SINODENTAL INVESTMENTS LTD AND OTHERS v. SIN CHUNG YIN RONALD AND OTHERS

HCA 2176/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 2176 OF 2012

_________________________

_________________________

_____________

D E C I S I O N

_____________

THE APPLICATION

1.  This is yet another application by the plaintiffs against the 4^th and 7^th – 18^th defendants (collectively called “the defendants”) under O.24, r.7 and r.11 RHC for the following categories of documents:

a. “Category A refers todocuments relating to:

i. D13’s negotiation with Galaxy Interior Design Ltd (“Galaxy”) of the tenancy of the XD Group’s Shau Kei Wan clinic (“XD SKW Clinic”), D13’s tenancy agreement with Galaxy and payment records for rental deposits.

ii. D15’s negotiation with Stars Technology Ltd (“Stars”) of the tenancy of the XD Group’s North Point clinic (“XD NP Clinic”), D15’s tenancy agreement with Stars and payment records for rental deposits.

(§§1-2 to Schedule of the Summons [A/97-98])

b. Category B refers to bank records showing the capital injection into D7-18.

c. Category C refers to audited financial statements of D7-18.”[1]

2.  This application is contested by the defendants and the parties are legally represented.[2]

THE FACTUAL BACKGROUND

3.  The plaintiffs have summarized the factual background as follows:

“a. In brief, Ps are part of a group of companies which provide a wide range of dental care services (the “H&C Group”).  Ps claim that D1-6 have set up a group of companies, D7-18 (the “XD Group”), in competition with the H&C Group’s business.  D12-18 operated a number of dental clinics (the “XD Clinics”) in competition with the H&C Group’s clinics.

b. Ps claim against D1-6 for breaches of their shareholders’ agreements, employment agreements, fiduciary duties as employees and/or directors for their involvement in the formation and operation of the XD Clinics.

c. Further or in the alternative, Ps plead that D4 and D7-18 conspired with one another in carrying out unlawful competition against the H&C Group’s business by unlawful means [A/40-46/§§16-17].[3]”

THE DEFENDANTS’ GROUND OF OBJECTION

4.  The defendants’ grounds of objection are as follows:

a. In relation to the tenancy for Shau Kei Wan clinic, neither Galaxy nor Kinvic are parties to this action.  The defendants say that the 13^th defendant is not a party to the tenancy agreement and it had no knowledge of the rental deposit records of the Shau Kei Wan clinic.

b. The same reasons for the Shau Kei Wan tenancy apply to the North Point clinic tenancy agreement in relation to the 15^th defendant as neither Butterfly nor Stars are parties to this action and the 15^th defendant has no knowledge of the rental deposit records of the North Point clinic.

c. There is a real risk that the said payment documents of Kinvic or Stars would incriminate the 13th Defendant, the 15th Defendant or other Defendants or exposed these parties to criminal prosecution.

d. The defendants have already affirmed that “there is no written negotiation document concerning SKW and/or NP premises.[4]”

e. As to the banking records and the financial documents, the defendants have made comments, which will be dealt with in the discussion of those documents below.

DISCUSSION

The relevant legal principles

5.  Both parties have set out extensively the relevant legal principles on specific discovery cited in the previous authorities of my decision.  I do not propose to repeat them here.  Those legal principles would be applied in the discussion below.  In fact, it can be seen that the parties do not dispute over those legal principles cited in the authorities.  It is a matter of opinion or positions of the parties that they are unable to resolve their disputes themselves.  In my view, the difference in their opinions must be considered in light of the factual issues to be resolved in the trial.

The plaintiffs’ facts as pleaded

6.  The plaintiffs have set out the fundamental factual issues in support of their case against the defendants, upon which they now apply for specific discovery against the defendants.  I shall set out the plaintiffs’ facts as follows:

“ a. The foundation to Ps’ claims (set out in §§4-5 above) is the allegation that D1-6 participated in the establishment, management, operation and control of the XD Group to carry on businesses in direct competition with that of the H&C Group [A/40/§16].

b. D4 is a key player in the formation of the XD Group. It is pleaded that D4 was engaged as P3’s centre manager and was later promoted to general manager. On 4.1.2012, his employment was terminated [A/31/§3].

c. By reason of the following facts, it is pleaded that D4 has participated in the establishment, management, operation and control of the XD Group:

i. D4 is the sole shareholder of D8-18 [A/34, 37/§9(2, 6, 7)].

ii. D7-18 each bears the prefix “Xpert Dental” in its name [A/34-39/§9].

iii. The first XD Group company that was formed was D7, on 29.4.2011. It provides dental training courses in competition with a H&C Group company called Kellett Healthcare Training Ltd. D4 is the course director of D7 [A/34, 39/§9(1, 11)].

iv. Shortly thereafter, D8-11 were formed on 13.4.2012. D4 is the director of D8-11 [A/34/§9(2)].

v. Subsequently, D12-18 were formed between 15.5 and 10.10.2012 [A/35-37/§9(3-7)]. D4 was a director of each of these companies until late 2012 [A/36-37/§9(5-7)]. D12-18 operate clinics which compete with, or threaten to compete with, the H&C Clinics [A/39/§9(10)].

vi. In around 6.2.2012, D4 prepared and designed the logo of the XD Group [A/41/§16(2)].

vii. Since around 8.2.2012, D4 was involved in the interior fitting out of the XD NP Clinic (operated by D15) [A/41/§16(3)].”

7.  The defendants have raised no objection to the factual issues above.  As such, the parties’ argument must be considered upon the above facts.

8.  I shall now discuss the plaintiffs’ application for the categories of documents.

Documents relating to D13’s negotiation with Galaxy on XD SKW Clinic and payment records for rental deposits

9.  It will be convenient to set out the full reasons for the plaintiffs to discover the category A documents relating to the SKW clinic and the NP clinic tenancies:

“23. By seeking the Category A documents, Ps are not seeking to challenge the propriety of the tenancy arrangements. Rather, Ps are seeking to find answers to the obviously relevant questions as to:

(1) Who did what in negotiating, devising and implementing the arrangements that existed for D13 and D15’s purported taking up of the XD SKW Clinic and XD NP Clinic tenancies;

(2) Who ultimately paid the rental deposits under the SKW Tenancy and NP Tenancy; and

(3) Whether such arrangements were implemented for the purposes of furthering the conspiracy in competing with the H&C Group.”[5]

10.  The main reason is 23(3), evidence to show the arrangements furthering the conspiracy in competing with the H&C Group.  We must bear in mind that for the present proceedings, the investigation of the facts should focus on the defendants.

11.  The plaintiffs have pleaded that at the material times:

a. Between April 2011 and July 2012, a group of companies bearing a similar prefix “Xpert Dental” to the plaintiffs’ company names including the 13^th and the 15^th defendants were established in competition with the plaintiffs.

b. The 13^th defendant and the 15^th defendant were set up in May 2012.  See § 9(3)(ii) & (iv) of the Amended Statement of Claim.

c. The directors of the 13^th defendant and the 15^th defendant were the 4^th defendant, Dr. Emily Tsang and Dr. Angela Ho.  See §9(5) of the Amended Statement of Claim.

12.  The plaintiffs admit that they have difficulty in the documents they attempt to discover as they have difficulty in proving that the documents are in the possession, custody or power of the defendants.  However, this issue will become insignificant even if the plaintiffs are able to establish this fundamental condition for specific discovery as the documents are not relevant for the trial or they will not be for a fair trial or for saving costs as will be discussed below.

13.  It is quite difficult to understand why the plaintiffs should refer to the analysis in Kao Lee & Yip v Koo Hoi Yan [2003] 3 HKLRD 296 where the discussion was on when a fiduciary or employee crosses the line between legitimate and illegitimate preparatory steps to start a competing business.  The factual disputes in this matter do not match those discussed in Kao Lee & Yip case.  See §6 supra.  In any event, the plaintiffs rely upon the complicated factual situations below in support of their application for the documents under category A.

14.  The plaintiffs explain why the documents under this category are necessary.  They say that the property of the tenancy agreement of the 13^th defendant was first purchased by Galaxy, a company controlled by the 1^st to 3^rd defendants.  Galaxy entered into a tenancy agreement with a company called Kinvic Ltd and Dr. Angela Ho signed the tenancy agreement for Kinvic.  In March 2012, the property was then sold to another company, which nominated another company called Cheung Co to take up the property.  In November 2012, the property was sold to another company called TYW, the present landlord.  Upon discovery ordered by this Court, the 13^th defendant only produced rents records which did not show who paid the rental deposit.  Being suspicious, the plaintiffs had written to the 13^th defendant’s solicitors for an explanation.  The solicitors did not give the particulars of the transactions leading to the formation of the tenancy agreement, especially on who had paid the rental deposit for the tenancy agreement, the plaintiffs ask for discovery of the documents as set out in the schedule.

15.  It is apparent that those transactions before the tenancy agreements of the 13^th and the 15^th defendants were the conveyancing transactions of the respective properties.

16.  What the plaintiffs are trying to establish at trial in support of their conspiracy claims against the defendants is the fact that those tenancy agreements for the 13^th and 15^th defendants respectively were set up to accommodate their business in competition with the plaintiffs’ business.  The fact of who had paid the rental deposit may be of assistance to identify the beneficial lessees of the properties.  The real question as pleaded in the pleadings is whether the defendants or any one or several of them had conspired together by setting up the tenancies to accommodate the businesses in competition with those of the plaintiffs’.  Evidence of who had paid the rental deposit may not be conclusive as to who the beneficial owners of those tenancies are.  There are a number of possibilities.  They might be the lenders of the fund under separate agreement without taking up the beneficial interest of the leases.  As revealed in the letters between the solicitors of the respective parties, there might have been set-off of money paid for the conveyancing transactions.  The parameter of discovery should be whether the defendants were part of the conspiracy to compete with the plaintiffs.  This is the pleaded case of the plaintiffs.  Therefore, the question is whether it is necessary to require those documents as set out in the schedule for this purpose.

17.  In my view, it is not necessary to obtain those documents as proposed by the plaintiffs to establish the fact discussed above.  The prima facie fact has been established that the 13^th and the 15^th defendants were established by the 4^th defendant as the director of the companies until late 2012.  See §6(c)(v) supra.  The plaintiffs have the information of the shareholders of the 13^th and 15^th defendants.

18.  As to who had paid the rental deposits for the properties under the respective tenancy agreements is, in my view, insignificant as the burden will be on the defendants to show that the money did not come from the shareholders of the companies.

19.  The plaintiffs may still argue that in order to expel any ambiguity or argument as who the real owners of the tenancy agreements are, the ones who had paid the rental deposits should be identified.  It may be so.  But to embark on an expedition of such massive discovery of the documents as proposed is, in my view, disproportionate to the probative value of the evidence obtained.  The plaintiffs can, as suggested by the defendants, administer interrogatory on the defendants as to who had paid the rental deposits for the properties under the tenancy agreements entered into by the 13^th and 15^th defendants respectively.  If they refuse to answer, the matter can be taken further.  In any event, they have to answer the questions at trial during cross-examination.  Besides, the plaintiffs may discover the financial statements under the category B and category C for the information on top of those that I have mentioned above.

20.  Furthermore, the defendants have already affirmed: “there [is] no written negotiation documents concerning SKW and/or NP premises”.  The affidavit evidence must be taken as conclusive for the interlocutory applications.  See Ready Set Goal Ltd v Kay-El (Hong Kong) Ltd. [2015] HKEC 731.  However, in view of the arguments as put to this Court this morning, the expression in the 2^nd affirmation of the defendants may need clarification.  This may need to call upon the affirmant to make another affirmation to clarify or to order cross-examination of him in another hearing, which is depreciated by the authorities.  I do not propose to take this course for the reasons stated for category A documents.

21.  The discovery of the documents as proposed by the plaintiffs will not be for a fair trial as they may even muddle the issues.  They are not saving costs.  As such, the application for the documents is dismissed.

Documents relating to D15’s negotiation with Stars Technology Ltd on XD NP Clinic and payment records for rental deposits

22.  The plaintiffs’ reasons for the discovery of the documents of the NP clinic are similar to those for the SKW clinic as discussed above.  For the same reasons, I dismiss the plaintiffs’ application for discovery of the documents as requested.

23.  These documents are under category A, which I dismissed.

Category B & C: bank records showing the capital injection into D7-18 and the audited financial statements of D7-18

24.  Paragraph 30 of the plaintiffs’ written submissions states: “Category B refers to bank records showing the capital injection into D7-18.  Category C refers to the audited financial statements of D7-18.”

25.  The plaintiffs submit that “the documents are clearly relevant as they would show the parties who have funded the establishment and operation of D7-18 by way of injection of capital: 4th Lee §§13-14 [A/125-126].  It will also show when the companies were put in funds.”[6]

26.  The defendants’ grounds of objection to discovery of these categories of documents can be dealt with below:

a. “capital injection” and “the period covered” are not precise.  They have raised an example of payment for the purchase of stationery.  This can be dealt with briefly.  The interpretation of such terms must be within the context of the pleadings.  Properly construed, it is not difficult to understand that capital injection refers to the money injected for the purpose of setting up the clinics in question.  The money can, of course, apply to the purchase of stationery for the clinics, but that is not the main purpose.  The period covered is again clear from the pleadings.

b. The bank records or audited financial statements would not show who established XD Group and XD Clinics.  This is disputed by the plaintiffs. On a logical understanding of the matter, one can readily see the defendants’ argument is trying to split the meaning of the words, which will not assist the Court to make the decision.  The purpose of such financial information has been stated quite clearly in the plaintiffs’ 4^th affirmation of Lee Wan Tai – to show or shed light on the true beneficial owner(s) of the 7^th to 18^th defendants.  See §14.  It is quite clear that the information is relevant to paragraph 16(26) of the Amended Statement of Claim, in which the plaintiffs pleaded, inter alia, the 1^st to 6^th defendants participated in the establishment, management, operation and/or control of the XD Group of companies and clinics to carry on businesses in competition with that of the Health & Care Group.  At §20 of the Defence, the defendants specifically denied paragraph 16 and put the plaintiffs to strict proof.  Since the defendants have made such a demand, it is only fair for the plaintiffs to have an opportunity of making discovery of the defendants’ financial statements so that they may prove their case.  If the defendants insist that those financial documents do not show who established XD Group and XD Clinics, it will be incumbent upon the defendants to tell the plaintiffs and the court where such information can be found.  This is not the burden on the defendants to assist the plaintiffs’ case, but rather an obligation on them to clear the allegations against them to the court as they have raised strict proof upon the plaintiffs.  The defendants have not said that they do not have such information in the affirmations.

c. The fact that the plaintiffs may use interrogatories to obtain the answer is neither here nor there.  The plaintiffs are at liberty to adopt the appropriate ways under the law as they may be legally advised.  The question here is whether the plaintiffs are able to establish their case for their application.

d. That the audited financial statements contained trade secret and confidential information of the defendants are only factors that the court should take into account but are not available to the defendants as the defence for discovery.  See Science Research Council v Nassé [1980] AC 1028, Fenn Kar Bak Lily & Another v Matthew Chan & Another (unreported, HCPI402/2008 Bharwaney J.) 5 April 2011.  See also Tullett Prebon (Hong Kong ) Ltd. v Chan Yeung Fong Nick & Others (unreported, HCA2197/2009 To J. 9 June 2011 §18)  This Decision also held that the discovery of the documents was under an implied undertaking that the documents were not to be used for any other purpose.

27.  The defendants’ objection to these categories fails.

28.  The plaintiffs have succeeded in their application for Category B and Category C.

COSTS

29.  As to the costs of this application, having considered counsel’s submissions, I consider the appropriate order should be each party bears its own costs, with counsel’s certificate.

ORDERS

30.  I shall  now make an order in terms as follows:

a. Category A is dismissed;

b. Category B and Category C are allowed and the defendants shall disclose those documents, subject to redaction of any irrelevant materials to be agreed between the solicitors;

c. Liberty to apply;

d. Costs of this application, including the costs reserved be as per paragraph 29 supra.