Civil Action2003

EAA SECURITIES LTD v. CHAN LIN MUI AND ANOTHER

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DCCJ4015/2003

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 4015 OF 2003

BETWEEN

	EAA SECURITIES LIMITED	Plaintiff
	and
	CHAN LIN MUI	1^st Defendant
	FATTYDAD ALICE PUI YAN	2^nd Defendant

Coram: H H Judge Marlene Ng in Chambers (open to the public)

Date of Hearing: 29^th July 2008

Date of Handing Down Decision: 31^st July 2008

DECISION

I. Introduction

1. The Plaintiff was/is a securities dealer. The 1^st and 2^nd Defendants were customers of the Plaintiff under a Joint Cash Account (“JCA”). One of the Plaintiff’s dealing directors was a So Tai Fai Anita (“Madam So”), who is also the 2^nd Defendant’s stepmother.

II. Pleadings

2. The Plaintiff sued the 1^st and 2^nd Defendants for a sum of HK$493,770.10 said to be the debit balance of the JCA as follows :

(a) On 15^th February 2000, the 1^st and 2^nd Defendants entered into a Cash Client Agreement and opened the JCA with the Plaintiff for securities investment.

(b) Pursuant to the Cash Client Agreement, the Plaintiff acted as agent for the 1^st and 2^nd Defendants in effecting securities transactions according to the instructions of the 1^st and/or the 2^nd Defendants.

(c) The Plaintiff denied the 1^st Transaction referred to below.

(d) The Plaintiff acknowledged the 2^nd Transaction referred to below, but pointed out that since the opening of the JCA the 1^st and 2^nd Defendants gave instructions to buy and sell shares including Tracker Fund and/or MTR shares.

(e) On/about 13^th March 2001, the 1^st and 2^nd Defendants signed a repayment schedule (“Schedule”) in favour of the Plaintiff promising to repay the outstanding balance of the JCA as at 28^th February 2001 in the sum of HK$385,927.41 and interest thereon by instalments.

(f) The 1^st and 2^nd Defendants made instalment payments from June to September 2001, but failed to pay the balance thereafter.

(g) On 17^th July 2001, the Plaintiff effected the last securities transaction for the JCA.

(h) As at 17^th April 2003, the JCA had 100 Tracker Fund shares and an outstanding debit balance of HK$493,770.10, which the 1^st and 2^nd Defendants failed to settle.

3. The 1^st and 2^nd Defendants denied the Plaintiff’s claim as follows :

(a) In/about October 1999, the 1^st and 2^nd Defendants, who were co-workers in a bakery shop, wanted to subscribe for 2,000 Tracker Fund shares. They sought assistance from Madam So who gave the 2^nd Defendant a subscription form. The 2^nd Defendant returned the completed form to Madam So with a cheque for her handling (“1^st Transaction”). The 1^st and 2^nd Defendants successfully subscribed for 2,000 Tracker Fund shares, and the 2^nd Defendant asked Madam So to keep such shares in safe custody for them.

(b) Shortly thereafter, Madam So gave the 2^nd Defendant some documents (which Madam So claimed to be account opening documents for depositing the aforesaid shares with her employer for safe custody) for signing by the 1^st and 2^nd Defendants. But Madam So only identified the place for signature on the documents and did not give any explanation or copies of the documents to the 1^st and 2^nd Defendants.

(c) On 13^th/17^th October 2000, the 1^st and 2^nd Defendants through Madam So bought 1,000 Tracker Fund shares (“2^nd Transaction”).

(d) In November 2000, investors of the Tracker Fund IPO were granted special bonus shares, so the Plaintiff should have received 100 Tracker Fund shares on behalf of the 1^st and 2^nd Defendants.

(e) In/about October 2000, the 1^st and 2^nd Defendants wanted to subscribe for 2,000 MTR shares. They sought assistance from Madam So who gave the 2^nd Defendant a subscription form. The 2^nd Defendant returned the completed form to Madam So with a cheque for her handling (“3^rd Transaction”). The 1^st and 2^nd Defendants successfully subscribed for 500 MTR shares, and the 2^nd Defendant asked Madam So to keep such MTR shares in the account they had opened with her employer.

(f) Apart from the 1^st, 2^nd and 3^rd Transactions, the 1^st and 2^nd Defendants did not give any instructions to the Plaintiff to engage in securities transactions on their behalf.

(g) At all material times, the 1^st and 2^nd Defendants had no idea of the particulars of the account Madam So opened for them or the exact name of the relevant stock brokerage firm at which such account was opened.

(h) The 1^st and 2^nd Defendants denied having signed the Schedule, and the signatures thereon were forgeries.

4. The 1^st and 2^nd Defendants also counterclaimed for delivery and return of 3,100 Tracker Fund shares and 500 MTR shares and/or damages to be assessed.

III. Specific discovery application

5. By a summons dated 26^th February 2008 (“Summons”), the 1^st and 2^nd Defendants sought specific discovery of the following documents (collectively, “Documents”) :

(a) investigation report made by the Securities and Futures Commission (“SFC”) on the operation of the Plaintiff resulting in a public reprimand published by the SFC on 7^th September 2004 (“Reprimand”) against the Plaintiff for internal control failures (“Report”);

(b) all related correspondence exchanged between the SFC and the Plaintiff in relation to the investigation by the SFC resulting in the publication of the Reprimand (“Letters”).

6. There is no dispute that :

(a) the Plaintiff was/is in possession of the Report;

(b) the Plaintiff had/has in its possession the Letters, ie 2 letters from the SFC to the Plaintiff and a letter from the Plaintiff’s solicitors to the SFC in relation to the investigation conducted by the SFC that resulted in the publication of the Reprimand;

(c) the Reprimand stemmed from an investigation in which the SFC found that the Plaintiff failed to ensure adequate internal controls which facilitated misdeeds by a former dealing director, Madam So, that includedthe conduct of unauthorised trades in clients’ accounts and dispatch of forged statements to clients.

7. The 1^st and 2^nd Defendants claimed (a) the Documents were highly relevant to their case that apart from the 1^st, 2^nd and 3^rd Transactions, all other transactions carried out in the JCA were unauthorised, and (b) the Documents might fairly lead them on a train of inquiry.

8. The Plaintiff resisted discovery on the basis that the Documents “have no specific and substantial reference to the operation of the trading account held by [the 1^st and 2^nd Defendants] in issue”, and that they were neither relevant nor necessary for disposing of any matter in question in the present action.

9. The Plaintiff’s operation manager Lau Chak Wah deposed in his affidavit in opposition (“Affidavit”) that the Documents “mainly discussed the internal control system and management of the Plaintiff” and they “did not contain any narration on the communications and dealings between the Defendants and [Madam So] which can resolve the main factual issue in dispute”, namely, whether the 1^st and 2^nd Defendants had given authorisation to Madam So for carrying out the securities transactions recorded in the JCA.

10. At the hearing on 21^st May 2008, the learned Master dismissed the Summons with costs. By a Notice of Appeal dated 3^rd June 2008, the 1^st and 2^nd Defendants applied to set aside the order of learned Master and to seek an order in terms of the Summons. Although the learned Master has delivered reasons for his decision, which were reduced into writing, the present appeal is by way of rehearing.

IV. Principles

(a) General

11. Under Order 24 rule 7 of the Rules of the District Court (“RDC”), a party may apply for an order requiring any other party to make an affidavit stating whether any document specified or described in the application or any class of document so specified or described is or has at any time been in his possession, custody or power, when he parted with it and what has become of it. By Order 24 rule 8 of the RDC, such order is not to be made unless the court is satisfied that it is necessary for disposing fairly of the cause or matter or for saving costs.

12. Hong Kong Civil Procedure2008 Vol.1 para.24/7/1 at p.473 states inter alia that :

“…… this is not sufficient unless a prima facie case is made out of (a) possession, custody, or power, and (b) relevance of the specified documents …… This prima facie case may be based merely on the probability arising from the surrounding circumstances or in part on specific facts deposed to. See too Berkeley Administration v. McClelland [1990] F.S.R. 381 where at 382 the court restated the principles as follows: (1) There is no jurisdiction to make an order under RSC, O.24 r.7, for the production of documents unless (a) there is sufficient evidence that documents exist which the other party has not disclosed; (b) the document or documents relate to matters in issue in the action; (c) there is sufficient evidence that the document is in the possession, custody or power of the other party. (2) When it is established that those three prerequisites for jurisdiction do exist, the court has a discretion whether or not to order disclosure. ……” (my emphasis)

(see also Lee Nui Foon administratrix of the estate of Chiu Yu Fu, deceased v Ocean Park Corporation, an Independent Statutory Corporation [1995] 2 HKC 390).

(b) Burden of proof

13. It is for the party seeking specific discovery to demonstrate a prima facie case for inter alia the relevance of the documents sought to the “matters in question” (see also Wong Wai Chun v Au Yeung Fung Sim & ors HCA5038/2000, Recorder G Ma, SC (unreported, 27^th April 2001)). But if the party seeking discovery establishes a prima facie case, it is for the party objecting to the order for discovery to satisfy the court that the discovery is not necessary either for disposing fairly of the cause or matter or for saving costs (see Hong Kong Civil Procedure 2008 Vol.1 para.24/8/1 at p.478).

14. The well-known test for determining “relevance” is set out in The Compagnie Financiere et Commerciale du Pacifique v The Peruvian Guano Company (1882) 11 QB 55, 63 :

“…… It seems to me that every document relates to the matters in question in the action, which not only would be evidence on any issue, but also which, it is reasonable to suppose, contains information which may – not which must – either directly or indirectly enable the party requiring the affidavit either to advance his own case or to damage the case of his adversary. I have put in the words “either directly or indirectly” because, as it seems to me, a document can properly be said to contain information which may enable a party requiring the affidavit either to advance his own case or to damage the case of his adversary, if it is a document which may fairly lead him to a train of enquiry, which may have either of these two consequences: the question upon a summons for a further affidavit is whether the party issuing it can shew, ……, that the party swearing the first affidavit has not set out all the documents falling within the definition which I have mentioned and being in his possession or control ……”

(see also Lee Nui Foon at p.392 and Full Range Electronics Co Ltd v General-Tech Industrial Ltd & anor [1997] 1 HKC 541, 544)

15. On the aforesaid test of “relevance”, the real question is whether the documents sought to be discovered are relevant to the issues between the parties to the litigation or, putting it in another way, to the “questions in the action” (see Matthews and Malek, Disclosure, 3^rd ed (2007) para.5.9 at p.127).

16. In paragraph 9 of my decision in Lei Chon Kun v Yip Teresita Pumares DCCJ892/2006 (unreported, 11^th April 2007), which case was cited by Mr Wong, counsel for the Plaintiff in the present action, I referred to the Court of Appeal judgment in Sun Yuet Tai Limited v British American Tobacco Company (HK) Limited CACV95/1999 (unreported, 4^th June 1999) to say that the issues or questions must be those identified in the pleadings. In Sun Yuet Tai Limited, such observation is necessarily correct in the context of that case (see paragraph 24 of the judgment).

17. Ms Lee, counsel for the Plaintiff in the present action, advocated that in determining whether to grant specific discovery of documents the court’s consideration was limited to the respective case as pleaded in the parties’ pleadings. In my view and as apparent from the authorities Ms Lee cited, this strict approach does not reflect the true position.

18. On one hand, the fact that an issue is raised in the pleadings is not determinative as to whether it relates to a “matter in question”. Cheung JA in Paul’s Model Art Gmbh & Co v U T Limited & ors CACV139/2005 (unreported, 14^th December 2005) at paragraph 25 said as follows :

“…… Discovery is not required of documents which relate to irrelevant allegations in pleadings which even if substantiated could not affect the result of the action : Allington Investments Corp & Others v First Pacific Bancshares Holdings Ltd & Another [1995] 2 HKC 139.”

(see also Deacons v White & Case HCA2433/2002, Deputy High Court Judge Poon (as he then was) (unreported, 13^th March 2003) paras.20-21).

19. In RetheEstate of Ng Chan Wah HCAP5/203 (unreported, 5^th March 2003), Chu J concluded that it was not sufficient for the plaintiff beneficiaries under the will of the deceased, who wished to revoke the appointment of the defendants as executors and who sought estate accounts on the footing of wilful default, to say that because there were on the pleadings allegations of improper conduct against the defendants, they were entitled to test the basis of the estate accounts generally or to check the accuracy of the items presented in the estate accounts irrespective of whether they were in issue.

20. On the other hand, matters can be “in question” even though not expressly raised on the pleadings. In Thorpe v Chief Constable of Greater Manchester Police [1989] 1 WLR 665, an authority cited by Ms Lee at the hearing before the learned Master, Neill LJ said at p.672 as follows :

“…… It is clearly established, however, that “the matters in question” cover wider ground than the issues as disclosed in the pleadings. Thus a party is obliged to disclose any document which it is reasonable to suppose contains information which may enable the party applying for discovery either to advance his own case or to damage that of his adversary or which may fairly lead to a train of inquiry which may have either of these two consequences. It follows that discovery is not necessarily limited to documents which would be admissible in evidence.”

21. In O Company v M Company [1996] 2 Lloyd’s Rep 347, an authority cited by Ms Lee at the hearing before me, Colman J explained as follows at pp. 350-351 :

“…… The “case” of the plaintiffs or the defendants respectively can be defined only by looking at the pleadings. It must be defined by reference to the plaintiffs’ pleaded claim in its general sense, as distinct from its detailed exposition and by the defendants’ pleaded defence in the sense of its general refutation of the plaintiffs’ claim. What matters for discovery purposes is the claim and defence to it in the broadest sense and not to the detailed particulars of either claim or defence. A document in a defendant’s possession, custody or power which provides information as to a ground not hitherto pleaded in a cargo claim upon which it can be said that they failed to exercise due care of the cargo is just as relevant for discovery purposes as one which contains information as to aground of want of due care which has already been pleaded. ……

…… The principle was never intended to justify demands for disclosure of documents at the far end of the spectrum of materiality which on the face of it were unrelated to the pleaded case of the plaintiff or defendant and which were required for purely speculative investigation …… On the contrary, the document or class of documents must be shown by the applicant to offer a real probability of evidential materiality in the sense that it must be a document or class of documents which in the ordinary way can be expected to yield information of substantial evidential materiality to the pleaded claim and the defence to it in the broad sense which I have explained. If the document or class cannot be demonstrated to be clearly connected to issues which have already been raised on the pleadings or which would in the ordinary way be expected to be raised in the course of the proceedings, if sufficient information were available, the application should be dismissed.” (my emphasis)

22. Ms Lee in her written submissions argued that witness statements were not part of the pleadings, so in determining whether a document ought to be disclosed relevancy was “not enlarged by reference to matters raised elsewhere, even in exchanged witness statements” (see S Sime, A Practical Approach to Civil Procedure 7^th ed, para.26.4 at p.281).

23. The learned textbook cites Paddick v Associated Newspapers Ltd [2003] EWHC 2991 (QB) in support of the above proposition, but it is evident that such proposition relates to “standard disclosure” under r.31.6 of the English Civil Procedure Rules (“CPR”). In Paddick, Tugendhat J said at paragraph 11 of the judgment that “[the] case of each party for the purposes of standard disclosure under CPR Part 31 is to be found in that party’s pleadings”.

24. But as explained in S Sime, A Practical Approach to Civil Procedure 7^th ed, para.26.4 at p.281, “[standard] disclosure in accordance with CPR, r 31.6, is narrower than the old discovery [under the Peruvian Guano test], in that it does not include train-of-inquiry documents”. Matthews and Malek, Disclosure, 3^rd ed (2007) para.5.10 at p.127 also confirms that the formulation in CPR, r.31.6 “significantly reduces the obligation to disclose from the Peruvian Guano test of relevance”. In the circumstances, I am unable to adopt the limitation suggested by Ms Lee in paragraph 22 above.

25. Of more interest are authorities from the Western Australian jurisdiction where Order 26 rule 6 of their Rules of the Supreme Court resembles Order 24 rule 7 of the RDC. I have referred the parties to Chandler v Water Corporation [2004] WASC 95 (17^th May 2004). In that case, the Supreme Court of Western Australia adopted the Peruvian Guano test of relevance, and went on to say that although the pleadings and particulars would usually determine relevance to a matter in question, regard must also be had to conduct and admissions of the parties and the nature of the action (see also Australian Mineral Investors Pty Ltd v Barndon [2007] WASC 302 (11^th December 2007)). Hasluck J in Chandler referred to Schlam v WA Trustee Executor & Agency Co Ltd [1964] WAR 178, 186 in which the Full Court accepted that the obligation to provide discovery in respect of a matter in question did not necessarily mean matters on which issue had joined in the pleadings. But the documents must be matters as to which an inference could properly be drawn that they were the subject of controversy between the parties.

26. Matthews and Malek, Disclosure, 3^rd ed (2007) para.5.12 at p.129 cites Chandler with approval, and accepts that whilst pleadings are the crucial reference point in determining whether documents are in existence which ought to be disclosed because they relate to a “matter in question” between the parties, they are not necessarily decisive.

27. In light of the provisions in Order 24 rule 7 of the RDC and the reasoning discussed above, I prefer the Peruvian Guano test as explained in Schlam, Chandler and Australian Mineral Investors PtyLtd over the approach suggested in Paddick.

(d) Fishing

28. It is clear that discovery will not be ordered for the purpose of “fishing” (see Wharf Properties Ltd & anor v Eric Cumine Associates, Architects, Engineers & Surveyors (a firm) & ors HCA13431/1985 and HCCL48/1985, Mortimer J (unreported, 25^th April 1987) and HKFE Clearing Corp Ltd v Yicko Futures Ltd [2006] 2 HKC 233).

29. In Re the Estate of Ng Chan Wah, Chu J at paragraph 16 said that “[it] is not the purpose of discovery to give the plaintiffs an opportunity to hunt around the documents in the hope that they will reveal some improprieties on the defendants’ part or will provide information for them to pursue more enquiries”.

(e) Credit

30. Further, documents going solely to the credit of the party giving discovery do not relate to a matter in issue (see Hong Kong Civil Procedure 2008 Vol.1 para.24/8/2 at p.479 and Thorpe).

(f) New case

31. As a corollary to the limitation against fishing application for disclosure of documents, discovery will not be ordered to enable a party to frame a new case. Yuen JA in HKFE Clearing Corp Ltd said at p.237 as follows :

“What the Company is seeking is discovery of materials to see if it might be able to turn a non-issue into an issue. That is not permitted under the principles of discovery, and especially not when the purpose is to see if an allegation of fraud can be made. It is well-established that a party should not be allowed to plead a vague case and unparticularised case of fraud in the hope of making it good after discovery ……”

(g)Other transactions and incidents

32. At the hearing before me, both counsel did not make detailed submissions or refer to any authority on the principles relating to relevancy of documents concerning other transactions and incidents. However, in light of Ms Lee’s oral submissions that the contents of the Documents did not concern the JCA but only related to the dealings in the accounts of the Plaintiff’s other customers, it is necessary to visit such area of the law.

33. Generally speaking, documents relating to other transactions or incidents are not admissible in civil proceedings, but discovery is not necessarily limited to documents which will themselves be admissible in evidence (see Peruvian Guano at pp.62-63). Further, “similar fact” evidence is admissible if its probative force in support of an issue or question is so strong to make it just to admit the evidence (see DPP v P [1991] 2 AC 447). In short, where documentary evidence of another transaction or incident is prima facie relevant to the transaction or incident being the subject matter of the proceedings, it is discoverable (see Thorpe at p.669 per Dillon LJ). Neill LJ said in Thorpe at p.674 that “[evidence] of “similar facts” is relevant both in criminal and in civil cases to rebut defences such as accident or coincidence or sometimes to prove a system of conduct. …….” (my emphasis). I also note that in Mood Music Publishing Co Ltd v De Wolfe Ltd [1976] Ch 119 Lord Denning MR suggested that as compared with criminal cases the courts in civil cases were less chary in admitting “similar fact” evidence. But obviously where documents relating to similar cases are not material to the issues raised, discovery should be refused.

V. Discussion

34. Both counsel were in agreement that one of the main issues in the present action is whether, apart from the 1^st, 2^nd and 3^rd Transactions, the securities transactions in the JCA were authorised by the 1^st and/or 2^nd Defendants or not.

35. Resistance to the application for specific discovery is mounted essentially on the basis that the court’s discretion is not engaged because the Documents are irrelevant to the “matter in question” in the present action.

36. As explained in O Company, the court does not adopt a blinkered approach to the pleadings, but will consider the pleaded issue “in the broadest sense” so that documents are discoverable if they are connected to such issue in the sense of offering a real probability of evidential materiality even though they may relate to a ground hitherto not pleaded. That was how Colman J understood Lord Brett’s formulation of the Peruvian Guano test of relevance for discovery purpose, ie the documents may fairly lead a party to a train of inquiry which may have the consequence that the party is enabled to advance his own case or damage the other party’s case.

37. This is also why in O Company, which dealt with a claim for damages as a result of the sinking of a vessel following explosions and/or fire, Colman J had no hesitation in granting discovery on traverse and longitudinal internal bulkhead construction plans for certain tanks, pump room and engineroom which covered cargo spaces not expressly referred to in the pleadings. It was held at pp.351-352 of the judgment that the configurations of these areas were evidentially material to an asserted explosion theory and fire in a port tank, so there was sufficient likelihood that disclosure of the plans would yield directly material information.

38. Ms Lee suggested that the court should focus on the matters in which there has been joinder of issue in the present pleadings and not speculate on what evidence would be adduced at trial. In my view, the question of relevance to the “matter in question” cannot be considered in isolation of the “evidential materiality” (if any) of the Documents sought. O Company makes clear that the proper consideration is whether the documents will “yield information of substantial evidentialmateriality to the pleaded claim” (p.351, my emphasis). It has been said that evidence is relevant if it is logically probative or disprobative of matters that require proof at trial. I agree, subject to the observation that for the purpose of discovery the court is concerned with potential rather than actual admissibility.

(a) Mr Wong’s submissions

39. Mr Wong submitted that the Documents are directly relevant to the Plaintiff’s control/supervision over Madam So at the material time, in particular the measures (if any) it took to ensure that Madam So would carry out authorised trading in the JCA. If the Documents show that the Plaintiff failed to take any or any adequate steps in this respect, the Plaintiff may fail to discharge its burden in proving the securities transactions in the JCA (apart from the 1^st, 2^nd and 3^rd Transactions) were authorised.

40. Thus, Mr Wong argued there is a real probability that the Documents may lead to a train of inquiry that is relevant to the issue of whether at all material times under the Plaintiff’s internal control/ supervision (if any) (a) Madam So could have made use of the JCA to carry out unauthorised transactions, (b) Madam So could have carried out unauthorised transactions without detection by the Plaintiff and/or its servants/agents, and/or (c) the Plaintiff and/or its servants/agents knew or ought to have known that Madam So made use of the JCA to carry out unauthorised transactions.

41. Further, it was said there is a real probability that the Documents may enable the 1^st and 2^nd Defendants to prepare their defence case, in particular for cross-examination of the Plaintiff’s witness on the aforesaid matters. If the Documents leading to a train of inquiry suggest that at all material times the Plaintiff failed to exercise any or any adequate control over Madam So in making use of the JCA without the 1^st and 2^nd Defendants’ authorisation, Mr Wong submitted that it may be more probable than not the subject transactions were unauthorised and/or, worse still, the Plaintiff knew or ought to have known Madam So carried out (and/or knowingly permitted Madam So to carry out) such unauthorised transactions.

42. Mr Wong therefore argued that the Documents are relevant to the Plaintiff’s stance that all securities transactions in the JCA were authorised, which stance the 1^st and 2^nd Defendants dispute. The Plaintiff carries the burden to prove due authorisation of the subject transactions, but the Defendant also has an evidential burden to discharge in relation to their refutation of such assertion by the Plaintiff. Mr Wong submitted that the Documents, which resulted in and/or were connected with the Reprimand, are relevant and of evidential materiality to the disputes in present action and necessary for fairly disposing of the “matters in question”.

(b) Ms Lee’s submissions

43. Ms Lee reminded that it was deposed in the Affidavit that the Documents only related to the Plaintiff’s internal control system and management, and did not contain any narration on the communications and dealings between Madam So and the 1^st and 2^nd Defendants. She asked the court to infer from the contents of the Affidavit and the press release in respect of the Reprimand (“Press Release”) that the Documents only relate to accounts held by other customers with the Plaintiff and not the JCA.

44. It was suggested that the Documents are wholly irrelevant to the “matters in question” in the present case because there is no live dispute or specific allegation in the pleadings as to the internal control failures of the Plaintiff. Hence, the present request for disclosure of the Documents is nothing but a fishing exercise and an unwarranted attempt to hunt around for information to pursue more enquiries and/or to raise a new case or cause of defence against the Plaintiff.

45. Insofar as matters relating to the Plaintiff’s internal control measures/failures have been raised in the witness statement of Madam So (but not in the pleadings), such matters (and hence the Documents dealing with such matters) go only to credit, which is not a permissible basis for seeking specific discovery.

46. Ms Lee further submitted that taking the above into account, the Documents do not help to resolve the “matters in question” in the present action or, to put it in another way, they are not necessary for fairly disposing of such “matters in question”.

47. There is no dispute that one of the main pleaded issues “in the broadest sense” in the present action is whether the securities transactions in the JCA (apart from the 1^st, 2^nd and 3^rd Transactions) were authorised by the 1^st and/or 2^nd Defendants or not, and that the Plaintiff carries the burden to establish that such transactions were authorised.

48. In considering what information will be of evidential materiality to such “matter in question” in the broad sense as postulated in O Company, as distinct from express and/or specific allegations in the pleadings, it is plain from the pleadings that the Plaintiff refutes the plea of unauthorised trading by relying on inter alia the sending of the monthly statements, the fact that some payments had been made, and the Schedule (and presumably also the bought/sold notes completed by Madam So in respect of the subject transactions) (see also EAA Securities Limited v Chan Lin Mui & anor CACV277/2006 (unreported, 20^th March 2007), which is an appeal against the lower court decision in these proceedings to strike out a substantial part of Madam So’s witness statement filed on behalf of the 1^st and 2^nd Defendants (“CA Judgment”)).

49. In short, the Plaintiff puts in issue its control system for cash accounts, ie the dealer’s recording of securities transactions, the sending of monthly statements to the customer, the monitoring of deposit payments in the cash account, and the arrangement for repayment of indebtedness in the cash account, to refute the allegation of unauthorised trading. In coming to this view, like the Court of Appeal in paragraph 46 of the CA Judgment, I need go no further than the pleadings. But I also draw comfort from the fact that this is the thrust of the witness statements of Lau Chak Wah filed on behalf of the Plaintiff.

50. Given the Plaintiff’s case in respect of the issue of unauthorised dealings in the broad sense, it is plainly open to the defence to call Madam So to corroborate their stance by explaining how and why the unauthorised transactions came to be made, and how she could have done so notwithstanding the Plaintiff’s control/measures and management system of inter alia (a) sending monthly statements to the customers (presumably to inform them of transactions in the cash accounts which arguably would have facilitated exposure of unauthorised transactions) and/or (b) requiring repayment of debit balances in cash accounts (presumably to prevent accumulation of indebtedness in “cash” accounts which arguably would have minimised risk of unauthorised transactions).

51. Likewise, the 1^st and 2^nd Defendants are entitled to adduce available documentary evidence on the above matters as being probative of the “matter in question” in a broad sense irrespective whether they have been expressly and/or specifically pleaded or not. In the circumstances, the 1^st and 2^nd Defendants are entitled to seek discovery on the basis that such documents are closely connected to the “matter in question” or they may lead to a train of inquiry in relation to the same. I am not persuaded by the argument that these matters are obviously unconnected to the “matter in question” because they are raised in Madam So’s witness statement.

52. Mr Wong reached for higher ground by suggesting that the Documents may be relevant to whether the Plaintiff knew or ought to have known there were unauthorised trading or whether the Plaintiff knowingly permitted Madam So to carry out unauthorised trading in the JCA. I do not find it necessary or appropriate to determine relevance on this basis. I bear in mind that in respect of the defence of unauthorised trading, it does not matter whether the Plaintiff knew or ought to have known that Madam So had no authority to put through the subject transactions.

53. With the above “matter in question” in mind, I now turn to the Documents. Ms Lee asked me to accept the assertion in the Affidavit that the Documents do not contain any narration on the communications and dealings between Madam So and the 1^st and 2^nd Defendants, and to infer from such assertion that the Documents only deal with accounts held by other customers with the Plaintiff and not the JCA held by the 1^st and 2^nd Defendants.

54. Mr Wong submitted that I am not bound by such assertion albeit on oath, and that the Press Release in relation to the Reprimand which stemmed from the investigation by the SFC (which investigation also resulted in the Report) suggested otherwise. It is therefore useful to set out below an extract of the Press Release :

“The reprimand stem from an investigation in which the SFC found that [Mr Robert Fuyaun Wu, EAA’s managing director,] had failed to ensure adequate internal controls at EAA, in particular segregation of duties and credit controls between 2000 and 2001, which facilitated misdeeds by a former dealing director, Ms Anita So Tai Fai. The misdeeds included the conduct of unauthorised trades in clients’ accounts and the dispatch of forged statements to clients.

Independent auditors appointed to investigate EAA found that EAA had made bad debt provisions for long standing receivables from clients’ accounts for about $27.3 million at the year-end 2001. Similar bad debt provisions for 32 clients’ accounts handled by So amounting to $15.6 million were made at the year-end of 2002. The lack of adequate control at EAA over the credit limits in clients’ accounts resulted in bad debts.

[Mr Robert Fuyaun Wu, EAA’s managing director,] …… left EAA’s operation almost entirely to the dealing directors and staff, without exercising sufficient reasonable supervision over them. When he became aware of large receivables in the clients’ accounts in the third quarter of 2000, he accepted advice from So …… to stall collection pending a market recovery. He submitted to So’s refusal for EAA to directly collect debts from her clients. ……”

55. What is evident from the above extract of the Press Release is that the Reprimand and the investigation by the SFC that preceded it are related to Madam So’s activities as the Plaintiff’s dealing director between 2000 and 2001, which (according to the 1^st and 2^nd Defendants) is the relevant period when the alleged unauthorised dealings in the JCA by Madam So took place. Secondly, the Reprimand and the investigation by the SFC that preceded it concerned not only the Plaintiff’s general internal control measures and failures, but also how such failures facilitated unauthorised trades by Madam So. Thirdly, the investigation by the SFC that preceded the Reprimand also covers measures taken by the Plaintiff that permitted Madam So to stall recovery action when receivables accumulated in the Plaintiff’s clients’ accounts. In my view, there is ample basis for inferring that the Documents (ie the Report which was the product of the aforesaid investigation by the SFC, and the Letters arising from such investigation) related to the matters canvassed in the Press Release and Reprimand.

56. In light of the pleaded issue in the broad sense described above, I am of the view that the Documents concerning matters referred to in the above paragraph are relevant and potentially probative or disprobative of the issue of whether there was unauthorised trading in the JCA or not. It is unnecessary and inappropriate to approach this on the Plaintiff’s narrow formulation that there is no “narration” of the communications/dealings between the 1^st and 2^nd Defendants and Madam So in the Documents.

57. As explained in paragraph 49 of the CA Judgment, it is relevant and admissible for the 1^st and 2^nd Defendants to adduce at trial viva voce evidence that the unauthorised trading was part of a system that involved not only the JCA but all Madam So’s other accounts. I do not see why documentary evidence on the same subject should be regarded as not relevant or not potentially admissible. Further, nothing can be clearer than paragraph 55 of the CA Judgment which said “the evidence available to the SFC are obviously relevant”, and I draw comfort that the above analysis accords with such observation.

58. Paragraph 56 of the CA Judgment goes on to say as follows :

“If the statement in the reprimand that unauthorised trades by Anita So in her clients’ accounts caused the plaintiff to write off bad debt of about $27.3 million is correct, that would of course support, to a certain extent, unauthorised tradings on the part of Anita So in other accounts as well. And that may be relevant to the plaintiff’s claims against the defendants, if it be the plaintiff’s case, that in relation to the other clients’ accounts, there had been unauthorised trades, but in relation to the 1^st and 2^nd defendants’ accounts, the trades were not unauthorised by the defendants.” (my emphasis)

In light of the above, I am unable to accept the Plaintiff’s assertion that the Documents which stemmed from the aforesaid investigation by the SFC are irrelevant or unconnected to the “matter in question”. The above observation by the Court of Appeal suggests that matters referred therein may advance either the case for the Plaintiff or that for the 1^st and 2^nd Defendants.

59. Even if the Documents deal solely with accounts held by other customers (although it is unnecessary for me to form any such view), I am still minded to consider requiring disclosure of the Documents. The aforesaid analysis show there are common features with the operation of the JCA, eg the other accounts and the JCA involved (a) Madam So as the handling dealer, (b) allegations of unauthorised trades and forged documents, (c) accumulation of substantial debit balances for “cash” accounts, and/or (d) consideration of the Plaintiff’s internal control measures that might have facilitated misdeeds.

60. It is a matter of delicate judgment as to whether particular evidence or document is relevant to an issue in the proceedings or goes only to credit. In my view, the Documents dealing with the transactions in and the control/management of the accounts (in particular, cash accounts) of other customers with the Plaintiff in the context discussed in paragraphs 54-59 above show more than just propensity and/or credit. The significance of conduct of this kind, ie unauthorised trading by the handling dealer via various clients’ accounts notwithstanding the control/management of the Plaintiff as a securities dealer (which eventually led to substantial bad debts for the Plaintiff for “cash” accounts and criminal conviction against Madam So) is that it is so contrary to expected behaviour of a dealing director in a securities brokerage firm that, if accepted, it may be logically probative of the contention by the 1^st and 2^nd Defendants that on other occasions Madam So was prepared to and did carry out unauthorised trades in the JCA. It seems that propensity and credit apart, the discovery of the Documents at the very least may give rise to a relevant train of inquiry.

(d) Summary

61. I am therefore of the opinion that the information in the Documents is relevant to the issues necessarily to be considered in order to determine whether there has been unauthorised trading in the JCA, and the disclosure of the Documents can make the matters that require proof more or less likely. The system of conduct by Madam So in the context of the Plaintiff’s management and control of clients’ accounts may well have significance since the administration of the JCA, such as sending of monthly statements to customers, monitoring of payments into the account, and pursuing repayment of indebtedness, has been put in issue. To exclude consideration of the Documents at this stage will unfairly limit the scope of investigation and proper presentation of the case of the 1^st and 2^nd Defendants. In my view, the Documents cannot simply be dismissed as irrelevant or going solely to credit in the collateral sense or as fishing for a new case, and I find that sufficient relevancy has been shown at least for the purpose of specific discovery.

62. The formulation of the test of necessity in this context by Bingham J as approved by Lord Scarman in the House of Lords in Air Canada v Secretary of State for Trade (No.2) [1983] 2 AC 394, 445 is as follows :

“In my judgment, documents are necessary for fairly disposing of a cause or for the due administration of justice if they give substantial assistance to the court in determining the facts upon which the decision in the cause will depend.”

On the basis of the above analysis, I am of the view that the discovery now sought will assist in clarifying issues between the parties and in the just handling of the proceedings between them. In short, it is necessary for the fair disposal of the cause or matter.

63. In the circumstances, I allow the appeal, set aside the order of the learned Master dated 21^st May 2008, and grant an order in terms of paragraph 1 of the Summons. There is no reason why costs should not follow event. I therefore grant a costs order nisi that the Plaintiff do pay the costs of the 1^st and 2^nd Defendants for this appeal and below to be taxed if not agreed with certificate for counsel. There be legal aid taxation for the 1^st and 2^nd Defendants’ own costs.

VI. Post-script

64. This case first began life over 5 years ago on 8^th July 2003 and is still nowhere near trial. It has seen interlocutory argument escalating to an appeal to the Court of Appeal. The 3^rd Pre-Trial Review took place on 15^th January 2008. It strikes me that the delay in bringing this case to trial requires both parties and their legal representatives to exercise good sense to minimise further interlocutory skirmishes and get on with the trial.

65. I direct that the parties do attend before the Listing Master for a further Pre-Trial Review hearing at 11:00am on 16^th September 2008 at Court No.47 in chambers (open to the public). Both parties should take stock of their respective case in good time so that all necessary steps are taken, all outstanding matters are attended to and further interlocutory applications (if any) are made before the Pre-Trial Review hearing. Given the long history of this matter, it should not be unexpected that the Listing Master will exercise bold case management and set the case down for trial.

(Marlene Ng)
District Court Judge

Ms Eling Lee instructed by Messrs Woo, Kwan, Lee & Lo for the Plaintiff

Mr Joeson Wong instructed by Messrs Keith Lam, Lau & Chan for the 1^st and 2^nd Defendants

53224-EN-2006-07-11

EAA SECURITIES LTD v. CHAN LIN MUI AND ANOTHER

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DCCJ 4015 of 2003

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 4015 OF 2003

__________________________

BETWEEN

	EAA SECURITIES LIMITED	Plaintiff
	and
	CHAN LIN MUI	1^st Defendant
	FATTYDAD ALICE PUI YAN	2^nd Defendant

___________________________

Coram: Deputy District Judge K.W. Wong in Chambers (open to public)

Date of Hearing: 27^th June 2006

Date of Handing Down Reasons for Decision: 11^th July 2006

______________________

REASONS FOR DECISION

______________________

1. This is the Defendants' application by summons dated 26^th May 2006 for leave to appeal to the Court of Appeal against my decision handed down on 25^th April 2006 (“ my said Decision”) ordering, inter alia, that 24 out of 28 paragraphs (paragraphs 4 to 24 and 26 to 28) of the witness statement of So Tai Fai (“Anita So”) filed herein on 3^rd May 2005 on the Defendants' behalf be struck out.

2. Mr. Simon Lui, counsel for the Defendants submitted the test for granting leave was whether or not the grounds of appeals as set out in skeleton submission dated 22^nd June 2006 were “arguable”. Miss Eling Lee, counsel for the Plaintiff, however contended that the proper test should be “realistic prospect of success” as set out in Smith v Cosworth Casting Processes Limited [1997] 1 WLR 1538. Mr. Lui said that although the phraseology employed by them was different, he submitted that the two tests referred to the one and the same test. He conceded that the principles in Smith v Cosworth, the case often cited with approval in decisions of many similar applications in the District Court, were the correct ones.

3. The realistic prospect test stated by Lord Woolf in Smith v Cosworth Casting Processes Limited [1997] 1 WLR 1538 and cited with approval by Leong CJHK in Ma Bik Yung v Ko Chuen, unreported, HCMP4303 of 1999, 8^th September 1999 is set out below:

“(1) The Court will only refuse leave if satisfied that applicant has no realistic prospect of succeeding on the appeal. The test is not meant to be any different from that which is sometimes used, which is that the applicant has no arguable case. Why however this court has decided to adopt the former phrase is because the use of the word “realistic” makes it clear that a fanciful prospect or an unrealistic argument is not sufficient.”

4. The other limbs of the test, e.g. public interest or unsettled law grounds referred to in Smith v Cosworth were not relied on by Mr. Lui.

5. Mr. Lui has helpfully summarized his grounds of appeal as this: the principles as set out in my said decision are correct but their application to the facts of this case is wrong. What he submitted was that although the Defendants had not pleaded a specific case of fraud, and had no intention to so doing, the evidence in Anita So's statement could still be adduced pursuant to the principles set out in my said Decision to support a broader case of unauthorized transactions on the ground of relevance. The Defendants were entitled to show how and why these unauthorized transactions came about. What the Defendants were prohibited to do is to argue or raise an issue of fraud by such facts. In any event he argued that the threshold for leave to appeal was low. The Defendants should be given an opportunity to argue the same in the Court of Appeal. He nevertheless agreed that a better pleading should state that these unauthorized transactions were done by an employee of the Plaintiff and at the Plaintiff's direction.

6. I have reconsidered the argument of Mr. Lui. As I have pointed out in my said Decision, the Defence is simply a denial of all transactions save and except three (paragraph 5 of my said Decision). As can be seen in my said Decision, Anita So's evidence went further than merely stating that it was she who did the transactions without the Defendants' instruction. She went a lot further and said all these transactions were done upon the Plaintiff's direction and suggested that these were with the Plaintiff's express consent and assistance. Although the Defendants said that they are not going to raise fraud, it will be unrealistic to expect these factual issues be left unchallenged because highly controversial factual evidence by Anita So is introduced. These factual issues will inevitably be hotly contested. Yet hardly anything about the role played by the Plaintiff was pleaded. In fact the amendment option was expressly ruled out by the Defendants.

7. Order 18 rule 8(1) of the Rules of District Court stipulates clearly that apart from fraud, any fact showing illegality which he alleges makes any claim of the opposite party not maintainable or which raises issues of facts not arising out of the preceding pleading (my emphasis) have to be pleaded: see paragraph 23 of my said Decision. I do not intend to repeat the principles stated in my said Decision. I simply do not understand how this dissection of issues and facts as advanced by Mr. Lui can help the Defendants. With due respect, I find his argument artificial and difficult to accept.

8. In my judgment, I do not consider that there is any realistic prospect for the Defendants' argument to be accepted by the Court of Appeal. I therefore dismiss the Defendants' summons for leave to appeal with costs to the Plaintiff, with certificate for counsel, to be taxed if not agreed. I also order that that Defendants' own costs be taxed in accordance with the Legal Aid Regulations.

(K.W. Wong)
Deputy District Judge

Miss Eling Lee instructed by M/s Woo, Kwan, Lee & Lo for the Plaintiff.

Mr. Simon Lui instructed by M/s Fairbairn Catley Low & Kong (DLA) for the Defendants.

Appeal allowed: see CACV277/2006 dated 20 March 2007

52258-EN-2006-04-25

EAA SECURITIES LTD. v. CHAN LIN MUI AND ANOTHER

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DCCJ 4015 of 2003

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 4015 OF 2003

__________________________

BETWEEN
	EAA SECURITIES LIMITED	Plaintiff
	and
	CHAN LIN MUI	1^st Defendant
	FATTYDAD ALICE PUI YAN	2^nd Defendant

___________________________

Coram : Deputy District Judge K.W. Wong in Chambers (open to public)

Date of Hearing : 23^rd January 2006

Date of Handing Down Reasons for Decision : 25^th April 2006

___________________________

REASONS FOR DECISION

___________________________

1. This is an application by the Plaintiff by summons dated 23^rd August 2005 to strike out 24 out of 28 paragraphs (paragraphs 4 to 24 and 26 to 28) of the witness statement of So Tai Fai (“Anita So”) filed herein on 3^rd May 2005 on behalf of the Defendants. The said statement as to fact was filed and served pursuant to an agreed memorandum of the parties dated 8^th December 2003 and intended to stand as the evidence in chief of Anita So at trial unless otherwise directed by the trial judge.

2. As stated in the margin note of the summons, the Plaintiff relies on the inherent jurisdiction of the Court to launch the application. The grounds for the striking out become apparent when one reads the affirmation of Heung Shuk Han Veronica filed on 23^rd August 2005. Basically, the Plaintiff submits that the paragraphs of the witness statement sought to be struck out suggested a conspiracy to defraud which the Defendants have never pleaded and are therefore irrelevant to the issues between the parties. These paragraphs of the witness statement only serve to embarrass the Plaintiff and prolong the trial unnecessarily, thus increasing the costs of both parties. According to the submission made by Miss Eling Lee, counsel for the Plaintiff, the said paragraphs of the witness statement are scandalous, frivolous, vexatious and/or otherwise irrelevant to the proceedings and thus offended the provisions of Order 38. Rule 2A of the Rules of District Court.

3. Mr. Simon Lui, counsel for the Defendants, contends that the main ground of defence is unauthorized trading in the account. The Defendants are therefore entitled to call evidence of how the Plaintiff dealt with the other accounts to show that such unauthorized trading is not an isolated incident. This evidence is relevant as to the background and has probative value. Further, evidence on why and how the unauthorized trading has occurred is important and relevant. The court has on many previous occasions allowed witnesses to give evidence on these areas. It is noted that the jurisdiction of the court to strike out certain part of a witness statement is not disputed by the Defendants.

The Pleadings of the Plaintiff

4. The Plaintiff’s case against the two Defendants is simple. It is the Plaintiff’s pleaded case that it was a securities dealer. On 15^th February 2000, the two Defendants opened a cash account with the Plaintiff for securities investment by signing a Cash Client’s Agreement (paragraph 2 of the statement of claim). It was pleaded that by the said agreement, the Plaintiff would be the agent of the Defendants in effecting transactions in securities according to instructions of the Defendants who in return agreed to, inter alia, settle payments and pay interest on overdue payments. Between February 2000 and 17^th July 2001, there had been numerous transactions carried out in the said account and as at 31^st July 2001, the account had a debit balance of HK$438,640.83. Interest accrued on the outstanding sum and the alleged total outstanding sum under the said account ran up to HK$493,770.10 as at 17^th April 2003. Monthly statements were sent to the Defendants. No payment was made by the Defendants despite repeated demands.

The Defence

5. The gist of the defence, as appeared in the Amended Defence and Counterclaim filed herein on 26^th May 2005, is this. The Defendants wanted to buy shares but were ignorant of the operation of the stock market. The 2^nd Defendant therefore enlisted assistance from Anita So, who was her stepmother and who worked in a securities brokerage house. It is noted that there is no mention that this securities brokerage house in which she worked is the Plaintiff. They were asked by Anita So to sign some account opening papers for the purpose of depositing stocks they had purchased into such account. Neither had Anita So explained the said documents to them nor had she provided them with any photocopies. Apart from purchase on 3 occasions they had never traded any securities. Save and except the above the Defendants denied paragraphs 2 of the Statement of Claim. There was neither admission that Anita So was an employee of the Plaintiff nor the forms they had signed being those of the Plaintiff’s. By the Defence, the Defendants simply denied having signed the alleged Cash Client Agreement and given instruction to trade save and except on three occasions.

6. Furthermore, the Defendants pleaded having no knowledge of the terms of the Agreement and specifically denied having receipt any monthly statements from the Plaintiff.

7. However in the Counterclaim, the Defendants appeared to admit that the account which they had opened was “…a cash account opened with the Plaintiff…”(paragraph 16), although there is no express reference as to whether the said account and the one referred to by the Plaintiff was in fact the same account. The Defendants pleaded that the shares which they had bought on the 3 occasions together with the bonus shares had disappeared in the said account and therefore counterclaimed against the Plaintiff for return of the shares or alternatively, damages.

Subsequent Pleadings

8. A Reply and Defence to Counterclaim was served. It was pleaded, inter alia, that the shares acquired by the Defendants in their first purchase had not been deposited with the Plaintiff. The pleadings repeated the debit balance of the account as at 17^th April 2003. It was pleaded that only 100 shares of Tracker Fund were left in the said Cash Account. It was also pleaded that a repayment schedule was jointly signed by the Defendants in or about 13^th March 2001. The Defendants served a Rejoinder dated 11 August 2005 saying, inter alia, that the signatures on the Schedule were forged.

Anita So’s Witness Statement

9. Anita So was a sales director of the Plaintiff as from February 1995. The first three paragraphs of the statement set out the background that after the 1997 financial turmoil, people had lost confidence in the economic future and had stopped investing in the shares market, resulting in financial difficulties to some brokerage firms. Some were forced to close down or cut staff.

10. Starting from paragraph 4, Anita So stated that in order to survive the financial crisis, her supervisor, one Elson Wong asked her to use clients’ accounts to trade. According to her, the purpose of using clients accounts was to fulfil buy/sell orders coming from some listed companies/brokerage firms and was “…mainly to prop up the price of a particular share or to dump a particular share in the market without drawing much attention.” (paragraph 4). She agreed to do so due to, allegedly, pressure on her by the Plaintiff. She did not want to be laid off. A total of 27 accounts, including the Defendants’ account, were used by her. She indirectly said that such trading was with the Plaintiff’s financial support (paragraph 5). She was not entitled to any commission for handling these unauthorized transactions. Instead the commission which the clients were required to pay for these transactions was debited into the respective accounts and she had to make use of the profit (if any) arising out of these transactions to pay off the commission chargeable by the Plaintiff. This practice did not stop even after Miss Suzanne Choo of the Plaintiff took over the duties of Elson Wong as her supervisor. With knowledge of Miss Choo, the Plaintiff did not stop her from trading using clients’ accounts (paragraph 12).

11. In paragraph 13, Anita So went on to say that in fact, the trading using clients accounts by staffs of the Plaintiff was a widespread practice/phenomena in the Plaintiff. It was with full knowledge of the Plaintiff who according to Anita So “tolerated” the unauthorized trading engaged by her (paragraph 14). From paragraphs 15 up to 24, Anita So stated that she was terminated by the Plaintiff in February 2002 and was asked to sign some letters of guarantee to cover the debit balance of her clients. Again, due to pressure exerted by the Plaintiff, she did sign on the documents and repay some of the amounts, notwithstanding that the activities were illegal and was masterminded by the Plaintiff.

12. In paragraph 26, Anita So, after acknowledging that the Defendants had not given any instructions to her to trade save and except the pleaded ones, admitted that all other transactions were carried out by her for the purpose of “…generating income by way of commission for the Plaintiff without knowledge and consent of the Defendants. Due to my [her] unauthorized trading I [she] had caused loss to their account”.

13. Paragraphs 27 and 28 stated how she was later arrested by the Police for suspected offence of false accounting but no charge was brought against her subsequently. It was said that the Plaintiff was severely reprimanded by the Securities and Future Commission for “…internal control failure allowing me [Anita So] to carry out unauthorized trades in clients’ accounts and the dispatch of forged statements to clients thereby causing the Plaintiff to write off bad debts of about 27.3 million”.

14. It appears what the pleader of the Defence is trying to say is that the Defendants have traded securities on three occasions only. Implicit in such allegation is that all other trading was carried without their knowledge and consent and the Defendants were therefore not liable for whatever loss under the account. When the pleader launched the counterclaim, he seemed to have forgotten what he had denied, and claimed that the securities they had bought were deposited with the account opened with the Plaintiff when they signed the papers brought by Anita So, as referred to in paragraph 2 (e) of the Defence. There may also perhaps be other minor mistakes such as the repeated reference to paragraph 2(k) in the Defence may in fact be a reference to 2(m). In any event, the Defendants had not pleaded who had carried out the transactions, nor was there the slightest indication that it was the Plaintiff who actually carried out such unauthorized transactions. In other words the defence of unauthorized trading simply put the Plaintiff to strict proof of the Defendants’ liability and quantum.

15. However by the evidence of Anita So, a positive case amounting to illegality and/or fraud and/or serious misconduct on the part of the Plaintiff is sought to be established. It was Anita So’s evidence that the trading, which was upon the request of the Plaintiff’s executive director, was for the purpose of “…prop up …or to dump …” the price of particular shares in the market for the purpose of fulfilling buy/sell orders from some listed companies/brokerage firms without drawing much attention (paragraph 4 of her statement). Although no further particulars are contained in her statement, her evidence discloses a case of serious illegal activities on the part of the Plaintiff, amounting to possibly, false trading under the Securities and Futures Ordinance, Cap 571 (“SFO”). It is a serious offence punishable by heavy fine and imprisonment term under the SFO.

16. Furthermore, the evidence in Anita So’s statement also suggested a direct involvement of the Plaintiff, either through other employee or Anita So in such unauthorized trading. The following is some of the allegations in the said statement:

i) “He [Elson Wong] further asked me whether I had any available accounts of my clients which the Plaintiff could use to buy/sell order coming …” (paragraph 4);
ii) “I would say that without the Plaintiff’s financial support, these trading could not be sustained.” (paragraph 5);
iii) “Notwithstanding that, the Plaintiff did not stop me from using my client’s accounts to trade …” (paragraph 12);
iv) “…No action nor demand was ever made by the Plaintiff to ask the account holders to settle payment as the Plaintiff knew they had no involvement in the trading. The Plaintiff was therefore fully aware of and tolerated the unauthorized trading engaged by me and other account executives….” (paragraph 14);
v) “…the Securities and Future[sic] Commission had severely reprimanded the Plaintiff for internal control failure allowing me to carry out unauthorized trades …and the dispatch of forged statements to clients …” (paragraph 28).

17. It is apparent that Anita So’s statement has a serious implication on the Plaintiff. Pitching the Defendants’ case to the highest, it may amount to a conspiracy on the part of the Plaintiff with Anita So to defraud customers including the Defendants. However, none of such misconduct, nor alleged illegality nor any suspected fraud had been pleaded by the Defendants. Obviously the defences, as revealed by Anita So’s statement, are more than a mere denial or unauthorized trading. The Defendants could now identify the Plaintiff’s senior staff, Miss Anita So, as the one who did the alleged unauthorized transactions. Furthermore the Defendants go further by accusing that it was the Plaintiff who pressurized Anita So into such illegal acts. The Defendants are in fact advancing a positive case of illegal acts or misconduct on the part of the Plaintiff, rendering the Defendants not liable for any loss in the said securities trading account. These are serious allegations.

18. A plaintiff has the burden of proof. Facing with a defence of simple denial normally a plaintiff will try to come up with the necessary evidence to establish liability and quantum failing which its claim must fail. Evidence of who actually carried out the transactions, or records kept in the normal course of the plaintiff’s business is expected to be adduced at trial. However, in the present case, if not for the allegations now contained in the Anita So’s statement, Elson Wong, the alleged supervisor of Anita So, may not necessarily be a witness. As correctly pointed out by the Plaintiff, Elson Wong has now become one of the star witnesses if the Plaintiff is going to rebut the serious allegation of Anita So.

19. The question is whether such evidence of Anita So can be led, and thus contained in her witness statement, without first having the material facts of which pleaded in the Defence.

The Applicable Principles

20. It is a settled principle that issues are defined by pleadings of the parties, and only evidence relevant to determine such issues is allowed to be put in. In the Court of Appeal decision in Wing Hang Bank Ltd v Crystal Jet International Ltd [2005] 2 HKC 638 at 647F - G, Lam J has this to say:

“ A pleading must comply with the requirements set out in the Rules of the High Court. One must remember that the parameters of a trial are defined by the pleadings. In an ordinary civil action, generally speaking, an issue that has not been pleaded is not an issue before the court and subject to the exception alluded to by the Court of Final Appeal in Poon Kau Kei v Hsin Chong Construction Co. Ltd [2004] 2 HKC 235, [2004] 2 HKLRD 442, the court should not consider such issue.”

21. In the present case, the exceptions in Poon Kau Kei are not applicable.

22. In the same decision, Ma CJHC further stated at page 643G to 644B the following:

“ If I may, I take this opportunity to reiterate some basic principles:
(1) The purpose of pleadings is fairly and precisely to inform the other side of the stance of the pleading party so that proper preparation is made possible, and time and effort are not expended unnecessarily on other issues. The passage at para 18/12/1 of Hong Kong Civil Procedure 2004 Vol I sets out the rationale for proper pleadings.
(2) In a trial, particularly where evidence is given by witnesses, it becomes extremely important that each side knows exactly what are the lives issues. Where issues are sought to be introduced that have not been adequately or properly pleaded, amendments must be sought unless the consent of the other party or parties has been obtained. It will simply not do for unpleaded issues to be ‘slipped in’ when evidence is being given in the hope that the other side is not sufficiently alert to object. Much testimony given in the course of a trial may in truth relate to a number of possible aspects or may simply be background information. Obviously, counsel must be astute to object when necessary but the primary responsibility of ensuring that any issue is properly before the court is on the party seeking to advance that issue. He must do so clearly and not ambiguously, and the usual way of doing so is through the pleadings. Care must be taken to plead issues clearly, and not draft pleadings either vaguely or ambiguously perhaps in the hope that the other side might not readily or easily understand a party’s real case….
(3) On appeal, it will be extremely rare for the Court of Appeal to allow unpleaded issues of fact to be run for the first time. Save in exceptional circumstances (such as where documents can safely be assumed to speak for themselves), the court will often not be in a position to take the view confidently that the other side has not been prejudiced.”

23. Furthermore, Order 18. Rule 8(1) of the Rules of District Court requires that a party in any pleading subsequent to a statement of claim plead specifically matters (my emphasis) including, but not limited to, fraud or any fact showing illegality which he alleges makes any claim of the opposite party not maintainable or which if not pleaded, might take the opposite party by surprise or which raises issues of facts not arising out of the preceding pleading. The commentary at paragraph 18/8/1 of Hong Kong Civil Procedure 2006 Vol. I states that wherever a party has a special ground of defence or raise an affirmative case to destroy a claim, he must specifically pleaded the matter on which he relies for such purpose. The effect of such rule is, according to the learned author, for reasons of practice and justice and convenience, to require the party to tell his opponent what he is coming to court to prove. The authority of Re Robinson’s Settlement, Gant v Hobbs [1912] I Ch. 717 is cited.

24. In paragraph 18/8/2 of the Hong Kong Civil Procedure 2006 Vol. I, the learned author continues to state that it is often not enough for a party to deny an allegation in his opponent’s pleading. The pleader must go further and dispute its validity in law, or set up some affirmative case of his own in answer to it. All matter justifying or excusing the act complained of must be specially and separately pleaded. No evidence of such matters can, as a rule, be given at the trial if they are not expressly pleaded. Davie v New Merton Board Mills Ltd [1956] 1 W.L.R. 233 is cited. The “confess and avoid” rule should be followed as far as possible.

25. I consider that the learned author of the Hong Kong Civil Procedure 2006 has set out the correct position of the law in this respect.

26. As analyzed above, the Defendants are now advancing a positive case of misconduct or illegality or even a case of fraud against the Plaintiff. Counsel for the Defendants has expressly informed the court in the course of his submission that the Defendants are not running a case of fraud against the Plaintiff, and it is only a simple case of unauthorized trading. However, if the Defendants are relying on the grounds of defence as revealed in the said statement of Anita So, the Defence still offends Order 18 Rule 8(1). Issues such as it is the Plaintiff or its employee who has done such transactions for self-benefit have never been raised. This Order of the Rules of District Court is not only limited to illegality and fraud. It obviously has a wider application covering the present situation.

27. Counsel for the Defendants has contended that the test of whether certain part of the evidence in a witness statement should be expunged is “relevance”. He relied on Re: HY & HT Lee Brothers & Co., Ltd [1999] 4 HKC 212 and O’Brien v Chief Constable of South Wales Police [2005] UKHL 26. I do agree but cannot see how principles in the two cited authorities assist the Defendants. The relevance test is not inconsistent with the principles I have discussed above. Relevance must, and can only, be judged by reference to the issues which the court is called upon to decide. As can be seen from the authorities referred to above, these issues are not defined by witness statements nor by counsel’s submission but by pleadings. The main gist of the defence is that the Defendants had not carried out the transactions concerned. It follows that if there are really transactions carried out in the account these transactions must be unauthorized. However, it does not follow that it is the Plaintiff or its employees who did the transactions. There is no suggestion in the Defendants’ pleadings that it is the case. A denial without pleading a positive case will not entitle the Defendants to adduce positive evidence now contained in Anita So’s statement otherwise a plea of denial will be the best licence to any defendant to adduce whatever evidence he considers relevant so far as such evidence is not inconsistent with the denial. It cannot be right. It offends the Rules of the District Court and the principles which I have been set out in the preceding paragraphs.

28. In fact before hearing submissions, I have made enquiry with Mr. Lui, counsel for the Defendants, as to whether the option of amendment of pleadings had been explored by the parties. I am surprised to note that the Defendants’ stance was, when the Plaintiff at last was prepared to allow the Defendants to amend, to refuse amendment. Evidence will not be considered as scandalous even though the allegations are grave and conduct outrageous if the evidence is relevant to the issues between the parties. However, if facts of such matters have never, and indeed refused to be pleaded, such evidence is irrelevant and therefore is scandalous because it only serves to embarrass or prejudice the other side. The other side will be put in a difficult position for the simple reason that although the evidence is irrelevant to the pleaded issues, the evidence will adversely implicates its interest or reputation and must be rebutted. It therefore also serves to lengthen a trial unnecessarily. This evidence is liable to be struck out from the witness statement. I accept the submissions made by counsel on behalf of the Plaintiff.

Conclusion and Order

29. By reasons of the above, I order that paragraphs 4 to 24 and 26 to 28 of the witness statement of Anita So filed on 3^rd May 2005 be struck out. I also make the following order nisi as to costs: that unless either party applies to be heard on the question of costs within 14 days, the Defendants do pay the Plaintiff costs of the application together with a certificate for counsel, to be taxed, if not agreed. The Defendants’ own costs to be taxed in accordance with the Legal Aid Regulations.

(K.W. Wong)
Deputy District Judge
District Court

Miss Eling Lee instructed by M/s Woo, Kwan, Lee & Lo for the Plaintiff.

Mr. Simon Lui instructed by M/s Fairbairn Catley Low & Kong (DLA) for the Defendant.

i)	“He [Elson Wong] further asked me whether I had any available accounts of my clients which the Plaintiff could use to buy/sell order coming …” (paragraph 4);
ii)	“I would say that without the Plaintiff’s financial support, these trading could not be sustained.” (paragraph 5);
iii)	“Notwithstanding that, the Plaintiff did not stop me from using my client’s accounts to trade …” (paragraph 12);
iv)	“…No action nor demand was ever made by the Plaintiff to ask the account holders to settle payment as the Plaintiff knew they had no involvement in the trading. The Plaintiff was therefore fully aware of and tolerated the unauthorized trading engaged by me and other account executives….” (paragraph 14);
v)	“…the Securities and Future[sic] Commission had severely reprimanded the Plaintiff for internal control failure allowing me to carry out unauthorized trades …and the dispatch of forged statements to clients …” (paragraph 28).

“	If I may, I take this opportunity to reiterate some basic principles:
	(1)	The purpose of pleadings is fairly and precisely to inform the other side of the stance of the pleading party so that proper preparation is made possible, and time and effort are not expended unnecessarily on other issues. The passage at para 18/12/1 of Hong Kong Civil Procedure 2004 Vol I sets out the rationale for proper pleadings.
	(2)	In a trial, particularly where evidence is given by witnesses, it becomes extremely important that each side knows exactly what are the lives issues. Where issues are sought to be introduced that have not been adequately or properly pleaded, amendments must be sought unless the consent of the other party or parties has been obtained. It will simply not do for unpleaded issues to be ‘slipped in’ when evidence is being given in the hope that the other side is not sufficiently alert to object. Much testimony given in the course of a trial may in truth relate to a number of possible aspects or may simply be background information. Obviously, counsel must be astute to object when necessary but the primary responsibility of ensuring that any issue is properly before the court is on the party seeking to advance that issue. He must do so clearly and not ambiguously, and the usual way of doing so is through the pleadings. Care must be taken to plead issues clearly, and not draft pleadings either vaguely or ambiguously perhaps in the hope that the other side might not readily or easily understand a party’s real case….
	(3)	On appeal, it will be extremely rare for the Court of Appeal to allow unpleaded issues of fact to be run for the first time. Save in exceptional circumstances (such as where documents can safely be assumed to speak for themselves), the court will often not be in a position to take the view confidently that the other side has not been prejudiced.”