ZHOU XI v. BRINK’S HONG KONG LTD AND ANOTHER

HCA 2900/2016 &
HCA 2775/2016
(consolidated)

[2021] HKCFI 1645

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2900 of 2016 AND 2775 of 2016

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BETWEEN

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(consolidated pursuant to the Order of Registrar Ho dated 26^th September 2017)

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D E C I S I O N

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Background

1.  This is the 1^st Defendant’s appeal against the Decision made by the Master on the 1^st Defendant’s 2 summonses of 6 May 2020 (“Summonses”), respectively for discovery and interrogatories.

2.  The appeal is confined to the parts of the Master’s order refusing to allow the discovery and interrogatories sought.  The Defendant now seeks on appeal orders to be made for:

(1) discovery of contracts and correspondence between the Plaintiff and 上海浦東新區恒大小額貸款有限公司 and 上海吉立典當有限公司 (“PRC Companies”) showing or indicating the positions (if any) and areas of responsibilities of the Plaintiff in the PRC Companies; and

(2) interrogatories as to:

(1) whether the Plaintiff, whether by himself or being an officer, director, shareholder, agent or employee of an entity, on his own behalf or on behalf of another entity, has been involved in any business of making loans, advertised himself, or held himself out in any way as being involved in the business of making loans at any material times in any places and/or country (ies) other than Hong Kong; if yes, specifying the place and/or country where the Plaintiff has done so; and providing details including the trading name and address of each such entity, the Plaintiff’s position in such entity, including the Plaintiff’s shareholding, title and the duties of the Plaintiff’s position and the duration of such position;

(2) the nature of the businesses of the PRC Companies, stating whether such business involves in any way the making of loans in Hong Kong or any place or country other than Hong Kong;

(3) if the businesses of the PRC Companies involve the making of loans, whether these companies held or hold any valid licence for money lending in any place and/or country other than Hong Kong;

(4) the full titles of the Plaintiff’s position as “Chairman” of the PRC Companies, the duration and duties of his appointment as Chairman;

(5) whether the Plaintiff holds or at any time held in the PRC Companies any indirect or beneficial shareholding; any shadow directorship; and apart from shareholding and directorship, any other position such as executive, management positions; and the details and duration of such shareholding/directorship/positions.

3.  It is clear and undisputed, that the hearing of the appeal before this Court is de novo.

4.  Some facts of the dealings between the parties in this action are startling and atypical, but the legal principles applicable to the present application are settled, and as indicated at the conclusion of the hearing on 3 June 2021, I will only give brief reasons for my decision.

5.  Although the Peruvian Guano principles of relevance apply to applications for discovery, under Order 24 rule 8 RHC, discovery will only be ordered if it is necessary for disposing fairly of the cause or matter or for saving costs.  This is particularly so post-CJR, with the Court’s emphases on the underlying objectives of procedural economy, cost-effectiveness and reasonable proportionality in the conduct of proceedings.

6.  Under Order 26 rule 1 RHC, interrogatories may be served only if they relate to any matter in question between the applicant and the party served which are necessary, either for disposing fairly of the cause or matter or for saving costs.

7.  In Lee Nui Foon v Ocean Park Corp (No 2) [1995] 2 HKC 395, it was held that interrogatories must not be fishing, oppressive, prolix or imprecise, and must not be questions which go to the facts which will assist in establishing the opposing party’s case as opposed to the case of the party seeking to interrogate.

The claims made in the proceedings

8.  It is necessary first to identify the nature of the claims made, and the issues in dispute in the cause or matter in the proceedings.

9.  HCA 2775/2016 (“HCA 2775”) was first commenced by Brink’s Hong Kong Limited (“Brink’s”) against Madam Lau Suk Mei (“Lau”) as defendant, on 25 October 2016.  Brink’s claims that under and pursuant to a Storage Agreement dated 2 August 2013 (“Storage Agreement”) made between Brink’s on the one part, and Lau and Mr Zhou Xi (“Zhou”) on the other part, Lau and Zhou deposited a 26.86 carats diamond (“Diamond”) with Brink’s for storage, at the estimated value of US$5 million.  Brink’s pleaded case in HCA 2775 is that the Storage Agreement expressly provided that instructions to release the Diamond must be given jointly by Lau and Zhou, but that Brink’s mistakenly released the Diamond to Lau on 12 January 2015, in reliance on the oral instructions given by Lau to Brink’s on 29 January 2014, that only Lau had the right to collect the Diamond (“Invalid Mandate”). Brink’s claims that the Invalid Mandate was not approved or authorized by Zhou and was contrary to the terms of the Storage Agreement and an Authorisation Letter dated 16 August 2013, signed by Lau and Zhou (“Authorisation Letter”), that Brink’s was to release the Diamond to Zhou upon his sole written request without Lau’s approval, with effect from 10 February 2014.

10.  Brink’s claims in HCA 2775 that it was the lawful bailee of the Diamond with immediate right of possession to the Diamond as against Lau, and that Lau had failed to return possession of the Diamond to Brink’s upon the latter’s demand.  In HCA 2775, Brink’s claims the return of the Diamond from Lau, alternatively, US$5 million as the value of the Diamond, and damages.

11.  On 7 November 2016, Zhou commenced HCA 2900/2016 (“HCA 2900”) against Brink’s, in reliance on the Storage Agreement and the Authorisation Letter.  Zhou claims in HCA 2900 that the Storage Agreement provided that any instruction to deal with the Diamond (the value of which was US$5 million) required the approval of both Zhou and Lau, and further claims that it was an implied term of the Storage Agreement and Authorisation Letter that Brink’s should not accept any instruction by Lau alone for the release of the Diamond, without first receiving Zhou’s approval.  On his pleaded case in HCA 2900, Zhou was a bailee for reward of the Diamond since August 2013, and was entitled to immediate possession of the Diamond as from 10 February 2014.  Zhou claims that Brink’s was in breach of its duties as bailee and in breach of the Storage Agreement and Authorisation Letter in releasing the Diamond to Lau in January 2015, without Zhou’s authorisation.

12.  By order of the Court made on 26 September 2017, HCA 2775 and HCA 2900 were consolidated, with Zhou named as Plaintiff, Brink’s as 1^st Defendant and Lau as 2^nd Defendant, and pleadings were subsequently filed for the consolidated action.

13.  In the consolidated Statement of Claim, Zhou as Plaintiff makes the same pleading and claims, in reliance on the Storage Agreement and bailment.  Zhou further pleads, as against Lau, a Joint Investment Agreement dated 16 August 2013 (“Investment Agreement”), whereby Zhou and Lau agreed to cooperate in selling the Diamond.  Under the Investment Agreement, Lau agreed (inter alia) to arrange for and handle the delivery of the Diamond to Brink’s for safe custody, to find interested buyers for the Diamond and to handle all matters relating to the sale.  Zhou agreed under the Investment Agreement to pay to Lau US$2 million as the Investment Amount, and in the event of a successful sale of the Diamond during the agreed period of 6 months, Lau agreed to pay to Zhou the Investment Amount of US$2 million, together with a “guaranteed profit of US$600,000” (“Guaranteed Profit”).  If the Diamond could not be sold during the period of 6 months, Zhou was entitled to terminate the Investment Agreement and demand for either: (1) Lau’s payment of US$2 million and the Guaranteed Profit; or (2) taking the Diamond from Brink’s in settlement of the Investment Amount, together with Lau’s payment of the Guaranteed Profit.

14.  In the consolidated Statement of Claim, Zhou seeks from Brink’s payment of US$5 million (the value of the Diamond), alternatively return of the Diamond and damages; and as against Lau, US$2,600,000, alternatively the return of the Diamond, and damages.

15.  In its Amended Defence filed in the consolidated action, Brink’s claims that on the basis of Zhou’s pleaded case on the Investment Agreement, Zhou was at the material time a money lender for the purposes of the Money Lenders Ordinance (“Ordinance”), and that the Investment Amount of US$2 million was a loan which is unlawful and unenforceable under the Ordinance, under sections 18, 22 (1) (c), 23 and 24 (2) of the Ordinance.  Brink’s further claims that the Investment Agreement is an extortionate transaction under section 25 of the Ordinance, and further, that clause 3.5 (2) of the Investment Agreement is unenforceable as a penalty clause.

16.  In its Amended Defence, Brink’s asserts that Zhou was never at the material time the owner of the Diamond, and further denies that he has suffered any loss and damage.  It admits that the Diamond was released to Lau, but denies that it was in breach of the Storage Agreement, the Authorisation Letter, or its duties as bailee.

Bailee estoppel

17.  On behalf of Zhou, Counsel argued that the defences raised by Brink’s as to the unenforceability of the Investment Agreement under the Ordinance are in effect challenges made to Zhou’s title to sue in these proceedings, and that it is not open to Brink’s, as the acknowledged bailee of the Diamond, to do so, whether by way of challenge to Zhou’s capacity to sue for the return of the Diamond, or to claim that Zhou as bailor has suffered no loss.  Mr Chain relies on the well-established principles of bailor/bailee estoppel set out in Cheesman v Exall (1851) 155 ER 574 and Biddle v Bond (1865) 122 ER 1179.  Counsel contended that the exception of a bailee defending by title paramount does not apply in this case, since Brink’s is not asserting nor defending Zhou’s claims against it on behalf and with the authority of the true owner.  Counsel pointed to the fact that in HCA 2775, Brink’s itself claims that Zhou was not entitled to the possession of the Diamond and that her detention of the Diamond constituted conversion and/or breach of the terms of the Storage Agreement and/or the Authorisation Letter.

18.  Mr Chain argued that Brink’s applications for discovery and interrogatories relate to Zhou’s positions and responsibilities in the PRC Companies, whether he was a money lender and involved on behalf of other entities in any business of making loans, and are part and parcel of its purported challenge to Zhou’s title as bailor, which is not open to Brink’s to do so as bailee, and should be refused on the ground of estoppel.

19.  On behalf of Brink’s, Mr Man argued that estoppel by bailment was not pleaded in the consolidated Statement of Claim, and that Zhou only applied on 24 May 2021 for leave to amend the pleading, to include his claim of contractual estoppel and/or bailor/bailee estoppel, which application will only be heard on 7 June 2021.  In this regard, I accept the submissions of Mr Chain, that the consolidated Statement of Claim adequately pleads the facts which give rise to the bailment, and the fact that Brink’s was a bailee for reward since the date of the Storage Agreement.  It is not necessary to plead the consequence of such bailment and the resulting operation of the estoppel on Brink’s application for discovery and interrogatories.

20.  In its Amended Defence in the consolidated action, Brink’s admitted that it was a bailee of the Diamond since August 2013.  It also admitted the fact that the Storage Agreement included a handwritten remark, that any instruction must have the approval of both Zhou and Lau, although it is Brink’s claim that Zhou did not sign the Storage Agreement.  In any event, bearing in mind the fact that in HCA 2775, Brink’s itself relied on bailment under and pursuant to the Storage Agreement, and the fact that the instructions to Brink’s under the Authorisation Letter were jointly from Lau and Zhou, it can scarcely be argued that bailment and the estoppel thereby created is a new issue.

21.  I also agree with Mr Chain, that Brink’s original pleading and the claims made against Lau in the Statement of Claim in HCA 2775 are not entirely consistent with the claim it now seeks to assert, as to Lau being the true owner who was entitled to the Diamond.

22.  However, as Mr Man pointed out, whether Brink’s was right in its delivery of the Diamond to Lau, is a matter to be ultimately established at trial.  At this stage, it is arguable that Brink’s has sufficiently pleaded facts in the Amended Defence, that the Diamond had been released and delivered by Brink’s to Lau, who was at least one of the owners of the Diamond and one of the persons described as customer and consignee in the Storage Agreement.  It is at least arguable that it is open to Brink’s to claim that it is entitled to defend Zhou’s claim to possession of the Diamond, and to dispute the value of the Diamond on the basis of the unenforceable loan transaction, and that estoppel does not apply when Brink’s, as bailee, was evicted by title paramount.  “Eviction” does not require physical eviction, merely the making of an adverse demand by the true owner against the bailee (English Private Law, para 16.23; Palmer on Bailment, para 4-033).  An eviction may be deemed to have occurred whenever the bailee returns the goods to the true owner upon the latter’s demand, as was the case when Brink’s released the Diamond to Lau upon her demand in January 2015.

23.  I therefore accept the submissions made on behalf of Brink’s, that for the purpose of the application for discovery and interrogatories at this stage, it is at least arguable that bailee estoppel does not apply to justify the dismissal of the appeal on the Summonses.

Whether discovery and interrogatories are relevant and necessary

24.  Having dealt with the preliminary objection based on estoppel, the appeal for the refusal of the application for discovery and interrogatories can be disposed of more briefly.

25.  The request for discovery of contracts and correspondence between Zhou and the PRC Companies, showing the positions and areas of responsibilities of Zhou in the PRC Companies, is said to be relevant to the question of whether Zhou was carrying on business as a money lender, through the PRC Companies.  Counsel for Brink’s contended that documents showing the level of Zhou’s involvement in the PRC Companies are relevant in establishing whether Zhou has a past history of being involved in making loans as a business under commercial terms, and also to test Zhou’s argument that his ordinary business is in real estate, and not in moneylending, such that any loan in the ordinary course of that business should be exempted under Schedule 1 of the Ordinance.

26.  The interrogatories seek whether Zhou by himself, or on behalf of another entity had been involved in any business of making loans in any place other than Hong Kong; the nature of the business of the PRC Companies and whether they were involved in the making of loans in and outside Hong Kong; and the title, duties, shareholding and positions of Zhou in the PRC Companies.

27.  In my judgment, the category of documents sought is too broad, and both the discovery and interrogatories are unnecessary for disposing fairly of the cause or matter, or for saving costs.

28.  The claim made by Brink’s in the Defence is that Zhou’s purported investment of US$2 million under the Investment Agreement was in substance a loan, that Zhou was carrying on an unauthorized business of moneylending and that the loan is unenforceable under the Ordinance (“MLO Defence”).  Any purported loan was a loan from Zhou, not the PRC Companies, and not any other entity.

29.  The PRC Companies carried on business on the Mainland.  The Ordinance provides for licensing of moneylenders in Hong Kong and offences committed in Hong Kong.  There are already documents disclosed and evidence from Zhou that he is or was the Chairman and director/legal representative of the PRC Companies, and company search results revealed the business of the PRC Companies.  Interrogatories have already been ordered as to whether Zhou himself, ie in his own personal capacity, was involved in any business of making loans in any place other than Hong Kong.  Whether Zhou had carried on business as a money lender as officer, agent, employee or shareholder, or for/on behalf of another entity, is not relevant, and certainly not material, to the MLO Defence.

30.  Further and extended discovery of all documents and correspondence, and interrogatories from Zhou, to show simply Zhou’s position, titles, shareholding, duties and responsibilities in the PRC Companies, is not necessary for the MLO Defence.  The discovery and interrogatories border on fishing, and the documents and information sought will at most be used to attack the credibility of Zhou’s assertions as to whether or not he had carried on business of moneylending in Hong Kong and elsewhere.  Questions as to his indirect or beneficial shareholding, positions, responsibilities, and titles can all be asked in cross-examination and I do not consider that Brink’s preparations for trial will be prejudiced without these documents and information, particularly with the documents and information already available to Brink’s.  The further documents and interrogatories sought will only lengthen the trial on peripheral matters, and unnecessarily increases costs.

31.  I bear in mind that for the purpose of s 25 of the Ordinance, all that has to be established is that, irrespective of whether or not Zhou was a money lender or carrying on business as such, the relevant loan transaction (if any is established) is extortionate.  The carrying on of any business of a money lender is not required for the s 25 defence.  Discovery on the carrying on of a business of a money lender should accordingly be proportionate to the main and real issues for determination at trial, and should not be unnecessarily extended.

Disposition

32.  The appeal and application for discovery and interrogatories is dismissed, with costs to Zhou with certificate for one counsel.