THE JOINT AND SEVERAL LIQUIDATORS OF DAYS IMPEX LTD (IN LIQUIDATION) v. MAHESH NANIK DAYARAM

HCCW 298/2011 & HCCW 299/2011
(HEARD TOGETHER)
[2020] HKCFI 549

HCCW 298/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING‑UP PROCEEDINGS NO 298 OF 2011

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IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING‑UP PROCEEDINGS NO 299 OF 2011

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(HEARD TOGETHER)

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D E C I S I O N

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Introduction

1.  The Respondent in these two misfeasance proceedings, Mahesh Dayaram, has issued two summonses in identical terms seeking discovery from the Applicants, the Liquidators of Days Impex Limited and Days International Limited, pursuant to RHC O24 r7.

2.  In August 2015 Mr Dayaram and his Father, Nanik Dayaram, were convicted of nine counts of conspiracy to defraud following a     trial in HCCC 2/2014 and sentenced to 10 years imprisonment (“Convictions”).  Their appeals against the Convictions to both the Court of Appeal and the Court of Final Appeal were unsuccessful.

3.  Mr Dayaram is acting for himself [1].  He has appeared before me at a number of case management hearings.  He is clearly an intelligent man.  Mr Dayaram has been able to produce a clear and comprehensive skeleton argument running to some 50 pages despite the restrictions he is under in Stanley Prison. Although not a lawyer my impression is that Mr Dayaram has sufficient understanding of the court process to present the present applications and manage the civil proceedings he faces competently.  I have made allowances in the directions I have made for the progress of the proceedings generally, and this application in particular, to take into account that Mr Dayaram is not a lawyer and is in prison.  The Liquidators have cooperated by generally agreeing to the directions Mr Dayaram has proposed and preparing hearing bundles, although Mr Dayaram is the applicant in the present summonses.

4.  The style and contents of this decision are aimed at ensuring that so far as possible Mr Dayaram understands both the decision and my reasoning.  I have endeavoured to keep it as brief and simple as possible.

Background

5.  The background to the misfeasance proceedings is as follows.  Much of this section is taken from Mr Chen’s useful summary in his skeleton argument:

(1)  The Convictions concerned false invoices and false bills of lading submitted to various banks for a total of 174 import and export loan applications.

(i)  The funds from the import loans were purportedly used to fund the purchase of goods by the Group from Oscoda Electronics Ltd (“Oscoda”).  In support of the applications for import loans, sales invoices from Oscoda were submitted to the defrauded banks and, after each successful application, the funds were released to Oscoda.

(ii)  The funds from the export loans were purportedly used to fund the sale of products by Days Impex to Priya International LLC (“Priya”) and Sadrudin Sumar (“Sadrudin Sumar”).  Bills of lading were issued by Opus Container Lines S. A. (“Opus”) and sales invoices between Days Impex and Priya or Sadrudin Sumar were submitted to the banks in support of the export loan applications.

(2)  The companies obtained over US$50 million in loan proceeds from the 174 loan applications.  The Commercial Crime Bureau analysed the fund flow arising from 161 loan applications and observed a circular fund flow pattern.  The Liquidators also carried out an independent analysis of the fund flow arising from 161 loan applications and similarly observed a circular fund flow pattern.

(3)  In the criminal proceedings, the prosecution’s case was that the underlying sale and purchase transactions giving rise to the 174 loan applications were fictitious, and the invoices, bills of lading and other documents submitted to the banks in support of the loan applications were false.  As regards the trading entities, the prosecutions’ case was that Oscoda was not a genuine supplier, Priya and Sadrudin Sumar were not genuine purchasers, and that Opus did not exist and the related bills of Opus were false.

(4)  The misfeasance proceedings concern 161 import loan applications (“Loan Applications”).  The Liquidators’ case is that Mr Dayaram acted in breach of his fiduciary duties owed to the companies by submitting or procuring the companies to submit false invoices and false bills of lading to various banks in support of the Loan Applications.  The scope of the misfeasance proceedings largely overlap with the scope of the criminal proceedings: 156 out of 161 Loan Applications formed part of the 174 loan applications being the subject matter of the Convictions.

	HCCW 298 (Days Impex)		HCCW 299 (Days International)
Bank	No. of Loans	Charge	No. of Loans	Charge
HSBC	46 import loans	1 and 2	11 import loans	1 and 2
HSB	22 import loans	3 and 4	45 import loans	3 and 4
BOB	15 import loans	5 and 6	17 import loans	5 and 6
DBS	4 import loans	Not charged
Citibank	1 import loan	Not charged
Total:	88 import loans		73 import loans

(5)  The principal issue that arises for determination in the misfeasance proceedings is whether the transactions underlying the Loan Applications were genuine.  Various sub-issues arise, including the fund flow pattern of the proceeds from the Loan Applications, and if the fund flow was circular, whether the circular fund flow could be justified.

6.  Mr Dayaram does not accept that the transactions underlying the Loan Applications are false. His application for discovery is directed to producing documents that he believes will demonstrate this.  Necessarily he suggests that the transactions were not adequately or competently explored by his counsel during the criminal trial.

The Relevant Legal Principles

7.  Mr Dayaram’s skeleton argument contained extensive citation of authorities explaining the principles that govern discovery applications and how those principles in practice are applied by the courts.  As I explained to Mr Dayaram judges are very familiar with the principles and it is not necessary to delve into them in any depth.  I summarise them in the following paragraphs by using Mr Chen’s summary of the principles in his skeleton argument, with the exception of [8], which refers to an authority relied on by Mr Dayaram, which neatly sets out my approach to the application, which to use layman’s language, has been to give Mr Dayaram the benefit of the doubt:

(1)  The Summonses are issued under RHC O24 r7 and the inherent jurisdiction of the court.  The principles governing RHC O24 r7 are as follows (see Hong Kong Civil Procedure 2020 §24/7/2):

(i)  There is no jurisdiction to make an order for specific discovery under RHC O24 r7 unless there is sufficient evidence or prima facie case that: (a) the documents or classes of documents exist which the other party has not disclosed; (b) the documents relate to a matter in issue in the action; and (c) the documents are in the possession, custody or power of the other party.

(ii)  Once it is established that those three prerequisites for jurisdiction do exist, the court has a discretion whether or not to order discovery.

(iii)  The Court will not make an order unless the discovery sought is necessary either for disposing fairly of the cause or matter or for saving costs.

(iv)  The Peruvian Guano test remains the test of relevance.  A document is relevant if:

(a) it is reasonable to suppose that it contains information which may, not must, either directly or indirectly enable the party requiring the same either to advance his own case or to damage the case of his adversary; or

(b) it is a document which may fairly lead the party to a train of inquiry which may have either of those two consequences.

(v)  For the purpose of discovery, the pleadings have to be looked at broadly.

(vi)  The order must identify with precision the documents or categories of documents which are required to be disclosed, for otherwise the person giving discovery may find himself in serious trouble for swearing to a false affidavit, even though doing his best to give an honest disclosure.

(vii)  Notwithstanding the Peruvian Guano test, “fishing” is not allowed, and discovery should not be oppressive.

(viii)  The respondent may answer an application for specific discovery by an affidavit stating that he does not have the documents, and this will be conclusive at the interlocutory stage.

(2)  It is insufficient for an applicant to allege that the respondent has or had documents: a prima facie case must be made out for (1) existence, (2) possession, custody or power, and (3) relevance of the specified documents.

(3)  Where a request for a class of documents is made, the class must not be defined or described so widely so as to include documents which are not relevant to the issue.  The prerequisites for the invocation of RHC O24 r7 must be established in respect of the class described as a class, not as regards some in the class only. Further, a party applying for discovery cannot simply seek “all documents bearing upon an issue or showing a particular thing”, for such documents merely bear on an issue but do not form a class                    of documents which is discoverable under RHC O24 r7:     Li Tak Yee Samuel v Societe Generale Bank and Trust (unreported, HCA 2478/2009, 16 April 2013) at §§36–39 per Anthony Chan J.

8.  Mr Dayaram referred me to the decision of Stone J in Vashdev Essardas Mahbubani t/a Vashi's Export Co v Motis Exports Ltd and Others [2] in which the judge says this:

“... As no doubt will become known by commercial practitioners, my attitude, as Judge presently in charge of the Commercial List, is that in general discovery is a good thing, and that in cases of doubt I am more likely to lean in favour of discovery than against it. In this connection I am reminded of one of the broad principles of the common law as expressed by Lord Justice Bingham (as he then was) in the case of Ventouris v. Mountain [1991] 1 WLR 607 at 611H, where the learned Lord Justice observed as follows:

‘Our system of civil procedure is founded on the rule that the interests of justice are best served if parties to litigation are obliged to disclose and produce for the other party’s inspection all documents in their possession, custody or power relating to the issues in the action. This is not of course a necessary rule but it is firmly established here.  It is not however an absolute rule, as exceptions such as legal professional privilege and public interest immunity demonstrate.  Nonetheless, disclosure being generally regarded as beneficial, any exception has to be justified as serving the public interest which gives rise to the exception ...’”

9.  As I noted in [7] this reflects my own approach, which means that I have tended to lean in Mr Dayaram’s favour.  I now turn to consider the specific categories of documents that have been sought.

Banking documents — [1(a)]

10.  The Liquidators agree to give discovery of the documents sought in this paragraph.

Communications concerning fraud insurance policies — [1(b)]

11.  Mr Dayaram seeks:

“(b) Any and all documents (including letters, faxes, email communications, meeting attendance notes and phone call records) in respect to Fraud Insurance Policies and/or Fraud Insurance Claims by HSBC, HASE, BOBI, DBSB, CITI and UCOB, including but not limited to:

(i)  HSBC and HASE (‘HSBC Group’) Fraud Insurance Policy;

(ii)  HSBC Group Fraud Insurance Submitted Claims; and

(iii)  HSBC Group Fraud Insurance Payments Received.”

12.  Mr Dayaram seeks these documents, because he assumes that the criminal prosecutions were in some way procured by HSBC in order to enable them to make a claim under fraud insurance that HSBC has.  It would appear to be a central feature of Mr Dayaram’s defence that the case against him and his Father, which led to the Convictions and the present proceedings, are a consequence of dishonesty on the part of those advancing the claims.  So by way of example in [16] of his 1^st affirmation Mr Dayaram says this when dealing with the application for discovery of the fraud insurance policies: “As this was the PL’s first assignment for HSBC, FHY [Mr Fok] promised HSBC a criminal conviction and therefore had to obtain the conviction at any cost, including but not limited to lying under oath and/or withholding material information.”.  Mr Dayaram provides nothing remotely approaching direct evidence for these serious allegations. Much of his application seems premised on his (prospective) ability to construct from information that may be gleaned from facts contained in the documents that he seeks facts and matters from which the inference of a dishonest conspiracy to obtain the Convictions can be made.

13.  The Liquidators, through the affirmation evidence of Mr Fok, deny Mr Dayaram’s allegations.  Mr Fok says on oath that the Liquidators have not seen any such insurance policies and I cannot see why one would expect them to do so.  It is well established that a statement on oath that a party does not have in their possession, custody or power a document is conclusive [3].  That disposes of the application in [1(b)].

Communications with former clients or vendors of the companies —   [1(c) & (d)]

14.  This paragraph seeks disclosure of all documents with former clients and vendors of the Companies. Their relevance is said to be that they will help show whether the underlying transactions were genuine.  Although Mr Dayaram does not demonstrate what in such of these documents as exist might contain information that shows the transactions were relevant, as the genuineness of the transactions are in issue I will make an order for discovery of these documents.

Documents relating to recovery actions in respect of the Companies assets — [1(e)]

15.  If Mr Dayaram caused or permitted the companies to enter into bogus trade finance with HSBC thus causing loss, the fact that the Liquidators recovered monies on behalf of the companies from genuine debtors of the companies in itself is irrelevant to either an assessment of Mr Dayaram’s breach of duty or the loss it caused.  I note that Mr Dayaram has not adduced any evidence to suggest that anything was recovered from entities said to be customers under the impugned transactions.

Documents relating to the proceeds of the sale of carparks — [1(f)]

16.  Mr Dayaram is seeking documents which show how the proceeds of the sale of carparks not paid to creditor banks under the mortgages that they had over some of the 112 carparks apparently owned by Days International Hong Kong were dealt with.  This simply has nothing to do with the issues that arise in the misfeasance proceedings.

All documents seized by the Liquidators from the offices of the companies after their appointment — [1(g)]

17.  Clearly Mr Dayaram is not entitled to an order in these terms.  He is only (at its widest) entitled to all documents that have been seized that are relevant (in the sense explained in [7] and [8]) to the issues in the proceedings.  Mr Dayaram frames his application for these documents in his 1^st affirmation in terms of an entitlement to look at the documents and assess whether any are relevant.  The Liquidators could, if it was practical, give Mr Dayaram access to the documents and let him get on with checking them, but this is not the criteria for assessing whether an order under RCH O24 r7 should be made.  Under rule 7 a party is entitled to discovery of a class of documents defined with adequate precision by its nature [4].  A party cannot simply ask for everything the other party may have on the basis that amongst the documents there may be, or even likely be, some relevant documents.  Mr Dayaram has not made any effort to identify what classes of documents within the 600 boxes of files he suggests have been seized he wishes disclosed.

Conclusion

18.  In respect of the summons in each winding up proceeding I will make an order in the terms of paragraph 1(a), (c) and (d).  I will not deal with inspection in this decision.  I invite the Liquidators in the first instance to write informing me and Mr Dayaram of the approximate quantity of documents they will disclose (in the case of class 1(a) I understand Mr Dayaram has already been provided access to the documents) and how long it will take to compile them. Mr Dayaram can then write informing me of how he wishes inspection to be dealt with bearing in mind he is in Stanley.

19.  Given my decision and the reality of Mr Dayaram’s position I will make a costs order nisi that there be no order as to costs.