LSH v. WLS

FCMC 11001 / 2014

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

MATRIMONIAL CAUSES

NUMBER 11001 OF 2014

----------------------------

____________________

RULING
(Discovery)

____________________

The Application

1. This is the respondent wife’s application on 23 May 2016 for disclosure against the petitioner husband.

2. For convenience, I shall refer the petitioner as “P” and the respondent “R”.

Background

3. This is a long marriage.  The parties started cohabitation in 1974 and married in July 1989.  They have 3 grown-up children, aged 37, 36 and 25 respectively.  All of them are independent and are not concerned with the present proceedings.  On 19 August 2014 P petitioned for divorce on the ground of R’s unreasonable behaviour.  This was defended by R, who subsequently issued a cross-petition on the basis of P’s unreasonable behaviour.  The parties then agreed to proceed with the cross-petition on an undefended basis, consequently decree nisi was pronounced on 17 July 2015.

4. P is now aged 68 and R is 64.  P used to be the Chairman, the CEO and the majority shareholder of a listed company in Hong Kong (“Listco”) which ran a primary business in manufacturing and trading of electronic products.  In the first and second quarters of 2014, P undertook a restructuring and privatisation exercise on Listco.  According to P, the exercise was required due to the dire financial situation of the company and it involved a transfer of the shares in Listco to his private company, referred to as “Privateco” in this Ruling, and selling the “shell” of Listco to a third party, who became the Chairman of it since or about July 2014. 

5. It is also important to note that some 2 years prior to P’s petition for divorce in August 2014, R had already taken out a petition for divorce on 16 January 2012 on the basis of P’s unreasonable behaviour.  This petition was subsequently withdrawn on 2 April 2012 upon the parties’ daughter’s intervention and P’s return to their home, though they continued to sleep in separate rooms.  As can be seen below, Mr Chan, on behalf of R, relied heavily upon this fact in support of R’s application for disclosure to begin from January 2011.

6. On 15 February 2016 I gave an order for the value of Privateco and its subsidiaries as at 31 December 2015 to be assessed by a Single Joint Expert (“the SJE”) but so far the report has not been prepared yet.  The FDR has been fixed on 20 December 2016.

The Legal Principles

7. Order 24 Rule 7 of The Rules of the High Court (Cap 4A) (“RHC”) is applicable to matrimonial proceedings by virtue of Rule 3 of The Matrimonial Causes Rules (Cap 179A).  I believe the relevant legal principles are not in dispute.  They have been succinctly set out by Hon Ng J in Jade’s Realm Ltd v Director of Lands (unrep., HCA No. 1509/2012, 10 June, 2014) at § 21,

“21. I shall first remind myself of the principles which are germane to the present application.

(1) There is no jurisdiction to make an order for specific discovery under RHC O 24 r 7 unless there is sufficient evidence or prima facie case that: (a) the documents or classes of documents exist which the other party has not disclosed; (b) the documents relate to a matter in issue in the action; and (c) the documents are in the possession, custody or power of the other party.

(2) Once it is established that those three prerequisites for jurisdiction do exist, the court has a discretion whether or not to order discovery.

(3) The Court will not make an order unless the discovery sought is necessary either for disposing fairly of the cause or matter or for saving costs.

(4) The order must identify with precision the documents or categories of documents which are required to be disclosed, for otherwise the person giving discovery may find himself in serious trouble for swearing to a false affidavit, even though doing his best to give an honest disclosure.

(5) Where discovery is sought in relation to a class of documents, it is important that the class should not be defined or described too widely, and should not be defined so as to include documents which are not relevant.

(6) Despite the Peruvian Guano test for relevance, “fishing” is not allowed, and discovery should not be oppressive.

(7) Statements in a party’s affidavit of documents are conclusive e.g. on the question whether he has or has had any documents other than those disclosed, as to their relevancy or as to the grounds stated in support of a claim for privilege from production.

(8) The respondent may answer an application for specific discovery by an affidavit stating that he does not have the documents, and this will be conclusive at the interlocutory stage.

See: Hong Kong Civil Procedure 2014 Vol. 1 para. 24/7/1; Berkeley Administration Inc v McClelland [1990] FSR 381 at 382-3; Lee Nui Foon v Ocean Park Corp (No 1) [1995] 2 HKC 390 at 391-3; Paul’s Model Art GMBH v UT Ltd [2006] 1 HKC 238 at paragraphs 24 & 32; Tai Fook Futures Ltd v Cheung Moon Hoi Jeff [2006] 4 HKC 81 at paragraphs 33 to 35.

(emphasis added)

8. As regards the Peruvian Guano test mentioned in sub-paragraph (6) above, a document is relevant not only when it is evidence on any issue in dispute but “also which, it is reasonable to suppose, contains information which may – not which must – either directly or indirectly enable the party requiring the affidavit either to advance his own case or to damage the case of his adversary”.  Further, “A document can properly be said to contain information which may enable the party requiring the affidavit either to advance his own case or damage the case of his adversary, if it is a document which may fairly lead him to a chain of inquiry, which may have either of these two consequences”.  See: Peruvian Guano case (1882) 11 QBD 55 at 63.

9. In the context of matrimonial proceedings, Rayden and Jackson on Relationship Breakdown, Finances and Children (July 2016) has this to say on discovery:

[13.104]

In financial remedy proceedings, disclosure and discovery begins with service of the Form E and the documents which are required to be attached to the Form E, and any other documents necessary to explain or clarify any of the information contained in the Form E. Thereafter, disclosure and discovery is by means of a questionnaire served in advance of the First Appointment and considered by the court at that appointment, and, if the court gives permission, by further questionnaire at a later stage of the proceedings.  Questionnaires can, like interrogatories, request information as well as seek production of documents. As part of its case management role, the court should regulate the extent of the discovery of documents so that the exercise is proportionate to the issues in question, and to ensure that the discovery process does not become a fishing expedition approved by the court. (emphasis added)

The Outstanding Questions

10. The information and documents sought by R are set out in Schedule A annexed to the Summons.  The requests are made with reference to P’s Answers to R’s 3^rd Questionnaire.  By the time when it came to the substantive hearing on 13 September 2016, many of the items had already been dealt with either in the call-over hearing of 30 May 2016 or subsequently by correspondences between the parties.  What remained were 5 questions, all grouped under item No 3 of the said Schedule A, plus an additional question of when the disclosure should begin (ie para 2 of the summons).  R insists that disclosure should begin from January 2011 but P says it should be from August 2011.

11. The 5 questions under item No 3 of Schedule A are:

“3. As the valuation of (Listco) and its subsidiaries is yet to be completed, the petitioner to provide the following documents:

a. Q12 Details of financial support provided by the Petitioner to (Privateco);

b. Q13 Copies of (Privateco)’s audited financial statements for the years 2011 to 2015;

c. Q31(i) Transactions related to SLE (a subsidiary company);

d. Q32(ii) Monies transferred to various companies; and

e. Q46 Valuation of (Listco)” (emphasis added)

12. The rift has further been narrowed down to 4 questions during the hearing for the reason that Mr Chan informed the court that he would withdraw Q46 in the meantime but reserve the right to raise it again after the SJE has issued his report on the value of Privateco. 

13. At the centre of P’s opposition is that these information and documents are not necessary for the purpose of assessing the value of P’s assets.  Mr Coleman SC, on behalf of P, emphasized that the purpose of production sought by R is for the valuation of Listco but not for P’s assets, as can glaringly been seen from the opening sentence of item No 3, “As the valuation of (Listco) and its subsidiaries is yet to be completed, the petitioner to provide the following documents …”.  It is upon this basis that Mr Coleman developed his arguments in resisting the requests.

Issues to be Determined

14. Notwithstanding R has withdrawn Q46 (ie the valuation of Listco), in my view, whether the historical value of Listco is relevant to the value of P’s assets is still a live issue in relation to at least 2 out of 4 remaining questions under item No 3.  Thus, there are two issues to be determined.

1. Whether the value of the Listco is relevant;

2. Whether the disclosure should be as from August 2011 (as agreed by P) or as from January 2011 (as contended by R). 

15. With the background highlighted above, it can readily be seen why the parties have disputes over these 2 issues.  R complains that Listco was worth at least some $676 million in 2009 but its value then significantly decreased to $338 million in 2014.  After the restructuring and privatisation exercise, Privateco was worth $124.1 million only.  It has always been R’s contention that following the withdrawal of her divorce proceedings in 2012, P deliberately proceeded with the restructuring and privatisation exercise of Listco and channelled funds or dissipated / hid assets via a complicated company structure or various companies as well as to his mother and siblings with a view to defeating her financial claims in the event of a divorce.  This is in relation to Issue 1.

16. To this, P insists that it is entirely unnecessary to value Listco and is a fishing exercise.

17. As for Issue 2, R relies on the fact that the “restructuring” took place in close proximity to her petition in January 2012 and was “completed” shortly before P’s present petition for divorce. She believes the restructuring was motivated by her petition of 2012 because R had known about the looming possibility of a divorce since 2012.  For this reason, she wants to have disclosure of documents to begin one year before her own petition for divorce, ie as from January 2011. 

18. P disagrees and insists that the proper period should be from August 2011, 3 years before his own petition for divorce.

Issue 1 : Whether the value of Listco is relevant

19. According to the materials disclosed by P, Listco experienced substantial loss for 6 consecutive years from 2009 to 2014 due to competition from the US.  The net asset value of Listco fell from $676 million in 2009 to $338 million in 2014. These figures can be found in Listco’s publicly available annual reports.  P said such dire financial health called for a group restructuring exercise which took place in 2014 and consisted of 3 components:  (1) distribution of shares of Privateco which retains property investment business, (2) voluntary creditors’ scheme for Listco’s de-consolidated manufacturing subsidiaries and (3) retention of electronic trading companies for Listco.  After the privatisation, P is only retained as a salaried executive director of Listco. He maintains control over Privateco and its subsidiaries, which, as said above, is subject to valuation by the SJE. 

20. Mr Coleman submitted that there is no basis for R to have alleged that there is a case of dissipation of matrimonial assets by way of the privatisation simply on the basis that the parties’ relationship was poor previous to that event and she had petitioned for divorce in January 2011.  This allegation is tantamount to suggesting that P has “cooked the books” of Listco since 2009 in order to embark on the privatisation exercise.  It also presupposes the privatisation was conducted by means or purpose other than compliance with the rigorous disclosure and approval system under Hong Kong and the Bermuda courts and regulatory bodies.  P has already provided the SJE with Listco’s annual reports of the years 2009 – 2014, the Composite Document and the consolidated statement of financial position of Privateco as at 31 March 2015 to 31 December 2015.  Mr Coleman referred me to B v B (Matrimonial Proceedings: Discovery) [1979] 1 All ER 801, at 810C/D, where it is said that usually the court would not go behind audited accounts for company valuation unless there is evidence before it from accountants or other experts that the published accounts of the company cannot be relied upon.  In the present case, there is no suggestion that Listco’s audited accounts as contained in its annual reports cannot be relied upon.  P has since sold his shareholdings in Listco to a third-party investor in compliance with the Listing Rules of the Hong Kong Stock Exchange.  He has only retained shares in Privateco, which the SJE has already been tasked with valuing. There is also no evidence that the privatisation and the sale had been anything other than an arm’s length transaction.  In any event, the former market value of Listco is readily ascertainable from the historical trading price on the Stock Exchange. 

21. It is common ground that at present P is not holding Listco, though he may still be holding some shares of insignificant amount.  I agree with Mr Coleman that insofar as the value of P’s minuscule shareholdings in Listco after the restructuring is concerned, their values could easily have been ascertained from the daily trading price; and insofar as the value of Listco before the restructuring is concerned, the same has already been disclosed in the annual reports.  It is trite that assessment of the size of matrimonial pot is to be taken at the date of hearing.  Thus, the value of Listco has no relevance to the present value of P’s assets.

22. I need to mention that I have already heard some arguments on whether the value of Listco had to be assessed in the First Appointment hearing on 17 November 2015 as a result of which I gave a direction, as a matter of case management, that both parties should take out all necessary interlocutory applications including the valuation of Listco on or before 1 February 2016.  I gave the same direction with a deadline that such an application should be taken out by the next hearing, ie 30 May 2016.  The parties raised no objection to these directions, which were given for the purpose of identification of matrimonial assets – something that ought to be dealt with before the FDR.  As a matter of fact, by the inclusion of Q46 in item No 3, R can be seen to have taken out the application in compliance with the direction.  Given the history of the matter and further that no explanation was given as to why the application had to be withdrawn, I fail to see how R would be in a position to raise the issue again after the SJE has issued the report.  At the very least, the court should be slow to entertain another application. 

23. With the conclusion that I have come to, I now turn to individual questions.

Question 12

At Annexure 33(a) of the Petitioner’s Answer dated 17^th March 2015, the Composite Document records at page IIA-23 that:

   … Mr. LSH has agreed to provide financial support to the SXX Group upon completion of the distribution in specie ….

(i) Please provide a full account, with documentary evidence in support, of the total amount of financial support provided by the Petitioner to SXX to date and details of any such amounts, if any, repaid to the Petitioner by SXX.

24. Mr Chan emphasized that the request is a straightforward one.  R wants to know how much P loaned and how much was repaid.  In any event, these information should have been disclosed in P’s Form E.

25. P’s Answer filed on 8 March 2016 is that “These information will come to light after the financial statements of the company is (sic) provided to the SJE”. Mr Coleman explained that the SXX Group is the Privateco group post-privatization and is owned by P.  As the SJE has already been instructed to value the Privateco and its subsidiaries, this would be dealt with in the valuation.  In any event, the SJE has not sought for a sight of these information. 

26. I agree with Mr Coleman.  I am satisfied that the discovery sought is not necessary.

Question 13

For the purposes of assessing the current value of the Petitioner’s beneficial interest in (Privateco), please provide copies of (Privateco)’s audited financial statements for the years 2011 to 2015.

27. Mr Chan argued that there is no reason why these audited statements should not be produced, especially when P has already agreed to have disclosure to begin from August 2011 and accepted that the court would not go behind audited accounts for company valuation.

28. It is noticeable that the purpose for obtaining these audited financial statements is expressly stated to be for “assessing the current value” of P’s beneficial interest in Privateco.  Presumably, they are not required for any other purpose.  With the conclusion that I have come to regarding the relevance of the value of Listco, I agree with Mr Coleman that insofar as the company was a subsidiary under Listco before the restructuring is concerned, the audited financial statements during the period must be irrelevant; and insofar as they fall within the post-privatization period, they are already subject to valuation by the SJE.  Again, I was informed that the SJE has not asked for these documents. 

Question 31

According to the Petitioner’s Form E, there are no monies owed to the Petitioner. However, based on the Summary of Transactions over $100,000, the Petitioner:-

(a) loaned HK$2,429,400 to members of his family for the purported purpose of exercising (S) options; and

(b) transferred HK$10,424,740 to members of his family with no explanation as to the reason(s) for the transfers.

Please refer to the Summary of Monies transferred by the Petitioner to his family members at Annexure 3 (sic) (note:  should be Annexure 4) attached hereto.

(i) Please provide a full account, with documentary evidence in support (including but not limited to loan agreements), of all amounts transferred by the Petitioner to members of his family from January 2011 to date; the reasons for each transfer; the terms of any loans; details of loan repayments made by the Petitioner’s family members; and details of any loans that have not been repaid.

29. Mr Chan adopted the same argument as he did for Q12 that these information regarding liabilities owed to P should have been disclosed in his Form E.

30. Mr Coleman informed the court that the only outstanding issue under this request concerned “S Electronics Limited”, which is a subsidiary of Privateco.  Given that the value of Privateco is going to be assessed by the SJE, the value would necessarily include the value of this company.

31. In response, Mr Chan submitted that the SJE has a different task from that of R’s forensic accountant. The SJE would not be interested in the transactions that P had with his family members and other companies which may or may not be the subsidiaries or associated companies of Privateco in the last few years but R is entitled to know, in particular how much P has loaned and how much has been repaid. 

32. I find some force in Mr Chan’s arguments.  Given that one of the issues would be on whether P channelled funds or dissipated or hid assets via a complicated company structure or various companies as well as to his family members with a view to defeating her financial claims, I consider these documents and information are relevant under the Peruvian Guano test - they may fairly lead R to a chain of inquiry which may either advance her case or damage the case of her adversary.  Considering that P has already conceded to have disclosure to begin from August 2011 and the significant stake involved I would allow this request but the disclosure should be limited to commence from August 2011.  In coming to this decision, I have borne in mind the commentary in Rayden and Jackson, supra, that the court should regulate the extent of the discovery so that the exercise is proportionate to the issues in question, and to ensure that the discovery process does not become a fishing expedition.

Question 32

According to the Petitioner’s Form E, there are no monies owed to the Petitioner. However, based on the Summary of Transactions over $100,000 records that between March 2012 and January 2015 the Petitioner transferred:-

(a) HK$47,265,468 to SLE Company Limited.

(b) HK$729,000 to EE Property Limited.

(c) HK$420,000 to FKP.

Please refer to the Summary of Monies transferred by the Petitioner to the affiliated companies at Annexure 4 (sic) (note: should be Annexure 3) attached hereto.

Please provide a full account, with documentary evidence in support (including but not limited to loan agreements), of all amounts transferred by the Petitioner to the companies identified above from 2011 to date; the reasons for each transfer; the terms of any loans; details of loan repayments made by the companies identified above; and details of any loans that have not been repaid.

33. The companies referred to in this request are associated companies of Privateco. Mr Coleman adopted the same argument that the value of these companies would be included in the SJE’s assessment.  He confirmed that if the SJE so requests for the purpose of valuing Privateco, the same would be provided.

34. I see little difference in nature between this question and Question 31.  R is essentially asking what debts are owed to P.  For the reason that I have said regarding Question 31, I am of the view that P has to produce the same.  Again, the disclosure is to commence from August 2011.

(2) Whether the Disclosure Should Start from January 2011

35. R insists that disclosure should begin from January 2011.  This is one year before her petition for divorce.  On the other hand, Mr Coleman submitted that P has properly consented to a 3-year pre-petition disclosure period, ie since August 2011, which is much longer than the normal period.

36. R’s reason is simple - January 2011 is one year before her petition for divorce.  In his skeleton, Mr Chan submitted it is certainly the case that P started to “do things” after the divorce had become a real possibility.

37. In my view, all that R can say is the proximity and timing nexus of the restructuring of Listco to R’s own petition and P’s present proceedings.  Other than that, as the matter now stands, there is nothing to support her belief that the restructuring exercise was executed with a view to defeat her ancillary relief claims.  The three-year disclosure period that P has agreed is sufficient.  It is sufficient for the purpose of an avoidance of disposition application under section 17 of The Matrimonial Proceedings and Property Ordinance (Cap 192) where it is provided that a disposition which took place less than three years before the date of the application is presumed, unless the contrary is shown, to have been made with the intention to defeat R’s claim.  The court is not dealing with her petition for divorce.  I see little force in seeking disclosure to begin one year before her petition.  In the absence of any materials that may give rise to a chain of inquiry, I see no reason for extending the disclosure period.

Conclusion

38. For the reasons aforesaid, I have determined in favour of P on 2 of the 4 questions canvassed in the substantive hearing.  I also found in his favour on the disclosure period.  As for R, she is successful in obtaining Questions 31 and 32.  I therefore give an order that:

1. P do provide his Answers to R’s requests under item Nos 3(c) and 3(d) of Schedule A attached to the summons within 14 days. Such answers are to commence from August 2011;

2. R’s requests under item Nos 3(a) and (b) of Schedule A attached to the summons are dismissed; and

3. Paragraph 2 of the summons (ie the disclosure period) is dismissed.

39. P has already agreed to provide the remaining items within 35 days from the date of the substantive hearing (ie by 18 October 2016). They are items nos 1(a), 2(a), 2(b), 2(c), 2(d), 2(e), 2(f), 2(g), 2(h), 2(i), 2(j), 2(l), 2(m), 2(n), 4, 5 and 6.  Needless to say, these documents are to begin from August 2011. By now, P should have complied with the same.  At all events, I give an order that the petitioner do provide these information and documents within 7 days from the date hereof.

40. I also give an order that a penal notice is to be endorsed.  Service of the order upon P’s solicitors shall be sufficient service to found an application for committal of the petitioner disobeying the order.

41. As regards item No 2(k), P has already provided the documents to the SJE.  P agrees to the extent that further specific documents are required by the SJE the same will be provided within 35 days.  I will hold him upon this agreement.

42. As for item Nos 1(b) and 7, P has already complied with it on 8 September 2016

Costs

43. Hartmann J (as he then was) in F v F (No 2) [2003] 3 HKLRD 976, made the point in §22 that, “the long-established principle that costs are determined not by dividing litigation into quantifiable subjects and figures, like a profit and loss account, but rather by way of overall impression”.

44. I have heard counsel’s arguments on costs.  With the concessions of P, R has been successful in obtaining most of the items before the substantive hearing and also item Nos 3(c) and (d) after arguments.  P has been successful in resisting item Nos 3(a) and (b) and the disclosure period.  Apparently, it is fair to say that R has been more successful in terms of numbers.  Yet, I also need to take R’s withdrawal of Question 46 for no reason into account; and overall, P has been more successful in the substantive hearing.  Doing the best I can and taking all the factors in a round, I am of the view that the appropriate order would be for P to pay 1/3 of the costs of R’s application, with counsel certificate.  The remaining 2/3 should be no order as to costs and I so order.