RE NDT (BVI) TRADING LTD

HCCW 49/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 49 OF 2008

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D E C I S I O N

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1.  This is a summons issued by the petitioners under Order 24 rule 14A of the Rules of the High Court, seeking leave of the court that part of the documents disclosed in these proceedings by the company being the subject of the petition, NDT (BVI) Trading Limited (“the Company”), may be used:

(a)  in HCA No. 342 of 2006 (“the Guarantee Action”);

(b)  to lodge a criminal complaint against two persons, Pang Kin Shing Michael (“Pang”) and Lo Chi Sum Andrew (“Lo”); and

(c)  to lodge a complaint to theLaw Society against [a firm of solicitors].

2.  The summons was served on the Company. The present position of the Company is that it takesa neutral stance in this application, and it has been agreed between the Company and the petitioners no order is to be made as to costs.

3.  The Guarantee Action was brought by the petitioners against Pang, Wyman Chan Chun Chung (“Chan”) and Lo. The petitioners’ solicitors have also provided copies of their summons and supporting affidavit to the solicitors for the defendants in the Guarantee Action. There is placed before the court a letter of objection from the solicitors of Pang and Chan. None of them has appeared today to make submissions.

4.  Under Order 24 rule 14A, any undertaking, whether express or implied, not to use a document for any purposes other than those of the proceedings in which it is disclosed shall cease to apply to such document after it has been read to or by the court, or referred to, in open court, unless the court for special reasons has otherwise ordered on the application of a party or of the person to whom the document belongs.

5.  Thus, the court has discretion to relax or modify the implied undertaking for special reasons. The general principle is that any release or modification of this undertaking should not occasion injustice to the person giving discovery (Crest Homes Plc v Marks [1987] 1 AC 829 at 860B to C).

6.  In exercising this discretion, the court may have regard to many factors and they vary from case to case. It is not possible to give an exhaustive list. A number of these factors were mentioned in Mead Corporation v Carbonless Papers (Australia) Pty Limited & Others [2002] WASC 237 para 45. They include the nature of the document, the nature of the information in the document, any prejudice the author of the document may sustain, and the likely contribution of the document to achieving justice in the second proceedings.

7.  Leave of the court is required before reporting any wrongdoings revealed by documents disclosed on discovery to the appropriate authorities (Disclosure by Matthews and Malek, 2^nd ed, para 13.21). It is a balancing exercise whether what is sought to be achieved by relaxing the implied undertaking is more important for the administration of justice generally, such as in discouraging and punishing false evidence, than in maintaining confidentiality so as not to operate as a disincentive to full and frank discovery.

8.  In A v A; B v B [2000] 1 FLR 701 at 746H to 747A,whilst acknowledging the public interest in full and frank disclosure on discovery, Charles J stated that if a court is satisfied there had been illegal or unlawful conduct which it had no power to deal with itself, it should generally report the relevant material to the relevant public authority. In Marlwood Commercial Inc v Kozeny [2004] EWCA Civ 798 at para 52, the English Court of Appeal stated that in the absence of any other factors argued to constitute some injustice, the public interest in the investigation or prosecution of serious fraud should take precedence over the general concern of courts to control the collateral use of compulsorily disclosed documents. It was reasoned that the court’s exceptional permission for relaxing the rule against collateral use in cases of serious fraud in the international context does not give cause for thinking that proper disclosure in the general run of cases will be undermined. See also Capital Television Group v Northern Rivers Television PtyLimited [1995] NSWSC 75 at para 10.

9.  Miss Ismail has placed before me a detailed submission with meticulous analysis of the issues in the petition and the Guarantee Action. I also have from the petitioners’ solicitors in a separate document a table listing each of the documents disclosed in the petition sought to be used in the Guarantee Action, to lodge a criminal complaint and a complaint to the Law Society, and what particular issue or issues each document is relevant to. Five issues are listed in that table. Issues A to C are relevant to issues in the Guarantee Action. Issue D is relevant to the complaint of perjury by Pang and Lo, and Issue E is relevant to the complaint against [a firm of solicitors] to the Law Society.

10.  I do not propose to recite counsel’s arguments. I am satisfied each of these documents are material and relevant to one or more of the identified issues. There is a close factual connection between the issues in the petition and the Guarantee Action. The validity of a settlement agreement is a key issue common to both proceedings.

11.  I am also satisfied there is a prima facie case that these documents would appear to contradict parts of the witness statement and affirmation of Pang, the witness statement and affirmation of Chan, the witness statement and affirmation of Lo filed in the Guarantee Action, as well as parts of the amended defence in the Guarantee Action. These contradictions and inconsistencies were set out at paragraphs 34 to 40 of Miss Ismail’s submission.

12.  I am persuaded special reasons are made out in this case for relaxing the implied undertaking for use of the documents in question in the Guarantee Action. In the interest of justice, the court determining the Guarantee Action should have available to it the documents in question to enable the court to arrive at the truth. As mentioned earlier, the Company has taken a neutral position. It does not appear to me the Company would suffer any prejudice if the implied undertaking of the petitioners not to use the documents disclosed in other proceedings is relaxed.

13.  I would also allow the documents to be used for making a criminal complaint against Pang and Lo and for lodging a complaint to the Law Society against[a firm of solicitors]. In view of the stark contradictions in the witness statements and affirmations in the Guarantee Action, it may be appropriate for there to be an investigation by the relevant authorities into the complaints of perjury. As for [a firm of solicitors], it would appear from the documents that the firm had purported to act for the Company without a retainer letter and had without proper authority commenced 6 High Court actions in September 2006, contrary to the provisions in the Solicitors’ Guide to Professional Conduct Rules and the Solicitors Practice Rules. This would appear proper to be looked into by theLaw Society.

14.  I make an order in terms of paragraph 1 of the petitioners’ summons as amended. The documents that may be used in making a criminal complaint and a complaint to the Law Society are restricted to those documents in the table prepared by the petitioners’ solicitors indicating that they are relevant to Issues D and E respectively.

HCCW 49/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 49 OF 2008

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D E C I S I O N

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1.  There are two issues I need to resolve in this hearing regarding the discovery given by NDT (BVI) Trading Limited (“the Company”) in this petition to wind up the Company on just and equitable grounds.  The petitioners own 20% of the shares of the Company.  It is alleged in the petition that the majority shareholders and other parties to a shareholders’ deed have disregarded their obligations to the petitioners under the deed, that the petitioners have been excluded from the management of the Company, there is need for investigation of the management of the Company, and it is just and equitable to wind up the Company.

2.  The first issue is whether the Company should give discovery of documents relating to the consideration of, and the commencement and discontinuance of 6 High Court Actions No. 2030 to 2035 of 2006 brought by the Company and/or its wholly owned subsidiary New Digital Technology Holdings Limited (“NDTHL”) against a director Lo Chi Sum and another, including legal advice rendered to the plaintiffs and the retaining of solicitors Messrs Or, Ng & Chan (now known as ONC Lawyers).  The detailed items are set out in an annex to the summons issued by the petitioners on 22 October 2008.  I shall refer to the 6 High Court Actions as “the Lo Actions”.  This issue is referred to as “the Lo Actions discovery issue”.

3.  The other issue is whether the documents disclosed in item 25 of the Company’s list of documents (described as the books and ledgers for 2007 of Beijing NDT Information and Technology Company Limited (“the Beijing Company”), a subsidiary of the Company in the PRC) and item 48 of the Company’s supplemental list of documents (described as the minutes book of the Beijing Company from 2007 to date) should be made available for inspection in Hong Kong rather than in Beijing as offered by the Company.  I shall refer to this issue as “the Hong Kong inspection issue”.

4.  I will deal with the issues in the order set out above.

The Lo Actions discovery issue

5.  The writs in the Lo Actions alleged misfeasance, breach of duty and breach of trust by Mr Lo in respect of his involvement with various entities to carry on business in competition with or against the interest of NDTHL and to permit NDTHL to dispose of its wholly owned subsidiary in Beijing NDT Digital Multimedia Technology Company Limited at no consideration to a company established or operated by him.

6.  The writs were issued on 14 September 2006.  The solicitors on record for the plaintiffs were Messrs Or, Ng & Chan.  The file reference of solicitors on the writ showed the name Michael Pang, who was not a director of the Company between 7 November 2002 and 22 September 2006.  Messrs Or, Ng & Chan had also presented notifications to the Companies Registry of the resignation of Mr Lo as a director and the appointment of Mr Pang as a director of three Hong Kong subsidiaries of the Company in October 2006.

7.  The Lo Actions were discontinued by consent on 19 October 2006.  Messrs Or, Ng & Chan acted for the Company and NDTHL in respect of such discontinuance.

8.  It was submitted by Miss Roxanne Ismail on behalf of the petitioners that the documents sought relate to the issues pleaded in paragraphs 14(g) and (h) of the re-amended petition.  Sub-paragraph (g) alleges that under the shareholders’ deed, the petitioners’ consent is required before the Company or its subsidiaries commences or settles any litigation involving a claim in excess of HK$1 million and the petitioners’ consent had never been sought regarding the institution of the Lo Actions or their collusive discontinuance with no consideration to the Company.  Sub-paragraph (h) states that the pleadings in the Lo Actions bespeak of fraudulent breaches of fiduciary duties owed by Mr Lo and other executive directors to the Company.

9.  Mr Patrick Tsang argued for the Company as the writs in the Lo Actions did not state the claim was in excess of HK$1 million, there could be no breach of the shareholders’ deed in bringing those actions without obtaining the petitioners’ consent and the documents in these actions should be regarded as irrelevant to the issues in the petition.  I do not think that is right.  As pointed out by Miss Ismail, the claims in the writs were not quantified, they alleged serious breaches of duty, and whether the claims if quantified would be in excess of HK$1 million would be a matter to be determined in the petition.  Besides, there are other complaints raised in sub-paragraphs (g) and (h) of the re-amended petition.  There is the allegation that the discontinuance of the actions was collusive, and that the fraudulent breaches of fiduciary duties owed by Lo and other executive directors to the Company pleaded in the Lo Actions indicated a case for investigation of the management.  I hold that the relevance requirement for discovery is satisfied.

10.  Next is whether there is prima facie evidence to establish that the documents sought are in existence and they are within the possession, custody or power of the Company.  I rule that this requirement is also satisfied.  In the affirmations filed by the Company, none of the deponents have stated on oath that the documents sought are not in the possession, custody or power of the Company, although that assertion was made in a letter of the Company.  The documents would have been retained by Messrs Or, Ng & Chan and they are obliged to do so for at least seven years.  They are within the power of the Company as the Company has a right to ask for their release from its former solicitors.

11.  The Company pointed out that these documents were sought by the petitioners in High Court Action No. 342 of 2006, brought by the petitioners against Mr Lo and two others and discovery was refused by Master J Wong, whose order was upheld on appeal by Suffiad J on 12 June 2007.  Discovery was refused in that action on the basis that the documents merely related to or could impinge on the credibility of the defendants, so the petitioners were not able to satisfy the relevance requirement for discovery.  The issues in the High Court Action are whether the petitioners are entitled to claim payment from the defendants under the subscription deeds as a result of shortfall in the net profits of the Company and whether the person who purportedly signed the settlement agreement on behalf of the petitioners with the defendants was authorised to do so.  They are very different from the issues raised in paragraphs 14(g) and (h) of the re-amended petition.  I reject the submission of the Company that the present application is an attempt to have the discovery issue re-litigated.

12.  The Company contended that this application is an attempt to obtain discovery in the petition via the back door for the purpose of using them in High Court Action No. 342 of 2006.  I reject this as well.  An implied undertaking is attached to any discovery given in the petition (see Order 24 r 14A).  If the petitioners are to use the documents disclosed in this petition in another action, leave of the court is required.  The court trying the petition would have control over the extent to which the documents in the Lo Actions are to be read in open court.  The Company can seek protection at trial if it is envisaged that privileged information might be read.

13.  The last objection raised by the Company is that these documents are protected by legal professional privilege.

14.  Miss Ismail has referred me to a line of English authorities which established the principle that a shareholder in a company is entitled to disclosure of all documents obtained by the Company in the course of the company’s administration of its affairs, including advice by solicitors to the company, but not where the advice relates to hostile proceedings between the company and its shareholders.  This principle is analogous to the rule which applies as between a trustee and the beneficiaries to a trust (Woodhouse v Woodhouse (1914) 30 TLR 559; Re Hydrosan Limited [1991] BCC 19 at 20G to 21C; CAS (Nominees) Limited v Nottingham Forest plc [2002] BCC 145 at paras 11 to 19; Arrow Trading and Investments Est 1920 & Another v Edwardian Group Limited & Others [2005] 1 BCLC 696 at para 24).  Here, the petitioners are not in hostile ligitigation with the Company.  Although the petitioners seek to wind up the Company on just and equitable ground, the Company is merely a nominal although essential respondent, the wrongs alleged are against those in control of the Company rather than by the Company itself.  Hence, legal professional privilege is not available against the petitioners who are shareholders of the Company.

15.  These principles were referred to in brief in Hong Kong Civil Procedure 2009, Volume 1, paras 24/5/25 and 24/5/27.

16.  Mr Tsang submitted that these English authorities have not been considered by a Hong Kong court and this court should be slow in adopting these decisions on a shareholder’s right to inspect privileged documents.  I do not consider this to be a reason for not following the English decisions, provided of course the basis for the principle established is sound.

17.  Mr Tsang referred to me to an article in a journal (“Privileged Litigants: Shareholder’s Rights, Information Disclosure and Corporate Privilege” by Joan Loughrey, published in Journal of Business Law, October 2007 at 778 to 806), in which the learned author examined various legal rationales for the principle relating to a shareholder’s right to inspect the company’s legal advice and other privileged documents in litigation.  I have read this lengthy article carefully.  I appreciate the conceptual difficulty to find a common basis that may justify this right of a shareholder in various kinds of situations and litigations, such as shareholders in a company with a diverse share ownership, and in derivative actions.  Here, we are not concerned with those situations which may pose difficulties.  Given the limited number of shareholders in the Company, there should be no problem to a legitimate claim to common interest privilege, as is recognised by the author (at 806).  Whatever the arguments may be in the case of a derivative action, it is quite clear that the petitioners here are not involved in hostile litigation with the Company.

18.  I am not persuaded that the principle in the English decisions giving a right to a shareholder to inspect a company’s privileged documents is unsound.  I will adopt the principle and hold that legal professional privilege is not available against the petitioners.

19.  I order discovery to be given of the documents in the Lo Actions.  Subject to hearing counsel for the time required for compliance with the order, I will make an order in terms of paragraphs 1 to 3 of the summons.

The Hong Kong inspection issue

20.  Under Order 24 rule 11(1)(c) of the Rules of the High Court, where a party offers inspection at a place which, in the opinion of the court, is unreasonable, the court may, subject to rule 13(1), order inspection at such place and in such manner as it thinks fit.

21.  Miss Ismail acknowledged that if the Company had properly established on affidavit it requires all of the documents in item 25 in Beijing (which relates to documents in 2007 and comprises over 10,000 pages in the Company’s estimate) for the daily operation of its business, the petitioners would accept that to be reasonable.  Here, there has been no attempt to demonstrate this other than by a bare assertion that all of the books and ledgers of the Beijing Company are inter-related and are therefore required for its present operation.  I am inclined to agree with Miss Ismail.

22.  Two other grounds were advanced by the Company why inspection of the documents of the Beijing Company should only take place in Beijing:

(1) if the books and ledgers are not available for spot checks by the tax authorities or the Beijing Administration for Industry and Commerce, the Beijing Company may be fined or penalised; and

(2) the law in the PRC prohibits taking the accounting archives out of the border.

23.  The Company has produced a legal opinion from a Beijing lawyer to back up these two grounds.  The petitioners have obtained a legal opinion from PRC lawyers asserting the contrary.

24.  The legal provision relied on by the Company’s legal expert is Article 18 of The Measures on Administration of the Accounting Archives (“the Measures”).  I will take the translation from the legal opinion of the petitioner’s legal expert which reads:

“The accounting archives of all units within the territory of our nation [translated as “within the border of China” in the expert opinion obtained by the Company] shall not be carried outside of the territory [translated as “taking out of the border” by the Company’s expert].  The accounting archives of foreign units of our nation and enterprises established outside of the territory by the domestic units (hereinafter referred to as “overseas units”) shall be administered in accordance with these Measures and the relevant provisions of the nation.”

25.  There is no reasoning or explanation in the opinion of the Company’s expert of what is meant by the material phrases “within the border of China” and “taking out of the border”.  Miss Ismail submitted this expert did not even give an opinion that it would contravene Article 18 if the documents are temporarily removed to Hong Kong for inspection.  This seems to be a fair observation.

26.  The Measures are administrative measures enacted by the PRC Ministry of Finance (“the MOF”).  Under Article 21 of the Measures, the MOF is the sole authority eligible for interpreting the Measures.  It was pointed out by the petitioners’ legal expert that other administrative measures and administrative circulars issued by the MOF have explicitly defined and provided that “the places outside of the PRC territory” and the Hong Kong SAR are two distinct areas with each excluding the other.  Hence, under the administrative measures issued by the MOF, the Hong Kong SAR is not a part of “the places outside of the PRC territory”.  It was reasoned that carrying the accounting books of a PRC domestic unit to the Hong Kong SAR will not constitute the carrying of the books “outside of the territory” as prohibited by Article 18.

27.  This reasoning appeared to me to be sound.  There is no need to consider the other reason advanced in the expert opinion of the petitioners’ lawyer based on the provisions in the Basic Law of Hong Kong.  I am not persuaded that the temporary removal of the books and ledgers of the Beijing Company to Hong Kong to facilitate inspection would violate Article 18.

28.  Regarding the minutes book of the Beijing Company, it has not been suggested by any of the legal experts that such documents would be regarded as “accounting archives” and caught by Article 18.

29.  As for the concern that the Beijing Company might be fined if the documents are not available for spot checks by the authorities, it would appear from the rules cited by the petitioners’ legal expert (Article 18 of the Manuals for Tax Auditing Work issued by the State Taxation Administration) that prior notification is likely to be given before the on-site tax auditing by the authorities, so that the Beijing Company should be able to meet the requirement for spot check if required.

30.  I accept the reasons advanced by the petitioners why it would be more appropriate for inspection to take place in Hong Kong.  There have been a lot of difficulties with inspection to date.  From time to time, the matter was brought back to this court for the differences to be resolved, and directions were made in October and November 2008.  It would be more conducive to resolving possible disputes that may arise if the inspection is to take place in Hong Kong.  I also bear in mind the volume of documentation involved, and the likely time and costs required for inspection to be carried out.

31.  For these reasons, I order inspection of the two items of documents in the possession of the Beijing Company to be given in Hong Kong.

32.  Costs of the applications today should follow the event.  Mr Tsang is not resisting that.  The only question is whether it should be paid forthwith or in any event.

33.  I see no good reason why the petitioners should have to wait until the conclusion of the trial to get their costs, as these applications are free-standing and would in no sense depend on the outcome of the petition.

34.  I order the Company to pay the petitioners’ costs of the two summonses forthwith, to be taxed if not agreed.