CHINA CONSTRUCTION REALTY LTD v. LUCKY DRAGON LTD AND OTHERS

HCA 1237/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 1237 OF 2012

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D E C I S I O N

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THE APPLICATIONS

1.  There are two applications before the Court:

a.   The plaintiff’s application for specific discovery pursuant to its summons filed on 17 March 2014; and

b.   The 4^th defendant’s application by summons filed on 3 April 2014 for an order that the plaintiff’s interrogatories served on the 4^th defendant on 11 March 2014  (the “Interrogatories”) be withdrawn, notwithstanding that the due date for such application for withdrawal had expired under the rules. 

2. These applications are contested.

3. Ms. S. Tong, counsel acts for the plaintiff.  Mr. Ling, counsel acts for the 4^th defendant.

THE HADKINSON ORDER

4. Ms. Tong has raised a preliminary issue that the 4^th defendant should not be heard because it is in contempt of the Court in that it is in breach of the Injunction Orders granted by the court.  The 4^th defendant has not purged its breaches. It is a matter of the court’s discretion.  The 4^th defendant opposes this application.

5. Mr. Ling submits that since the 4^th defendant is in a defensive role, this rule or discretion is not applicable and has never been applied.  In this case, the 4^th defendant is defending the plaintiff’s application.  According to the modern approach, the starting point for the court’s exercising of discretion is that refusing to hear a party, even a contemnor, is a strong thing only to be justified by grave considerations of public policy.  It is a step which a court will only take when the contempt itself impedes the course of justice and there is no other effective means of securing his compliance.[1]

6. Ms. Tong relies upon X Ltd v Morgan-Grampion (Publishers) Ltd [1991] 1 AC 1 (HL) at p.46 per Lord Bridge to found her argument that the court has the discretion not to hear a party who is in contempt of court, for his own benefit, unless and until the contempt has been purged.  At 46E-F, Lord Bridge of Harwich cited Denning LJ in Hadkinson v Hadkinson p.258 as follows:

“……Apply this principle, I am of opinion that the fact that a party to a cause has disobeyed an order of the court is not of itself a bar to his being heard, but if his disobedience is such that, so long as it continues, it impedes the course of justice in the cause, by making it more difficult for the court to ascertain the truth or to enforce the orders which it may make, then the court may in its discretion refuse to hear him until the impediment is removed or good reason is shown why it should not be removed.” (emphasis added)

7. It can be seen at once that the court is concerned with its course of justice being or to be impeded.  It is on this basis that the court should exercise its discretion to refuse to hear the party in order to remove this impediment.

8. In the case of Arrow Nominees Inc and Another v Blackledge and Others [2000] 2 BCLC 167, the Court of Appeal held that the object of the rules as to discovery was to secure the fair trial of the action in accordance with the due process of the court and accordingly a party was not to be deprived of his right to a proper trial as a penalty for disobedience of those rules, even if such disobedience amounted to contempt for or defiance of the court, if that object was ultimately secured.  But where a litigant’s conduct amounted to such an abuse of the process of the court as to render further proceedings unsatisfactory and to prevent the court from doing justice, the court was entitled and bound to refuse to allow that litigant to take further part in the proceedings and, where appropriate, to determine the proceedings against him.[2]

9. The nature of the order sought by the plaintiff is restrictive of the 4^th defendant’s constitutional right of access to court under Article 35 of the Basic Law and Article 10 of Bill of Rights.  The Court of Final Appeal in Ng Yat Chi v Max Share Limited & Others (2005) 8 HKCFAR 1 had extensive discussion on this issue.  This is a guaranteed right under the Basic Law.  However, it is not an absolute right and can be taken away if it is an abuse of the court proceedings, subject to the tests as provided in the judgment.[3]  PJ Ribeiro in the judgment at paragraph 73 said:

“…In relation to BL 35 and BOR 10, it has firmly been established in the jurisprudence of the European Court of Human Rights in relation to the closely analogous right of access under Art 6(1) of the European Human Rights Convention, that such right is by its nature not absolute, but may be subject to limitations. Such limitations are valid if they pursue a legitimate aim, are proportionate to that aim and are not such as to impair the very essence of the right: Ashingdane v UK [1985] 7 EHRR 528 at §57; Tolstoy-Miloslavsky v United Kingdom (1995) 20 EHRR 442 at §59.”

10. The Court of Appeal in TCWF v LKK [2012] HKFLR 500 had dealt with the petitioner taking out the application asking for leave to disclose the documents for enforcement proceedings outside the jurisdiction and at the same time seeking a Hadkinson order against the respondent regarding the proceeding.  The Court of Appeal held that it was a matter of discretion and it said: “Bearing in mind the constitutional right to a fair hearing, in the present circumstances, we regard it as disproportionate to bar the respondent from making any submissions notwithstanding his partial non-compliance with the order of Saunders J..” 502F.

11. In CWG v MH & Others (unreported, CACV80/2013, CACV83/2013 & HCMP264/2014, 3 March 2014) the Court of Appeal heard an application for a Hadkinson order against the husband’s and the mother’s appeals on the grounds that the husband had failed to comply with an Interim Order of payments in full and the mother had failed to comply with the order for discovery.  In exercising its discretion having considering all the relevant factors, the Court of Appeal upheld the Hadkinson order granted by the Deputy Judge.  This is a case where the applicants were the contemnors.

12. Similar to TCWF case, the plaintiff is now seeking an order from this Court to compel the 4^th defendant to disclose the documents as set out in the summons and to answer its questions, the purpose of which must be to advance the plaintiff’s case on the one hand, and on the other asks the Court to deny the 4^th defendant’s right to be heard in this hearing.  Mr. Ling is quite right to point out that the 4^th defendant is now responding to the plaintiff’s summons to attend this hearing.  There is no evidence that the 4^th defendant’s alleged contempt would impede the course of the orders that the plaintiff asks this Court to make against it.  Quite the contrary, if the 4^th defendant is debarred from being heard, the Court will not be assisted by its counsel to make submissions on its behalf for the Court to come to a fair conclusion.

13. The Court of Final Appeal in Poon Hau Kei v Hsin Chong Construction Company Limited & Another (2004)HKCFAR 148 at §21 referred to “Bank of America v  Chai Yen [1980] 1 WLR 350 at p.353 D, Lord Lane, delivering the advice of the Privy Council, said “the essence of any rule of procedure must be fairness”. The same is true of any rule of practice.”  CJ.  Li in Secretary of Security v Sakthevel Prabakar (2004) 7 HKCFAR 187 at §43, said: “One is concerned with procedural fairness and there is of course no universal set of standards which are applicable to all situations.  What are the appropriate standards of fairness depends on an examination of all aspects relating to the decision in question, including its context and its nature and subject matter: R v Home Secretary, ex p Doody [1994] 1 AC 531 at p.560D-G.” 

14. In the discussion of procedural fairness, the Court of Appeal in ST v Betty Kwan & Others (unreported,CACV115/2013, 26 June 2014 where the Chief Judge at paragraph 25 of the Judgment highlighted “effective representations” being the important requirement of fairness and he cited R (West) v Parole Board [2005] 1 WLR 350 “… (5) Fairness will very often require that a person who may be adversely affected by the decision will have an opportunity to make representations on his own behalf either before the decision is taken with a view to producing a favourable result…”

15. It is one thing for the court to exercise its power to prevent abuse of its process where the contemnor makes an application to court to advance its interest in the proceedings, but quite another where it is summoned before the court but is disallowed to defend itself.  We should never lose sight of the primary aim in exercising the powers of the Court is to secure the just resolution of disputes in accordance with the substantive rights of the parties under O.1A, r. 2(2) of RHC.

16. In the circumstances, I consider that the plaintiff is unable to pass the proportionality test as laid down in Ng Yat Chi and I exercise my discretion to hear the 4^th defendant on the plaintiff’s application for specific discovery and on interrogatories.

THE FACTUAL BACKGROUND

17. I have had the benefit of reading Poon J’s judgment in the previous hearing on the discharge of the injunction delivered on 12 April 2013.  For the purpose of this Decision, I shall state the facts of this matter as brief as the applications require.

18. As the preamble to the background, this is the plaintiff’s exercise to catch the defendants in a hide and seek game in order to obtain the fruit of its judgment granted by the Australian court in 2005 against the buyer defendant in a sale and purchase of a piece of land in Dalian in China, together with the development of the project whereby the defendant as the purchaser had failed to pay to the plaintiff the installment payments and was therefore in breach of the contract.  Having obtained the judgment, the plaintiff then discovered that the interests in the land and the project were transferred to Lucky Dragon, the 1^st defendant.  The plaintiff took out an action against Lucky Dragon, only to find subsequently that it had, by two agreements, assigned the assets of its subsidiaries to Empire Star, the 4^th defendant in this action.

19. The plaintiff was the dominating owner (60%) of a valuable piece of land in Dalian and the land development project thereon (the “Dalian Land”) through a number of its subsidiaries, the 2^nd defendant and the 3^rd defendant being two of them.  The other subsidiaries are Golden Pebble Beach Development Ltd (“GPB”), Dalian Jinshitan Baotong Real Estate Development Co Ltd (“Dalian JV Company”), Dalian International Foreigners’ Entertainment Club Co Ltd (“DIFEC”) and Dalian International Entertainment Co Ltd (“DIEC”).  DIFEC and DIEC are the holders of the Dalian Land.

20. By an agreement dated 26 June 1997 (“the SBS Agreement”), the plaintiff agreed to sell the shares of its subsidiaries to Sino Business Services Proprietary Limited (“SBS”) for AUS$46,500,760.00, payable in tranches as stipulated therein.  SBS had nominated its subsidiaries to take over the plaintiff’s shares.  However, SBS had failed to pay the tranches as agreed. The plaintiff instituted legal proceedings in Victoria, Australia to seek damages for breach of contract or alternatively the return of the shares and they obtained judgment against SBS.

21. However, before the judgment was granted by the Australian Court, without the knowledge of the plaintiff, SBS had procured GPB, its subsidiary to enter into an agreement with the 1^st defendant (“the Lucky Dragon Agreement”) under which all the equity interests held by GPB, the Dalian JV Company, the 2^nd defendant and the 3^rd defendant were all transferred to the 1^st defendant.  The plaintiff might then obtain an empty judgment.

22. The plaintiff then commenced another action (HCA1294/2005) against SBS and its subsidiaries and the 1^st defendant for defraud and to set aside the Lucky Dragon Agreement.  It succeeded to obtain a judgment from the court after trial.  However, in the course of enforcing the judgment, the plaintiff discovered that sometime in 2010, the 2nd and 3rd defendants had, by two agreements, already transferred their equity interest in DIFEC and DIEC to the 4th defendant for the consideration of HK$48 million and HK$36 million respectively (“the Empire Star Agreements”).

23. The plaintiff complained that the Empire Star Agreements effectively stripped the 2nd and 3rd defendants of all its valuable assets.  The plaintiff is again left with an empty judgment.  Hence, the plaintiff took out this action for injunction against the defendants.

THE PARTIES’ PLEADED CASE

24. The plaintiff’s case relies upon:

a.  the facts found by the court before Mr. Justice Suffiad that the transfer of the beneficial interest in the Dalian Land by GPB to Lucky Dragon was not a genuine transaction, but rather was a scheme to channel off the entire interests and assets of Dalian Land to Lucky Dragon in order to put them beyond the reach of the plaintiff;[4]

b.  the Empire Star Agreements by which Lucky Dragon transferred the interest and assets of the Dalian Land through its subsidiaries to the 4^th defendant was a fraud to defraud the plaintiff as the creditor, which is evidenced by Lucky Dragon having knowledge of such a scheme[5] and the 4^th defendant having actual or constructive notice of such a fraudulent scheme by reference to the circumstances as pleaded in paragraphs 54, 55 and 56 of the Statement of Claim, in particular for the present purposes: share prices at gross undervalue, no evidence of payment of share price by the 4^th defendant for the shares, due diligence would enable the 4^th defendant to have knowledge of the litigation between the plaintiff and Lucky Dragon in Hong Kong; no evidence of obtaining independent legal advice prior to the shares agreements; and

c.   by virtue of section 60 of the Conveyancing and Properties Ordinance, Cap.219, the Empire Star Agreements should be set aside.

25. The 4^th defendant’s defences to the plaintiff’s pleaded case above are:

a.  no admission to Lucky Dragon’s scheme, but only admitted the transfer of the equitable interest of the shares of Luck Dragon’s subsidiaries to it for the consideration of HK48 million and $36 million[6] respectively;

b.  denial of knowledge of Lucky Dragon’s intention to defraud the plaintiff and denial of purchase of the shares under the Empire Star Agreements at gross undervalue;[7]

c.   the transactions were for valuable consideration and in good faith, relying upon section 60(3) of the Conveyancing and Properties Ordinance, Cap.219; in particular, the 4^th defendant pleaded it had no knowledge of the judgment against Lucky Dragon before the end of March 2011[8]; upon signing the Framework Agreement, the 4^th defendant commissioned for itself or for Fulbond due diligence studies and a valuation report on the Dalian Project, ascertaining its legal and commercial viability[9]; pursuant to the Framework Agreement, the 4^th defendant arranged for the transfer of RMB530 million to Jinan Company for the purchase of the shares of DIEC and DIFEC[10]; the share price was not undervalued, taking into account of the debts and liabilities of DIEC and DIFEC[11].

THE PLAINTIFF’S SUMMONS FOR SPECIFIC DISCOVERY

26. The plaintiff has altogether 11 items of documents to be discovered from the 4^th defendant.  They are long descriptions as set out in the schedule attached to the plaintiff’s summons.  I do not intend to set them out in full in this Decision.  I propose simply to make reference to the items here.  As pointed out by Mr. Ling, although the margin of the summons stated that the application is made under Order 24 rule 7, some of the documents requested are referred to in the pleadings and the witness statements, which should be covered under Order 24 rule 10 instead.  This is, however, a technical defect, which Mr. Ling has not taken, rightly in my view, seriously as it will not prejudice the 4^th defendant’s position in its opposition to the application.  I shall deal with the summons accordingly.

27. Reference has been made to the 5^th affidavit of Mr. Li Kit Wai, the solicitor acting for the plaintiff, in support of the plaintiff’s application and the 4^th affirmation of Mr. Zhang Xi for the 4^th defendant in opposition.

28. On the first day of the hearing on 24 June 2014, the 4^th defendant submitted the 5^th affirmation of Zhang Xi, in which he affirmed that he did not have or ever had the documents under other categories not covered by his 4^th affirmation.  Ms. Tong raised no objection to it being adduced and considered by this Court in this hearing and the 4^th defendant agreed to give costs of and occasioned by its late applications and the 5^th affirmation.  With Zhang Xi’s 4^th and 5^th affirmations, the 4^th defendant now says that it does not have or ever had the possession, custody or power over the documents sought by the plaintiff.

29. Ms. Tong has summarized the contents of the items in her written submission as follows:

“(1) Items 1-3: The Alleged debts of DIEC and DIFEC (approx. RMB 510 million) at the time the subject transaction was entered into in December 2009, and the alleged repayments of such debts (RMB 430 million) subsequently using the purported consideration paid by D4 under the Framework Agreement.

(2) Item 4: The alleged “potential legal actions” which DIEC and DIFEC faced at the time of the subject transaction.

(3) Item 5: The alleged application made to the Dalian authorities for the cancellation/revocation of the Jinan Company’s registration as 60% shareholder of DIEC and DIFEC.

(4) Items 6-7: The alleged payment of the RMB530 million by the Xiamen Company, the Chongqing Company and the Guangxi Company as the consideration under the Framework Agreement, and the source of such funds.

(5) Item 8-9: The alleged beneficial interest of Zhang in the Chongqing Company and the Guangxi Company and Mr. Weng in the Guangxi Company.

(6) Item 10: D4’s breach of the Injunction Order.

(7)  Item 11: Originals of various documents disclosed by the parties herein.” 

Discussion on the relevant legal authorities

30. Respective counsel have made submissions on the relevant legal principles for my consideration.

31. The 4^th defendant now says that in the 4^thand 5^th affirmations of Zhang Xi, the 4^th defendant does not have and has never been given possession, custody or power over the documents.  The 4^th defendant relies upon In the matter of Prudential Enterprise, Ltd. (unreported, HCCW594/1999, 24 October 2003)that the applicant has to prove by affidavit evidence that the documents are relevant; that the other party has or had in its possession, custody or power of the documents; that the other party may oppose that the discovery is unnecessary;[12] that the court may grant the order upon a prima facie case as to relevance and possession and being satisfied that discovery is necessary[13]; that the affidavit in answer is conclusive at the interlocutory stage unless it is shown to be insufficient by its contents or by admissions made in the proceedings, in which event, a further affidavit may be ordered.[14]

32. Miss Tong has referred me to the case of Lee Sai Nam v Li Shu Chung & Ors (unreported, HCA 1711/2009, 10 January 2014), and submits that an affidavit is not regarded as conclusive where it can be shown that there has been insufficiency of discovery, demonstrated by (i) the pleadings, the list and affidavit of documents themselves, or documents referred to therein; (ii) any other source that constitutes an admission of the existence of a discoverable document not so far discovered; (iii) an apparent exclusion of documents from discovery by a party under a misconception of the case (see Lee Sai Nam supra at §§55-57).  See also §24/7/1 of HKCP2014, Vol.1.

33. Ms. Tong has also referred me to various documents in the bundle of documents, which show that of the four directors of DIEC and DIFEC, three were nominated by the 4^th defendant.[15]  Recently, two of the nominated directors of DIEC and DIFEC had been replaced by Zhang Xi and his sister, both too, are the 4^th defendant’s nominees.  Also, from the lists of documents filed by the 4^th defendant, it can be seen that many of the documents belonging to the business of DIEC and DIFEC were produced by the 4^th defendant, which demonstrates, as submitted by Ms. Tong, either the 4^th defendant has the power to all the documents of DIEC and DIFEC or alternatively DIEC and DIFEC must have given general consent to the 4^th defendant to inspect their documents.  By virtue of the decision in Schlumberger Holdings Limited (a company incorporated in the British Virgin Islands) v Electromagnetic Geoservices as (a company incorporated in Norway) [2008] EWHC 56 where Mr. Justice Floyd at paragraph 21 stated:

“I accept that the mere fact that a party to a litigation may be able to obtain documents by seeking the consent of a third party will not on its own be sufficient to make that third party’s documents disclosable by the party to the litigation. They are not within the present or past control precisely because it is conceivable that the third party may refuse to give consent. But what happens where the evidence reveals that the party has already enjoyed, and continues to enjoy, the co-operation and consent of the third party to inspect his documents and takes copies and has already produced a list of documents based on the consent that has been given and where there is no reason to suppose that that position may change? Because that is the factual situation with which I am confronted here. In my judgment, the evidence in this case sufficiently establishes that relevant documents are and have been within the control of the claimant. I should emphasize that my decision does not turn in any way on the existence of a common corporate structure. My decision depends on the fact that it appears from the evidence that a general consent has in fact been given to the claimant to search for documents properly disclosable in this litigation…”

Mr. Ling is challenging whether the plaintiff has the evidence that DIEC and DIFEC had given general consent to the 4^th defendant in respect of all their documents. However, given the nature of the documents belonging to DIEC and DIFEC disclosed by the 4^th defendant in its explanation on the breach of the Injunction, it can be shown that the corporate documents such as the accounts of the companies, the security documents and guarantees were disclosed by the 4^th defendant.

On the issue of whether the 4^th defendant has “power” over the corporate documents of DIEC and DIFEC on the basis that the 4^th defendant has nominated directors in the board of those companies and under Hong Kong law, the directors would, by virtue of their office, have an unfettered right to inspect the companies’ documents so long as it is not exercised for an improper purpose, Mr. Ling has submitted his 4^th written submissions with his 5^th list of authorities on this issue. He refers to B v B (Matrimonial Proceedings: Discovery) [1978] Fam 181 at 188F where Dunn J. held that a director owes fiduciary duties to the company and to the shareholders.  He is not allowed to abuse his position as a director to inspect the company’s documents or to take copies of them “for his own purposes unconnected with the business of the company.” 188 F. It is in this context that the company’s documents are not within his power and the learned Judge said: “It is a question of fact in each case whether or not a director has such an enforceable right; much will depend upon the structure of the company.” 188G.  It cannot be argued that a director must not abuse his position as a director of the company.  The significant issue for discussion for this application is that the directors nominated by the 4^th defendant are not required to abuse their position as directors of the companies.  They are to obtain the companies’ documents to show that the sale of the companies’ shares to the 4^th defendant were, as alleged by the 4^th defendant in its defence, genuine transactions at an arm’s length for valuable consideration under section 60 (3) of the Conveyancing and Properties Ordinance, Cap. 219. DIEC and DIFEC have the right to oppose the directors’ right of inspection of their corporate documents if they have the reasons to suspect that the directors are abusing their positions as directors.  But this is a matter for the court to determine; such issue will not, in my view, affect the directors’ statutory rights under section 375 of the Companies Ordinance, Cap. 622.

34. Mr. Ling has also referred to Re Neath Rugby Ltd (No.2) [2009] BCLC 427 and at 436, Stanley Burnton LJ held at paragraph 42 of his judgment: “In my judgment, the fact that a director of a company has been nominated to that office by a shareholder does not, by itself, impose any duty on the director owed to his nominator.  The director may owe duties to his nominator if he is an employee or officer of the nominator, or by reason of a formal or informal agreement with his nominator, but such duties do not arise out of his nomination, but out of a separate agreement or office.”  This is in support of his proposition that the nominator, whilst subject to the usual discovery obligations, can have no power (in the discovery sense) over the company’s documents.[16]  It should be noted that in this authority, the plaintiff was claiming against the defendant, its nominee, as a director of one of the local rugby clubs for breaching his duties as the nominee under an agreement with the plaintiff in that the defendant had put his personal interest before the plaintiff’s interest. It should also be borne in mind that the defendant had interest in the local rugby club in question.  Here, the Court of Appeal was referring to the general principle that the nomination itself does not create any duty between the nominee to his nominator.  Such duty is to be determined by their agreement.  In the present case, it is obvious that the nominees of the 4^th defendant as directors of DIEC and DIFEC have no interest whatsoever in the companies themselves.  They appear to be mere agents for the 4^th defendant, acting in accordance with the instructions of the 4^th defendant in the operation of the companies.  It will be for the nominees, ie Mr. Zhang and his sister as directors of the companies to tell the court the agreement between themselves and the 4^th defendant.  For the present application, there is no such evidence before the court.

35. Ms. Tong also relies upon another Australian case Linfa PTY Ltd v Citibank Ltd [1995] V.R.643, in which the court held that the court may order a company to give discovery of documents in the possession of its subsidiary either because of the company’s commercial-corporate power over its subsidiary or in the exercise by the court of general power under the rules.  Whether a court would order a company to discover documents of its subsidiary under such circumstances would depend upon the facts of the particular case.  The facts of this case were that the subsidiaries were not operating at separate legal entities.  They were both staffed by the defendant’s staff and were not operating on their own behalf but on behalf of the defendant.  The court therefore held that the defendant had possession, power and control over the relevant documents physically within the possession of the subsidiaries.  However, Mr. Ling points out that the Australian case may have peculiar features like commercial-corporate power, under the Australian law, which distinguishes it from this case.  I agree that the legal principle as set out in this case should be treated with caution. However, he is unable to assist me by pointing out the relevant difference between the Australian law and the Hong Kong law.  Suffice it to say for the present purpose, there is no evidence that this case bears similarity of facts as Linfa.

36. Mr. Ling relies upon the authority of Innovations Ltd. v Chan Sing-chuk & Others [1992] 2 HKLRD 306 where the Court adopted the decision of Lord Diplock in Lonrho Ltd v Shall Petroleum [1980] 1 WLR 627 that “the expression of power means a presently enforceable legal right to obtain from whoever actually holds the documents inspection of it without the need to obtain the consent of anyone else.”  at 311(35) (emphasis added).

37. A presently enforceable right means the legal entitlement, which can be enforced by legal proceedings, if necessary, against the holder or the controller of the documents.  An example of this will be a shareholder’s statutory right under section 152FA of the Companies Ordinance, Cap.32 to inspect the company’s documents provided that the application is made in good faith and the inspection applied for is for a proper purpose.[17]  Mr. Ling agrees that the legal principles apply to the new Companies Ordinance with the same statutory provision.  Another example is a director’s right under section 375 of the Companies Ordinance, Cap. 622.

38. With the above authorities in mind, I shall now deal with each of the items as set out in the plaintiff’s summons.

Item 1

39. The request is directed at documents showing debts owed by DIEC and DIFEC at the time of the signing of the Framework Agreement.  The 4^th defendant disputes that there is no evidence that it has the unfettered control over the documents (“the issue of power”).  However, the 4^th defendant admits that it had nominated three directors to the board of DIEC and DIFEC, it is obvious that the 4^th defendant has power over the documents through its nominee directors in DIFEC and DIEC, bearing in mind that the nominated directors have no interest in the companies.  Alternatively, the 4^th defendant must have the legal enforceable right as a shareholder of DIEC and DIFEC to inspect those documents under section 152FA of Companies Ordinance, Cap. 32 (section 740 under the new Companies Ordinance, Cap. 622 with the same provision).  See discussions on B & B and Re Neath Rugby Ltd (No 2).

40. Although the 4^th defendant has on affirmation stating that it does not have and has never had possession, custody or power over the documents, on the face of the evidence available, his affirmation is simply not true.  They are the documents in support of the 4^th defendant’s pleaded case as shown above.  The documents are clearly relevant to the issues in dispute and it is necessary to have the documents in order to have a fair trial.

41. The 4^th defendant then submits that disclosure of the underlying documents is unnecessary and oppressive, given their likely volume, and the utter absence of any evidence to counter the relevant findings in the Deloitte Report, which is annexed to the Defence[18]. It is uncertain of the status of this annexure as parties agree that no leave has been obtained for it as an expert report.  However, on the cover of the report, the Accountants’ firm has stated it expressly that it was compiled for its client and should not be used by any third party, for which it has no responsibility.  It has also warned the user of the report that due to the constraints of time and scope of work, they were not given audited materials and for this reason, the accountants were unable to verify the truthfulness of such materials and they do not guarantee the reliability of the materials and for which the Accountants’ firm does not take the responsibility.  The same reservations appear in the 工作範圍和基礎- 財務盡職調查 and 德勤計算的負債金額與法律顧問認定的負債金額差異説明。[19]  It is unfair for the 4^th defendant to ask this Court to order the plaintiff to rely upon this report whereas its accountants have stated that the materials may not be reliable for its own use.  It cannot be denied that the scope of the documents is wide and large, though they should be confined to the stated purpose.  However, given the circumstances of this matter and its historical background, it is understandable that the plaintiff has no faith in the transactions as genuine and made in good faith as alleged by the 4^th defendant, the 1^st defendant having been found by the court as dishonest and fraudulent, harming the plaintiff.  It cannot be said to be oppressive.  The 4^th defendant, in the circumstances and for the fair trial, has to make a further affidavit to disclose those documents.

Item 2

42. It requests discovery of documents regarding the repayment of debts owed by DIFEC and DIEC.  The issue of power over the documents as the objection raised by the 4^th defendant must fail on the analysis under item 1.  Mr. Ling also submits that “sources of funds used for such repayment” are too wide for practicable purpose.  However, Mr. Ling agrees that it is the 4^th defendant’s pleaded case that the 4^th defendant had, through Xiamen Company, Chongqing Company and Guanxi Company paid off the debts of DIEC and DIFEC.  Upon enquiry by this Court, Mr. Ling also accepts that the documents recording the repayments of the debts did not contain the information as to who paid the money to those companies.  As this issue is in dispute and must be relevant for the trial, they should be disclosed at this stage or the plaintiff will be taken by surprise.  For the same reasons as above, I attach no weight to the 4^th defendant’s 4^th affirmation.  These documents are necessary for a fair trial between the parties.  The 4^th defendant should make an affidavit disclosing the documents under this item.

Item 3

43. They are the documents regarding the alleged payment of RMB430 million from the account of Liaoning East Asia Law Offices.  The 4^th defendant’s objection on the ground of no power fails.  As submitted by Mr. Ling, this figure emanates from Exhibit 5 to the Witness Statement of Ma Roupeng where he sets out in a table the state of a separate client account for Jinan Company, it must be relevant. In the supporting affidavit of Mr. Li, lawyer Ma was acting for DIEC and DIFEC[20], the 4^th defendant, being the nominator of their directors, it should be in a position to direct its nominated directors in DIEC and DIFEC to obtain those documents from the lawyer.  There is no evidence that lawyer Ma will raise objection to the request.  As the payments are mentioned in the witness statement of lawyer Ma, it follows that there should be documents evidencing such payments through the lawyer.  I discard Zhang Xi’s 4^th and 5^th affirmations.  The 4^th defendant should make an affidavit to disclose those documents for the fair trial.

Item 4

44. It refers to the documents regarding the alleged potential legal actions against DIEC/DIFEC as at November 2009.  The 4^th defendant’s arguments that the documents belong to DIEC and DIFEC, not the 4^th defendant’s.  For the reasons stated in item 1 relating to power, fail.  The 4^th defendant’s 4^th affirmation cannot assist the 4^th defendant as the documents are specifically pleaded in the Defence.  The Deloitte Report bears serious defects as admitted by the accountants.  It cannot be relied upon.  If there had not been any lawsuit, the 4^th defendant can simply make an affirmation to confirm the fact.  The 4^th defendant should file and serve an affidavit for the disclosure of the documents under this item.

Item 5

45. They are the documents regarding the alleged application for cancellation/revocation of the Jinan Company’s registration of its interests in DIEC/DIFEC.  The 4^th defendant now in the 5^th affirmation of Zhang Xi says that he had inquired with Dalian Economic Bureau, which said that the documents had been destroyed.  He had not kept any copy of the documents, nor the 4^th defendant.  His lawyer Ma also had not kept any copy.  The plaintiff in Mr. Li’s 5^th affidavit, is unable to show that the 4^th defendant has or had had the documents requested.  Absent any other evidence to show the contrary, this Court has to accept the evidence in accordance with Prudential case.  No order will be made for this item.

Item 6

46. In this category the plaintiff seeks disclosure of all bank, financial and accounting records of the Xiamen Company, Chongqing Company and Guangxi Company in respect of the RMB530 million laid out for the purchase of the DIEC and DIFEC Shares.  The 4^th defendant admits that Xiamen Company, Chongqing Company and Guangxi Company are the companies through which the 4^th defendant paid the RMB530 million for the shares of DIEC and DIFEC.[21]  Mr. Ling submits, however, that there had been bank transfer slips accounting for RMB 530 million.  But he agrees that the bank transfer slips do not show where the money had come from.  Since the plaintiff disputes the good faith of the transactions, it is legitimate for it to require the 4^th defendant to prove who had paid the money to Xiamen Company, Chongqing Company and Guangxi Company.  They are clearly relevant to the issues in dispute.  If the disclosed documents show that the money came from Lucky Dragon, then, as Mr. Ling said, the plaintiff will succeed to prove its case.  The 4^th defendant should have power over the documents relating to the RMB530 million.  For a fair trial, the 4^th defendant has to make an affidavit to disclose those documents.

Item 7

47. They are the receipts and/or written acknowledgement in respect of RMB530 million allegedly paid to Liaoning East Asia Law Offices.  The 4^th defendant’s argument is that there had been no receipt or written acknowledgment issued to the 4^th defendant and in the 5^th affirmation of Zhang Xi for the 4^th defendant, the 4^th defendant says that the East Asia Law Offices had given the particulars of the receipt of the RMB530 million.  The 4^th defendant does not have the documents.  However, in Zhang Xi’s 5^th affirmation, paragraphs 11 and 12, he said that the 4^th defendant did not have the power to produce the documents which might be in the power of Xiamen Company, Chongqing Company and Guangxi Company, which is not correct since it has been shown that they were the companies used by the 4^th defendant to pay the RMB530 million for the shares.  Since the 4^th defendant admitted that it had used the three companies as its vehicles to pay RMB530 million to pay off the debts of DIEC and DIFEC, it must have the power over the documents relating to the money it had paid the three companies.  As such, the 4^th defendant should make an affidavit to produce those documents.

Item 8

48. They are documents showing Mr. Zhang Xi’s purported 100% beneficial ownership of the Xiamen Company and the Chongqing Company.  Zhang Xi’s 5^thaffirmation has confirmed that the 4^th defendant does not or ever had the documents because those documents has never existed.  There is no evidence from the plaintiff to show that the contents of Zhang Xi’s 4^th affirmation are not true or insufficient other than Mr. Li’ 5^th affidavit at paragraph 37, which is only a bare assertion that the 4^th defendant should have the documents, unsupported by evidence.  I shall accept Mr. Zhang’s affirmation evidence.  No order will be made for this item.

Item 9

49. They are the documents evidencing the shareholding and directorships of Onwin Enterprises Holdings Limited, Guangxi Company, 深圳市華強 興業投資有限公司and 深圳市中廣城實業發展有限公司.  In paragraph 43 of the plaintiff’s supporting affirmation, there is no evidence to support that the documents sought are or were in the possession, custody and power of the 4^th defendant.  I agree with Mr. Ling that the plaintiff has failed to show that the documents sought are within the possession, custody or control of the 4^th defendant.  This item should be dismissed.

Item 10

50. They are the documents in relation to the 4^th defendant’s breach of the Injunction Order.  The plaintiff submits that these documents are relevant as they will show the ill-intent of the defendants in the scheme to defraud the plaintiff and the court should allow counsel at the trial to ask questions on this issue.  They are also relevant because the plaintiff would make use of the documents to make another application for a Hadkinson order at the trial.

51. The 4^th defendant disputes that the plaintiff’s discovery for the documents are solely for the purpose of impeaching the credit of the 4^th defendant, which is prohibited under the law as decided by the Court of Appeal in Bekhor v Bilton [1981] 1 QB 923, at 939G and the documents are irrelevant and unnecessary. In this case, the defendant was found to be in breach of a Mareva Injunction. The plaintiff applied to the court for an order that the defendant should make an affidavit setting out, among other things, the value of the assets and the whereabouts of them within the jurisdiction, all of which amounted to establishing breach by the defendant of his undertaking of the court order.  The Judge made the order.  On appeal, the Court of Appeal (by majority) allowed the appeal for the reason that the documents “did not relate to one or more of the matters in question in the cause or matter.”  939E  The court should “refuse to make such an order if and so far as it is of opinion that discovery is not necessary either for disposing fairly of the cause or matter or for saving costs.” (rule 8 of Order 24) 939G.  Here the breach of DHCJ Sakhrani’s Injunction Order is not pleaded in the Statement of Claim and as such not an issue in the trial.  Mr. Ling also submits that to allow the documents to be discovered and the interrogatories to be administered simply means the plaintiff can raise another conspiracy among the defendants without a proper pleading, which should be prohibited under the law.

52. For the reasons that I shall give for the summons on interrogatories, I hold that the documents are irrelevant to the issues in dispute and as such, they should be disallowed.

Item 11

53. They are the original of documents disclosed in 4^th defendant’s List of Documents.  The 4^th defendant has in Zhang Xi’s 4^th affirmation said that the Empire Star Agreements had been kept in the Trade Department.  The 4^th defendant does not have the original documents.  The plaintiff cannot show by evidence that the 4^th defendant has the original documents, its application relating to those documents be dismissed.

THE INTERROGATORIES

54. I now come to discuss the 4^th defendant’s summons requesting this Court to order the plaintiff’s interrogatories be withdrawn pursuant to Order 26 r.3(2) RHC.

55. This application is in relation to the plaintiff’s application under Order 26 r.3, in which the plaintiff set out 14 interrogatories, all relating to four loans obtained by DIEC and DIFEC from Sheng Jing Bank.  For the present purposes, I do not propose to set them out here.  I will simply make reference to them if necessary.

56. The 4^th defendant is late to take out the application.  It has failed to take out the application within 14 days after service of the plaintiff’s interrogatories, the delay being 9 days.  The 4^th defendant asks for leave to file and serve its summons out of time, which the plaintiff opposes.

57. The Court has to consider the factors under Order 2 r. 5 RHC:

(a) the interests of the administration of justice;

(b) whether the application for relief has been made promptly;

(c) whether the failure to comply was intentional;

(d) whether there is a good explanation for the failure to comply;

(e) the extent to which the party in default has complied with other rules and court orders;

(f) whether the failure to comply was caused by the party in default or his legal representative;

(g) in the case where the party in default is not legally represented, whether he was unaware of the rule or court order, or if he was aware of it, whether he was able to comply with it without legal assistance;

(h) whether the trial date or the likely trial date can still be met if relief is granted;

(i) the effect which the failure to comply had on each party; and

(j) the effect which the granting of relief would have on each party.

58. Taking the circumstances together and for the administration of justice, there being no obvious prejudice to the plaintiff, I grant leave to the 4^th defendant to file and serve the summons out of time and the hearing should accordingly proceed as respective counsel are well-prepared for argument.

59. The jurisdiction for interrogatories is provided under Order 26 r.1 RHC:

1.   Discovery by interrogatories (O. 26, r. 1)

(1)  A party to any cause or matter may in accordance with the following provisions of this Order serve on any other party interrogatories relating to any matter in question between the applicant and that other party in the cause or matter which are necessary either-

  (a) for disposing fairly of the cause or matter; or

  (b) for saving costs.

(3)   A proposed interrogatory which does not relate to such a matter as is mentioned in paragraph (1) may not be administered notwithstanding that it might be admissible in oral cross-examination of a witness.

Discussion on the relevant authorities

60. Counsel have cited the relevant authorities in support of their arguments, which may require some discussion to resolve their differences.  I shall set out the relevant authorities as follows:

a.   Mr. Ling: The meaning of “relating to any matter in question… …in the cause or matter” in Order 26 r.1 refers to the issues to be decided in the litigation as decided in Bekhor Ltd. v Bilton [1981] 1 QB 923, at 948F-G, per Griffiths LJ; see also 939-940C, per Ackner LJ, at 952C-953A, per Stephenson LJ;

b.   The first case cited by Ms. Tong relates to the proposition that a party needs not show that costs “will necessarily be saved” as long as the interrogatory is necessary if “any saving of costs is to be achieved” Baroness Dunn v Li Kwok Po David [1994] 2 HKC 597 at 600E-H per Barnett J.  This proposition relates to whether the plaintiff has to establish that the interrogatories are for saving costs.  However, I do not find this case useful for our present discussion. In this case (a libel case) the defendants argued that provided that the plaintiffs were able to establish that the interrogatories were for disposing fairly of the cause or matter or for saving costs, the court had no jurisdiction to allow the interrogatories and they must be withdrawn.  See 599D.  The Judge disagreed with defence counsel’s interpretation of the statutory provision under rule 1.  He took the view that if the answer to the interrogatory was necessary, saving of costs would be achieved.  That is why he said at 600F “An answer favourable to the interrogator would have to be a foregone conclusion.”  Mr. Ling has not raised this issue of saving costs in his written submission.  I do not intend to discuss this issue further here.  Suffice it to say, I do not think that the plaintiff has to establish that the interrogatories are for saving costs before this Court considers its application.  But I consider it is clear that the Court has the discretion to exclude them if they are not for a fair disposal of the matter or for saving cost as provided under rule 1 (1)(a) and (b).

c.  The second case cited by Ms. Tong is Marroit v Chamberlain (1886) 17 QBD 154 (CA), per Lord Esher MR at p.163.  Ms. Tong submits that interrogatories which relate to any matter in question in the cause or matter are admissible, and the right to interrogate is not confined to facts directly in issue, but extends to any facts the existence or non-existence of which is relevant to the existence or non-existence of the facts directly in issue.[22] This refers to the parameter of relevance for interrogatory.  Ms. Tong goes further to propose that the test of relevance, which she submits,is fairly wide by the Court of Appeal in Lau Tak Wah v Hang Seng Bank Ltd (unreported, CACV 621/2001, 18 July 2001).  I shall discuss these cases below.

d.   The Marroit is a libel case.  The defendant pleaded justification and he took out the interrogatories to require the plaintiff to give the answer, disclosing the source of information the plaintiff obtained.  The plaintiff refused to comply with the requests, saying that it intended to call them as witnesses. In the discussion, the Court of Appeal remarked at page 163:

“The law with regard to interrogatories is now very sweeping. It is not permissible to ask the names of persons merely as being the witnesses whom the other party is going to call, and their names not forming any substantial part of the material facts; and I think we may go so far as to say that it is not permissible to ask what is mere evidence of the facts in dispute, but forms no part of the facts themselves. But with these exceptions it seems to me that pretty nearly anything that is material may now be asked. The right to interrogate is not confined to the facts directly in issue, but extends to any facts the existence or non-existence of which is relevant to the existence or non-existence of the facts directly in issue.” (emphasis added)

e.  It is important to note the exceptions stated by the Court of Appeal.  The Court of Appeal stated clearly that the interrogatory must go to the substantial part of the material facts. On this basis, the Court of Appeal allowed the interrogatories to be administered because they formed a substantial part of facts material to the case upon the issue of justification.[23]

f.   Lau Tak Wah is a passing-off case whereby the plaintiff claimed against the bank for using his image and name to promote its credit cards business without his licence.  The plaintiff also pleaded that the defendant had misrepresented to the public that the plaintiff had endorsed its product, which the plaintiff denied.  The defendant denied passing-off. It further denied misrepresentation.  The plaintiff interrogated the defendant, among other things, on the number of applications for credit cards and the number of applications where the applicants selected the plaintiff’s image.  The defendant refused to answer saying that they were irrelevant to the issues in dispute.  The Court of Appeal held at §17:

“In our judgment, these interrogatories cannot be labeled irrelevant or immaterial to the plaintiff’s reputation and goodwill as an advertiser, promoter and endorser of goods and services, notwithstanding that the prime facie ambivalence of the particulars response to each of the questions may not, in themselves, directly be probative of this issue. Mr. Kotewall was surely correct in asserting that it was not the position that interrogatories are to be permitted only if conclusive on any given issue. To the contrary. the established position is that interrogatories may be ordered when, at the least, they relate to facts the existence or non-existence of which is relevant to the existence or non-existence of matter directly in issue, whilst the test of relevance is satisfied if the potential relevance of the subject matter interrogated suffices. The information now sought will almost certainly emerge at trial, whereat it is highly unlikely that such questions would be excluded as irrelevant, and, as Mr. Kotewall further observed, it is far better that they the plaintiff has this information (which is entirely within the knowledge of the defendant) at this relatively early stage so that it can assist in preparation of the plaintiff’s case.” (emphasis added)

g.   The Court of Appeal also held that interrogatory must relate to facts relevant to the matter directly in issue.  The existence of the facts supports the plaintiff’s case whereas the non-existence of which destroys the plaintiff’s case.

h.   It is clear that the above authorities confirm the legal principle that the interrogatory must relate to “a matter in question” between the parties and must be “necessary” either for disposing fairly of the cause or matter or for saving costs.

i.   Ms. Tong relies upon the legal principle in Lee Nui Foon v Ocean Park Corp. (No.2) [1995] 2 HKC 395 on the admissibility of interrogatory.  This authority confirms the above legal principle that the interrogatories must relate to a matter in question between the parties.  The court further held that the court retained an overriding discretion as to whether or not to allow them to be administered even if they were relevant.[24]

j.   In the Decision of Kao Lee & Yip (a firm) v Donald Koo Hoi Yan & Others (unreported, HCA8847/1993 23 April 2002, Ma J (as he then was), the law of interrogatory has taken a further development where the learned judge, adopting a more restrictive approach, held that to order interrogatory once admissibility was demonstrated was wrong, emphasizing the importance of necessity.  At paragraph 7 of the Decision, he said:

‘Before dealing with the interrogatories themselves, I should first set out the applicable principles governing applications of this kind :

(1)  The general principle is that interrogatories are admissible where they go to support the applicant’s case or destroy the opponent’s : see Hong Kong Civil Procedure 2002 at paragraph 26/4/7.  The width of this general principle is similar to the Peruvian Guano principles governing discovery of documents.

(2)  However, this only goes to the question of admissibility.  Whether a court will in its discretion allow interrogatories is entirely a different matter.  Too often in the past, there has been a tendency to order interrogatories once admissibility is demonstrated.  This is wrong.

(3)  In the exercise of its discretion, the court must bear in mind that interrogatories will be ordered only where they are necessary either for disposing fairly of the cause or matter, or for saving costs : cf RHC, Order 26, rule 1(1); Hong Kong Civil Procedure 2002 at paragraph 26/4/11.  This is the key consideration going to the exercise of discretion.

(4)  The particular factors that a court will take into account in deciding whether or not to exercise its discretion are well known : see Lee Nui Foon v. Ocean Park Corporation (No.2) [1995] 2 HKC 395; Hong Kong Civil Procedure 2002 at paragraphs 26/4/5 to 26/4/34.  It is not necessary for me to repeat these principles at length.

(5)  I would, however, draw special attention to the case of Det Danske Hedeselskabet v. KDM International plc [1994] 2 Lloyds 534.  There, Colman J referred to various considerations (or “yardsticks” as he termed them) for the court to bear in mind when considering the question of interrogatories: see page 537 (col.1).  I set out one of these considerations in full :

“Fifthly, requests for information ascertainable by cross examination at the trial are inappropriate unless the party questioning can establish that it is essential for the proper preparation of his case that such information is made available to him before trial, in the sense that if the matter is left until cross examination at the trial that party will, or probably will be irremediably prejudiced in his conduct of the trial or the trial may be unduly interrupted or otherwise disorangised by the late emergence of the information.”

(6)  The administering of interrogatories is not for the purpose of enabling a party to indulge in some sort of deposition taking exercise or to enable him to have a “dry run” in cross examination against the other side prior to trial.  As I have already said, the key consideration is the factor of necessity referred to the RHC, Order 26, rule 1(1).’

61. The above set out clearly the relevant legal principles for interrogatory applicable to this application.

62. The interrogatories relate to the four loans between the period of May 2011 and February 2013 mentioned in Zhang Xi’s supplemental witness statements.[25] The plaintiff submits that they are necessary for the purpose of fairly disposing of various issues in this action, in particular, the issues of the four loans, which the 4^th defendant was unable to explain.[26]  It is difficult to envisage what relevance they have in relation to the issues of dispute in the action as set out in paragraphs 24 and 25 supra.  The plaintiff is asking the court to set aside the Empire Star Agreements on the basis that the 4^th defendant had notice or constructive notice that those agreements were procured by Lucky Dragon in its fraudulent scheme.  See paragraph 54 of the Statement of Claim.  The interrogatories are obviously issues after the action.  They are the interlocutory injunctive reliefs granted by the court.  The trial judge does not have to determine those issues at the trial.  As the plaintiff has repeatedly said in the submissions, the 4^th defendant had admitted breach of the injunction.  It will be for the plaintiff to enforce the order against the 4^th defendant.  The fact that the plaintiff’s counsel can cross-examine Mr. Zhang at trial is not a reason to allow the interrogatories unless they are relevant to the issues in dispute.  See 26/4/6 of the White Book 2014 Vol. 1.

63. Obviously, the plaintiff is minded to make use of the 4^th defendant’s breach of the court’s injunction to demonstrate the misconduct, ill-intent or even dishonesty of the 4^th defendant. But this has been established as, according to the plaintiff, the 4^th defendant has admitted the breach.  According to the plaintiff,there is simply no defence to the 4^th defendant in relation to the breach of the interlocutory injunction.

64. The plaintiff may be interested in how the loans were made use of and whether they had been misappropriated.  However, these are not the issues pleaded in the Statement of Claim.  To bring the four loans into the trial of the matter seems to be unnecessary and will escalate the costs and waste time for the trial.

65. The importance of pleadings has been brought to our attention by the Court of Final Appeal in Sinoearn International Ltd. v Hyundai – CCECC Joint Venture (a firm) FACV 22/2012 delivered on 30 September 2013.  The Court of Final Appeal had criticized the court below allowing the plaintiff to run the argument of parallel issues without proper pleadings, which caused confusion to the trial, the appeal and finally the Court of Final Appeal and procedural unfairness.  The parties must clearly plead all their issues in the pleadings so that each party knows what the issues are and prepare for their cases accordingly.[27]  The Court of Final Appeal held that without proper pleadings, there would be confusion, not only at the trial, but also in the appeals, all the way going to the Court of Final Appeal.  Pleadings are not mere formalities, but are disciplines ensuring procedural fairness in the adversarial system. [28]

66. For those reasons, I am not satisfied that the plaintiff has established that the interrogatories are relevant to the issues for the trial, still less that they are necessary for the purpose of a fair trial or saving costs.  The 4^th defendant succeeds in its application and the plaintiff should withdraw the interrogatories.

67. I shall make an order of the plaintiff’s application for specific discovery in terms as follows:

a.  In terms of the summons in respect of items 1-4 and  6-7;

b.  Items 5 and 8-10 be dismissed;

c.   Costs to be dealt with.

68. I shall also make an order of the 4^th defendant’s summons on interrogatories in terms as follows:

a.  The plaintiff’s interrogatories as set out in the summons be withdrawn;

b.  Costs to be dealt with.

69. As to the issue of costs of the applications, as suggested by respective counsel, it will be adjourned to next Monday at 10 am for counsel’s submission and this Court’s decision.