DU GUORONG v. BANK OF CHINA INTERNATIONAL LTD AND ANOTHER

HCMP 43/2017

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 43 OF 2017

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D E C I S I O N

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1.  This is an application by a proposed plaintiff for pre‑action discovery against his bank (the defendants) which is seeking to enforce what it claims to be a debt in the region of US$852,000 owed to it by its borrower (the plaintiff) (“the Statutory Demand”). That demand dated 16 May 2016 (HCSD 50/2016) is presently adjourned sine die by order of Anthony Chan J dated 13 October 2016 to enable the plaintiff to proceed with his current application (issued on 6 January 2017). The plaintiff has set out a number of categories of documents it requires the bank to disclose in order to enable the plaintiff to formulate its claim against the bank. In very general terms the claim is based on allegations by the plaintiff that the bank’s servants or agents — three of whom have been identified — have contrived to diminish the plaintiff’s funds, lodged with the 1^st and/or 2^nd defendants for investment, by investing his funds without authority. He estimates his potential loss as being in the region of HK$100,000,000.

2.  The first of the defendants’ servants or agents to be closely involved with the plaintiff was a Miss Lau, a Relationship Manger who was assigned to handle his accounts.  The plaintiff says that he opened an account with the 1^st defendant, the Bank of China International Ltd, on or about 29 March 2011, with funds in the region of RMB93.886 million from the sale of land on the Mainland.

3.  His case is, in principle, set out in §9 of his first affidavit.  The funds were not to be used for high risk investments as he intended the money to be used for the purchase of accommodation and education and living expenses of his children when they moved to Hong Kong.  He had applied for immigration to Hong Kong under the Capital Investment Entrant Scheme for which the investment threshold, as he understood it to be, was approximately HK$6.8 million.  Preservation of capital in his relation with the Bank of China was the high priority.

4.  Throughout 2011 until late 2015 or early 2016 he had seemingly much contact with Ms Lau who often visited him at his home for him to sign documents on her advice and instruction.  Some meetings were at the defendants’ premises.  Throughout this period Ms Lau assured him that his funds were properly invested.  There was no mention by her of any loss being incurred.

5.  In early 2016, however, the picture changed significantly.  A telephone call from Ms Lau to him in Zhongshan informed him that his investments with the Bank of China were “lost” and that there was an “overdue” amount of the order of HK$2 million (presumably referring to the amount then owed to the bank).  Within a very short time he was informed by her that the net loss on his portfolio was at least HK$6 million.

6.  Then the other two employees of the bank came into the picture — a Mr Kwok and Mr Lo, one of whom suggested that the plaintiff should mortgage some of his property in Zhongshan to fund “another round of investment” with a view to recouping what had been lost.

7.  Over a period of time these two employees reiterated that suggestion and Ms Lau herself made contact pleading for him “not to pursue the matter” lest she be disqualified from holding any licence. At one stage, the plaintiff contends that Ms Lau offered to pay and in fact paid the fees of his daughter who had started at the Baptist University in September 2016.  There is a transfer slip showing the sum of HK$30,993 paid on 11 July 2016.

8.  In due course he reported the matter to the Commercial Crime Bureau and to the Monetary Authorities.  His lawyers have advised him that he has the basis of a claim for fraudulent and/or reckless misrepresentation, and breach of duty of care against Ms Lau as servant or agent of the defendants.

9.  This has precipitated the demand for wide-ranging and substantial pre‑action discovery relating to a period of at least five years.  It is estimated that over that period 6,000 or so transactions took place, in relation to the funds in the plaintiff’s accounts.  These will have generated, on any view, a substantial amount of documentation.

10.  What then are the categories of the documents for which disclosure is sought and what has been, and is, the defendants’ stance in relation to them?

Category 1 —  The account opening documents covering the period 1 March 2011 to 31 April 2016

There cannot possibly be any sensible objection by the defendants to the disclosure of these documents and I am satisfied that they are an essential starting point for the plaintiff’s formulation of the basic financial picture in relation to his claim.

Category 2 —  Terms and conditions relating to the plaintiff’s accounts with the defendants over the same period

There cannot possibly be any sensible objection to the disclosure of these relevant documents.  Such terms and conditions are well-known to vary or be amended from time to time during the course of a banking relationship.

Category 3 —  Documents relating to procedures for vetting and determining the plaintiff as a Professional Investor as provided for in the Code of Conduct of the Securities and Futures Commission

The same period applies.  This is at the very core of what the plaintiff contends was the defendant’s assessment of his status which was unknown to him.

Category 4:

Once again the period of time for which these documents are sought is the 5-year plus duration from March 2011 until April 2016.  It encompasses all records and recordings of instructions and confirmations given by the plaintiff concerning transactions between him and the defendants.  Proper practice by a bank would ensure that these are maintained throughout the life of every account and preserved for many years thereafter.

Category 5:

This concerns the documents presented to the plaintiff by the defendants which relate to each investment product prior to its purchase or subscription over the same period.

11.  All these categories are precise as to their nature, the period concerned and their link with the defendants and their client.  There is in my view no ambiguity or room for misunderstanding.

12.  They all are, or ought to be in the possession and/or control of the defendants.  It is a matter of common knowledge that banks monitor closely the accounts of their clients — the greater the activity in or of the accounts, the closer the supervision by the bank and its employees.  It is normal, indeed essential practice, for the bank to record every advice, instruction or other contact, and the documentary basis relied upon for such with the clients.  It is unarguably a matter of mutual interest.

13.  However, in the light of discussions between counsel for both parties and myself I have amended the terminology of Categories 3, 4 and 5 to meet what the defendants contend is in effect too broad and onerous a requirement.  More of that anon.

14.  Category 3 will now read:

“ Documents relied upon by the 1^st and 2^nd defendants respectively in vetting and determining the assessment of the applicant as a Professional Investor as stipulated in the Code of Conduct for Persons Registered with the Securities and Futures Commission in force during the ‘Period’.”

15.  Category 4 — the main bone of contention — will now read:

“ Documents recording directly the instructions and/or confirmations purportedly given by the applicant to the 1^st and 2^nd defendants respectively, if any, of all investment products entered into by the applicant with the 1^st and 2^nd defendants respectively during the ‘Period’.”

16.  Category 5 now reads:

“ Brochures, fact sheets and risk disclosure statements in relation to each investment product (excluding bonds) entered into by the applicant with the 1^st and 2^nd defendants respectively prior to each purchase/subscription during the ‘Period’.”

17.  I take the view that these changes to the original categories identified by the applicant are essentially cosmetic though a modicum of precision has emerged.  The greatest burden for the defendants is said to be the request relating to audio-recordings.

18.  It may be that the production of the banks’ core report(s) will obviate the need to trawl through the audio-recordings to identify those telephone conversations between the banks and the applicant directly relevant to the transactions.  If not, then no doubt the applicant will have recourse to interrogatories once his action is under way.  I am satisfied that the material now covered by my order should enable him to plead a full case, assuming the merits stay with him.

The justification for pre-action disclosure

19.  The overriding consideration following the Civil Justice Review is:

“ No order for the disclosure of documents shall be made under section 41 or 42 of the Ordinance, unless the Court is of opinion that the order is necessary either for disposing fairly of the cause or matter or for saving costs.” (see: 24/7A/A of Hong Kong Civil Procedure 2017)

20.  The following requirements are to be fulfilled where there is such an application for pre-action disclosure:

(1)   the person making the application appears to be likely to be a party to subsequent proceedings in the High Court;

(2)   the person against whom the order is sought appears to be likely to be a party to such proceedings; and

(3)   such person appears to be likely to have or to have had in his possession, custody or possess any relevant documents.

21.  It is not necessary for me to repeat all the matters set out earlier by me.  Suffice it to say that I am satisfied that these conditions have been met.

The plaintiff’s 1^st affirmation

22.  There is of course a significant difference between the factual matrix of this potential claim and that of the case before Godfrey Lam J (Zhang and Zhang v Standard Chartered Bank (HK) Ltd HCMP 682/2015, unreported, 15 October 2015), whose findings the defendants rely upon in answer to this application.  Once again it shows the fallacy of relying upon another judge’s findings without proper forensic regard to the specific circumstances confronting that particular judge.  I have adopted the same basic approach as Godfrey Lam J, but a simple review by the defendants of the contrast between the respective factual situations, in which the defendants’ own affidavit lends considerable support for the merits of the plaintiff’s application, by what it says and by what it does not say in its comments on the categories requested, and by its clear failure to understand the contentions at large.

23.  The essence of the plaintiff’s potential claim is the disappearance of funds entrusted to the defendants’ care in the approximate sum of almost RMB94 million and what appears to be its replacement by a claimed indebtedness to the defendants of just over US$852,000 over a period of five years.

24.  Only the defendants are in a position to show what has been done with the money in his accounts because they, and only they, have the original records of all transactions, and only they have the records and relevant documents which influenced or led directly or indirectly to their activities in relation to the accounts of the plaintiff on his or their behalf.

25.  The inference to be drawn from the contents of the plaintiff’s affirmation is that the bank has indulged in speculative risky investments contrary to their duty of care to him, and contrary to his instructions, express or implied, that his capital should not be exposed to risk.

26.  It is readily apparent to me that at present he is in no position to plead a comprehensive case against these defendants until he and his advisers have all the records and other documentary material at their fingertips.  Any expectation to the contrary is unreasonable.  Besides, it is unsatisfactory for any pleading of such a case to be set out on a general basis exposing it to requests for particulars.  That is contrary to the entitlement of both parties.  If fraud were to be alleged, and on the basis of the plaintiff’s assertions it cannot be excluded as a possible claim, then it will require full particularisation.

27.  The other side of the coin is that full disclosure as sought may eliminate any justified basis for alleging negligence, misrepresentation, breach of duty of care or fraud.

The defendants’ affirmation

28.  It is sworn by the first named defendant’s Executive Director in the Legal and Compliance Division.  Despite the deponent’s apparent status and the purpose of the affirmation being in reply to that of the plaintiff, it is a singularly uninformative document riddled with irrelevancies and inaccuracies.

29.  There is not a single comment or reply to any of the assertions made by the plaintiff, even in the most general way.

30.  I will follow the enumeration of the paragraphs of his affirmation:

§11 —  The plaintiff has clearly provided the basis of his request under Category 3 (using my designation).  It is a well justified request which has been slightly amended.

§13 —  Referring to Categories 4 and 5, it is paramountly clear what is the basis for these requested categories.  The time period is identified clearly viz March 2012 to April 2016.  The last sentence of that paragraph identifies precisely why the plaintiff requires this discovery.

§14 —  A thorough review is what is to be carried out.  A selective form of compliance will not be compliance.  Banks are required to keep detailed records of the transactions carried out on behalf of their clients, and of instructions given by them and advice and/or confirmation given by the bank.

Banks are notoriously often coy about disclosure of their minuted activity in monitoring a client’s account.  Whilst opinions formed by a bank’s officers of their clients may properly be regarded as privileged, all other records are relevant and disclosable.

No “relevant documents (for example Order Forms and Confirmations”— quoted directly from §14.1 — should have been destroyed.  If reliance has to be placed on retrieving them from hard-copy files then that must be done.

As far as telephone calls to and from the plaintiff are concerned, it would be surprising if these were not noted on the plaintiff’s bank record.  It might also be negligent not to do so.  No doubt these are also computerised.  If the extensive research suggested by this deponent in the form in which it is to take, is truly necessary to obtain the material then it indicates an ineffective and unreliable system of managing these accounts.  All telephone instructions and advice and actions should have been confirmed by the bank in writing.  How else could it be capable of effecting accurate contemporaneous compliance?  I have nonetheless modified this category.

The defendants’ later extended argument

31.  The initial argument of the defendants was in effect ‘this will be such an onerous task that the expenditure of time and effort is not justified until we know the case we have to meet’.  Reliance is placed upon the philosophy of the Civil Justice Review and yet it is quite clear in my judgment that none of the categories of documents sought is outside the ambit of the CJR.  Indeed they are all linked and constitute vital aspects of how the defendants dealt with the plaintiff’s accounts, and his money, and their advice in respect of investments, whether it was in accordance with his instructions, and how they dealt with the acquisition and disposal of such investments. They are not background documents, but ones highly material to how the defendants did handle or ought to have handled those accounts.

32.  They are material to the pleading of a full and proper case.  Not until defence counsel’s submissions, received on Monday 26 June, is there any consideration by the defendants of the nature of the case that they may be faced with.

33.  That consideration is very limited.  Paragraphs 2.1 to 2.4 — a maximum of ten lines.  In the broadest of brushes it covers the history of the relationship between the parties over a five year period.

34.  The defendants seem to have lost sight of the fact that they and only they have all the material and records which cover this activity.  It is no answer to the proper purpose of pre-action discovery to say:

(1)   we are going to be put to considerable effort to disclose all these records before we see the nature of the case against us;

(2)   once we see the fully pleaded cases against us, then the time for full discovery has arrived.

That is simply to bury the head in the sand and seek to defeat the whole rationale of pre-action discovery.

35.  Of course the applicant has to show that he needs the documents “before he can properly plead a potentially good claim”. The defendants however seek to elevate one particular sentence in the plaintiff’s affirmation to a level of assertion well beyond reasonable meaning, viz:

“ I was subsequently advised by my legal advisers and I verily believe that contrary to my express instructions, Ms Lau and/or other of her colleagues had, inter alia, purported on my behalf, purchased and/or engaged in high risk structure products and/or utilizing my funds without my authority thereby causing huge losses.”

36.  This does not by any stretch of the imagination mean that the plaintiff or his advisers are able to plead a sufficient case at this stage.  It means no more than his advisers saying ‘on the basis of what you tell us, and if supported by any documentation disclosed, you appear to have a good prima facie claim’.

37.  This is far from saying, as Mr Li has contended in his written submissions:

“ On his own admission, his lawyers had sufficient material to advise on the merits of his claim.”

38.  Nor does this application or its success offend the need for “reasonable proportionality and procedural economy”.  What does offend that requirement is the effort to turn it into a “battle royal” when it should not be even a skirmish, wasteful in time and cost, but a sensible laying of cards on the table.

The rationale

39.  It is important to bear in mind that my decision in no way reflects a view on the merits or otherwise of the plaintiff’s claim as outlined by him.  It cannot do so.  But the claim — to the extent that it can be outlined at this stage — is not vague or fanciful.  The documents sought, of which some, perhaps many, have been supplied by the defendants, are “directly relevant to an issue arising or likely to arise out of the claim” and “would be likely to be relied upon in evidence by any party in the proceedings or they support or adversely affect any party’s case”.

40.  The need for direct relevance is demonstrated by those contents of the plaintiff’s affidavit which outline his potential claim — substantial funds were paid into his accounts for one purpose.  They had disappeared to the extent that the bank is seeking to recover a not insubstantial sum from him.  How have those funds come to be used or misused? All the documents sought form part or the whole of the picture needed to explain this state of affairs.

41.  Regrettably, the defendants’ affirmation does not even begin to raise valid questions or arguments, in opposition to the extent of the plaintiff’s application.  My reading of it suggests that the draftsman’s mind has not even been applied to recognising the force of the application.

42.  This application as modified is allowed to the extent that there has not been compliance with the requests.  Where it is agreed that the defendants have provided some disclosure, then the order must reflect that.

Costs

43.  It was unjustified of the defendants to seek to block the plaintiff’s application.  It smacks of an ultra-defensive tactic rather than one born of any legitimate arguments.

44.  The plaintiff may not succeed in formulating a claim and providing a pleading which is founded on documentary evidence and thus his efforts may fall by the wayside.

45.  The starting point is Order 24, rule 7A(8) — the person against whom the order is sought under this rule is entitled to his costs of the application and of complying with any order made unless the court orders otherwise.  There are therefore two aspects.

46.  I have already indicated, by reference to a number of matters, that the defendants’ opposition, even allowing for the degree of cooperation at an earlier stage, was unreasonable.  Had minds been applied at an earlier stage, I think differences, such as those reflected by the alterations made to the categories, would have been resolved and this application would not have been necessary.  I therefore make no order as to the costs of this application at present, and subject to the following caveat.

47.  If the applicant pursues a claim against the defendants, and succeeds, or achieves an outcome which is tantamount to success, then and only then, he will be entitled to the costs of the application.

48.  On the other hand, if the applicant does not pursue a claim, or for some other reason his action is struck out, then the defendants will be entitled to the costs of the application by reason of inaction or the failed action.

49.  In relation to the costs of compliance, I should follow in the first instance the normal provision for costs viz the defendants should have its reasonable costs of compliance.  I stress “reasonable” because, on the information available to me, I am far from satisfied that the defendants’ “record-keeping” and system of overall maintenance of accounting is efficient — the defendants may well have created, through their own fault, much unnecessary work.

50.  If, however, the applicant succeeds in his action, or achieves an outcome tantamount to success, then he will be entitled to the return to him of any sum he has paid in respect of such costs.