SHUN HING HOLDINGS COMPANY LTD AND OTHERS v. LI KWOK PO DAVID AND OTHERS

HCA 664/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 664 OF 2012

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D E C I S I O N
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1.  There are two summonses taken out by the 4th and 5th defendants. One summons is for an order to unseal certain redaction of some audited financial statements (“AFS”) disclosed by the plaintiffs in discovery. The second summons is for an order that the plaintiffs do make a further and better list of documents to include the representations made by the boards of directors of each of the four plaintiffs to their auditors in relation to the AFS relevant in this action.

The Parties

2.  The parties are described in the written submissions of the 4th and 5th defendants are as follows: 

“(a) The plaintiffs are companies in the Shun Hing Group of Companies.

(b) The 1^st defendants are executors of the estate (“Estate”) of the late Dr Mong Man-wai (“Deceased”) who was the Founder and Chairman of the Shun Hing Group.

(c) The 2nd and 3rd defendants are children from the Deceased’s first marriage and specific legatees of the Estate under the Deceased’s Will. Both of them are not contesting the claim. (They currently control the Shun Hing Group.) On 13 February 2015, by a Third-Party Notice served by the 4th and 5th defendants against the 3rd defendant, the 3rd defendant was joined as a 3rd party to the present proceedings.

(d) The 4th and 5th defendants are the surviving widow and child of the Deceased’s second marriage and beneficiaries of the residuary estate under the Will.

(e) The 1^st defendants have adopted a neutral stance in this action to avoid incurring personal liability for costs in defending the claim.  The 4th and 5th defendants are the only parties to actively defend the claim against the Estate.”

The Action

3.  An overview of the action is given in the plaintiffs’ written submissions as follows:

“2.1 In this action, the plaintiffs’ claim against the late Dr Mong for a breach of fiduciary duties during the subsistence of his directorship by diverting moneys belonging to the plaintiffs to himself and/or third parties nominated by him, or alternatively such advances constituted loans from the plaintiffs to the late Dr Mong. Upon his death, such liability falls upon his estate and, hence, the 1^st defendant as his executors.

2.2 The claim amount is significant, in the region of HK$872 million.

2.3 All the other defendants are joined because they are beneficiaries of and thus have an interest in the Estate. The 2nd and 3rd defendants indicated that they would not contest the plaintiffs’ claim.

2.4 At a high level of generality, the 4th and 5th defendants oppose the plaintiffs’ claim on the basis that there was an agreement between (inter alia) the plaintiffs and the late Dr Mong that his liability towards the plaintiffs would be shouldered by other entities including one Liberian company known as Timmerton. The 4th and 5th defendants draw support from the fact that in the plaintiffs’ accounting documents (the AFS), the late Dr Mong’s liability towards the plaintiffs was originally booked against those other entities as their liabilities. The subsequent reversals of accounting entries (i.e. booking these withdrawals back against the late Dr Mong) carried out by the plaintiffs were alleged to be improper.

2.5 It is noteworthy that the plaintiffs have always admitted that the reversal process actually took place. The plaintiffs nonetheless say that the reversals accurately reflected the true nature of the transactions in question.”

The 4th and 5th defendants in their written submissions gave more details on their defence as follows:

“15. The pleadings, looked at broadly, disclose a number of defences, the ultimate issue being whether the Deceased (or after his death the Deceased’s state) was or is liable in respect of any of the moneys or other relief sought to be recovered from or claimed as alleged or at all. A principal issue in this case is whether the Deceased withdrew funds from the plaintiffs’ companies without their respective consent and approval (hence, in breach of the Deceased’s fiduciary duties owed by him as a director to each of the plaintiffs). If not, whether the Deceased should be regarded as having borrowed such funds from the plaintiff companies.

16. One of the pleaded defences turns upon whether there was in fact a tripartite agreement or implicit understanding or Common Assumption amongst the Deceased, the plaintiff companies and (Timmerton), a shareholder of the 1^st plaintiff (which is in turn the ultimate holding company of the other plaintiffs) of which the Deceased was a shareholder together with the children from his first marriage, that the transfers allegedly made by the Deceased from the Group companies would be for the account of Timmerton, and no recourse would be made to the Deceased as opposed to Timmerton.

17. It is part of the 4th and 5th defendants’ case that the manner in which each of the four plaintiffs accounted for the Disputed Transfers (referred to as the Accounting Treatment) prior to the purported Reversals complained of in the re‑re-amended defence is relevant to one or other of the pleaded defences.”

The Unsealing Summons

4.  In the light of the disputes between the parties, it is obvious that the AFS of the plaintiffs showing the indebtedness created by Dr Mong’s withdrawals but to be repaid by other entities are relevant documents.  Master Levy made an order on 9 October 2013 requiring their discovery.  The plaintiffs then served a further and better list of documents on 6 January 2014, making discovery of them, but the plaintiffs stated in the list their objection to produce these AFS except as redacted by sealing or cover up. Their ground for doing so was that the parts that they would seal up did not relate to any matter in question in the action.

5.  Inspection of the redacted AFS was eventually allowed to the 4th and 5th defendants after an unless order was made on 21 February 2014. After inspection, the solicitors for the 4th and 5th defendants were not satisfied with the AFS as inspected, because some pages were mere copies and with redaction on the account balance and/or text.  The 4th and 5th defendants, for fear that they might be deemed to admit under Order 27 rule 4(1) to such unsatisfactory documents as the original AFS described in the further and better list, issued a notice on 25 April 2014 under Order 27 rule 4(2), disputing the authenticity of the documents that they had inspected. 

6.  Order 27 rule 4(1) to (3) provide as follows:

“(1) Subject to paragraph (2) and without prejudice to the right of a party to object to the admission in evidence of any document, a party on whom a list of documents is served in pursuance of any provision of Order 24 shall, unless the Court otherwise orders, be deemed to admit-

(a) that any document described in the list as an original document is such a document and was printed, written, signed or executed as it purports respectively to have been, and

(b) that any document described therein as a copy is a true copy.

This paragraph does not apply to a document the authenticity of which the party has denied in his pleading.

(2) If before the expiration of 21 days after inspection of the documents specified in a list of documents or after the time limited for inspection of those documents expires, whichever is the later, the party on whom the list is served serves on the party whose list it is a notice stating, in relation to any document specified therein, that he does not admit the authenticity of that document and requires it to be proved at the trial, he shall not be deemed to make any admission in relation to that document under paragraph (1).

(3) A party to a cause or matter by whom a list of documents is served on any other party in pursuance of any provision of Order 24 shall be deemed to have been served by that other party with a notice requiring him to produce at the trial of the cause or matter such of the documents specified in the list as are in his possession, custody or power.”

7.  The solicitors for the 4th and 5th defendants further took the view that some of the redacted figures were relevant and necessary for disposing of the disputes fairly.  They therefore requested for removal of the sealing on 23 May 2014.  However, the plaintiffs’ solicitors disagreed.  They replied as follows:

“…

(2) Following the inspection, you on 29 April 2014 served on us a ‘Notice Disputing Authenticity of Documents in the plaintiffs’ second Further and Better List of Documents (“your clients’ Notice”), which we assume to be served pursuant to Order 27, rule 4 of the Rules of the High Court (since no rule was quoted on the margin of your clients’ Notice), whereby your clients did not admit the authenticity of the AFSs and required the AFSs to be proved by our clients at trial; and

(3) given your clients’ Notice, our clients decided not to adduce the AFSs as evidence at trial, thereby effectively disposing of any issues that may arise, or may have arisen, from the AFSs, including your clients’ dispute over the authenticity of the same by way of your clients’ Notice.

3. Given paragraph 2(3) above, … we write to expressly inform that:

(1) our clients will not adduce any of the AFSs as evidence at the trial; and

(2) accordingly, it should not be necessary to deal with any of the matters raised in the Letter.” 

8.  The solicitors for the 4th and 5th defendants wrote again, repeating the words of Order 27 rule 4(2) to require the plaintiffs to prove the authenticity of the AFS at the trial and reminding the plaintiffs their obligation under Order 27 rule 4(3) to produce the AFS at the trial.  The relevant parts of the letter read:

“We refer to your reply letter of 6 June 2014.

We are of the view that it is not open to your clients to withhold the AFS as evidence at trial for the following reasons:

(a) The 2nd Further and Better List of Documents (“2nd FBL”)was disclosed pursuant to the Order made by Master Levy on 9 October 2013 on the application by our clients by way of a Summons taken out under, inter alia, RHC O 24 rr 3 and 7.

(b) By virtue of RHC O 27 r 4(3), your clients having served the 2nd FBL in pursuance of O 24 are deemed to have been served by our clients a notice requiring your clients to produce at the trial the AFS enumerated as items 1 to 21 under Schedule 1 Part 2 of the 2nd FBL.

(c) By our clients’ filing the said notice disputing authenticity pursuant to O 27 r 4(2), your clients are required to prove the authenticity of the documents at trial in addition to your clients’ obligation in §(b) above.

In light of §§ (a) to (c) above, the Rules of the High Court require that your clients do adduce the AFS at trial. Your clients are not at liberty to choose whether to adduce the AFS at trial.

Without prejudice to the above, our letter of 23 May 2014 invited your clients to unseal various redactions on the bases stated therein.  Your letter of 6 June 2014 failed to respond to our request for such unsealing. Regardless of whether your clients themselves intend to rely on the AFS as evidence at the trial, they are duty-bound to disclose relevant documents in the proceedings.  …”

9.  However, the plaintiffs’ solicitors remained unwavering. They exhibited their understanding of Order 27 rule 4(2) and (3) in their letter of 10 July 2014 as follows:

“3. … we write to share our understanding of Order 27, rule 4(3) of the Rules of the High Court referred to in item (b) in your letter dated 16 June 2014 which you attempt to rely on to compel our clients to adduce the AFSs as our clients’ evidence at trial as follows:

(1) If our clients wish to adduce the AFSs as their evidence at trial, merely disclosing the AFSs by way of discovery is not enough and they must also produce the AFSs at trial.

(2) Therefore, if our clients do not produce the AFSs at trial notwithstanding they have disclosed the AFSs by way of discovery earlier on, they would not be able to adduce the AFSs as their evidence at trial.

4. We hereby repeat that our clients will not adduce any of the AFSs as their evidence at trial, so there is no question of our clients’ production of any of the AFSs at trial.

5. In fact, it does not make sense, to us at least, that one party in an action can compel the other party in that action to produce a document at trial if that other party has no intention to adduce that document as his evidence at trial. We do not think that there is a rule which provides otherwise.

6. Given our clients will not adduce the AFSs as their evidence, and thus do not need to produce the same at trial, our clients are relieved from the burden of proving the authenticity of the AFSs as required by the “Notice Disputing Authenticity of Documents in the Plaintiffs’ 2nd Further and Better List of Documents” served on us by you on 29 April 2014 pursuant to Order 27, rule 4(2) of the Rules of the High Court.

7. In view that: -

(1) your clients dispute the authenticity of the AFSs;

(2) as such, the AFSs cannot be produced, and thus cannot be adduced as evidence, at trial unless our clients prove the AFSs are authentic; and

(3) our clients are not prepared to prove such authenticity.

there is no need, and no point, to consider whether any of the sealed parts has to be unsealed or not.”

10.  I cannot understand why the plaintiffs’ solicitors can have such a twisted understanding of Order 27 rule 4(3).  They regarded that the plaintiffs had total liberty to decide whether to produce the AFS.  This is in total disregard of Order 27 rule 4(3) which requires them to produce at the trial all the documents in the plaintiffs’ list of documents as are in their possession, custody or power.

11.  This obligation remains regardless of whether the documents will advance or damage the plaintiffs’ case.  The plaintiffs have no choice. It is wrong for their solicitors to say that since they will not adduce the AFS as their evidence at the trial, therefore the 4th and 5th defendants cannot compel them to do so.  Even if the plaintiffs do not want to rely on the AFS as part of their evidence at the trial, they are still obliged by Order 27 rule 4(3) to produce them at the trial as they are relevant documents that have been listed in the further and better list of documents and are in the plaintiffs’ possession, custody and power.

12.  Furthermore, the plaintiffs’ obligation under Order 27 rule 4(3) remains the same despite the service by the 4th and 5th defendants on them a notice under Order 27 rule 4(2) disputing the authenticity of the AFS as inspected.  By virtue of the notice disputing authenticity, the plaintiffs are obliged to produce at the trial the authentic documents that they have listed in the list of documents.  It is wrong for them to say that since authenticity of the AFS is disputed, therefore the AFS cannot be produced. 

13.  In fact, the plaintiffs’ obligation under Order 27 rule 4(3) is to produce the authentic documents as enumerated in the list of documents and are in their possession, custody and power regardless of whether there is a notice disputing authenticity.  Such notice disputing authenticity is for the protection of the party on whom the list of documents is served so that that party will not be affected by the deeming effect of Order 27 rule 4(1). 

14.  Since the plaintiffs’ solicitors had steadfastly refused to remove the redaction, the 4th and 5th defendants therefore issued the summons for an order to remove them.  The substance of the summons has now been resolved by the plaintiffs’ agreement to unseal the redaction. 

15.  The question of costs of the summons, however, still remains despite a without-prejudice offer from the 4th and 5th defendants for no order as to costs.  The 4th and 5th defendants now ask for costs of the summons on the ground that if the plaintiffs should have agreed to unseal the redaction after the letter of 23 May from their solicitors, it would not have been necessary to issue this summons.

16.  The plaintiffs also ask for costs of this summons. They do not argue whether the redacted parts of the AFS were relevant to the disputes in the action.  They instead say that since the 4th and 5th defendants have issued their notice disputing authenticity of the AFS, it is open for the plaintiffs to elect not to prove any of the AFS at the trial as evidence.

17.  I am of the view that this is again a misreading of Order 24 rule 4(3) by saying that the plaintiffs have a choice on whether to produce at the trial the AFS specified in their list which are in their possession, custody or power.  Order 27 rule 4(3) does not allow the plaintiffs to elect whether to produce the AFS or not.  This is so despite the issuance of the notice by the 4th and 5th defendants disputing authenticity of the AFS.

18.  The plaintiffs further argue that as a matter of logic and common sense, it is impossible to see how a person can deny the authenticity of a document but at the same time seek to rely on the content of such document to advance his case.

19.  I think the plaintiffs in making this argument have misrepresented the clear position of the 4th and 5th defendants.  The two defendants deny the authenticity of the AFS they inspected because these AFS as inspected comprised redacted copies instead of unredacted originals.  These two defendants issued the notice disputing authenticity just to avoid being deemed to have admitted these redacted copies and, hence, unable to ask for the unredacted originals.  They seek to rely on the unredacted originals of the AFS at the trial, not the AFS comprising redacted copies as shown to them in the inspection.  This argument of the plaintiffs therefore has no merit at all.

20.  The plaintiffs further say that the 4th and 5th defendants cannot say that the Rules of the High Court require the plaintiffs to adduce the AFS at the trial as the 4th and 5th defendants cannot dictate how the plaintiffs would run their case at the trial and decide what evidence to adduce to prove their case.

21.  This is yet again a misreading of Order 27 rule 4(3). The plaintiffs are obliged to produce at the trial documents specified in their list and are in their possession, custody or power.  But that does not mean that the plaintiffs will have to use such documents as evidence of their case or to rely on such documents to advance their case.  Their obligation under this rule is to produce at the trial the authentic documents as specified in their list that are in their possession, custody or power and no more. 

22.  Since the arguments used by the plaintiffs in the correspondence and at the hearing are all based on a twisted reading of Order 27 rule 4 and a misrepresentation of the position of the 4th and 5th defendants, they do not have a valid argument to oppose the summons to unseal the redaction.  Hence, they should be liable for the costs of the unsealing summons, and I so order.

23.  In the light of the importance of the summons, I also certify the matter fit for three counsel. 

The Representations Summons

24.  By this summons, the 4th and 5th defendants seek discovery by the plaintiffs the written representations that were given by the boards of directors of the plaintiffs to their auditors in relation to the indebtedness stated in the AFS which indebtedness are now said to be due and owing from the Estate of Dr Mong, deceased, and are the subject matters of this action.

25.  There is no dispute about the existence of these representations.  In fact, one Mr Simon Tam, the group financial controller of the Shun Hing Group, of which the plaintiffs form part, has gone through each of them on about 28 November 2014 when he made his third affirmation to oppose this summons. Mr Tam confirmed in his affirmation that there were the representations which were all in the same format.  He also exhibited one of them not for the purpose of making discovery but to demonstrate why none of the representations (which must include the one he exhibited) should be disclosed in discovery.

26.  On the basis of the exhibited representation, the plaintiffs argue that the representations should not be produced as they only delineated the directors’ obligations from the auditors’ obligations under the Companies Ordinance in a general manner and without stating anything specific as to the individual indebtedness.

27.  The AFS originally stated that the HK$872 million withdrawn by or at the direction of Dr Mong were to be repaid not by Dr Mong but by other entities.  One can reasonably expect that such accounting treatments of the indebtedness would invoke queries from the auditors who would qualify the AFS unless there would be satisfactory explanations from the plaintiffs.

28.  The AFS does not contain any explanation as to why the repayments should come from these other entities.  It is thus reasonable to expect that the auditors would have found comfort from the representations he received from the board of directors of the relevant plaintiffs.  Such representations are not supposed to be perfunctory statements that the boards of directors would have made casually.  They are statements that should have been carefully considered by the boards before they were made.  Such representations are therefore relevant on why there were the accounting treatments on repayment of the indebtedness in the AFS.  Hence, they are relevant to the issue of whether the plaintiffs are entitled to give fresh accounting treatments to the indebtedness in question and hold the estate of Dr Mong liable for such indebtedness.

29.  The 4th and 5th defendants have indeed through their accountant witness, Mr Illet, identified some general statements in the representation exhibited by Mr Tam that are relevant to the disputes in this action though they do not refer to any of the specific indebtedness.  Mr Illet discussed these statements in paragraphs 5.6, 5.7, 5.11 and 5.12 of his letter dated 16 January 2015 as follows:

“5.6 The directors confirmed that the financial statements had been prepared in accordance with the applicable financial reporting standards and Hong Kong Companies Ordinance. In recognising the amounts due from directors as an asset of SHHC (the 1^st plaintiff), the directors confirmed that they were expecting future economic benefit from these loans to be at least the value shown in the AFS i.e. that they were fully recoverable. They also confirmed the owing party was correct.

5.7 In the preparation of the consolidated financial statements, the directors confirmed they had made judgments which were prudent and reasonable. Such prudence would include any judgment over the recoverability of the indebtedness of a group company by a director. No provision was raised against this debt which suggests there was no doubt over recoverability of the amounts stated in the AFS to be due to the company and group by the directors.

…

5.11 In relation to related party transactions the directors confirmed the value and owing parties to be correct.

5.12 Therefore, the directors confirmed all of the material related party transactions had been properly recognised in the AFS.  This would include identifying the correct amounts and owing party.”     

30.  The plaintiffs argue that these representations merely corroborate the original accounting treatments given to the indebtedness in the AFS and they show an inconsistency with the views taken by the current boards of the plaintiffs.  However, their contents should have been reflected in the AFS. There is therefore no point in having them produced at the trial.

31.  In other words, the plaintiffs now do not challenge relevance but say that it is unnecessary to have the representations produced. I disagree.  I think these representations are not mere corroborations.  They are the statements made by the boards contemporaneously with the preparation of the AFS and were made by the boards after careful deliberation.  They were then relied upon by the auditors in auditing the AFS.  I think each set of AFS should be read and considered together with the corresponding representation given by the board of the relevant plaintiff so that it is clear as to why the indebtedness had been given the accounting treatments in question.

32.  Finally, the plaintiffs argue that there is already one representation exhibited by Mr Tam and there is no point in requiring the plaintiffs to make discovery of all of them.  I agree with Mr Chang SC, leading counsel for the 4th and 5th defendants, that Mr Tam did not even intend to make discovery of the representation he exhibited.  He in fact refused to make discovery of any representation, including the one he exhibited. 

33.  Furthermore, Mr Tam already had all the representations collected for him and he had read them all.  I see no reason why these representations should not be all disclosed.  There are only about two dozens of representation and this action is for some HK$872 million.  I cannot see any question of disproportionality between the size of the claim and the costs for this discovery exercise.

34.  In the premises, I make an order in terms of the representation summons.  I also make a costs order nisi that the plaintiffs do pay the 4th and 5th defendants the costs of this summons.  Since the representations are of core relevance to the dispute between the parties and this summons is important for the resolution of these disputes, I also certify this summons fit for three counsel.

35.  I also certify that no counsel fee need be paid for today as I have dispensed attendance of counsel for today.