INVEST GAIN LTD v. NOVEL GOOD LTD

HCA 939/2013

[2018] HKCFI 1226

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 939 OF 2013

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REASONS FOR DECISION

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Introduction

1.  The present trial commenced on 29 May 2018.

2.  On 24 May 2018, P filed a supplemental list of documents (“Supplemental List”), and on 28 May 2018, the day before the commencement of the trial, an affirmation was filed by Mr Jia Liquan (“Jia”) on behalf of P, to explain the lateness and the relevance of the documents.

3.  D opposed the late production of 3 of the 5 items in the Supplemental List.

4.  After hearing the parties’ submissions, I allowed P to produce the 3 items which were all emails.  These are my reasons.

Brief Background

5.  P is a BVI company.  D is also a BVI company and is a wholly owned subsidiary of Shanghai Industrial Holdings Limited, a publicly listed company in Hong Kong of Stock Code 363 (“SIH”).

6.  On 19 January 2010, P and D entered into an agreement which was later amended and varied on 11 May 2010[1] (“SPA”), whereby P agreed to sell and D agreed to purchase 500,000,000 shares of a publicly listed company in Hong Kong (Stock Code 563 ) (“Target Company”).  At the time, the trading of the shares of the Target Company was suspended.  Also on 19 January 2010, the Target Company entered into a subscription agreement with D for D to subscribe 683,692,000 shares.  Through these agreements, D would acquire a controlling stake in the Target Company.

7.  On 24 June 2010, pursuant to the SPA, P transferred 500,000,000 shares to D and the consideration was paid by D (“Completion Date”).  The shares of the Target Company resumed trading on 25 June 2010.

8.  The SPA provided, amongst other things, for certain warranties indemnities/undertakings on the part of P to be secured for a one year period post completion.  Subsequently, by a deed dated 27 August 2010, P granted a charge in favour of D, over its rights, title, and interest in another 50m shares of the Target Company (“Charged Shares”), as continuing security for the payment and discharge of the “Secured Obligations” as defined therein.

9.  On 21 June 2011, D gave notice to P for its claims for certain P’s alleged breaches of its warranties/undertakings under the SPA.  P denied any breaches.

10.  P requested for the discharge and release of the Charged Shares but D refused to do so. 

11.  P later issued the writ herein on 29 May 2013.

12.  D’s defence is that P has no basis to demand the release of the Charged Shares, and D counterclaims, amongst other things, for damages for breach of the SPA.  There are 9 items of breaches alleged by D, referred to respectively as E1–E9 in the amended defence and counterclaim[2], and as set out in the Scott Schedule on Liability[3].

The Supplemental List

13.  D opposed the following 3 Items in the Supplemental List:

(i)   Item 1 – two emails of 5 May 2008, from Bao Jing Tao (“Bao”), then one of the senior management of the Target Company to Julia Zhu (“Zhu”), a lawyer who was then with the Mainland law firm AllBright Law Offices (“AllBright”).  AllBright was acting for D in carrying out legal due diligence work in connection with the acquisition of the Target Company;

(ii)   Item 3 – emails between Bao and Zhu from 3 to 17 July 2009;

(iii)   Item 4 – two emails between Bao and Zhu of 10 September 2009

D’s Reasons for objection

14.  D’s reasons for objecting to P’s production of the 3 Items of emails were:

(i)   Inexplicable lateness;

(ii)   Actual prejudice;

(iii)   The emails were not relevant;

(iv)   As P only pleaded non admissions in its pleadings, P was not entitled to call any evidence under Order 18 rule 13(5) of the Rules of the High Court.

Delay

15.  Jia’s explanation in his affirmation was that in around mid/late April 2018, P decided to change its team of counsel and after meeting with the new team, he was advised to go through his personal documents once again to see if he could find anything else relevant to the case and managed to retrieve the 3 Items of emails.

16.  Mr Wong SC, Leading Counsel for P, had readily conceded that the emails were produced at a very late stage but submitted this would not mean that it was fatal and that those emails were contemporaneous documents between D’s lawyer and P during the legal due diligence. Mr Wong submitted that the emails were highly relevant and in fact should have been disclosed in the first place by D.  This was because D’s case was that there had been non disclosure on the part of P during due diligence and that the 3 emails would go show there had been disclosure by P and/or otherwise contradict the evidence of D’s witnesses.

Relevance

Item 1

17.  Item 1 consisted of two emails from Bao to Zhu on 5 August 2008 referring to an attached schedule of payments dated 4 August 2008 in relation to certain projects[4] (“04.08.08 Payment Schedule”).  One of the items in the 04.08.08 Payment Schedule was said to be in relation to D’s complaint regarding P’s purported failure to maintain proper records in respect of payments in the Rich Glory transaction, namely the alleged breach E7 and Issue 7 of the Scott Schedule.  According to P, it had disclosed in the 04.08.08 Payment Schedule that there was no receipt issued for the sum of RMB10m in relation to the Rich Glory transaction.

18.  Ms Sit on the other hand pointed out that as the payment date of the RMB10m in the 04.08.08 Payment Schedule was 1 October 2007, this payment could be of a different transaction as that set out in E7 due to difference in the dates of payments.

19.  I accept that the payment date of the RMB10m in the 04.08.08 Payment Schedule did not accord with the dates of payments as set out by D under E7.  However, the date of payment in the 04.08.08 Payment Schedule was within the period of the various agreements in relation to the Rich Glory transaction, namely between 7 September 2007 and 12 October 2007, and there was no sufficient evidence at this stage that there was another project involving Rich Glory or land in Shenyang.

Item 3

20.  As for Item 3, this consisted of a chain of emails from 3 to 17 July 2009 between Bao and Zhu, and two of the emails were in relation to the provision for an unpaid balance of RMB60m arising out of a Tongzhou project, and according to Jia, this relates to the Guo Rui Agreement under the alleged breach E4, and Issue 4 of the Scott Schedule. 

21.  Ms Sit had referred to the Zheng Judgment of the Beijing No 1 Intermediate People’s Court stated under E4 and submitted that there was no evidence that what was mentioned in the Item 3 emails was related to the same transaction under E4.

22.  What was alleged by D under E4 was P’s non disclosure of Ms Zheng’s litigation against Wo Ke for RMB 60m under the Guo Rui Agreement and that no provision had been made for this amount by P in the accounts of the Target Company.  

23.  It can be seen from the Zheng Judgment, the total consideration stated under the Guo Rui Agreement was RMB1.65m less the deductions set out in Part A and Part B referred therein.  The deductions were the total value of the shareholding and receivables of a Tongzhou company which I understand held the Tongzhou project.

24.  According to the Zheng Judgment, the Beijing Court found that Wo Ke had in fact paid RMB340,000,000 under the first two instalments of payments, and that Wo Ke was of the opinion that, based on the audit  investigation report dated 6 August 2008[5], the amounts paid by Wo Ke had already exceeded the balance of what was required to be paid under the Guo Rui Agreement, but Ms Zheng disagreed. The Beijing Court was of the view that because the consideration set out in the Guo Rui Agreement was not clear, this was what was led to the parties’ dispute[6].  Although in the end, the Beijing Court found that after the deductions, the balance due should be RMB294,048,781.64 but Ms Zheng was only claiming RMB60m, and the Beijing Court ordered Wo Ke to pay RMB60m.  Further, as Ms Zheng was not able to prove the date by which the balance should have been paid, hr claim for penalties was not allowed.  

25.  Although the amount of the consideration of the Tongzhou project and the amount actually paid as stated in the emails of Item 3 did not seem to accord with the amounts in the Zheng Judgment, on the face of it, those emails did refer to the Tongzhou project and the amount of RMB60m claimed by Ms Zheng and those emails appeared to show that there was a provision for RMB60m made.

Item 4

26.  As for Item 4, this consisted of two emails dated 10 September 2009 between Bao and Zhu concerning an attachment of a schedule of unpaid amounts (“31.08.09 Unpaid Schedule”)[7], which included an unpaid amount of RMB138,096,800 for the Zhuhai project.  This was the sum set out under the table under paragraph 22 of the statement of claim in  HCA1298/2012[8] or Chan Litigation as defined in paragraph 11.14 of Zhao Ye’s witness statement, concerning the Moral Luck Agreement.  Although the alleged breach under E8 or Issue 7 of the Scott Schedule was failure to disclose the undertaking given by the Target Company, Mr Wong submitted at least the emails showed that the unpaid amount was disclosed.

My view

27.  Having considered the above, I was of the view that on the face of it, Items 1, 3 and 4 of the Supplemental List would be relevant and necessary in connection with 3 of the disputed issues in the Scott Schedule and they were contemporaneous documents.

Prejudice

28.  Ms Sit had referred this Court to Wise Union Industries Limited and Hong Kong Science and Technology Parks Corporation HCAL 12/2009, (unreported) judgment dated 21 September 2009 where it was said by A Cheung J, as he then was, that in the post-CJR era, a late application to amend or to introduce new evidence had a fairly high threshold to pass[9], and that he would not accept that the fact that the innocent party could ask for an adjournment (even if one that was to be paid by the other side) would mean that there was no prejudice, and equally, the fact that a party, not wanting to lose a hearing date, refrained from asking for an adjournment, did not mean that there was no prejudice[10].

29.  Ms Sit submitted that there was also actual prejudice because the 3 Items of emails were directly between P’s side and Zhu, who was working for Allbright and who was involved in carrying out the legal due diligence work at the time.  Only one of those emails was copied to a staff of D at the time.  Zhu had already left Allbright and D would need time to contact her and also to retrieve the documents in relation to the 3 Items of emails which took place almost 10 years ago, and that these documents would then have to be shown to Zhu for her to confirm, and therefore D was not able to obtain instructions in time during the trial.  None of the D’s present witnesses was copied in those emails. 

30.  Ms Sit also complained that she could not proceed to cross examine Mr Jia, P’s only witness, without instructions.

31.  As Mr Wong submitted, and which I agree, D was under a duty to disclose all relevant documents in the first place and if there were any further relevant documents, they should have been produced by D.  The documents should be in the possession of AllBright and there was no need for Zhu to confirm those documents.  Also, if D were to discover any further documents or information during this 10 day trial after Jia had completed his oral evidence, P offered to recall Jia for further cross examination by Ms Sit.

Order 18 rule 13

32.  Ms Sit had also referred to Order 18 rule 13(5) and (6) and submitted that since P did not put forward its own case in the pleadings, P should not be entitled to put forward or call any evidence in support of its case at this late stage.

33.  Mr Wong however argued that D’s case was one of non disclosure on the part of P and as those emails could be relevant in showing that there had been disclosure by P, they would go to the credibility issue, and that he only intended to use the emails in cross examining D’s witnesses.  

34.  I accept what was submitted by Mr Wong.

Conclusion

35.  As set out by DHCJ Yee in Toyota Tsucho(HK) Corporation Limited and Chimei Innolus Corporation and anor HCA 1173/2011, (unreported) 25.02.15 Decision, the court has to embark on a balancing exercise having particular regard to the reason for lateness (if any), the relevance and necessity of the new evidence to be adduced and any prejudice that the other side would suffer if such new evidence is to be allowed to be included, and all the matters have to be considered in light of the specific circumstances of the case.

36.  In my view, as the trial was set down for 10 days, there should be sufficient time for D to take instructions on the emails. I accept that there would be prejudice to D due to the lateness but there was no sufficient evidence that there needed to be an adjournment of the trial or there would be any serious disruption to the trial.  As I have said, the emails were contemporaneous documents and on the face of it, they would be relevant and necessary in relation to 3 of the disputed issues in the Scott Schedule. Having weighed up the balance and having regard to all the circumstances of this case, I allowed P to produce them during cross examination of D’s witnesses.