BAWANG INTERNATIONAL (GROUP) HOLDING LTD AND ANOTHER v. NEXT MAGAZINE PUBLISHING LTD

HCA1109/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 1109 OF 2010

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D E C I S I O N

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1. This is the defendant’s application for specific discovery by summons dated 19 September 2012 in respect of 40 items of documents. Further developments have now reduced the scope of discovery considerably. Before I turn to the requests, I will first outline the background very briefly as follows.

A.   BACKGROUND

2. The 1^st plaintiff, a listed company in Hong Kong, is the ultimate holding company of the Bawang group of companies.  The 2^nd plaintiff, a PRC company, is the 1^st plaintiff’s subsidiary.  Based in Guangzhou, the 2^nd plaintiff is responsible for manufacturing the Bawang shampoo products.  The plaintiffs carry on the business of designing, manufacturing and marketing of Chinese herbal shampoo and hair-care products, skin-care and other heal care products.  Two of their main products are the Bawang and Royal Wing brands of shampoo and hair‑care products (“the Products”).

3. At the time of the publication of the Article (see below), the relevant entities within the Bawang group that were engaged in the sales of the Products are the 2^nd plaintiff, Bawang International Group Holding (HK) Limited (“HK1”) and Hong Kong Bawang International Trading Limited (“HK2”).  Another entity within the Bawang group that engaged in the trading and sales of the Products was Guangzhou Bawang Cosmetics Co Ltd (“Guangzhou Bawang”).  But it had already ceased trading and sales of the Products since December 2007 because of the reorganization of the Bawang group, which involved a transfer of its business to the 2^nd plaintiff. 

4. The defendant is the publisher of the Next Magazine, a widely circulated magazine in Hong Kong.

5. On 14 July 2010, the defendant published in the 1062^nd issue of the Next Magazine an article entitled “霸王致癌” (“Bawang causes cancer”) (“the Article”).  The Article alleged, among other things, that the Products contained 1, 4-dioxane, which would, through normal and regular use, cause serious illness and cancer to the users; and that the plaintiffs manufacture and marketed the Products with full knowledge of these matters.

6. What followed was immediate and extensive media coverage of the story both in Hong Kong and in the Mainland, which the plaintiffs alleged, had caused serious damage to their reputation and business.

7. On 21 July 2010, the plaintiffs commenced the present proceedings, suing the defendant for defamation and malicious falsehood.  They claimed for damages, exemplary damages and loss of business and profits between 15 July 2010 and 30 June 2011 (“the Relevant Period”) as particularized in the re-amended statement of claim.  The total loss and damage suffered is stated to be RMB448,354,000.

8. The defendant pleaded justification, fair comment and qualified privilege as defence.

9. On 12 December 2011, the master gave leave to the parties to adduce accounting expert evidence on the claim for loss of business and profits.  On 6 March 2012, the plaintiff’s expert filed his report.  The defendant did not file its expert report but sought further information from the plaintiffs as requested by its expert.  In response, the plaintiffs provided further disclosure in subsequent correspondence.

10. In September 2012, the defendant took out the present application.  The plaintiffs then provided further disclosure by letter dated 19 November 2012, which, as observed, has considerably narrowed the scope of discovery being sought.

B.   DISCUSSION

11. The law on specific discovery is well known.  I think I will be forgiven for not repeating it here.  I will simply go straight into the items in dispute.  They are to be found in the Annex to this Decision, which replicates the relevant parts in the Schedule attached to the summons.

12. In his written submissions, Mr Chow, SC, for the defendant, has helpfully categorized and summarized the bulk of the discovery application under three heads.  I will deal with them in turn.

B1.   The first head – the period to cover

13. Perhaps for present purposes, the most important dispute between the parties concerns the period in which discovery should be given.  This relates to Items A19.1, A19.2, A19.3, A20 – A23, A25 and A26, A29, A36, A38, A42, A44, B54, A58 and AA.  The plaintiffs have already disclosed the relevant documents covering the period from 1 January 2008 to first half of 2011.  They took the view that that period is sufficient and appropriate for the experts to obtain a reasonably accurate picture of the plaintiffs’ financial performance upon which to base their reports.  The defendant argued that the plaintiffs should give discovery from 1 January 2006 to 31 December 2011.  In brief, the defendant’s contention is that it is necessary to establish a reasonable track record of the performance and profitability of the businesses operated by the Bawang group and to understand the factors that contributed to the growth in the level of actual and projected business and profits generated by the plaintiffs before the publication of the Article by reference to the financial data covered by the years between 2006 and 2011.

14. Subject to one minor point, I disagree with the defendant’s contention.

15. As noted, the plaintiffs’ claim for loss of business and profits for the Relevant Period (between 15 July 2010 and 30 June 2011).  I accept the view of the plaintiff’s expert that generally the 3 years period starting from 1 January 2008 should be sufficient and appropriate for an analysis of the plaintiffs’ loss of business and profits to be performed.  More importantly, the earlier years of 2006 and 2007 would not provide comparable financial data for the purpose of the analysis.  The scale of the Bawang group’s operations was significantly smaller during those years.  Significantly, the Bawang group underwent series of corporate restructuring before 2008, although the shareholders in control of the group and the group’s primary business remained the same.  HK1 and HK2, the entities involved in the sale of the Products at the time of the Article were not even incorporated until in or shortly before 2008.  There was an influx of capital from the IPO in 2009.  A number of the Products were only launched in 2008 and 2009.  These factors clearly demonstrate that the structure and operations of the group must have become consistent with and comparable to its state immediately before and after the publication of the Article after the restructuring in 2008 onwards.

16. I accordingly accepted the submission of Mr Bartlett, for the plaintiffs, that the inclusion of 2006 and 2007 would simply distort any meaningful attempt at projecting business and profits.  That said, I agree with the submission of Mr Chow that the financial information relating to the performance of the Bawang group after 30 June 2011 would provide evidence as to the likely level of business and profit that would have been enjoyed but for the publication of the Article.  I therefore conclude that the period to which discovery should cover is between 1 January 2008 and 31 December 2011 (“the Relevant Examination Period”).  It follows that any discovery allowed must be limited to the Relevant Examination Period only.

17. For the following Items, the only dispute concerns the period in respect of which discovery ought to be given.  They are disposed of as follows.

18. Item A19.1 is allowed to the extent that any audited financial statement of the 2^nd plaintiff falling within the Relevant Examination Period which has not been disclosed should be disclosed.

19. It is not in dispute that Guangzhou Bawang had already ceased trading in the Products since December 2007.  The financial documents sought relating to Guangzhou Bawang under Item A19.3 and the relevant part under Item A21 fall between 1 January 2006 and December 2007.  They are all outside the Relevant Examination Period.  Item A19.3 and the relevant part in Item A21 which concerns Guangzhou Bawang are refused.

20. For Item A26, Mr Chow accepts that if the contracts sought are available, the rest of the documents are not necessary.  The plaintiffs have already disclosed the contracts from 2008 and up the 1^st half of 2011.  The application is allowed to the extent that the contracts for the 2^nd half of 2011 should be disclosed as well.

21. For Items A44 and A46, the plaintiffs have confirmed that they do not have possession, custody or power of the documents sought or that the documents are privileged for the period between 2008 and the 1^st half of 2011.  The application for documents between 2006 and 2007, even if existed, is refused as it falls outside the Relevant Examination Period.  Further, I think the assertion for privilege must equally extend to the 2^nd half of 2011 as well.  So even if the documents sought for the 2^nd half of 2011 exist, the application is refused.

22. Item B54 is refused.  So is Item A58.

23. I now turn to the second head.

B2.   The second head – provision of financial statements other than    audited financial documents

24. This head affects Items A19.2, A20, A21, A22 and A23.

25. To recap, item A19.2 consists of two items :

(1)  the management accounts of HK1 and HK2 for the period between 1 January 2011 and 31 December 2011; and

(2)  the financial records of HK1 and HK2 provided to the auditors of the 1^st plaintiff for the preparation of the consolidated Audited Financial Statements of the 1^st plaintiff for the year 31 December 2011.

26. In respect of Item A20, the plaintiffs have now disclosed consolidated adjustments lists prepared by KPMG for the years ended 31 December 2008, 2009, 2010 and the six months ended 30 June 2011.  The outstanding parts are the reports, memoranda, schedules, correspondence, minutes, or notes containing explanations for the differences between : (i) the Audited Financial Statements of the 2^nd plaintiff, HK1 and HK2; and (ii) the figures relating to the 2^nd plaintiff, HK1 and HK2 at Appendix A20 to HS’s first letter dated 25 July 2012.

27. Item A21 relates to management reporting packages prepared for and/or distributed to the management and/or directors of the Bawang group during the period between 1 January 2006 and 31 December 2011, which includes Management Accounts.  The entities within the Bawang group in respect of which discovery is sought are now confined to the 2^nd plaintiff, HK1, HK2 and Guangzhou Bawang, the entities that had traded in the Products.

28. Item A22 refers to schedules identifying adjustments to the Management Accounts referred to at Item A21 above for financial reporting purposes and the reasons for those adjustments.  Item A23 relates to schedules reconciling the year and Management Accounts to the Audited Financial Statements and Interim Reports (where applicable) covering the period between 1 January 2006 and 31 December 2011.  Both Items relate to Item A21.

29. Mr Chow relied on the arguments that he deployed in respect of Item A21 in support of other Items.  So they can all be dealt with together conveniently.

30. The plaintiffs have already produced audited financial statements of theirs, HK1 and HK2 between 2008 and the 1^st half of 2011.  The audited financial statements for the 2^nd half of 2011 should be disclosed as well.

31. Mr Chow submitted that the documents sought are necessary for the following reasons.

32. First, Management Accounts or other documents included in the management reporting packages are prepared by companies more frequently than Audited Financial Statements, and Management Accounts are also more detailed than Audited Financial Statements.  The purpose of Management Accounts, and presumably other documents in management reporting packages, is, on the plaintiff’s own explanations, mainly to enable management of the Bawang group to keep track of business performance.

33. Second, the contemporaneous monthly information that was made available to and referred to by the management of the Bawang group for the purposes of resource allocation and performance assessment is very relevant to the assessment of the plaintiffs’ loss of business and profits as a consequence of the publication of the Article, and those documents are necessary for the fair disposal of these proceedings.

34. Third, whilst the plaintiffs’ expert has made reference to the contemporaneous financial data in his report that he considers to be necessary to support his analysis of the plaintiffs’ claim, the defendant’s expert should be afforded the opportunity to review the Management Accounts for the purpose of properly considering the accuracy of Mr Skalak’s view and in order that Mr Dick would be able to conduct his independent assessment of the plaintiffs’ claim for loss of profits.  Mr Chow also asked the court to note that the plaintiffs’ expert appeared to have had sight of the Management Accounts.  The defendant’s expert should be given an opportunity to consider the same materials that the plaintiff’s expert had had access to, including Management Accounts and reports, memoranda, schedules, correspondence, minutes, or notes containing adjustments proposed and/or allocated by the management of the Bawang group, and reach his own conclusion as to whether to accept the adjusted data.

35. Mr Bartlett’s submission in response is briefly this.

36. The audited financial statements disclosed (which must now include those ordered to be disclosed for the 2^nd half of 2011) are prepared by auditors based on their review of the management accounts and other relevant financial reports and materials, and reflect a true and fair view of the performance of the Bawang group and the entities concerned.  On the other hand, the Monthly Accounts do not purport to provide a true and fair view as by their nature they are inevitably susceptible to adjustments regarding accrual of expenses and revenues and audits and audit adjustments.

37. Further, the plaintiffs have already provided their consolidated P&L Worksheets which enable the Bawang group to be separately identified in the audited financial statements and interim report of the Bawang group.  The plaintiffs have also provided the relevant monthly revenue and sales returns data; the relevant monthly COGS data and the relevant monthly advertising expenses.

38. Mr Bartlett therefore submitted that the further financial data sought is unnecessary.

39. With respect, I agree with Mr Bartlett entirely. 

40. As to the allegation that there is a lack of equality of arms because the defendant’s expert does not have access to the same materials which the plaintiff’s expert has had, this is now dispelled by the evidence of the plaintiff’s expert that he did not have sight of the documents concerned when he prepared his report.

41. Subject to what I have said in paragraph 30 above, Items A19.2, A20, A21, A22 and A23 are all refused.

42. I then come to the third head.

B3.   The third head – historic information

43. These are Items A29, A36, A38 and A42.  They are historical financial information, forecast and budgets.

44. Mr Chow submitted that the defendant’s expert needs the historical documents to examine the performance and profitability of the business operated by the Bawang group between 2006 and 2011.

45. I have already ruled that any discovery must be confined the period between 2008 and 2011.  More importantly, I agree with Mr Bartlett that the performance and profitability of the business operated by the Bawang group in 2008 are already accurately reflected in the audited figures prepared by KPMG and published in the IPO Prospectus in 2009. That audit is not in dispute and it is unnecessary for the experts to repeat or re-evaluate that process in order to arrive at their assessment of the plaintiffs’ loss of business and profits.

46. The plaintiffs have already provided the budget of the Bawang group at the time of the IPO for the period between 2010 and 2015, and the annual budget for 2010 and 2011.  Mr Wong Sin Yung, the plaintiffs’ Chief Financial Officer, (“Mr Wong”) described the lengthy and numerous discussions, meetings and telephone calls of different types and with different parties underlying the preparation of the budgets and the results of which are reflected in the budgets.  He further confirmed that notes or minutes of discussions leading to the budgets and material referred to in such discussions no longer exist and have not been retained by the plaintiff.

47. I agree with Mr Bartlett that it is unnecessary and would be unduly oppressive to the plaintiffs to in effect re-perform those historical budgeting processes in order to try to collate such materials as might still exist and might have been relied upon in the original budgeting exercises, now that the plaintiffs’ management cannot now recall what figures they looked at or generated or considered at the time.   

48. Items A29, A36, A38 and A42 are all refused.

49. What remains are the following miscellaneous items.

B4.   Miscellaneous items

50. They are Items A25, A47, A57, Request 6(2), and Item AA.

51. Item A25 are general ledger reports identifying the components of the selling and distribution costs and administrative expenses incurred by the Bawang group.  Mr Chow said it is necessary to enable the accounting experts to identify which costs are variable, and which are fixed.  Variable costs are included in the assessment of lost profits; fixed costs are excluded from the assessment of lost profits since those profits would have been the same with or without the publication of the Article.  Detailed analysis to compare the movement of expenses against the movement to income is important, and it is necessary to carry out sufficient analysis to understand the relationship between each cost and revenue in order to consider whether it is fixed or variable in nature.

52. Mr Chow submitted that the plaintiffs’ expert has included at Appendix 4 - Schedule 6 to his report his analysis of certain costs, including components of the selling and distribution costs and administrative expenses, and also contemporaneous financial data prepared by KPMG in the course of their auditing work.  However, it cannot be fair or reasonable that the defendant only has access to the plaintiffs’ expert’s or auditor’s analysis.  The defendant’s expert should have access to the general ledger reports to conduct his own analysis of the figures.  Further, it is unsatisfactory to classify fixed or variable costs based on the broad description of an expense item, which is the method propounded by the plaintiffs.  Mr Chow went on to submit that while the description of a cost might provide an indication of whether it is fixed or variable in nature, the definitive classification ought to be determined by examining the relationship of that cost with revenue.  Further, whilst the plaintiffs have suggest that “office expenses” are by nature most appropriately considered as to be fixed costs, based on the information available from their expert’s report, it is not possible to determine the nature of the items that are included in office expenses, in particular whether some of the items included in office expenses are fixed in nature while others are variable in nature.

53. Mr Bartlett argued that the plaintiff’s expert has already provided a breakdown, description and explanation of the nature of the selling and distribution costs and administrative expenses which enables the identification of fixed and variable costs in Appendix 4 - Schedule 6 to his report.  The components of those selling and distribution costs and administrative expenses have also been provided in a form which contains contemporaneous financial data prepared by KPMG in the course of their auditing work.  Further, whether an item of cost/expenditure is fixed or variable is often readily apparent to an accounting expert simply from its description in the documents already provided.  The defendant will not be able to identify the nature of the costs from the General Ledger reports as these are merely an expanded list of each item of cost/expenditure containing a similarly brief description of the nature of the cost/expenditure to that found in [Appendix 4 - Schedule 6] and Exhibit 4 to the plaintiff’s expert’s report.

54. Most importantly, Mr Bartlett submitted, a decision having been made based on the nature of the item, it is impractical for the experts to consider each and every component of every fixed and variable cost to see how many sub-components they could be broken down into and to seek to decide whether the sub-components might be allocated as a fixed or variable cost irrespective of the allocation of the major item as fixed or variable.  This would involve too much effort, detail and data and be entirely disproportionate. A laborious trawl through a multitude of sub‑items under “office expenses” is thus pointless and unwarranted.

55. Mr Bartlett pointed out that the plaintiff’s expert did not review or consider it necessary to review General Ledger reports in assessing the plaintiffs’ loss of business and profits because he considered those reports to be unnecessary for the purpose in that they were unlikely to contain more or superior information to that already contained in the materials in Appendix 4 - Schedule 6 and Exhibit 4 to his report.  Thus, there is no inequality of aims between the experts. 

56. Again, I wholly agree with Mr Bartlett.  Item A25 is refused.

57. For Item A47, a legible copy of Appendix A47 has now been provided by the plaintiffs.  But Mr Chow complained that documents referred to at Item A47, namely reports, memoranda, schedules, correspondence, minutes, or notes containing explanations for the differences between : (i) the analysis of monthly revenue data reproduced at Exhibit 5 of the plaintiff’s expert’s report; and (ii) the figures in the annual and interim reports, and also explanations of consolidation adjustments and/or reconciliations, remain at issue.

58. Mr Chow argued that the defendant’s expert ought to be provided with the documents referred to at Item A47 to enable him to understand the nature of the figures recorded in Appendix A47, and to independently assess how much of those expected sales returns are related to the publication of the Article.

59. Mr Bartlett submitted that Appendix had already been reviewed by KPMG in carrying out its audit function.  In assessing the plaintiff’s loss of business and profits it is not necessary for the experts to assess the documents underlying Appendix 47 as the auditors had already revised the same and, if allowed, it would amount to re-performing work that had been done by the independent auditors.  I agree.  Item A47 is refused.

60. For Item A57, counsel relied on the same arguments advanced under Item A25.  Like Item A25, it is refused.

61. Request 6(2) relates to reports, memoranda, correspondence, minutes and telephone conversation records containing or referring to discussions between the management and/or directors of the Bawang group and the organisers of the 16^th Asian Games in respect of the possibility of or their interest in becoming, and/or the decision to appoint the Bawang group the official sponsor of the 16^th Asian Games.

62. Mr Chow argued that the documents requested are all relevant to the present proceedings because the plaintiffs’ computation of the damages they have allegedly suffered includes the expenditure that was spent by the Bawang group on becoming the official sponsor of the 16^th Asian Games, and the question of causation, in particular whether the Bawang group’s decision to sponsor the 16^th Asian Games arose out of the publication of the Article, is clearly a relevant issue in these proceedings.

63. However, the plaintiffs have already disclosed the relevant documents at items 20 to 220 of their supplement list and item 8 of their 2^nd supplemental list.  The documents include the minutes of the 1^st plaintiff’s meeting on 10 September 2010, which recorded the impact of the Article and the decision to sponsor with a re-banding campaign to resort its reputation, inducing the decision to sponsor the 16^th Asian Games.  Given the disclosure already made, the documents now sought are wholly unnecessary.

64. Item AA relates to invoices, receipts, reports and other documents prepared by the plaintiffs in respect of the selling and distribution expenses and administrative expenses incurred by Forever Giants Limited, Maxford Investments Development Limited, Lucky Rich Investments Limited, Bawang (China) Herbal Co Limited and Bawang International Investment Limited in respect of the plaintiffs’ products for the period between 1 January 2006 and 31 December 2011.

65. Forever Giants Limited, Maxford Investments Development Limited, Lucky Rich Investments Limited, Bawang (China) Herbal Co Limited and Bawang International Investment Limited did not engage in any sales activities during the Relevant Period, but were engaged in sales support services.  Mr Chow argued that Item AA is relevant for examining the nature and cost of these sales support services and expenses in order to determine the extent to which they might have been impacted by the publication of the Article. 

66. For Forever Giants Limited, the plaintiffs have voluntarily provided the S&D Expenses and administrative expenses for the period between 2008 and the 1^st half of 2011 contemporaneous data generated from the ERP system; and Forever Giants Limited’s S&D Expenses and administrative expenses.  In my view, the disclosure should be made up to the 2^nd half of 2011.  Discovery of other additional documents sought is unnecessary.

67. For documents concerning other companies, Mr Bartlett submitted that they are irrelevant and unnecessary.  For Mr Wong has already confirmed that none of the other companies were engaged in the sales of the Products at the time of the publication of the Article.  I agree.

C.   CONCLUSION

68. Subject to what I have allowed, the balance of the defendant’s application for specific discovery is dismissed.

69. As the plaintiffs have substantially succeeded in their opposition, they should be entitled to costs.  I make an order nisi that the defendant shall pay the costs of its application, including any costs reserved, in any event, to be taxed if not agreed. 

Annex