CHRISTIAN EMIL TOGGENBURGER AND OTHERS v. LUU, HUNG VIET DERRICK AND OTHERS

HCA 815/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 815 OF 2009

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D E C I S I O N

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1.  At this pre-trial review, there are 3 summons to be dealt with:

(i)  Plaintiff’s summons for specific discovery against D1;

(ii)  Plaintiff’s summons for specific discovery against D2 and D3;

(iii)  Plaintiff’s application to adduce voluntary particulars.

Background

2.  P1 is an investor.  P2 and P3 are his corporate vehicles.

3.  D1 (”Luu”) is an investor.  D3 is an accountant practicing in Hong Kong.  D2 is the accounting firm in which D3 is the shareholder and director. 

4.  The pleaded case relevant to these applications is as follows.  It is the Plaintiffs’ case that relying on representations by the Defendants, P1 made various investments described in the pleadings as the Warderly Agreement, the Champ Car Racing Project and the Listed Company claim (alternatively the China Oil claim).  In the course of the investments, monies were transferred to D2 as escrow agent/stakeholder.  D2/D3 has transferred the money to D1, allegedly in breach of its duty to disburse the money strictly in accordance with the instructions of the Plaintiffs.  The investments eventually failed.  Much of P1’s money ended up with Luu personally or for his use.  The Plaintiffs seeks damages and repayment based on fraudulent misrepresentations, total failure of consideration and money had and received.  They claim against D2 additionally for breach of duties as escrow agent. 

Specific Discovery

5.  The applicant has to produce sufficient evidence that the documents are relevant to the issues in the action, that the documents exist and that they are in the possession, custody or power of the respondent.  Once these are established, the Court has a discretion whether or not to order disclosure.  Hong Kong Civil Procedure 2011, para 24/7/1.  These principles are not in dispute.

Plaintiff’s summons for specific discovery against D1 (Luu)

6.  The Plaintiff seeks 9 classes of documents described as:

(i)   Classes 1-4: Warderly documentation ;

(ii)   Class 5: Champ Car documentation;

(iii)   Class 6-7: travel documentation;

(iv)   Class 8: documents relating to HCMA 882/2010;

(v)   Class 9: General ledger entries documentation. 

Classes 1-4: The Warderly Documentation. 

7.  The issues under this class of documents are relevance and scope of discovery, existence and possession by D1.

8.  The Plaintiffs’ case is that P1 agreed to lend HK$23 million to Warderly with a view to becoming its 20-25% shareholder.  The money was passed to Messrs Stevenson Wong & Co (“SWC”), then solicitors for D1. On the instructions of P1, the money was transferred out to entities named by Luu.  The Plaintiffs never received the loan documentation or any shares in Warderly.  Instead of arranging the loan to Warderly, D1 acquired shares in Warderly with P1’s money.  On the other hand, D1 denies the existence of the Warderly Agreement and D2 and D3 claims they have no knowledge of it.  D1 avers that the loan facility provided by Luu to Warderly came solely through Luu’s nominee Lanakia. In consideration thereof, Warderly shares were pledged to D1 as security. P1 was never involved in the deal between Luu and Warderly.  Warderly failed to repay the loan.  The shares were sold by D1 at a profit. Warderly defaulted in repayment.  Luu obtained the Warderly shares by way of security and sold them.

9.  Luu has never disclosed documents showing he had executed any loan documentation with Warderly, that there had been default, that the shares had been pledged to him, that the shares had been sold upon default in payment of the loan.

10.  This class of documents is clearly relevant to the core issue of who made the loan to Warderly and the party entitled to the fruits of the investment.

11.  As to the scope, D1 contends that discovery should be limited to the loan facility documents and any written communications between Luu (or his agents) and SWC in preparation of those documents.  He also says that documents in relation to the subsequent default of the actual loan, purchase and sale of shares by Luu would not be necessary for disposing of the issue fairly at trial and for saving costs.

12.  I disagree.  It is the Plaintiffs’ case that those were the shares that should have been the fruit of the Plaintiffs under the Warderly Agreement.  How the shares got into the hands of the Defendants as a result of a security arrangement is thus a pertinent issue.  I am of the view that relevance has been established.

13.  This class of documents clearly existed even before this litigation started.   Luu has through his present solicitors been asking SWC to release the Warderly documentation.    In its letter dated 6 November 2008, SWC had informed the Plaintiffs that there was no loan agreement made between P1 and Warderly.  But there was no similar denial in respect of the loan agreement between Luu and Warderly, the pledge and sale of shares.

14.  On possession, Luu claims to have done all he could to ask SWC to release the documents.  Luu and SWC say that the documents belonged to Lanakia over which Luu has no control.  This assertion is unacceptable because it has always been his case that Lanakia was only his nominee.

15.  I am satisfied that the Plaintiffs have made out a case for specific discovery.

Class 5: Champ Car Documentation

16.  Luu claims that he had disclosed all documents under this class.

17.  An issue of fact is whether Luu was merely a co-investor of the Plaintiffs through one Fortune King (D1’s case) or a promoter of the Champ Car Racing project (P1’s case).  Luu’s case is that he and P1 had lost in the investment.  Luu had invested in the project to the amount of US$7 million. He identified US$3 million as having gone to one Mr Ma who was the actual operator of the Champ Car Racing Project and a group of investors and the rest was advanced to one New Energy through Luu’s account at D2.  He denied the funds he invested into the Project came from P1.

18.  Mr Thomas Lee, counsel for the Plaintiffs, has aptly identified the problem with the assertion that Luu had already made full disclosure.  The documents disclosed do not add up to US$7 million allegedly invested by Luu. Some of the documents do not appear to be related to the Champ Car Racing Project.  Most of the alleged investments were drawn from third party accounts and not Luu’s.  Those that went through his account at D2 to New Energy were funds originating from P1. The documents already disclosed do not show that the destiny of the money was to Mr Ma or New Energy.

19.  Similarly, the money said to have been spent by Luu for various purposes (loan to Warderly, personal investment in the Champ Car Racing Project and P1’s investment in the same Project) well exceeded the HK$10 million which he allegedly instructed SWC to disburse.

20.  A statement by a party under oath that he has disclosed all documents is usually final.  However, the version of Luu under oath was so full of contradiction and illogicality that his statement cannot be taken at face value.  I am not satisfied that he had made full disclosure.

Classes 6-7: Travel Documentation

21.  This class is relevant to the Plaintiff’s case that Luu made the representations in respect of the Warderly Agreement at 2 meetings held between 28 February and 2 March 2007.  It is Luu’s case that he was not present in HK and he had already produced his statement of travel records issued by the HK Immigration Department.

22.  The Plaintiff would not accept this.  They assert that given Luu’s ethnic background, he might have other travel documents (Class 6).  This, in my view, is speculation and discovery ought not to be allowed.   The statement of travel records has stated the travel records pertaining to the person named therein and not to a particular passport of his.  The Plaintiffs have no other evidence to suggest that Luu has other passports.

23.  The Plaintiffs also want his application form (Class 7) which he used to obtain the statement of travel records.  It is not in dispute that such document exists.  Disclosure of this form is part and parcel of the discovery of travel records of Luu which he should disclose.

Class 8: Proceedings under HCMA 882 of 2010

24.  Those HCMA proceedings against Luu were held in camera.  The Plaintiffs aver that it was an appeal against a Magistrate’s refusal to return Luu’s travel documents (other than his Canadian passport already disclosed) pursuant to section 17B(1) of the Prevention of Bribery Ordinance, Cap. 201.  The Plaintiffs are, however, unable to produce any document in support of this averment.  On the other hand, Luu is prohibited by law from disclosing anything in those proceedings. Mr Thomas Lee for the Plaintiff very fairly agreed that proceedings under section 17B(1) were not the only type that could proceed in camera. Luu has through his solicitors informed the Plaintiffs that HCMA 822 of 2010 was not related to the present action and it was legally improper for Luu to disclose any matter relating to it.  I am not satisfied on balance of probabilities that the HCMA proceedings were related to Luu’s travel document or that specific discovery for this class of documents should be ordered.

Class 9: General Ledger Entries

25.  The issue is one of relevance and necessity.

26.  The Plaintiff is asking for supporting documents in respect of the general ledger produced by D2 and counter-signed by Luu (“the General Ledger”).  This General Ledger purports to account for where the HK$88.7 million paid by P1 to D2 for the Car Racing Project and the Listed Company Agreement had gone.   According to D3, the money was paid out from D2’s account in accordance with Luu’s oral instructions.  They were to Luu personally, to his projects and his nominee Million Base.  D1 indicates that he will dispute the contents of the instructions and the purpose of the fund transfer.  Given the amount involved and the number of payments out, there must have been document trail.

27.  A key issue is werhe the HK$88 million paid by P1 had gone.  It is important to remember that the Plaintiff’s case is for money had and received and breach of stakeholder’s duties on the part of the D2.  The supporting documents will be relevant for the purpose of verifying the destination of the payments out.

28.  Luu says it is unnecessary to order him to disclose this class because D2 and D3 have already disclosed the supporting documents and a number of email instructions given by Luu.    In any event, he has already disclosed all documents relating to the transactions.

29.  I disagree.  A party’s duty to disclose is independent from that of other parties, especially since D2 and D3 are here separately represented.  In any case, I am not satisfied that D2 and D3 have made full disclosure in this aspect.

Plaintiff’s summons for specific discovery against D2 and D3

30.  There is an application to re-amend the Plaintiff’s summons to reduce the scope of specific discovery which is not opposed.  I give leave to do so.

31.  The Plaintiff seeks specific discovery of 2 classes of documents both relating to the General Ledger entries:

(i)   Class 1: all monthly bank statements of 4 identified bank accounts of D2 and D3 for the stated period showing transfers between them of funds originally transferred to D2 by P1 between 21 May 2007 to 26 July 2007 in the total sum of $88 million;

(ii)   Class 2: the corresponding General Ledger entries to the transactions previously disclosed in the General Ledger.

32.  D2 and D3 oppose the application on the following grounds:

(i)  The application came too late.  The General Ledger with the supporting documents were disclosed by D1 in his first list of documents but specific discovery was only sought in February 2011.

(ii)   This is a fishing expedition by the Plaintiffs.  It is not the purpose of discovery to give the Plaintiffs an opportunity to hunt around the documents in the hope that they will reveal some improprieties on the Defendants’ part or will provide information for them to pursue more enquiries: Re Estate of Ng Chan Wah, HCAP 5 of 2003, Chu J.

Class1: Bank Statements of 4 Identified Bank Accounts.

33.  This is a parallel application against D2 and D3 arising from the General Ledger.   The issue is relevance and breach of confidence.

34.  D2 and D3 admit that HK$88 million had been deposited by P1 into the bank account of D2 which had been paid out to D1.  However, though the General Ledger shows a zero balance at the end of March 2008, only about HK$56 million were actually paid out of D2’s account and the rest was paid out of D3’s personal account or his joint account with his wife.  According to D2 and D3, funds were transferred amongst 4 identified bank accounts to avoid queries by the Inland Revenue Department.  The documents are relevant to show if the money had come from P1 and how and to whom it was paid out.   Further, since D2 was allegedly the escrow agent, it would be relevant to the clam that D2 breached its duties in failing to pay out strictly in accordance with instructions of P1 and to account for it.

35.  D3 stated that as the bank statements contained information on fund movements relating to the business of D2 and other clients, it would be in breach of confidence to disclose the documents and the bank statements are irrelevant.  The short answer to this, in my view, is that those parts not related to the Plaintiffs or any of the Defendants can be redacted.  Only those parts showing transfer between the 4 identified bank accounts of funds originating from P1 needs to be disclosed.

Class 2: Corresponding General Ledger Entries

36.  The issue is one of relevance.

37.  Given the double entry accounting principle (D2 being a CPA firm and D3 being a CPA), there must be corresponding general ledger entries to the transactions disclosed in the General Ledger in the possession of D2/D3.  D3 admits that he has mixed his personal funds with what P1 had paid into D2’s account.  The corresponding general ledger entries would be relevant to support or destroy Defendants’ case over the source and destination of P1’s money; and to establish the breach of stakeholders’ duties by D2.

38.  In summary, the Plaintiffs have made out a case for specific discovery. Late as this application might be, there is a continuing duty on a party to make proper discovery of relevant documents.  There is no suggestion that this further round of discovery will create risk of postponement of the trial to be held in less than 7 weeks.  Therefore, save for those classes which I view as based on speculation, the documents sought ought to be disclosed for the fair disposal of the action.

Voluntary Particulars

39.  The practice of serving voluntary particulars without request is intended to show the readiness of the party concerned to inform the opposite party of the material facts upon which he intends to rely, to narrow the issues, to prevent surprises and to reduce costs: Hong Kong Civil Procedure 2011, para 18/12/65.

40.  It is not intended as a device for a party to introduce new particulars to vary its case unilaterally or to introduce a new cause of action: Hong Kong Civil Procedure 2011, para 18/12/64-65.

41.  It is also not the function of particulars to take the place of necessary averments in the pleadings nor to state the material facts omitted in order by filling the gaps, to make good an inherently bad pleading: Hong Kong Civil Procedure 2011, para 18/12/1.

42.  The Court has a discretion.  Where there has been inexcusable delay in making the application so as to place a trial at risk of adjournment, the Court may refuse the application: Hong Kong Civil Procedure 2011, para 18/12/54.

43.  The draft voluntary particulars pertain only to paragraph 110 of the Amended Statement of Claim.    Mr Thomas Lee submits that the voluntary particulars were all based on existing witness statements and discovered documents and merely raised legal arguments.    There have always been a lot of alternative pleas and Mr Lee could have made submissions at the trial along the lines stated in the voluntary particulars anyway.  There was no need for any further evidence, let alone expert evidence.  Detailed allegations of fraud and misrepresentation had been advanced.  The Plaintiffs would rather serve the voluntary particulars now than to take the Defendants by surprise.

44.  The Plaintiffs’ case is that owing to the fraudulent misrepresentations by the Defendants, he was misled into signing an agreement with Richtex Investment Limited for the acquisition of shares in China Oil.  The Richtex S&P Agreement was thus void and unenforceable.  None of the HK$73 million from P1 had been transferred to Richtex Investment Limited pursuant to the Richtex S&P Agreement.  The HK$73 million paid to D2 on escrow and as stakeholder had been transferred to D1 for his own use.   Paragraph 110 of the Amended Statement of Claim pleads that:

“Further or in the 2^nd alternative, by reason of wrongfully accepting or putting the said HK$73,000,000 to his use, the 1^st Defendant is liable to repay the same as money had and received by him or otherwise by way of restitution.”

45.  Paragraph 110 contains a personal claim against the 1^st Defendant in putting monies received from P1 to his own use.  The voluntary particulars, however, relies on total failure of consideration of the Richtex S&P Agreement under which there was supposed to be a sale and purchase of shares.  Instead of sale and purchase of shares, new shares were issued.  Those new shares were not registered with the Securities and Exchange Commission of the USA and were subject to a share transfer restriction  unless the purported sale or transfer was registered in compliance with rule 144 of the Securities Act of 1933 (United States).  The new shares were worthless and the Richtex S&P Agreement was but a means to defraud P1 of his money.

46.  This short summary of the voluntary particulars will immediately show that they are not particulars for a personal claim against Luu.  They do not logically support the plea in paragraph 110.  They in fact refer to at least one more independent causes of action for total failure of consideration which should be against Richtex.  This cause of action necessarily means there was a valid contract in the first place, which was never pleaded but only in the context of misrepresentation under the China Oil claim.  The voluntary particulars introduce additional terms of the Richtex S&P Agreement.  There were references to fraud which require particulars on their own and specific pleas on fraudulent intention: Order 18, rule 12(1)(a) and (b).

47.  As rightly pointed out by Mr PC Lee, counsel for Luu, the issue of share transfer restriction had been raised between the parties.  The amendments to the Statement of Claim as late as in March 2011after the second round of exchange of witness statements have not raised the issues now disclosed in the voluntary particulars.  In the Amended Statement of Claim, the Plaintiffs added the alternative case of total failure of consideration under the Warderly Agreement, Champ Car Racing Project but not under the China Oil claim.  The present attempt to adduce voluntary particulars is to introduce new causes of action through the backdoor.  Further, D1 disputes the allegation that no shares had been transferred by Richtex, that only new shares were issued to P3 and that the shares were worthless.  D1 asserts that detailed instructions would need to be obtained.

48.  I am not satisfied that these pleas, if relevant and necessary, should come in the form of voluntary particulars as opposed to an application for proper amendment to the Amended Statement of Claim.  I decline to grant leave.

Conclusion

49.  I order as follows:

(i)  There be an order in terms of the Summons for specific discovery against D1 for all classes of documents except classes 6 and 8.  D1 shall file and serve the affidavit within 21 days.

(ii)   There be leave to re-amend the Summons against D2 and D3.

(iii)   There be an order in terms in terms of the Summons for specific discovery against D2 and D3.  They shall file and serve the affidavit within 21 days.

(iv)   I dismiss the application for leave to file and serve voluntary particulars to the Amended Statement of Claim

50.  On costs, the Plaintiffs should in principle get the costs for the discovery summonses and bear the costs for the summons for leave to serve the voluntary particulars.   The bulk of the affidavits filed and time spent on arguments were for the specific discovery summonses.  Taking a broad brush approach, I order, nisi, that D1 on the one part and D2 and D3 on another part should bear 60% of the Plaintiffs’ costs under the respective discovery summons.

51.  There shall be summary assessment of costs on the papers on 9 August 2011 at 9:30 am.  No attendance is required. The plaintiff shall file and serve its statement of costs by 2 August 2011.  The defendant shall file and serve its grounds in opposition by 8 August 2011.

52.  I thank counsel for their assistance.