MELVIN WAXMAN v. LI FEI YU AND OTHERS

HCA 1973/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 1973 OF 2012

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REASONS FOR DECISION

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INTRODUCTION

1.  On 27 April 2016, Master H Au-Yeung made the following order (“the Wallersteiner Order”):-

“The 9^th Defendant shall indemnify the Plaintiff against all costs incurred by the Plaintiff in this action forthwith on common fund basis to be taxed if not agreed, subject to the setting-off of any costs to be paid by the 1^st, 2^nd, 4^th [to] 7^th Defendants to the Plaintiff save that as far as the Plaintiff’s costs on the director’s remuneration claim is concerned, the Wallersteiner order made herein only covers the time up to the consideration by the Plaintiff’s legal team (counsel and solicitors included) of the 1^st Defendant’s Defence and the giving of advice thereon to the Plaintiff”.

2.  On 17 May 2016, the Master made the following further order (“the Retention Order”):-

(1) the 9^th Defendant’s summons dated 2 December 2015 (“the Payment Out Summons”) seeking payment out to it of the sum of HK$1,996,000 (“the Sum”) paid into court by the 1^st, 2^nd, 4^th to 7^th Defendants on 14 July 2015 as sanctioned payment (“the Sanctioned Payment”) be dismissed;

(2) the Sum should be retained in court until the Wallersteiner Order against the 9^th Defendant has been satisfied;

(3) the costs of the Payment Out Summons be paid by the 9^th Defendant to the Plaintiff, to be taxed on a common fund basis if not agreed, with certificate for counsel; and

(4) the costs of the 9^th Defendant’s summons dated 20 April 2016 (“the Strike Out Summons”) be paid by the 9^th Defendant to the Plaintiff, to be taxed on a common fund basis if not agreed, with certificate for counsel.

3.  The 9^th Defendant appealed against the Wallersteiner Order and Retention Order by two notices of appeal dated 10 May 2016 and 27 May 2016 respectively (“the 1^st Notice of Appeal” and “the 2^nd Notice of Appeal”).

4.  The 1^st and 2^nd Notices of Appeal came before me on 24 and 25 January 2017.  At the conclusion of the hearing, I informed the parties that:-

(1) in respect of the appeal under the 1^st Notice of Appeal, I would (i) vary the Wallersteiner Order such that the indemnity in the Plaintiff’s favour would be subject to a cap of 70% of the recovery made by the Plaintiff for the benefit of the 9^th Defendant in this action (ie, 70% of HK$3,108,234) and (ii) re‑cast the setting off provision in the Wallersteiner Order; and

(2) the 2^nd Notice of Appeal would be dismissed,

with reasons to be given later, which I now do.

5.  I also dealt with the costs of the proceedings below and of the appeals, including the costs of the adjournment of the appeal hearing on 3 August 2016, and I summarily assessed those costs.  I do not propose to set out my reasons for making the various orders as to costs, or my summary assessment of those costs, here. If any parties require those reasons, they may apply for a transcript of the relevant part of the hearing on 25 January 2017.

Brief background facts

6.  The 9^th Defendant was incorporated in Hong Kong under the Companies Ordinance on 22 November 2000. The 1^st Defendant, the Plaintiff and his son (Larry Waxman) were at all material times and are the shareholders of the Company, holding 60%, 30% and 10% respectively of all the issued share capital of the 9^th Defendant. The three of them together with one Mr Keith Ngai were, until 18 February 2015, the only directors of the Company.  The 1^st Defendant has also been the president of the 9^th Defendant since its incorporation.

7.  This is a derivative action brought by the Plaintiff (suing on behalf of himself and all other shareholders of the 9^th Defendant except the 1^st Defendant) on 22 October 2012 against the 1^st Defendant and 7 other companies (namely, the 2^nd to 8^th Defendants) which the Plaintiff says are under the control of the 1^st Defendant for wrongdoings allegedly committed by the 1^st Defendant as director and president of the 9^th Defendant resulting in loss and damage to the 9^th Defendant.

8.  The 9^th Defendant has been joined as a nominal party to this action.

9.  In the Amended Statement of Claim, the Plaintiff raises (inter alia) the following grounds of complaint:-

(1) The 1^st Defendant misused or misapplied assets belonging to the 9^th Defendant amounting to HK$1,102,322.40 to meet the operating expenses of the 2^nd to 8^th Defendants (“the Operating Expenses Claim” – paragraph 12(1) of the Amended Statement of Claim).

(2) The 1^st Defendant misappropriated the sum of HK$235,528 from the 9^th Defendant (“the Misappropriation Claim” – paragraph 12(2) of the Amended Statement of Claim).

(3) The 1^st Defendant caused or permitted the 2^nd to 8^th Defendants to carry on their businesses at the registered office of the 9^th Defendant, and to use and benefit from the administrative and supporting services provided by the employees of the 9^th Defendant, without making any payment to the 9^th Defendant (“the Administrative Resources Claim” - paragraph 12(3) and (4) of the Amended Statement of Claim). The Plaintiff has quantified this claim in the amount of HK$4,666,548.

(4) The 1^st Defendant caused the 9^th Defendant to pay about HK$2,242,349 from 2003 to 2010 to himself purportedly as director’s remuneration (“the Director’s Remuneration Claim” – paragraphs 21 to 26 of the Amended Statement of Claim).

10.  On 8 November 2012, the 5^th Defendant remitted the sum of HK$1,112,234 to the account of the 9^th Defendant in settlement of the payments, or part of the payments, made by the 9^th Defendant on behalf of the 2^nd and 4^th to 8^th Defendants (“the Corporate Defendants”).

11.  On 7 December 2012, the Corporate Defendants issued a summons seeking to strike out the Statement of Claim.  Following amendments to the Statement of Claim made on 14 February 2013, the Corporate Defendants issued a further summons on 23 May 2013 seeking to strike out the Amended Statement of Claim.

12.  On 23 August 2013, To J dismissed the Corporate Defendants’ strike out applications.

13.  On 30 March 2015, the 1^st Defendant issued a summons seeking to strike out paragraphs 21 to 26 of the Amended Statement of Claim relating to the Director’s Remuneration Claim, on the ground that the relevant sums were in fact paid to Mr Keith Ngai.

14.  On 14 July 2015, the 1^st, 2^nd and 4^th to 7^th Defendants made the Sanctioned Payment.  In the Notice of Sanctioned Payment, it was stated that:-

(1) the amount of HK$998,000 was paid into court in satisfaction of “All claims save and except the claim on the alleged wrongful or unlawful payments of sums totalling HK$2,243,349 as director’s remuneration …”; and

(2) an additional amount of HK$998,000 was offered for interest.

15.  On 27 July 2015, the Director’s Remuneration Claim was struck out by consent, the Plaintiff accepting that the relevant sums were in fact paid to Mr Keith Ngai instead of to the 1^st Defendant.

16.  On 10 August 2015, the Plaintiff gave notice of acceptance of the Sanctioned Payment.

17.  Accordingly, all the Plaintiff’s claims in this action, save in relation to costs, have been resolved:-

(1) In so far as the Operating Expenses Claim, the Misappropriation Claim and the Administrative Resources Claim are concerned, they were satisfied by the remittance of HK$1,112,234 by the 5^th Defendant on 8 November 2012 together with the Sanctioned Payment in the total sum of HK$ HK$1,996,000 made on 14 July 2015.

(2) In so far as the Director’s Remuneration Claim is concerned, it was struck out by consent.

18.  On 15 October 2015, the Plaintiff issued a summons (“the Indemnity Summons”) seeking an order that the 9^th Defendant shall indemnify him against all costs incurred by him in this action, subject to the setting-off of any costs to be paid by the 1^st, 2^nd, 4^th to 7^th Defendants to him in this action.

19.  On 2 December 2015, the 9^th Defendant issued the Payment Out Summons seeking an order that the Sum in court be paid out to it.

20.  On 20 April 2016, the Company issued the Strike Out Summons seeking to strike out various parts of the 7^th Affirmation of the Plaintiff filed on 5 April 2016 and the exhibits thereto on the ground that they consisted of, or related to, “without prejudice save as to costs” correspondence.

21.  The Indemnity Summons came before Master H Au-Yeung on 21 and 27 April 2016. The Master gave a decision in the Plaintiff’s favour on 27 April 2016, save that in so far as his costs relating to the “Director’s Remuneration Claim” were concerned, the indemnity would only cover his costs up to the consideration by his legal team of the 1^st Defendant’s defence and the giving of advice thereon to him.  The Master further ordered the 9^th Defendant to pay 97% of the costs of the Indemnity Summons to the Plaintiff, to be taxed on a common fund basis if not agreed with certificate for counsel.

22.  The Payment Out Summons and Strike Out Summons came before Master H Au-Yeung on 3 and 17 May 2016.  Prior to the hearing, the parties had reached agreement that various parts of the 7^th Affirmation of the Plaintiff, as well as paragraph 12 of the Affirmation of the Mr Kok Lap Seng (“Mr Kok”), except the last sentence thereof, dated 2 December 2015 on behalf of the 9^th Defendant be removed, leaving the issue of the costs of the Strike Out Summons to be determined by the Master.  Eventually, the Master (i) dismissed the Payment Out Summons, and ordered the Sum to remain in court until the Wallersteiner Order had been satisfied, and (ii) ordered the 9^th Defendant to pay the costs of Payment Out Summons and the Strike Out Summons to the Plaintiff, both to be taxed on a common fund basis if not agreed with certificate for counsel.

23.  As earlier mentioned, the 9^th Defendant lodged the 1^st and 2^nd Notices of Appeal against the Wallersteiner Order and the Retention Order on 10 May 2016 and 27 May 2016 respectively.

24.  It is well established that an appeal to a judge in chambers against a decision of a master is by way of actual rehearing of the application.  Save in relation to a decision on costs, the court is generally not fettered by the master’s exercise of discretion, and treats the application as though it comes before the court for the first time.  However, the court may, if it thinks fit, have regard to or adopt the master’s reasoning.

The Wallersteiner Order

25.  The test for deciding whether to grant an indemnity as to costs in favour of a minority shareholder in a derivative action commenced by him for the benefit of a company is whether an independent board, exercising the standard of care which a prudent businessman would exercise in his own affairs, would have decided to bring the action (Chung Sau Ling v Asia Woman’s League Ltd [2001] 3 HKC 410, at 415E per Chu J (as she then was)).

26.  In determining whether the minority shareholder in a derivative action should be granted an indemnity of his costs, the court, apart from having regard to the merits of the case, may take into account a variety of other factors, including the wishes of the genuinely independent shareholders (if any), whether the action is brought for the benefit of the shareholders, and the impecuniosity or the financial strength of the minority shareholder (Chung Sau Ling at 415G-I), as well as the company’s ability to pay the costs of the proposed derivative action (Re F & S Express Ltd [2005] 4 HKLRD 743, at paragraph 28 per Kwan J (as she then was)).

27.  In the present case, subject to the discussion below on the specific objections raised by Ms Lee on behalf of the 9^th Defendant, I consider that (i) the Plaintiff has acted fairly and reasonably in commencing and prosecuting the present action and in the conduct of the proceedings throughout, (ii) the Plaintiff has achieved a substantial recovery for the benefit of the 9^th Defendant, and (iii) it would be justifiable to order the 9^th Defendant to indemnity the Plaintiff as to the costs incurred by him in this action.

28.  Ms Lee submits, however, that the Wallersteiner Order should be set aside on 3 grounds:-

(1) there is a justifiable concern that the amount of costs that the 9^th Defendant may be asked to indemnify the Plaintiff may well equal or exceed the amounts recovered by it from the other Defendants;

(2) the dispute in the present case is essentially between two camps of shareholders such that it is only fair that the Plaintiff should assume part of the litigation risk; and

(3) the 9^th Defendant does not have sufficient assets or cash to meet the Wallersteiner Order.

(i)    Proportionality between costs incurred and amount recovered

29.  In respect of Ms Lee’s first ground, the application for indemnity was made by the Plaintiff after the substantive issues in the action had been resolved. The Plaintiff was in a position to provide information on the amount of the costs that he had incurred in the action to the court.  However, he declined to do so despite this court’s invitation prior to the hearing of the appeal.  Ms Tong maintains that it is meaningless and misleading to compare the amount of recovery and the costs incurred.  She submits that the Plaintiff incurred significant costs to resist wholly unmeritorious applications made by the Defendants, that the Plaintiff did not have a “crystal ball” and it was impossible for the Plaintiff to predict whether the amount that might ultimately be recovered for the benefit of the 9^th Defendant would be disproportionate to the legal costs to be incurred, that the Plaintiff was forced in effect to accept the Sanctioned Payment (for lack of financial resources to continue the claims), and finally that the purported analysis provided in paragraph 14 of Mr Kok’s 2^nd Affirmation (on “rate of recovery”) is misleading in many respects.

30.  Generally speaking, an application for an indemnity as to costs should be made by the minority shareholder in a derivative action soon after the issue of the writ (see Wallersteiner v Moir (No 2) [1975] QB 373, at 392D per Lord Denning MR), although it is well established that the application may be made at a later stage, even after the conclusion of the action.

31.  If the application is made at an early stage of the proceedings, the minority shareholder is normally expected to provide an estimate of the likely costs to be incurred in prosecuting the action.  Having regard to the estimate of costs provided by the minority shareholder and such other factors as the court may consider to be relevant, the court will exercise its discretion on whether to grant to the minority shareholder an indemnity as to costs, and if so whether the indemnity should in the first instance be limited to a particular stage of the proceedings (eg, discovery, exchange of witness statements, advice on evidence, etc).  The estimated costs to be incurred and the size of the claim are plainly matters relevant to the court’s exercise of discretion in this regard.

32.  If the application is made after the conclusion of the action, I am of the view that, in principle, the minority shareholder ought equally to inform the court of the costs that he has actually incurred in the action.  The proportionality between the costs incurred and the amount of recovery is, I believe, a factor relevant to the court’s exercise of discretion whether to grant an indemnity in favour of the minority shareholder and the extent of the indemnity to be granted.

33.  While I accept Ms Tong’s submissions that the Plaintiff probably incurred substantial costs to resist unmeritorious applications made by the Defendants, that is something which the court can also take into account in the overall exercise of its discretion.  I do not consider the matters raised by Ms Tong, whether singularly or cumulatively, justify the Plaintiff’s wholesale failure or refusal to provide information to the court on the costs actually incurred by the him in this action. 

34.  In the absence of such information and in order to maintain a degree of proportionality, I consider that it would be appropriate to limit the amount of the indemnity to 70% of the recovery made by the Plaintiff for the benefit of the 9^th Defendant in this action (ie, 70% of HK$3,108,234) in all the circumstances of this case.

(ii)   Nature of dispute

35.  In respect of Ms Lee’s second ground, she relies on Bhullar v Bhullar [2016] 1 BCLC 106 and argues that the present case should properly be viewed as a dispute between two camps of shareholders such that they should be treated equally and no indemnity costs order should be made to give a shareholder an advantage at the expense of the other.

36.  In my view, this case is far from being a mere dispute between two camps of shareholders of a private company.  The Plaintiff’s complaints here relate to misappropriation, misapplication and/or misuse of assets of the 9^th Defendant by the 1^st Defendant as the party in control of that company, and the action is brought to recover the misappropriated, misapplied or misused assets from the 1^st Defendant or his companies, or compensation for such misappropriation, misapplication or misuse of assets, for the benefit of the 9^th Defendant.  I see no reason why the Plaintiff should not be entitled to be indemnified by the 9^th Defendant in respect of his costs in the present case.

(iii)  9^th Defendant’s alleged inability to meet the Wallersteiner Order

37.  In respect of Ms Lee’s third ground, the 9^th Defendant has failed to produce any credible evidence of its financial position, whether as at the date of commencement of the action (in 2012) or as at present.  In Mr Kok’s 2^nd Affirmation dated 23 December 2015, references were made to (i) the audited financial statements of the 9^th Defendant for the year ended 31 March 2010, (ii) an unaudited balance sheet of the 9^th Defendant “As of 31st Oct 2015” (“the Unaudited Balanced Sheet”), and (iii) a demand letter dated 23 December 2015 (“the Demand Letter”) issued by WDI Technology to the 9^th Defendant.

38.  The reliability of the audited financial statements of the 9^th Defendant made up to 31 March 2010 was questioned by Master K Lo when dealing with the Corporate Defendants’ previous application for security for costs against the Plaintiff.

39.  The Unaudited Balance Sheet and the Demand Letter are, to say the least, highly suspicious or dubious, for the following reasons:-

(1) The Demand Letter was issued by WDI Technology, a company that was 70% owned by the 1^st Defendant.

(2) On the face of the Demand Letter, it was sent by airmail and courier from Xiamen to the 9^th Defendant’s address in Hong Kong, and bore the date of 23 December 2015.

(3) However, it was included as an exhibit to Mr Kok’s 2^nd Affirmation which, according to the court’s record, was filed in court at 9:44 am on 23 December 2015.

(4) If the Demand Letter was indeed sent by airmail/courier on 23 December 2015 from Xiamen to Hong Kong, it was practically impossible for the letter to be included as an exhibit to Mr Kok’s 2^nd Affirmation filed in the early morning of 23 December 2015.

(5) Furthermore, the Demand Letter states that, as at 31 October 2015, the 9^th Defendant was indebted to WDI Technology in the amount of HK$26,133,192.66.

(6) This exact amount of indebtedness also appears in the Unaudited Balance Sheet of the 9^th Defendant which, as earlier mentioned, purports to show the financial position of the 9^th Defendant as at 31 October 2015.

(7) On the other hand, it would appear that the 9^th Defendant’s financial year end date for 2015 was 31 March 2015.  There was no apparent reason as to why the 9^th Defendant would prepare an unaudited balance sheet to show its financial position on the particular date of 31 October 2015.

(8) The 9^th Defendant did not offer any explanation for the above abnormalities to Master Au-Yeung, or to this court (notwithstanding the adverse comments made by the Master in paragraph 55 of his decision). 

(9) The clear inference, in my view, is that both the Unaudited Balance Sheet and the Demand Letter were prepared for the purpose of resisting the Plaintiff’s Indemnity Summons and the Payment Out Summons.  I am not prepared to give any weight to those documents.

40.  On the other hand, there is evidence that: (i) the 9^th Defendant’s two subsidiaries in the PRC (Voreto and WDI Precision) made substantial profits before taxation for the years from 2006 to 2009, (ii) for the financial years of 2011 and 2012, they declared dividends of nearly US$2 million, and (iii) for the financial years 2010 to 2012, the 9^th Defendant declared and paid dividends of over US$2.38 million to its shareholders.  As earlier mentioned, the latest audited financial statements of the 9^th Defendant produced by it were made up to 31 March 2010 only.  In the absence of more updated and reliable audited financial statements of the 9^th Defendant and taking into account the historical financial information mentioned above, I do not accept Ms Lee’s argument that the 9^th Defendant does not have sufficient assets or cash to meet the Wallersteiner Order.

(iv)  9^th Defendant’s alternative arguments

41.  Ms Lee submits, in the alternative, that:-

(1) no indemnity should be given in respect of the Director’s Remuneration Claim or it should be limited to shortly after December 2013 or 21 October 2014; and

(2) the remaining claims should have been discontinued earlier, ie, after the payment by the 5^th Defendant in November 2012 or after the decision of To J on 23 August 2013.

42.  In respect of Ms Lee’s first alternative argument, I accept Ms Tong’s submission that there were initially proper grounds for the Plaintiff to make the Director’s Remuneration Claim for the benefit of the 9^th Defendant and he should, prima facie, be indemnified by the 9^th Defendant in respect of the costs that he has incurred in relation to that claim.

43.  Ms Lee argues, nevertheless, that the Plaintiff ought, in view of subsequent disclosure or information provided by the Defendants, discontinued or withdrew that claim prior to July 2015.

44.  First, Ms Lee says that the Plaintiff should have realised, from various tax returns for the years of 2002/2003 to 2009/2010 of the 9^th Defendant disclosed by it in December 2013, that the relevant sums were paid to Mr Keith Ngai.  However, those returns did not show that Mr Ngai was paid any director’s remuneration.  He was referred to as a “manager” or “chief representative” and the sums received by him were listed as “Salary/Wages” instead of as “Director’s Fee”.  In the absence of evidence or explanation that the payments to Mr Ngai made in those years were the same director’s remuneration complained of by the Plaintiff, I consider that it was reasonable for the Plaintiff not to discontinue or withdraw the Director’s Remuneration Claim at that stage.

45.  Second, Ms Lee says that the position was made plain in the Amended Defence of the 2^nd and 4^th to 7^th Defendants filed on 21 October 2014. However, the plea that the director’s remuneration was paid to Mr Ngai was, it would appear, based on the same tax returns disclosed in December 2013. I consider that the Plaintiff was entitled not to accept such plea at face value until at least the same plea was also made in the Defence of the 1^st Defendant filed on 6 January 2015 and the Plaintiff had a reasonable time to consider the 1^st Defendant’s Defence and obtained legal advice on it.

46.  Ms Lee’s second alternative argument that the Plaintiff should have discontinued the remaining claims either after the payment by the 5^th Defendant in November 2012 or after the decision of To J on 23 August 2013 is plainly without merit having regard to the fact that a substantial sanctioned payment was made by the 1^st, 2^nd and 4^th to 7^th Defendant in July 2015.

47.  Lastly, I consider it to be correct, in principle, for the Plaintiff’s costs to be taxed on a common fund basis, if not agreed, for the purpose of the indemnity (see Wallersteiner v Moir (No 2), at 392A per Lord Denning MR and 405B per Buckley LJ).

The Retention Order

48.  There are three aspects of the Retention Order which require consideration:-

(1) whether the Sum paid into court by the 1^st, 2^nd, 4^th to 7^th Defendants on 14 July 2015 should be paid out to the 9^th Defendant, or should remain in court until the Wallersteiner Order in favour of the Plaintiff has been satisfied;

(2) whether the costs of the Payment Out Summons ordered to be paid by the 9^th Defendant to the Plaintiff should be taxed on a common fund basis if not agreed, with certificate for counsel; and

(3) whether the costs of the Strike Out Summons should be paid by the 9^th Defendant to the Plaintiff, to be taxed on a common fund basis if not agreed, with certificate for counsel.

49.  In respect of the first matter, it is clear that the court has a discretion on whether to permit payment out of the Sum in court under Order 22A, rule 1(1) of the Rules of the High Court, in order to achieve justice between the parties (see Ng Chi Kwan, Danny Summer v Yeung Yiu Kwai [2015] 1 HKC 348, at paragraph 29 per Deputy High Court Judge Marlene Ng).  In the present case, I consider the following considerations to be relevant in the exercise of my discretion:-

(1) The 9^th Defendant has made it clear that, if the Sum in court is paid out to it, it intends to use the money to repay the alleged indebtedness of HK$26.1 million owing to WDI Technology (see paragraph 11(8) of Mr Kok’s 3^rd Affirmation). However, as earlier mentioned, I consider the documentation produced by the 9^th Defendant regarding the alleged indebtedness to WDI Technology to be highly suspicious or dubious.  On the basis of the existing materials before me, I am by no means satisfied that the alleged current indebtedness of HK$26.1 million owing to WDI Technology is genuine. There is thus clearly a risk of improper dissipation by the 9^th Defendant if the Sum is paid out to it.

(2) The 9^th Defendant is currently still under the control of the 1^st Defendant, whose wrongdoings have given rise to the present derivative action brought by the Plaintiff.

(3) It is though the Plaintiff’s effort in this action that the 9^th Defendant has been able to recover the Sum from the 1^st, 2^nd, 4^th to 7^th Defendants.

(4) As mentioned by the Master in his decision on 17 May 2016 which I agree with, there is every reason to believe that the 9^th Defendant will not be forthcoming when being asked by the Plaintiff to meet its obligation under the Wallersteiner Order.

50.  In these circumstances, notwithstanding the fact that the 9^th Defendant is prima facie entitled to the Sum in court, I consider it to be plainly correct that the Sum ought not to be paid out the 9^th Defendant, but should remain in court until the Wallersteiner Order in favour of the Plaintiff has been satisfied.

51.  In respect of the second matter, I accept Ms Lee’s submission that the Plaintiff’s opposition to the Payment Out Summons cannot be regarded as steps taken for the benefit of the 9^th Defendant, and therefore the Wallersteiner Order, including the basis for assessment of the Plaintiff’s costs, should not apply to the Plaintiff’s opposition to the Payment Out Summons (see Waddington Limited v Chan Chun Hoo Thomas, CACV 142/2015 (17 February 2016), at paragraphs 28 and 29).  Nevertheless, in view of the fact that the Plaintiff is the successful party in relation to the Payment Out Summons, in the absence of any good reason to the contrary, the Plaintiff ought to be entitled to the costs of that summons.  Further, having regard to the 9^th Defendant’s conduct in pursuing the Payment Out Summons, including the preparation and/or reliance of suspicious or dubious documents in support of the application, as well as the obvious lack of merits of the 9^th Defendant’s application, I consider that the Master’s order to award costs to the Plaintiff to be taxed a common fund basis to be correct.

52.  In respect of the third matter, Ms Lee’s principal argument is that the Master failed to give any reason for awarding the Plaintiff the costs of the Struck Out Summons.  However, Ms Tong has informed the court that the Master actually gave the following reasons at the hearing on 17 May 2016 for the making the costs order in favour of the Plaintiff:-

(1) it was the 9^th Defendant who had waived privilege in the first place by referring to “without prejudice” matters in paragraph 12 of Mr Kok’s Affirmation dated 2 December 2015;

(2) the 9^th Defendant acted unreasonably in issuing the Strike Out Summons notwithstanding the fact that the matters in the Plaintiff’s 7^th Affirmation caused the 9^th Defendant no prejudice at all;

(3) the 9^th Defendant had no useful objective in pursuing the strike out application;

(4) the 9^th Defendant unreasonably refused to agree to the Plaintiff’s proposal made on 27 April 2016 to resolve the strike out application, including that there be no order as to the costs of the Strike Out Summons;

(5) the 9^th Defendant’s unreasonably insistence in seeking costs against the Plaintiff necessitated the hearing, which was disproportionate to the relatively minimal costs involved; and

(6) the 9^th Defendant’s unreasonable conduct justified making a costs order against it.

53.  Ms Lee accepted at the hearing before this court that she was not in a position to dispute that the Master did give the above reasons orally for the costs order.

54.  In general, a judge in chambers will not allow an appeal from a master’s order on costs unless it is unreasonable or the master erred in law.   Having regard to the reasons given by the Master, I consider the order made by him to be neither unreasonable nor erroneous in law.

DISPOSITION

55.  For the forgoing reasons, in respect of the 1^st Notice of Appeal, I would vary the order made by the learned Master by substituting the following:-

(1) the 9^th Defendant shall indemnify the Plaintiff against all costs incurred by the Plaintiff in this action, to be taxed on a common fund basis if not agreed, subject to the setting-off of any costs payable and paid by the 1^st, 2^nd, 4^th to 7^th Defendants (or any of them) to the Plaintiff in this action, save that as far as the Plaintiff’s costs on the Director’s Remuneration Claim is concerned, the indemnity herein shall only cover the costs incurred by the Plaintiff up to the consideration by the Plaintiff’s legal team (counsel and solicitors included) of the 1^st Defendant’s Defence and the giving of advice thereon to the Plaintiff;

(2) the Plaintiff shall be entitled to enforce the indemnity herein against the 9^th Defendant upon the expiry of 14 days after both (i) the Plaintiff’s costs have been assessed by a taxing master on a common fund basis (if not agreed), and (ii) the costs payable by 1^st, 2^nd, 4^th to 7^th Defendants (or any of them) to the Plaintiff in this action have been assessed by a taxing master (if any agreed);

(3) the Plaintiff shall immediately repay to the 9^th Defendant any costs that it may subsequently recover from the 1^st, 2^nd, 4^th to 7^th Defendants (or any of them) after satisfaction of the indemnity herein; and

(4) liberty to apply.

56.  The 2^nd Notice of Appeal is dismissed in its entirety.

HCA 1973/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 1973OF 2012

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DECISION
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INTRODUCTION

1.  The hearing today was originally fixed to deal with the 1^st defendant’s summons dated 30 March 2015 (“the summons”) seeking to strike out paragraphs 21 to 26 of the amended statement of claim filed on 14 February 2013.  As will be seen below, the only substantive matter now remaining for decision relates to the 9^th defendant’s application that certain costs incurred by it relating to discovery made prior to the date of the summons should be paid by the plaintiff.

BACKGROUND FACTS

2.  The 9^th defendant is a company incorporated under the Companies Ordinance on 22 November 2000.  The plaintiff (30%), the 1^st defendant (60%) and one Larry Waxman (10%) were at all material times and are shareholders of the 9^th defendant, and the three of them together with one Keith Ngai were at all material times and are directors of the 9^th defendant.  The 1^st defendant has also been the president of the 9^th defendant since its incorporation.

3.  This is a derivative action brought by the plaintiff (suing on behalf of himself and all other shareholders of the 9^th defendant except the 1^st defendant) against the 1^st defendant and 7 other companies (namely, the 2^nd to 8^th defendants) which the plaintiff says are under the control of the 1^st defendant for wrongdoings allegedly committed by the 1^st defendant as director and president of the 9^th defendant resulting in loss and damage to the 9^th defendant.

4.  The 9^th defendant has been joined as a nominal party to this action.

5.  In the amended statement of claim, the plaintiff raises, broadly speaking, two grounds of complaint:-

(1) misapplication of assets of the 9^th defendant by the 1^st defendant for the benefit of himself and/or the 2^nd to 8^th defendants (see paragraphs 12 to 20 and 26 of the amended statement of claim);

(2) wrongful payment of director’s remuneration in the total amount of HK$2,242,349 to the 1^st defendant during the period from 2003 to 2010 (“the Claim”) (see paragraphs 21 to 26 of the amended statement of claim).

6.  On 30 March 2015, the 1^st defendant took out the summons seeking, effectively, to strike out the Claim on grounds which it is not necessary to set out in this decision, because the plaintiff has now conceded that the Claim ought to be struck out, although he maintains that he has consented to the striking out of the Claim “merely to save costs and time and without prejudice to the merits of the Claim” (see paragraph 29 of Mr Hugh Kam’s skeleton submission for the plaintiff dated 27 July 2015).

7.  In any event, the plaintiff and the 1^st defendant signed a consent summons on 23 July 2015 whereby it was agreed that:-

(1) the plaintiff’s claims in respect of the alleged wrongful or unlawful payment of sums totalling HK$2,242,349.00 as director’s remuneration pleaded in paragraphs 21 to 26 of the amended statement of claim be struck out; and

(2) the costs of and occasioned by the striking out application and the Claim be paid by the plaintiff to the 1^st defendant forthwith, such costs to be taxed if not agreed.

8.  So far, it may appear that the summons and its disposition by way of consent summons should have no direct or immediate impact on the 9^th defendant, although the summons was originally also served on the 9^th defendant’s solicitors (Messrs Kok & Ha)

9.  However, in a letter dated 17 July 2015 from Messrs Kok & Ha to the plaintiff’s solicitors (Messrs Oldham, Li & Nie), the following was stated:

“ The Company [ie the 9^th defendant] had incurred substantial costs in relation to the discovery and inspection of documents regarding [the Claim] and therefore will seek the costs of and occasioned by [the Claim] against your client.

You are required to confirm in writing … that your client agrees to pay the Company’s costs of and occasioned by the striking out application and [the Claim], to be taxed if not agreed, or otherwise the Company does not have any other choice but to instruct Counsel to attend the hearing on 29 July 2015 … on its behalf and seek the appropriate order for costs against your client.”

10.  At this juncture, it is necessary to say a little about the role of the 9^th defendant in this litigation.  Mr Jason Yu (on behalf of the 9^th defendant) accepts that in a derivative action, the company concerned is a nominal party and, in principle, the company’s moneys should not be expended on any dispute which in substance is a dispute between shareholders, save for proper costs incurred, such as on giving discovery.  In other words, the company should adopt a neutral position in the action, give discovery as appropriate, and abide by any judgment which may be given by the court in the action.  All these are very well established. See Re CG & L Investment Ltd and Wyatt Estates Ltd [1972] 1 HKC 78; Carlisle & Cumbria United Supporters Society v Story [2011] BCC 855; Waddington v Chan Chun Hoo Thomas, HCA 319/2003 (30 April 2007), Saunders J.

11.  Mr Yu accepts that the 9^th defendant has not incurred any costs (or any costs of substance) in relation to the summons, because the summons concerns a dispute between the plaintiff and the 1^st defendant in respect of which the 9^th defendant ought to, and did, adopt a neutral position.  Nevertheless, Mr Yu argues that the 9^th defendant had, prior to the date of the dispute, given discovery of documents relevant to the Claim, and had incurred costs in so doing.  According to Mr Yu, the plaintiff, having consented to the striking out of the Claim, should also be ordered to pay the 9^th defendant’s costs incurred in complying with its discovery obligation in respect of documents relating to the Claim.  Mr Yu points out that in the aforesaid consent summons, the plaintiff agreed to pay the costs of and occasioned by the striking out application and the Claim to the 1^st defendant, and argues that there is no reason why the plaintiff should not likewise pay the 9^th defendant its costs of and occasioned by the Claim.

12.  The relevant costs, according to a letter dated 22^nd July 2015 from Messrs Kok & Ha to Messrs Oldham, Li & Nie, come to not less than HK$87,000 (excluding the costs incurred in relation to the present hearing).

DISCUSSION

13.  As accepted by Mr Yu, the costs that the 9^th defendant are seeking from the plaintiff today do not concern the costs of the summons, but relate to the discovery which the 9^th defendant gave in the ordinary course of litigation.  Such costs as may have been incurred by the 9^th defendant would have been incurred long before the issue of the summons by the 1^st defendant on 30 March 2015, the 9^th defendant’s list of document being dated 18 March 2014.  If the 9^th defendant has incurred any costs in relation to the summons (such as perusal of the summons), the amount of costs involved would be minimal.

14.  Mr Yu also accepts that, in an ordinary case, the general costs incurred by the company in a derivate action may be recovered by the company from the losing party at the end of the day, although whether to order any party to bear the company’s costs would still be a matter of discretion.  As to why this course is not followed in the present case, Mr Yu says that costs will have to be incurred in any event to argue the question of costs, whether at this stage or at the end of the case, and since the parties are before the court who has heard arguments on this issue, the court should now deal with the question of the 9^th defendant’s costs of giving discovery relevant to the Claim.

15.  It seems clear that a plaintiff who ultimately loses in a derivative action ought, prima facie, to bear the costs of the substantive defendant(s).  However, this prima facie rule does not necessarily apply as between the plaintiff and the company for whose benefit the action is brought.  On the contrary, the court may, in an appropriate case, order the company to indemnify the plaintiff in respect of the costs that he or she may incur in prosecuting the action under the well established principle in Wallersteiner v Moir (No 2) [1975] QB 373. Whether it is appropriate to make a cost indemnity order in favour of the plaintiff would of course depend on the circumstances of the case.  Where the application for indemnity is made before trial, the court will have to assess, amongst other things, the merits of the plaintiff’s claim.  The court’s assessment of the merits of the plaintiff’s claim may of course turn out to be wrong, but that cannot be a ground to revoke an earlier cost indemnity order made in favour of the plaintiff, or be a ground to order the plaintiff to bear the company’s costs.  On the other hand, where the application is made after trial, the court will no doubt take into account the outcome of the action. There cannot, in my view, be any inflexible rule that a plaintiff who has lost in a derivative action should always be required to bear the company’s costs.

16.  In the present case, Mr Kam has on behalf of the plaintiff raised various arguments in support of the contention that the plaintiff ought not to be required to bear the 9^th defendant’s costs.  In particular, Mr Kam argues, inter alia, that (i) the plaintiff did not know, and could not have been sure, prior to filing the amended statement of claim that the relevant payments the subject matters of the Claim were in fact paid not to the 1^st defendant but to Keith Ngai, (ii) the Claim was not bound to fail (although, as earlier mentioned, the plaintiff consented to its striking out to save costs and time), and (iii) no additional costs have been incurred by the 1^st defendant by giving discovery of documents relevant to the Claim, because those documents would also be relevant to the remaining claim against the 1^st defendant for misapplication of assets belonging to the 9^th defendant.

17.  In respect of the last point, I have considered the discovery made by the 9^th defendant in its list of documents filed on 18 March 2014.  It seems to me that the bulk of the documents which the 9^th defendant gave discovery would have been relevant to the remaining claim against the 1^st defendant for misapplication of assets, although there may be a few isolated documents which might not have been required to be discovered but for the existence of the Claim in the amended statement of claim. This having been said, I accept Mr Yu’s submission that the costs incurred by the 9^th defendant in complying with the discovery obligation cannot be determined solely by looking at the documents actually discovered, because the 9^th defendant and its legal advisors would or might also have spent or incurred time or costs to consider the scope of discovery in the first place, and generally to go through the discovery exercise.

18.  In my view, the question whether the plaintiff ought to bear the 9^th defendant’s costs incurred in complying with its discovery obligation in relation to the Claim ought to be dealt with at the end of the trial and not at this stage, because by that stage the court would be in a much better position to assess whether it was reasonable of the plaintiff to make the Claim in the first place, whether the Claim has merits (as contended by the plaintiff), and whether, and if so what, additional costs might have been incurred by the 9^th defendant in complying with its discovery obligation in relation to the Claim. The court would also have a much better view of the overall conduct of the parties for the purpose of exercising its discretion whether the plaintiff ought to bear the 9^th defendant’s costs.

19.  There are two other reasons why I am not prepared to make the costs order sought by the 9^th defendant:-

(1) the costs now sought by the 9^th defendant do not in fact relate to the costs of the summons, and I see no good reason why the court ought to be called upon to deal with a portion of the general costs of the action of the 9^th defendant at this stage;

(2) I consider it to be an extravagant exercise for the parties to incur the costs of this hearing (including the attendance of counsel and solicitors on both sides and the preparation of no less than 5 bundles of documents excluding submissions and authorities) for the purpose of arguing a relatively small amount of costs (of about HK$87,000), when the matter can conveniently and economically be dealt with at the end of the trial.  As I remarked in the course of the hearing, under the CJR, the parties and their legal advisors are under a duty to promote a sense of reasonable proportion and procedural economy in the conduct of proceedings.  I regret to say that the parties and/or their legal advisors have done exactly the opposite in the present case.

20.  In all, I refuse to make any order that the plaintiff should pay the 9^th defendant its costs incurred in giving discovery of documents relevant to the Claim. I consider that this matter ought to be dealt with at the end of the trial.  I shall hear the parties on the issue of costs of today’s hearing.

[Mr Kam on behalf of the plaintiff asked for an order that the 9^th defendant paid to the plaintiff the costs of the hearing. The court heard further submissions on the issue of costs.]

21.  If the parties had spared a moment to consider how the matter ought to be dealt with in a reasonable and economic way, it must have been obvious to them that the question of the 9^th defendant’s costs of discovery should be dealt with at the end of the trial and not at a separate hearing today.

22.  The costs which have been incurred today are, in my view, wholly disproportional to the amount at stake.

23.  I am not minded to make any order for the costs of today’s hearing.

HCA 1973/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 1973 OF 2012

____________

____________

____________________________________________________

DECISION ON SUMMARY ASSESSMENT OF COSTS
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1.  At the hearing on 9 April 2015 (“Hearing”), I ordered inter alia that the plaintiff (“P”) shall pay the costs of the 2^nd and 4^th to 7^th defendants (“Subject Ds”) in respect of the Subject Ds’ summons filed on 10 March 2015 (“Amendment Summons”) for amendment of my order dated 21 October 2014 and sealed on 2 March 2015 (“Order”) to be summarily assessed and paid forthwith (“Costs Order”). Such Costs Order did not include the costs of and occasioned by the hearing bundles.

2.  Three matters are of note.  First, the scheduled hearing time for the Amendment Summons was 15 minutes and the actual hearing time limited for such summons was about 26 minutes from 9:34 am to 10:00 am.  Secondly, there was another summons taken out by the Subject Ds for time extension to comply with the Order of Master S Kwang dated 3 September 2014 (“Time Summons”), and the adjourned hearing of such summons was returnable and heard at the same time as the Amendment Summons at the Hearing.  Thirdly, on any account the Amendment Summons was a straightforward application with no complexity at all.  Notwithstanding some initial resistance by P which eventually transpired to be nothing more than dispute over where costs of the application should lie, the Subject Ds were merely seeking amendment of the Order under the slip rule so that the sealed copy of the Order should reflect what the court actually ordered at the hearing on 21 October 2014 and recorded in my judgment dated 30 January 2015.

3.  The proper approach to summary assessment of costs has been laid down by the Court of Appeal in Poon Shu Fan v Wong Tin Yan [2012] 5 HKLRD 512.  For present purpose, it is sufficient to refer to the useful summary in the headnote of the reported judgment at pp 512‑514 as follows:

“(2) As in an ordinary taxation, under O.62 r.28(2) of the Rules of the High Court (Cap.4A) (the RHC), in a summary assessment, party-and-party costs were allowed only if they were “necessary or proper” for the attainment of justice or for enforcing or defending the rights of the receiving party.  Pursuant to Practice Direction 14.3, the court adopted a broad-brush approach to ensure the final figure assessed was not disproportionate and/or unreasonable having regard to the nature and circumstances of the application or matter and the underlying objectives stated in O.1A of the RHC, even if there was no challenge to individual items.  ……

(3) A summary assessment required a two-stage approach.  If total costs claimed appeared proportionate, then all that was normally required was that each item should have been reasonably incurred and the cost reasonable.  If the overall costs appeared disproportionate, then the court would have to be satisfied that each item was necessary and its costs was reasonable.  A sensible standard of necessity should be adopted allowing fully for the different judgments which those responsible for the litigation could sensibly come to as to what was required.  While the threshold was higher than that of reasonableness, it should be achievable by a competent practitioner without undue difficulty.  The conduct of the other party was relevant, since a cooperative party could reduce costs, but an uncooperative party could render necessary costs which would otherwise be unnecessary.  ……

(6) Since Civil Justice Reform in 2009, taxation of counsel’s fees under a party-and-party taxation was no different from taxation of costs and expenses.  The test of “necessary or proper” applied and must take into account the matters set out in para.1(2) of Part II of the First Schedule to O.62 of the RHC, as well as the requirement of reasonable proportionality.  Accordingly, paras.62/App/28(5) (p.1172) and 62/App/28A of Hong Kong Civil Procedure 2012 (p.1172), which referred to the previous pre-CJR “excessive and unreasonable” test under the former para.2(5) of Part II of the First Schedule to O.62 of the RHC, should no longer be followed, ……”

4.  Here, the Subject Ds sought a total sum of $63,159 comprising solicitors’ profit costs and disbursements of $40,659 and counsel’s fees of $22,500.  P suggested that $4,089 be allowed, ie solicitors’ profit costs and disbursements of $36,570 and all counsel’s fees should be deducted.

5.  I bear in mind the two-stage approach required for summary assessment.  Having considered the nature and scope of the application under the Amendment Summons, the affirmation filed in support of such summons, the skeleton submissions, what transpired at the Hearing, the involvement of counsel in this matter, the matters noted in paragraph 2 above, and considering all circumstances, the overall costs claimed by the Subject Ds under their statement of costs appeared to be disproportionate on party and party basis.  It is therefore necessary to consider each item to be satisfied whether or not it “was necessary and its costs reasonable” on the sensible standard of necessity as explained by the Court of Appeal.

Hourly rates

6.  The Subject Ds claimed that hourly rates for HW (senior partner admitted in 1988), LCS (senior associate admitted in 2007) and zht (1^st year trainee solicitor) were $4,000, $3,500 and $1,300 respectively.  P contended that the respective hourly rates for LCS and zht should be $2,900 and $1,066.

7.  I am not persuaded that on party and party basis the Subject Ds would be entitled to the hourly rates as claimed.  Having carefully considered all the circumstances, including the matters referred to in paragraph 5 above, I consider appropriate party and party hourly rates for LCS and zht should be $3,100 and $1,100 respectively.

8.  Of more significance is the time spent by three fee earners on “communications including conference, telephone calls and letters” and “professional work”.  In my view, given the overall simplicity of the application a duplicative approach is unnecessary.  Most of the work could have been done by LCS or by zht as supervised by LCS with little need to involve HW.  Taking into account these matters, in assessing costs for a piece of work, the quantum of costs will have to be adjusted to take into account whether such work should notionally be done either by a junior fee earner under the supervision of another fee earner or by one fee earner of appropriate seniority alone. 

9.  For the purpose of the summary assessment herein, I shall adopt a broad-brush approach pursuant to paragraph 13 of Practice Direction 14.3 as it is inappropriate to conduct any mini-taxation.

Items B1

10.  The Subject Ds claimed photocopy charges of $64 for 16 pages x 4.  I agree with P’s objection that the relevant rate is $1, and the charges under Item B1 should be $16 and not $64.

Item C1

11.  Under this Item, the Subject Ds claimed $14,200 being 1.75 hours by HW ($7,000.00), 1.5 hours by LCS ($5,250) and 1.5 hours by zht ($1,950) for “communications including conference, telephone calls and letters”.  P claimed this was excessive, and suggested that I should only allow LCS 0.5 hours.

12.  In my view, there is no need for attendance on client except to tell them such an application would be made.  An error in a sealed copy court order must be corrected by amendment under the slip rule, and the uncorrected order should not be allowed to stand.  Only two letters were sent to P’s solicitors and their contents were quite similar.  Although counsel was engaged, the matter is so straightforward and self-evident that any necessary liaison between the solicitors for the Subject Ds and their counsel should have been quite minimal.  Taking all these matters into account, but considering the nature and scope of the subject application, I agree that the time spent by HW, LCS and zht (ie 4.75 hours) under this Item excessive.  On party and party basis, I allow 0.5 hour for LCS in the sum of $1,550.00 for this Item.

Item D1

13.  The essential documents under this Item are the Amendment Summons and its supporting affirmation.  I have reviewed those documents, and find the Subject Ds’ claim for 5.45 hours of work (1.7 hours by HW, 1.5 hours by LCS and 2.25 hours by zht) in the sum of $14,975.00 excessive.  P suggested that at most 0.25 hours for HW and 0.5 hours for zht be allowed.

14.  In my view, given the ambit and nature of the application and the documents involved, I find the Subject Ds’ claim of time spent for drafting work excessive on party and party basis.  The Amendment Summons has only two straightforward reliefs, ie correction of the Order and provision for costs, and only a small correction was added to the draft amended order.  The supporting affirmation gave a brief summary of the relevant proceedings, the circumstances that led to the application (which were quite similar to the contents of the letter dated 9 March 2015 by the Subject Ds’ solicitors), and extracts from my judgment dated 30 January 2015.  There is no complexity at all in respect of such work.  I allow $1,825.00 under this Item (0.75 hours for zht and 0.25 hours for HW). 

Item D2

15.  The Subject Ds claimed 1.5 hours (0.5 hour for each of HW, LCS and zht) for perusal of three letters from P’s solicitors in the sum of $4,400.00.  Upon consideration, I am not persuaded that such exercise would require 0.5 hours for any fee earner and there is no justification to charge for perusal by three fee earners.  On party and party taxation basis, I allow 0.25 hours for LCS in the sum of $775.00 for this Item.

Items D3

16.  The Subject Ds claimed $6,800 (0.5 hour for HW and 1 hour each for LCS and zht) for preparation for and attendance of the Hearing.  I am unable to see how such intensive preparation can be justified as being necessary or proper, or indeed, proportionate.  In my view, on such a straightforward application and given counsel’s involvement, only zht was required to attend the Hearing.  Since she drafted the supporting affirmation (and hence well familiar with the background) and counsel was involved, only minimal time is required to refresh for the Hearing.  I allow zht 0.75 hours at $825 for such Item.

Item E1

17.  The Subject Ds claimed for counsel’s brief fee of $22,500.  P claimed this Item should be disallowed since there was no certificate for counsel.  However, paragraph 2(3) of Part II of the First Schedule of Order 62 rule 38A of the Rules of the High Court provides that “[no] costs shall be allowed in respect of counsel appearing before a master in chambers, or of more counsel than one appearing before a master in open court or a judge or the Court of Appeal, unless the master or judge or the Court of Appeal, as the case may be, has certified the attendance as being proper in the circumstances of the case”.  No certificate for counsel is required for counsel appearing solely before judge (in contra-distinction to a master) in chambers, and P did not apply to disallow cost of counsel’s attendance at the Hearing when this court granted the Costs Order. 

18.  But that said, on party and party taxation, only necessary and proper counsel’s fees on the basis of notional counsel of suitable seniority/experience will be allowed.  Given the simple nature of the Amendment Summons, only the most junior counsel would have been appropriate.  I also bear in mind that counsel was briefed to deal with both the Amendment Summons and Time Summons.  In my view, the brief fee for suitable notional counsel attending the Hearing on both the Amendment Summons and Time Summons, which had no complexity at all, would be $9,000.00, and I allow $4,500.00 of such apportioned brief fee for the Amendment Summons.

Conclusion

19.  The total costs of the Subject Ds on their statement of costs are assessed at $9,711 (being $16 (B1) + $220 (B2) + $1,550 (C1) + $1,825 (D1) + $775 (D2) + $825 (D3) + HK$4,500 (E1)).  I therefore order that P shall forthwith pay costs in the sum of $9,711 to the Subject Ds.

HCA 1973/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 1973 OF 2012

_________________________

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D E C I S I O N
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A. INTRODUCTION

1.  This is the hearing of the summons taken by the 2^nd defendant and the 4^th to 7^th defendant (collectively called “the corporate defendants”) under O23 r1 RHC on 11 July 2014 for security for costs against the plaintiff.

2.  Plaintiff opposed the application on the following grounds: -

(a) Plaintiff is ordinary resident in Hong Kong.

(b) There was delay in making the application and no explanation was given for the delay.

(c) Plaintiff has a genuine and strong claim against the corporate defendants.

(d) Plaintiff’s claim would be stifled if security for costs were ordered against him.

(e) Plaintiff has substantial assets in Hong Kong.

(f) Plaintiff has substantial assets in PRC.

(g) There have been previous interlocutory costs orders in favour of the plaintiff, which remain pending.

B.  BACKGROUND

3.  In 1995, the plaintiff and 1^st defendant set up a PRC joint venture company doing plumbing business.  Later, 6 other companies were set up running related businesses.  They together form the WDI Group (the “WDI Group”).

4.  9^th defendant (the “Company”), a company within the WDI Group, was incorporated in Hong Kong with its registered office at Room 801, 8^th Floor, Prince Commercial Building, 150-152 Prince Edward Road West, Hong Kong (the “Registered Office”).

5.  It is not in dispute that

(a) 1^st defendant presently had complete legal and de facto control of the Company and that he has been President of the Company since its incorporation.

(b) Since March 2002, plaintiff, plaintiff’s son Larry Waxman (“Larry”), 1^st defendant and Ngai Kam Man Keith (“Keith”) were directors of the Company.

(c) Since March 2003, 1^st defendant held 60% of the shares of the Company whereas plaintiff and Larry held the remaining 30% and 10% shareholding respectively.

(d) The Company is basically a holding company.  It holds 60% of Voreto (Xiamen) Plumbing Technology Co Ltd (“Voreto”) and 75% of WDI (Xiamen) Precision Mould & Plastics Co Ltd (“WDI Precision”). Both Voreto and WDI Precision were within the WDI Group.

(e) 2^nd defendant and 4^th to 7^th defendants ie the corporate defendants are all locally incorporated companies controlled and/or entirely owned directly or indirectly by 1^st defendant.

(f) Neither the plaintiff nor Larry nor the Company had at any time held interest in any of the corporate defendants.

C.  THE PRESENT CLAIM

6.  Plaintiff (in a derivative capacity on behalf of the 9^th defendant, the Company) claims against the corporate defendants for their having used or misappropriated the assets of the Company without prior authorization of the Company.  The claims pleaded included: -

(a) The sum of HK$1,102,332.4 belonging to the Company were applied to meet the operating expenses of the corporate defendants; and

(b) That corporate defendants used both the Company’s registered office and human resources for their operating benefit.

7.  The sum claimed against 1^st defendant as compensation amounts to $7.1 million and that against 2^nd to 8^th defendant is $4.89 million.

8.  The plaintiff claims for an account of all sums misappropriated by 1^st defendant from the Company as well as amount sums for misappropriated by the corporate defendants from the Company and for payment of such sums.

9.  The defence pleaded is that: -

(a) In relation to claim for the allegedly misappropriated sum, the primary source of funds was WDI (Xiamen) Technology Inc.  The Company acted merely as an intermediary for the transmission of payments in respect of the operating expenses of the defendants.  All of the payments were recorded as receivables in the management accounts, which had been made available to the plaintiff.

(b) In any event, the corporate defendants say the sum of HK$1,112,234 had been repaid to the Company, representing the sum owed by the corporate defendants to the Company.  This, the corporate defendants said, extinguished any cause of action.

10.  They further submitted that though they have used the Company’s registered office as their offices, the use was minimal only.

11.  The history of events was that on 26 September 2012, the then solicitors of 2^nd to 8^th defendants, Skadden, Arps, Slate, Meagher and Flom (“Skadden”), denied there was any misappropriation of funds.

12.  On 22 October 2012, plaintiff commenced the present derivative action against 1^st to 8^th defendants.

13.  On 8-13 November 2012, 2^nd to 8^th defendants made payment of $1,112,234 to the Company as repayment of the funds paid on their behalf and demanded that plaintiff discontinue the present action.

14.  On 7 December 2012, 2^nd defendant and 4^th to 8^th defendants took out a summons to have the present action struck out (the “Strike Out Application”).

15.  On 14 February 2013, plaintiff filed an Amended Statement of Claim (ie the ASOC) pursuant to Order 20 rule 3 of the Rules of the High Court (Cap 4A) (“RHC”).

16.  The Striking Out Application was dismissed on 23 August 2013.

17.  Subsequent thereto, pleadings were closed and list of documents exchanged.

18.  Later, plaintiff took out a summons for specific discovery against the corporate defendants (the “Specific Discovery Application”) followed by a case management hearing on 12 May 2014.

19.  On 12 May 2014, the CMS was heard before Master Ho.  Master Ho fixed the Case Management Conference for 11 December 2014.

20.  It was only on 11 July 2014, that the present summons for security for costs was taken out under O23 r1 RHC.

21.  In the meantime, on 3 September 2014, the Specific Discovery Application was heard before Master S Kwang.  Master S Kwang who ordered specific discovery substantively along the lines sought by plaintiff (the “Specific Discovery Judgment”).  Witness statement were also exchanged.

22.  On 12 September 2014, the corporate defendants filed a Notice of Appeal to appeal the Specific Discovery Judgment.  The same was heard on 21 October 2014 with judgment reserved.

23.  On 9 October 2014, the corporate defendants also took out a summons to amend their Defence.

24.  With the plaintiff’s consent, they later filed an Amended Defence.

25.  O23 r1(1) RHC reads: -

“1. Security for costs of action, etc. (O. 23, r. 1)

(1) Where, on the application of a defendant to an action or other proceeding in the Court of First Instance, it appears to the Court- (25 of 1998 s. 2)

(a) that the plaintiff is ordinarily resident out of the jurisdiction, or

(b) that the plaintiff (not being a plaintiff who is suing in a representative capacity) is a nominal plaintiff who is suing for the benefit of some other person and that there is reason to believe that he will be unable to pay the costs of the defendant if ordered to do so, or believe that he will be unable to pay the costs of the defendant if ordered to do so, or

(c) subject to paragraph (2), that the plaintiff’s address is not stated in the writ or other originating process or is incorrectly stated therein, or

(d) that the plaintiff has changed his address during the course of the proceedings with a view to evading the consequences of the litigation, then if, having regard to all the circumstances of the case, the Court thinks it just to do so, it may order the plaintiff to give such security for the defendant’s costs of the action or other proceeding as it thinks just.”

D.  DISCUSSION

Ordinary resident

26.  It is the case of the plaintiff that whilst he is a US citizen ordinary resident in Hong Kong, he is also ordinary resident in Hong Kong.

27.  It is agreed by counsels from both sides that a person can be ordinarily resident in more than 1 place.

28.  Mr Kam referred this Court to the case of Suzanne Ruth Henderson v Scott Henderson (HCMP 1780/2013, 27 September 2013) where it is said that

(a) Ordinary residence “refers to a person’s abode in a particular place or country which he has adopted voluntarily and for settled purposes as part of the regular order of his life, whether of short or long duration”.

(b) “Although residence must be voluntarily adopted, a residence dictated by exigencies of business will count as voluntary residence”.

(c) “The purpose, while settled, may be for a limited period; and the relevant purposes may include education, business or profession as well as a love of a place”.

29.  The burden of establishing the plaintiff is a resident outside Hong Kong lies with the defendants.

30.  It is said that where the considerations relevant to the determination of residence abroad are finally balanced, the court will find that the defendant has failed to satisfy the burden of proof.  See Hui Yin Sang v Tsoi Ping Kwan (HCA 392/2008, 21 July 2011) at §17 (Mimmie Chan DHCJ (as she then was)).

31.  Plaintiff said he had been spending 1/3 of his time in Hong Kong as he had business obligations in Hong Kong and Taiwan and that he used Hong Kong as his base in the region.

32.  He also said he is familiar with the people, the culture, the way of life in Hong Kong and will call Hong Kong, just as much as “home”.

33.  He produced 2 tenancy agreements dated 17 May 2012 and 16 May 2013 respectively pursuant to which he was made the lawful occupant of an apartment in mid-levels.  The tenant named in these tenancy agreements were respectively a Hong Kong Company and a Taiwanese Company.

34.  The authenticity of two tenancy agreements are not challenged.

35.  For the tenancy agreement in 2013, plaintiff and his family were the only lawful occupants of the apartment.

36.  The plaintiff here did not disclose any movement record nor passport copy though demanded by the defendants to support his allegation regarding his yearly length of stay in Hong Kong.

37.  It was submitted by Mr Kam for the plaintiff that it is difficult to explain why these companies, whether a company owned by the plaintiff or otherwise, will waste the company money paying high rental for an apartment if the apartment was left vacant most of the time.

38.  On what is before this court, I find the defendants did marginally manage to establish plaintiff is resident outside Hong Kong.

Delay

39.  It was submitted by Mr H Kam for the plaintiff that although any application for security may be made at any stage of the proceedings, it should be made “as promptly as possible”.  (Tsang Yee Mui v The Personal Representatives of Mak Chik Wing, The Deceased (HCA 2606/2006, 21 July 2008) at §34 (Chu J (as she then was)).

40.  He said that according to Tsang Yee Mui case, whether an application is late depends on when the defendant learnt of the circumstances justifying an application.  In this case he says, along the corporate defendants knew the plaintiff is a US citizen, that his stated address in the annual returns and other corporate documents of the Company are stated to be in United States, therefore they knew all along these facts upon which they form the view plaintiff is resident outside Hong Kong, yet, they have chosen to make the application almost 2 years after the present action commenced.

41.  Mr Kam concluded this only shows that these corporate defendants do not genuinely need security and/or do not genuinely take the view that their costs will be unpaid if they are successful.  He says this is only a tactical move designed to put undue pressure on the plaintiff to raise substantial fund[s]” before the trial.  (Waddington Ltd v Chan Chun Hoo Thomas (2013) at §36 (Lok DHCJ)

42.  Further, Mr Kam submitted that it is incumbent on the defendant to provide full information and reasons for the lateness, on affidavit.  A failure to do so may result in the rejection of the application “without further ado”. He referred this court to the case of Liu Chen v Chan Poon Wing (HCPI 779/2006, 7 October 2009) at §§32-33 and 37 (Master M Ng (as she then was)). See also Tsang Yee Mui v The Personal Representatives of Mak Chik Wing, The Deceased (2008) at §34 (Chu J); and Raj Kumar Mahajan v HCL Technologies (Hong Kong) Ltd (HCA 1510/2004, 15 September 2010) at §§33 and 35 (L Chan DHCJ (as he then was)).

43.  In the present case, he argued that the present application should be dismissed on this basis alone as it has been brought very late and these defendants did not offer any explanation for this lateness.

44.  He referred this court to the case of Waddington Ltd v Chan Chun Hoo Thomas (2013) where Lok DHCJ held that late applications for security for costs per se constitutes very real prejudice to a plaintiff, since the plaintiff is being put in a position of having little or no choice but to put up the security in order not to abandon and waste all the work done and costs incurred in preparing for trial.

45.  Mr D Lam, counsel for the defendants submitted that they were waiting for the outcome of the striking out application before they took out the present application.

46.  This explanation offered by Mr Lam cannot be found in affidavits filed by the defendants.

47.  In any event, the decision dismissing the striking out application was made in August 2013 and the corporate defendants had waited until July 2014 to file the present application.  No reasons or explanation were offered for the delay.

48.  It is also not disputed by the corporate defendants that they had knowledge of the facts upon which they now rely on to say the plaintiff is a resident outside Hong Kong.

49.  Delay is therefore one of the factors that this court will consider in the exercise of its discretion in the present application.

Assets within the jurisdiction

50.  The plaintiff here holds 30% shareholding in the Company.

51.  It is true that there is no valuation report prepared on the shareholding.

52.  It is stated in the 2010 Audited Financial Statements of the Company that there has been no consolidation of the accounts of the 2 subsidiaries, Voreto and WDI Precision.  The asset deficit of the Company was stated to be HK$14 million.  The value of these subsidiaries were presented at cost value.

53.  Nevertheless, in 4^th affirmation of the plaintiff dated 24 September 2014 the plaintiff told the court the amount of dividends paid to him as shareholder of the Company from WDI and Voreto in the year 2010, 2011 and 2012 by reason of his shareholding in the Company.  Total dividend paid to the plaintiff in these 3 years was US$714, 292, roughly $5.57 million and this court can safely concluded that the shareholding of the plaintiff in the Company is of substantial value as it gives an average yearly $1.85 million dividend per year.

54.  The net asset value of the Company is clearly substantial after taking into consideration of the performance of the subsidiaries even though nothing the stated asset deficit of $14 million.

55.  Plaintiff said also that substantial dividend for these subsidiaries for years subsequent to 2012 had already been declared and was payable to him but they were withheld by 1^st defendant.

56.  The corporate defendants did not disagree to this in the 5^th affirmation of Wai Yip Hin dated 3 November 2014.

57.  It is said by Mr Yip that the dividend distributed to the plaintiff and other shareholders are unlawful distribution under section 297 of the Companies Ordinance and are liable to be repaid to the Company.

58.  They also said valuation of shares could only be done by expert.

59.  I differ from their view as it is clear that a company which is able to hand out substantial amount of dividend is prima facie company of high net asset value.  This court does not need assistance of an expert to come to this conclusion.

60.  Further, 1^st defendant is the one having de facto control and also the majority shareholder of the Company.  The so called questionable dividend distribution could only be made possible with his blessings.

61.  The corporate defendants mentioned about the lack of marketability of the 30% shareholdings in the Company, but as they are either controlled and/or entirely owned by the 1^st defendant, costs suffered by these corporate defendants could easily be enforced seizing the shareholding of the plaintiff in the Company.

62.  Coupled with the fact that the declared dividend in the sum of US$597,143.97 (referred to in the paragraph 76 of 4^th affirmation of the plaintiff) was yet to be paid to the plaintiff (which is not disputed), and the costs orders previously made in favour of the plaintiff in the present action referred to in paragraph 80 of the 4^th affirmation of the plaintiff, I do not find the corporate defendants at risk of not able to recover their costs of the action should they be so entitled.

63.  As for the pending appeal lodged by the corporate defendants, at the time of this hearing, the result of the appeal is not known.  This court therefore will not consider that as a relevant issue.

64.  In the circumstances I accept that the plaintiff does hold substantial assets within jurisdiction.  It matters not where the assets of the Company lies as the plaintiff’s shareholdings is shareholding of a Hong Kong company.

65.  It is said the plaintiff is in grave financial difficulties in United States, in fact on the verge of bankruptcy and having had receivers appointed over his assets and that it would be difficult for the defendant to enforce any costs over there.  The plaintiff however said there was a settlement with the creditors in March 2014 and that the defendants actual knew.

66.  Bearing in mind what was said earlier, I do not find there is need for the corporate defendants to enforce cost order in US.

67.  Having so concluded, I do not find it necessary to address the other issues.

E.  CONCLUSION

68.  I do not find the present application appropriately taken out in the circumstances of this case and I refuse the application.

69.  I also make an order nisi that the defendants shall pay the plaintiff costs of the application, with certificate for counsel, the same to be summarily assessed and be paid forthwith.

70.  Solicitors for the plaintiff shall lodge with court and serve on the corporate defendants within 14 days the Statement of Costs.

71.  Solicitors for the corporate defendants shall lodge their objection (if any) within 14 days thereafter.

72.  Summary assessment be dealt with on a date to be fixed on paper or in court as the court directs after receiving the objections from the corporate defendants.

Mr Hugh Kam, instructed by Oldham, Li & Nei, for plaintiff

Mr Donglas Lam, instructed by Henry Wai & Co, for 2^nd, 4^th to 7^th defendants.

HCA 1973/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 1973 OF 2012

____________

____________

___________________

J U D G M E N T

___________________

I. INTRODUCTION

1. The plaintiff (“P”) is a United States national.  He had been in the plumbing business for over 50 years and was assisted by his son Larry Waxman (“LW”).  The 1^st defendant (“D1”) is a PRC national who resides in Xiamen, PRC.  According to P’s witness statement filed on 24 July 2014 (“P’s WS”), P and D1 became business partners in 1995 when they established a sino-foreign joint venture company to run a plumbing related business in Xiamen, PRC.  P claimed that as their business grew over the years they set up other companies, including the 9^th defendant (“WDI Intl”) and Xiamen WDI Technology Co Ltd (“WDI Tech”), which formed a group commonly known between P and D1 as the “WDI Group”.  According to P’s WS, P began to take a much less active role in the WDI Group by 1999 because the joint venture business had begun to thrive and P wanted to spend more time with his family in the USA.

II.  WDI INTL

2. WDI Intl was incorporated in Hong Kong on 22 November 2000.  Since 18 March 2003, D1, P and LW respectively were/are its 60%, 30% and 10% shareholders.  Since 28 March 2002, P, D1, LW and WDI Intl’s manager Ngai Kam-man Keith (“KN”) were/are its directors.  Since WDI Intl’s incorporation, D1 was/is its president with powers conferred on him as such under WDI Intl’s articles of association (“Articles”).  Since January 2001, Bright Way Accounting & Secretarial Services Ltd (“Bright Way”) had been the company secretary of WDI Intl and also the 2^nd to 8^th defendants (“D2-D8”).  WDI Intl’s registered office was at certain premises at Prince Edward Road, Kowloon (“Reg Office”).

3. According to P’s WS, WDI Intl was principally a holding company with two PRC subsidiaries established in 2004-2005 in the business of trading/manufacturing water tank fittings, cover board, watering tools, shower/bathroom facilities, kitchen utensils and tooling making equipment.  On the other hand, D2 and D4-D7 (“Subject Ds”) claimed WDI Intl did not have any business operations other than (a) to serve as a holding company for its subsidiaries and (b) to provide administrative support and customer services for WDI Tech being one of several companies owned or partly-owned by D1 and recognised inter alia by P and D1 as a group (“D1 Group”) that were engaged in the manufacture of water tank fittings, cover boards, watering tools and shower facilities in the PRC. 

4. The Subject Ds claimed that all along (a) WDI Intl’s expenses including its office in Hong Kong, and the rent, management fees, staff salaries (including the remuneration paid to KN) had been funded by WDI Tech, (b) the orders placed by WDI Intl’s customers were orders it handled on behalf of WDI Tech and all sums it received from such customers (necessitated by PRC foreign exchange control/restriction) were received on behalf of WDI Tech, and (c) the funds WDI Tech paid into WDI Intl and the sums WDI Intl received on behalf of WDI Tech were held by WDI Intl upon trust for WDI Tech to be used/applied for such purposes as WDI Tech directed from time to time.  The Subject Ds further claimed P and LW were well aware of and agreed to such arrangements between WDI Tech and WDI Intl (“WDI Arrangements”) as evidenced by WDI Intl’s audited financial statements from the date of its incorporation to 31 March 2010 (i) which were signed by D1 and P on behalf of WDI Intl and approved by WDI Intl’s board of directors (“WDI Board”), and (ii) which recorded WDI Intl’s turnover/revenue throughout such financial years to be zero even though it had from time to time acquired orders from WDI Tech’s customers and received purchase price for products sold on behalf of WDI Tech. 

III.  D1

5. The Subject Ds claimed articles 16-17 of the Articles conferred wide powers on D1 as WDI Intl’s president to deal with its affairs/matters.  It was said that (a) P and LW agreed with D1 as to (i) D1’s appointment as WDI Intl’s president to confer such wide powers on him and (ii) the WDI Arrangements (collectively, “WDI Agreement”), which agreement was unanimous amongst all WDI Intl’s shareholders and binding on them, and (b) D1 used his powers as WDI Intl’s president to implement the WDI Arrangements and/or otherwise handle WDI Intl’s affairs.  The Subject Ds claimed they would rely on the Duomatic principle if necessary. 

IV.  Overview of D2-D8

6. D2-D8 were/are Hong Kong companies controlled and/or directly/indirectly owned by D1, and D1 was/is the directing mind and will of D2-D8.  D3 was deregistered/dissolved on 14 November 2008.  The Subject Ds claimed D6 was a shareholder of D5, and as of 15 June 2001 D7’s shares were transferred to Li Fei Young.  P claimed Li Sui Tao (30% shareholder of D6) and Li Fei Young (100% shareholder of D7) are D1’s sons, and Kevin Joseph Oak (100% shareholder of D8) was/is an employee of WDI Intl and a close associate of D1. The registered offices of the Subject Ds were/are the Reg Office, and their corporate secretary was/is Bright Way.

V.  D2

7. P claimed D2 was to facilitate setting up WDI Tech to acquire a factory plant in Xiamen, PRC and to hold other investments belonging to D1.  The Subject Ds claimed D2’s main business was to sell bathroom products and to act as a holding company for WDI Tech, D4 and Xiamen Yike Bathroom Technology Company Limited.

VI.  D4

8. P claimed D4 was to facilitate investing in Shanghai Clean Stream Toilet Facilities Company Limited, but D4 did not carry on any operational business in its own right.  However, the Subject Ds claimed D4 previously acted as a Hong Kong company for its Shanghai subsidiaries that manufactured high-technology e-bidet toilets, but these subsidiaries were deregistered in June 2013.

VII.  D7

9. D7 did not carry on any operational business in its own right.  P alleged D7 was to facilitate investing in Hebei Tswoshen Toilet Facilities Company Limited, but the Subject Ds claimed D7 at one time held shares in Hebei Axent Toilet Facilities Company Limited (“Hebei Axent”) and not Heibei Tswoshen Toilet Facilities Company Limited.

VIII.  PROCEEDINGS

10. Since August 2012, dispute arose over the distribution of shares in WDI Tech.  P claimed the companies in the WDI Group, including WDI Tech, were beneficially held by D1, his brother-in-law Yu Yuebin Ben, P and LW in agreed proportion of 42%, 18%, 30% and 10% respectively.  P denied WDI Intl formed part of the D1 Group, and averred that D1 directly/indirectly held the entire beneficial interest in D2-D8. 

11. In P’s WS and P’s 2^nd affirmation filed on 19 August 2014 (“P 2^nd Aff”), P claimed he experienced difficulties in exercising his right as WDI Intl’s director to inspect WDI Intl’s documents due to obstacles by WDI Intl and its solicitors. 

12. On 21 August 2012, P’s solicitors wrote to WDI Intl for inspection of inter alia WDI Intl’s books of accounts.  According to P’s WS, P and his solicitor attended the Reg Office for inspection on 27 August 2012, but WDI Intl’s staff refused to make available the requested documents, made self-contradictory excuses, and eventually admitted the “headquarters” in Xiamen, PRC (“PRC Headquarters”) had instructed Bright Way and WDI Intl not to produce any documents to P for inspection.

13. On 28 August 2014, P’s solicitors wrote to WDI Intl inter alia to demand inspection of the requested documents by 4 September 2014.  On the same day, D1’s and WDI Intl’s then solicitors informed P’s solicitors that inspection of certain documents could be conducted on the same day.  On 5 September 2012, P’s solicitors as P’s attorneys conducted inspection at the Reg Office.  P claimed they were allowed to inspect various official registers for the financial years of 2007-2009 but not, say, books of accounts for the financial years of 2002-2006 and 2010-2012, which WDI Intl’s staff explained could be inspected upon retrieval from the warehouse but they did not say when that would be.

14. On 4-5 September 2012, P’s solicitors wrote to D1’s and WDI Intl’s then solicitors to say it was likely D1 had committed a series of breaches and commercial fraud at the expense of “the Group company” and/or had taken company assets and used them to the detriment of “the Group” and to the prejudice of “the Group’s” best interests.  On 13 September 2012, P’s solicitors wrote to D1’s and WDI Intl’s then solicitors asking for inspection of the further documents they had requested, and again alleging D1 had (without prior authorisation by board or general meeting) misused/misappropriated WDI Intl’s funds to finance certain activities of other companies owned by D1. 

15. On 21 September 2012, P’s solicitors requested inspection of the rest of the requested documents, but D1’s and WDI Intl’s then solicitors declined further inspection on the ground that P’s inspection proposal was designed to cause hardship to WDI Intl and P was abusing his inspection rights, but nevertheless WDI Intl would continue to search for further responsive documents and endeavour to provide a substantive response.  On 26 September 2012, D1’s and WDI Intl’s then solicitors replied to admit that WDI Intl had customarily settled miscellaneous invoices on behalf of a number of companies related to D1 that did not have any bank account, which payments had been properly recorded as receivables in WDI Intl’s management accounts and would be settled in due course. 

16. Meanwhile on 22 October 2012, P commenced the present action against D1 for an order that (a) D1 and D2-D8 do compensate WDI Intl in the respective sums of $7,1125,823.40 and $4,883,474.80, (b) an account of all sums misappropriated from WDI Intl by D1 (and paid away by him or at his direction) and by D2-D8, and (c) an order for payment to WDI Intl of all sums found due on taking of such account.  Such legal process was served on the Subject Ds but not on D1.

17. After further correspondence, P eventually inspected further company documents of WDI Intl on 26 October 2012.  During such inspection, P allegedly discovered that from 31 July 2002 to 1 April 2012 D1 had, without prior disclosure to and authorisation by board or general meeting, used WDI Intl’s funds to settle various operating expenses for D2-D8 which were not members of the WDI Group.

18. On 6 November 2012, P filed his Statement of Claim (“SoC”).

19. On 8 November 2012, D5 remitted a total sum of $1,112,234.00 into WDI Intl’s account in settlement of payments for operating expenses made by WDI Intl on behalf of D2‑D8 (“8/11/12 Payment”).  On 13 November 2012, D1’s and WDI Intl’s then solicitors wrote to inform P’s solicitors of the 8/11/12 Payment and invited P to discontinue the present action (“13/11/12 Letter”):

“As we have previously explained, the various amounts identified transparently as receivables in the management accounts of [WDI Intl] are in respect of certain miscellaneous expenses of certain companies and [D1]. These expenses concern mainly the auditing fee, company secretarial fee and business registration fee of various companies. As you know, all of these companies have the same registered address as [WDI Intl], and due to the fact that none of them holds a bank account in Hong Kong, it is out of expediency and efficiency that [WDI Intl] has customarily settled these amounts on behalf of these companies, such payments having always been clearly recorded as receivables in the management accounts of [WDI Intl].

As we have indicated, all amounts payable would be settled in the ordinary course and payments have now been arranged to credit the outstanding sums, which include the amounts referred to in [P’s] claim. We enclose a table prepared by the company secretary of [WDI Intl] indicating the amounts to be paid by [D1-D8] as of 31 August 2012 and the various bank transfer confirmations in respect of the repayment of these amounts. The company secretary of [WDI Intl] has confirmed that [WDI Intl] has not settled any additional expenditures on behalf of any of these companies or [D1] since 31 August 2012.

Having now paid to [WDI Intl] the total amount of HK$1,112,234.00, [D1-D8] no longer have any liabilities to [WDI Intl]. In the circumstances, we invite [P] to discontinue the derivative action, failing which this letter will be drawn to the attention of the Court in respect of any application for wasted legal costs.

[WDI Intl]

Amount due from related companies

From the date of incorporation of the related companies to 31 August 2012

Company Name	Currency	Amount
[D5]	HK$	256,405.00
[D8]	HK$	84,927.00
[D4]	HK$	74,640.00
[D2]	HK$	153,862.00
[D6]	HK$	405,189.00
[D7]	HK$	97,016.00
[D1]	HK$	40,195.00*
Total:	HK$	1,112,234.00

Note:

[WDI Intl] paid for the audit fee, company secretarial fee, and business registration fee on behalf of the above related companies.

*  Comprising HK$3,500 owed personally by [D1], HK$24,670 by the dissolved [D3] and HK$12,025 by the dissolved HK Da Chen Trade Ltd.”

In short, D1, the Subject Ds and WDI Intl by the 13/11/12 Letter intimated that the 8/11/12 Payment was to cover sums allegedly used for D2-D8’s operating expenses and for D1’s own personal use.  For convenience, the table and explanatory notes in the 13/11/12 Letter are collectively referred to herein as the “13/11/12 Table”.

20. On 7 December 2012, D2 and D4-D8 filed a summons to strike out P’s Writ of Summons and SoC (“1^st Strike Out Summons”).  On the same day, D2 and D4-D8 filed the 1^st supporting affirmation of Bai Ping, WDI Tech’s in-house counsel and D1’s personal assistant.  On 14 February 2013, P filed his Amended Statement of Claim (“ASoC”) and his 1^st affirmation to oppose the 1^st Strike Out Summons (“P 1^st Aff”).  On 28 March 2013, D2 and D4-D8 filed Bai Ping’s 2^nd affirmation in reply (“Bai 2nd Aff”). On 23 May 2013, D2 and D4‑D8 filed a summons to inter alia strike out P’s Amended Writ of Summons and ASoC (“2nd Strike Out Summons”).  The 1^st and 2^nd Strike Out Summonses are collectively referred to herein as the “Strike Out Application”.  On 23 August 2013, To J dismissed the Strike Out Application (“To Order”) and handed down a reasoned decision (“To Decision”).  On 19 October 2013, D2 and D4-D8 filed their Defence (“Defence”). 

21. P and his solicitors allegedly discovered there were some outstanding documents not provided to him, so on 23 October 2013 his solicitors wrote to inform WDI Intl they would conduct a physical inspection.  P claimed that during the inspection on 25 October 2013 WDI Intl refused to provide his solicitors with WDI Intl’s human resources related documents, but after further correspondence WDI Intl agreed to produce the requested documents for inspection on 14 November 2013.  On 5-6 December 2013, WDI Intl’s then solicitors sent P’s solicitors copies of the documents from the inspections on 25 October and 14 November 2013 that P requested.

22. On 13 December 2013, P filed his Reply (“Reply”).  On 16 February, 18 March and 18 March 2014 respectively, P, WDI Intl and the Subject Ds filed their respective List of Documents.  WDI Intl’s discovered documents included its accounting documents, eg audited financial statements, monthly income and expenses lists (“Monthly Lists”), trial balances, management accounts, monthly accounting files, etc.

23. On 21 March 2014, P’s solicitors wrote to the Subject Ds’ then solicitors for discovery of the Subject Ds’ audited financial statements and internal accounting documents including but not limited to the management accounts and general ledgers not disclosed in their List of Documents, and urged the Subject Ds to file a supplemental List of Documents.  On 27 March 2014, the Subject Ds’ then solicitors replied to say they were obtaining instructions and requested P to refrain from issuing any specific discovery application pending their further response.

24. P claimed that pursuant to his solicitors’ previous request for inspection of all bank statements of WDI Intl’s accounts WDI Intl disclosed bank statements of an account with Standard Chartered Bank, so he thought WDI Intl did not hold other bank accounts.  But in/about June 2014, P discovered WDI Intl had a bank account with the Industrial and Commercial Bank of China (“ICBC Account”) when (a) WDI Intl distributed certain dividends to LW via such remitting bank account and (b) LW showed P a copy of the banker’s record he obtained from his own bank.  So P’s solicitors wrote to WDI Intl on 7 July 2014 to request inspection of all accounting documents and bank account statements of all banks accounts maintained by WDI Intl whether in Hong Kong or elsewhere. 

25. P claimed that at the inspection on 9-10 July 2014 (a) his solicitors were refused access to the requested documents, (b) instead P’s solicitors inspected documents placed inter alia on the guest table and in the cabinet beside the guest table as a result of WDI Intl’s uncooperative attitude, (c) in the afternoon on 10 July 2014 WDI Intl’s then solicitors asked P’s solicitors to leave the Reg Office on the basis that a director could not inspect company documents without invitation by WDI Intl or search warrant from the court, (d) WDI Intl’s staff called the police so P’s solicitors had to stop their inspection, (e) the police officers who arrived acknowledged P’s rights as director to inspect and agreed that P’s solicitors could stay as long as they wished, and (f) P’s solicitors nevertheless decided to leave in view of the hostile attitude of WDI Intl’s staff towards them.  P’s solicitors recorded such complaints in their letters to WDI Intl’s solicitors dated 21 and 28 July 2014. 

26. On the other hand, WDI Intl’s solicitors complained there was no proper appointment for inspection of documents, and P’s solicitors forcibly carried out search/inspection on 10 July 2014 without consent, which led to report being made to the police and P’s solicitors being requested to leave and to make appointment for inspection through them.  WDI Intl’s solicitors wrote to P’s solicitors on 14 and 24 July 2014 on such complaints and on the requirements for further inspection of documents.

27. P claimed that during inspection at the Reg Office on 9‑10 July 2014 his solicitors discovered that documents belonging and/or relating to D2-D8’s affairs had been stored at the Reg Office (“D2-D8 Documents”), and that D2-D8 had made use of WDI Intl’s administrative resources and WDI Intl’s employees had assisted D2-D8 in pitching for business, handled D5’s business transactions, and generally handled D2-D8’s affairs.

28. On 23 July 2014, the Subject Ds filed the witness statement of Chau Wing Yan (also known as Suka Chau) (WDI Intl’s account clerk, “Chau”) (“Chau’s WS”).  Chau’s WS confirmed Chau would record all items of WDI Intl’s income/expenditure in the Monthly Lists, and such lists from May 2002 to April 2012 would record payments for D2-D8’s audit fees, company secretarial fees and business registration fees by WDI Intl on their behalf.  A table annexed to Chau’s WS listed each such payment by WDI Intl on D2-D8’s behalf, which payments totalled $1,063,092.00.

29. On 24 July 2014, P filed P’s WS.  On 21 October 2014, ie shortly after Master S Kwang granted the Order referred to in paragraph 33 below, the Subject Ds filed their Amended Defence (“Amended Defence”).

30. On 12 December 2014 (ie after the Hearing), P filed Notice of Discontinuance against D3.  On 31 December 2014, P filed his Amended Reply (“Amended Reply”).

IX.  SUMMONSES AND APPEAL

31. On 15 April 2014, P filed a summons (“Summons”) for an order that the Subject Ds do within 14 days thereof file/serve on P (a) a further and better list of documents and an affidavit verifying such list (collectively, “F&B List”), and (b) an affidavit giving specific discovery of documents, ie all audited financial statements and all internal accounting documents (including but not limited to management accounts and general ledgers) of the Subject Ds since the date of their respective incorporation (“Documents”), and the Subject Ds shall within seven days produce those documents which were in their possession, custody or power for P’s inspection.

32. On 7 May and 19 August 2014, P filed the 2^nd affidavit of his solicitor Gordon David Michael George Oldham (“Oldham 2^nd Aff”) and the P 2^nd Aff that referred to inter alia his pleadings, the P 1^st Aff and P’s WS in support of the Summons.  On 9 and 11 July 2014, the Subject Ds filed the 1^st and 2^nd affirmations of their solicitor Wai Yip Hin in opposition (“Wai 1^st and 2^nd Affs”). 

33. On 3 September 2014 (“Master Hearing”), Master S Kwang ordered that (“Order”):

(a) the Subject Ds do on or before 15 October 2014 make, file and serve an affidavit stating whether any of the documents or classes of the documents specified in the paragraph 34 below (“Ordered Documents”) is/are or has/have at any time been in their possession or custody or power; and if the same or any of them having at any time been in their possession or custody or power; and if the same or any of them were not then in their possession, custody or power, when they parted therewith and what had become thereof;

(b) the Subject Ds do produce those documents disclosed and listed in the affidavit filed in compliance with (a) above within seven days upon filing/serving of such affidavit;

(c) costs of the Summons, including costs of the Master Hearing and all costs reserved thereunder, be paid forthwith by the Subject Ds to P to be taxed if not agreed with certificate for counsel. 

34. The Ordered Documents comprised the following:

(a) all audited financial statements and internal management accounts (balance sheets, profit and loss statements and cash flow statements) of the Subject Ds since the year 2002 or the date of their respective incorporation, whichever is later (collectively, “Ordered Accounts”); and

(b) all quotations, invoices, receipts and vouchers of the Subject Ds during the financial years 2010 to 2012 (collectively, “Ordered Records”).

35. On 12 September 2014, the Subject Ds filed Notice of Appeal against the Order for the following reliefs (“Appeal”):

(a) the Order be rescinded and the Summons be dismissed;

(b) as an alternative to (a), the Order be varied, ie the Subject Ds do on or before 15 October 2014 make, file and serve an affidavit stating whether any of the quotations, invoices, receipts and vouchers of the Subject Ds during the financial years 2010 to 2012 handled by any of the employees of WDI Intl (if any) (“Alternative Records”) was/were or had at any time been in their possession or custody or power; and if the same or any of them having at any time been in their possession or custody or power; and if the same or any of them were not then in their possession, custody or power, when they parted therewith and what had become thereof;

(c)     costs of the Appeal and of the Summons be paid by P to the Subject Ds forthwith to be taxed if not agreed.

36. Notwithstanding the reliefs sought in the Summons, Mr Kam, counsel for P, confirmed at the hearing of the Appeal on 21 October 2014 (“Hearing”) that P would only seek to uphold the Order and not seek any order in respect of the F&B List and/or discovery/production of the Documents (other than the Ordered Documents).  In the circumstances, it is unnecessary for me to consider such reliefs which are not pursued by either P or the Subject Ds in the Appeal.

37. On 15 October 2014, the Subject Ds filed a summons for extension of time for 56 days from the date of the decision of the Appeal for the Subject Ds to file/serve their affidavit pursuant to the Order (“Time Summons”).  On 16 October 2014, Mr Lam, counsel for the Subject Ds, lodged his written submissions for the Appeal and the Time Summons.  On 17 October 2014, Mr Kam lodged his written submissions.  On the same day, the Subject Ds filed a summons for stay of execution of the Order pending determination of the Appeal (“Stay Summons”), and also the 4^th affirmation of their solicitor Wai Yip Hin said to be in support of the Stay and Time Summonses (“Wai 4^th Aff”).

38. The hearing of the Appeal, Time Summons and Stay Summons came before me at the Hearing on 21 October 2014.  Mr Kam sought leave to rely on WDI Intl’s latest audited financial statement in response to the Wai 4^th Aff, but later dropped such application when Mr Lam confirmed the Subject Ds would not rely on the Wai 4^th Aff for the purpose of the Appeal.  Mr Kam also sought leave to rely on the Hong Kong Standard on “Auditing 500 on Audit Evidence” published by the Hong Kong Institute of Certified Public Accountants (effective for audits of financial statements for periods beginning on or after 15 December 2009) (“Accounting Standard”).  Mr Lam had no objection, and leave was granted accordingly.

X.  TIME AND STAY SUMMONSES

39. When P issued the Time Summons on 15 October 2014, such summons did not pray for any alternative relief for stay of execution of the Order.  Mr Lam’s written submissions lodged on the following day gave no hint that P would take out the Stay Summons and/or a substantial supporting affirmation would be filed for inter alia the Time Summons on the very next day.  Indeed, Mr Lam’s written submissions simply contended that the Time Summons “is, of course, necessary, or otherwise [the Appeal] would be rendered nugatory”. 

40. There is no evidence/material before me that notwithstanding (a) the expiry of the deadline imposed under the Order and (b) the Subject Ds’ continued non-compliance of the Order even up to the Hearing P has taken any steps to enforce the Order pending the Appeal.  There is also no suggestion that (i) P disagrees with the relief sought in the Time Summons, which plainly must have been issued to formally regularise the position pending the outcome of the Appeal, and/or (ii) the Subject Ds expect any lively resistance at all. 

41. It therefore came as a surprise that P chose to file/serve the Stay Summons and the Wai 4^th Aff on the very day following Mr Lam’s written submissions.  The Wai 4^th Aff is a substantial affirmation of some 22 pages (with 10 exhibits) that essentially sets out the views of P’s solicitor on how Master S Kwang has erred in granting the Order.  But given that (a) the hearing bundle for the Appeal has been lodged with the court, (b) the Wai 1^st and 2^nd Affs (that set out the Subject Ds’ factual affirmation evidence) have been filed, and (c) Mr Lam’s written submissions for the Appeal and Time Summons have been lodged with the court, there is, in my view, no place in any further factual affirmation put forward in support of the Time and Stay Summonses for any argumentative assertions on how Master S Kwang has erred (which have already been canvassed in Mr Lam’s written submissions).  There is no point for the Wai 4^th Aff to either repeat matters contained in (a)-(c) above and/or to introduce new evidence under the guise of discussing the merits of the Appeal for the purpose of the Time and Stay Summonses when the Subject Ds do not seek leave to adduce any new evidence for the Appeal proper.[1] Indeed, out of the 10 exhibits to the Wai 4^th Aff, two are completely redundant, ie Mr Lam’s written submissions for the Appeal that have already been lodged, and the transcript of the Master Hearing (“Master Transcript”) that has already been included in the hearing bundle for the Appeal as lodged.  The other exhibits are documents not found in the hearing bundle for the Appeal, and I am unable to see how they will be pertinent to the merits of the Appeal.  As explained in paragraph 38 above, Mr Lam, quite rightly in my view, has disclaimed any intention to rely on the Wai 4^th Aff for the purpose of the Appeal.

42. In my view, the Wai 4^th Aff is an unnecessary exercise in costs; it is argumentative, prolix, repetitive and unnecessary.  Indeed, its argumentative content on the merits of the Appeal is even more abundant than that found in Mr Lam’s written submissions for the substantive Appeal.  If any support is required for the Time Summons (which I doubt given the fullness of Mr Lam’s written submissions and the hearing bundle for the Appeal that have already been lodged with the court), all that is required is a short letter to P’s solicitors indicating intended reliance on the Wai 1^st and 2^nd Affs and Mr Lam’s written submissions that speak to the merits of the Appeal and, according to the Subject Ds, the merits of the Appeal themselves sufficiently justify the reliefs sought in the Time Summons.

43. At the Hearing, Mr Lam confirmed that the Subject Ds would not rely on the Stay Summons and/or the Wai 4^th Aff at all, and would only pursue the Time Summons.  This volte-face on the part of the Subject Ds on the very day immediately following the filing of the Stay Summons and the Wai 4^th Aff immediately raises doubt as to whether there is any real necessity for such application and evidence, and lends support to the conclusion in the above paragraph.  After the CJR, the court shuts its face against any obviously unnecessary application that burdens the litigation with unjustified costs.  Mr Kam very sensibly confirmed at the Hearing that P had no objection to the Time Summons. 

44. At the Hearing, for all of the above reasons, I granted an order in terms of paragraph 1 of the Time Summons with costs in the cause of the Appeal, dismissed the Stay Summons, and ordered the Subject Ds to forthwith pay costs of and occasioned by the Stay Summons including the costs of the Wai 4^th Aff to P on indemnity basis to be taxed if not agreed.

XI.  LEGAL PRINCIPLES: APPEAL FROM MASTER

45. It is trite that an appeal from the master to judge in chambers is dealt with by an actual rehearing of the application which led to the order under appeal, and the judge treats the matter as though it came before him for the first time.  The judge will give the weight it deserves to the previous decision of the master; but he is in no way bound by it.[2]

XII.  LEGAL PRINCIPLES: SPECIFIC DISCOVERY

46. Under Order 24 rule 7 of the Rules of the High Court (“RHC”), a party may apply for an order requiring any other party to make an affidavit stating whether any document or class of document specified or described in the application is or has at any time been in his possession, custody or power, when he parted with it and what has become of it. But if the court is satisfied that discovery is not necessary, or not necessary at that stage of the cause or matter, it may dismiss or adjourn the application, and shall in any case refuse to make such an order if and so far as it is of opinion that discovery is not necessary either for disposing fairly of the cause or matter or for saving costs.[3]

47. Court’s approachHong KongCivil Procedure2015 states inter alia as follows:[4]

“…… But this is not sufficient unless a prima facie case is made out of (a) possession, custody, or power, and (b) relevance of the specified documents …… This prima facie case may be based merely on the probability arising from the surrounding circumstances or in part on specific facts deposed to. …… See too Berkeley Administration v. McClelland [1990] F.S.R. 381 where at 382 the court restated the principles as follows: (1) There is no jurisdiction to make an order under RSC, O.24 r.7, for the production of documents unless (a) there is sufficient evidence that documents exist which the other party has not disclosed; (b) the document or documents relate to matters in issue in the action; (c) there is sufficient evidence that the document is in the possession, custody or power of the other party. (2) When it is established that those three prerequisites for jurisdiction do exist, the court has a discretion whether or not to order disclosure. (3) The order must identify with precision the document or documents or categories of document which are required to be disclosed, for otherwise the person making the list may find himself in serious trouble for swearing to a false affidavit, even though doing his best to give an honest disclosure ……”[5]

48. Existence of the documents  In Ngan In Lengv Chu Yuet Wah (No 1), DHCJ Queeny Au-Yeung (as she then was) said as follows:[6]

“42. A prima facie case on existence may be established on merely showing the probability arising from the surrounding circumstances or on specific facts deposed to: Hong KongCivil Procedure 2012, Vol 1, p.553 para.24/7/1. For example, a prima facie case on existence may be established simply by assessing whether it is business practice for a certain type of document to exist: Union Bank of India v General Nice Resources (Hong Kong) Ltd (unrep., HCA 299/2007, [2010] HKEC 704), 10 May 2010, Bharwaney J, [10].”

49. Relevance  It is for the party seeking specific discovery to demonstrate a prima facie case for inter alia the relevance of the documents sought to the “matters in question”.  The well-known test for determining “relevance” is set out in The Compagnie Financiere et Commerciale du Pacifique v The Peruvian Guano Company as follows:[7]

“…… It seems to me that every document relates to the matters in question in the action, which not only would be evidence on any issue, but also which, it is reasonable to suppose, contains information which may – not which must – either directly or indirectly enable the party requiring the affidavit either to advance his own case or to damage the case of his adversary. I have put in the words ‘either directly or indirectly’ because, as it seems to me, a document can properly be said to contain information which may enable a party requiring the affidavit either to advance his own case or to damage the case of his adversary, if it is a document which may fairly lead him to a train of enquiry, which may have either of these two consequences: the question upon a summons for a further affidavit is whether the party issuing it can shew, ……, that the party swearing the first affidavit has not set out all the documents falling within the definition which I have mentioned and being in his possession or control ……”[8]

50. Mr Lam advocated the approach adopted by Colman J in O Company v M Company:[9]

“…… The ‘case’ of the plaintiffs or the defendants respectively can be defined only by looking at the pleadings. It must be defined by reference to the plaintiffs’ pleaded claim in its general sense, as distinct from its detailed exposition and by the defendants’ pleaded defence in the sense of its general refutation of the plaintiffs’ claim. What matters for discovery purposes is the claim and defence to it in the broadest sense and not to the detailed particulars of either claim or defence. A document in a defendant’s possession, custody or power which provides information as to a ground not hitherto pleaded in a cargo claim upon which it can be said that they failed to exercise due care of the cargo is just as relevant for discovery purposes as one which contains information as to a ground of want of due care which has already been pleaded. ……

…… The principle was never intended to justify demands for disclosure of documents at the far end of the spectrum of materiality which on the face of it were unrelated to the pleaded case of the plaintiff or defendant and which were required for purely speculative investigation …… On the contrary, the document or class of documents must be shown by the applicant to offer a real probability of evidential materiality in the sense that it must be a document or class of documents which in the ordinary way can be expected to yield information of substantial evidential materiality to the pleaded claim and the defence to it in the broad sense which I have explained. If the document or class cannot be demonstrated to be clearly connected to issues which have already been raised on the pleadings or which would in the ordinary way be expected to be raised in the course of the proceedings, if sufficient information were available, the application should be dismissed.”

51. The approach in O Company was applied by Findlay J in A v B[10] and Fung J in Chan Kwok Hong v AXA China Region Insurance Company (Bermuda) Limited & anor,[11] and the parties before Barma J (as he then was) in Moulin Global Eyecare Holdings Limited (in liquidation) (formerly known as Moulin International Holdings Limited) & ors v KPMG (a firm)[12] accepted this was the correct approach.

52. But DHCJ Horace Wong SC in Chan Hung v Yung Kwong Chung[13] acknowledged the observation by the editors of Hong Kong Civil Procedure 2009 that such approach represented “a marked departure from the very wide Peruvian Guano test that Hong Kong courts have accepted as the appropriate test to determine relevance”, and he doubted whether it was open to the Court of First Instance to follow the gloss Colman J put on the Peruvian Guano approach in O Company in view of the Court of Appeal’s adoption of the Peruvian Guano test in Deak & Co (Far East Ltd) v NM Rothschild & Sons Ltd & ors.[14]  DHCJ Horace Wong SC confessed he could not reconcile the difference between the test advocated by Colman J and the much wider formulation in Peruvian Guano.  On appeal,[15] the Court of Appeal did not disturb DHCJ Horace Wong SC’s discussion of the relevant legal principles.

53. I also prefer the Peruvian Guano test of relevance.[16]   In coming to this view, I am comforted by Man Cheung International Traders Limited & anor v CLSA Limited formerly trading as Credit Lyonnais Securities (Asia) Limited[17] in which the Court of Appeal allowed certain specific discovery on Peruvian Guano terms, ie “that such discovery may promote a relevant line(s) of inquiry and have the effect of buttressing the defendant’s case or of undermining that of the plaintiff”, and Paul’s Models Art GmbH & Co KG v UT Limited & ors in which DHCJ Coleman SC said as follows:[18]

“One area of dispute at the hearing was whether or not the test of relevance in Hong Kong is still that in the Peruvian Guano case, [counsel for the 4^th and 5^th defendants] suggesting that the excesses of that type of discovery are to be deplored. But, whatever one might personally think of the application of that test to many cases, I accept …… submission [by counsel for the plaintiff] that the Peruvian Guano test is still the applicable test even after the Civil Justice Reforms of 2009 (when the possibility of removing that test was rejected).”

54. On the Peruvian Guano test of “relevance”, the real question is whether the documents sought to be discovered are relevant to the issues between the parties to the litigation or, putting it in another way, to the “questions in the action”.[19] There has been suggestion that the issues or questions must be those identified in the pleadings[20] and that “it is the case of the party seeking discovery that must be assumed to be true, and not that of the party from whom the discovery is sought”,[21] but in Thorpe v Chief Constable of Greater Manchester Police[22] it was held that matters can be “in question” even though not expressly raised on the pleadings.  At p 833, Neill LJ said as follows:

“…… It is clearly established, however, that ‘the matters in question’ cover wider ground than the issues as disclosed in the pleadings. Thus a party is obliged to disclose any document which it is reasonable to suppose contains information which may enable the party applying for discovery either to advance his own case or to damage that of his adversary or which may fairly lead to a train of inquiry which may have either of these two consequences. It follows that discovery is not necessarily limited to documents which would be admissible in evidence.”

But even if an issue is raised in the pleadings, it is not necessarily determinative as to whether it relates to a “matter in question”.[23]  In Wu Ching Sau v New World First Bus Services Limited,[24] I also said that:

“…… although the pleadings and particulars will usually determine relevance to a matter in question, the obligation to provide discovery in respect of a matter in question does not necessarily mean a matter on which issue has joined in the pleadings, but the documents must be matters as to which an inference can properly be drawn that they are the subject of controversy between the parties ……”

55. Necessity According to Hong Kong Civil Procedure 2015,[25] if the party seeking discovery establishes a primafacie case, it is for the party objecting to the order for discovery to satisfy the court that the discovery is not necessary either for disposing fairly of the cause or matter or for saving costs under Order 24 rule 8 of the RHC.[26]

56. Mr Kam suggested that (a) admissions made in relation to a particular issue would not per se render documents pertaining to that issue irrelevant, and (b) documents that related to an issue which the applicant inherently was expected to know little about or had little information on would provide an additional reason for the discovery of such documents.  He referred to Horst Joachim Franz Geike v I-Onasia Limited & ors[27] in support of such propositions. 

57. In that case, the defendants admitted that (a) the plaintiff’s wife engaged the 1^st defendant to provide inter alia a campaign of general surveillance and investigation services relating to the plaintiff for use in the divorce proceedings, and (b) their legal fees in respect of the plaintiff’s proceedings against them were paid for entirely by the plaintiff’s wife, but they denied they had committed any unlawful act.  The plaintiff pressed for discovery of the invoices/receipts issued by the defendants to his wife as such documents might well contain descriptions of services rendered, work done and/or equipment purchased, which DHCJ Judge Lok found to be directly relevant to the disputed issues notwithstanding the defendants’ admissions:

“21. Further, the relevance of a document should not be tested solely against the detailed particulars pleaded by the parties. In this regard, Deputy High Court Judge H Wong, SC said the following in Chan Hung v Yung Kwong Chung, HCA 216 & 217 of 2004, unreported (decision on 15 January 2009):

  “27. … … … For the purpose of discovery, the relevance of a document should not be solely tested against the detailed particulars pleaded by the parties.  It is the pleaded case of the parties in the broad sense that one should be concerned with.  A document may be generally relevant to a party’s case as pleaded (many so‑called ‘background documents’ are of this nature) although its relevance cannot be specifically pinned to some pleaded particulars.  For discovery purposes, the pleadings have to be looked at broadly.”

……

23.  I would add one more observation.  Since it was supposed to be a covert surveillance operation, the Plaintiff would not be able to know the full extent of the alleged unlawful activities relating to the surveillance on the Plaintiff and the Children until the Defendants make full discovery of the relevant documents including the Invoices.  This is also an additional reason why discovery should be ordered in the instant case.”

58. Necessity – evidential materiality  Order 24 rule 8 of the RHC brings in the question of evidential materiality of the discovery sought to a particular issue.  DHCJ Horace Wong SC in Chan Hung said as follows:

“32. In any given case, there is likely to be a spectrum of evidential materiality within which documents may fall. There may be documents which are central to the pleaded issues; but there may also be documents which fall at the other end of the spectrum in that though they may ‘fall within the letter of Lord Justice Brett’s formulation of relevance for discovery purposes’, they are documents which are unlikely to contain or yield information of such evidential materiality to the pleaded case (in the broad sense mentioned above) of the parties as to make their disclosure necessary for the fair disposal of the proceedings or to save costs. The Court is entitled to take the view that although relevance in the Peruvian Guano sense has been established, it is not necessary for them to be disclosed. The power to refuse unnecessary discovery of documents is expressly conferred by the rules of court.

33. Indeed in the O Company v M Company case mentioned above, after dealing with the question of relevance, Colman J further held at p.352:

‘… I would only add that if I had held that the applicable analysis of relevance derived from Compagnie Financiere du Pacifique v Peruvian Guano Co., sup., was wide enough to include as relevant those documents in respect of which I have refused to make an order for discovery, I should in each case have held that discovery was not necessary either for disposing fairly of the matters in issue or for saving costs under O.24. r.8. Documents of which discovery is necessary for the fair disposal of a matter in issue must at least have a demonstrable evidential materiality. For the reasons which I have given in relation to relevance I am not satisfied that all those documents covered by items 9,10 and 20 do so.’

Hence Colman J would have arrived at the same conclusion by applying O.24 r.8 if he had simply followed the ‘letter’ of Brett L.J.’s formulation in the Peruvian Guano case on the question of relevance.”

59. This is echoed in Hong Kong Civil Procedure 2015 which states that “[an] application for discovery of a specific class of documents was refused in Kahn (David) Inc v Conway Stewart & Co Ltd [1972] F S R 69 upon the grounds that the probative value of the documents, if they existed, would be so slight as not to justify the inconvenience of giving discovery; and upon grounds that such discovery was not in the circumstances necessary for determining the issue to which it was said to relate ……”[28]

60. Width of discovery sought  Where the applicant seeks to see a class of documents, the class must not be defined or described so widely as to include documents which are not relevant to the issue.[29]  In other words, the prerequisites for invoking Order 24 rule 7 of the RHC must be established in respect of the class described as a class and not as regards some in the class only.[30] Even though an excessively wide class remains a valid class, the fact that the party will be compelled to discover much irrelevant material in addition to relevant material is something which goes to the issue of whether a discovery order is necessary “either for disposing fairly of the cause or matter or for saving costs”.[31] Put in other words, if the class of documents sought covers a large number of documents, and “disclosure is resisted on the grounds that it would be oppressive ……, the Court will weigh against any such potential oppression the possible injustice that would be caused if the material were not available at trial ……”[32] But where an oppressive, too wide or imprecise request contains within it a proper request which can be revealed without prejudice to the other side, the blue pencil test can be applied to limit the scope of the order.[33]

61. Fishing request Discovery will not be ordered for the purpose of “fishing” or to enable a party to turn a non-issue into an issue.[34] In RetheEstate of Ng Chan Wah, Chu J (as she then was) stated that:[35]

“It is not sufficient for the plaintiffs to say that because there is on the pleading allegation of improper conduct against the defendants as executors, they are entitled to test the basis of the estate accounts generally or to check the accuracy of the items presented in the estate accounts, irrespective of whether they are in issue. It is not the purpose of discovery to give the plaintiffs an opportunity to hunt around the documents in the hope that they will reveal some improprieties on the defendants’ part or will provide information for them to pursue more enquiries.”

62. Credit  “As in the case of interrogatories, discovery solely for the purpose of impeaching the credit of the opposite party and giving him a bad name will not be ordered; it probably does not “relate to a matter in question” ……”[36]

XIII.  PARTIES’ RESPECTIVE CASE

63. P claimed that D1 was in breach of (i) his fiduciary duties which he as WDI Intl’s director/president owed/owes to WDI Intl or (ii) the duties which he as trustee of WDI Intl’s assets/property owed/owes to WDI Intl by misusing or misapplying such assets as follows:

(a) by a series of transfers between 31 July 2002 and 1 April 2012, D1 caused funds in the sum of $1,102,322.40 belonging to WDI Intl to be paid to meet D2-D8’s operating expenses;

(b) by a series of transfers between 1 October 2002 and 1 April 2012, D1 misappropriated from WDI Intl an aggregate sum of $235,528.00;

(c) D1 caused/permitted D2-D8 to carry on their business at the Reg Office since their respective incorporation date but without making any payment to WDI Intl;

(d) D1 caused/permitted D2-D8 to use and benefit from the “administrative”/“supporting” services provided by WDI Intl’s employees from about 2002 without payment to WDI Intl, and in view of the extent of D2-D8’s business/affairs during the financial years ended 31 December 2002 to 31 December 2010, at least 40% of WDI Intl’s total administrative expenses (excluding those that related solely to WDI Intl) of $11,666,371.00, ie $4,666,548.00, were deployed or used for D2-D8’s purposes.

64. P claimed such use of WDI Intl’s assets was unlawful in that (a) D1 never disclosed to P or the WDI Board his interests in D2-D8 or the fact he had caused WDI Intl’s assets to be used for D2-D8’s purposes, (b) there was no board or general meeting authorising such use of WDI Intl’s assets for D2-D8’s purposes, and (c) by reason of D1’s interests in D2-D8 such transactions were in breach of section 162 and regulation 86(1) of Table A in the First Schedule of the Companies (Winding Up and Miscellaneous Provisions) Ordinance Cap 32 (“Old CO”), which P claimed applied to WDI Intl by virtue of article 1 of the Articles. 

65. P claimed that in so misusing or misappropriating WDI Intl’s assets, D1 was benefitting himself and D2-D8 at the expense and to the detriment of WDI Intl, so D1 was in breach of his duties owed to WDI Intl, and notwithstanding the 8/11/12 Payment, WDI Intl suffered loss and damage as follows:

	Amount ($)
1. Payments for D2-D8’s operating expenses	1,102,322.40
2. Amounts misappropriated by D1	235,528.00
3. 40% of WDI Intl’s administrative expenses	4,666,548.40
LESS the 8/11/12 Payment	(1,112,234.00)
Total:	4,892,164.80

66. P also claimed that in further breach of his duties owed to WDI Intl and those under section 121 of the Old CO, and without the knowledge/consent of WDI Intl, WDI Board and/or P, D1 failed to record such transactions in WDI Intl’s books of accounts and audited financial statements so as to conceal his misuse or misappropriation of WDI Intl’s assets, and despite repeated requests made between 21 August and 22 October 2012, D1 (in breach of his duties under section 121(3) of the Old CO) refused to permit P to have access to WDI Intl’s books of accounts.

67. P claimed that since D1 was/is the directing mind and will of each of D2-D8, his knowledge would be imputed into D2-D8’s knowledge, and D2-D8 were therefore liable to account to WDI Intl as constructive trustees in respect of the assets received or misused by them.  Further or alternatively, P claimed D2-D8 were liable to compensate WDI Intl for all loss and/or damages suffered as a result of the misapplication of assets.

68. The Subject Ds denied such claim.  They contended that any duty D1 owed as WDI Intl’s director/president was subject to, and modified and/or restricted by the WDI Arrangements/Agreement, and the funds WDI Tech paid into WDI Intl and the sums WDI Intl received on behalf of WDI Tech were all held by WDI Intl upon trust for WDI Tech to be used/applied for such purposes as directed by WDI Tech from time to time.  The Subject Ds claimed that since WDI Intl did not operate a business with a revenue stream, any cash held by WDI Intl and any monies it deployed were sourced mainly from WDI Tech, and WDI Tech’s cash injections that were used to discharge WDI Intl’s liabilities were reflected as “administrative expenses” in WDI Intl’s audited accounts.  The Subject Ds averred that likewise all sums paid by WDI Intl to meet D2-D8’s various expenses (including the sum of $1,102,322.40) were funded by WDI Tech and held by WDI Intl upon trust for WDI Tech from time to time.  WDI Intl (being the only entity in the D1 Group with an office and bank account in Hong Kong) was a convenient intermediary for transmission of payments for D2-D8’s operating expenses, which payments were recorded as receivables in WDI Intl’s management accounts prepared by Bright Way as company secretary of WDI Intl and D2-D8.  The Subject Ds claimed that since the funds for such payments did not belong to WDI Intl, the use of such funds to meet D2-D8’s operating expenses did not constitute misuse or misappropriation of WDI’s assets.  In the circumsatnces, even if any part of WDI Intl’s administrative expenses in the total sum of $11,666,731.00 for the financial years ended 31 December 2002 to 31 December 2010 were deployed/used for D2-D8’s purposes, by reason of the WDI Arrangements they did/do not constitute misuse or misappropriation of WDI Intl’s assets. 

69. The Subject Ds pointed out these transactions had been recorded in WDI Intl’s management accounts and/or in the accounts audited by Kevin Law & Co in accordance with applicable accounting standards.  WDI Intl’s audited accounts had been duly approved/signed by P and D1, who as WDI Intl’s directors were responsible for preparing and making true/fair presentation of the financial statements in the audited accounts free from material misstatement, and selecting/applying appropriate accounting policies and making accounting estimates that were reasonable in the circumstances.

70. The Subject Ds averred that in any event WDI Intl had not suffered any loss or damage (and D2-D8 had no further liability) as a result of any payment made by WDI Intl in respect of D2-D8’s operating expenses because (a) in/about early November 2012 Bright Way calculated that D2-D8 owed $1,112,234 to WDI Intl for its discharge of D2-D8’s operating expenses, (b) the 8/11/12 Payment was paid to WDI Intl for reimbursement of such operating expenses and P was notified of such payment on 13 November 2012, (c) no further sum was due to WDI Intl by D2-D8. 

71. The Subject Ds further claimed that although they had used the Reg Office as their own respective registered office, (a) they had not at any time (or in any sense) occupied the Reg Office, (b) they only used the Reg Office as an address for company registration and formal filings without carrying on any business thereat, and (c) no loss had been occasioned to WDI Intl by such use.  Further, by reason of the WDI Arrangements, D2-D8’s use of the Reg Office did/does not constitute misuse or misappropriation of WDI Intl’s assets. 

72. The Subject Ds claimed the aforesaid use of WDI Intl’s assets (which WDI Intl held upon trust for WDI Tech) was not unlawful, and whether D1 disclosed his interest was an internal management issue.  The WDI Board conferred extensive powers on D1, and article 17 of the Articles conferred powers upon D1 qua president, so even though the WDI Board did not formally consider the aforesaid use of WDI Intl’s alleged assets, WDI Intl’s other directors were content to acquiesce in D1 running WDI Intl according to the powers granted under article 17 of the Articles.

73. The Subject Ds (a) did not admit the level of “administrative expenses” WDI Intl incurred during the years ended 31 December 2002 to 31 December 2012, (b) denied any element of such “administrative expenses” was properly attributable to them, and (c) even if WDI Intl’s employees had provided any “administrative”/“supporting” services to D2-D8, claimed the nature/extent of those services had been de minimis.  It was alleged that the main business of D2, D5 and D6 concerned bathroom and sanitary related products, and their principal place of business was at the PRC Headquarters in Xiamen, PRC with staff there assisting in their business operations.  They merely used the Reg Office as their respective registered office and not for any other purpose, and they did not have any operating office or bank account in Hong Kong.  Their products were generally shipped by their PRC suppliers (except for one supplier in Taiwan in 2005) directly to addresses in, say, the United States, Europe and Indonesia stipulated by their overseas purchasers, so business communications were mainly among the customers, suppliers and staff at the PRC Headquarters.  It was also alleged that the prior principal activity of D4 and D7 was to act as holding companies for their subsidiaries.  D4 had no business operations or bank account in Hong Kong, and its subsidiaries were deregistered in June 2013.  On 15 November 2010, D7 transferred the shares in its subsidiary Heibei Axent to D5, and since then did not have any operations.  Hence, the Subject Ds as non-residents were granted exemption from Hong Kong profits tax by the Inland Revenue Department since their incorporation.

74. In summary, the Subject Ds denied any misuse or misapplication of WDI Intl’s assets and further denied they received/ misused any WDI Intl’s assets or they were liable to account to WDI Intl as constructive trustee or otherwise.  Even if D1 were the directing mind and will of the Subject Ds and/or D8, it was denied that any knowledge of D1 would have been imputed to any of D2-D8, or any of D2-D8 was liable to account to WDI Intl.  By reason of the above matters, the Subject Ds also denied WDI Intl suffered any loss or damage or D2-D8 were liable to compensate WDI Intl.

75. But P claimed the WDI Arrangements were recent fabrications by D2-D8 for the purpose of avoiding liability to WDI Intl: (a) there had never been any declaration of trust by WDI Intl in favour of WDI Tech in respect of funds used to pay for WDI Intl’s expenses, (b) WDI Intl audited financial statements up to 31 March 2010 refer to monies received from WDI Tech as being “due to a related company”, (c) WDI Intl’s accounts never contained segregation of monies belonging to WDI Intl and those belonging to WDI Tech (as would be standard accounting practice had WDI Intl held monies on trust for WDI Tech), (d) D1-D8 made the 8/11/12 Payment purportedly in full and final settlement of liabilities due from D1-D8, which was inconsistent with the WDI Arrangements. 

76. P claimed the Subject Ds had never disclosed the WDI Arrangements to P or LW.  Such practice was of no convenience to WDI Intl (who received no consideration/payment in return, had less capital to expend for its own purposes, and had to go to the trouble of settling D2-D8’s operating expenses), D2-D8 (since it would require little effort for D2-D8 being Hong Kong companies to open local bank accounts) and/or WDI Tech.  P further claimed the convenience of the WDI Arrangements (which he denied) did not in any way render it lawful or absolve D1-D8 from liability in relation thereto.  Further, P denied the “administrative”/“supporting” services provided by WDI Intl’s employees had been de minimis since they inter alia (a) processed payments to settle D2‑D8’s operating expenses, (b) received, filed and/or stored the invoices/receipts in relation to those payments, correspondence sent to D2-D8, and operational documents of D2-D8 and their subsidiaries. 

77. P claimed that none of WDI Intl’s audited financial statements (which in any event were untrue, inaccurate and unreliable in view of their failure to comply with requisite accounting standards and in view of the untruthfulness, inaccuracy and unreliability of WDI Intl’s internal accounts) evidenced the existence of the WDI Arrangements.  P averred that WDI Intl was responsible for preparing its accounts, but even if such accounts were prepared by Bright Way, all information including raw data of the accounting documents for the preparation of the internal management accounts and audited financial statements were provided by WDI Intl.  P doubted the veracity/accuracy of WDI Intl’s management accounts, and there were indications that the receivables being payments of D2-D8’s operating expenses had not been properly recorded at the time when each audited financial statement was prepared: (a) WDI Intl’s audited financial statements for the financial years 2002 to 2010 did not mention these payments, (b) given D1’s and D2-D8’s relationship with WDI Intl, applicable accounting practice suggested these payments should have been booked as payments “due from a director or a shareholder or related parties” or “loan(s) to a director or a shareholder or related parties” in WDI Intl’s audited financial statements, and they should have been noted as “related parties’ transactions” in the footnotes thereto, (c) since WDI Intl’s audited accounts were not prepared in accordance with applicable accounting standards, and without the disclosure and/or authorisation required by law and the Articles, P by signing/approving such audited accounts could not be taken to have approved of the acts and/or omissions allegedly recorded in the management or audited accounts, and (d) WDI Intl’s reluctance to provide its management accounts to P was reflective of a party seeking to conceal misappropriation of assets.

78. P averred that insofar as the Subject Ds sought to rely on a rule of internal management they in fact had knowledge of each of the matters in paragraph 64 above and/or they were put on inquiry as to those matters by virtue of inter alia the following suspicious/unusual circumstances and/or they did not make proper enquiry to ascertain the payment of their operating expenses by WDI Intl on their behalf, their use of the Reg Office and their use of the “administrative”/“supporting” services of WDI Intl’s employees were properly authorised.  P claimed it was suspicious/unusual that the payments/uses continued for over 10 years (and the payments made and costs incurred by such uses were substantial) without there ever having been a request to provide any consideration or payment in return even though (a) D2-D8 belonged to a different group of companies to WDI Intl, (b) there were no business dealings between D2-D8 and WDI Intl, and (c) D1 was a registered shareholder, direct/indirect beneficial owner and/or director of WDI Intl and D2-D8 whereas P and LW were WDI Intl’s (and not D2‑D8’s) registered shareholders, beneficial owners and directors.

79. P claimed that in using the Reg Office since 2002 as the registered offices of D2-D8 (in which P, LW, WDI Intl and WDI Tech had no legal or beneficial interest but D1 directly or indirectly held the entire beneficial interest) and a storage facility for their documents, including operational documents and receipts for operating expenses settled by WDI Intl, WDI Intl did not receive any consideration or payment in return and had less storage space for its own materials.  P also claimed that WDI Intl’s employees processed payments to settle D2-D8’s operating expenses, received/filed/stored documents of D2-D8,[37] handled D2-D8’s business affairs,[38] and liaised with employees of D2-D8 and their subsidiaries in relation to the affairs of D2-D8 and their subsidiaries.  WDI Intl did not receive any consideration or payment in return for these services of value and had a reduced use of its employees as a result.  The Subject Ds had never disclosed to P or LW such use of the “administrative”/“supporting” services of WDI Intl or the reasons for it.  Such use of WDI Intl’s “administrative”/“supporting” services amount to misuse or misappropriation of WDI Intl’s assets, and they caused WDI Intl to suffer inconvenience, loss and damage.

80. P claimed that as a result of the above matters, a portion of WDI Intl’s administrative expenses not attributable solely to WDI Intl was properly attributable to D2-D8, and attributing 40% of such expenses to D2-D8 were in all the circumstances reasonable.  If the commonly used costs management accounting methodology apportionment based on turnover were used, D2-D8 should be liable for a much larger apportionment percentage.  After all, since the 2003 financial year WDI Intl’s turnover had been $0 whereas since the 2002-2006 financial years D6’s turnover alone ranged from US$1,434,000,000.00 to US$3,499,000,000.00. 

81. P denied that the sum of $1,112,234 represented the correct figure of D2-D8’s operating expenses paid for by and/or owed to WDI Intl.  P claimed the correct sum should be $1,102,322.40 but the sum D1 misappropriated from WDI Intl for his own personal use was $235,528, thus giving a total sum of $1,337,850.40.  Since D1-D8 made clear the 8/11/12 Payment was to cover both misappropriated sums, and they never stated such payment also covered the cost of (a) use of the Reg Office and (b) “administrative”/“supporting” services provided by WDI Intl’s employees, D1-D8 still owed WDI Intl $225,616.40 and accrued interest notwithstanding the 8/11/12 Payment, and D2-D8 were still liable to WDI Intl for a portion of WDI Intl’s administrative expenses not attributable solely to WDI Intl, such portion being 40% of such expenses.

XIV.  SUBJECT Ds’ AFFIRMATION EVIDENCE

82. The Wai 1^st Aff summarised the Subject Ds’ opposition to the Summons as follows:

(a) P was simply fishing for evidence in the hope that he might find some evidence to substantiate his only outstanding claim against the Subject Ds in paragraph 63(c)-(d) above and paragraph 83(b) below that was based on speculation and conjecture, and not supported by facts or evidence.

(b) Both shortly before/after commencement of the present action (from late August 2012 to late 2013), P and his representatives had on numerous occasions conducted very comprehensive inspection/copying of WDI Intl’s documents and records, including accounting documents and records.

(c) WDI Intl had already made very comprehensive discovery of its accounts and accounting records in the present action.

(d) Notwithstanding (b)-(c) above, P was still unable to find anything to support P’s outstanding claim against the Subject Ds, so the Documents were simply not relevant and the Summons a fishing exercise in the hope P might find some evidence to support his outstanding claim.

(e) Since D2 and D6 were incorporated over 14 years ago, D5 was incorporated over 11 years ago, and D4 and D7 were incorporated 8 years ago,[39] the scale of the discovery and production sought would be massive, and highly oppressive against the Subject Ds. 

(f) P failed to show discovery and/or production of the Documents were necessary either for disposing fairly of the cause or matter or for saving costs. 

83. According to the Wai 1^st Aff, P’s claims against the Subject Ds under the ASoC were essentially for (a) the sum of $1,102,322.40 being alleged payments by WDI Intl for D2-D8’s operating expenses, and (b) the sum of $4,666,548.40 being 40% of WDI Intl’s administrative expenses allegedly deployed or used by D2-D8 for their purposes.  The other claims for $235,528.00 being alleged misappropriations by D1 and $2,242,349.00 being alleged wrongful payments of director’s remuneration did not concern D2-D8.

84. In respect of P’s claim in paragraphs 63(a) and 83(a) above, the Wai 1^st Aff claimed the 13/11/12 Letter/Table (with breakdown of sums due from D2-D8, bank transfer confirmations for repayment and detailed calculation of such sums) recorded repayment to WDI Intl in full and final settlement of all audit fees, company secretarial fees and business registration fees paid by WDI Intl on behalf of D2-D8 (including a small sum owing from D1 personally) by way of the 8/11/12 Payment in the total sum of $1,112,234.00.  Since WDI Intl had not settled any additional expenditure on behalf of D2-D8 and/or D1, and the 8/11/12 Payment had been paid to WDI Intl, D1-D8 no longer owed any liabilities to WDI Intl in respect of the claim in paragraphs 63(a) and 83(a) above.

85. In respect of P’s only outstanding claim in paragraph 63(c)-(d) and 83(b) above, the Wai 1^st Aff claimed paragraph 13 of the ASoC showed such claim was not based on facts and evidence, but was purely based on speculation and conjecture, and was totally arbitrary. 

86. The Wai 1^st Aff claimed that from late August to October 2012 and from late October to early December 2013 P (presumably as WDI Intl’s director) and/or his representatives inspected and obtained copies of a comprehensive range of WDI Intl’s documents/records, including accounting documents/records,[40] and further claimed that WDI Intl made extensive discovery of its accounting documents in its List of Documents, which P would have inspected and which included the Monthly Lists that recorded monthly payments from May 2002 to April 2012 by WDI Intl on behalf of D2-D8 for, say, audit fees, company secretarial fees and business registration fees totalling around $1.1 million.  Apart from such fees which had been repaid by way of the 8/11/12 Payment, there was no other payment made by WDI Intl on behalf of any of D2-D8 recorded in the Monthly Lists or evidenced in WDI Intl’s discovered documents and/or WDI Intl’s documents provided to P for inspection.  So there was nothing to support P’s theory, which was no more than speculation and conjecture, that “at least 40% of such expenses were deployed to or used by [D2-D8] for their purposes, that is, HK$4,666,548” as pleaded in paragraph 13 of the ASoC.  P’s application for specific discovery of the Documents was therefore a classic case of fishing for evidence in the hope of finding evidence to substantiate such claim. 

87. The Subject Ds claimed P had not shown the Documents related to one or more of the matters in question in the cause or matter such that they would offer a real probability of evidential materiality since (a) sufficient information/documents had been made available to P by inspection of WDI Intl’s documents and by WDI Intl’s discovery, which demonstrated that the claim in paragraphs 63(c)-(d) and 83(b) above did not have any basis, and (b) specific discovery of the Documents would be a futile exercise and not necessary for disposing fairly of the cause or matter. The Subject Ds also claimed that discovery of 8-14 years of D2-D8’s accounting documents/records would be very draconian and oppressive to them, and not necessary, justifiable or relevant. 

88. Further, the Subject Ds claimed that discovery of the Documents was not necessary for saving costs. First, preparation of the affirmation in respect of the Documents and production/inspection of the same would be very costly for both P and the Subject Ds, and there was nothing to indicate such massive exercise would produce documents that would or might add anything to the documents already inspected by P and the documents already discovered by WDI Intl.  Secondly, since D2-D8 were incorporated 8-14 years ago, the discovery sought would involve them searching for and going through a huge volume of documents (which included not only the Subject Ds’ audited financial statements but also all their internal accounting documents “including but not limited to management accounts and general ledgers, since its date of incorporation”) thereby incurring substantial time and costs.  In any event, there was no basis for the Oldham 2^nd Aff to state that the Documents were in existence since sections 377 and 379 of the Companies Ordinance Cap 622 (“New CO”) (or section 121(3A) of the Old CO) only required Hong Kong companies to preserve accounting records for seven years after the end of the financial year to which such records related, so the Subject Ds had no obligation to keep their accounting records for more than seven years. 

89. As regards P’s application for production of the Documents for inspection, the Subject Ds argued that since P was not entitled to specific discovery of the Documents, he would not be entitled to production of the Documents for inspection.  The Subject Ds contended that P’s application for specific discovery and production of the Documents ought to be dismissed with costs.

XV.  DISCUSSION

90. Mr Lam submitted the Order was wrong in principle and could not stand in that (a) the court had no jurisdiction to order the discovery as sought in the Summons or as ordered by Master S Kwang since P was unable to demonstrate they related to a class of documents relevant to matters in the action, and (b) even if the court had jurisdiction it should refuse to exercise its discretion to do so since (i) such discovery was unnecessary either for disposing fairly of the cause or matter or for saving costs, and (ii) the categories of documents were impermissibly wide-ranging and ill-defined, and amounted to a roving examination or fishing exercise for additional evidence.

91. The Wai 1^st and 2^nd Affs do not deny that the Documents did/do exist or that they were/are in the possession, custody or power of the Subject Ds.  Rather, the Subject Ds suggest the New/Old CO only require Hong Kong companies to preserve accounting records for seven years after the end of the financial year to which such records relate, and argue there is no basis to suggest the Subject Ds have accounting records going back beyond seven years when they have no obligation to keep the same. 

92. I am not persuaded by such argument.  There can be no doubt that companies are expected to have or have had in their possession, custody or power their audited reports, internal accounts and other financial documents (eg invoices, receipts, bank statements and other necessary business records).  Indeed, the Subject Ds have admitted as much by saying Hong Kong companies are required to preserve accounting records for seven years. But this is only the minimum requirement, and there is nothing to prevent Hong Kong companies from keeping their accounting, financial and/or business documents/records for longer periods.  But apart from pointing to the statutory provisions that set the minimum requirements, the Wai 1^st and 2^nd Affs do not say the Documents are no longer in the Subject Ds’ possession, custody or power. 

93. More importantly, the Oldham 2^nd Aff and P 2^nd Aff explain that when P’s solicitors inspected documents at the Reg Office on 10 July 2014 they came to discover that the D2-D8 Documents were stored there, including (a) several box files of D5-D6’s quotations, purchase orders and invoices stored in a cabinet, and (b) piles of marketing materials such as D2-D8’s (in particular D5’s) leaflets, brochures and product specifications on a guest table and on the rack of another cabinet.  P claims that some of the D2-D8 Documents go back more than 13 years ago to May 2001.  Further, D2-D8’s invoices, receipts and other supporting documents that form the basis of P’s claim for misuse or misappropriation of funds in paragraphs 63(a) and 83(a) above date back to July 2002.[41] Plainly, P has sufficiently demonstrate a prima facie case that documents going back more than seven years have been kept by the Subject Ds and that they have the Ordered Documents in their possession, custody or power.

94. Mr Lam submits the Documents or Ordered Documents are unnecessary either for disposing fairly of the cause or matter or for saving costs.  He argues that even taking into account WDI Intl’s discovery and P’s inspection of WDI Intl’s documents at the Reg Office, P cannot demonstrate how the Documents or Ordered Documents will provide any greater evidential materiality in relation to the disputed issues in the present action, and it is insufficient for P to simply allege they may assist on some peripheral issues.  Mr Lam particularly reminds that allegations in the original SoC for dishonest assistance, knowing receipt and conspiracy against inter alia the Subject Ds have been completely abandoned. 

95. The Oldham 2^nd Aff claims that specific discovery is sought in respect of P’s claim against the Subject Ds on the premise they have received/used WDI Intl’s assets without approval by the WDI Board or WDI Intl’s shareholders and/or without provision of consideration in return.  Such assets include (a) WDI Intl’s funds ($1,102,322.40) that have been used to pay for D2-D8’s operating expenses, (b) the Reg Office from where D2-D8 have run their business, and (c) WDI Intl’s human resources being administrative support by WDI Intl’s employees for D2-D8. 

96. As regards the claim against the Subject Ds in paragraphs 63(a), 83(a) and 95(a) above, Mr Lam contends that since the Subject Ds do not dispute that WDI Intl should be reimbursed for payments it has made for D2-D8’s operating expenses, whether or not such operating expenses are intended to be repaid is irrelevant to the pleaded issues, and indeed D1-D8 by the 8/1/12 Payment have repaid a total sum of $1,112,234.00 to WDI Intl in relation to such operating expenses.  As regards P’s allegation that the total sum WDI Intl has paid on behalf of D2-D8 is $1,102,322.40 rather than the sum reflected in the 13/11/12 Letter, Mr Lam submits the Subject Ds do not contend otherwise.  Mr Lam argues that on such basis there is no live issue that necessitates further discovery by the Subject Ds.  In this respect, Mr Lam reminds that P’s calculation of D2-D8’s operating expenses paid by WDI Intl in total sum of $1,102,322.40 is based on individual invoice for each separate sum, so there is no need for further discovery to prove P’s calculation is precisely correct.  Mr Lam argues the probative value of such information is extremely limited and does not justify the massive exercise of disclosing all the Documents or the Ordered Documents.[42]

97. Briefly put, the Subject Ds’ beguiling assertion is that as a result of the 8/11/12 Payment P’s claim is hopeless so there is no outstanding issue that justifies any specific discovery.  Indeed, the 13/11/12 Letter claims D2-D8’s operating expenses paid by WDI Intl have been recorded as amounts receivable in WDI Intl’s management accounts because WDI Intl customarily settles such expenses for D2-D8 who do not have any bank account in Hong Kong, and “all amounts payable would be settled in the ordinary course”, which transpires to be the payment arranged/effected by way of the 8/11/12 Payment.

98. I start my discussion with Mr Lam’s fundamental assertion that this head of claim originally for $525,034.40 in the SoC has been resolved by repayment being the 8/11/12 Payment made after commencement of the present action.  But as seen in paragraphs 28-29 and 52 of the To Decision, To J was unimpressed by such argument which he said ignores P’s amendment of the SoC that increased the quantum for this head of claim.  Such amendment takes effect not from the date of the amendment but from the date of the original SoC, so what stood before the amendment is no longer material before the court and no longer defines the issues to be tried.  Simply put, the issues are defined by the increased sum in the ASoC rather than the lesser sum claimed in the SoC.  I am not persuaded anything turns on Mr Lam’s submissions in relation to the quantum of this head of claim as originally pleaded in the SoC. 

99. Next, a quick study of the Amended Defence reveals that the Subject Ds’ defence to P’s claim in paragraphs 63(a), 83(a) and 95(a) above is much wider in scope than what Mr Lam would have us believe.  In fact, the primary defence pleaded in the Amended Defence (which pleading was not yet available at the Master Hearing) is premised on the WDI Arrangements that irrespective whether WDI Intl has made payment in respect of D2-D8’s operating expenses or not, D2-D8 are not liable torepay WDI Intl because the funds WDI Intl has used to pay D2-D8’s operating expenses are not WDI Intl’s own monies and are held by WDI Intl on trust for WDI Tech to be used/applied for such purposes as WDI Tech directs, and WDI Intl is merely a convenient intermediary for transmission of payments for D2-D8’s operating expenses.  The Subject Ds claim all sums paid by WDI Intl to meet D2-D8’s operating expenses (including the sum of $1,102,322.40 that P alleges) do not belong to WDI Intl but are funded by WDI Tech and held by WDI Intl upon trust for WDI Tech, and on such basis there is no misuse or misappropriation in respect of WDI Intl’s assets. 

100. In my view, such denial of liability to repay premised squarely on non-involvement of any monies/assets of WDI Intl must be the Subject Ds’ primary line of defence.  The Subject Ds’ other assertion that WDI Tech has provided monies to WDI Intl on unsecured and interest-free basis to enable WDI Intl (and not WDI Tech) to customarily settle D2-D8’s operating expenses on the basis that D2-D8 (who treats these as “amounts payable”) are liable to repay (and by the 8/11/12 Payment has repaid) these “amounts receivable” by WDI Intl is necessarily a further/alternative line of defence.  Since such further/ alternative line of defence acknowledges liability to repay WDI Intl for use of WDI Intl’s monies/assets (albeit sourced from WDI Tech on unsecured and interest-free basis),[43] the Amended Reply avers that P regards these two lines of defence to be inconsistent.

101. The matters raised by the Subject Ds and Mr Lam in paragraphs 96-97 above are focused on the further/alternative (but not the primary) line of defence.  Mr Kam complains that although counsel for the Subject Ds (not Mr Lam) has confirmed at the Master Hearing that the Subject Ds will not rely on the WDI Arrangements to dispute liability to make repayment of their operating expenses paid by WDI Intl,[44] and that they will merely contend there has been full repayment to WDI Intl (without disputing liability to repay) by the 8/11/12 Payment, the primary line of defence has been slipped back into the Subject Ds’ pleadings by the amendments in the Amended Defence filed on 21 October 2014[45] shortly after the Order was granted.[46] Mr Kam therefore says the Subject Ds’ arguments set out in paragraphs 96-97 above are misleading.

102. In my view, the Appeal is by way of re-hearing, and it is not without significance that P is now faced with the Amended Defence (rather than the Defence) being the Subject Ds’ current pleadings.  I cannot ignore (as Mr Lam suggests I should) the pleaded primary line of defence premised on the WDI Arrangements that deny any misuse/ misappropriation of WDI’s Assets on the basis that there is no liability to repay WDI Intl, especially when the Subject Ds have particularly chosen to include such averments in their pleadings by amendments made after the granting of the Order.

103. The primary line of defence takes on significance because it is clear from the P 2^nd Aff and the Reply (now the Amended Reply) that P disputes both lines of defence: he denies the existence of the WDI Arrangements, and he disagrees D2-D8 have made full repayment of the operating expenses WDI Intl has paid on their behalf.  Mr Kam reminds that the WDI Arrangements have not been explicitly documented anywhere, and paragraphs 32-34 and 38-39 of the To Decision have expressed doubts as to its existence.  This clearly suggests that the Subject Ds’ primary line of defence does raise disputed issues that are relevant to the Summons.

104. Although it will be logical to first consider the primary line of defence to elicit the relevance of the Ordered Accounts to the disputed issues arising thereunder, I defer to Mr Lam’s emphasis on the further/ alternative line of defence and deal with it first.

105. On the premise that the Subject Ds are required to repay WDI Intl for their “amounts payable” (ie “amounts receivable” by WDI Intl) being operating expenses that WDI Intl has paid on their behalf, Mr Lam places heavy reliance on the 8/11/12 Payment (which he says has fully settled the Subject Ds’ liability to repay) to suggest there is no remaining issue that justifies discovery of the Documents or Ordered Documents.  But P’s case[47] shows there are unexplained differences between P’s and the Subject Ds’ calculations that raise fundamental questions as to whether there has been “full” repayment, which at the very least demonstrates that P’s claim is not as hopeless as the Subject Ds would have us believe:

(a) P claims that D2-D8’s operating expenses paid by WDI Intl are $1,102,322.40, but the 13/11/12 Letter puts such expenses at a lesser sum of $1,096,709.00.[48] The difference is $5,613.40, but it cannot be lightly brushed aside merely on the basis that the Subject Ds in face of the quantum of P’s claim and in defence thereto the Subject Ds simply do not contend otherwise[49] (especially when the different sums put forward by P and the Subject Ds are not round-off ballpark figures but precise sums that must surely correlate to underlying individual payments and calculations).

(b) This immediately calls into question whether the grouped sums allegedly owed by each of D2-D8 (which again are precise amounts rather than round-off ballpark figures) set out in the 13/11/12 Table are accurate, and whether the 8/11/12 Payment is truly paid in full settlement of D2-D8’s operating expenses paid by WDI Intl.  This is of particular concern because P claims the cumulation of individual payments that result in the total sum of $1,102,322.40 are supported by documents,[50] but in the absence of contemporaneous supporting documents and any breakdown of the grouped sums in the 13/11/12 Letter/Table one is left to wonder how the Subject Ds have arrived at the total sum of $1,096,709.00 and whether it is correct/accurate. 

(c) Although the difference between P’s calculations and the amounts put forward by the Subject Ds is not large, such difference arguably reflects a more fundamental dissension between P and the Subject Ds as to what underlying items of payment in respect of D2-D8’s operating expenses by WDI Intl comprise the alleged repayment, which further brings into question whether all of the individual items of payment that comprise P’s claim of $1,102,322.40 in Schedule 1 of the ASoC have actually been repaid.

(d) It is interesting to note that Chau’s WS reveals three payments not included amongst the individual items of payment that comprise P’s claim of $1,102,322.40 in Schedule 1 of the ASoC,[51] so even on presently known information, D2-D8’s operating expenses paid by WDI Intl arguably should be $1,102,322.40 + $2,600.00 + $3,212.00 + $716.00 = $1,108,850.40, which is again different from the sum of $1,096,709.00 allegedly repaid by D2-D8 by way of the 8/11/12 Payment.

(e) In the ASoC, P claims D1 has misappropriated WDTL’s Intl funds in the sum of $235,528.00[52] which ought to be repaid, so on P’s case the total repayment due from D1-D8 is $1,102,322.40 + $235,528.00 = $1,337,850.40, and on presently known information in (d) above it is $1,108,850.40 + $235,528.00 = $1,344,378.40.  The pertinence of P’s claim against D1 arises from the explanation given in the 13/11/12 Letter/Table that the 8/11/12 Payment is meant to cover sums owing to WDI Intl by D2-D8 as well as by D1.[53] But no matter whether P’s claim against D1-D8 is $1,337,850.40 or $1,344,378.40, it is significantly more than the sum of $1,100,209.00 out of the 8/11/12 Payment that the Subject Ds allege in the 13/11/12 Letter/Table as being repayment attributable to D1-D8.[54]

(f) P also claims WDI Intl is entitled to interest on the sums paid for D2-D8’s operating expenses, which may be substantial given that some payments have been made 12 years ago and compound interest may possibly be ordered.  The Subject Ds have not addressed this in the Wai 1^st and 2^nd Affs and neither has Mr Lam in his written submissions.  But even if one puts aside the possibility of compound interest, it is plainly arguable for P to claim interest as recognised in paragraphs 40, 47 and 52 of the To Decision.

(g) The above demonstrates that even if D2-D8 do not dispute any liability to repay their operating expenses which WDI Intl has paid on their behalf, there is still a real dispute as to whether there has been full and final repayment of all sums owed by D1-D8 (as the Subject Ds allege) or whether there is still a shortfall (as P claims), which is not a mere contest of arithmetics but a genuine dispute of real substance that goes to whether and which of the underlying individual items of payment in Schedule 1 of the ASoC has been repaid.  To J in dealing with the Strike Out Application has questioned the existence of the alleged long standing back-to-back reimbursement arrangement, and in paragraph 34 of the To Decision he has said “[it] is also significant to note that settlement “in due course” meant the only reimbursement in ten years [ie the 8/11/12 Payment].  The assertion of long standing arrangement of payment and reimbursement is just a bald assertion unsupported by any evidence.  As [P] put it, the reimbursement [by the 8/11/12 Payment after the commencement of the present action] is no difference from restitution by a thief after having been caught”.  In short, there is arguable basis for P to call into question the alleged repayment by way of the 8/11/2 Payment as purported answer to his claim in paragraphs 63(a), 83(a) and 95(a) above.

(h) Mr Kam complains that previously D2-D8 have already put forward the argument that WDI Intl’s claim for reimbursement of payment for their operating expenses has been extinguished by the 8/11/12 Payment,[55] and even though P has already responded with the above explanations[56] and even though paragraphs 40, 47 and 52 of the To Decision have rejected the Subject Ds’ reliance on the contention that there has been full repayment for the purpose of the Strike Out Application, the Subject Ds still fail to address P’s explanations in resisting the Summons and prosecuting the Appeal. 

(i) I agree with To J that P’s claim in paragraphs 63(a), 83(a) and 95(a) above is arguable and viable, and it is certainly not clear and obvious that such claim is hopeless, extinguished and/or concluded merely by the 8/11/12 Payment.  In face of the To Decision, Mr Lam at the Hearing has conceded as much and he has restricted his reliance on 8/11/12 Payment merely for criticism against the wide and disproportionate scope of the discovery ordered, especially in relation to the Ordered Accounts rather than to suggest that this head of claim by P has been extinguished.

106. In my view, review of the Ordered Accounts is necessary for they clearly go towards resolving the dispute as to whether the 8/11/12 Payment amounts to repayment made on the basis calculated by the Subject Ds or on the basis as P alleges.  The fact that the Subject Ds are able to refer to particular payments in paragraph 105(d) above that are not known to P from the documents he or his representatives have inspected at the Reg Office and/or from WDI Intl’s discovery also goes to show that (a) WDI Intl’s disclosure whether for inspection or by discovery is not as comprehensive as the Subject Ds suggest, and (b) (as evident from Chau’s WS) the Subject Ds hold documents relevant to the present action that have not been discovered and/or disclosed.  The matters in paragraph 105(e) above also raise question over the accuracy/reliability of (i) the contents of the 13/11/12 Letter/Table, (ii) the amounts allegedly repaid by D2-D8, and (iii) the underlying individual operating expense payments that comprise the alleged repayment.

107. Mr Kam has drawn my attention to paragraph 68(3) of P’s WS which raise questions as to the reliability of WDI Intl’s management accounts, eg the “ending balances” of balance sheet items for a year in which the debtor account of one of the Subject Ds do not correspond with the “opening balances” of the same items in the following accounting year, and suggests that prima facie there at least seems to be debts (other than those set out in the ASoC) owed to WDI Intl by the Subject Ds.  On the other hand, Mr Lam says this is irrelevant because the issues are defined by the pleadings, and not by matters raised in witness statements but not specifically pleaded in the ASoC and Amended Reply.  He says P may (if he can) apply for further discovery if and when obtains leave to include such assertions in his pleadings.

108. In my view, the Ordered Accounts are relevant even without specifically adding new heads of claim for other alleged unauthorised misappropriations by the Subject Ds canvassed in P’s WS.  What is significant is that P’s WS lends colour to the suggestion that WDI Intl’s management accounts may well be unreliable and inaccurate,[57] and gives further weight to the prima facie case that P has demonstrated for disputing the Subject Ds’ fundamental propositions that the 8/11/12 Payment represents their full and final repayment to WDI Intl and that such repayment covers the individual items of payment of operating expenses in Schedule 1 of the ASoC. If there is some evidence to show that WDI Intl made payments for items of D2-D8’s operating expenses other than those set out in Schedule 1 of the ASoC,[58] then irrespective whether they have been the subject of claim in the ASoC, it becomes immediately questionable whether the 8/11/12 Payment amounts to “full” repayment by D2-D8 to WDI Intl. In my view, there is clear and cogent basis for ordering specific discovery of the Ordered Accounts to verify entries of “amounts payable” by the Subject Ds against “amounts receivable” due to WDI Intl.

109. Turning to the Subject Ds’ primary line of defence as discussed above, ie there is no liability to repay WDI Intl at all given the existence of the WDI Arrangements, Mr Kam says the Ordered Accounts are relevant and necessary for disposing fairly of the cause or matter and/or for saving costs.  He says that if the WDI Arrangements exist, there should be entries in WDI Intl’s accounts for sums “due from” D2-D8 under the “assets” section and matching entries in the Subject Ds’ accounts for sums “due to” (or accounts payable to) WDI Tech (or loans from related companies) under the “liabilities” section.  P contends that failure to record the latter (or the existence of mismatched entries) may go to support P’s assertion that the WDI Arrangements do not exist and there has been misuse or misappropriation of WDI Intl’s own funds for paying D2-D8’s operating expenses.  Further, as P fairly recognises, matching corresponding entries in the Subject Ds’ accounts as being sums due to WDI Tech (or loans from related companies) can arguably bolster their case that there is such a scheme.  On such basis, I agree with Master S Kwang[59] that the Ordered Accounts are relevant towards establishing whether or not the WDI Arrangements have ever existed.

110. I further note that D2-D8 also allege P has approved use of funds to pay for D2-D8’s operating expenses by reason of their having been recorded in WDI Intl’s management accounts and P having approved WDI Intl’s audited accounts.  Quite apart from the concerns discussed above, paragraph 36 of the To Decision has also expressed scepticism in respect of such allegation.  Indeed, all along P has queried the veracity/accuracy of WDI Intl’s management accounts and has made clear his approval of WDI Intl’s audited accounts does not equate to approval of payments by virtue of D1’s failure to make necessary disclosures,[60] which concerns are also reflected in paragraphs 35-36 and 38-39 of the To Decision. 

111. Plainly, there is a live issue as to the accuracy and effect of WDI Intl’s management/audited accounts.  Since it has been alleged that various payments have been paid by or through WDI Intl on behalf of D2-D8, the existence or otherwise of corresponding entries in the Ordered Accounts clearly goes towards supporting or undermining the reliability of WDI Intl’s accounts upon which the Subject Ds place strong reliance and upon which P seeks to challenge.  Mr Kam says the Ordered Accounts will also enable P to come to a view to elect between remedies for account/inquiry or for repayment.  In my view, the Ordered Accounts are plainly relevant to the issues in the present action.

112. Mr Lam submits it is wholly unacceptable to make specific discovery application for the sole purpose of “shedding light on credibility” of the Subject Ds.  However, the above analysis shows that far from just going solely towards “impeaching the credit of the opposite party and giving him a bad name”, the Ordered Accounts do “relate to a matter in question” for they are likely to provide information that may support or undermine the P’s and the Subject Ds’ respective contentions on the aforesaid disputed issues.

113. As regards P’s claim against the Subject Ds in paragraphs 63(c)-(d), 83(b) and 95(b) above, the Subject Ds claim that D2-D8’s use of the Reg Office and WDI Intl’s human resources is not based on facts and evidence, but is purely based on speculation and conjecture and is totally arbitrary.  Mr Lam submits that:

(a) the use of the Reg Office as D2-D8’s registered offices has been recorded in the Companies Registry and the annual market value of such use as alleged by P is $2,000-$3,000, hence the Documents or Ordered Documents are irrelevant to the resolution of such issue;

(b) it is misconceived and plainly unjustified to seek discovery of the Subject Ds’ internal accounting documents purportedly to ascertain the precise percentage of WDI Intl’s resources used for the purpose of D2-D8 (arbitrarily alleged by P to be 40% of the administrative expenses WDI Intl have incurred that are not related solely to WDI Intl) because (i) all (or even a significant proportion of) such documents as a class cannot be relevant to the issues in the present action, which is the threshold for the court’s jurisdiction to order specific discovery, and (ii) such wholesale examination of all the Subject Ds’ internal accounting documents, whether or not these include the Ordered Records, amounts to a roving examination of the Subject Ds’ internal and confidential business documents, and is therefore an unjustified fishing exercise. 

Mr Lam says that at the highest, any discovery of quotations, invoices and receipts and vouchers (without prejudice to the Subject Ds’ argument that no such documents have been sought in the Summons) should be limited to the swearing of an affidavit as to whether there are such documents of the Subject Ds for the financial years 2010-2012 whichhave beenhandled by any of WDI Intl’s employees (if any) (ie the Alternative Records).

114. Mr Kam submits there is no basis to suggest that such claims are hopeless and that the charges against the Subject Ds are misconceived.  The P 2^nd Aff says that as regards D2-D8’s use of the Reg Office and WDI Intl’s administrative resources, D2-D8’s annual returns as well as various invoices sent by third parties to D2-D8 and/or payment vouchers for operating expenses give the Reg Office as their addresses, so as a matter of logic D2-D8 have used the Reg Office for their addresses and for its physical storage space to store the invoices/vouchers, and D2-D8 have also used the services of WDI Intl’s employees to receive/store these documents and to process payments to third parties, all of which uses have monetary value. 

115. Moreover, P claims that inspection at the Reg Office on 10 July 2014 reveals that the D2-D8 Documents have been stored at the Reg Office, including the documents described in paragraph 93(a)-(b) above, which show that D2-D8 have made substantial use of the Reg Office and WDI Intl’s administrative resources.[61]  P argues that such evidence shows D2-D8, without appropriate consent and without payment of any consideration and for their own benefit and/or for purposes unconnected with the business of WDI Intl, have made use of the Reg Office and WDI Intl’s administrative/human resources on a widespread scale, which casts doubt on the truthfulness/accuracy of D2-D8’s assertions otherwise in the Bai 2^nd Aff,[62] the Defence (now the Amended Defence)[63] and the Wai 1^st Aff.[64]

116. Mr Kam submits the Ordered Records are critical for determining to what extent the business of the Subject Ds has been conducted through WDI Intl and thus to what extent the administrative expenses of WDI Intl are caused by the Subject Ds and in turn what percentage of such expenses should be paid by the Subject Ds.  Mr Kam further argues the Ordered Records will also be important for determining whether any further payments have been made on behalf of the Subject Ds, especially when the payment vouchers/documents made available by WDI Intl for inspection and/or by discovery are not comprehensive.[65]

117. P says it is ironic that he is criticised for putting forward an arbitrary percentage of WDI’s administrative expenses attributable to D2‑D8 when the reason why he cannot assess more accurately what percentage of WDI Intl’s resources have been used for D2-D8 rather than for WDI Intl itself is because he does not have access to D2-D8’s internal documents.  P claims that under the principles of cost accounting a more accurate assessment requires the parties’ “cost drivers” (ie the factors that cause costs to be incurred within an organisation), and that the Ordered Documents (in particular D2-D8’s audited accounts) will allow for determination of the “cost drivers” and thus the percentage of the administrative expenses attributable to D2-D8.

118. I start with Mr Lam’s complaint that it is misconceived for P to contend the Ordered Documents (and in particular the Ordered Records) somehow fall within the class of documents described as “all internal accounting documents” being part of the Documents.  Mr Lam points out that the Summons seeks to define “internal accounting documents” as “including but not limited to the management accounts and general ledgers” (my emphasis) without mention of quotations, invoices, receipts or vouchers, and that even the Oldham 2^nd Aff makes no mention of these documents.  Mr Lam submits the Documents as a class is ill-defined and hopelessly wide (and there has been no attempt to amend the schedule in the Summons), and the mutation into quotations, invoices, receipts and vouchers cannot fall within any reasonable interpretation of “internal accounting documents”.

119. Mr Kam submits it is provided in the Accounting Standard that for the purpose of the Hong Kong Standard on Auditing (which explains inter alia what constitutes audit evidence in an audit of financial statements), “accounting records” means “[the] records of initial accounting entries and supporting records, such as checks and records of electronic fund transfers; invoices, contracts; the general and subsidiary ledgers, journal entries and other adjustments to the financial statements that are not reflected in journal entries; and records such as work sheets and spreadsheets supporting cost allocations, computations, reconciliations and disclosures”.  In short, internal accounting records are the underlying documents that provide information for preparation/verification of the financial statements.  Mr Kam therefore argues that the Ordered Records plainly come within the class of “internal accounting documents” even though they are not mentioned in the Summons as specific examples of such class.  On the other hand, Mr Lam submits that the Accounting Standard offers no assistance because unless P can identify with precision the class of documents sought and demonstrate how all documents in such class (as opposed to potentially some documents in the class) are relevant to the pleaded issues in the present action, the court has no jurisdiction to order discovery, and P’s application is nothing but a roving examination or fishing exercise which must be dismissed.

120. I am not persuaded the Documents are ill-defined or hopelessly wide.  Apart from management accounts and general ledgers, “internal accounting documents” as a class of documents necessarily refers to the raw data or primary documents internal to the company that enable preparation and verification of the financial statements, and the Ordered Records plainly fall within such a class.  But even if the request in the Summons for specific discovery is too wide or imprecise, since I accept the Ordered Records are properly within such a class, the blue pencil test can be applied to limit the scope of the discovery if such limited specific discovery “is a proper request which can be revealed without prejudice to the other side”.  Mr Kam contends there is no prejudice because even if, as the Subject Ds contend, the Ordered Records are not within the “internal accounting records” as a class of documents and the Summons is dismissed on such basis, P remains entitled to apply for specific discovery of the Ordered Records as being documents relevant to and necessary for resolving the disputed issues and the Subject Ds will face the same application as they do now.

121. It is therefore useful to turn to the question whether or not it is proper to grant specific discovery of the Ordered Documents (and in particular the Ordered Records) as being relevant to a matter in question.  As seen in paragraph 115 above, the revelations from the D2-D8 Documents from inspections at the Reg Office demonstrate that P has shown a prima facie case that D2-D8’s use of the Reg Office and WDI Intl’s administrative resources has been more than de minimus, and that WDI Intl’s employees have rendered service/assistance in relation to pitching for and handling business transactions on behalf of the Subject Ds.  Plainly, there is dispute between the parties as to the scope and extent of “administrative”/“supporting” assistance rendered to D2-D8 by WDI Intl by their use of the Reg Office and/or services by WDI Intl’s employees. In such context, Mr Kam submits that access to the raw accounting records (being the Ordered Records) is necessary to give a full picture for working out the appropriate apportionment of WDI Intl’s administrative expenses that are attributable to the Subject Ds, and for determining whether the broad-brush apportionment percentage of 40% presently adopted by P is correct or not. 

122. But Mr Lam submits that even if some primary documents ought to be discovered (which he disagrees), it should be limited to the Alternative Records, ie quotations, invoices, receipts and vouchers of the Subject Ds during the financial years 2010 to 2012 “handled by any of the employees of WDI Intl (if any)” otherwise discovery of the Ordered Records will be impermissibly wide and wholly disproportionate.  He argues that any quotations, invoices, receipts and vouchers not handled by WDI Intl’s employees are irrelevant, and there is no need to compare the proportion of business transactions of each of the Subject Ds handled by WDI Intl’s employees against those that were not so handled.  He also expresses concern over wholesale disclosure of D2‑D8’s confidential business transactions.   Mr Lam says that if any specific discovery is required (which he disagrees), at the highest it suffices for the Subject Ds to file/serve a disclosure affidavit limited to the Alternative Records, and leaving it to P (if he can) to challenge the veracity of such affidavit at trial.

123. As discussed above, I am persuaded the plaintiff has demonstrated he has arguable basis to suggest the Subject Ds have used the Reg Office and WDI Intl’s “administrative”/ “supporting” services that is significantly more than de minimus, so there is justifiable basis to seek specific discovery of the Ordered Records which, in my view, are necessary and evidentially material to aid resolution of the dispute. The Subject Ds have all along been shy about the nature of information their internal accounting documents or their quotations, invoices, receipts and vouchers may reveal. Whilst it is commercially logical for P to expect the Ordered Records may reveal some direct information (eg the P 2^nd Aff claims D2-D8’s quotations may ask potential customers to liaise with WDI Intl employees, and D2‑D8’s invoices may ask for payments to be sent to the Reg Office for WDI Intl’s employees to acknowledge receipt), they may not necessarily be so directly helpful.  But it does not mean there is therefore no evidential materiality to the disputed issues.  In those circumstances, P may well have to carry out a forensic cross-match exercise between the Subject Ds’ internal accounting records and the documents from discovery by WDI Intl (eg entries in WDI’s accounts/ledgers and its bank statements) and from P’s inspection of the documents at the Reg Office (eg documents from the D2-D8 Documents), and on such basis ask the court to draw inference as to the scope of the Subject Ds’ use of the Reg Office and the “administrative”/“supporting” services rendered by WDI Intl’s employees. In this respect, I am mindful that the learned master has blue-pencilled the discovery request so that the Ordered Records are limited as to the nature of documents to be disclosed and the relevant time period.

124. This nicely brings in Mr Kam’s concern over informational asymmetry between P on the one hand and the camp comprising Subject Ds, D1 and WDI Intl on the other hand.  Mr Kam submits that (a) P in good faith placed WDI Intl in D1’s hands and was not involved in WDI Intl’s affairs for the past 14 years, (b) D1 all along has complete control of WDI Intl and its day to day operations, so he knows (in a way P never can without discovery), say, the details of how and how much WDI Intl’s employees were working for D2-D8 or details of the amounts of funds paid for the benefit of D2-D8, (c) P has legitimate and substantial doubts as to whether WDI Intl has provided all the relevant documents in his possession, custody or power, and (d) the Subject Ds has informational advantage over P by virtue of being in the same camp as D1 and WDI Intl, thus, in the interest of fairness and justice and taking into account concerns over information asymmetry as expressed by DHCJ Lok in Horst Joachim Franz Geicke, this court should uphold the Order. Mr Kam says that to allow the Appeal will cause serious prejudice to P.

125. In my view, the disputed issues in the present action on their own justify the need for the Ordered Records, and the undoubted informational asymmetry between P and the Subject Ds merely reinforces such conclusion.  The reality is that P is placed between a rock and a hard place. He has an arguable claim and has demonstrated prima facie basis that the Ordered Documents are essential and relevant for proving or disproving his claim, but such documents are all with WDI Intl and D2-D8. On the other hand, the Subject Ds criticise the vagueness in P’s apportionment of the “administrative”/“supporting” services by WDI Intl attributable to them, but at the same time they keep the Ordered Documents close to their chest. This is clearly a case in which specific discovery of the Ordered Documents will create a level playing field for disposing fairly of the cause or matter between the parties.  In all the circumstances, I am not persuaded that the proposed variation of the Order alternatively suggested by the defendant is appropriate or adequate for disposing fairly of the cause or matter.

126. In my view, in light of the Subject Ds’ denial of P’s claim and given the matters in paragraphs 77, 108 and 110-111 above which have raised an arguable case that the accuracy and/or reliability of WDI Intl’s audited and management accounts are questionable, the source or raw accounting records being quotations, invoices, vouchers and receipts of the Subject Ds must be relevant and necessary for resolving the disputed issues, ie to enable P to assess the extent to which the Subject Ds used the Reg Office and WDI Intl’s administrative resources, and to elect between the remedies of an account/inquiry or a claim for repayment/damages.  This is especially so when Master S Kwang has carefully limited the scope of discovery of the Ordered Records to the financial years of 2010 to 2012, leaving open the option for future application for further discovery if necessary after review of the Ordered Documents. 

127. Turning to another aspect of the question of necessity which has been touched upon in the above discussion (and I have borne in mind that the burden of challenging necessity falls on the Subject Ds), it has been suggested that the Ordered Documents are unnecessary given WDI Intl’s extensive discovery and P’s inspection of WDI Intl’s documents.  But, as explained above, P has shown a prima facie case for doubting the comprehensiveness of the documents provided under such discovery/ inspection.  Further, it is difficult to see how WDI Intl’s provision of its documents to P absolves D2-D8 as separate defendants in the present action from their own discovery obligations if the Ordered Documents are relevant and necessary.

128. P claims that (a) WDI Intl is in D1’s complete control and its employees act in accordance with D1’s instructions, (b) there is much hostility between P and D1 (and with WDI Intl’s employees personally),[66] (c) there is a general history of concealment by WDI Intl[67] and specific concealment of documents relevant to the present action,[68] and (d) WDI Intl cannot be believed because D1 being its controlling mind has (i) dishonestly applied WDI Intl’s funds, the Reg Office and WDI Intl’s administrative resources, (ii) produced false minutes, and (iii) repeatedly caused false statements to be filed on oath.  Indeed, the P 2^nd Aff claims the inspection on 10 July 2014 was cut short by WDI Intl so that P’s representatives were only able to photograph a small portion of the D2‑D8 Documents seen, and there may well be further documents belonging/relating to D2-D8’s affairs that P’s representatives have not been able to see/discover at the Reg Office, which fuels P’s concern that there may have been selective disclosure on D1’s ultimate instructions.  However, for the present purpose, it is not necessary for me to come to any definitive view on these assertions, but at the very least the matters highlighted in paragraphs 77, 108 and 110-111 above show an arguable case that the WDI Intl’s documents discovered/inspected may well not be complete, and it is an insufficient answer for the Subject Ds to point to WDI Intl’s discovery and P’s inspection of WDI Intl’s documents at the Reg Office to challenge the Order.

129. As regards the suggestion that specific discovery of the Ordered Documents will be oppressive and/or a colossal waste of substantial time and costs bearing in mind the scale of the discovery, Mr Kam reminds that the Ordered Documents comprise the Ordered Accounts and Ordered Records.  As regards the former, since Hong Kong companies are required to file one audited report each year, so even if any of D2-D8 has been established as early as 2002 (but D4 and D7 came into existence only in 2006), there can only be 13 audited financial statements which can hardly be described as voluminous.  The same observations can be made for the corresponding management accounts.  The Subject Ds have not condescended upon how they will have to spend very much time to search for or go through the Ordered Accounts or why such exercise is oppressive to them.  There is no evidence that the Ordered Accounts (or indeed the Ordered Records too) are kept anywhere other than in the Reg Office or that extensive searching will be required.  Further, there is no evidence of the rough volume/number of documents that form the Ordered Records or that needs to be gone through for complying with the Order.  Mr Lam submits that D6 is a sizable trading company with an annual turnover that ranges from US$1,434,000,000.00 to US$3,499,000,000.00.  But there is no evidence at all as to whether D6 has engaged in high volume of small sales or low volume of large sales in the financial years from 2010 to 2012 to support the suggestion that the Order entails a colossal exercise. 

130. Further, even if the Order does involve many documents and hence time and costs, this court is mindful of the necessity of the Ordered Documents for disposing fairly of the cause or matter.  As explained in paragraph 60 above, the court will weigh the potential oppression against the possible injustice if the documents were not available. In light of the aforesaid analysis, I have no hesitation in coming to the conclusion that justice requires that the Ordered Documents be discovered and disclosed. Mr Lam alludes to concerns over confidentiality over the Subject Ds’ business documents, but discovered documents are protected by usual undertakings as to their use. In weighing the relevant factors, I am persuaded that justice and necessity come down in favour of the Order.

131. There is even no need for me to go so far as P asserts, ie that (a) D2-D8 in colluding in the misapplication of WDI Intl’s funds, the Reg Office and WDI Intl’s administrative resources for such a lengthy period only had themselves to blame for this allegedly “massive” discovery exercise, and (b) had the Subject Ds’ controlling mind not insisted on blocking inspection by P’s representatives at the Reg Office on 10 July 2014 pursuant to the rights given to him under the New CO they might well not be facing a specific discovery application. At this interlocutory stage, there is no need for me to form any definitive view on these matters.

132. I am unconvinced by Mr Lam’s submissions that the Summons is a fishing exercise to reveal some further alleged improprieties on the part of the Subject Ds.  Whether or not further improprieties will be revealed upon review of the Ordered Documents is beside the point.  I am satisfied that the Ordered Documents are necessary for disposing fairly of the cause or matter and is likely to provide information of evidential materiality to the disputed issues that justify their disclosure.

XVI.  CONCLUSION

133. For all of the above reasons, I dismiss the Appeal.  There is no reason why costs should not follow event, and I grant a costs order nisi that the Subject Ds do pay P costs of and occasioned by the Appeal (including all costs reserved if any) to be taxed if not agreed.

HCA 1973/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1973 OF 2012

____________

_______________

D E C I S I O N

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Introduction

1.  I have before me two summonses taken out by the 2^nd and 4^th to 8^th defendants (the “Corporate Defendants”).  By their first summons dated 7 December 2012 (“1^st Summons”), the Corporate Defendants apply to strike out the plaintiff’s (“Plaintiff’s”) writ of summons and statement of claim dated 6 November 2012 (“SOC”), which is an action brought on behalf of the 9^th defendant (the “Company”).  On 14 February 2013, the Plaintiff amended the SOC as he was entitled to under Order 20 rules 1(1) and 3(1) of the Rules of the High Court (“RHC”).  Then, by their second summons dated 23 May 2013 (“2^nd Summons”), the Corporate Defendants apply to strike out the Plaintiff’s amended writ of summons and amended statement of claim (“ASOC”).  In addition, the Corporate Defendants seek an alternative relief that there be a determination or trial of a preliminary issue as to the Plaintiff’s locus in bringing the action on behalf of the Company.

Dramatis Personae

2.  The Plaintiff is a United States national.  He had been in the plumbing business for over fifty years.  He is assisted by his son (“Larry”).

3.  The 1^st defendant (“Frank”) is a national of the People’s Republic of China (“the PRC”) residing in Xiamen.  He owns and controls the Corporate Defendants and the 3^rd defendant which was deregistered.  He is the controlling mind and corporate will of the Corporate Defendants.  He has not been served the SOC or ASOC and is not an applicant in either of the summonses.

4.  The 2^nd defendant (“Solut”) is a company incorporated in Hong Kong and wholly owned by Frank.

5.  The 9^th defendant (the “Company”) is a company incorporated in Hong Kong.  Since March 2003, its shares are held by Frank, the Plaintiff and Larry as to 60%, 30% and 10% respectively.  Frank, Larry, the Plaintiff and Keith Ngai (“Keith”) are its four directors.  Frank is its president.

6.  The Plaintiff, Frank and Solut are also the parties in High Court Action 1972 of 2012 (“HCA 1972/2012”).  The 3^rd defendant was deregistered.  The Corporate Defendants are represented by Skadden, Arps, Slate, Meagher & Flom (“Skadden”).  The Plaintiff is represented by Oldham, Li & Nie (“OLN”).

7.  “WDI Group” refers to WDI Plumbing and the five companies set up by Frank and the Plaintiff, including the Company, mentioned in paragraph 9, WDI Technology mentioned in paragraph 10 and Solut.  The Plaintiff’s allegation in HCA 1972/2012 is that these companies in WDI Group are beneficially held by Frank, his brother-in-law, the Plaintiff and Larry in certain agreed proportion.  That is disputed by Frank and Solut.  

8.  For the purpose of this decision, “WDI Camp” refers collectively to the companies in WDI Group with the exception of Solut.

9.  Bai Ping (“Bai”) is an in-house counsel of WDI Technology and personal assistant of Frank.  She filed two affirmations in support of the Corporate Defendants’ striking out applications.   

The background

10.  The Plaintiff came to know Frank at a conference in 1989.  Together they established a Sino-foreign joint venture in plumbing business in Xiamen (“WDI Plumbing”).  The business was successful.  Between 1995 and 2002, they formed five other companies including the Company to engage in other aspects of the plumbing business.  Since 1999 when the Plaintiff reached the age of 65, he began to leave the day‑to‑day management of their business to Frank.

11.  By July 2002, the manufacturing facilities of WDI Plumbing were about to reach full capacity.  Through Solut as his investment vehicle, Frank and WDI Plumbing set up another Sino‑foreign equity joint venture (“WDI Technology”) to take advantage of the more favourable land prices and tax incentives available to Sino-foreign joint ventures to acquire a piece of land in Xiamen for the purpose of building a new factory for WDI Group. 

12.  Since August 2012, dispute arose over the distribution of the shares in WDI Technology among the Plaintiff, Larry, Frank and his brother-in-law.  On 21 August 2012, the Plaintiff first sought inspection of the books of accounts of the Company.  He was denied access.  Prior to commencement of this action, OLN on behalf of the Plaintiff made a non-particularized allegation in a letter dated 13 September 2012 that Frank used the Company’s cash flow to finance certain activities of his companies. By a letter dated 26 September 2012, Skadden, acting on behalf of all the defendants, including Frank, replied that there had been transactions of the type referred to but such payments had been properly recorded as receivables in the Company’s management accounts and would be settled in due course.  The Plaintiff did not respond. 

13.  On 22 October 2012, the Plaintiff issued a writ of summons with a general indorsement in High Court Action No 1972 of 2012 claiming the shares in WDI Technology against Frank and Solut and a writ in this action on behalf of the Company against all the other defendants.  It was not until 26 October 2012 that the books of the Company were provided to the Plaintiff for inspection.  During the inspection, the Plaintiff discovered that for ten years from 31 July 2002 to 1 April 2012 Frank had, without prior disclosure to and authorisation from the board of directors or the shareholders, used the Company’s funds to settle various operating expenses for the Corporate Defendants which are not members of WDI Group.

14.  On 6 November 2012, the Plaintiff filed statements of claim in both actions.  In the original SOC in this action, the Plaintiff claimed loss and damage in the sum of $525,030.40, being the Company’s funds used to pay the operating expenses of the Corporate Defendants and in the sum of $342,000 for the Corporate Defendants’ use of the registered office of the Company as their registered offices.  The SOC did not contain a plea of wrongdoer’s control of the Company by Frank preventing the Company from suing.  The originating and other legal processes were duly served on the Corporate Defendants but not on the 1^st Defendant who is resident in Xiamen in the PRC.

15.  On 8 November 2012, the 5^th Defendant remitted a total sum of $1,112,234 into the account of the Company in settlement of the payments made by the Company on behalf of the Corporate Defendants.  On 13 November 2012, Skadden informed OLN of the payment and invited the Plaintiff to discontinue this action.

16.  Then on 7 December 2012, the Corporate Defendants took out the 1^st Summons seeking to strike out the SOC.  In the affirmation filed in support of the application, the Corporate Defendants pointed out the absence of a plea of wrongdoer’s control and a plea that the cause of action was pursued on behalf of the Company. 

17.  Then two months later, the Plaintiff filed the ASOC which included those pleas and abandoned the claim on the engagement of legal representation by the Company.  He substantially increased his claim for payment of operating expenses and use of the Company’s registered office against the Corporate Defendants to $1,102,322.40 and $4,666,548 respectively, while the total amount of claim against Frank was increased to over $7 million.

18.  On 23 May 2013, the Corporate Defendants took out the 2^nd Summons to strike out the ASOC.  Presumably, in view of the amendment, they abandoned the ground that no reasonable cause of action had been pleaded.  As the pleadings now stand, the Plaintiff is claiming against Frank for breach of fiduciary duties owed to the Company in (a) misapplying the Company’s assets for the purposes of himself and the Corporate Defendants; (b) causing the Company to pay $2,242,349 to himself purportedly as director remuneration; (c) denying the Plaintiff and Larry access to the Company’s documents; (d) producing false accounts and minutes of the Company; and (e) failing to convene meetings.  As against the Corporate Defendants, the Plaintiff claims $4,656,636.80 being the total amount of the Company’s funds of $1,102,322.40 paid on behalf of the Corporate Defendants plus a sum of $4,666,548.40, being 40% of the rental and administrative expenses of the Company between 2002 and 2012 for their use of the Company’s office as their registered offices less the sum of $1,112,234 repaid by Frank and the Corporate Defendants. 

19.  Frank is not a party to these applications.  He has not been served the originating processes.  The Corporate Defendants do not dispute the fact that the Company has been paying their operating expenses.  By repaying the Company the sum of $1,112,234 which is slightly more than the amount claimed by the Plaintiff, the Corporate Defendants are admitting the claim but saying that the payments were in accordance with an established back-to-back arrangement and now the amount has been duly repaid.  They admit the use of the Company’s office as their registered offices but deny that the Company suffered any loss as claimed.  The major grounds of their striking out application are essentially that the Plaintiff has failed to establish a prima facie case of the Company’s claim against the Corporate Defendants, whether as originally pleaded or as amended, or a prima facie case that the claims fall within an exception to the rule in Foss v Harbottle.  Their subsidiary grounds are that the action is frivolous, vexatious and otherwise an abuse of the process of court and that the action is premature and misconceived.

Legal principles applicable to a challenge on locus in a derivative action

20.  The legal principles applicable to a challenge on locus in a derivative action has been well settled by the Court of Final Appeal in Waddington Ltd v Chan Chun Hoo Thomas (2008) HKCFAR 63. The practice in common law in a case where the plaintiff’s standing to bring a derivative action is challenged is that he must establish a prima facie case of both (a) that the company, on behalf of whose shareholders he sues, would be likely to succeed if it brought the action itself and (b) that the case falls within an exception to the rule in Foss v Harbottle (1843) 2 Hare 461.  In Waddington Ltd, Ribeiro PJ firmly rejected the proposition that the plaintiff in a derivative action was not required to establish a prima facie case.  He said at paragraph 20:

“20. The common law rule is therefore that a plaintiff whose standing to bring a derivative action is challenged must establish a primafacie case that the company is entitled to the relief claimed and that the action falls within an applicable exception to the rule in Foss v Harbottle (usually the fraud on the minority exception).”

Although this dictum was obiter, it was endorsed by the other members of the court: Li CJ, Bokhary and Chan PJJ.  The dictum must be taken as the most authoritative statement of the law in this jurisdiction.

21.  Counsel are in dispute as to how this prima facie test operates in an application to strike out a common law derivative action.  Essentially, their dispute is about the burden and standard of proof. Mr Shieh, counsel for the Corporate Defendants, is of the view that the approach in such an application is not the usual one as in striking out on the basis that a statement of claim disclosed no reasonable cause of action or that a claim is scandalous, frivolous or vexatious.  The courts are not to proceed on the basis that the allegations in the plaintiff’s pleadings are facts as they would be on the trial of a preliminary point of law or determining a striking out application under Order 18.  Rather, the onus is on the plaintiff to actually provide sufficient evidence for the court to be satisfied that there is a prima facie case that the company would be likely to succeed and that the case falls within an exception to the rule in Foss v Harbottle. He relies on Tan Eng Guan v Southland Co Ltd & Ors [1996] 2 HKLR 117; Waddington Ltd and Company Law in Hong Kong at paragraph 8.027. 

22.  Ms Chan, counsel for the Plaintiff, disagrees. She submits that the prima facie test is met simply on the basis of the pleaded facts without the plaintiff having to actually prove them.  She refers to the dicta of Ribeiro PJ in Waddington  Ltd at paragraphs 6 and 7:

“6. His Lordship furthermore held that the threshold test for permitting such a derivative action to proceed requires the plaintiff to show, on a prima facie basis, both that the company having the cause of action would be likely to succeed if it brought the proceedings itself and that the case falls within an applicable exception to the rule in Foss v Harbottle. On the facts assumed, Barma J held that such a prima facie case had been established in relation to the transaction involving Profit Point. But he held that no prima facie case had been shown in relation either to Autoestate’s acquisition of Pretty Star Limited or to Autoestate’s acquisition of Bagnols Limited.

7. Since the Statement of Claim had formulated Waddington’s claim solely as a derivative action on behalf of Playmates (and not on behalf of either Profit Point or Autoestate, neither company having then been joined as a party), the entire pleading had to be struck out as falling foul of the reflective loss principle. However, since a derivative action on behalf of Profit Point was in principle available and was prima faciesustainable on the facts pleaded, he declined to dismiss the action but granted Waddington the opportunity to reconstitute its pleading to accord with the principles laid down. Whether the Autoestate transactions could be revived as part of Waddington’s claim would depend on whether an amendment capable of meeting the threshold requirement of a prima facie case could be formulated on the facts.” (Plaintiff’s emphasis underlined)

Relying on the dicta high-lighted above, Ms Chan argues that in quoting Barma J’s approach in the Court of First Instance, the Court of Final Appeal approved the approach that what a plaintiff has to show is a prima facie case on the facts as pleaded which are assumed to be true without the plaintiff having actually to prove them. 

23.  Ms Chan also draws support for her proposition from paragraph 21 of Waddington Ltd, where in approving the observation of Lord Bingham in Johnson v Gore Wood & Co [2002] 2 AC 1 at 36, Ribeiro PJ said that at the strike-out stage any reasonable doubt must be resolved in favour of the claimant.  For completeness, I quote hereunder the dicta of Ribeiro PJ in paragraphs 20 and 21:

“20. The common law rule is therefore that a plaintiff whose standing to bring a derivative action is challenged must establish a prima facie case that the company is entitled to the relief claimed and that the action falls within an applicable exception to the rule in Foss v Harbottle (usually the fraud on the minority exception). Where, as often occurs, the plaintiff seeks an order to be indemnified as to costs by the company which may benefit from the derivative action, the court’s approach is to consider whether and to what extent an honest, independent and prudent board might decide to authorise prosecution of the action, given the available evidence. (My emphasis underlined)

21.    One may also note in passing that the burden and threshold requirements are different where a defendant seeks to strike out a plaintiff’s action on the ground that the loss claimed is merely reflective loss.  In such cases, the plaintiff is asserting his own cause of action and the burden lies on the defendant to show that it is plain and obvious that the losses are indeed merely reflective and the action is unsustainable.  Thus, in Johnson v Gore Wood, Lord Bingham of Cornhill noted: “At the strike-out stage any reasonable doubt must be resolved in favour of the claimant.”

With respect to Ms Chan, I think she was misreading what was said by Ribeiro PJ.  From paragraph 20, it is clear that his Lordship was of the view that the burden of proving a prima facie case rests on the plaintiff whose locus to bring the derivative action is challenged.  When paragraph 21 is read together with paragraph 20, it is obvious that his Lordship was actually distinguishing between striking out an action in which the plaintiff is asserting his own cause of action as in a striking out under Order 18, and striking out a derivative action.  It was in the context of a striking out under Order 18 that his Lordship said that any reasonable doubt must be resolved in favour of the claimant.  Indeed, in Johnson v Gore Wood, Lord Bingham was considering the defendant’s application to strike out the plaintiff’s claim on the usual ground of abuse of process and not striking out in a locus challenge.  I agree with Mr Shieh that in a striking out application involving a locus challenge in a derivative action, the burden of proof is on the plaintiff to prove a prima facie case that the company is entitled to the relief claimed and that the action falls within an applicable exception to the rule in Foss v Harbottle.

24.  As for the standard of proof required, it is just the prima facie case standard.  This standard was considered by the English Court of Appeal in Prudential Assurance Co Ltd v Newman Industries Ltd (No2).  The relevant passages have been quoted by Ribeiro PJ in paragraphs 15 to 18 in Waddington Ltd and it would be convenient to quote these paragraphs from the judgment of the Court of Final Appeal:

“15. The Court of Appeal in Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204 at 219 addressed the need for a standard to determine whether a sufficient case has been shown by the plaintiff, identifying the potential dilemma posed by the choice of standard as follows:

“...what course is to be taken ... if ...  the court is confronted by a motion on the part of the delinquent or by the company, seeking to strike out the action?  For at the time of the application the existence of the fraud is unproved.  It is at this point that a dilemma emerges.  If, upon such an application, the plaintiff can require the court to assume as a fact every allegation in the statement of claim, as in a true demurrer, the plaintiff will frequently be able to outmanoeuvre the primary purpose of the rule in Foss v Harbottle by alleging fraud and ‘control’ by the fraudster.  If on the other hand the plaintiff has to prove fraud and ‘control’ before he can establish his title to prosecute his action, then the action may need to be fought to a conclusion before the court can decide whether or not the plaintiff should be permitted to prosecute it. In the latter case the purpose of the rule in Foss v Harbottle disappears.  Either the fraud has not been proved, so cadit quaestio; or the fraud has been proved and the delinquent is accountable unless there is a valid decision of the board or a valid decision of the company in general meeting, reached without impropriety or unfairness, to condone the fraud.”

16.    The Court concluded that the answer was for a prima facie case test to be adopted, coupled with the possibility of seeking the views of the company in general meeting where appropriate:

“In our view, whatever may be the properly defined boundaries of the exception to the rule, the plaintiff ought at least to be required before proceeding with his action to establish a prima facie case (i) that the company is entitled to the relief claimed, and (ii) that the action falls within the proper boundaries of the exception to the rule in Foss v Harbottle. On the latter issue it may well be right for the judge trying the preliminary issue to grant a sufficient adjournment to enable a meeting of shareholders to be convened by the board, so that he can reach a conclusion in the light of the conduct of, and proceedings at, that meeting.” Ibid at 221-222

17.    The foregoing passages from Prudential were applied by Knox J in Smith v Croft(No 2) [1988] Ch 114 at 129-130 and 131 at 221-222,where his Lordship held that O 18 r 19 or O 33 r 3 were equally acceptable vehicles for deciding whether a minority shareholder had the necessary standing, Ibid at 135 applying the prima facie case test whichever procedure is adopted:

“...my conclusion is that it is the question stated by the Court of Appeal as a preliminary matter that has to be decided, that it is a special form of procedure concerned with giving sensible operation to the rule in Foss v Harbottle, 2 Hare 461 and which was concerned with avoiding the Scylla and Charybdis, on the one hand of having a preliminary issue which effectively requires one to try the whole action where the rule serves no useful purpose, and on the other side of the strait, of assuming that everything that the plaintiffs allege is necessarily correct as a matter of fact, which is of course the technique the court adopts when it has what was called a strict demurrer. The Court of Appeal, it seems to me, has laid down a halfway house for this very special type of case, one in which the legal issues in this particular case are sufficiently well defined for the parties to be able to argue them.” Ibid at. 138-139.

This has continued to be the approach of the English courts (See, eg, Barrett v Duckett [1995] BCC 362 at 367; Halle v Trax [2000] BCC 1,020 at 1,023; and Airey v Cordell [2007] BCC 785 at 797, §55.)

18.    The prima facie case test has also been adopted in Hong Kong.  Thus, in Tan Eng Guan v Southland Company Ltd [1996] 2 HKLR 117, the Court of Appeal held that the Judge at first instance should not have entered summary judgment where the plaintiff’s locus standi to bring a derivative action was being challenged and, referring to the prima facie case test adopted in Prudential and Smith v Croft (No 2), held that the question of standing was best dealt with by the trial of a preliminary issue, as recognized in England and Wales.”

25.  In balancing between the very onerous burden of proof to the necessary legal standard and the purpose of the rule in Foss v Harbottle, the English Court of Appeal chose at this preliminary stage the prima facie case test, which Knox J described in Smith v Croft (No 2) [1988] Ch 114 at 129-130 and 131 as a halfway house for this very special type of case.  This phrase has been used day in and day out in the courts.  It is widely understood by the legal profession.  It means something less than proof beyond reasonable doubt or proof on a balance of probability.  This is because once those standards are reached, it would be actual proof on a criminal or civil standard.  The term prima facie case or prima facie evidence just means sufficient evidence to pass the judge so as to make the issue fit for determination by the tribunal of fact.  To achieve that standard, the party which bears the burden of proof has to adduce sufficient evidence to satisfy the court, sitting as the tribunal of law, that there are reasonable grounds for believing that his case or the issue in question is well founded so that the issue becomes one which is fit for the tribunal of fact to adjudicate on.  It should never be equated with proof beyond reasonable doubt or proof on a balance of probability.

26.  As to how this burden is discharged by the plaintiff in a locus challenge, Ms Chan adopts the approach in an Order 18 striking out application and argues that the burden is discharged once a party shows that an issue is hotly disputed.  Then, it is not a matter which could be determined summarily and should be left to trial.  With respect, I disagree.  Such an approach totally ignores the plaintiff’s burden of having to prove a prima facie case and equates the burden as nothing but raising a disputed issue of fact.  That cannot be right.  In my opinion, how this burden is discharged depends on the circumstances of the case.  If the issues in question are adequately pleaded and not contradicted by evidence filed by the parties, then the pleading alone would be sufficient proof of the prima facie case.  But even if contrary evidence has been filed by the defendant, the courts are not required to conduct a trial by affidavit nor in all cases necessarily required to call the makers of the affidavit for cross-examination.  The courts are capable of and well experienced in making provisional finding of facts on affidavit evidence in such interlocutory proceedings by testing the plaintiff’s case against documentary evidence, incontrovertible evidence, or evidence which is not in dispute.  The court can determine against the backdrop of such contrary evidence whether the plaintiff’s evidence has passed the judge so as to make the issue or the case fit for determination by the tribunal of fact.  In an appropriate case, the court may be satisfied on the basis of the pleaded case that the prima facie test is met, irrespective whether contrary evidence has been filed by the defendant.  This may well explain why Barma J held at first instance in Waddington Ltd that on the facts assumed a prima facie case had been established.  That was a decision on its facts which is far from laying down any principle of law that the plaintiff is relieved of its burden of having to prove a prima facie case in resisting a striking out application in a locus challenge.

27.  The present dispute between counsel arose out of their refusal to appreciate that a different burden of proof applies in a striking out application based on the ordinary frivolous and vexatious or no reasonable cause of action grounds under Order 18 from that in a striking out application based on a locus challenge in a derivative action.  If the striking out application is made on both basis, then the application has to be considered on each basis separately.  If an applicant, ie the defendant, proceeds on the former basis, he has to accept the facts pleaded by the plaintiff as proven.  But if he proceeds on the latter basis, he puts the plaintiff to the proof of a prima facie case.  In the majority of cases, where the plaintiff succeeds in proving a prima facie case in a locus challenge, it is difficult to see how the defendant can succeed in striking out the plaintiff’s action under the Order 18 grounds.

Prima facie case of the Company’s claim – payment of expenses

28.  The thrust of the Corporate Defendants’ argument that the Plaintiff has failed to establish a prima facie case of the Company’s claim is that the operating expenses, whether the lesser sum claimed in the original SOC or the increased sum under the ASOC were repaid on 8 November 2012 before the filling of the ASOC.  The cause of action was thereby extinguished.  The argument is very technical.  First, Mr Shieh relies on the Plaintiff’s failure to plead wrongdoer’s control in the SOC.  Second, he relies on the reimbursement on 8 November 2012 by the 5^th defendant on behalf of the Corporate Defendants of $1,112,234 to the Company, which is more than the total of the two sums pleaded in the SOC or the revised amount of operating expenses pleaded in the ASOC filed three months after the said payment.  Then, he argues that by the time the Plaintiff purported to cure the defect in the SOC on 14 February 2013 by pleading wrongdoer’s control, it was already too late since insofar as the Corporate Defendants are concerned the expenses were settled and there is no longer a live cause of action which may be pursued by the Plaintiff against them.

29.  With respect, such argument is disingenuous. The effect of amendment of a writ or pleading has been succinctly summarised in paragraph 20/8/2 in Hong Kong Civil Procedure 2013.  An amendment duly made, with or without leave, takes effect, not from the date when the amendment is made, but from the date of the original document which it amends.  This rule applies to every successive amendment of whatever nature and at whatever stage the amendment is made.  When an amendment is made to the writ, the amendment dates back to the date of the original issue of the writ and the action continues as though the amendment had been inserted from the beginning.  The writ as amended becomes the origin of the action, and the claim thereon indorsed is substituted for the claim originally indorsed (per Collins MR in Sneade v Wotherton, etc [1904] 1 KB 295 at 297).  Similarly, in the pleadings, once pleadings are amended, what stood before amendment is no longer material before the Court and no longer defines the issues to be tried (per Hodson LJ in Warner v Sampson [1959] 1 QB 297 at 321).  Therefore, the plea of wrongdoer’s control and the amount of claim are all related back to the date of issue of the SOC.  Despite the rather substantial increase in the sum claimed under the ASOC, the amendment does not create any new or different cause of action.  The effect of the amendment is to insert a plea of wrongdoer’s control ab initio and to increase the amount of operating expenses and damages claimed.  Simply put, the ASOC has the effect of relating the increased amount of claim back to the date of the SOC.   Therefore, the payment on 8 November 2012 did not have the effect of extinguishing the cause of action which had accrued before the payment was made.  Furthermore, the payment actually amounted to an admission that the operating expenses were owed to the Company and the Company had a good cause of action against the Corporate Defendants.  Besides, in addition to the claim for operating expenses, there is also an increased claim for damages for the use of the Company’s registered office, which is not covered by the payment.  The fact that the operating expenses have been fully repaid before the issue of the ASOC does not extinguish the cause of action, but may be relevant as to costs.

30.  The secondary arguments advanced by the Corporate Defendants in Bai’s affirmations are that (1) because the Corporate Defendants do not have bank accounts in Hong Kong, a long standing back-to-back arrangement was made under which the Company, which is a holding company with no income, was given unsecured and interest free loans by WDI Technology to pay the operating expenses of the Corporate Defendants; (2) it is factually incorrect that those operating expenses were not recorded and/or improperly written off; (3) it is misconceived for the Plaintiff to suggest that Frank gave no consideration for the transfer of the funds to pay the operating expenses since the funds were not advanced to Frank but to the Corporate Defendants and were duly recorded as receivables repayable by them; and (4) the claims are premature as they are not supported by any proper letter before action. 

31.  These arguments are premised on the existence of the back-to-back arrangement between the Company and the Corporate Defendants. In support of her assertion of the existence of this arrangement, Bai quoted in her affirmation the following passages from Skadden’s letter of 26 September 2012 in reply to OLN’s demand for inspection:

“There have also been transactions of the type referred to in your letter of 13 September 2012. Due to the fact that a number of companies related to Mr Frank Li do not have bank accounts, the Company has customarily settled miscellaneous invoices on behalf of these companies in respect of, mainly, the audit fee, the company secretarial fee and the business registration fee. We are instructed that such payments have been properly recorded as receivables in the current account within the Company’s management accounts. We are further instructed that such receivables as remain outstanding will be settled in due course.

In your letter of 13 September 2012 your client makes allegations against Mr Frank Li of misappropriation of the Company’s assets for personal gain relating to such transactions.  Such allegations are without any basis.  First, the transactions were transparently recorded as receivables in the Company’s management accounts.  Second, if the transactions indeed constituted acts of misappropriation for personal gain (which is denied) as you have sought to mischaracterize them, one would expect that there would have been evidence of concealment; but there is none.  Third, the Company’s management accounts have been provided to the auditors for auditing in accordance with the applicable accounting standards and the audited accounts of the Company have duly been approved by Mr Frank Li and Mr Melvin Waxman.”

(Emphasis by the Corporate Defendants underlined. My emphasis high-lighted in bold print.)

32.  Despite Skadden’s very assuring letter, it can be readily seen that the existence of the alleged long standing back-to-back arrangement is illusory.  The obvious flaws in Bai’s argument are that she treated the Company and the Corporate Defendants as Frank’s own companies and there is also nothing to support the existence of this long standing arrangement.  While it is true that the Company is related to Frank who is a common and majority shareholder of the Company and the Corporate Defendants, the Company and the Corporate Defendants belong to two different camps.  The Company is a member of the WDI Camp held by Frank, the Plaintiff and Larry.  The Corporate Defendants are companies held by Frank solely, or at least not jointly with the Plaintiff and Larry, and carrying on his personal business, which is unrelated to WDI Camp.  If Frank should look for an entity to make the payments, he should and would turn to one within his own camp and not one within the WDI Camp.  When the Company paid the operating expenses of the Corporate Defendants using funds from WDI Technology, it was used as a conduit for siphoning funds from one camp to the other.  Simply put, Frank was using funds from WDI Camp to settle the liabilities of his own companies, ie the Corporate Defendants. This is really the basis of the Plaintiff’s complaint. I appreciate, of course, that Bai’s argument is that the Company would be and was reimbursed under the long standing back-to-back arrangement.  But, is this assertion credible?

33.  Some of the Corporate Defendants are substantial investment and trading companies.  Solut holds 60% of the shareholding in WDI Technology, which itself is a substantial company and the income generating arm of WDI Group.  The 6^th defendant, Swell International Trading Co Limited (“Swell International”), had an annual turnover of between US$1,434 million and US$3,499 million.  It is inconceivable that these two companies, at least, do not have bank accounts and operating offices in Hong Kong of their own, which could be used as registered offices for the Corporate Defendants.  Hong Kong is an international business and banking centre where natural persons and companies can freely open bank accounts.   It is incredible that for over ten years these Hong Kong companies do not need a bank account in Hong Kong for their business activities and took no steps to open one.  No explanation was given for this bald assertion.

34.  Except for Bai’s oral assertion, there is simply no evidence of this arrangement.  The arrangement is not corroborated by any document showing that it has been previously disclosed or considered by the board of directors or the shareholders of the Company at general meetings.  Most significantly, there is no evidence of any previous payment and reimbursement to support the long standing or back-to-back nature of this alleged arrangement.  For the past ten years, the Company had only paid but had never been reimbursed.  It was not until 8 November 2012 and only after the request for inspection of the Company’s books that Skadden informed OLN on Frank’s instruction that the receivables “will be settled in due course”.  It is also significant to note that settlement “in due course” meant the only reimbursement in ten years.  The assertion of long standing arrangement of payment and reimbursement is just a bald assertion unsupported by any evidence.  As the Plaintiff put it, the reimbursement is no difference from restitution by a thief after having been caught.  I seriously question the existence of this alleged long standing back-to-back arrangement.

35.  Except for the fact that the payments were entered in the books of the Company, there is no support for Bai’s assertions. Based on the entries, Bai argued that the Plaintiff knew that the operating expenses were properly recorded in the accounts of the Company and not written off.  The basis of her assertion is that the Plaintiff had access to the source documents as a result of the inspection of the Company’s books and was able to plead in the SOC and ASOC the source and particulars of payments from the “Expense List”, “Payment Voucher”, “Invoice” and/or “Petty Cash” as appropriate.  In particular, she said that the amounts due from the Corporate Defendants as a result of the payments were recorded in the current accounts between the Company and the Corporate Defendants; in the Detail Trial Balance/General Ledger of the Company and were recorded as part of the assets of the Company in the annual Balance Sheet in the Management Accounts of the Company.  She reiterated that the payments were not written off or treated as gifts.  Obviously, the SOC and ASOC were drafted based on the books of the Company which were eventually disclosed to the Plaintiff.  However, I think these entries in the books should be viewed with suspect in view of the delay in their production for inspection.  The books were not readily available for inspection or available within a reasonable time upon request.  OLN first requested for the books on 21 August 2012, Keith indicated that the Company would need 14 days to produce the books.  On 27 August 2012, Sally Lo of the Company refused to disclose any documents saying that they were locked up by a staff who was then on maternity leave for three months.  Later, she said that the headquarters in Xiamen had instructed the Company and its corporate secretary not to produce any document to the Plaintiff.  Despite arrangements made with Skadden, the internal accounting documents for the financial years of 2007 to 2009 only were produced.  The Company refused to produce the books of accounts for the remaining financial years under the excuse that they were stored in the warehouse.  The Plaintiff only had access to the full set of books until 67 days after OLN’s first letter requesting for inspection and four days after commencement of the action.  If the entries had been entered contemporaneously in the books, there is no good reason why the books could not have been produced timeously.  Such inordinate delay and the non-reimbursement in ten years cast serious doubts on the authenticity of the entries and suggest that the entries were concoctions which would not have been made but for the Plaintiff’s demand for inspection.

36.  Bai also relied on the Plaintiff’s approval of the audited accounts of the Company as his knowledge and approval of the payment of the Corporate Defendants’ operating expenses. However, nowhere in the audited accounts was the existence of the payments made by the Company for the Corporate Defendants disclosed, despite the mandatory requirement that such payments must be disclosed as related party transactions.  Bai said that the payments were recorded in the “management accounts” of the Company and explained the non-disclosure by asserting that the auditors have exercised professional judgment in auditing the accounts, suggesting that it was the auditors’ decision not to make the disclosure.  Bai is not even an employee of the Company.  She is in no position to speak on behalf of the auditors.  This is a matter of evidence for trial to be established by cross-examination of the Plaintiff and evidence of the auditors.

37.  Furthermore, Bai does not have personal knowledge of the matters she asserted.  She is an in-house counsel of WDI Technology but not an employee, officer or director of the Company.  She does not even reside in Hong Kong.  She joined WDI Technology seven years ago and could not possibly have personal knowledge of the back-to-back arrangement which, according to her evidence, had been in place for ten years ago.  She claimed to have knowledge of these matters in her capacity as Frank’s personal assistant.  This assertion was made belatedly.  She claimed that she had confirmation from the other director of the Company, Keith.  But, there is no explanation why Frank, Keith or indeed any of the Company’s local staff who have personal knowledge of these matters were not asked to give an affirmation relating to these matters.  I give no weight to Bai’s evidence.

38.  I have doubts as to the existence of the long standing back-to-back arrangement and the authenticity of the entries in the books of the Company.  As such, Bai’s argument that Frank had given consideration for the payments by the Company must fall apart. I also reject her argument that the claims are premature as not being supported by any proper letter before action.

39.  Summing up this part of the defence, there is an admission by the Corporate Defendants that their operating expenses for the past ten years had been paid by the Company and not reimbursed until 8 November 2012 after commencement of the present action.  The defence are that there was a long standing back-to-back arrangement of payment and reimbursement; that the Plaintiff knew about and approved the arrangement and that the payments were properly entered in the books of the Company.  The existence of this alleged long standing back-to-back arrangement and associated allegations is hotly disputed by the Plaintiff. Viewed objectively, the alleged long standing back-to-back arrangement is inherently incredible and inconsistent with the incontrovertible fact that the reimbursement was the only one in ten years.  The delay in production of the books of the Company casts serious doubts on their authenticity.  It must also follow that the defence that Frank had given consideration for the payment of the operating expenses must fail.  Adverse inference may be drawn against the Corporate Defendants because of their failure to adduce evidence from people who are expected to have personal knowledge of the matters in dispute.  This inference further undermines the credibility of their defence. 

40.  I am only left with the evidence of the Plaintiff which is largely incontrovertible or not disputed.  For the purpose of these proceedings, I am satisfied that the Plaintiff has proved a prima facie that the Company is entitled to claim.  Though the damages are likely to be nominal, on the evidence, the irresistible inference is that but for the commencement of this action, the reimbursement would not have been made and the wrongful conduct would have continued.  Furthermore, even if the operating expenses have been fully reimbursed, the Company is entitled to claim interest for the unauthorized payments over the past ten years.  Thus, the Plaintiff has established a prima facie that the Company is likely to succeed if it brings the action itself.

Prima facie case of the Company’s claim – use of the Company’s office and administrative support services for the Corporate Defendants

41.  There is no dispute that the office of the Company had been  and is still being used by the Corporate Defendants as their registered office without payment and approval by the board of directors or shareholders in general meetings. Initially under the SOC, the Plaintiff claimed damages in the sum of $342,000.  In the ASOC, the Plaintiff pleaded that Frank caused or permitted the Corporate Defendants to make use of the administrative resources of the Company and increased the claim to $4,666,548.  The amount of claim was assessed on the basis of 40% of the actual administrative expenses of the Company inclusive of rental for each financial year between 2002 and 2012 less those related to the Company.     

42.  In her second affirmation, Bai asserted that the Company could not have suffered any other than nominal loss as the use of the office of the Company by the Corporate Defendants as their registered office was only nominal.  She asserted that other than adopting the registered office by way of company registration and formal filings, the Corporate Defendants have not physically occupied or possessed the registered office of the Company or performed any acts or had use of the registered office to the exclusion of the Company, including any employees or had used any administrative resources identified by the Plaintiff.  Bai said that she had confirmed the above with Keith.  As analysed above, Bai does not have personal knowledge of the matters she asserted.  There was no explanation why Keith or the local staff of the Company were not asked to give an affirmation to this effect.  I can give no weight to her evidence. 

43.  However, I cannot ignore the very forceful argument of Mr Shieh that the loss and damage was not particularised in the SOC or ASOC or explained by the Plaintiff in his affidavit.  He submits that the Plaintiff’s assertion that Frank caused or permitted the Corporate Defendants to make use of the administrative resources of the Company is a bare assertion.  There was no averment in the SOC or ASOC that other than adopting the registered office of the Company as their registered offices, the Corporate Defendants occupied or possessed the registered office or used the Company’s staff for the business of the Corporate Defendants or did any acts on the registered office to the exclusion of the Company and/or the Company’s rights in the use of the registered office have been affected or prejudiced as a result.  The salaries of the staff and rental of the registered office have to be paid in any event.  Hence, Mr Shieh submits that the Plaintiff’s claim of 40% of the total administrative expenses of the Company under the cloak of a “broad brush” approach is arbitrary and that put to the highest, the Company would only be entitled to nominal damages.

44.  There is no dispute that despite his position as a director, the Plaintiff was refused access to the books of the Company by its staff on the instruction from “headquarters in Xiamen”, which could not mean anyone but Frank.  Bai explained that the books were unavailable, but that explanation is incredible.  It is clear that Frank is in control of the Company and obstructed the Plaintiff’s inspection.   If the Company is under a wrong-doer’s control, it would be difficult for the Plaintiff to obtain evidence of the wrongful acts committed by Frank in collaboration with the Corporate Defendants, at least not until after discovery.

45.  On the evidence, Solut and particularly Swell International are substantial companies which are expected to have operating offices in Hong Kong.  Bai has not tendered any evidence that these or any of the other Corporate Defendants have operating offices in Hong Kong.  If they have, there is no reason why their offices could not be used as the registered offices of the Corporate Defendants.  From these circumstances, the inference could be drawn that they do not and their use of the registered office of the Company is more than nominal.  If it is, the apportionment of the administrative expenses by the Plaintiff is not unreasonable and is a matter for trial.

46.  Furthermore, one would expect Frank as the director in overall control of the Company and the Corporate Defendants, Keith as the only other director of the Company other than the Plaintiff and the local staff of the Company would be called to give evidence, if the Corporate Defendants are serious and acting in good faith in contesting the Plaintiff’s claim.  Frank is the corporate will of the Company and Corporate Defendants. It is no answer to argue that as he is not a party to the application he is not required to give an affirmation.  No explanation was given for the Corporate Defendants’ failure to call them.  Adverse inference could therefore be drawn that the Corporate Defendants have much to hide in relation to their use of the registered office of the Company.  This inference lends further support to the Plaintiff’s apportionment.  I therefore find that in the absence of evidence from Frank and Keith, the Plaintiff has shown a prima facie case that the Company has more than a nominal claim against the Corporate Defendants for the use of its registered office.  In any event, in my view, nominal damages would be sufficient for the purpose of proving a prima facie case to enable the Plaintiff to bring the action against the Corporate Defendants on behalf of the Company.

Prima facie case of the Company’s claim – conclusion

47.  There are other claims made by the Plaintiff against Frank such as engagement of legal representation by the Company and other acts of misappropriation of the Company’s funds.  They are not relied on by Ms Chan as Frank is not before the court.  In view of the interest element, the damages are not likely to be nominal.  But even if they are, the inference is that but for the commencement of this action, the wrongful conduct of Frank and the Corporate Defendants would have continued.  On the evidence, I am satisfied that the Plaintiff has shown a prima facie case of the Company’s claim. 

Exception to the rule in Foss v Harbottle

48.  The Plaintiff relies on the generally recognised exception of fraud on the minority to justify bringing the derivative action. As submitted by Ms Chan, the fraud is not confined to “fraud” in the Derry v Peek sense, but includes equitable fraud where a director has misused the company’s assets to make interest-free loans to himself and other corporate defendants in which he was interested (see: Tan Eng Guan v Southland Company Ltd at 121G-122F).  The Plaintiff therefore relies on the payment by the Company of the operating expenses of the Corporate Defendants in the past ten years as Frank’s misuse of the Company’s assets.  Had there been no reimbursement, the payment would have been caught as “fraud” in the Derry v Peek sense.  

49.  Mr Shieh argues that the Plaintiff’s claim of fraud on the minority under the original SOC which was premised on the failure to record and/or writing off of the amounts due is bound to fail as being contrary to the evidence.  Though the payments were entered in the books and management accounts of the Company, because of the delay in producing the books for inspection and for other reasons as explained in paragraph 34, the Corporate Defendants’ case is not credible.  The entries in the books are of doubtful authenticity.  I have found the Plaintiff has proved a prima facie case of a claim against the Corporate Defendants. Of course, whether he can discharge the burden of proof, ie that the entry was a concoction, is a matter of evidence to be established at trial.  At this stage, it must necessarily follow that he has also proved a prima facie case of fraud on the minority.

50.  Next, Mr Shieh submits that there could be no right of action if the alleged breaches of duties are capable of ratification. Hence, he argues that as the Plaintiff’s pleaded case is that the payment was not disclosed or authorized by the board of directors or the Company in general meeting, it is implicit that the payment could have been disclosed and authorized by the Company, and therefore capable of ratification.  Particular reliance is placed on the fact that the payments were recorded in the books of the Company.

51.  However, it is well established that a director is precluded from self-dealing or from entering into engagements in which his duties may conflict with his personal interest.  The liability to account does not depend upon proof of mala fides (see: Regal (Hastings) Ltd V Gulliver [1967] 2 AC 134 at 137G-138G, per Viscount Sankey and 147A-F and 149A-150B, per Lord Russell).  As I have observed, the Corporate Defendants belong to a different camp from WDI Technology.  They belong to Frank who is their controlling mind and corporate will.  On the basis that the entry in the books of the Company are concoctions afterthought, which the Plaintiff has established a prima facie case, the payments were, at the very least, interest free loans by the Company to Frank and the Corporate Defendants and therefore a fraud on the minority.  Furthermore, appropriation of company’s money by a director is not a matter which can be ratified by shareholders (see: Burland v Earle [1902] AC 83 at 93-94, per Lord Davey; Cook v Deeks [1916] 1 AC 554 at 564, per Lord Buckmaster LC).

52.  Under this subsection, Mr Shieh also relies on the repayment by the 5^th Defendant on behalf of the Corporate Defendants on 8 November 2012 as having extinguished the cause of action.  As the ASOC is related back to the date of the SOC, the Company had a valid cause of action against the Corporate Defendants before the repayment.  The cause of action was not extinguished.  Besides, the Company has a valid claim of interest which has not been satisfied.  For reasons as explained in paragraphs 27 and 28, I dismiss this line of argument.

53.  Accepting that the Plaintiff has established a prima facie case of fraud on the minority, he has no difficulties in proving wrongdoer’s control.  Frank is the president of the Company and, hence, the person vested with the power to bring legal proceedings on behalf of the Company. It is inconceivable that he would agree to bring legal proceedings against himself.  This is amply demonstrated by the obstruction he caused to the Plaintiff’s inspection of the books of the Company since October 2012 and the striking out action which must have been taken out by the Corporate Defendants at his instruction.  In this regard, it is curious to note that while Skadden acted for Frank and the Corporate Defendants up to and including the date of repayment, they ceased to act for him thereafter, but continued to act for the Corporate Defendants of which Frank is the corporate mind and will.

54.  Keith has been accustomed to act in accordance with Frank’s direction.  As such, Frank has control over two out of the four directors of the board.  Even if the board has power to procure the Company to commence action against Frank and the Corporate Defendants, the board would be unable to do so because of the deadlock.  Thus, Bai’s suggestion that the Plaintiff did not attempt to convene a board meeting to consider bringing action against the Corporate Defendants prior to commencement of this action is simply unrealistic.

55.  Furthermore, even if the company in general meeting has the residual power to authorise the commencement of an action against Frank and the Corporate Defendants, as Frank holds 60% of the issued shares in the Company, he would be able to defeat any such resolution for that purpose proposed to be passed by the Company at general meeting.

56.  Accordingly, I am satisfied that The Plaintiff has shown a prima facie case that the claim falls within an exception to the rule in Foss v Harbottle.

Conclusion

57.  For the above reasons, I am satisfied that the Plaintiff has shown a prima facie casethat the Company has a claim against the Corporate Defendants and that the claim falls within an exception to the rule in Foss v Harbottle.  The Plaintiff is entitled to bring the action on behalf of the Company against the Corporate Defendants.  As a prima facie case having been shown, it must necessarily follow that the writ and ASOC cannot be said to be scandalous, frivolous or vexatious or otherwise an abuse of the process of the court. 

58.  As for the application for alternative relief that there be a determination or trial of a preliminary issue as to the Plaintiff’s locus in bringing the action, the Corporate Defendants only adduced the affirmations of Bai who does not have personal knowledge of the facts asserted in her affirmations.  In any event, for reasons as I have given, her evidence is inherently incredible and inconsistent with other incontrovertible evidence.  The persons who have personal knowledge of the controversy in dispute are Frank and Keith.  For reasons best known to themselves and therefore the Corporate Defendants, they chose not to give any affirmation.  There is no evidence from the Corporate Defendants to contradict the Plaintiff’s.  It is therefore not possible to conduct a trial of the preliminary issue as to the Plaintiff’s locus in bringing the action or to make any determination as to his locus beyond finding that he has shown a prima facie case of a claim against the Corporate Defendants.

59.  Accordingly, the 2^nd and 4^th to 8^th Defendants’ two summonses dated 7 December 2012 and 23 May 2013 must be dismissed. 

Costs

60.  Mr Shieh contends that the ASOC must be taken as an admission that the SOC was defective and hence the Corporate Defendants should be entitled to costs at least up to the date of the filing of the ASOC. Ms Chan argues otherwise on the ground that the 1^st Summons was issued by the Corporate Defendants in breach of the usual practice.

61.  The practice enshrined in Practice Direction 19.1 is that before issuing a striking out summons a party should write to the other side pointing out the alleged deficiencies in the pleading.  At the time when the Corporate Defendants issued the 1^st Summons, pleadings were not yet closed.  Under Order 20 rules 1(1) and 3(1), the Plaintiff was entitled to amend the Writ and SOC without leave.  In issuing the 1^st Summons before the close of pleadings, the Corporate Defendants must be taken to have accepted the risk that the costs incurred in preparing the 1^st Summons would be wasted if the defects in the SOC will be rectified by amendment.  The Corporate Defendants contend that they were only following the practice which requires a strike out application to be made promptly and before close of pleadings.  However, that is no answer to their failure to inform the Plaintiff of the alleged defects in the SOC and their issue of the 1^st Summons without any warning or letter preceding the application.  While the Plaintiff was at fault in filing the SOC which was defective, the Corporate Defendants should have followed the usual practice of alerting him of the defects before issuing the 1^st Summons.  The Plaintiff’s fault would be penalised in costs by having to bear the costs of and occasioned by the amendments under Order 62 rule 3(3), unless the court orders otherwise.  But there is no reason why he should be penalised for the costs wasted as a result of the Corporate Defendants’ failure to follow the usual practice and issuing the 1^st Summons without prior letter.  Had the Corporate Defendants followed the usual practice, the Plaintiff would have amended the SOC in time and all costs of preparing the 1^st Summons and Bai’s 1^st affirmation could have been saved.  The Corporate Defendants’ departure from the usual practice unnecessarily generates costs and offends the underlying objectives of the Rules of the High Court as stated in Order 1A rule 1 of increasing cost-effectiveness of any practice and procedure and promoting a sense of reasonable proportion and procedural economy in the conduct of the proceedings.  The Corporate Defendants should not be awarded costs which they need not have incurred had they followed the usual practice.  They should be deprived of their costs prior to 14 February 2013. 

62.  The Plaintiff is successful in resisting the application.  There is nothing in the circumstances of this case to suggest that there should be a departure from the ordinary costs principles.  Accordingly, I make an order nisi that the 2^nd and 4^th to 8^th defendants shall pay the plaintiff’s costs of these proceedings incurred after 14 February 2013 with certificate for two counsel.