WING FAI CONSTRUCTION CO LTD v. BENEFIT HOLDINGS INTERNATIONAL LTD AND OTHERS

HCA810/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 810 OF 2003

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R U L I N G

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1. I am satisfied that this is a case where I should vary the order nisi.

2. The Plaintiff has chosen to appeal against the whole of the Master’s order.  It was not until trial that it determined that it would effectively abandon the appeal against the Master’s order.

3. That is a success for the Defendant because the liquidator is then obliged to file the affidavit.  It gives the Defendant an order that he can rely upon in relation to any other documents that might be found in the event that there is an argument as to whether they are discoverable.  It is right that it did not take up a lot of a hearing but it was the subject of affidavits and subject also in the submissions.

4. In all of the circumstances, I am satisfied that the proper order should be that there are no orders for costs on the appeal, including the argument as to costs.

HCA 810/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 810 OF 2003

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JUDGMENT

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1.  This is an appeal from a decision of the Master given on 3 December 2004, in which the plaintiff was ordered to give further and better discovery of documents in certain classes which were described in a Schedule to the Summons for Further and Better Discovery.  I heard the parties on the matter on 29 June 2005, when I indicated that I was satisfied that the Master had been wrong to order discovery of certain of the documents sought, and I allowed the appeal to that extent, indicating that I would give my reasons later, which I now do.

2.  The claim by the plaintiff against the defendants arises in the following way.  The plaintiff, (Wing Fai), was a wholly owned subsidiary of the 1^st defendant, (Benefit), which itself is a wholly owned subsidiary of China Rich Holdings Limited.  The 2^nd, 3^rd, and 4^th defendants are directors of Benefit and China Rich.  In April 2002, Benefit entered into an agreement for sale and purchase with Wing Fai, Sino Glister International Investments Ltd, (Sino Glister), and the sole shareholder in Sino Glister, Eric Chim Kam Fai, (Mr Chim), to sell shares in Wing Fai to Sino Glister for a consideration of HK$5 million.

3.  Wing Fai subsequently went into liquidation, and it is the liquidator’s case that the sum of HK$5 million used by Sino Glister and Mr Chim to fund the purchase of Wing Fai shares came from funds of Wing Fai, contrary to s 47A Companies Ordinance.  The liquidator now proceeds against the defendants contending a breach of section 47A, a breach of duty by the 2^nd 3^rd and 4^th defendants in continuing to act as directors of Wing Fai following the sale of shares, and conspiracy, and seeks to recover a sum of HK$5 million.

4.  The case is somewhat unusual in that the liquidator does not plead specific payments of a sum totalling $5 million from Wing Fai either directly or indirectly to the defendants.  Instead the liquidator pleads, first a specifically identifiable sum of HK$2 million, and second a series of admissions of payment to Benefit of a total of HK$5 million, from which the liquidator will ask the court to infer, first that the further HK$3 million has been paid, and second that it had come from Wing Fai.

5.  In previous interlocutory proceedings the liquidator has acknowledged the limitations upon which his claim is based and it is clear that he does not, and could not without leave, rely upon any specific payments in relation to the balance of HK$3 million.  Mr Maurellet, frankly acknowledges this position, and accepts that if the admissions upon which he relies are found to be insufficient the claim will fail.

6.  It is against this background that the discovery issue arises.  Not surprisingly the defendants initially asserted that if it was the case for the liquidator that payment of HK$5 million had been made, the liquidator must identify the payments.  If the liquidator's case was based upon specific payments that would be right.  But it is not, it is based upon admissions.

7.  I approach the question of discovery bearing in mind two matters.  First, it is clear from Peruvian Guano, (1882) 11 QBD 55, that a plaintiff is required to discover documents which may not only advance his own case or may damage the case of the defendants, but also those which would advance the defendants’ case and damage his own.  It is for a defendant to determine which of the relevant documents may advance his case or damage that of the plaintiff, not the plaintiff.  Second, as pointed out by Coleman J. in O Co v M Co, [1996] 2 Lloyd’s Rep 347, the Peruvian Guano principles do not justify demands for disclosure of documents at the far end of the spectrum of materiality which on the face of it are unrelated to the pleaded case of the plaintiff or defendant and which were required purely for speculative investigation.

8.  It is convenient to set out the Schedule that was attached to the Summons; (note that when it was prepared the Schedule omitted an item 4, and throughout the parties have maintained the numbering system in all correspondence and submissions):

“Schedule

1.	Bank statements of Sino Glister International Ltd in respect of its accounts at Hongkong Bank for the period from May 2002 to July 2002 (inclusive).
2.	Copies of all correspondence passing between the liquidators of the Plaintiff and Sino Glister International Investments Ltd and/or Sino Glister International Investments Ltd’s director dealing with or referring directly or indirectly to:-
	(i)	payments from the Plaintiff to Sino Glister International Investments Ltd;
	(ii)	payments from Sino Glister International Investments Ltd to any third party utilising monies received from the Plaintiff;
	(iii)	repayments of moneys from Sino Glister International Investments Ltd to the Plaintiff.
3.	Records of interviews (in any form) with all persons including but not limited to Mr Eric Chim Kam Fai concerning the matters listed in 2(i), (ii), and (iii) above.
4.	(Omitted)
5.	Correspondence and other communications passing between the liquidators of the Plaintiff and members of the Committee of Inspection of the Plaintiff, the Official Receiver, the Hong Kong Police and/or Office of the Secretary for Justice in relation to the matters listed in 2(i), (ii), and (iii) above.
6.	Records (in any form) of meetings of the Committee of Inspection of the Plaintiff containing references to the matters listed in 2(i), (ii), and (iii) above.”

9.  Although the liquidator does not accept that the documents in items 1, 2 and 3 are discoverable, he has agreed to supply them.  In this respect the appeal is not pursued.  It is not at all clear to me why or how the liquidator comes to be in possession of banking documents belonging to Sino Glister, but that does not matter as the documents are to be supplied.  I am satisfied that all documents in the possession or power of the liquidator set out in categories 1, 2 and 3 are properly discoverable, and had agreement not been reached to supply them, I would have made the appropriate order.  For that reason, in this respect, the Master’s order remains.

10.  It is open to the defendants to assert as part of their defence that any money received by Benefit in payment for the shares did not in fact come from Wing Fai.  I am told by Mr Maurellet that not all of the accounting documents of Wing Fai have been located by the liquidator, but that he has made discovery of those documents which he has, that discovery being the subject of an affidavit from a solicitor to the liquidator.  Mr Smith has correctly taken the point that the affidavit should come from the liquidator, and Mr Maurellet has agreed to supply an appropriate affidavit.

11.  It is clear that those documents are discoverable because there may be accounting documents in those documents that the defendants can point to in order to demonstrate that payments made by Wing Fai have neither gone to Sino Glister in order to pay Benefit, nor indirectly to either Benefit or its directors.  They may even be able to say that all payments made by Wing Fai to Sino Glister or indirectly to Benefit or the three directors were perfectly proper payments.  That is a conclusion that must be reached on the face of the accounting documents, and any other admissible evidence as to the circumstances of the payments.

12.  The argument between the parties is as to the items in clauses 5 and 6 of the Schedule.  Mr Smith’s argument drew my attention to the fact that, on the face of it, Sino Glister and Mr Chim would be equally liable to the liquidator under the provisions of s47A of the Companies Ordinance.  However the liquidator has not proceeded against either, a situation which Mr Smith says was inevitably as a result of a decision made by the liquidator and approved by the Committee of Inspection.  Mr Smith says that that decision can only have come after consideration.  He says that in the correspondence, communications and records sought there may be information as to the basis upon which that decision has been made, which may lead to the defendants to be able to say that in fact no recoverable payments were made.  Mr Smith points to the situation that while the liquidator may be able to prove an admission of a fact, (in this case payment of HK$3 million), he must also prove that fact, i.e. that not only is it admitted that the sum was paid but also that it was in fact paid.

13.  By making available to the defendants the documentation in clauses 1, 2 and 3 of the schedule, (and of course any other discoverable accounting documents of Wing Fai for the relevant period which would include bank statements and paid cheques), the liquidator has put the defendants in the same position as he was when he made his decision not to proceed against Sino Glister and Mr Chim.  In my view any correspondence communications and records of the liquidator and the Committee of Inspection in relation to this decision are not properly discoverable.  They are documents which have all arisen after the event, and are not documents which are relevant to the issue as to whether or not Wing Fai funds were used by Sino Glister or Mr Chim to pay for the purchase of shares.  It may well be that the defendants will come to some other conclusion on the same information that was available to the liquidator, and they have all of that information.

14.  Just as the liquidator has been able to reach a conclusion as to the steps he would take in relation to Mr Chim and Sino Glister, so can the defendants, upon the same information, reach whatever conclusion they think appropriate as to any payments made at the relevant time, and in the course of these proceedings use whatever documents they have obtained in discovery to support their position in the trial.  The reasoning of the liquidator as to the status of those payments is plainly not admissible in this trial in establishing why any particular payments were made, that reasoning being merely his own conclusion.  The basis upon which the liquidator reached his decision is simply not relevant.  There is no evidence that there may be any documents, not included in clauses 1, 2 and 3, that may be found by an examination of the documents in clauses 5 and 6.  Mr Smith did not cite any authority which demonstrated that the liquidator would be required to justify his decision not to proceed against Sino Glister or Mr Chim, in these proceedings.  It may well be that he may be required to justify his decision in the Companies Court in the plaintiff’s winding up proceedings.  Benefit is a creditor of Wing Fai and is free to make such applications as it thinks appropriate to that court in relation to the conduct of the liquidator or the Committee of Inspection.

15.  As to the demand for copies of correspondence and communication with the Official Receiver, the Hong Kong Police, or the Office of the Secretary for Justice, Mr Maurellet’s complaint that there is no evidence that any such documents exist is well made.  In any event for the same reasons as set out above I am not satisfied that such documents, if they exist, are relevant.  Relevance for discovery purposes, it must be remembered, is determined with regard the pleaded case of both parties.  In the present case I am satisfied the documents sought under clauses 5 and 6 of the Schedule are sought purely for speculative investigation.

16.  For the foregoing reasons the order of the Master that the liquidator must give further and better discovery of the items set forth in clauses 5 and 6 of the Schedule to the Summons is set aside.

17.  As to costs, it must have been plain to the defendants following the liquidator’s agreement to supply the items in clauses 1, 2 and 3 of the Schedule that those matters were not being pursued on appeal.  All of those items were supplied as long ago as November 2004.  That there had been no formal amendment of the appeal restricting it to items 5 and 6 is beside the point.  The appeal has succeeded and there appears to me to be no reason why the usual order should not be made and costs follow the event.

18.  There will be in order nisi, to be made absolute in 14 days, that the defendants must pay the plaintiff's costs of and occasioned by the appeal.

HCA 810/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 810 OF 2003

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Dates of Hearing: 16 September 2004

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J U D G M E N T

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I.       Introduction

1.  I have to decide whether the defendants have waived legal professional privilege (LPP) in respect of certain instructions to their former solicitors (JSM).  If I find that there has been waiver, Wing Fai's liquidators ask for discovery relating to those instructions.

II.      Background

2.  Companies Ordinance s.47A forbids a company from providing financial assistance for the acquisition of its own shares.  Wing Fai's liquidators claim that in breach of s.47A Yip, Cheng and Kam caused Wing Fai to provide $5 million to facilitate the purchase by Sino Glister of Wing Fai shares belonging to Benefit Holdings.

3.  In support of their case the liquidators rely in §15 of the Statement of Claim on a letter to them dated 24 October 2002 from JSM.  The letter (marked “cc: client”) reads:-

“We refer to your letter dated 15 October 2002 marked ‘3rd Letter’.

We are instructed by our client that the payment by Wing Fai of HK$5 million which features in the proof of debt of Benefit Holdings was, from the perspective of our clients, entirely proper and bona fide.

As you will be aware, under the terms of the sale and purchase agreement by which Wing Fai was sold by Benefit Holdings to Sino Glister, payment was required to be made in the sum of HK$5 million by Sino Glister to Benefit Holdings.  We are informed that the cheque drawn by Sino Glister for payment in this regard was dishonoured as was a subsequent cheque drawn by way of replacement.

The decision to repay HK$5 million from the account of Wing Fai was a decision which emanated from Eric Chim, a director of Wing Fai.  Our clients were informed in advance of the payment that the board of directors of Wing Fai had approved the payment in order to settle the Sino Glister debt due o Benefit Holdings and that, in addition, Sino Glister itself, in its capacity as sole shareholder of Wing Fai, also approved this method of payment.

Whether or not this payment represents a payment by Wing Fai by way of financial assistance for the purchase of its shares or what arrangement may have existed between Wing Fai and its shareholders and management as to the financial accounting treatment of this payment is of no concern to our clients.  Section 47A of the Companies Ordinance is a prohibition aimed at a company who provides financial assistance and the officers of a company, not third parties to the financial transaction.”

4. The Defence admits JSM's letter but denies its “relevance or import”.  The defendants also deny that Wing Fai “made any payment to [Benefit Holding] which had the result of directly or indirectly discharging Sino Glister's liability to pay the Consideration [of $5 million]”.

5.  In his witness statement filed for the forthcoming trial, Yip states (at §46):-

“At the time Kelly Cheng was dealing with [JSM] on these issues...  The liaison with and instructions given to JSM were deficient because instead of asking Kennedy [a liquidator] to back up his allegation that Wing Fai had paid $5 million to Benefit, JSM wrote a letter asserting that this payment had been made and that it was all the responsibility of Eric Chim.  I had never given any such instructions to JSM and I have no knowledge of Kelly Cheng or Kam Shing ever giving such instructions.”

6.  In his witness statement, Kam states (at §8):-

“I deny that I have been part of any conspiracy to defraud Wing Fai by procuring the transfer of Wing Fai’s money to Benefit as settlement of the purchase price for the sale of its shares....  I was not also involved in giving instructions to [JSM] and therefore cannot comment on the circumstances under which their letter dated 24th October 2002 was issued.  What I do know is that apart from a cheque for HK$2 million paid by Sino Glister to Benefit in early May 2002, the balance of the purchase price of HK$3 million was never paid by Sino Glister to Benefit.”

7.  Cheng’s witness statement reads (at §20):-

“At the time I was dealing with our former lawyers [JSM] on these issues,...  The liaison with and instruction given to JSM were deficient.  I would ask the Court to bear in mind that since these liquidators were appointed as provisional liquidators of Wing Fai in July 2002, I was placed under extreme psychological pressure and stress by their various acts of harassment....  As a result of this pressure and stress my thinking and approach towards dealing with the threats and demands of the liquidators was not as clear as it could have been....  I do not recall ever seeing a draft of the letter dated 24th October 2002 which JSM sent to the liquidators before it was issued.  The letter was clearly wrong because it is quite obvious from the bank statements of Benefit, the simple fact was that Benefit never received HK$5 million from Wing Fai or Sino Glister.  Had I seen the draft letter and checked the bank statements I would have corrected JSM and that letter would never have been issued in those terms.”

III.     Discussion

8.  Mr. Smith SC (appearing for the defendants) submits that on a fair reading of the witness statements it is not possible to contend that there has been waiver of LPP.  I disagree.

9.  The defendants say that the letter cannot be taken at face value.  They allege that there has been defective communication with JSM and JSM somehow misunderstood matters.  Considering the witness statements in the context of the Defence, the defendants disavow that JSM was entitled to write what JSM purported to write on their behalf.

10.  Accordingly, the defendants squarely raise the issue whether the letter truly reflected their instructions.  In raising such issue the defendants must be deemed to have waived LPP.  The issue cannot be fairly explored at trial unless the liquidators are allowed access to relevant material to enable them to deal in cross-examination with the defendants’ case of an alleged mismatch between instructions and the contents of the letter.  The defendants cannot both assert that JSM did not act on instructions and refuse discovery of those instructions.

11.  The issue which I have highlighted is one that will have to be canvassed regardless of the outcome of the defendants' pending application to strike out §15 of the Statement of Claim.  I am not persuaded by Mr. Smith's argument that discovery should be different depending upon whether or not an issue arises out of the pleadings.  In any event, it seems to me that in denying the import and relevance of the letter the Defence itself raises the issue which I have identified.

12.  Mr. Smith says that mere service of a witness statement does not amount to waiver of privilege.  He cites Hong Kong Civil Procedure 2004, Note 38/2A/12 (p.600) in support of this proposition.  However, this matter involves more than just mere service of a witness statements.  The defendants are expressly challenging the obvious meaning of their own agent's letter.  The defendants are saying that the letter should be ignored because it was written in error.  They may be right that there is a perfectly innocent explanation for how the alleged error came about.  That explanation needs to be tested at trial and fairness demands that the liquidators should be given discovery in relation to the defendants' contentions.

13.  Mr. Smith argues that at best only some, but not all, of the defendants have waived LPP.  Since the instructions to JSM would have been joint, the waiver by only some defendants (Mr. Smith argues) cannot constitute waiver of LPP by the whole.  Mr. Smith reasons that the non-waiving parties can still assert privilege over the same material.

14.  In my view, for the reasons already mentioned, all defendants challenging JSM's letter and querying whether it truly reflected their instructions, there has been a waiver of LPP by all.

15.  Given that I am in principle prepared to order discovery, I now propose to work out an appropriate order for the ambit of discovery with the assistance of counsel.

HCA810/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.810 OF 2003

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D E C I S I O N

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1. This is an appeal against the decision of Master Wolley made on 24 February 2004, where the learned Master dismissed the defendants' application for Further and Better Particulars of the Statement of Claim. The request for Further and Better Particulars that remained relevant for the purpose of this hearing are nos. (1), (8), (9), (12), (13) and (14), and they fall within three broad categories which I would call the "Shadow Directorship Claim", the "Damages Claim" and the "HK$3 million Claim."

The Shadow Directorship Claim

2. Turning first to the claim for Shadow Directorship, the request was made under paragraph 20(b)(i) of the Statement of Claim. The pleading reads :

"(i)	The Appointed Directors acted on instructions from the Second, Third and Fourth Defendants in all matters to do with the Plaintiff's business and management."

The request is to ask for all facts and matters relied upon by the plaintiff for the allegation that the appointed directors so acted.

3. Having heard Mr Clifford Smith, SC on behalf of the defendants and having heard Mr Jose Maurellet on behalf of the plaintiff, I am of the view that it is not possible for the plaintiff to further particularize how exactly the 2nd, 3rd and 4th defendants have behaved as shadow directors. As stated in the Statement of Claim, the appointed directors acted on their instructions in all matters to do with the plaintiff's business and management, and I would think that in the light of that broad allegation, the defendants must be able to know what exactly is the case that they have to meet. It is not a case that some of the appointed directors on occasions on matters of importance acted on instructions from one or more of the defendants in question, the claim is sweeping as it is : that the appointed directors acted upon instructions from the 2nd, 3rd and 4th defendants in all matters to do with the plaintiff's business and management, so effectively they say that the 2nd , 3rd and 4th defendants acted as directors throughout. In my view that matter is not something that the plaintiff can be asked to provide further particulars on. To ask more would, in my view, be asking for evidence to support the plaintiff's case.

The Damages Claim

4. Turning to the request which are numbers (8) and (9) under paragraph 35 of the Statement of Claim, that is the request for the plaintiff to particularise their loss and damage suffered as a result of the alleged conspiracy pleaded against the defendants. The complaint is that no particulars have been given and the defendants have submitted that these particulars must be given, relying on ADS v. Wheelock Maden [1994] 2 HKC 264.

5. I accept the principle as stated in the ADS case. However in the plaintiff's solicitors' letter dated 20 November 2003, at paragraph 6, the plaintiff's solicitors have made it clear that their claim is against the defendants for a declaration against the 1st defendant, who is the recipient of the HK$5 million in question, that it holds that sum as constructive trustee for the plaintiff and an account of that sum or, in the alternative, the plaintiff seeks damages against all four defendants in the sum of HK$5 million.

6. It seems to me very clear from that paragraph that the damages that the plaintiff's claim is in the sum of HK$5 million. Of course that is special damages claimed by the plaintiff and that does not preclude general damages, the damages at large which the court may choose to award in the event that a successful claim for conspiracy is made out. But it seems to me that once one looks at the terms of that letter, insofar as the nature of the plaintiff's claim in terms of damages arising from the alleged conspiracy is concerned, the plaintiff's claim is clearly limited to HK$5 million and not any other sum. It would not be permissible for the plaintiff to spring on the defendants at the trial any sum other than the HK$5 million. Of course that does not mean that they cannot be allowed to claim a sum less than HK$5 million, but the defendants would have the "comfort" (if that may be the word) of knowing that that is the limit of the claim made against them in terms of the damages arising from the alleged conspiracy. So in relation to those paragraphs, the appeal is dismissed.

The HK$3 million Claim

7. The other remaining requests nos. (12) to (14) are requests made under paragraph 15 of the Statement of Claim. I will not read out the paragraph of the Statement of Claim. In short, what the defendants are complaining about is that the plaintiff have been able to particularise how HK$2 million out of that HK$5 million allegedly went from the plaintiff's bank account via Sino Glister and found its way to the 1st defendant. What they are complaining of is that there is no pleaded case as to how the remaining HK$3 million was transferred to the 1st defendant save that there is pleading as to how the HK$3 million originated from the plaintiff and found its way to Sino Glister.

8. Having heard from Mr Maurellet and Mr Smith, it seems to me that the plaintiff's position is that they are at the moment unable to say what is the precise case on the movement of the HK$3 million. Mr Smith said that even if that be the case, it would be helpful to the defendants for the plaintiff to set that out formally in the pleading, so that they would know exactly what to do and how to take the matters from there.

9. In my judgment, Mr Smith is correct in that regard. I would,for the reasons that he advanced, order that the plaintiff do provide the particulars as sought in relation to Answer paragraph 1(2)(v), which is the number used in the Further & Better Particulars of the Statement of Claim given on 2 October 2003, alternatively, a statement of their case in relation to the sum of HK$3 million. So if the plaintiff cannot give the particulars as sought, they can at least give a statement of their case. If they are not able to give a statement of their case, then the defendants will know the position and they can decide for themselves what next to do. For that reason, I will allow the appeal insofar as the requests under paragraph 15 of the Statement of Claim are concerned.

[Submissions on Costs]

10. Having heard the arguments on costs, I think at least in relation to the hearing before the Master, I am not prepared to disturb the costs order that he made. It seems to me that even taking into account the result of the decision today, the plaintiff was substantially the winner before the Master and I would, therefore, not disturb the Master's order.

11. In terms of the hearing today, Mr Smith has argued that he is substantially the winner and he emphasized the importance of the arguments on the case for the HK$3 million. However, I agree with Mr Maurellet that when one looks at the matter broadly, I think this is probably more or less a draw. For that reason, I am of the view that the costs for today should be costs in the cause. That I think would be a fair order to make.

Representation:

Mr Jose Maurellet, instructed by Messrs Clifford Chance, for the Plaintiff

Mr Clifford Smith, SC, instructed by Messrs Barlow Lyde & Gilbert, for the Defendants