XCHRX SEACLIFF LTD. v. DECCA LTD. AND OTHERS

HCMP 4900/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 4900 OF 2000

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J U D G M E N T

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1. The Shanghai Centre is a development in Shanghai comprising shops, offices, residential apartments, a hotel and an exhibition centre. It is and has at all material times been managed by the plaintiff (Seacliff) a Hong Kong registered company which is a joint venture owned by a number of corporate investors.

2. Seacliff managed and paid for capital improvements undertaken between 1995 and 2000. The budgeted costs were US$49 million. Management of the refurbishment was originally undertaken by inhouse personnel of senior rank. The Chief Finance Officer surnamed McNett was to play a prominent role. For reasons not clear Seacliff came to engage the 5th defendant (Benswick) to participate in the management of the refurbishment. Benswick is and was at all material times owned and controlled by a man surnamed Howe.

3. By or shortly after the project was complete, in early 2000, the plaintiff came to realise that it had exceeded the budget. It had cause to believe that there were irregularities including the misappropriation of funds. It appointed an independent company called Kroll Associates (Asia) Limited to undertake an investigation. A chartered accountant named Alexander Duperouzal (Duperouzal) was put in charge.

4. It was soon apparent that McNett had helped himself to large amounts of money in cash advances which could only have been without authority and improper. In addition both McNett and Howe had claimed and been paid large amounts of money for expenses in connection with the project which smacked of unauthorized expenditure for personal use. And then, shortly after the investigation got underway, McNett disappeared suddenly, and has not been heard of since.

5. An investigation running parallel to that of Duperouzal's has revealed that the budget has been overspent by US$35 million and that in fact the total cost should have been US$41 million, leaving US$43 million unaccounted for. Duperouzal has also found a number of unexplained unusual features about the project which included:

(a) that there is a paucity of records justifying payments made by Seacliff, some of them substantial;

(b) that there appears to be no commercial or other good reason why Benswick was appointed to manage the project;

(c) that a number of PRC registered companies appear to have been used as conduits for the passage of money without good cause or reasonable explanation. Through them approximately US$42 million has been channelled and then paid to Benswick purportedly thence to various suppliers, but there are insufficient records to verify these.

6. Duperouzal's investigation to date points to large scale commercial fraud implicating McNett, Howe and perhaps others.

7. Certain of the irregularities uncovered have included what on the face of it appears to be a duplication or even triplication of payments made for the supply and installation of marble, provided by the 1st defendant (Decca). As an example Decca was paid direct by the plaintiff an invoiced charge of HK$16.831 million. But the plaintiff was also debited for this amount by Benswick on the basis that it paid Decca. Further, sums totalling RMB$30 million were channelled through one of the PRC companies purportedly for marble supplied, but there are wholly inadequate records to explain or justify the outlay. There has also been difficulty in finding out what has been paid for carpeting, the supplier of which was the 2nd defendant (Tai Ping) because of an apparent instruction to route payments through a PRC company. But this cannot be ascertained because so much of documentation supporting this is non-existent or has gone missing.

8. Duperouzal sought the assistance of Decca and Tai Ping requesting copies of documents, records, correspondence and so on as may help his enquiries. He claims there has been partial, ineffective response from both suppliers.

9. It was Howe who told Duperouzal that many of the payments made by Seacliff in the course of the project to the PRC companies were then routed through Benswick's accounts with the 3rd defendant (the Hong Kong Bank) to pay the suppliers. Howe has on request provided some information and documents, but his co-operation has been selective and limited. Duperouzal says much vital detail has not been and is unlikely to be forthcoming, at least voluntarily.

10. The investigation has uncovered that McNett used the 4th defendant (Credit Lyonnais) through which he channelled funds derived from the Shanghai Centre. Further, he was in control of a BVI Company called MBM Investments Limited (MBM) which at one stage held deposits "in the low 7 figures in US dollars", thus in excess of US$1 million. An inspection of bank statements and records of accounts in the names of McNett and MBM would likely be of assistance to trace the present whereabouts of funds rightfully Seacliff's.

11. Against this background, on 22 September 2000, Seacliff filed an originating summons, naming Decca, Tai Ping, the Hong Kong Bank and Credit Lyonnais as the four defendants, seeking production of documents as specifically named and described for the purpose of assisting it in establishing fraud and running to earth those responsible, and as a means of tracing funds which Seacliff might be entitled to recover. The application amounts to a pre-action claim for discovery, for there are no proceedings yet underway. Seacliff's stated position is that this is a necessary prerequisite to identify the wrongdoers and formulate to the required acceptable level of preciseness its pleadings. The application was brought in reliance on section 21 of the Evidence Ordinance, Cap.8(EO), and the court's inherent jurisdiction to make the orders sought.

12. Benswick with notice of the application, applied to be joined, and was made 5th defendant by order of 12 December 2000. Seacliff's application has been set down for hearing, two days reserved, on 12 March 2001.

13. But meanwhile, Benswick applied for the summons to be struck out for want of jurisdiction under Order 18 rule 19 of the Rules of High Court, Cap 4.

14. The application asks for the following:

"1. An Order that the Originating Summons filed 22 September 2000 be struck out on the grounds that

(1) it fails to disclose any reasonable cause of action; and/or

(2) it is frivolous and vexatious; and/or

(3) it amounts to an abuse of the process of the Court;

and that the same be dismissed.

2. An Order that the time for the 5th Defendant to file and serve an affidavit in opposition be extended until the determination of the strike-out application herein.

3. The costs of the Originating Summons including the costs of and occasioned by this application be to the 5th Defendant to be paid forthwith.

Dated the 8th day of January 2001.

L.S. Registrar, High Court."

15. In fact when the matter came on for hearing counsel for Benswick Mr Smith said the application was limited to the striking out of paragraph 2 of Seacliff's application, which seeks an order that the Hong Kong Bank make discovery in the following terms:-

"Against the 3rd Defendant:

2. The 3rd Defendant do within 14 days from the date of this Order or such other period of time as this Honourable Court may see fit:-

(a) disclose in writing to the Plaintiff's solicitors a list of all the accounts in the name of Benswick International Limited held at any of the 3rd Defendant's branches situated within the jurisdiction of Hong Kong ("Benswick's Accounts");

(b) produce true copies of all the bank account statements and supporting records in respect of Benswick's Accounts for the period from July 1996 to date."

16. That is the preliminary matter now before me for determination.

17. At the hearing Mr Burns, counsel for the plaintiff, conceded, in my respectful view correctly, that section 21 EO is not applicable and that the plaintiff's application is founded on the court's inherent jurisdiction to order in terms sought.

18. The argument against discovery being ordered pre-action is that it falls within the "mere witness" rule. This was referred to by Lord Reid in Norwich Pharmacal v. Customs & Excise [1974] AC 133. In this case the plaintiff sought discovery from the defendant of the names and particulars of those it had reason to believe had committed breaches of copyright, there being no other means of identifying the alleged wrong doers. Lord Reid said at p. 173:-

"But it is argued for the respondents that it was an indispensable condition for the ordering of discovery that the person seeking discovery should have a cause of action against the person from whom it was sought. Otherwise it was said the case would come within the "mere witness" rule.

I think that there has been a good deal of misunderstanding about this rule. It has been clear at least since the time of Lord Hardwicke that information cannot be obtained by discovery from a person who will in due course be compellable to give that information either by oral testimony as a witness or on a subpoena duces tecum. Whether the reasons justifying that rule are good or bad it is much too late to inquire: the rule is settled. But the foundation of the rule is the assumption that eventually the testimony will be available either in an action already in progress or in an action which will be brought later. It appears to me to have no application to a case like the present case. Here if the information in the possession of the respondents cannot be made available by discovery now, no action can ever be begun because the appellants do not know who are the wrongdoers who have infringed their patent. So the appellants can never get the information.

To apply the mere witness rule to a case like this would be to divorce it entirely from its proper sphere. Its purpose is not to prevent but to postpone the recovery of the information sought. It may sometimes have been misapplied in the past but I see no reason why we should continue to do so.

But that does not mean, as the appellants contend, that discovery will be ordered against anyone who can given information as to the identity of a wrongdoer. There is absolutely no authority for that. A person injured in a road accident might know that a bystander had taken the number of the car which ran him down and have no other means of tracing the driver. Or a person might know that a particular person is in possession of a libellous letter which he was good reason to believe defames him but the author of which he cannot discovery. I am satisfied that it would not be proper in either case to order discovery in order that the person who has suffered damage might be able to find and sue the wrongdoer. Neither authority, principle nor public policy would justify that."

19. There are exceptions to the 'mere witness' rule.

20. The court will properly be entitled to order discovery before any proceedings brought where the alleged tortfeasor's identity can only be assertained by this means; Norwich Pharmacal is authority for this.

21. It is also within the jurisdiction of the court to order discovery by way of a tracing exercise to establish where the proceeds of fraud have got to; see Bankers Trust Co. v. Shapiro [1980] 1 WLR 1270.

22. And the rule has no application in discovery against a third party sought after judgment has already been entered against the wrongdoer; see Mercantile Group A G v. Aiyela [1994] QB 366.

23. The arguments raised before me focused on whether Seacliff's application against the Hong Kong Bank falls within the first two of the exceptions to the 'mere witness' rule.

24. Mr Smith submitted that the application is misconceived. Duperouzal's investigations have identified the wrongdoers. Seacliff has sufficient information to issue a writ and, if it is to sue Benswick, then to compel discovery of the bank records as part of the interlocutory activity. And it cannot apply an exception to the rule for the purposes of tracing money taken by fraud unless and until fraud has been established. Mr Burns argued that justice requires that Seacliff be entitled to an order which might lead to the recovery of money massive amounts of which having been taken from its coffers by systematic fraud, there being no other realistic means of uncovering this.

25. Both counsel referred to a number of authorities and dealt at length with the evidence so far filed.

26. But I am alive to the fact that what is before me is not Seacliff's application under paragraph 2 but one to strike out that application for want of jurisdiction. Of course it became necessary to explore the merits of Seacliff's application, because if it is caught by the 'mere witness' rule then it falls outside the inherent jurisdiction of this court and must fail without further consideration. As Rimer J said at first instance, whose findings and reasoning were in the appeal approved by the Court of Appeal in Axa Equity & Life v. National Westminster Bank (unreported) dated 7 May 1998:-

"the orders sought against the five defendants are of a type which the courts do not make and, were the applications to be opposed by the defendants, it would decline to make them. That is because they are in the nature of "fishing" orders and because they are not justified by any exception or qualification to the mere witness rule. Moreover, I agree with [Counsel for Coopers] that the correct analysis is that the court has no jurisdiction to make the orders sought. I do not consider that the correct analysis is that the court has a general jurisdiction to make discovery orders of all sorts and for all purposes against anyone but merely declines to make orders of the present sort as a matter of discretion and if the application is opposed. I prefer the view that the development of English law has reached the point that it recognises a jurisdiction to make discovery orders of, inter alia, the Norwich Pharmacal type, but that it has not reached the point where it recognises a jurisdiction to make orders of the type sought by the Investors in the present case."

27. Order 18 rule 19 states:-

"Striking out pleadings and indorsements (O.18, r.19)

19.-(1) The Court may at any stage of the proceedings order to be struck out or amended any pleading or the indorsement of any writ in the action, or anything in any pleading or in the indorsement, on the ground that-

(a) it discloses no reasonable cause of action or defence, as the case may be; or

(b) it is scandalous, frivolous or vexatious; or

(c) it may prejudice, embarrass or delay the fair trial of the action; or

(d) it is otherwise an abuse of the process of the Court;

and may order the action to be stayed or dismissed or judgment to be entered accordingly, as the case may be.

(2) No evidence shall be admissible on an application under paragraph (1)(a).

(3) this rule shall, so far as applicable, apply to an originating summons and a petition as if the summons or petition, as the case may be, were a pleading."

28. The White Book, 1999 edition, in its commentary on the order and rule states at 18/19/6:-

"It is only in plain and obvious cases that recourse should be had to the summary process under this rule; per Lindley MR in Hubbuck v. Williamson [1899] 1 QB 86 and p. 96."

29. Under the head 'no reasonable cause of action or defence', it states at 18/19/10:-

"So long as the statement of claim or particulars disclose some cause of action or raise some question fit to be decided by a judge or jury the mere fact that a case is weak and not likely to succeed is no ground for striking it out; see Moore v. Lawson [1915] 3TLR 418, CA."

30. Under the head 'frivolous or vexatious' it states at 18/19/16:-

"By these words are meant cases which are obviously frivolous or vexatious or obviously unsustainable, per Lindley LJ in AG of Duchy of Lancaster v. L v. N.W. Railway [1892] 3 Ch 274 at 277."

31. And under the head 'abuse of the powers of the Court' it states at 18/19/18:-

"... ... This term connotes that the powers of the Court must be used bona fide and properly and must not be abused; see Castro v. Murray [1875] 10 Ex 213."

32. It is apparent that there is a burden on Benswick to establish that the plaintiff's application under paragraph 2 is so patently a claim beyond the jurisdiction that it falls under one or other of the heads of order 18 rule 2 and should be struck down without further ado.

33. This to my mind is a high burden, and is defeated by my being satisfied that the plaintiff has on the case law demonstrated it has a good arguable case to put in support of the application.

34. The result is that Benswick's application is dismissed and the plaintiff's application remains alive to be dealt with on 12 March next if there remains sufficient time for the parties to be ready for trial by then, or some later date.

35. Costs will follow the event, nisi at first instance. Seacliff's costs of this application to strike out are to be met by Benswick taxed if not agreed and payable forthwith.