PATRIARCH PARTNERS MEDIA HOLDINGS LLC v. WONG SIU WA, SAMMY AND ANOTHER

HCA 865/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 865 OF 2013

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D E C I S I O N

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Introduction

1. This is the plaintiff’s appeal against Master Chow’s order made on 19 August 2014 in relation to the plaintiff’s application for specific discovery. The appeal is by rehearing of the plaintiff’s application for a further and better list of documents to be filed by the 1^st defendant (“Wong”), and for specific discovery of 5 categories of documents identified in its summons of 8 May 2014 (“Summons”).

2. The principles for discovery are settled and I will not waste time to deal with these in detail.  Nor will I rehearse the arguments made by counsel.  In summary, the principles which I bear in mind are as follows. 

3. A party seeking an order for specific discovery must make out a prima facie case that a specified a document or class of documents exists; that the party against whom the discovery is sought has or had the documents in his possession, custody or control; that the documents sought relate to any matter in question in the action; and that discovery is necessary either for disposing fairly of the cause or matter or for saving costs.  It is for the party resisting the order for discovery to show that discovery is not necessary.

4. Post CJR, the court should give effect to the underlying objectives of the rules and procedures when it exercises its powers under Order 24 and when it interprets the provisions of Order 24.  Accordingly, in deciding whether any document relates to a matter in question in the action, whether any document is or has been in the possession, custody or power of a party, and whether discovery of a document sought is necessary, the court should bear in mind the underlying objectives of cost-effectiveness, expeditious disposal of cases, proportionality, procedural economy and ensurance of fairness between the parties.  The court must take a proportionate approach, balancing the interests of the fair disposal of the cause or matter in accordance with the parties’ substantive rights against these objectives. 

5. Questions of relevance, necessity and proportionality should always be considered by reference to the issues for determination at trial.

6. Under Order 24, discovery is to be made by each party of documents “which are or have been in his possession, custody or power”, relating to “any matter in question” between the parties in the action.

7. Relevance is to be determined by reference to the pleadings (Re Estate of Ng Chan Wah [2003] HKEC 317).  On the other hand, the fact that an issue is raised in the pleadings is not determinative as to whether it relates to a matter in question.  Discovery is not required of documents which relate to irrelevant allegations in pleadings which, even if substantiated, could not affect the result of the action (Paul’s Model Art GMBH & Co v UT Limited CACV 139/2005, Allington Investments Corp & Others v First Pacific Bancshares Holdings Ltd [1995] 2 HKC 139). 

8. It is trite, that a party is not released from its duty to make discovery of a document simply because the party seeking discovery is already in possession of a copy of the document in question, or that it is aware of the existence and contents of the document.  Each party has the separate obligation to make discovery of all documents in its possession, custody or control which relate to any matter in question in the action.

The issues for determination at trial

9. The plaintiff instituted these proceedings as assignee of XSEL, a company in liquidation by order of the court of the Cayman Islands on 8 July 2011.  Under the terms of an agreement defined in the pleadings as the June 2007 Agreement, XSEL agreed to purchase from the 2^nd defendant (“Company”) 100% of the shares of XFML, which in turn owned 3 advertising companies in Hong Kong (“Convey Companies”).  Wong is a party to the June 2007 Agreement, as he owned and controlled the Company at the material time, and he agreed to be bound by the covenants and warranties given to XSEL and contained in the June 2007 Agreement.

10. Under the terms of a December 2008 Agreement, XSEL agreed to transfer 85% of the issued share capital of XFML back to the Company for the sum of US$85 million.  By 2010, as a result of the transactions and obligations under the June 2007 Agreement and the December 2008 Agreement, a net debt in excess of US$50 million was claimed to be due from the defendants to XSEL (“Net Receivable”). 

11. Following a series of negotiations, the August 2010 Deed was executed between the parties, whereby XSEL agreed to release the defendants from the Net Receivable due and payable under the June 2007 Agreement and the December 2008 Agreement, in consideration of the Company transferring 34.5% of the issued share capital of XFML to XSEL, and XSEL agreeing to issue US$5 million worth of XSEL shares to the Company.

12. The claims made by the plaintiff in these proceedings are that the August 2010 Deed was induced by misrepresentations made fraudulently or recklessly by the defendants to XSEL, that the shares in XFML “were of the same value and conveyed the same ownership of the Convey Companies as they had in the earlier agreements” (“Representations”).  The plaintiff claims that these Representations were in fact false, in that Wong and the Company had already procured or caused XFML in early 2010 to transfer XFML’s only assets, namely the Convey Companies and the advertising business, to China Media Enterprises Limited (“China Media”).  The shares of XFML to be transferred under the August 2010 Deed by way of settlement of the Net Receivable were claimed to be worthless, by virtue of the disposal of XFML’s only assets.

13. In his Defence, Wong denies (inter alia) that the Net Receivable was US$50 million, claiming that it was US$30 million.  He claims that at the same time as the execution of the August 2010 Deed, XSEL had entered into an agreement with the Company, whereby it was to maintain its shareholding in XFML at the minimum level of 19.9% (“Anti-Dilution Agreement”). In particular, Wong claims that he was not aware of the details of the “restructuring” regarding the Convey Companies which XFML had entered into in 2010.

14. On the face of the pleadings as they currently stand, the issues for determination at the trial of these proceedings are: the meaning and effect of the August 2010 Deed; whether Wong and the Company had made representations to XSEL as to the value of the XFML shares to be transferred under the August 2010 Deed, or as to XFML’s ownership of the Convey Companies; whether Wong and the Company had knowledge of the transfer of the advertising business of the Convey Companies to China Media in January and February 2010 (“China Media Transfer”); and whether Wong’s interests or involvement in Sharp Gain Holdings Limited (“Sharp Gain”), which was the corporate director of XFML and the Convey Companies at the time of the China Media Transfer, demonstrates the defendants’ knowledge of the China Media Transfer.

The discovery sought

15. In relation to the 5 categories of documents sought to be disclosed (set out in the schedule attached hereto), I am satisfied that the plaintiff has established a prima facie case of the existence of these documents, which are or were in the possession, custody or control of Wong. 

16. At the material time of the transactions which are the subject of these proceedings, Wong was the sole director of the Company, which is the party to the agreements referred to and defined in the pleadings, namely, the June 2007 Agreement, the December 2008 Agreement and the August 2010 Deed.  Wong himself does not dispute that he had a stakeholding interest in the Company between January 2007 to April 2010, that he was the Company’s business consultant and its sole director between January 2007 and April 2009, and that he had access to all the Company’s business documents at the time.  Nor does Wong dispute that he had conducted the negotiations between the Company, himself and XSEL relating to the June 2007 Agreement, the December 2008 Agreement and the August 2010 Deed.

17. As the sole director and person representing the Company at the material time, as well as being a party to the relevant agreements, it is more than highly likely that Wong would at the material time have been in possession of documents relating to the subject transactions, any correspondence at the material time of the negotiations, and the corporate documents including notes and minutes of board and shareholders meetings of the Company and of Sharp Gain - the latter being at the material time the corporate director of XFML which transferred the Convey Companies to China Media.  It is also claimed by the plaintiff that Wong was at all material times the principal and secretary of Sharp Gain.  Wong does not dispute that he was director of Sharp Gain until December 2009 and shareholder of Sharp Gain until April 2010.

18. Wong claims that he is not in possession of the documents sought to be disclosed.  From his Affirmation filed in opposition to the Summons, only the following facts could be ascertained in the context of his dealings with the documents:

(1) Upon the conclusion of the August 2010 Deed, Wong ceased to be the Company’s business consultant;

(2) By August 2010, he had handed over all corporate documents and all the Company’s papers in his possession to the Company, since which he ceased to have access to the Company’s documents;

(3) In line with his routine practice, he cleared his backlog of emails every now and then and had no “soft records” of them;

(4) Since his cessation as the Company’s consultant in August 2010, he ceased to have access to any of “the transfer documents of the Convey Companies” and had not kept any records;

(5) In December 2009 he resigned as director of Sharp Gain and in April 2010, he ceased to be a shareholder of Sharp Gain and turned over or otherwise disposed of all its records.

19. It was argued on Wong’s behalf that in his Affirmation, he had already deposed to his not being in possession of the documents, and that no further order should be made against him. 

20. The order which the court may make under Order 24 rule 7(1) is for a party to make an affidavit stating whether any document specified is, or has at any time been, in his possession, custody or power, “and if not then in his possession, custody or power when he parted with it and what has become of it”.

21. The standard form of affidavit to which Wong’s counsel referred, in support of his argument that adequate disclosure has been made, is a form of affidavit used to verify a party’s list of documents, when the court orders a verified list under Order 24 rule 3 (2).  The deponent accordingly simply confirms that the statements made in paragraphs 1 and 3 of the list of documents are true.  Paragraph 3 of a list of documents states that the party “has had, but has not now, in his possession, custody or power the documents relating to the matters in question” in the action as enumerated in schedule 2 of the list.  That standard form does not deal with an order for discovery made under Order 24 rule7 (1), whereby a party may be ordered to state by affidavit: “when he parted with” the document; and “what has become” of the document.

22. In this case, where I am satisfied of the existence of the relevant documents and that at the material time, the relevant documents had been in Wong’s possession, custody or power, Wong may be ordered to depose to facts which adequately and clearly explain when he had parted with the specified documents which had been in his possession, and what has become of such documents.  On the facts of this case, it is inadequate in my view for Wong simply to state that he had returned the documents “to the Company”.  He was the sole director of the Company at the time of his possession of the documents.  Without stating to whom of the Company he had “turned over” the documents, or how he had returned the documents, Wong has not in my view adequately explained “what has become” of the documents in question.

23. Mr Chan on behalf of Wong submitted that the court should imply from what Wong had stated in the Affirmation, that he had returned all the relevant documents to the office of the Company, wherever such office may be.  I fail to see how that can be implied from the facts deposed to by Wong in the Affirmation.  The history of Wong’s  negotiations, the nature of his involvement in the transactions, his capacity as shareholder, sole director and business consultant over the period of time from January 2007 to August 2010, all have to be borne in mind.  Without having stated to whom of the Company (be it a new director appointed of the Company, a corporate secretary or other individual who took over the control and running of the Company from Wong) he had handed over the relevant documents, Wong has not explained on affidavit what has become of the documents.  I do not agree with Mr Chan that it is harsh to require a party to depose to such matters.  The requirements of Order 24 r 7 are few, and simple to comply with.  A party should state facts as to what has become of the specified documents, not facts or circumstances from which it can be implied, or inferred by the party’s opponent and the court, what has become of the documents.

24. As to the question of relevance, I will deal with the 5 categories of documents sought, in turn. In this context, I bear in mind that the description of the documents to be disclosed must be certain and clear in ambit, and that all the documents in the class must be relevant.

25. For category 1, I am satisfied that the correspondence, emails and attachments exchanged among the parties in connection with the August 2010 Deed are relevant to the matters in question as to whether the Representations were made in the course of the negotiations.  Bearing in mind proportionality and that even if relevant, the documents sought should be necessary, I will not at this stage make any order for specific discovery of the correspondence relating to the June 2007 Agreement, or the December 2008 Agreement.  As for the Anti-Dilution Agreement, although it has been raised in the Defence, Wong has not pleaded any fact or matter relating to the Anti-Dilution Agreement which he alleges makes the plaintiff’s claim not maintainable.  I fail to see its relevance at this stage and as the pleadings now stand, and will not order discovery of the correspondence relating to the Anti-Dilution Agreement.

26. The plaintiff has agreed to delete “and/or any of the individuals employed by or acting on behalf of XSEL” and the words following “16 August 2010” in the category 1 description of documents.

27. For category 2, I am satisfied that “documents relating to the transactions between XFML and China Media referred to in paragraph 29 of the Statement of Claim” are relevant to the questions of whether the Representations were false and fraudulent or reckless, as claimed by the plaintiff.

28. For category 3, the corporate documents for the Company are relevant to the issue of whether Wong was the directing mind and controller of the Company, whether Wong was the principal of the Company in entering into the relevant agreements, or was simply a party to the agreement to procure the Company’s performance as he claims.  In relation to the minutes of meetings and resolutions of the shareholders and directors of the Company, I will only order the discovery to extend to those relating to the January 2007 Agreement, the December 2008 Agreement and the August 2010 Deed. 

29. For category 4, the corporate documents for Sharp Gain are relevant to the question of Wong’s knowledge of the China Media Transfer, and whether the Representations were false and fraudulent or reckless. In relation to the minutes and resolutions, I will confine discovery to those relating to the August 2010 Deed, as Mr Lane for the plaintiff accepts.

30. For category 5, documents relating to the sale of the Convey Companies particularized in paragraph 29 of the Statement of Claim are relevant to the question of Wong’s knowledge of the China Media Transfer, and whether the Representations were false and fraudulent or reckless.

31. Bearing in mind the time span covered, and the claims made in the proceedings, I am satisfied that the relevant documents sought are necessary for disposing fairly of the cause or matter or for saving costs.

Orders made

32. I will grant the order in terms of paragraph 3 of the Summons, for Wong to make an affidavit within 14 days, stating whether any documents or class of documents specified or described in the schedule attached is or has at any time been in his possession, custody or power, stating when he parted with the specified documents in question, and what has become of them, as outlined in paragraph 23 above.  The description of the categories of documents is amended as set out in paragraphs 25 to 30 above.  For avoidance of doubt, the amendments are indicated in the schedule.

33. A further and better list of documents, as sought in paragraph 4 of the Summons, will not be necessary if Wong makes the affidavit ordered above.

34. I will make an order nisi that the costs of the appeal and the hearing below are to be paid by Wong to the plaintiff.

Schedule