DELCO PARTICIPATION B.V. v. HWH HOLDINGS LTD

HCA 2943/2015

[2021] HKCFI 869

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2943 OF 2015

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AND

HCA 3040/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 3040 OF 2015

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AND

HCA 2939/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2939 OF 2016

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(Heard together)

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D E C I S I O N

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A.  Introduction

1.  These matters are listed for a 15-day trial, fixed to commence before me on 12 July 2021.  At the 5^th (but not necessarily the final) case management conference on 30 March 2021, in addition to adjourning to future dates some substantive argument on yet further interlocutory applications, I also heard applications for specific discovery, as follows:

(1)  Delco’s application by summons dated 15 January 2021 for specific discovery of various categories of documents from Fang/HWH; and

(2)  Delco’s application by summons dated 15 January 2021 four specific discovery and/or third-party discovery of various categories of documents from CT/USUMHK.

2.  I reserved my decision on those applications, and this is my Decision.  For the purposes of this Decision, I continue to adopt the definitions and abbreviations used in previous decisions.

B.  Applicable Principles

3.  The principles applicable on an application for specific discovery of documents under RHC Order 24 rule 7 are well-established, and do not require citation of authority.

4.  There is no jurisdiction to make an order unless (1) there is sufficient evidence that the documents exist which the other party has not disclosed; (2) the documents relate to the matters in issue in the action; and (3) there is sufficient evidence that the documents are in the possession, custody or power of the other party.

5.  The relevance of documents is to be determined by reference to the pleadings, looked at broadly.  With respect to the requirement of ‘possession, custody or power’, ‘power’ means a presently enforceable legal right to obtain the document from the holder without the need to obtain the consent of anyone else.

6.  When the three prerequisites for jurisdiction are established, the court has a discretion whether or not to order disclosure.  But any order must identify with precision the document or documents or categories of documents which are required to be disclosed.  If the party seeking discovery establishes a prima facie case, it falls to the party objecting to the order for discovery to satisfy the court that the discovery is not necessary either fit disposing fairly of the cause or matter or for saving costs.

7.  On the other hand, discovery should be sensibly controlled and should not be allowed to be used as an oppressive weapon. Therefore, 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 documents sought is necessary either for disposing fairly of the cause or matter or for saving costs, the court necessarily bears in mind the objectives of cost effectiveness, proportionality, procedural economy and ensuring fairness between the parties.

8.  ‘Fishing’ – being the search for material in the hope of being able to raise allegations of fact, as opposed to the solicitation of evidence to support allegations of fact which have already been bona fide raised with adequate particulars – is not allowed.

9.  The principles applicable to an application under section 42 of the High Court Ordinance Cap 4 and RHC Order 24 rule 7A(2) are also well-established.  Essentially the principles are similar to those relating to an application for specific discovery.  The applicant has to satisfy the Court that there is sufficient evidence that the documents exist, that they are relevant (in the Peruvian Guano sense) and that they are in the possession, custody or power of the third party.  No order for discovery shall be made 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.

10.  The question of necessity may require consideration of one or more of the following points: (1) how important information is to the issues; (2) whether the applicant has taken appropriate steps to obtain the information within the proceedings, before seeking discovery from the third party; (3) whether it would be sufficient to draw adverse inferences, on the basis that the party from whom the information was sought within the proceedings has failed to supply the information; (4) the nature of the relationship between the parties to the proceedings and the third party; (5) whether, if disclosure is necessary and proportionate, editing of documents would protect private information; and (6) whether the existence of other routes or methods to obtained information sought militates against granting discovery.

C.  Discovery from Fang/HWH

C.1  The Schedule

11.  The Schedule to the summons identifies the following targeted categories of documents:

Part 1

1.  Records (including ledgers, accounts, statements, receipts) showing or reflecting the source of the funds relating to the debts in the sum of HK$72,345,000 which was allegedly owed by Delco Asia Limited (“Delco Asia”) to HKM Metal Limited (“the Alleged HKM Metal Debt”), including the complete statements of HKM Metal Limited issued by (i) DBS in respect of Portfolio No. 000004336-000004300 showing the transfers in relation to HKD and USD Multi-Currency Savings Account No. 04838380546840; and (ii) SCB in respect of USD Savings Account No. 447-1-095103-8, from June 2007 to December 2008 (both months inclusive), being three months prior to the first transfer and three months following the last transfer constituting the Alleged HKM Metal Debts.

2.  Records (including ledgers, accounts, statements, receipts) showing or reflecting the source of the funds relating to the debts in the sum of HK$31,772,969.19 which was allegedly owed by Delco Asia to the 4^th Defendant personally (the “Alleged Fang Debt”);

3.  Records (including ledgers, accounts, statements, receipts) showing or reflecting the source of the funds relating to the debts in the sum of HK$65,730,898.19 which was allegedly owed by Delco Asia to Mr. Chern as the nominee of the 4^th Defendant (the “Alleged Chern Debt”).

Part 2

4.  WeChat and/or other telephone messages during the period of 16 August 2014 (being six months prior to the receipt of a US$50milion deposit by CT on 16 February 2015) to 16 February 2015 between Fang and Kong Wei, Chan Tung Tung Emily, any officer or employees of CT, and any personnel of USUM or USUMHK, recording, referencing or reflecting discussions about USUM/USUMHK’s potential investment into CT, including but not limited to:

a.  messages recording, referencing or leading to the identification of USUM or USUMHK as a potential investor;

b.  messages recording, referencing or leading to the payment of the US$50million deposit.

12.  Items 1-3 (Part 1) have been collectively described as the “Source of Funds Documents”.  Item 4 (Part 2) has been described as the “USUM Messages”.

13.  The application is opposed by Mr Norman Nip (appearing with Mr Roger Phang) for Fang/HWH, broadly on the basis that the requests for the Source of Funds Documents constitutes a fishing expedition and/or are not necessary, and the request for the USUM Messages constitutes a fishing expedition.

C.2  Source of Funds Documents

14.  As to the Source of Funds Documents, Mr Victor Dawes SC (leading Mr James Man) for Delco identifies one major issue in these Actions as being whether the Debts (comprising the Fang Debt, the HKM Metal Debt, and the Chern Debt) allegedly owed by Delco to Fang/HWH were genuine, or whether they represented the unreported profits arising from the Scheme.  Therefore, he says, the source of the funds allegedly advanced to Delco Asia by Fang or his company/nominees would clearly be of relevance, and necessary for the fair disposal of the issue relating to the Scheme.

15.  As to the opposition by Fang, put forward in his 10^th affirmation and elaborated in argument by Mr Nip, Mr Dawes says they have no merit.

16.  Mr Nip reminds me that Delco specifically alleges that the unreported profits were transferred “from the PRC Operating Companies to Fang or to the companies or persons associated with Fang”.  But the Source of Funds Documents requested are not records of the PRC Operating Companies, showing relevant payment out and the destinations of those payments.  Instead, Delco glosses over the lack of any documentary evidence to show that the PRC Operating Companies had paid out sums corresponding to the Debts, and instead makes a roving enquiry for “records” showing the source of funds, irrespective of whether they show the funds originated from the PRC Operating Companies.  That, says Mr Nip, is plainly a fishing expedition: in effect, by making the request now made, Delco hopes that either documents produced will show that the funds were transferred from the PRC Operating Companies, or if not they will show from where else the funds originated.  But that is beyond the scope of the issues: the relevant issue is whether the Debts represented unreported profits of the PRC Operating Companies, and the issue is not from where Fang/HWH obtained their funds to make the loans.

17.  In response, Mr Dawes says that the argument that the records showing the source of funds of the three alleged Debts may not show that they originated from the PRC Operating Companies does not make the discovery application a fishing expedition.  Rather, in this case, Delco has made an allegation as to what the Debts actually represented. Therefore, the source of funds relating to those Debts must be relevant.  If they come from the PRC Operating Companies or their associated companies, it tends to support Delco’s allegation of fact; alternatively, if they do not, then there is no relevant evidence to support Delco’s allegation of fact from the fund flow perspective.

18.  Further, Mr Dawes says that whilst Delco would want to have the records of the PRC Operating Companies, there is no basis to think that Fang has them in his possession, custody or power.  There is some force in Mr Nip’s submission that Delco could have sought documents from the PRC Operating Company some time ago, but has not done so, choosing instead to make the current ‘roving’ enquiry.  But there is at least equal force in Mr Dawes’ rhetorical response by asking why Delco should ask for disclosure from a non-party who is not before the court and who is outside the jurisdiction, instead of seeking disclosure from a party who is before the court.

19.  There is also force in Mr Nip’s submission that the request might be only at the first tier of information, potentially opening another round of requests.  For example, if a certain sum is said to have had as its source the company ‘ABC’, it might then be asked where ‘ABC’ sourced that money; if the source of that money is identified as company ‘XYZ’ or person ‘EFG’, then it might be asked where ‘XYZ’ or ‘EFG’ sourced that money; and so on.  Identifying the source may be even more problematic where money is fungible, unless funds in precisely similar amounts are transferred from one place to another (and perhaps another, etc).

20.  Nevertheless, it seems to me that where the allegation is that the relevant sums said to constitute the Debts were paid from the PRC Operating Companies via Fang or his companies/nominees, the source of those monies paid to create the alleged Debts is appropriately and necessarily disclosable.  However, the form of the request made is currently too broad, both as to its scope and to the period.  For example, I do not see the justification for seeking every entry on the bank account statements, nor do I see why bank account entries for a period after the payment creating the alleged Debts is relevant.  I think I can appropriately ‘blue pencil’ the request.

21.  Therefore, I would order the discovery only as follows:

1.  Records (including ledgers, accounts, statements, receipts) showing or reflecting the source of the funds relating to the debts in the sum of HK$72,345,000 which was allegedly owed by Delco Asia Limited (“Delco Asia”) to HKM Metal Limited (“the Alleged HKM Metal Debt”) from June 2007 to September 2008 (both months inclusive), being three months prior to the first transfer and up to the last transfer constituting the Alleged HKM Metal Debts.

2.  Records (including ledgers, accounts, statements, receipts) showing or reflecting the source of the funds relating to the debts in the sum of HK$31,772,969.19 which was allegedly owed by Delco Asia to the 4^th Defendant personally (the “Alleged Fang Debt”);

3.  Records (including ledgers, accounts, statements, receipts) showing or reflecting the source of the funds relating to the debts in the sum of HK$65,730,898.19 which was allegedly owed by Delco Asia to Mr. Chern as the nominee of the 4^th Defendant (the “Alleged Chern Debt”).

22.  I think that formulation permits a precise identification, where possible, of the immediate source of the funds used by Fang or his companies’ nominees to make the payments to Delco Asia said now to constitute the Debts.  If any part of the source of funding was the profits transferred from the PRC Operating Companies, that disclosure may identify it. However, precisely what is to be made of any materials disclosed, or any response on affidavit to the order, remains a matter of trial.  Nor is the order I now make intended to open the door to further rounds of enquiries prior to trial.

C.3  USUM Messages

23.  Part of the dispute relating to the requested USUM Messages focuses on the prerequisite of sufficient evidence of existence. Mr Nip says that it has been demonstrated in Fang’s 10^th affirmation that there is no pleading, evidence or assertion that there were WeChat and/or other telephone messages concerning the USUMHK investment during the period of 16 August 2014 to 16 February 2015.  That is why, he says, it is not surprising that Delco cannot demonstrate existence of relevant documents or that they might be in the possession, custody or power of Fang/HWH.

24.  Further, in so far as Delco now seeks to rely on the fact that Fang’s solicitors wrote to the relevant telephone service provider to make enquiry as to the availability of any relevant messages made by or with Fang, that cannot add to the analysis.

25.  For his part, Mr Dawes says that it simply makes no commercial sense that USUMHK would place a significant deposit of US$50 million on 16 February 2015 before starting any due diligence exercise on CT, and that negotiation only started in late January 2015 (after the January 2015 Sale on 23 January 2015).  Further, Delco has put Fang’s knowledge in issue in the pleading, where there has been no attempt to strike it out, and where the evidence now sought to be listed is in support of an allegation bona fide raised.

26.  Mr Nip is correct, of course, when he says that ultimately Delco is seeking to infer from the circumstantial evidence that Fang must have been aware of USUMHK’s investment before the January 2015 Sale.  But that seems to me to identify why specific discovery is appropriately ordered so as to avoid (at least potentially) inferences only from circumstantial evidence, instead of findings from specifically relevant factual evidence.

27.  On balance, I am persuaded that there is sufficient evidence – from the overall surrounding circumstances – that satisfies the prima facie test of existence, and hence possession, custody or power.  Fang’s own case is that there was negotiation on the potential investment by USUMHK before 16 February 2015, and he has himself taken the initiative to write to the telephone service provider to ask for messengers (albeit perhaps in a way which would not have encouraged a response to him, where the service in question was held in the name of another person whose authority was not given to support the enquiry).  Further, I do not think any such messages are limited just to the content of any negotiation itself, but may instead evidence the fact that there were negotiations.

28.  I am, therefore, prepared to make an order in the terms of Item 4 of the Schedule.

E.  Discovery from CT/USUMHK

29.  The Schedule to the summons identifies the following targeted categories of documents:

1.  The Memorandum of Understanding (“MOU”) or any equivalent agreement, term sheet, or other written record regarding a proposed investment by USUM Investment Group Limited (“USUM”), a limited liability company incorporated in the PRC, and/or the Respondent, USUM Investment Group Hong Kong Limited (“USUMHK”), circulated, issued or signed between 1 December 2014 and 16 February 2015;

2.  Documents discussions and/or negotiations between CT (including its officers, employees, agents and representatives) and USUM/USUMHK recording, referencing or reflecting discussions about USUM/USUMHK’s potential investment into CT during the period of 16 August 2014 (being six months prior to the receipt of a US$50m Deposit by CT on 16 February 2015) to 16 February 2015, including but not limited to:

(a)  documents evidencing discussions and/or negotiations in relation to the MOU or any equivalent agreement, term sheet, or other written record regarding a proposed investment by USUM;

(b)  documents recording or referencing any meetings between Fang (the 4^th Defendant) on the one hand and any personnel of USUM/USUMHK on the other hand (“Meetings”), including but not limited to agenda, minutes, meeting notes, letters, emails, instant messages, summaries; and

(c)  documents recording, referencing or leading to the payment of the US$50m Deposit.

3.  Documents recording, referencing or leading to the identification by CT of USUM/USUMHK as a potential investor; and

4.  Documents recording or referencing any communication (including email correspondence, notes of telephone calls, SMS records and instant messaging records) by any officers, employees, agents and representatives of CT with Fang in relation to USUM/USUMHK’s potential investment into CT or the US$50m Deposit or the Meetings.

30.  I agree with Mr Anthony Chan (appearing with Mr Jason Lee) for CT that it is non-party discovery which is the applicable provision in the present application against CT.  The documents sought do not concern any issue arising between Delco and CT.  Hence, there is also force in Mr Chan’s submission that Delco could and should have sought discovery against Fang/HWH first, instead of applying against CT straightaway. Nevertheless, Mr Chan also recognises that the relevant principles to be applied are little different to an application for specific discovery against a party.

31.  As Mr Dawes says, CT does not contest the relevance of the documents sought.  Instead, the opposition to the application is based on the two broad grounds that (1) the documents sought were covered by a voluntary discovery exercise agreed between CT and Delco and performed over many months, and (2) Delco has not established that CT has in its possession, custody or power the documents now sought.

32.  I do not think, for the purposes of this Decision, I need go into the detail of the voluntary discovery exercise conducted following the agreement between CT and Delco.  Broadly, there were three stages: (1) a search against agreed search parameters; followed by (2) CT’s assessment whether the documents thereby identified are relevant, and whether production was precluded on the ground of privilege or otherwise; then (3) production of those documents identified in the previous stage, for delivery to Delco.

33.  Relevantly, the search parameters included a search for emails, electronic documents and hardcopy documents (a) falling within the date range 1 June 2014 to 21 March 2015, (b) involving two or more of designated individuals, including Fang, Kong Wei, Mr Tu and other USUM personnel, and (c) containing any of the dozens of designated search terms, essentially aimed at the or any USUM subscription, acquisition, due diligence, etc.

34.  As explained in CT’s evidence, even after revisiting the searches following Delco’s further queries about an alleged MOU signed in December 2014, no communications between CT and USUM prior to the payment of the US$50 million deposit on 16 February 2015, and no document meeting the description of an MOU, were found.  CT also gave, by its solicitors, specific confirmation sought by Delco that CT is not aware of any MOU regarding the proposed investment by USUM, and that no documents were excluded from disclosure just because they did not respond to the agreed search parameters.

35.  In response, Mr Dawes makes what I think can be distilled into two main points: (1) the complete absence of any documentation is counter-intuitive and inherently implausible (though I would not necessarily endorse Mr Dawes’ use of the word “shocking” to describe the result of the search); and (2) the enquiries and searches made under the voluntary discovery exercise did not extend to enquiries made of CT’s agents and/or of any other person over whom CT can exercise its ‘power’ over documents.  As so distilled, I accept both points.  As to the first, there is some evidence as to the existence of an MOU, from the recollection of a person contemporaneously involved.  Further, where the alleged relevant negotiation was conducted through or involving third party agents, it is at least prima facie likely that they have relevant documents over which CT can exercise power.  I do not think approaching matters in this way somehow reverses the test.

36.  As to whether disclosure is necessary, I accept that ordinarily Delco might have applied for specific discovery from Fang/HWH first.  Nevertheless, in the context of Fang/HWH’s response to the request has been made (see above), and in the context of the limited time remaining prior to the trial of the relevant issues, I do not think that point is of any great weight.  I also take account of the fact that Fang says he did not bring documents with him when he left the CT Group.

37.  As to Mr Chan’s point that Fang can be cross-examined at trial, and the court can be invited to make any adverse inference Delco puts forward, I do not think that sufficiently militates against seeking to obtain actual evidence in the form of relevant documents where at present there is a reasonable view that they exist and are in the position or custody or power of CT.

38.  As to proportionality, again I accept that CT has expended substantial time and resources in the course of its voluntary discovery exercise, including in making the additional searches after further Delco queries.  Therefore, insofar as the order might require CT to undertake any further searches of documents in its own direct custody or possession, I think that CT might reasonably rely on what searches it has so far performed. But, clearly that does not extend to the searches/requests which could be made of its agents or other persons who might reasonably be expected to hold documents over which CT can exercise power.

39.  That point suggests to me that the request is, therefore, proportionate.  No one is asking – at least, the court order that I make will not ask – CT to revisit the entirety of the voluntary discovery exercise.  But it can be asked that CT perform the full range of discovery exercise enquiries relating to documents not currently within CT’s possession or custody, but which might be within its power, as seems to me to be appropriate in this case at this point.

40.  Mr Chan also raises an argument about privilege.  He says, and I accept, that a well-established ground for refusing specific discovery is that the relevant documents are privileged, and in the context of discovery sought from a non-party the right to privilege is expressly preserved by Order 24 rule 7A(6).

41.  Nevertheless, I do not think the particular argument about legal professional privilege (“LPP”) – turning on whether CT is not entitled to assert LPP over documents on the basis that Delco was a shareholder of CT at the time when the relevant documents came into existence – is entirely straightforward.  I have been referred to the case of Re NDT (BVI) Trading Ltd [2009] 2 HKLRD 409, and to the line of English authorities referred to in that case.  In that case, Kwan J (as she then was) held that LPP was not available against the petitioners who were shareholders of the company in that case.  She stated that she was not persuaded that the principle in the English decisions, giving a right to a shareholder to inspect the company’s privilege documents, was unsound.

42.  Reference has also been made to Schmidt v Rosewood Trust Ltd [2003] 2 AC 709 and CAS (Nominees) Ltd v Nottingham Forest Ltd [2002] BCC 145 (as well as an article ‘Company robbed of privilege in Nottingham Forest’ published in (2001) Company Lawyer 22 at 152, which is critical of that decision).

43.  I also acknowledge that section 742 of the Companies Ordinance Cap 622 identifies that section 740 – under which a shareholder may be given the right to inspect company documents – or an order made under that section, does not authorise a person to inspect any record or document containing information that is subject to LPP.

44.  But, and meaning no disrespect to the arguments of Counsel at the hearing, I currently think it better to preserve the argument on LPP, to be resolved as appropriate at trial in the context of matters as might necessarily be canvassed at the trial.  I am not sure I have all relevant information to enable me to decide the point now.  That will also permit the identification of whatever documents as do exist, over which any claim to LPP is actually asserted.  Therefore, for the avoidance of doubt, the order I make does not remove from CT its ability to make claim to privilege of any of the documents disclosed.  In so far as it is necessary, any such specific claim to privilege, if challenged, will be resolved subsequently.

45.  Insofar as the application is directed against USUMHK, I accept that proper service has been effected.  No appearance has been made by USUMHK to oppose the application against it.  Nevertheless, where I am making an order against CT, it seems to me to be appropriate for present purposes to adjourn the summons in so far as it is directed to USUMHK, and do so sine die with liberty to apply.

46.  Therefore, I make an order in the terms of the Schedule to the summons against CT only.

F.  Costs

47.  I reserve all questions of costs.