FOK HING INTERNATIONAL CO LTD v. LIU HSIAO CHENG

HCA 97/2013

[2018] HKCFI 1612

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 97 OF 2013

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(By Original Action)

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(By Counterclaim)

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DECISION

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The parties, and the appeal

1.  Fok Hing International Company Limited (“FHI”) is the plaintiff by original action and 1^st defendant by counterclaim.  It is a limited company incorporated in Hong Kong.  Wong Shu Wai (“Wong”) is the 2^nd defendant by counterclaim.  He, together with his brother Wong Shu Chun, are the two directors and equal shareholders of FHI.  Liu Hsiao Cheng (“Liu”) is the defendant by original action and plaintiff by counterclaim.

2.  By summons dated 16 November 2016, Liu sought, pursuant toOrder 24, rules 7, 11, 11A of the Rules of the High Court, specific discovery by affidavit, production and provision of copies of 7 classes of documents.  They are specified in the schedule attached to the summons.  The scope of the application has subsequently been narrowed down.  The application is now confined to the following specified classes:

(a)  Class 1 documents, namely:

“Audited financial statements (‘AFS’) of [FHI] for the financial years ended 31 March 2004, 31 March 2005 and 31 March 2006 to the extent that they relate to the Trading JV or the trading business conducted by Liu”;

(b)  Class 5 documents, namely:

“All notes, documents and records (including accounting journals and ledgers) relating to alleged reported losses of [FHI] under ‘Internal Accounts’ as shown in the March 2012 Summary and the June 2012 Summary as alleged in paragraphs 94 and 97 of [Wong’s witness statement dated 18 May 2016]”;

(c)  Class 6 documents, namely:

“All notes, documents and records (including accounting journals and ledgers) relating to alleged amounts owed to Liu as shown in the March 2012 Summary and the June 2012 Summary as alleged in paragraph 98 of [Wong’s witness statement dated 18 May 2016]”;

(d)  Class 7 documents, namely:

“All notes, documents and records (including accounting journals and ledgers) relating to the purported Provision for Doubtful Debts in the sum of HK$5,878,826 as reported in [FHI’s AFS] for the financial year ended 31 March 2008 as disclosed under Item 17 of [FHI’s List of Documents]”.

3.  The application came before Registrar Lung for hearing on 18 July 2017.  The application was dismissed with costs.  This is the appeal of that decision.

The claim, the defence and the counterclaim

4.  For the factual background of the claim and counterclaim between the parties, I respectfully refer to the judgment of Deputy High Court Judge Lok (as he then was) dated 20 August 2014 whereby His Lordship allowed Liu’s appeal and granted him unconditional leave to defend (the “Order 14 Ruling”).  In gist, FHI by the original claim seeks from Liu the repayment of what it says to be a loan in the sum of HK$1 million.  Liu accepts that he has been paid a sum of HK$1 million.  He says that it was not a loan, but prepayment of certain profits which he was entitled to.  His case is that in 2000, he and Wong started a trading joint venture (“Trading JV”). The related trading joint venture agreement (“JV Agreement”) wasan oral one.  According to paragraphs 7, 8, 9, 19, 21 and 22 of his Amended Defence:

“7. In around early 2000, [Wong] invited Mr. Liu and his wife to be his business partners. He suggested that they could use his office … and that he would help arrange obtaining banking facilities for their trading business as he had long-standing relationships with a number of banks in Hong Kong.

8. Being new comers, Mr. Liu and his wife were pleased to accept [Wong’s] offer and they started a new trading joint venture with him in around 2000 (‘Trading JV’).

9. It was agreed orally amongst Mr. Liu and [Wong] … that:

(a) They would each own 50% of the new Trading JV as equity partners;

(b) The new Trading JV would be run through [FHI] (as its agent);

(c) Mr. Liu and his wife would inject their flourishing trading business into [FHI];

(d) On the other hand, [Wong] would be responsible for arranging necessary trade finance facilities and accounting matters; and

(e) Mr. Liu and [Wong] would each be entitled to 50% of Trading JV’s profits captured under [FHI].

…

19. In common with most trading businesses, the business model of the Trading JV was simple—it would, through [FHI] as its agent, first collect payments from customers (by way of cheques, remittances or letters of credit) before paying suppliers and releasing merchandises …

…

21. In around August 2008, pursuant to the JV Agreement and as 50% equity partner of the Trading JV, Mr. Liu requested [Wong] to provide an account of cumulative profits of the Trading JV and to distribute his 50% share of the same.

22. In reply, [Wong] suggested that as the audited accounts of [FHI] for the financial year ended 31 March 2008 was not yet finalized, the Trading JV’s cumulative profits could not be worked out. He suggested instead to pay Mr. Liu HK$1 million first as a prepayment of his profit share. Once the audited accounts of [FHI] were available, he would then work out the parties’ respective profit share and pay Mr. Liu balance of his profit share.

23. Since then, despite repeated requests and demands by Mr. Liu, [Wong] has neglected and failed to account for the Trading JV’s profits or to pay Mr. Liu the balance of his profit share for the period from May 2000 to March 2008 and for the financial years thereafter, whether in part or at all.”

5.  On that pleaded basis, Liu claims that he is not liable to repay the HK$1 million.  He further counterclaims, according to paragraphs 33 and 34 of his Counterclaim that:

“33. Wrongfully and in breach of the Trading JV Agreement, Section 30 of Cap. 38 and [Wong’s] fiduciary duties to Mr. Liu (as partner), [Wong] has to date failed and/or refused to account for the Trading JV’s profits or to pay Mr. Liu the balance of his profit share (after giving credit to the prepayment).

34. Further, [Wong] (as partner) and [FHI] (as nominee of [Wong] and/or agent of the Trading JV) have wrongfully retained or enriched themselves unjustly with the sum of around HK$6,455,443 (i.e. US$955,826, being Mr. Liu’s profit share for the period from May 2000 to March 2008 less HK$1m in prepayment) and his profit share of the Trading JV’s cumulative profits from 1 April 2008 to date.”

He prays accordingly for the following relief:

“(A) An order for repayment of HK$6,455,443 or any sums found to be due to Mr. Liu, being his share of the Trading JV’s profits for the period from May 2000 to March 2008 as pleaded in paragraph 33 above;

(B) An account of the cumulative profits of the Trading JV from 1 April 2008 to date and Mr. Liu’s profit share thereof;

(C) An account of all moneys belonging to Mr. Liu wrongfully retained and/or converted by [Wong] or FHI to their own use or otherwise;

(D) An order for repayment of any sums fund to be due to Mr. Liu upon taking such account.”

The defence to counterclaim

6.  Both FHI and Wong deny the existence of the Trading JV and the JV Agreement.  They say in effect that the Counterclaim was a complete fabrication.

Main issues for trial

7.  The parties agree that the main issues for trial, as framed by the pleadings, are broadly as follows:

(a)  whether the HK$1 million was in the nature of a loan or part prepayment for Liu’s share of the profits from the Trading JV;

(b)  whether the JV Agreement existed, and if so its terms;

(c)  whether the Trading JV existed, and if so the cumulative profits from the same; and

(d)  the quantum of Liu’s share of those profits.

The relationship between FHI and the Trading JV

8.  It is significant to note that on the face of pleadings, Liu treats FHI and the Trading JV as being different.  He is not saying that he is entitled to 50% of the profits of FHI.  He claims that he is “entitled to 50% of Trading JV’s profits captured under [FHI]” (whatever that means).  That Liu draws that distinction is also apparent from paragraphs 13(b) and 20 of his Amended Defence (which Mr Vincent Lung, counsel for FHI and Wong, has drawn my attention to).  Therein, the original references to FHI were deleted.  In their places, “the Trading JV” were inserted. 

9.  Despite treating FHI and the Trading JV as being different, Liu has failed to make clear on the face of pleadings what he avers the relationship between FHI and the Trading JV is.  I have set out the relevant parts of Liu’s pleaded case below.  It is silent as to (1) the nature of the business undertaken by the Trading JV; (2) how the profits of the Trading JV were supposed to be “captured under [FHI]”; (3) whether FHI carried out other businesses of its own; (4) if so, how the businesses which FHI carried out on its own on the one hand and as agent of the Trading JV on the other (and the related accounts of those different businesses) were segregated.  Importantly, it has never been Liu’s pleaded case that FHI had no business ofits own, and that all the businesses conducted by FHI were in fact conducted by it as agent for the Trading JV.

10.  Liu has himself filed no evidence in support of the present application.  It was supported by the 2^nd affirmation of his solicitor Ms Chow Wai Mee May (“Ms Chow”).  Ms Chow does not in that affirmation deal with the relationship between FHI and the Trading JV.

11.  Wong filed an affirmation in opposition of this application (“Wong’s 4^th Affirmation”).  At paragraph 10 thereof he says, inter alia, that:

“10. As a matter of fact, [FHI] also carried out business other than the businesses referred by Liu and would make financial arrangements with Gold Driven Investments Limited (‘GDIL’) and my other businesses in Zimbabwe to assist their operations.”

12.  In an attempt to reply to Wong’s 4^th Affirmation, Ms Chow filed her 3^rd affirmation.  At paragraph 7, she refers to paragraph 10 of Wong’s 4^th Affirmation.  She makes the following comments and criticisms:

“7. … I crave leave to refer to paragraph 9(e) of the Amended Defence and Counterclaim. It is Liu’s case that the entire Trading JV was conducted through FHI and pursuant to the Trading JV Agreement, all profits of the Trading JV were to be captured under FHI. [Wong] asserts that FHI also carried out other businesses but fails to identify these business and their significance relative to the trading business.”

I note that whilst Ms Chow has endeavoured to say that the entire Trading JV was conducted through FHI, she did not attempt to suggest the reverse, ie FHI conducted no business of its own and that all the businesses it conducted were conducted by it as agent for the Trading JV.  In any event, that is not the sort of factual matters which a legal advisor can or is expected to say on behalf of one’s lay client.

13.  Liu was content to let his solicitor make the comments and criticisms on his behalf.  He decided not to make any factual affirmation to traverse Wong’s evidence that “[FHI] also carried out business other than the businesses referred by Liu”.  I note further that during an email exchanged on 27 July 2012, Liu himself mentioned the possibility of FHI carrying out other businesses.

14.  During the hearing, Mr Jean-Paul Wou, counsel for Liu, suggested that as the gross profits of the Trading JV as shown in the Sale and Payment Record (“SPR”) corresponded to the revenue figures reported by FHI in its AFS, “one can readily see that the trading businesses conducted by Liu accounted for 100% (if not more) of FHI’s business at least between 2005 and 2008”.  I do not agree. I accept Mr Lung’s submissions in this regard, that a closer look at the primary documents shows that the SPR actually bear FHI’s heading, that those are FHI’s own figures, not that of the Trading JV, and that it is hardly surprising that FHI’s figures match those appearing on FHI’s own AFS.  

15.  I will come back to this issue when I consider each class of the documents below.

Discovery—the applicable legal principles

16.  In summary, the Court will order discovery of a document if, prima facie, it is relevant to the issue in dispute, that the document is in existence and in the respondent’s possession, custody or power, and that discovery is necessary for disposing fairly of the matter or for saving costs. Under Order 24, rule 8 of the Rules of the High Court (“RHC”), it is for the party seeking discovery to demonstrate a prima facie case for discovery of the documents sought, and once that has been established, it is for the opposing party to satisfy the Court that discovery is not necessary for either of the stated purposes—Hong Kong Civil Procedure 2018, paragraphs 24/2/7, 24/2/10, 24/7/3 and 24/8/1.

17.  Post CJR, when considering whether discovery should be ordered, the Court should give effect to the underlying objectives in RHC Order 1A.  In the words of Mimmie Chan J at paragraphs 8, 17 and 20 of her Judgment in Billion Lead Investment Ltd v Union Joyce Ltd & Others (unreported, HCMP 2145/2011, 14 December 2012), which I respectfully adopt:

“8. … In deciding whether any document relates to a matter in question in the action, whether any document is or has been in the possession, custody or power of a party, and whether discovery of a document sought 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 cost effectiveness, expeditious disposal of cases, proportionality, procedural economy and ensurance of fairness between the parties.

…

17. Since the Civil Justice Reform, no order for discovery shall be made unless the Court is of the opinion that the order isnecessary either for disposing fairly of the cause or matter, or for saving costs. The Court must take a proportionate approach, balancing the interests of the fair disposal of the cause or matter in accordance with the parties’ substantive rights against effectiveness, expeditious disposal of cases, and procedural economy.

…

20. In any case, discovery should be sensibly controlled, and not allowed to be used as an oppressive weapon, to be pursued without sufficient regard to economy and efficiency in terms of the usefulness of the information which is likely to be obtained from the documents.  It would be oppressive and unnecessary to order discovery of documents for each and every transaction entered into by Ming, and every payment made by Ming, irrespective of their importance or marginal relevance to the matters in dispute.”

Class 1 Documents

18.  Mr Wou submitted that they are relevant and necessary to the determination of Issues (c) and (d) identified above.

19.  Liu claims that he is entitled to 50% of the profits of the Trading JV captured under FHI.  He is not claiming any entitlement to any profits of FHI.  Hence, unless those AFS contain information on the “Trading JV’s profits captured under FHI”, or is otherwise relevant to the existence (or otherwise) of the Trading JV, those documents are not subject to discovery.

20.  I have considered above the issue concerning the relationship between FHI and the Trading JV.  On the face of his own pleading, Liu has never asserted that FHI had no business of its own so that all the businesses which FHI conduced were in fact conducted on behalf of the Trading JV as its agent.  Wong has said on affirmation that FHI carried out businesses of its own.  Liu chose not to traverse it.     

21.  I have looked at those AFS which Wong has disclosed.  They contain no reference to the Trading JV.  Even assuming that the Trading JV existed, one cannot tell which part of the financial figures reported in those AFS concern FHI’s own business, and which part concern the Trading JV.  So viewed and analyzed, Class 1 Documents are irrelevant.

22.  On the issue of relevance, Mr Wou relied further on the fact that Wong and FHI have themselves disclosed those AFS for the years of 2008 to 2013.  Mr Wou submitted that they would not have done so unless they were of the view that those AFS of FHI are relevant. 

23.  Wong has in that regard tendered the explanation in his 4^th Affirmation that the earlier discovery was given “for the sole purpose of showing the relevant accounting treatment of advancing the Sum made in August 2008.”  That is a plausible explanation.  In any event, when considering the present application, the Court is not dictated by the view of the parties on relevance.  What the Court should do is to consider the totality of the evidence and all relevant circumstances to decide whether the criteria for ordering specific discovery have been established.  This is what I have done.  

24.  In the present case, for the reasons set out above, I am not satisfied that the criteria for ordering specific discovery of the Class 1 Documents have been established.  I find that Liu has failed to prove on a prima facie basis the relevance of those AFS. 

25.  In any event, I note that Class 1 Documents are historical AFS (for the years between 2004 and 2006).  Applying and giving effect to the underlying objectives in RHC Order 1A, I rule that discovery of those documents are not necessary whether for disposing fairly of any issue or matter, or for saving costs.  On the contrary, I find that ordering discovery of those documents will unnecessarily add to the costs which will need to be incurred.

Class 5 and Class 6 Documents

26.  Class 5 and Class 6 Documents relate to two entries in two documents which the parties refer to as “the March 2012 Summary” and “the June 2012 Summary” (the “Summaries”). 

27.  Mr Wou in his written submissions describes the Summaries as “‘home made’ documents”.  According to Wong (paragraph 24 of his 4^th Affirmation):

“… the Summaries are merely unaudited internal financial records of GIIL, another company Liu and I had been run [sic] together for our tobacco business and my other businesses in Zimbabwe (disputes surrounding GDIL will be adjudicated in HCA 1278/2013).”

28.  I emphasize that while Class 5 and Class 6 Documents relate to two entries in the Summaries, they are not the Summaries themselves.  The Summaries have been disclosed.  The documents now being sought are “all notes, documents and records (including accounting journals and ledgers) relating to” two entries in the Summaries, namely, (1) for Class 5, “alleged reported losses of FHI under ‘Internal Accounts’” and (2) for Class 6, “alleged amounts owed to Liu”.  In other words, Class 5 and Class 6 Documents concern all underlying or supporting primary accounting documents relating to two entries that appear in two homemade documents.  The scope of the discovery sought is very wide.

29.  Importantly, on the face of the Summaries, the Trading JV is not mentioned.

30.  In so far as any financial information on FHI which Class 5 and Class 6 Documents might reveal, my observations above on the irrelevance of Class 1 documents are equally applicable.

31.  In so far as any financial information on GDIL which Class 5 and Class 6 Documents might reveal, I am of the view that prima facie relevance has not been established. GDIL is distinct and different from the Trading JV.

32.  On the relevance of the Summaries, Mr Wou relied on the observations made by Deputy High Court Judge Lok (as he then was) at paragraphs 14 and 15 of the Order 14 Ruling.  But I repeat that the present application is not for discovery of the Summaries, but for discovery of all underlying or supporting primary documents relating to two entries therein.  The difference should not be conflated.

33.  Having considered the above, I am not satisfied that prima facierelevance in relation to Class 5 and Class 6 Documents has been established.  In any event, on the facts of this case, applying and giving effect to the underlying objectives in RHC Order 1A, and having considered the factor of proportionality, I am of the view that the wide disclosure sought of what are in effect all underlying or supporting primary documents relating to two entries in the Summaries are not necessary whether for disposing fairly of any issue or matter, or for saving costs.  On the contrary, I find that ordering discovery of those documents will unnecessarily add to the costs which will need to be incurred.  In my view, this is exactly the sort of discovery which should be controlled, and which should not be allowed to be used as an oppressive weapon.

34.  I refuse the request for discovery of Class 5 and Class 6 Documents.

Class 7 Documents

35.  At paragraph 31 of his 4^th Affirmation, Wong says:

“… [FHI] and I do not have in our possession, custody and power Class 7 documents. I have also instructed my solicitors ONC Lawyers to enquire with [FHI’s] then auditor Jeffery Tsang & Co. but I am advised that no response has been received as at the date of his affirmation.”

36.  Despite what Wong has deposed to, and despite acknowledging that Wong’s 4^th Affirmation in this regard is conclusive at the interlocutory stage (see Re Prudential Enterprises (No 2) [2004] 2 HKC 205, per Chu J (as she then was) at paragraph 16), Mr Wou submitted that “Wong’s claim is not worthy of belief”, and that “the contents of the affirmation and the efforts taken by Wong are plainly insufficient to meet its duty of disclosure”.  For myself, I see no sufficient basis for those submissions, which I do not accept.

37.  I also refuse disclosure of Class 7 Documents.

Conclusion

38.  For the reasons set out above, I refuse Liu’s application and dismiss the appeal.  I also make a cost order nisi that Liu should bear the costs of this appeal, to be taxed if not agreed.