IVY ZHU XU v. HONG KONG PETROCHEMICAL CO LTD

HCA 1248/2017

[2023] HKCFI 3252

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1248 OF 2017

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BETWEEN

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D E C I S I O N

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A. INTRODUCTION

1.  On 24 February 2023, Master KW Wong ordered:

(1) The Defendant to produce a series of documents for inspection pursuant to the Plaintiff’s summons dated 23 November 2022 (“Discovery Order”); and

(2) The Plaintiff to pay security for the Defendant’s costs up to and including trial in the sum of $715,500, adopting the Plaintiff’s suggested amount (“Security Order”).

2.  The Defendant now appeals against both Orders. In this appeal against the Discovery Order, only 4 groups of documents (defined below) are in dispute. Existence or possession is not in issue. Rather, necessity for disposing fairly of the cause or matter or for saving costs is. In respect of the appeal against the Security Order, the Defendant seeks an increase in the quantum of security to $2,000,000.

3.  An appeal from a master to a judge operates by way of re- hearing but the judge can give weight it deserves to the master’s decision or adopt the master’s reasoning as the judge thinks fit: Hong Kong Civil Procedure 2023, Vol 1, §58/1/2.

B. FACTUAL BACKGROUND

4.  According to the Plaintiff, there were 2 loans (collectively, “Root Loans”) granted by one C&S Chem Limited (“C&S”) to the Defendant, a company incorporated in Hong Kong.

5.  The Root Loans were rolled over and refinanced by the 1^st and 2^nd Loan Agreements respectively, tabled below:

	1st Loan or Director’s Loan	2nd Loan or Related Company Loan
Date of loan agreement	14 January 2011	14 January 2011
Amount of loan	HK$12,480,000	HK$15,184,260
Interest	2.5% per annum	2.5% per annum

6.  There were 2 subsequent assignments of each of the 2 Loans such that the Plaintiff became the assignee. This is an action by the Plaintiff, for recovery of the 2 Loans from the Defendant.

7.  The Defendant denies the claim and effectively puts the Plaintiff to strict proof. In gist, the defences are that:

(1) The Root Loans had never been advanced and hence never refinanced by the 1^st and 2^nd Loans because of a total absence of bank account records at the material time;

(2) The 1^st and 2^nd Loan Agreements executed by the then Chief Financial Officer of the Defendant were void for want of authority;

(3) The documents adduced by the Plaintiff in support of the Root Loans, the Loan Agreements, and the Assignments are not binding on the Defendant as the relevant directors of the Defendants had acted in breach of fiduciary duties;

(4) The Assignments are not binding on the Defendant for want of authority of the person executing on behalf of the Defendant and want of the metallic seal;

(5) The 2^nd Assignment was void ab initio;

(6) The Assignments are void for being champertous;

(7) The Plaintiff is a mere equitable assignee;

(8) The claim is time-barred.

C. APPEAL AGAINST THE DISCOVERY ORDER

C1. Legal principles on discovery

8.  There is no dispute that an applicant has the burden of showing relevance, existence and possession of the documents by the respondent; and that the documents are necessary for the fair disposal of the trial and for saving costs: Hong Kong Civil Procedure 2023, Vol 1, §24/7/2.

9.  A document is considered to be relevant if it contains information which may, not must, either directly or indirectly enable the party requiring the same either to advance his own case or damage the case of his adversary. It is a document which may fairly lead the party to a train of inquiry which may have either of these two consequences: Compagnie Financiere et Commerciale du Pacifique v Peruvian Guano Co (1882) 11 QBD 55. This authority was applied in K&L Gates v Navin Kumar Aggarwal and Others, HCA 1061/ 2011 (unreported, 27 November 2017) at §16. There, Lok J cautioned against the excessively wide application of the Peruvian Guano test, and said that ultimately the question is whether the discovery is necessary for disposing fairly of the proceedings.

10.  In deciding whether discovery is necessary either for disposing fairly of the cause or matter or for saving costs, the Court should always bear in mind the objectives of, amongst others, ensurance of fairness between the parties: Sunny Tadjudin v Bank of America, National Association, HCA 322/2008, 22 December 2011, §7 Mimmie Chan J.

C2. A few preliminary observations

11.  Of the 4 groups of documents in dispute, Groups One and Four were mentioned in the Defendant’s former Expert Evidence Application but are sought only after dismissal of that Application. Dismissal of the Expert Evidence Application does not, in my view, bar the Plaintiff’s Discovery Application. This is because the 2 applications involve different tests. For expert evidence, the Defendant had to satisfy the Court that there was an issue that required an expert to give an opinion and not just to help the Defendant find documents. The Defendant failed to discharge that burden. For discovery, the Plaintiff has to satisfy the criteria in paragraph 8 above. The refusal to grant leave to adduce expert evidence meant that there was no issue that required the assistance of an expert. It does not mean that documents referred to in the Expert Evidence Application may not be relevant to the issues for trial.

12.  To seek discovery, it is not necessary for the document to have been pleaded or mentioned in an affirmation. Most often, documents are not pleaded because many of them are evidence and it is not the function of pleadings to plead evidence. If a document has been mentioned in a pleading or affirmation, it only means that the applicant can seek discovery under Order 24, rule 10(1).

13.  Contemporaneous documents are important especially since the personnel of either party actually handling the Root Loans, the 1^st and 2^nd Loans are not the witnesses themselves. Generally speaking, contemporaneous written documents and documents which came into existence before the problems in question emerged are of the greatest importance in assessing credibility: Hui Cheung Fai and Another v Daiwa Development Ltd and Others HCA 1734/ 2009 (unreported, 8 April 2014) at §77.

C3. Group One Documents – §1(a) to (c) of the Discovery Summons

14.  These items are:

(1) §1(a): the Agreement for Sale and Purchase of Shares dated 26 January 2010 (“SPA”);

(2) §1(b): a cashier’s order dated 26 January 2010 in the sum of $12,480,000 owed by the Defendant to C & S with interest at 2.5% p.a;

(3) §1(c): a cashier’s order dated 26 January 2010 in the sum of $15,184,260 owed by the Defendant to C & S with interest at 2.5% p.a.

15.  There is no dispute that Group One Documents were referred to in the 5^thaffirmation of Chau Kit Yee (“CKY-5^th”), filed in support of the Defendant’s application for leave to adduce expert evidence (“the Expert Evidence Application”). That application was dismissed by Master Dick Ho without any appeal.

16.  Under Order 24, rule 10(1),

“Any party to a cause or matter shall be entitled at any time to serve a notice on any other party in whose pleadings, affidavits or witness statements served under Order 38, rule 2A, … reference is made to any documents requiring him to produce that document for the inspection of the party giving the notice and to permit him to take copies thereof.” (emphasis added)

17.  In Moulin Global Eyecare Holdings Ltd v Olivia Lee Sin Mei [2013] 3 HKLRD 72, at §35, Fok JA (as he then was) laid down a two- stage test for this rule:

“35. There are thus two separate stages to be considered, although in practice these will usually be examined together. First, the party who has referred to the document in a pleading or affidavit bears the burden of showing good cause why an order for production should not be made. As a matter of practicality, at that stage, the fact of reference to a document in a pleading or affidavit will make it difficult for the referring party to contend that the document does not exist and it may also make it difficult for him to contend that it is not relevant. However, that is not the end of the inquiry as there is not then a presumptive rule in favour of an order for production and the referring party may be able to show, for example, that the document is privileged from production. In any event, under O.24 r.13 there remains, secondly, and independent of the first stage, a burden on the applicant for an order for production to show the Court that the order is necessary either for disposing fairly of the cause or matter or for saving costs.” (underline added)

18.  For the first stage, Mr Cheung and Ms Wong, defence counsel, submit there is good cause that an order for production should not be made. This is because the Group One documents are not canvassed in the pleadings but only in CKY-5^th, in support of the issue that the Loans were extinguished. Clause 4 of the SPA provided for some specified direct arrangements for full settlement or discharge of the Root Loans and the cashier orders were presumably issued pursuant thereto. Master Dick Ho held that that issue was not pleaded and the Expert Evidence Application was dismissed. The Plaintiff had not sought disclosure of any of the documents referred to in CKY-5^th prior to the hearing of the Expert Evidence Application and vehemently opposed that Application. Mr Cheung submits that the Plaintiff is estopped from withdrawal of its stance to say that the Group One Documents are relevant.

19.  I am unable to agree with defence counsel. I repeat paragraph 11 above. Under Order 24, rule 10(1), the Plaintiff is entitled to seek discovery “at any time”.

20.  The Group One Documents bore specific dates and were clearly in existence at the material times. This brings us to the second stage described by Fok JA.

21.  Mr Cheung submits that the Plaintiff has failed to establish necessity for fair disposal of the cause or for saving costs. The documents sought are not part of the pleaded case of either party. Specific discovery for the purpose of impeaching the credit of the opposing party is not generally allowed: Kan Wai Chung v Hau Wun Fai (unreported, HCA 811/2010; HCA868/2013, 6 February 2015), §§ 16-17, Chung J.

22.  I am unable to agree with Mr Cheung. Firstly, I repeat paragraph 12 above. Class One Documents constitute evidence. The Court can order inspection of documents even where those documents are not mentioned in the pleadings, provided that the requirements in paragraph 8 above are met.

23.  The Defendant’s reliance on Kan Wai Chung is misplaced. In that case, Chung J held (at §14) that the subject documents were not part of the false evidence relied on by the plaintiffs as part of their pleaded case concerning the false claim and evidence conspiracy. The part of the defence focussed on the background leading to why the documents referred to therein came to be executed, rather than on the documents themselves. Hence, mere relevance did not by itself satisfy either of the purposes in Order 24, rule 13(1). Kan Wai Chung is fact-sensitive and does not assist in the disposal of the present Discovery Application.

24.  Secondly, it was the Defendant’s own case in the Expert Evidence Application that Group One Documents were of particular relevance. CKY-5^th (§13) explained that the SPA was the first sale and purchase agreement that C&S executed as the buyer with other parties including the Defendant, which had the affect of discharging the Root Loans. The SPA was not completed resulting in another sale and purchase agreement. Clause 4 of the SPA provided for full settlement and discharge of the Root Loans. The Defendant is barred from saying that the Group One Documents are not relevant.

25.  Thirdly, Group One Documents are not for impeaching the credit of the Defendant. They go to the core of the issue in dispute, ie whether the Root Loans existed in the first place. If they had never existed, how could they ever be purportedly settled or discharged?

26.  For the reasons given in this Section, Group One Documents are relevant and necessary and would save costs of establishing the existence of the Root Loans. This Group clearly ought to be disclosed pursuant to the Peruvian Guano principles.

C4. Group Two and Three Documents

27.  Group Two Documents are:

(1) §1(h): the general ledger that shows “Loan payable” as stated under “Statement of Financial Position” of the Annual Financial Statement (“AFS”) of the Defendant from 1 January 2012 to 31^st December 2016;

(2) §1(i): the general ledger that shows “Loan payable” as stated under “Statement of Financial Position of the 2017 AFS of the Defendant.

(3) §1(j): the general ledger that shows “Other loans, unsecured” as stated under “Statement of Financial Position” of the 2018 AFS.

28.  Group Three Documents (§1(k)(viii) and (ix) of the Discovery Summons) concern finance costs, ie other loan interest in 2016, 2017 and 2018 as stated in the 2017 and 2018 AFSs.

29.  The Defendant says that they are irrelevant and unnecessary. The Defendant did not possess the general ledger, accounting vouchers and supporting documents sought for the years of 2009-2011. Those sought for 2012 to 2018 are not contemporaneous documents. They have not been canvassed in pleadings or affidavits either.

30.  On the other hand, the Plaintiff points out that two entries in the AFSs match exactly with the total principal sum of the 1^st and 2^nd Loans, i.e. HK$27,664,260; and the interests payable thereon, i.e. HK$691,607 as claimed by the Plaintiff. The AFSs, however, do not show who the lenders were, but one would expect the general ledgers to show their identity.

31.  I notice that the 2 entries in the preceding paragraph appear throughout in the Defendant’s AFSs not only for 2009-2011 but also for 2012-2018 (except 2016). Whilst the Defendant does not possess the general ledger, accounting vouchers and supporting documents sought for the years of 2009-2011, it may possess such documents for 2012-2018. These documents may shed light on who the lenders were and whether the finance costs matched the interest charged under the 2 Loans Agreements. I agree with the Plaintiff that the Group Two and Group Three Documents are relevant as going to the core of either party’s case and ought to be disclosed pursuant to the Peruvian Guano principles.

32.  Imagine that if these 2 Groups of Documents are not disclosed now and the Defendant denies that the sum of HK$27,664,260 and the interests of HK$691,607 in the AFSs are in relation to the 2 Loans, there is nothing to affirm or contradict that answer. These documents are plainly necessary and can save costs if they are disclosed ahead of the trial.

C5. Group Four Documents – §1(l) of the Discovery Summons

33.  This Group is for the AFSs of the Defendant for the 3 years ending 31 December 2019, 2020 and 2021.

34.  Mr Cheung points out that Group Four has never been canvassed at all in any pleading or affidavit. All along, the Plaintiff only referred to one audit report of the Defendant in the re-amended reply, ie the one for the year ending 31 December 2009, to illustrate that the Defendant acknowledged and confirmed the 2 Root Loans. The Plaintiff made no reference to any other AFSs in her pleadings.

35.  Further, Mr Cheung points out that the Plaintiff is already in possession of the AFSs of the Defendant for the years between 2010 and 2018 (except 2016), and 17 monthly Financial Reports from January 2016 to May 2017. Given that the 2 Root Loans were allegedly advanced in around 2009 and the 1st and 2^nd Loan Agreements were dated 14 January 2011, Mr Cheung submits that the Plaintiff is effectively “witch hunting” for AFSs 10 years after the event. No relevance or necessity can be established by the Plaintiff. Discovery of Group Four Documents is not cost-effective pursuant to the underlying objectives in Order 1A, rule 2, RHC.

36.  Mr Cheung also points out that Master KW Wong initially had reservations on the necessity of Group Four Documents. The Plaintiff’s counsel submitted before the learned Master that there was a duty on the directors under the Companies Ordinance to prepare the annual accounts to give a true and fair view of the financial position of the Defendant. Once the Defendant discovered the “mistake” (presumably about the existence of the 2 Loans), the directors needed to reverse their entry. That was for “testing” the Defendant’s case. Once again, Mr Cheung submits that discovery solely for the purpose of impeaching the credit of a party will not be ordered: Hong Kong Civil Procedure 2023, Vol 1, §24/8/3.

37.  On the other hand, Mr Fong, counsel for the Plaintiff, maintains his submission before the Master as stated in the preceding paragraph. He explains that the annual accounts needed to apply the accounting standards laid down by the Hong Kong Financial Reporting Standard for Private Entities (“FRSFPE”) issued by the Hong Kong Institute of Certified Public Accountants in May 2017. See s.380(1) & (4), and s.357(1) of the Cap 622; Companies (Accounting Standards (Prescribed Body)) Regulation (Cap. 622C).

38.  Under the FRSFPE, a company needs to disclose and correct prior period errors in the first financial statement authorized for issue after its discovery (§§10.19-10.23); and make provisions for contingent obligations (including those arising from litigation) (§21.4, 21.10, 21.11). An entity shall recognize a provision only when … it is probable (ie more likely than not) that entity will be required to transfer economic benefits in settlement” (original emphasis in §21.4(b)).

39.  The defence was filed on 7 May 2018. If the directors of the Defendant allegedly discovered the two Loans in 2018 as “erroneously” recorded in the Defendant’s AFSs, the directors should have reversed the entries in the 2018 AFSs in order to give a true and fair view of the accounts. “Provisions” had been made for the 1^st and 2^nd Loan Agreements together with the incidental interest in the 2018 AFS under Note 31.^[1]

40.  Mr Fong submits that the Plaintiff is entitled to “test” the case of the Defendant by verifying against its 2019 to 2021 AFSs to see whether the provisions made in the 2018 AFS had been reversed.

41.  Further, the Defendant itself has accepted, in its Expert Evidence Application, that the Group Four Documents were of particular importance in determining whether the Loans had been advanced (§§18 and 27 of CKY-5^th).

42.  I ask rhetorically, to test what? Whether the AFSs had been corrected reflects the directors’ opinion of the situation as the litigation progressed. The Court should not and could not rely on the directors’ opinion to determine if the 2 Loans existed. The Group Four Documents are to test and impeach the credibility of the Defendant’s directors.

43.  Moreover, there are many other financial documents of the Defendant that the Plaintiff can rely on. Group Four Documents are not contemporaneous to any of the disputed Loan transactions.

44.  I agree with Mr Cheung’s submission set out in paragraphs 35-36 above and thus decline to make an order for discovery of Group Four Documents.

C6. Conclusion on appeal against Discovery Order

45.  For the reasons given in this Section, the appeal is only allowed in relation to the Group Four Documents.

D. APPEAL AGAINST SECURITY ORDER

46.  There is no dispute that the Court should adopt a broad-brush approach instead of a mini-taxation when assessing the amount of security. Even on this approach, the Defendant submits that the sum of HK$715,500 as proposed by the Plaintiff and ordered by Master KW Wong was too low.

47.  Quantum of security is a matter of discretion. The Court will fix such sum as it thinks just, having regard to all the circumstances of the case. It is not always the practice to order security on a full indemnity basis. It is for the applicant to place materials before the court to enable the court to come to a view on the quantum to be ordered as security: Hong Kong Civil Procedure 2023, Vol 1, §23/3/32, p669.

48.  Further, in my view, a judge on appeal should, as a matter of principle, give great weight to a master’s decision on quantum because a master with taxation experience is better placed than the judge to have an overall view on the costs of an action. Hence, a judge should only interfere with the master’s decision if the master has erred in principle, failed to take into account relevant matters or has taken into account irrelevant matters.

49.  The security in this case is to cover all stages of the proceedings up to and including trial. The Defendant has estimated costs ranging between HK$2.3 million and HK$2.67 million.

50.  Neither the Defendant’s bill nor the list of objections of the Plaintiff adopt a broad-brush approach but is drafted in a way more for taxation. I shall not consider the items one by one. To engage a law-costs draftsman to do the list of objections is a waste of costs for this summons.

51.  There are 2 major factors which the learned Master has failed to give sufficient weight to:

52.  Firstly, the length of the trial. The Defendant estimated that the trial would last for 5 days, with 2 days reserved, in its bill of costs. In accepting the Plaintiff’s proposed figure, the learned Master must have accepted the estimate of trial length to be 3 days, as set out in page 6 of the list of objections.

53.  Following a series of exchanges between the Master and Mr Fong, the latter indicated that the whole trial would last for 4 days and he later even accepted 5 (pp 37E-38C and p43L of the transcripts before Master KW Wong).

54.  In my view, 3 days were an over optimistic estimate. Although this case relies heavily on documentation, one cannot ignore the fact that there will be 5 witnesses. The existence of the Root Loans is only one of the issues. There are other issues as set out in paragraph 7 above.

55.  The Plaintiff and the current personnel of the Defendant do not have personal knowledge of the grant of the Root Loans and execution of the Loan Agreements. One can reasonably expect each party to cross- examine the other party’s witnesses on various matters.

56.  In my view, an estimate of 5 days is more realistic and tallies with the Plaintiff’s own estimate before Master KW Wong. The learned Master has failed to give sufficient consideration to the length of trial.

57.  Secondly, the Plaintiff has attempted, in her list of objections, to rely on costs orders in her favour to object to the Defendant’s estimated costs, but she has failed to quantify her costs. Mr Fong has no submission on this respect. In accepting the Plaintiff’s proposed security, the learned Master has wrongly taken into account those costs orders.

58.  Mr Fong refers to the meaning of “refresher fee” as set out in Hong Kong Civil Procedure 2023, Vol 1, §62/App/28, p1390 and the refresher of the Defendant’s counsel. It is not clear what Mr Fong’s objection is.

59.  For the reasons given in this Section, I consider it fit to exercise the discretion on quantum of security afresh. Even if one were to consider the Defendant’s bill of costs (including the refreshers) to have been inflated, I consider the sum of HK$715,500 to be far below the reasonable scope of a broad-brush assessment of the quantum. I replace it with a figure of HK$1,500,000. The Defendant’s appeal is allowed.

E. A NOTE ON PRODUCTION OF TRANSCRIPTS ON APPEAL

60.  An appeal against a master’s decision is by way of rehearing. There is no point in producing the reasons for decision of the master except, eg where there is a record of a party’s concession which has not featured in the pleadings, affirmations or written submissions before the master.

61.  In the present case, the transcripts of the hearing before Master KW Wong were produced. Master KW Wong’s reasons for decision were that he agreed with the Plaintiff’s counsel in respect of Groups One to Three Documents. He initially had reservations about Group Four but eventually ordered its discovery with only a one-liner explanation: that “many of the amendments [to pleadings] took place recently” (p50M-P of the transcripts). Instead of citing extensively from the transcripts, I do not see why Mr Fong could not have just repeated his submission before the Master in his present written submission.

62.  Two other sets of transcripts were produced in respect of (i) the call-over hearing for the Discovery Summons on 6 December 2022 when, as admitted by the Plaintiff, there was no written submission by either side as yet; and (ii) the hearing before Master Dick Ho in respect of the Expert Evidence Application. They do not concern this appeal.

63.  Therefore, on a nisi basis, the party who sought to produce the transcripts should bear all the costs incidental thereto.

F. CONCLUSION AND COSTS

64.  I therefore order as follows:

(1) In respect of the appeal against the Discovery Order,

(a) The appeal is allowed in part such that the Discovery Order as regards the Group 4 Documents is set aside;

(b) On a nisi basis, 25% of the Defendant’s costs here and below should be borne by the Plaintiff;

(2) In respect of the appeal against the Security Order,

(a) The appeal is allowed such that the Master’s Order is set aside and the Plaintiff shall provide security in the sum of $1,500,000 as security for the Defendant’s costs;

(b) On a nisi basis, the Defendant’s costs here and below should be borne by the Defendant.

(3) Notwithstanding paragraphs (1)(b) and 2(b) above, on a nisi basis, the party suggesting the production of the transcripts should bear all costs of and incidental thereto.

65.  In the light of the above costs order nisi¸ I direct the Defendant to re-draft its statement of costs within 7 days and the Plaintiff to produce its grounds of objection, if any, within 7 days thereafter. The costs will be summarily assessed on paper.