JOSE MIRANDA DA COSTA JUNIOR AND ANOTHER v. LORENZO YIH AND OTHERS

HCA 156/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 156 OF 2010

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J U D G M E N T

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Introduction

1. This was the plaintiff’s application for judgment.  It was premised on the breach of an unless order of Master Au Yeung dated 22 May 2013.  At the conclusion of the hearing judgment was reserved which I now give.

2. The unless order in question arose in this way: on 26 March 2013, on an appeal from an order of Master Lai, this court ordered that the 1^st defendant (“Lorenzo”) provide a further and better list of documents verified by affidavit and give specific discovery of three classes of documents, referred to as “Item B e-mails”, “Item C minutes” and “Item H registers” (“the discovery order”).  The deadline under the discovery order was 9 April 2013.

3. Lorenzo did not comply with the discovery order. Instead, inter alia, he took out a summons for an extension of time on the date of the deadline itself (9 April 2013) which came before Master H Au Yeung on 19 April 2013.  That was adjourned part heard to 22 April 2013 when the master made an unless order extending time for compliance to 4 pm on 20 May 2013, failing which the defence would be struck out and the first plaintiff (“Miranda”) would be at liberty to enter judgment against Lorenzo.

4. Pursuant to Master Lai’s order, on 16 May 2013, Lorenzo filed his third affidavit (“Lorenzo 3”).  By filing Lorenzo 3, Lorenzo appeared to have complied with the unless order.

5. It is common ground that as a matter of legal principle, the general rule as to the conclusiveness of an affidavit given by a party under an order for discovery is not applicable where that the affidavit can be shown to be a lie or is illusory or wilfully defective, displaying no evidence of a conscientious effort to meet the party’s discovery obligations: see Ka Wah Bank Ltd v Low Chung-song [1989] 1 HKLR 451.

6. Accordingly, the burden is on Miranda to show that Lorenzo 3 is false and/or illusory and/or wilfully defective.

Factual background

7. The factual background is set out in §§2 to 10 of my Decision dated 26 March 2013 (“the March Decision”) when I made the discovery order.  For convenience, that part of the March Decision is replicated below:

“2. The 1^st plaintiff is a Brazilian merchant engaged in the business of supplying high end gemstones and is the founder and owner of the 2^nd plaintiff, a Brazilian company. This action arises from the 1^st plaintiff’s claim that in or around September 2003 he and the 1^st defendant orally agreed to jointly set up and operate in partnership a wholesale business of gemstones in Hong Kong through a Hong Kong company to be formed. The 1^st plaintiff would manage and develop the business and its goodwill by making use of his expertise and experience and the 1^st defendant would provide financial and local support in Hong Kong including office premises and staff.

3. The 1^st defendant is the major beneficial owner, the Chairman and CEO of LJ International Inc (‘LJI’), a NASDAQ listed company engaged in the manufacture and marketing of jewellery.

4. Pursuant to the agreement, the 3^rd defendant was incorporated in Hong Kong on 7 January 2004. Two shares were issued: one was issued to Li Fung Ying, Cam and the other to Wan Po Ming, Flora. They were employees of LJI and held the same on trust for the 1^st plaintiff and the 1^st defendant.

5. On 31 December 2006, the two issued shares in the 3^rd defendant were transferred to a BVI company beneficially owned by the 1^st defendant called Oceandrift Group Ltd (‘Oceandrift’) and on 6 November 2008, Oceandrift transferred those shares to the 2^nd defendant. The 1^st plaintiff’s case is that those shares continued to be held on trust for the 1^st plaintiff and the 1^st defendant.

6. The 1^st plaintiff actively participated in the business of the 3^rd defendant from 2004 onwards until his exclusion from the 3^rd defendant’s office on 5 November 2009. The 1^st plaintiff gave instructions to staff who took orders from him and was treated as one of two bosses. He was also a director from August 2007 until 10 November 2009. He and the 1^st defendant were each paid a monthly shareholder’s bonus of $120,000 until December 2008 when the 3^rd defendant’s cash flow situation no longer permitted that.

7. At all material times the 1^st defendant controlled a company called Goldleaves Trading Ltd (‘Goldleaves’) which had an office at Unit C, LG/F, Phase 3, Kaiser Estate, 18 Man Lok Street, Hunghom (‘the premises’). The 3^rd defendant operated from the premises and staff of Goldleaves was seconded to and placed under the payroll of the 3^rd defendant. Rental for the use of the premises, office furniture and supplies were paid to a subsidiary of LJI at the request of the 1^st defendant.

8. It is the 1^st plaintiff’s case that on 5 November 2009, the 1^st defendant repudiated the agreement. When the 1^st plaintiff returned from Shenzhen that day he found out that Mr Osorio Mendes Quintino Neto who had worked with the 1^st defendant for many years caused the 3^rd defendant’s office to close and compelled all staff to leave. The 1^st plaintiff was thus excluded from the 3^rd defendant’s office. He was also denied access to the 3^rd defendant’s computer system and was no longer able to access his e-mail accounts or the 3^rd defendant’s server.

9. The relief the 1^st plaintiff seeks includes:

(1) declarations that the 1^st defendant had repudiated the agreement, that the 1^st plaintiff and the 1^st defendant were at all material times the beneficial owners of the 3^rd defendant, that the 2^nd defendant holds one of the two shares in the 3^rd defendant on trust for the 1^st plaintiff;

(2) an account; and

(3) payment of the fair value of a 50% interest in 3^rd defendant and consequential relief.

10. The 1^st defendant denies the agreement or any business partnership between himself and the 1^st plaintiff but advances no positive case as to the beneficial ownership of the 3^rd defendant. Mr Manzoni SC (counsel for the 1^st defendant) characterized the 1^st plaintiff’s claim as a claim by a disgruntled exemployee.  The 2^nd defendant who was the sole registered shareholder of the 3^rd defendant has not appeared in these proceedings.”

The 3^rd defendant and the 2^nd defendant are hereafter respectively referred to as “MGHK” and “Paraiba”.   Reference should be made to the March Decision as a whole by way of background.

8. Notwithstanding a number of hearings since the March Decision, including a hearing before G Lam J on 7 May 2013 (whose Decision rendered on 13 May 2013 (“the May Decision”) adopted §§2 to 8 of the March Decision as a summary of the background to Miranda’s claim), no issue was taken as to the factual background set out above until Lorenzo’s 4^th affidavit dated 19 November 2013 (“Lorenzo 4”).  Specifically, Lorenzo now asserts that he never was the major beneficial owner or controller of LJI, the NASDAQ listed company. 

9. He relies on two documents to show that during the period 2006 to 2012, he owned no more than 12% of the issued share capital of LJI and that prior to privatisation, there was always a majority of independent non-executive directors on LJI’s board.  The provenance of those documents and the basis for them are not known.  In this regard, Mr Manzoni SC who appeared for Lorenzo could not assist.

10. The first document is a compilation showing for each year from 2005 to 2012 the common stock issued and outstanding, the number of shares published on the Form 20F (presumably as being owned by Lorenzo) and the percentage of such shares in relation to the issued stock.  Against that, 14 months earlier, Miranda had exhibited to his 4^th affidavit dated 6 September 2012 (“Miranda 4”) extracts from the Annual Reports published by LJI for the years ended 2004 to 2011 which categorically state that Lorenzo is a “director and major beneficial shareholder” of LJI.  Lorenzo, who after all was chairman of the listed company, has not explained why that statement in the Annual Reports is wrong.

11. Lorenzo also takes issue with the court’s description of the monthly payment of $120,000 made to each of Lorenzo and Miranda by MGHK as “monthly shareholder’s bonus”.  The fact of payment is not in issue but the reason for payment is.

12. Lorenzo’s case is far from clear.  In September 2010, according to his answers to Miranda’s request for further and better particulars, he maintained that the payments to the plaintiff were “in the nature of directors fees, the quantum of which (i.e.  HK$120,000/month) was a notional advance on 50% of the anticipated unretained profits”. 

13. However, the Directors’ Report and Financial Statements for the year ended 31 December 2008 of MGHK exhibited to Lorenzo 4 (made available in November 2013) directly contradicts Lorenzo’s case in that no directors’ remuneration was paid in 2008.  In any event, Miranda did not became a director until 21 August 2007 but he had been receiving the payments since mid-2004.

14. That aside, there are other contradictions and inconsistencies that emerge from his pleaded case and evidence filed relating to Miranda’s entitlement to a 50% share of the profits of MGHK.  In his answers to the request for further and better particulars, Lorenzo hinted at Miranda’s entitlement to anticipated profits.  Two years later, Lorenzo categorically denied that Miranda was so entitled: see §7 of his 1^st affidavit dated 22 August 2012 (“Lorenzo 1”).  That remained his position until November 2013 when, in Lorenzo 4, Lorenzo changed his stance yet again: he variously accepted that Miranda was “entitled to retain a profit share” if MGHK was profitable; that Miranda was “simply entitled to a share of profits (as indeed he was)”; that when MGHK was set up he (Lorenzo) had told Cam Li that “Miranda would only be a profit sharer”; that Miranda was a director of MGHK who provided day-to-day management assistance in that capacity, “for which he was paid an advance on anticipated profits”, such advance being recorded in the balance sheet as “Due from a director”; and that in return for the day to day operational input, and sourcing of gems, Miranda drew a payment of $120,000 a month, “being an advance on the anticipated profits” of MGHK: Lorenzo 4, §§17(d), 21, 23 and 29(h) and (l).

15. Suffice it to say that quite what Miranda was entitled to was left vague and nebulous.  In those circumstances, I stand by the factual background stated in the March Decision.  Nothing in Lorenzo 4 warrants any revision to what has been stated as “Background facts” in the March Decision.

Procedural history

16. The procedural history is relevant and needs to be set out below in some detail.

(a)  The action commenced in July 2010.  Pleadings closed in August 2010.

(b)  When lists of documents were eventually exchanged in May 2012, Lorenzo’s list disclosed four items of which only one was relevant to these proceedings.

(c)  Miranda applied for a further and better list and sought specific discovery of nine classes of documents (itemised under items A to I).

(d)  A call-overhearing took place in July 2012 in relation to the discovery application as well as a case management conference at which, upon Lorenzo’s submission that should specific discovery be ordered of item B, it would take many weeks to go through the e-mail exchanges, the master deferred the exchange of witness statements until five months after the CMC.

(e)  On 13 August 2012, Lorenzo sent LJI a non-binding proposal letter to privatise LJI.

(f)  In applying for security for costs against Miranda in August 2012, Lorenzo put forward a schedule of costs that included the cost of 125 hours in total to be spent by his solicitors after the determination of the discovery application on discovery of documents if so ordered by the court.

(g)  Lorenzo 1 opposing the discovery application was filed in August 2012.

(h)  In October 2012 Master Lai ordered specific discovery of four classes of documents (items A, E, F and G) which include declarations of trust signed by Cam and Flora in 2004 in respect of their shares in MGHK and bought and sold notes in respect of subsequent transfers of such shares by them to Oceandrift and by Oceandrift to Paraiba.

(i)  Lorenzo filed his 2^nd affidavit on 14 November 2012 (“Lorenzo 2”) following Master Lai’s order stating that the four classes of documents ordered to be discovered “are not and have never been in my possession, custody or power”.

(j)  Skeleton arguments for Lorenzo opposing the discovery appeal were lodged on 14 March 2013.

(k)  Miranda’s appeal from Master Lai was heard on 18 March 2013 and the discovery order made on 26 March 2013 in respect of three additional items (items B, C and H):

“Item B

E-mails sent to and from [Lorenzo], [Lorenzo’s] subordinates (namely, Alfonsa Au, King Leung, Cam Li, Ringo Ng, Vincent Tang, Iris Tsang and Elsa Yue (‘the subordinates’)) and [Miranda] between 7 January 2004 and 5 November 2009 (the ‘relevant period’) and the attachments thereto insofar as they relate to the shareholding of [MGHK], the beneficial ownership of the shares in [MGHK], the control of [MGHK], the distribution of profits of [MGHK] and the partnership between [Miranda] and [Lorenzo] during the relevant period.

Item C

Board minutes evidencing the authorised signatories of [MGHK’s] bank accounts.

Item H

Register of shareholders and register of directors of [Paraiba] and the declaration of trust in respect thereof.”

(l)  Lorenzo did not comply with the discovery order by the date of the deadline which was 9 April 2013.  Instead, on that same day, he took out a summons for an extension of time for compliance and a summons for leave to appeal the discovery order.

(m)  On 15 April 2013, Lorenzo’s solicitors (“Laracy”) wrote to:

   i.  LJI’s board asking for item B e-mails;

  ii.  Kennedys, the solicitors for MGHK asking for item C minutes; and

  iii.  Paraiba asking for item H registers.

(n)  Kennedys replied the following day (16 April 2013) stating that Lorenzo had no standing within MGHK’s corporate structure and refused to provide the information sought.

(o)  An affirmation in support of the extension of time application was filed on 18 April 2013 exhibiting Kennedys’ letter as confirmation of instructions received from Lorenzo that the three classes documents were not in his possession and seeking further time to enable Lorenzo to complete his enquiries.

(p)  On the same day, Andrew Bernstein, LJI’s non‑executive director and General Counsel replied by e-mail to the effect that there was a need to research and review the laws of the Hong Kong, BVI and the US and for a special meeting of the independent members of the board to evaluate LJI’s obligations and liabilities and determine LJI’s future actions.

(q)  The time summons was heard on 19 April 2013 with Master Au Yeung expressing the view that it was ‘artificial’ for Lorenzo’s solicitors to write to Lorenzo’s companies to ask for the documents.  The application was adjourned to 22 April to work out the precise terms of the order the master was minded to make and culminated in the unless order in question.

(r)  The unless order made on 22 April 2013 reads:

“1. Unless [Lorenzo] do comply with Deputy High Court Judge Le Pichon’s Order made on 26 March 2013 by 4 pm on 21 2013, Lorenzo’s defence be struck out and [Miranda] be at liberty to enter judgment against [Lorenzo].”

(s)  In response to a chaser from Laracy to LJI’s board, Bernstein replied by e-mail on 24 April 2013 to the effect that he could not confirm any timetable for the decision of the independent directors regarding the request for item B e-mails.

(t)  Lawyers for Paraiba replied to Laracy on 14 May 2013 stating that Lorenzo was not entitled to the information sought under Anguillan law.

(u)  Lorenzo filed a 3^rd affidavit (“Lorenzo 3”) on 16 May 2013, several days before the deadline under the unless order, to the effect that he had requested LJI, MGHK and Paraíba for copies of the documents but that his requests had not been acceded to.

(v)  Completion of the privatisation of LJI occurred on 30 July 2013.  On the same date, LJI requested that trading of its ordinary shares on NASDAQ be suspended, that NASDAQ file a Form 25 to deregister LJI’s registered securities.  (White deregistration would become effective 90 days after the filing of Form 25 or such shorter period as might be determined by the SEC, there was no evidence as to when deregistration actually occurred.)

(w)  On 11 September 2013, Miranda took out the present summons for judgment.

(x)  A call-over hearing took place on 9 October 2013 when it was intimated to the court (by Lorenzo) that, subject to taking advice, no further evidence would be necessary since it may rest only on a point of law, namely, whether one could go behind an affidavit denying possession, custody or power of the relevant documents.

(y)  On 17 October 2013, when Bernstein was neither on LJI’s board nor its general counsel, he sent an unprompted e-mail to Laracy stating that in light of the successful privatisation and the subsequent post closing composition of LJI’s board, the new directors might agree to entertain the request for documents.

(z)  Lorenzo 4 was filed on 19 November 2013, stating for the first time that:

  (i)  the listed status and the ongoing privatisation process of LJI had prevented Lorenzo from making discovery of e-mails; and

  (ii)  the “indirect beneficial owners” of MGHK were and are Lorenzo’s daughter and niece and that they have for undisclosed reasons refused to release any trust documents in their possession or the item B documents.

(aa)  Lorenzo filed a supplemental list of documents listing 380 items being some of the item B e-mails. Nothing was produced under items C and H.

Whether there was compliance with the unless order

17. Lorenzo 3 is short.  What is said in relation to the three classes of documents ordered to be discovered are dealt with under the next two headings.

Item B e-mails

18. In respect of item B e-mails, Lorenzo stated that they “are not and have never been in my possession, custody or power” except for the documents disclosed by the plaintiffs within those categories and e-mails under item B which Lorenzo might have seen “whilst logging on to [LJI’s] computer network between 7 January 2004 - 5 November 2009”.  Lorenzo added that although he had recently requested for the provision of item B e-mails from LJI, his request had not been acceded to, exhibiting Laracy’s letters to LJI and Bernstein’s replies of 18 and 24 April 2013: see §16(l)(m), (p) and (s).  It should be noted that that was not strictly accurate as Bernstein did not refuse the request as such.  All he said was that he could not commit to a timeframe as to when the request would be considered by the Board.

19. Pausing here, I digress to mention that it is pertinent to note that while listed on NASDAQ, LJI’s operations were not in the US but remained in Hong Kong and China.  Lorenzo was its Chairman and CEO.  The only member of LJI’s Board based in the US while LJI was so listed was Bernstein who had a Colorado address.  Executive directors included Alfonsa and Ringo who were Lorenzo’s “subordinates”: see §§11 and 12 of the March Decision.  While being staff of LJI, they had been deployed by Lorenzo on MGHK business.  It might be added that the non-executive directors other than Bernstein are all Chinese, based in Hong Kong and/or China, two of whom were respectively the Chairman and director of a Shenzhen-based company of which LJI was a client.

20. It was not until Lorenzo 4 sworn almost six months later, in November 2013 that Lorenzo proffered reasons for his previous inability to give discovery of the items ordered, namely,

  (i)  the privatisation process during which time he “actually had diminished authority and ability to control the company” as a result of his personal interest in the privatisation; and

  (ii)  LJI’s listed status in that it would not have been lawful or proper for Lorenzo to unilaterally volunteer discovery of item B e-mails from LJI servers or even LJHK servers without prior approval of the LJI Board during the time when it was a NASDAQ public listed company.

21. What is inexplicable is why, despite the many opportunities for doing so, the reasons proffered in Lorenzo 4 had not surfaced earlier.  There was ample opportunity for Lorenzo to have done so and one would have expected those reasons to have been advanced much earlier to explain his inability to produce item B e‑mails if they had been genuine reasons.  In fact, there were no fewer than nine occasions (namely those identified in §16(d), (f), (g), (i), (j), (o), (s), (u) and (x) above) when Lorenzo could have done so.  This fact necessarily undermines the genuineness of the reasons.

22. Tellingly, while Bernstein’s e-mails might explain the first of the two reasons proffered, they do not explain the second of the reasons.   Lorenzo does not state how or when he came to realise that he would not be able to give discovery of item B e-mails because LJI’s listed status rendered it unlawful for him to do so. 

23. Exhibited to Lorenzo 4 is a letter dated 19 November 2013 from Joseph Chan, a partner in the Shanghai office of Sidley Austin LLP to Laracy.  That letter refers to the fact that Miranda has sought production of electronic communications of a personal nature sent by Lorenzo prior to 30 July 2013 ‘on corporate e-mail account using LJI’s computer and outgoing server to certain non-company business acquaintances as well as to company personnel who were asked by Lorenzo to assist with separate non-company business matters.  The letter went on to assert that in order to produce such e-mails Lorenzo would need to access LJI’s servers.  However the basis of that assertion is nowhere stated.  Its correctness is problematic, to say the least.

24. Mr Chan went on to opine that all communications transmitted through LJI’s computer, e-mail account in network, albeit of a personal nature, are also assets of LJI.  Mr Chan’s credentials are in corporate work such as mergers and acquisitions.  He does not appear to have expertise in intellectual property matters.  So, in my view, his opinion in such matters is irrelevant.

25. In any event, that letter which, coincidentally (and, one may even say, conveniently) bears the same date as Lorenzo 4, seemingly, was procured for the very purpose of providing a basis for the second of the reasons.  It appears to be little more than an ex post facto justification for what is a conspicuous absence of any conscientious effort by Lorenzo to meet his discovery obligations.  I would add that I find it quite remarkable that the essence of the 19 November letter could have been taken up and reflected in various parts of Lorenzo 4 (a 45 page document) when the letter bears the same date as the affidavit sworn and filed that day.

  Listed status of LJI

26. Be that as it may, I turn to consider whether the listed status of LJI constitutes a valid reason for Lorenzo’s inability, while LJI remained listed on NASDAQ, to provide discovery of item B e-mails.

27. The evidence shows that apart from having an e-mail address “@ljintl.com”, Lorenzo had personal accounts with hotmail and gmail and his subordinates also used e-mail accounts with other domain names such as “@mghk.net” and “@colorgems.net”.

28. The evidence of Ringo Ng, a director and CFO of LJI from 2001I providing a basis for the second of the reasons. from mid-2004.to July 2013 is to the following effect:

(a)  LJI’s retention policy was to keep e-mails for 11 months (prior to 2009) or 12 months (post 2009).

(b)  Whenever Lorenzo logs on to LJI’s e-mail system, his e-mails would be automatically downloaded from the corporate server to his computer’s hard drives.  LJI’s e-mail system would automatically delete those downloaded e-mails from the server.

(c)  On 17 October 2013, Ringo instructed Iris to e-mail the current IT manager to conduct an initial search but no e-mails matching the description of item B could be found in any of LJI’s servers including backups.

(d)  Another IT staff named Guo conducted e-mail archive searches on, inter alia, Lorenzo’s computers.  He identified nine such devices.

(e)  There was a size limitation of 2GB in each notebook and once the stored mails reach the limit, they cannot be downloaded from the server.

(f)  It was said that Lorenzo’s practice was to manually cull old e-mails to free space for new ones.  But there was no evidence of the volume of e-mails he received whether monthly or annually.

29. Of the nine devices identified by Guo, other than the Blackberry 9700 said to be owned by LJI and another Blackberry 9900 owned by Lorenzo personally, there is no evidence as to the ownership of  the remaining seven devices.

30. Lorenzo’s case is that any e-mail downloaded via LJI’s server belongs to LJI.  But what would be so downloaded would be e-mails using the ‘ljintl.com’ address.  E-mails sent to and from Lorenzo’s personal accounts at hotmail and gmail can be downloaded anywhere without using LJI’s servers. 

31. In so far as it is suggested that LJI acquires proprietary rights to e-mails sent to and from personal accounts because of the synchronisation process between Lorenzo’s LJI account, hotmail and gmail accounts, absent authority (and none has been cited to support it), as a matter of principle, it does not strike me as correct.  In my view, the process of synchronization cannot affect or alter the proprietary character of the information.

32. Even assuming for argument’s sake (but without accepting) that LJI has proprietary rights over information sent via the LJI server, that does not and cannot extend to e-mails sent to and from his personal accounts.  In fact, Miranda has shown that Lorenzo’s supplemental list belatedly filed, sought to disclose no fewer than

·  149 items of e-mails sent to or from his hotmail account;

·  91 items of e-mails between Miranda and Lorenzo’s subordinates at e-mail accounts under the domain name of “@mghk.net” and

·  15 items of e-mails under the domain name of “@colorgems.net”.

33. I have already remarked on the oddity that had LJI’s listed status been a real impediment to complying with the discovery order and the unless order, one would have expected that reason to have surfaced much earlier than November 2013. §16(d) and (f) above suggest that at the CMC held on July 2012 and at Lorenzo’s application for security for costs heard in August 2012 that was not considered to be an obstacle.

34. Even in Lorenzo 3 (which was after Bernstein’s e-mails of April 2013), there was no suggestion that the listed status would be an obstacle.

35. Miranda has shown that in relation to litigation in Brazil between Miranda’s daughter and Lorenzo, Lorenzo had no difficulty in February 2012 in producing e-mails sent to Lorenzo at his LJI e-mail address and e-mails that were printed out by Lorenzo’s subordinates.  Lorenzo sought to explain this away by saying that it was something he should not have done because of LJI’s listed status.  But what he does not tell the court is quite when he came to realize that LJI’s listed status was an impediment and how that came about.

36. If he knew about it at the time of the Brazilian proceedings i.e.  February 2012, there is no explanation, much less a credible one, why he and his legal advisers led the court to believe that compliance with discovery if ordered would require substantial man-hours and cost: see §16 (d) and (f) above and deliberately refrained from putting forward that explanation for his “inability” to comply with the discovery order.  If the “realization” of the impediment happened later, there is still no explanation as to when that occurred and how it came about.

37. As to LJI’s alleged proprietary rights over any information that has been captured through its server including personal e-mails, I am not remotely satisfied, based on the mere say so of Mr Chan who does not pretend to have expertise in such matters, as to the correctness of that proposition.  It is contrary to first principles and, in any event, there was clear non-compliance in so far as the e-mails that should have been discovered were sent to/from Lorenzo’s personal e-mail addresses.  In my view, the need to access LJI’s servers was a total red herring.

38. It should be mentioned that shortly before the hearing Lorenzo applied by summons dated 15 January 2014 for leave to file his 5^th affidavit (Lorenzo 5) of even date.  The thrust of Lorenzo 5 was to the effect that he used Microsoft Outlook to receive emails from different e-mail accounts; that he would delete e-mails sent to his personal accounts (at Hotmail and Yahoo) once they had been read except very rarely when important ones would be left on the hard drives for following up; and that the earliest e-mail found in his Hotmail account is dated May 2013.

39. That evidence could and should have been filed in Lorenzo 3 or 4.  It was not and no explanation has been given as to why it was not.  Moreover, Miranda has not had the opportunity of making a reply.  In those circumstances, Lorenzo 5 should be disregarded.

Miranda’s e-mail dated 5 November 2009

40. Amongst the 380 documents that Lorenzo belatedly disclosed is an e-mail dated 5 November 2009 addressed to Elsa and Cam and copied to Lorenzo that Miranda had sent.  It reads:

“From: Miranda Costa [mailto: Costa@mghk.net]

Sent: Thursday, November 05, 2009 1:22 PM

To: Elsa (GEMS); Cam

Cc: Lorenzo Yih; Alfonsa Au

Subject: MGHK Termination

Please let our colleagues take leave until next Tuesday. And stop the all operation. Keep the door key and safe key in your hand.

Thanks

Miranda Sent via Blackberry”

41. Mr Manzoni made the point that despite disclosing 867 items, Miranda failed to disclose that particular e-mail because it was contrary to Miranda’s case and shows that Miranda was not “suddenly shut out”.  Rather, it was Miranda who had asked Cam to close MGHK’s business.  Mr Manzoni set great store by that e‑mail submitting that it runs directly contrary to the core of Miranda’s pleaded case on repudiation, that it was Mr Osorio Neto (“Osorio”) and other LJI staff members who, acting on the instructions of Lorenzo, had attended MGHK’s office and evicted MGHK’s employees on 5 November 2009 and wrongfully prevented Miranda from participating in the operation and business of MGHJK.  He submitted that the e-mail showed that it was Miranda who was responsible for stopping the operations at MGHK.

42. §8 of the March Decision (set out in full in §7 above) is a summary of Miranda’s case as to the events of 5 November 2009.  It will be seen from the summary that it has always been Miranda’s case that upon returning from Shenzhen that day, he found that Osorio had caused MGHK’s office to close and had compelled all staff to leave.  Miranda was “thus excluded from [MGHK’s] office.  He was also denied access to [MGHK’s] computer system and was no longer able to access his e-mail accounts or [MGHK’s] server”.

43. Miranda gave a full account in his affidavit in reply filed on 20 December 2013 (“Miranda 9”) (at §46) of the events that occurred on 5 November 2009 which is summarized below:

·  Miranda received a message the evening before to meet Lorenzo at LJI’s Shenzhen office on the morning of 5 November 2009. 

·  He travelled from Hong Kong that morning to meet with Lorenzo. 

·  After a short discussion about gemstones projects, Lorenzo told Miranda that MGHK would be “terminated”. As MGHK was a partnership, Miranda believed it was a decision he had to live with if Lorenzo, being one of the partners, decided that it should be terminated.

·  Lorenzo proposed that Osorio could be the “middleman” to facilitate MGHK’s termination and further suggested that as part of that process MGHK’s office should be closed for a short while and reopened the following Tuesday i.e.  10 November 2009.  Miranda agreed.  In his mind what Lorenzo had proposed would not involve the supporting staff and in that sense MGHK’s office would close for a short while.

·  Miranda then left Shenzhen for Luohu and whilst en route sent the e-mail in question. 

·  While on his way from Luohu to MGHK’s office, Miranda received calls from Cam (who oversaw the gems business) and a sales manager informing him that Osorio and some others of LJI had suddenly turned up at MGHK’s office and told all of them including Elsa to leave MGHK’s office immediately.

·  At about that time, Miranda discovered that his Blackberry ceased to function properly. 

44. According to Osorio (who filed two affidavits on behalf of Lorenzo), he received a call at around lunchtime from Lorenzo who was in Shenzhen asking him “to shut down the office of [MGHK]”.  He went to MGHK’s office at around 2 pm.  Miranda was not in Hong Kong at that time.  He told Cam and Elsa to leave the office without taking away anything except their personal belongings.  It will be seen that Osorio’s evidence is entirely consistent with and supports Miranda’s account.

45. It is to be noted that Miranda used his Blackberry to send the e-mail of 5 November, via his account “@mghk.net”. The subject and the time shown on the e-mail are consistent with his evidence.  It is also the case that from the outset of this litigation Miranda has complained about his inability to access his e-mail accounts including “@mghk.net” upon the closure of the MGHK office by Osorio.  Accordingly, I reject any suggestion that Miranda deliberately suppressed discovery of the e-mail of 5 November or that there was any lack of “clean hands” on his part.

Item C minutes and Item H registers

46. In respect of item C minutes and item H registers, Lorenzo simply exhibited and relied on Laracy’s letters to Kennedys, the solicitors for MGHK and to Paraiba and their respective replies: §16 (l), (m) and (s) above.  The issue is whether MGHK and Paraíba are entities controlled by Lorenzo.

47. It is necessary to recap Miranda’s case regarding the incorporation of MGHK as stated in §§2, 4 and 5 of the March Decision and set out in §7 above.  One share in MGHK was issued on 7 January 2004 to each of Cam and Flora (who were LJI employees) as nominees.  They transferred the two issued shares in MGHK to Oceandrift (a BVI company beneficially owned by Lorenzo) on 31 December 2006 and then on 6 November 2008 Oceandrift transferred those shares to Paraíba.

48. Very simply, Miranda’s case is that the issued shares in MGHK were held in trust for him and Lorenzo in equal shares and since the issued shares in MGHK were later transferred to Oceandrift and subsequently from Oceandrift to Paraiba apparently for no consideration, the transfers did not affect the initial trusts.

49. Between the commencement of the action in July 2010 and Lorenzo 4 sworn in November 2013, Lorenzo never put forward a positive case as to the true owners of MGHK and their identity.  Rather, while refraining from asserting a beneficial interest in MGHK, he simply put Miranda to proof. 

50. Some three and a half years later, Lorenzo asserts for the first time that his daughter and his niece are the indirect owners.  Yet, not a shred of evidence has been put forward in support.  Not only is there no evidence from the alleged true owners, there is no explanation from Lorenzo at all as to the circumstances in which Miranda came to be involved with MGHK which after all been Miranda’s name.  Lorenzo does not deny that Miranda worked at MGHK but he studiously refrained from giving an account of how it all came about, the person or persons who contacted and/or negotiated with Miranda and details of what was agreed despite filing Lorenzo 4 which is 45 pages long.

51. It would be no exaggeration to say that such evidence as Lorenzo has deigned to put forward as regards the ‘arrangement’ with Miranda and/or the payment of HK$120,000 to Miranda per month until December 2008 and/or the basis upon which Miranda worked at MGHK is, at best, fuzzy, imprecise, inconsistent and contradictory.  It served no purpose other than to obfuscate and confuse: see §§ 12-14 above.

52. But an even more remarkable feature is that the new assertion is flatly contradicted by documents Lorenzo has belatedly disclosed including the following:

·  A PowerPoint file headed “MGHK – 2004 Business Presentation” which showed a circle divided into 2 equal 50% portions, one of which is designated as Lorenzo’s and the other Miranda’s.

·  An e-mail dated 6 February 2007 from Miranda to Elsa (who was in charge of administrative matters at MGHK) and copied, inter alia, to Lorenzo in which Miranda stated:

“I am not an employee. I’m a partner of Lorenzo …”

·  An e-mail dated 17 February 2008 from Miranda to Lorenzo stating:

“ Since we are the owner of MGHK, we must protect, and give our personal effort to let him [MGHK] survie (sic) …”

·  An e-mail from Alfonsa (Lorenzo’s aide) dated 2 November 2009 to Lorenzo enclosing a draft e-mail intended for Cam with the following instruction:

“ Please email the full set account of the projects to the 2 partners (Mr Yih and Miranda) by tonight after it’s ready.”

53. Lorenzo never disputed or challenged the accuracy of what was stated in the e-mails referred to above.

54. Further, while it is asserted that the true beneficial owners have refused to provide the documents under the unless order, that is difficult to reconcile with the fact that, as noted above, 91 of the 380 documents in the supplemental list are documents of MGHK.

55. In the March Decision, I had considered the question whether Lorenzo had possession, custody or control over MGHK minutes and Paraíba registers and concluded that there was prima facie evidence that indicated a real likelihood that Lorenzo did.  Since the March Decision, Lorenzo has had ample opportunity to adduce evidence to demonstrate the contrary but other than baldly asserting that other family members indirectly own MGHK, Lorenzo has not seen fit to do so.

56. The court is not assisted by the absence of supporting evidence from Lorenzo and/or the failure of the alleged true owners of MGHK to counter Miranda’s case of MGHK being a 50:50 partnership between him and Lorenzo when there has been ample opportunity for that to be done.  That state of affairs has the trappings of a considered and deliberate strategy.  Be that as it may, it does not assist Lorenzo’s case.

57. In the circumstances, I see no reason to depart from my view that the MGHK minutes and Paraíba registers remain in Lorenzo’s control.  In that connection, Mr Manzoni’s criticism of Master Au-Yeung’s use of the epithet ‘artificial’ in describing letters written by Lorenzo’s lawyers to Lorenzo’s companies requesting disclosure is unwarranted.

Conclusion

58. I am firmly of the view that Lorenzo 3 is non-compliant: Miranda has demonstrated that Lorenzo 3 is a lie, illusory and wilfully defective.  I have no hesitation in reaching the conclusion that Lorenzo has made no conscientious effort to meet his discovery obligations and that non-compliance was deliberate and intentional.

59. While Lorenzo’s supplemental list of documents of 20 December 2013 (served some 3½ years later and 7 months out of time) was some attempt at compliance (but then only as regards item B e-mails), the disclosure was nevertheless incomplete, with no credible explanation offered for the missing items.  Ms Wong SC, counsel for Miranda, drew attention to appendix 3 to her written submissions which lists items/categories of documents Lorenzo has failed to disclose. 

60. As regards item C minutes and item H registers, the excuse eventually proffered — the refusal of the beneficial owners to provide the requested documents — rings hollow because one would have expected such an excuse to have been asserted at the first available opportunity and the true owners to have defended the claim through Paraíba. 

61. A few matters are worth highlighting in terms of Lorenzo’s efforts in making discovery:

·  Lorenzo made voluntary discovery of only one relevant document and that was after several months of repeated chasers.

·  Lorenzo failed to disclose a single document under the Master’s order of 24 October 2012 for specific discovery of four classes of documents.

·  Lorenzo made no real effort to comply with the discovery order timeously and was cavalier in his disregard of the deadline imposed; in fact nothing was done to comply with the discovery order until almost a week after the expiration of the deadline.

·  Lorenzo purported to comply with the discovery order by having his solicitors write to companies he controlled requesting assistance with disclosure, a process that Master Au-Yeung correctly characterised as “artificial”.

·  While a time summons was taken out on the day of the deadline itself, the supporting affirmation was not filed until several days later, exhibiting letters which were not in existence at the date of the time summons.  That suggests that at the time the summons was issued, there was nothing to support it.

·  Even on Lorenzo's own case that LJI’s listed status was an obstacle to his making discovery of item B e-mails, the privatisation transaction was successfully completed at the end of July 2013.  Yet, no discovery was made until December 2013.  There is merit in Ms Wong's submission that there had not been any voluntary attempt at purging his breach of the unless order.  I agree that given the procedural history of the matter, but for the judgment summons taken out by Miranda on 9 October 2013, it is unlikely that any discovery would have been made at all.

62. I do not accept, as Mr Manzoni would have it, that Lorenzo was doing no more than exercising his rights under the rules.  When a party exercises his rights under the rules, regard must still be had to the obligations that O.1A, r.3 imposes on the parties to any proceedings and their legal representatives, namely, a duty to assist the court to further the underlying objectives of the CJR set out in O.1A, r.2.  In other words, a party's rights are necessarily tempered by that party's obligations under O.1A, r.3.

63. The procedural history shows that Lorenzo has resorted to every strategy and means to thwart the discovery process and to delay the progress of this action.  In my view, Lorenzo had not acted in good faith.

64. The procedural history set out in §16 speaks for itself. In addition, the following matters should be mentioned and serve to illustrate Lorenzo’s approach to this litigation:

·  MGHK derailed the case management directions on 20 December 2012 by intimating its intention to apply for the joinder of 5 new parties to its counterclaim.  In §37 of the May Decision, G Lam J observed that but for MGHK’s intimation of its intention to apply for amendment and joinder, the master would most likely have made an unless order for the exchange of witness statements at the case management conference.

·  The timing of MGHK’s joinder application is significant: as G Lam J further observed in (at §§49 and 51), MGHK had shown little interest in pursuing its application expeditiously until the near critical stage of exchanging witness statements (which should have happened but for [MGHK’s] application) and shortly thereafter getting set down for trial.

·  In those circumstances, MGHK’s intervention at that late stage was obviously a strategic decision and given Miranda's exclusion from MGHK since November 2009 on Lorenzo's express instructions, the only candidate for masterminding the joinder application is Lorenzo.

·  G Lam J also made the observation (at §31) that MGHK’s

“conduct of these proceedings does not inspire confidence at all that the counterclaim, if expanded in the way sought, would be expeditiously proceeded with in keeping with the spirit of the civil justice reform.”

·  As noted in my Decision of 9 October 2013 (“the October Decision”) refusing Lorenzo’s application to strike out prayer 3(a)–(e) of the amended statement of claim, that application, taken out 3½ years’ after the commencement of the action and after the filing of 4 listing questionnaires and 3 case management conferences, was prompted by and had its genesis in the chance remarks of G Lam J made in exchanges between bar in bench in the context of a wholly different application.

·  Despite my refusing leave to appeal the October Decision because Lorenzo’s case was “so misconceived and palpably unarguable”, Lorenzo nevertheless sought leave from the Court of Appeal only to have all 13 grounds of appeal dismissed on paper by a 2 member courtwith indemnity costs.

65. Lorenzo’s conduct is to be deplored as being wholly contrary to the spirit and intent of the CJR.

Whether judgment should be entered against Lorenzo

66. Where there has been a clear breach of a peremptory order such as an unless order, the court has power under O.24, r.  16 to strike out the defence and enter judgment for the plaintiff.  In Re Jokai Tea Holdings Ltd [1992] 1 WLR 1196 the English Court of Appeal held that non‑compliance was contumelious if it was “deliberate and without excuse”.  That test was applied in Chan Chun Lung Allen & Anor v Ryland Ltd & Ors [1999] HKCU 1096, unrep, HCA 4904/1996, 26 August 1999 at § 47:

“For non-compliance to be contumelious, there is no necessity for it to involve anything akin to a contempt of court. Non‑compliance is contumelious where it is the result of the litigant’s conscious and deliberate decision to ignore or disobey the court’s order in the absence of any extraneous excuse.”

67. The present case is just such a case.

68. Ribeiro J (as he then was) gave examples of what might constitute an extraneous excuse:

“… where the litigant has made a serious effort to comply in good faith but has been unsuccessful through bad luck or incompetence (c.f., Ka Wah Bank Ltd v Lo Chung-song & Anr [1989] 1 HKLR 451), or … where the litigant has not complied because of circumstances outside his control (including cases where his solicitor has negligently or otherwise missed the deadline through no fault of the litigant).”

69. Insofar as Lorenzo has sought to put forward any extraneous excuse, namely, that LJI’s listed status prevented him from making disclosure of the item B e-mails, that has been considered and rejected.

70. Here, Lorenzo has failed to show that non-compliance was not contumelious.  That fact alone would justify a strike out order.  Ms Wong submitted that, there is another reason that would justify a strike out order and that is that the courts have adopted a new and more robust approach towards a party’s conduct of litigation in the post-CJR era so as to give effect and teeth to the underlying objectives of the CJR.  She referred to the approach of Fok J (as he then was) in Top One International (China) Property Group Co Ltd v Top One Property Group Ltd [2011] 1 HKC 425.  That case concerned the approach that should be adopted in applications for an extension of time to comply with an unless order. Previously, only an intentional and contumelious disregard of a peremptory order would lead to a refusal. 

71. Fok J considered it entirely consistent with the more pro-active case-management approach encouraged by the CJR that the threshold should be lowered by adopting the approach in Hytec Information Systems Ltd v Coventry City Council [1997] 1 WLR 1666 at 1677 so that failure to comply with one or a number of orders through negligence, incompetence or sheer indolence could equally qualify for a refusal.  He observed (at § 41) that:

“Any other conclusion would, in my opinion, be to ignore the positive duty placed on parties to assist the court to further the underlying objectives of CJR (RHC O 1A r 3) and on the court to do so by actively managing cases (RHC O 1A r 4(1)).”

72. I fully agree with the sentiments expressed. 

73. For those reasons, I consider it would be appropriate in all circumstances to strike out the defence and enter judgment against Lorenzo.

The order

74. In such cases the court is to give judgment according to the pleadings.  The relief Miranda seeks includes declarations, an order for an account, payment to Miranda of an amount equal to the fair value of his 50% shareholding or interest in MGHK, damages for wrongful repudiation, an order for indemnity (for loss and damage suffered by Miranda as a result of any conduct committed by Lorenzo in respect of the affairs of MGHK or any activities undertaken in the name of MGHK on or after 5 November 2009), interest and costs on an indemnity basis.

75. A draft of the order Miranda seeks is attached to the judgment summons.  Paragraphs (1) and (2) set out the declarations sought.  The declarations in paragraph (1) relate to Lorenzo's wrongful repudiation of the agreement (as defined in §9 of the amended statement of claim), Miranda's acceptance thereof, the lawful termination of the agreement and consequentially that Miranda is not liable for any conduct committed in respect of the affairs of MGHK on or after 5 November 2009.

76. Paragraph (2) declarations relate to the ownership of MGHK prior to Lorenzo's wrongful repudiation of the agreement.  Only the first of the two declarations concerns Lorenzo and as to the effect that he and Miranda were the only equal beneficial owners of the entire shareholding in MGHK in that each of them at all material times beneficially held 50% of the entire shareholding in MGHK.

77. Mr Manzoni (citing the observations of Buckley LJ in Wallersteiner v Moir [1974] 1 WLR 991, 1029) submitted that it would be more appropriate:

“not to make a declaration but to state that the relief shall be upon such and such as footing without any declaration to the effect that that footing in fact reflects the legal situation.”

78. While it is not the normal practice of the court to make declarations without trial, as stated in Hong Kong Civil Procedure 2014 at §19/7/14 that:

“… it is a rule of practice and not of law and will give way to the paramount duty of the court to do the fullest justice to the plaintiff to which he is entitled …”

79. Mr Manzoni did not present the court with an alternative draft order nor has he shown how the fullest justice can be done in the present case without the declarations sought. The declarations sought appear to me to be necessary to enable full justice to be done to Miranda.  Accordingly, I will make the declarations set out in paragraphs (1) and (2) of the draft order.

80. Save for a minor linguistic amendment, I will also make the orders sought in paragraphs (3) and (4).

81. Miranda seeks indemnity costs.  I consider that the circumstances of this case fully justify such an order.  As Mr Manzoni did not address the court on this issue, I will order nisi that the costs of this action be paid by Lorenzo on an indemnity basis.

Judgment against Paraíba

82. Paraiba is a company incorporated in Anguilla.  It has been duly served with writ, the statement of claim, the amended statement of claim, the judgment summons and this court’s order dated 9 October 2013.

83. Paraíba has neither given any notice of intention to defend nor filed any defence nor has it responded to any of the letters sent to it by Miranda solicitors.

84. The only order sought against Paraíba is for a declaration that prior to the wrongful repudiation of the agreement and Miranda's acceptance thereof, Paraíba at all material times held one of the two issued shares in MGHK (being 50% of the entire issued share capital of MGHK) on trust for Miranda.  For the reasons already explained, it would be appropriate for such a declaration to be made.