RE SHUN ON CO. LTD.

HCCW 828/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 828 OF 2000

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D E C I S I O N

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The two applications

1. I have before me two summonses issued by the petitioners. The summons issued earlier in time on 9 September 2002 is a summons for a further and better list of documents and for specific discovery ("the discovery summons") against the 1st to 6th respondents, made under O. 24 r. 3 and 7 of the Rules of the High Court. On 13 September 2002, I gave certain directions for the hearing of this summons and adjourned it for argument. The later summons, which was issued on 22 November 2002, to be heard at the same time as the discovery summons, is for an unless order against Mr Yuen Cho Nang, the 3rd respondent herein, that unless within seven days of the order to be made he complies fully with his undertaking given by counsel and contained in the order of the court dated 30 September 2002 by providing to the petitioners copies of all accounting records of Shun On (USA) Inc. ("SOUS") kept by Mr John Richmond at the latter's office, the respondents be debarred from opposing the petition and an order be made granting the relief sought by the petitioners in the terms set out in the petition herein ("the enforcement summons"). Alternatively, the petitioners seek such order as the court deems just in the circumstances of the 3rd respondent's failure to comply with his undertaking and the order for discovery made on 30 September 2002. The enforcement summons is made under O. 24 r. 16, O. 45 and the inherent jurisdiction of the court.

2. For the background of these proceedings, I refer to the decision of Yuen J (as she then was) given on 11 February 2002 ("the 1st Decision") and my decision given on 30 September 2002 ("the 2nd Decision"). The decision I give on the present applications will be the third decision on discovery and it seems unlikely that this will be the last. The first discovery application was issued in July 2001. The order made on that application, for one reason or other, has still not been complied with in full. This state of affairs is plainly undesirable to all the parties involved in this litigation. I am giving fair warning that if the parties and their legal advisers do not adopt a more sensible and responsible approach in dealing with discovery in future, I may impose sanction in awarding costs on a higher scale against the culpable party, to be paid forthwith.

3. I propose to deal with the enforcement summons first, which arose out of the undertaking and order in the 2nd Decision.

The undertaking and order in the 2nd Decision

4. In the 1st Decision, Yuen J had ordered, inter alia, specific discovery to be given by the 3rd respondent of the ledger kept by SOUS containing its accounts with three companies incorporated in the United States, namely, MCI Investments Inc. ("MCI"), Cana Realty Group Inc. ("Cana Realty") and Cana Corporation ("Cana Corp"). After the 1st Decision was given, the 3rd respondent made his 2nd affirmation on 22 March 2002 in which he stated that the judge had assumed there was in existence the ledgers kept by SOUS whereas in fact there were none. He stated on oath that he was unable to give discovery as ordered because "SOUS does not and has not kept any 'ledgers' containing accounts with MCI and Cana Realty" and that "as regards Cana Corporation, SOUS does not have or maintain any ledgers concerning its accounts with Cana Corporation", although there are "massive" records and bookkeeping data which ran into 2,000 pages a year. Such records were generated in this way. SOUS had engaged Cana Realty to manage its properties and Cana Realty had in turn appointed an outside accountant, Mr Richmond, to process the bookkeeping data generated by Cana Realty and to prepare financial statements.

5. Extensive correspondence was exchanged between the parties' solicitors from March to June 2002 to attempt to reach some agreement as to what discovery should be given by 3rd respondent in view of his stated inability to give discovery of the ledgers of SOUS. As the differences could not be resolved, the petitioners restored their summons for discovery before me and I made the 2nd Decision. I should mention here I make no findings in this decision whether there are in fact in existence any ledgers of SOUS containing its accounts with MCI, Cana Realty and Cana Corp as ordered to be disclosed in the 1st Decision, as this is not strictly necessary to the resolution of the enforcement summons as things stand at this stage.

6. The 2nd Decision was my attempt to resolve in a pragmatic way the differences as to the extent of the discovery that should be given by the 3rd respondent, on the premise that there were no ledgers of SOUS in existence. I made no order for discovery of items 1, 3 to 10 of the schedule of the documents sought by the petitioners, on an undertaking given by leading counsel for the 3rd respondent. By the undertaking, the 3rd respondent is to "(1) make arrangement for the petitioners' representatives to inspect all accounting records kept by Mr John Richmond in support of the Summaries and Analysis at the office of Mr John Richmond, or another venue in the United States to be agreed between the parties; and (2) make available to the petitioners copies of such of the above-mentioned accounting records as may be requested by the petitioners upon agreement of the petitioners to pay the reasonable photocopying charges therefore".

7. The reasons for not ordering the 3rd respondent to give formal discovery right away but to accept his undertaking to make available for inspection in the first instance all the accounting records of SOUS kept in Mr Richmond's office are set out in paragraphs 25 to 39 of the 2nd Decision. It was expressly envisaged in the 2nd Decision that after inspection has been carried out by the petitioners, and if relevant documents were identified as a result, the respondents would give formal discovery by serving and filing a further list of documents. If the parties were in disagreement as to which of the documents inspected should be formally disclosed, they would have liberty to apply to the court.

8. After the 2nd Decision was handed down on 30 September 2002, and when a draft order was submitted for my approval, it was pointed out to me by the petitioners' solicitors that the 3rd respondent had not specified in his undertaking the time within which he should provide access to the documents and that the respondents' solicitors had rejected the petitioners' request to carry out inspection during October. The petitioners' solicitors also proposed to provide in the draft order the period within which the inspection of documents may be made and copies are to be provided and the number of people who could attend the accountant's office to carry out inspection, to avoid further argument on these matters. As I took the view that it would be desirable to provide for these matters in the order, the parties were invited to make proposals to these matters by letter before the order was to be drawn up. After taking into account the responses on both sides, the order on the 2nd Decision that was approved and sealed on 25 October 2002 contained inter alia the following terms:

"1. There be no order for discovery in respect of items 1, 3 to 10 in the Schedule hereto upon the undertaking by Counsel on behalf of the 3rd Respondent that:-

(i) the Petitioners' representatives be given access to inspect all accounting records of SOUS kept by Mr John Richmond at his offices within November 2002;

(ii) the above mentioned accounting records should, for the avoidance of doubt, include, but not be limited to, the accounting records listed under the first paragraph of Part Five of the Respondents' Analysis; and

(iii) the Petitioners be given copies of such of the said accounting records of SOUS as may be requested by the Petitioners within 7 days of such request and upon agreement of the Petitioners to pay the reasonable photocopying charges for the same.

2. The Petitioners' representatives shall total no more than 4 in number and shall be permitted to conduct such inspection at the offices of Mr John Richmond for a period of 14 days, between the hours of 9:00 am to 5:30 pm each day."

What happened subsequently

9. Once again, extensive correspondence was exchanged on the implementation of the undertaking given by the 3rd respondent and the order that was subsequently approved, this time involving not just the solicitors for the parties in Hong Kong, but also their attorneys in the United States.

10. When the petitioners' solicitors first requested inspection of the documents in early October 2002, it was envisaged that the scale of the exercise was such as to make it necessary for the petitioners' solicitors to fly from Hong Kong to Oregon to conduct the inspection, as the 3rd respondent has deposed that there are 2,000 pages of documents a year with the accounting records going back to 1989 for 13 years. As the petitioners wished to proceed with the inspection as soon as practicable, it was agreed by the respondents' solicitors that the petitioners should make direct contact with Mr Richmond's office to confirm arrangements. The petitioners instructed an attorney in Oregon, Mr Joseph Field, to liaise with Mr Richmond. Mr Field was asked to conduct a preliminary inspection to assess the scope of the documents to be made available by the 3rd respondent for inspection, so as to enable the petitioners' solicitors to decide how best to inspect and copy the documents.

11. I do not propose to go into the details of the discussion on 24 October 2002 between Mr Field and Miss Saidee McKay, who is Mr Richmond's assistant. There is dispute between them as to what was said. What is not in dispute is that Miss McKay had told Mr Field that a car accident in 1996 had caused extensive damage to Mr Richmond's office and destroyed most of the copies of the source materials. She also stated that the records that are boxed would need to be reassembled and computer data can be re-printed.

12. On 31 October 2002, Mr David Harper, the attorney of the 3rd respondent in Oregon, faxed to Mr Field an inventory of the records held by Mr Richmond that would be available for inspection.

13. On 5 November 2002, Mr Field attended Mr Richmond's office to carry out a preliminary inspection. In his estimate, the documents shown to him would only amount to about 6,000 pages in total (Mr Field's estimate is disputed by the respondents' solicitors who asserted in their letter dated 13 November 2002 that there are about 16,000 to 18,000 pages of documents, reduced from 25,000 pages as initially deposed to by the 3rd respondent). He made an inventory at the time of all the documents shown to him in the presence of Mr Harper, using the exact words appearing on the files to describe the documents listed in his inventory, and sent a typed copy of the inventory to Mr Harper on 6 November 2002. According to Mr Field, nine lever files and one of the ring-binders shown to him were marked "SOUS General Ledger", it is however disputed by the respondents' solicitors on 15 November 2002 that this was the case.

14. Mr Field also informed Mr Harper during his inspection on 5 November 2002 that he would engage a litigation copying service to attend at Mr Richmond's office to pick up all the records of SOUS for copying by way of digital scanning at the premises of the copying service, as scanning would require sophisticated digital copying equipment unsuitable to be moved from job to job. I understand from Mr Field that the copying of bulk documents by litigation copying services is a common feature of discovery in the United States and it has become common in recent years to copy by scanning instead of manual copying and marking of documents, because scanning is much more convenient and cost effective. Obviously, it will be much more efficient to send copies of the documents scanned onto compact discs to Hong Kong. By then, the petitioners' solicitors had decided that as there are far fewer documents to inspect, it would be more economic to copy all the documents and send them to Hong Kong for review instead of sending someone from Hong Kong to Oregon to examine the documents in Mr Richmond's office.

15. On 6 November 2002, a professional copier engaged by Mr Field went to Mr Richmond's office with a copy of Mr Field's inventory to review the documents so as to give an estimate of the cost of copying the documents by scanning. He was not shown the full set of documents shown to Mr Field. On 6 November 2002, Mr Harper sent a fax to Mr Field stating that his client has interpreted the order on the 2nd Decision to mean that copying of the documents is to be made, not by scanning, and that the copying must be done in Mr Richmond's office. On 7 November 2002, Mr Harper sent Mr Field another fax stating that the respondents' solicitors has informed him that according to the order on the 2nd Decision, the petitioners are to inspect the records in Mr Richmond's office and make a list of those documents they want to be copied. Mr Harper also stated that he was advised by the respondents' solicitors as no order for discovery was made in respect of items 1, 3 to 10 in the Schedule to the order, the petitioners "may copy only what is in [item] 2 as appropriate". He received instructions from SOUS that Mr Field would not be allowed to copy "all its financial record" as originally envisaged.

16. Mr Field took advice from the petitioners' solicitors and wrote to Mr Harper on 8 November 2002 enclosing a copy of the letter from the petitioners' solicitors of the same date to the respondents' solicitors refuting the interpretation that the order only allowed copies to be made of the documents in item 2 in the Schedule, and requesting to inspect all of the documents in the inventory that had been drawn up by Mr Field and to mark relevant documents for copying by a litigation copying service.

17. On 11, 13 and 15 November 2002, the respondents' solicitors wrote to the petitioners' solicitors putting forward their interpretation of the 2nd Decision and the order. In summary, they contended as follows:

(1) The purpose of allowing the petitioners access to the documents at Mr Richmond's office is to identify the source documents relating to (a) "property management fees"; (b) "legal accounting and consulting fees"; and (c) "leasing commission", set out in the Summaries and Analysis provided by the 3rd respondent in May and June 2002. No permission is given to the petitioners to look at any documents they wish.

(2) The procedure provided under the order is that the petitioners will attend Mr Richmond's office for an on-site inspection of the accounting documents. They should identify the relevant documents and give the respondents a list of each and every document for which copies are requested. If any documents requested are relevant to the issues as stated in (1), such documents will be disclosed by the respondents in a further and better list of documents to be filed and verified on affidavit and copies thereof will be supplied to the petitioners upon payment of the prescribed photocopying charges. The respondents may object to some of the documents requested.

(3) Scanning of all the documents inspected by Mr Field, without regard to their relevance to the issues, is not permitted under the order.

(4) On the premise that 14,000 to 15,000 pages (revised downwards from the earlier estimate of 16,000 to 18,000 pages) are to be manually photocopied, it is estimated that it would take a clerk, fully engaged over 12 working days to do the photocopying and the respondents would need at least 21 days for the copying and despatch of the documents. If Mr Field's estimate of 6,000 pages is correct, at least 14 days would be required for copying and despatch (I pause here to note that according to the petitioners, only one day is required if digital scanning is used, at an initial cost of US$720 with extra compact discs available at US$5 per disc).

18. The inspection process came to a standstill as the respondents' attorney did not wish to be placed in an untenable position of being used by Hong Kong lawyers to interpret an order of the Hong Kong court. To resolve the impasse, the petitioners issued the enforcement summons.

The enforcement summons

19. At the hearing, Mr Fung, SC submitted on behalf of the respondents that the proper interpretation of the 2nd Decision is as stated in the above letters of the respondents' solicitors and made the following points in addition:

(1) Inspection under the order is not meant to be formal discovery. It is not intended that all or any of the documents offered for inspection must be disclosed.

(2) The petitioners must first inspect the documents and identify relevant documents. The respondents may object to the disclosure of such documents, in which event the matter will be decided by the court.

(3) Contrary to the above, the petitioners have not bothered to conduct any bona fide inspection but have demanded a "wholesale disclosure of all the documents offered for inspection", which was not contemplated by the order.

(4) In making the order, the court could not have intended to deprive the respondents the right to raise objection about supplying copies of documents on the ground of privilege, as once inspection of the documents has taken place their contents are revealed and admissible as secondary evidence and the other party is entitled to copies of the documents notwithstanding an omission by mistake to claim privilege in the list of documents (Hong Kong Civil Procedure 2002, Vol. 1, para. 24/9/5). It was asserted that there are "privacy issues relating to tenants' personal information" in some of the documents offered for inspection, and that the respondents will object to production of these documents on the ground of privilege under the laws of the United States.

20. I do not accept the above submissions.

21. It should be fairly clear on a proper reading of the 2nd Decision and consequent order that informal inspection of documents at Mr Richmond's office is to be followed by the provision of copies of the documents requested. The copying process is an inherent and integral part of the informal inspection. As submitted by Mr Bartlett for the petitioners, if the petitioners are allowed to inspect the documents in the United States and return to Hong Kong with merely a list of those documents they request to be copied, and the respondents could then object to provide copies of any of the documents requested, the whole process would fall apart.

22. As this process is not formal discovery, the relevance of the documents should not be gone into at this stage. This accords with the wording and spirit of the order. The rationale for the undertaking given by the respondents, which led to the order providing for informal inspection and provision of copies, is that there will be no concession by the respondents on the relevance of documents inspected in this informal process. The relevance of the documents is to be gone into when formal discovery is given by the respondents in filing a further and better list of documents in due course, this would be done after the petitioners have reviewed the documents they inspected with the benefit of copies provided as requested and have identified the relevant documents they would ask the respondents to disclose in the further and better list. It is simply wrong for the respondents to maintain that the effect of the order is such that copies of the documents would only be provided to the petitioners at the end of the formal discovery process, i.e. after a further and better list of documents has been filed by the respondents.

23. It is true that it was initially envisaged that the petitioners would only request for copies of some of the documents inspected, no doubt because of the sheer volume of documents involved as stated by the 3rd respondent at that time. When it was realised that the volume of documents to be examined was to be reduced from 25,000 pages to 6,000 pages, the petitioners decided to ask for copies of all the documents offered for inspection so that the review could be done in the offices of the solicitors in Hong Kong instead of examining each and every document in Mr Richmond's office. In my view, it is clearly within the terms and the spirit of the order for the petitioners to request for copies of all, not just some, of the documents inspected in the informal process. The undertaking offered by the 3rd respondent relates to inspection of "all accounting records kept by Mr John Richmond in support of the Summaries and Analysis at the office of Mr John Richmond" and he has agreed to make available to the petitioners "copies of such of the above-mentioned accounting records as may be requested by the petitioners upon agreement of the petitioners to pay the reasonable photocopying charges therefore". This is consistent with the offers made throughout by the 3rd respondent in correspondence and on affidavit, as mentioned in the 2nd Decision, in that in none of the offers was any qualification made regarding relevance or any claim for privilege in providing copies of the documents as may be requested by the petitioners.

24. As for the claim for privilege that might be lost by providing copies of the documents to the petitioners in this informal process, I am sceptical about this argument which was only raised cursorily without elaboration in the extensive correspondence of the respondents' solicitors. I am quite unable to see at present how any claim for privilege could arise under Hong Kong law in respect of the accounting records offered for inspection. In any event, to lay this argument to rest, Mr Bartlett has offered an acknowledgment on behalf of the petitioners that the provision of copies in the informal inspection would not be regarded as a waiver of privilege, so that the respondents will be at liberty to raise any claim of privilege at the relevant time which is when they file a further and better list of documents.

25. I am of the view that relief should be granted on the enforcement summons. I am not minded to make an unless order at this stage and Mr Bartlett has not pressed for this. It seems to me it would be far better to resolve the impasse by ordering specifically what the 3rd respondent is required to do to comply with the order consequent on the 2nd Decision. I consider I do have power, under O. 24 r. 11(2), to order the 3rd respondent to permit the petitioners to inspect all the accounting records of SOUS kept by Mr Richmond on the undertaking given by the 3rd respondent as contained in the order in the 2nd Decision.

26. Further, by virtue of O. 24 r. 11A(1), any party who is entitled to inspect any documents under any provision of O. 24 or any order made thereunder may at or before the time when the inspection takes place serve on the party who is required to produce such documents for inspection a notice (which shall contain an undertaking to pay the reasonable charges) requiring him to supply a true copy of any such document as is capable of being copied by photographic or "similar process". This provision is met in that there was an application for specific discovery by the petitioners under O. 24 r. 7 and the order recording the undertaking of the 3rd respondent consequent on the 2nd Decision was made in that context. The petitioners have served notice on the respondents' solicitors on 8 and 12 November 2002, requesting copies of the documents offered for inspection by digital scanning with an undertaking to pay the charges thereof. As the respondents have failed to comply with this within seven days of receipt of the notice provided in r. 11A(2), under r. 11A(3) the court may, on the application of either party, make "such order as to the supply of that document as it thinks fit".

27. Mr Fung has made no submissions why the copies of the documents should not be supplied in compact discs by digital scanning, which would appear to be a more convenient, efficient, and cost effective mode as compared to manual photocopying.

28. I make the following orders on the enforcement summons:

Within seven days of the handing down of this decision, the 3rd respondent do

(i) produce for inspection by the petitioners the 44 volumes of accounting records of SOUS that were made available for inspection at the office of Mr John Richmond on 5 November 2002; and

(ii) supply to the petitioners copies of all the accounting records produced for inspection or such of the said documents as may be requested by the petitioners on compact discs by digital scanning upon the undertaking of the petitioners to pay reasonable charges thereof.

29. As for the costs of the enforcement summons, I make an order nisi that the respondents are to pay the costs of the petitioners in any event.

The discovery summons

30. I turn to the discovery summons. In the schedule to the summons, the petitioners seek discovery of all documents of SOUS or Cana Realty which

(i) support the averments of the 3rd respondent in his first affirmation dated 21 January 2002 that the land and building costs of the First Interstate Tower ("the Tower") in 1990 or 1991 had amounted to US$21.23 million;

(ii) support the respondents' contention in their solicitors' letter dated 3 September 2002 that the land and building costs of the Tower were in the estimated region of US$16 million to US$17 million;

(iii) support or explain the calculation of the "buildout" expenses or other expenses purportedly incurred and included in the calculation of land and building costs of the Tower as averred in the said letter of the respondents' solicitors dated 3 September 2002 and the third affirmation of the 3rd respondent dated 11 July 2002; and

(iv) evidence the purported payments made by the tenants of the Tower to, and receipt by, SOUS or Cana Realty and/or any of the respondents, constituting reimbursements relating to the buildout expenses of the Tower.

31. At the adjourned hearing of the summons, Mr Bartlett informed the court that he would not seek discovery of the documents in item (i), after I have indicated to him I would regard such documents to be of peripheral relevance to the matters in issue, in view of the further evidence filed by the 3rd respondent in his fourth affirmation dated 17 October 2002, which was after the summons was adjourned, deposing that the figure of US$21.23 million is the present value of the Tower and explaining how that figure is arrived at, by adding to the construction costs over the years the buildout expenses or tenement improvement reimbursed by instalments by the tenants throughout the tenancy. Mr Bartlett wished to reserve his position on item (ii), after the petitioners have had an opportunity of considering the accounting records of SOUS that should have been made available for inspection pursuant to the order made on the 2nd Decision.

32. In respect of items (iii) and (iv), Mr Bartlett submitted that the petitioners would seek discovery of the following documents in lieu of these items:

(a) owner statements sent by Cana Realty to SOUS for all properties managed by Cana Realty on behalf on SOUS for the period from 1993 to 2000; and

(b) schedules of collected income for 1993 to 1998, similar to the schedules exhibited as exhibit 13 to the first affirmation of the 3rd respondent dated 21 January 2002.

33. The relevance of the documents to the issues in dispute is said to arise in this way. It is part of the petitioners' case that the respondents had procured unsecured advances of the funds of Shun On Company Limited ("the Company") to SOUS for building the Tower. The value of the Tower in 1990 was assessed to be no more than US$14.5 million, far less than the land and building costs at US$21.23 million as stated in the first affirmation of the 3rd respondent, and which the petitioners had understood the 3rd respondent to mean the costs of the Tower as in 1990 or 1991. On this basis, the petitioners have alleged that the project was an unfeasible over-improvement of the site and had constituted gross mismanagement of Company assets, thereby causing unfair prejudice to the petitioners.

34. It was only after the petitioners had received the expert evidence of the respondents' valuer in July 2002 that they came to realise the respondents might not accept the land and building costs in 1990 or 1991 were US$21.23 million and the letter of the respondents' solicitors dated 3 September 2002 confirmed this. The case of the respondents, as stated in that letter, is that the Tower had cost only US$16 to 17 million, after taking into account the "buildout" expenses which were recoverable from the tenants throughout the tenancy period.

35. As mentioned above, the 3rd respondent gave an explanation in his fourth affirmation how the "actual" land and construction costs of the Tower was arrived at, which he has put at about US$15,123,127.01 or US$15.69 million, and stated that the figures were arrived at with the advice and assistance of Mr Richmond and the project manager of the Tower, Cana Realty. He produced a summary of expenses of three pages and an analysis of one page to explain the figure of US$15 million odd. However, the source documents were not disclosed.

36. As for the buildout expenses, the 3rd respondent explained in his fourth affirmation that particulars of the payments and reimbursements can be found in the owners statements, an example of which he produced in exhibit 23 to his affirmation, although this does not give a breakdown of the payments and reimbursements for each of the tenants.

37. The petitioners seek discovery of the documents in support of the case advanced by the respondents on the land and building costs of the Tower, in view of the apparent change in the evidence filed by the respondents. At this stage, their focus is primarily on the buildout expenses, as it is not entirely clear from the respondents' evidence how the reimbursement of the buildout expenses are accounted for on the present information and documents disclosed, for the reasons as explained in the letter dated 19 November 2002 of Mr Kevin Keithley, a certified public accountant in Oregon engaged by the petitioners to consider the relevant documents. I am satisfied that the documents sought in items (a) and (b) as stated above are relevant to the issues in dispute. These documents are relevant to the calculation of buildout expenses and the alleged reimbursement of the same by the tenants.

38. As for the existence of these documents, this is apparent from the evidence of the respondents as I have mentioned above. I am also satisfied these documents are within the possession, custody or power of the respondents. These are the documents of SOUS and it was held in the 1st Decision that the 3rd respondent has sufficient control or power over SOUS for the purpose of an application for specific discovery for the documents of SOUS. Further or alternatively, these are the documents generated by Cana Realty as the agent of SOUS under a Construction and Management Agreement between these entities, pursuant to which Cana Realty was obliged to "keep separate accounting of all asset income and expenses" and its actions would be "subject to the complete control of [SOUS] and under [SOUS's] absolute direction".

39. The only other matter to consider is whether discovery of these documents should be given for the fair disposal of the dispute in the exercise of my discretion. The petitioners have sought to narrow down the ambit of the discovery sought from "all documents" relating to items (iii) and (iv) in the schedule to the summons to the specific items in (a) and (b) mentioned above. I do not think it would be oppressive to require the respondents to produce the documents in items (a) and (b), which are specific and restricted in scope.

40. I am mindful of the fact that in the last hearing in September 2002, the petitioners sought discovery in item 10 of the schedule of documents relating to all payments of rental income of SOUS collected by Cana Realty for the period from September 1999 to August 2000 because of an apparent discrepancy in the "collected" income and the rental income, which the respondents have explained was due to the buildout expenses. Mr Fung has complained that the petitioners are revisiting the same point that has been disposed of in September 2002. If the respondents had complied with the order made on the 2nd Decision and the petitioners had the opportunity of reviewing the documents offered for inspection with copies of the documents requested, this complaint might have some justification. As it is, I do not think this is a valid reason for not ordering specific discovery, notwithstanding that the respondents are at the same time required to give inspection and provide copies of the documents requested under the order I have made on the enforcement summons. If the documents in items (a) and (b) are among the documents offered for inspection at Mr Richmond's office on 5 November 2002, no additional action by the respondents would be required. In the event that these documents are not among the documents kept in Mr Richmond's office, the respondents would be required to do what is necessary to disclose these documents. So an order for specific discovery would serve a purpose.

41. I make the following order on the discovery summons:

(1) Within 28 days of the handing down of this decision, the 1st to 6th respondents do

(i) make and serve on the petitioners a further and better list of documents within the classes specified hereunder

(a) owner statements sent by Cana Realty to SOUS for all properties managed by Cana Realty on behalf of SOUS for the period of 1993 to 2000; and

(b) schedules of collected income for 1993 to 1998, similar to the schedules exhibited at "YCN-13" to the first affirmation of the 3rd respondent dated 21 January 2002;

(ii) make and file an affirmation stating whether they have, or have at any time had, in their possession, custody or power any document within the classes specified in (i) above and if the documents or any of them have been but are not now in the possession, custody or power of any of the respondents, stating when they parted with them and what has become of the same.

(2) The petitioners be at liberty to restore for argument the application for specific discovery in relation to item (ii) in the Schedule to the summons.

42. As for the costs of the discovery summons, I make an order nisi that the 1st to 6th respondents do pay the petitioners' costs of this application in any event. I take the view that if the respondents had complied with the order made on the 2nd Decision, and had given the petitioners the opportunity of reviewing the accounting records of SOUS with copies of the documents requested, it is possible that this further application might not have been necessary.

Representation:

Mr Jeremy Bartlett, instructed by Messrs CMS Cameron McKenna, for the Petitioners

Mr Patrick Fung, SC, and Mr Johnny Mok, instructed by Messrs Liu Choi Chan, for the Respondents

HCCW 828/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 828 OF 2000

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D E C I S I O N

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The earlier application

1. This is an application by the petitioners to restore for hearing a summons for specific discovery that was issued on 12 July 2001 and heard by Yuen J (as she then was) on 9 October 2001. The decision was given on 11 February 2002 ("the Decision"). It is necessary to give an account of the earlier application and its outcome before I come to the present application.

2. The petition in HCCW No. 828 of 2000 is brought by six petitioners, who hold 44.76% of the shares in Shun On Company Limited ("the Company"), to wind up the Company on just and equitable grounds. Alternatively, relief is sought under section 168A of the Companies Ordinance, Cap.32 on the basis that the affairs of the Company are being conducted in a manner unfairly prejudicial to the interests of the petitioners. The six individual respondents are the remaining shareholders of the Company. The 7th respondent is the Company and the 8th respondent is a company to which the 1st respondent had transferred some of the shares in the Company. The Company was incorporated by Un Sam in 1937 and the petitioners and the individual respondents are his family members. For details on the background of this petition and a related petition in HCCW No. 829 of 2000, which concerns World Win Management Limited, I refer to paragraphs 2 to 16 of the Decision. These proceedings are substantial litigation, a considerable amount of evidence has been filed on both sides and much discovery has been given.

3. For the purpose of the application before me, I am concerned with allegations made by the petitioners in relation to payments and benefits from a company known as Shun On (USA) Inc ("SOUS") to three entities also incorporated in the United States known as MCI Investments Inc ("MCI"), Cana Realty Group Inc ("Cana Realty") and Cana Corporation ("Cana Corp"). It is the petitioners' case that the Company's assets have been depleted owing to the decisions of the directors to make equity investments and unsecured loans to SOUS, in which the Company has a minority interest of 18%. The 3rd respondent, Yuen Cho Nang, controls a substantial portion of the shares in SOUS and is its president. SOUS had utilised the funds of the Company to invest in five real estate projects in Vancouver, the State of Washington and USA. Since then, the directors have proposed to write off a large amount of the Company's investments in SOUS on the basis of substantial alleged losses suffered by SOUS. In respect of the unsecured loans, SOUS had issued promissory notes for payment due 1998 but the payment date has been extended. In total, SOUS owes the Company well over US$9 million.

4. The five properties in which the Company's funds had been utilised were not held by SOUS directly. Four of them were held through MCI and the development and management of the projects was carried out by Cana Realty. The fifth property, the Arts Building, was co-owned by SOUS with Cana Corp and managed by Cana Realty.

5. The 3rd respondent's involvement in MCI, Cana Realty and Cana Corp is as follows. He is a 50% shareholder of MCI and of Cana Realty. He claims he has ceased to be a director of these two companies as from 15 December 2000. The minutes of the meeting of the board of directors of Cana Realty were produced in support of this, there has not been produced any document of MCI in relation to his resignation as a director. He has a minority interest in Cana Corp with the remaining shares held by his sister and her daughters.

6. In the application before Yuen J, the petitioners sought in their summons specific discovery of, inter alia, "all documents relating to the payments or other benefits received by MCI, Cana Realty and Cana Corp from their dealings with SOUS, the current financial position of such companies and the extent of the interest of the 3rd respondent (or other respondents) in such companies". There followed a list of the particular kinds of documents within this broad class that the petitioners sought discovery of. This class of documents is referred to as the Class 6 documents in the Decision and the application for such documents was pursued against the 3rd respondent only. The decision and order of Yuen J in this respect may be summarised as follows:

(1) The Company's decision to invest in SOUS and to give unsecured loans to SOUS for investments from which the 3rd respondent acquired personal benefits through his shareholdings in MCI, Cana Realty and Cana Corp is relevant to the allegations of unfair prejudice in the petition in HCCW No. 828 of 2000.

(2) It would be oppressive to order the 3rd respondent to disclose all the documents in Class 6, as the range of the documents sought is widely drafted.

(3) Some of the documents sought are the usual documents that would be kept in the course of business where a company's properties (i.e. SOUS in this instance) are held in the name of another or are being managed by another, or are co-owned by another, such as ledgers showing its accounts with them. Further, the Judge is of the view that MCI, Cana Realty and Cana Corp would have periodical financial statements, such as balance sheets and profits and loss accounts, to inform their shareholders of the respective companies' assets and liabilities.

(4) It could be inferred from the available evidence that the 3rd respondent has sufficient control or power over SOUS for the purpose of an application for specific discovery for the documents of SOUS. As for MCI, Cana Realty and Cana Corp, given that the 3rd respondent cannot be regarded as having overriding control or power over these companies, and in the absence of any actual evidence of his power or control over them, he should only be ordered to disclose documents to which he would be entitled purely as a shareholder, i.e. the periodical financial statements issued by these three companies to their shareholders.

(5) In the exercise of her discretion, the Judge considers that "in the first instance", the petitioners' purpose would be served by disclosure within seven days of the order of firstly, the ledger kept by SOUS containing its accounts with MCI, Cana Realty and Cana Corp and secondly, the periodical financial statements received by the 3rd respondent as a shareholder of MCI, Cana Realty and Cana Corp. It is significant to note that the order provides for specific discovery "in the first instance", as it is envisaged in the Decision that "it may be that information contained in the ledger may have to be followed up by inspection of some of the other documents listed in Class 6".

What happened subsequently

7. The Decision given on 11 February 2002 did not mention the time within which specific discovery was required to be given by the 3rd respondent. As the petitioners' summons had mentioned seven days to give specific discovery, the petitioners' solicitors submitted a draft order on this basis. The draft order was approved and sealed on 27 February 2002 and served on the 3rd respondent the same day, by which time the time for complying with it had expired. On 27 February 2002, the respondents' solicitors wrote to the petitioners' solicitors requesting 14 days to take instructions on the existence or availability of the ledgers of SOUS and the financial statements of MCI, Cana Realty and Cana Corp required to be disclosed.

8. A substantive reply was given by the respondents' solicitors in their letter to the petitioners' solicitors dated 13 March 2002. It was stated that SOUS had contracted out all the management, including bookkeeping, and project development works and it does not have an office or salaried staff. For the acquisition and holding of title of investment properties, SOUS has appointed MCI its nominee and for the management of these investment properties, SOUS has appointed Cana Realty the property management company. From time to time, Cana Realty would deliver the bookkeeping data to the data processing department of Mr John Richmond, an outside accountant employed by SOUS ("the Accountant"). Out of such data, the Accountant would prepare the financial statements required for income tax reporting. The data generated by this process ran into 2,000 pages per year.

9. It was asserted by the respondents' solicitors that as SOUS does not have an accounts department and does not keep ledgers, strictly speaking the data maintained by the Accountant are not the ledgers of SOUS. The respondents' solicitors however made an offer to the petitioners' solicitors to allow them or their representatives to inspect the data "on site", subject to the respondents ascertaining from the Accountant the extent of his record keeping as required under the law of the United States. It was pointed out that when the 1st and 2nd petitioners brought proceedings against SOUS and its directors in the United States, they had through their American attorney already inspected the data in 1999 at the offices of both Cana Realty and the Accountant. If the petitioners' solicitors should require a copy of the data or records, this could be done provided that they were to pay all costs incurred in producing and despatching the records.

10. The respondents' solicitors also made a proposal to the petitioners' solicitors instead of the latter going through an inspection of the data kept by the Accountant, as this would be time-consuming and expensive. On the basis of no admission and no obligation, the respondents proposed to provide the following information to the petitioners, which would address the points raised by them relating to MCI and Cana Realty:

(1) summaries of itemised operation expenses of SOUS ("the Summaries") to be prepared by the Accountant;

(2) particulars of the "management fees" charged by MCI and Cana Realty; and

(3) an analysis of charges levied by Cana Realty and MCI ("the Analysis").

11. As for Cana Corp, the respondents' solicitors were instructed that SOUS does not keep any ledgers concerning its accounts with Cana Corp and that Cana Corp makes no payment to and receives no payment from SOUS.

12. For the periodical financial statements of these three entities, which were incorporated in the State of Washington, it was stated that the 3rd respondent has not received any such statements from any of these companies in the past. However, the 3rd respondent has received legal advice that according to the statutes of the State of Washington, he can make a written request to the companies for a copy of the financial statements of the most recent year and these would be disclosed to the petitioners as and when received.

13. On 18 March 2002, the petitioners' solicitors wrote to the respondents' solicitors that on an entirely without prejudice basis, they would accept the proposal for the respondents to produce the Summaries, the particulars of "management fees" charged by MCI and Cana Realty, and the Analysis. The petitioners' solicitors did not agree that the respondents should have five weeks to prepare the Summaries and 21 days thereafter to do the Analysis, as suggested by the respondents.

14. By their letter dated 21 March 2002, the respondents' solicitors sought to justify the time required to produce the Summaries and the Analysis. This was because records for over a decade would have to be gone into in order to prepare the Summaries. As for the Analysis, this would be done by the respondents with assistance from their advisers, including the Accountant.

15. On 22 March 2002, the 3rd respondent made his 2nd affirmation in which he set out the measures he has taken to give specific discovery as ordered by the court. Essentially, he repeated what was set out in the letter of the respondents' solicitors dated 13 March 2002 as to why he was unable to disclose the ledgers of SOUS as ordered. Again, he made the offer to the petitioners of on-site inspection of the records kept by the Accountant.

16. The petitioners' solicitors wrote to the respondents' solicitors on 28 March 2002 stating that if the Summaries were not served by 8 May 2002, an application for an unless order would be made. Further, the petitioners' solicitors pointed out that the periodical financial statements of MCI, Cana Realty and Cana Corp should not be restricted to the most current year and if the 3rd respondent had not requested for financial statements from 1990, he should provide a valid reason why he should not do so, supported by precise reference to the legislative provision that he relies on. In response to this, the respondents' solicitors reiterated their stance in their letter dated 11 April 2002 that only the most recent financial statements would be supplied.

17. On 22 May 2002, the petitioners' solicitors wrote to the court applying to restore the summons for specific discovery, as they had not received any documents or further information from the respondents. On 23 May 2002, the respondents' solicitors sent to the petitioners' solicitors the Summaries for the fiscal years from 1990 to 2001 and stated that the respondents were still in the process of preparing the Analysis, which would be ready in two weeks. The respondents' solicitors once again repeated their offer to the petitioners to attend the office of the Accountants for on-site inspection of the records kept by the Accountant, "so that the figures described in the Summaries could be verified by [the petitioners], if so desired".

18. The Summaries produced by the Accountant merely contain an itemised breakdown of the operating expenses of SOUS. It is not stated in the Summaries which of the items were payments made to MCI or to Cana Realty. Thus, the petitioners' solicitors could only infer from the description of an item that it would probably relate to payments made to one or more of these entities. The items they have singled out, for the purpose of the present application, are "property management fees", "legal, accounting and consulting fee", and "leasing commission".

19. Leave was given to the petitioners to restore the summons for specific discovery on 24 May 2002.

20. It was only on 6 June 2002 that the respondents' solicitors sent to the petitioners' solicitors the Analysis, the financial statements of Cana Corp for the year ended 31 August 2001 and the financial statements of MCI for the year ended 31 December 2000. On 8 July 2002, the financial statements of Cana Realty for the year ended 31 December 2001 were supplied to the petitioners. On 26 August 2002, the financial statements of MCI for the year ended 31 December 2001 were supplied. Those are all the documents and information provided by the 3rd respondent to comply with the order of 11 February 2002 before the hearing of the present application.

The present application

21. Two broad categories of documents are sought by the petitioners in the present application. The first relates to payments and/or benefits received by MCI, Cana Realty and Cana Corp from their dealings with SOUS since August 1983. Instead of seeking discovery of "all documents" relevant to this issue as in their previous summons, the petitioners have now confined the discovery sought to the following kinds of documents, namely, records kept on computer databases; bank statements, mandates, instructions to SOUS's bankers; receipts for payments made by SOUS and/or other benefits provided by SOUS; tax returns; and accounts and financial statements. I shall refer to this category of documents in this decision as "the accounting records of SOUS". It seems to me that the ambit of the types of documents sought is still very wide. The second broad category relates to the periodical financial statements of MCI, Cana Realty and Cana Corp from 1983 or the respective dates of incorporation of MCI, Cana Realty and Cana Corp (if later) to date. I shall refer to this category as "the periodical financial statements".

22. For ease of reference, I annex as a schedule hereto the specific kinds of documents sought by the petitioners in the present application. Items 3 to 5 and 6 to 10 in the schedule are sub-groups of the documents sought in item 1, being the accounting records of SOUS. Items 3 to 5 arise from the Summaries provided by the respondents. The petitioners seek the source documents for "property management fees", "legal, accounting and consulting fee" and "leasing commission" in the itemised operation expenses of SOUS. Items 6 to 10 relate to various matters referred to in the evidence filed by the 3rd respondent after the hearing of the previous summons in October 2001. An explanation was given in paragraphs 11.6 to 11.10 of the second affirmation of the petitioners' solicitor filed in support of the present application why the documents in items 6 to 10 of the schedule are sought. In short, the petitioners have pointed to various further documents disclosed by the respondents to support their assertion that the discovery given by the respondents is incomplete, because there is no mention of some of these matters in the Analysis provided in June 2002 or because of substantial discrepancy in the figures. The 3rd respondent has sought to deal with the matters queried by the petitioners in paragraphs 17 to 29 of his 3rd affirmation. In summary, he stated that the Analysis provided is correct regarding payments made to MCI and Cana Realty and asserted that an examination of the source accounting records would verify the accuracy of the information in the Analysis.

23. On behalf of the petitioners, Mr Bartlett submitted that the present application is to "enforce" the rights of the petitioners under the Decision and order and pursue discovery of the Class 6 documents where Yuen J has either already ruled on the petitioners' entitlement to them or on the petitioners' right to come back to court to seek disclosure of them. On behalf of the 3rd respondent, Mr Fung, SC submitted that in view of the undertaking offered by the 3rd respondent (which I shall deal with) and as Yuen J did not think it appropriate to make the order for discovery of the wide-ranging nature sought by the petitioners on the previous occasion, I should not accede to the present application.

24. I do not think my discretion whether to order the discovery sought in the present application is affected in any way by the Decision. Yuen J had only ruled on what the respondents should disclose "in the first instance". Whether and to what extent the respondents should give further discovery had been left open in the Decision.

The undertaking

25. I turn to the undertaking offered by the 3rd respondent, as this formed the main plank of Mr Fung's submission.

26. The undertaking on behalf of the 3rd respondent is in these terms:

"(1) make arrangement for the petitioners' representatives to inspect all accounting records kept by Mr John Richmond in support of the Summaries and Analysis at the office of Mr John Richmond, or another venue in the United States to be agreed between the parties; and (2) make available to the petitioners copies of such of the above-mentioned accounting records as may be requested by the petitioners upon agreement of the petitioners to pay the reasonable photocopying charges therefore.

For the avoidance of doubt, the above-mentioned accounting records include the accounting records listed under the first paragraph of Part Five of the Analysis."

27. Part Five of the Analysis deals with accounting records and it is stated in the first paragraph that the Accountant had examined a number of source documents to produce a database for accounting records. By the undertaking, the 3rd respondent offered to make available for on-site inspection the source documents examined by the Accountant and the accounting records database produced by him. It was submitted by Mr Fung that what is offered in the undertaking had been offered to the petitioners in correspondence, i.e. the letters of the respondents' solicitors dated 13 March 2002 and 23 May 2002, as well as in the 2nd affirmation of the 3rd respondent made on 22 March 2002 and his 3rd affirmation made on 11 July 2002. This repeated offer of on-site inspection was not taken up by the petitioners.

28. Mr Bartlett submitted that an on-site inspection is not a satisfactory mode of giving discovery. The petitioners seek an order that the 3rd respondent should make a further and better list of documents within the classes specified in the schedule hereto and that he should make an affirmation stating whether any document specified in the present application is, or at any time has been, in his possession, custody or power, and if it is not then in his possession, custody or power, when he parted with it and what has become of it. Various reasons are put forward why formal discovery should be given.

29. Firstly, it was contended in the 4th affirmation of the petitioners' solicitor that the discovery sought is not oppressive and the exercise should be "manageable", as the task of identifying the documents (from records of 2,000 pages a year and 25,000 pages in total) and making them available for inspection should be "straightforward", in view of the fact that the respondents have recently undertaken the exercise of producing the Analysis. I have some difficulty in accepting this, as the solicitor went on to say in the affirmation that the on-site inspection is "not a reasonable or acceptable alternative", because this would mean that the petitioners should search for the relevant documents by inspecting all SOUS records in the United States "without assistance".

30. Secondly, it was submitted that the documents to be disclosed as covered by the specific discovery sought should be listed in a comprehensive list so that the petitioners could choose from the list what they would wish to inspect.

31. Thirdly, the inspection offered by the respondents is to take place in the United States, this would add to the expense and inconvenience for that exercise to be undertaken. I understand the 3rd respondent's position to be that these documents belong to companies incorporated in the United States and it is uncertain if they could be removed out of the country.

32. I accept that in the absence of special circumstances, formal discovery in compliance with the provisions of the Rules of the High Court should be given. It was submitted by Mr Fung that there are the following special circumstances to warrant a different treatment here.

33. Firstly, the documents to be gone through to identify the relevant ones falling within items 1, 3 to 10 in the schedule are voluminous. The accounting records that are available dated back to 1989 for 13 years.

34. Secondly, the respondents have already undertaken the exercise of preparing from the source documents the Summaries and the Analysis, to alleviate the burden of all concerned in going through the massive accounting records. I should add that the Summaries were prepared by the Accountant, an outside professional not in the employ of the respondents, and there is no suggestion that the Summaries he compiled are in any way inaccurate. The petitioners simply want discovery of the source documents in items 3 to 5 of the schedule so that they would be able to verify for themselves the fees itemised as "property management fees", "legal, accounting and consulting fee" and "leasing commission" in the Summaries.

35. Thirdly, the accounting records have been inspected at the offices of the Accountant and Cana Realty by the attorney representing the 1st and 2nd petitioners in 1999 in the course of proceedings brought in the United States, so the legal representatives of the petitioners would not be totally unfamiliar with these records even if they would not be assisted by a list of documents prepared by the respondents. I note that there is no suggestion in any of the affirmations filed by the petitioners that the previous inspection of documents is not of any or any real assistance.

The accounting records of SOUS

36. I have considered the above submissions and the grounds put forward by the petitioners in attacking the disclosure made by the respondents, some of which came after the hearing in October 2001 but before the Decision was given, as inadequate. The view I form at this stage on the evidence before me (this is but a provisional view and has no bearing on any finding that the court may make at the trial on factual matters in dispute) is that the difference between the parties on certain payments or expenses is more a question of how they were treated in the accounting records, not so much whether or not the payments had been made or the expenses incurred. I am not satisfied it is necessary for the fair disposal of the issues in dispute to order discovery of the wide range of documents sought by the petitioners. I also have a suspicion, looking at how discovery has been sought and given and the extensive correspondence exchanged, that the dispute as to the adequacy of discovery given and the relevance of certain documents would not come to an end even if the 3rd respondent were ordered to give formal discovery.

37. It seems to me that the undertaking offered by the 3rd respondent is a pragmatic way to resolve this in the special circumstances of this case. I think it would be far better for the petitioners to inspect the accounting records first instead of requiring the 3rd respondent to give formal discovery right away. The petitioners should know what they would be looking for. If, after inspection of the records and the petitioners are satisfied as to the veracity of the information in the Summaries and the Analysis, or that no issue need be taken with the explanation on the matters queried by the petitioners as given in the 3rd affirmation of the 3rd respondent, there would be no need for some or all of the documents inspected to be formally disclosed.

38. I was referred by Mr Fung to Fuji Photo Film Co. Ltd v. Carr's Paper Ltd [1989] RPC 713 in which Aldous J adopted a similar approach of accepting an offer of inspection by the defendants in the action of all the documents requested (subject to their contention that the documents are not relevant), instead of ordering formal discovery. Aldous J took the view that the discovery sought was of great width, not all the documents sought could be of relevance, in the circumstances the proper thing to do was for the plaintiff to inspect the documents offered first to see if there were any documents which were considered to be relevant and which should have been disclosed. Thereafter, if the parties could not agree as to whether any documents should be incorporated in a formal list, then an application should be made to the court. The court could then look at the documents in dispute and decide as to whether they should be formally disclosed or not.

39. I agree this would be an appropriate course of action to take in relation to the discovery sought of the accounting records of SOUS. If the petitioners have identified any documents of relevance after inspection, such documents and any other documents that the respondents may consider to be of relevance should be disclosed by the 3rd respondent in a further and better list of documents and verified on affidavit. If there is dispute as to which of the documents should be formally disclosed, an application should be made to the court. In this way, the respondents are not relieved from the obligation to give formal discovery of relevant documents.

The periodical financial statements

40. As for the periodical financial statements of the three companies in the United States, what has happened is that the 3rd respondent has made requests in writing asking for the most recent financial statements of each of the companies to be supplied to him and he has disclosed the most recent financial statements he has received from these companies. He did so on the legal advice he received which is to the effect that according to the statutes of the State of Washington, in which the companies were incorporated, his right as a shareholder is to be supplied with a copy of the financial statement of the most recent year on written request. Two letters from the US attorney advising the 3rd respondent dated 25 February 2002 and 26 April 2002 were exhibited, in which reference was made to the Revised Code of Washington ("RCW") 23B.16.020, RCW 23B.16.200(2) and RCW 23B.16.040(3). The RCW came into effect on 1 July 1990.

41. The petitioners have sought advice from their American attorney on the entitlement of a shareholder to the documents of a corporation under the RCW and I have the full text of the relevant statutory provisions. Having read the legal advice and the additional provisions in the RCW, I am satisfied that as a shareholder of MCI, Cana Realty and Cana Corp, the right of the 3rd respondent to ask for periodic financial statements is not confined to the most recent year. I refer to RCW 23B.16.010(2) and (5)(d), and RCW 23B.16.020(1), (2)(b) and (3). By virtue of the former provisions, a corporation is obliged to maintain "appropriate accounting records" and it shall keep at its principal office the financial statements for shareholders "for the past three years". By virtue of the latter provisions, a shareholder is entitled to inspect and copy at the corporation's principal office any of the records kept including the financial statements for the past three years upon written notice of the shareholder's demand at least five business days before the date on which the shareholder wishes to inspect and copy. Further, a shareholder is entitled to inspect and copy at a reasonable location specified by the corporation any accounting records of the corporation upon similar written notice of at least five business days, if his demand is made in good faith and for a proper purpose, that he describes with reasonable particularity his purpose and the records he desires to inspect, and that the records are directly connected with the shareholder's purpose.

42. In item 2 of the schedule, the petitioners seek discovery of the periodical financial statements of MCI, Cana Realty and Cana Corp from 1983 or the respective dates of incorporation of these companies (if later) to date. It seems to me that these documents should probably be regarded as "appropriate accounting records" and kept at the principal office of the companies as from July 1990, when the RCW came into effect, if not before. I am satisfied that these documents are within the power of the 3rd respondent because he has a legally enforceable right to obtain them from the companies that should have possession of them.

43. In the circumstances, I think it would be right to order the 3rd respondent to give formal discovery of this class of documents. There is some debate as to whether the full scope of these documents as sought in the present application was covered by the order of Yuen J and whether there was compliance with that order in that the 3rd respondent was merely ordered to disclose "all periodical financial statements received by him as a shareholder" of these companies. It is not stipulated how far back the periodical financial statements should go and counsel has taken the point that technically there was compliance with the order in that the 3rd respondent has only "received" the most recent financial statements which were specifically requested by him on legal advice. It is not necessary to go into this for present purpose.

Orders

44. I make the following orders:

(1) Upon the undertaking by counsel on behalf of the 3rd respondent in the terms as set out in paragraph 26 above, there be no order for discovery in respect of items 1, 3 to 10 in the schedule.

(2) The 3rd respondent do, within 28 days of the handing down of this decision, (a) make and serve on the petitioners a further and better list of documents within the classes specified in item 2 in the schedule; and (b) make and file an affirmation stating whether he has, or has at any time had, in his possession, custody or power any document within the classes specified in item 2 in the schedule and if the documents or any of them have been but are not now in his possession, custody or power, stating when he parted with them and what has become of the same.

45. As for costs, I make an order nisi that the costs of and occasioned by the present application, including the costs reserved on 14 June 2002, are to be costs in the cause of the petition. I do so for these reasons.

46. The petitioners have only succeeded in obtaining an order for item 2 in the schedule. Most of the evidence filed and the arguments have been taken up with the accounting records of SOUS, being the nine items in the schedule, for which no order is made.

47. As for the 3rd respondent, although an undertaking was offered early on and repeated in the affirmations and correspondence, it is not entirely clear specifically what documents would be offered for the petitioners' inspection, particularly when the offer is read in conjunction with other parts of the letter dated 13 March 2002. It was only in the course of the hearing that the undertaking in the above terms was given with reference to the source documents as mentioned in Part Five of the Analysis.

48. In the circumstances, I do not think it appropriate to award costs of the application to either party in any event.

Representation:

Mr Jeremy Bartlett, instructed by Messrs CMS Cameron McKenna, for the Petitioners

Mr Patrick Fung, SC and Mr Johnny Mok, instructed by Messrs Liu Choi Chan, for the 3rd Respondent

SCHEDULE

The Petitioners now seek an order compelling the Third Respondent to give discovery of the following documents: -

1.	(a) records kept on computer databases,
	(b) bank statements, mandates, instructions to SOUS's bankers,
	(c) receipts for payments made by SOUS and/or other benefits provided by SOUS,
	(d) tax returns, and
	(e) accounts and financial statements,

whether held by SOUS or by a party obliged to account to SOUS for such documents (collectively called "Documents of SOUS") relating to, recording or evidencing the payments and/or other benefits received by MCI, Cana Realty and Cana Corporation respectively from their dealings with SOUS, since August 1983.

2. The periodical financial statements of MCI, Cana Realty and Cana Corporation from 1983 or the respective dates of incorporation of MCI, Cana Realty and Cana Corporation (if later) to date.

3. Without prejudice to the paragraph 1, Documents of SOUS relating to, recording or evidencing payment to MCI, Cana Realty and Cana Corporation respectively of the fees itemized as "building management fee" in the "Itemized Operation Expenses" since August 1983.

4. Documents of SOUS relating to, recording or evidencing payment to MCI, Cana Realty and Cana Corporation respectively of the fees itemized as "legal, accounting and consulting fee" in the "Itemized Operation Expenses" since 1983.

5. Documents of SOUS relating to, recording or evidencing payment to MCI, Cana Realty and Cana Corporation respectively of the fees itemized as "leasing commission" in the "Itemized Operation Expenses" since 1983.

6. Documents of SOUS relating to, recording or evidencing any payment(s) to Cana Realty in respect of the amount payable by SOUS to Cana Realty under the "Construction and Management Agreement" dated 5 July 1989 exhibited as "YCN-12" of Yuen Cho Nang's 1st Affirmation dated 21 January 2002.

7. Documents of SOUS relating to, recording or evidencing any payment to MCI in respect of the sum of US$2.1 million described as "new loan" to MCI in or about 1998 after the disposal of the Arts Building.

8. Documents of SOUS relating to, recording or evidencing payment to Cana Realty in respect of brokerage commission for disposal of the properties of SOUS, including but not limited to the sum of US$50,000 paid as "broker commission" in respect of the sale of the "Normandy Project", as described in "YCN-4" of Yuen Cho Nang's 1st Affirmation of 21 January 2002.

9. Documents of SOUS relating to, recording or evidencing payments received or retained by Cana Realty in respect of the collection of interest as referred to in page 5 of "YCN-13" of Yuen Cho Nang's 1st Affirmation of 21 January 2002.

10. Documents of SOUS relating to, recording or evidencing:

(a) all payments of rental income of SOUS, collected by Cana Realty, including but not limited to payments totalling US$2,709,139.85 for the period between 1 September 1999 and 31 August 2000 as set out in the Schedules at pages 2, 3 & 4 of "YCN-13" of Yuen Cho Nang's 1st Affirmation of 21 January 2002; and

(b) all payments by Cana Realty to SOUS of rental income of SOUS collected by Cana Realty, including but not limited to payments totalling in the sum of US$2,105,327 as set out in the SOUS Accounts for the year ended 31 August 2000.

HCCW 828/2000 and
HCCW 829/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP NO. 828 OF 2000

____________

____________

(Heard Together)

_____________

D E C I S I O N

_____________

1. In relation to the summonses taken out in these winding up petitions by the Respondents on 22 September 2001, I note the following.

2. The affidavits in reply were filed in May, so the issues would have been apparent to the parties more than four months ago. Both the Petitioners and Respondents filed their lists, in the first instance, on 14 June 2001.

3. Within 21/2 weeks, the Petitioners' solicitors had asked the Respondents for a further list and for specific documents. The Respondents' solicitors asked for time to respond to that letter up to 1 August 2001, and on 12 July, the discovery summonses were issued returnable on 9 October. To date, the Respondents' solicitors have had two months in which to consider the matter. The first matter to be considered must be the relevance or otherwise of the items sought in the schedule. In my view, two months odd have been more than adequate for them to have considered the relevance or otherwise of those documents.

4. In relation to the argument that some of the documents were such that it would be oppressive to provide them, it would appear from the letter from the Respondents' solicitors of 22 September that this relates only to two items.

5. In any event, as it turns out, should three hours be required, three hours are available on 9 October and consequently, I would not vacate 9 October and I will set aside three hours for that hearing on that day. Should the Respondents wish to do so, I will give them leave to file an affidavit in opposition to be served by 5 October, which would give them 5 working days to do so. I would have thought that by now, some 21/2 months after the first request for these documents in early July, the Respondents' legal advisers would have been able to marshall their response to file this affidavit in opposition. It would be up to the Petitioners to file an affidavit (if they wish to do so) in reply sufficiently in advance of the hearing on 9 October to make that day viable.

6. Accordingly, I will dismiss the summonses of 20 September 2001 save to the extent that the 1st to 6th Respondents in Winding-up 828 and the 1st to 5th Respondents in Winding-up 829 have leave to file affidavits in opposition by 5 October 2001 and the Petitioners have leave to file evidence in reply if so advised by noon 8 October. I will hear the parties as to costs.

Representation:

Mr J Harris, instructed by CMS Cameron McKenna, for the Petitioners in both cases

Mr William M F Wong, instructed by Liu, Choi & Chan, for 1st to 6th Respondents in CW 828/00 and 1st to 5th Respondents in CW 829/00