SAIF PARTNERS II L.P. AND ANOTHER v. JOE ZHIXIONG ZHOU

HCMP 208/2020

[2021] HKCFI 727

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 208 OF 2020

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J U D G M E N T

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1.  This is the Plaintiffs’ contempt proceedings against the Defendant (“Zhou”) in respect of his disobedience of the Order of DHCJ Field made on 26 June 2018 (“Account Order”) in HCCL 16/2016 (“Action”).

Background

2.  The Action was brought by Zhou against the Plaintiffs for outstanding contractual payments.  Apart from defending the claim, the Plaintiffs made a Counterclaim against Zhou for breach of fiduciary duty.  Both the Action and the Counterclaim were upheld after trial. 

3.  A very substantial judgment sum (in excess of USD22.4 million) together with interest awarded in Zhou’s favour was duly paid by the Plaintiffs on 6 April 2018. 

4.  To understand the Counterclaim, I need to provide a little detail which is extracted from the Judgment of DHCJ Field given in the Action on 14 February 2018 (“Judgment”). 

5.  Zhou was a limited partner of the 1^st Plaintiff, which was a limited partnership.  The 2^nd Plaintiff was the general partner of the 1^st Plaintiff.  The 1^st Plaintiff was the general partner of SAIF II GP LP, which in turn was the general partner of SB Asia Investment Fund II LP (“Fund II”). 

6.  As a limited partner, Zhou was under a fiduciary duty of loyalty to the Plaintiffs.  At the material times, Zhou was managing the portfolio companies of Fund II.

7.  It was found by the court that Zhou had breached his fiduciary duty by engaging in serious discussions with one Zhou Yang to invest in a new entity which was to develop a technology known as “Diandao” or “Point Advertising Technology”, such technology being available and appropriate for development by a portfolio company of Fund II controlled by the 1^st Plaintiff. 

8.  In the course of leaving the 1^st Plaintiff and joining a rival fund, KPCB China Fund LP (“KPCB”), Zhou caused KPCB to invest in a new entity which would develop the Diandao technology.  The investment was governed by an agreement referred to as the Xinrui investment agreement dated 24 August 2007.

Disgorgement Order

9.  Pursuant to the Counterclaim, the court ordered against Zhou: (a) disgorgement of the profit he made personally as a result of the investment made by KPCB under the Xinrui investment agreement; and (b) all necessary enquiries and accounts be taken to establish the sum due under (a) (“Disgorgement Order”).

10.  Appeared on behalf of the Plaintiffs with Mr Tang, Mr Pow SC submitted that there were relevant findings made against Zhou in the Judgment on his credibility and adamant refusal to produce documents which should be borne in mind for the present purpose.

11.  At the trial, Zhou refused to request KPCB to provide an executed version of the Xinrui investment agreement (an unsigned copy was available at the trial), even though he remained a limited partner of one of the general partners of KPCB. 

12.  Zhou’s answers in relation to the details of the Xinrui Investment[1] were found to be untruthful.  The learned Deputy Judge took the view that “he was making his evidence up as he went along, which casts doubt over the whole of those parts of his evidence that are disputed by [the Plaintiffs]”[2].

13.  The events which followed the conclusion of the trial are relied upon by the Plaintiffs to prove Zhou’s contempt.  I therefore need to recount the course of the litigations after the Judgment.  It will also be seen from the events that Zhou could not (and cannot) be under any misunderstanding about what he had (and has) to do to comply with the Account Order. 

14.  On 12 March 2018, the Plaintiffs applied against Zhou for disclosure in aid of, and directions for, the accounting exercise. Two days later, on 14 March 2018, Zhou filed his Notice of Appeal against the Judgment (the appeal is referred to as “CACV 62/2018”)[3]. 

Zhou 1st

15.  On 26 March 2018, Zhou provided his 1^st Affirmation in draft[4] (“Zhou 1^st”) purportedly in compliance with his obligation to account.  Zhou said that he had made no profit from the Xinrui Investment.  According to this affirmation :

(1)  KPCB invested USD8M into Keygate/Xinrui on about 24 August 2007;

(2)  In April 2008, Zhou left KPCB to set up Keytone Ventures of which he was still a partner;

(3)  By that time, the Keygate/Xinrui investment had not gone well.  In about July 2008, KPCB sold Keygate/Xinrui to Keytone at cost, ie, USD8 million;

(4)  As there was no capital gain, no “carried interest” was payable by KPCB to Zhou as a result of the sale to Keytone.  He therefore personally made no profit from KPCB’s Keygate/Xinrui Investment;

(5)  In about December 2009, Keygate’s business failed;

(6)  On 13 July 2011, Keytone sold the remaining assets in Keygate for USD3.5 million.  There was a loss of USD4.5 million to Keytone.  Zhou therefore personally made no profit from Keytone’s investment in Keygate/Xinrui.

16.  The Plaintiffs did not accept Zhou’s evidence. There was no explanation why Keytone had paid USD8 million for an investment which had not gone well.  Also, Zhou was caught out on his failure to make discovery of documents regarding KPCB’s investment in Keygate/Xinrui when he was specifically asked to do so for the purpose of the trial. 

17.  The Plaintiffs say that the documents exhibited to Zhou 1^st demonstrated that his previous answer that such documents were not in his possession, custody or power was patently untrue, and Zhou had been suppressing disclosure unless he found it useful for his purpose. 

18.  Further, Zhou 1^st was totally silent as to the salaries, fees and bonuses that he ought to have received by virtue of his position as a partner of KPCB and later Keytone.  At least part of such income must be attributable to the Xinrui Investment, say the Plaintiffs.

Account Order

19.  In a Ruling dated 26 June 2018 (“Account Decision”), DHCJ Field did not accept Zhou’s claim that he had fully complied with the Disgorgement Order by way of Zhou’s 1^st.  The learned Judge held (§9) that :

“… given [Zhou’s] untruthful account … and the relative scarcity of the discovery he provided for the trial, [the 1^st Plaintiff] is entitled to an order that goes wider than might have been conventionally appropriate in setting the modalities for an account of secret profits to be given by a fiduciary. It is also the case that, since [Zhou] did not himself provide the alleged US$8 million invested in Xinrui, the absence of any profit for [KPCB] on the US$8 million investment does not necessarily mean that [Zhou] personally did not benefit financially in one way or another from the investment.”

20.  The learned Judge went on to make the Account Order :

“(1)  … [Zhou] must, within 36 days of the date hereof, provide an account duly verified by affidavit identifying and attaching all vouchers and documents that are relied upon of all income, including salary, fees, dividends and other remuneration whether by way of “Capital Distribution” and/or “Carried Interest” or similar payments received by [Zhou] and/or entities owned and/or controlled by [Zhou] down to 31 December 2012 (“the end date”) from (i) [KPCB] and its subsidiaries, affiliates and related entities (KPCB); and (2) Keytone Ventures LP and its subsidiaries, affiliates and related entities (“KV”), identifying the entitlement under which the said income or other remuneration was received, the aforesaid account to be supported by documents that [Zhou] possesses, or are within his power and/or control, including at least the following:

(a)  a copy of the relevant partnership agreements amongst inter alios [Zhou] on the one hand and KPCB and/or KV on the other, current down to the end date;

(b)  a copy of any consulting or employment agreements amongst inter alia [Zhou] on the one hand and KPCB and/or KV on the other, current down to the end date;

(c)  a copy of the distribution letters and notices issued by KPCB and/or KV to [Zhou] down to the end date;

(d)  The whole package of sale and purchase agreements relating to the alleged transfer from KPCB to KV at US$8 million;

(e)  A full list of assets of Keygate/Xinrui/Neogrid immediately prior to the alleged disposition in July 2011 …”

21.  Zhou filed a Supplementary Notice of Appeal to appeal against, inter alia, the Account Decision on 11 July 2018.  On 13 July 2018, he applied to stay the account-taking procedure directed under the Account Decision until the final determination of CACV 62/2018. 

Zhou 2^nd

22.  Zhou’s 2^nd Affirmation (“Zhou 2^nd”) was filed in support of the stay application.  It is relied upon by Mr Pow to show that Zhou was perfectly aware of his obligations under the Account Order. Zhou 2^nd stated as follows :

“14.  In order to comply with the terms of the [Account Order], I will be required to conduct an elaborate and extensive information gathering exercise. The terms of the [Account Order] require me to identify all income, including salary, fees, dividends and other remuneration from KPCB plus KPCV and Keytone (with supporting documentation) between August 2007… to 31 December 2012, events that took place from 7 to 11 years ago. Most of the information is contained in documents or records of non-parties (such as KPCB and Keytone and their subsidiaries, affiliates and related entities) over which I have no power, possession or control.

15.  The terms of the [Account Order] require me to identify information for all forms of income, not just capital distributions and carried interest. It is very difficult or almost impossible to provide a complete account for such information. Most of the income that I have received other than capital distribution and carried interest are not linked to any specific investment made by the funds. For example, the management fee that is tied in to the size of the specific fund and even if the fund does not make any investment for a certain period, the manager still receives a 2% management fee which is then paid to the partners. …

16.  As KPCB and Keytone are non-parties, I will need to make a request to them to release the relevant information to me. Given the information sought contains commercial sensitive information, KPCB and Keytone may be reluctant to provide such information. Even if KPCB and/or Keytone were willing to assist, there may be some difficulty in locating the information or the relevant documents may no longer exist. Pursuant to US tax requirements, corporations are only required to maintain financial records for the past 5 years, there is no obligation to keep such records beyond that timeframe. Even if KPCB and/or Keytone kept the records beyond the legal requirement, such documents are likely to have been archived. Moreover, the information concerning the income, salary, distributions and other similar payments of an individual employee or a partner like myself, is likely to be recorded as a single line ledger in a large accounting book …

17.  As an individual, I am subject to similar obligations to retain financial records for the past 3 years for US tax purposes and I do not actively maintain such records beyond this requisite period.  As for many bank statements, I have closed old accounts, changed banks and opened new accounts since the events relevant to the Keygate/Xinrui Investment took place and no longer have the records, statements or details of my previous accounts given the amount of time that has passed.  I converted to receiving electronic bank statements (foregoing paper statements) several years ago and can only retrieve my bank statement up to 12 months ago.  Therefore, to obtain a copy of my bank statements for the [relevant period], I will have to track down the bank account information (such as the bank name and account number) and make a special request to the bank that I no longer hold an account with to retrieve the information.  Given the passage of time, it is likely that the bank will not be able to furnish the statements readily, if at all as it may not be required to keep the records for so long.”

23.  Mr Pow also relies on the submission of Zhou’s senior counsel for the stay application :

“… I don’t think there can be any serious dispute that the account-taking exercise is going to be a major piece of litigation. It’s going to involve a search for documents in multiple jurisdictions going back 11 years, some of which may be difficult to uncover after all of this time.”

24.  Taking stock at this point, it should be noted that Zhou had admitted in para 15 of Zhou 2^nd that he had received income from KPCB and/or Keytone, and an example of the income was the management fee.

25.  By a Ruling dated 11 January 2019, DHCJ Field dismissed the stay application on the basis, inter alia, that there had been trenchant delay.

26.  Mr Pow relies upon some extracts from the transcript of the stay hearing for the present purpose :

“Mr Barlow (Zhou’s senior counsel): There is an additional argument, of course, and that goes to the scope of the discovery that’s been ordered requiring [Zhou] to obtain documents from other non-parties, including KPCB.

Court: [Zhou] must provide such documents as fall within the classes identified in the order as he is able to obtain.  The order doesn’t require [him] to bring any legal proceedings against the holders of documents.

Mr Barlow: I’m very grateful for that, my Lord.

Court: He must make all reasonable attempts to obtain the documents and if he is unable to obtain the documents then he must set out the circumstances of that situation.  What he has got to do is to make all reasonable efforts to obtain them and, as I understand it, that exercise has not been (sic) begun.

Mr Barlow: I don’t’ think there’s any evidence that it hasn’t been (sic) begun, but there is certainly plenty of evidence as to the difficulties involved.

Court: [Zhou] has got to do his best to obtain these documents that fall within this class. … At the moment what is required is action by [Zhou] in order to obtain these documents … These documents have been ordered so that a proper assessment can be made as to what benefits [Zhou] has received which derive from the Xinrui investment.  The order does not depart from an order that is in aid of recovery of the secret profit.  The order does not say that any salary that has been received has been paid over.  Discovery must be made of all benefits, remuneration and the like that’s been received by Mr Zhou so that a realistic assessment can be made as to what he has received by virtue of the Xinrui Investment Group.  So I think that that, with respect, is manifest from the order that I made.”

Zhou 4^th

27.  On 18 February 2019, Zhou provided his draft 4^th Affirmation[5] (“Zhou 4^th”) purportedly in compliance with the Account Order.

28.  Mr Pow submitted that Zhou had made a volte face in Zhou 4^th.  Contrary to the position previously adopted by him, Zhou deliberately and disingenuously narrowed the scope of accounting and disclosure to only what he alleged as profits made from the Xinrui Investment :

“Although, I was not present at the [stay hearing], I have been informed by my lawyers who were present and I believe that, in the course of that hearing, the Trial Judge confirmed that … (b) his Ruling is limited to an account of the profits and income that I personally received from KPCB’s Keygate/Xinrui Investment and/or from Keytone’s Keygate/Xinrui Investment and not to any other profits or income received by me.” (para 16 of Zhou 4^th)

29.  However, in Zhou 4^th, Zhou accepted that :

(1)  he was entitled to “carry interest” which was about 3% of the profit distributions paid to KPCB’s General Partner (of which he was one) (para 29); and

(2)  he was entitled to salaries of around USD1.2 to 1.5 million per year (para 39).

30.  Zhou provided no further information in relation to these 2 types of payments as required by the Account Order, eg, the dates, amounts, entitlements under which the amounts were received, and documentary support.  Instead, Zhou simply alleged that he did not and would not receive any amount “in respect of or relating to” the Xinrui Investment (paras 38, 40, 64 and 72).

31.  Disagreeing with the purported compliance of the Account Order, on 6 March 2019, the Plaintiffs’ solicitors wrote to those of Zhou :

“It must be plain to you and your client that the scope of the Account Order requires your client to provide an account … for all income … including but not limited to any income relating to the Keygate/Xinrui Investment, and indeed regardless of whether, in your client’s subjective view, such income relates to the Keygate/Xinrui Investment.”

32.  On 25 Mar 2019, the Plaintiffs applied for a further order, to clarify any interpretation differences between the parties and to give Zhou a further chance to comply (“Further Order Application”).

33.  Meanwhile, on 28 May 2019, CACV 62/2018 was heard.  On 20 June 2019, Zhou made an application to stay the Further Order Application pending determination of CACV 62/2018.  The stay was granted by M Chan J on 24 June 2019.

34.  On 12 July 2019, judgment was handed down in CACV 62/2018 by which Zhou’s appeal was dismissed, and the stay expired. 

35.  By a Decision dated 9 September 2019, this court refused the Further Order Application on, inter alia, the basis that such an order would serve no purpose.  It was Zhou’s stance that he had fully complied with the Account Order and he “steadfastly declines a second chance”.  The court observed that the matters might be further ventilated by way of contempt proceedings or in the taking of the account where the Plaintiffs could falsify the account put forward by Zhou.

Judgment in CACV 62/2018

36.  In his Supplementary Notice of Appeal, Zhou challenged the Account Order arguing, inter alia, that :

(1)  the disclosure was “irrelevant to [the 1^st Plaintiff’s] Xinrui Counterclaim and incapable of constituting any part of any entitlement of [the 1^st Plaintiff] thereunder”;

(2)  it “extends to matters which are obviously irrelevant to [the 1^st Plaintiff’s] Xinrui Counterclaim (e.g. [Zhou’s] salary and remuneration while he was employed by KPCB)”.

37.  Such arguments were rejected by the Court of Appeal.  In particular, Kwan VP (whose judgment was agreed by Barma and Au JJA) held as follows :

“132. [Zhou] contended that the order complained of exceeded the permissible bounds for an order for account … He should not be made to account for more than he actually received as a result of his breach. One of the matters required of him was to account for “all income, including salary” … salary he agreed with KPCB before they made the Xinrui investment was not within the scope of the judgment order, as this was not profit he derived from KPCB’s investment made under the Xinrui Investment Agreement.

…

135  … The [Account Order] made clear that given [Zhou’s] untruthful account of when he began to discuss a possible investment in Xinrui and the relative scarcity of the discovery he provided for the trial, it is appropriate to make “an order that goes wider than might have been conventionally appropriate in setting the modalities for an account of secret profits to be given by a fiduciary”.  It is with such considerations in mind that the order was made, so that the court can properly ascertain whether and to what extent those monies could be regarded as falling within the scope of his duty to account and disgorge, instead of merely relying on the assertion made in [Zhou 1^st].

136.  As for monies received including “salary, fees dividends and other remuneration”, assuming that his salary was agreed with KPCB before they made the Xinrui investment, if his salary was enhanced as a result of the profits he brought in by such investment, this may well be a profit attributable to his breach of fiduciary duty …”

38.  The Plaintiffs submitted that the above dicta puts beyond doubt that the true scope of the Account Order is wider than that contended for by Zhou and he well knew that is the case.  Zhou has no basis to insist on his narrow interpretation and to purport to comply on the basis of the same.  Yet, to date, Zhou has not sought to correct his position and provide a proper account with the requisite disclosure.  The Account Proceedings, which are ongoing[6], are being seriously prejudiced.

39.  On 9 August 2019, Zhou filed an application for leave to appeal to the Court of Final Appeal.  Subsequently, leave was granted by the CFA on an issue of law.  Zhou’s appeal was finally dismissed on 1 December 2020. 

Zhou 6^th and 7^th

40.  Two further affirmations which are relevant for the present purpose had been filed by Zhou on 29 August 2019 and 24 September 2019, namely, his 6^th Affirmation (“Zhou 6^th”) and 7^th Affirmation (“Zhou 7^th”). 

41.  By Zhou 6^th, Zhou repeated his allegation that he did not have in his possession, custody or power any partnership, consulting or employment agreements between himself and KPCB. However, he had made enquiries with KPCB regarding such documents, and elaborated on his attempts to obtain the same.  Up to the date of Zhou 6^th, no document had been supplied by KPCB. 

42.  Zhou 7^th provided a follow-up on the documents sought from KPCB.  A total of 11 documents were disclosed in that affirmation, and Zhou alleged that he had taken all reasonable steps and effort to fully account to the 1^st Plaintiff for any profit he made from Xinrui Investment, and to disclose all “responsive documents”.  

Contempt Proceedings

43.  On 8 October 2019, the Plaintiffs applied ex parte for leave to issue contempt proceedings against Zhou.  The application was supported by a Statement made pursuant to O 52, r 2 (“Statement”) and Ho-Ping Lin’s 4^th Affirmation.

44.  On 5 February 2020, DHCJ Field granted leave to commence contempt proceedings on the basis that “it is distinctly arguable that [Zhou] is in breach of the Account Order” (see the Decision dated 11 March 2020, §11).

45.  The Originating Summons for the contempt proceedings was issued on 10 March 2020.  However, the hearing of the Summons had to be adjourned due to the decline by Zhou’s solicitors to accept service. A substituted service order was granted by this court on 4 June 2020. 

46.  On 9 June 2020, Zhou applied to set aside the leave order.  On 22 June 2020, he applied to set aside the substituted service order.  On 24 July 2020, this court gave directions whereby, inter alia, (a) Zhou’s applications were to be heard together; and (b) Zhou was required to file any evidence in opposition to the Originating Summons by 8 September 2020.

47.  By a Decision dated 17 September 2020, Zhou’s applications were dismissed.

48.  On 5 October 2020, Zhou applied for leave to appeal against such dismissal.  On 20 Nov 2020, this court (a) allowed Zhou’s leave application only in relation to the substituted service challenge; and (b) dismissed Zhou’s application for stay of these Contempt Proceedings pending appeal.

49.  On 4 Dec 2020, Zhou renewed his leave and stay applications before the Court of Appeal.  No decision has yet been made by the CA in respect of these applications. 

Applicable principles

50.  The following principles are not contentious.  For civil contempt, what is required to be proved is that the court order in question has been breached (the actus reus).  Mens rea is established when the act or omission in breach of the order is done or made consciously, voluntarily and unaffected by any mistake.  It is immaterial that the breach was committed in reliance on a third party’s advice, even legal advice.  There is no additional need to prove mens rea in the sense of an intention to interfere with or impede the due administration of justice: Kao, Lee & Yip v Donald Koo (2009) 12 HKCFAR 830 at §§40-53.

51.  The principles concerning the burden and evidential requirements for a finding of contempt had been helpfully set out by G Lam J in the recent judgment of Jeanny Helena Franslay v Fung Ariel Mei Shan [2021] HKCFI 258 at §37 :

“(1)  The burden lies on the plaintiff to prove the alleged contempt beyond reasonable doubt: Kao, Lee & Yip v Donald Koo Hoi Yan (2009) 12 HKCFAR 830, §30.

(2)  Whilst the defendant may bear an evidential burden in relation to particular matters he has raised to exculpate himself, there is no legal burden on him to prove anything affirmatively: Concorde Construction Co Ltd v Colgan Co Ltd (No 2) [1984] HKC 253, 257; Ip Pui Lam Arthur & another v Alan Chung Wah Tang & another (CACV 214/2016, 16 February 2017), §4.3.

(3)  No adverse inference against the defendant may be drawn from his failure to call one or more witnesses or adduce certain evidence: China Metal Recycling (Holdings) Ltd v Chun Hei Han [2018] 1 HKLRD 455, §§36-37; Kissel v HKSAR (2010) 13 HKCFAR 27, §82.

(4)  If by cross-examination to credit a plaintiff proves that the defendant’s evidence cannot be relied on, and he has testified that he did not do a certain act, the plaintiff does not thereby prove that he did it: Hobbs v Tinling (C T) and Co Ltd [1929] 2 KB 1, 21.  The plaintiff has to prove his case affirmatively, though this may be done by inference.

(5)  For an inference of fact properly to be made: (a) it must be grounded on clear findings of primary fact; (b) the inference must be a logical consequence of those facts; (c) beyond being logical, the inference must be “irresistible”, that is, it must be the only inference that can reasonably be drawn on the basis of those facts: Winnie Lo v HKSAR (2012) 15 HKCFAR 16, §115.  The third requirement has also been expressed in other ways, such as that “the inference must be compelling — one (and the only one) that no reasonable man could fail to draw from the direct facts proved”: Kwan Ping bong v R [1979] HKLR 1 at 5, or that the facts must be such as to exclude reasonable hypotheses consistent with innocence: Nina Kung v Wang Din Shin (2005) 8 HKCFAR 387, §185.

(6)  In other words, if the court concludes from the evidence that there is more than one reasonable inference to be drawn and at least one of them is inconsistent with a finding of contempt, the plaintiff fails: Daltel Europe Ltd v Makki [2005] EWHC 749 (Ch), §30.

(7)  The standard of proof beyond reasonable doubt does not mean that every piece of evidence that does not by itself establish a fact beyond reasonable doubt should be disregarded. It is sufficient if the body of evidence relied on, viewed as a whole, satisfies the burden: Myers v R [2015] UKPC 40, §46; HKSAR v Lo Hung Kwong [2000] 3 HKC 474, 480.

(8)  In appropriate cases, proof of a fact by inference to the requisite standard may be achieved by taking various pieces of circumstantial evidence together, like cords comprised in a rope, or strands in a cable, or converging rays of light producing a body of illumination, such that “there may be a combination of circumstances, no one of which would raise a reasonable conviction, or more than a mere suspicion, but the whole, taken together, may create a strong conclusion of guilt, that is, with as much certainty as human affairs can require or admit of”.”

52.  In light of the fact that one of the alleged breaches of the Account Order by Zhou is his failure to disclose specific documents, the following dicta in Re Bramblevale Ltd [1970] Ch 128, per Denning LJ at 137A-E, are relevant :

“A contempt of court is an offence of a criminal character. A man may be sent to prison for it. It must be satisfactorily proved. To use the time-honoured phrase, it must be proved beyond reasonable doubt. It is not proved by showing that, when the man was asked about it, he told lies. There must be some further evidence to incriminate him. Once some evidence is given, then his lies can be thrown into the scale against him. But there must be some other evidence. Take this very case. Mr Hamilton told a lie when he said that the books were damaged and lost in the car accident on October 25, 1967. That lie does not prove that Mr Hamilton kept those books for a further year and still had them in his possession from November 28 to December 5, 1968. He may have told the lie for another purpose – to conceal the fact that he destroyed the books himself shortly after the car accident. That would be a criminal offence, but not the one with which he is charged.

On this charge, the court has to see whether there is sufficient evidence that Mr Hamilton did have these books in the week of November 28 to December 5 of 1968.  On his own confession, he had them on October 25, 1967; but there is nothing more.  That confession leaves two possibilities: either that he had them on that date in November, 1968, and wrongfully refused to deliver them, or alternatively, that he got rid of them before that time so that he could not deliver them.  Those two possibilities are equally likely.  It is not possible to say which of them is correct.  The court cannot be satisfied beyond reasonable doubt that he still had the books in November, 1968.  That would be conjecture rather than inference – surmise rather than proof.  Where there are two equally consistent possibilities open to the court, it is not right to hold that the offence is proved beyond reasonable doubt.”

53.  Re Bramblebvale was applied in Hong Kong in Bruno Arboit v Koo Siu Ying, unrep, HCMP 2749/2012, 8 March 2016, where Au-Yeung J held as follows :

“114. In a situation where it is said that the contemnor has failed to produce documents as ordered, it is crucial to determine that he did have the document in his possession, custody or power at the time of the order …

…

138. “Possession” means the right to possession of a document … It does not require actual physical possession … A person has possession of documents that are in the hands of his servant or agent …

139. The mere status as majority shareholder or director of a company does not necessarily give a person “control” of the company’s documents.

140. In cases of a one man company, where the director owns all or substantially all the shares and any minority shareholders are not adverse to him, then the inference may be drawn that the company, although a separate legal entity, does not control him but he controls the company in such manner as to make it his other person or alter ego. In such a case, where the director controls the company and nominates the other directors, all the documents of the company are within his power in the sense that in truth and in fact he is able to obtain control of them ...

…

142. Documents are in the “power” of a person only if that person has “some sufficient control … over the company” …

143.  Contrary to Mr Huggins SC’s submission (which was not based on any authority), for the company’s documents to be in a person’s control, power or possession, there is no requirement that the person has to know that he has the right to obtain the documents from whoever holds them, or that he knows of the existence of the documents of the company.  Were it otherwise, the documents which that person does not have knowledge of would not be in the power of anyone.  This would be absurd.”

Zhou’s contentions

54.  Zhou has not filed any evidence in opposition.

55.  Apart from maintaining that he had complied with the Account Order, Zhou contends that: (i) there are irrelevant documents in the Hearing Bundles; (ii) he has a right to cross-examine the Plaintiffs’ witness; (iii) there is ambiguity in the Account Order; (iv) there is lack of clarity in the charge against him; and (v) the contempt proceedings are not the last resort.

56.  The issue whether Zhou has disobeyed the Account Order will be analysed below.  The alleged lack of clarity in the charge will also be addressed.  The remainder of the contentions can be disposed of quickly.

57.  There was no application to cross-examine the Plaintiffs’ witness, Mr Lin.  The Plaintiffs are entitled to rely upon Mr Lin’s affirmation evidence in these proceedings: see Numeric City Ltd v Lau Chi Wing [2016] 4 HKLRD 812, §23.

58.  There is nothing in contention (i).  In these proceedings, the Plaintiffs are relying on, firstly, the materials which had been generated in the course of the long and contentious litigation between the parties.  Most, if not all, of these materials are in the court files.  Indeed, Mr Lin’s affirmation was basically a collation exercise, putting together those materials which are relied upon by the Plaintiffs for the contempt proceedings[7]. Secondly, the Plaintiffs are relying upon the Account Order and Zhou’s own evidence.

59.  Contentions (iii) and (v) are regurgitation of submissions previously advanced by Zhou and rejected by the court.  The issue of ambiguity was raised in CACV 62/2018[8] and was not accepted by the Court of Appeal.  I am unable to see why Zhou is entitled to have the matter re-opened.  Mr Barlow, who appeared with Mr Chan for Zhou, did not try to justify the re-opening. 

60.  As for the not the last resort argument, it was dealt with by this court in the Decision dated 17 September 2020, §§41-48. 

Analysis

61.  The procedural history of these matters has been set out above in some detail because, apart from its relevance, the case against Zhou may be said to be self-evident from what had gone on in these matters.  It should be noted that Zhou has all along been represented by an experienced team of lawyers led by senior counsel. 

62.  I agree with Mr Pow that there is no question of Zhou having unintentionally breached the Account Order.  Indeed, no such suggestion was made on his behalf.  Therefore, mens rea is not an issue.  The focus of the court’s inquiry is whether the Account Order has been breached by Zhou (the actus reus). 

Ambit of the Account Order

63.  The relevant part of the Order has been set out in para 20 above. 

64.  In my view, the terms of the Order are abundantly clear.  They were detailed because of the need to ensure that Zhou would not try to wriggle out of it in light of his disinclination to comply with his disclosure obligation. 

65.  I agree with the Plaintiffs that, in simple terms, the Order imposed 2 obligations on Zhou: (i) provide an account of all income; and (ii) make disclosure of specific documents.

An account of ALL income

66.  Under the Order, Zhou has to identify all items of income down to 31 December 2012 received by him and/or entities owned and/or controlled by him from (i) KPCB and its related entities and (ii) Keytone Ventures LP and its related entities.

67.  For each item of income, Zhou has to identify the entitlement under which it was received, eg, the income was salary. Further, Zhou has to disclose all documents within his power and/or control in support of the account. 

68.  I agree with Mr Pow that the account may be provided by drawing up a table of all items of income which Zhou and his related entities had received from KPCB and Keystone (and their related entities), and attaching the supporting documents.  The fact that such a simple exercise has not been carried out, despite the resources available to Zhou, speaks volumes.  

69.  The charge against Zhou here is that he had unilaterally read down the scope of the Account Order, namely, his obligation was limited to income from the investment of KPCB and/or Keystone (and their related entities) into Xinrui (see, as an example, para 28 above).  Consequently, Zhou has failed to account for all his income as ordered by the court. 

70.  The charge is sufficiently clear from paras 28 and 29 of the Statement which is relied upon in the Originating Summons (pp 2-3) for these contempt proceedings.  I am in no doubt that Zhou was and is fully aware that he has to account for all his income, and the reading down was deliberate and done with the purpose of evading his obligations under the Account Order.  I disagree with the submission that the charge against Zhou for his failure to account is unclear. 

71.  Plainly, Zhou has not fulfilled his obligations.  He has never tried to identify all the income which fit the prescriptions in the Account Order.

72.  Even according to Zhou 4^th (see also para 24 above), Zhou has not account for the following income:

(1)  Para 29 of Zhou 4^th referred to Zhou’s entitlement to receive “carried interest” from KPCB (and/or its related entities).  By April 2008 (when he left KPCB), his “vested “carried interest” was about 3% of the profit distributions paid to the General Partner” [emphasis added].  Zhou made no attempt to even disclose the amount in question; 

(2)  Paras 69 and 70 referred to the management fee received by Keytone Management (of which Zhou was the controlling shareholder) from which Zhou was paid salaries and possibly further payment by way of distribution of “remaining funds”.  He simply failed to account for such payment(s) under the pretext of they had “no direct or indirect connection to [Xinrui Investment]”.  

73.  For completeness, I do not believe that Zhou was in any way misled by his lawyers.  There is no suggestion to that effect, and even if that were the case, the erroneous advice would have been corrected in light of the Plaintiffs’ strong and continuing objection, as well as the views expressed by the Court, over the purported compliance of the Account Order by Zhou.

74.  In the premises, I find it proved beyond all reasonable doubt that Zhou is in breach of the Account Order by failing to account for all his income. 

Disclosure of specific documents

75.  The charge here concerns Zhou’s alleged failure to disclose the specific documents which are within his power and/or control and fall under the classes defined in sub-paras (1)(b)-(d) of the Account Order :

“(b):  a copy of any consulting or employment agreements amongst inter alia [Zhou] on the one hand and KPCB and/or KV[9] on the other, current down to [31 December 2012];

(c):  a copy of the distribution letters and notices issued by KPCB and/or KV to [Zhou] down to [31 December 2021];

(d):  the whole package of sale and purchase agreements relating to the alleged transfer from KPCB to KV at US$8 million.”

(b) and (c)

76.  The Plaintiffs are no longer pursuing the alleged breach in relation to the documents of KPCB in relation to (b) and (c). 

77.  The evidence is that Zhou is the founder of Keytone and has at least substantial control over it and its related entities: see Zhou 4^th, paras 11, 41, 42, 43, 69 and 71.  There is considerable force in Mr Pow’s submission that, applying Bruno Arboit, it can be inferred that Zhou has power over Keytone’s documents.  Such inference is supported by the fact that Zhou has in fact exhibited a number of Keytone’s documents in his evidence. 

78.  The Plaintiffs say that Zhou has failed to disclosed the documents required under (b) simply by stating in Zhou 4^th, para 71 :

“During the Relevant Period: … (b) I had no written employment or consulting contract with Keytone Management, as I was the controlling shareholder of that company.”

79.  Zhou’s obligation under (b) requires disclosure of agreement(s) between him and Keystone (defined as “Keytone Ventures LP and its subsidiaries, affiliates and related entities”), not simply Keytone Management which is only one of the entities. 

80.  Whilst there is merit in the Plaintiffs’ contention, and it is unfortunate that it was not made clear in Zhou 4^th (or any of his other affirmations) whether there was any consulting or employment agreement between him and the other Keytone entities, I am not satisfied that it can be inferred to the requisite standard that there is any such document(s).  The court must bear in mind that (a) the structure and operations of Keystone were explained in Zhou 4^th; and (b) it might be the case that Keytone Management was the only entity providing service to the other Keytone entities.  Hence, there was no other agreement which answers to the obligation under (b). 

81.  In respect of category (c) documents, para 63 of Zhou 4^th stated :

“During the Relevant Period, there was only one distribution made by Keytone GP, … It was not a distribution of investment profits … it was not related to [Xinrui Investment].”

82.  Two related distribution notices were exhibited to the affirmation. 

83.  The same arguments arose from the disclosure. The Plaintiffs say that under the Account Order disclosure has to be made in respect of all distribution letters and notices from all the Keytone entities, and not confined to Keytone GP. 

84.  Again, whilst the complaint is not without merits and it is lamentable that Zhou has not made the position clear, I cannot be satisfied beyond all reasonable doubt that there was in fact any other distribution (and hence the existence of other letter(s) or notice(s)).  In particular, the Statement — “During the Relevant Period, there was only one distribution made by Keytone GP …” — may mean that there was no other distribution by any other Keytone entities.  The court must give the benefit of any doubt to Zhou.

(d)

85.  The Plaintiffs here rely heavily on, firstly, Zhou’s previous failure to make discovery of relevant documents.  In Zhou 1^st, Zhou produced some documents in relation to the sale at USD8 million and asserted that those were “the only relevant documentation that [he possesses]”. However, in Zhou 4^th, he produced 2 additional documents without any explanation why they had not been produced previously.

86.  Secondly, the Plaintiffs had challenged the adequacy of Zhou’s disclosure and contended that he should “confirm on oath that he has disclosed the whole package of sale and purchase agreements relating to the alleged transfer from KPCB to KV at US$8 million”[10]. However, Zhou had not made any attempt to do so despite the filing of Zhou 7^th subsequently. 

87.  Based on these facts, the Plaintiffs contend that the irresistible inference is that there exist documents within category (d) which Zhou has failed to disclose. 

88.  There is some force in the Plaintiffs’ submission.  However, there is stringent standard of proof to be discharged. There is no suggestion that the documents disclosed by Zhou indicated that there existed other relevant document(s) which has not been disclosed.  It is not uncommon that the terms of the commercial documents of a complex transaction would give rise to such indication. 

89.  In the absence of any indication of undisclosed document(s), I am reluctant to draw the requisite inference.  Again, the court must resolve any reasonable doubt in favour of Zhou. 

90.  For these reasons, the charge in respect the disclosure of specific documents is not made out. 

Sentence

91.  There is no room for doubt that Zhou is a litigious and recalcitrant party.  He came to this court and obtained justice by way of very substantial payment to him by the Plaintiffs.  Yet, when it comes to meeting his obligations to the Plaintiffs, he resorted to playing litigation games to deny justice to them.  His actions fly in the face of the court.

92.  Zhou is clearly in contempt of this court in respect of his refusal to disclose all his relevant income.  Such refusal has prejudice the Plaintiffs in their rightful quest for remedies under the Counterclaim. 

93.  The normal practice is for the court to adjourn these matters for sentencing and request Zhou to attend in person: see Jeanny Helena Franslay v Fung Ariel Mei Shan [2021] HKCFI 258, §65.

94.  As submitted by Mr Pow, should Zhou fail to attend :

(1)  if he is not represented, the court may issue a warrant for committal so as to have him arrested and brought before it as soon as possible so that he may make submissions on penalty: see Navig8 Chemical Pools Inc v Inder Sharma, unrep, HCMP 2885/16, 14 February 2017, §43;

(2)  if he is represented, the court can request his lawyers to make submissions in mitigation and proceed with sentencing: see La Dolce Vita v Zhang Lan [2019] HKCFI 618, §§5-7.

95.  In the present circumstances, it is appropriate to adjourn the sentencing, and I adopt the order set out in Jeanny Franslay, §65, mutatis mudantis, save that para (1) of the order be replaced as follows :

“The Originating Summons be adjourned to an early date to be fixed in consultation, but not in accordance, with the diary of 1 counsel on each side with 2 hours reserved for the purposes of mitigation, sentencing and costs.”

96.  In addition, all necessary draft orders and directives should be lodged and served by the Plaintiffs in conjunction with their skeleton submissions.

97.  I am grateful to counsel for their assistance.