FIL LEVERAGED US GOVERNMENT BOND FUND LTD. v. TCW FUNDS MANAGEMENT, INC.

HCCL000231C/1998

HCCL231/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO.231 OF 1998

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BETWEEN
	FIL LEVERAGED US GOVERNMENT BOND FUND LIMITED	1st Plaintiff
	MBS CAPITAL SECURED LIMITED	2nd Plaintiff
	MBS SECURITIES LIMITED	3rd Plaintiff
	FIRST INVESTMENTS LIMITED	4th Plaintiff
	FIL INVESTMENT SERVICES LIMITED	5th Plaintiff
	AND
	TCW FUNDS MANAGEMENT, INC	Defendant
	and
	GEOFFREY JAY MANSFIELD	Third Party

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Coram: Hon Stone J in Chambers

Dates of Hearing: 26 and 27 March 2001

Date of Judgment: 30 March 2001

 

___________________

J U D G M E N T

___________________

 

THE APPLICATION

1. There is before the court an application by the defendant, by summons dated 2 March 2001, for specific discovery pursuant to the provisions of Order 24 rule 7.

2. This summons, which is in the form usual for this type of application, seeks an order that the plaintiffs and the third party herein, Mr Mansfield, do within 14 days make and file affidavits stating whether they have at any time had in their possession, custody or power the documents or classes of documents specified in the Schedule annexed to the summons, alternately stating what has become of such documents no longer retained. The Schedule annexed is considerable, itemising some 26 classes of documents which are now sought.

3. The application is backed by the Second Affidavit of Mr Keith Mak, sworn and filed on 8 March 2001. It is an affidavit which has been drawn by counsel. In the complex circumstances prevailing in this case it is also a document which has been of real assistance, the style adopted therein being to group the items sought within common areas of inquiry, the better in order to explain why the documents are required for the resolution of this dispute.

4. This particular discovery application appears to have been waiting in the wings for a considerable time, being first flagged as long ago as 1999, although the particular development of the case subsequent to its commencement in this jurisdiction (I am reminded that it was ongoing for two years in the United States prior to a successful forum nonconveniens application) appears to have resulted in its delay. Perhaps, too, it reasonably may have been anticipated that an earlier accommodation on the subject might have been reached with those acting for the plaintiffs, much as the plaintiffs' own specific discovery application was disposed of by consent at the composite hearing of outstanding interlocutory matters held in November 2000. Be that as it may. Without wishing in any way to attribute fault - and Mr Fok SC, who appears for the defendant, has carefully and fairly reminded the court of the procedural history in this case, including the two contested strike out applications and the application to join Mr Mansfield as third party - it is unfortunate to say the least that there remains to be adjudicated a wide-ranging discovery application in what is a complex commercial case, the trial of which is scheduled to commence on 29 October 2001, a mere seven months from today - in itself a relatively short period given the amount of preparatory work currently necessary in order to ensure that these dates are met. And there can be no doubt in anyone's mind, I surmise, of this court's desire to see that this trial indeed does take place as scheduled.

5. Surprisingly, given the manner in which this application was launched, no evidence whatever has been filed either by the plaintiffs or by Mr Mansfield. Whilst I can understand why the Herbert Smith critique of the discovery requests, as set out in their letter of 20 February 2001, was couched in the terms that it was, it is perhaps more difficult to see why a similar 'dead bat' approach thereafter was maintained in light of Mr Mak's full and detailed explanation, on affidavit, of each of the categories of documents sought. The matters outlined in that affidavit may or may not have been regarded by the plaintiffs as justifying the relief sought, but it might reasonably have been thought appropriate for some evidential engagement to have taken place upon the issues raised. Whilst relevance is always an inviting subject for argument, in the circumstances of this case there seemed little to be gained by initially opposing the present application "root and branch", as in fact occurred, on the basis that Mr Mak's affidavit did not get over the "existence threshold" in terms of the classes of documents sought - a blanket approach which possibly contributed to Mr Fok's subsequent complaint that a serious and well-founded application was being trivialised. Indeed, in a commercial case of this magnitude, the objective observer might reasonably take the view that doctrinaire reliance should not be allowed to hold sway at the expense of pragmatism and commonsense.

6. Fortunately, the latter attributes began to be demonstrated early in the argument by Mr Scott SC, appearing on behalf of the plaintiffs, and indeed latterly by Mr Mansfield, who attended throughout. I pause to note that Mr Mansfield's position in this case is not an easy one. Whilst as Third Party he represents himself, clearly he is and has been the key person instructing those acting for the plaintiffs - as he explained in one of his exchanges with the Bench, "every piece of paper" that he had relating to matters prior to TCW's termination in June 1995 already has gone to Messrs Herbert Smith, albeit he retains post-termination materials. For the purposes of the present application he adopted Mr Scott's submissions, although his subsequent suggestions with regard to the possibility of retrieving and reviewing electronic records proved independently helpful and constructive, and as I understand the position these proposals have been adopted.

7. I turn now to the substance of the application, and also to record the accommodations which were reached within the framework of the argument.

(1) ITEMS NO LONGER IN CONTENTION

(a) By the defendant

8. Prior to commencement of this hearing, it had been indicated on behalf of the defendant that, out of the 26 items contained in the Schedule annexed to the summons, the defendant did not wish to pursue Item 11 (identities / holdings of bondholders in the MSL Fund) and Item 23 (reports / records etc relating to management of Bond Fund by IPA since June 1995). Indeed, these particular items were not developed by Mr Mak in his affidavit leading the application.

9. Further, at the conclusion of the hearing, Mr Fok SC helpfully submitted that on reflection he had decided no longer to press Item 24 (pricing information / methodology in respect of Bond Fund securities provided to FIL by IPA / APAM) and Item 25 (trade records / reports etc showing purchases and sales of Bond Fund securities by IPA / APAM since their appointment in June 1995). In my view, Mr Fok was correct to take this course.

(b) By the plaintiffs

10. Mr Scott SC indicated early in the argument that his clients were prepared to consent to an order in relation to Item 3 (all documents in relation to the calculation / breakdown of the alleged losses suffered by the Bond Fund shareholders, MSL Fund bondholders and the First Investment Group as set out in the Mansfield Memo to MCSL directors dated 19 April 1995) and Item 14 (the Guarantee, and related documents, referred to by Mr Mansfield in his fax dated 3 February 1994 in respect of the annual distribution payment of the MSL Fund).

11. In this context Mr Scott made it clear that although his client did not have any of these documents (and out of abundance of caution waived no residual privilege argument), it was accepted on behalf of the plaintiffs at this hearing that the twin requirements of existence and relevance were satisfied.

12. In addition, Mr Scott submitted that in the circumstances his client was prepared to make a second concession, on this occasion without accepting that a case properly had been made out in terms of probable existence, in order to shortcut matters. His clients, he said, would make an affidavit stating that they did not have or no longer had (and if appropriate what had become of them) documents within the following categories :-

Items 1 and 2 up to the end of May 1995 (Bond Fund Reports to shareholders and FIL financial intermediaries), Item 4 (correspondence between FIL / First Investments (HK) Ltd / FIS / MSL / MCSL and the eight financial institutions referred to in Mr Mansfield's letter to W. Finance of 15 June 1994), Item 12 (file notes / records / documents of FIL / First Investments (HK) Ltd / MSL / MCSL and correspondence between themselves and bondholders regarding the annual distribution payment by the MSL Fund leading to payment of the participation amount in January 1995), Item 13 (legal advice obtained by Mr Mansfield in relation to the annual distribution payment by the MSL Fund), Item 15 (correspondence between FIL / FIS / First Investments (HK) Ltd / MSL / MCSL / Mr Mansfield and Arral & Partners Ltd, Arral Pacific Management Ltd and correspondence with the Bank of Butterfield regarding the repayment extension of FIL's US$10 million term loan taken out to subscribe in MCSL), Item 16 (correspondence between FIL / FIS / First Investments (HK) Ltd / Mr Mansfield and Arral & Partners Ltd, Arral Pacific Management Ltd, FH Prince & Co. and the Bank of Butterfield regarding FIL's loan facility with the Bank of March 1995), Item 22 (correspondence between Matheson PFC and FIL / FIS / First Investments (HK) Ltd in relation to Matheson's public reprimand and sanction by the Hong Kong SFC in April 1995), and finally the second element within Item 26 (namely, that part which refers to documents relating to the Early Payment of the Participation Amount to investors in the MSL Fund and the subsequent exchange of MCSL bonds for the underlying zero coupon notes issued by Sudwestdeutsche Landesbank).

(2) ITEMS REMAINING CONTENTIOUS

13. The end result of the foregoing exercise was that out of the 26 items particularised in the Schedule to the summons, substantive argument was maintained only in terms of those items, or categories of items, set out below.

Items 1 and 2 - after the end of May 1995

14. As earlier noted, these items focused upon reports to shareholders of Bond Fund, and reports of Bond Fund to financial intermediaries. The affidavit to be made by the plaintiffs would, as Mr Scott stipulated, cover the period up to the end of May 1995, whilst for his part Mr Fok was content to limit the defendant's inquiries in this regard to the end of August 1996, which date correlated with the divestment by TCW's managerial successors of the last of those securities which had been purchased by TCW, and which had remained in the Bond Fund portfolio after TCW's termination in May 1995.

15. There is, therefore, a small window which remains outstanding as the subject for argument, and I have no hesitation in ordering discovery of the relevant reports categorised in Items 1 and 2 for the period from the end of May 1995 to the end of August 1996. Whilst I accept Mr Scott's contention that management of a different portfolio by different managers is not of compelling interest in the context of this case, I can see the relevance of reports relating to the interim period when the portfolio continued to contain what I will refer to, for shorthand purposes, as 'TCW securities'.

Items 9 and 10

16. As drawn, these items go to what has been referred to by counsel as the 'conflict of interest' point. These items read as follows :-

"Item 9

All subscription documents, correspondence, agreements, notes, reports, memoranda and other documents in connection with the personal investments of each of the directors and officers of the Bond Fund, FIL, FIS, First Investments (Hong Kong) Limited, MCSL and MSL, in particular, Geoffrey Mansfield, in the Bond Fund and/or the MSL Fund during the period from October 1992 to June 1995.

Item 10

All documents and correspondence in relation to borrowings, bank loans and other financial arrangements of each of the directors and officers of the Bond Fund, FIL, FIS, First Investments (Hong Kong) Limited, MBS MCSL and MSL, in particular Geoffrey Mansfield, to finance their investments in either or both the Bond Fund and the MSL Fund during the period from October 1992 to June 1995."

17. Under this head Mr Scott made two points in opposition to this request : first, that there was in fact no live issue in this regard so far as Mr Mansfield was concerned, since the fact of his interest in Bond Fund had been admitted on the pleadings, and second, that no case whatever had been pleaded alleging that any officer apart from Mr Mansfield had any conflict of interest. Thus, absent Mr Mansfield himself, this was a blatant 'fishing' expedition.

18. Mr Fok clearly recognised the strength of this last submission, and at the end of the argument indicated that he was prepared to limit the application in this regard to Mr Mansfield alone. He further made the point that whilst the admission to which Mr Scott alluded went to Mr Mansfield's admission of an interest in FIL, the request also went to shareholding in Bond Fund and also to MSL Fund, which was not the subject of any admission, expressed or implied.

19. I do not think that it necessarily follows that an admission in itself is sufficient to preclude discovery - and, to be fair, Mr Scott did not put it as high as this - and after reflection, in the exercise of my discretion I am inclined to order specific discovery under these two heads, with the excision of the clause "each of ... to particular" in the second to fourth lines of Item 9, and a like deletion in the second and third lines of Item 10, so that the request is clearly stated to be limited solely to Mr Mansfield.

Items 17 - 20

20. These items form a further recognisable 'cluster', and broadly deal with the change of investment adviser from TCW to International Portfolio Analytics Ltd ("IPA") and Atlantic Portfolio Analytics & Management Inc. ("APAM"). As framed, these discovery requests are as follows :-

"Item 17

File notes, records, memoranda and correspondence between FIL/FIS/First Investments (Hong Kong) Limited/Geoffrey Mansfield and International Portfolio Analytics Ltd. (IPA) and/or Atlantic Portfolio Analytics & Management Inc (APAM) or other investment managers in relation to the Bond Fund portfolio leading to IPA's appointment as Investment Adviser, including all correspondence, discussion and file notes, memoranda, presentation materials and other documents relating to the strategy used by IPA and/or APAM in respect of the Bond Fund.

Item 18

All correspondence between FIL/FIS/First Investments (Hong Kong) Limited and the Hong Kong Securities and Futures Commission regarding the change of Investment Advisor for the Bond Fund in 1995.

Item 19

All correspondence between FIL/FIS/First Investments (Hong Kong) Limited and the Bank of Butterfield regarding the change of Investment Advisor for the Bond Fund in 1995.

Item 20

All correspondence between FIL/FIS/First Investments (Hong Kong) Limited and all distribution agents of the Bond Fund regarding the circumstances leading to the change of Investment Advisor in 1995."

21. There perhaps has been some misapprehension as to the true aim of this request, Mr Fok being at pains to emphasise that the point at issue here went not to any question of annual percentage return, whether of 12% or otherwise, as Mr Scott had initially thought, but solely to the historical statements within certain classes of contemporary documentation relating to the reason or reasons for the change of investment adviser in 1995. In this context Mr Fok stressed that this material was particularly relevant to the allegation of deceit made against his client, in that the contemporaneously recorded reaction of the plaintiffs at or around the time of the change had a signal bearing as to whether the plaintiffs in fact had been misled, as was claimed; in addition, these heads also went to the absence of contemporary correspondence as to misrepresentation.

22. I allow the discovery sought under each of these heads, that is, 17, 18, 19 and 20, save that Item 17 is to be amended by the deletion of all that follows the word 'Adviser' in the fifth line thereof. In his concluding remarks, Mr Fok recognised, I think, the desirability of amendment in these terms.

Item 21

"All minutes of board and shareholders' meetings of: (i) the Bond Fund, (ii) FIL, (iii) FIS, (iv) First Investments (Hong Kong) Limited, (v) MSL and (vi) MCSL."

23. This head of request sparked lively debate. In his affidavit (at page 24) Mr Mak usefully sets out, in tabular form, such minutes as have been disclosed of board or general meetings of each of the plaintiffs, noting in particular that only three sets of minutes of FIL had been produced, and that no minutes either of MSL or FIS appear to have been disclosed either by the plaintiffs or by Mr Mansfield. He makes the fair point that on the probabilities there should be more, and further makes observations as to the clear relevance of these documents in terms of decisions made at material times, in particular in relation to various issues in question including pricing, leverage, fees, redemption payment at the time of suspension, hedging, distribution payments, termination of TCW as investment adviser, and liquidation of the MSL Fund.

24. For his part, Mr Scott submitted that what was being sought is analogous to the type of 'discovery by file' which is wont to occur in construction disputes, that his clients already had made discovery of what is relevant in terms of the issues pleaded, and that judicial discretion should be firmly exercised against such "speculative discovery". In effect, he said, the defendant was challenging the veracity of the discovery thus far made, which it should not be forgotten was, in its original and supplemental form, extensive.

25. Mr Fok's response was that there could as yet be no challenge to the plaintiffs' veracity because the plaintiffs pointedly had not yet said anything in evidence, in particular on the point that there were no more minutes relevant to the issues pleaded in this case. And that absent such evidence, in circumstances like this the defendant was obliged to make an application of this nature.

26. In my view Mr Fok is correct. Had the plaintiffs chosen to explain their position in evidence (and I do not consider that inter-solicitor correspondence in this regard suffices as a substitute), such averment on oath would have been conclusive, and thus an end of the matter. But, as observed at the outset, thus far there has been no evidential engagement of any kind, the plaintiffs choosing initially to resist the application with "a straight bat on everything", to adopt Mr Scott's colourful phrase.

27. I order discovery under this head also in terms of the request as drawn.

Items 5, 6, 7, 26 and 8

28. I have taken these items out of numerical sequence, and deal with them at the last, because they achieved by far the greatest profile during argument. These items, which were cumulatively referred to under the label 'the redemption point', are framed thus :-

"Item 5

All redemption requests, redemption forms or redemption notices in the Bond Fund submitted to the Manager and/or other distribution agents during 1994 and 1995, in particular during the period shortly before and during the suspension of the Fund and between February and September 1994.

Item 6

All internal memoranda, reports, statements, correspondence, notes, guidelines and other documents of the Bond Fund, FIL, First Investments (Hong Kong) Limited and FIS regarding redemption requests and the decision to make redemption payments during the period of suspension of the Bond Fund in 1994.

Item 7

All correspondence between FIL/First Investments (Hong Kong) Limited/FIS and the Bank of Butterfield, Chemical Bank or any other party in connection with redemption payments during the period between February and September 1994.

Item 26

All documents referring or relating to the redemption of investors' investments in the Bond Fund between September 1992 and the present time, and all documents referring or relating to the Early Payment of the Participation Amount to investors in the MSL Fund and the subsequent exchange of MCSL bonds for the underlying zero coupon notes issued by Sudwestdeutsche Landesbank. This would include documents recording the details of the individual investors and their investments, instructions given to redeem shares or to exchange bonds, the arrangements made in consequence to cancel shares/bonds or otherwise, and the funding and payment of redemption entitlements or the Participation Amount.

Item 8

All bank statements, correspondence and documents in respect of the accounts maintained by the Bond Fund with the Bank of Butterfield and Citibank from September 1992 to June 1995."

29. The latter item, item 8, was in fact accorded separate treatment by Mr Mak in his affidavit, albeit there is undoubtedly correlation with these other heads, and was referred to as such in argument. An additional point I have borne firmly in mind within this cluster of requests is that Item 26 was but a late entry onto the specific discovery scene, being first ventilated in inter-solicitor correspondence by Baker & McKenzie's letter of 13 February 2001, although as matters transpired, only the request in the opening two lines of paragraph 26 remained in issue, given Mr Scott's concession as to an affidavit covering the balance of paragraph 26, as amended to delete the words "to redeem shares or" (seventh line) and "redemption entitlements or" (final line).

30. Mr Scott strenuously objected to discovery under these items. He noted that with regard to redemptions within the period of the Bond Fund suspension, that is from April to September 1994, that Mr Mansfield had admitted some redemptions, namely those which were in the pipeline at the time of the suspension, in paragraph 14 of the Third Party Defence, and he submitted, therefore, that in light of such admission there was little relevance, to take Item 5 as an example, in seeking redemption requests at the individual investor level. Redemptions were a matter of historical fact, and the pieces of paper representing that process were, he asserted, of no consequence. Similar observations were equally applicable, he said, to Item 6, in that the admitted historical fact of such redemptions was sufficient for the pleaded case. Equally in terms of Item 7, the instructions to the custodian / trustee of the Fund were merely part of the redemption sequence, and added nothing to the basic issue. Likewise, he suggested with Item 8, which was all to do with the details of the monetary processing of the relevant requests. In a nutshell, he said, there was no issue in terms of what redemptions were actually made, but, put simply, the fundamental point was whether the plaintiffs were justified in acting upon the redemption requests during the suspension period of the Fund.

31. As for the newly-introduced Item 26, this, he submitted, was "breathtaking in its width", and it was unclear to what precise pleaded issue the arrangements of individual investors were relevant. Descriptive compression often does less than justice to argument, but that at least was the thrust of his observations under these heads.

32. Mr Fok maintained, correctly in my view, that mere admission of a fact did not remove documents from the scope of primary discovery obligations, albeit this fact was but an element which could legitimately be fed into the discretionary 'mix'. But in any event Mr Fok's primary submission under these heads was that the relevance of the discovery sought had not been fully appreciated, notwithstanding its detailed elaboration by the draftsman of Mr Mak's affidavit, in particular at paragraphs 41 to 43 thereof. There was in this case, he said, an important legal argument to be run which impacted directly upon whether the plaintiff companies (as opposed to individual shareholders) could recover the losses alleged. In essence, the point was that if Bond Fund was to recover claims in respect of securities whose value had declined, but which in effect represented the investment of shareholders who had already redeemed their shares, those redeeming shareholders who had actually suffered the loss would not receive compensation which might be awarded to the plaintiff companies, which compensation thus would enure to the benefit of the continuing shareholders - a situation, it would be submitted, which could not be correct given that any such recovery would not compensate those who in fact had suffered the loss.

33. This line of legal argument may or may not ultimately bear fruit at trial, said Mr Fok, but critical factual information upon which such legal submission depended was the ascertainment of what proportion of any particular head of loss claimed (to take for example, the claim for $71 million), was attributable to retained investments, and what proportion to redeemed investments. In other words, the vital information that was required was who redeemed, when, and how much? Once this historical data became known, TCW would contend that no damages were recoverable by any of the plaintiffs in this action in respect of losses associated with securities representing shareholder redemptions. Such information must be readily available, said Mr Fok, and these specific discovery requests were designed to elicit this information, which ought to be available "at the press of a button". Nor was it necessary, he said, to have details of new investors; what was necessary was to obtain details of those who invested under the TCW regime (i.e. pre June 1995) who fell within the class of investors who had already redeemed.

34. Mr Scott's initial objection was that this line should have been pleaded, and that absent such properly formulated plea, this was inappropriately widening the scope of the plaintiffs' discovery obligations. However, this was neatly met with reference to paragraph 154 of the Amended Defence, which in my view adequately sets out the point, so that under these heads I am unable to accede to Mr Scott's objection that what was being sought were "mountains of documents on tangential unpleaded issues". Mr Scott may, however, have been nearer the mark when he also argued that if what the defendant was after was simply information, there were considerably easier ways of getting at that, for example, by interrogatories, rather than via the cumbrous process of specific discovery of all the thousands of pieces of paper representing the primary redemption documents.

35. I confess I found this latter point very attractive, not least given the current relatively tight timetable to trial, and the probabilities that a very significant amount of documents would otherwise require to be sifted and analysed. As to this, in a brief and helpful submission, Mr Mansfield stated that documentation relevant to "redemption data", as he put it, would be in the region of some 20,000 to 30,000 documents, which must now be retained in warehouses or other repositories.

36. Nevertheless, Mr Mansfield suggested a way out of the difficulty. This was to instruct the Registrar of Bond Fund to provide categories of information to the defendant's solicitors directly and in electronic form, a process which would elicit the primary redemption data the defendant now wished to obtain. In my view, and notwithstanding Mr Fok's immediate reservations, this provides an admirable solution to the practical discovery difficulty which otherwise undoubtedly would arise, and which I was highly concerned may have had the effect of jeopardising the current trial dates. As I understand the current position, a draft schedule has been prepared which details the instructions the plaintiffs will give to the sub-registrar of the Bond Fund in order to obtain the information specified in subparagraphs (a)-(f) of that Schedule. The form of the Schedule, which now has been sent to the court under covering letter, reads thus :-

" SCHEDULE

The Plaintiffs will instruct the sub-registrar of the Bond Fund to provide the following information to the Defendant's solicitors, namely particulars of all acquisitions and redemptions of investors' investments in the Bond Fund by investors in such fund who acquired their interests prior to 1 June 1995, such particulars to identify the following information:-

(a) The account number of the investor;

(b) The date of acquisition of each of that investor's interest(s) in the Bond Fund (including any re-investment);

(c) the price at which the investor acquired each interest as stated in (b) above and the number of shares held by it in the Bond Fund;

(d) The amount of any dividends received in cash by the investor and the date of payment of such dividends, and/or the number of shares in lieu of such dividends (if any) and the date of issue of such shares;

(e) The date of redemption of any of that investors' interest(s) in the Bond Fund;

(f) The price at which the investor redeemed each interest in the Bond Fund and the number of shares so redeemed."

37. Subject to any submissions counsel now wish to make, I am prepared to approve this course of action, and, if appropriate, to make an order in these terms, which will stand in lieu of the orders presently sought under Items 5, 7 and the relevant part of Item 26.

38. This leaves outstanding Items 6 and 8.

39. As to Item 6, on reflection I am inclined to agree with Mr Fok's submission that this item should, as he put it, be "hived off", and justifiably accorded separate treatment. After considering the matter, I have decided to make an order in terms of Item 6 as drawn.

40. As to Item 8, which it will be recalled were bank statements, this head of discovery seems to me to add little or any real assistance, although undoubtedly it will add considerably to the amount of paper requiring to be processed in this case. Mr Mansfield has also told the court that he estimates that there would be some 800 statements in question arising from the specified bank accounts. Moreover, the bank accounts in question do not contain, he said, "investor specific data", and if necessary he could ask the Registrar of the Fund to confirm this fact. These bank accounts were in the control of the custodian - indeed, the Citibank account was accessed by the trustee on a daily basis - and both accounts were used solely to deal with aggregate inflows / outflows of funds consequent upon the purchase and sale of securities.

41. In the circumstances, and in light of the data to be obtained pursuant to the Schedule of detailed information to which earlier I have referred, in the exercise of my discretion I decline to make an order under Item 8.

42. I will now hear the parties upon any matter arising, and upon the question of the costs of this application.

( Submissions )

43. One matter of detail has been brought to my attention. This relates to Item 21, the request for minutes of board and shareholders' meetings of the various corporate entities specified. The request as it stands is presently unlimited in terms of time, and it has been suggested that the cut-off date of end August 1996, which has been adopted in other contexts, be applied equally in this instance. I agree, and so order that the like cut-off date be applicable to this request.

44. Turning now to costs. Mr Fok SC asked for the costs of this application, a request resisted by Mr Byrne Hill. Whilst not seeking himself to recover any costs, he submitted that a more just order would be a proportionate recovery only, in light of the fact that the discovery in fact awarded by the court "resulted in a substantial dimunition" of that which originally had been requested, so much so that, he argued, the defendant should recover but 50% of its costs.

45. In response, Mr Fok accepted that indeed he had not pressed some of the requests, and had been amenable to reasoned argument in cutting down the scope of others, but he emphasised that his clients had "heard nothing" before coming to court, and that prior to this hearing there had been no dialogue with regard to any item. It was certainly right for the defendant to have its costs, he asserted, and any dimunition thereof should be minor at best.

46. Looking at the application in the round, I have no doubt in all the circumstances that the defendant should have the bulk of its costs, notwithstanding that the scope of some of the contentious items has been cut down, and an alternative procedure adopted in terms of the 'redemption heads'. In my judgment the appropriate costs order, and the only such order that I make, is that the plaintiffs are to pay the defendant 85% of the defendant's costs of and occasioned by this application in any event, such costs to be taxed if not agreed.

47. I thank counsel for their assistance.

 

 

 

Representation:

26 and 27 March 2001

Mr John A. Scott, SC instructed by Messrs Herbert Smith, for the 1st - 5th Plaintiffs

Mr Joseph Fok, SC instructed by Messrs Baker & McKenzie, for the Defendant

Third Party in person, present

30 March 2001

Mr Byrne Hill of Messrs Herbert Smith, for the 1st - 5th Plaintiffs

Mr Joseph Fok, SC instructed by Messrs Baker & McKenzie, for the Defendant

Third Party in person, present

HCCL000231A/1998

HCCL231/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO.231 OF 1998

---------------

BETWEEN
	FIL LEVERAGED US GOVERNMENT BOND FUND LIMITED	1st Plaintiff
	MBS CAPITAL SECURED LIMITED	2nd Plaintiff
	MBS SECURITIES LIMITED	3rd Plaintiff
	FIRST INVESTMENTS LIMITED	4th Plaintiff
	FIL INVESTMENT SERVICES LIMITED	5th Plaintiff
	AND
	TCW GROUP, INC.	1st Defendant
	TCW FUNDS MANAGEMENT, INC.	2nd Defendant Defendant

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Coram: Hon Stone J in Chambers

Dates of Hearing: 30, 31 May and 1, 2 June 2000

Date of Judgment: 23 June 2000

 

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J U D G M E N T

____________________

 

1. There are presently two applications before the court :-

(1) The plaintiffs' summons dated 10 February 2000 for leave to amend the Statement of Claim in terms of the draft annexed thereto; and

(2) The defendants' summons dated 20 April 2000 for security for costs.

THE APPLICATION TO AMEND

The Background

2. This matter has some history. There are perhaps few cases, in the Commercial List at any rate, which attract the degree of dissension on the pleadings that this case has provoked.

3. This is in effect the second round of a battle that began with the defendants' summons dated 10 September 1999 to strike out the existing Statement of Claim. Unusually, this summons came after the conclusion of pleadings and after the court had made detailed pre-trial directions up to and including the exchange of witness statements and expert reports. Certain of these directions were stayed pending the conclusion of the strike out application. Also placed in abeyance (and continuing to be stood down pending determination of the current amendment application) is the plaintiffs' summons dated 4 October 1999 for specific discovery.

4. The defendants' original summons to strike out had the desired effect. The original Statement of Claim the subject of the strike out application was withdrawn, and that application continued in the form of the plaintiffs' cross-application, by summons dated 10 November 1999, for leave to amend by substitution of the existing Statement of Claim by an Amended Statement of Claim, which sought substantially to recast and clarify the original pleading.

5. This amendment application was refused. The judgment pursuant to that application, dated 30 December 1999, speaks for itself; for present purposes, suffice to say that the refusal of leave was placed squarely upon what was viewed as an "unsatisfactory, and practically difficult, plea of fraudulent misrepresentation".

6. The result, therefore, was that the plaintiffs reverted to the drawing board, hence the present application to amend with a further pleading in a different form, and a pleading which, as Mr Heslop QC for the plaintiffs submits, has sought to take into account the criticisms earlier levelled at it.

The Revised Amendments

7. The amendment moved by Mr Heslop at the conclusion of argument was not in terms of the proposed amended pleading as had been annexed to the summons. During argument the plaintiffs had responded to certain of the issues raised and had made additional amendments by way of further clarification. Further, and more important in terms of the constitution of these proceedings, the parties reached agreement, a draft of which was shown to the court at the conclusion of the hearing (and has since been engrossed in the form of a consent summons to that effect), the thrust of which was and is that the erstwhile 2nd defendant, TCW Funds Management, Inc. ("TCWFM"), accepted responsibility for statements and representations shown to have been made by individuals employed by any company within the overall TCW Group of companies. As a consequence, the plaintiffs agreed to discontinue the action against the 1st defendant, TCW Group Inc., Mr Heslop for the plaintiffs stressing to the court that this course had been taken specifically in reliance on the "no advantage" principle, and on the sworn representations in the affidavits filed in this application to the effect that TCWFM was a company of financial substance.

8. The court has now been furnished with an engrossed document encompassing such amendments as have been made consensually and in which TCWFM now is named as sole defendant, and those amendments which remain in dispute. It is this revised document, therefore, which is the subject of the plaintiffs' application for leave to amend.

The Relevant Approach

9. In considering this further application for leave so to amend, I have adopted the broad approach set out in the court's earlier judgment (see page 7 thereof), that is, an essentially macro approach which is concerned to ensure not only that the amended document may be fairly pleaded to, but also with an eye on ensuring that the trial of a hotly-contested action involving complex subject-matter can fairly and clearly be conducted. These considerations, no doubt, are different sides of the same coin.

10. Neither leading counsel, I think, objects to this broad approach, nor is there any dissension as to the broad statements of principle laid down in the authorities. For practical purposes, however, the real division of view lay in whether it was appropriate in this case for the court to become involved in a merits investigation as opposed to taking a pure pleadings approach.

11. In this regard, there were amassed for this hearing two box files of affidavits, together with some ten volumes of exhibits, and Mr Heslop QC strongly submitted that, in a case redolent with factual dispute, this was no place for any "prolonged investigation of the merits".

12. For his part, Mr Carr QC asserted that the court should ask itself whether it harboured doubts as to the adequacy of the pleading "when viewed in the merits perspective", and submitted that in addition to the established pleadings / merits dichotomy there was a third category, namely, that of abuse of process, which had not been canvassed in the speech of Sir Nicholas Browne-Wilkinson VC in Frogmore Estates plc v. Berger & others, (1989), unreported, Court Transcript, and that it was incorrect necessarily to conclude that what was not a pleadings issue was a merits issue.

13. I do not accept this contention, persuasively though it was advanced. The court always has the inherent power to protect itself from the improper invocation of its process, and in such instances, as Danckwerts LJ put it in Wenlock v. Moloney, [1965] 1 WLR 1238 (at 1243) :-

"... the commonest course was where a plaintiff was seeking to bring an action on a point which had already been decided or was obviously wholly imaginary."

But in my view the present dispute cannot be regarded as one falling within these parameters, and in so far as the strict approach of Wenlock v. Moloney (the trial of issues of fact on affidavit "a wholly improper procedure") has been tempered by the speeches of Lords Templeman and Mackay in Williams & Humbert Ltd v. W & H Trade Marks (Jersey) Ltd, [1986] 1 AC 368 - to the effect that doubts must be harboured about the soundness of the pleading together with the prospect of a substantial reduction in the trial burden - in the circumstances of this case such gloss is not satisfied either. In fact, in my view this case represents the type of situation the Vice-Chancellor had in mind when he observed in Frogmore, op.cit. :-

" In my judgment, the proper administration of justice requires the court to limit, so far as is consistent with ultimate justice at the trial, the growth of these huge interlocutory applications involving investigation of the merits. In all but the clearest cases, the proper time for consideration of the merits of a case is at trial, after discovery and with oral evidence, not on interlocutory applications when the full facts cannot be known and oral evidence cannot be heard. ..."

14. In the event, therefore, upon an indication of the court's view of that which Mr Carr had termed the "abuse dimension", reference by Mr Carr to the abuse element of the case was confined to the pleadings problems which he maintained had been created.

The Continued Objections

15. The revamped pleading the subject of this application was subjected to a variety of criticisms by Mr Carr QC. However, I think it fair to say, as Mr Heslop noted in his submission, that there now was, as he put it, "a different level of criticism" of this pleading, which did not present any of the fundamental structural difficulties - in particular in terms of the pleading of fraud - that were perceived both in the original and in its proposed successor, and which had been primarily responsible for the rejection of the previous amendment application. Mr Heslop's fundamental proposition was that, fairly and sensibly regarded, the case that now had to be pleaded to was clear, and that whilst the defendants may not like the approach adopted, matters should now be permitted to take their usual course in a case which for "far too long" had been delayed by interlocutory skirmishing.

16. During his wide-ranging critique, Mr Carr submitted that whilst there may be a perfectly proper case waiting to emerge, the plaintiffs' best efforts thus far had failed to produce a satisfactory pleading reflecting that case. In any event, some of the criticisms, or potential criticisms, were immediately met by further amendment.

17. So that, for example, that which for shorthand purposes I will call the 'agency point', involving the status of the 1st defendant in the action and the allegation of the representations in question being made on its behalf, has of course now been dealt with by the collateral agreement, and the removal of TCW Group, Inc. from the action. Similarly, Mr Carr's strong and persuasive attack upon what were termed the 'regulatory pleas' (at paragraph 33 et.seq.), wherein he maintained that these allegations were irrelevant and patently bad in law, public regulatory compliance obligations not being translatable into private law duties, was, as he put it, "disarmed" by the amendment to plead Californian law as governing the obligations of a prudent adviser pursuant to the phrase "any other matter" in Clause 3(d) of the Bond Fund Advisory Agreement.

18. As a consequence, therefore, two major areas of contention were, in effect, removed from the ambit of the debate. Nor do I consider that the potential duplication between contractual and fiduciary duties under Californian law is of particular relevance at this stage. The plaintiffs, as Mr Heslop repeatedly pointed out, are entitled to frame their case as they wish.

19. Of the remaining issues canvassed, the pleaded use of the Rangeley Brochure as an instrument attaching fraudulent misrepresentations to TCW attracted the most criticism. Mr Carr's complaint was in substance two-fold. First, he said, it was very odd in the circumstances that the plaintiffs should seek to rely on Rangeley at all, asking rhetorically why the plaintiffs could not be content with bringing suit upon the TCW Brochure itself - which was palpably a TCW document - and that if the substance of both documents was basically the same, which the plaintiffs suggested was the case, reliance on Rangeley was otiose. Second, Mr Carr asserted that the plaintiffs' current and entire case with regard to Rangeley had changed : whereas in the first incarnation of this claim there had been a plea that the content of the Rangeley Brochure had been provided by TCW to Mr Pitts, this plea had now gone, neither was there any allegation that TCW had authorized Mr Pitts to say what had been said in the Rangeley Brochure. In its place was solely an assertion that the facts and matters relevant to TCW in the Rangeley Brochure, including the representations alleged to emanate therefrom, "were adopted by TCW throughout the discussions that led to the signing of the Bond Fund Advisory Agreement in September 1992" (paragraph 19).

20. As to the plea of 'adoption' by TCW, Mr Carr submitted that this was highly unsatisfactory : the plea rested upon a conversation between Mr Mansfield and Mr Gundlach in March 1992 (paragraph 12) and a meeting between Mr Mansfield and Mr Stockholm in Hong Kong later that month (paragraph 15), neither of which made out the 'adoption case'. In addition, Mr Carr critically referred to Mr Mansfield's affidavit evidence, in particular as to the meeting with Mr Stockholm (at paragraph 20), and submitted that this was a most unsatisfactory way to frame an affidavit given that no allegation had been made as to any uttering of adoptive words. To the contrary, he said : the deponent had sought to deal with this issue "by innuendo", which patently was insufficient to ground a plea of fraudulent misrepresentation. In short, submitted Mr Carr, Mr Mansfield had not done enough either to plead the fact of adoption by TCW nor had he sufficiently explained the situation in his affidavit, which was drawn despite Mr Mansfield well-knowing that the defendants challenged the bona fides of the fraud plea. It was incumbent, continued Mr Carr, to provide the description of the basic essentials of that plea, and this had not occurred. It followed, he argued, that in these circumstances the plea of fraud was manifestly inadequate and clearly abusive.

21. Both during the argument and in reply thereto, Mr Heslop strongly asserted his objection to the 'abuse' argument, maintaining that this plea was clearly not within the realm of the type of "fantastic claims" readily recognized by any court to be abusive, and thus strikeable. This issue had been pleaded clearly, and the events pleaded in paragraphs 12 and 15 (namely, the Mansfield / Gundlach telephone conversation and the Mansfield / Stockholm meeting) were themselves prefaced by the matters pleaded in paragraphs 5 and 6 of the proposed amendment, matters which could not simply be ignored; indeed, he submitted, the relevant background to the conversation and to the meeting in question was contained in paragraph 6(i) of the proposed amendment, which at this stage could not simply be gainsaid :-

"The section of the Rangeley Brochure concerning TCW and its Duration Advantage Strategy was based on and was an accurate reflection of information as to TCW, its personnel, its expertise and its Duration Advantage Strategy that Mr Gundlach, a managing director within the TCW Group, had given to Mr Pitts at some time prior to 1992."

This was followed by the plea (at paragraph 6(ii)) that TCW gave the information to Mr Pitts so as to enable Mr Pitts to introduce TCW to Asian investors, and the subsequently pleaded assertions had to be regarded against this broad background. Further, said Mr Heslop, the submission of Mr Carr that there was manifest exaggeration in the Rangeley Brochure, and that this could not be something that TCW knew about, was a proposition which, in the circumstances, was "bristling with triable issues", nor was it permissible to indulge in a detailed comparative textual analysis of the Rangeley and TCW brochures. It was, he asserted, plain that there was a striking resemblance in the content of these two documents, and the position became even more difficult if one took on board the totality of the information which had been given to Mr Pitts - so that, as contemplated, both the narrow and broad exercises were manifestly inappropriate at this stage, and this was not an exercise to which the court presently should incline.

22. I agree. I have reflected upon the arguments raised in connection with the Rangeley Brochure. Notwithstanding Mr Carr's arguments, I will leave the pleading as it is. The Rangeley / Pitts episode is clearly part of the relevant factual matrix about which evidence will certainly be received at trial, doubtless from both sides. Nor am I prepared to damn the pleading on the basis of an analysis of what Mr Mansfield did or did not say in a particular paragraph of an affidavit dealing with the meeting with Mr Stockholm, and this in the context of a document sworn in general response to the widespread abuse allegations developed in the plaintiffs' own affidavit evidence.

23. The issue of the Rangeley Brochure in general and the 'adoption' plea in particular may be ambitious, I know not, and I have no wish to speculate. For present purposes, however, the plaintiffs are to be permitted to plead it. The pleading is clear on its face, and the issue clearly framed. I am not persuaded that in this regard I should depart from the usual course, and thereby interfere with the manner in which the plaintiffs wish to put their case.

24. The other matters raised by Mr Carr are not, I think, strike out points in themselves, but perhaps fall more within the category of pleas for clarification, with an eye cocked for potential future difficulties that may arise - for example, in the instruction of expert witnesses - absent such clarification. That which was referred to as the "capability point" falls into this category, and arises in terms of the allegation that TCW represented to FIL and the Bond Fund that the Duration Advantage Strategy "was capable of delivering returns of at least 12% regardless of the direction of interest rates".

25. Mr Carr questioned the parameters of this plea, and whether this meant such returns deliverable at any given point, and whether the allegation pertained, for example, notwithstanding a severe market dislocation of the type as had occurred in the United States in the mid-1990s.

26. To this Mr Heslop proffered a further clarification - the insertion of the words "on an annual compound basis" after the figure of 12% - which provides some assistance in this regard, although he was presently not prepared to take the matter further pending completion of the pleadings.

27. For my own part, in the context of the Duration Advantage Strategy I should have thought that it is fairly obvious what this statement, in amended form, may reasonably be construed to mean, but if and in so far as there is any requirement for further post-pleading clarification, such can easily be achieved. As can clarification, if such be necessary, of the meaning of "hedging", Mr Heslop declining further to develop the point, maintaining that the particular language used is derived from that of the Bond Fund prospectus, and that presently it was not appropriate to plead further. In fact, Mr Heslop questioned whether even now there was an identity of understanding between the parties in terms of precisely what is meant by 'internal' and 'external' hedging, albeit during argument it seemed clear that the thrust of the plaintiffs' case in this context related solely to 'internal' hedging. Be that as it may. Notwithstanding Mr Carr's objection that this was ambiguity requiring definition, in the circumstances I decline to order further amendment at this stage, and will consider the matter further if it arises after issue is joined by the defendant in pleading to the point.

28. The only other matters remaining, I think, are the restoration of the plea in negligent misrepresentation (negligence having been dropped from the previous version of the pleading), as to which, in my judgment, Mr Carr was entirely right to "give way gracefully", and a complaint in passing that, in terms of the allegation (at paragraph 58) as to the inadequacy of TCW's computer facilities, any question of mistake (as opposed to fraud) effectively had been ruled out, and that this was a non-sequitur. This was Mr Carr's concluding point on the pleading and I will not dwell upon it. Whilst his observation may be fair, I do not regard this as rendering the pleading on the subject untenable, or sufficiently objectionable not to permit it to go forward in its current form.

DECISION

29. It will be apparent from the foregoing that, in the exercise of my discretion, I accede to the application for leave to amend in terms of the revised draft pleading. The benchmark test is that propounded by Sir Nicholas Browne-Wilkinson VC in Frogmore Estates, op.cit. :-

"... In my judgment, the law is well settled that a statement of claim should not be struck out before defence, unless it is embarrassing to plead to. The position, to my mind, is the same when leave to amend is sought and objection is taken to the proposed amendments on the ground that they are embarrassing as improper in terms of pleading. I deprecate any attempt at the stage before defence to go into detailed analysis of a statement of claim with a view to showing that in certain respects it was defective. The question at this stage - and the only question, to my mind - is whether the plaintiffs are putting forward a statement of claim which can be fairly pleaded to and fairly tells the defendants the case they have to meet."

(emphasis added)

30. After considering the proposed pleading, together with such additional amendments as have emerged, I am satisfied that this criterion has been met, and that there is no unfairness to the defendant in responding to this document. Nor, for that matter, do I think that the revised pleading in such amended form will raise any of the 'spectres' to which Mr Carr alluded in argument, whether from the viewpoint of the litigant, or from that of the court seized with trying this dispute. The case now put forward is structurally clear, and in my view can safely and fairly be proceeded with on this basis.

31. Accordingly, I give leave to amend in terms of the revised draft pleading in the form as subsequently submitted. I further order that service of the Amended Statement of Claim be dispensed with. I also make the following immediate procedural directions :-

(i) that the defendant do have 21 days from the date hereof to file and serve its amended Defence;

(ii) that the plaintiffs do have 14 days from the date of service of such amended Defence to file and serve its amended Reply.

32. As I understand the position, a considerable amount of discovery has already been achieved, both in the Californian proceedings and in Hong Kong. I have not overlooked the fact that the plaintiffs have outstanding a summons dated 4 October 1999, which to date has by agreement been stood over pending completion of the strike out / amendment argument. This summons should now be refixed for hearing at the earliest date available.

33. I will hear junior counsel as to such other directions as may be required, and also, absent agreement thereon, as to the costs of the application for leave to amend.

SECURITY FOR COSTS

34. This is the defendant's application pursuant to the summons dated 20 April 2000. The issue was canvassed concurrently with, but very much towards the conclusion of the amendment argument, Mr Carr QC mounting the application late in the afternoon of the third day of this hearing.

35. In terms of evidence, the application was backed by the affidavit of Mr Michael Cahill sworn on 20 April 2000, and responded to on behalf of the plaintiffs by the second affidavit of Mr Mansfield sworn on 25 May 2000.

36. In moving the application Mr Carr made it clear that he was not pursuing any interim stay of proceedings pending provision of such security (paragraph 2 of the summons), nor was he pursuing relief in the form of directors' undertakings (sub-paragraphs 1(c) and (d)). In addition, he made it clear that for the purpose of the present application, he was pursuing security to a limited stage only, without prejudice to his right to make further application for security as the case progressed.

37. The reasons behind this application are summarized in paragraph 4 of Mr Cahill's affidavit, the background, shareholding, location and financial standing of the individual plaintiffs thereafter being particularized, together with observations by Mr Cahill upon the manner in which the present litigation apparently is being funded.

38. In putting the case for the grant of security, Mr Carr suggested that in all the circumstances the court could discern a real likelihood of events conspiring to disable the plaintiffs - and in particular Bond Fund, the 1st Plaintiff, which demonstrably was the only one of the five plaintiffs with any assets, and was clearly running these proceedings financially - from satisfying any costs order which may be made against them, and in developing this argument he stressed the twin factors of risk of redemption plus risk of market volatility as potentially combining to create a situation in which the plaintiffs would be unable to satisfy any such adverse costs order. Mr Carr further suggested that the most recent, albeit interim unaudited accounts, of Bond Fund indicated a substantial diminution in investment assets, which on this basis now stood at or around US$17.4 million, and in fact a solicitor's letter had adverted to a slightly lower figure of some US$16 million odd. Looked at in the round, he said, the circumstances of this case made an order for security appropriate in principle. If that was correct, the figure of HK$8 million, with which the plaintiffs' solicitors did not disagree, was acceptable in terms of historic costs, and he further suggested a sum of HK$5.7 million in terms of future costs up to and including specific discovery.

39. In response, Mr Heslop QC asked the court not to order security. He submitted that on the currently available figures, the net asset value of Bond Fund was more than sufficient to deal with any costs order that might be made against his clients, and that the risk to the defendant in this regard had been "exaggerated"; in this connection he referred in particular to paragraphs 30 and 31 of Mr Mansfield's affidavit summarizing the plaintiffs' case as to the provision of security. Whilst in the circumstances, Mr Heslop did not feel able to dispute primary jurisdiction to order security under Order 23, given the particular position of the 4th plaintiff, he nevertheless stressed that this litigation was only in Hong Kong at all by virtue of the defendant's forum non conveniens application in the Californian proceedings, in which jurisdiction security had not been available, and he submitted that this was a striking and permissible factor to take into account in the exercise of the court's discretion. He further argued that his case was that the plaintiffs' financial position essentially arose from the defendant's conduct, and he alluded to the additional practical difficulties created for his clients in this litigation should security be ordered.

40. These latter matters in particular have caused concern. I am presently unpersuaded, notwithstanding Mr Mansfield's assertions to this effect in his affidavit evidence, that the sole purpose behind TCW's application for security is to "stifle this litigation", nor do I consider, on reflection, that the somewhat surprising success of TCW's Californian stay application should in some wise mitigate against the present application on the basis that such relief was not available in California, whereas it is here. I must, I think, take these proceedings as they are, and I take the view that there is no warrant for building into what is put forward as a legitimate procedural application what would otherwise be an unjustified bias deriving from the Californian decision to stay the proceedings in favour of Hong Kong.

41. Be that as it may. I have reflected on the evidence relevant to this application, and also on the submissions of counsel. In weighing the arguments, I have been considerably influenced by that which Mr Mansfield describes as the operation by Bond Fund of "accrual accounting". He puts the position thus (at paragraphs 24 and 25) :-

"24. ... the Bond Fund operates accrual accounting. An amount is accrued each week to deal with the costs of this litigation. The accrual figure is reflective of the Plaintiffs' legal advisers' estimates of the costs anticipated through to the end of a trial and is thus adjusted from time to time as necessary. The directors of the Bond Fund could adjust this accrual, if so advised, to factor in the costs potentially payable to TCW if this action is unsuccessful, so that there would be no risk to the Defendants of the Bond Fund having insufficient assets due to shareholder redemptions to meet their presently estimated costs of the litigation to date and going forward, as well as the Plaintiffs' own costs. The result is that if a Court order were made awarding costs to the Defendants at the end of the trial, the directors of the Bond Fund would pay this as a previously accrued liability.

25. The second point is that, in the event the amount accrued were potentially insufficient to meet such a Court order at the time it is made, the Plaintiffs having sought advice on this from their legal advisers, further provision would be made. Shareholders could only exercise their rights of redemption net of this provision."

As Mr Carr observed, these passages would indicate that the concept of a 'costs fund' appears to be accepted in principle, and that accordingly if provision is made, or is contemplated to be made, in the manner outlined, there would be no apparent prejudice should an order for security be made as the defendant now requests.

42. If this be correct, as I am inclined to think that it is, the only remaining issue, therefore, is as to who is to hold such accrued fund, and where. In all the circumstances of the case, I see no good reason why such part of an accrued fund as reflects the potential costs liability to TCW should not be retained, in some acceptable form, within this jurisdiction, since the court presently is unable to police the fund as now accruing given that the 1st plaintiff, which for all practical purposes clearly maintains these proceedings on behalf of all the claimants, is incorporated in and has its central management and place of business in Bermuda.

43. Accordingly, in the exercise of my discretion I have concluded that in principle it is appropriate that security for costs should be provided against the defendant's costs of this action, and for present purposes I propose to make an order for such security up to the completion of discovery (including the forthcoming application for specific discovery) only.

44. I now turn to the thorny issue of quantum. The approach adopted by the parties is this. No skeleton bill has been prepared in usual form in respect of the defendant's costs up to and including the amendment hearing in November 1999, and in this regard, says Mr Cahill (at paragraph 69 of his affidavit) :-

"... the defendants are prepared to adopt the figure reported to investors by the 1st plaintiff as their costs for this litigation."

Mr Cahill then provides an estimate of the defendant's future costs (at "MEC-1").

45. In response to the issue of quantum, Mr Mansfield makes the point that this estimate amounts to double the plaintiffs' own estimate, and that, if this court were to order security to the level now apparently sought (the summons figure of HK$44 million seems now to have been updated to HK$52 million) :-

"... or even half that amount, none of the plaintiffs would presently be in a position to immediately satisfy such an order"

[and that]

"... the steps which would have to be taken would depend on quantum."

46. To this, Ms Pryor of the plaintiffs' solicitors has added an affidavit as to quantum which, in summary, "make no objections" to the historical figure of HK$8 million, but castigates as "exorbitant" the estimated figure for future costs of HK$44.4 million, noting that the plaintiffs' advisers' estimate is closer to some HK$17.6 million.

47. This then is the background of the present interim application for security, wherein Mr Carr seeks the figure of HK$8 million plus the further figure of HK$5.724 million, which figures are relied upon in an open letter dated 1 June 2000 from Messrs Baker & McKenzie to Messrs Herbert Smith.

48. In response, Mr Heslop argued that if security was to be awarded, there should be reductions in the figures claimed, such revisions amounting to a total sum of HK$2.5 million. Mr Heslop justified such reductions by reference to the particular figures contained in paragraph B of the Schedule contained in the Baker & McKenzie letter of 1 June. In summary, the revisions suggested consist of a 50% reduction in terms of estimated counsel's fees for the application for leave to amend, the preparation of the defence, and the specific discovery application (at paragraphs B1, 2 and 4), whilst at the same time a deletion in toto of fees notionally arrogated to "Contribution and Third Party Proceedings" (at paragraph B3), which proceedings have yet to see the light of day.

49. I am bound to say, at first blush, that Mr Heslop's quantum criticisms strike me as well founded, and if I were to accept these figures as so revised, it would be open to this court to make an interim security for costs order on this basis. As matters presently stand, however, I am not inclined immediately to do so. The costs figures canvassed are extremely high by any standards, and whilst I accept that this is complex (and no doubt expensive) commercial litigation, the history and circumstances of this case seem to me to merit greater scrutiny of the costs figures than might normally occur in an application of this type. Even given the interlocutory disputes that have taken place, and after accepting the costs revisions proposed by Mr Heslop, the sum of HK$11 million odd to take a case to discovery strikes me as extraordinary, and I do not consider that solicitor / client costs (on either side) should necessarily reflect an appropriate security for costs figure. In this connection I remind myself that whilst providing comfort to the potentially successful defendant on risk as to recovery of costs, such comfort is not without limits, and that in principle security should be no more than a fund available for recovery of the defendant's taxed costs.

50. It may be that the joinder of the security for costs application with the contentious (and fundamental) issue of amendment has meant that the question of the quantum of such security has become more broad brush than is usually the case. In any event, although I have made the decision in principle that security for costs is to be provided on behalf of the plaintiffs, I decline to take the matter further absent input from a law costs draftsman who has reviewed the figures proposed in accordance with what I understand are Law Society guidelines as to recoverable costs on the normal party and party scale. Whilst the affidavit of Ms Pryor exhibits to her affidavit her revision of the defendant's estimate of future costs, which revision appears to have derived information from Mr Nelson Yu in terms of hourly charging rates, I have no idea, for example, how the base figure of $8 million is made up (Schedule A of Baker & McKenzie's letter of 1 June), nor is the court able properly to assess relevant parts of the estimate, as revised, and to correlate the same with the figures in Schedule B of the Baker & McKenzie letter.

51. At the end of the day therefore, whilst I understand the way in which this issue came to be presented, I am not willing simply to accept the quantum exercise in its present somewhat shorthand form, and I will adjourn the issue of the quantum of security up to and including discovery for further assistance. In this connection, I should be prepared to receive further brief written submissions, say within 21 days of the date hereof, and, if so desired, I will hear junior counsel (on an appointment not exceeding one hour) on an early date to be fixed.

52. I will stand over the issue of the costs of the application for security pending its conclusion.

53. I thank counsel for their assistance.

 

 

 

Representation:

Mr Philip Heslop QC, leading Mr John Bleach SC and Mr A.T. Reyes, instructed by Messrs Herbert Smith, for the 1st plaintiff to 5th plaintiff

Mr Christopher Carr QC, leading Mr Aarif Barma, instructed by Messrs Baker & McKenzie, for the 1st and 2nd defendants