the evidence as expert evidence.

36.  One of the grounds for consolidation as advanced by Garwin and Takahashi was that the $10 million purported loan from Hypermax to Garwin was in fact payment by Ho of his capital contribution.  This point was made abundantly clear on the affirmations filed on behalf of Garwin and Takahashi.  Hypermax took a full part in that application, and Mr Wong represented Hypermax at the hearing before Chu J.

37.  Regarding the checklists that were filed by the parties in the second action in July 2007, there was then not yet any application by Garwin and Takahashi for consolidation of the two actions.  It appeared that Garwin at that time indeed did not intend to call the accountants as witnesses.  The accountants’ reports had also not been prepared yet.

38.  However, after the trial of the two actions were ordered to be one after the other (now to take place together), it was abundantly clear that Garwin and Takahashi would rely on these reports.  It was indeed an oversight that the pleadings were not updated and clarified in time and the witness statements of the accountants filed promptly.  However, such oversight did not create any significant prejudice to Ho, Ng or Hypermax.

39.  Ho and Ng had through counsel said to Chu J on 18 December 2007 that they had to engage accountants.  They had not done so up till now.  I, therefore, do not see sufficient reason to accede to Ho’s summons.  I dismiss it.  However, I also appreciate the inadequacy of discovery of accounting documents.

40.  In order not to abort the trial but also to ensure as much discovery as reasonably practicable, I order that Garwin and Takahashi do make further discovery of some accounting documents.  They have to do so by 12 noon on Saturday, 13 March 2010, or to disclose and provide copies of as much as they shall have gathered by then and to complete the whole exercise and serve all copies of the documents by 9 am on Tuesday, 16 March 2010.

(Discussion re list of documents)

41.  Garwin and Takahashi are to embark on this exercise immediately but I do not want the personal involvement of Mr Takahashi.  These are just matters for opening the drawers and cupboards and to take out the relevant documents.  Mr Takahashi may not even be the best person to perform this exercise, and I do not want him to be involved.  I want it to be done by the staff of Garwin or his other employees.

42.  For whatever documents that they have gathered and made copies for the two legally represented parties by 12 noon, Saturday,they should be sent over by then.  If the exercise cannot be completed by then,the work should continue to completion by 9 am on Tuesday.

43.  I take this matter very seriously because I think we really need these documents so as to consider whether Ho was indeed indebted to Garwin for the capital contribution.  If there was no capital contribution due and owing from Ho, then there is no basis for the defence in the Hypermax action.

44.  I understand Miss Wu’s view, but I disagree with that.  The existence of indebtedness of capital contribution from Ho and the defence of Garwin to Hypermax’s claim are intertwined.  If Ho was not indebted, I think it necessarily follows that there was no reason for him to borrow the money from Hypermax to pay it to Garwin as alleged by Takahashi.  I think it is important to have these documents to understand whether Ho was and still is indebted. 

45.  It is not just documents relating to the capital contribution.  I also ask for documents relating to the payment of the loans into Garwin and the payments of interest. 

46.   I also want the audit reports of Jolly Hope and the amounts of payments received by Ho throughout the years to see whether he has been really working to produce some benefit to himself or, if Takahashi’s story is true, whether he has been really working to produce an indebtedness for himself.  It is Takahashi’s case that the capital contribution due from him is over $17 million throughout the years.  But it seems from the very brief references in the pleadings and the witness statements, he has not received that sum of money by way of salary or bonus throughout these 12 or 13 years.  I just want to understand how come that he would have spent all these good years of his life and moving his factory into the Mainland and working everyday just to produce nothing but an indebtedness for himself.  Now, this is a crucial issue that I have to consider.

47.  Now, I will rise and for parties to look at my list and to see whether any of the items are really useless and should be deleted and whether any other handy items should be included.  I stress that any item to be included should be handy.  I do not want the trial to be aborted.  It has already taken too many twists and turns.

(Discussion re additional documents)

48.  Let me continue with my decision, that is, on the list of documents to be disclosed, and I am happy to record that it is a list agreed to by all parties save Madam Ng who is not here today.  The documents are:

(1)    the vouchers of Garwin recording the receipts of all purported payments by Ho Kai Cheung of capital contribution from November 2005 to April 2006;

(2)    the vouchers of Garwin recording the payments of interest to Hypermax from January 2006 to October 2006;

(3)    Garwin’s general ledger from November 2005 to November 2006;

(4)    Garwin’s current account with Takahashi from 1994 to November 2006;

(5)    Garwin’s current accounts with Jolly Hope and Jolly Hope Enterprises from 1994 to November 2006;

(6)    Garwin’s current account with Ho Kai Cheung from 1994 to November 2006;

(7)    the audited reports of Garwin from 1994 to 31 March 2007;

(8)    Jolly Hope’s and Jolly Hope Enterprises’ current accounts with Takahashi from 1994 to November 2006;

(9)    Jolly Hope’s current account with Garwin from 1994 to November 2006;

(10)  Jolly Hope’s current account with Ho Kai Cheung from 1994 to November 2006;

(11)  the audited reports of Jolly Hope from 1994 to 31 March 2007;

(12)  the employer’s returns filed by Garwin for Ho Kai Cheung and Ng Mei Fa from 1994 to 31 March 2007;

(13)  a table showing the salary and bonus given to Ho Kai Cheung and Ng Mei Fa by Garwin for the years of 1994 to September 2006;

(14)  the audited reports of Jolly Hope Enterprises from 1994 to 31 March 2007;

(15)  the working papers of T C Ng & Co. since it was appointed as the auditors of Garwin;

(16)  a list of, together with the copies of, all orders placed by Jolly Hope and Jolly  Hope Enterprises with Garwin from October 2005 to November 2006;

(17)  a list of, together with the copies of, the contracts made by Jolly Hope and Jolly Hope Enterprises with their customers for resale of the orders referred to in item (16) above;

(18)  minutes of board meetings and resolutions of Jolly Hope and Jolly Hope Enterprises in connection with capital contributions for Garwin;

(19)  All vouchers and invoices regarding purchase of machines by Jolly Hope for Garwin’s PRC subsidiary, the factory in Panyu, in 2000 after removal to the larger factory.

(Discussion re costs)

49.  The application by Ho is not totally without any ground.  The failure of Garwin and Takahashi to put in the witness statements of T. C. Ng and Liu Man Kin and to make the amendments to the pleadings in time gave Ho the opportunity to bring out the inadequacy of discovery of accounting documents.  The application, though failed, allowed discovery of more accounting documents by Garwin and Takahashi, which are necessary and can benefit all parties at the trial.  So I make no order as to costs on this application by Ho as supported by Ng and Hypermax.

(Discussion re costs for summons for stay.)

50.  Ho has to pay the costs of the summons to stay the proceedings under section 181 of the Companies Ordinance, Cap. 32 to Garwin, Takahashi and Hypermax.

(Application for costs by counsel for the plaintiff in HCA2418/2006)

51.  Garwin has to pay the costs to Hypermax for Hypermax’s preparation of its defence and evidence to oppose the now abandoned claim of Garwin that Hypermax was a vehicle of Ho and Ng and Ho and Ng were behind Hypermax.  There will be gross assessment of these costs.