MIMI KAR KEE WONG HUNG v. SEVERN VILLA LTD AND ANOTHER

HCMP 243/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 243 OF 2011

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HCMP 522/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 522 OF 2011

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R U L I N G

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Introduction

1.  This is a summons dated 16 September 2011 taken out by the Plaintiff requiring the 1st and 2nd Defendants to disclose documents or classes of documents set out in the Schedule to the summons.  It is convenient to set out this Schedule here and then work through its parts:

(1)  All documents containing records of directors current accounts (including ledgers or records that are stored electronically, on microfilm or by any other means) of the 2nd Defendant (whether under the name Applied International Holdings Limited (“AIHL”) and/or Applied Development Holdings Limited (“ADHL”) covering the period 1989 to 2010 in respect of all credit or loan transactions involving the Plaintiff, the 3rd Defendant and/or the Plaintiff and the 3rd Defendant jointly.

(2)  All documents containing records of inter-company current accounts (including ledgers or records that are stored electronically, on microfilm or by any other means) covering the period from 1 July 2001 to 2010 between:-

(1)  AIHL/ADHL and the 2nd Defendant (whether under the name Incar Electronics Limited or Severn Villa Limited);

(2)  AIHL/ADHL and iQuorum Cybernet Limited/Applied Investment (Asia) Limited; and

(3)  AHIL/ADHL and RJP Finance Limited.

2.  The summons is supported by an affirmation, also dated 16 September 2011, of Elaine Sum who is one of the Plaintiff’s solicitors in these proceedings.

3.  She explains that the discovery sought relates back to my order of 24 February this year which was in general form requiring both parties to make discovery relevant to the issues raised in the Amended-originating summons.  The chronology is that on 19 April the parties exchanged their lists and on 3 May the 1st and 2nd Defendants, through their solicitors, delivered copies of the documents set out in their lists.  On 11 May, Miss Sum’s firm wrote to the Defendants’ solicitors requesting a further and better list in respect of the Defendants’ and their associated companies which relates to records as to the amounts paid or received in respect of the property sale and purchase at Santa Monica and the subsequent purchase of the premises at Severn Road.  Since then the respective solicitors have been in dispute as to what has and what should or, need not be disclosed, culminating in this summons.

A brief summary of the way the case is put in the originating summons and the right to discovery arising from it

4.  What I am about to set down is no substitute for a full reading of the pleadings.  Nevertheless, it will I hope provide the necessary background against which this Ruling must be based.

5.  What the Plaintiff is asking for is a declaration that the 1st Defendant holds the property on a resulting or constructive trust for her benefit and for an account of all sums received and paid out by the Defendants in respect of Severn Road.  The Plaintiff’s case is that Severn Road was purchased using her funds or funds belonging to her provided for the purpose by ADHL (the 2nd Defendant).  It is her case that Mr Hung (the 3rd Defendant) promised to her that the purchase of Severn Road was to be funded, at least in part, by the proceeds of sale of the four townhouses built on the land at Santa Monica (the Santa Monica property) which had been purchased and registered in the Plaintiff’s name.

6.  The Defendants’ case is that the purchase of Severn Road and before it, the purchase of the Santa Monica property were funded by the 2nd Defendant or through its associates and/or subsidiaries either by their own funding or through bank loans raised for the purpose.  The proceeds of sale of Santa Monica were paid to a company called AI (Asia) Limited in partial discharge of a loan due to that company by the 2nd Defendant.

7.  Be that as it may, the Plaintiff’s position is that even if the Santa Monica property was paid for using funds belonging to the 2nd Defendant or, of one of its wholly-owned subsidiaries, such payments had been made on behalf of the Plaintiff as loans to her which should and would have been recorded in the current account ledgers of the 2nd Defendant.

8.  It is this accounting treatment that has now given rise to a trail of discovery which the Plaintiff’s solicitors are seeking to follow.  It is submitted that the accounting treatment of the amounts paid by the 2nd Defendant and its associated and subsidiary companies in respect of Severn Road and the Santa Monica property that are now in issue.  That treatment is to be revealed from a consideration of the books of account of the companies that paid or received sums in respect of these two properties.

The disclosure to date

9.  What has been disclosed so far is considerable. It follows from the issue of the summons that the Plaintiff suggests that the present disclosure does not go far enough.

10.  Mr Barlow SC, for the Plaintiff, begins by demonstrating that everything that is being asked for has been referred to either directly or indirectly in the parties’ pleadings.  The references are the following:

(a)	SOC:	paras. 16-17, 29(3),33-34, 36, 41(2)-(4), 42 and 48-50.
(b)	The D1/D2:	paras. 12(b) and (d), 18(a), 20(a), 40(a)
	Defence	and (b), 42(b)(i)-(iii) and 44(d)-(f).
(c)	D3's Defence:	paras. 11(2) and (4)(a), 16(1)-(3), 17, 31(1) and 39(3).
(d)	P's Reply:	paras. 12(1), 13(3)

As such, Mr Barlow submits therefore that these documents must be relevant and should be disclosed.

11.  Whilst I would have thought that, prima facie, where a document is referred to in a pleading, directly or indirectly, then it ought to be disclosed subject to sufficient relevance being shown to the issues raised by the pleadings.

12.  Nevertheless, other factors will inevitably impinge on the final decision as to whether disclosure will be ordered.  In this regard, consideration needs to be given to what has already been disclosed and therefore whether any further disclosure would involve disproportionate effort and cost in obtaining what is said to be lacking in an opponent’s discovery.  In making the correct assessment the importance of what is sought to be disclosed relative to the issues in the case will assume the greatest importance.

13.  In opposing discovery the Defendants have filed the third affirmation of Miss Ng Kit Ling dated 22 September.  She is the company secretary and financial controller of the 2nd Defendant.

14.  As to disclosure of records pre-2000 she affirms, referring to the Defendants’ supplementary list of documents dated 7 July 2011, that the documents were either destroyed (as they were beyond the normal retention period) or handed over to the new owners of the companies when they were disposed of.  By her third affirmation she confirms this to be the case save for any records that the two Defendants have already disclosed.

15.  This being her evidence on affirmation I take it to be conclusive and no further order will be made in relation to the pre-2000 documents.

16.  As to documents after 2000 different considerations must apply given that these have not been destroyed nor parted with.

17.  As I already indicated the Defendants’ case is that there has already been extensive discovery and that the Plaintiff had been given all that she is entitled to.  In such circumstances, I now propose to work through the Schedule to the Plaintiff’s summons in order to examine whether I should oblige the Defendants to prove more documentation.

18.  Firstly, under (1) in the Schedule all the documents from 2001 (as it now is) to 2010 in respect of all credit or loan transactions involving the Plaintiff, the 3rd Defendant and/or the Plaintiff and the 3rd Defendant jointly.

19.  It is helpful to refer to Miss Sum’s affirmation for a summary of what has been disclosed following and, in addition to the parties’ original discovery by List on 19 April 2011.  This was followed by a request by the Plaintiff’s solicitors by letter dated 11 May 2011 to which I have already referred for a further and better list on the basis that the original list did not amount to full disclosure.  The request for more disclosure was extensive and it is helpful and instructive to set out here the precise terms of what was being asked for and the reasons why there should be such disclosure.  The relevant parts of the letter are at pages 93-94 of the bundle prepared for this hearing:

“Incomplete discovery by your clients

Despite the aforesaid, your clients have selectively disclosed, insofar as accounting documents are concerned, (a) the audited accounts of Applied Properties Limited (pages 38 to 158 of exhibit ‘HKMM-2’; (b) the audited accounts of Incar Electronics Limited/SVL (Item Nos.144, 148, 155, 162, 168, 174, 182 and 196 of the List of DLOD); (c) the general ledger of iQuorum Cybernet Limited from 1st July 2000 to 30 June 2001 (Item No.57 of DLOD); (d) a copy breakdown of the amount allegedly due from the Applied Group to the iQuorum Group (Item No.65 of DLOD); and (e) a journal voucher of Applied Properties Limited dated June 2001 (Item No.69 of DLOD).

In particular, we note that your clients have failed to disclose the relevant books of accounts (such as the general ledgers and/or the directors/shareholders current accounts) of at least the following seven entities (each of which was a wholly owned subsidiary of ADHL — so that its accounts and ledgers were incorporated within the consolidated accounts of ADHL in each relevant year) relating to sums paid or received in respect of the Santa Monica Property and the Properties:-

(1) Applied Electronics Limited (which allegedly paid the US$803,000 balance for the land acquisition for the Santa Monica Property);

(2) Applied Electronics (OEM) Limited (which allegedly reimbursed our client for the US$25,000.00 deposit of the land acquisition and paid US$1,267,993 towards the construction costs and expenses for the Santa Monica Property);

(3) AIHL (which allegedly paid US$40,993 of the contribution costs/expenses for the Santa Monica Property);

(4) Applied Properties Limited (which was allegedly the beneficial owner of the Santa Monica Property);

(5) RJP Finance Limited (which allegedly provided ‘internal funding’ of HK$8,112,500 towards the purchase price of the Properties);

(6) iQuorum Cybernet Limited/Applied Investment (Asia) Limited (which allegedly obtained a loan of HK$20,000,000 from Wing Hang Bank, Limited for the purchase of the Properties); and

(7) Incar Electronics Limited/SVL (which allegedly obtained total loan of HK$35,400,000 from Hang Seng Bank and DBS Kwong On Bank for the purchase of the Properties).

In view of your clients’ ability to disclose a purported declaration of trust dated as early as 23^rd January 1990 in respect of the Santa Monica Property and purported general ledger and journal voucher dated 2000 to 2001 as identified above, we are firmly of the view that your clients do have the above records of accounts in their possession, custody or power.”

20.  On 7 July, Miss Ng filed her second affirmation to which she exhibited a supplementary List of Documents but with some of those documents containing redactions or being sealed up on the basis that those parts were not relevant.

21.  On 28 July, the Plaintiff’s solicitors sought further discovery of the accounting documents of AEL, AE(O)L and iQuorum being related companies of the 1st and 2nd Defendants.  This request produced a redacted copy of the trial balance of AE(O)L as at 30 June 1998 and the general ledger of iQuorum from 1st July 2000 to 30 June 2001.  This was challenged by the Plaintiff’s solicitors and responded to by the Defendants’ solicitors on 22 August with the explanation that no entry relating to the acquisition or disposal of the Santa Monica Property had been entered into the director’s current account ledgers in which circumstances such disclosure was unnecessary.

22.  On 1 September 2011, the 1st and 2nd Defendants filed a second supplemental List disclosing more documents including a ledger of the 1st defendant about leasehold improvements from June 2002 to September 2005, copy monthly trial balances of AEL from July 2002 to February 2006, some of which were either redacted or sealed up, a copy of the general ledger of iQuorum being its account with Wing Hang Bank from July 2001 to June 2002, together with a copy of a temporary receivables ledger from July 2002 to June 2004 which did not contain the current accounts of directors/shareholders of AIHL or of the 2nd Defendant in respect of credit or loan transactions relating to the Plaintiff, the 3rd Defendant or of both of them jointly.

23.  Complaint is also made that the Defendants have not disclosed all the documents that record inter-company current accounts including records from July 2001 to 2010 between AIHL/2nd Defendant and the 2nd Defendant whether under the name of Incar Electronics Limited or the 1st defendant and also AIHL/2nd Defendant and iQuorum and lastly AIHL/2nd Defendant and RJP Finance Limited.

24.  Apart from this, Miss Sum has said in her affirmation [para.22] that in addition to a failure to make such disclosure some of the disclosed documents, as I have already observed, have either been sealed up or have had parts of them redacted.  It is said that as an executive director of AIHL/2nd Defendant at the times that are material to these proceedings, the Plaintiff has a right to see everything that has been asked for.

25.  In this regard, Mr Barlow has drawn attention to and shown me a judgment dated 30 August 2011 by Harris J relating to an application by this Plaintiff against the 2nd and 3rd Defendants in these proceedings for production of documents of ADHL (the 2nd Defendant before me).  The matter before Harris J was under S.152FA Companies Ordinance by the Plaintiff qua shareholder of ADHL for production of company documents.  The complaint before Harris J, as it has been since the start of this matter, was that the 3rd defendant, who directs the operations of ADHL, has been deliberately obstructive and seen to it that the Plaintiff has had a sight of as few as possible of ADHL’s documents and those of its associated companies.  Before Harris J the Plaintiff has been substantially successful in obliging ADHL to produce a number of documents which, but for that proceeding, she would not have obtained.  I am told that the matter before Harris J still has some outstanding issues to be resolved.

26.  Insofar as Mr Barlow wishes to argue that where the Plaintiff has succeeded before Harris J she should also succeed before me, I venture to think that Mr Leung, for the Defendants, must be right that a S.152FA application by a shareholder exercising a shareholder’s rights must be materially different from the Plaintiff’s rights to disclosure of company documents in her capacity as a putative beneficiary under a constructive or resulting trust in respect of company property.  The rules relating to discovery differ as do the issues between the Plaintiff and the Defendant companies in this case from those of the Plaintiff qua shareholder under specific statutorily given rights to have access to company documents, which was her application before Harris J.  In such circumstances I do not believe that I am able to look to Harris J’s judgment as providing direction or guidance on this discovery application.

The Argument

27.  Mr Barlow submits that all the documents that are asked for comprise the two corporate Defendants accounting records and therefore are within their power, custody and possession and, as such, within the wide ambit of the original order for discovery and additionally, that the four types of ledgers asked for are within the specific discovery order that was made in June 2011.  Without these documents the Plaintiff will be grossly hampered in presenting her case including in the preparation of his opening speech by Mr Barlow.

28.  In resisting the summons, Mr Leung has largely followed Miss Ng’s third affirmation.

29.  As to the Director’s current accounts, Mr Leung submits that in asking for discovery relating to “all credit or loan transactions” involving the Plaintiff and the 3rd defendant the demand is too wide in two respects.  One needs to go back to the issues in dispute.  These need to be identified and the class of documents sought should then be limited to those relevant to the issues.  There should also be some explanation as to how those documents are relevant.  Mr Leung says that there is nothing of this in Miss Sum’s affirmation in support of the summons.

30.  In this regard it must be right that a request for “all credit or loan transactions” is well outside the scope of the issues that will need to be decided at the hearing.  Mr Leung is also right to draw attention to the fact that the request by correspondence was correctly limited to the Santa Monica property.  I am satisfied that this is what the Plaintiff would be entitled to and presently I will consider whether she has been given everything that she is entitled to.

31.  The second complaint by Mr Leung as to the width of the request is that it demands discovery of director’s accounts up to 2010. This he says goes well beyond the time-frame of the dispute.  The Plaintiff’s case is that the loans for the purchase of Santa Monica were in late 1989 or 1990.  These loans were repaid by the Plaintiff between January 1995 and June 2001.  Thereafter, SV Investment Properties was purchased in 2001 and the Plaintiff started her occupation of Severn Villa in January 2004 or, thereabouts.

32.  In such circumstances, I uphold Mr Leung’s submission that there is no need to insist on disclosure of such transactions after 2004 although some of the discovery already provided goes up to 2006.  This therefore will provide the time-frame.  Upon her occupation of the property the owner of the legal title to Severn Villa will have been, on the Plaintiff’s case, fixed with the constructive or resulting trust contended for by her.  To roam beyond 2004 up to 2010 would be tantamount to a roving investigation of the companies’ affairs which is not the ambit of this proceeding, although such an investigation may well be permissible, in terms of access to documents of the companies, under an application such as the one brought before Harris J.

33.  From this I now turn to a consideration of what has been provided and whether this suffices.  The Defendants’ case is that affirmed to by Miss Ng in her third affirmation.

34.  The point has already been made that the Defendants have not kept pre-2000 records.

35.  From 2000 to 2006, the 2nd Defendant did not keep director’s current accounts.  All directors’ accounts with the Plaintiff and the 3rd Defendant were booked into AEL.  In terms of present disclosure the monthly trial balances of AEL from July 2000 to February 2006 have been disclosed.  The information so provided is the balance figure of the current accounts with directors of the 2nd Defendant’s group at the end of each month together with any changes during the course of a month. Mr Leung’s comments that upon a consideration of these monthly trial balances the directors’ current accounts are very small when compared to the alleged Santa Monica loans and the shareholders loans.  That point is perhaps neither here nor there on this summons although, no doubt, a matter for the trial itself.

36.  The other matter that Miss Ng has related is that the accounting practise of AEL was to clear off a director’s current account at the close of each financial year so that none has been carried over from year to year.  Consequently, 2010 records could say nothing about the position for a relevant accounting period such as 2001.

37.  Drawing this together, Mr Leung submits that once the AEL trial balances have been disclosed up to February 2006, which show figures that are far less than the contended for loans in the purchase of Santa Monica, there is nothing else that needs or ought to be disclosed by the Defendants.  There is nothing in the accounting records under this head that supports or appears to be relevant to the Plaintiff’s case.

38.  Mr Leung has rightly anticipated one point which concerns the ledgers, because it is from these ledgers that the trial balances have been compiled.  He has referred to four layers of accounting documents starting, at bottom, with the various vouchers which evidence the figures up the accounting chain.  Thereafter, are the ledgers, from which, up the chain, are the trial balances and from which the accounts would be prepared. Mr Barlow says he is entitled to and wants to see the ledgers which referred to the already disclosed trial balances.  Miss Ng has deposed that these ledgers disclose nothing that pertains to directors’ loans in relation to Santa Monica or to the purchase of SV Investment Properties Limited and, in such circumstances, her affirmation to this effect must be conclusive.  Mr Barlow therefore is not allowed to delve into the ledgers to try, presumably, to disprove Miss Ng’s statement or, find something else which might cause him to ask for yet more discovery.  In support of this, Mr Leung has cited the case of Dah Sing Bank v Chu [1946-72] HKC 296 at 306D-E, an old authority and, the even older case of Jones v Montevideo Gas Co. [1880] 5QBD at 558, per Brett LJ.

39.  Mr Leung submits that to permit such disclosure would be to entertain an impermissible fishing expedition.  Those are not his words but they describe what he is submitting.

40.  It strikes me that there must be a limit to how far an enquiry will be allowed to go.  In a case such as this, where suspicion runs so deep, a refusal to provide access to the ledgers will only make matters worse.  That in itself is no reason to order disclosure.  Nevertheless, I do propose to direct production of the ledgers as the primary documents of account from which the trial balances have been drawn.  What will be shown are the entries which refer to the Plaintiff and the 3rd Defendant which have been used to compile the trial balances which have already been disclosed.  That is the limit of the order.  There is no need to show the ledgers which refer to the accounts of other directors.  As the disclosure of the trial balances up to 2006, so the ledgers up to 2006 will need to be disclosed insofar as they relate to the Plaintiff and the 3rd Defendant.  These will be provided within seven days of today.

41.  Finally, the summons seeks disclosure of inter-company current accounts.  Miss Ng has affirmed that none exist between the 1st and 2nd Defendants nor, between the 2nd Defendant and RJP Finance.  This must therefore stand as a sufficient answer.

42.  There is also a request to see inter-company accounts between the 2nd Defendant and iQuorum.  Mr Leung submits, and rightly so in my judgment, that the only relevant inter-company account between these two companies is that in November 2000 the 2nd Defendant used the proceeds of sale of Santa Monica to repay a loan advanced by iQuorum to the 2nd Defendant.  Mr Leung accepts that there must be disclosure as to this transaction which has already been provided.  Accordingly, I will make no further order under this part of the Schedule to the summons. 

43.  Beyond the ledgers, about which I have just made an order, I am satisfied that the plaintiff has all the discovery that she is properly entitled to.  Mr Barlow has submitted that Miss Ng is not a deponent whose affirmation is to be believed.  No doubt she will be closely cross-examined by him at the trial on a number of matters but, in terms of what she has deposed to in her third affirmation I am prepared to take it at face value in the absence of anything that is obviously untruthful or inherently unreliable.  I say this despite the error at para.18 of this affirmation and has been corrected by Mr Leung at the earliest opportunity before me in relation to the audited accounts for 2001 to 2003 inclusive which have not been disclosed and will be.

44.  I am bound to say that this is case where both parties have made much disclosure and I trust that this ruling will now close this facet of the litigation.

Clarification

45.  Immediately after delivery of this ruling, Miss Sum has asked for clarification of which ledgers are to be disclosed.  It seems to me, as I hope I had been made clear in the ruling itself, the ledgers of the trial balances of all the companies that have already been disclosed will now be produced for the Plaintiff’s solicitors’ inspection insofar as these relate to transactions between herself and the 3rd Defendant, if any.

46.  I will adjourn the argument as to the costs occasioned by this summons to a convenient time during the course of the main hearing itself.