MEGA HONOUR HOLDINGS LTD v. 李森田AND OTHERS

HCA 1131/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 1131 OF 2015

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D E C I S I O N

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THE APPLICATION

1.  By Summons dated 6 June 2017, the Plaintiff (“P”) seeks specific discovery of 5 classes of documents against the Defendants (“Ds”).  The classes of documents sought are set out in the Summons.

2.  The application is contested and the parties are legally represented.[1]

THE FACTUAL BACKGROUND

3.  The facts of this matter are very much in dispute at trial by the parties.  However, it will be of assistance for this application to set out the salient facts as alleged by the parties.  I shall first set out the facts as submitted by counsel for P in his written submissions below.

P’s alleged facts

4.  P is a company wholly owned and controlled by Mr. Wang Yangke, who is a PRC national/citizen (“Wang”).

5.  Wang was interested in acquiring 20% shareholding in a Taiwanese company named “Armia EcoEnergy” that manufactured solar energies equipment.

6.  It is P’s case that D1, D2 and/or D3 had made representations to Wang that:

(a) D3 (which was a HK company) was holding the 20% shareholding in Arima EcoEnergy.

(b) Hence, P could indirectly hold the shares in Arima EcoEnergy by acquiring the shareholdings. Under this arrangement, the restrictions against PRC citizens/nationals under Taiwanese laws could be circumvented. 

7.  P and D2 entered into the agreement dated 11 November 2011 (the “Agreement”) for acquiring the 100% shareholding in D3 at the consideration of US$4,390,000.  The underlying purpose of the transaction was to enable P to acquire 20% shareholding in Armica EcoEnergy via D3.

8.  Pursuant to the Agreement, P had fully paid up the consideration in two tranches.  As per D2’s instructions, P did pay the sums of EUR2,600,000 and US$847,2000 (which were all together equivalent to US$4,390,000) to D3.

9.  However, wrongfully and in breach of the Agreement, D3 never transferred the shareholding in D3 to P.  Further, P never acquired any shareholding in Arima EcoEnergy at all.  P further pleaded that on 27 November 2014, P had accepted D2’s repudiatory breach of the Agreement and demanded restitution of the monies paid.  See §21 of the Amended Statement of Claim.

10.  P therefore claims against Ds for restitution of the money paid. However, because P has also pleaded misrepresentation by D1, D2 and D3 (it is not easy how D3 can have made misrepresentations by itself); fraud by D1, D2 and D3 as pleaded in §28 of the Amended Statement of Claim, P has now claimed against Ds as trustees of the money received under constructive trust and quistclose trust.  P has pleaded that there was evidence to show that money paid by P to D3 had been transferred to D4 and then by D4 to other companies within the Acrima Group, of which Arima EcoEnergy is a part.  See §31 of the Amended Statement of Claim.

11.  From P’s pleadings, what appears to be a simple monetary claim for money had and received by D3 for breach of the Agreement by D2 has turned into various claims for fraud, breach of constructive and breach of quistclose trust.  When P claims against D2 and D3 for constructive trust, it is a claim further to the contractual claim. See §29 of the Amended Statement of Claim. When it turns to claim for breach of quistclose trust, it is a claim further or alternative to the contractual claim.  See §34A.

Ds’ defences and counterclaim

12.  Briefly speaking, Ds deny having breached the Agreement.  They maintain throughout the pleadings that the Agreement remains valid.  The reason for it being unable to complete is that P had failed to cooperate with Ds in that it had failed to procure the notarized documents as required by the Taiwan authority for the transfer of the shares directly to P. Ds deny any misrepresentation or trust relationship with P.

13.  Ds Counterclaim against P for specific performance of the Agreement.  P contends that since specific performance is a discretionary equitable remedy, no specific performance should be ordered as the whole exercise proposed by P is just futile and meaningless, relying upon Goal Upward Investment Ltd v. Osmand Mohammed Arab & Anor [2016] 5 HKLRD 158, §37 (DHCJ Cooney SC).

THE RELEVANT LEGAL PRINICPLES

14.  The legal principles on the issues are trite.  The court should be expected to exercise its case management powers with a view to tailoring an appropriate discovery regime for the case at hand.  See Proposal 29 of the Final Report on CJR.  The burden is on P to establish that those documents are relevant to the pleaded issues in dispute, that Ds are in possession, custody or power of the documents and discovery is necessary either for disposing fairly of the cause or matter or for saving costs.  Full Range Electronics Co Ltd v General-Tech Industrial Ltd & Another [1997] 1 HKC at 544C-E. Relevance should be defined flexibly in accordance with the nature of the issues in dispute instead of the details pleaded. Billion Lead Investment Ltd v Union Joyce Ltd & others (unrep. HCMP 2145/2011, 14 December 2012 at §16.  “Fishing expeditions” arise where what is sought is not evidence but information which may lead to a line of inquiry which would disclose evidence.  It is the search for material in the hope of being able to raise allegations of fact, as opposed to the solicitation of evidence to support allegations of fact, which have been raised bona fide with adequate particularization: C v C (unreported, CACV 410/2005, 28 July 2006, §8). K & L Gates v Melco Crown Gaming (Macau) Ltd (unreported, HCA 349/2012, Au-Yeung J., 20 May 2016 at §64).

DISCUSSION

15.  It will be convenient to set out the general outlines of Ds’ grounds of objection to P’s application here.  Paragraph 13 of Ds’ written submissions says:

“For this application for specific discovery, the questions are: (i) whether the five categories of documents are relevant to the Plaintiff’s pleaded case, (ii) whether discovery is necessary; (iii) whether scope of the application is too wide both in terms of its definition as to categories and in terms of the number of years and (iv) whether discovery would save costs. It is the Defendant’s case is that all the necessary contemporaneous documents have been discovered.”

Class A: Audited accounts of D3 and Arima EcoEnergy for (i) periods from 2011 to 2013; and (ii) 2014 up to latest financial Year

16.  For this category, Ds say that the documents are not relevant to the issues in dispute.  The main issue is relevancy.

17.  I agree with P that Ds’ reason that P had not given further and better particulars is not good defence to P’s application.

18.  P’s reasons for the audited accounts between 2011 to 2013 are that they will show whether the representations (if made) were false in that D2 had never held any shares in Arima EcoEnergy.  This can be done by way of interrogatory.  It only requires a simply answer, saving costs and time, whereas by way of discovery, more time and costs will be unnecessarily incurred.

19.  P’s second reason is whether there was a breach of an implied term in the Agreement that D2 had warranted that D3 should ultimately own and control the shareholdings in Arima EcoEnergy.  Whether there was an implied term in the Agreement is subject to the finding by the trial court.  It is difficult to see how the documents requested will show the implied term.  The answer to the interrogatory on the fact whether D2 had shares in Arima EcoEnergy will be sufficient even if the implied term as alleged is found by the court.

20.  As regards the audited accounts between 2014 up to date, they are irrelevant because under the contractual claim, whether Arima EcoEnergy is an on-going concern is neither here nor there.  As to whether specific performance order should be made, it is clearly not relevant.  This case can easily be distinguished from Goal Upward Investment Ltd. The documents will not assist the court to determine whether an order for specific performance should be made.  From the Counterclaim, there is no pleading that Ds have suffered damage and that damages cannot compensate the loss by Ds.  If P succeeds in its claim against Ds, Ds’ claim for specific performance will not be considered.  If Ds succeed in their Counterclaim, that information or evidence as sought by P will be irrelevant as P will be compelled to complete irrespective of the ongoing of the business or otherwise.

21.  This category is rejected.

Class B: the documentations showing the shareholders/shareholdings of the named companies within the Arima Group (i.e. Arima EcoEnergy, D4, Arima P&Q, Acmesoft and Rioworks) for (i) the period from 2011 to 2012; and (ii) from 2013 up to today)

22.  Ds’ objections are that they are irrelevant, too vague or too wide and fishing exercises only.

23.  P has given three reasons in support of its application.  It is clear that what P is requesting Ds to disclose are not evidence, but rather information that will lead to allegation of facts against Ds.

24.  As P pleaded constructive trust and fraud relating to the other parties, it is for P to prove, by prima facie evidence, their relationships and the fact that the monies transferred by D3 to them were the monies belonging to P.  The requests simply demonstrate that P does not have the information in support of its case and is now seeking discovery of the information.  This is impermissible as held in K & L Gates, supra.

25.  As regards the documents from 2013 up to date under this category, for the same reasons I have given for category A documents, I reject P’s argument.

26.  I hold that the requests are fishing exercise.  They are not for a fair trial or saving costs.  This category is rejected.

Class C: all relevant documentations showing the directors of the named companies within the Arima Group (i.e. Arima EcoEnergy, the 4^th Defendant, Arima P&O, Acmesoft and Rioworks) for (i) the period from 2011 to 2012; and (ii) from 2013 up to today)

27.  They are the documents and information to show whether D1 and D2 were the directors of the above companies.  As submitted by P, the information is for the purpose “such that there would be evidence or an inference showing that D1 and D2 are liable as constructive trustees by having knowingly received the sums of EUR2,600,000 and US$847,2000 and/or dishonestly assisted in dissipation of the same.  They are also for the relief of constructive/Quistclose trust and tracing”.

28.  This is clearly a fishing exercise and should be rejected at once.

Class D: the documentations showing the whereabouts of the sums of EUR2,600,000 and US$847,2000 and their traceable proceeds)

29.  P supports its application by saying that the documents will show whether the monies were used by D bona fide or otherwise in order to support its claim for constructive trust and Quistclose trust and to trace the proceeds.[2]

30.  It is quite clear that the documents and information are not relevant to P’s contractual claim.  The property of the monies belongs to D2 and the way the monies were used has nothing to do with Ds.

31.  When P pleaded its case against Ds on fraud and breach of trusts, P should have prima facie evidence in support of its claims, in which case, P should not make the requests for the purposes above. Such exercise is clearly fishing.  As such, it is not permissible.

Class E: the relevant documentations showing the registered business of Arima EcoEnergy (a) 2011 to 2012; and (ii) from 2012 up to the date when the present summons was taken out)

32.  In support of P’s application, P submits that such documents will show

(a) whether the Representations were false in that P could not have acquired any shareholdings of Arima EcoEnergy whether directly or indirectly in any event due to the Taiwanese restrictions in or around 2011 to 2012;

(b) whether there were / are any registered business items in Arima EcoEnergy which would cause it to be barred from being invested in by PRC investors and hence rendering specific performance impossible. 

33.  Ds’ objections seem to be that the issue of whether P could acquire the business under the Taiwanese law has been dealt with by expert reports.  The requests are fishing.

34.  The purpose under 32.a is obviously fishing, the scope being too wide and P is attempting to collect information in order to substantiate its claim for misrepresentation and fraud.

35.  For the reasons given for category A, the reasons under 32.b is irrelevant as far as P’s case is concerned.

CONCLUSION

36.  P’s application is dismissed.

COSTS AND ORDER

37.  As to the costs of this application, including the costs reserved and for today’s hearing with a counsel certificate, the costs should follow the event.  The costs will be assessed under O.62, r.9A RHC to be $75,000 to be paid by P within 21 days from the date hereof.

38.  The Court shall now make an order in terms as follows:

(a) P’s application is dismissed;

(b) Costs be as per paragraph 37 above.