XCHRX TAIPAO RESINS CHEMICAL CO. LTD. v. CHUNG-PAO RESIN CHEMICAL CO. LTD. AND OTHERS

HCA 16246/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 16246 OF 1998

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D E C I S I O N

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1. This is an application for specific discovery under Ord.24 r.7 of the Rules of the High Court and for inspection of documents under Ord.24 r.11(2). Before I deal with the issues, I should briefly set out the background to this action in order to put the application in context.

The action

2. The action is by a company against a former director and against companies under his control. In fact, the 1st Defendant was, apart from being a director, previously also a minority shareholder of the Plaintiff Company and he and his family (the Yin family) had succeeded in obtaining an order under s.168A for the majority shareholders (the Huang family) to purchase their shares.

3. In the present action, the Company says that the 1st Defendant had through his companies sold goods and materials as a middleman to the Company and had made profits from those transactions, instead of informing the Company that there was a cheaper source of goods and materials. The Company says in effect that the 1st Defendant has thereby diverted a corporate opportunity to himself and was therefore in breach of his fiduciary duty to the Company. The Company is seeking an account of profits and an order for payment of those profits.

4. The Defendants' defence to this cause of action is that article 92(3) of the Articles of Association of the Plaintiff Company provides that:-

"No director shall be disqualified by his office from contracting with the company, nor shall any such contract, or any contract or arrangement entered into by or on behalf of the company in which any director is in any way interested, be liable to be avoided, nor shall any director so contracting or being so interested be liable to account to the company for any profit realised by any such contract or arrangement."

5. The Defendants' defence is also that the Huang family knew of the dealings between the Company and the 2nd and 3rd Defendants, and also of the 1st Defendant's interests in those companies and had not raised any objection.

6. Apart from the profits made by the 1st Defendant's companies from their dealings with the Company, the issues in the action also include the following:

(1) a claim by the Company against the 1st Defendant's companies for failure to deliver 7,500 tins of resin under invoices issued in July 1998; and

(2) a claim by the Company against the 2nd Defendant under an agency agreement made between the Company and the 2nd Defendant.

7. The Company alleges that under that agreement, the 2nd Defendant had agreed to receive purchase orders from customers of the Plaintiff and had agreed to arrange for the delivery of the goods and of the delivery orders according to those orders received. It is also alleged that the 2nd Defendant had agreed after such delivery of the delivery orders to prepare statements of account and invoices and to deliver these to the Plaintiff's customers.

8. The Company says that it has delivered $3.38m. worth of goods to such customers, being the value of the goods, not the invoiced amounts. However, in their defence, the 2nd Defendant had admitted to only issuing invoices for $1.45m.

9. It is not for the Court at this stage to decide the merits of each of those claims or defences. The significance of the background is only so that one can consider the relevance or otherwise of the orders for specific discovery sought.

Orders sought in Notice of Appeal

10. The orders for specific discovery sought in the Notice of Appeal are as follows:

11. That the Defendants do within 7 days from the date of the order make and file an affirmation or affidavit stating whether they have or have at any time had in their possession, custody or power, any class or classes of the following documents and if the said document has or have been but is or are not now in their possession, custody or power, stating when they parted with the same and what has become of the same:-

(i) Accounts, journals, books, invoices and/or ledgers, and/or records of the 2nd and 3rd Defendants for the financial years 1995 to 1996, 1996 to 1997, 1997 to 1998, and 1998 to 1999.

12. However, the order for production sought in the Notice of Appeal is for only those parts of those accounting documents showing the purchase prices from the Defendants' suppliers and the sale prices to the Plaintiff of the goods and raw materials in the transactions referred to in Schedule B of the Statement of Claim and the 2nd para.(a) on the 1st page of the Further and Better Particulars of the Defence dated 8 February 2000.

(ii) According to the Notice of Appeal, the order sought on specific discovery is an inventory relating to resin stocks of the 2nd Defendant for the months June, July and August 1998.

13. However, counsel for the Company has, in the course of the hearing before me, amended that to seek only an inventory relating to stocks of resin of the type pleaded in para.25 of the Statement of Claim kept in the Donguan warehouse in July 1998. There is also an application for production of these documents.

(iii) According to the Notice of Appeal, specific discovery is sought of invoices and delivery orders and delivery records in relation to goods delivered by the 2nd Defendant to its customers for the months July and August 1998 relating to the customers on the list provided by the Plaintiff pursuant to this application.

14. Similarly, counsel for the Company has, in the course of the hearing before me, amended that to read as follows:

"Invoices, delivery orders and delivery records for goods delivered by the 2nd Defendant to customers pursuant to the agency agreement for the months of July and August 1998 relating to the customers on the list exhibited to the 6th affirmation of Mr Ip Kun Wing where the right hand column has been left blank."

15. There is also an application for production of these documents.

16. Before dealing with each item, it may be helpful for me to set out the practice and procedure relating to specific discovery and production of documents, insofar as they are of more relevance to the application in the present case.

Practice and procedure relating to specific discovery and production of documents

17. I should add that the comments in this part of this decision do not apply to documents which are privileged.

(1) Each party in proceedings is obliged under Ord.24 r.2 to make discovery by exchanging lists of documents. In the first instance, an oath is not required to verify the list, but the other party may require the party making discovery to verify the list on oath. (see rule 2(7)).

(2) If it appears from the list itself or from documents referred to in it or from admissions in the pleadings or otherwise, that there are other relevant documents in the possession, custody or power of the party making discovery which have not been listed, then the other party should make an application for a further and better list (see rule 3).

(3) An order for specific discovery under rule 7 can only be obtained if the other party can show, first, with sufficient evidence that the documents sought actually exist, secondly, with sufficient evidence that they are in the possession, custody or power of the person who had made the allegedly inadequate discovery and thirdly, that they relate to matters in issue. It is only when these 3 requirements are satisfied that the Court has jurisdiction to consider whether to exercise its discretion to order specific discovery.

(4) All documents in lists, whether the original list or a further and better list or pursuant to an order for specific discovery, must be produced for inspection (see rule 9). However, irrelevant parts may be blanked out. If there is any dispute as to whether the parts blanked out are relevant or irrelevant, there may even be an application for attendance of a deponent for cross-examination.

(5) Although rule 11(2) is couched in wide terms, an order for production of documents is not usually made. This sub-rule is intended for documents not disclosed in a list (see Wiedeman v. Walpole XXIV QBD 537). This rule only applies when the applicant shows that it would be necessary for these documents to be produced (see rule 13). This rule is not intended for use together with an application for specific discovery, because if a party succeeds in getting a specific discovery order, and if the documents are then included in a supplemental list, the documents would have to be produced for inspection anyway under rule 9.

18. With that summary of the relevant practice and procedure, I now turn to this application for specific discovery.

Preliminary objections

19. There were 2 primary preliminary objections by Mr Simon Lam, counsel for the Defendants. The first was that he said it was an abuse of process for the Plaintiff to have made the present application because the case had reached an advanced stage of preparation for trial. A Check List Review has already been held and a date for the trial has been fixed for some time in February 2001. In my view, that is not so close to the present hearing that discovery even of relevant documents should not be ordered. There are still some 5 months to go before February 2001 and I would also note that at the Check List Review, the Plaintiff had not indicated that discovery had been completed.

20. Secondly, the objection taken by Mr Lam was that the application, or at least part thereof, was res judicata or an abuse of the process because some of the items in the present summons had been the subject matter of another summons heard by Master Kwan in March 2000 (which I will refer to as "the previous summons"). The previous summons had been dismissed by Master Kwan.

21. In my view, the only identical item between the previous summons and the present one is the invoices which have been referred to in item (i) of the application for specific discovery. These are invoices passing between the suppliers and the Defendants for goods which were subsequently sold by the Defendants to the Plaintiff. It is clear that these invoices were included as part of the subject of the previous summons, and this is accepted by Miss Lan, counsel for the Plaintiff.

22. As far as the other items are concerned, I do not consider there to be any objection on the ground of res judicata or abuse of process. In respect of the accounting documents in the previous summons, the request had been couched in such a way that on one reading, separate accounting records kept specifically for transactions with the Plaintiff were being sought. The Defendants' filed an affirmation to the effect that they did not keep such separate accounting records. At the hearing before Master Kwan, the Defendants argued that that was sufficient compliance with the summons and there was no challenge to that by the Plaintiff. The present item (i) asks for accounting documents in general, and not the separate documents kept particularly for these transactions. Therefore, given the different language used in the previous summons, I find that there is no res judicata or abuse of process in the Plaintiff making the present application for the accounting documents as set out in item (i) of the application for specific discovery.

23. Mr Lam for the Defendant also suggests that in respect of the inventory under item (ii) the Plaintiff had asked for records of inflow and outflow of goods from the Donguan warehouse and he says that that is more or less the same type of document that is being sought in the Notice of Appeal. In my view, there is a sufficient difference between these 2 types of documents - on the one hand, a record of inflow and outflow of goods, and secondly, an inventory of stock within the warehouse for the same period. Accordingly, I find that there is no res judicata or abuse of process by the Plaintiff in making the present application.

Determination of application for specific discovery

24. I now turn to the merits of the application for specific discovery.

Item (i)

25. In relation to item (i), I take the view that certainly some accounting records are specifically discoverable. It is obvious that since the Defendant companies are Hong Kong companies, they would be obliged by law to keep proper accounting records. They would include records of the price which the Defendant companies had to pay the suppliers for goods or materials which the Defendant companies then on-sold to the Plaintiff, and records of the prices at which the Defendant companies did on-sell these goods to the Plaintiff.

26. It is also obvious that accounting records of this nature would be in the possession, custody and power of the Defendant companies. Therefore, the first 2 requirements of an application for specific discovery have been made out by the Plaintiff.

27. The third requirement is that it must be shown that these documents requested are relevant to matters in issue between the parties. In my view, these documents are clearly relevant to an account of profits which has been claimed by the Plaintiff. In this connection, Mr Lam, counsel for the Defendants has submitted that the Court should not order discovery of the accounting records because that would be pre-empting the order that the trial judge may or may not decide to make at the end of the trial. He says that that would be giving the Plaintiff what it wanted without it having first to succeed at trial.

28. In my view, that is not so. What the Plaintiff wants at trial is not just an account of profits but also an order for payment upon the taking of that account. There is no question of any payment at this stage.

29. I further note that no order has been made for the separation at the hearing of the action of the issues of liability and quantum. So documents relevant to quantum only could be made the subject of discovery even now (see Auto Treasure Ltd v. Noble Diamond Ltd [1992] 1 HKC 117 in which at p.121, Godfrey J held that a defendant in an ordinary common law action should be aware that, absent an order for a split trial, he may well be ordered to disclose at one and the same time, all documents in his possession and power relating to the issue of damages as well as those relating to the issue of liability).

30. Miss Lan, counsel for the Plaintiff, has also submitted that it is not only relevant to quantum but also relevant to the question whether the Company had been apprised of all relevant information in relation to the 1st Defendant's profit margin from the alleged diversion of the corporate opportunity through the Defendant companies' supply of goods to the Plaintiff.

31. In my judgment, therefore, some accounting records are specifically discoverable. However, I take the view that item (i) in the Notice of Appeal is couched too wide. In my view, the order should be restricted to those parts of the 2nd and 3rd Defendants' accounts, journals, books and ledgers showing these companies' purchase price from their suppliers and their sale prices to the Plaintiff of the goods and materials in the transactions in Schedule B of the Statement of Claim and of the relevant paragraph in the Further and Better Particulars of the Defence referred to in the Summons.

Item (ii)

32. I then deal with the application for specific discovery relating to the delivery of resin.

33. It is common ground that 7,500 tins of a certain type of resin had been ordered by the Plaintiff from the 2nd Defendant. The Plaintiff's case is that these tins should have been delivered to the Char Tai Factory and/or the Guangzhou warehouse of the Plaintiff but these tins were never delivered. The Defendants' case is that the 2nd Defendant had duly delivered these tins. In the Further and Better Particulars of the Defence, the Defendants' case was that these tins had been delivered to the Plaintiff's customers, to Hong Kong and to the Guangzhou warehouse of the Plaintiff.

34. I note that it is not the Defendants' case that these tins were delivered to the Donguan warehouse in performance of the admitted agreement between the Plaintiff and the 2nd Defendant. However, in para.45 of the Defence, the Defendants had also pleaded that there were more than 7,500 tins of resin in the Donguan warehouse and they have pleaded that those tins allegedly not delivered "could well constitute" part of the tins in the Donguan warehouse.

35. The specific discovery is sought of the inventory of the Donguan warehouse for the month of July 1998.

36. However, in my view, the Plaintiff has failed to adduce sufficient evidence that the Donguan warehouse had an inventory for July 1998. The Donguan warehouse was only a transitory store operated by the 2nd Defendant for delivery of goods to the Plaintiff's customers. No one has deposed to there having been any practice of keeping an inventory. No reference has been made in any document to such an inventory. The Defendants' allegation of the quantity of resin in the Donguan warehouse did not come from any inventory of the Donguan warehouse itself, but from records showing deliveries from the Guangzhou warehouse. In my view, therefore, the Plaintiff fails at the first hurdle for specific discovery, i.e., it has failed to adduce sufficient evidence that this document exists. I will therefore dismiss the application for specific discovery under item (ii).

Item (iii)

37. Thirdly, there are the invoices and delivery orders and delivery records issued by the 2nd Defendant as agent for the Plaintiff under the agency agreement.

38. The Plaintiff says that it had delivered goods worth more than $3m. but the Defendant has admitted issuing invoices for only slightly more than $1m. worth of goods. So on the face of it, goods worth about $2m. had been delivered to customers without invoices having been issued by the 2nd Defendant.

39. The Plaintiff says that this failure to issue the invoices would be in breach of the agency agreement and therefore one can imply from that that the 2nd Defendant had in fact issued such invoices but had somehow refused to admit to their issue or to their disclosure. That may or may not be so, but there is no evidence that invoices had in fact been created by the 2nd Defendant for this balance of goods worth about $2m. I note that the agency agreement was relatively short-lived. It may be that no invoices had even been created by the 2nd Defendant due to the lack of time before the agreement was terminated, or it may be that no invoices were created through sheer negligence, or it may be that the 2nd Defendant had refused to create any further invoices due to the breakdown in the relationship between the Plaintiff and the 2nd Defendant. There could be any number of reasons why invoices for this balance of goods were not created.

40. Mr Lam, counsel for the Defendants, has not been able to inform me whether the invoices for the $1m. worth of goods have been included in the existing list or not, but he accepts that if they are not already there, then they ought to be there.

41. In relation to the $2m. worth of goods which is what the Plaintiff is interested in, I take the view that the Plaintiff has failed to show that these invoices (as supposed to the $1m. invoices) exist(ed). It is for the Plaintiff to consider whether to issue interrogatories asking specifically whether invoices had been created for despatch to the customers in the list in the 6th affirmation of Mr Ip. But until that is done, and positive answers given by the 2nd Defendant that invoices had been created for this $2m. worth of goods or part thereof, in my view, there is no sufficient evidence before this Court that the 2nd Defendant had ever created invoices to the customers at all. For that reason, I will also dismiss the application under item (iii) set out in the Notice of Appeal.

Production of documents

42. As for production of documents by way of the application under rule 11(2), as I have indicated above, the Plaintiff's application is inappropriate. This sub-rule is only for documents not referred to in a list of documents. As far as those accounting records for which I have ordered specific discovery are concerned, they would have to be included in a supplemental list and would have to be produced for inspection in the normal course.

43. For the other documents requested, for which I have not ordered specific discovery, there cannot be an order for production. It is implicit in rule 11 that the applicant for production should show that these documents exist and are in the possession, custody or power of the other party and that they relate to the matter in question. For the reasons which I have set out above in relation to the dismissal of items (ii) and (iii) in the Notice of Appeal, I would therefore similarly not give an order for production.

Costs

44. Accordingly, I would only grant the order sought in the Notice of Appeal in the following respect:- that the Defendants do within 7 days from the date of the order make and file an affirmation or affidavit stating whether they have or had at any time had in their possession, custody or power any class or classes of the following documents and if the said documents has or have been but is or are not now in their possession, custody or power stating when they parted with the same and what has become of the same:-

"Those parts of the accounts, journals, books and ledgers of the 2nd and 3rd Defendants showing the purchase price of the 2nd and 3rd Defendants from their suppliers and the sale prices to the Plaintiff of the goods and materials involved in the transactions referred to in Schedule B of the Statement of Claim and the 2nd para.(a) on the 1st page of the Further and Better Particulars of the Defence dated 8 February 2000."

45. As far as the costs are concerned, the Plaintiff has been successful in part only of the summons and not the rest, and certainly it has failed in relation to the application for production of documents. However, insofar as the Master refused any discovery, that order has been set aside in part. I believe that the correct order as to costs would be to order that one-third of the costs of the appeal be paid by the Defendants to the Plaintiff and two-thirds of the costs of the appeal be paid by the Plaintiff to the Defendants, and that the Master's order as to costs below be maintained and I would make this order an order nisi.