SHEN YI v. GUOYUAN SECURITIES BROKERAGE (HONG KONG) LTD

HCMP 1694/2019

[2020] HKCFI 1447

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1694 OF 2019

________________________

________________________

________________________

DECISION

________________________

Introduction

1.  This is the substantive hearing of the plaintiff’s (“Plaintiff’s”) summons seeking pre-action discovery under section 41 of the High Court Ordinance and under the Norwich Pharmacal jurisdiction against the defendant (“Defendant”).  At the hearing, the Plaintiff abandoned his argument based on section 41 and confirmed that he would seek the Norwich Pharmacal relief only.

2.  The Plaintiff is a mainland merchant allegedly engaged in hotel business in Poland and Shanghai.  The Defendant is a licensed securities company, listed in the Hong Kong Stock Exchange.  On or about 12 June 2015, the Plaintiff opened a margin trading account (the “Account”) with the Defendant through its account executive, Mr Poon Che Ho (“Poon”).  He was able to trade in his account via telephone or internet with the use of a password.  He designated his personal e-mail account 13901780888@139.com for the purpose of receiving monthly statements in relation to his Account, communication and correspondence between him and the Defendant.  He deposited $6 million into the Account.

3.  The above factual background is not in dispute. What is in dispute is whether 157 transactions in his Account which the Defendant alleged had been executed pursuant to 232 orders placed by the Plaintiff via internet or telephone between June 2015 and June 2019 and which resulted in a loss of about $5.5 million were authorised by the Plaintiff.

The Plaintiff’s case

4.  The Plaintiff’s case is that in June 2015 he deposited $6 million in his Account for a “potential investment” which somehow did not materialize.  Since then, he had hardly logged into his Account and his funds were just left idling in his Account.  He had never traded in his Account.

5.  However, when he logged into his Account at the end of March 2019, he discovered that transactions had been conducted in his Account relating to purchases of shares in Merdeka Financial Services Group Limited (“Merdeka”) without his knowledge and consent.  He met with Poon on 8 April 2019 when he came to Hong Kong.  He asked Poon to investigate the unauthorised transactions.  Poon agreed but did not tell the Plaintiff that he had already left the Defendant’s employ.  Not having received any response from Poon, the Plaintiff made a request to the Defendant on 27 May 2019 for copies of monthly statements of his Account.

6.  On 4 June 2019, the Defendant provided the Plaintiff the monthly statements of his Account via e-mail.  The statements showed that there were 220 orders placed via internet and 12 orders via telephone to purchase Merdeka shares during 2015, 2016 and 2018.  Of these orders, 148 internet orders and 9 telephone orders were successfully executed resulting in 157 purchases.  Other than these 157 transactions, the Plaintiff’s account had no trading activities.  As at 3 September 2019, the net value of his Account was about $0.57 million due to depreciation in value of Merdeka’s shares.  On the same day, upon being chased by the Plaintiff, Poon informed the Plaintiff via WeChat message that there were 37 transactions in his Account in total.  That contradicts the monthly statements given by the Defendant.

7.  On 13 June 2019, the Plaintiff attended the Defendant’s office to discuss the matter.  The Defendant’s representative confirmed with him that apart from the account opening documents, the Defendant did not have any other documents signed by the Plaintiff.  On 8 July 2019, the Defendant informed the Plaintiff by e-mail that following internal investigations, it came to the conclusion that it was not liable for the Plaintiff’s loss in the Account.

8.  On or around 1 August 2019, the Defendant sent the Plaintiff an e-mail attaching four documents allegedly signed by him.  Three of these documents were related to the Plaintiff’s depositing 25 million shares in Merdeka into his Account on 5 September 2016.  The fourth document is a copy of the Plaintiff’s account opening document.  Except for the account opening documents which he signed when he opened the Account in June 2015, the Plaintiff denied that the signatures on the other documents were his.  He argued that the Defendant’s allegation in that e-mail was inconsistent with what the Defendant’s representative told him during the meeting on 13 June 2019. 

9.  Despite repeated requests to the Defendant for telephone recordings and other documents evidencing the 157 transactions, the Defendant refused citing various reasons:

(1)     the telephone recordings are for internal use only; and the regulatory requirement of keeping such recordings for 6 months had expired;

(2)     the Plaintiff’s request for discovery was made for ulterior motive; and

(3)     it would likely incur substantial expenses in making the discovery; that was despite the fact that the Defendant had told him that it had carried out an internal investigation and reviewed all relevant records thoroughly.

10.  The Plaintiff believes that there are reasonable grounds to suspect that Poon, possibly with the assistance of others, including the Defendant and/or its former/current employees and/or other relevant persons, deliberately and/or negligently caused the 157 unauthorised transactions.  He seeks discovery of three classes of documents:

(1)     evidence and/or records of purported delivery of any statements and notification of transactions in the Plaintiff’s Account (“Category 1 Documents”);

(2)     telephone recordings concerning the 12 executed orders allegedly placed pursuant to the Plaintiff’s instruction via telephone (“Category 2 Documents”); and

(3)     all other documents and records including (i) instructions, (ii) IP address(es) and type of device(s); and (iii) statements, receipts, notes, invoices, advices etc relating to the 232 orders placed in the Plaintiff’s Account (“Category 3 Documents”).

11.  According to the Plaintiff, the discovery is sought for the following purposes:  

(1)     to commence proceedings against the Defendant and other relevant individuals who deliberately and/or negligently caused the unauthorized transactions;

(2)     the discovered documents will likely enable him to identify the persons who were involved in the unauthorized transactions and determine whom to be made defendants in the prospective proceedings; and

(3)     there are strong grounds for suspicion that Poon was implicated in the unauthorized transactions whether deliberately or negligently, but there is no information or evidence as to whom, where, in what manner and by whom the orders were placed.

The Defendant’s case

12.  The Defendant’s case is very simple.  It says that all monthly statements were successfully sent to the Plaintiff via e-mail. It just followed the Plaintiff’s instructions to carry out the 157 transactions, which the Plaintiff now alleged were unauthorised.  The Plaintiff had received news and updates from the Defendant through the Plaintiff’s designated e-mail account at all material times and should have likewise received the monthly statements showing the 157 transactions.  According to the terms of their agreement, the account statements are deemed to be accepted by the Plaintiff if he did not raise objection in writing within 7 business days of the date of the statement.

13.  The Defendant filed an affirmation of Li Chiu Jamie (“Li”) in opposition to the Plaintiff’s application.  Li alleged that the Plaintiff had been subject to a disqualification order in Hong Kong.  Li also alleged that the Plaintiff had ulterior motive and made this application with a view to harassing the Defendant for the purpose of extracting benefit from the Defendant.  Li was informed by Poon that the Plaintiff had told Poon that he was negotiating with the boss of Merdeka for compensation and would try to extract benefit from the Defendant if he failed.  However, the Defendant has not filed any affirmation from Poon nor explained why it did not do so. Seemingly, it is the Defendant’s stance that the transactions were properly authorised by the Plaintiff and neither Poon nor the Defendant nor any of its staff handling the transactions was at fault.  If the transactions were unauthorised, Poon or some unidentified member of the Defendant’s staff and the Defendant vicariously were liable for his loss.

The Norwich Pharmacal Jurisdiction

14.  The Plaintiff seeks Norwich Pharmacal relief.  This relief had its origin from the House of Lords judgment in Norwich Pharmacal Co. v Customs and Excise Commissioners[1]. The judgement is based on the 19^th century procedure known as the “bill of discovery” and the case was brought by Norwich Pharmacal Co as the owner of the patent for a chemical.  Norwich Pharmacal Co knew that its patent had been infringed, because the chemical had been imported into the United Kingdom, but it was unable to identify the alleged wrongdoer.  It therefore brought proceedings against the Commissioners for Customs and Excise to force them to disclose the names of the importers, which were the “Intended Defendants”.  The House of Lords held that where an innocent third party has information relating to unlawful conduct, a court could compel them to assist the person suffering damage by giving them that information.  Lord Reid summarised the principle of the Norwich Pharmacal jurisdiction as follows[2]:

“They seem to me to point to a very reasonable principle that if through no fault of his own a person gets mixed up in the tortious acts of others so as to facilitate their wrong-doing he may incur no personal liability but he comes under a duty to assist the person who has been wronged by giving him full information and disclosing the identity of the wrongdoers. I do not think that it matters whether he became so mixed up by voluntary action on his part or because it was his duty to do what he did. It may be that if this causes him expense the person seeking the information ought to reimburse him. But justice requires that he should co-operate in righting the wrong if he unwittingly facilitated its perpetration.

I am the more inclined to reach this result because it is clear that if the person mixed up in the affair has to any extent incurred any liability to the person wronged, he must make full disclosure even though the person wronged has no intention of proceeding against him.  It would I think be quite illogical to make his obligation to disclose the identity of the real offenders depend on whether or not he has himself incurred some minor liability.  I would therefore hold that the respondents must disclose the information now sought unless there is some consideration of public policy which prevents that.”

15.  This principle is founded on a duty owed by a person who, wittingly or unwittingly, has become involved in a wrong against the person seeking the order to the extent that he has facilitated the wrongdoing when legal proceedings for the alleged wrongdoing cannot be brought because the identity of the wrongdoer is unknown and the need to do justice under such circumstances.  The usual relief is to require this third party to disclose information relating to the identity of the suspected wrongdoer.  This relief is a very important tool in the court’s armoury to be able to order discovery. In the 45 years since the jurisdiction was founded, there has been effort to expand the scope of the jurisdiction.  The relief has been expanded to cover information beyond names and addresses, but also information to facilitate the tracing of misappropriated funds[3], information to discover whether a suspected wrongdoer was responsible for the wrong done[4], information which may be used as evidence[5] and even information to enable pleading to be formulated[6].

16.  Ms Liao, counsel for the Plaintiff, referred me to the case of Carlton Film Distributors Ltd v VCI Plc[7].  In that case, the applicant (“Carlton”) had entered into a licence agreement with VCI Limited (“VCI”) for VCI to make a limited amount of licensed copies of a number of films.  The films were then produced by VDC Limited (“VDC”).  Judging from what happened in the market there has been some breach of the licence agreement.  VCI have made it absolutely plain that they do not have the manufacturing records.  Hence, Carlton sought discovery of those manufacturing records against VDC.  Jacaob J quoted the following dicta of Morritt LJ (as he then was) in Axa Equity and Life Assurance Plc v National Westminster bank Plc[8]:

“The consequence would be that the principle of Norwich Pharmacal would be applicable in any case where, for whatever reason, the action for which the document or information was required could not in its absence proceed to trial and would not be confined to cases in which the reason why the action could not so proceed was ignorance as to the identity of the proper defendant. The establishment of such a proposition would also enable effect to be given to the reference made by Lord Reid in Norwich Pharmacal to the duty to provide ‘full information’ as well as the identity of the wrong-doer without giving rise to a general obligation to give disclosure.”

His Lordship then held that application of the Norwich Pharmacal principle is not limited to disclosure of the identity the wrongdoer but also to disclosure of information or documents without which the victim could not start proceedings, or properly plead particulars of claim, or verify a statement of truth.  I respectfully agree with that opinion.

17.  On the other hand, the Norwich Pharmacal relief is a very extraordinary relief.  As pointed out by Ma J (the Chief Justice as he then was) in A Co v B Co[9], the relief is made against an innocent party whose only involvement was to become mixed up in the tortious or wrongful activities of another.  The suspected wrongdoer in relation to whose activities the relief is sought but against whom no relief may be sought at that stage will most probably not be before the court and would not be able to answer what are often very serious allegations made against him.  Usually, there will exist a legal relationship between the innocent person against whom the discovery order is sought and the alleged wrongdoer and this relationship may involve strict duties to be observed on the part of the innocent party.  Accordingly, in exercising its discretion in granting this relief, the court must balance the competing interest of the victim of the alleged wrongdoing and the innocent party caught up in the wrongdoing.  Hence, the relief is not to be lightly granted.  There must be cogent and compelling evidence to demonstrate that serious tortious or wrongful activities have taken place.  Where fraud or similar serious allegations are made, the degree of proof must correspondingly be high.  This is particularly pertinent in this application.  It must also be clearly demonstrated that the relief will or will very likely reap substantial and worthwhile benefits for the plaintiff.  The discovery sought must not be unduly wide.

The suspected wrongdoing

18.  On the strength of his affirmation, the Plaintiff has a good case against the Defendant in contract or in the tort of negligence.  The Plaintiff has not produced a draft statement of claim.  He has not alleged fraud, but presumably his action against Poon and other unidentified parties would be founded in fraud or some very serious allegations.  Presumably, some unidentified people, who may or may not be associated to Poon or other employees of the Defendant, had managed to hack into the Plaintiff’s Account or stolen his password and conducted the unauthorised transactions via internet or entered some fictitious transactions using his Account with a view to gain.  However, the scheme went wrong and resulted in significant loss.  Apart from asserting that he never traded with his Account, the Plaintiff did not know anything about the 157 transactions. He does not know who effected the transactions and the purpose.

19.  All the evidence the Plaintiff has is his assertion that he had never traded with his Account and that he was informed by Poon that there were only 37 transactions in his Account since it was first opened until June 2018 which is contrary to the statement of account produced by the Defendant.  The Plaintiff suggests this is evidence of fraud against the Defendant.  At this stage of the consideration, the court usually accepts the evidence of the applicant as asserted in his affidavit in support of the application at its face value.  If the Plaintiff had never traded in his Account, the only reasonable inference is that the 157 transactions were unauthorised or fictitious transactions created as result of some wrongdoing by Poon or other employees of the Defendant or some unknown third parties.  If the Defendant was not a party to such wrongdoing, it has in the words of Lord Reid “got mixed up in the tortious acts of others so as to facilitate their wrongdoing”.  Even if the Defendant has incurred no personal liability, it comes under a duty to assist the Plaintiff who has been wronged by giving him full information and disclosing the identity of the wrongdoers.  The information sought by the Plaintiff is solely within the knowledge of the Defendant.  It will enable the wrongdoers to be identified.  The loss suffered by the Plaintiff is substantial.  I accept the Plaintiff’s argument that the information is likely to reap substantial benefits for the Plaintiff.  Subject to the Plaintiff’s discharging the burden of adducing cogent evidence in support of his application, justice requires that the information be provided.  The Norwich Pharmacal jurisdiction is available to the Plaintiff.

Cogency of the Plaintiff’s evidence

20.  The Norwich Pharmacal relief is a very extraordinary relief which will not be lightly granted unless supported by cogent evidence.  At this stage of the consideration, the court will not accept the evidence of the applicant at its face value, otherwise this exceptional relief would easily become a tool of abuse by the unscrupulous for ulterior motive.  It becomes necessary to weigh the cogency of the Plaintiff’s evidence by testing it against the incontrovertible evidence or evidence not in dispute and particularly contemporaneous documents.

21.  All the evidence that the Plaintiff has is his own assertions and the hearsay evidence from Poon.  As against that, the Defendant has produced the monthly statements of the Plaintiff’s Account, hearsay evidence from Poon about the Plaintiff’s ulterior motive, and three documents purportedly signed by the Plaintiff relating to a deposit of 25 million shares in Merdeka into his Account.  It is curious that both parties are seeking to rely on the hearsay evidence of Poon and complaining against the opponent for not adducing any affidavit evidence from Poon.   Putting the hearsay evidence aside, the three documents purportedly signed by the Plaintiff are pertinent.

22.  I am alive to the fact that authenticity of these documents is in dispute and that the Plaintiff denied that the signatures on the documents which purported to be his are his.  These documents were annexed to the Defendant’s reply to the Plaintiff’s inquiry of 20 July 2019.  They were instructions to the Defendant purportedly signed by the Plaintiff.  They include a securities settlement instruction instructing the Defendant to receive 25 million shares in Merdeka into his Account; a written instruction to deduct the stamp duty fee and handling charge for stamping the purchase document from the Account; and the purchase document.  The purchase document is unlikely to be forged.  It bears the stamp of the Stamp Duty Office showing the stamp duty fee of $2,575 for the purchase and the date when the document was stamped.  Assuming a similar amount of stamp duty was paid for stamping the sale document, the total amount of stamp duty was $5,150.  These three documents are related to a deposit of 25 million shares worth $2.575 million into the Plaintiff’s Account on 5 September 2016.  This deposit, the stamp duty fee of $5,150 and handling charge of $300 are reflected in the monthly statement of the Account for the month of September 2016.  In the circumstances, it is most likely that these three documents are both authentic and contemporaneous.  The signatures on these three documents are markedly similar to the Plaintiff’s signature on the account opening document which is accepted by the Plaintiff to be authentic.  Besides, who else but the Plaintiff would have deposited shares worth $2.575 million into his Account?  Though handicapped by the absence of handwriting expert, this court may fairly reach a provisional finding for the purpose of considering this application that these signatures are the Plaintiff’s. 

23.  This finding casts a very serious doubt on the credibility of the Plaintiff’s case.  These three documents and the monthly statement for September 2016 evidence a deposit by the Plaintiff of 25 million shares in Merdeka worth $2.575 million into his Account.  Though depositing shares is not the same as trading in shares, this transaction shows the Plaintiff’s interest in Merdeka shares and that he did carry out some activities with his Account, albeit technically not trading activity.  This cast serious doubts on the Plaintiff’s evidence that he never traded with his Account.  It also supports the Defendant’s case that monthly statements have been sent to the Plaintiff during the past four years and that the transactions shown in the statements were genuine. 

24.  I accept that on the Plaintiff’s case, he has strong grounds for suspicion that Poon and possibly others might be implicated in the unauthorised transactions.  I accept that the discovery will likely reap substantial and worthwhile benefits for the Plaintiff.  I accept that the discovery sought, suitably narrowed down, would not be costly as the Defendant had on its own evidence completed the investigation.  Costs would not be a reason for refusing this relief.  I accept that the suggestion of ulterior motive by the Defendant is speculative.  I accept that the Defendant’s allegation that the Plaintiff was subject to a disqualification is in dispute and in any event irrelevant.  But, as the Plaintiff has failed in discharging this onus of adducing cogent evidence in support of its own case, his application cannot even get off the ground.  All the benefits which the Plaintiff argues he will likely reap are illusory for he might not even have a credible case to begin with. 

25.  On the Plaintiff case, he has sufficient evidence to enable him to commence an action at least in contract and possibly in negligence as well against the Defendant.  He has sufficient evidence to enable him to plead his case and verify the statement of truth.  He has difficulties to bring in additional defendants.  If he is to commence action against the Defendant, he would most probably obtain inter-parties discovery for most of the disclosures he now seeks.  If he succeeds in the action against the Defendant, that would give him the best and most convenient remedy at the least costs.  The Defendant, being a listed company, is probably good for the damages he is likely to obtain.  Judgment against the Defendant would be a more assuring remedy than one against Poon or some parties yet to be identified by the discovery he is seeking.  This is not a case that without the Norwich Pharmacal relief, he would be left with no remedy.  There is no conceivable reason why he should choose this more indirect and expensive course of seeking the Norwich Pharmacal relief with a view to bring in additional defendants.  If after obtaining inter-parties discovery he sees fit to bring in other defendants, he is at liberty to do so.  The Plaintiff would not suffer any prejudice if this relief is refused. Conversely, justice requires the discretion to be exercised against granting this relief.

26.  Ms Liao argues strenuously that this case is similar to Carlton Film Distributors Ltd.  I accept her argument that the Norwich Pharmacal jurisdiction may be extended to cover information necessary to enable the intended plaintiff to draft his statement of claim and verify the statement of truth.  But Carlton Film Distributors Ltd is distinguishable from the present case on the facts.  In that case there was incontrovertible market evidence of overproduction.  The evidence of wrongdoing was compelling.  The issue was primarily how to quantify the damage.  In the present case, considered in the round, there are serious doubts in the Plaintiff’s case that he had never traded in his Account.  The evidence of wrongdoing he adduced is seriously debatable on credible grounds.  It is not cogent or compelling enough to invoke the court’s discretion in granting this exceptional relief.  On this ground alone, the Plaintiff’s application must be dismissed.

Conclusion

27.  For the above reasons, the Plaintiff’s application is dismissed with costs and with certificate for counsel.