RE COMSEC TRAVEL LTD

HCCW 467/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 467 OF 2005

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D E C I S I O N

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1.  There are 3 summonses before me in these misfeasance proceedings brought by the judgment creditors of Comsec Travel Limited (“the Company”) against five former directors of the Company.  The Company was ordered to be wound up on a creditor’s petition on 17 August 2005.

2.  The 1^st summons, issued by the applicants on 10 October 2008 against the respondents, is for an unless order.  They seek an order that unless the respondents file and serve their expert evidence and report by a forensic accountant pursuant to the order I made on 10 July 2008 within fourteen days hereof, the respondents are to be debarred from adducing expert evidence in these misfeasance proceedings.

3.  The 2^nd summons, issued by the respondents against the applicants on 14 October 2008, is for specific discovery of the documents of the Company.  The respondents seek an order in these terms:

(1)  the applicants do file an affidavit within seven days stating whether they have in their possession, custody or power or have at any time had in their possession, custody or power the documents as listed in the summons;

(2)  they shall within seven days after filing the affidavit in paragraph (1) produce copies of all documents sworn to be in their possession, custody or power to the court and to the respondents; and

(3)  leave be granted to the respondents to file a report by a forensic accountant in response to the applicants’ expert report filed on 31 July 2008 within one month after production of copies of all documents provided under paragraph (2).

4.  The 3^rd summons was issued by the applicants )against the liquidator on 2 March 2009.  It was stated to be issued pursuant to section 219 of the Companies Ordinance, Cap. 32, and an order of Master J Wong dated 15 December 2005, by which the Master gave leave to the applicants to inspect the books and papers of the Company and to take copies thereof.  This summons required the liquidator to attend the hearing today of the respondents' summons for specific discovery against the applicants.  It did not appear to seek any substantive relief against the liquidator.

5.  Three things are clear to me from the outset.

6.  Firstly, if there is power to order discovery, the respondents should be given some time, after they have been given discovery of the documents sought, for their forensic expert to go through these documents before the expert is to produce his report.  The period of one month as sought in the 2^nd summons would seem to me to be reasonable.  This is not an appropriate case to make an unless order against the respondents, as sought in the 1^st summons.

7.  Secondly, I am satisfied a prima facie case is made out of the relevance of the documents sought to the misfeasance proceedings.  I do not understand the applicants to have contended otherwise.

8.  Thirdly, the applicants do not have in their possession the documents sought.  The liquidator has in his possession all except one of the documents sought.  He has listed them out in some detail item by item in his letter to the applicants' solicitors dated 10 February 2009, which was copied to the respondents' solicitors and he has located further documents, as set out in the letter of his solicitors to the applicants and the respondents dated 11 March 2009.

9.  The liquidator has taken the stance that under section 219, inspection of documents could be allowed to support the misfeasance proceedings against the Company’s officers but has reservation if the former officers should be allowed to obtain inspection for defending the misfeasance proceedings.  Because of this, the respondents have not been able to obtain inspection of documents from the liquidator directly.  Hence, the respondents turned to the applicants asking the latter to obtain them from the liquidator, as the applicants were empowered by the order of the Master on 15 December 2005 under section 219 to inspect the books and papers of the Company and to take copies thereof.  When the applicants refused, the respondents took out the 2^nd summons, contending that the documents sought, although not in the possession or custody of the applicants, are within the power of the applicants.  Mr Coleman, SC submitted the court should order the applicants to provide the discovery sought, alternatively to order the liquidator to provide copies of the requested documents directly to the respondents.

10.  The liquidator has now indicated through his solicitors he is most willing to assist the court in the misfeasance proceedings and will comply with the orders and directions of the court, notwithstanding the Company is not a party thereto.  So all that is required is an order from the court for the liquidator to produce the documents sought and provide copies of the same.

11.  Mr Frederick Chan submitted on behalf of the applicants there are jurisdictional obstacles for the court to make an order for inspection as sought in the 2^nd summons.

12.  Firstly, he drew the attention of the court to an Australian decision in IACS Pty Limited v Australian Flower Exports Pty Limited (1993) 10 ACSR 769, in support of the proposition that a liquidator has no statutory or residual power to permit inspection of documents by a creditor or contributory.  The statutory power to inspection is a power conferred on the court and the court alone, under the provision equivalent to our section 219.

13.  He then submitted that for an order of discovery to be made against the applicants, the court must be satisfied the documents sought are within their power.  In this context, “power” means “a presently enforceable legal right to obtain from whoever actually holds the document inspection of it without the need to obtain the consent of anyone else” (Lonrho Limited v Shell Petroleum [1980] 1 WLR 627 at 635H, per Lord Diplock).  He relied on Re Lombard Shipping and Forwarding Limited [1992] BCC 700 at 706B to D as a most pertinent case.  In that case, the party against whom documents were sought could request the administrative receiver for the documents.  If the receiver should refuse to comply, that party could apply to court for an order to permit inspection of the books and papers of the company.  The court would have a discretion whether to grant the application and was not bound to do so.  Vinelott J held that in those circumstances, it could not be said that the party concerned had a presently enforceable legal right to obtain the documents sought in the summons and refused the application under Order 24 of the Rules of the Supreme Court, as the documents were not within the power of the respondent.

14.  It seems to me the present situation is distinguishable.  Unlike Re Lombard Shipping where no court order for inspection had been made against the receiver, the applicants here have obtained an order under section 219 in 2005 against the liquidator.  Pursuant to that order, they had requested the liquidator for inspection of documents and to take copies in mid 2006 and early 2008 for the purpose of these misfeasance proceedings and the liquidator had acceded to the requests in compliance with the court order.  The liquidator has confirmed to the court through his solicitor if the applicants are to request him for documents sought in the respondents’ summons, he would likewise comply with the request.  I hold that in this situation, the documents sought are within the power of the applicants.

15.  I am satisfied I have jurisdiction to make an order for discovery under Order 24 rule 7 of the Rules of the High Court.  The order is made against the applicants who are the parties to the misfeasance proceedings.  It is not necessary to join the Company as a respondent in the proceedings for the purpose of giving discovery.  As the documents sought are within the power of the applicants, they are to make a request to the liquidator for the documents in compliance with the order for discovery herein.  Mr Chan informed the court at this hearing that the applicants will make the request.

16.  It does not appear to me necessary for an affidavit to be made to give discovery, as sought in the summons.  The liquidator has clearly stated he has in possession all the documents sought with the exception of one invoice.

17.  I make these orders on the 2^nd summons:

(1)  on the undertaking of the respondents to pay reasonable copying charges, the applicants do provide copies of the documents sought in paragraph 1 of the summons to the respondents within fourteen days hereof, with the exception of the invoice in item (vii); and

(2)  leave be granted to the respondents to file a report by a forensic accountant in response to the applicants’ expert report filed on 31 July 2008 within one month after production of the copies of the documents in paragraph (1) above.

18.  The 1^st summons is dismissed.  No order is made on the 3^rd summons.

19.  I now turn to the question of costs on each of the summonses.  Mr Coleman, SC and Miss Leong sought costs in these applications from the applicants forthwith and assessment on a gross sum basis.  Mr Chan did not resist the liability to pay costs but submitted that costs should be in any event, not forthwith.

20.  I have been taken through the correspondence in September and October last year and in February and March this year.  This application for discovery was necessitated because of the unfortunate stance of the applicants’ solicitors not to make a request to the liquidator for the documents sought by the respondents, notwithstanding that the applicants have obtained an order from the court earlier and had themselves made two requests under that order to the liquidator for documents to assist them in the preparation of their case.  The applicants’ solicitors took the view that they had no duty to help the other side.  This position is quite wrong and cannot be supported in law.  Because of this, the 2^nd summons was taken out and the applicants took out a third summons.  Much costs and time had been wasted on account of this.  It seems appropriate to make an order for costs to be paid forthwith.  I will order accordingly.

21.  I make an order for gross sum assessment in respect of the liquidators’ costs at $50,000 and the costs of the respondents at $150,000.

HCCW 467/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 467 OF 2005

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D E C I S I O N

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1.  This is a summons for leave to the applicants in misfeasance proceedings to adduce expert evidence from a forensic accountant.  The respondents are former directors of the company in liquidation.

2.  The parties are in agreement that expert evidence should be allowed.  They have also agreed that the expert’s report should deal with these issues:

“(1)   to identify and explain the procedure of sales of air tickets, the accounting system of the Company and how they were implemented;

   (2)     how Yen Lok perpetrated her wrongful and/or fraudulent acts through the system of the Company.”

3.  The applicants propose that the expert should deal with a third issue, which reads:

“what system should be put in place in respect of sales of air tickets by the Company.”

4.  This is opposed by the respondents, on the ground that the expert evidence on the third issue is inadmissible as it trespasses on the central issue in the misfeasance proceedings and would usurp the function of the court, or is irrelevant.

5.  Mr Coleman, SC submitted on behalf of the respondents that such expert evidence relates to the commercial running of a company and is entirely within the competence of the court.  I do not agree with his submission.

6.  In my view, the expert evidence on the third issue is admissible, relevant and it does not usurp the court’s function in trying one of the central issues in the misfeasance proceedings, which is whether the respondents were in breach of their duty of care and skill to the Company.

7.  It would be of assistance to the court to consider what system should be put in place in respect of the sales of air tickets by the Company, as this would afford a measure by which the conduct in question may be gauged.  As stated in Phipson on Evidence, 16^th ed, para 7-29:

“such evidence does not, of course, bind the trier of fact as a fixed legal standard; it is merely one, amongst other circumstances, by which they may be guided.”

8.  The respondents seek costs incurred by them concerning a previous expert report obtained by the applicants from another forensic expert in May 2008 on the basis that this would be superseded by the report now called for.

9.  Mr Man submitted for the applicants that it is too early to say if the respondents’ costs in that regard have been thrown away, as it remains to be seen whether the new expert’s report will be substantially similar to the previous report.  He suggests it would be more appropriate to reserve the question of costs in that regard.  I am inclined to agree.

10.  I give leave to the applicants to adduce expert evidence from the forensic accountant and a report is to be filed and served by such expert within 21 days hereof to deal with the three issues mentioned above.

11.  I make an order in terms of paragraphs 2 and 3 of the summons.  The question of costs incurred by the respondents in respect of the previous report is reserved and the misfeasance summons is to be restored for a further directions hearing on compliance with the orders I make today on the exchange of expert evidence.

12.  I make an order that the costs of this application be in the cause of the misfeasance summons.