HO SHUK CHING PORTIA v. WONG MEI CHU AND OTHERS

HCA1213/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1213 OF 2003

-----------------------

-----------------------

-----------------------

DECISION

---------------------

1.  This is the plaintiff’s application for an interlocutory order that the 1^st and 2^nd defendants deliver up to the plaintiff or allow the plaintiff to inspect and take copies of the books, accounts, records and documents of the 2^nd and 3^rd defendants, and for an order that the 1^st defendant makes an affidavit verifying compliance with the order.                       

Background

2.  The factual background of the case can be briefly stated as follows.

3.  The 3^rd defendant is a company incorporated in Hong Kong and engaged in the trading of personal care products.

4.  Before September 1998, the plaintiff and her husband were the shareholders and directors of the 3^rd defendant.  On 19 September1998, the 1^st defendant became a shareholder and director of the 3^rd defendant, jointly with the plaintiff.  The present ratio of their shareholdings is a matter under dispute, and is irrelevant to the determination of the application.

5.  The 2^nd defendant is a company incorporated in Hong Kong on 2 November 2001. According to the Companies Registry records, the 1^st defendant and the plaintiff’s husband are the shareholders of the 2^nd defendant holding 89 and 9 shares respectively.  The 1^st defendant and another person are the directors of the 2^nd defendant.  It is not in dispute that the line of its business is similar to that of 3^rd defendant.  

6.  In June 2001, the plaintiff went on maternity leave.  Her husband was appointed as her authorized representative to deal with the affairs of the 3^rd defendant.  The appointment was recorded in a board minutes dated October 2001.

7.  It is the plaintiff’s case that after she went on maternity leave, the 1^st defendant, through the 2^nd defendant, carried on business in competition with the 3^rd defendant and had diverted the business of the 3^rd defendant to the 2^nd defendant.  In particular, it is said that the 1^st defendant had in early 2002 sent out notices announcing the 3^rd defendant was dormant and that the business of the 3^rd defendant would be taken over by the 2^nd defendant.  The plaintiff also complained that she had since June 2001 been excluded from the management of the 3^rd defendant and that the 1^st defendant, when in control of the company, had misappropriated the funds of the 3^rd defendant for her and/or the 2^nd defendant’s benefits. 

8.  It is common ground that on 30 June 2002, an agreement was reached between the plaintiff, acting by her husband, and the 1^st defendant with a view to resolving all their disputes.  The agreement was recorded in writing (“the June 2002 Agreement).   One of the matters agreed and which is relevant to the present application, is that Miss Jenny Poon (“JP”), who has been engaged to deal with the accounts of the 3^rd defendant, would calculate the purchase price due from the 2^nd defendant to the 3^rd defendant and upon the calculation being verified and confirmed to be correct by the parties, the amount found due together with interest was to be paid into the account of the 3^rd defendant. 

9.  On 2 April 2003, the plaintiff issued the Writ herein.  The 3^rd defendant was initially named as the 1^st plaintiff.  The 1^st and 2^nd defendants took issue with the plaintiff’s authority to bring proceedings in the 3^rd defendant’s name.  Consequently, on 11 April 2003, leave was granted to amend the Writ and the 3^rd defendant was named as a defendant instead. 

10.  The Statement of Claim was filed on 29 October 2003.  The plaintiff’s claim is a derivative claim in breach of director’s duties against the 1^st defendant for: (1) wrongful diversion of the 3^rd defendant’s business to the 2nd defendant, and (2) misappropriation of funds of the 3^rd defendant.  The plaintiff seeks damages and an account of the profits by reason of the wrongful acts complained of.  The plaintiff further seeks an order of delivery up of all the accounts and books of the 2^nd and 3^rd defendant.   In respect of the June 2002 Agreement, the plaintiff claims that it is vague and uncertain and seeks a declaration that it is unenforceable.  Alternatively, the plaintiff seeks an order that the agreement be specifically performed.

11.  The 1^st and 2^nd defendants filed their defence on 17 December 2003.  Their case is that in late 2001, as a result of queries over the 3^rd defendant’s accounts, the 1^st defendant had lost confidence in the plaintiff and wished to close down the 3^rd defendant and set up her own business.  The 1^st defendant reached an oral agreement with the plaintiff’s husband, acting on behalf of the plaintiff, for the cessation of the 3^rd defendant and for the formation of the 2^nd defendant.  In particular, they refer to a board minutes dated 21 May 2002 in which it was stated that the 3^rd defendant was dormant and was to be wound up as soon as possible.  The minutes were signed by the plaintiff’s husband and the 1^st defendant.  It appears from Mr Wong’s submissions that the plaintiff disputes her husband’s authority to agree to the winding-up of the company.  In any event, the 1^st and 2^nd defendants’ case is that there is no breach of director’s duty as it was the understanding of the parties that the plaintiff and the 1^st defendant were both free to contact or deal with the customers and suppliers of the 3^rd defendant.  As to the June 2002 Agreement, the 1^st and 2^nd defendants’ case is that it is a final and binding settlement agreement. 

The present application

12.  The present application has its origin in 2003.  On the same day as the issue of the Writ, the plaintiff issued an inter partes summons applying under Order 29 rule 1, Rules of the High Court or the inherent jurisdiction of the Court, for:

(1)	Interlocutory injunctions against the 1st and 2nd defendants restraining them from, inter alia, carrying on business in competition with the 3rd defendant and doing business with the 3rd defendant’s customers; and
(2)	Delivery up of the books, accounts, records and documents of the 2nd and 3rd defendants.

13.  On 11 April 2003, leave was granted to the plaintiff to amend the inter partes summons to make the 3^rd defendant a defendant in these proceedings.  Directions were also given for the filing of evidence and hearing of the summons.  The parties did not proceed to fix a date for the hearing of the summons.

14.  Instead on 31 January 2005, the plaintiff applied by summons to re-amend the summons by: (1) abandoning the application for interlocutory injunctions, (2) adding a new relief of delivery up by the defendants of the documents set out in the newly added schedule 1, and (3) amending the initial relief of delivery up to include an alternative relief of inspection and taking copies.  The amendment was initially opposed and directions were given on 8 February 2005 for filing of evidence and the hearing of the amendment application.  The initial summons and the summons to re-amend were listed for hearing together.  At the hearing, the defendants no longer opposed the amendment.

15.  Mr Wong for the plaintiff indicated at the outset of the hearing that apart from Order 29, the plaintiff intended also to pray in aid Order 27 rule 3, and applied to further amend the summons to include Order 27 rule 3 in the marginal note.  Mr Khaw for the 1^st and 2nd defendants opposed the further amendment, complaining principally that the defendants were taken by surprise.  After hearing submissions, I disallowed the further amendment and reliance on Order 27 rule 3.  Primarily, I consider that the proposed amendment would have substantially changed the nature and character of the application. The proper course is for the plaintiff to issue another summons and to give proper notice of the application to the defendants.  Further, there was no notice of an Order 27 rule 3 application whether in the affirmations filed or correspondence exchanged.  The first time it was raised was by way of Mr Wong’s Reply Submission, which only reached Mr Khaw and the court on the day of the hearing.  The defendants have not been afforded a proper opportunity to meet the application.  It will therefore be unfair to allow the plaintiff to change the basis and nature of the application.      

16.  It is clear from Mr Wong’s submission that the present application for delivery up or inspection of documents is not a discovery exercise pursuant to Order 24 of Rules of the High Court.  It is stated to be in the nature of an interlocutory injunction.  That being the case, it must mean that the plaintiff is seeking a mandatory injunction compelling the 1^st and 2^nd defendants to deliver up books, accounts, records and documents of the 2^nd and 3^rd defendants.   Indeed, upon my query, Mr Wong confirms that it is so.

17.  Broadly speaking, the plaintiff’s application relates to three types of documents:

(1)	Business documents of the 2nd and 3rd defendants as contained in Schedule 1 (“Schedule 1 Documents”): paragraph 1 of the re-amended summons;
(2)	Books, accounts, records and documents of the 3rd defendant (“D3’s Documents”): paragraph 2 of the re-amended summons; and
(3)	Books, accounts, records and documents of the 2nd defendant (“D2’s Documents”):  paragraph 3 of the re-amended summons.

Plainly, the Schedule 1 Documents will overlap with the D2’s Documents and D3’s Documents.

18.  So far as D3’s Documents are concerned, they are kept in a rented storeroom.  The evidence seems to be that the key to the storeroom is kept with JP.  The 1^st defendant’s position has been that she accepts the plaintiff as director, has the right under section 121 of Companies Ordinance, Cap. 32 to inspect D3’s Documents.  At the outset of the hearing, Mr Khaw confirmed that the 1^st defendant had no objection to the plaintiff inspecting the D3’s Documents and taking copies of them.  The plaintiff however persisted in seeking a delivery up order.  In the course of Mr Khaw’s submissions on the second day of the hearing, it was confirmed that the 1^st defendant was prepared to offer an undertaking to allow the plaintiff to inspect and take copies of the D3’s Documents.  As a result, the plaintiff through Mr Wong indicated that she no longer wished to pursue a delivery up order in respect of the D3’s Documents, hence paragraph 2 of the summons as re-amended.

19.  In the circumstances and given the overlap between D3’s Documents and Schedule 1 Documents, I need only determine the application with regard to the D2’s Documents and the Schedule 1 Documents insofar as it relates to documents of the 2^nd defendant.

Justifications for delivery up of D2’s Documents and Schedule 1 Documents

20.  Given that the present application is an interlocutory injunction application, the starting point is to consider the merits of the claim.  The law clearly establishes that at this interlocutory stage, the plaintiff’s prospects of success should only be investigated to a limited extent, and the court should not resolve disputes of facts on affidavits.  On the evidence filed in this case, I am prepared to accept there are serious issues to be tried with regard to whether there is any breach of director’s duty on the 1^st defendant’s and whether the parties had compromised their disputes by the June 2002 Agreement.

21.  However, given that the plaintiff is seeking mandatory injunctions to compel the 1^st and 2^nd defendants to deliver up the Schedule 1 Documents and the D2’s Documents, the plaintiff will also have to make out a case that the court can feel a high degree of assurance that at the trial, it will be shown that the interlocutory injunction was rightly granted: see Hong Kong Civil Procedure 2004 vol.1 para.29/1/30, and Music Advance Limited v. The Incorporated Owners of Argyle Centre Phase I (unreported) HCA 2574/2002, 30 August 2002, at para.12.

22.  Mr Wong relies on two matters in contending that the court can have the requisite high degree of assurance.  The first relates to the June 2002 Agreement, on which the 1^st and 2^nd defendants rely in their defence.  It is said that under the agreement, the plaintiff and the 1^st defendant have to verify and confirm the final accounts between the 2^nd and 3^rd defendants, it is therefore inevitable that there will be taking of account and the D2’s Documents and Schedule 1 Documents will have to be delivered up to the plaintiff to facilitate that.  In Mr Wong’s submissions, it is thus likely that the court will at trial grant a delivery up order. 

23.  There are three major difficulties in this submission.  Firstly, the plaintiff’s primary case is that the June 2002 Agreement is unenforceable and she seeks a declaration to that effect.   It must be the plaintiff’s stance that she has a meritorious claim that will succeed at trial.  On that basis and if she were to succeed in her primary case, there is no question of enforcing the June 2002 Agreement.  Secondly, if the plaintiff succeeds in her claim, an order for account may be made in her favour.  It is only at the stage of taking accounts that the 1^st and 2^nd defendants may be called upon to disclose by way of discovery, the books, accounts and records of the 2^nd defendant.   Thirdly, assuming the plaintiff succeeds in her claim at trial, it remains for the plaintiff to show why a delivery up order, as opposed to an inspection and production order, of documents of the 2^nd defendant is justified.

24.  Mr Wong has referred to paragraph 50(4) of the Defence and argues that the 1^st and 2^nd defendants had impliedly accepted that plaintiff has a right to inspect the documents of the 2^nd defendant.  I do not agree that the Defence is capable of bearing such implication.  Paragraph 50 of the Defence is pleading to paragraph 27 of the Statement of Claim, which pleads that the 1^st and 2^nd defendants had failed and refused to provide documents for ascertaining the true state of the accounts of the 2^nd and 3^rd defendants.  After making a general traverse and denial, paragraph 50 of the Defence goes on to aver that the defendants had afforded the plaintiff full co-operation and access to the relevant documents for ascertaining the accounts of the 3^rd defendant (emphasis added).  Sub-paragraphs (1) to (4) give particulars of co-operation and access afforded to the plaintiff.  Sub-paragraph (4) pleads that: “At all material times, the plaintiff had not requested for inspection of the books and records of the 2^nd defendant.”  Properly read in context, it cannot amount to any concession or acceptance that the plaintiff is entitled to inspect the documents of the 2^nd defendant.

25.  The second matter Mr Wong relies upon to say that the court can feel a high degree of assurance it will be shown at trial that the delivery up order was rightly granted is the decision of Normalec Limited v. Britton [1983] FSR 318, 322.  In that case, an employer claimed against an ex-employee for breach of fiduciary duty, alleging he had during his employment enticed customers away from the employer and had used the employer’s confidential information for gains, and for breach of a restrictive covenant in his employment contract.  In granting an interlocutory injunction to enforce the restrictive covenant, Walton J held that the whole of the employee’s business belonged in equity to the employer so that it is nihil ad rem that the business set up by the employee might have dealt in a large number of matters with which the employer itself did not.  Relying on this case, Mr Wong argues that the 2^nd defendant can be regarded as belonging to the plaintiff in equity so that it is justified to have the documents of the 2^nd defendant delivered up to the plaintiff and that any objection based on trade secrets or confidential information should not be upheld.

26.  As submitted by Mr Khaw, the Normalec case must be read and understood in context.  In that case, there is no dispute that the employee had made use of customers’ information belonging to the employer and had enticed away the employers’ customers with the employer’s knowledge and agreement: see p.321.  It is on the basis of these admitted facts that Walton J held the employee’s business as belonging in equity to the employer, and granted the injunction to protect the employer and to enable it to get back into possession of its customers, displacing the employee: at p.323.  In the present case, however, the 1^st and 2^nd defendants’ entitlement to deal with the customers of the 3^rd defendant is an important issue in dispute.  There is no assurance at this interlocutory stage that at trial, the court will determine the issue in the plaintiff’s favour.  The Normalec case therefore does not serve to advance the plaintiff’s course in this regard. 

27.  There can be no doubt that an order compelling the delivery up or inspection of the company and business documents and accounts and records of the 2^nd defendant is highly intrusive and the risk of injustice involved is higher than a prohibitory order.  I do not consider that the plaintiff has shown a strong prima facie case for granting the mandatory order.  The point becomes clearer when the reasons for the delivery up or inspection order and the balance of convenience is considered.

The reasons for seeking delivery up or inspection of the 2^nd defendant’s documents

28.  It appears from the affirmations filed and the submissions of Mr Wong that there are two main reasons why the plaintiff requires the delivery up or inspection of the D2’s Documents and the Schedule 1 Documents.  The first reason is to enable her to deal with the Inland Revenue Department (“IRD”) with regard to the tax liabilities of the 3^rd defendant.  The second reason is to enable her to ascertain the true financial position of the 3^rd defendant and the extent of the funds and assets that had been transferred or diverted from the 3^rd defendant to the 2^nd defendant.

29.  On the first reason, it is to be noted that because the present application started off in April 2003, the bulk of the affirmations were filed in 2003.  The plaintiff’s last affirmation was filed on 8 December 2004.  The   evidence with regard to the 3^rd defendant’s tax problems is therefore not up-to-date.  What can be gathered from the materials before the court is that the IRD had made an additional profits tax assessment against the 3^rd defendant for the 1996/1997 Year of Assessment.  Subsequently, the IRD issued two actions in the District Court under DCTC No. 7680 of 2003 and DCTC No. 523 of 2004 to recover tax payments of $42,000 and $4,200 respectively from the 3^rd defendant.  According to the plaintiff, judgment had been entered by the IRD. 

30.  Apart from this, the IRD had also in August 2003 sought information and documents from the 3^rd defendant in connection with its profits tax liability for the 1997/1998 Year of Assessment.  The plaintiff’s latest affirmation does not reveal what is the current position.  Although Mr Wong indicated during submissions that the IRD had also made additional profits tax assessment for 1997/1998, it is unclear whether the 3^rd defendant had lodged any objection or appeal against the additional assessment.  It is therefore not known what it is about the 1997/1998 Year of Assessment that the plaintiff needs to liaise with the IRD.

31.  In addition, the affirmations filed suggest that the IRD was at least in 2003, holding a sum of $50,000 paid by the 3^rd defendant.  It is not very clear from the evidence as to the nature of the sum.  It had been referred to as a “deposit” or as “provisional tax”.  The plaintiff had said that the 3^rd defendant might not be able to recover the sum if it did not file the latest tax return.  It is said that the plaintiff requires the documents of the 2^nd defendant for the filing of the tax returns of the 3^rd defendant.

32.  In my view, the plaintiff has only made a general statement that the documents were required for the purpose of dealing with the IRD, but has failed to show how the documents sought are relevant and why they are required urgently.  Insofar as the 1996/1997 and 1997/1998 additional tax assessments are concerned, apart from the fact that any enquiries from the IRD would most probably have concluded, there is no reason to believe that the documents of the 2^nd defendant will assist in meeting any enquiry of the IRD, given that the 2^nd defendant did not come to be incorporated until November 2001.   As for the outstanding tax return, as noted above, it is not altogether clear from the evidence filed as to what has prevented the preparation of the latest account of the 3^rd defendant.  There is no elaboration as to why the 2^nd defendant’s documents are necessary for the preparation or finalization of the tax return of the 3^rd defendant, bearing in mind it is not really disputed that the 3^rd defendant ceased to be in active operation since 2002. 

33.  In the final analysis, it will appear that the plaintiff’s core reason for seeking delivery up or inspection of the 2^nd defendant’s documents is to find out the extent of the 2^nd defendant’s business and profits, which the plaintiff says were built upon the customers and business of the 3^rd defendant.   In the normal course, this is a matter for discovery either in the action or during the taking of account process.  Mr Wong justifies the production of the 2^nd defendant’s documents at this early interlocutory stage on the ground that there has been delay in the finalisation of the accounts under the June 2002 Agreement, and that the delay only operates to the benefit of the 2^nd defendant.  It is also said that the plaintiff has limited resources so that delay in finalizing the accounts may compromise her ability to pursue her claim.  Additionally, it is stressed that the plaintiff does not know and has no means of finding out and monitoring the activities and operations of the 2^nd defendant.   

34.  In my view, none of these justifies an order compelling delivery up or granting inspection of the 2^nd defendant’s documents.  Firstly, any delay in carrying out the terms of the June 2002 Agreement cannot provide a basis for an interlocutory delivery up order, when the plaintiff’s primary case is that the June 2002 Agreement should not be enforced.   Secondly, it is to be observed that although the action was commenced in April 2003, pleadings have not closed as the plaintiff has yet to file her Reply.   One would have thought that the plaintiff’s interest is better served by an expeditious resolution of the claim rather than indulging in protracted interlocutory proceedings.   Thirdly, any delay in resolving the parties’ dispute cannot be laid exclusively at the doorstep of the 1^st and 2^nd defendants, considering that the present application has taken almost 2 years to reach a substantive hearing, and that attempt to revive it was only made in January this year by way of the plaintiff’s 31 January 2005 summons.   Fourthly, the plaintiff’s wish to know or monitor the 2^nd defendant’s operations and activities by itself is not a ground for allowing her to access the 2^nd defendant’s documents at this early interlocutory stage. 

Adequacy of damages and balance of convenience

35.  As to the adequacy of damages, it is important to note that the 3^rd defendant is no longer in operation.  The plaintiff has also not shown that without the delivery up or inspection order, damages will not be an adequate remedy.  Whatever loss that may occasion to the 3^rd defendant by reason of its inability to meet enquiries or demands of the IRD can be made the subject matter of an order for damages against the 1^st and/or 2^nd defendant.  The plaintiff will also have an opportunity to ascertain or verify the accounts of the 3^rd defendant by counter-checking with the 2^nd defendant’s documents if she succeeds in obtaining an order for an account.  Any loss she sustains because of the delay in finalizing the 3^rd defendant accounts can also be the subject matter of an order of damages.  It is not the plaintiff’s case that the interlocutory order is required for the preservation of the 2^nd defendant’s documents and/or the evidence for case.  The plaintiff has no basis for believing so.   It is also not the plaintiff’s case that the 1^st and/or 2^nd defendants will be unable to meet any order for damages.   

36.  On the other hand, it is readily appreciated that there will be grave prejudice to the 1^st and 2^nd defendants by the grant of the interlocutory order sought.  As noted above, the order is highly intrusive.  Not only that, the Schedule 1 Documents and the D2’s Documents in combination effectively means the entirety of the company and business documents and accounts of the 2^nd defendant.  A delivery up of them will have the effect of stifling the operations and business of the 2^nd defendant.  Thus viewed, the balance of convenience comes down heavily against ordering the delivery up or inspection of the D2’s Documents and the Schedule 1 Documents relating to the 2^nd defendant’s documents.   

Conclusion

37.  For the above reasons, paragraphs 1, 3 to 5 of the plaintiff’s summons as re-amended are refused.  As to paragraph 2, upon the 1^st defendant’s undertaking to allow the plaintiff to inspect and take copies of the books, accounts, records and documents of the 3^rd defendant, no order is made on it.  Although it had not been made plain by Mr Khaw on behalf of the 1^st defendant, it will be implicit in the undertaking offered that the right to inspection is extended to the plaintiff’s appointed accountant and that the time, place and manner of inspection are to be agreed between the respective solicitors having regard to the mutual convenience of the parties.

38.  Finally on the costs of the application, I make an order nisi that: (1) The costs of the application up to the 31 January 2005 be costs in the cause; and (2) The costs of the application after 31 January 2005 be to the 1^st and 2^nd defendant against the plaintiff in any event.  The order nisi is on the basis that prior to the re-amendment, the application was essentially for prohibitory injunctions against the 1^st and 2^nd defendants, and the disclosure relief was in aid of the injunctions.  But with the re-amendment to the summons, the nature of the application has changed.  And as the above reasons show, the plaintiff has failed to cross the first threshold for a mandatory order.  The defendants’ entitlement to the interlocutory costs should not be made dependent on their success at the trial so that the usual rule of costs follow event should apply.         

39.  In short, I make the following orders:

(1)	Upon the 1st defendant undertaking by counsel to allow the plaintiff and/or her authorised accountant to inspect and take copies of the books, accounts, records and documents of the 3rd defendant at a time, place and in a manner to be agreed between the respective solicitors, no order is made on paragraph 2 of the plaintiff’s summons filed on 2 April 2003 as amended by the Order made on 5 May 2005 (“the Re-amended Summons”).
(2)	Paragraphs 1, 3 to 5 of the Re-amended Summons are dismissed.
(3)	There be an order nisi that:
	(a)	The costs of the application up to and including 31 January 2005 be in the cause.
	(b)	The costs of the application after 31 January 2005 be to the 1st and 2nd defendants against the plaintiff in any event.