Civil Action2005

SINOCARD TECHNOLOGY LTD v. LEE CHI KEUNG AND OTHERS

Files (3)

65766-EN-2009-05-13

HTML content

HCA 2022/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2022 OF 2005

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

BETWEEN

	SINOCARD TECHNOLOGY LIMITED	Plaintiff
	and
	LEE CHI KEUNG also known as
	LEE CHI KEUNG CHRIS	1^st Defendant
	E-PILOT GROUP LIMITED	2^nd Defendant
	ORIENTAL POWER TECHNOLOGY LIMITED	3^rd Defendant
	KWAN KWOK LAM	4^th Defendant
	CHEUNG WAI YUEN also known as	5^th Defendant
	CHEUNG WAI YUEN STANLEY

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

Before: Deputy High Court Judge Carlson in Chambers

Date of Hearing: 4 May 2009

Date of Judgment Handed Down: 13 May 2009

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

J U D G M E N T

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

Introduction

1. On 3 April last Master Christopher Chan gave the Plaintiff leave to amend its Statement of Claim in the terms of the draft attached to its summons. This is the Defendants’ appeal from that order.

2. The Plaintiff’s case is that there had been a joint venture agreement between it and the Defendants which operated between 1 December 2003 and 19 July 2005. The Plaintiff and the 3^rdDefendant (“OPT”) were in the business of manufacturing and selling inlays for a variety of smart cards which are commonly in use throughout the world. These were manufactured, in the Plaintiff’s case at its factory in Dongguan, and in the case of OPT at its factory in Shenzhen and sold throughout China and overseas. The two companies were in competition with each other and therefore it was considered that they might do better if they pooled their resources by means of a joint venture.

3. The joint venture is pleaded at paragraph 5 of the Statement of Claim as having been concluded partly orally, partly in writing and partly by conduct which is specified in 27 sub-paragraphs at paragraph 7 of the pleading [Bundle 98-7 to 98-11]. For the purposes of this judgment it is not necessary to go into these matters in any detail. It is sufficient to say that as part of the arrangements that the parties had put into place, the Plaintiff transferred 8 of its key staff and 6 sales staff to the 3^rd Defendant’s Shenzhen factory. Part of these arrangements included the transfer to Shenzhen of Mr Fordhan Ng, the Plaintiff’s general manager, where he worked and drew a salary from Pioneer Oriental Engineering Limited (“POE”), an associate company of OPT. Thereafter, Mr Ng became an executive director and subsequently managing director of OPT. In the result the Plaintiff’s business became subsumed into that of OPT and the Plaintiff has now ceased operating and having a separate existence of its own.

4. In respect of its case that there was a completed joint venture agreement which had been carried into effect, the Plaintiff says that the Defendants are now in breach of that agreement. By reason of the arrangements which had brought the joint venture into being the Plaintiff became owner of one third of the shares in OPT. Precisely how that came about need not be recited here. Suffice it to say that these facts and matters, which are said to give rise to this state of affairs have been pleaded in the Statement of Claim. The breach that the Plaintiff complains of comes about by virtue of the sale by the shareholders of E-Pilot (“the 2^ndDefendant”), who were the majority shareholders in OPT, to a company called On Track Innovations Limited (“OTI”). As a result of that sale OTI assumed control over OPT. This sale of shares had been done without the knowledge or consent of the Plaintiff. Additionally, the Defendants are said to have wrongfully refused to perform the joint venture agreement by refusing to issue to the Plaintiff its one third of all the issued shares in OPT. The Plaintiff’s case is that once the joint venture had been put into effect, which gave the Plaintiff its one third shareholding in OPT, those shares were held by the Defendants has constructive trustees for the Plaintiff’s benefit.

5. By refusing to execute the transfer of that one third shareholding to the Plaintiff and the Defendants then selling their shares in E-Pilot to OTI the Defendants have in effect robbed the Plaintiff of its shareholding in OPT. The relief that it seeks is for specific performance to direct the Defendants to carry out the joint venture agreement by executing the transfer to it of one third of OPT’s shares. There is also a claim for a declaration as to the one third of OPT’s shares being beneficially owned by the Plaintiff and an order for rectification of OPT’s share register to reflect the Plaintiff’s ownership of one third of OPT’s shareholding. There is also a claim for an injunction, basically to preserve the position until trial in respect of any further dealing in OPT’s shares and also, in lieu of all of that relief, damages for breach of contract.

6. That is a brief account of the Plaintiff’s primary case based on a concluded joint venture agreement as it emerges in much more detail in the Statement of Claim. From that I move to the alternative case, in the event that the court finds that there was no such concluded joint venture agreement and it is this which is the subject of the amendments which the Master allowed and which the Defendants, by this appeal, would wish me to refuse.

A description of the proposed amendments

7. The case put is that by virtue of the transfer of the Plaintiff’s production assets to OPT’s Shenzhen factory and the use of those assets as well as the use of the Plaintiff’s staff which resulted in the close-down of the Plaintiff, the Defendants have become unjustly enriched at the Plaintiff’s expense for which the Plaintiff requires to be compensated.

8. The real dispute concerns the addition of sub-paragraphs (g) to (j) to the particulars of unjust enrichment and the Plaintiff’s resulting loss which in its original form comprised sub-paragraphs (a) to (f) of paragraph 14. This new (g) to (j) seeks to establish a quantified claim of $45 million as the amount which the Plaintiff should receive based on the Defendants’ unjust enrichment.

9. The basis of the unjust enrichment is said to come from the acquisition of the Plaintiff’s assets and the business goodwill by OPT which in term would inevitably have increased the value of OPT’s shares when it came to sell its shares to OTI. A value of $45 million is placed on this by the Plaintiff which in turn now seeks to be compensated in this amount. The way that this is arrived at has been set out in sub-paragraphs (g) to (j) of paragraph 14 [the amendments]. It is not necessary to recite these amendments here. They are there to be read.

10. The calculation of the $45 million appears in an expert accountant’s report from Mr Horace Man whose report is at pages 247 to 264. He has adopted as his methodology what is called, certainly by him, a “Discount Cash Flow Approach” which I believe to be a standard system of valuation in the accountancy profession when valuing a company that is a going concern. Mr Man has presented his calculation in detail and the relevant arithmetic is at pages 260-261. His conclusion is that the value to OPT’s business as contended by the Plaintiff is $44,863,374, now rounded up to $45 million. It is in this case that the amended pleading seeks to advance and the Plaintiff would wish to call this evidence in support of it at the trial.

The objections

11. Mr Hudson, who appears for the Defendants, has taken the sharpest objection to these amendments. He has summarised his objections as follows: Firstly, that the amendments have not been properly and exactly formulated. In this regard he submits that the Plaintiff has failed to include particulars of facts which would show how the claim for $45 million has been calculated, and in having failed to do so the Defendants are in no position to know the case that they have to meet. In such circumstances, Mr Hudson submits that this would put the Defendant in the position of having to administer a Request for Further and Better Particulars which will result in both a waste of time and costs which would run counter to the underlying objectives of the Civil Justice Reform provisions (“CJR”) as expressed in the new Order 1A of the Rules of the High Court. Secondly, Mr Hudson complains that these proposed amendments in effect amount to particulars of particulars which would not be right and lastly, that the claim for unjust enrichment lacks particulars and contains a number of errors.

12. Mr Hudson has drawn attention to a number of authorities on amendment. These really relate back to what Fuad JA said in Perek Pioneer Ltd v Carrian Holdings Ltd Civil Appeal 59/1985. I will set out the passage that Mr Hudson has drawn attention to in a moment but what this amounts to is that when a party wishes to amend its pleading and in doing so is asking the court to extend to it an indulgence it should at least ensure that the proposed amendments come with full particularity. The passage relied on is this:

“An applicant, who seeks to amend a petition or other pleading is seeking an indulgence and has to comply with the relevant Rules. The opposing party is fully entitled to object to the amendments on principles laid down by practice and the R.S.C. It was incumbent on the judge to decide, once he did not adjourn the matter, each issue raised as to the propriety of the amendments, on its merits.
As regards particulars, in my view, it is no answer to an objection that a proposed amendment lacks particulars, to say that particulars can later be given. Of course, if a pleading lacks particulars, particulars can be asked for in the usual way and ordered by the Court if necessary, but where an amendment is applied for it would be an unusual case where the Court would consider it appropriate to allow an amendment to be made which lacks particularity, and might cause embarrassment.” (emphasis added)

13. This being the approach to take I will need to examine the proposed pleading to see whether it passes muster in terms of providing the necessary particularity, to which I will shortly return.

14. Mr Hudson has also submitted at some length that the application to amend, coming quite late in this already stale litigation, the writ having been issued in 2005, should not be allowed. To confirm the Master’s order allowing these amendments would run counter to the underlying objectives of the CJR and more particularly to the court’s duty to further the underlying objectives by active case management which under Order 1A r.4(2) requires the court to:

(a)  identify issues at an early stage;
(b)  decide promptly which issues require full investigation at trial and which can be summarily disposed of;
(c)  consider whether the likely benefits of taking a particular step justify the cost of taking it; and
(d)  deal with as many aspects of the case as practicable on the same occasion.

15. In regard to the timing of these proposed amendments I think it should be remembered that the case on unjust enrichment, which the amendments go to support as further particulars of that plea, first appeared in the Statement of Claim as long ago as October 2005 when this alternative case was advanced at paragraph 14. And so this is not a new case being put forward four and a half years later. Mr Man’s expert report, to which I have already referred, is dated January 2009 and it seems very clear therefore that the proposed amendments represent an attempt to advance what Mr Man has said by means of the pleaded case.

Conclusions

16. Whilst Mr Hudson has put forward stout resistance to these amendments on the broadest possible front, I am satisfied that the Master was right to have allowed them. It seems to me that in terms of particulars these have been sufficiently provided save for a reference to Mr Man’s calculations and how he arrives at those calculations. Mr Andrew Mak, whose pleading this is, says that to incorporate what appears in the report by Mr Man would amount to pleading evidence, but I would have thought that his calculation at paragraphs 50 and 51 of his report [260-261] should be added to paragraph (j) 8 of the Particulars of Benefit of at least $45 million and also by making reference to his report. This after all is the calculation which will be advanced at the trial and the Defendants can therefore have no complaint that they do not know how the quantum of the Plaintiff’s case is calculated. I propose to allow the amendments as currently proposed and allowed by the Master but I also require the additions that I have just indicated.

17. In respect of Mr Hudson’s other objections concerning the incorrect formulation of the case on unjust enrichment, it seems to me that this is a matter for argument at the trial. An amendment will not be allowed if it can be shown to be unarguably bad and bound to fail with the result that there would be no purpose in letting it go to trial. In this case Mr Mak has amply demonstrated that he has a perfectly arguable basis for saying that the Defendants have been unjustly enriched. This is not to say that he is likely to succeed or anything of that sort but that is not the test – all he needs to show is that the matter sought to be advanced is fairly arguable which in this case it is. Mr Hudson’s other objections as to a mismatch between the pleaded numbers and the claim for $45 million now goes once the references to Mr Man’s report are added as I have directed. The complaint that the pleading and Mr Man’s report do not match is something for the trial. All that I am concerned with is whether these pleas are viable which, in my judgment, they are.

18. Finally, whilst Mr Hudson’s references to the CJR are well-intentioned and should have been drawn to my attention as he has done, it strikes me that I am also required to find a proper balance which will provide a just outcome to the trial itself. These amendments, which support a case first pleaded in 2005 will achieve that. The Plaintiff had laid out its stall on unjust enrichment over four years ago, it wishes to further particularise it now and, in my judgment it should be allowed to do so. The lateness of these amendments can be addressed in costs.

19. Accordingly, the appeal must be dismissed. The Master’s orders, including those on costs, will stand and the costs of this appeal, which will be an order nisi, will have to be borne by the Defendants and taxed on a party and party basis if they cannot be agreed.

(Ian Carlson)
Deputy High Court Judge

Andrew Y S Mak, instructed by Messrs K B Chau & Co. for the Plaintiff

Richard Hudson of Messrs Deacons, for the 1^st to 5^th The Defendants

61144-EN-2008-05-20

SINOCARD TECHNOLOGY LTD v. LEE CHI KEUNG AND OTHERS

HTML content

HCA 2022/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2022 OF 2005

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

BETWEEN
	SINOCARD TECHNOLOGY LIMITED	Plaintiff
	and
	LEE CHI KEUNG also known as LEE CHI KEUNG CHRIS	1^st Defendant
	E-PILOT GROUP LIMITED	2^nd Defendant
	ORIENTAL POWER TECHNOLOGY LIMITED	3^rd Defendant
	KWAN KWOK LAM	4^th Defendant
	CHEUNG WAI YUEN also known as CHEUNG WAI YEUN STANLEY	5^th Defendant

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

Before: Deputy High Court Judge Gill in Chambers

Date of Hearing: 7 May 2008

Date of Ruling: 20 May 2008

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

R U L I N G

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

1. This is an appeal by rehearing against the decision of a Master to order discovery of particular documents on applications made by the plaintiff. The defence challenged the applications upon the grounds of relevance and maintains that stance on appeal.

History

2. The plaintiff (Sinocard) and 3^rd defendant (OPT) are Hong Kong registered and based companies. Up to about 1 December 2003 (the material date) both companies were engaged in the manufacture of the product known as “smart card” and products related, in competition with each other and others operating in the same field. With a view to improving market share and minimising the adverse effects of competing with each other, those in control of the two companies explored the prospects of a joint enterprise; the result was a merger of their respective businesses as from the material date.

3. But this did not last. Some 17 months later, on 19 July 2005, the companies ceased to operate together. What led to the dispute that is the basis of this action is that neither can agree on the nature of the commercial relationship that lasted for the 17 months they worked together.

4. Sinocard claims that what had been achieved in the lead up to the material date was an agreement made partly in writing and partly orally and evidenced by conduct that there be a joint enterprise, which it refers to as the Joint Venture.

5. From the material date Sinocard ceased to operate in its own right and transferred its business, including orders, staff and plant to OPT, in consideration for a substantial interest in the shareholding of OPT. It claims that OPT failed to perform this agreement, and on 19 July 2005 brought the relationship to an end when it sacked the staff formerly working for Sinocard and joined forces with another company altogether.

6. Following the parting of the ways, Sinocard claimed a breach of the Joint Venture agreement and by this action sues for specific performance, a declaration that it owns beneficially one third of the shareholding of OPT, damages in addition or in lieu and consequential orders.

7. Particularly pertinent to this appeal is that if Sinocard is not successful in establishing there was a Joint Venture agreement, in the alternative it claims that OPT is a constructive trustee of Sinocard’s assets transferred to OPT, and sues for compensation for OPT’s unjust enrichment.

8. To complete the picture Sinocard joined OPT’s parent company as second defendant (E-Pilot) and those who owned and controlled E-Pilot and thus OPT, being the 1^st, 4^th and 5^th defendants (Messrs Chris Lee, K L Kwan and Stanley Cheung).

9. The defence as pleaded by all five defendants is that the parties had not at or before the material date or thereafter advanced to the stage where there was a Joint Venture agreement or other form of agreement binding the parties to a joint enterprise. There were discussions, during which merger prospects were considered, but they did not lead to a positive outcome. What happened from the material date was that by agreement OPT took on staff and equipment and fulfilled orders of Sinocard, for appropriate consideration. They referred to this as the Interim Arrangement, which persisted until 19 July 2005. They deny any liability owed Sinocard.

The Discovery Applications

10. In the post-pleading period those representing Sinocard filed two summonses under O.24 rr. 3 and 7 RHC in December 2006 and June 2007, for further and better lists of documents as set out in attached schedules with verifying affidavits.

11. These are the applications the subject of the appeal.

12. By the time they came before the Master many of the queries had been resolved or withdrawn. Those that remained dealt with six sets of documents. As the Master granted the application in respect of all six, and as this appeal concerns all six, it is convenient to reproduce his order which he made on 4 January 2008, and I now do so:

“IT IS ORDERED THAT :-

1. the Defendants do within 14 days from the date hereof file and serve a further and better list of documents as follows and to be verified by affidavit :-

(a)   Sales ledgers of Oriental Power Technology Limited (‘OPT’) for the period from June 2002 to 30 November 2003; sales ledgers of Power Oriental Engineering Limited (‘POE’) and 銳凱科技 (深圳) 有限公司 (‘POE Shenzhen’) for the period from June 2002 to 31 December 2005;
(b)   Sales ledgers or records of OPT’s Shenzhen Factory for the period from June 2002 to 30 November 2003;
(c)   Annual examination record (including audit report and accounts) of OPT’s Shenzhen Factory covering the period from June 2002 to December 2002;
(d)   Sales ledgers of Pioneer Oriental International Limited (‘POI’) for the period from 1 June 2002 to 31 December 2005; and
(e)   Purchase orders and purchase ledgers of POI for the period from 1 June 2002 to 31 December 2005.
(f)    Audited financial statements for POI for the years ended 31 December 2002, 31 December 2003, 31 December 2004, and 31 December 2005”

13. By way of explanation; it is not in issue that POE is, in effect, a sister company of OPT, with the same founders including the defendants in person. It makes the machinery that is capable of recognizing and reading smart cards.

14. POE Shenzhen is a mirror company of POE, founded in the PRC for the purpose of trading in the PRC. OPT’s Shenzhen Factory is a separate entity, trading separately, maintaining its own ledgers and records.

15. At the material time POI was a subsidiary of POE. POE Shenzhen was a subsidiary of POI.

16. The first three sets of documents are those outstanding from Sinocard’s first summons in time; the remaining three are those from the second.

17. On 23 January 2008 on application by the defence, a Master stayed execution pending the determination of this the appeal.

The Legal Principles

18. These are I believe not in issue, but it is as well briefly to summarize what a court in a contest such as this must pay heed to when faced with an application for specific discovery.

19. In this respect I begin by quoting from the judgment of Chu J in the unreported case in Re the Estate of Ng Chan Wah, Deceased HCAP 5/2003at para.8:

“8. The relevant principles underlying an Order 24, rule 7 application are set out by Mustill LJ in Berkeley Administration Inc. & Others v. McCelland & Others [1990] FSR 381 at 382-3. The relevant part of the judgment reads:

‘    (1)   There is no jurisdiction to make an order under R.S.C., Order 24, rule 7, for the production of documents unless (a) there is sufficient evidence that the 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.
(3)   The order must identify with precision the document or documents or categories of document which are required to be disclosed, for otherwise the person making the list may find himself in serious trouble for swearing to a false affidavit, even though doing his best to give an honest disclosure.
(4)   It has been suggested that the court should approach the appeal on the basis that this is a matter of discretion, and that the appellate court should not ordinarily interfere with that discretion in the absence of misdirection or some other factor which, according to familiar principles, would justify it in taking such a course. This is right as regards the exercise of that discretion which arises once the conditions for the existence of jurisdiction have been satisfied. But on the question whether they have been satisfied and whether the order is in the appropriate form, we are not concerned with discretion at all, and they are reviewable without inhibition by the appellate court.
(5)   It is not an answer to an assertion that documents falling within a particular category are disclosable that no such documents are in the other party’s possession or power, although if this information has already been conveyed on oath in the course of the proceedings this would furnish a reason why, in the exercise of the court’s discretion, it might well not make an empty order.”

And she went on to say at para.16:

“… 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.”

20. Documents sought to be disclosed are relevant to an issue of the case if the issue is raised in the pleadings; see Paul’s Model Art Gmbh & Co. KG v UT Ltd & Ors [2006] 1 HKC 238, CA; per Cheung JA at p.247.

21. I quote also from Burrell J’s judgment in Mariner International Hotels Ltd v Atlas Ltd (unreported)HCA 10714/1998 from para.8:

“8. This court shares the views expressed by Stone J in Vashdev Essardas Mahbubani t/a Vashi’s Export Co. v. Motis Exports Ltd and others (unreported) in 1997:

‘As no doubt will become known by commercial practitioners, my attitude, as Judge presently in charge of the Commercial List, is that in general discovery is a good thing, and that in cases of doubt I am more likely to lean in favour of discovery than against it. In this connection I am reminded of one of the broad principles of the common law as expressed by Lord Justice Bingham (as he then was) in the case of Ventouris v. Mountain [1991] 1 WLR 607 at 611H, where the learned Lord Justice observed as follows:
‘Our system of civil procedure is founded on the rule that the interests of justice are best served if parties to litigation are obliged to disclose and produce for the other party’s inspection all documents in their possession, custody or power relating to the issues in the action. This is not of course a necessary rule but it is firmly established here. It is not however an absolute rule, as exceptions such as legal professional privilege and public interest immunity demonstrate. Nonetheless, disclosure being generally regarded as beneficial, any exception has to be justified as serving the public interest which gives rise to the exception …’’
9. It should not be thought however that this represents a charter for opening the flood gates on discovery. If doing justice is an onerous task then so be it. The task of the court will often be to determine when ‘doing justice to the claim’ stops and ‘fishing’ or, to use another analogy ‘the scatter gun approach’ starts. At that point the onerous nature of the discovery exercise passes from the necessary and permissible to the unnecessary and impermissible.
10. With the above general principles in mind the rules require that in respect of each item sought :
(a) there must be sufficient evidence that the document exists;
(b) the document must relate to matters in issue; and
(c) there is sufficient evidence that the document is in the possession, custody or power of the other party.
If these conditions are satisfied the court retains a discretion whether or not to order disclosure.”

22. Finally, a famous quote from the Compagnie Financière et Commerciale du Pacifique v Peruvian Guano Co. [1882] 11 QBD 55CA:

“… the documents to be produced are not confined to those, which would be evidence either to prove or to disprove any matter in question in the action … It seems to me that every document relates to the matters in question in the action, which not only would be evidence upon 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 … a document can properly be said to contain information which may enable the 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 inquiry, which may have either of these two consequences …”

The Opposition

23. The resistance mounted by the defence to discovery is based on relevance. The documents sought do not relate to matters in issue in the action. Thus the discretion of the court is not engaged.

24. What are relevant are the financial and commercial activities of OPT during the 17 months or so that the parties were working together. If it is found that OPT must compensate for unjust enrichment then its records and accounts for this period will necessarily provide the means whereby this can be calculated. This much has been conceded, and OPT’s accounts, records, sales ledgers and so on have been disclosed.

25. What is not relevant are those records for any period of time that precedes the material date or post-dates the date in July 2005 when the relationship came to an end.

26. What also is not relevant are the records of the associated companies POE, POE Shenzhen and POI. There are no claims against any of these entities. They are not parties. There is no connection established in the evidence binding them to OPT and Sinocard’s claim.

The Case for Discovery

27. Those accounts so far disclosed reveal that there are connections between OPT and the associated companies referred to in the orders the Master made. For example, POE Shenzhen was used to sell in the PRC, the OPT Shenzhen Factory having no licence to sell there. And POI also played a role in purchasing OPT’s products.

28. Support for the need for the accounts and other records to be examined comes from a report by Horace Man Kit Ho, a chartered accountant commissioned by Sinocard for the purpose of calculating what financial advantage was achieved for OPT as a result of the contribution of machinery, workforce and orders made by Sinocard. With benefit of access to the audited financial statements of OPT and the Shenzhen Factory for the year ending December 2005, he noted that sales approaching $2 million and in excess of $10 million were made “to a related company” and to the “ultimate holding company”. The related company he surmised was either POE or POI, and the holding company E-Pilot. OPT, he reported, might well have benefited from onward sales with profits generated by the related companies. For this reason, those companies’ records bear examination.

29. As for the need for disclosure of accounts and records pre-dating the material date and post-dating the termination date by a number of months; Mr Ho’s report reveals that his view is that to assess the quantum of profit enhancement during the period the warring parties were operating together, a comparison has to be made with figures achieved before and after that time. For that comparison to be meaningful, he believes that would require inspection of records and accounts for the period June 2002 to December 2005.

Discussion

30. The resistance to this course is to repeat the assertion that the so-called related companies’ records would not assist. It was averred:

OPT did make sales to POI (not POE), but this was after Sinocard ceased being involved with OPT. They were not made with Sinocard machines, they were not sold to Sinocard’s customers and there was no Sinocard input into their making;

POE Shenzhen has not and does not profit from the sale of OPT products in the PRC. Its profits are derived from business not connected with OPT;

The transaction that excited Mr Ho in OPT’s accounts to December 2005 had nothing to do with POE. POE’s link with OPT concerns the sharing of management fees, which are transparently evident from OPT’s accounts. There was one transaction with POE back in 2003, but that was well before the so-called “period of co-operation”.

31. In putting forward the proposition that accounting records pre the material date must be inspected for comparison to be made, Mr Ho does not explain how the comparison process would work. There are too many variables for the approach to be meaningful, such as sales to one of OPT’s existing customers increasing during the period of co-operation.

32. Mr Hudson representing all the defendants before the Master and then me submitted that the so-called related companies are not litigants and that no claim has been made against them. Further, that evidence adduced by the defence has demonstrated that those transactions targeted as prospectively involving one or other of the related companies turned out to be red herrings and not relevant to the dispute.

Determination

33. In my view Sinocard has done enough to show that the records of these companies may have a bearing on the accounting calculations necessarily to be made to determine compensation for unjust enrichment, if liability comes to be established under this head.

34. The fact that they are associated companies carries its own implications. That there are transactions with them following the material date and prior to cessation of the period of co-operation strengthens these implications.

35. There has been evidence to refute relevance, that the transactions identified are unconnected. Perhaps so, but these are assertions, and in my view Sinocard should have the opportunity to test the truth and adequacy of these assertions.

36. Further, there is a logic in the proposition that comparisons with pre-and post-activity will or may be useful. Of course there will be variables but these are capable of analysis and allowance being made for them.

37. For these reasons I am satisfied that the documents sought may (not must) either directly or indirectly enable Sinocard to advance its own case or to damage the case of the defendants, and that they are thus related for the purpose of satisfying the jurisdictional requirement of rule 7 of order 24.

38. In exercise of my discretion I order their discovery.

The Result

39. The appeal is dismissed. Costs of the appeal, nisi, are to Sinocard in any event.

(D M B Gill)
Deputy High Court Judge

Messrs A Mak and S Ng, instructed by Messrs Chan & Associates, for the Plaintiff

Mr R Hudson, of Messrs Deacons, for the 1^st to 5^th Defendants

59676-EN-2008-01-04

SINOCARD TECHNOLOGY LTD v. LEE CHI KEUNG AND OTHERS

HTML content

HCA 2022/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2022 OF 2005

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

BETWEEN

	SINOCARD TECHNOLOGY LIMITED	Plaintiff
	And
	LEE CHI KEUNG also known as LEE CHI KEUNG CHRIS	1st Defendant
	E-PILOT GROUP LIMITED	2nd Defendant
	ORIENTAL POWER TECHNOLOGY LIMITED	3rd Defendant
	KWAN KWOK LAM	4th Defendant
	CHEUNG WAI YUEN also known as CHEUNG WAI YUEN STANLEY	5th Defendant

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

Coram : Before Master J. Wong in Chambers

Date of Hearing : 24 September 2007

Date of Decision : 4 January 2008

______________________

D E C I S I O N

______________________

The Dispute

1. There are two summonses before me. Parties have been able to agree on some items of discovery sought therein, leaving costs to be disputed. However, they still disputed over 6 items of documents.

Preliminary question

2. Shortly before the hearing, the Defendants issued a summons asking leave to adduce further evidence. The Plaintiff opposed to it. To avoid waste of time, I allowed it on a de bene esse basis. Having considered the matter further, I agree to grant leave to the Defendants to rely on the new evidence. The Plaintiff will suffer no prejudice that cannot be compensated by costs. Costs of the summons will be borne by the Defendants to the Plaintiff, to be taxed if not agreed, in any event.

Background

3. On 15 October 2005, the Plaintiff commenced the present proceedings against the Defendants. It is the Plaintiff’s case that they were competitors. However, in or about December 2003, by a Joint Venture Agreement (“the Agreement”), the Plaintiff stopped its business and sent its staff and machinery to help the 3rd Defendant. Its business was therefore substantially improved.

4. Regrettably, the Defendants failed to honor their obligations under the Agreement. The Plaintiff then sought specific performance, damages, accounts and various declarative as well as injunctive relieves.

5. The Defendants contested the proceedings and denied the conclusion of the Agreement. There was discussion only. Nonetheless, there was also an Interim Arrangement whereby the 3rd Defendant would employ staff and use equipment of the Plaintiff. If the Agreement would be materialized, the Plaintiff would be paid 1/3 profit of the 3rd Defendant and its associated companies. However, if Agreement were not concluded, the Plaintiff would be paid rental only.

6. The parties have moved into the discovery stage. Various lists and witnesses statements have been filed and served.

7. By 2 summons issued on 19 December 2006 and 4 June 2007 respectively, the Plaintiff sought specific discovery against the Defendants. Parties have resolved partially their dispute, leaving the questions of costs thereof and the following disputed areas.

(a) Sales ledgers of OPT for the period from June 2002 to 30 November 2003; sales ledgers of POE and POE Shenzhen for the period from June 2002 to 31 December 2005;
(b) Sales ledgers or records of OPT’s Shenzhen Factory for the period from June 2002 to 30 November 2003; and
(c) Annual examination record (including audit report and accounts) of OPT’s Shenzhen Factory covering the period from June 2002 to December 2002;
(d) Sales ledgers of POI for the period from 1 June 2002 to 31 December 2005;
(e) Purchase orders and purchase ledgers of POI for the period from 1 June 2002 to 31 December 2005; and
(f) Audited financial statements for POI for the years ended 31 December 2002, 31 December 2003, 31 December 2004, and 31 December 2005.

8. The parties appeared before me on 26 September 2007. Mr. Andrew Mak of Counsel acted for the Plaintiff and Mr. Richard Hudson of Messrs. Deacons represented the Defendants. Having heard from them, I reserved my decisions to be handed down.

Ruling

9. Now, upon consideration of all the evidence authorities and submissions before me, I have decided to allow the Plaintiff’s application. My reasons appear in below.

Reasons

10. Mr. Hudson raised 3 objections to the discovery.

(a) It was premature.
(b) The documents relating the associated companies, POE, POE Shenzhen and POI, were irrelevant.
(c) All documents before December 2003 were also irrelevant because the Agreement was made after December 2003.

11. However, with respect, I do not agree on all 3 objections.

12. To start with, the application cannot be described as premature because there has been no order for split trial. From the pleadings, the Court will deal with the following issues.

(a) Was there the Agreement?
(b) If yes, should specific performance or damages be ordered?
(c) If no, was there the Interim Arrangement?
(d) If yes, how and what should the Plaintiff be compensated?
(e) If no, was the Defendants still caught by unjustly enrichment and could the Plaintiff get some redresses?

13. For the time being, unless the Court will order otherwise, all alternative issues are to be put before the Court. Though the discovery sought is only be relevant when unjust enrichment will become a choice of this Court, it does not alter the fact that all evidence should be ready.

14. The authorities of Ho Lee Man v Wong Wai Kai [1993] 1 HKC 183, CA and Kids World Limited v XL Machine Limited & Others (Reyes J, unreported, HCA 125/2002, 18 September 2003) were relied upon by Mr. Hudson to make good his proposition that this Court would not order for an account to be taken before disputed factual issues, like scope or duration of partnership, were resolved. I agree only to the extent that these authorities are applicable to Order 43 RHC application. Here, we are not dealing with application for interim account and as such the two cases will not help the Defendants.

15. Second, as to the argument of irrelevancy of the documents concerning the related companies, briefly, it was the Defendants’ case that POE, POE Shenzhen and POI were not defendants in the proceedings. They were also not mentioned in the pleadings. They therefore had nothing to do so with the present proceedings.

16. I do not agree. As pointed out by Mr. Mak, in relation to the claim for unjust enrichment, it was the Plaintiff’s case that the Defendants had been benefited from a number of ways. They included the stop of the dropping of the price of the goods, customers of the Plaintiff became those of the Defendants, reduction of overhead, including rental, depreciation, administrative costs and transportation expenses. Hence, to ascertain the “unjust enrichment” earned by the Defendants, it requires the discovery of those documents relating to the associated companies. It is therefore relevant.

17. Further, Mr. Mak also took this Court go through the financial statements of the 3rd Defendant. He attempted to show that there were connected transactions with related companies. Moreover, it appeared that there was a change in booking of the transactions after the Agreement or the Interim Arrangement. In this respect, I notice that the Defendants have denied any improper practice. However, it does raise a concern for further tracing of the original accounting records, like purchase and sales ledgers. Hence, if discretion is to be exercised, I will do so for ordering a discovery.

18. Third and finally, the Defendants objected to the discovery because the Plaintiff asked for a longer period than the Agreement and/or the Interim Arrangement. Nonetheless, to put this Court in a position to assess the “unjust enrichment”, if applicable, he has to be informed the “Pre-Agreement” and/or “Pre-Interim Arrangement” situation so that a meaningful “comparison” can be made.

Order

19. In conclusion, I will order that the Defendants do within 14 days from today file and serve a further and better list of documents as set out at paragraph 7(a) to (e) hereto and to be verified by affidavit.

Costs

20. I do not have the benefit of oral submissions from the parties in relation to the question of costs. However, having taken into account the matters stated in their skeletons and the decision herein, I will make the following costs order nisi.

(a) The Plaintiff shall have costs of the hearing on 24 September 2007, including Certificate for Counsel, as well as one-thirds of the costs of the 2 summonses, to be taxed if not agreed, in any event.
(b) The remaining two-thirds of the costs of the 2 summonses be costs in the cause.

(Jack Wong)
Master of the High Court

Mr. Andrew Y.S. Mak instructed by Messrs. Chan & Associates for Plaintiff.

Mr. Richard Hudson of Messrs. Deacons for Defendants.

(a)	Sales ledgers of OPT for the period from June 2002 to 30 November 2003; sales ledgers of POE and POE Shenzhen for the period from June 2002 to 31 December 2005;
(b)	Sales ledgers or records of OPT’s Shenzhen Factory for the period from June 2002 to 30 November 2003; and
(c)	Annual examination record (including audit report and accounts) of OPT’s Shenzhen Factory covering the period from June 2002 to December 2002;
(d)	Sales ledgers of POI for the period from 1 June 2002 to 31 December 2005;
(e)	Purchase orders and purchase ledgers of POI for the period from 1 June 2002 to 31 December 2005; and
(f)	Audited financial statements for POI for the years ended 31 December 2002, 31 December 2003, 31 December 2004, and 31 December 2005.

(a)	It was premature.
(b)	The documents relating the associated companies, POE, POE Shenzhen and POI, were irrelevant.
(c)	All documents before December 2003 were also irrelevant because the Agreement was made after December 2003.

(a)	Was there the Agreement?
(b)	If yes, should specific performance or damages be ordered?
(c)	If no, was there the Interim Arrangement?
(d)	If yes, how and what should the Plaintiff be compensated?
(e)	If no, was the Defendants still caught by unjustly enrichment and could the Plaintiff get some redresses?

(a)	The Plaintiff shall have costs of the hearing on 24 September 2007, including Certificate for Counsel, as well as one-thirds of the costs of the 2 summonses, to be taxed if not agreed, in any event.
(b)	The remaining two-thirds of the costs of the 2 summonses be costs in the cause.