Civil Action2006

WANG KIENG SEN v. CHAN YUI BIU AND ANOTHER

Files (2)

59111-EN-2007-10-12

HTML content

HCA1954/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1954 OF 2006

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

BETWEEN

	WANG KIENG SEN	Plaintiff
	and
	CHAN YUI BIU	1^st Defendant
	YIU HING WAI	2^nd Defendant

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

Before : Hon Yam J in Court

Dates of Hearing : 9 July, 20 September and 26 October 2007

Date of Delivery of Judgment : 12 October 2007

Date of Sentencing : 26 October 2007

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

J U D G M E N T

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

Background

1. The background of this case has been fully set out in my Reasons for Decisions handed down on 10 September 2007. I would not repeat the background here.

2. This is the First Notice of Motion to commit the two defendants for contempt of court in failing to comply with my Order dated 4 May 2007 on or before the last day of compliance on 11 May 2007 which was extended by consent to 15 May 2007. The failure was in respect of my Order compelling the two defendants to deliver up the Original Subject Documents to Shinewing, the Independent Auditors by 15 May 2007 until 6 June 2007.

3. There is no dispute between the parties that the Subject Documents were not delivered until the late afternoon and early evening on 6 June 2007. The plaintiff further alleged that some documents were not delivered even by 6 June 2007. This is the issue in the Second Notice of Motion which is not the concern of this Judgment.

Legal principles

4. In the recent case of Kao, Lee & Yip v. Koo Hoi Yan & Others [2006] 4 HKLRD 631, it was decided by the Court of Appeal as stated in the Headnote that :

“ (1) [a] There was a distinction between civil contempt and criminal contempt in relation to the mental element required. In civil contempt, liability was strict in the sense that an intention to interfere with or impede the administration of justice was not required.
[b] Contempt was conduct which was ‘neither casual nor accidental and unintentional’.
[c] Unlike criminal contempt, it was not necessary to prove that the alleged contemnor appreciated that his conduct would constitute a breach of the order.
[d] Moreover, the fact that the act or omission was bona fide and based on legal advice was not a defence. …”
[Sub-paragraphing supplied]

5. The burden of proof is on the applicant, i.e. the plaintiff herein, to prove beyond reasonable doubt that the two defendants were in contempt of court in failing to comply with the order.

The defence as stated in the affirmation

6. In response to the application, the 2^nd defendant filed his 11^th affirmation only on 17 September 2007, although direction was given as early as the 1^st hearing on 9 July for him to file his affirmation. This affirmation was confirmed to be true and correct by the 1^st defendant.

7. The two defendants admitted that they had attended the hearing on 4 May 2007 and were aware of the Order. In fact they were thereafter advised by his counsel, Mr Arthur Wong to comply with the order within the prescribed deadline which was originally prescribed as 11 May 2007.

8. The 2^nd defendant therefore went back to his office and started to work on the execution of the order by compiling the Original Subject Documents to be photocopied and certified by an independent solicitor, Ms Virginia Szeto before they were intended to be delivered to Shinewing.

9. The certification was done on or about 9 May 2007 and the plaintiff’s solicitors were informed shortly thereafter on 11 May 2007 as follows :

“ In comply with the [said order] the subject documents as defined by the order would be delivered up to [Shinewing]. A copy of the said order is enclosed for your reference…”

10. The defendants were further advised for the second time by Mr Arthur Wong to comply with the Order when he had a conference with them in the morning of 12 May 2007.

11. The defendants were furthermore advised by another counsel who turned out to be Mr Louie Chan in the late evening of 14 May 2007 when they had a conference with him at their then solicitors office, Mr Damien Shea.

12. Then he went on to say the following which I shall set out in full since the exact wordings used by the 2^nd defendant became important, as follows :

“ 14. However there was a drastic change when it came to the afternoon of 15^th May 2007. At around 3p.m. the 1^st Defendant and I were at the office of Messrs. Virginia Szeto & Co. and we gave a final check to the Original Documents and the same would be delivered to Shineway afterwards. The 1^st Defendant suddenly received a phone call from one Mr. Raymond Yung of DSC whom I believed to be a legal clerk to DSC. He was told not to deliver the Original Documents to Shineway. He further requested us to come up to the office of DSC. We immediately suspected if it was really unnecessary for us to deliver the Original Documents and the 1^st Defendant told Mr. Yung our suspicion. Mr. Yung replied that the Original Documents should not be delivered according to the ‘highest level of instructions’ he received. We then left Messrs. Virginia Szeto & Co’s office and came to DSC’s office with doubt and uncomfortable feeling.
15. When we arrived at DSC’s office we met Mr. Damien Shea and Mr. Raymond yung. We were told by Mr. Shea that Mr. Arthur Wong had just sought for further legal advice from Mr. McCoy of Senior Counsel. It was the advice from Mr. McCoy that we needed not to deliver the Original Document to Shineway.
16. The gist of Mr. McCoy’s advice is this. As the order by Recorder A. Chan was procured by fraud and/or fraudulent misrepresentation the said order should be set aside, and Mr. McCoy also advised us to issue a Writ of Summons to set aside the said Order and therefore not until the disposed of the new case we should not deliver the Original Documents.
17. Although we had sought for previous advice which are inconsistent with Mr. McCoy’s advice the 1^st Defendant and I verily believed that Mr. McCoy’s advice was a piece of good advice. We understood that the ‘highest level of instructions’ was meant to be Mr. McCoy’s advice.
18. Therefore relying on Mr. McCoy’s advice and pursuant to the ‘highest level of instructions’ we, during the conference, decided to withhold delivery of the Original Documents to Shineway.
19. On the same date and pursuant to Mr. McCoy’s advice we also decided to take out a summons to stay the Order (‘Stay Summons’). The Stay Summons was fixed to be heard on 6^th June 2007. By taking out the Stay Summons it would be apparent for the Plaintiff that for some reasons the Order might not be complied with. However the Plaintiff made no complaint as to the taking out of the Stay Summons.
20. The 1^st Defendant and I cannot recall that anyone had advised us the following matters during the conference at DSC’s office on 15^th May 2007 :-
a. The effect of the Stay Summons to the Order; and
b. Possibility of being held contempt where Stay Summons is taken but the Order was not complied with on time.”

Any defence disclosed?

13. Ms Winnie Tam SC appearing with Mr Douglas Lam for the plaintiff expressed serious doubt as to whether Mr McCoy SC would have advised the two defendants that they needed not comply with the Order of delivering the Original Documents to Shinewing and that by issuing the Writ of Summons to set aside the consent order by Recorder A. Chan, they should not deliver the Original Documents until the disposal of the new case.

14. The latest affidavit of the 2^nd defendant should be contrasted with his earlier 4^th affirmation filed on 1 June 2007. After he explained his discovery of the alleged fraud and/or fraudulent misrepresentation in double accounting and diversion of funds of the plaintiff, he then said in paragraph 13 as follows :

“ 13. In the light of these discoveries, the 1^st Defendant and I sought urgent advice on around 15 May 2007 form leading Counsel (Mr Gerard McCoy S.C.). Following Mr McCoy’s advice, the 1^st Defendants and I and New Bright on 17 May 2007 commenced a new action against the present Plaintiff as defendant, in HCA 1027 of 2007, for a declaration to set aside the Consent Order dated 11 September 2006 made in this action. …”

15. The aforesaid 11^th affirmation was drafted carelessly with a number of typos and ungrammatical expressions. Quite apart from these mistakes, the earlier contention of seeking advice from senior counsel in the 4^th affirmation is somewhat different from the later description. There was no contention that Senior Counsel had advised the defendants that they needed not comply with the Order of 4 May 2007.

16. Thus, anyone would have reservation as to the accuracy of the 2^nd defendant’s contention that he was informed by Mr Damien Shea of solicitor that Mr Arthur Wong of counsel had told Mr Shea that Mr McCoy SC had given the aforesaid advice. It is surprising since even junior solicitor would know that an application to stay an order would not have the effect of staying an order at all. If the defendants wanted to stay the 4 May 2007 Order right away, an application should be made for an interim stay pending the hearing of the actual application to stay the order. That was not done and that was not even advised by solicitor, junior counsel, or senior counsel.

17. However as stated before, it is quite clear that in Donald Kao’s case, it was decided that even the act or omission was bona fide and based on legal advice was not a defence. This is only relevant to mitigation when penalty has to be imposed. Ms Winnie Tam had applied, with no objection from the defendants, for reference to be made to Mr McCoy and Mr Arthur Wong for their responses to the contentions of the defendants. They would be made known to me only after I have delivered this judgment. I would say no more on this issue.

The defence put forward at the hearing

18. Mr Kenneth Chan leading Mr Herbert Leung appeared for the two defendants. They have submitted their written skeleton submission only by the afternoon on 18 September 2007. However, when Mr Chan addressed this court he made two new points and did not rely on the original submissions. They are as follows :

(1) the plaintiff has not proven beyond reasonable doubt that the two defendants were aware of the consequence of non-compliance of the 4 May Order, and in particular that they would be in contempt of court should they not deliver the Subject Documents on or before the deadline of 15 May 2007;
(2) by 6 June 2007, the defendants had or at least had substantially complied with the order and in the light of the non-disclosure on the part of the plaintiff of this fact when he applied for the leave of the court herein, this application of the plaintiff should be dismissed

19. In the first point, Mr Chan relied on the fact that the Order was only served on the defendants’ solicitors the next day, i.e. 5 May 2007.

20. The defendants’ solicitor refused to accept service of the Order (which was endorsed with a penal warning notice) for and on behalf of the defendants. The defendants were not served personally of the Order. The Order of substitute service was only made on 6 June 2007 in the morning and the court decided only by then that the service on the defendants’ solicitors would be deemed to be good service on the defendants and the requirement of serving the Order personally on the two defendants could be dispensed with.

21. Thus, Mr Chan submitted that it had not been proven beyond reasonable doubt that the defendants were aware of the contents of the penal warning notice as endorsed on the Order itself.

22. Mr Chan for the defendants further relied on the case of Citibase Property Management Limited v. Kam Kyun Tak [2003] 2 HKC 98, at pp. p.102 and 103 Ma J, as he then was, said as follows :

“ 14. Before considering whether a contempt has been committed where the breach of a court order is involved, the court must be satisfied of the following :
(1) The relevant order, together with an appropriate penal notice, must generally have been personally served on the alleged contemnor: RHC O 45 r 7(2)(a), (4). This, however, is the general rule. Personal service will not necessarily required to be shown in relation to an order requiring a person to abstain from doing something, if the person to be served (the alleged contemnor) was present in court when the order was made or that person was notified of the terms of the order whether by telephone, telegram or otherwise: see O 45 r 7(6); Hong Kong Civil Procedure 2002 at para 52/2/8. The court however retains a discretion whether or not to enforce an order where it has not been personally served: O 45 r 7(6) is in permissive terms.
(2) The relevant order must also contain, as I have said, a penal notice. Where there has been a failure in this regard, the court nevertheless has the power to enforce the order subject of course to the exercise of its discretion: see O 45 r 7(6); Hong Kong Civil Procedure 2002 at para 45/7/6. However, it is in my view essential that the alleged contemnor shall have been told, whether by being present in court of by being notified by telephone, telegram or otherwise, that the consequences of breaching any order made is to be held in contempt of court and liable to a process of execution. This I regard as a natural consequence of O 45 r 7(4) which requires a penal notice to be endorsed on the relevant order. In my view, whether the penal notice is made in writing or given orally, the alleged contemnor must be made aware of the consequences of a breach of the relevant order. It would be an extremely rare exercise of discretion under O 45 r 7(6) for the court to dispense with this requirement and in principle, I cannot conceive of any circumstances in which it would be right to dispense with such a requirement: cf Hong Kong Civil Procedure 2002 at para 52/2/9.
…
17. Having said that the standard of proof is the criminal one (ie beyond reasonable doubt), I should however point out what may possibly the regarded as anomalies in this type of proceedings:
(1) Affidavit evidence is invariably used in committal proceedings unless otherwise directed by the court: see O 38 r 2(3); Hong Kong Civil Procedure 2002 at para 52/6/3. Furthermore, hearsay evidence is permissible: see Hong Kong Civil Procedure 2002 at para 52/6/3; Savings & Investment Bank Ltd v Gasco Investments (Netherlands) BV (No 2) [1988] Ch 422. The court obviously has a discretion whether or not to disregard such evidence and is certainly duty bound to consider carefully the quality of such evidence. I would, however, make this observation: where contempt proceedings are involved, although affidavit evidence is both admissible and normal, it is important that as much first hand evidence of the actual contempt is adduced or if not, an explanation given as to why such evidence is unavailable. This is not to fetter a court’s consideration of hearsay evidence where appropriate, but no court would wish to make a finding of contempt unless the evidence to support such a finding was good. It is to be borne in mind that in contempt proceedings, there is no burden on the respondent to prove his innocence: see Concorde Construction Co Ltd v Colgan Co Ltd (No 2) [1984] HKC 253 at 257.
(2) Unlike in criminal proceedings, where mens rea has to be demonstrated, there is no requirement in civil contempt proceedings to show that the alleged contemnor intended to disobey the order (ie his conduct was contumacious). It is sufficient to proof (a) that he knew the facts which are said to make his act or omission a contempt and (b) that such act or omission was not accidental: see the cases referred to in Hong Kong Civil Procedure 2002 at para 52/1/6. Of course, the alleged contemnor should be aware of the order and the consequences of breaching it: see paras 14(1) and (2) above.”

23. Thus Mr Chan submitted that even the defendants were aware of the Order, they were not aware of the consequences of breaching it.

24. However after the Order was served on the defendants’ solicitors on 5 May 2007, they, as aforesaid, actually referred to this Order in their letter on 11 May 2007 when they wrote to TCF and said inter alia :

“ In comply with the [said order] the subject documents as defined by the order would be delivered up to [Shinewing]. A copy of the said order is enclosed for your reference …”

25. The defendants were advised on two occasions by Mr Arthur Wong of counsel on 4 and 12 May 2007 when they had conferences with him and once by Mr Louie Chan of counsel on 14 May 2007. Mr Damien Shea of DSC were also present at those three conferences. By the time of the 2^nd and 3^rd occasions, the solicitor would have a copy of the Order endorsed with the penal notice when they were advised again by Mr Arthur Wong and Mr Louie Chan to comply with the Order on time. In fact the 2^nd defendant said that at the end of the conference it was their conclusion that they would comply with the Order on time. Of course they met Mr Damien Shea of solicitor again on 15 May 2007 as stated hereinbefore.

26. On these occasions the 2 defendants must be aware of the actual copy of the Order with the penal notice endorsed thereon. In fact upon reading the 2^nd defendant’s 4^th affirmation of 1 June 2007, I have no doubt that the defendants were aware of the Order from day one when the Order was made in court in the defendants’ presence. That was the reason why I made the Order of substituted service on 6 June 2007. It is not open to their counsel to submit that the plaintiff had not proven beyond reasonable doubt that the defendants were not aware of the consequence of not complying with the Order as stated in the penal notice.

27. The defendants had conveniently said that they could not recall that anyone had advised them during the conference at DSC office on 15 May 2007 :

(a) the effect of the stay summons to the Order; and
(b) possibility of being held contempt where stay summons is taken but the Order was not complied with on time.

28. They did not say that there was no such advice but just said they could not recall they had been so advised. In other words, even if they had been so advised, the fact was only that they could not recall such kind of advice had been given. By then the Order endorsed with the penal code, which was served on the defendants’ solicitor, must be in the hands of the solicitor and accessible to the two defendants.

29. In any event it has been decided in Donald Kao’s case that it was not even necessary to prove that the alleged contemnor appreciated that his conduct would constitute a breach of the Order.

30. In the end I do not accept this first point as submitted for the defendants.

31. The second point submitted by Mr Chan for the defendants was in respect of the chronology of events in which he set out in detail what had happened on 6 June 2007 and in particular those events which happened since 3:15 p.m. as follows :

“ (i) At 3:15 p.m. : Cheng Tsz Ying (principal of TCF) made enquiries with Bowie Cheung and/or Richard Wong (accounting managers of Shinewing) who informed Cheng Tsz Ying that Shinewing has not received the subject documents. [see : SB-20 paragraph 3 of Affirmation of Cheng Tsz Ying]
(ii) About 3:30 p.m. : Cheung Man Ching Rachel (a clerk to DSC) telephoned Shinewing to notify the delivery of subject documents and asked to speak to Bowie Cheng who was the person in charge of Shinewing but was told that he was on business trip. She then asked to speak to Barry Ip (the managing partner of Shinewing) who claimed that Bowie Cheng was not in office and Barry Ip refused to accept the subject documents because he was not in the position to accept them. He then caused an undertaking letter together with the Court Order dated 4 May 2007 be faxed to Shinewing. [see : CB-48, paragraph 5 of Affirmation of Cheung Man Ching and exhibit CMC-1 (CB-112)]
(iii) Cheung Man Ching Rachel then telephoned Ho Wing Kwong Sam (the plaintiff’s solicitor TCF) to see if he could send in a representative to witness the delivery at Shinewing. However he was in the conference and until about 4:30 p.m. Cheung Man Ching Rachel was informed that the plaintiff would not send any representative there for such purpose. [see: CB-48, paragraph 6 of Affirmation of Cheung Man Ching]
(iv) 4:00 p.m. : Ms Rachel Cheung (a paralegal staff member of DSC) called Shinewing to arrange for delivery of the subject documents. Mr Barry Ip said he refuses to accept the delivery without explanation. Nevertheless it was delivered. [see : CB-42, paragraph 11 of 6^th Affirmation of Yiu Hing Wai]
(v) 4:10 p.m. : Cheng Tsz Ying (principal of TCF) made another enquiry with Bowie Cheng and/or Richard Wong (accounting managers of Shinewing) who informed Cheng Tsz Ying that Shinewing has not received the subject documents. [see : SB-20, paragraph 3 of Affirmation of Cheng Tsz Ying]
(vi) 4:30 p.m. : TCF replied that it will not send a representative to witness the deliver. [see : CB-48, paragraph 6 of 6^th Affirmation of Cheung Man Ching]
(vii) Between 4:10 p.m. to 5:00 p.m. :
(1) Cheng Tsz Ying affirmed to his 3^rd Affirmation at M.L. Tam & Co. Solicitors of Unit B, 11^th Floor, Two Chinachem Plaza, 135 Des Voeux Road Central, Hong Kong, stating that he had made enquires with Shinewing at 3:15 p.m. and 4:10 p.m. that they had not received subject documents from the defendants.
(2) 3^rd Affirmation of Cheng Tsz Ying and statement pursuant to RHC Order 52 R. 2 filed at 5:00 p.m. in support of plaintiff’s ex parte application for leave to issue contempt proceedings.”

32. It should be noted that Cheng Tsz Ying was probably talking to Richard Wong of Shingwing only over the phone whereas Rachel Cheung talked to Barry Ip of Shinewing when she discovered that Bowie Chan was not in Hong Kong as he was on a business trip. Then Rachel Cheung talked to Sam Ho of TCF and she did not talk to Cheng Tsz Ying. I therefore cannot draw the inference that Cheng was aware by 4:10 p.m. that Rachel Cheung was trying to deliver the documents to Shinewing.

33. Thus it cannot be said that Cheng has not fully disclosed in his affidavit that Rachel Cheung of DSC was trying to deliver five boxes of documents to Shinewing as even Rachel Cheung of DSC did not say that Cheng of TCF was aware of the fact that DSC was trying to deliver the documents to Shinewing. At about 4:10 p.m. Cheng was just informed by Shinewing that they had not received the documents yet. He therefore proceeded to make his affirmation and had the same filed by 5:00 p.m.

34. In any event the written submission of Mr Douglas Lam filed the next day together with other papers in the ex parte application for leave has clearly stated that the plaintiff by then knew that five boxes of documents had been delivered to Shinewing the night before subject of course to the completeness of the documents delivered (which is the subject matter of the 2^nd notice of motion). Thus by the time of the application for leave, there was full disclosure of all the relevant facts.

35. Then Mr Chan submitted that if there was substantial or full compliance of the Order they should not proceed on the committal proceedings. But the fact remained was the defendants were in breach of the Order between 15 May 2007 and 6 June 2007. They had made a conscious decision not to deliver the documents albeit allegedly on legal advice. It was neither casual nor accidental and unintentional.

36. Lastly I must put on record that Ms Tam complained that the defence side had conducted litigation by ambush. Those points in their belated submissions were not put forward at the hearing. They were without substance in any event in light of the decision in the aforesaid Donald Kao’s case. Those two new points were only made by their counsel Mr Chan whilst he was on his feet. I hope this would not be repeated in future.

Conclusion

37. In the end I consider that the defendants had intended not to comply with the 4 May 2007 Order on 15 May 2007 until 6 June 2007 and therefore they were in contempt of an order of the court.

38. I shall hear mitigation from counsel for the defendants.

[Both parties agreed to wait for the reply from Mr McCoy SC and Mr Arthur Wong as to their responses to the defendants’ contentions in their affirmation. Court adjourned to 26 October 2007.]

26 October 2007

39. I have heard mitigation from defence counsel, in particular, I was given Mr McCoy, SC’s letter dated 25 October 2007, i.e. yesterday. That was given so late because solicitors for the defendants had delayed for seven days in this urgent matter in informing Mr McCoy that their clients had formally waived their privilege.

40. I must say I am not happy with the way this matter was handled, but Mr McCoy was given a very short time and in the available time he has kindly attended to this matter on urgent basis.

41. To start with, as I have suspected, Mr McCoy had never advised the defendants that they needed not comply with the Order of 4 May 2007. In particular, he actually advised that :

“ 1. The Order of 4 May 2007 needed to be complied with, unless it was varied or stayed. An application for stay or an appeal does not operate as stay, which meant that the Subject Documents should still be provided to Shinewing. There might well be legal consequences flowing from non-compliance with the Order, such as contempt of court proceedings.”

Further, he said :

“ … there was a risk of non-compliance with the Order of 4 May 2007 by the Defendants. The learned Judge might see things differently. Consequences would follow.”

42. That, of course, is quite different from the 11^th Affirmation of the 2^nd defendant in which (in paragraph 20) he said that the two defendants could not recall that anyone had advised them of the following :

“ (a) The effect of the Stay Summons to the Order; and
(b) Possibility of being held contempt where Stay Summons is taken but the Order was not complied with on time.”

43. However, Mr McCoy said earlier in his letter after he had given advice that :

“ 2. …. every Order of any Court is valid unless and until set aside”;

he also advised that :

“ 3. … the Order might be invalid (in the absence of personal service …
4. Various strategies were considered including that an urgent stay of the Order be sought. The lay clients representative was adamant that as a commercial decision
(a) they would not give the original copies to Shinewing ….”

44. Mr McCoy did not advise his lay clients directly through interpretation in a conference, he advised his solicitors and junior counsel. According to the defendants, it was Mr Shea, their previous solicitor, who told them that Mr McCoy had advised Mr Arthur Wong who then advised Mr Shea that the Order needed not be complied with.

45. Whether their breakdown of communication was a miscommunication through hearsay upon hearsay, I do not know. Mr Shea did not make any affidavit and the defendants did not require him to make one either. But in these contempt proceedings I have decided to take a lenient view in favour of the defendants. Therefore I have come to the conclusion that on one hand, although the defendants were never advised the Order needed not be complied with, on the other hand, they were advised the Order might be “invalid” (to use the word of Mr McCoy which I take it to mean “not effective” or “not yet effective”) in the absence of personal service. The defendants were taking a commercial decision by taking the risk not to deliver the Original Documents to Shinewing.

46. As I have said before, summons for substituted service was taken out the next day on 17 May 2007 by the plaintiff. The defendants should have been advised once an order of substituted service was made, it could even take retrospective effect as decided by the Court of Appeal in the case of AXA China Region Insurance Co. Ltd v. Li Yu Ping Ellen [2002] 3 HK 339. I, again, take the most favourable view in favour of the defendants in that they had never been so advised. After their decision on 15 May 2007 that they were not going to deliver the Original Documents to Shinewing up to 6 June 2007, they were aware that this summons for substituted service had been taken out and therefore they were taking the risk of being in contempt of court by disobeying an order.

47. Taking all the mitigating factors into consideration and the comparatively short period of time in disobeying a court’s order between 15 May 2007 and 6 June 2007, I would impose a fine of $50,000 on each of the defendants, to be paid within 14 days. Costs of the contempt proceedings be to the plaintiff, to be taxed on indemnity basis if not agreed.

(D. Yam)
Judge of the Court of First Instance
High Court

Ms Winnie Tam, SC, leading Mr Douglas Lam (on 9 July 2007 and 20 September 2007), instructed by Messrs T.C. Foo & Co., and

Mr Douglas Lam (on 26 October 2007), instructed by Messrs T.C. Foo & Co., for the Plaintiff

Mr Paul Harris, SC (on 9 July 2007), instructed by Messrs Damien Shea & Co., and

Mr Kenneth Chan and Mr Herbert Leung (on 20 September 2007 and 26 October 2007), instructed by Messrs T.K. Cheng & Co., for the 1^st and 2^nd Defendants

58701-EN-2007-09-10

WANG KIENG SEN v. CHAN YUI BIU AND ANOTHER

HTML content

HCA1954/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1954 OF 2006

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

BETWEEN

	WANG KIENG SEN	Plaintiff
	and
	CHAN YUI BIU	1^st Defendant
	YIU HING WAI	2^nd Defendant

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

Before : Hon Yam J in Chambers (Open to Public)

Dates of Hearing : 4 May, 6 June, 9 July, 3 and 16 August 2007

Dates of Decision : 4 May, 6 June, 9 July and 16 August 2007

Date of Handing Down Written Reasons for Decisions : 10 September 2007

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

REASONS FOR DECISIONS

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

1. In any relationship with an amicable, trusting and candid initiation, be it that of parents and children, that of marriage, or in this particular case, that of business partnership, its sustenance is often proven more difficult than its conception.

2. In this case Mr “Wang” Kieng Sen (the plaintiff), Mr “Chan” Yui Biu (the 1^st defendant) and Mr “Yiu” Hing Wai (the 2^nd defendant) were business partners who until recently owned and operated a synthetic leather manufacturing business in the form of a group of corporate entities. The souring of their relationship, the various hot-style interactions and the disputed “agreements” leading to the present litigation involved a history of unfortunate events. The joint business built by the cooperation of all the said parties is now facing a melt-down. It is unfortunate since their relationship had apparently ended by certain agreements. Even after this action was instituted, there was a “Consent Order” which apparently would have settled the dispute between them. However thereafter there have been a number of interlocutory applications one after the other. As such no finding of facts could and should be made. I have grouped all my decisions herein for the better understanding of them. It will also serve the purpose of better understanding by unravelling the initial structure of the said joint business venture at the outset.

The companies structure

3. There are four limited companies involved as follows :

(1) “New Bright” Synthetic Leather Company Limited;
(2) Saint Fair “International” Limited;
(3) Saint Fair “Holdings” Limited; and
(4) 昇暉合成皮革 (鶴山) 有限公司 (translated as “Sing Fai” Leather (Hok Shan) Company Limited).

4. The shareholdings of each company is now set out in Appendix I hereto.

5. It can be seen that the two defendants, Chan and Yiu, are the majority shareholders of the first three companies. Sing Fai was wholly owned by New Bright and therefore Chan and Yiu are the majority shareholders controlling these four companies. The three of them are directors of the first three companies.

6. However, Wang is the general manager and legal representative of Sing Fai in the Mainland whereas New Bright, International and Holdings were managed by Chan and Yiu in Hong Kong at an office in Hung To Road, Kwun Tong, which was held in the name of Holdings.

7. Basically Sing Fai manufactured leather goods at its factory in the Mainland and sold them to International. International is a trading company which would buy leather goods from Sing Fai and sell them to foreign buyers.

The dispute

8. The disputes between the two parties arose in around the first half of 2006. Each party made the following allegations :

(1) Chan and Yiu alleged Wang for refusing to deliver goods to their customers, i.e. their customers of International; whereas
(2) Wang alleged that his refusal to deliver goods was because International and New Bright were indebted to Sing Fai and they had refused to make payments up to the amount of about $9.5 million.

9. On 17 July 2006, Chan issued a Notice of Board Meeting of New Bright to be held on 19 July 2006 to consider a number of matters including removing Wang as the general manager and legal representative of Sing Fai and to appoint Yiu in his stead. The said Meeting was said to be held on 19 July 2006 at New Bright’s purported solicitors’ office of Ko & Co. (“Ko”).

10. Wang then instructed T.C. Foo & Co. (“TCF”) to represent him and a number of correspondences followed between TCF and Ko and later on Rowland Chow, Chan & Co. (“RCC”) representing Chan and Yiu and purportedly their companies. RCC was later replaced by the present solicitors for the defendants, Damien Shea & Co. (“DSC”). (Wang, through TCF, did not accept that the companies had properly appointed these firms of solicitors.)

11. Eventually a board meeting of New Bright was purportedly held on 25 July 2006 in the absence of Wang. Chan and Yiu resolved that, inter alia, Wang would be replaced by Yiu as the general manager and legal representative of Sing Fai. This was under the protest of Wang through his solicitors.

The Chinese agreements

12. On 8 August 2006, Chan and Yiu, together with one Benny Chu of Messrs J.B. & Co., CPA, and a group of other unidentified individuals went to the premises of Sing Fai in the Mainland. They demanded Wang to vacate his office as the general manager and legal representative of Sing Fai. Wang and his Mainland lawyer, and certain officials from the local government were also present there and then. They pointed out to the other party that under Chinese law, Wang remained the legal representative until he was removed in accordance with the PRC law.

13. On the same day after negotiation, Wang on one part and Chan and Yiu on the other part entered into and signed a written Chinese agreement in the presence of the Chinese lawyer and the local government officials (“the Chinese agreement”). The agreement was intended as a settlement of all disputes between the parties and the division of assets in order that the two parties would thereafter go their own separate ways.

14. In a nutshell, Clause 1 of the agreement provided that Wang would transfer all his share in International and Holdings (i.e. “the Saint Fair Group”) to Chan and Yiu and in return Chan and Yiu would transfer all their shares in New Bright (held by them and through Holdings) and all the assets of Sing Fai to Wang.

15. Clause 2 of the agreement provided that Wang would pay to Chan and Yiu the difference in the net assets value between :

(1) the Saint Fair Group, i.e. Holdings and International and
(2) New Bright and Sing Fai.

The amount would be confirmed by accountants of the respective companies. (See Appendix I)

16. In respect of the aforesaid Clause 1, I perceive that to mean the 350 shares of New Bright held by Holdings would be transferred to Wang. Wang got four out of ten shares of Holdings anyway. Chan and Yiu’s 50 shares in New Bright would of course be transferred to Wang as well. By then New Bright would be wholly owned by Wang and therefore in turn he would have owned Sing Fai which is wholly owned by New Bright. However, Wang’s four shares out of ten in Holdings would be transferred to Chan and Yiu and this would enable Chan and Yiu to own Holdings completely. Since Holdings has been the registered owner of the Hung To Road office, the Hong Kong office which is the main assets of the Saint Fair Group would be wholly owned by Chan and Yiu.

17. Even if the true purport of Clause 1 is not that clear, it would not matter since Clause 2 provided with the payment of the difference in net assets values between the two groups of companies.

18. Two days later, on 10 August 2006, Wang signed a supplemental Chinese agreement with Chan and Yiu. Basically, the supplemental agreement provided that the cut-off date of the account for the four companies would be 30 June 2006 and from 1 July 2006, the two groups of companies would be responsible for its own profit and loss and the right and liabilities of all three parties (i.e. Chan and Yiu on one part and Yiu on the other part) would be separated and not connected with each other.

19. After “the Chinese agreements” of 8 and 10 August 2006 the parties and their legal representatives and accountants met at the Hung To Road office on 14 August 2006. There is a dispute even between the solicitors as to what had happened that day. It is however common ground that there were negotiations at the meeting but no definite further agreement has been reached and signed as to each party’s proposal(s). It is also common ground that not much has been achieved in the inspection of books there and then with allegations from each party as to why that happened.

20. Before that meeting of 14 August 2006, TCF wrote to DSC on 10 August 2006 and alleged that Chan and Yiu and their unidentified individuals accompanying them had behaved in a threatening and abusive manner when the 1^st Chinese agreement was signed on 8 August 2006.

21. Chan and Yiu however counter-alleged that Wang and his party was the one who had threatened them with abusive behaviour.

22. In any event TCF stated that they were obtaining legal advice from a Chinese lawyer on the validity of the agreements.

23. After the meeting on 14 August 2006 DSC wrote to TCF on 16 August 2006 by saying, inter alia, that :

“ We hereby confirm that all the terms of the above mentioned letter of intent shall be set aside.”

24. There was a letter dated the same day from TCF to DSC in reply to that letter concerning other matters. Chan and Yiu later on pointed out that TCF did not dispute the aforesaid contention of DSC. This was however denied by Wang’s solicitor Mr Cheng Tsz Ying of TCF in his affirmation filed on 6 September 2006 in respect of a matter which I will consider in a moment. He produced the attendance notes he made thereafter which contained no agreement that the Chinese agreements should be set aside as agreed between the parties. There were only various proposals from each side without any concluded agreements at all.

25. This court is not concerned with who is speaking the truth in their affirmation nor the task of reconciling each other’s version in the various interlocutory applications which I shall set out hereinafter. I shall, first of all, consider the common grounds of the parties and decide what should be the best interlocutory measure at each stage of the application and decide accordingly with those reasons which I now reduce into writing after my various decisions.

26. By about 25 August 2006, Wang received two legal opinions from his PRC lawyers. Both of them confirmed the validity of the Chinese agreements and thereafter Wang accepted and maintained that the Chinese agreements are valid and binding on himself and Chan and Yiu. Thus on 4 September 2006, TCF, on instructions from Wang, wrote to DSC and pressed for the performance of the agreements.

The AGM which triggers off the commencement of the action herein

27. However on 21 August 2006, Chan issued a Notice of Annual General Meeting (“AGM”) of New Bright to be held on 12 September 2006. Wang obviously had serious concerns as to the convening of the AGM at that sensitive time as one of the agendas was to re-elect Wang, Chan and Yiu as directors of New Bright. Having failed to persuade Chan and Yiu to postpone the AGM, the writ herein was issued on 6 September 2006, and a summons was issued on the same date for an order that Chan and Yiu should be restrained from convening the AGM of New Bright on 12 September 2006. The summons was scheduled to be heard on 8 September 2006.

The Consent Order before Mr Recorder A. Chan SC

28. Eventually the parties came to terms as to Wang’s application by a Consent Summons and the hearing on 8 September was vacated. The Consent Summons was endorsed by Mr Recorder A. Chan SC on 11 September 2006. In this order Chan and Yiu undertook that they would not convene, hold or attend any shareholders’ meeting of New Bright until the determination of the independent auditor as contained in the schedule attached thereto.

29. Basically the schedule provided that (under Paragraph 1) the parties should jointly appoint an independent auditor (“IA”) to prepare and conduct an audit of the books and accounts of the four companies up to 8 September 2006. The IA is appointed as an expert and shall determine the net worth of the companies and, in particular, any determination by the IA shall be binding and conclusive on the parties.

30. Further, under Paragraph 7 both parties, i.e. Wang on one part and Chan and Yiu on the other part, do undertake to give the IA full access to all the books and accounts and other documents belonging to the companies for the purpose of carrying out the aforesaid of audit and valuation.

31. Under Clause 10 the IA shall use his best endeavours to arrive at a determination within 60 days from the date of appointment.

Events after the Consent Order

32. Eventually the parties could not agree on the IA and “Shinewing” CPA was eventually nominated by the president of the Hong Kong Institute of Certified Public Accountants at the parties’ request on or about 15 January 2007. Pursuant to the Consent Order, Wang submitted those books and accounts in his possession to Shinewing. However Shinewing made out a list of missing books and accounts not given to them by Chan and Yiu or International which is under their control.

33. In a summons dated 23 April 2007 scheduled to be heard on 4 May 2007, the plaintiff Wang asked for an order that Chan and Yiu should deliver up and/or procure International to deliver up to Shinewing all original books, accounts and records of Sing Fai in the possession, custody or power of Chan and Yiu and/or International, including but not limited to those items set out in the schedule thereto. The schedule contained two and a half pages of items listed out by Shinewing as the missing books and accounts (“the Subject Original Documents”).

34. Wang relied on the affirmation of Chan in this application which was previously filed on 6 September 2006 and his own affirmation filed on 25 April 2007. In Wang’s affirmation he would like the books and accounts be given to his previous accountant, one Mr Cheung, and his then accountant, Ms Lee working in Sing Fai in the Mainland for reasons stated therein.

35. Yiu filed three affirmations in opposition, one on 30 April 2007 and the other two just before the hearing on 3 May 2007 and in the morning on 4 May 2007. Yiu made a number of allegations against Wang and, in particular, that the books and accounts should not be delivered to any one in Sing Fai in the Mainland. Yiu alleged that :

(1) there is something wrong with the Subject Original Documents and that Wang might have committed violations of the PRC laws and in particular the PRC administrative regulations in relation to taxation. He also noted that there were inconsistencies or discrepancies in relation to certain account records of Sing Fai and he was still investigating in the matter;
(2) Wang was trying to siphon off funds belonging to New Bright and/or Sing Fai by requesting customers to pay to his Hong Kong company called昇暉合成皮革(香港)有限公司(“Hong Kong Sing Fai”) which is just different from the original name of Sing Fai with the words Hok Shan(鶴山)and that happened since 15 August 2006.

36. However, the defendants Chan and Yiu had no objection to Shinewing’s inspection of and access to the Subject Original Documents and the plaintiff’s inspection that they should take place at the office of New Bright with prior notice.

37. In addition Yiu alleged that Wang had prepared or caused to be prepared two conflicting versions of accounts, namely the Audited Financial Statements and the Management Accounts.

The decision of 4 May 2007

38. At the hearing before me I have considered all the arguments of the defendants. The fear of the defendants that Wang or his accountants of Sing Fai would tamper with the documents became irrelevant since the order sought by Mr Douglas Lam, counsel for the plaintiff, was only an order that the defendants should deliver the Subject Original Documents to Shinewing who should have custody of the books. Mr Lam also proposed that inspection of the subject documents should be at the premises of Shinewing by any of the parties and none of them should be entitled to remove and/or tamper with any of the subject documents. That would certainly remove the worries of the defendants that the plaintiff might have the chance of tampering with the original documents. Further, I understand that upon inspection, certified true copies would be made of them in order that if the original, for whatever reason, was tampered with, it would be revealed by the certified true copies in the hands of each of the parties.

39. Further, Chan and Yiu had agreed by the Consent Order made by Recorder A. Chan SC on 11 September 2006 (i.e. months before this hearing) that Shinewing should have free access to all the original books and accounts for the purpose of auditing the accounts in assessing the true value of each of the companies. In fact, Chan and Yiu undertook to give Shinewing full access to all the books and accounts belonging to the companies, i.e. including those of Sing Fai.

40. In light of the serious allegations made by Chan and Yiu against Wang, it is all the more incumbent that the accounts of Sing Fai should be audited at once. This would be beneficial to Chan and Yiu. It therefore baffles me as to why Chan and Yiu resisted the auditing by allowing Shinewing to have the Subject Original Documents.

41. Thus I acceded to the request of Mr Lam for the plaintiff that the defendants should, within 7 days (i.e. on or before 11 May 2007), deliver up and/or procure International to deliver up to Shinewing the subject documents in the possession, custody, or power of Chan and Yiu and/or International including but not limited to the items set out in the schedule thereto. There were also provisions for inspection and prohibition of removal and/or tampering with any of the subject documents in the Order.

Variation summons of Chan & Yiu dated 4 May 2007

42. On the day of the hearing on 4 May 2007, the defendants also applied by a summons dated that day for a variation of Mr Recorder A. Chan’s order on 11 September 2006 to the extent that Chan and Yiu be at liberty to convene, hold or attend any shareholders meeting of New Bright notwithstanding the fact that the determination by the independent auditor has not yet been completed.

43. That application was adjourned to a date to be fixed for arguments with directions given for the filing of affirmations.

Events after 4 May 2007 and before 6 June 2007

44. Since Shinewing was moving office, the parties agreed to extend the time of delivery of the Subject Documents to 15 May 2007.

45. By a letter dated 11 May 2007, DSC wrote to TCF that :

“ In compliance with the Order made by the Honourable Mr Justice Yam dated 4^th May 2007, the Subject Documents as defined by the Order would be delivered up to Shinewing (HK) CPA Limited. …
The Subject Documents were made photocopies and certified by an independent solicitor.
…”

46. Instead of delivering up all the subject documents to Shinewing as promised in the aforesaid letter of DSC, Chan and Yiu issued summons on 15 May 2007 four days later applying for a stay of my order of delivering up the subject documents on 4 May 2007. In the 4^th affirmation of Yiu filed on 1 June 2007 in support of the said summons scheduled to be heard on 6 June 2007, he voluntarily disclosed that that was the result of an urgent advice sought from a leading counsel on or around 15 May 2007.

47. Consequently, Chan and Yiu together with New Bright commenced an action HCA1027/2007 on 17 May 2007 against Wang for a declaration to set aside the consent order of Recorder A. Chan dated 11 September 2006. In the endorsement of claim, it was pleaded that the consent order was procured or caused by fraud and/or fraudulent misrepresentation by the defendant and persons unknown.

48. On 17 May 2007, Wang also issued a summons for substituted service of the order of 4 May 2007 which was required to be served on Chan and Yiu personally. Two affidavits in respect of the failure to serve personally on Chan and Yiu were filed by TCF.

49. On 31 May 2007, the defendants issued another summons scheduled to be heard also on 6 June 2007 for amendment of their original summons dated 4 May 2007 which was adjourned for argument as aforesaid. Instead of varying the order of 11 September 2006 to the extent that Chan and Yiu could hold a shareholders meeting of New Bright, the defendants asked for an order to set aside the Consent Order altogether.

50.	(a)	Further, they also seek to amend their summons dated 15 May 2007 to the effect that instead of staying the execution of my order on 4 May 2007 pending the resolution of the defendants’ summons dated 4 May 2007, they applied for a stay pending the resolution of their claim against Wang in HCA1027/2007.
	(b)	Alternatively, they asked for an order that the order made on 4 May 2007 concerning delivery up of the subject documents be set aside or alternatively stayed pending the resolution of the defendants’ claim against Wang in HCA1027/2007.
	(c)	In the same summons they also asked for consolidation of the action herein with HCA1027/2007.

51. In Yiu’s 3^rd affirmation he explained that fraud and fraudulent misrepresentation of Wang were in respect of his previous allegations against Wang, namely :

(1) diversion of funds belonging to Sing Fai;
(2) keeping two different sets of account for Sing Fai.

52. In the 2^nd affirmation of Wang filed on 2 June 2007, he was seeking to reply to Yiu’s 1^st, 2^nd and 3^rd affirmations and to oppose the defendants’ summons of 4 May 2007 to vary the consent order before Recorder A. Chan on 11 September 2006. In a nutshell, he sought to reply the aforesaid two allegations of Yiu in his 3^rd affirmation.

53. In respect of the allegation of diversion of funds, he said that in the two Chinese agreements of 8 and 10 August 2006, the cut-off date had already been agreed as at 30 June 2006, and thus thereafter he could not rely on Chan and Yiu’s two companies i.e. Holdings and International in Hong Kong to collect payment from customers for contracts made after 30 June 2006. That is why he requested his customers to pay at first to his personal bank account in Hong Kong and after the incorporation of the new Hong Kong Sing Fai Company on 6 September 2006, the customers were asked to pay into the bank account of the new Hong Kong Sing Fai Company. However, all the payments were eventually remitted back to the bank account of Sing Fai in PRC or used to settle payment due and owed by Sing Fai to its suppliers. Wang went at length to deal with each and every transaction mentioned by Yiu in his 3^rd affirmation and produced all the supporting documents therefor including purchase orders, monthly statements, credit advice, bank deposit ledgers, invoices transfer advice, etc. in support of his contention.

54. Since the two Chinese agreements provided that Wang should own Sing Fai after 30 June 2006, there is no need for him to mislead any of his customers or Chan and Yiu. In any event even if they were invalid as contended by Chan and Yiu, all of the money transferred or deposited into the new Sing Fai Hong Kong Company or his personal account were all ultimately transferred or deposited back into Sing Fai’s account in the PRC. He had been keeping and would continue to keep proper records of all these sums paid after 30 June 2006 and those documents are available to Chan and Yiu on discovery in due course.

55. Consequently if Shinewing were to audit the accounts of Sing Fai up to 8 September 2006, the payments in the period between 1 July 2006 and 8 September 2006 would be revealed in the audited accounts. One does not know why the audit would have to be extended to 8 September 2006. That was the agreement between the parties. There might well be funds received during that period of time which were in respect of contracts entered into before 1 July 2006. In any event all payments outstanding for those contracts made before 1 July 2006 would be monies receivable by Sing Fai in the audited account anyway.

56. In respect of the existence of two sets of accounts, namely, the Management Accounts and the Audited Financial Statements of Sing Fai, Wang said that that has always been the case since its incorporation in June 2002. In fact, Yiu’s younger brother, one Yiu “Hing Fung” was responsible for Sing Fai’s bookkeeping and accounts from its incorporation up to May 2003. Then the aforesaid Mr Cheung took over the bookkeeping and accounts in Hing Fung’s place and left a year later in May 2004 whereupon Ms Lee was employed to handle the matter since then. Wang said that Chan and Yiu, apart from knowing the existence of the two sets of accounts, the Hong Kong companies were given those two sets of accounts from time to time for the years ending 2003, 2004 and 2005.

57. Wang said that it was recognised by all directors since the incorporation of Sing Fai, that it was not uncommon that most of the business operators if not all in the Mainland used to maintain two versions of statement accounts i.e. one Management Accounts and the other Audited Financial Statements. In any event, all these would be disclosed to Shinewing, who would audit Sing Fai properly.

58. Wang concluded that since the Subject Original Documents were made photocopies and certified by an independent solicitor, there should be no concern of Chan and Yiu that Wang could tamper with the documents. Wang therefore opposed the defendants’ summons dated 31 May 2007, applying to amend their two previous summonses, namely :

(1) their summons dated 4 May 2007 applying to vary Recorder A. Chan’s consent order to the extent that Chan and Yiu can hold a shareholders meeting for New Bright and substitute that application by setting the whole consent order of 11 September 2006 aside;
(2) their summons dated 31 May 2007 applying to stay my order of 4 May 2007 instead of until the resolution of the defendants’ another summons of 4 May 2007 and substitute by pending the resolution of their HCA1027/2007; and
(3) in the same defendants’ summons of 31 May 2007, they also asked for consolidation of the action herein with HCA1027/2007.

6 June 2007 Hearing

59. In respect of the plaintiff’s summons for substituted service, I consider the service of my order of 4 May 2007 on the 1^st and 2^nd defendants’ solicitors would be good service on the 1^st and 2^nd defendants personally. The defendants were in court on 4 May 2007 last time when the order was made. In fact, the two defendants referred to the order. They are now asking for a stay of the order. They are fully informed of the effect of the order and the content of the order. There were repeated efforts on the part of the plaintiff’s solicitors to serve on the defendants personally but were met with no co-operation from the defendants’ solicitors and the defendants personally. The situation is bordering on evasion of service.

60. For these reasons, I order in terms of paragraph 1 of the summons. I think it is better to continue and say “service on the 1^st and 2^nd defendants personally be dispensed with and the service of the said order on the defendants’ solicitors on 5 May 2007 shall be deemed to be good service of the said order on the 1^st and 2^nd defendants personally”.

61. Since this summons is opposed, I think Mr Harris would not oppose the application for costs. So in paragraph 4 : costs of the summons be to the plaintiff in any event.

62. In respect of the 1^st application of Mr Harris for the two defendants for a stay of my order of auditing on 4 May 2007 until the determination of HCA1027/2007 as aforesaid, the main ground put forward was that the defendants only discovered that Wang siphoned off funds belonging to Sing Fai to his personal bank account in Hong Kong from 1 July 2007 and after the incorporation of the Hong Kong Sing Fai in September 2006, into its Hong Kong bank account. Mr Harris described the new High Court action based on fraud and/or fraudulent misrepresentation of Wang in setting aside the said consent order of 11 September 2006 as a strong case on merit. However he had no instructions and therefore no submission made as to Wang’s explanation in his 2^nd affirmation in that since the two Chinese agreements, Sing Fai became his company in equity and, he could no longer collect payments through International or Holdings, he would have to collect payments in Hong Kong through his personal bank account and later Hong Kong Sing Fai. He produced all the documents in the receipt of payments from various purchasers in respect of goods sold and delivered after 30 June 2006. In any event, he said under oath that all payments were well documented and eventually they found their way into the accounts of Sing Fai in the PRC. This will be revealed in Shinewing’s audited account.

63. When Mr Harris was asked whether he was interested as to how much was actually siphoned off by Wang, he apparently said they must be interested but he had no instructions as to why Chan and Yiu wanted a stay of the auditing of the accounts of Sing Fai in order to reveal clearly whether there was any fraudulent dealings in siphoning off the funds belonging to Sing Fai albeit whether they were before or after the dividing line of 30 June 2006 or 8 September 2006.

64. Thus, we have a very strange situation here : the two defendants who alleged fraudulent misrepresentation and fraudulent dealings of Wang did not want Sing Fai’s accounts to be audited by an independent auditor. The alleged fraudster Wang on the contrary strongly urged the audit of Shinewing to go ahead at full speed.

65. It is not a mini-trial to have a preliminarily decision as to the strength of HCA1027/2007 in deciding whether there should be a stay of the order of auditing. However the fact that HCA1027/2007 so far did not disclose a very strong case on merit as put forward by Mr Harris on instructions as aforesaid is something that has to been taken into consideration.

66. Accordingly even if Chan and Yiu succeeded in HCA1027/2007 the audited account of Sing Fai must be of assistance to them instead of a hindrance. On the contrary if Wang was proved to be right, there is no reason why the auditing of Sing Fai should be stayed for months and possibly years until the determination of HCA1027/2007.

67. In the end I accepted the submissions of Ms Winnie Tam SC for Wang and dismissed the defendants’ application to stay the execution of my order of 4 May 2007 until the determination of HCA1027/2007 or, before the application for amendment of this summons, pending the resolution of the defendants’ summons issued on 4 May 2007 (that is the summons to vary the consent order and in order to allow Chan and Yiu to convene a shareholders meeting of New Bright).

68. That dealt with the defendants’ summons of 15 May 2007 and paragraph 2 of the amendment summons dated 31 May 2007 seeking to amend the former summons for a stay pending the resolution of the defendants’ summons of 4 May 2007 by substituting the aforesaid by an application to stay my order pending the resolution of HCA1027/2007. For the avoidance of doubt, both applications were dismissed for the aforesaid reasons.

69. In the 3^rd paragraph of the defendants’ summons of 31 May 2007, there was a further application for an order that :

“ 3. … further or in the alternative, that the Order made by the Honorable Mr Justice Yam on 4 May 2007 concerning delivery up of the Subject Documents as defined therein, be set aside, alternatively stayed, pending the resolution of the Defendants’ claim against the Plaintiff in HCA 1027 of 2007, or further order, and that the Defendants’ said 2 summonses be adjourned sine die; …”

For the aforesaid reasons this application as embodied in the aforesaid paragraph 3 is also dismissed since there should not be any stay of my order of 4 May 2007 and there is no reason why the said two summonses be adjourned sine die either.

70. In respect of paragraph 1 of the summons of 31 May 2007 the application was to amend the defendants’ summons on 4 May 2007 by deleting the application to vary the consent order of 11 September 2006 to the extent that the defendants should be at liberty to convene the shareholders meeting of New Bright notwithstanding the determination by the independent auditor is not yet completed and substituting with the application to set aside the consent order of 11 September 2006 altogether.

71. The original application by summons of 4 May 2007 had been adjourned for argument. The application to amend this summons is now opposed and therefore the application to amend this summons in the aforesaid paragraph 1 is also adjourned to a date to be fixed and to be heard together with the original summons of 4 May 2007.

72. Lastly there is an application in the summons of 31 May 2007 to consolidate the action herein with HCA1027/2007. This is also opposed by the plaintiff and the application is therefore also adjourned to a date to be fixed.

73.	(a)	Costs of the adjourned summonses are costs in the cause.
	(b)	However, costs of the summonses or parts thereof which were dismissed would be to the plaintiff in any event to be taxed and paid forthwith with certificate for two counsel.

The contempt proceedings and the hearing on 9 July 2007

74. There is only one thing concerning the contempt proceedings which was first heard on 9 July 2007 and that proceedings have been adjourned for argument and I understand they have been fixed to be heard on 20 September 2007. I should not say anything about the contempt proceedings except that there was one application on 9 July 2007 whereby Mr Harris for Chan and Yiu applied to me that I should recuse myself from hearing the contempt proceedings. It all came from the remark I made at the end of the last hearing on 6 June 2007 whereby I told Mr Harris that his clients were in contempt of court in not complying with the 4 May 2007 and if I were the defendants I would purge that contempt by supplying the Original Subject Documents as required by Shinewing.

75. Mr Harris, on instructions, submitted that it would seem that this court had already come to conclusion that the defendants were in contempt of court without hearing arguments and therefore his clients had the impression that this court would be bias in hearing the defendants’ defence as to whether they were in contempt of the order.

76. After hearing arguments from Mr Harris and Ms Tam for the plaintiff I refused the application to recuse myself from the contempt proceedings. It is easy just to wash one’s hand from a case. However my task is not to do what is easy but what is fair and right. It will not be fair to the parties if the basis of recusing oneself from hearing the proceedings is not made out. The remark I made was only in the spirit of urging the defendants to comply with a court order. It was not a decision without hearing argument that the defendants must be in contempt of court in fact and in law. Apparently they are in contempt in the sense that they have not complied with a court order of 4 May 2007 up to the date of 6 June 2007 when they applied for a stay of that order. An application to stay an order is not a stay of the order itself. In any event that application has been refused. Between 15 May 2007, which was the date by consent that the parties have agreed that they should supply all original books and accounts to Shinewing pursuant to my order, up to 6 June 2007, there were still a number of outstanding original documents in the hands of the defendants which were not supplied to Shinewing. Whether the defendants are in fact and in law in contempt of court will have to be decided after they have filed their affirmations in reply as directed and hearing submissions from counsel.

Another summons from the defendants to be heard on 3 August 2007

77. On 31 July 2007 the defendants took out another summons in terms of trying to vary my order of 4 May 2007 again. The term of the order is quite ungrammatical and incomprehensible and I do not intend to repeat them here. This summons was heard on 3 August 2007. Mr Harris at the hearing told me that the intention was to allow the Original Subject Documents to be delivered to Jianymen City People’s Court after Shinewing have checked that the certified true copies were true and accurate copies of the original.

78. The basis of the application was that the Jiangmen Court has on 24 July 2007 ordered Chan and Yiu to deliver the original books and accounts of Sing Fai to the court, and the last day of compliance was on or about 25 August 2007. That was in respect of an action taken by Chan and Yiu in the Jiangmen Court against Wang in respect of the affairs of Sing Fai. That was apparently instituted by them in April 2007.

79. In fact the application was made by Chan and Yiu themselves on 1 June 2007 to the Jiangmen Court for an audit of the books and records of Sing Fai.

80. On 2 August 2007 Wang filed his summons to strike out the defendants’ aforesaid summons as an abuse of process of court. At the hearing on 3 August 2007 both parties appeared before me, and Wang would like to file affirmation in reply and Chan and Yiu would like to file further affirmation. The matter is quite urgent and the last day as aforesaid for Jiangmen Court was on or about 25 August 2007. Thus after giving directions for urgent filing of affirmations, I have adjourned the matter to be heard on 16 August 2007.

The hearing on 16 August 2007

81. On 16 August 2007 after hearing submissions from counsel, I have decided that the defendants’ application is an abuse process of court and therefore I dismissed the defendants’ summons and ordered in terms of the plaintiff’s summons and awarded costs of both summonses to the plaintiff on common fund basis, to be taxed and paid forthwith with certificate for two counsel. The following is my reasons.

82. In Wang’s 3^rd affirmation, he said he was advised by his PRC lawyers that the Jiangmen Court is likely to accede to his application to extend the time of submitting the original documents to Jiangmen’s Court if the parties consent to such an application. Apparently this was eventually not disputed by Chan and Yiu.

83. At first Chan and Yiu did not indicate their stance to the plaintiff’s application to the Jiangmen Court for extension of time and thus TCF wrote to DSC on 11 August 2007 inviting Chan and Yiu to consent to Wang’s Jiangmen application and to adjourn the hearing of this court on 16 August 2007 pending further directions from the Jiangmen Court. DSC did not response to that letter but the defendants’ affirmations filed on 14 August 2007 indicated that the defendants rejected this proposal.

84. Shinewing has repeatedly indicated that they required the original subject documents to conduct the audit pursuant to the consent order by their letters dated 27 April 2007 and 18 July 2007 albeit that Mr Harris pointed out that their indication was in response to certain prompting from TCF. Up to 16 August 2007 there were still five items of original documents missing from the books and accounts of Sing Fai or International in the possession or control of Chan and Yiu which were required for the auditing of Shinewing. Thus the contention there was a recent changed of circumstances by the order of Jiangmen Court of 7 July 2007 was entirely self-induced by the defendants as that was their own application for the audit of the accounts of Sing Fai leading to the order of the Jiangmen Court to require delivery of the original books and accounts to them. The defendants also refused to consent to the extension of time as suggested by the plaintiff. The provision to extend time by consent is actually embodied in the directions of the Jiangmen Court.

85. Thus this court must be driven to the irresistible inference that the defendants’ summons is an abuse of process of court as their obvious intention is to frustrate the carriage of the consent order into effect and to circumvent the 4 May order. There is no reason why the orders of 4 May and 6 June 2007 should be revisited.

86. Further the defendants’ conduct would also amount to a breach of paragraph 7 of the consent order (which is an agreement between the parties) and their implied undertaking that neither party would prevent performance of the order and that each party would do all that is reasonably necessary to see that the terms of the order are carried out as submitted by counsel for the plaintiff, Mr Johnny Mok SC who appeared together with Mr Douglas Lam. They relied on paragraph 8-O8 of the Law and Practice of Compromise (4^th edition).

87. Lastly I have again asked Mr Harris why the auditing by Shinewing, an independent auditor in Hong Kong who are already in charge of the auditing would not assist Chan and Yiu eventually in their Jiangmen Court action. Apparently their auditor’s report when it is ready can be used by Chan and Yiu in the Jiangmen Court action. There is no answer given on instructions by Chan and Yiu. For the aforesaid reason I dismiss the defendant’s summons.

Epilogue

88. I have set out my various rulings in this action concerning a number of interlocutory applications and grouped them together in order that one can have a better understanding of each ruling from the background and development of the case.

( D. Yam )
Judge of the Court of First Instance
High Court

Messrs T.C. Foo & Co., solicitors for the plaintiff instructing :

(1) Mr Douglas Lam on 4 May 2007;
(2) Ms Winnie Tam SC, leading Mr Douglas Lam on 6 June 2007;
(3) Ms Winnie Tam SC, leading Mr Douglas Lam on 9 July 2007;
(4) Mr Douglas Lam on 3 August 2007; and
(5) Mr Johnny Mok SC, leading Mr Douglas Lam on 16 August 2007

Messrs Damien Shea & Co., solicitors for the defendants instructing :

(1) Mr Authur Wong on 4 May 2007;
(2) Mr Paul Harris SC, leading Mr Authur Wong on 6 June 2007;
(3) Mr Paul Harris SC on 9 July 2007;
(4) Mr Paul Harris SC on 3 August 2007; and
(5) Mr Paul Harris SC on 16 August 2007.

“	(1)	[a]	There was a distinction between civil contempt and criminal contempt in relation to the mental element required. In civil contempt, liability was strict in the sense that an intention to interfere with or impede the administration of justice was not required.
		[b]	Contempt was conduct which was ‘neither casual nor accidental and unintentional’.
		[c]	Unlike criminal contempt, it was not necessary to prove that the alleged contemnor appreciated that his conduct would constitute a breach of the order.
		[d]	Moreover, the fact that the act or omission was bona fide and based on legal advice was not a defence. …”
	[Sub-paragraphing supplied]

“	14.	However there was a drastic change when it came to the afternoon of 15^th May 2007. At around 3p.m. the 1^st Defendant and I were at the office of Messrs. Virginia Szeto & Co. and we gave a final check to the Original Documents and the same would be delivered to Shineway afterwards. The 1^st Defendant suddenly received a phone call from one Mr. Raymond Yung of DSC whom I believed to be a legal clerk to DSC. He was told not to deliver the Original Documents to Shineway. He further requested us to come up to the office of DSC. We immediately suspected if it was really unnecessary for us to deliver the Original Documents and the 1^st Defendant told Mr. Yung our suspicion. Mr. Yung replied that the Original Documents should not be delivered according to the ‘highest level of instructions’ he received. We then left Messrs. Virginia Szeto & Co’s office and came to DSC’s office with doubt and uncomfortable feeling.
	15.	When we arrived at DSC’s office we met Mr. Damien Shea and Mr. Raymond yung. We were told by Mr. Shea that Mr. Arthur Wong had just sought for further legal advice from Mr. McCoy of Senior Counsel. It was the advice from Mr. McCoy that we needed not to deliver the Original Document to Shineway.
	16.	The gist of Mr. McCoy’s advice is this. As the order by Recorder A. Chan was procured by fraud and/or fraudulent misrepresentation the said order should be set aside, and Mr. McCoy also advised us to issue a Writ of Summons to set aside the said Order and therefore not until the disposed of the new case we should not deliver the Original Documents.
	17.	Although we had sought for previous advice which are inconsistent with Mr. McCoy’s advice the 1^st Defendant and I verily believed that Mr. McCoy’s advice was a piece of good advice. We understood that the ‘highest level of instructions’ was meant to be Mr. McCoy’s advice.
	18.	Therefore relying on Mr. McCoy’s advice and pursuant to the ‘highest level of instructions’ we, during the conference, decided to withhold delivery of the Original Documents to Shineway.
	19.	On the same date and pursuant to Mr. McCoy’s advice we also decided to take out a summons to stay the Order (‘Stay Summons’). The Stay Summons was fixed to be heard on 6^th June 2007. By taking out the Stay Summons it would be apparent for the Plaintiff that for some reasons the Order might not be complied with. However the Plaintiff made no complaint as to the taking out of the Stay Summons.
	20.	The 1^st Defendant and I cannot recall that anyone had advised us the following matters during the conference at DSC’s office on 15^th May 2007 :-
		a.	The effect of the Stay Summons to the Order; and
		b.	Possibility of being held contempt where Stay Summons is taken but the Order was not complied with on time.”

(1)	the plaintiff has not proven beyond reasonable doubt that the two defendants were aware of the consequence of non-compliance of the 4 May Order, and in particular that they would be in contempt of court should they not deliver the Subject Documents on or before the deadline of 15 May 2007;
(2)	by 6 June 2007, the defendants had or at least had substantially complied with the order and in the light of the non-disclosure on the part of the plaintiff of this fact when he applied for the leave of the court herein, this application of the plaintiff should be dismissed

“	14.	Before considering whether a contempt has been committed where the breach of a court order is involved, the court must be satisfied of the following :
		(1)	The relevant order, together with an appropriate penal notice, must generally have been personally served on the alleged contemnor: RHC O 45 r 7(2)(a), (4). This, however, is the general rule. Personal service will not necessarily required to be shown in relation to an order requiring a person to abstain from doing something, if the person to be served (the alleged contemnor) was present in court when the order was made or that person was notified of the terms of the order whether by telephone, telegram or otherwise: see O 45 r 7(6); Hong Kong Civil Procedure 2002 at para 52/2/8. The court however retains a discretion whether or not to enforce an order where it has not been personally served: O 45 r 7(6) is in permissive terms.
		(2)	The relevant order must also contain, as I have said, a penal notice. Where there has been a failure in this regard, the court nevertheless has the power to enforce the order subject of course to the exercise of its discretion: see O 45 r 7(6); Hong Kong Civil Procedure 2002 at para 45/7/6. However, it is in my view essential that the alleged contemnor shall have been told, whether by being present in court of by being notified by telephone, telegram or otherwise, that the consequences of breaching any order made is to be held in contempt of court and liable to a process of execution. This I regard as a natural consequence of O 45 r 7(4) which requires a penal notice to be endorsed on the relevant order. In my view, whether the penal notice is made in writing or given orally, the alleged contemnor must be made aware of the consequences of a breach of the relevant order. It would be an extremely rare exercise of discretion under O 45 r 7(6) for the court to dispense with this requirement and in principle, I cannot conceive of any circumstances in which it would be right to dispense with such a requirement: cf Hong Kong Civil Procedure 2002 at para 52/2/9.
			…
	17.	Having said that the standard of proof is the criminal one (ie beyond reasonable doubt), I should however point out what may possibly the regarded as anomalies in this type of proceedings:
		(1)	Affidavit evidence is invariably used in committal proceedings unless otherwise directed by the court: see O 38 r 2(3); Hong Kong Civil Procedure 2002 at para 52/6/3. Furthermore, hearsay evidence is permissible: see Hong Kong Civil Procedure 2002 at para 52/6/3; Savings & Investment Bank Ltd v Gasco Investments (Netherlands) BV (No 2) [1988] Ch 422. The court obviously has a discretion whether or not to disregard such evidence and is certainly duty bound to consider carefully the quality of such evidence. I would, however, make this observation: where contempt proceedings are involved, although affidavit evidence is both admissible and normal, it is important that as much first hand evidence of the actual contempt is adduced or if not, an explanation given as to why such evidence is unavailable. This is not to fetter a court’s consideration of hearsay evidence where appropriate, but no court would wish to make a finding of contempt unless the evidence to support such a finding was good. It is to be borne in mind that in contempt proceedings, there is no burden on the respondent to prove his innocence: see Concorde Construction Co Ltd v Colgan Co Ltd (No 2) [1984] HKC 253 at 257.
		(2)	Unlike in criminal proceedings, where mens rea has to be demonstrated, there is no requirement in civil contempt proceedings to show that the alleged contemnor intended to disobey the order (ie his conduct was contumacious). It is sufficient to proof (a) that he knew the facts which are said to make his act or omission a contempt and (b) that such act or omission was not accidental: see the cases referred to in Hong Kong Civil Procedure 2002 at para 52/1/6. Of course, the alleged contemnor should be aware of the order and the consequences of breaching it: see paras 14(1) and (2) above.”

“	(i)	At 3:15 p.m. : Cheng Tsz Ying (principal of TCF) made enquiries with Bowie Cheung and/or Richard Wong (accounting managers of Shinewing) who informed Cheng Tsz Ying that Shinewing has not received the subject documents. [see : SB-20 paragraph 3 of Affirmation of Cheng Tsz Ying]
	(ii)	About 3:30 p.m. : Cheung Man Ching Rachel (a clerk to DSC) telephoned Shinewing to notify the delivery of subject documents and asked to speak to Bowie Cheng who was the person in charge of Shinewing but was told that he was on business trip. She then asked to speak to Barry Ip (the managing partner of Shinewing) who claimed that Bowie Cheng was not in office and Barry Ip refused to accept the subject documents because he was not in the position to accept them. He then caused an undertaking letter together with the Court Order dated 4 May 2007 be faxed to Shinewing. [see : CB-48, paragraph 5 of Affirmation of Cheung Man Ching and exhibit CMC-1 (CB-112)]
	(iii)	Cheung Man Ching Rachel then telephoned Ho Wing Kwong Sam (the plaintiff’s solicitor TCF) to see if he could send in a representative to witness the delivery at Shinewing. However he was in the conference and until about 4:30 p.m. Cheung Man Ching Rachel was informed that the plaintiff would not send any representative there for such purpose. [see: CB-48, paragraph 6 of Affirmation of Cheung Man Ching]
	(iv)	4:00 p.m. : Ms Rachel Cheung (a paralegal staff member of DSC) called Shinewing to arrange for delivery of the subject documents. Mr Barry Ip said he refuses to accept the delivery without explanation. Nevertheless it was delivered. [see : CB-42, paragraph 11 of 6^th Affirmation of Yiu Hing Wai]
	(v)	4:10 p.m. : Cheng Tsz Ying (principal of TCF) made another enquiry with Bowie Cheng and/or Richard Wong (accounting managers of Shinewing) who informed Cheng Tsz Ying that Shinewing has not received the subject documents. [see : SB-20, paragraph 3 of Affirmation of Cheng Tsz Ying]
	(vi)	4:30 p.m. : TCF replied that it will not send a representative to witness the deliver. [see : CB-48, paragraph 6 of 6^th Affirmation of Cheung Man Ching]
	(vii)	Between 4:10 p.m. to 5:00 p.m. :
		(1)	Cheng Tsz Ying affirmed to his 3^rd Affirmation at M.L. Tam & Co. Solicitors of Unit B, 11^th Floor, Two Chinachem Plaza, 135 Des Voeux Road Central, Hong Kong, stating that he had made enquires with Shinewing at 3:15 p.m. and 4:10 p.m. that they had not received subject documents from the defendants.
		(2)	3^rd Affirmation of Cheng Tsz Ying and statement pursuant to RHC Order 52 R. 2 filed at 5:00 p.m. in support of plaintiff’s ex parte application for leave to issue contempt proceedings.”

“	3.	… the Order might be invalid (in the absence of personal service …
	4.	Various strategies were considered including that an urgent stay of the Order be sought. The lay clients representative was adamant that as a commercial decision
		(a)	they would not give the original copies to Shinewing ….”

(1)	“New Bright” Synthetic Leather Company Limited;
(2)	Saint Fair “International” Limited;
(3)	Saint Fair “Holdings” Limited; and
(4)	昇暉合成皮革 (鶴山) 有限公司 (translated as “Sing Fai” Leather (Hok Shan) Company Limited).

(1)	Chan and Yiu alleged Wang for refusing to deliver goods to their customers, i.e. their customers of International; whereas
(2)	Wang alleged that his refusal to deliver goods was because International and New Bright were indebted to Sing Fai and they had refused to make payments up to the amount of about $9.5 million.

(1)	the Saint Fair Group, i.e. Holdings and International and
(2)	New Bright and Sing Fai.

(1)	there is something wrong with the Subject Original Documents and that Wang might have committed violations of the PRC laws and in particular the PRC administrative regulations in relation to taxation. He also noted that there were inconsistencies or discrepancies in relation to certain account records of Sing Fai and he was still investigating in the matter;
(2)	Wang was trying to siphon off funds belonging to New Bright and/or Sing Fai by requesting customers to pay to his Hong Kong company called昇暉合成皮革(香港)有限公司(“Hong Kong Sing Fai”) which is just different from the original name of Sing Fai with the words Hok Shan(鶴山)and that happened since 15 August 2006.

“	In compliance with the Order made by the Honourable Mr Justice Yam dated 4^th May 2007, the Subject Documents as defined by the Order would be delivered up to Shinewing (HK) CPA Limited. …
	The Subject Documents were made photocopies and certified by an independent solicitor.
	…”

(1)	diversion of funds belonging to Sing Fai;
(2)	keeping two different sets of account for Sing Fai.

(1)	their summons dated 4 May 2007 applying to vary Recorder A. Chan’s consent order to the extent that Chan and Yiu can hold a shareholders meeting for New Bright and substitute that application by setting the whole consent order of 11 September 2006 aside;
(2)	their summons dated 31 May 2007 applying to stay my order of 4 May 2007 instead of until the resolution of the defendants’ another summons of 4 May 2007 and substitute by pending the resolution of their HCA1027/2007; and
(3)	in the same defendants’ summons of 31 May 2007, they also asked for consolidation of the action herein with HCA1027/2007.

(1)	Mr Douglas Lam on 4 May 2007;
(2)	Ms Winnie Tam SC, leading Mr Douglas Lam on 6 June 2007;
(3)	Ms Winnie Tam SC, leading Mr Douglas Lam on 9 July 2007;
(4)	Mr Douglas Lam on 3 August 2007; and
(5)	Mr Johnny Mok SC, leading Mr Douglas Lam on 16 August 2007

(1)	Mr Authur Wong on 4 May 2007;
(2)	Mr Paul Harris SC, leading Mr Authur Wong on 6 June 2007;
(3)	Mr Paul Harris SC on 9 July 2007;
(4)	Mr Paul Harris SC on 3 August 2007; and
(5)	Mr Paul Harris SC on 16 August 2007.