Mega Honour Holdings Ltd v. 李森田 and Others
Read the full judgment text of HCA 1131/2015 on BabelCite. This High Court CFI judgment was delivered on 29 March 2018.
1. This is an appeal against the decision of Mr Registrar Lung for dismissing P’s application for specific discovery.
Cites 4 cases
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HCA 1131/2015 [2018] HKCFI 687 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ACTION NO 1131 OF 2015 ________________________
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_____________________ D E C I S I O N _____________________ Introduction 1.This is an appeal against the decision of Mr Registrar Lung for dismissing P’s application for specific discovery. 2.The Registrar has handed down his reasons for dismissing P’s application on 5 December 2017 (“Reasons”). 3.P is a limited company incorporated in Hong Kong and wholly owned and controlled by Mr Wang Yangke, a Mainland Chinese citizen (“Wang”). 4.At all material times D1 was/ is the substantial shareholder, a director and chairman of a Taiwanese company Arima EcoEnergy Technologies Corp/華旭環能股份有限公司 (“Arima EcoEnergy”). 5.Arima EcoEnergy is one of a group of companies in the fields of trading and/or manufacturing products for generating, storing or transmitting energies/powers (collectively “Arima Group”). 6.D2 was at all material times a consultant working in the Arima Group under and/or reporting to D1, and D2 was at all material times also the sole director and shareholder of D3, a limited company incorporated in Hong Kong. 7.D4 is also a limited company incorporated in Hong Kong, and its registered office was/is the same as that of D3. P’s claim 8.P’s claim arose out of an agreement dated 11 November 2011 between P and D2 pursuant to which P agreed to purchase and D2 agreed to sell 100% of his shares in D3 (“New Acme Shares”), with the understanding that P was to end up ultimately holding 5,058,400 shares (or 20% of the entire shareholding) in Arima EcoEnergy (“Target Shares”) through D3 (“Agreement”)[1]. The consideration for the acquisition was USD4,390,000 (“Consideration”). 9.The Consideration was paid by P by two sums (collectively “Sums”) :
10.It is P’s case that the Sums were paid into D3’s bank account pursuant to the terms of the Agreement and that the Sums paid into D3’s bank account were later transferred by D3 to D4 and then by D4 to 3 companies within the Arima Group, which are simply referred to as Arima P&O, Acmesoft and Rioworks (collectively “3 Companies”). 11.It is further P’s case that despite P’s repeated requests and enquiries, D2 had all along failed and/or refused to transfer the New Acme Shares to P. P had accepted D2’s repudiatory breach of the Agreement by a letter dated 27 November 2014 sent by P’s solicitors and P demanded repayment of the Sums. 12.Further, P claims it is entitled to restitution of the Sums on the basis that the Sums had been received by Ds and/or there was unjust enrichment, there being total failure of consideration and/or failure of consideration and/or mistake. 13.P also alleged that there had been certain representations made by D1, D2 and D3 (“Representations”), upon reliance of which P had entered into the Agreement, and that the Representations were made dishonestly and fraudulently, and that Ds held the Sums as constructive trustees for P and P is entitled to trace and recover the Sums. P’s amended statement of claim has now also included a claim based on quistclose trust and that P is entitled to claim repayment and/or account of the Sums, equitable compensation as well as tracing, and an account and/or enquiry in respect of the Sums. Ds’ defence and counterclaim 14.Ds’ case is that in about 2011 a Mainland company called 山西南燁集團有限公司 (“Nan Ye Group”), of which a Li Jian-ming (“JM Li”) was/is the Chairmen, was interested in investing in Arima EcoEnergy. However, at the time, there were restrictions in Taiwan which prohibited Mainland investors from directly investing in power and energy equipment manufacturers in Taiwan such as Arima EcoEnergy. 15.In view of the Taiwanese restrictions, an investment structure was set up, under which the Nan Ye Group would indirectly acquire the Target Shares through P acquiring the New Acme Shares, and that the Agreement formed part of this investment structure. 16.However, due to P’s/Nan Ye Group’s/JM Li’s refusal to cooperate and to produce the necessary notarized documents as required by the Taiwan authority for the transfer of the New Acme Shares, D2 was unable to complete the transfer, and that Ds remain ready and willing to effect transfer of the New Acme Shares to P. Ds counterclaim for seek specific performance of the Agreement. P’s application for specific discovery 17.P issued its summons for discovery on 6 June 2017 (“Discovery Summons”), some 10 months ago. 18.There were 5 classes of documents sought by P, and briefly they were as follows:
19.Ds have filed their 1st list of documents on 6 April 2016 (“1st List”). After the Discovery Summons was issued, Ds filed two further supplemental lists of documents, one filed on 8 June 2016 (“2nd List”) and one on 31 August 2017 (“3rd List”). Parties have also since filed their respective listing questionnaires. The Legal principles 20.It is trite that an appeal from the master to the judge in chambers is dealt with by way of 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[2]. 21.There was also no dispute on the legal principles in relation to specific discovery. The burden is on P to establish that the documents sought are relevant to the pleaded issues in dispute, that Ds are in possession, custody or power of those documents and the discovery is necessary either for disposing fairly of the cause or matter or for saving costs. The issues 22.According to P’s listing questionnaire, the main issues to be tried include the following:
23.According to D’s listing questionnaire, the main issues to be tried include the following:
24.The Representations pleaded by P are in essence: (i) although under the laws of Taiwan, it was impermissible for Mainland investors to hold interests in Taiwanese companies involved in the manufacture of equipment in connection with solar electric system, P could still acquire the Target Shares indirectly through layers of Hong Kong companies; (ii) D3 was indirectly holding the Target Shares and therefore by acquiring 100% of D3, P would be indirectly holding the Target Shares and become an ultimate shareholder of Arima EcoEnergy. 25.The Class A, B, C, E Documents in the Discovery Summons are in relation to two periods, from 2011 to 2012 (save for the Class A Documents, 2011 to 2013) and from 2012 (or 2013 for Class A Documents) up to the date of the Discovery Summons. 26.So far as can be seen, the time for payment of the Consideration and completion provided in the Agreement were as follows:
27.However, the Consideration was not fully paid until 20 March 2012. It appears from the 1st List, there were numerous email communications between the two sides, among which only some has been placed before this Court. Anyway, it would appear from the 1st List that relevant emails between the two sides in relation to the transfer of the New Acme Shares/Targe Shares would range from about 26 December 2011 until 4 November 2013. 28.For present purposes, it would appear that the documents are said to be relevant in relation to broadly 3 areas:
29.At the end of the hearing, the parties’ main dispute concerned the Class A Documents. P also decided not to pursue the Class C and D Documents. 30.I will first consider the Class B and Class E Documents. 31.Counsel Mr Alan Kwong and Mr Joseph Wong appeared for P and Counsel Mr Samuel Wong appeared for Ds. Class B Documents 32.These are submitted by Mr Kwong to be relevant to the Chain of Ownership Issue. 33.First of all, P, D3, and D4 are all companies incorporated in Hong Kong. 34.From the documents disclosed by P, as well as Ds, P was incorporated on 7 July 2011 and it would appear that Wang acquired the company and became its sole shareholder on 12 October 2011[5]. 35.As for D3 and D4, it would appear neither side had disclosed any incorporation/acquisition documents in their respective lists of documents, but these should all be available from the Companies Registry. 36.In Ds’ 1st List, Ds had disclosed, amongst other things:
37.Then in Ds’ 3rd List that they disclosed a copy of a declaration of trust between RK Nominees Limited (Trustee) and D3 (beneficiary) (“Declaration of Trust”). 38.Since a copy of this Declaration of Trust has not been produced to the Court, the contents of this document are unknown to this Court. Although this document was disclosed by Ds at end of August 2017, and P’s solicitors should have had ample time to inspect and/or obtain a copy and yet, it would appear that Mr Kwong was not quite clear about the contents of this document either. 39.In any event, at the hearing, Ds’ Counsel Mr Wong informed the Court that Ds would be prepared to provide copies of the share certificates showing that the Target Shares were registered in the name of D4, after the execution of the 3 Stock Purchase Agreements. Mr Wong also informed this Court that the Declaration of Trust would show that RK Nominees Limited were holding the shares in D4 in trust for D3 (beneficiary) at the time of the Agreement. 40.To allay P’s concerns over the Chain of Ownership Issue, Mr Wong indicated to this Court that Ds would be willing to provide:
41.Mr Kwong indicated that if Ds could provide the register of shareholders and the above ownership documents in relation to the Target Shares, P would not press for the Class B Documents. 42.As Ds are counterclaiming that the Agreement has not been validly terminated and further seeks specific performance thereof, in my view, Ds should also confirm that there has been no change in the ownership of the Target Shares since the date of the Agreement todate. Class E Documents 43.Mr Wong informed the Court that the Memorandum & Articles of Association (“M&A”) of Arima EcoEnergy have been amended so that the “Business Items” would not fall within the restrictions imposed by the Taiwanese law on foreign/Mainland investors, in order for the acquisition of the Target Shares by Nan Ye Group through P to take place. 44.Again to allay P’s concerns, Ds are willing to provide a copy of the amended M&A and if necessary to provide confirmation that the Business Items as contained in the amended M&A have not been changed since the amendment todate. 45.Mr Kwong indicated that the provision of the amended M&A and the confirmation would be sufficient for P’s purpose for the time being, and upon this, P would not pursue Class E Documents. Class A Documents - Financial Situation Issue 46.Under Class A, P sought the audited financial statements of D3 and Arima EcoEnergy for (i) from 2011 to 2013 (“1st Period”) and (ii) from 2014 up to date (“2nd Period”). 47.In P’s skeleton submissions, Mr Kwong argued that the Class A documents for the 1st Period are directly relevant to the issues (a) whether the Representations (if made) were false in that D3 had never held any shares in Arima EcoEnergy; and (b) whether there was a breach of an implied term in the Agreement that D2 had warranted that D3 should ultimately own and control the shareholding in Arima EcoEnergy. 48.As for the 2nd Period, namely from 2014 todate, Mr Kwong argued that the audited accounts would show (i) whether Arima EcoEnergy is still carrying on business as an on-going concern; and (ii) whether Ds have caused D3/Arima EcoEnergy adverse financial consequences, and that these matters are relevant to the Court’s exercise of discretion in considering whether the specific performance sought by Ds should be granted. 49.So far as the 1st Period is concerned, as mentioned earlier, Ds have now agreed to provide (i) relevant share certificates of the Target Shares to show when they were acquired by D4 and/or registered in the name of D4; (ii) relevant documents to show that D4’s entire shareholding was held by RK Nominees Limited in trust for D3 and (iii) the register of shareholders in relation to the Target Shares. 50.As I have indicated earlier, there should be a confirmation or evidence that there has not been any change from date of Agreement todate. 51.The audited financial statements of D3 and Arima EcoEnergy would not be relevant to the Chain of Ownership Issue. In any event, so far as the audited financial statements of Hong Kong companies are concerned, the names of owners/shareholders would not normally appear on the audited financial statements. 52.I note that under clause 5.2 of the Agreement, the vendor/D2 warranted that prior to the transfer of the New Acme Shares, the New Acme Shares were not subject to any charges/mortgages and further under clause 5.3 of the Agreement, the vendor/D2 warranted that prior to the transfer of the New Acme Shares, D3 had no other liabilities. 53.Although the above warranties are only in relation to the New Acme Shares and D3, it is not really disputed that the intention under the Agreement was for P (or on Ds’ case, the Nan Ye Group/JM Li represented by P/Wang) to acquire ultimately the Target Shares through acquiring the New Acme Shares. This is also clear from the “Introduction” of the Agreement. 54.However, it was not specifically pleaded by P that Ds were in breach of the above warranties in the Agreement. 55.What was pleaded by P is that wrongfully and in flagrant breach of the Agreement, D2 had, amongst other things, failed and/or refused to show that no adverse changes were caused to Arima EcoEnergy’s business and operation[10]. Ds had on the other hand had averred that P had not asked whether there were adverse changes to Arima EcoEnergy’s business and operations[11]. P then responded in its amended reply and defence to counterclaim, that Wang had repeatedly raised enquiry with D2 as well as staff working for D1 in the Arima Group about accounts , financial information, corporate information and/or operation status of Arima EcoEnergy, as well as D3 and D4 but despite the enquiry, Wang and/or P was not provided with any information[12]. P further averred that after the Completion Date, D2 still wrongfully, continuously and repeatedly failed and/or refused to, amongst other things, perform the Agreement by, amongst others, showing that there was no adverse changes to the business and operation of Arima EcoEnergy. 56.It was however not clear whether P had obtained any financial information from D2 in relation to Arima EcoEnergy prior to entering into the Agreement, nor was it clear from P’s pleadings as to over what period P was referring to “adverse changes”, namely from when to when. 57.Anyway, Ds have voluntarily disclosed the balance sheet of Arima EcoEnergy as at 30 September 2011 in their 1st List and also the profit and loss accounts of Arima EcoEnergy for one month, from 1 September to 30 September 2011. The profit and lost accounts appeared to show that for the month of September 2011, the net loss was some NTD 2.9m and the accumulated net losses some NTD 47.7m. The balance sheet appeared to show a negative value for the net shareholders’ equity of about NTD 46m. 58.By disclosing the above, it would appear that Ds have taken the view that the above financial statements of Arima EcoEnergy would be relevant or related to a matter in question between them and P in the present action. 59.However, as pointed out by Mr Wong, which this Court accepts, the financial statements of D3 and/or Arima EcoEnergy would not be relevant to the Chain of Ownership Issue, namely whether the Representations were false and/or whether there was any breach of an implied term that D2 warranted that D3 would ultimately own and control the Target Shares, as pleaded by P. 60.At this stage, P has not provided any other reason for seeking the financial statements for the 1st Period. Thus, I am of the view that P’s application for the Class A Documents for the 1st Period must fail. 61.As for the 2nd Period, Mr Kwong submitted that the documents are relevant to the court’s exercise of discretion in considering whether specific performance of the Agreement should be ordered in case the court finds in favour of Ds in this action. 62.Specific performance is a discretionary remedy and equity will not grant specific performance if it would be futile to do so and Mr Kwong had referred this Court to Goal Upward Investment Ltd v Osmand Mohammed Arab & Anor [2016] 5 HKLRD 158[13]. In his judgment, DHCJ Cooney SC had referred to a passage in Snell’s Equity, 33rd Ed 2015:
63.In the Goal Upward case, it was held, amongst other things, that although the purported notice of termination given by the defendants was too short and null and void, it was open to the defendants to issue a fresh termination notice, which would thus render any order for specific performance nugatory. 64.As pointed out by Mr Registrar Lung in his Reasons, the circumstances of the present case are different from those in the Goal Upward case. 65.However, as pointed out by the author of Snell’s Equity, the court is entitled to have regard to the practical consequences of granting or refusing an order for specific performance[15]. This passage was not referred to Mr Registrar Lung by the parties. 66.Mr Kwong has referred to a very recent decision, after the Reasons were handed down, Thiess Mongolia LLC v Mongolia Energy Corporation Ltd HCA 31 & 34 of 2016, 4/12/17 where DHCJ Kent Yee, citing Pacific Link Communications Ltd v Wong Man Him Melvyn [1996] 1 HKC 474[16], stated[17]:-
67.DHCJ Kent Yee went on to state[18]:-
68.Mr Kwong further referred to Tullett Prebon (Hong Kong) Ltd v Chan Yeung Fong Nick & Ors HCA 2197/2009 (09.06.11) where To J had said:
69.Ds have only disclosed financial statements as at 30 September 2011, prior to the Completion Date (31 December 2011) but the Consideration was not fully paid by P until 20 March 2012, and it was P’s case that by its solicitors’ letter dated 27 November 2014 that P accepted D2’s repudiatory breach of the Agreement. In any event, there has now been a lapse of over 6 years since Ds’ September 2011 financial statements. 70.Having considered this, I have come to the view that P has satisfied this Court there is a prima facie case for relevance and/or the discovery is necessary for disposing fairly of the matter or for saving costs, in that whether Arimo EcoEnergy is still an on-going concern and the present financial situation of D3 and Arima EcoEnergy may be practical consequences the court will take into consideration in exercising its discretion as to whether to order specific performance in the event of Ds being successful in this action. 71.There was no evidence that the audited financial statements of D3 and ArimaEcoEnergy are not in the possession custody or power of Ds. 72.I am therefore prepared to order that Ds do produce the latest available audited financial statements and accounts of D3 and Arima EcoEnergy. Conclusion 73.Having regard to the above, I will allow P’s appeal to the extent as indicated and upon Ds agreeing to provide those documents as stated earlier. 74.I will allow Ds to provide the documents within 28 days from the date of this order, unless otherwise agreed by the parties. 75.The parties are to submit an agreed draft order for approval. 76.So far as costs are concerned, on an overall basis P has only succeeded to a limited extent. I order P to pay 90% of Ds’ costs, to be summarily assessed and paid within 21 days from the date of assessment. Ds to provide their statement of costs within 14 days and P its list of objections within 7 days thereafter. This is an order nisi, which shall become final after 21 days.
Mr Alan Kwong and Mr Joseph Wong, instructed by Zhong Lun Law Firm, for the plaintiff Mr Samuel Wong, instructed by Sit Fung Kwong & Shum for the 1st to 4th defendants [1] B2:87-90 [2] Para 58/1/2 Hong Kong Civil Procedure 2018, Vol 1, pg 1118 [3] As defined in Ds’ listing questionnaire [4] As defined in Ds’ listing questionnaire [5] B2:41, see also descriptions of items 27, 28 of the 1st List [6] B2: 40 [7] B2: 42 [8] B2:43 [9] B2:72-86 [10] See para 18, B1:6 [11] Para 26, B1:53 [12] See para 19(1) and (2), B1:88 [13] See para 37, Goal Upward Investment Ltd v Osmand Mohammed Arab & Anor [2016] 5 HKLRD 158, and also Snell’s Equity, 33rd Ed 2015, para 17-020 [14] At para 17-020 [15] At pg 439, para 17-007 [16] At A-B, pg 479, per Power VP [17] At para 21 [18] At para 22 | ||||||||||||||||||||||||||||
Cases cited in this judgment
Further hearings and rulings under HCA 1131/2015