ZENJOY LTD v. CONTEX GROUP CO., LTD

HCA 1339/2019

[2019] HKCFI 2558

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1339 OF 2019

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DECISION

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1.  This case concerns an appeal against the decision of a master, by which the master dismissed the plaintiff’s third party discovery application.

2.  The plaintiff had filed its Statement of Claim in these proceedings on 24 July 2019.  This was followed two days later by the subject discovery application, wherein the plaintiff applied for discovery against a non- party to the main action namely, The Hong Kong and Shanghai Banking Corporation Limited (“HSBC”).  The discovery orders sought related to an allegedly fraudulently induced transfer of US$539,261.39; a case of email fraud.  The orders sought were directed towards HSBC providing all documents in its possession, custody or power relating to the alleged fraud (draft orders (1) and (2)). In addition, the plaintiff sought an order that pending compliance with its obligations to hand over the documents, HSBC be restrained from parting with the possession of or destroying or manipulating or amending or deleting or removing any of the documents (draft order (5)).  During the hearing, we referred to this order as the “restraint order”.

3.  In his reasons for decision dated 22 August 2019, Master Lai dismissed the plaintiff’s discovery application.  By its notice of appeal dated 23 August 2019, that decision was appealed.

4.  While it is accepted that an appeal from the decision of a master to a judge in chambers is dealt with by way of a rehearing (Hong Kong Civil Procedure 2019, §58/1/2), it is convenient to begin with an assessment of how the learned master arrived at his decision to decline the relief sought by the plaintiff. 

Legal context

5.  In his reasons for decision handed down on 22 August 2019, the learned master referred to the following provisions (set out in full for convenience):

(a)  Section 42(1) of the High Court Ordinance:

“(1)  On the application, in accordance with rules of court, of a party to any proceedings in which a claim is made, the Court of First Instance shall, in such circumstances as may be specified in the rules, have power to order a person who is not a party to the proceedings and who appears to the Court of First Instance to be likely to have or to have had in his possession, custody or power any documents which are relevant to an issue arising out of that claim—

(a)  to disclose whether those documents are in his possession, custody or power; and

(b)  to produce such of those documents as are in his possession, custody or power to the applicant or, on such conditions as may be specified in the order—

(i)    to the applicant’s legal advisers;

(ii)   to the applicant’s legal advisers and any medical or other professional adviser of the applicant; or

(iii)   if the applicant has no legal adviser, to any medical or other professional adviser of the applicant.”

(b)  Order 24, rules 7A and 8(2) of the RHC:

“7A. Application under section 41 or 42(1) of the Ordinance (O. 24,r. 7A)

(1)  An application for an order under section 41 of the Ordinance for the disclosure of documents before the commencement of proceedings shall be made by originating summons (in Form No. 10 in Appendix A) and the person against whom the order is sought shall be made defendant to the summons.

(2)  An application after the commencement of proceedings for an order under section 42(1) of the Ordinance for the disclosure of documents by a person who is not a party to the proceedings shall be made by summons, which must be served on that person personally and on every party to the proceedings other than the applicant.

(3)  A summons under paragraph (1) or (2) shall be supported by an affidavit which must—

(a)  in the case of a summons under paragraph (1), state the grounds on which it is alleged that the applicant and the person against whom the order is sought are likely to be parties to subsequent proceedings in the Court of First Instance;

(b)  in any case, specify or describe the documents in respect of which the order is sought and show, if practicable by reference to any pleading served or intended to be served in the proceedings, that the documents are relevant to an issue arising or likely to arise in the proceedings and that the person against whom the order is sought is likely to have or have had them in his possession, custody or power.

(3A)  In the case of a summons under paragraph (1), paragraph (3)(b) shall be construed as if for the word ‘relevant’, there were substituted the words ‘directly relevant (within the meaning of section 41 of the Ordinance)’.

(4)  A copy of the supporting affidavit shall be served with the summons on every person on whom the summons is required to be served.

(5)  An order under section 41 or 42(1) for the disclosure of documents may be made conditional on the applicant’s giving security for the costs of the person against whom it is made or on such other terms, if any, as the Court thinks just, and shall require the person against whom the order is made to make an affidavit stating whether any documents specified or described in the order are, or at any time have been, in his possession,custody or power and, if not then in his possession, custody or power, when he parted with them and what has become of them.

(6)  No person shall be compelled by virtue of such an order to produce any documents which he could not be compelled to produce—

(a)  in the case of a summons under paragraph (1), if the subsequent proceedings had already been begun; or

(b)  in the case of a summons under paragraph (2), if he had been served with a writ of subpoena duces tecum to produce the documents at the trial.

(7)  (Repealed L.N. 152 of 2008)

(8)   For the purposes of rules 10 and 11 an application for an order under section 41 or 42(1) shall be treated as a cause or matter between the applicant and the person against whom the order is sought.”

“ 8. Discovery to be ordered only if necessary (O. 24, r. 8)

...

(2)  No order for the disclosure of documents shall be made under section 41 or 42 of the Ordinance, unless the Court is of opinion that the order is necessary either for disposing fairly of the cause or matter or for saving costs.”

6.  The underlining in the above cited provisions is my own.

Master’s decision

7.  The learned master began by summarizing the nature of the email fraud allegedly suffered by the plaintiff in March of 2019.  Thereafter, the master set out the relief sought by plaintiff in its Statement of Claim (as filed on 24 July 2019), namely:

(a)  A declaration that the sums lost (and their traceable proceeds) at all times remained the plaintiff’s property and were constructively held by the defendant (who has taken no part in the proceedings) as its constructive trustee).

(b)  A declaration that the defendant has been unjustly enriched in that sum.

(c)  Monies had and received in the amount of the sums lost.

(d)  Damages, interest and costs.

8.  I would pause here to note that an unusual feature of this case is that the underlying recovery proceedings launched by the plaintiff (as above) were not coupled with what might be described as the “usual” injunctive or third party discovery applications, directed towards the identification, freezing and recovering of sums lost.   This array of potential “weapons” for a party suffering from a fraud of this type includes (at least) the following:

(a)  Mareva injunctions[1], directed towards stopping a wrongdoer from removing his assets from the jurisdiction.  While there are established conditions that must be met for such relief to be granted, when such relief is given, the injunction can be served not just on the wrongdoer whose assets are to be frozen but also on third parties (eg banks) which the plaintiff believes may hold the wrong doer’s assets.  

(b)  Third party discovery applications which can be made (again subject to established conditions), either by way of Norwich Pharmacal applications[2] or by applications under section 21 of the Evidence Ordinance (cap.8).   

9.  The absence of an application for Mareva relief in this case was commented upon by the learned master in his decision and is, I believe, relevant to the way that this matter falls to be assessed.  

10.  Returning to the masters’ decision, the learned master noted that the defendant did not acknowledge service and while the plaintiff is now be entitled to seek default judgment, it has not done so.  Instead, the defendant seeks discovery orders in the context of this action, albeit that the “contest” between the plaintiff and defendant never really got underway.

11.  HSBC for its part, was neutral as to the plaintiff’s discovery application, saying that it would comply with any order made by the court.

12.  In the plaintiff’s submissions before the master, plaintiff’s counsel, Mr Keith Tam, submitted that the test of relevance for the purposes of HCO section 42(1) and related provisions of Order 24 was as set out in the Peruvian Guano case[3] and that there was no different or higher test for the plaintiff to meet.  The master (as recorded in his decision, at §32) queried what the issue was that arose from the plaintiff’s claim when, as here, the defendant was not defending or disputing the plaintiff’s claim.  Although the learned master did not put it in these words, the import of his concern here seems to me to be “why is the court asked to give relief in this case when the case is effectively already finished?”

13.  After a short adjournment to give the plaintiff time to consider this question, the plaintiff made reference to the decision of DHCJ Lok (as he then was) in Waddington Ltd v Chan Chun Hoo Thomas and Others (unrep. HCA 3291/2013).  The plaintiff maintained its position that the threshold for third party discovery in the present situation was as set out in  Peruvian Guano - in the plaintiff’s submission, an easy threshold to establish.

14.  Mr Tam also emphasized that part of the relief sought by the plaintiff was a proprietary claim.  The plaintiff relied here on the authority of Pacific King Shipping Holdings Pte Ltd  (in Compulsory Liquidation) (A Company Incorporated in Singapore) v Huang Ziqiang [2015] 1 HKLRD 830.          

15.  The learned master declined to grant the third party discovery and restraint orders as sought by the plaintiff.  His reasoning, in a nutshell, was as follows:

(a)  In the absence of a defence or dispute from the defendant, what are the issues arising or likely to arise in this action? Absent such “live” issues, the threshold requirement of there being documents that go to “an issue arising from the claim” is not met.    The master was persuaded in this context that the absence of a co-existing application for Mareva injunctive relief was problematic for the plaintiff.  The master was not satisfied that third party discovery in this case was “necessary” as per Order 24 rule 8(2).  

(b)  The restraint order was declined for a different reason.  The learned master took the view that the provisions relied upon by the plaintiff did not allow the proposed restraint order to be made against a non-party (decision, §79/80).      

16.  This then, is the reasoning of the learned master, from which the plaintiff has appealed.

Plaintiff’s appeal submissions

17.  At the hearing of this matter before me, I had the benefit of written submissions from Mr Tam, appearing again for the plaintiff.  I have considered those submissions which of course, he took me to in the course of his submissions.

I shall now turn to a discussion and decision on the application for third party discovery and for a restraint order.

Third party discovery

18.  The starting point for this inquiry is the wording of the provisions that are cited at §5 herein.

19.  Starting with HCO section 42, the power under this section to make third party discovery orders is clearly discretionary. And they key requirement for present purposes is the existence of documents “which are relevant to an issue arising out of the  claim”.  “Claim” for the purposes of this case is the plaintiff’s claim against the defendant.  This must be so, since there are no other parties to the underlying action.;

20.  Order 24, rule 7A(3)(b), which sets out the requirements for the supporting affidavit in applications made under HCO section 41 and 42, provides that documents should be shown to be “relevant to an issue arising or likely to arise in the proceedings”.

21.  The slight difference between HCO section 42(1) and Order 24, rule 7A(3)(b) can be seen to arise from the fact that the latter is directed towards the required content of affidavits both prior to and after the commencement of proceedings.  I do not see the differences in the language of HCO section 42(1) and Order 24, rule 7A(3)(b) as being significant.

22.  We turn then to the wording of Order 24 rule 8(2).  Here, there is an overarching and mandatory restriction that no orders are to be made under HCO sections 42 or 43 unless the Court is of opinion that the order is “necessary either for disposing fairly of the cause or matter or for saving costs.”  I note that while HCO section 42 refers to “claims”, whereas Order 24 rule 8(2) refers to the “cause or matter”.  But I again, I do not think anything turns on that difference in language.  In either case, the reference is to the claims and proceedings between the plaintiff and the defendant.   

23.  Put simply, meeting at least one of the necessity criteria as laid out in Order 24 rule 8(2) is mandatory for any third party discovery sought under HCO sections 41 and 42.  Here, one might simply refer to the observation of G Lam J in Zhang Shouen v Standard Chartered Bank (Hong Kong) Ltd (unrep., HCMP 682/2015, [2015] HKEC 2170) that where the test of necessity is met, the discretion “is an unfettered one to be exercised in all the circumstances of the case” (see decision, §22).

24.  Finally, there is the question of burden of proof under Order 24, rule 8(2).  For this, I refer again to the decision of G Lam J in the Zhang Shouen case (supra), where it was held that this provision “places the burden squarely on the applicant to satisfy the court that the order is necessary in the manner described, not only that the document is relevant or that discovery is desirable” (decision, §32).

25.  For this case, things come down to this question: is the third party discovery relief sought by the plaintiff necessary, either:

(a)  to dispose of the plaintiff’s claim (and proceedings) against the defendant; or

(b)  to save costs.  

both being subject to the court’s discretion, and with the burden of proof on the plaintiff.

26.  In my assessment, the requested third party discovery is not necessary to dispose of the plaintiff’s claim as against the defendant.  The plaintiff is already entitled to default judgement and there is really nothing more that it can achieve in these proceedings vis-à-vis the defendant.  There being no other parties to these proceedings, I cannot see how the requested third party discovery relief helps the plaintiff as regards the claim (and proceedings) against the defendant.  The application, in my view is speculative, given the current pleadings - and parties - in this action.   

27.  It seems apparent that the better course for the plaintiff would have been to combine the present proceedings with Norwich Pharmacal or Evidence Ordinance applications as those applications formally bring third parties into the arena – and of course there are conditions and discretions that must be tested and applied, before such relief is granted. But in a contest between the plaintiff and defendant only, without parallel applications of this type, I am not persuaded that the third party discovery sought is necessary to dispose of the plaintiff’s claim (and proceedings) against the defendant.     

28.  From the language of G Lam J in the Zhang Shouen case (supra), where it was held that Order 24, rule 8(2) places the burden squarely on the applicant to satisfy the court that the order is necessary in the manner described, my conclusion is that the plaintiff falls at this hurdle.  While the documents sought may be relevant and discovery desirable, that, of itself, is not enough to discharge the burden of proof faced by the plaintiff.

29.  Thus, in the exercise my discretion under Order 24, rule 8(2), I would decline the relief sought by the plaintiff. 

30.  Even if it could be said the application were necessary to save costs (which I doubt to be so), I would decline the discovery application under the second limb of Order 24, rule 8(2), for the same reasons.

Restraint Order

31.  Similarly, I see no reason to grant the restraint order sought by the plaintiff.

32.  Accordingly, the plaintiff’s appeal against the decision of Master Lai is dismissed.  As there were no applications for costs before me, I make no order as to costs.