ORIENT FINANCE HOLDINGS (HONG KONG) LTD v. CHINA VERED ASSET MANAGEMENT (HONG KONG) LTD AND ANOTHER

HCA 682/2022

[2024] HKCFI 649

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 682 OF 2022

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BETWEEN

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DECISION

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1.  This is the Respondent’s appeal from the order of Master Frances Lok dated 18 September 2023 made in relation to the Plaintiff’s summons dated 11 November 2022 for third party discovery (“the Summons”). The Respondent was ordered to give specific discovery of an investigation report (“the Report”) prepared by Deloitte Advisory (Hong Kong) Limited (“Deloitte”) to the Plaintiff. At the conclusion of the hearing the decision was reserved which I now give.

Background facts

2.  D1 is the investment manager of D2 (“the Fund”). The Fund is a feeder fund into the Shareholder Value Fund (“the Master Fund”). The Fund is an indirect wholly owned subsidiary of the Respondent, a company listed on the Hong Kong Stock Exchange.

3.  The Plaintiff invested US$25 million in the shares of the Fund on 24 November 2016 that had a lock-up period of 36 months.

4.  In May 2021, the Plaintiff submitted a redemption request in respect of the balance of its investment in the Fund, the redemption date being on or before 1 October 2021. Approximately US$17 million of the redemption request remains unsatisfied.

5.  The Plaintiff’s legal representatives sent demand letters to the Respondent on 19 January, 31 January and 17 February 2022, seeking confirmation that it would fulfil the Plaintiff’s redemption request, failing which the Plaintiff would take all appropriate legal actions, including reporting the matter to relevant regulatory/enforcement authorities as well as recovering the redemption amount.

6.  After receipt of the demand letters, it became clear to the Respondent that there was an imminent need for it to obtain legal advice from external lawyers on the Plaintiff’s redemption request as well as the Respondent’s potential civil liability and regulatory obligations. The Respondent also reported the matter to its auditors, PricewaterhouseCoopers (“PwC”).

7.  By letter dated 8 March 2022 (“PwC’s letter”), PwC requested the Respondent, inter alia, to establish an independent investigation committee (“IIC”); and the IIC to appoint an independent professional advisor (“the Independent Consultant”) to conduct an independent investigation into various matters described in §§23-24 below (“the Investigation”).

8.  On 30 March 2022, the IIC (formed on 18 March 2022) appointed Deloitte as the Independent Consultant to carry out the Investigation. By then, the IIC had also engaged Herbert Smith Freehills (“HSF”) to provide legal advice in connection with the Investigation[1].

9.  Also on 30 March 2022, the Respondent announced a delay in publication of the Respondent’s 2021 audited annual returns as the Investigation (which was still ongoing[2]) could involve additional auditing.

10.  On 7 June 2022, the Plaintiff issued a generally indorsed writ against D1. It joined the Fund as D2 when the Plaintiff amended the writ on 10 August 2022[3]. The Plaintiff’s claims concern (i) the Defendants’ failure/refusal to comply with the redemption request; (ii) D2’s breaches of the terms of the subscription agreement; and (iii) D1’s breaches of its common law/fiduciary duties.

11.  On 13 September 2022, the Respondent published an announcement on the SEHK website (“the September Announcement”) setting out the key findings[4] of the Report.

12.  On 26 September 2022, the Plaintiff filed its statement of claim.

13.  On 18 September 2023, the Master ordered the Respondent to give discovery of the Report to the Plaintiff and, on 3 October 2023, the Respondent filed its Notice of Appeal.

Applicable principles

(1) Third party discovery

14.  The applicable principles are not controversial. A convenient summary of the principles on third party discovery can be found in Zenjoy Limited v Contex Group Co Ltd [2019] HKCFI 2558 at §§19-24.

15.  The relevant statutory provisions are section 42 of the High Court Ordinance (“the HCO”) (which confers a discretion on the court to order a third party to the proceedings, inter alia, to disclose documents “relevant to an issue arising out of the claim”) and Order 24, rule 8 (2) of the Rules of the High Court. The latter provides as follows:

“8. Discovery to be ordered only if necessary (O. 24, r. 8)

(2) No order for the disclosure of documents shall be made under section 41 or 42 of the Ordinance, unless the Court is of opinion that the order is necessary either for disposing fairly of the cause or matter or for saving costs.”

16.  That provision places the burden squarely on the applicant to satisfy the court that the order is necessary in the manner described, not only that the document is relevant or that discovery is desirable: see per G Lam J (as he then was) in Zhang Shouen v Standard Chartered Bank (Hong Kong) Limited, unrep., HCMP 682/2015, 15 October 2015 at §32.

(2) Legal professional privilege (“LPP”)

17.  While the parties cited different authorities, there is no disagreement as to the applicable principles. As explained in Lai Chee-Ying v Commissioner of Police [2022] HKCFI 3003 (at §8), LPP consists of 2 categories: legal advice privilege and litigation privilege. A useful summary of the relevant legal principles on litigation privilege can be found at §§9-15.

18.  For present purposes, the following propositions derived from that case are pertinent:

a) given the wider ambit of the litigation privilege, the requirements/conditions must be strictly adhered to: §11

b) the burden of proof is on the party claiming privilege to establish it: §13 (1)

c) a party claiming privilege must show that the relevant communications were for the dominant purposes of either (i) enabling legal advice to be sought or given, and/or (ii) seeking or obtaining any evidence or information to be used in or in connection with such anticipated or contemplated proceedings. Where communications may have taken place for a number of purposes, it is incumbent on the party claiming privilege to establish that the dominant purpose is litigation. If there is another purpose this test will not be satisfied: §13 (4)

d) the dominant purpose is a matter for a court to determine after consideration of the relevant evidence: §14 (citing Passmore on Privilege, 4^th ed, §3-071)

e) affidavits claiming privilege should be “specific enough to show something of the deponent’s analysis of the documents or, in the case of a claim to litigation privilege, the purpose for which they were created[5]”: §15

f) the fact that legal professionals were involved does not assist the plaintiff: §26 (citing Westminster International BV v Dornoch BV [2009] EWCA Civ 1323[6])

g) the purpose of the communications must be for “conducting the litigation”, and not merely in connection with litigation: §31 (3) (citing Phipson on Evidence 20^th ed at §23-81)

h) as a general rule, “non-privileged documents do not, without more, acquire privilege simply because they are copied by a solicitor for purposes of an action[7]”: §33 (3)

i) the common interest privilege does not enable a claim for privilege to be made when previously none was available because it is adjunct to legal advice privilege and litigation privilege, not a separate head of the privilege: §34 (citing Phipson on Evidence (supra) §24-09)

j) hence, "raw material (viz original documents which come into existence during the course of the transaction or event, not created for the purpose of legal advice) is not protected by LPP" and "are not protected by privilege even though such copies were forwarded to or made by a solicitor for litigious purposes”: §34 (2) (citing Citic Pacific Limited v Secretary for Justice (No 2) [2015] 4 HKLRD 20 at §§42-43)

The issues

A. Privilege

19.  The matter for determination is whether the Respondent is able to show that the dominant purpose of the Report was to obtain facts and enable the provision of legal advice in relation to contemplated legal proceedings.

20.  Mr Jin Pao SC and Mr Joshua Chan, counsel for the Respondent submitted that having been served with 3 letters of demand, there was a real prospect of litigation. The Respondent submitted that the dominant or major driving force behind the preparation of the Report was a need to obtain external legal advice and to the extent that there was a request from the Respondent’s auditors for an independent investigation, that would be at most a subsidiary purpose.

21.  The Respondent did not exhibit PwC’s letter. Rather, the first reference to it in contemporaneous documents in the hearing bundles is the public announcement published by the Respondent on 15 March 2022 (“the 1^st Announcement”). As noted in §7 above, PwC requested, inter alia, (1) the establishment of the IIC and (2) the IIC appoint an independent professional adviser to conduct the Investigation. In addition to those two requests, there was a third, namely, that the IIC “shall commission and lead the Investigation” (collectively “the Request”).

22.  The 1^st Announcement sheds some light on the scope and nature of the Investigation. It was to be conducted

“on, among others, (a) certain investments[8] made by an offshore fund … which is managed by the Group’s asset management subsidiary; and (b) the nature, existence and valuation of the underlying assets of such investments”.

23.  However, the 1^st Announcement offered no information as regards the specific investments that formed the subject matter of the Investigation that would have been expressly identified in PwC’s letter. Be that as it may, those were obviously matters of sufficient concern to PwC to warrant the commissioning of the Investigation in the circumstances described below.

24.  When the auditors made the Request, the deadline for the publication of the audited annual results of the Respondent for the year ended 31 December 2021 was approximately 3 weeks away. There was little likelihood of the deadline for publication being met given that the IIC had to be set up and the Independent Consultant appointed before the Investigation could even begin. Any delay in publication would involve a breach of the Listing Rules and raise the spectre of suspension of trading.

25.  Nevertheless, it is evident that the concerns of the auditor required the establishment of the relevant facts before it could complete the audit. As Millett J explained in Price Waterhouse v BCCI Holdings (Luxembourg) SA [1992] BCLC 583 (at 590):

“ … the board needed to establish the facts whether or not litigation ensued, so the board of BCCI, the auditors and the controlling shareholders needed to establish BCCI's financial position whether or not recovery proceedings were necessary.

Given that the dominant purpose of the investigation was to establish the facts necessary to enable BCCI's financial position to be determined, documents brought into existence in the course of the investigation did not in my judgment attract legal professional privilege merely because legal advice might be necessary in order fully to evaluate the financial implications of the facts.”

26.  Yet, §14 of the affirmation of Mak Tsz Yeung (“Mr Mak”) dated 24 February 2023 (“Mak 1^st”) filed on behalf of the Respondent stated:

“the Investigation Report was prepared for the collection of information or evidence to be used in or in connection with legal proceedings reasonably in contemplation and to facilitate the provision of legal advice by HSF to the [Respondent]/IIC”.

27.  That statement failed to take into account the fact that the respective roles and interests of the Respondent and the IIC do not necessarily align. While HSF was retained to advise both the Respondent and the IIC, the IIC was established as “an independent[9] investigation committee to “commission and lead the Investigation”. Further, “an independent[10] professional advisor” was to carry out the Investigation.

28.  Hence, under no circumstances could HSF render legal advice to the IIC that might undermine or erode the independence of the IIC and the Independent Consultant. In other words, HSF was not in a position to shape the Report in any way.

29.  The Respondent published 4 further public announcements within 2 weeks of the 1^st Announcement. It announced the formation of the IIC, the appointment of the Independent Consultant, the possible of the delay in publication of the 2021 audited annual results and their publication, and the possible suspension in trading of the Respondent’s shares failing publication of such results by 31 March 2022. All that came to pass on 31 March 2022.

30.  The events that unfolded after the last of the demand letters from mid-February to the end of March demonstrate that, at the very least, the Report served a dual purpose.

31.  At the hearing, the Respondent did not challenge the correctness of the test expressed in Lai Chee-Ying (at §13(4)[11]).

32.  Rawlinson and Hunter Trustees SA & Ors v Akers & Anor [2014] EWCA Civ 136 was a case that involved more than a single purpose. Tomlinson LJ (with whom Moore-Bick and Ryder LLJ agreed) held (at §22) that there was “an obvious need to establish which of dual or even multiple purposes was dominant if a plausible claim to privilege was to be made out”.

33.  There is no basis for the Respondent to relegate the Request to a subsidiary purpose. The Investigation was clearly instigated at the behest of PwC who, as the auditor, was best placed to formulate the scope and content of the Investigation.

34.  The Request was not a matter that the Respondent could sweep under the carpet as without the auditor’s concerns being addressed, the auditor would not be in a position to complete the 2021 audit.

35.  The Respondent cited Skandinaviska Enskilda Banken AB (Publ), Singapore Branch v Asia Pacific Breweries (Singapore) Pte Ltd [2007] SGCA 9 (“the SEB case”) to show that the court in that case “rejected a similar attempt to rely on public announcements to defeat a privilege claim[12]”.

36.  In that case, after the police informed the company of fraudulent activities by an employee of one of its subsidiaries, the company set up a special committee to oversee investigations into unauthorized transactions and take the necessary actions. The company appointed auditors and lawyers to undertake the investigation jointly. Public announcements were published on MASNET.

37.  It will have become apparent from the matters set out in §§22-30 above that the SEB case is distinguishable on the facts. There, the police report of fraudulent activity and arrest of the employee concerned prompted the company to commission the investigation to look into unauthorized transactions.

38.  In the present case the overarching feature is the ‘independence’ both of the IIC (comprised only of non-executive directors whose task was to “commission and lead” the Investigation) and of the Independent Consultant. That element does not feature in the SEB case.

39.  The question of dominant purpose is to be determined by the purpose at the time when the documents were created[13]. On the available evidence, it is more probable than not that the dominant purpose of the Report is the Investigation rather than fact-finding in connection with the then anticipated legal proceedings. In any event, at the very least, it served more than one purpose.

40.  I do not consider that the Respondent has remotely demonstrated that the dominant purpose of the Investigation was in connection with anticipated legal proceedings. In my view, the submission that the dominant purpose of the Report was the need to obtain external advice for the litigation is transparently unsustainable.

B. Necessity

41.  The September Announcement contained a “Summary of the Independent Consultant’s Key Findings” under 5 headings[14] (“the Summary”). The Investigation carried out by the Independent Consultant concerned investments in two funds that were not identified by name but by the designations "Subject Fund A" and "Subject Fund B".

42.  As pleaded in the indorsement on the writ and reflected in the SOC, the Plaintiff’s case relates, inter alia, to the Fund’s investment into shares of Fenghua 2 and Fenghua 4 and the Fund’s failure to classify the illiquid investments in Fenghua 2 and Fenghua 4 as “Designated Investments” pursuant to the terms of the Private Placement Memorandum (“PPM”).

43.  It is evident from perusing the Summary and the allegations made in the SOC that there is a considerable overlap of issues. The Respondent is not in a position to deny that the Fund’s investment into Fenghua 2 and Fenghua 4 was part of the subject matter of the Investigation.

44.  The Respondent’s objections to production of the Report are the following:

(1) the application is premature;

(2) there is a lack of explanation as to how the Report would be necessary for the fair disposal of the Plaintiff’s contractual claims against D2;

(3) as against D1, the claim is for breach of duty (in investing too heavily into the 2 subject funds both of which had long lock-up periods) but how the Report can make good that point is not explained; and

(4) the Plaintiff’s real purpose in seeking third party discovery is nothing more than a “fishing expedition”.

45.  The Respondent submitted that one of the relevant factors for non-party discovery is whether the Plaintiff is able to get the material it needs through other means. In the present case, the next step in the proceedings is for the Defendants to file their lists of documents. As they are under an obligation to disclose all relevant documents, if the Plaintiff is not satisfied with any aspect, it is entitled to apply for specific discovery. As that stage has not been reached, the present application is premature.

46.  The Respondent drew a distinction between the Report and liquidators’ reports in as much as a liquidator is an officer of the court. Further, the Independent Consultant’s evaluation of the primary facts is but opinion evidence. That is impermissible unless it is otherwise adduced as some form of expert evidence, which it is not.

47.  The Respondent accepted that the September Announcement that is in the possession of all the parties would be before the trial judge although its position remains that the Independent Consultant’s evaluation is opinion evidence. The thrust of the Respondent’s objections is that the Plaintiff has not shown why it is necessary to have the Report with all the methodology, with all the witnesses and with all the details.

48.  The Investigation took approximately 5½ months to complete. The Summary is informative and suggests that the Report itself is thorough. The Independent Consultant traced the inception of the subject investments to events commencing 27 August 2019

49.  What the Respondent failed to address is the feature of “independence” that pervaded the whole exercise. Plainly, the stipulation of that requirement was to ensure the impartiality of the Investigation and of the Report itself. That being the case, it is material to which a court would have regard.

50.  The Plaintiff submitted that the Respondent’s reporting of the findings of the Independent Consultant would be hearsay and it would be of more assistance to the court to have direct evidence of the Report.

51.  While it is for the trial judge to make primary findings of fact, I consider that the findings of the Independent Consultant would materially assist the parties and the Court in navigating the relevant events. Moreover, it would not be possible for the Court to make a proper evaluation of the key findings set out in the Summary without sight of the entire Report.

52.  For those reasons, I am satisfied that disclosure of the Report is necessary for a fair disposal of the proceedings. In my view, the overwhelming likelihood is that such disclosure would also achieve a saving in costs.

Order

53.  Accordingly, the Respondent’s appeal is dismissed. There is to be an order nisi of costs in favour of the Plaintiff with certificate for counsel, such costs to be taxed if not agreed.