Re Jinro (HK) International Ltd.

HCCW 1352/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO. 1352 OF 2001

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REASONS FOR DECISION

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1. This is an application taken out by Jinro (HK) International Ltd. ("the Company") on 10 June 2002 for an order that certain paragraphs in the 3rd and 4th affidavits of Jeffrey Fergus filed on behalf of the petitioners, Goldman Sachs International and Goldman Sachs (Asia) Finance, be struck out on two grounds under Order 41 rule 6 and Order 38 rule 36 of the Rules of the High Court. Firstly, some of the paragraphs complained of relate to settlement negotiations that are subject to without prejudice privilege. Secondly, other paragraphs complained of contain expressions of comment, opinion and/or legal submission by a non-expert witness who is only able to give factual evidence.

2. The application was taken out pursuant to a direction I gave on 3 June 2002. I was given to understand that the Company objected to certain parts of the affidavit evidence of the petitioners on the ground that they are protected by without prejudice privilege. I decided that it would be appropriate to resolve this issue before the petition is set down for hearing because one of the deponents is residing in Korea and it would dispense with the need of cross-examination on affidavits if the parts objected to by the Company should be struck out. When the Company issued the summons to strike out, it added the second ground that I have mentioned and raised objections to other paragraphs in the 3rd affidavit of Mr Fergus.

3. At the conclusion of the hearing, I ruled that the Company is successful only to a very limited extent and these are the reasons for my decision.

4. Before I go to the two grounds of objection, I will set out briefly the relevant background to make my ruling comprehensible.

5. The petition to wind up the Company is founded on a debt of US$25 million. It is alleged by the petitioners that they are accountholders of US$25 million of the US$50 million Guaranteed Floating Rate Notes issued by the Company due 2001 ("the 2001 Notes") pursuant to documentation dated 24 June 1996, under which the Company was obliged to pay interest and the principal on the maturity of the 2001 Notes on 27 June 2001. Apart from their rights under the 2001 Notes, the petitioners allege that as accountholders they have also acquired rights against the Company under a deed of covenant executed by the Company as the issuer on 24 June 1996 in favour of all accountholders ("the Deed of Covenant"). By reason of this, they have rights of payment of principal under the 2001 Notes, as if they were holders of Definitive Notes duly executed, authenticated and issued, and rights to payment of interest. The Company has not paid interest due under the 2001 Notes after the period ending 24 December 1997. The principal was not paid on maturity. A statutory demand was served on the Company on 12 November 2001 and the petition was presented on 14 December 2001. It is alleged in the Amended Petition that "the Company has never previously disputed its indebtedness to the Petitioner".

6. In the 1st affirmation of Tae Sub Kim ("Mr T.S. Kim") filed on behalf of the Company, the Company has denied liability on these grounds. The 2001 Notes are in bearer form and they were issued under a scheme as set out in the documentation dated 24 June 1996. The 2001 Notes were initially represented by a temporary global note, which was then exchanged for a permanent global note issued on 24 June 1996. The permanent global note would then be exchangeable for Definitive Notes. In this instance, the permanent global note has never been surrendered to the Company in exchange for the issuance of Definitive Notes by the Company. In the absence of exchange of the permanent global note and the issuance of Definitive Notes, it is asserted by the Company that the petitioners cannot be holders of bearer promissory notes of any kind and do not have any rights against the Company in that capacity.

7. Insofar as the petitioners have relied on their rights as accountholders under the Deed of Covenant, the Company asserted that the petitioners have not put forward any evidence to show that they were accountholders in relation to the 2001 Notes at the relevant date as defined in the Deed in that they each held an account with a clearing system and had credited to those accounts the 2001 Notes at the material time.

8. Lastly, Mr T S Kim asserted that the Company "has never admitted liability to any of the Petitioners".

9. Among the matters covered in the 3rd affidavit of Mr Fergus filed in reply to the 1st affirmation of Mr T S Kim, he sought to refute the allegation that the petitioners were not accountholders at the relevant date. This involved a lengthy explanation as to how the Euroclear system operates, the details of which I will not go into. In summary, the 2001 Notes were issued by the Company into the international debt market via Euroclear. Euroclear is an international clearing system that provides a clearance, trading and settlement system for securities, and it is also an international central securities depository. Where securities are represented by a global note, this is lodged with a common depository authorised by Euroclear and the process of deposit of the physical document being the bearer global note is described as "immobilisation". As described by Mr Fergus, after the permanent global note for the 2001 Notes has been immobilised in a Euroclear authorised depository, the 2001 Notes are then recorded in the accounts of the relevant participants in the Euroclear system. The Euroclear participant with access to settlement and clearing in the system is recognised as the accountholder of the 2001 Notes. Transfers of the 2001 Notes would be settled electronically through Euroclear without physical exchange of any documentation and it is the book entries recording the participant's entitlement in its account with Euroclear that would constitute the source of the participant's rights attaching to the 2001 Notes, including the rights of enforcement against the Company under the Deed of Covenant.

10. The Company seeks to strike out various parts in the 3rd affidavit of Mr Fergus dealing with the Euroclear system and the transfer of securities within the Euroclear system on the basis that I have mentioned earlier.

11. Other parts of the 3rd and 4th affidavits of Mr Fergus are objected to on the basis that they deal with discussions between the Goldman Sachs entities and the Jinro group of companies that were allegedly without prejudice. This evidence was introduced to counter the assertion of Mr T S. Kim that the Company has never admitted liability to any of the petitioners. I will deal with the without prejudice privilege first.

Without prejudice privilege

12. It would be convenient to separate the paragraphs complained of into two periods. The first period covered the discussions that took place before the service of the statutory demand on 12 November 2001. The relevant paragraphs are 59 to 70 of the 3rd affidavit of Mr Fergus and 4 to 15 of the 4th affidavit of Mr Fergus. It is the contention of the petitioners that discussions in this period were not without prejudice.

13. Mr Carolan, who appeared for the Company, referred me to an article in the International Journal of Evidence & Proof, Vol. 5, 2001at page 213, entitled "Without Prejudice Privilege" by Declan McGrath, which contained a helpful exposition of the law. For a claim of privilege to succeed, the party claiming it must establish that the communication in question was made "(1) in a bona fide attempt to settle a dispute between the parties, and (2) with the intention that, if negotiations failed, it could not be disclosed without the consent of the parties". In establishing that there is a bona fide attempt to settle a dispute, the party seeking to assert privilege must show that "at the time the communication was made, a dispute existed between the parties in respect of which legal proceedings had commenced or were contemplated and the communication was made in a genuine attempt to further negotiations to settle that dispute. The fact that a communication concerns a dispute between the parties is not sufficient to confer privilege - it must be made in furtherance of the settlement of the dispute" (at pages 213-4). See also Foskett's The Law and Practice of Compromise, 5th ed., paras 27-04, 27-05 and 27-15. It does not matter that the "without prejudice" stamp was not expressly applied to the negotiations if it is clear from the surrounding circumstances that the parties are genuinely seeking to compromise their dispute (Rush & Tompkins Ltd. v. Greater London Council [1989] 1 AC 1280 at 1299, per Lord Griffiths).

14. I have considered the evidence of the discussions as related in the affidavits of Mr Fergus, as well as the account given on behalf of the Company in the 1st affidavit of Walter Yanghoon Kim ("Mr Walter Kim"), the legal counsel to the Jinro group of companies. It does not appear to me, in the discussions as related by Mr Fergus, that there was any dispute of the petitioners' rights at that time, the discussions were on the timing and terms on which the Company and the Jinro group would repay the indebtedness under the 2001 Notes by repurchasing these Notes at a discount. On the evidence of Mr Walter Kim, the discussions centred on the debts that the Goldman Sachs companies claimed against the Jinro group of companies, the latter's restructuring plans for meeting its debt obligations and the treatment of claims arising out of corporate guarantees provided by the parent company to members of the Jinro group. At the time of the discussions, and for the reasons given by Mr Walter Kim, the Jinro group did not conduct due diligence on, or determine the validity of, any of the claims raised by the Goldman Sachs entities. According to Mr Walter Kim, the validity of the petitioners' claims was never discussed in the meetings.

15. I am not satisfied on the above evidence that there was an extant dispute at the time the discussions took place and that the discussions were made in a genuine attempt to settle that dispute. There were merely requests for accommodation when there was no challenge to the petitioners' rights. The without prejudice privilege cannot be invoked in these circumstances.

16. The second period of the negotiations covered the period after the statutory demand was served. They are different from the earlier discussions in that by then, the Jinro group had by two letters in November 2001 raised a dispute to the petitioners' claim. Further, the letter in question dated 7 December 2001 (which the petitioners seek to put into evidence) was marked "without prejudice". At the requests of both parties, I have looked at that letter de bene esse.

17. It was contended by Mr Bartlett, who appeared for the petitioners, that the letter is admissible evidence under an exception to the without prejudice privilege, in that "the exclusion of the evidence would act as a cloak for perjury ... or other 'unambiguous impropriety'" (see Unilever Plc. v. Proctor & Gamble Co. [2000] 1 WLR 2436 at 2444, per Robert Walker LJ). For the expression "unambiguous impropriety", which has become part of the legal lexicon in this context, see Forster v. Friedland, unreported, English Court of Appeal, 10 November 1992, per Hoffmann LJ and Foskett's The Law and Practice of Compromise, op. cit. at paras 27-28 to 27-44. It was submitted by Mr Bartlett that the letter should be admitted as evidence as this would show that the positive assertion made by Mr T S Kim on oath that the Company has never admitted liability to the petitioners is perjured evidence.

18. The exception of "unambiguous impropriety" to pierce the veil of without prejudice privilege should only be applied in the "clearest cases of abuse of a privileged occasion", otherwise "the value of the without prejudice rule would be seriously impaired if its protection could be removed by anything less than unambiguous impropriety" (Unilever, supra. at 2444; Forster v. Friedland, supra.). As Simon Brown LJ stated in Fazil-Alizadeh v. Nikbin, unreported, English Court of Appeal, 25 February 1993, "There are powerful policy reasons for admitting in evidence as exceptions to the without prejudice rule only the very clearest of cases. Unless this highly beneficial rule is most scrupulously and jealously protected, it will all too readily become eroded."

19. It does not appear to me that the statements made in the without prejudice letter of 7 December 2001 contain an unambiguous acknowledgment of the debt of the petitioners so that it is clear that the assertion in the 1st affirmation of Mr T S Kim must be false. I hold that the exception of unambiguous impropriety does not apply in this instance for that letter to be admitted as evidence and I order that the last sentence of paragraph 71 and paragraph 72 of the 3rd affidavit of Mr Fergus, which made reference to that letter, be struck out.

Expert or opinion evidence

20. I have been taken by Mr Carolan to each of the paragraphs complained of in the 3rd affidavit of Mr Fergus. He informed me that only the parts in that affidavit as identified in paragraph 10 of his skeleton submissions would be objected to, not the paragraphs as stated in the summons issued by the Company. In the course of his submissions, he withdrew his objection to some of the paragraphs, after it was shown by Mr Bartlett that what the Company has found as objectionable is merely a paraphrase of the explanatory documents published by Euroclear on the operations and procedure of the system, which have been exhibited to the 3rd affidavit of Mr Fergus.

21. I accept the submissions of Mr Bartlett that the Company's objection is ill founded and that the application to strike out should be refused for one or more of these reasons.

22. Firstly, I am of the view that some of the paragraphs complained of (paragraphs 17, 18, 19, 23, 27, 35) do not constitute opinion evidence but are merely factual descriptions of how the Euroclear system works. The evidence was given on the basis of Mr Fergus' experience in the trading and transfer of debt securities. The fact that Mr Fergus has expertise in the field does not transform his evidence into expert or opinion evidence (Koninklijke Philips Electronics NV v. Wealth Full Technology Ltd. [2002] HKEC 740).

23. Secondly, if I were wrong about this in that the evidence given is opinion evidence, such evidence is admissible, either under section 58(2) of the Evidence Ordinance, Cap. 8 (if Mr Fergus is not an expert) or by virtue of O. 38 r. 36(2) (if Mr Fergus is an expert). Section 58(2) provides that "where a person is called as a witness in any civil proceedings a statement of opinion by him on any relevant matter on which he is not qualified to give expert evidence, if made as a way of conveying relevant facts personally perceived by him, is admissible as evidence of what he perceived". O. 38 r. 36(2) provides that the restrictions on adducing expert evidence in O. 38 r. 36(1) do not apply to evidence which is permitted to be given by affidavit. It is provided in O. 38 r. 2(3) that in any cause begun by petition, evidence may be given by affidavit unless the court otherwise directs and subject to any direction as to cross-examination.

24. Thirdly, insofar as some of the statements complained of are statements of belief (paragraphs 56, 57 and 58), based on Mr Fergus' experience and the Euroclear documents he referred to and exhibited, they are admissible on that basis.

25. Fourthly, insofar as some of the statements complained of may be regarded as comments or legal submissions (paragraphs 25, 54, 56), I would regard them as transgressions of a minor nature and I would not have exercised my discretion in this instance to strike out these paragraphs.

Orders

26. For the above reasons, I have made an order that save for the last sentence of paragraph 71 and paragraph 72 of the 3rd affidavit of Mr Fergus, which is to be struck out, the summons issued by the Company is dismissed. I have ordered that two-thirds of the costs of the petitioners in this application are to be borne by the Company in any event.