NGAN IN LENG AND OTHERS v. CHU YUET WAH

HCA 388/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 388 OF 2006

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D E C I S I O N

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THE APPLICATIONS

1.  By 2 separate summonses, the plaintiffs seek specific discovery against the defendant (“the Chu Summons”) and a third party company called Kingston Financial Group Ltd (“Kingston”) (“the GR Summons”) respectively.

BACKGROUND

2.  Kingston, a listed company, was formerly known as Golden Resorts Group Limited (“Golden Resorts”) and, before that, Medtech Group Co Ltd.  In 2005, Golden Resorts acquired the plaintiffs’ interests in companies which owned the Casa Real Hotel with a casino in Macau.  The price was HK$1.25 billion, payable partly in cash of HK$750 million and partly by allotment of newly issued ordinary shares of Golden Resorts (“the Shares”) at a value of HK$0.4545 each (equivalent to about HK$500 million).  The negotiation for the acquisition was conducted by the defendant (“Chu”) and her father (“Mr Lee”) on behalf of Golden Resorts.

3.  It is the plaintiffs’ case that in the course of negotiation, Chu represented, amongst others, that she was the controlling shareholder and the boss of Golden Resorts (“the representation”).  She orally agreed to buy back the Shares at $0.4545 each should the value per share in the Hong Kong Stock Exchange fall below that price.  It was allegedly in reliance on her offer that the plaintiffs agreed to accept the Shares as part of the consideration (“the share purchase agreement”).

4.  The sale of the shares of companies holding the hotel and casino was completed on 31 May 2005 and the Shares were issued to the plaintiffs.  At all times since the making of the agreement for the acquisition, the share price has been below $0.4545 per share.

5.  It is the plaintiffs’ case that Chu assured them that the share price would recover as a result of a restructuring of Golden Resorts involving, amongst others,:

(i)   acquisition of the Casa Real Hotel and associated business (“the Casa Real Acquisition”); and

(ii)  completing an agreement to acquire the Grandview Hotel and share of the profits generated by the casino carried out in the Grandview Hotel (“the Grandview Acquisition”).

6.  Chu also allegedly represented to the plaintiffs that if for any reason the buyer was unable to complete the Casa Real Acquisition, she or her nominee would take over the deal.

7.  The plaintiffs were given 1.1 billion shares.  After a 10:1 consolidation (“the consolidation”), they held 110 million shares.  They transferred away 6 million shares to the casino operator and still hold 104,000,000 shares.

8.  Before consolidation, the value was HK$0.196 per share (ie HK$1.96 after consolidation).  The plaintiffs claim that there was an implied term that after consolidation, the buy-back price would become HK$4.545 per share.  Accordingly, the Shares in the plaintiffs’ hands were worth only HK$20,384,000, representing a loss of HK$268,840,000.

9.  The plaintiffs seek specific performance of the share purchase agreement, alternatively damages for its breach.

10.  Chu is now a director, CEO and controlling shareholder of Kingston, but during the course of negotiations with the plaintiffs, she was still a minority shareholder in Golden Resorts. She denies having made the representation or entered into the share purchase agreement.  Her case is that she negotiated the deal on behalf of Golden Resorts, on the instructions of its then Chairman, Mr Jenkin Cheung.  The plaintiffs contended that the reverse was true, ie it was Mr Cheung who acted in accordance with the instructions of Chu and Mr Lee.

A.  THE CHU SUMMONS

11.  The plaintiffs seek specific discovery of 13 classes of documents relating to 3 key transactions as follows:

	Date of preliminary agreement	Date of completion
The Subscription	24.12.2003	13.4.2004
The Casa Real Acquisition	6.1.2005	31.5.2005
The Grandview Acquisition	24.11.2004	March 2005

The Subscription documents (classes 1-3)

12.  By the Subscription, one Perfect View subscribed for 5 billion shares in Golden Resorts.  The acquisition was financed by a loan of $50 million from Kingston Securities Ltd (whose controlling shareholder was Chu) to Perfect View. On 13 April 2004, the day of completion of the Subscription, Mr Cheung was appointed as executive director and chairman of Golden Resorts.

13.  The plaintiffs seek discovery of the transaction documents in relation to the Subscription, correspondence and notes of meeting between Mr Cheung and/or Perfect View, Chu and/or Kingston relating thereto, the loan documentation and documents relating to repayment of the loan. 

The Casa Real Acquisition documents (classes 4-5)

14.  The share purchase agreement was allegedly entered into during the course of negotiation for the Casa Real Acquisition.  There is no dispute that Chu had an active role in the negotiation and Mr Lee was also involved.  Whether Chu acted on the instructions of Mr Cheung, or the latter acted on the instructions of Chu and Mr Lee, is in dispute. 

15.  No correspondence between Chu/Mr Lee and Mr Cheung/ Golden Resorts has been disclosed in the course of discovery.  The plaintiffs seek discovery of :

(i)   all correspondence and all notes of meetings between (a) Chu and Mr Lee and (b) Mr Cheung and/or Golden Resorts, concerning the Casa Real negotiation;

(ii)  all correspondence and all notes of meetings between Chu, and Mr Cheung and/or Golden Resorts, in relation to Chu’s reward and/or remuneration (if any) for acting on behalf of Golden Resorts in the Casa Real negotiation.

The Grandview Acquisition documents (classes 6-13)

16.  The Casa Real Acquisition and Grandview Acquisition were close in time and bore strikingly similar features:

(i)   The consideration for both was partly in cash and partly by issuance of new shares in Golden Resorts.

(ii)  Though not an officer of Golden Resorts and being a minority shareholder, Chu was extensively involved in the Grandview Acquisition to the extent of entering into the Chu Guarantee Agreement dated 24 November 2004, effectively to personally guarantee the completion of the Grandview Acquisition in order to protect Golden Resorts from losses. 

17.  On 6 April 2005, following completion of the Grandview Acquisition, (a) Chu was appointed the managing director of Golden Resorts and Mr Lee was appointed non-executive director; (b) Chu and Mr Lee, through their respective corporate vehicles, was bestowed by Perfect View with 1.6 billion shares (over 20% of the issued shares) in Golden Resorts.

18.  The Grandview Acquisition and Casa Real Acquisition both formed part of Golden Resorts’ strategic business diversification into the Macau hotel and casino business at the material time: see circular of Golden Resorts dated 18 April 2005 on the Casa Real Acquisition.

19.  The plaintiffs seek discovery of: 

(i) all correspondence and all notes of meetings between (a) Chu and (b) Mr Cheung and/or Golden Resorts, concerning the Grandview negotiation (similar to those re the Casa Real Acquisition);

(ii) the Grandview provisional agreement;

(iii) documents created during the course of negotiations for the Grandview Acquisition relating to the nature and amount of consideration to be paid by Futuremind, being all drafts of the Grandview provisional agreement, all correspondence accompanying the same exchanged with the parties to the transaction and all notes of meetings relating to the same;

(iv) all correspondence and all notes of meetings between Chu, and Mr Cheung and/or Golden Resorts, in relation to Chu’s reward and/or remuneration (if any) for acting on behalf of Golden Resorts in the Grandview Acquisition (similar to those re the Casa Real Acquisition);

(v) the Chu guarantee agreement;

(vi) all correspondence and all notes of meetings between (a) Chu and (b) Mr Cheung and/or Golden Resorts, relating to or culminating in the Chu guarantee agreement;

(vii) the agreement for 1.2 billion ordinary shares of Golden Resorts to be conferred on Sure Expert in return for Chu agreeing to be a consultant of Golden Resorts in managing the Grandview Hotel (“the Chu consultancy agreement”);

(viii) all correspondence and all notes of meetings between (a) Chu and (b) Mr Cheung and/or Golden Resorts, relating to or culminating in the Chu consultancy agreement.

Bases of the application

20.  The bases for the application have been summarized in a specific discovery table Exhibit WJGB-3.  In a nutshell, it is said that the documents sought will shed light on whether Chu was the controlling/ de facto beneficial shareholder of Golden Resorts at the material time, with Mr Cheung as the front man.  The documents will assist in explaining why she made the share purchase offer and support the existence of the share purchase agreement. 

The applicable principles

21.  To invoke the jurisdiction of the court under Order 24, rule 7 of the Rules of the High Court to order discovery, the 3 prerequisites are relevance, existence and possession of the documents.  Once a prima facie case is made out, the court has a discretion whether or not to order disclosure: Paul’s Model Art GMBH & Co KG v UT Ltd [2006] 1 HKC 238.  It is up to the party objecting to discovery to show that it is not necessary for disposing fairly of the cause or for saving costs: Hong Kong Civil Procedure 2012, Vol 1, para 24/8/1, at page 559.

22.  Chu opposes the application on the ground that the classes of documents for which specific discovery is sought are:

(1)  Not relevant;

(2)  Not shown to be in her possession, custody or power;

(3)  Not necessary for the fair disposal of the cause or matter; and

(4)  Not necessary for the purpose of saving costs.

Relevance

23.  The parties’ cases are diametrically opposite on the core issue of the existence of the share purchase agreement. Closely related to this issue is whether or not Chu made the representation, although there is no separate cause of action in misrepresentation.  The credibility of witnesses will be of crucial importance at the trial. 

24.  Counsel are not in dispute over the principle that in assessing the credibility of a party’s case, the Court will have regard to (a) whether the testimony is inherently plausible or implausible (“the plausibility issue”); and (b) whether the testimony is supported or contradicted by other undisputed or indisputable evidence (such as contemporaneous documents): Lee Fu Wing v Yan Po Ting Paul [2009] 5 HKLRD 513, 524.

25.  Counsel are also not in dispute over the principle that discovery which solely relates to credit is not allowed: Man Won Co Ltd & anor v Tay Vi Bing & ors,HCA 2553/1989, 6 October 1991,Bokhary J (as he then was); EG Music v SF (Film) Distributors Ltd [1978] FSR 121at 125.

26.  Fishing expedition with a view to hunting 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 is not permitted: Re Estate of Ng Chan Wah, HCAP 5/2003, 5 March 2003,Chu J (as she then was), at para 16.  However, this must be distinguished from onerous discovery causing inconvenience to a party: Man Won Co Ltd & anor v Tay Vi Bing & ors.

27.  In resisting this application, Mr Chan SC, counsel for Chu, relies on Allington Investments Corp & ors v First Pacific Bancshares Holdings Ltd [1995] 2 HKC 139, the facts of which appear to be similar to the present case.  In that case, the plaintiffs who were minority shareholders in the 1^st defendant, sued the defendants for $10 million under an oral agreement.  They claimed that the defendants had entered into it to secure the plaintiffs’ votes in favour of a proposal at a special general meeting to cancel the minority shareholdings for a cash payment.  The defendants pleaded that the $10 million settlement was suggested by the plaintiffs in relation to three other outstanding matters between them and was unconnected to securing minority votes.  They expressly denied any agreement was reached.  The defendants sought discovery of documents relating to the three outstanding matters between the parties.  The Court of Appeal considered that raising an issue in the pleadings was not determinative as to whether it related to a matter in question. Discovery was not required of documents which related to irrelevant allegations in pleadings which, even if substantiated, could not affect the result of the action.  The application was held by the Court of Appeal to be without merit both as a matter of entitlement and as a matter of the discretion of the court (at 142E-F).

28.  Allington is clearly distinguishable from the present action on the facts.  There, establishing the three outstanding matters went nowhere near to showing that the oral agreement existed or that the plaintiffs’ case was more plausible.  The discovery sought in the present action is relevant to the plausibility issue.  A revelation that Chu was the controlling shareholder of Golden Resorts at the material times would enhance the inherent plausibility that she had made the representation, that she would be willing to commit to a repurchase of the Shares from the plaintiffs at a fixed price, an act that would potentially incur a great loss in return for retaining control in Golden Resorts.  The discovery is not solely on credibility[1].

29.  Chu in her affirmation stated that (i) while it might be argued that it was improbable that an individual would make the share purchase offer if he/she was not a shareholder of and did not have any beneficial interest in Golden Resorts, (ii) it did not follow that it became probable that an individual would make the share purchase offer if he/she was a shareholder of Golden Resorts. There was also no basis to say that as between a minority shareholder and a controlling shareholder of Golden Resorts, it was more probable that the latter would make the share purchase offer bearing in mind there were always other shareholders including members of the public.

30.  In my view, part (i) of Chu’s argument is actually a concession of relevance to the plausibility issue. Part (ii) of her argument, however, is an inference to be drawn by the trial judge and does not affect the test of relevance in the present application.

31.  In fact, Chu had conceded the relevance of documents relating to the Grandview Acquisition. Pursuant to the plaintiffs’ original request by letter dated 23 October 2007, Chu gave discovery by her further supplemental list of documents dated 25 January 2008 of Golden Resorts’ announcement dated 14 December 2004 and circular dated 22 February 2005 on the Grandview Acquisition.

32.  Given the proximity in time and striking similarity between the Casa Real Acquisition and Grandview Acquisition, documents in respect thereto may be pieced together to advance a case on controlling/de facto beneficial ownership.  Their relevance, subject to what I shall say as to the width of the discovery, is established. 

33.  In respect of the Subscription, however, Chu has never been a shareholder or director of Perfect View.  The Subscription was completed in April 2004, well in advance of the share purchase agreement.  On the evidence, it is not even alleged that Chu was a negotiator in the Subscription.  Her role (through Kingston Securities) was limited to lending money to Perfect View and could not have any bearing on Chu’s role as controlling/de facto beneficial owner in Golden Resorts. Even if, to borrow Mr Barlow SC’s example, Chu had waived the loan, that would not go to show her control in Golden Resorts.  Relevance of the Subscription documents is not established.

Width of the discovery

34.  Though relevance is established, the order must identify with precision the document or documents or categories of document which are required to be disclosed, for otherwise the person making the list may find himself in serious trouble for swearing to a false affidavit, even though doing his best to give an honest disclosure: Re Estate of Ng Chan Wah; Berkeley Administration Inc v McClelland [1990] FSR 381.

35.  Where a claim to see a class is made, the class must not be defined or described so widely as to include documents which are not relevant to the issue. The prerequisites mentioned above must be established in respect of the class described as a class, not as regards some in the class only: Hong Kong Civil Procedure 2012, Vol 1,paragraph 24/7/1.

36.  An excessively wide class remains a valid class, and even a valid relevant class, notwithstanding that irrelevant material is brought within its ambit. The fact that the party will be compelled to discover much irrelevant material in addition to relevant material, is something which goes to the issue of whether a discovery order is necessary “either for disposing fairly of the cause or matter or for saving costs”: Toeca National Resources BV v Baron Capital Ltd & anor, HCA 1913/2009, 31 May 2011, McWalters J, at para 38.

37.  I have considered the table prepared by Mr Tommy Lo for Chu and Lai’s affirmation containing complaints as to width of the classes of documents but shall not reproduce the details here.  Requiring discovery of eg correspondence and communication “in relation to” a key transaction was not too wide or too vague.  The classes are defined by reference to the nature of the documents but not to an issue: Deak & Co (Far East) Ltd v NM Rothschild & Sons Ltd & ors [1981] HKC 78, at 82F; Toeca National Resources BV v Baron Capital Ltd & anor, at paras 27-28.

38.  Classes 1-3 should be excluded for reasons given in para 33.

39.  Documents relating to the Casa Real Acquisition are directly related to the subject matter of this action.  It is the internal and unpublicized documents that may reveal the true position of Chu as a controlling/beneficial shareholder.  Class 4 is relevant. However, whether or not Chu has been given a reward or remuneration for acting on behalf of Golden Resorts in the negotiations for the Casa Real Acquisition is speculative and has no bearing at all even on the plausibility issue; discovery sought is a fishing exercise.  Class 5 should be excluded.

40.  For documents relating to the Grandview Acquisition, Classes 7, 10 and 11 are relevant for the same reason as for Class 4.  Class 6 is relevant to give the proper context for considering class 7.  The provisional and formal agreements would have set out the terms of the Grandview Acquisition and I do not see the need for discovery of the drafts, hence class 8 should be excluded.  Class 9 should be excluded for the same reason as for Class 5.  Classes 12 and 13 fall into the fishing category.  Exercising control as a consultant is not relevant to exercising control as de facto beneficial shareholder.

41.  The plaintiffs have made out a case of relevance for classes 4, 6, 7, 10 and 11 (collectively “the relevant classes”).  

Existence

42.  A prima facie case on existence may be established on merely showing the probability arising from the surrounding circumstances or on specific facts deposed to: Hong Kong Civil Procedure 2012, Vol 1, para 24/7/1, at pg 554.  For example, a prima facie case on existence may be established simply by assessing whether it is business practice for a certain type of document to exist: Union Bank of India v General Nice Resources (Hong Kong) Ltd, HCA 299/2007, 10 May 2010, Bharwaney J atpara 10.

43.  Documents under classes 7 and 10 had been referred to in the publicannouncements concerning the Casa Real Acquisition and Grandview Acquisition.  By business practice one can safely conclude that the listed companies would have generated correspondence and communication in the course of the negotiations.  Chu does not seriously dispute the existence of these documents.  I am satisfied that the plaintiffs have satisfied the test of existence.

Possession, custody and power over the documents

44.  Where documents are in the possession of a company of whom the respondent to an application is a director, the applicable principles are as follows:

“(1) …

(2) The documents of a company are in the legal possession of the company. If they are or have been in the actual physical possession of a director who is a party to litigation they must be disclosed by that director, if relevant to the litigation, even though he holds them as servant or agent of the company in his capacity as an officer of the company.

(3) Whether or not documents of a company are in the power of a director who is a party to the litigation is a question of fact in each case. “Power” in this context means “the enforceable right to inspect or obtain possession or control of the document”. If the company is the alter ego of such a director so that he has unfettered control of the company’s affairs, he must disclose and produce all relevant documents in the possession of the company.

(4) Where relevant documents in the possession of a company are disclosed by a director as being in his custody or power, the court has a discretion whether or not to order production of them.

(5)  The discretion is a judicial discretion, and in exercising it the court will have regard to all the circumstances. The court will balance the relevance and importance of the documents and the hardship likely to be caused to the [applicant] by non-production against any prejudice to the [respondent] and third parties likely to be caused by production. It has not hitherto been the practice of the court to order production of company documents to which the board of directors objects on affidavit, provided that the court is satisfied that the objection is not contrived for the purpose of frustrating the powers of the court. The court will not in exercise of its discretion order parties to do that which they have no power to do. The court will not order production unless it is satisfied that production is necessary either for disposing fairly of the issues between the parties or for saving costs.”

B v B (Matrimonial Proceedings: Discovery) [1978] 1 Fam 181page 193D-194A

45.  The relevant classes cover documents of Casa Real, Grandview, Mr Cheung, Mr Lee, Golden Resorts and Kingston Securities.  As Chu is sued in her personal capacity, Mr Barlow SC makes clear that the plaintiffs are only seeking discovery of those documents in her possession, custody or power.

46.  Chu denies having possession, custody or power of the documents or that the relevant companies were her alter ego.  At the time when she gave discovery she had not considered specifically whether she was or was not authorized to give discovery of those documents. 

47.  By a board resolution dated 23 September 2011 (“the board resolution”), Kingston has forbidden Chu from accessing or producing documents belonging to or held by Kingston, Kingston Securities or any other subsidiary of Kingston for the purpose of this action.

48.  I view Chu’s denial of possession with caution.  Firstly, she had affirmed to the fact that documents of Golden Resorts are not and “have never been” in her possession, custody or power.  However, Mr Chan SC has conceded in his submission that this statement was wrong. 

49.  Secondly, in her 3 lists of documents, virtually all but 3% in her 2^nd list of documents were Golden Resorts' documents. 

50.  Thirdly, Lai, who was purportedly authorized by the board of Kingston (in which Chu and her husband abstained from voting) stated that he had no idea how Chu came into possession of some of the documents belonging to Golden Resorts and its subsidiaries and had no knowledge of her making discovery of the same.  There was apparently no investigation done by Lai or anyone to ascertain why Chu was able to do that. Lai’s version is simply not capable of belief.

51.  Fourthly, Chu’s has, in the words of Mr Barlow SC, calculated to mislead the court on her shareholding.  She affirmed to having 18.84% shareholding in Golden Resorts as of December 2004, became a controlling shareholder (in the sense of holding over 50% of the issued share capital) of Golden Resorts in April 2011, and has a present shareholding of 56.19%.  In fact, she has been a controlling shareholder (as defined in the Listing Rules, holding over 30% shares) as at July 2006; her shareholding as of October 2011 was about 56.23%.  This application for specific discovery was made at a time when Chu has become majority shareholder of Golden Resorts. 

52.  Fifthly, Chu has previously been held by the court to be an incredible witness, who had contrived a plot whereby employees of Golden Resorts and Kingston Securities, friends and relatives of such employees and clients of Kingston Securities bought shares and then signed proxy forms in favour of a scheme of arrangement.  The purchase was subject to a buy-back offer from Chu regardless of the market price. It was done with a view to boosting the head count in favour of the scheme at the court meeting.  Despite her denial, the court found Chu not to be credible and that Chu had devised a scheme as described.  See Re PCCW Ltd, HCMP 2382/2008, 6 April 2009, Kwan J (as she then was), para 70, 72(4), 111 and 116.  Such findings were upheld by the Court of Appeal in Re PCCW Ltd [2009] 3 HKC 292, 313 F-H.

53.  The inference to be drawn is that Chu has chosen to make disclosure only when it suited her. 

54.  Despite what was said in paragraphs 48-53, I do not think the rights of Golden Resorts can be taken away.  Golden Resorts is not a one-person company.  There are shareholders from the public and other independent directors.  I am unable to find, on the balance of probabilities, that Golden Resorts was the alter ego of Chu or that the directors were parties to some form of contrivance with Chu in the passing of the board resolution.  I am not satisfied that Chu is or was in possession, custody or power of the documents belonging to Golden Resorts, except in relation to classes 10 and 11 which are documents that Chu would have.

Necessity for disposal of the cause or matter and saving costs

55.  The court has to balance the interests of the plaintiffs, those of the defendant and the interest of the judge,

“33. … The judge accommodates all these interests by a balancing exercise in which he firstly takes into account the likely value of the materials to the person seeking discovery. This is expressed as assessing what information it is reasonable to suppose the documents contain and determining whether such information may, not will, enable the party seeking them to advance its own case or damage that of its opponent. After making this assessment he then places into the balance the interests of the opposing parties and his own interests as ultimate arbiter of the rights and liabilities of the parties and his case management responsibilities.” Toeca National Resources BV v Baron Capital Ltd & anor

56.  Even if relevant, if the probative value of the documents would be so slight as not to justify the inconvenience of giving discovery, discovery may be refused: Chan Hung v Yung Kwong Chung, HCA 216 & 217/2004, 15 January 2009, Deputy Judge Horace Wong SC, at para 32.

57.  I do not consider the probative value to be so slight as not to justify the inconvenience of giving discovery.  The relevant classes may include irrelevant materials (like letters on settling terms of an agreement).  That does not matter because it is really the way the correspondence or communication was handled internally and whether it was controlled by Chu that the discovery is aiming at.

58.  Mr Edward Chan SC also submits that since Chu has stated on affirmation that she does not have the documents, it would not assist in disposing fairly with the cause or matter by making an order of discovery against her.  Rather than saving costs, an order to that effect would increase costs.

59.  Given the hurdle of the board resolution, I agree it would not be costs saving to order Chu to personally produce the relevant classes, except for classes 10 and 11.

Discretion

60.  Mr Edward Chan SC has drawn to my attention that the Chu Summons was taken out very late – 7 years after the event, over 1 year after the witness statement was filed by Chu and 4 months after the latest list of documents was filed.  I do not consider this delay, in itself, is sufficient to deny the plaintiffs access to the documents.  I order discovery of classes 10 and 11 under the Chu Summons.

B.  THE GR SUMMONS

The applicable principles

61.  The court may order discovery against a non-party under section 42(1) of the High Court Ordinance, Cap 4:

“42 (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

    …”

To that end, Order 24, rules 7A and 8(2) are applicable.

62.  The governing principles have been set out in the case of Tullett Prebon (HK) Ltd v Chan Yeung Fong Nick & ors, HCA 2197/2009, 9 June 2011, paras 64(1) and 76:

(i)   It must be shown that the non-party is likely to have the documents in his possession, custody or power any documents which are relevant to an issue rising out of the claim.

(ii)  The test of relevance is the same Peruvian Guano test as for inter-parte discovery, as are the other related principles governing exercise of the court’s discretion: Hong Kong Civil Procedure 2012, Vol 1, para 24/7A/4-8.

(iii)    It must be shown that the order must be necessary either for disposing fairly of the matter or for saving costs.

(iv)    The order sought must identify with precision the document, documents or categories of documents which are required to be disclosed: Berkeley Administration Inc v McClelland.

(v)  Even if satisfied with the above, the court still has discretion to exercise.  It should be borne in mind that disclosure orders against third parties are exceptional.  It should not be used as a fishing exercise for documents nor speculative.  It should not be oppressive to the witness, eg by the terms being too wide.  It must identify the documents by means of a particular description and not a general description.

(vi)    It will be oppressive if the order required the third party to make fine judgments regarding the relevance of the documents; or if it requires him to undertake a search of an excessively large amount of documents; or if it does not specify the documents with reasonable particularity.  See ACCC v Shell (1999) 161 ALR 686.

(vii)   The court may also in its discretion refuse to order the disclosure of documents which are confidential: Re Global Info Ltd [1999] 1 BCLC 74 at 79a.

Documents sought

63.  Specific discovery is sought for the same classes of documents as those in the Chu Summons, plus one class of documents (“the financing documents”)[2] in respect of the Casa Real Acquisition, ie:

(a)  Loan applications and agreements, security documentation in respect of loans made by Golden Resorts; and

(b)  Correspondence between Golden Resorts and banks or companies providing those loans.

I need only concentrate on the relevant classes.

64.  Kingston has no interest in the outcome of this action.  It objects to the application on the grounds of (i) failure to prove possession; (ii) lack of relevance; (iii) lack of necessity for fair disposal of the matter; (iv) lack of adequate identification of the classes of documents; and (v) oppression.

Failure to prove that Kingston has possession, custody or power

65.  The plaintiffs’ solicitors have deposed to his belief that Kingston should have kept written records.  It is not sufficient to make a general affidavit based on a priori reasoning that certain classes of documents must be in his opponent’s possession or power: White v Spafford & Co [1901] 2 KB 241 (CA) at 246.

66.  Mr Lai has affirmed to the practice of Kingston:

(i)   of not keeping formal attendance notes for internal meetings or communications, and that even if attending officers took their own notes, they as a matter of practice would not be kept; and

(ii)  of destroying documents kept beyond the required 7 years under revenue law; since documents sought related to commercial transactions completed for more than 7 years, it is likely that those documents have been destroyed in accordance with usual practice.

67.  Mr Wong, counsel for Kingston, submits that the plaintiffs have failed to show that Kingston is “likely” to have or have had internal notes and correspondence in its possession, custody or control.  As for other documents, the plaintiffs fail to show that they are “likely to be in Kingston’s possession, custody or control. In this regard, section 42(1)(a) and (b) of the High Court Ordinance are worded to the clear effect that the court is only given the power to order a non-party to disclose documents which “are” in his possession, custody or power.  There is only jurisdiction for the Court to make a discovery order if it can be shown that the documents are (as opposed to “have been”) in the non-party’s possession, power or custody.

68.  Lai’s evidence must be viewed with caution for the reasons given in paragraphs 50 and 52.  He only came into employment of Kingston in 2008, years after the key transactions.  All that he could depose to was the practice of the company.  He only said that “for most of the time”, internal communications were conducted orally and not reduced into writing. He did not go so far as to assert that the documents sought (principally for the 2004/2005 period) had been destroyed.

69.  There is contrary evidence from the plaintiffs that Golden Resorts’ representatives did take meeting notes during the Casa Real negotiation.  It would have been likely for a listed company to keep such notes and have correspondence as part of its business practice.  The GR Summons taken out in November 2011 was just before expiry of the 7 year period for 2004 documents.  One would not expect Golden Resorts to have destroyed them pending resolution of the GR Summons.

70.  The plaintiffs have made out a prima facie case that the documents exist and are likely to be in the possession of Kingston.

Relevance

71.  The analyses on relevance under the Chu Summons apply.  As for the financing documents, it appears from Golden Resorts’ circular dated 18 April 2005 that part of the cash consideration for the Casa Real Acquisition of $750 million would be funded by bank financing. The plaintiffs say that this class of documents would likely reveal the true extent of the Chu’s involvement in the Casa Real Acquisition, including the question whether she was the beneficial controlling shareholder of Golden Resorts at that time.  Since it would be Golden Resorts taking out the loans, it is almost certain that Kingston would have possession, custody or power of the financing documents.  In my view, it is far-fetched to say that financing documents can reveal Chu’s controlling role.  I decline to order discovery of the financing documents.

NECESSITY EITHER FOR DISPOSING FAIRLY OF THE MATTER OR FOR SAVING COSTS

72.  The analyses under paragraphs 55-57 equally apply.

Lack of precise identification of document or categories of documents to be disclosed

73.  For the reasons given in paragraph 37 above, the complaint is unjustified.

OPPRESSION

74.   It will be oppressive if the order requires the third party to make fine judgments regarding the relevance of the documents; or if it requires him to undertake a search of an excessively large amount of documents; or if it does not specify the documents with reasonable particularity.  See ACCC v Shell.

75.  In reducing the categories of documents to be disclosed under the Chu Summons, I have already taken into account the need to bar the plaintiffs from fishing for evidence and acting on speculation.

76.  The relevant classes are well defined.  No fine judgment regarding relevance of documents need to be made by Kingston’s employees to decide whether a document falls within a class.

77.  As for the necessity to undertake asearch, Kingston says that an order for specific discovery will require it to undertake a search of an excessively large amount of documents of over 2,000 cartons.  It will require 2 out of 5 administrative staff costing $10,000 to undertake a full-time search for the documents for not less than 2 weeks.

78.  Oppression is not confined to the situation of asking a third party to undertake an extensive search.  Engaging a high percentage of his workforce in the search may also be oppressive in the sense of affecting the normal running of the business.

79.  Is “oppression” real in the circumstances of this case?  Each subsidiary keeps its own documents.  The 2,000 cartons are for all subsidiaries of Golden Resorts.  The relevant classes concern only a few subsidiaries, 2 key transactions and a period of about a year from negotiation to completion.

80.  If documents are kept for tax purposes and if there is a system of each department of the Group regularly destroying documents after 7 years, it is inconceivable that the contents of 2,000 cartons have not been labelled or indexed by reference to date, content or subsidiary for easy retrieval.

81.  In my view, the assertion of oppression is exaggerated and I reject the same.

OTHER FACTORS TO BE CONSIDERED IN EXERCISE OF DISCRETION

82.  The court may in its discretion refuse to order the disclosure of documents which are confidential: Re Global Info Ltd at 79a.

83.  There is no serious dispute that the documents sought contain confidential and/or sensitive commercial information privy to Kingston and its counter-parties.  However, all the transactions have been completed years ago.

84.  There is an implied undertaking as to confidentiality in discovery.  If that is not sufficient, the plaintiffs are prepared to give an express undertaking and I do require that undertaking as a condition for discovery.  The issue of confidentiality carries little weight.

85.  The plaintiffs have made their first port of call to the defendant before taking out the GR Summons.  Having considered all the circumstances, I consider it fair and appropriate to make an order for discovery of the relevant classes against Kingston.

SECURITY

86.  The court has power under Order 27, rule 7A(5) to make such order “conditional upon the applicant giving security for the costs of the person against whom it is made”.

87.  It is established that the usual costs order for non-party discovery is for the non-party to have the costs of the application and of the production of the document from the applicant: Tullett Prebon, at para 105.  There is no reason why the usual indemnity basis of costs applicable to a Norwich Pharmacal order should not be similarly applied to an application for non-party discovery: A Co v B Co [2002] 3 HKLRD 111, para 31.  On taxation or assessment of costs on indemnity basis, all costs are allowed except those unreasonably incurred and the receiving party will be given the benefit of the doubt: Hong Kong Civil Procedure 2012, Vol 1, para 62/App/11. 

88.  The plaintiffs are indisputably based in Macau.  Despite the issue of security being raised, they have not shown the existence of assets within the jurisdiction of Hong Kong. Indeed the plaintiffs do not dispute the need to provide security.  The dispute is on quantum of security.

89.  Kingston asks for security in the sum of $378,200.  I will not reduce the hourly rates or number of fee earners.  However, apart from perusal of documents, the substantive work done leading up to the hearing was the drafting of one affirmation of Chu and one of Mr Lai in opposition.  I appreciate, of course, that there may be further legal work required for Kingston to make discovery on affirmation. Even so, the costs claimed are excessive. I order security for costs in favour of Kingston, assessed on indemnity basis, at $100,000.  This will cover costs on discovery to be incurred after the hearing.  Additionally, I order the plaintiffs to bear the costs of Kingston in the first instance for the GR Summons. Such costs shall remain in the discretion of the trial judge who, by the time of trial, will be in a position to see what comes out of the discovery and its overall impact on the trial.

CONCLUSION

90.  On the Chu Summons, I make an order in terms of paragraphs 1-3, limiting discovery to classes 10 and 11.  The plaintiffs are partly successful but for the board resolution passed after the taking out of the Chu Summons. There is however an element of fishing involved. I make an order nisi that the plaintiffs’ costs be in the cause.

91.  On the GR Summons, I order as follows:

(1)  Upon fulfilment of the following conditions:

(i)  Within 14 days, provision of an express undertaking of confidentiality by the plaintiffs in terms agreed with Kingston (or, failing agreement, settled by the court);

(ii)  Within 14 days of the summary assessment referred to in sub-paragraph (3) below, payment of the costs of Kingston;

(iii)  Within 21 days, provision of security of costs of Kingston for the discovery by payment of $100,000 into court;

there be an order in terms of paragraphs 1-2 of the GR Summons, save that the documents to be disclosed shall be confined to classes 4, 7, 8, 11 and 12[3].

(2)  Costs of the summons including all costs reserved and this hearing shall be on an indemnity basis and be borne by the plaintiffs in the first instance in favour of Kingston.  Such costs as between the plaintiffs and the defendant shall remain in the discretion of the trial judge.

(3)  Costs of Kingston are to be summarily assessed on 27 December 2012 at 4:30 pm on the papers without attendance.  Kingston shall file and serve its statement of costs by 14 December 2012.  The plaintiffs shall file and serve their grounds in opposition by 21 December 2012.

92.  I thank counsel for their assistance.