LIU HSIAO CHENG v. WONG SHU WAI AND OTHERS

HCA 1278/2013

[2019] HKCFI 115

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 1278 OF 2013

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（by original action）

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（by counterclaim）

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D E C I S I O N

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INTRODUCTION

1.  On 29 July 2016, Master J Wong made 2 orders, namely:

(1)  “the Amendment Order” - granting leave to the 1^st Defendant (by original action) and the Plaintiff (by counterclaim) (“Wong”) to amend his discovery summons dated 12 October 2015 (“the Discovery Summons”) pursuant to an amendment summons dated 21 April 2016 (“the Amendment Summons”); and

(2)  “the Discovery Order” - ordering the Plaintiff (by original action) and the 1^st Defendant (by counterclaim) (“Liu”) to make discovery of 2 classes of documents more particularly described below under the Discovery Summons as amended.

2.  By a Notice of Appeal dated 11 August 2016, Liu appealed against the Amendment Order and Discovery Order to a Judge in Chambers (“the Appeal”).  The Appeal first came before me on 9 March 2017. However, the hearing on that date was utilized to hear a strike out summons issued by Liu on 3 March 2017 (“the Strike Out Summons”), which was also listed to be heard on 9 March 2017. The hearing of the Appeal was adjourned pending the court’s decision on the Strike Out Summons.  On 17 March 2017, I handed down my decision on the Strike Out Summons (“the Strike Out Decision”).  That decision went on appeal to the Court of Appeal as CACV 92/2017.  The Court of Appeal handed down its decision on 7 February 2018 (“the CA Decision”) reversing the Strike Out Decision.

3.  The Appeal came back before me on 19 December 2018.  This is my decision on the Appeal.

THE DISCOVERY ORDER

4.  A brief outline of this case can be found in Mr Justice Anthony Chan’s decision delivered on 21 August 2015 when dealing with a previous application by Liu to strike out Wong’s Amended Counterclaim and related paragraphs of the Amended Defence (reported as Liu Hsiao Cheng v Wong Shu Wai [2015] 4 HKLRD 766, at paragraphs 4 to 7), which I do not propose to repeat in this decision.  For the purpose of this decision, I shall continue to use the expressions and abbreviations as defined in the Strike Out Decision.

5.  As stated in paragraph 3.4 of the Skeleton Argument of Mr Paul Lam, SC (for Wong) dated 17 December 2018, Wong’s counterclaim against Liu is based on the following facts or allegations:

(1)  It was agreed between Liu and Wong that they would share the profits out of the Tobacco Business and the Zimbabwe Businesses on a 50-50 basis.

(2)  Of the 6 Zimbabwean Companies, Golden Driven Investments (Private) Ltd is the corporate vehicle for the Tobacco Business, whereas the other 5 are the corporate vehicles for the Zimbabwe Businesses.

(3)  It was agreed that GDIL would take the role of a “financial hub” for the Tobacco Business and the Zimbabwe Businesses.

(4)  Funds coming from 4 sources all belonging to GDIL in the region of HK$477 million were transferred to accounts in Zimbabwe specifically designated by Liu.

(5)  The transfers were remitted to Liu for the purposes of the Tobacco Business and the Zimbabwe Businesses pursuant to his requests for funds.

(6)  Particulars of the relevant remittances are set out in Appendix A to the Re-Amended Defence and Counterclaim (“Appendix A”), and the purported reasons given by Liu for the requested funds are set out in Appendices A-1 to A-11.

(7)  Most of the accounts designated by Liu to which the remittances were made were unknown to Wong.  Liu has full control of the funds remitted to Zimbabwe, and Wong relied on Liu to manage those funds.

(8)  Wong’s case is that Liu never reported on how any of the funds were actually used or applied, and accordingly Liu is liable to account to GDIL for those funds.

6.  The following averments in the Re-Amended Defence and Counterclaim are relevant for the purpose of the present Appeal:

“11. Since around 2005, [Wong] invested in other businesses in Zimbabwe via the following corporate vehicles, all of which were managed by Liu in Zimbabwe, (the companies described below are hereinafter collectively referred to as ‘the Zimbabwe Businesses’):

(a) Golden Manor Properties (Private) Limited (‘GMPL’) – Incorporated in Zimbabwe on 18 March 2005 with Liu, Shen, WSW and TYY as the directors. GMPL was formed to run a real estate investment business in Zimbabwe.

(b) Gold Driven Tobacco (Private) Limited (‘GD Tobacco’) – Incorporated in Zimbabwe on 2 March 2006. The purpose of GD Tobacco was to operate the cigarette business in addition to the Tobacco Business. The difference between the aforementioned cigarette business and the Tobacco Business was that the cigarette business involved the finished product (ie completed packs of cigarettes) whereas the Tobacco Business only sold the raw tobacco without the packaging work involved in wrapping the tobaccos into cigarettes.

(c) Golden Mushrooms (Private) Limited – Incorporated in 2005 to operate a mushroom processing business.

(d) Golden Brick Enterprise (Private) Limited – Incorporated on 1 June 2005 to operate a brick manufacturing business.

(e) Global Diamond Enterprise (Private) Limited – Incorporated on 1 December 2010 in Zimbabwe to operate a diamond trading business.

13. Ultimately, no profits were ever split from the Zimbabwe Businesses as any revenue generated were subsequently remitted to Zimbabwe pursuant to Liu's funding requests.

14. GDIL has become the financial hub of the Tobacco Business and the Zimbabwe Businesses through its funding of the said companies' expenditures in Zimbabwe and receipt of sale proceeds from the Tobacco Business and Zimbabwe Businesses in Hong Kong in the manner explained below.

15. In respect of the Tobacco Business and the Zimbabwe Businesses:

(a) From time to time, Liu would make requests for funds in writing (such as by email or written requisition signed by Liu or Shen) or orally through the telephone. In most cases, Liu would provide specific bank accounts for [Wong] to transfer the funds, many of which were unknown to [Wong]. Insofar as written requests are concerned, they are evidenced by emails or written requisition forms. The remaining transfers of funds were made pursuant to Liu's oral requests made over the telephone. The particulars of funds transferred to Zimbabwe pursuant to Liu’s requests for funds are set out in ‘Appendix A’ hereto.

(b) To meet Liu’s requests, [Wong] would arrange the funds to be transferred to the accounts specifically provided by Liu. Although most of the accounts provided by Liu were unknown to [Wong], [Wong] did not question Liu as, at that material time, he trusted Liu.

(c) The funds were transferred through GDIL, FH, FHI or [Wong]'s personal accounts. In certain occasions and for reasons only known to Liu, Liu would specifically request the funds to be transferred from FH or FHI. The total sums remitted to Zimbabwe and expenses paid by FH and FHI for GDIL during the Relevant Period are particularized in ‘Appendix D’ hereto.

16. From 25 July 2003 (the date of GDIL’s incorporation) to 31 March 2013 (‘the Relevant Period’):

(a) A total sum of HK$447,636,928.67 was remitted by [Wong] (through GDIL, FH, FHI or [Wong]'s personal accounts) to Zimbabwe for the Tobacco Business and the Zimbabwe Businesses.

(b) Out of the said sum remitted to Zimbabwe, HK$367,533,244.16 were telegraphic transfers made pursuant to Liu's said written requests and HK$80,103,684.51 pursuant to Liu's verbal requests as particularised in Appendix A hereto.

(c) The said funds remitted to Zimbabwe came from 4 sources.

32     (e) As pleaded above, Liu made requests for funds from time to time and he had full control of the funds remitted to Zimbabwe.

(f) [Wong] relied on Liu to manage the said funds in Zimbabwe. Until disputes arose between him and Liu, he believed that Liu would use the funds honestly and for proper purposes, and had never asked Liu to provide any accounts.

125. As pleaded above, Liu has, in breach of his fiduciary duties to GDIL, refused and/or failed to produce any financial information in relation to the Tobacco Business and the Zimbabwe Businesses in Zimbabwe. In the premises, Liu is liable to give an account of the funds remitted to Zimbabwe in the total sum of HK$447,636,928.67. Insofar as such an account may reveal that he has misappropriated any part of this sum, he is liable to repay the same and account for the profits made out of the same.”

7.  Liu’s responses to Wong’s allegations are, in summary, as follows:

(1)  Liu is the sole owner of the Zimbabwe Businesses.  He denies any investment or involvement by Wong in relation thereto (see paragraph 17 of the Amended Reply to Re-Amended Defence and Counterclaim).

(2)  Liu denies that he made any funds requests over the telephone, and otherwise does not admit having made the written funds requests.  Liu also does not admit that he received the HK$447 million, and avers that the remittances as particularised in Appendix A were approved and arranged by Wong (see paragraphs 21, 22 and 120 of the Amended Reply to Re-Amended Defence and Counterclaim).

(3)  Liu claims that there are numerous errors in Appendix A; and that, subject to his non-admission, it appears that the remittances were for the purpose of funding tobacco purchases and the Tobacco JV[1]’s operations, and buying certain machinery for the cigarette, bricks and diamond businesses, ie some of the Zimbabwe Businesses (see paragraphs 21 and 22 of the Amended Reply to Re-Amended Defence and Counterclaim).

8.  The discovery sought by Wong relates to his complaint that Liu has failed to account for the sum of HK$447,636,928.67 remitted by Wong to Zimbabwe upon the alleged requests of Liu.  The relevant remittances are summarised in Appendix A, and further details of those remittances are set out in Appendices A-1 to A-11.  Numerous individual transactions are listed in Appendices A-1 to A-11.

9.  Originally, in the Discovery Summons, Wong sought discovery of 3 classes of documents as set out in paragraphs 1, 2 and 3 of the Schedule thereto.  By the Amendment Summons, Wong sought to abandon paragraph 2 and qualify the scope of the discovery sought under paragraph 3 of the Schedule.

10.  On 29 July 2016, Master J Wong, after a contested hearing, made the following orders, namely:

(1)  the Amendment Order, granting Wong leave to amend the Discovery Summons; and

(2)  the Discovery Order, requiring Liu to (a) file and serve within 42 days an affidavit stating whether he has in his possession or has at any time had in his possession custody or power the documents mentioned below, and if such documents have been but are not now in his possession custody or power, stating when Liu parted with the same and what has become of them; and (b) within 14 days thereafter produce for inspection by Wong, through his solicitors, the said documents, and permit Wong’s solicitors to peruse the same and take copies thereof or make notes of their contents, and be supplied with copies thereof on payment of proper charges -

“1. Corporate documents of the following companies incorporated in the Republic of Zimbabwe since their incorporation, including but not limited to (i) the Certificate of Incorporation; (ii) Particulars of Directors / Secretary / Principal Officers; and (iii) Return of Allotment (save and except those documents exhibited as WSW-21 and WSW-22 to the 1^st Defendant’s 3^rd Affirmation, and those already disclosed in the Plaintiff’s List of Documents as described in paragraph 32 of the same affirmation):

(a) Gold Driven Investments (Private) Limited

(b) Golden Manor Properties (Private) Limited

(c) Gold Driven Tobacco (Private) Limited

(d) Golden Mushrooms (Private) Limited

(e) Golden Brick Enterprises (Private) Limited

(f) Global Diamond Enterprise (Private) Limited

(collectively, the ‘Zimbabwean Companies’)

2. All transaction records, receipts, invoices, business agreements, bank statements and audited/unaudited financial statements of each of the Zimbabwean Companies since their incorporation insofar as they relate to (i) the receipt of any part of the funds constituting the HK$447,636,928.67 remitted to Zimbabwe by or on behalf of GDIL (as particularised in Appendix A to the Amended Defence and Counterclaim); and (ii) the usage, application or any disposition of the same”

(hereinafter referred to as “the Class 1 Documents” and “the Class 2 Documents” respectively).

11.  Liu now appeals against the Amendment Order and Discovery Order.

DISCUSSION

(i)  The Class 2 Documents

12.  I shall first consider the Class 2 Documents, which constitutes the main battle ground between the parties.  Under paragraph 2 of the Discovery Order, Liu is required to make discovery of not only documents relating to the “receipt” of the funds constituting the HK$447,636,928.67 remitted by or on behalf of GDIL to Zimbabwe, but also the “usage, application or any disposition the same”.  In my view, Wong is entitled to discovery of the former, but not the latter, for the following reasons.  First, it is important to note that what Wong is claiming against Liu is for an “account simpliciter” without alleging any breach of duty on the part of Liu (see paragraphs 8, 43 and 45 of the CA Decision).  There is presently no claim by Wong to recover any trust property from Liu (see paragraphs 43 to 49 of the CA Decision).

13.  In paragraph 33 of the CA Decision, the Court of Appeal stated that Wong’s claim against Liu in paragraph 125 of the Re-Amended Defence and Counterclaim is a “a claim arising from the allegations that Liu was a de facto director exercising control over the company’s assets.  Seen in that light, it is a claim based on a pure equitable right as in the case of a claim by a beneficiary against a trustee for an account.”  At paragraph 36, the Court of Appeal further stated as follows:

“Whilst we have reservation if it is appropriate to include that sentence at the end of paragraph 125, we agree with Mr Lam that as the pleadings stand there is no properly advanced claim based on misappropriation of any part of such sum and an account of profit. The prayer does not seek such relief and the further orders that the court may give should be confined to the usual orders to be made upon the taking of an account like directions for falsifying the accounts or surcharges.”

14.  The sentence at the end of paragraph 125 of the Re-Amended Defence and Counterclaim referred to by the Court of Appeal is the following:

“Insofar as such an account may reveal that [Liu] has misappropriated any part of this sum, he is liable to repay the same and account for the profits made out of the same.”

15.  In order to make out his claim for an account, what Wong needs to establish at the trial will be that Liu was a de facto director of GDIL, and received, or had control of, the company’s assets in or by virtue of his capacity as de facto director of GDIL (see paragraphs 25 to 31 of the CA Decision).  It is not necessary for Wong to prove that Liu has misapplied or misappropriated GDIL’s assets in order to maintain his claim for an account.

16.  While I consider that documents relating to the “receipt” of the funds constituting the HK$447,636,928.67 remitted by or on behalf of GDIL to Zimbabwe are relevant and, prima facie, discoverable by Liu, I do not consider the documents relating to the “usage, application or any disposition the same” to be relevant to Wong’s claim against Liu as currently advanced.  In this regard, for the purpose of discovery, “[t]he fact that an issue is raised in the pleadings is not determinative as to whether it relates to a matter in question.  Discovery is not required of documents which relate to irrelevant allegations in pleadings which even if substantiated could not affect the result of the action” (see Allington Investments Corp v First Pacific Bancshares Holdings Ltd, CACV 179/1994 (unreported, 8 February 1995), per Nazareth VP).

17.  Second, I consider the scope of the discovery sought, to the extent that it requires Liu to disclose “[a]ll transaction records, receipts, invoices, business agreements, bank statements and audited/unaudited financial statements of each of the Zimbabwean Companies since their incorporation insofar as they relate to … the usage, application or any disposition of the [HK$447,636,928.67]” to be too wide and oppressive, and would not be proportional to the issue which has to be determined at the trial, namely, whether Liu ought to be required to give an account of the funds allegedly remitted by or on behalf of GDIL to Zimbabwe upon his requests.

18.  I shall now briefly deal with a number of points raised by Liu in support of the Appeal.

(1)  Liu has stated on oath that “the documents requested are no longer in his possession or custody”, because Wong had commenced an action in the Zimbabwe High Court and obtained an order for the appointment of a Provisional Judicial Manager, Ms Grimmel, to seize control of the Zimbabwean Companies.  According to Liu, on or about 17 March 2014, Ms Grimel and a group of people raided and took control of an office in Harare, Zimbabwe, for 4 days during which they seized all the books and records and certain computer diskettes of (4 of the) the Zimbabwean Companies. Although Liu has since obtained an order from the High Court of Zimbabwe to rescind the appointment of the Provisional Judicial Manager, he has not been able to recover the documents from Ms Grimmel (see paragraphs 46 to 51 of Liu’s 2^nd Affirmation filed on 21 January 2016).  On the other hand, Wong has produced some clear evidence to contradict Liu’s assertions, including an affirmation made by Ms Grimmel and some contemporaneous documents generated in legal proceedings in Zimbabwe to show that only 16 stock sheets were taken, and Ms Grimmel had invited the legal representatives of the relevant companies to collect the 16 stock sheets following the rescission of her appointment but no one came to collect them.  Both Mr Lam and Mr Wou have referred me to the judgment of Kwan JA (within whom Fok JA, as he then was, agreed) in Wong Kar Gee Mimi v Severn Villa Ltd [2012] 1 HKLRD 887.  At paragraph 51, Kwan JA stated that the oath of a party giving discovery is generally conclusive, “unless the court can be satisfied – not on a conflict of affidavits, but either from the documents produced or from anything in the affidavit made by [that party], or by any admission by him in the pleadings, or necessarily from the circumstances of the case – that the affidavit does not truly state that which it ought to state”, and that a heavy burden lies on a party who seeks to challenge the veracity of the other party’s oath (in that case regarding “redaction”).  While I should not conduct a mini-trial on affidavit evidence or make any finding of fact upon disputed evidence, it cannot be disputed, on the face of documents produced by Liu, that Ms Grimmel was appointed as Provisional Judicial Manager of only 4 of the 6 Zimbabwean Companies.  Accordingly, Liu’s explanation that he no longer has possession, custody or power of the relevant documents is clearly incomplete and unsatisfactory.  In such circumstances, I consider that Liu ought to be required make an affidavit as directed by the Master to clearly set out and explain which companies’ documents, and what documents, have allegedly been seized by the Provisional Judicial Manager, and what has happened to the documents of the other two Zimbabwean Companies (namely, Golden Manor Properties (Private) Limited and Golden Mushrooms (Private) Limited) which were not placed under provisional judicial management.

(2)  In so far as it is suggested that the documents in question are the properties of the Zimbabwean Companies, not of Liu, and therefore they are not in his possession custody or power for the purpose of discovery, it is significant that Liu has never said in his 2^nd Affirmation that he does not have possession custody or power of the relevant documents because he is a mere director or shareholder of the companies.  His position, as mentioned above, is that the documents are “no longer” in his possession, custody or power because they were seized by the Provisional Judicial Manager and have not been returned by her (see paragraph 51 of Liu’s 2^nd Affirmation).  There is, I consider, an implicit admission by Liu that he did have possession custody or power of the documents until they were allegedly seized by the Provisional Judicial Manager.  It is also relevant that the Zimbabwean Companies are, apparently, under the management and control of Liu.  In such circumstances, I consider that the Master is correct to require Liu to make an affidavit in the terms as set out in paragraph 10(2) above.

(3)  Liu’s point about limitation has now been disposed of by the CA Decision.

(4)  Liu’s objection that the issue of whether the relevant funds were properly utilized in the best interests of the Zimbabwean Companies must fall within the exclusive jurisdiction of the Zimbabwe court (see paragraph 41 of Liu’s 2^nd Affirmation) is misconceived, because the issue to be determined in the Hong Kong proceedings is not whether the funds were used for some improper purposes, but whether Liu is under an obligation to give an account of the funds belonging to GDIL which came under his control.

(5)  Liu’s argument that the discovery sought by Wong is a “fishing expedition” has no merits because the documents relating to the “receipt” of the funds are part of the primary evidence in support of Wong’s claim for an account to be rendered by Liu.

(6)  Lastly, Liu’s argument based on “confidentiality” has likewise no substance.  Although confidentiality is a factor which the court may take into account in the exercise of its discretion whether to order discovery and when determining the scope of the discovery, it is not a bar to the court making an order of discovery of documents which are relevant to the issues in the proceedings and necessary for the fair disposal of those issues.  Further, it appears that Wong, his wife and/or his alter ego (FCK International Company Ltd) are directors and 50% shareholders of the Zimbabwean Companies and, on one view of the matter, those companies were incorporated to carry out joint venture businesses of Liu and Wong.  Moreover, the documents which I consider Liu ought to disclose relate to the receipt of funds paid by or on behalf of GDIL, on whose behalf the present derivative action is brought by Wong by way of counterclaim.  In these circumstances, I do not consider the alleged confidentiality to be a good reason or ground to refuse to order Liu to give discovery.

19.  In all, in respect of the Class 2 Documents, I would narrow down the scope of discovery to be given by Liu as follows –

“All transaction records, receipts, invoices, business agreements, bank statements and audited/unaudited financial statements of each of the Zimbabwean Companies since their incorporation insofar as they relate to the receipt of any part of the funds constituting the HK$447,636,928.67 remitted to Zimbabwe by or on behalf of GDIL (as particularised in Appendix A to the Re-Amended Defence and Counterclaim)”.

(ii)  The Class 1 Documents

20.  The Class 1 Documents go to the question of the ownership and control of the Zimbabwean Companies.  They are relevant to the issue of whether Liu made the alleged funding requests, and whether Wong caused the funds to be remitted to the accounts designated by Liu because he thought they were required for the purposes of the Tobacco Business and Zimbabwe Businesses, and are necessary for the fair dispose of that issue.  Liu’s contention that the documents (or some of the documents) in question are in the public domain (which is disputed by Wong), or that Wong himself has copies of the documents (or some of the documents), is not a ground to refuse to make the discovery order sought.

DISPOSITION

21.  For the above reasons, I allow the Appeal to the extent of limiting the scope of the discovery in respect of the Class 2 Documents as mentioned in paragraph 19 above, but otherwise dismiss the Appeal.  The Amendment Order shall stand, but the Discovery Order shall be varied accordingly.

22.  On the question of costs, in view of the fact that Liu is only partially successful in the Appeal, I make an order that he shall have 50% of the costs of the Appeal, to be taxed if not agreed.  In so far as the costs before the Master are concerned:

(1)  In relation to the Amendment Summons, the Master’s order that there be no order as to the costs of that summons shall stand.

(2)  In relation to the Discovery Summons as amended, the Master made an order that Liu was to pay half of Wong’s costs, including the costs of the hearing on 29 April 2016 and 29 July 2016 and all costs reserved, with certificate for counsel.  Even taking into account the limitation on the scope of the discovery in respect of the Class 2 Documents as mentioned in paragraph 19 above, I consider the costs order made by the Master to be fair and reasonable, and I do not propose to vary it.

23.  Lastly, in relation to the costs of the hearing on 9 March 2017, it will be recalled that it was originally fixed for hearing both the Appeal and the Strike Out Summons.  I am told by counsel that they had one brief covering both matters.  For the benefit of the Taxing Master, I direct as follows:

(1)  50% of counsel’s brief for the hearing on 9 March 2017 shall be attributed to the Appeal, and 50% to the Strike Out Summons; and

(2)  the soli;citors’ costs of attending the hearing on 9 March 2017, which only dealt with the Strike Out Summons, shall be attributed to that summons.