XCHRX NOVATEL COMMUNICATIONS (FAR EAST) LTD. v. CANADIAN IMPERIAL BANK OF COMMERCE and HORST JULIUS PUDWILL (Third Party)

HCA8052/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.8052 OF 1999

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J U D G M E N T

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The appeal

1. This is the plaintiff's appeal against the decision of the master who refused the plaintiff's application for specific discovery of documents.

The discovery

2. The documents sought are set out in items 1-5 of the Schedule of the Notice of Appeal (items 1, 3, 4, 5 and 7 of the Schedule of the summons) :

"1. A copy of the letter from the Defendant to the Auditors, which the memo of 3rd March 1994 indicated would be signed by Mr. P.H. Mak on his return (at page 2562 of item 321 of the Defendant's documents);

2. A copy of the Defendant's auditors' reply (together with enclosures) to the Inland Revenue ('IRD')'s letter of 9th February 1994;

3. Subsequent correspondence between the Defendant's auditors and/or the Defendant and the IRD regarding the write-off of the ICB's indebtedness for the year of assessment 1992/93;

4. A copy of the Defendant's Tax Return for the year of assessment 1992/93 insofar as it pertains to the deductions sought pursuant to the provisions of Section 16(1)(d) of the Inland Revenue Ordinance Chapter 112 Laws of Hong Kong;

5.A copy of Form 401 for the year end 31st October 1992 as referred to in the Defendant's internal Memorandum from the Chief Executive Officer dated 9th October 1992 (at page 2629 of item 321 of the Defendant's documents)."

Shortly before the hearing in front of the master, the defendant disclosed some of these documents.

The parties' cases

3. The plaintiff's claim is as follows. The defendant agreed to lend a term loan of HK$3.9 million to the plaintiff, repayable by 12 equal quarterly instalments and interests. However, the defendant only credited HK$3,575,000 to the plaintiff's account and, at the same time, it debited the plaintiff for HK$3.9 million plus interests. Assuming that the loan had been advanced to the plaintiff, the plaintiff made regular instalments. The plaintiff now claims the sum of HK$3.9 million lent by the defendant or HK$4,387,160.24, being the money repaid by the plaintiff to the defendant.

4. The defendant alleged that there was an oral agreement in mid 1993 with one Mr Pudwill that the loan proceeds would not be paid to the plaintiff but would be used to reduce the indebtedness of a company called International Consumer Brands Limited ("ICB") to the defendant.

5. The plaintiff denies that there was any agreement between Mr Pudwill and the defendant and further said that the agreement, if any, would not be binding on the plaintiff because Mr Pudwill had no authority to enter into the agreement on behalf of the plaintiff. Further, the use of the HK$3.9 million to reduce the debt of ICB is not for the benefit of the plaintiff by reference to the principles set out in Rolled Steel Ltd v. British Steel Corporation [1986] 1 Ch 246.

Claim for bad debt

6. The reason why the discovery is sought is because the plaintiff discovered through the defendant's list of documents that the defendant had asked the Inland Revenue Department ("IRD") to write off a bad debt due from ICB. The contemporary documents showed that the HK$3.9 million had been used to reduce the debt of ICB. It is hardly surprising that the plaintiff is seeking specific discovery because while the defendant had deducted some substantial sums of money to reduce ICB's indebtedness, it had at the same time asked the IRD to write off the indebtedness as a bad debt. This brings into focus whether there was in fact any agreement between the defendant and Mr Pudwill.

7. In the correspondence between the solicitors, there was allegation of misconduct in claiming a bad debt when HK$3.9 million had been recovered. This is disputed by the defendant. The defendant claims that the tax treatment of the debt was proper and carried out in accordance with the advice of its auditors. Further, a claim for bad debt is entirely consistent with having reached an agreement with Mr Pudwill. The defendant said, upon receipt of the payment in subsequent years, the recovery is brought into the account as income for the relevant year.

Documents are relevant

8. In my view, what the defendant said is not a complete answer to the specific discovery by the plaintiff. The deciding factor is whether the documents are relevant. In my view, they clearly are. In a letter dated 28 April 1994, the defendant referred the auditor to "recent arrangement with an outside party to recover a portion of the loss...". A letter dated 17 May 1994 stated that the defendant experienced considerable difficulty in negotiating the recovery and it was reticent to disclose any information to outside parties on the arrangement with the company. Clearly, the documents required by the plaintiff would, at the very least, put the plaintiff on a train of enquiry on whether there is information in these documents which may advance the plaintiff's own case or damage the defendant's case. The documents sought clearly are relevant to show whether the oral agreement exists and how the defendant perceived the role and authority of Mr Pudwill in the transaction. These are the very issues in this case. The documents go beyond merely challenging the credibility of the defendant as stated in George Ballantine & Son Ltd v. F E R Dixon & Son Ltd [1974] 2 All ER 503. The discovery is clearly necessary. This is not as if the defendant had difficulties in discovery. Selected discovery of documents relating to the claim for bad debt had already been made.

9. As provided in Ormerod, Grierson, and Co. Ltd v. St.George's Ironworks Ltd [1906] 95 LT 694, where a relevant document is produced which refers to other documents, then those documents are at once prime facie relevant to the matter in question. Relevant documents had been produced in this case. The documents now sought are all related to one class of documents, namely the treatment of the bad debt of ICB. These are not wide-ranging discovery. The documents now sought by the plaintiff should be disclosed subject to the irrelevant parts being covered up. I will so order.

10. As to the last category of documents, the defendant said that they were still being searched although an initial search was unfruitful. I think the proper approach is for the order to be made and an affidavit should be made on whether the documents had been found or not despite the search.

Appeal allowed

11. Accordingly, the appeal is allowed.