FOK HING INTERNATIONAL CO LTD v. LIU HSIAO CHENG

HCA 97/2013

[2018] HKCFI 2367

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 97 OF 2013

________________________

________________________

(By Original Action)

________________________

(By Counterclaim)

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DECISION ON COSTS

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1.  I adopt the same abbreviation used in my Decision handed down on 12 July 2018.

2.  On 12 July 2018, I dismissed the appeal by Liu against the Decision of Registrar refusing his application for specific discovery of certain documents.  I also made a cost order nisi that Liu should bear the costs of the appeal, to be taxed if not agreed.

3.  On 30 July 2018, and having considered the Summons taken out on 26 July 2018 (“the Summons”) by FHI, I made an Order varying the cost order nisi and directed that the costs of the appeal and the Summons be summarily assessed.  I at the same time gave some directions on the filing of submissions.

4.  On 6 August 2018, FHI filed and served its Statement of Costs.  The costs incurred were stated to be HK$140,590.

5.  On 13 August 2018, Liu filed and served his List of Objections.

6.  I have considered the Statement of Costs and the List of Objections carefully.  I agree that there has been some duplication of work (“Communication” (C1) and “Perusal of documents” (D2)).  Given the engagement of counsel, I also have doubts on the reasonableness of incurring 3 hours on “Preparation for the hearing” (D4) and in addition 3 hours on “Legal Research including perusing the cases authorities cited by the respective Counsel” (D6). 

7.  By reason of the above, and adopting a broad brush approach, I summarily assess the costs of the appeal and the Summons to be $110,000.

HCA 97/2013

[2018] HKCFI 1612

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 97 OF 2013

________________________

________________________

(By Original Action)

________________________

(By Counterclaim)

________________

DECISION

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The parties, and the appeal

1.  Fok Hing International Company Limited (“FHI”) is the plaintiff by original action and 1^st defendant by counterclaim.  It is a limited company incorporated in Hong Kong.  Wong Shu Wai (“Wong”) is the 2^nd defendant by counterclaim.  He, together with his brother Wong Shu Chun, are the two directors and equal shareholders of FHI.  Liu Hsiao Cheng (“Liu”) is the defendant by original action and plaintiff by counterclaim.

2.  By summons dated 16 November 2016, Liu sought, pursuant toOrder 24, rules 7, 11, 11A of the Rules of the High Court, specific discovery by affidavit, production and provision of copies of 7 classes of documents.  They are specified in the schedule attached to the summons.  The scope of the application has subsequently been narrowed down.  The application is now confined to the following specified classes:

(a)  Class 1 documents, namely:

“Audited financial statements (‘AFS’) of [FHI] for the financial years ended 31 March 2004, 31 March 2005 and 31 March 2006 to the extent that they relate to the Trading JV or the trading business conducted by Liu”;

(b)  Class 5 documents, namely:

“All notes, documents and records (including accounting journals and ledgers) relating to alleged reported losses of [FHI] under ‘Internal Accounts’ as shown in the March 2012 Summary and the June 2012 Summary as alleged in paragraphs 94 and 97 of [Wong’s witness statement dated 18 May 2016]”;

(c)  Class 6 documents, namely:

“All notes, documents and records (including accounting journals and ledgers) relating to alleged amounts owed to Liu as shown in the March 2012 Summary and the June 2012 Summary as alleged in paragraph 98 of [Wong’s witness statement dated 18 May 2016]”;

(d)  Class 7 documents, namely:

“All notes, documents and records (including accounting journals and ledgers) relating to the purported Provision for Doubtful Debts in the sum of HK$5,878,826 as reported in [FHI’s AFS] for the financial year ended 31 March 2008 as disclosed under Item 17 of [FHI’s List of Documents]”.

3.  The application came before Registrar Lung for hearing on 18 July 2017.  The application was dismissed with costs.  This is the appeal of that decision.

The claim, the defence and the counterclaim

4.  For the factual background of the claim and counterclaim between the parties, I respectfully refer to the judgment of Deputy High Court Judge Lok (as he then was) dated 20 August 2014 whereby His Lordship allowed Liu’s appeal and granted him unconditional leave to defend (the “Order 14 Ruling”).  In gist, FHI by the original claim seeks from Liu the repayment of what it says to be a loan in the sum of HK$1 million.  Liu accepts that he has been paid a sum of HK$1 million.  He says that it was not a loan, but prepayment of certain profits which he was entitled to.  His case is that in 2000, he and Wong started a trading joint venture (“Trading JV”). The related trading joint venture agreement (“JV Agreement”) wasan oral one.  According to paragraphs 7, 8, 9, 19, 21 and 22 of his Amended Defence:

“7. In around early 2000, [Wong] invited Mr. Liu and his wife to be his business partners. He suggested that they could use his office … and that he would help arrange obtaining banking facilities for their trading business as he had long-standing relationships with a number of banks in Hong Kong.

8. Being new comers, Mr. Liu and his wife were pleased to accept [Wong’s] offer and they started a new trading joint venture with him in around 2000 (‘Trading JV’).

9. It was agreed orally amongst Mr. Liu and [Wong] … that:

(a) They would each own 50% of the new Trading JV as equity partners;

(b) The new Trading JV would be run through [FHI] (as its agent);

(c) Mr. Liu and his wife would inject their flourishing trading business into [FHI];

(d) On the other hand, [Wong] would be responsible for arranging necessary trade finance facilities and accounting matters; and

(e) Mr. Liu and [Wong] would each be entitled to 50% of Trading JV’s profits captured under [FHI].

…

19. In common with most trading businesses, the business model of the Trading JV was simple—it would, through [FHI] as its agent, first collect payments from customers (by way of cheques, remittances or letters of credit) before paying suppliers and releasing merchandises …

…

21. In around August 2008, pursuant to the JV Agreement and as 50% equity partner of the Trading JV, Mr. Liu requested [Wong] to provide an account of cumulative profits of the Trading JV and to distribute his 50% share of the same.

22. In reply, [Wong] suggested that as the audited accounts of [FHI] for the financial year ended 31 March 2008 was not yet finalized, the Trading JV’s cumulative profits could not be worked out. He suggested instead to pay Mr. Liu HK$1 million first as a prepayment of his profit share. Once the audited accounts of [FHI] were available, he would then work out the parties’ respective profit share and pay Mr. Liu balance of his profit share.

23. Since then, despite repeated requests and demands by Mr. Liu, [Wong] has neglected and failed to account for the Trading JV’s profits or to pay Mr. Liu the balance of his profit share for the period from May 2000 to March 2008 and for the financial years thereafter, whether in part or at all.”

5.  On that pleaded basis, Liu claims that he is not liable to repay the HK$1 million.  He further counterclaims, according to paragraphs 33 and 34 of his Counterclaim that:

“33. Wrongfully and in breach of the Trading JV Agreement, Section 30 of Cap. 38 and [Wong’s] fiduciary duties to Mr. Liu (as partner), [Wong] has to date failed and/or refused to account for the Trading JV’s profits or to pay Mr. Liu the balance of his profit share (after giving credit to the prepayment).

34. Further, [Wong] (as partner) and [FHI] (as nominee of [Wong] and/or agent of the Trading JV) have wrongfully retained or enriched themselves unjustly with the sum of around HK$6,455,443 (i.e. US$955,826, being Mr. Liu’s profit share for the period from May 2000 to March 2008 less HK$1m in prepayment) and his profit share of the Trading JV’s cumulative profits from 1 April 2008 to date.”

He prays accordingly for the following relief:

“(A) An order for repayment of HK$6,455,443 or any sums found to be due to Mr. Liu, being his share of the Trading JV’s profits for the period from May 2000 to March 2008 as pleaded in paragraph 33 above;

(B) An account of the cumulative profits of the Trading JV from 1 April 2008 to date and Mr. Liu’s profit share thereof;

(C) An account of all moneys belonging to Mr. Liu wrongfully retained and/or converted by [Wong] or FHI to their own use or otherwise;

(D) An order for repayment of any sums fund to be due to Mr. Liu upon taking such account.”

The defence to counterclaim

6.  Both FHI and Wong deny the existence of the Trading JV and the JV Agreement.  They say in effect that the Counterclaim was a complete fabrication.

Main issues for trial

7.  The parties agree that the main issues for trial, as framed by the pleadings, are broadly as follows:

(a)  whether the HK$1 million was in the nature of a loan or part prepayment for Liu’s share of the profits from the Trading JV;

(b)  whether the JV Agreement existed, and if so its terms;

(c)  whether the Trading JV existed, and if so the cumulative profits from the same; and

(d)  the quantum of Liu’s share of those profits.

The relationship between FHI and the Trading JV

8.  It is significant to note that on the face of pleadings, Liu treats FHI and the Trading JV as being different.  He is not saying that he is entitled to 50% of the profits of FHI.  He claims that he is “entitled to 50% of Trading JV’s profits captured under [FHI]” (whatever that means).  That Liu draws that distinction is also apparent from paragraphs 13(b) and 20 of his Amended Defence (which Mr Vincent Lung, counsel for FHI and Wong, has drawn my attention to).  Therein, the original references to FHI were deleted.  In their places, “the Trading JV” were inserted. 

9.  Despite treating FHI and the Trading JV as being different, Liu has failed to make clear on the face of pleadings what he avers the relationship between FHI and the Trading JV is.  I have set out the relevant parts of Liu’s pleaded case below.  It is silent as to (1) the nature of the business undertaken by the Trading JV; (2) how the profits of the Trading JV were supposed to be “captured under [FHI]”; (3) whether FHI carried out other businesses of its own; (4) if so, how the businesses which FHI carried out on its own on the one hand and as agent of the Trading JV on the other (and the related accounts of those different businesses) were segregated.  Importantly, it has never been Liu’s pleaded case that FHI had no business ofits own, and that all the businesses conducted by FHI were in fact conducted by it as agent for the Trading JV.

10.  Liu has himself filed no evidence in support of the present application.  It was supported by the 2^nd affirmation of his solicitor Ms Chow Wai Mee May (“Ms Chow”).  Ms Chow does not in that affirmation deal with the relationship between FHI and the Trading JV.

11.  Wong filed an affirmation in opposition of this application (“Wong’s 4^th Affirmation”).  At paragraph 10 thereof he says, inter alia, that:

“10. As a matter of fact, [FHI] also carried out business other than the businesses referred by Liu and would make financial arrangements with Gold Driven Investments Limited (‘GDIL’) and my other businesses in Zimbabwe to assist their operations.”

12.  In an attempt to reply to Wong’s 4^th Affirmation, Ms Chow filed her 3^rd affirmation.  At paragraph 7, she refers to paragraph 10 of Wong’s 4^th Affirmation.  She makes the following comments and criticisms:

“7. … I crave leave to refer to paragraph 9(e) of the Amended Defence and Counterclaim. It is Liu’s case that the entire Trading JV was conducted through FHI and pursuant to the Trading JV Agreement, all profits of the Trading JV were to be captured under FHI. [Wong] asserts that FHI also carried out other businesses but fails to identify these business and their significance relative to the trading business.”

I note that whilst Ms Chow has endeavoured to say that the entire Trading JV was conducted through FHI, she did not attempt to suggest the reverse, ie FHI conducted no business of its own and that all the businesses it conducted were conducted by it as agent for the Trading JV.  In any event, that is not the sort of factual matters which a legal advisor can or is expected to say on behalf of one’s lay client.

13.  Liu was content to let his solicitor make the comments and criticisms on his behalf.  He decided not to make any factual affirmation to traverse Wong’s evidence that “[FHI] also carried out business other than the businesses referred by Liu”.  I note further that during an email exchanged on 27 July 2012, Liu himself mentioned the possibility of FHI carrying out other businesses.

14.  During the hearing, Mr Jean-Paul Wou, counsel for Liu, suggested that as the gross profits of the Trading JV as shown in the Sale and Payment Record (“SPR”) corresponded to the revenue figures reported by FHI in its AFS, “one can readily see that the trading businesses conducted by Liu accounted for 100% (if not more) of FHI’s business at least between 2005 and 2008”.  I do not agree. I accept Mr Lung’s submissions in this regard, that a closer look at the primary documents shows that the SPR actually bear FHI’s heading, that those are FHI’s own figures, not that of the Trading JV, and that it is hardly surprising that FHI’s figures match those appearing on FHI’s own AFS.  

15.  I will come back to this issue when I consider each class of the documents below.

Discovery—the applicable legal principles

16.  In summary, the Court will order discovery of a document if, prima facie, it is relevant to the issue in dispute, that the document is in existence and in the respondent’s possession, custody or power, and that discovery is necessary for disposing fairly of the matter or for saving costs. Under Order 24, rule 8 of the Rules of the High Court (“RHC”), it is for the party seeking discovery to demonstrate a prima facie case for discovery of the documents sought, and once that has been established, it is for the opposing party to satisfy the Court that discovery is not necessary for either of the stated purposes—Hong Kong Civil Procedure 2018, paragraphs 24/2/7, 24/2/10, 24/7/3 and 24/8/1.

17.  Post CJR, when considering whether discovery should be ordered, the Court should give effect to the underlying objectives in RHC Order 1A.  In the words of Mimmie Chan J at paragraphs 8, 17 and 20 of her Judgment in Billion Lead Investment Ltd v Union Joyce Ltd & Others (unreported, HCMP 2145/2011, 14 December 2012), which I respectfully adopt:

“8. … In deciding whether any document relates to a matter in question in the action, whether any document is or has been in the possession, custody or power of a party, and whether discovery of a document sought is necessary either for disposing fairly of the cause or matter or for saving costs, the Court should always bear in mind the objectives of cost effectiveness, expeditious disposal of cases, proportionality, procedural economy and ensurance of fairness between the parties.

…

17. Since the Civil Justice Reform, no order for discovery shall be made unless the Court is of the opinion that the order isnecessary either for disposing fairly of the cause or matter, or for saving costs. The Court must take a proportionate approach, balancing the interests of the fair disposal of the cause or matter in accordance with the parties’ substantive rights against effectiveness, expeditious disposal of cases, and procedural economy.

…

20. In any case, discovery should be sensibly controlled, and not allowed to be used as an oppressive weapon, to be pursued without sufficient regard to economy and efficiency in terms of the usefulness of the information which is likely to be obtained from the documents.  It would be oppressive and unnecessary to order discovery of documents for each and every transaction entered into by Ming, and every payment made by Ming, irrespective of their importance or marginal relevance to the matters in dispute.”

Class 1 Documents

18.  Mr Wou submitted that they are relevant and necessary to the determination of Issues (c) and (d) identified above.

19.  Liu claims that he is entitled to 50% of the profits of the Trading JV captured under FHI.  He is not claiming any entitlement to any profits of FHI.  Hence, unless those AFS contain information on the “Trading JV’s profits captured under FHI”, or is otherwise relevant to the existence (or otherwise) of the Trading JV, those documents are not subject to discovery.

20.  I have considered above the issue concerning the relationship between FHI and the Trading JV.  On the face of his own pleading, Liu has never asserted that FHI had no business of its own so that all the businesses which FHI conduced were in fact conducted on behalf of the Trading JV as its agent.  Wong has said on affirmation that FHI carried out businesses of its own.  Liu chose not to traverse it.     

21.  I have looked at those AFS which Wong has disclosed.  They contain no reference to the Trading JV.  Even assuming that the Trading JV existed, one cannot tell which part of the financial figures reported in those AFS concern FHI’s own business, and which part concern the Trading JV.  So viewed and analyzed, Class 1 Documents are irrelevant.

22.  On the issue of relevance, Mr Wou relied further on the fact that Wong and FHI have themselves disclosed those AFS for the years of 2008 to 2013.  Mr Wou submitted that they would not have done so unless they were of the view that those AFS of FHI are relevant. 

23.  Wong has in that regard tendered the explanation in his 4^th Affirmation that the earlier discovery was given “for the sole purpose of showing the relevant accounting treatment of advancing the Sum made in August 2008.”  That is a plausible explanation.  In any event, when considering the present application, the Court is not dictated by the view of the parties on relevance.  What the Court should do is to consider the totality of the evidence and all relevant circumstances to decide whether the criteria for ordering specific discovery have been established.  This is what I have done.  

24.  In the present case, for the reasons set out above, I am not satisfied that the criteria for ordering specific discovery of the Class 1 Documents have been established.  I find that Liu has failed to prove on a prima facie basis the relevance of those AFS. 

25.  In any event, I note that Class 1 Documents are historical AFS (for the years between 2004 and 2006).  Applying and giving effect to the underlying objectives in RHC Order 1A, I rule that discovery of those documents are not necessary whether for disposing fairly of any issue or matter, or for saving costs.  On the contrary, I find that ordering discovery of those documents will unnecessarily add to the costs which will need to be incurred.

Class 5 and Class 6 Documents

26.  Class 5 and Class 6 Documents relate to two entries in two documents which the parties refer to as “the March 2012 Summary” and “the June 2012 Summary” (the “Summaries”). 

27.  Mr Wou in his written submissions describes the Summaries as “‘home made’ documents”.  According to Wong (paragraph 24 of his 4^th Affirmation):

“… the Summaries are merely unaudited internal financial records of GIIL, another company Liu and I had been run [sic] together for our tobacco business and my other businesses in Zimbabwe (disputes surrounding GDIL will be adjudicated in HCA 1278/2013).”

28.  I emphasize that while Class 5 and Class 6 Documents relate to two entries in the Summaries, they are not the Summaries themselves.  The Summaries have been disclosed.  The documents now being sought are “all notes, documents and records (including accounting journals and ledgers) relating to” two entries in the Summaries, namely, (1) for Class 5, “alleged reported losses of FHI under ‘Internal Accounts’” and (2) for Class 6, “alleged amounts owed to Liu”.  In other words, Class 5 and Class 6 Documents concern all underlying or supporting primary accounting documents relating to two entries that appear in two homemade documents.  The scope of the discovery sought is very wide.

29.  Importantly, on the face of the Summaries, the Trading JV is not mentioned.

30.  In so far as any financial information on FHI which Class 5 and Class 6 Documents might reveal, my observations above on the irrelevance of Class 1 documents are equally applicable.

31.  In so far as any financial information on GDIL which Class 5 and Class 6 Documents might reveal, I am of the view that prima facie relevance has not been established. GDIL is distinct and different from the Trading JV.

32.  On the relevance of the Summaries, Mr Wou relied on the observations made by Deputy High Court Judge Lok (as he then was) at paragraphs 14 and 15 of the Order 14 Ruling.  But I repeat that the present application is not for discovery of the Summaries, but for discovery of all underlying or supporting primary documents relating to two entries therein.  The difference should not be conflated.

33.  Having considered the above, I am not satisfied that prima facierelevance in relation to Class 5 and Class 6 Documents has been established.  In any event, on the facts of this case, applying and giving effect to the underlying objectives in RHC Order 1A, and having considered the factor of proportionality, I am of the view that the wide disclosure sought of what are in effect all underlying or supporting primary documents relating to two entries in the Summaries are not necessary whether for disposing fairly of any issue or matter, or for saving costs.  On the contrary, I find that ordering discovery of those documents will unnecessarily add to the costs which will need to be incurred.  In my view, this is exactly the sort of discovery which should be controlled, and which should not be allowed to be used as an oppressive weapon.

34.  I refuse the request for discovery of Class 5 and Class 6 Documents.

Class 7 Documents

35.  At paragraph 31 of his 4^th Affirmation, Wong says:

“… [FHI] and I do not have in our possession, custody and power Class 7 documents. I have also instructed my solicitors ONC Lawyers to enquire with [FHI’s] then auditor Jeffery Tsang & Co. but I am advised that no response has been received as at the date of his affirmation.”

36.  Despite what Wong has deposed to, and despite acknowledging that Wong’s 4^th Affirmation in this regard is conclusive at the interlocutory stage (see Re Prudential Enterprises (No 2) [2004] 2 HKC 205, per Chu J (as she then was) at paragraph 16), Mr Wou submitted that “Wong’s claim is not worthy of belief”, and that “the contents of the affirmation and the efforts taken by Wong are plainly insufficient to meet its duty of disclosure”.  For myself, I see no sufficient basis for those submissions, which I do not accept.

37.  I also refuse disclosure of Class 7 Documents.

Conclusion

38.  For the reasons set out above, I refuse Liu’s application and dismiss the appeal.  I also make a cost order nisi that Liu should bear the costs of this appeal, to be taxed if not agreed.

HCA 97/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 97 OF 2013

________________________

________________________

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D E C I S I O N

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THE APPLICATION

1.  The Plaintiff (“P”) claims against the defendant (“D”) for repayment of a loan of one million Hong Kong Dollars.  D admits receipt of the money, but argues that the money was not a loan from P, but was in fact pre‑payment of 50% of the profit of a joint venture between Wong Shu Wai (“Wong”), the 2^nd defendant in the Counterclaim being a director and shareholder of P and D.  Wong and D agreed to use P as their agent for the joint venture.[1] In the Counterclaim, D also claims against P as the joint venture agent for breach of fiduciary duties and against Wong as his partner for his share of the profits held by P and controlled by Wong.  It should be noted here that D in the Counterclaim denies any joint venture agreement between him and themselves, Wong or P being the agent of the joint venture between D and Wong.

2.  By summons dated 16 November 2016, D applies for specific discovery of 7 classes of documents under O.24 r.7 RHC.  The application is contested and the parties are legally represented.[2]

THE SCOPE OF DISCOVERY

3.  The scope of discovery has subsequently been narrowed down.  As indicated in D’s skeleton §2, this hearing is only concerned with the following:

a.   Class 1 documents – FHI’s [P’s] audited financial statements (“AFS”) for the financial years ended 31.3.2004, 31.3.2005 and 31.3.2006;

b.   Class 5 documents;

c.   Class 6 documents; and

d.   Class 7 documents.

4.  D submits that the parties are in broad agreement as to the issues which would require determination at trial[3]:

a.   Whether the JV Agreement existed and if so, what are its terms;

b.   Whether the Trading JV existed and if so, whether D is entitled to share any profits arising therefrom;

c.   If so, what was D’s shares from inception to date;

d.   Whether the HK$1 million payment was in the nature of a loan or pre‑payment for profit sharing.

SIGNIFICANT ISSUES RELATING TO THE APPLICATION

The pleaded case

5.  It will be relevant to note the prayers in D’s Counterclaim here.  They are, among others:

a.   An order for repayment of HK$6,455,443 or any sums found to be due to Mr. Liu (D), being his profit share of the Trading JV’s profits for the period from May 2000 to March 2008 as pleaded in paragraph 33 (emphasis added);

b.   An account of the cumulative profits of the Trading JV from 1 April 2008 to date and D’s profit share thereof;

c.   An account of all moneys belonging to D wrongfully retained and/or converted by WSW (Wong) or Fok Hing (P) to their own use or otherwise.

The significant issues

6.  After perusal of the pleadings, the following issues are significant for the determination of this application:

a.   D has not pleaded the nature of the business of the joint venture, the time for the sharing of the profits, the reasons for not sharing the profits between 2000 and 2008 and it was only in 2008 D had asked for accounts of the joint venture.  D admits that the pleadings have to be reviewed.

b.   D has not set out the particulars for his claim of HK$6,455,443 in paragraph 34 of the Counterclaim.  Counsel has today referred to the bundle of documents [Bundle II pp. 466-507], which show the sales records.  However, D admits that those particulars were not pleaded in the Counterclaim and they are disputed by P.  The figures in the sales records comprise other businesses of P.  Therefore, it is clear that the pleaded liquidated amounts in the Counterclaim are not correct.

c.   D has not pleaded the way P has been acting as the agent of the joint venture other than saying in paragraph 19 of the Defence that it will first collect payment from customers (by way of cheques, remittances or letters of credit) before paying supplies and releasing merchandises. There are no pleadings as to whether P is keeping the accounts of the joint venture and how it should keep such accounts, separate from P’s own accounts or otherwise.  D refers ths Court to the financial summaries of P. Page 542 of Bundle II shows the accounts of P.  There are separate accounts for three business, including the GDIL, another joint venture between D and Wong. But there is no separate account for this joint venture in this financial summary.

d.   D admits that he is neither a director nor a shareholder of P.

THE RELEVANT LEGAL PRINCIPLES

7.  The legal principles for this application are trite.  The parties have referred me to the following authorities:

a.   Billion Lead Investment Ltd v Union Joyce Ltd. and others (unreported, HCMP 2145/2011, 14 December 2012).  It clarifies the proportionate approach in exercising the court’s discretion [17].  But it also defines the parameter of discovery, which should not be narrowed down to the particulars of the pleadings, but should cover the general issues.

b.   Disclosure, the 5^th edition by Paul Matthews and Hodge M. Malek Q.C., Sweet & Maxwell;

c.   Chan Yee Kit v Chan Yee Man (unrep., HCA 1743/2014, 10 June 2016) It sets out the statutory requirements for the application [11] and even if the documents are pleaded, they are not discoverable if they are irrelevant to the allegations and could not affect the result of the action.  [19]

DISCUSSION

8.  I have had the benefit of reading the Decision of Deputy High Court Judge Lok (as he then was) Lok’s Decision delivered on 20 August 2014, in which the learned Judge had set out the factual background of this matter.  The Court decided that the business relationships between D and Wong should be investigated by the court.[4]

9.  P raises the objections by saying that in D’s case, he claims to be entitled to 50% profit of the joint venture, not that of P, therefore the financial position of P is irrelevant to the issue in dispute unless P’s business contains the joint venture only.  But there is common ground that this is not the case as D has another joint venture with Wong of tobacco run by P. Secondly, the Sales and Payment Records only bear P’s name, not the joint venture’s name.  These records are irrelevant to the issues in dispute.

10.  D’s argument is that P is the agent for the joint venture.  As such, P is keeping the business accounts for the joint venture.  Given the fact that P is also running business of other joint venture(s), the documents to be disclosed will shed light on the joint venture as alleged, which P denies.

The fundamental burden of the pleadings

11.  Despite those questions which called for explanation as found by Deputy Judge Lok (as he then was) in his Decision, the fundamental burden is on D to establish his defence and his case in the Counterclaim against P.  The Court of Appeal commented: “It is for the plaintiff in an action to formulate his claim in an intelligible form and it does not lie in his mouth to assert that it is impossible for him to formulate it and that it should, therefore, be allowed to continue unspecified in the hope that, when it comes to trial, he may be able to reconstitute his case and make good what he then feels able to plead and substantiate.” adopting Lord Oliver in Wharf Properties v Eric Cumine Associates [1991] 2 HKLR 154 at 166F, Sunny Tadjudin v Bank of America, National Association (unreported, HCMP 691/2012 29 June 2012 per Kwan JA at paras. 14 & 15)

12.  Under Order 1A r.1(c) & (d), the Court must, in the exercise of its discretion, “promote a sense of reasonable proportion and procedural economy in the conduct of proceedings” and “ensure fairness between parties”.

13.  It is therefore incumbent upon D to set out the business of the joint venture such that the scope of the discovery of P’s accounts can be narrowed down to those information and documents relevant to the issues in dispute between the parties.  As mentioned in paragraph 5a, D counterclaims a liquidated sum without giving any particulars as to the constituents of the liquidated sum.  But he also counterclaims any other sum that might be found by the court without telling the court in the Counterclaim the ground on which the court would find other than the liquidated sum.  D’s reference to the sales records in Bundle II do not explain that the amounts claimed in the Counterclaim is the correct amount because Wong or P made no admission and D admits that P had other businesses as well.  These records belong to P as a whole.

The unusual features of the partnership agreement

14.  It is not in dispute that D had not requested for the accounts of P since April 2000, not until 2008 when the dispute arose.  This is rather unusual for a partnership for not sharing the profits for such a long period of time.  The terms of the joint venture agreement are therefore important for the court’s consideration, not least as to whether such a joint venture agreement exists.  This issue is now being contested by P in the Counterclaim.  One of the grounds of objection is that the scope of the request is too wide.

15.  Bearing in mind the above, I shall now consider each of the classes of documents.

The classes of documents

16.  In respect of Class one documents, P’s grounds of objection are: “Even with the disclosure of FHI’s (P’s) AFS for the financial years ended 31.3.2004, 31.3.2005 and 31.3.2006, and assuming that the Court finds at trial that the alleged JV exists, the Court will still not be able to determine the profits generated by the alleged JV and Liu’s (D’s) 50% share by reading FHI’s (P’s) AFS.”  This is because P has other accounts and D is unable to identify which parts of the AFS relate to the joint venture business.  On this basis, P argues that such documents are irrelevant.

17.  The purpose of having the documents is to ascertain whether the joint venture agreement exists between D and Wong and if so, the amount due to D.  D has counterclaimed for liquidated sum.  If D has set out the particulars in support of the amounts claimed, the parameter of the documents can be defined. However, since D has not done so, which, coupled with the fact that D admits that P’s accounts have other businesses, I agree with P that the documents required may not be relevant to the issue in dispute.  In any event, the scope is too wide for this matter.  Such discovery will not be saving costs or for the just resolution of the disputes.  As such, I reject D’s request.

18.  In respect of Class 5 and Class 6 documents, P’s objection seems to be saying that such documents are summaries of internal accounting documents of another joint venture, GDIL (a joint venture between Liu (D) and WSW (Wong) carrying out business in Zimbabwe), not FHI (P) nor the alleged JV.  They are irrelevant to the joint venture between D and Wong, even if P was their agent. P further submits today that the information required by D is in the audited account of P ended 2012, which has been disclosed.  D does not dispute this fact.

19.  If D is a partner of GDIL, D is entitled to the documents relating to the joint venture concerned.  This action has noting to do with the GDIL joint venture.  For the same reasons as for Class one documents, since D has not set out the particulars relating to D’s profits as counterclaimed by D, there is simply no evidence to define the scope of the documents relating to the joint venture in this action.  Such requests will not be saving costs for a fair disposal of the matter.  This request should also be rejected.

20.  In relation to Class 7 documents, P’s argument is that it and Wong had made affirmations that they were not in possession, custody and control of the documents.  In the matter of Prudential Enterprise, Ltd. Chu J. (as she then was) (unreported, HCCW 594/1999, 24 October 2003) held “…At this interlocutory stage, this affidavit has to be accepted as conclusive, and the petitioners cannot seek to challenge the affidavit of documents made”.  Under O.24, r.10 could only be made “if it can be shown by admissions in pleadings or the contents of the affidavit itself or documents referred thereto that the affidavit is insufficient: Jones v. Monte Video Co. (1880) 5 QBD 556 at 558.”  See paragraphs 16 & 18.  The burden is on D to show the deficiency of the affirmations or other materials evidential of such deficiency, see Lee Sai Nam v. Li Shu Chung & Ors (unreported, HCA 1711/2009, DHCJ M. Ng, 10 January 2014), §§55-57.  See also §24/7/1 of HKCP 2017, Vol.1.

21.  D submits that the records were reported in P’s audited financial statements for the financial year ended 31 March 2008, which is more than 7 years to date.  This provides a prima facie reason for the loss of those documents.  D submits that P is only obliged to maintain the financial statements for 7 years.  This may be for the cross-examination at the trial. But for the present purpose, the court will not go into a mini trial of the matter.  See Hong Kong Niiroku Ltd v Kyokuto Securities (Asia) Ltd (unrep., HCA 4122/2000, 18 March 2002).

22.  D’s summons is dismissed.

COSTS AND ORDER

23.  On the question of costs for this application, including the hearing today, D admits liability (with counsel’s certificate), but disputes the quantum as shown in the schedule of costs.  The costs are assessed summarily under O.62, r.9A to be $140,000, to be paid by D to P within 14 days from the date hereof.

24.  I shall now make an order in terms as follows:

a.   D’s summons is dismissed;

b.   The costs for this application and today’s hearing are as per paragraph 23.

  

  

HCA 97/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 97 OF 2013

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_____________

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DECISION

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1.  This is an appeal by the defendant in the original action and the plaintiff in the counterclaim, Mr Liu Hsiao Cheng (“Mr Liu”), against the order of Master S Lo dated 18 February 2014, granting summary judgment in favour of the plaintiff in the original action, Fok Hing International Company Limited (“Fok Hing”), against him in the sum of HK$1,000,000 and interest. Execution of the said judgment has been stayed upon Mr Liu’s payment into court in the sum of HK$1,500,000.

Background

2.  Fok Hing’s claim in the original action is a simple one: a claim for the repayment of a loan in the sum of HK$1,000,000 advanced on 11 August 2008 (“the Loan”).  According to Fok Hing, the Loan was evidenced by: (i) a cheque in the same amount dated 11 August 2008 drawn by Fok Hing in favour of Mr Liu (“the Cheque”); and (ii) a receipt signed by Mr Liu on 11 August 2008 (“the Receipt”).

3.  Mr Liu does not dispute that he had received a sum of HK$1,000,000 by way of the Cheque issued by Fok Hing.  However, this was only a prepayment of the cumulated profits due to Mr Liu under a joint-venture business.

4.  According to Mr Liu, the present case is, in substance, about a dispute between him and the 2^nd defendant in the counterclaim, Mr Wong Shu Wai (“Mr Wong”).  In around 2000, Mr Liu and Mr Wong entered into a trading joint-venture agreement (“the JV Agreement”).  Under the JV Agreement, each of them would own 50% of the joint-venture business (“the JV Business”).  The JV Business would be operated through Fok Hing and each of them would be entitled to 50% of the profits of the JV Business captured under Fok Hing.

5.  It is common ground that, apart from the JV Business, Fok Hing carried on other businesses on its own.

6.  According to Mr Liu, in or around late 2002 and early 2003, he and Mr Wong entered into a trust agreement whereby Mr Wong agreed to hold 5,000 shares in Fok Hing on trust for him.  However for the purpose of the present application, Mr Liu is not relying on his beneficial interests in the shares of Fok Hing in maintaining the counterclaim against Fok Hing, rather he relies on the terms of the JV Agreement that he is entitled to receive half of the profits of the JV Business.

7.  At all material times, Mr Wong and his brother were equal shareholders and the only directors of Fok Hing.  According to Mr Liu, his brother was a mere nominee of Mr Wong.  He had no involvement in Fok Hing’s affairs and Fok Hing was and still is under the sole control of Mr Wong.

8.  In around August 2008, Mr Liu requested Mr Wong to account and to distribute to him 50% of the cumulated profits of the JV Business captured under Fok Hing.  In reply, Mr Wong claimed that the audited accounts of Fok Hing ended 31 August 2008 were yet to be finalised and the cumulated profits of the JV Business could not be worked out.  Mr Wong suggested to pay Mr Liu a sum of HK$1,000,000, which was the amount under the Cheque, as a prepayment of his profit share and undertook to pay Mr Liu the balance of his share once the audited accounts were available.  But despite repeated requests, neither Mr Wong nor Fok Hing has accounted to him for his share of the cumulated profits of the JV Business, the amount of which Mr Liu calculates is at least US$955,826.

9.  According to Mr Liu, he has a bona fide claim against Fok Hing to account for his share of the profits of the JV Business on the ground of unjust enrichment or that Fok Hing is holding his share of the profits as constructive trustee.  It is also Mr Liu’s defence that Fok Hing does not have the locus to sue him for the Loan.  It has been stated many times in Mr Wong’s affirmations that the Loan was a personal loan by him to Mr Liu.  In such circumstances, Fok Hing does not have the locus to sue for the repayment of such personal Loan.

The factual disputes

10.  In his affirmations, Mr Wong denies the existence of the JV Agreement.  For the business carried on under Fok Hing, Mr Wong claims that Mr Liu and his wife, Madam Shen Luan (“Madam Shen”), only agreed to introduce their customers in Taiwan to Mr Wong and Fok Hing in return for the financial assistance and remuneration provided by Mr Wong.  Pursuant to such arrangement, Mr Wong had advanced various loans to Mr Liu throughout the years to ease his financial pressure.

11.  In attacking Mr Liu’s case about the JV Agreement and the prepayment of profit share, Mr Lam SC, counsel for Fok Hing, submits that: (i) Mr Liu cannot produce any documentary proof to support the existence of the JV Agreement; (ii) Mr Liu had not mentioned the existence of the JV Agreement in the reply to the pre-action letter issued on behalf of Fok Hing[1]; (iii) Mr Liu cannot produce any documentary proof to support his contention that he had repeatedly asked Mr Wong and Fok Hing to account to him for his share of the profits of the JV Business; (iv) Mr Liu admitted in his email to Mr Wong dated 31 July 2012[2] that he was neither a director nor shareholder of Fok Hing, and hence he was not liable to shoulder the liability or entitled to share the profits of Fok Hing, nor was he able to examine its financial accounts; (v) Mr Liu’s allegation about the sum of HK$1,000,000 being prepayment of his profit share is unbelievable, since he expressly acknowledged in the Receipt that the said sum was a loan to him; and (vi) it was stated in Fok Hing’s accounting documents that the sum of HK$1,000,000 was a loan to Mr Liu and not a prepayment of the profits of the JV Business.

12.  Despite the able submission of Mr Lam, I cannot simply dismiss Mr Liu’s factual allegations at this stage.  According to the evidence of the present case, it is clear that there had been considerable business dealings between Mr Liu and Mr Wong throughout the years.  They had set up a joint-venture tobacco business (“the Tobacco Business”) which was operated under a company known as Gold Driven Investments Ltd (“GDIL”).  The dispute between the parties relating to the Tobacco Business is the subject matter of the other litigation in HCA 1278 of 2013 and another proceedings in Zimbabwe.

13.  If Mr Wong’s evidence is the truth, Fok Hing had nothing to do with the Tobacco Business.  But surprisingly, the accountant of Fok Hing, Ms Amy Lit (“Ms Lit”), had provided Mr Liu with the sales and payment records for the trade conducted by Fok Hing between 2000 and 2008 (“the Sales and Payment Records”)[3]. If the Mr Liu was only entitled to receive remuneration and financial assistance for the businesses introduced by him, why would he be entitled to receive these financial records of Fok Hing?  In this regard, Fok Hing has not provided any credible explanation.

14.  Furthermore, by an email dated 25 May 2012, Ms Lit had provided Mr Liu with a financial summary of all the joint venture companies including GDIL and Fok Hing suggesting that Fok Hing suffered a cumulative loss of about HK$32.7 million as at 31 March 2012[4].   Later on 31 July 2012, Mr Wong produced the financial summary to Mr Liu suggesting that Fok Hing’s cumulative loss was reduced to about HK$17.2 million as at 30 June 2012 over a period of 3 months[5]. If Mr Wong’s evidence is the truth and there was no JV Business involving Fok Hing, why would Ms Lit or Mr Wong have provided Mr Liu with such sensitive financial records of Fok Hing?  Again no explanation has been given.

15.  The contents of these financial records may also support Mr Liu’s case.  In these records, the liabilities of all the joint-venture companies were combined and reported as one, and the records also show that the 2 joint-ventures owed Mr Liu a sum of HK$4,503,115.44 as at 31 March 2012 and HK$4,531,975.54 as at 30 June 2012.  These are certainly consistent with Mr Liu’s allegation that the JV Business was run side-by-side with the Tobacco Business.  Although the evidence is not conclusive at this stage, Mr Liu’s allegations deserve serious investigation at the trial.

16.  As mentioned above, Mr Wong claims that Mr Liu was not involved in the business of Fok Hing.  In return for the business opportunities introduced by Mr Liu and Madam Shen to Fok Hing, Mr Wong only agreed to advance various loans to Mr Liu in order to ease his financial pressure. However, the Sales and Payment Records show that Mr Liu was able to generate over US$1 million in income for Fok Hing.  On the other hand, the amounts of the loans allegedly advanced by Mr Wong were relatively insignificant.  In such circumstances, I have serious doubt as to why Mr Liu would have agreed to forego such a promising business for some insignificant loans.  It seems to me that the arrangement between the parties for the business carried on under Fok Hing was more complicated than that depicted by Mr Wong, and the details of such business arrangement should be fully investigated at the trial.

17.  I also have some queries about Mr Wong’s evidence relating to the advancement of the loans.  According to Mr Wong’s own ledger[6], some of these alleged advances were related to dealings with an entity known as “Universal Taikang” and not Mr Liu.  These loans were booked under “sundry debtors” rather than as “loans”.  Further, the financial statements of GDIL for the year ended 31 August 2008[7] show that the Tobacco Business was generating some handsome profits for the partners.  With a net profit of about HK$6 million, I doubt whether Mr Liu was experiencing financial difficulties as alleged by Mr Wong.  In such circumstances, although Mr Liu signed the Receipt acknowledging that the advancement was a loan, such document may not reflect the true position between the parties and all above queries should be properly investigated at the trial.

18.  I also do not accept that the contents of Mr Liu’s email dated 31 July 2012 are necessarily inconsistent with his case.  Although Mr Liu apparently admitted that he was neither a director nor shareholder of Fok Hing, one must bear in mind that, based on Mr Liu’s version, he left the actual operation of the JV Business to Mr Wong and Fok Hing.  Technically, he was right in saying that he was neither a director nor shareholder of Fok Hing, but he was still a partner of the JV Business which, according to him, was operated under the name of Fok Hing.  As Fok Hing carried on other businesses on its own, it was also right that Mr Liu had nothing to do with those other businesses. Furthermore, by a subsequent email dated 23 May 2013[8], Mr Liu wrote to Ms Lit to enquire about his shareholding status in the various joint-venture companies he operated with Mr Wong.  That was certainly consistent with Mr Liu’s case that he left the actual operation of the JV Business to Mr Wong, and he was not clear about the details of the actual operation of the JV Business.

19.  Finally, I do not find that the contents of the reply letter from Mr Liu’s then solicitors dated 3 October 2012, reading as a whole, are inconsistent with Mr Liu’s case.  His allegation about his beneficial interest in the shares of Fok Hing in the reply letter is actually consistent with his case about the existence of the JV Agreement.

20.  Although there is no document evidencing the existence of the JV Agreement and Mr Liu signed the Receipt acknowledging that the advancement of HK$1,000,000 was a loan, there are also other documents (as mentioned above) which support that, contrary to Fok Hing’s evidence, the JV Business was operated side-by-side with the Tobacco Business.  As I see it, both parties are able to put up some arguments in support of their respective case, but ultimately the business relationship between Mr Liu and Mr Wong deserves further investigation by the court.

21.  In fact, the learned Master agreed that there are various triable issues of facts between Mr Liu and Mr Wong.  In his oral reasons, the learned Master said:[9]

“As I found that [Fok Hing] is not a party to [the alleged JV Agreement], although I tend to agree that there are a lot of triable issues as between [Mr Liu] and Mr Wong, but that has nothing to do with [Fok Hing]. [Fok Hing’s] case [is] based on the loan, which was made orally and evidenced by the written receipt signed by [Mr Liu], and in the written receipt it is clearly said that it is a loan, I think [Mr Liu has] not [established] any triable issue as to why the loan shall not be repaid. Even there is a term in [the JV Agreement] between Mr Wong and [Mr Liu] that such loan is, in fact a prepayment of certain profit from [the JV Agreement]. This term can be enforceable against Mr Wong, but [it is] not enforceable against [Fok Hing].”

22.  For the reasons given earlier in this Decision, the learned Master was right in saying that there are various triable issues of fact between Mr Liu and Mr Wong.  However if that are so many factual issues between them, it would virtually mean that Mr Liu’s evidence is capable of being believed.  As Mr Liu claims that the sum of HK$1,000,000 was a prepayment of his profit share, this factual dispute alone should entitle Mr Liu to have unconditional leave to defend Fok Hing’s claim.  Hence, the learned Master’s order should be set aside.

Mr Liu’s claim for his share of profits of the JV Business against Fok Hing

23.  For the sake of completeness, I will also address the issue as to whether Mr Liu has a bona fide claim against Fok Hing to account for his share of the profits of the JV Business allegedly captured under Fok Hing.

24.  On the basis that Mr Liu’s evidence about the JV Agreement and the JV Business is the truth, then Fok Hing had operated the JV Business on behalf of the joint-venture involving Mr Liu and Mr Wong (“the Joint-Venture”).  Because Fok Hing was entrusted by the Joint-Venture to operate the JV Business, it is quite arguable that Fok Hing had to hold the money received from such business on trust for the Joint-Venture.  Apparently, Fok Hing was entitled to deduct its own expenses for the operation of the JV Business, but it had to hold the net surplus, ie. the profits of the JV Business, on behalf of the Joint-Venture.  It is a simple application of agency and trust principles.  Although Mr Liu does not know the details of the operation of the JV Business, it is certainly open to him to argue that Fok Hing was holding his share of profits on trust for him.

25.  Mr Lam submits that since Mr Liu is relying on the JV Agreement to sue for his share of the profits, he only has a contractual right to sue for the profits which is enforceable against Mr Wong and not Fok Hing.  Further, in asking Fok Hing to account for his profit share on the ground of constructive trust, Mr Liu has to establish that he has an equitable interest in the profits earned by Fok Hing.  Since the profits earned by Fok Hing could only belong to Fok Hing and no one else, Mr Liu had no equitable interest over the profits and so he is not entitled to maintain an action based on constructive trust against Fok Hing.  Finally, it is not permissible in law for Mr Liu to pierce the corporate veil by saying that Mr Wong was the alter-ego of Fok Hing.

26.  Obviously, whether Fok Hing was holding the money or profits relating to the JV Business on behalf of the Joint Venture is a fact-sensitive issue which depends very much on the actual arrangement between the relevant parties.  It was possible for the Joint-Venture and Fok Hing to make an arrangement to the effect that Fok Hing was to carry on all the businesses, including the JV Business, on its own, and Fok Hing was only liable to pay a certain sum to the Joint-Venture under the contractual arrangement.  However, if Fok Hing was a corporate vehicle on behalf of the Joint-Venture in operating the JV Business, then it is also very arguable that Fok Hing was the Joint-Venture’s agent, and the money received by Fok Hing on behalf of the Joint-Venture, subject to the deduction of the expenses, actually belonged to the Joint-Venture itself.  If what Mr Liu tells the court is the truth, he knew very little about the actual operation of the JV Business, and the court therefore needs to investigate further into such matter in order to ascertain whether Fok Hing was holding the profits of the JV Business on behalf of the Joint-Venture.

27.  According to Mr Liu, Mr Wong was the person who actually controlled Fok Hing, and so Fok Hing, through Mr Wong, should have known about the JV Agreement and that it was operating the JV Business as a corporate vehicle for the Joint-Venture.  This has nothing to do with piercing the corporate veil.

28.  Based on the aforesaid, I find that Mr Liu has managed to establish a triable issue as to whether he has a valid claim for his profit share against Fok Hing.  As Fok Hing’s claim for the Loan and Mr Liu’s claim for the profit share are somewhat related, in the sense that both are related to the business dealings between Mr Liu and Mr Wong relating to Fok Hing, Mr Liu’s cross-claim may amount to a defence of equitable set-off to Fok Hing’s claim for the Loan.  Hence, this offers an additional reason as to why unconditional leave should be given to Mr Liu to defend the claim.

Fok Hing’s locus to sue

29.  Based on the aforesaid reasons, it is quite unnecessary for me to consider whether Fok Hing has the locus to sue for the personal loan advanced by Mr Wong.  However, there is no dispute that the money advanced to Mr Liu actually came from Fok Hing, and so even if the alleged Loan was personal in nature, it is arguable that Fok Hing can maintain the cause of action against Mr Liu.  In any event, how Mr Wong had arranged the advancement to Mr Liu is a fact-sensitive issue.  If Mr Liu seeks to run this defence for the purpose of resisting the summary judgment application, he should have raised such issue in the pleading or the affirmations in opposition so that Fok Hing would have the opportunity to reply to such query.  Mr Liu has failed to do so.  In any event, since Mr Liu has managed to raise an arguable defence on some other grounds, it is not necessary for him to rely on such argument.

Conclusion

30.  For the above reasons, I allow the appeal and set aside the order of Master S Lo.  I also grant Mr Liu unconditional leave to defend Fok Hing’s claim in the original action.

31.  I also make the following order nisi:

(i) the costs of the O 14 summons before the Master be costs in the cause;

(ii) the costs of the appeal be paid by plaintiff;

(iii) the sum of HK$1,500,000 paid by Mr Liu into court, together with any interest, be paid out to Mr Liu.

32.  The order nisi shall be made absolute 14 days after the date of the handing down of this Decision.