DELCO PARTICIPATION B.V. v. HWH HOLDINGS LTD

HCA 2943/2015

[2021] HKCFI 265

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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DECISION ON
(1) EXPERT EVIDENCE DIRECTIONS AND
(2) THIRD PARTY DISCLOSURE

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A.      Introduction

1.  In advance of the 4^th Case Management Conference on 29 January 2021, I dealt with matters relating to directions for potential expert opinion evidence.  I did so with the benefit of written submissions provided by the parties in advance.

2.  I decided most of the questions at the hearing, but reserved one point for further consideration.  This Decision is to identify the expert opinion directions ordered, and deal with that remaining point.

3.  This Decision is also to deal with an application by Delco for third party disclosure.

B.     Expert Directions Given

4.  I gave expert directions in relation to the following questions.

5.  First, as regards forensic accounting experts, I directed the experts to address the following questions/issues (being a combination of those questions put forward by Delco and Fang/HWH, as amended):

(1)     What do the financial statements and records (or any elements thereof) disclosed in these actions indicate or evidence as to the existence or nonexistence of the Scheme?

(2)     What were the respective capital investments of Fang and his group of companies or nominees (including Tian’an Resources, Tian Recycling, and HWH, collectively “Fang’s Group”) and Delco and its group of companies or predecessors (including Delco Recycling, Delco Europe and Delco Asia, collectively “Delco’s Group) in Taizhou Chiho-Tiande Foundry Co Ltd (“CT Foundry”), (collectively, “JV Companies”) between 1999 and 2008?

(3)     How did Delco Asia record Delco Group’s capital investments in the JV Companies in its accounts?  In particular, did Delco Asia under-record Delco Group’s capital investments in the JV Companies and if so, by how much?

(4)     What adjustments, if any, were made to Delco Asia’s accounts in or around 2008 in relation to: (i) each of the Debts, i.e. the Fang Debt, the HKM Metal Debt and the Chern Debt; (ii) each of the Delco Asia Loans, i.e. the Hefast Loan and the CTHK Loan, as shown in the Shareholders Loans Assignment and Capitalization Agreement dated 24 June 2010?

(5)     If Delco Asia under-recorded Delco Group’s capital investments in the JV Companies, where the Debts and in particular the Chern Debt recorded as a result of (i) Delco Asia’s under-recording of its capital investments in the JV Companies or (ii) the Scheme alleged by Delco?

6.  However, I disallowed Delco’s proposed expert question 4, and Fang/HWH’s proposed questions (e) and (f).

7.  Secondly, as regards the financial instruments valuation experts, I allowed the following questions/issues:

(1)     What is the amount which Delco ought to have received had all material facts (i.e. those set out in A2939 SoC §47(1)) relating to the January 2015 Sale been reflected in the sale price and the commission to Fang?

(2)     What is the market value of the CB (namely the convertible bond with a principal amount of HK$312.6 million) on the dates between 30 June 2015 and 31 August 2015?

C.     Remaining Issue on Expert Directions

8.  The issue which I reserved for further consideration relates to Delco’s proposed question/issue 3A, being:

What are the steps and market practice for procuring a buyer at fair or market value of financial instruments of similar nature and size as the CB?

9.  The proposed question does not concern Fang/HWH.  But it was opposed by CT.

10.  For Delco, Mr Dawes submitted that the proposed question/issue goes to whether CT was in breach of its best endeavours obligation to procure a buyer to purchase the CB.  He pointed to Delco’s pleaded case that for CT to satisfy the best endeavours obligation, it would have to take four steps, including: (1) assessing the fair value of the CB at the relevant time; (2) identifying potential buyers of the CB; (3) making enquiries with the potential buyer and soliciting best offers from them; and (4) assessing the offers received from the potential buyers.

11.  So, Mr Dawes submitted, the steps and market practice for procuring a buyer at fair or market value of financial instruments of similar nature and size as the CB is therefore relevant.  Delco has procured a draft expert report of Mr Arnold Ip of Altus Capital Ltd (“Altus”), showing there are industry standards in the corporate finance field on the approach in pricing and procuring buyers for financial instruments of similar nature and size as the CB.

12.  Mr Dawes submitted that the prevailing market price was part of the background matrix which would inform the proper construction of the obligation.

13.  For CT, Mr Anthony Chan submitted that the ineluctable conclusion derived from reading Mr Ip’s draft report is that all he proposes to say is that one ought to take steps to “know the product you are trying to sell” and “know your potential purchasers and how to attract them”.  But, Mr Chan submitted, that is a subject-matter on which the court is perfectly capable of forming a sound judgment on its own.

14.  Further, Mr Chan submitted that Mr Ip does not profess to give an opinion on a subject matter that forms part of a body of knowledge or experience which is sufficiently organised or recognised to be accepted as a reliable body of knowledge or experience.  This is evident from the various assumptions made in the draft report that falls foul of the requirement placed on Delco to demonstrate that the subject matter of the opinion would fall within an area in which expert evidence may properly be given: see Shenzhen Futaihong Precision Industry Co Ltd v BYD Co Ltd [2019] 2 HKC 175 at §§4-5.  I tend to agree.

15.  Mr Chan also submitted that the proposed evidence – even if properly regarded as expert evidence – should be refused on the basis that it is irrelevant and unnecessary, and accordingly lacks probative value.  This is because the question of the content of a “best endeavours” obligation, and what an obligor is required to do to satisfy that obligation is a question of interpretation of the relevant contract.  That is necessarily an exercise conducted by reference to the specific circumstances and context of the case, with close regard to the commercial purpose and object of the contract.  Further, in the context of a company and its officers, the “best endeavours” duty imposed imports the standard of a reasonable and prudent board of directors acting properly in the interest of their company.  The issue is not concerned with what a corporate financial adviser would have done.

16.  Whilst Mr Ip can obviously speak to his own experience and awareness of industry standards and practice (which is not an assumption), he goes on to make what is an assumption, that the operational practice of Altus is in line with the market practice, before setting out how he himself would approach the transaction if he had been instructed to procure a buyer for the CB.

17.  Hence, Mr Ip’s evidence would apparently be as to what he would have done if he had been instructed to sell a client’s bond, acting as someone paid to procure the sale.  But, Mr Chan submitted, this case is concerned with what CT did when selling its own bond.  Further, it is not appropriate to leave as a matter for argument at trial (as Mr Dawes submitted) the question as to whether the standard of a paid procurer is relevant to a company in the position of CT which is not in the industry of corporate finance and was not paid to procure a buyer.

18.  It is settled, Mr Chan submitted, that when deciding whether expert evidence should be adduced, the court will take into account whether that evidence is on true analysis unarguable and thus irrelevant, or only marginally arguable or relevant.  If such expert evidence would have little if any probative value, it may lead to substantial costs and time spent by the parties, so the court should exclude it as a matter of case management.

19.  I accept those submissions.  On first reading the proposed question/issue, my instinctive view was that it was unlikely to be real expert evidence of the sort which would provide any real assistance to the court in deciding the particular issue arising on the CB and the CB Undertaking.  Upon further consideration of the competing arguments put forward, I remain of that view.

20.  In the circumstances, I decline to direct expert evidence on Delco’s proposed question/issue 3A.

D.     Costs of Expert Directions

21.  At the hearing, I ordered the costs of the various summonses and arguments relating to expert directions to be costs in the cause.

E.     Third Party Disclosure

22.  By paragraph 1 of its summons dated 15 January 2021, Delco seeks specific discovery from CT of various documents or classes of documents described in the Schedule to the summons.

23.  The disclosure sought is by reference to the following categories of documents being:

(1)     the Memorandum of Understanding or any equivalent agreement/term sheet regarding the proposed investment by USUM Investment Group Ltd (“USUM”) or USUM Investment Group Hong Kong Ltd (“USUMHK”) in CT;

(2)     documents evidencing discussion and/or negotiation between CT and USUM/USUMHK in relation to the latter’s investment into the former during the period 16 August 2014 to 16 February 2015;

(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 by any officers, employees, agents, representatives of CT with Fang in relation to USUM/USUMHK’s potential investment into CT or the US$50 million deposit or the meetings between Fang and USUM/USUMHK.

24.  Paragraph 3 of the same summons pursues the same relief by way of third-party disclosure against USUMHK as respondent to the summons.  I have been provided with an affirmation of service identifying that the summons was served on USUMHK on 15 January 2021.  But, there has been no response since then from USUMHK.  In those circumstances, Mr Dawes asked me to make an order in the terms of paragraph 3 of the summons.

25.  Part of the context identified for Delco is that in September 2019 one of Delco’s solicitors had a telephone conversation with Mr David Xu, a former member of the senior management of USUM/USUMHK.  Mr Xu confirmed that he was involved in the initial stage of the acquisition of CT in around 2014/2015, and stated his best recollection that a Memorandum of Understanding regarding the proposed investment was signed in December 2014.  This supports the position that it is implausible given the size of the deposit and the transaction in contemplation that no documents whatsoever would have been generated, as should have been disclosed in these proceedings.

26.  At the hearing, I gave directions for the filing of affirmation evidence and skeleton submissions by Delco and CT, and for the substantive argument on the summons (and on a further specific discovery summons issued by Delco against Fang/HWH) to be adjourned to 30 March 2021.

27.  In those circumstances, I do not think it would be appropriate to accede to the application immediately to make the requested order against USUMHK.  Rather, the directions I have given should also be applicable to USUMHK.  It will therefore have the opportunity to file any affirmation and/or arguments in advance of, and if desired to attend at, the adjourned substantive hearing on 30 March 2021.