China Shanshui Cement Group Ltd and Others v. Zhang Caikui and Others
Read the full judgment text of HCA 2880/2015 on BabelCite. This High Court CFI judgment was delivered on 13 October 2016.
1. This is the Plaintiffs’ application for leave to cross-examine D3 on his affirmation filed pursuant to an injunction and disclosure order (“ the Orders ”).
Cites 4 cases
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HCA 2880/2015 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ACTION NO 2880 OF 2015 ____________
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______________ D E C I S I O N ______________ INTRODUCTION 1.This is the Plaintiffs’ application for leave to cross-examine D3 on his affirmation filed pursuant to an injunction and disclosure order (“the Orders”). BACKGROUND 2.The 1st Plaintiff (“GroupCo”) is a Cayman Islands company whose shares are listed on the main board of Hong Kong Stock Exchange (“SEHK”). The 2nd Plaintiff (“HK Cement”) is a wholly owned subsidiary of GroupCo. The 3rd Plaintiff (“Pioneer”) is a wholly owned subsidiary of HK Cement. 3.The most valuable asset of the Plaintiffs’ group of companies is a subsidiary named Shandong Shanshui Cement Group Co (“Shandong Cement”) which is a wholly owned subsidiary of Pioneer, which in turn beneficially owns the vast majority of the fixed assets and produced about 99% of the revenue of the Plaintiffs’ group. 4.This action arose out of the misfeasance of D1 and D2 (respectively “Zhang Senior”, “Zhang Junior” and collectively “the Zhangs”) with the assistance of, amongst others, D3, to misappropriate the Plaintiffs’ assets for their own benefit, in breach of the fiduciary duties which they owed to the Plaintiffs. Zhang Senior effectively treated the Plaintiffs as if they were his own companies. It was not until 1 December 2015 that, with the assistance of the Court, GroupCo’s board of directors (the “Board”) was completely replaced by individuals who are not subject to the control or influence of the Zhangs. 5.The newly appointed Board took possession of the GroupCo Premises at Lippo Centre (“the Lippo Office”), only to discover that all of the Plaintiffs’ essential books and records (the “Plaintiffs’ Records”) and even computer server had been unlawfully removed. There was no staff left to assist the new Board. 6.The removed Plaintiffs’ Records include: the Plaintiffs’ accounting ledgers and other accounting records; bank statements and bank account records; financial records; employment records; GroupCo’s records of its dealings with the SEHK and the SFC; GroupCo’s records of its involvement in legal proceedings, in particular the ultra vires Cayman Islands Proceedings; and all the Plaintiffs’ computer data. 7.This greatly hampered the management of the Plaintiffs by the Board. Hence, on 24 December 2015, the Plaintiffs commenced this action and obtained the Orders, amongst others, against D3. 8.Schedule 2 to the Orders requires D3 to deliver up specified classes of the Plaintiffs’ Records (“the Listed Items”) and, in respect of items not in his possession, to disclose their whereabouts. The Orders also require him to disclose whether he had received assets from the Plaintiffs and, if so, their current whereabouts. He is required to confirm the information he gives by affirmation. 9.The Plaintiffs also obtained an Anton Pillar Order against the then Defendants, including D3. The Plaintiffs’ solicitors sought to execute it in the morning of 30 December 2015, at a time when D3 was not at home. 10.In purported compliance with the Orders, D3 has, through his solicitors, Smyth & Co:
11.In summary, of the assertions in items (a) to (c) were as follows: D3 had handed over some of the Listed Items, including the Plaintiffs’ company chops and seals to Li Hengwen (“Li”) and Yao Tianjun (“Yao”), employees of GroupCo. He enclosed 2 Handover Lists. D3 used to have 2 email accounts to perform his work during his employment with GroupCo. Smyth & Co enclosed a CD-ROM containing soft copies, purporting to be all the documents in D3’s possession. D3 was no longer in possession of the Plaintiffs’ Records. He said that he was not responsible for, did not assist in and had no knowledge of the removal of any of the Listed Items from the Lippo Office. He had not received any assets from the Plaintiffs. He also made an open offer to make his home available for search. 12.In item (d), sent after the present summons was issued, Smyth & Co disclosed 2 further email accounts previously used by D3. 13.Meanwhile, on 30 January 2016, with the assistance of the Jinan local police, GroupCo took over Shandong Cement’s headquarters. GroupCo recovered various chops and licenses belonging to Shandong Cement’s subsidiaries and had the chops and seals replaced. It has been taking stock of the books, important documents and fixed assets of Shandong Cement. 14.The Plaintiffs made this application on 4 February 2016 to gain more information regarding the current whereabouts of the Listed Items, which they say D3 is likely to know more about. 15.D3 has filed 2 other affirmations, enclosing further documents to prove the employee status of Li and Yao. He also stated that the soft copies of documents belonging to GroupCo should have been stored on the Group Server located in Lippo Office and formed part of the 2nd Handover List. Further, the Plaintiffs’ Records should be at the GroupCo’s Mainland Office. 16.Mr Barlow SC submits that the purported disclosure was evasive, incredible, “illusory” and a “mere travesty of discovery”, to borrow the words used in Ka Wah Bank Ltd v Low Chung-song and Anor [1989] 1 HKLR 451, Fuad VP, at 461G‑462A. The Plaintiffs assert that D3 knew that Li and Yao were not employees of GroupCo. They also assert that the company chops and seals would have been delivered to the Zhangs in the Mainland in aid of their fiduciary theft of the Plaintiffs’ Records and assets. D3 has also failed to disclose the current whereabouts of the Listed Items. 17.It is not in dispute that D3 was (i) an executive director of GroupCo between 23 August 2013 and 13 October 2015; and (ii) the joint company secretary of GroupCo from 23 August 2013 (having been appointed on or about 13 June 2008). The other secretary was D2 (Zhang junior). In dispute was whether D3 had resigned as director and ceased being the company secretary on 25 November 2015 (D3’s case) or was dismissed on 1 December 2015 (Plaintiffs’ case). 18.D3 says that he had complied with the Orders and he has nothing further to disclose; the Plaintiffs’ application was based on speculation or distorted facts. LEGAL PRINCIPLES 19.The court has unfettered discretion to order cross‑examination of a deponent on his affidavit in interlocutory proceedings, including an affidavit made pursuant to a Mareva injunction disclosure order: Motorola Solutions Credit Co LLC v Kemal Uzan & ors [2014] 5 HKC 96, (CA), at 101E, following Yau Chiu Wah v Gold Chief Investment [2002] 2 HKLRD 832. 20.The object is to enable a Mareva injunction to be more effective and to obtain more information as to a defendant’s assets and as to their whereabouts in circumstances where the court has already formed the view that there exists a risk of dissipation: Yau Chiu Wah, at 838C‑D, F‑G. 21.Clearly, the Court’s jurisdiction exists a fortiori in the context of a proprietary injunction, which concerns the preservation and recovery of a plaintiff’s own property. 22.The ultimate test on whether an order for cross-examination should be made in interlocutory proceedings is whether it is necessary in the interests of justice: Motorola, Lam VPat 101E; Yau Chiu Wah, §14(5). 23.The applicant has to show good and sufficient reason for the application in the light of the purpose of the proceedings for which the affirmation is used and that the proposed cross-examination might be productive of a useful result at the stage that the application is made: Wendy Wenta Seng Yuen v Philip Pak Yiu Yuen [1984] HKLR 431 per Fuad JA at 436E‑H; Andrew Wyles Waters v Malahon Credit Co Ltd, CACV 44/2003, 8 October 2003, per Kwan J (as she then was), at §10. 24.Leave to cross-examine will be granted where:
25.The court will not grant an order for cross-examination to gather information which will be used later to impugn the defendant’s credit, or to investigate possible dealings in assets that may lead to possible contempt proceedings, or to obtain material to be used in the trial itself: Yau Chiu Wah, at 838 G‑H, 839 C‑D. 26.An order made must be proportionate and just. It could not be undertaken for an ulterior purpose nor be oppressive: Jenington International Inc v Assaubayev. 27.The court has to bear in mind the potential wastage of costs, court time, injustice to the defendant and invasion to his privacy in pre‑judgment cross-examination and that an order for cross-examination is an exceptional step to take: Yau Chiu Wah, at §14(2); Gee on Commercial Injunctions, 6th ed, at §23‑026. APPLICATION OF THE LEGAL PRINCIPLES 28.Mr Barlow SC has made clear that he was not insinuating that Smyth & Co did anything to assist D3 in failing to comply with the Orders. I will not, therefore, deal with the submission in §§10 and 11 of his skeleton submission. I will bear in mind that D3 has been legally represented throughout these proceedings. Purpose of the application 29.It is not appropriate to resolve the various disputed issues, eg whether D3 assisted the Zhangs in fiduciary theft and misappropriation of Shandong Cement, and whether D3 is still working with the Zhangs. These should be resolved at the trial. 30.Yen-6th filed on behalf of the Plaintiffs states that the present application is to explore whether or not D3-1st constituted compliance with the Orders, to demonstrate the falsity of D3-1st, to question D3 about his involvement in assisting the Zhangs in their misappropriation of Shandong Cement. Applying paragraph 25 above, these are not proper purposes for the present application. 31.That said, the court has formed a view of risk of dissipation of assets and loss of documents. It was clear that the purpose of the Orders was to ensure that the Plaintiffs would not be left without remedy after trial. 32.There is a current need for the Listed Items to run the Plaintiffs. The implication of not having them is that the Plaintiffs or its directors may commit criminal offences for contravening:
33.Item (a) applies to all companies registered in Hong Kong. Section 2 of the Companies Ordinance, Cap 622, defines a company as one formed and registered under Cap 622 or a former Companies Ordinance, but does not include a foreign company even if it is registered in Hong Kong: Re Dejin Resources Group Co Ltd [2015] 1 HKLRD 973 per Harris J, at §8 (a case concerning the old section 70 of the Companies Ordinance, Cap 32). Item (a) therefore applies to HK Cement and Pioneer but not GroupCo which was registered in Cayman Islands. 34.Item (b) applies to companies carrying on business in Hong Kong although it does not specify where the records had to be kept. The company secretary, amongst others, is liable for breach of this statutory requirement. 35.As GroupCo’s company secretary and qualified accountant, D3 would not have missed the importance of complying with these statutory provisions. 36.Mr Barlow SC submits that GroupCo’s listing agreement made the retention of the Plaintiffs’ Records in Hong Kong a condition for its listing. Absence of these Records put the interests of shareholders in serious disadvantage. However, the listing agreement was not exhibited and there was no way to verify the truth of this submission. 37.The cross-examination is to ascertain further information to enable the Plaintiff to identify and recover as many of the Listed Items as possible, to acquire information concerning the missing Listed Items, to inquire into D3’s knowledge of the Plaintiffs’ operation so as to assist the new Board to conduct the affairs of the Plaintiffs properly, to conduct the Cayman Islands proceedings properly and if possible to recover as many of the Plaintiffs’ assets now in the hands of D3 or strangers. 38.Having regard to paragraphs 31‑35 and 37, I am satisfied that this application is made for proper purposes. Significant or serious deficiencies in the existing disclosure 39.Because of his former position in GroupCo, D3 was subject to the most extensive disclosure orders amongst the first 5 defendants, because he has the most intimate knowledge of the make-up of the Plaintiffs’ Records and the responsibility to maintain and safeguard them. 40.The items in the Handover Lists formed only a small part of the Listed Items. D3 failed to disclose the other Listed Items and assets of the Plaintiffs and their current whereabouts. What he had disclosed was significantly or seriously deficient for the following reasons. 41.Firstly, there is dispute as to whether or not Li and Yao were employees of GroupCo or Shandong Cement on the date(s) of the Handover. 42.D3 affirmed to the fact, from his own knowledge, that Li was the CFO of GroupCo and Yao was the Head of the Securities Services Department of GroupCo. There was purported proof in the form of 2 appointment documents of Shandong Cement, D3’s letter dated 25 November 2015 to Yao regarding the Handover, the photo showing Li at the GroupCo’s EGM in October 2015 as the CFO, and a newly discovered email chain. D3 also produced the copy name card of Yao. 43.However, D3’s assertion was contradicted by contemporaneous documents relating to mandatory provident fund (“MPF”) of the Plaintiffs. They showed that during 2015, the Plaintiffs only had 5 employees including D3, but not Li and Yao. D3 told the MPF trustee that all employees had concluded their employment during November 2015. GroupCo’s MPF report was signed by D3 himself. It showed D3 and one Tang Boxian to be the only employees. The employer annual statement also showed no MPF contributions for the month of November 2015. HK Cement had no MPF report as it had no employees in 2014 or 2015. Pioneer was not D3’s employer and yet D3 signed the employment and termination report of Pioneer. 44.In fact, as Mainland Chinese residents, Li and Yao could not have worked in Hong Kong without a working visa. 45.The photo and name card hardly bore any weight. 46.These contemporaneous documents thus showed that Li and Yao were not employees of the Plaintiffs at the time of the Handover and D3 knew about it. 47.The dispute as to whose employees Li and Yao were may be a matter for trial. However, it is also relevant to whether or not D3 has handed over the Listed Items and assets to the right persons and if not, whether he still has possession/control or knowledge of the whereabouts of the Listed Items and assets. 48.Secondly, there was no explanation as to why D3 had to give the Handover Items to Li and Yao, in view of the fact that HK Cement and Pioneer are Hong Kong companies and there was a need to observe the requirements under the Companies Ordinance and Inland Revenue Ordinance. Moreover, there was no reason to hand over chops and seals of a Hong Kong listed company to Li and Yao. 49.Mr Zimmern points to the Plaintiffs’ own case that 99% of the business was conducted via Shandong Cement in the Mainland. According to the Group’s interim results of 2015, there was another principal place of business in the Mainland. D3 was at all material times a joint company secretary of GroupCo, living and residing in Hong Kong. Zhang Junior, the other joint company secretary was based and operated in the Mainland. D3 claimed that if the Plaintiffs' Records were not in Hong Kong, they would be kept in the Mainland office. D3 also stated that he was not responsible for carrying out any accounting or finance roles for GroupCo or the Group. 50.I am not satisfied that these facts could explain why D3 did not ensure that the Plaintiffs would not contravene the penal requirements in paragraph 32 above. 51.Thirdly, if, as D3 has deposed, he was not involved in the removal of the Listed Items from the GroupCo Office, it would follow that, by 24/25 November 2015, the Handover Items had already been removed. This raises the question of where D3 had kept the Listed Items before he passed them to Li and Yao, bearing in mind that the Lippo Office was then GroupCo’s only place of business in Hong Kong. 52.Fourthly, there had been 2 instances when D3 failed to disclose email accounts in relation to work. For the first instance, D3 claimed that those were old and redundant email accounts which he had ceased to use in 2011 and August 2015 respectively. He claimed that the non-disclosure was an honest mistake, which has been remedied by provision of hard copies on 29 March 2016. 53.The second instance occurred on 8 August 2016, when Smyth & Co forwarded to W&G (without any explanation) an email chain between D3 (using his Gmail account) and a Mr Jeff Liu of Belden Hiramoto Liu & Co LLP. An explanation only came 2 weeks afterwards, which revealed that D3 first made enquiries for those emails only in about August 2016, which was months beyond service of the Orders. 54.Such staged discovery of emails could not instill confidence in the court in terms of D3’s compliance with the Orders. He might have concealed documents. 55.Fifthly, it appears that D3 still has access to the Plaintiffs’ Records. By way of example, he was able to get a letter from Computershare enclosing a list of the attendees at the October 2015 EGM. This list was not at the Lippo Office or the Jinan Plant and the Plaintiffs never had a copy. Computershare would only provide such lists to officers of a listed company. D3 may still have access to the Plaintiffs’ Records and was apparently able to produce documents should he so wish. Oppressiveness of a cross-examination order 56.Mr Zimmern points out that the Plaintiffs’ own case was that the Plaintiffs’ Records were/are in the possession of the Zhangs. That was why they sued the Mayor and Deputy Mayor of Jinan in HCA 562/2016 (writ issued on 4 March 2016) for unlawfully conspiring with the Zhangs to injure Pioneer and Shandong Cement by, amongst others, unlawfully (a) removing and concealing from Pioneer and Shandong Cement their company seals, chops and litigation records relating to Shandong Cement; and (b) obstructing, hampering and interfering with Pioneer and Shandong Cement’s attempts to gain access and entry to their Jinan Plant. D3 queries whether the Plaintiffs were saying that they have already located the whereabouts of the Plaintiffs’ Records, or was purely founding that action on speculation. 57.D3 also says that the Plaintiffs have, despite requests, failed to explain the steps taken since December 2015 to secure the Plaintiffs’ Records and have failed to offer any explanation of the level of success achieved. It cannot be said that an order for cross-examination serves any useful purpose. 58.Mr Zimmern submits that the present application is highly oppressive to D3 who is a retired ex-employee and has no financial interest in GroupCo or in the ongoing shareholder dispute between the Zhangs and others. It appears that due to his previous position in GroupCo and the Plaintiffs’ apparent difficulties with the Zhangs, D3 has been made an unfortunate and convenient target by the Plaintiffs. 59.I am not satisfied that this application is oppressive in nature. The Zhangs have been totally uncooperative. They have not appeared in proceedings in Hong Kong. They took steps to try and remove assets before trial. The Plaintiffs say that D3 had been assisting the Zhangs. The Plaintiffs could not be blamed for taking steps both in Hong Kong and Jinan to fulfil the purpose in paragraph 37 above. 60.It is true that the Plaintiffs have not taken up the offer to visit D3’s home pursuant to the Anton Pillar order. However, given the nature of an Anton Pillar order, once D3 had been tipped off by his building’s security guard about its execution, there was no point going back another day. CONCLUSION 61.The need for the Listed Items to run the Plaintiffs could not wait till the end of the trial. D3’s disclosure was significantly deficient. There was evidence that he had handed over some Listed Items to Li and Yao who were not employees of the Plaintiffs. D3 could not explain why he did not keep the documents to comply with statutory requirements or to keep the chops and seals of a Hong Kong listed company at the Lippo Office. He ought to explain where he kept the Listed Items before the Handover. The staged disclosure of email accounts might be an indication of his concealment of documents. D3 also appeared to still have access to the Plaintiffs’ documents, such as the list of attendees at an EGM. 62.An order for cross-examination is necessary in the interests of justice. It would involve time and costs but no issue of privacy as the cross-examination is about the Plaintiffs’, not D3’s,records and assets. Even if D3 is unable to state the current whereabouts of the Listed Items, cross-examination would still be useful for him to say what the Listed Items comprised, how they might be reconstituted, what became of them and who (apart from himself) was responsible for keeping them. It would make the Orders more effective. 63.I therefore order that D3 do attend before a judge for cross‑examination on his 3 affirmations. COSTS 64.I make an order nisi that the Plaintiffs shall have the costs of this application with certificates for 2 counsel. The Plaintiffs shall also have costs of the summons dated 29 August 2016 in relation to the filing of D3’s affirmation. 65.There was no urgency or complexity to justify so many fee earners and charging such high hourly rates. There was a lot of repetition in Yen’s affidavit. I summarily assess costs at $450,000. 66.I thank counsel for their assistance.
Mr Barrie Barlow SC, instructed by Wilkinson & Grist, for the 1st, 2nd and 3rd plaintiffs Mr Richard Zimmern, instructed by Smyth & Co, for the 3rd Defendant |
Cases cited in this judgment
Further hearings and rulings under HCA 2880/2015