ENRICH FUTURE LTD AND OTHERS v. DELOITTE TOUCHE TOHMATSU (a firm)

HCCL 10/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO 10 OF 2011

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D E C I S I O N

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Background

1.  On 22 June 2016, this court handed down its decision (“Decision”) on the application made by the Defendant for production of the affidavits (“Yen affidavits”) relied upon by the Liquidators of Sunlink International Holdings Limited (“Sunlink”) in their ex parte applications to the court for extensions of the validity of the Writ issued on 14 April 2011 (“Extensions”). The background of the dispute is set out in the Decision and will not be repeated here. 

2.  As ordered by the court, the disputed Yen affidavits in their unredacted form were furnished by the Liquidators to the Defendant.

3.  By its summons issued on 22 July 2016 (“Summons”), the Defendant seeks further disclosure of additional documents (generally referred to as “Documents”) which it claims are necessary for the fair disposal of the Defendant’s adjourned application to set aside the orders granted for the Extensions (“Setting Aside Application”).  The application for disclosure is made pursuant to O 24 rr 7, 10 and 11 RHC.

Relevant principles

4.  The legal principles relevant to general discovery and relevance are not in dispute in this application, save in the limited areas to be particularized below. 

5.  The Defendant’s application is based on the fact that in the Yen affidavits relied upon in the ex parte applications for the Extensions, the Liquidators had referred to the Documents listed in Annexure 1 to the Summons, and it is entitled to an order for production by virtue of O 24 r 7. As for the Documents listed in Annexure 2 to the Summons, the Defendant claims that they are necessary for fairly disposing of the Setting Aside Application.

6.  The increasing tendency and emphasis of the courts, post-CJR, is to limit discovery in the context of the court’s duty to actively manage cases, instead of routinely allowing full, automatic Peruvian Guano discovery. As this court ruled in Sunny Tadjudin v Bank of America, unreported, HCA 322/2008, 22 December 2011:

“It is also clear that post CJR, the Court should give effect to the underlying objectives of the rules and procedures when it exercises its powers under Order 24 and when it interprets the provisions of Order 24. In deciding whether any document relates to a matter in question in the action, whether any document is or has been in the possession, custody or power of a party, and whether discovery of the documents sought is necessary either for disposing fairly of the cause or matter or for saving costs, the Court should always bear in mind the objectives of cost-effectiveness, expeditious disposal of cases, proportionality, procedural economy and ensurance of fairness between the parties.”

7.  This court has also made it clear that cases (such as the present one) are put on the Commercial List with the objective of having these disputes resolved in a way which commercial men can understand and appreciate, and this necessarily involves having their disputes resolved promptly, efficiently, and with unnecessary costs and delay.  Cases on the Commercial List can be dealt with more speedily since the Commercial Judge can take control of his or her court diary to accommodate hearings, and interlocutory applications are heard by the judge and not by a master.  However, this cannot be achieved if the Commercial List diary is clogged with unnecessary interlocutory applications and unwarranted hearings which are not confined to matters of substance, with the objective of facilitating an early and effective trial for the resolution of the core issues of the real dispute between the parties.  It is with these objectives in mind that trial dates are fixed for cases on the Commercial List at the 1^st case management hearing which is to be initiated upon close of pleadings, pursuant to PD SL 1.1. 

8.  The present summons for discovery is to be considered and will be disposed of with the above general principles in mind.  In addition, O 24 r 13 clearly and specifically provides that no order for the production of any documents for inspection or to the Court or for the supply of a copy of any document shall be made under any of the rules under O 24, unless the Court is of the opinion that the order is necessary, either for disposing fairly of the cause or matter, or for saving costs. 

Cause or matter

9.  The references made in O 24 are to any party to “a cause or matter” (in O 24 r 7 (1) and r 10 (1)), to documents which relate “to one or more of the matters in question in the cause or matter” (in r 7 (3)) and to the necessity for “disposing fairly of the cause or matter” (r 13 (1)).  “Cause or matter” is a general term, and both “cause” and “matter” are widely defined in s 2 of the High Court Ordinance. 

10.  I am prepared to accept the submissions made on behalf of the Defendant, that under O 24 r 7, discovery may be applied for and an order for discovery may be made of documents, if they relate to one or more of the matters in question in the cause or matter being dealt with by the court at any stage of the proceedings before the trial, so long as such documents are necessary for the fair disposal of the cause or matter, including an interlocutory application before trial.  This was so held by the court in Fiona Trust Holding Corp v Privalov (2007) EWHC 39 and in Dubai Bank v Galadari (No 2) [1990] 1WLR 731, and applied in Zida Technologies Ltd v Tiga Technologies Ltd [2001] 3 HKLRD 698.  However, the stage at which the discovery is sought, the questions in the relevant cause or matter to which the discovery is said to relate, the nature of the interlocutory application, etc are all matters which the court will take into consideration, in deciding whether discovery should be ordered at the relevant stage of the proceedings, bearing in mind the objectives of proportionality, procedural economy, costs effectiveness, expeditious disposal of cases etc.  I agree with the sentiments expressed by the court in Turnstem Ltd v Bhanderi [2004] EWHC 1318, that it should be rare, and often inappropriate, for the court to order full-blown discovery, or relief which is tantamount to compelling further and better particulars, interrogatories or cross-examination of witnesses on matters deposed to in affidavits filed for interlocutory applications or summary determinations.

“Reference” and relevance

11.  I do not accept that a document referred to, or in which reference is made in a pleading, affidavit or witness statement must necessarily be relevant to the matter in question in a cause or matter.  A party cannot make a document relevant simply by making reference to it in its pleading or affidavit filed in a cause or matter, or by exhorting it to be so.  As Fok JA (as His Lordship then was) explained the application of O24 rr10 and 11 in Moulin Global Eyecare Holdings Ltd v Olivia Lee Sin Mei [2013] 3 HKLRD 72 (CA):

“There are thus two separate stages to be considered, although in practice these will usually be examined together. First, the party who has referred to the document in a pleading or affidavit bears the burden of showing good cause why an order for production should not be made. As a matter of practicality, at that stage, the fact of reference to a document in a pleading or affidavit will make it difficult for the referring party to contend that the document does not exist and it may also make it difficult for him to contend that it is not relevant.” (emphases added)

It is still possible for the party to contend, and to persuade the court that despite reference being made to it, the document is not, in fact, relevant to the case and the issues for determination.

12.  With the above principles in mind, I turn to the different categories of the Documents.

Drafts of the Statement of Claim for the action

13.  Under items 1, 3, 16, 18 and 22 of Annexure 1 and item 3 of Annexure 2, the Defendant seeks disclosure of the drafts of the statement of claim filed in these proceedings.  It is claimed that the drafts are referred to in Yen 2, Yen 3 and Yen 4, and hence discloseable under O 24 r 10, and otherwise under r 7 as relating to one or more of the matters in question in the Setting Aside Application. 

14.  In Yen 2 which was filed in March 2013 in support of the Liquidators’ application for the extension of the writ, the Liquidators stated that the 1^st Plaintiff had sought legal advice from Counsel in 2012 “in relation to analyzing documents, formulating a claim and causes of action against the Defendant, drafting a Statement of Claim against the Defendant and evaluating the strategy going forward”.  The Liquidators further stated that the 1^st Plaintiff had not yet finalized its statement of claim (at the time of the making of Yen 2 in March 2013).  In each of Yen 3 filed in February 2014 and Yen 4 filed in April 2015 in support of applications for further Extensions, the Liquidators repeated the statement that the 1^st Plaintiff had not yet finalized the statement of claim. 

15.  According to the Defendant, the draft statement of claim was also referred to in an exhibit to Yen 4 filed in April 2015, when the Liquidators referred to HCMP 91/2015 (“Sanction Proceedings”) which was commenced by the Liquidators as the scheme administrators of Sunlink, to seek the leave of the companies court to enter into a deed of assignment with funders (“Deed”). The exhibit referred to a meeting of the Scheme Committee members which was held on 16 July 2014, at which the scheme administrators reported that upon obtaining funding and leave from the court, the scheme administrators would consolidate the various proceedings including the present action, “and engage Senior Counsel to settle the draft consolidated Statement of Claim”.  The Liquidators further stated in Yen 4 that the 1^st Plaintiff had “not yet finalized its Statement of Claim” at the time of the making of Yen 4, on 1 April 2015.

16.  I am prepared to accept that reference made in an exhibit to an affidavit is tantamount to a reference made in the affidavit itself, as found by the court in Shun Kai Finance Co Ltd v Japan Leasing (HK) Ltd (in liq) (No 2) [2001] 1 HKC 636 at 641, following Re Hinchliffe [1895] 1 Ch 117 at 120. 

17.  As Slade LJ pointed out in Dubai Bank v Galadari (No 2) [1990] 1WLR 731 at 737, a general reference to a class of documents may be sufficient to obtain inspection of documents under O 24 r 10 (1), provided that it is indeed a reference, but a direct allusion of the document is required.  Emphasis was made in the judgment in Dubai Bank that the task of the court must always be to extract the fair meaning of the words used in their context.  In Zida Technologies Ltd v Tiga Technologies Ltd [2001] 3 HKLRD 698, the court held that if a document is not specifically mentioned, its existence is prohibited from being inferred.  As Slade LJ explained in Dubai Bank, “reference by inference” cannot be read into the phrase “reference is made to any document” as used in O 24 r 10 (1).

18.  Given their plain and fair reading, I do not accept the references made in Yen 2, Yen 3 and Yen 4 (and its exhibit) can be said to be direct references to a draft statement of claim which existed at the material and relevant time. In particular, the references to the instruction of counsel to advise on the claims and to settle the statement of claim cannot be any direct reference to a document which existed.  They are references to the process of the preparation of the document and to the work for the commencement of the present action.

19.  Even if I am wrong on the lack of reference to the draft statement of claim, I am not satisfied that the production of the drafts of the statement of claim as they existed at different stages of the Liquidators’ applications for the Extensions is necessary, either for the fair disposal of the cause or matter, or for saving costs.  According to the Defendant, the production of the drafts demonstrate the state of readiness of the statement of claim for filing and use in the present action, whether there is delay on the part of the Liquidators, and whether there was good reason for the Extensions (which will be the matter in issue for determination in the Setting Aside Application).

20.  Whether or not there was delay on the part of the Liquidators in the service of the Writ and in the finalization of the statement of claim can be fairly argued by the Defendant and the Liquidators, on the materials and documents so far served on and supplied to the Defendant.  The facts as to when the preparation of the draft statement of claim commenced, and when the Liquidators were provided with documents by the banks, by the Defendant and by any third parties, have been stated and can be ascertained from the Yen affidavits already filed on behalf of the Liquidators in these and in the Sanction Proceedings, and provided to the Defendant (together with the exhibits), without the further Documents now sought.  Arguments can be made for the Defendant on the basis of the facts stated in the Yen affidavits.

21.  Even if the drafts of the statement of claim were provided by the Liquidators, they would not set out the evidence available to the Liquidators as a result of the investigations made or completed (or yet to be completed) by the Liquidators at the relevant time.

22.  As Counsel has highlighted on behalf of the Defendant, the readiness of the statement of claim is not, on the Defendant’s case, a relevant or good reason for the Extensions.  The state of readiness (or otherwise) of the statement of claim, is therefore simply irrelevant.

23.  The discovery now sought is at an early stage of the proceedings, for the purpose of the Setting Aside Application.  Bearing in mind the issue to be determined at the Setting Aside Application, which is confined to whether there were good reasons for the Extensions, it would in my view be totally disproportionate to order full discovery of the drafts of the statement of claim at different stages, for the purpose of showing whether or not the Liquidators were ready with the service of the writ at each stage.

24.  Finally, on the question of privilege, I accept that the drafts of the statement of claim were privileged documents made in contemplation of litigation and prepared for the purpose of seeking legal advice (Visx Inc v Nidex Co [1999] FSR 91), and that privilege has not been waived by the references to the drafts not having been finalized, or to counsel to be instructed to settle the same.  There was no reliance on the contents of the drafts (Marubeni Corporation v Aristides A Alafouzos (6 November 1986) Westlaw transcript).  The Liquidators simply stated that the effect of any drafts of the statement of claim was that they were incomplete, or not finalized.  Such reference does not constitute deployment of the drafts in evidence (Nea Karteria Maritime Co v Atlantic and Great Lakes Steamship Corp [1981] Com LR 132, 139; General Accident Fire and Life Corp v Tanter [1984] 1 WLR 100).

25.  I refuse the application for discovery of items 1, 3, 16, 18 and 22 of Annexure 1 and item 3 of Annexure 2 of the Summons.

Report by EY to the scheme committee members

26.  The Liquidators have deposed by affidavit that the document does not exist.  That is conclusive for present purposes, and no order will be made.

Documents filed in related proceedings

27.  The Defendant seeks copies of the petition and affidavits filed in: (1) winding up proceedings against Grand Asia International Ltd (“Grand Asia”); (2) proceedings against the former chairman and director of Sunlink (“Chairman”); and (3) the Liquidators’ other proceedings against the Defendant, which have not yet been served. 

28.  Grand Asia is referred to in the Statement of Claim as a “false supplier” to the companies in the Sunlink group, in the fictitious transactions and fraud which were allegedly not detected as a result of the Defendant’s negligence in the auditing of the accounts of the Sunlink group.  According to the Defendant, the documents which were filed in the proceedings for the winding-up of Grand Asia and the appointment of provisional liquidators will provide contemporaneous evidence of the investigations made by the Liquidators into the transactions, and the state of their knowledge relating to such transactions involving Grand Asia (and the alleged fraud) as at October 2010, 5 years before the writ was issued in these proceedings.  The documents sought therefore relate to the issue of when the Liquidators had sufficient knowledge of the alleged fraud, to be in a position to serve the writ in these proceedings.

29.  The documents relating to the winding up of Grand Asia were not referred to in the Yen affidavits made in support of the applications for the Extensions. They were referred to in the order made by the court for the appointment of provisional liquidators to Grand Asia, which order was exhibited as part of the report made by the provisional liquidators of Grand Asia to the court.

30.  The question of any delay on the part of the Liquidators in the service of the writ in these proceedings, and whether it was necessary for the Liquidators to obtain evidence in respect of Grand Asia before the service of the writ, can be adequately and fairly argued on behalf of the Defendant in the Setting Aside Application, without the need to examine the documents filed in the Grand Asia liquidation proceedings.  Documents relating to the liquidation of Grand Asia do not relate to the questions for determination at the trial of these proceedings, and in the context of the issues to be determined in the Setting Aside Application, it will be disproportionate and a waste of time and legal costs to order the discovery sought.

31.  The application for discovery of items 4 to 6 of Annexure 1 is refused.

32.  For the same reasons, I refuse the application for discovery of item 1 of Annexure 2, in relation to the pleadings and affirmations filed and the decision of Harris J in the proceedings against the Chairman.  According to the Defendant, these documents show the state of knowledge of the Liquidators in relation to the fraud and fictitious transactions involving the Sunlink group. The fictitious transactions were allegedly created or procured by the Chairman, through false accounting and forged documents to produce false or higher accounts receivables.  Proceedings have been commenced against the Chairman for damages in respect of his breach of fiduciary duties.  These documents are unnecessary either for the fair disposal of the issues for determination in the Setting Aside Application, or for saving costs, and to order discovery will be totally disproportionate to the issues raised in the Setting Aside Application.

33.  Likewise, the order and affidavits filed in HCCL 17/2013 for the extension of the writ in that action are not relevant, and are unnecessary to the determination of the issue in the Setting Aside Application: of whether the writ should be renewed for good reasons in this (and not any other) action.  This issue can be adequately and fairly argued and disposed of on the documents already supplied in this action, and it will be a fishing expedition to seek discovery of documents in another action, in an attempt to see whether they will reveal matters relevant to this action.

Documents relating to the Sanction Proceedings

34.  The Defendant seeks discovery of the exhibits to the affirmation filed on behalf of the Liquidators in the Sanction Proceedings, for leave to enter into the funding arrangements for this action.  These documents include the skeleton submissions in respect of a hearing on 20 April 2015 in the Sanction Proceedings.  According to the Defendant, the documents are relevant to the question of whether funding was sought with appropriate expedition.

35.  In paragraph 10 of my Decision dated 22 June 2016, I already stated my view that the Defendant was already informed of the fact of the restructuring involving the Plaintiffs in this case, of the Plaintiffs having sought the court’s sanction for their funding arrangement, and that whether the restructuring and funding arrangements constitute good reasons for the Extensions can be argued on behalf of the Defendant, without sight of the restructuring agreements, the details of the restructuring scheme, and of the funding.  This clearly remains my view.  Having now been furnished with the unredacted Yen affidavits ordered to be supplied, I have no hesitation in finding that the further Documents are unnecessary for the fair disposal of the Setting Aside Application, and that no order for further discovery should be made by virtue of O 24 r 13.

36.  I refuse the application for discovery of items 19 of Annexure 1 and 4 of Annexure 2.

Correspondence with the funders

37.  It is totally unnecessary for the Defendant to have discovery of the correspondence exchanged between the Liquidators and the funders or potential funders, for arguing whether the Liquidators were dilatory in seeking the Extensions.  The relevant facts as to whether there were good reasons for the Extensions of the writ have all been stated and are contained in the Yen affidavits and documents already supplied.  As the Defendant itself has repeated throughout, the lack of funding is not a factor which is relevant at all to the consideration of whether the writ should be renewed or extended. Arguments can more than adequately be made for the purposes of the Setting Aside Application, and it is totally irrelevant whether the Liquidators had made adequate efforts to seek funding, when the Liquidators commenced discussions with potential funders, and whether their efforts were made with appropriate expedition.  Pursuing discovery of the correspondence with the funders will only waste time and costs. 

38.  The application for discovery of item 2 of Annexure 2 is accordingly refused.

Bank statements and correspondence

39.  The Defendant seeks discovery of bank statements and correspondence, which were referred to in Yen 3, when the Liquidators explained the work they had done and inquiries which they had made with various banks, at which companies within the Sunlink group had maintained accounts.  The discovery sought by the Defendant is for copies of the bank statements and cheques which the Liquidators had obtained from the banks, and of the correspondence exchanged between the Liquidators and the various banks, on the basis that these are relevant to “understanding the work carried out by the Liquidators and their identification of the questionable transactions underlying the falsification of the Sunlink group’s financial statements”. 

40.  The Yen affidavits already give adequate information, setting out the facts as to the time when such work was done, when the documents were requested from the banks and when the relevant documents were received.  At this stage and for the purpose of the Setting Aside Application, the bank statements, cheques and correspondence asked for by the Defendant are totally unnecessary to the matters in question for determination on the Setting Aside Application. The Defendant acknowledges this, since Counsel’s submission is that the Setting Aside Application will not involve any forensic analysis of the banking documents.  To order discovery of this wide range of documents is not only unnecessary but also oppressive.  It wastes time and costs, and will delay the disposal of the Setting Aside Application. 

41.  For these reasons, the application for discovery of items 7-15 of Annexure 1 is refused.

Conclusion

42.  The application for discovery of the Documents is refused, and the Summons is dismissed.  The costs order nisi is that such costs are to be paid by the Defendant to the Plaintiffs, with certificate for Counsel.

43.  I give leave to the Defendant to amend the Summons.  The Defendant is to pay the costs of and occasioned by its summons of 3 January 2017 to amend the Summons seeking discovery.