PIONEER IRON AND STEEL GROUP CO LTD (in provisional liquidation) v. PIONEER METALS CO LTD AND OTHERS

HCMP 1974/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1974 OF 2011

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D E C I S I O N

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Introduction

1. The Plaintiff in these proceedings, Pioneer Iron and Steel Company Limited (“Company”), is incorporated in the British Virgin Islands where it is in liquidation.  On 21 September 2010 I appointed provisional liquidators over the Company.  On 16 June 2011 I made an order pursuant to section 221 of the Companies Ordinance for the examination of the sole shareholder of the Company, Chen Ning Ning, concerning its affairs.  The order was unsuccessfully appealed.  The examination commenced before Master Lai on16 July 2012 and lasted 5 days.  On 4 January 2013 I ordered that there be a further examination before me with 3 days reserved.  This was because I was persuaded that Ms Chen had been uncooperative in answering questions before Master Lai and that the examination might be more effectively conducted before me.  The dates for the resumed examination are yet to be fixed.

2. The Company has issued an application under O.24 r.14A for an order that it be at liberty to use for the purpose of the examination certain of the documents of which 1^st Defendant has made discovery in the Action.  The Action is well advanced.  The Parties exchanged witness statements in early June of this year.  The Company filed one witness statement; that of John Batchelor. The 1^st Defendant filed one witness statement; that of Ms Chen.

3. The Company was represented at this hearing by Mr Charles Sussex SC and Ms Rachel Lam.  The 1^st Defendant was represented by Ms Linda Chan SC and Ms Janet Ho.

4. The Company’s claim can be summarised as follows:

(1)    On 12 December 2006 an agreement was signed between the 1^st Defendant, which is currently owned 51.5% by Ms Chen, as a buyer and the 2^nd Defendant, which is incorporated in Chile where it carries on business, as seller for the purchase of iron ore, which was to be shipped to the Mainland.

(2)    The terms of the agreement provided for the 1^st Defendant to make a loan to the 2^nd Defendant in advance of US$10,000,000 to be paid by 4 equal installments.  I understand the loan to be intended to be used to finance costs incurred in the construction of facilities required to produce the iron ore.

(3)    The 2^nd Defendant agreed to produce and delivery 500,000 WMT of iron ore to the 1^st Defendant between 1 April 2008 and 31 March 2018.

(4)    The 2^nd to 4^th installments of the loan were paid by the Plaintiff not by the 1^st Defendant.

(5)    In December 2007 the Company and the 1^st and 2^nd Defendants agreed that the contractual position should be changed to reflect the true position, namely, that it was the Company that had the economic interest in the agreement.  A new contract was signed between the Company and the 2^nd Defendant novating the 1^st Defendant’s rights to the Company.

(6)    When the 2^nd Defendant was informed in November 2011 that the Company was in liquidation it stopped delivery of the iron ore.

(7)    The amount of the outstanding loan is US$6,717,052.50.

(8)    The Company claims that it is entitled to repayment of the outstanding loan.

5. The 1^st Defendant says that any agreement that was reached in December 2007 was a mistake and that the new agreement that was signed was not a valid and enforceable novation of the 1^st Defendant’s rights under the December 2006 agreement.

6. The disclosed documents which are the subject of this application are letters of credit, invoices, surveying certificates and invoices concerning shipments of iron ore between April 2008 and October 2011.  Some of the documents make reference to the Company or use language which suggests that they are referring to the Company.

7. The provisional liquidators wish to be able to show these documents to Ms Chen during examination concerning the arrangements between the Company and the 2^nd Defendant for shipment of iron ore.  This transaction was indirectly referred to in the list of matters about which the provisional liquidators wished to examine Ms Chen, which was sent to her solicitors in advance of the examination in order that she could prepare for it.  She was not asked questions about it.  The intention is that she is asked such questions when her examination recommences before me.

8. The 1^st Defendant objects to the application.  It does so principally on the grounds that Ms Chen should not be questioned about the transaction at all as it would be an oppressive and improper use of the section 221 procedure to examine her to obtain information which could be used against the 1^st Defendant in this Action.

Legal principles

9. A party to litigation is under an implied obligation not to use documents which are disclosed to him during the course of an action for any purpose other than proper conduct of the proceedings: Hong Kong Civil Procedure 2013 at §24/14A/1.  The Court has a discretion to release the implied undertaking.  The applicable principles are not in dispute:

(1)  Any party to whom documents are produced on discovery impliedly undertakes to the court that he will not use them for a collateral or ulterior purpose, without leave of the court or consent of the party providing such discovery. This is to ensure that the discovery process should not be allowed to place upon the litigant any harsher or more oppressive burden than is strictly required for the purpose of securing that justice is done.[1]

(2)  the court will not release or modify the implied undertaking given on discovery, save in special circumstances and where the release or modification will not occasion injustice to the person giving discovery.[2]

(3)  Specifically, the revelation of a civil contempt in some wholly unrelated proceeding would not outweigh that of ensuring the continued observance of an undertaking given to the court by the party obtaining discovery.[3]

(4)  In deciding whether to exercise the discretion to release the undertaking, the court may take into account the nature of the document, the circumstances under which it came into existence, the attitude of the author of the document, whether the document pre-existed litigation, the nature of the information in the document, the circumstances in which the document came into the hands of the applicant for leave and, the likely contribution of the document to achieving justice in the second proceedings.[4]

10. Ms Chan submits that it would not be a proper exercise of the discretion to release the Company from its implied undertaking to use the documents for examination under section 221 as Ms Chen cannot properly be asked questions concerning the subject matter of the transaction to which they relate.  This she argues would be to allow the Company to obtain a special advantage not available to other litigants[5].

11. Similarly, argues Ms Chan, it is apparent from the authorities[6] that a private examination is not intended to give the liquidator advantages over and above an ordinary litigant, and the court always takes into account all the circumstances to see if a private examination would offend against fairness, such as the availability of other sources of information, the urgency of the need for information, and in the case of civil proceedings whether they are contemplated or pending.  There is a distinction, Ms Chan argues, between an application for the (impermissible) purpose of improving the liquidators' position in current civil litigation against the proposed examinee and an application for a permissible purpose which may at the same time have the result of improving the liquidator's position in other respects.

12. However, as Shierson v Rastogi ibid demonstrates the fact that proceedings have already been commenced which concern matters, which it is proposed are the subject of examination is not necessarily a bar to such an examination being ordered. The Court of Appeal explained this in the following terms:

“46. I accept that an order for examination is not indispensable in relation to some matters indicated in the statement of grounds in view of Mr Rastogi's and Mr Jain's limited offer to co-operate. But I have no doubt that considerable areas remain, questions on which will only be answered in the near future if the examination order stands, in particular relating to missing moneys and the trading system. I do not accept that when the liquidators sought an order for examination knowing that the answers obtained may go to issues in the litigation, they did so for a collateral purpose. The liquidators, acting in good faith as is conceded, seek the information for the purposes of the liquidation and in particular to get in the assets of the company. Nor do I accept that the liquidators, having opted for court proceedings against Mr Rastogi and Mr Jain are thereby precluded from obtaining a s 236 order against them. ... for the reasons given in Cloverbay I accept that to require defendants accused in civil proceedings of serious wrongdoings to give answers to questions, from those bringing those proceedings, which go to issues in the proceedings is oppressive.

…

48. As against those factors must be set the following. First, Mr Rastogi as the chief executive officer and Mr Jain as an executive director with particular responsibility for trading not only owed fiduciary duties to the company but, as the judge aptly said, are "the most crucial sources of information relating to what went on inside [the company]" and were "its brains". They are obliged to co-operate with the liquidators, who are accountants with no prior knowledge of the company. Secondly, the estimated deficit is very large, some US$350 million, the crash occurring with remarkable suddenness. Thirdly, the liquidators want the answers to their questions as soon as possible so that they can act quickly, for example, in respect of outstanding receivables and missing moneys.

…

50. On conducting the balancing exercise I have no doubt but that the scales come down in favour of making the order. This is a case where the legitimate requirements of the liquidators to obtain speedy information from those who have run the company and the other considerations set out in para 48 above outweigh the oppression to Mr Rastogi and Mr Jain in being required to submit to a private examination. Like the judge I conclude that the need for making the order is overwhelming." [7]

"There is no justification for any suggestion that the purpose of the examination under s 236 [in that case] is to obtain any advantage in the current civil proceedings. That is also to view the matter from the wrong perspective. The nature of the application and the evidence in its support shows that its purposes are both more fundamental and more wide-ranging. They are to reconstitute the company's records, to understand its affairs and, with that understanding, to identify its assets wherever they may be, including any causes of action against anyone whoever they may be. It is true that, inthe course of any examination on these matters, information may well be forthcoming that will bear on, or expand the scope of, the current civil proceedings against the directors. But that will be an incidental consequence or effect of an examination which is needed in order to enable the liquidators to perform their functions generally: see Re Brook Martin & Co [1993] BCLC 328 at 335. While any effect on the civil proceedings should be taken into consideration when deciding whether to make an order for examination, I have no doubt that in this case the need to have an examination, if the liquidators are to fulfil their functions generally, outweighs any such consideration." [8]

13. The Court is, therefore, required to balance the legitimate need of liquidators to understand the relevant part of a company’s affairs and the right of the examinee not to be subject to an examination, which will put him at a disadvantage that he would not normally be under in the course of litigation or, approaching the matter from the opposite direction, will not give a company in liquidation an advantage not available to other litigants.  In approaching this balancing exercise the Court has regard to the fact that the liquidators of an insolvent company are commonly at a disadvantage in advancing claims on behalf of an insolvent company with a view to ensuring recovery of assets for the benefit of creditors, namely, that they are appointed normally with no prior knowledge of a company’s affairs and by the very nature of insolvency commonly find the company’s records incomplete and unsatisfactory and its officers unhelpful. This in my view is the position in this case.  The liquidators have had considerable difficulty in obtaining documents and, despite the endless protestations to the contrary by Ms Chen and the lawyers who she has instructed during the course of the winding‑up proceedings, it seems clear to me that she has no genuine interest in assisting the liquidators; quite the contrary.

The argument

14. The liquidators have produced for the purpose of the next part of Ms Chen’s examination a questionnaire listing the matters on which they wish to examine her.  The first section deals with the transaction, which is the subject matter of the present proceedings. It is clear that the large majority of the questions are directed to the transaction with the 2^nd Defendant and involve asking questions of the sort that Ms Chen is likely to be asked in cross-examination at trial.

15. Ms Chan argues that an examination of Ms Chen of the sort indicated by the questionnaire would be a dry-run, carried out with the benefit of Ms Chen’s witness statement, of her cross-examination at trial.  This she says is necessarily giving the Company an advantage that it would not normally have in litigation and is oppressive.  The fact that Ms Chen is the majority shareholder of the 1^st Defendant rather than the Defendant makes no difference.  The principles extend to witnesses.[9]

16. The Company’s position is that this is an unusual case.  It is clear that for a period the Company and the 2^nd Defendant proceeded on the basis that the Company was the true contracting party and that in the normal course of events it would have had the documents, which it has only obtained after discovery. The Liquidators of the Company are trying to understand how this Company conducted its affairs and how the transaction the 2^nd Defendant fits in.  They accept that part of the purpose of examining Ms Chen on matters concerning the transaction is to be better able to advance the Company’s case, but this Mr Sussex submitted is not to an attempt to obtain a special advantage, it is a permissible attempt to recreate the knowledge that the Company should have and, but for its liquidation, would have.  Mr Sussex accepted that there may be individual questions that are impermissible, but the general line of questioning is not.  In these circumstances he submitted the Company should be released from the implied undertaking.  If Ms Chen objects to any particular question and the use of any particular documents to support it the objection can be dealt with during her examination.

17. Ms Chen was at the material time not only the sole shareholder of the Company, but for much of that time its only director.  The authorities establish that in exercising its discretion the fact that the intended examinee is a director makes for as stronger case for ordering an examination than where he is a third party[10]. In my view there is reason for the liquidators to want to understand more fully how the Company apparently came to sign a contract with the 2^nd Defendant and to advance a substantial sum to it.  Although, Ms Chen has addressed certain aspects of the transaction in her witness statement she has in my view clearly not addressed all.  She does not address at all how staff of the Company came to think that the 2^nd contract should be executed or how the 2^nd Defendant came to sign it.  Neither does she address the accounting treatment of the money advanced by the Company.  Ms Chen has not provided a comprehensive explanation for what, even on her own case, is a strange situation.

18. In my view it would be proper to allow Ms Chen to be examined on matters relating to the signing of the contract between the Company and the 2^nd Defendant although I accept that there may be questions that intrude too directly into the issues to be determined in the trial of this action.  As the examination will be carried out before me in my view the risk of the examination becoming oppressive can be kept within acceptable parameters.

19. It may be that the documents which have been disclosed will have a limited role to play in the examination.  That is matter that can be best addressed during the examination.  In my view it is, however, desirable that the provisional liquidators are able to use them to assist in asking permissible questions of Ms Chen.

20. I, therefore, will make an order in the terms of the summons of 13 July 2012.