MOULIN GLOBAL EYECARE HOLDINGS LTD AND ANOTHER v. MA LIT KIN, CARY AND ANOTHER

HCA 1037/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1037 OF 2006

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D E C I S I O N

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Application

1. The 1st Defendant said that, before he could properly prepare his Defence, the followings were needed:

(a) further and better particulars (“FBP”) of the Statement of Claim herein, and

(b) discovery of documents.

2. Except for a letter of 1 April 2005, the Plaintiff opposed vigorously the said application.

Background

3. The 1st Plaintiff is and was a company listed on the Stock Exchange of Hong Kong Limited.  The 2nd Plaintiff is and was an indirect wholly-owned subsidiary of the 1st Plaintiff.

4. At the material times, the 1st Defendant was the CEO of the 1st Plaintiff while the 2nd Defendant, an employee, independent contractor and/or director of each of the Plaintiffs.

5. On 21 June 2005, HSBC commenced winding up proceedings against the Plaintiffs, resulting in, inter alia, an appointment of Mr. Roderick Sutton and Mr. Desmond Chiang as provisional liquidators of the same.

6. Upon investigations by the provisional liquidators, they believed that both Defendants had acted in breach of their fiduciary duties towards the Plaintiffs.  They therefore commenced the proceedings herein on 15 May 2006 and the Plaintiffs’ complaints included:

(a) On 12 November 2004, the 1st Defendant purported to enter into an agreement (the “Term Sheet”) for the 1st Plaintiff with the 2nd Defendant whereby the former would pay the latter, inter alia,

(i) US$375,000 annual base salary;

(ii) bonus of US$1,250,000 after closing of an acquisition deal by the 1st Plaintiff of a large retail optical chain in USA Eye Care Centers of America Inc. (“ECCA”), and

(iii) stock option to purchase 3% shares ECCA at 90% discount of its market value.

(b) In about March or April 2005, the 1st Defendant further purported to enter into a stock purchase agreement (the “Stock Purchase Agreement”) for the 1st Plaintiff with the 2nd Defendant whereby 3% shares in ECCA was transferred to the latter for his past services to the former.

(c) On 1 April 2005, the 2nd Plaintiff transferred $1,037,183.64 (“the Payment”) to the 2nd Defendant to the account of his consulting company for payment under the Term Sheet.

(d) At as 31 December 2004, the Plaintiffs were manifestly insolvent and serious accounting irregularities, and highly questionable/fraudulent transactions were found.

7. It is the liquidators’ case that the Defendants conspired to defraud and/or injure the Plaintiffs.  The Term Sheet, the Stock Purchase Agreement and the Payment are void, voidable or otherwise unenforceable and of no legal effect.  The 1st Defendant did not have the necessary authority to perform any act thereof for the Plaintiffs and the 2nd Defendant was at all times aware of such fact.  In the circumstances, the Plaintiffs claimed against the Defendants for various declarative reliefs, accounts, damages and costs.

8. Both Defendants filed their acknowledgments of receipt indicating that they would contest the proceedings.  The 2nd Defendant is now arguing with the Plaintiffs as to the appropriate forum.

9. On the other hand, by a summons dated 22 July 2006, the 1st Defendant sought FBP of the Statement of Claim and discovery in order to prepare his Defence.  I understand that the Plaintiffs have provided all copies of documents referred to in the Statement of Claim to the 1st Defendant pursuant to Order 24 rule 10 Rules of the High Court (“RHC”).

10. The substantive hearing of the matter was heard by me on 20 and 24 October 2006.  Mr. Rimsky Yuen, S.C. acted for the 1st Defendant while Mr. Richard Tollan of Messrs. Johnson Stokes & Master represented the Plaintiffs.  Both parties have submitted a number of authorities on the applicable principles and I attempt to sum up them in the followings.

FBP

11.     (a)    The requirement to give particulars reflects the overriding principle that litigation between the parties, and particularly the trial, should be conducted fairly, openly, without surprises and, as far as possible, so as to minimize costs (para. 18/12/1 at page 307 HKCP 2006).

(b)    Paragraphs 268 to 270 of the CJR – Final Report state that

“Applications for further and better particulars

268.    …… applications to the court for particulars to be ordered should only be launched where there is a genuine need for clarification of the nature of the other side’s case in order to ensure fairness or to avoid wasting costs ……

269.         …… A pleading which conveys the nature of a party’s case, stating the material facts, should not attract an application for particulars even if certain details (which are peripheral or likely to emerge in the usual course) are not disclosed.  The Working Party is of the view that the rules should make this clear and that unnecessary applications should attract appropriate costs sanctions.

270.         ……

It is desirable that …… orders for further and better particulars will only be made where this is necessary for disposing fairly of the cause or matter or for saving costs.”

(c)    O.18 r.12(5) RHC sets out that

“An order under this rule shall not be made before service of the defence unless, in the opinion of the Court, the order is necessary or desirable to enable the defendant to plead or for some other special reason.”

(d)     Jenkins LJ, in Ross v Blakes Motors, Ltd [1951] 2 All ER 689, at 692, described O.19 r.7B RSC (our equivalent O.18 r.12(5) RHC) as an exceptional order.

(e)      Both Mr. Yuen and Mr. Tollan have referred me to quite a number of authorities.  They are useful in extracting useful general principles.  However, it suffices to conclude that there is no hard and fast rule.  Each case depends on its own circumstances to see if particulars should be ordered before the defence.

Discovery

(f)      Applicable principles relating to O.24 r.7 RHC are not disputed.

“…… (1) There is no jurisdiction to make an order under RSC, O.24, r.7, for the production of documents unless (a) there is sufficient evidence that the documents exist which the other party has not disclosed; (b) the document or documents relate to matters in issue in the action; (c) there is sufficient evidence that the document is in the possession, custody or power of the other party. (2) When it is established that those three prerequisites for jurisdiction do exist, the court has a discretion whether or not to order disclosure. (3) 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 ……”

(HKCP 2006 at page 450)

(g)      This Court will not make an order if it is of the opinion that discovery is not necessary either for disposing fairly of the cause or matter or for saving costs (O.24 r.8 RHC)

(h)      Mr. Yuen kindly accepted that discovery was normally given after close of pleadings.  Indeed, paragraph 24/3/5 HKCP 2004 at page 431 also states that

“Stage at which discovery may be ordered—The court has a wide discretion when to order discovery in the interest of justice.  But it is, generally, inexpedient and unnecessary to do so until the issues have been defined by the pleadings.  The practice is to refuse discovery before the close of pleadings save in exceptional circumstances.  The potential severity of this rule can be mitigated by postponing the service of particulars until after discovery.  Therefore, until at least a statement of claim has been delivered the court can seldom know what are the matters in question in the action.  The principle also applies to a defence.  Where a plaintiff had issued a summons for summary judgment, and the defendant applied for specific discovery without having filed a defence, the court refused to order specific discovery on the basis that the defendants had applied for it partly to assist them in finding a defence (Bank of India v. Gobindram Naraindas Sadhwani & Another [1994] 2 H.K.L.R. 69, HC; R.H.M. Foods Ltd v. Bovril Ltd [1982] 1 W.L.R. 661; [1982] 1 All E.R. 673, CA).  But if inspection is so desirable that it is very nearly essential before statement of claim, it will be ordered: Dun and Bradstreet Ltd v. Typesetting Facilities Ltd [1992] F.S.R. 320.”

12. Bearing these principles in mind, I have decided that the 1st Defendant’s application for FBP and discovery are to be dismissed save Request nos. 3(1), 4 and 7(1).  My reasons appear below.

(a) Mr. Yuen mainly argued that the 1st Defendant would be unable to file and serve a meaningful Defence, but a non-admission or denial one, without the FBP and discovery.  I respectfully disagree.

(b) The 1st Defendant has not filed his Defence.  Hence, the burden lies on him to satisfy this Court to make an exception to the general rule.  Such burden has not been discharged.

(c) The following facts are peculiar to the present case:

(i) The present proceedings were commenced by liquidators against its former CEO and director/senior officer for breach of fiduciary duties, conspiracy to defraud, and so forth.  For the time being, I am satisfied that the liquidators have done their best to come up with the Statement of Claim including the particulars thereof.  Apart from those requests that I allow, the case of the Plaintiff is clear enough.  Documents will be disclosed in due course and FBP can also be produced after discovery.

(ii) The liquidators have provided all copies of documents to 1st Defendant according to O.24 r.10 RHC.

(d) In my view, the FBP generally ask only for:

(i) matters not relevant for the purpose of putting a positive defence,

(ii) evidence that the Plaintiffs are not obliged to produce at this stage,

(iii) documents and details that would become available at discovery stage.

(e) Regarding discovery, paragraphs 1 and 2 of the Schedule to the 1st Defendant’s summons are irrelevant to the present proceedings.  I agree with Mr. Tollan that the ECCA Acquisition is mentioned in the Statement of Claim by way of background only.  As to the remaining, I simply fail to see how they could assist the 1st Defendant to prepare his Defence.

(f) Finally, without going to the extent that the 1st Defendant is trying to delay the proceedings, he certainly fails me because I am not persuaded that his application is necessary for disposing fairly of the cause or matter or for saving costs.

Conclusion

13. In the circumstances, I order that:

(a) The Plaintiffs do within 14 days from today provide the Further and Better Particulars of the Statement of Claim sought pursuant to nos. 3(1), 4 and 7(1) of the 1st Defendant’s Request dated 18 July 2006.

(b) The 1st Defendant shall file and serve his Defence, and Counterclaim, if any, 14 days thereafter.

(c) Subject to (a) above, the application of the 1st Defendant for discovery and FBP are dismissed.

(d) There will be a costs order nisi that the 1st Defendant’s application be to the Plaintiffs, including costs reserved and hearings on 20/24 October 2006, to be taxed if not agreed, in any event.