DELCO PARTICIPATION B.V. v. HWH HOLDINGS LTD

HCA 2943/2015
HCA 3040/2015
HCA 2939/2016

[2019] HKCFI 2923

HCA 2943/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2943 OF 2015

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HCA 3040/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 3040 OF 2015

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HCA 2939/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2939 OF 2016

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(Heard together)

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DECISION

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The appeals

1.  These are the appeals by HWH Holdings Limited (“HWH”) and Fang AnKong (“Fang”) against the decisions of Master H Au‑Yeung (the “Master”) made on 11 May 2018 refusing their applications against Delco Participation B.V. (“Delco”) for the provision of certain further and better particulars (“F&BPs”).  The pleadings concerned of which F&BPs were sought are:

 (a) Delco’s Amended Reply and Defence to Counterclaim (“Delco 2943 AR&DC”) filed in HCA 2943/2015 (“HCA 2943”);

 (b) Delco’s Amended Reply and Defence to the Defence and Counterclaim of the 2^nd Defendant (“Delco 3040 AR&DC”) filed in HCA 3040/2015 (“HCA 3040”); and

 (c) Delco’s Amended Reply to Defence of the 3^rd and 4^th Defendants (“Delco 2939 Amended Reply”) filed in HCA 2939/2016 (“HCA 2939”, and together with Delco 2943 AR&DC and Delco 3040 AR&DC collectively, the “Replies”) [1].

The requests for F&B

2.  On 11 October 2017, HWH/Fang took out a summons in each of the Actions (the “F&B Summonses”) for F&B of the Replies.  The requests were set out in the F&B Summonses (the “2943 Requests”, the “3040 Requests” and the “2939 Requests” and collectively the “Requests”).  Delco had no objection to answering some of the requests in those Requests.  On 27 October 2017, the Master ordered that the disputed requests be adjourned for argument.

3.  On 24 November 2017, Delco voluntarily provided answers to all the Requests.  3 sets of Voluntary Further and Better Particulars (“2943 VF&BPs”, “3040 VF&BPs” “2939 VF&BPs”, and collectively the “VF&BPs”) were served.  Delco did so whilst maintaining its stance that HWH/Fang were not entitled to them.  The VF&BPs were hence all prefaced with the following statement stating Delco’s position (which Mr Nip calls it the “Headline Position”):

“ The responses below are given voluntarily without prejudice to the Plaintiff’s position that the Defendant is not entitled to one or more of the Requests and/or that one or more of the Requests is/are not necessary for disposing fairly of the cause or matter or for saving costs. The Plaintiff reserves its rights to take issue on all or any of such Requests.”

4.  HWH/Fang took the view that many of the answers provided were inadequate.  They took the further view that Delco’s Headline Position was relevant to the question of costs.  The substantive hearing of the F&B Summonses was hence proceeded with.  That took place on 20 April and 11 May 2018.  At the end of the hearing, the Master granted the application in respect of some requests, refused some, and ordered HWH/Fang to pay 70% of Delco’s costs of the hearing.  

5.  HWH/Fang now seek to appeal against part of that decisions of the Master.  I said part because HWH/Fang are not seeking to appeal against all the refusals.  Given the overlapping contents amongst the Replies, the Requests and the VF&BPs, those requests which are the subject‑matters of these appeals (the “Subject Requests”) may best be set out in a table. Each of the requests in each of the columns or sub‑columns (which contents I will return to later) are, or are materially, the same:

HWH/Fang also seek to appeal against the costs order made by the Master.

6.  In the course of the hearing before me, Mr Nip informed me that in respect of Group 2, Group 3, Group 5 and Group 6, he, whilst not accepting or conceding that the answers provided in the VF&BPs were full, sufficient and proper, he would not be pushing for further answers beyond those already provided in the VF&BPs.  In respect of those 4 groups, Mr Nip informed me that the only issue remaining is costs.  However, to resolve the issue on costs, the Court is still required to decide whether HWH/Fang were entitled to raise them in the first place.

The background facts   

7.  The Actions are related.  The facts are not straight forward.  They concern disputes arising from the joint venture formed between Delco and its predecessors on the one part, and Fang and his companies (“Fang’s Group”) on the other.  The joint venture was subsequently listed on the Hong Kong Stock Exchange in 2010 through Chiho‑Tiande Group Limited (“CT Group”) as the listing vehicle.

The plaintiff

8.  Delco is the common plaintiff in the Actions.  It is a company incorporated in the Netherlands in November 2000.  It is a company within a group (the “Delco Group”).  Within the Delco Group were also Delco Asia Company Limited (“Delco Asia”) and its predecessor Delco Recycling B.V. (“Delco Recycling”).  Delco Asia was incorporated in Hong Kong in November 2001, and was dissolved upon deregistration in September 2012. 

9.  Each entity within Delco Group was jointly held by SVO Company B.V. and H.P.L. Metals B.V. SVO, which were and are in turn solely owned by respectively Mr Stephanus van Ooijen (“SVO” or “Stephan”) and Mr Herman de Leeuw (“HDL” or “Herman”).  

10.  Delco is pursuing the Actions under the direction of an independent director appointed by the Dutch Court in February 2016.

The defendants

11.  The defendants in each of the Actions differ:

 (a) In HCA 2943, HWH is the sole defendant.  It is a BVI company incorporated in April 2008 with Fang as the sole beneficial owner;

 (b) In HCA 3040, CT Group is D1, and Fang D2.  Fang had been the Chairman of CT Group until 29 April 2015, and its Vice‑Chairman and CEO until 16 February 2016;

 (c) In HCA 2939, CT Group is D1, Chiho‑Tiande (HK) Limited (“CT (HK)”) D2, HWH D3, and Fang D4.  CT (HK) was incorporated in Hong Kong in May 2004, with Fang as its sole shareholder.  In August 2008, it became an indirect wholly owned subsidiary of CT Group.

Dealings which led to the Actions

12.  Since the 1990s, Fang and his companies had been trading with Delco Recycling.   

13.  In 1999, Stephan, Herman and Fang became joint venture partners to carry on metal scrap recycling and trading business (the “Joint Venture”). Taizhou Chiho‑Tiande Metals Co Ltd (“CT Metals”) was the joint venture entity established for that purpose.  Delco Asia was set up in 2001 by Stephan and Herman to hold their investments in the Joint Venture and to operate as a procurement company for the Joint Venture.

14.  In 2002 and 2003, the Joint Venture was restructured and placed into an investment holding company called Hefast Corporation Limited (“Hefast”). Hefast was jointly owned by Delco’s Group and Fang’s Group.

15.  In 2003, HKM Metal Limited (“HKM Metal”) was established by Fang.  Delco Asia and HKM Metal became the major scrap metal suppliers of the Joint Venture.

16.  In around 2008, Stephan, Herman and Fang decided that the Joint Venture should be listed (the “Listing”).  CT Group was incorporated in May 2008 in the Cayman Islands as the holding company for that purpose.  It was held in equal shares by Delco and HWH.   

17.  The Listing subsequently took place on 12 July 2010.  Fang was the Chairman and Chief Executive Officer of CT Group.

18.  According to the case of HWH/Fang [2], prior to the Listing, each of Fang, his wholly owned companies and Delco Asia had advanced loans (collectively “Shareholders’ Loans”) to CT Group and its subsidiaries.  The total amount of the portion of Shareholders’ Loans from Fang and Fang’s Group was HK$223,671,266, and that from Delco Asia was HK$169,681,118.  As part of the Listing exercise, Delco Asia and Fang as the assignors of the one part and CT Group as the assignee of the other entered into a Shareholders’ Loan Assignment and Capitalisation Agreement dated 24 June 2010 (the “Capitalisation Agreement”).  Pursuant to the Capitalisation Agreement, part of the Shareholders’ Loans was capitalised into CT Group’s shares, and the uncapitalised portion of the Shareholders’ Loans (the “Uncapitalised Portion”) was to be repaid in full by CT Group out of the proceeds of the listing.  Delco Asia’s Uncapitalised Portion at the time was in the amount of HK$57,827,118 [3].

19.  It is Delco’s case that by an Assets & Liabilities Transfer Agreement dated 3 October 2011 (the “Assets and Liabilities Transfer Agreement”), Delco acquired all assets and liabilities of Delco Asia as of 31 December 2010.

20.  After the Listing, Delco intended to reduce its investment in CT Group and took steps to exit from the Joint Venture.  As pleaded by Delco[4] and summarized by Mr Dawes SC [5], leading counsel for the Delco Group:

 (a) on 17 January 2012, Delco and HWH agreed to sell an aggregate of about 16% of CT Group shares to Sims Metal Management Dragon Holdings Limited (“Sims”) for HK$4.50 per share.  By a subscription agreement signed by CT Group, Sims, HWH and Delco, HWH and Delco agreed to re‑invest into CT Group about 2/3 of the proceeds of their sale by subscribing convertible bonds issued by CT Group.  The principal amount of the convertible bond subscribed by Delco (the “CB”) was HK$312.6 million;

 (b) By a Transfer Agreement dated 17 January 2012 entered into between Delco and Fang on behalf of HWH (the “1% Sale Agreement”), Delco sold approximately 1% of the shares in CT Group to HWH for HK$4.50 per share.  Delco transferred the shares to HWH on or about the same day.  The total consideration was HK$46,833,466, which the parties agreed would be left outstanding and be payable on demand.

21.  By a Sale and Purchase Agreement dated 23 January 2015 (the “January 2015 Agreement”), Delco agreed to sell the remainder of its holding in CT Group to HWH for HK$2.50 per share.

22.  On 16 February 2015, CT Group made an announcement of a “Possible Fund Raising” and stated in effect that it had secured investment commitment from an independent third party investor.  On 27 March 2015, that investor was announced to be USUM Investment Group Hong Kong Ltd (“USUM”). 

23.  The share price of CT Group substantially increased after the January 2015 Agreement, from HK$2.94 per share on 23 January 2015 to HK$12.46 on 16 June 2015.  Delco’s case is that that was the result of the announcements in respect of the investment by USUM.

24.  By 17 December 2015, HWH had transferred most of its interest in CT Group to USUM and those parties declared to be acting in concert with it (other than HWH).  They had by then acquired a total stake of about 56.61% of CT Group.

HCA 2943

25.  In HCA 2943, Delco claims against HWH the outstanding sale price of HK$46,833,466 under the 1% Sale Agreement.

26.  HWH admits the existence of the 1% Sale Agreement.  It further admits that the shares concerned had been transferred.  HWH relies on the defence of set‑off, that it is entitled to set off the whole or part of Delco’s claim against certain debts which Delco owes to HWH.  The financial transactions which have been pleaded as being relevant to that defence are complicated.  They may be summarized as follows:

 (a) For the purpose of assisting Delco Asia’s business operations, HKM Metal and Fang had over certain periods made to Delco Asia a number of loans.  Those loans had no fixed term, were unsecured, interest‑free and were repayable upon demand.  No written loan agreements had been entered into;

 (b) As a result of those loans, and immediately before the Listing, Delco Asia owed (a) Fang the total sum of HK$31,772,969.19 (the “alleged HK$31m Fang Debt”) and (b) HKM Metal the total sum of HK$72,345,000 (the “alleged HK$72m HKM Debt”) (together and in total HK$104,117,969.19, the “alleged Debts”).  Subsequently in around June 2013, upon HKM Metal’s cessation of business, HKM Metal assigned the alleged HK$72m HKM Debt to Fang;

 (c) In around late June 2010 and in anticipation of repayment of the Shareholders’ Loans, Fang on behalf of HKM Metal and himself of the one part, and Stephan on behalf of the Delco Group of the other, orally agreed that the alleged Debts should be repaid by Delco’s Group after the Listing (1) as and when Fang demands, whatever the form of payment so long as the payment was in satisfaction of the needs of Fang and/or Fang’s Group; or (2) when Delco Asia had sufficient funds (the “alleged 2010 Agreement”);

 (d) It was part of the listing requirement of CT Group that upon successful listing, all the Uncapitalised Portion would be repaid and CT Group’s liability to the shareholders cleared.  Accordingly, amounts of HK$78,880,708 and HK$46,513,200 were in July 2010 paid to Fang as part repayment of the Shareholders’ Loans;

 (e) Further, pursuant to the Capitalisation Agreement and in order to give effect to the alleged 2010 Agreement, CT Group on about 13 July 2010 transferred HK$50m to Fang as further repayment of the Shareholders’ Loans;

 (f) Fang had therefore received from CT Group in total HK$175,393,908 (HK$78,880,708 + HK$46,513,200 + HK$50m).  It is the case of Fang and HWH that part of that total sum represented Delco Asia’s Uncapitalised Portion, which was treated as part repayment of the alleged Debts by Delco Asia to Fang.  As pleaded in §15 of HWH’s Amended Defence and Counterclaim in HCA 2943:

“ [Fang] had therefore received a total of HK$175,393,908 in repayment of the [Uncapitalised Portion]. Of that sum, the amount representing the Delco Asia’s Uncapitalised Portion was in part repayment of the Debts. To reflect the part repayment of the Debts by Delco’s Group in Delco Asia’s draft financial statements for the year ended 31 December 2010, the Delco Asia’s Uncapitalised Portion should be, or should have been, set off against the Debts, which would leave, or would have left, a net balance of HK$48,581,304.19 payable by Delco Asia to [Fang].”

 (g) In July and August 2011, Mr Frank van Lint (“Frank”) allegedly representing Delco Asia objected to the above accounting treatment and denied that Delco Asia had agreed to set off Delco Asia’s Uncapitalised Portion against the alleged Debts.  Because of the objection, Fang agreed to Frank’s suggested accounting treatment whereby CT Group’s liability in respect of Delco Asia’s Uncapitalised Portion (which according to HWH/Fang was subject to certain adjustments, and the adjusted amount was HK$55,501,079.97) would be treated as having been taken up by Fang and recorded in Delco Asia’s accounts as a receivable from Fang, while the alleged HK$31m Fang Debt would at the same time be recorded in the same accounts separately as a liability of Delco Asia owed to him.  The said accounting treatment was evidenced by an audit confirmation dated 15 August 2011 signed by Delco Asia and Fang (the “Audit Confirmation”);

 (h) After the above events and since then, Delco’s Group and Fang’s Group had adopted a convention of not immediately offsetting mutual receivables and payables (the “Convention”).  As pleaded in §15B of HWH’s Amended Defence and Counterclaim in HCA 2943:

“ [Fang’s] agreement as aforesaid was without prejudice to his position that part of the Debts had in fact been repaid pursuant to the 2010 Agreement, although as a matter of accounting treatment, no set off would yet be recorded in Delco Asia’s financial statements…Delco’s Group and Fang’s Group have since adopted as a conventional basis of their legal relationship the practice that their mutual receivables and payables would not be immediately offset against each other, but would instead be recorded as receivables or payables (as the case may be) in the accounts, such that if either party were to demand payment of its debts at any time, the receivables and payables would be immediately set off against each other and only the net balance would be payable (‘the Convention’).”

 (i) At the time when the 1% Sale Agreement was entered into and the relevant shares transferred, both Fang and Stephan were aware of the alleged Debts and of the fact that Fang had personally taken up CT Group’s liability in respect of Delco Asia’s Uncapitalised Portion (ie HK$55,501,079.97).  Despite the fact that the overall indebtedness of Delco’s Group towards Fang exceeded the amount of the consideration payable under the 1% Sale Agreement, but because of the Convention, mutual payables and receivables were made in the accounts, but were not immediately set off;

 (j) Separately, in accordance with the alleged 2010 Agreement and pursuant to Fang’s demand made orally to Stephan on 28 August 2012, Delco instructed CT Group to transfer the sum of HK$6,252,000 to HWH, being the first coupon interest on the CB, in part repayment of the alleged Debts (the “CB Interest”). Pursuant to the Convention, there was no immediate set‑off of that sum against the alleged Debts;

 (k) On 3 March 2017, Fang orally assigned to HWH all his rights and interest in the amount of HK$47,117,969.19 being part of the alleged Debts;

 (l) Pursuant to the alleged 2010 Agreement and/or the Convention, Delco is estopped by convention from demanding payment of the consideration under the 1% Sale Agreement without first setting off the amounts payable by Delco Group to Fang’s Group.  Departure from the Convention is unjust and HWH would suffer detriment.  In the premises, the total of the alleged Debts (HK$104,117,969.19) ought to be set off against the total of HK$103,653,079.97 recorded to be owing by Fang’s Group to Delco (the total sum of HK$103,653,079.97 being (1) Delco Asia’s adjusted Uncapitalised Portion, (2) the consideration under the 1% Sale Agreement, and (3) the CB Interest.

27.  Mr Nip, counsel for HWH/Fang, submits [6] that the pleaded defences of set‑off have prompted Delco to allege for the first time in its Replies that there was a scheme of under‑reporting of profits of the Joint Venture (the “Scheme”).

28.  The material parts of Delco 2943 AR&DC, which are repeated in Delco 3040 AR&DC and Delco 2939 Amended Reply go as follows:

 (a) In respect of the Scheme and its effect:

“ 6.1 From around 2001, profits generated by the operating companies of the Joint Venture incorporated in the PRC, including Taizhou Chiho‑Tiande Foundry Company Limited…and CT Metals…, were significantly under‑reported in the PRC Operating Companies’ accounts.

6.2 The profits that were not reported (the ‘Unreported Profits’), and thus not taxed in the PRC, were transferred, at the direction of Fang, from the PRC Operating Companies to Fang or to companies or persons associated with him. Although not aware of the detailed methodology, the Plaintiff understands that the under‑reporting of profits in the PRC Operating Companies and the transfer of those profits were achieved by various methods, such as through mis‑invoicing the purchase and sale of inventory, and falsely recording commission payments.

6.3 The Unreported Profits were subsequently reinvested in the Joint Venture by or at the direction of Fang during the period 2001 to 2008. By the time of the proposed listing in 2008, a total of approximately HK$400 million had been invested into the Joint Venture by Fang (directly or indirectly via other entities); the vast majority of which represented the reinvestment of the Unreported Profits.

…

6.6 As at 2008, and in preparation for the listing of the Joint Venture, there was a need to ensure that Delco’s Group and Fang’s Group were recorded as having made approximately equal investments in the Joint Venture (to reflect Delco’s Group’s 50% interest in the Joint Venture).

6.7 In pursuit of this balancing exercising, in 2008:

(a) the 2007 Delco Asia Accounts were adjusted…

(b) Delco Asia booked in its 2008 accounts a new receivable…

6.8 By the arrangements pleaded in paragraph 6.7 above…

(a) Delco Asia was recorded as having contributed a total of HK$169,681,118 to the Joint Venture…

…

6.9 In the accounts of Delco Asia, it was necessary for the purpose of the Scheme to show liabilities corresponding to the shareholder loans to the Joint Venture described in paragraph 6.8(a) above prior to the audit of the Joint Venture in preparation for listing. Accordingly, Delco Asia booked a number of different payables…totalling HK$169,843,599 to Fang, his wholly‑owned or affiliated entities incorporated offshore…

…

6.11 By reason of the aforesaid, it is averred that:

(a) The mutual intention of Delco Asia, Fang and HKM Metal was that the alleged Debts would not be repayable by Delco Asia as repayment would not reflect the equal shareholding of Fang’s Group and Delco’s Group held in the Joint Venture (and, following the listing, in CT).

(b) Further or alternatively, the alleged Debts as booked in Delco Asia’s accounts were a sham, in that they were created solely or predominantly for the reasons described above and they were not intended as genuine debts with repayment obligations.

(c) Accordingly, Delco Asia was not indebted to Fang and HKM Metal (nor Chern Shyn Kang) as alleged.

6.12 The Plaintiff does not admit that the [Audit Confirmation] was issued by Delco Asia. It was not signed by any director of Delco Asia. In any event, it cannot give any legal effect to the [alleged HK$31m Fang Debt] which does not exist.

…

  8.1 The existence of the 2010 Agreement is specifically denied.  Further, it is averred that SVO was not a director of Delco Asia and accordingly had no authority (whether actual, apparent or implied) to enter into the alleged 2010 Agreement on behalf of Delco Asia with Fang.”

 (b) In respect of the Audit Confirmation, Delco pleads further at §15.4 that:

“ It is admitted that Delco Asia’s chop was applied to the [Audit Confirmation] and that the audit confirmation was counter‑signed by Fang, but it is not admitted that the audit confirmation was issued by Delco Asia. The audit confirmation was not signed by any director of Delco Asia.”

 (c) The existence of the alleged Convention is denied.

 (d) As summarized by Mr Dawes[7]:

“ In summary, (a) Delco did not owe the alleged Debts to Fang and Fang’s Group; (b) HWH owed HK$46,833,466 to Delco, being the consideration under the 1% Sale Agreement; (c) HWH/Fang owed HK$6,252,000 to Delco, being the CB Interest; and (d) CT Group, or alternatively Fang, owed HK$57,827,118 to Delco, being Delco Asia’s Uncapitalised Portion.”

HCA 3040

29.  In HCA 3040, Delco claims against CT Group, alternatively Fang, Delco Asia’s Uncapitalised Portion.

30.  Fang and CT Group have raised primarily the same defences as HWH has in HCA 2943, and Delco’s reply is also largely the same.

HCA 2939

31.  In HCA 2939, Delco claims against CT Group, CT (HK), HWH/Fang the CB Interest.  Similar defenses and replies have been raised.

32.  Further, Delco claims against Fang breach of fiduciary duties by failing to disclose the potential investment of USUM which information Delco says would be favorable to the share price of CT Group.  Fang denies owing fiduciary duties to Delco, or that he was in breach of the same.

33.  The following paragraph in the Delco 2939 Amended Reply is relevant to this appeal, that

“ 15. While SVO (Stephan) was a director of CT and in theory had access to CT’s books, in practice, he was only informed in a very general way about the business of CT. He did not speak or read Chinese and had no independent way to obtain information other than relying on those associated with Fang, such as Paul Chow (CFO of CT) and Emily Chan (assistant of Fang)…”

The Subject Requests

34.  I start with an overview of the Subject Requests:

 (a) I refer to the Table in paragraph 5 above;

 (b) The Subject Requests relate primarily to the Scheme pleaded in the Replies and the related Audit Confirmation;

 (c) In respect of all Groups except Group 5, the Subject Requests relate to “the basis” upon which certain allegations that Delco makes in its Replies;

 (d) In respect of Group 5, the Subject Requests relate to the related Audit Confirmation;

 (e) In respect of Groups 2, 3, 5 and 6, as I have recorded above, whilst not accepting or conceding that the answers provided in the VF&BPs were full, sufficient and proper, Mr Nip is not pushing for further answers beyond those already provided in the VF&BPs.  The entitlement on the part of HWH/Fang to raise those relevant requests in the first place will nonetheless have to be decided in order to determine the issue of costs.

Delco pleading fraud

35.  Mr Nip’s main argument is that Delco, by pleading the Scheme, “was plainly alleging fraud ”, and that “it follows that special rules apply as to the level of particularity required for Delco to plead a case of fraud” [8]. He relies on Order 18, rule 8(1).  He relies further on Zimmer Sweden AB v KPN Hong Kong Ltd [2016] 1 HKLRD 1016.

36.  In Zimmer Sweden, the Court of Appeal was concerned with the “fraud exception” under Order 14, rule 1(2)(b).  Yuen JA observed that in considering whether that exception applies, the court should have regard to all the relevant materials and ask the question “does this action include a claim for which an allegation of fraud would have to be made by the plaintiff in order to establish or maintain that claim” [9]. In considering in turn that question, one must look at the substance, and not the mere form of the plaintiff’s case.  If all the factual constituents of fraud are alleged and relied upon, it does not matter whether the actual word “fraud” has or has not been used[10]. Her Ladyship observed further at §18(5) that:

“ It may be that originally a claim (eg breach of fiduciary duty) may be established without the plaintiff having to make an allegation of fraud (as in Newton). But the nature of the defence (whether disclosed in a pleading or an affidavit) may be such that in rebuttal (whether in a Reply or in an affidavit in reply), the plaintiff would have to allege fraud, in which case, ‘the fraud exception’ would be engaged.”

37.  In the present case, whilst I am not concerned with the “fraud exception”, the considerations which Yuen JA explained in Zimmer Sweden are nonetheless relevant.  I note that words like “fraud” and “dishonesty” have not been specifically used in the Replies.  But that is not conclusive one way or the other.    I need to consider the nature of the allegations made by Delco in relation to the Scheme, which I have. The Scheme is alleged to have been one of deliberate underreporting of profits to the relevant authorities in the Mainland.  Methods such as “mis‑invoicing the purchase and sale of inventory, and falsely recording commission payments ”[11]are alleged to have been employed.  It has further been alleged that “the alleged Debts as booked in Delco Asia’s accounts were a sham”[12].   In the light of the substance of the allegations, and albeit raised only in the Replies, and applying Zimmer Sweden, I am satisfied and conclude that Delco has in relation to the Scheme pleaded and alleged fraud.

The level of particularity required

38.  Mr Dawes does not appear to be seriously arguing against Mr Nip’s contention that fraud has been pleaded in relation to the Scheme.  His focus is rather the approaches and principles to be applied despite that.

39.  In Aktieselskabet Dansk Skibsfinansiering v Wheelock Marden & Co Ltd & Ors [1994] 2 HKC 264 at 270, Bokhary JA (as he then was) explained that:

“ What pleadings must do – generally …

… [T]he things which properly particularized pleadings must do are to:

(1) inform the other side of the nature of the case they have to meet as distinguished from the mode in which that case is to be proved;

(2) prevent the other side from being taken by surprise at the trial;

(3) enable the other side to know what evidence they ought to be prepared with and to prepare for trial;

(4) limit the generality of the pleadings, the claim and the evidence;

(5) limit and define the issues to be tried, and as to which discovery is required; and

(6) tie the hands of the party so that he cannot without leave go into any matters not included (although if the opponent omits to ask for particulars, evidence may be given which supports any material allegation in the pleadings).

… and especially where fraud is alleged

To the generality of the foregoing must be added the special rule that allegations of fraud must be pleaded distinctly and with the utmost particularity.  The word ‘distinctly’ is the one used by Thesiger LJ in his well‑known statement in Davy v Garrett (1878) 7 Ch D 473 at p 489 as to how fraud is to be pleaded.  And the expression ‘utmost particularity’, as one sees from note 18/8/8 at p 297 of Vol 1 of the 1993 Supreme Court Practice, is the one chosen by its learned editors and has the authority of their combined experience.”

40.  Underpinning the reasons for those rules are in my view the notion of fairness and justice:

 (a) In Aktieselskabet, immediately after setting out those rules, Bokhary JA explained at p 270F that:

“ None of the basic rules of pleading have anything to do with technicality. All of them have everything to do with practical justice.” (Emphasis added, same in this paragraph below.)

 (b) In Deak Perera Far East Ltd v Deak & Ors [1995] 2 HKC 28, Mortimer JA observed at p 38A to C that:

“ It is well settled that fraud must only be pleaded when there is sufficient evidence. It must then be pleaded specifically and the party must give full particulars of the case upon which it relies. If he fails to particularise his case in his original pleading, he will be ordered to do so before discovery. This is so even in cases such as this where some of the facts are known only to the other party.

   The principle is that it is not just to permit a party to raise a vague unparticularised case on the pleadings in the hope of making it good after discovery.  Equally, if a party has evidence of fraud and he gives sufficient particulars, justice requires that he be allowed to proceed even if his case is augmented after discovery.”

 (c) Indeed, as stipulated in Order 18, rule 12(3B), no order shall be made under Order 18, rule 12(3) for service of particulars “unless the Court is of the opinion that the order is necessary either for disposing fairly of the cause or matter or for saving costs”.

 (d) As explained by Lord Millett in Three Rivers DC v Bank of England (No 3) [2003] 2 AC 1, the purpose of the “special rule” under discussion is to give the opposite party sufficient notice of the case he has to meet:

“ 185 It is important to appreciate that there are two principles in play. The first is a matter of pleading. The function of pleadings is to give the party opposite sufficient notice of the case which is being made against him. If the pleader means ‘dishonestly’ or ‘fraudulently’, it may not be enough to say ‘wilfully’ or ‘recklessly’. Such language is equivocal. A similar requirement applies, in my opinion, in a case like the present, but the requirement is satisfied by the present pleadings. It is perfectly clear that the depositors are alleging an intentional tort.

   186 The second principle, which is quite distinct, is that an allegation of fraud or dishonesty must be sufficiently particularised, and that particulars of facts which are consistent with honesty are not sufficient.  This is only partly a matter of pleading.  It is also a matter of substance.  As I have said, the defendant is entitled to know the case he has to meet.  But since dishonesty is usually a matter of inference from primary facts, this involves knowing not only that he is alleged to have acted dishonestly, but also the primary facts which will be relied upon at trial to justify the inference.  At trial the court will not normally allow proof of primary facts which have not been pleaded, and will not do so in a case of fraud.  It is not open to the court to infer dishonesty from facts which have not been pleaded, or from facts which have been pleaded but are consistent with honesty.  There must be some fact which tilts the balance and justifies an inference of dishonesty, and this fact must be both pleaded and proved.”

 (e) In this regard, I agree with Mr Dawes’ submission[13] that the rule is in essence one of fairness given the seriousness of the charge against the party the allegation is made.

41.  This notion of fairness and justice also has relevance when it comes to considering the “sufficiency” of the particulars that have been pleaded:

 (a) Whilst superlatives like “utmost” and “full” have been used, the main consideration remains the “sufficiency” of the particulars provided (see also the authorities discussed above);

 (b) The concept of “sufficiency” comes into play when one considers whether sufficient particulars have been provided so that the opposite party has sufficient notice of the case he has to meet — see eg Three Rivers;

 (c) The concept of “sufficiency” comes further into play when deciding whether sufficient particulars have been provided so that the party pleading fraud “be allowed to proceed even if his case is augmented after discover” — see Deak Perera per Mortimer JA;

 (d) It may be noted that the nature of fraud being what it is, and secrecy being the badge of fraud, the party alleging and seeking to prove fraud might not be in the position to provide full particulars at the pleading stage, pending discovery, so as to satisfy in full the “special rule”.  However, if sufficient particulars have been provided in the pleadings so as to give the opposite party sufficient notice of the case it has to meet, the alleging party may as a matter of fairness and justice be allowed to proceed to discovery so as to augment his case.  As observed by Bowen LJ in Leitch v Abbott (1886) LR 31 Ch D 374 (at pp 378‑379):

“ Ought, then, the generality of an allegation of fraud to be a bar to the right to discovery? It seems to me that the very fact that the pleader is unable to plead except in general terms, is in many cases the very reason why he should have discovery from the other party, so as to enable him to plead the fraud in detail. If at a particular stage of an action you are stopped by reason of your ignorance of some fact which is known only to the other party, that is the very reason why you should have discovery of that fact from him, and what difference does it make whether you are stopped at the trial or before?”

 (e) Deak Perera and Leitch v Abbott were both considered by the Court of Appeal in Haifa International Finance Co Ltd v Concord Strategic Investments Ltd [2009] 4 HKLRD 29 at §§17 and 18.  The correctness of those cases have not been doubted.  In Haifa, the plaintiff’s claim based on fraud which lacked particulars was struck out without the opportunity of going for discovery and interrogatory because the plaintiff had failed to provide even the threshold level of particularity.  As held by Cheung JA at §23 and §24:

“ 23. In my view the plaintiff has not even reached the stage where it can be said that it has sufficiently pleaded a general case of fraud and it is merely the particulars that are lacking and allowance should be given to it to flesh out the details later on…

   24.    In my view the plaintiff has not satisfied the threshold that the law requires for pleading when it seeks to pursue a case of fraud against the first defendant.”

 (f) Beyond the seriousness of the charge, there is in fact nothing magical in the word “fraud”.  Every set of pleadings will have to be looked at on a case by case basis with the notions of fairness, justice and sufficiency in mind so as to decide whether F&BPs should be ordered, or whether the accuser has sufficiently pleaded a “general case of fraud ”[14] so as to be permitted to flesh out the details later on;

 (g) Consistent with the above is the modern approach in considering when F&BPs should be ordered.  As explained by Deputy Judge Marlene Ng (as she then was) in Willwin Development (Asia) Co Ltd v Wei Xing in HCA 797/2012 (unrep, 25 February 2013) at §27, applying the observations of Lord Woolf MR in McPhilemy v Times Newspapers Ltd & Ors [1999] 3 All ER 775 at 792j‑793b:

“ 27. In a nutshell, the purpose of FBP is to permit the parties to understand the case they have to meet at trial so as to remove the element of surprise. But the particularity of what is required from the pleader depends on the facts of each case. The modern approach is stated in McPhilemy v Times Newspapers Ltd & ors [1999] 3 All ER 775 as follows: the current practice of requiring witness statements, expert reports and so forth to be exchanged should reduce the need for FBP to clarify pleadings, and as long as the pleadings do convey the nature of the party’s case and state the material facts, they should not attract applications for FBP even though some details that are likely to come forth in discovery or witness statements are not disclosed.”

42.  Also, even when fraud has been pleaded, the traditional demarcation between facts and matters of evidence remains distinct, and requests for particulars of evidence remain impermissible.  To be fair, I do not believe Mr Nip has sought to argue otherwise.  At §42.1 of his written submissions, he accepts that a plea of fraud “does not translate into an entitlement to request for evidence”.

43.  In support of these Appeals, Mr Nip relies also on the rule that fraud may only be pleaded when there is clear and sufficient evidence in support.  At this stage, we are concerned with particulars, but not evidence.  Further, as Mr Dawes submits, which I agree, that rule has nothing to do with the pleading of particulars, but relates to the duty of counsel when settling pleadings — see Associated Leisure Ltd (Phonographic Equipment Co Ltd) and Others v Associated Newspaper [1970] 2 QB 450, 456E‑F, and §10.23 of the Code of Conduct adopted by the Hong Kong Bar Association on 14 November 2018.

44.  I will apply the above considerations and principles when considering the Subject Requests.

Group 1

45.  The 3 Subject Requests in Group 1 are the same.  They relate respectively to §6.1 of Delco 2943 AR&DC, §8(b) of Delco 3040 AR&DC and 11(1) of Delco 2939 Amended Reply, which contents are in turn the same.

46.  I have set out the contents of §6.1 of Delco 2943 AR&DC above.

47.  Request 1(c) of the 2943 Requests is in the following terms:

“ 1. Please give full particulars of the alleged under‑reporting of the profits generated by the operating companies of the Joint Venture incorporated in the PRC, including but not limited to:

…

(c) the basis upon which it is alleged that the profits were under‑reported;” (Emphasis added, same below.)

48.  Delco’s answer in the 2943 VF&BPs to Request 1(c) of the 2943 Requests is in the following terms:

“ It is alleged that the profits in the PRC Operating Companies were significantly under‑reported on the basis of (i) inferences from the absence of underlying documentation regarding Fang’s shareholder contribution of HK$223 million and regarding the alleged Payment of HK$169,843,599 to Delco Asia from Fang’s Offshore Group (as pleaded in paragraphs 6.8 and 6.9 of the Plaintiff’s Reply and Defence to Counterclaim); (ii) inferences from the increase in the Joint Venture’s reported profits in 2009; and (iii) witness evidence.”

49.  The first point to note is the employment of the word “basis” in Request 1(c). Mr Nip submits that in “construing” that word as used in the Requests, the Court ought to have regard to a number of matters:

 (a) that “fraud can only be pleaded when there is clear and sufficient evidence to support It ”[15]:

 (i) I have dealt with this above, that we are now concerned with the provision of particulars as part of the pleadings.  We are not concerned with evidence;

 (ii) Indeed, Mr Nip himself accepts that a plea of fraud “does not translate into an entitlement to request for evidence”;

 (b) that “without knowing what Delco’s case is, the requests for particulars have to be worded (often broadly or generally) to elicit the required particulars”[16] — In this regard, I accept Mr Dawes’ submission[17] that this argument is circular.  F&BPs are ordered precisely when those that have already been pleaded are not sufficient to inform the other party of the case it is required to meet.  That does not justify the making of a request in a vague and ambiguous way — like the use of the word “basis”;

 (c) that “the need for a party to know the case against him is a fortiori where fraud is alleged against him” ^[18]:

 (i) I repeat §41(f) above;

 (ii) I repeat §§42 and 49(a) above;

 (d) that “as Delco argued that it had not pleaded fraud, it is unlikely that Delco pleaded the allegations of fraud with the above principles in mind ”[19] — These Appeals are to be considered in the light of the contents of the pleadings before me.  I do not find it helpful to double guess what the pleaders had in mind when they pleaded the Replies;

 (e) that “the relevant requests now being appealed were not independent or isolated requests, but formed part of larger requests which aimed to elicit the full particulars of the material allegations made by Delco” [20]:

 (i) This brings me to this fundamental concern — why the need for the word “basis” to be construed?  as Mr Dawes submits [21], requests for F&BPs are not a game of construction.  If any request was not properly framed, for example for being too wide, or ambiguous, or for delving into matters of evidence, fresh requests should be served;

 (ii) An order for the provision of F&BPs is an important one. Imprecise requests will lead to dispute as to whether they have been sufficiently answered, and the consequences of a party being ruled to have failed to do so are grave;

 (iii) Further, F&BPs once provided become part of the pleadings.  The hands of the providing party will be tied.  It will be quite unfair to that party unless the requests (and hence the answers) were clear and unambiguous;

 (iv) I therefore agree with Mr Dawes’ submissions that when considering whether a request for F&BPs should be allowed, the starting and most important point must be the wording of the request.  Context might to a small extent assist, but the most important consideration must remain the actual words employed.

50.  I come back to Group 1.  The “basis” of an averment is sought.  Despite Mr Nip’s arguments to the contrary, which I have dealt with above, I accept Mr Dawes’ submissions that a request for the “basis” of a factual averment is plainly a request for evidence. Despite the allegation of fraud in relation to the Scheme, HWH/Fang remain not entitled to seek particulars on matters of evidence.

51.  In respect of Group 1, Mr Nip is arguing not just that HWH/Fang were entitled to raise the requests concerned, but that the answers provided in the VF&BPs are insufficient.

52.  I have considered the contents of Delco 2943 AR&DC.  I have considered in particulars §§6.1 to 6.13 thereof, the most material parts of which I have set out above.  I have also considered the answers provided by Delco in 2943 VF&BPs to the 2943 Requests 1(a) and 1(d), which relate to the period during which the under‑reporting is alleged to have occurred and the amount of profits alleged to have been under‑reported. In my view, sufficient particulars have been provided to HWH/Fang for them to have sufficient notice of the case which is being made against them in respect of the Scheme.  I repeat further my observations I have made in §41(d), and the fact that Delco is now pursuing the Actions under the direction of an independent director appointed by the Dutch Court in February 2016.  In my view, it is fair and just to allow Delco to proceed and to augment its case if deemed necessary.  Justice in fact requires that (borrowing the words of Mortimer JA in Deak Perera). The other way to put it is that in my opinion, it is not necessary at this stage to order further answers to Group 1 for “disposing fairly of the cause or matter or for saving costs”.

53.  For the reasons set out above, I dismiss the appeals in respect of Group 1.

Group 2

54.  The 2 Subject Requests in Group 2 are the same.  They relate respectively to §6.2 of Delco 2943 AR&DC and §8(c) of Delco 3040 AR&DC, which contents are in turn the same.

55.  I have set out the contents of §6.2 of Delco 2943 AR&DC above.

56.  Request 2(c) of the 2943 Requests is in the following terms:

“ 2. Please give full particulars of the alleged direction of Fang of the transfer(s) of the profits generated by the PRC Operating Companies to himself or to companies or persons associated with him, including but not limited to:

…

(c)     the basis upon which it is alleged that those companies or persons were associated with Fang;”

57.  Delco’s answer in the 2943 VF&BPs to Request 2(c) of 2943 Requests is in the following terms:

“ At the material times, Fang was the sole beneficial owner of HKM Metal and the Defendant. Chern Shyn Kang is a business associate of Fang.”

58.  Again, the word “basis” is employed.  For the same reasons explained above, I agree with Mr Dawes’ submissions [22] that the “basis” of the association is evidential matter on which particulars should not be ordered.  In my view, HWH/Fang was not entitled to raise those requests as formulated and worded. 

59.  Mr Nip is not pushing for any further particulars beyond those provided in the VF&BPs.  I have nonetheless set out and considered the answers provided by Delco.  If necessary, I would have ruled that the answers provided are sufficient for the purpose of sufficiently informing HWH/Fang of the case they have to meet.

60.  Upon the same reasoning explained above, I dismiss the appeals in respect of Group 2.

Group 3

61.  The 2 Subject Requests in Group 3 are the same.  Same as Group 2, they relate respectively to §6.2 of Delco 2943 AR&DC and §8(c) of Delco 3040 AR&DC.

62.  Request 3 of the 2943 Requests is in the following terms:

“ 3. Please give full particulars of the Plaintiff’s understanding of the alleged methods by which the alleged under‑reporting and/or transfer of profits were achieved, including but not limited to:

(a) the basis of the Plaintiff’s understanding of the alleged methods used to achieve the under‑reporting of profits in the PRC operating Companies and the transfer of those profits;

(b) if the Plaintiff’s understanding was derived from documents, identify and provide copies of the documents; and

(c) the full particulars of the various methods to achieve:

(i) under‑reporting of profits; and

(ii)     the transfer of those profits.”

63.  Delco’s answer in the 2943 VF&BPs to Request 3 of the 2943 Requests is in the following terms:

“ Pending discovery, witness evidence and/or accounting evidence, full particulars are not known to the Plaintiff beyond Paragraph 6.2 of the Reply and Defence to Counterclaim.”

64.  In so far as Request 3(a) is concerned, again the “basis” of an averment is sought.  For the same reasons explained above, I accept Mr Dawes’ submissions [23] that the Requests for “the basis of the Plaintiff’s understanding” are requests for evidence, as Delco’s understanding could only have been from witness or documentary evidence.  In my view, HWH/Fang was not entitled to raise the Requests as formulated and worded. 

65.  In so far as Request 3(b) is concerned, Mr Nip himself in his written submissions [24] concedes that it goes beyond the scope of a request for F&BPs. 

66.  In so far as Request 3(c) is concerned, some particulars of the “methods” with which “the under‑reporting of profits in the PRC Operating Companies and the transfer of those profits were achieved ” have been provided in §6.2 of Delco 2943 AR&DC.  I accept Mr Dawes’ submissions[25] that the Requests for “full particulars” are ambiguous.  I am further of the view that the particulars pleaded are sufficient for the purpose of sufficiently informing HWH/Fang of the case they have to meet.

67.  Mr Nip is not pushing for the provision of any further particulars.  But for the reasons set out above, and given the particulars already in the Replies, I am of the view that HWH/Fang was not entitled to raise Group 3 in the way as formulated and worded.

68.  I dismiss the appeals in respect of Group 3.

Group 4

69.  The 3 Subject Requests in Group 4 are the same.  They relate respectively to §6.3 of Delco 2943 AR&DC, §8(d) of Delco 3040 AR&DC and 11(3) of Delco 2939 Amended Reply, which contents are in turn the same.

70.  I have set out the contents of §6.3 of Delco 2943 AR&DC above.

71.  Request 5(a) of the 2943 Requests is in the following terms:

“ 5. Please give full particulars of the amount allegedly representing the reinvestment of the Unreported Profits, including but not limited to:

(a)     the basis upon which it is claimed that the vast   majority of the total of approximately HK$400 million invested into the Joint Venture by Fang represented the reinvestment of the Unreported Profits;”

72.  Delco’s answer in the 2943 VF&BPs to Request 5(a) of the 2943 Requests is the same as its reply to Request 1(c) of the 2943 Requests (which answer I have set out above in relation to Group 1).

73.  Again the word “basis” is employed.  For the same reasons explained above, I accept Mr Dawes’ submissions[26] that the Requests are for evidence and are unjustified.

74.  I further repeat §52 above.  For similar reasons, and having regard to the contents of §6.3 of Delco 2943 AR&DC and the answers to Requests 5(a) and 5(b) given in 2943 VF&BPs, I am of the view that the particulars pleaded are sufficient for the purpose of sufficiently informing HWH/Fang of the case they have to meet.

75.  I dismiss the appeals in respect of Group 4.

Group 5

76.  The Subject Requests in Group 5 all relate to the Audit Confirmation. 

77.  Though relating to different paragraphs of the Delco 2943 AR&DC and Delco 3040 AR&DC [27]:

 (a) Requests 20 and 22 of the 2943 Requests, and Requests 24 and 27 of the 3040 Requests, are all materially the same;

 (b) Requests 21 and 23 of the 2943 Requests, and Requests 25 and 28 of the 3040 Requests, are all materially the same;

 (c) It is therefore only necessary for me to deal with Requests 20 and 21 of 2943 Requests.

78.  Requests 20 and 21 of the relate to §6.12 of Delco 2943 AR&DC.

79.  I have set out the contents of §6.12 of Delco 2943 AR&DC above.

80.  Requests 20 and 21 of the 2943 Requests are in the following terms:

“ 20. Please confirm whether, in pleading that the audit confirmation was not signed by any director of Delco Asia, the Plaintiff is denying that the audit confirmation was issued by Delco Asia.

   21.    If the Plaintiff denies that the audit confirmation was issued by Delco Asia, then to the extent not already pleaded in paragraph 6.12, please give full particulars of the facts or grounds upon which it is denied that the audit confirmation was issued by Delco Asia.”

81.  Delco’s answers in the 2943 VF&BPs to Requests 20 and 21 of the 2943 Requests are in the following terms:

“ 20. The Plaintiff does not admit the assertion that the audit confirmation was issued by Delco Asia.

   21.    Not applicable.”

82.  That the Audit Confirmation was not signed by any director of Delco Asia is a fact.  Delco has pleaded that fact.  The absence of any signature by any director of Delco Asia however does not necessarily mean that it was not issued by Delco Asia.  Delco hence pleads a non‑admission (as opposed to a denial). As submitted by Mr Dawes [28], which I accept, there is nothing which prohibits a party from doing that.

83.  In my view, what Delco has pleaded are sufficiently clear.

84.  Mr Nip explains that the raising of Group 5 was so that HWH/Fang could “understand whether Delco is denying that the Audit Confirmations were issued by Delco Asia, or whether Delco is not admitting it on the basis that Delco Asia has no knowledge of the matter and puts HWH/Fang to strict proof ”.

85.  In my view, that purpose goes beyond the purpose of seeking F&BPs. In any event, bearing in mind the modern approach in ordering F&BPs as discussed above, I am of the opinion that it is not necessary to order answers to Group 5 for “disposing fairly of the cause or matter or for saving costs”.

86.  Mr Nip is not pushing for further particulars beyond those already given.

87.  For the reasons set out above, I am of the view that HWH/Fang was not entitled to raise Group 5, and I dismiss the appeals in relation to Group 5.

Group 6

88.  Request 22(b) of the 2939 Requests relates to §15 Delco 2939 Amended Reply, which contents I have set out above.

89.  Request 22(b) of the 2939 Requests is in the following terms:

“ 22. Please give full particulars of how, in practice, Stephan acquired knowledge of CT’s business, including but not limited to:

…

(b)     the basis upon which it is alleged that Stephan was only informed in a very general way about the business of CT, and identify the specific or detailed information, if any, that was not provided to Stephan;”

90.  Delco’s answer in the 2939 VF&BPs to Request 22(b) of the 2939 Requests is in the following words:

“ Stephan van Ooijen did not speak and read Chinese and hence could not have participated in the day‑to‑day running of the PRC/Chinese‑related businesses of CT. Further, Stephan van Ooijen was residing in the Netherlands, and he was in particular not provided with information about the identity of the party which had made a US$50 million deposit with CT on 16 February 2015.”

91.  Again Request 22(b) seeks the “basis” of an averment.  It is a request for evidence.

92.  Further, having regard to what have been pleaded in §15 of Delco 2939 Amended Reply, I am of the view that sufficient particulars have been provided to HWH/Fang so as to inform them sufficiently of the case which they are called upon to meet.

93.  Mr Nip is not pushing for further particulars beyond those already given.

94.  For the reasons set out above, I am of the view that HWH/Fang was not entitled to raise Group 6, and I dismiss the appeals in relation to Group 6.

Disposition

95.  For the reasons set out above, I dismiss all the appeals in respect of all the Subject Requests.

Costs

96.  I make a costs order nisi order that the costs of the appeals be borne by HWH/Fang, with certificate for two counsel.  I am minded to order summary assessment.  Any party who seeks any variation or summary assessment should lodge their submissions within 14 days from the date hereof, response within 14 days upon receipt, and reply within 7 days thereafter.