MEGA HONOUR HOLDINGS LTD v. 李森田 AND OTHERS

HCA 1131/2015

[2018] HKCFI 687

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1131 OF 2015

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D E C I S I O N

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Introduction

1.  This is an appeal against the decision of Mr Registrar Lung for dismissing P’s application for specific discovery.

2.  The Registrar has handed down his reasons for dismissing P’s application on 5 December 2017 (“Reasons”).

3.  P is a limited company incorporated in Hong Kong and wholly owned and controlled by Mr Wang Yangke, a Mainland Chinese citizen (“Wang”).

4.  At all material times D1 was/ is the substantial shareholder, a director and chairman of a Taiwanese company Arima EcoEnergy Technologies Corp/華旭環能股份有限公司 (“Arima EcoEnergy”).

5.  Arima EcoEnergy is one of a group of companies in the fields of trading and/or manufacturing products for generating, storing or transmitting energies/powers (collectively “Arima Group”).

6.  D2 was at all material times a consultant working in the Arima Group under and/or reporting to D1, and D2 was at all material times also the sole director and shareholder of D3, a limited company incorporated in Hong Kong.  

7.  D4 is also a limited company incorporated in Hong Kong, and its registered office was/is the same as that of D3.

P’s claim

8.  P’s claim arose out of an agreement dated 11 November 2011   between P and D2 pursuant to which P agreed to purchase and D2 agreed to sell 100% of his shares in D3 (“New Acme Shares”), with the understanding that P was to end up ultimately holding 5,058,400 shares (or 20% of the entire shareholding) in Arima EcoEnergy (“Target Shares”) through D3 (“Agreement”)[1]. The consideration for the acquisition was USD4,390,000 (“Consideration”).

9.  The Consideration was paid by P by two sums (collectively “Sums”) :

(i)   €2.6m (equivalent USD 3,469,700) transferred into D3’s bank account on 9 December 2011;

(ii)   The balance of USD 847,200 transferred into D3’s bank account on 20 March 2012.

10.  It is P’s case that the Sums were paid into D3’s bank account pursuant to the terms of the Agreement and that the Sums paid into D3’s bank account were later transferred by D3 to D4 and then by D4 to 3 companies within the Arima Group, which are simply referred to as Arima P&O, Acmesoft and Rioworks (collectively “3 Companies”).

11.  It is further P’s case that despite P’s repeated requests and enquiries, D2 had all along failed and/or refused to transfer the New Acme Shares to P. P had accepted D2’s repudiatory breach of the Agreement by a letter dated 27 November 2014 sent by P’s solicitors and P demanded repayment of the Sums.

12.  Further, P claims it is entitled to restitution of the Sums on the basis that the Sums had been received by Ds and/or there was unjust enrichment, there being total failure of consideration and/or failure of consideration and/or mistake.

13.  P also alleged that there had been certain representations made by D1, D2 and D3 (“Representations”), upon reliance of which P had entered into the Agreement, and that the Representations were made dishonestly and fraudulently, and that Ds held the Sums as constructive trustees for P and P is entitled to trace and recover the Sums.  P’s amended statement of claim has now also included a claim based on quistclose trust and that P is entitled to claim repayment and/or account of the Sums, equitable compensation as well as tracing, and an account and/or enquiry in respect of the Sums.

Ds’ defence and counterclaim

14.  Ds’ case is that in about 2011 a Mainland company called 山西南燁集團有限公司 (“Nan Ye Group”), of which a Li Jian-ming (“JM Li”) was/is the Chairmen, was interested in investing in Arima EcoEnergy.  However, at the time, there were restrictions in Taiwan which prohibited Mainland investors from directly investing in power and energy equipment manufacturers in Taiwan such as Arima EcoEnergy. 

15.  In view of the Taiwanese restrictions, an investment structure was set up, under which the Nan Ye Group would indirectly acquire the Target Shares through P acquiring the New Acme Shares, and that the Agreement formed part of this investment structure.

16.  However, due to P’s/Nan Ye Group’s/JM Li’s refusal to cooperate and to produce the necessary notarized documents as required by the Taiwan authority for the transfer of the New Acme Shares, D2 was unable to complete the transfer, and that Ds remain ready and willing to effect transfer of the New Acme Shares to P.  Ds counterclaim for seek specific performance of the Agreement.

P’s application for specific discovery

17.  P issued its summons for discovery on 6 June 2017 (“Discovery Summons”), some 10 months ago.

18.  There were 5 classes of documents sought by P, and briefly they were as follows:

(1)   Class A – audited financial statements and accounts of D3 and Arima EcoEnergy (i) from 2011 to 2013; and (ii) from 2014 up to the latest financial year;

(2)   Class B – all relevant documentations showing (a) Target Shares were directly or indirectly held by D3; and (b) the shareholders of Arima EcoEnergy, D4 and the 3 Companies, for (i) the period from 2011 to 2012 and (ii) from 2013 up to the date of issue of P’s Summons

(3)   Class C – all relevant documentations showing (a) whether D1 and D2 were directors of the Arima EcoEnergy, D4 and the 3 Companies; and (b) all directors for those 5 companies (i) from 2011 to 2012; and (ii) from 2013 up to the date of issue of P’s Summons;

(4)   Class D – all relevant documentations showing the whereabouts of the Sums paid by P to D3 and/or their traceable proceeds;

(5)   Class E – relevant documentations showing the registered business items of Arima EcoEnergy (i) from 2011 to 2012 and (ii) from 2012 up to the date of issue of P’s Summons.

19.  Ds have filed their 1^st list of documents on 6 April 2016 (“1^st List”).  After the Discovery Summons was issued, Ds filed two further supplemental lists of documents, one filed on 8 June 2016 (“2^nd List”) and one on 31 August 2017 (“3^rd List”).  Parties have also since filed their respective listing questionnaires.

The Legal principles

20.  It is trite that an appeal from the master to the judge in chambers is dealt with by way of an actual rehearing of the application which led to the order under appeal, and the judge treats the matter as though it came before him for the first time[2].

21.  There was also no dispute on the legal principles in relation to specific discovery.  The burden is on P to establish that the documents sought are relevant to the pleaded issues in dispute, that Ds are in possession, custody or power of those documents and the discovery is necessary either for disposing fairly of the cause or matter or for saving costs. 

The issues

22.  According to P’s listing questionnaire, the main issues to be tried include the following:

(i)   whether P is entitled to recover the Sums paid under the Agreement which was entered into by P in reliance on the Representations and Ds’ failure to deliver up and/or transfer the New Acme Shares;

(ii)   whether the Agreement is still operative.

23.  According to D’s listing questionnaire, the main issues to be tried include the following:

(i)   what was the agreement between the vendors of the Target Shares and JM Li representing the Nan Ye Group;

(ii)   Whether P was and is in breach of the Agreement?

(iii)   Whether Nan Ye Group as represented by P is obligated to acquire the Target Shares either indirectly through D3 or directly by acquiring all the shares of D4;

(iv)   Whether the refusal of P (representing the Nan Ye Group) to procure the signing and execution of documents required for the Indirect Investment Scheme[3] or alternatively the Direct Investment Scheme[4] constitutes a breach of the Agreement.

24.  The Representations pleaded by P are in essence: (i) although under the laws of Taiwan, it was impermissible for Mainland investors to hold interests in Taiwanese companies involved in the manufacture of equipment in connection with solar electric system, P could still acquire the Target Shares indirectly through layers of Hong Kong companies; (ii) D3 was indirectly holding the Target Shares and therefore by acquiring 100% of D3, P would be indirectly holding the Target Shares and become an ultimate shareholder of Arima EcoEnergy.

25.  The Class A, B, C, E Documents in the Discovery Summons are in relation to two periods, from 2011 to 2012 (save for the Class A Documents, 2011 to 2013) and from 2012 (or 2013 for Class A Documents) up to the date of the Discovery Summons.

26.  So far as can be seen, the time for payment of the Consideration and completion provided in the Agreement were as follows:

(i)   The Consideration was to be paid immediately upon signing of the Agreement and at least 2 working days prior to the completion date for the sale and purchase of the New Acme Shares (Clause 1.2.3);

(ii)   The completion date for the sale and purchase was stated to be 20 December 2011 (or such date as the parties have agreed in writing) whereupon the vendor was to deliver to the purchaser the New Acme Shares together with transfer documents and evidence of tax payments etc (Clause 2);

(iii)   The completion date for the transfer of the New Acme Shares was stated to be on or before 31 December 2011 (or such date as the parties have agreed in writing) (Clause 3) (“Completion Date”).

27.  However, the Consideration was not fully paid until 20 March 2012.  It appears from the 1^st List, there were numerous email communications between the two sides, among which only some has been placed before this Court.  Anyway, it would appear from the 1^st List that relevant emails between the two sides in relation to the transfer of the New Acme Shares/Targe Shares would range from about 26 December 2011 until 4 November 2013.

28.  For present purposes, it would appear that the documents are said to be relevant in relation to broadly 3 areas:

(i)   Whether D3 was/is indeed holding the Target Shares at the material times (“Chain of Ownership Issue”);

(ii)   What were/are the “business items” of Arima EcoEnergy at the material times, since whether there was permission for a Mainland investor to invest in the Target Shares would depend, amongst other things, on whether the registered “business items” of Arima EcoEnerby would fall within the scope of permissible investments under the Taiwanese law (“Business Items Issue”);

(iii)   whether Arima EcoEnery was at all material times/is still carrying on business as an on-going concern; and whether Ds have caused D3/Arima EcoEnergy adverse financial consequences (“Financial Situation Issue”).

29.  At the end of the hearing, the parties’ main dispute concerned the Class A Documents.  P also decided not to pursue the Class C and D Documents.

30.  I will first consider the Class B and Class E Documents.

31.  Counsel Mr Alan Kwong and Mr Joseph Wong appeared for P and Counsel Mr Samuel Wong appeared for Ds.

Class B Documents

32.  These are submitted by Mr Kwong to be relevant to the Chain of Ownership Issue.

33.  First of all, P, D3, and D4 are all companies incorporated in Hong Kong.

34.  From the documents disclosed by P, as well as Ds, P was incorporated on 7 July 2011 and it would appear that Wang acquired the company and became its sole shareholder on 12 October 2011[5].

35.  As for D3 and D4, it would appear neither side had disclosed any incorporation/acquisition documents in their respective lists of documents, but these should all be available from the Companies Registry.

36.  In Ds’ 1^st List, Ds had disclosed, amongst other things:

(i)   copy of a power of attorney dated 6 October 2011, signed by JM Li on behalf of the Nan Ye Group, authorizing D2 on behalf of D3 to sign a declaration of trust and an indemnity agreement with RK Nominees Limited[6];

(ii)   copy of a power of attorney dated 20 October 2011, signed by JM Li on behalf of the Nan Ye Group, authorizing D2 on behalf of D3, to further authorize D4 to enter into a stock purchase agreement with each of the 3 Companies to purchase the Target Shares (“Stock Purchase Agreements”)[7]; 

(iii)   copy of a power of attorney dated 20 October 2011, signed by D2 on behalf of D3, authorizing RK Directors Limited to sign the 3 Stock Purchase Agreements on behalf of D4[8];

(iv)   Copies of the 3 Stock Purchase Agreements duly signed by RK Directors Limited on behalf of D4 with the 3 Companies[9].

37.  Then in Ds’ 3^rd List that they disclosed a copy of a declaration of trust between RK Nominees Limited (Trustee) and D3 (beneficiary) (“Declaration of Trust”).

38.  Since a copy of this Declaration of Trust has not been produced to the Court, the contents of this document are unknown to this Court.  Although this document was disclosed by Ds at end of August 2017, and P’s solicitors should have had ample time to inspect and/or obtain a copy and yet, it would appear that Mr Kwong was not quite clear about the contents of this document either.

39.  In any event, at the hearing, Ds’ Counsel Mr Wong informed the Court that Ds would be prepared to provide copies of the share certificates showing that the Target Shares were registered in the name of D4, after the execution of the 3 Stock Purchase Agreements.  Mr Wong also informed this Court that the Declaration of Trust would show that RK Nominees Limited were holding the shares in D4 in trust for D3 (beneficiary) at the time of the Agreement. 

40.  To allay P’s concerns over the Chain of Ownership Issue, Mr Wong indicated to this Court that Ds would be willing to provide:

(i)   relevant share certificates of the Target Shares to show when they were acquired by D4 and/or registered in the name of D4;

(ii)   relevant documents to show that D4’s entire shareholding was held by RK Nominees Limited in trust for D3 as at the date of the Agreement.

41.  Mr Kwong indicated that if Ds could provide the register of shareholders and the above ownership documents in relation to the Target Shares, P would not press for the Class B Documents.

42.  As Ds are counterclaiming that the Agreement has not been validly terminated and further seeks specific performance thereof, in my view, Ds should also confirm that there has been no change in the ownership of the Target Shares since the date of the Agreement todate.

Class E Documents

43.  Mr Wong informed the Court that the Memorandum & Articles of Association (“M&A”) of Arima EcoEnergy have been amended so that the “Business Items” would not fall within the restrictions imposed by the Taiwanese law on foreign/Mainland investors, in order for the acquisition of the Target Shares by Nan Ye Group through P to take place.

44.  Again to allay P’s concerns, Ds are willing to provide a copy of the amended M&A and if necessary to provide confirmation that the Business Items as contained in the amended M&A have not been changed since the amendment todate.

45.  Mr Kwong indicated that the provision of the amended M&A and the confirmation would be sufficient for P’s purpose for the time being, and upon this, P would not pursue Class E Documents.

Class A Documents - Financial Situation Issue

46.  Under Class A, P sought the audited financial statements of D3 and Arima EcoEnergy for (i) from 2011 to 2013 (“1^st Period”) and (ii) from 2014 up to date (“2^nd Period”).

47.  In P’s skeleton submissions, Mr Kwong argued that the Class A documents for the 1^st Period are directly relevant to the issues (a) whether the Representations (if made) were false in that D3 had never held any shares in Arima EcoEnergy; and (b) whether there was a breach of an implied term in the Agreement that D2 had warranted that D3 should ultimately own and control the shareholding in Arima EcoEnergy.

48.  As for the 2^nd Period, namely from 2014 todate, Mr Kwong argued that the audited accounts would show (i) whether Arima EcoEnergy is still carrying on business as an on-going concern; and (ii) whether Ds have caused D3/Arima EcoEnergy adverse financial consequences, and that these matters are relevant to the Court’s exercise of discretion in considering whether the specific performance sought by Ds should be granted.

49.  So far as the 1^st Period is concerned, as mentioned earlier, Ds have now agreed to provide (i) relevant share certificates of the Target Shares to show when they were acquired by D4 and/or registered in the name of D4; (ii) relevant documents to show that D4’s entire shareholding was held by RK Nominees Limited in trust for D3 and (iii) the register of shareholders in relation to the Target Shares.

50.  As I have indicated earlier, there should be a confirmation or evidence that there has not been any change from date of Agreement todate.

51.  The audited financial statements of D3 and Arima EcoEnergy would not be relevant to the Chain of Ownership Issue. In any event, so far as the audited financial statements of Hong Kong companies are concerned, the names of owners/shareholders would not normally appear on the audited financial statements.

52.  I note that under clause 5.2 of the Agreement, the vendor/D2 warranted that prior to the transfer of the New Acme Shares, the New Acme Shares were not subject to any charges/mortgages and further under clause 5.3 of the Agreement, the vendor/D2 warranted that prior to the transfer of the New Acme Shares, D3 had no other liabilities. 

53.  Although the above warranties are only in relation to the New Acme Shares and D3, it is not really disputed that the intention under the Agreement was for P (or on Ds’ case, the Nan Ye Group/JM Li represented by P/Wang) to acquire ultimately the Target Shares through acquiring the New Acme Shares.  This is also clear from the “Introduction” of the Agreement. 

54.  However, it was not specifically pleaded by P that Ds were in breach of the above warranties in the Agreement.

55.  What was pleaded by P is  that wrongfully and in flagrant breach of the Agreement, D2 had, amongst other things, failed and/or refused to show that no adverse changes were caused to Arima EcoEnergy’s business and operation[10]. Ds had on the other hand had averred that P had not asked whether there were adverse changes to Arima EcoEnergy’s business and operations[11].  P then responded in its amended reply and defence to counterclaim, that Wang had repeatedly raised enquiry with D2 as well as staff working for D1 in the Arima Group about accounts , financial information, corporate information and/or operation status of Arima EcoEnergy, as well as D3 and D4 but despite the enquiry, Wang and/or P was not provided with any information[12]. P further averred that after the Completion Date, D2 still wrongfully, continuously and repeatedly failed and/or refused to, amongst other things, perform the Agreement by, amongst others, showing that there was no adverse changes to the business and operation of Arima EcoEnergy.

56.  It was however not clear whether P had obtained any financial information from D2 in relation to Arima EcoEnergy prior to entering into the Agreement, nor was it clear from P’s pleadings as to over what period P was referring to “adverse changes”, namely from when to when. 

57.  Anyway, Ds have voluntarily disclosed the balance sheet of Arima EcoEnergy as at 30 September 2011 in their 1^st List and also the profit and loss accounts of Arima EcoEnergy for one month, from 1 September to 30 September 2011.  The profit and lost accounts appeared to show that for the month of September 2011, the net loss was some NTD 2.9m and the accumulated net losses some NTD 47.7m.  The balance sheet appeared to show a negative value for the net shareholders’ equity of about NTD 46m. 

58.  By disclosing the above, it would appear that Ds have taken the view that the above financial statements of Arima EcoEnergy would be relevant or related to a matter in question between them and P in the present action. 

59.  However, as pointed out by Mr Wong, which this Court accepts, the financial statements of D3 and/or Arima EcoEnergy would not be relevant to the Chain of Ownership Issue, namely whether the Representations were false and/or whether there was any breach of an implied term that D2 warranted that D3 would ultimately own and control the Target Shares, as pleaded by P.

60.  At this stage, P has not provided any other reason for seeking the financial statements for the 1^st Period. Thus, I am of the view that P’s application for the Class A Documents for the 1^st Period must fail. 

61.  As for the 2^nd Period, Mr Kwong submitted that the documents are relevant to the court’s exercise of discretion in considering whether specific performance of the Agreement should be ordered in case the court finds in favour of Ds in this action.

62.  Specific performance is a discretionary remedy and equity will not grant specific performance if it would be futile to do so and Mr Kwong had referred this Court to Goal Upward Investment Ltd v Osmand Mohammed Arab & Anor [2016] 5 HKLRD 158[13].  In his judgment, DHCJ Cooney SC had referred to a passage in Snell’s Equity, 33^rd Ed 2015:

“… specific performance will be refused where the contract gives the defendant the right to terminate it, since it is assumed he would exercise the right and render the order for specific performance nugatory[14].”

63.  In the Goal Upward case, it was held, amongst other things, that although the purported notice of termination given by the defendants was too short and null and void, it was open to the defendants to issue a fresh termination notice, which would thus render any order for specific performance nugatory.  

64.  As pointed out by Mr Registrar Lung in his Reasons, the circumstances of the present case are different from those in the Goal Upward case.

65.  However, as pointed out by the author of Snell’s Equity, the court is entitled to have regard to the practical consequences of granting or refusing an order for specific performance[15].  This passage was not referred to Mr Registrar Lung by the parties.

66.  Mr Kwong has referred to a very recent decision, after the Reasons were handed down, Thiess Mongolia LLC v Mongolia Energy Corporation Ltd HCA 31 & 34 of 2016, 4/12/17 where DHCJ Kent Yee, citing Pacific Link Communications Ltd v Wong Man Him Melvyn [1996] 1 HKC 474[16], stated[17]:-

“First, Mr Smith highlights that the Company only has to show a prima facie case for relevance. The Court of Appeal found it sufficient even if the contents of the purportedly relevant document can only be said to be “at the most of marginal relevance”: Pacific Link Communications Ltd v Wong Man Him Melvyn [(supra)]

67.  DHCJ Kent Yee went on to state[18]:-

“The Peruvian Guano test remains applicable and the definition of “relevance” is framed in the widest possible terms: Mariner International Hotels Ltd v Altas Ltd & Anor, unreported, HCA10714,10752 & 10821/1988, 18.1.2002 at §5 citing with approval the dictum of Sir Thomas Bingham MR (as he then was) in Taylor v Anderton [1995] 1 WLR 447 at p 460C.”

68.  Mr Kwong further referred to Tullett Prebon (Hong Kong) Ltd v Chan Yeung Fong Nick & Ors HCA 2197/2009 (09.06.11) where To J had said:

“Once a prima facie case is established, the Court has a discretion to order disclosure. It is for the party who resists discovery to satisfy the Court that the discovery is not necessary either for disposing fairly of the cause or matter or for saving costs”

69.  Ds have only disclosed financial statements as at 30 September 2011, prior to the Completion Date (31 December 2011) but the Consideration was not fully paid by P until 20 March 2012, and it was P’s case that by its solicitors’ letter dated 27 November 2014 that P accepted D2’s repudiatory breach of the Agreement.  In any event, there has now been a lapse of over 6 years since Ds’ September 2011 financial statements.

70.  Having considered this, I have come to the view that P has satisfied this Court there is a prima facie case for relevance and/or the discovery is necessary for disposing fairly of the matter or for saving costs, in that whether Arimo EcoEnergy is still an on-going concern and the present financial situation of D3 and Arima EcoEnergy may be practical consequences the court will take into consideration in exercising its discretion as to whether to order specific performance in the event of Ds being successful in this action.

71.  There was no evidence that the audited financial statements of D3 and ArimaEcoEnergy are not in the possession custody or power of Ds.

72.  I am therefore prepared to order that Ds do produce the latest available audited financial statements and accounts of D3 and Arima EcoEnergy.

Conclusion

73.  Having regard to the above, I will allow P’s appeal to the extent as indicated and upon Ds agreeing to provide those documents as stated earlier. 

74.  I will allow Ds to provide the documents within 28 days from the date of this order, unless otherwise agreed by the parties.

75.  The parties are to submit an agreed draft order for approval.

76.  So far as costs are concerned, on an overall basis P has only succeeded to a limited extent. I order P to pay 90% of Ds’ costs, to be summarily assessed and paid within 21 days from the date of assessment. Ds to provide their statement of costs within 14 days and P its list of objections within 7 days thereafter.  This is an order nisi, which shall become final after 21 days.