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 11 January 2021.
1. Across two hearing days, I heard the following various applications:
Cited by 4 cases · Cites 5 cases
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HCA 2880/2015 [2020] HKCFI 2560 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ACTION NO. 2880 OF 2015 ________________________ BETWEEN
________________________ Before: Hon Coleman J in Chambers (Open to Public) Dates of Hearing: 30 September and 22 October 2020 Date of Decision: 11 January 2021 ________________________ D E C I S I O N ________________________ A. Introduction 1.Across two hearing days, I heard the following various applications:
2.On the Amendment Application and the Mareva Application, the plaintiffs were represented by Counsel, Ms Rachel Lam SC leading Mr David Chen. On the Specific Discovery Application and the Time Application, the plaintiffs were represented by Mr David Chen alone. On all four applications, the defendants were represented by Counsel, Mr Jean-Paul Wou. 3.This is my Decision on the applications. 4.The background to the case and some procedural history can be found in my Judgment [2019] HKCFI 3033 (“Strike Out Judgment”) at §§4-16. I shall not repeat it in this Decision. Unless the context otherwise makes clear, I shall broadly adopt the definitions and abbreviations used in the Strike Out Judgment. B. Amendment Application B.1 The Proposed Amendments 5.The proposed amendments relate to the plaintiffs’ claim (“Qilu Claim”) arising from Shandong Cement’s acquisition (“Qilu Transaction”) of a 30% equity interest in Qilu Property Co Ltd (“Qilu”). In my Strike Out Judgment, I struck out the previous formulation of the Qilu Claim, which was predicated on the Qilu Transaction being “bogus”. I also struck out the relevant paragraphs of the witness statements. In consequence, I reduced the restrained value in the Mareva injunction order, albeit that I stayed the reduction until the hearing of the current applications (and now until their determination). 6.By the summons dated 23 January 2020, the plaintiffs sought to introduce alternative claims regarding the Qilu Transaction, being (1) a claim expressly identifying misapplication, in that the defendants knew or ought to have known that Qilu was valueless or of insignificant value, yet caused Shandong Cement to pay RMB146.88 million under the Qilu Transaction for the benefit of Qilu’s selling shareholders; and (2) an alternative claim in negligence, in that insofar as the defendants did not know that Qilu was valueless, the defendants were negligent in failing to make any or any sufficient enquiries of Qilu’s value before causing Shandong Cement to enter into the Qilu Transaction. 7.Following the issue of that summons, further documentation has been produced (in circumstances I will address below), which the plaintiffs say necessitates alterations to the proposed amendments from the form attached to that summons. Hence, the plaintiffs issued the 28 August 2020 summons with the revised draft proposed amendments attached. 8.Mr Wou was sensibly content to deal with the proposed amendment application by reference to the form of draft amendments attached to the 28 August 2020 summons – though he also made comments about the evolution and various iterations of the proposed claim. Therefore, I allow the amendment of the 23 January 2020 summons and approach the application by reference to the latest draft proposals. 9.I can deal with any relevant costs questions later. 10.Some aspects of the proposed further amendments are not controversial, and I grant leave for them now. They are to be found in the amendments reflecting that part of the pleading struck out by the Strike Out Judgment, and the deletion of certain misappropriation claims relating to (1) Shanshui Heavy Industries Co Ltd; (2) Xinghao Cement Co Ltd; (3) Jinan Changqing Shanshui Micro Finance Co Ltd; (4) Rushan Shanshui Cement Co Ltd; and (5) a PRC judgment debt, together totalling around RMB730 million, which have been settled. 11.The controversial parts of the proposed further amendments to the RASOC for present purposes are as follows, where the underlining identifies the proposed ‘violet’ amendments, and the remainder is already present on the face of the RASOC as previous ‘green’ amendments:
12.As is evident, the plea as now proposed puts forward two causes of action: one in negligence, and the other relating to an alleged misapplication of funds. The draft §15A (in addition to existing §§14 and 15) pleads the alleged duty of care owed by the defendants, and the other elements of the cause of action in negligence are set out in the sub- paragraphs of §44D. For example, §§(1A) to (1E) identify the alleged problems with the underlying relevant documentation (see below), §(1F) pleads the breach, §(1G) pleads the causation, and §(1H) pleads the loss. The claim relating to misapplication is to be found in §(1I). B.2 Applicable Principles 13.The principles applicable to applications to amend pleadings are well-established. 14.The guiding principle on the question of amendment is that, generally speaking, all such amendments ought to be made for the purpose of determining the real questions in controversy between the parties to any proceedings, or of correcting any defect or error in any proceedings. This is consistent with the underlying objectives of the Rules of the High Court, which include that the court should recognise that the primary aim in exercising its powers is to secure the just resolution of disputes in accordance with the substantive rights of the parties. 15.Leave to amend is readily granted before trial, unless it can be shown that the new claim based on the proposed amendment is bound to fail. Whilst the court is entitled to have regard to the merits of the case, it should only do so when the merits are readily apparent, and are so apparent as not to require prolonged investigation. If the proposed amendments are bound to fail, when taking the applicant’s proposed pleaded case to its highest, no leave to amend should be granted. 16.Even late applications for amendment must, absent any real prejudice, be decided upon the general principle that the courts seek to adjudicate on the real issues and disputes between the parties. Where prejudice is claimed, the burden is on the party opposing the amendment to show prejudice. 17.The court’s discretion is, however, limited by Order 20 rule 8(1A), which provides that the court shall not order a pleading to be amended unless it is of the opinion that the order is necessary either for disposing fairly of the cause or matter or for saving costs. The burden of identifying the necessity is on the applicant. It is also trite that the party seeking amendment should plead all necessary averments of his cause of action, and to ensure adequate particularity. B.3 The Plaintiffs’ Claim Now 18.The version of the draft amendments attached to the 23 January 2020 summons referred to Qilu’s audited financial statements for the years ended 31 December 2014 and 31 December 2015 (“2014 Statement” and “2015 Statement”). According to those two Statements, Qilu’s shareholders’ equity at each year end respectively was negative RMB33.6 million and negative RMB82.4 million. So, the plaintiffs said, those Statements supported the case that Qilu was valueless at the time of the Qilu Transaction. 19.As Ms Lam submitted, on the factual premise that Qilu had a negative net equity value at the time of the Qilu Transaction, there were arguable claims that: (1) the defendants knew from the Statements that Qilu was valueless, but nevertheless proceeded to cause significant payment, constituting a misapplication of funds for the benefit of third parties in breach of fiduciary duties owed; and (2) insofar as the defendants were not aware that Qilu was valueless, they were negligent in engaging in the Qilu Transaction without carrying out sufficient due diligence and making sufficient enquiries as to Qilu’s value. 20.However, subsequent disclosure was provided by the plaintiffs of a Financial Due Diligence Report (“DD Report”), and the Asset Valuation Report (“AVR”) of Qilu prepared by Beijing Jinhexin Asset Appraisal Co Ltd (“Qilu Valuer”), and an AVR prepared by the Qilu Valuer of Jina Shenming Property Development Co Ltd (“Shenming”), Shenming being one of subsidiaries of Qilu. These documents were provided in response to a prior specific discovery request made by the defendants, which led to a further search for documents by the plaintiffs. 21.But, later, the defendants themselves also gave further disclosure of the DD Report and eight AVRs (including the two reports on Qilu and Shenming, as well as six other subsidiaries of Qilu). Therefore, the defendants apparently had access to those reports even at the time they made the specific discovery request of the plaintiffs – though I note the defendants’ case is that they obtained the documents from the indirect requests made of the President of Shandong Cement. 22.There has been argument between the parties as to the rights and wrongs of the disclosure process. In effect, both sides accuse the other of deliberate concealment of documents, or at least negligent failure to find and disclose relevant documents. Without further investigation, it seems to me that there is probably scope for criticism of both sides. The ETA specifically references the DD Report and the AVRs, and notwithstanding earlier claims that thorough searches had failed to locate those documents, the plaintiffs were ultimately able to locate them when they looked again. On the other hand, having failed to mention the particular documents when it might otherwise be thought that the defendants logically would have done so, they raised a request fairly late in the day, then without too much difficulty were able to obtain the documents for themselves. 23.However, I do not think that the current amendment application requires any determination of who may have been in the right or wrong in the various discovery processes. The simple fact is that the materials newly disclosed are plainly properly regarded by both the plaintiffs and the defendants as being relevant to the issues in dispute between them. 24.On the basis of the additional materials, which purport to suggest that Qilu was not valueless at the time of the Qilu Transaction, the plaintiffs have sought to “modify” or “refine” their claims having regard to the evidence now available. I have set out above the relevant proposed amendments now put forward as the intended claims arising out of the Qilu Transaction. 25.There is some force in Mr Wou’s submission that the terms “modify” and “refine” used are a “whitewash”, if one compares the two drafts amendments; the latest draft is a new claim founded on negligence in reliance on the DD Reports. But, once it is accepted that the amendment application is to be considered on the basis of the latest draft, it is that draft which falls for consideration (irrespective of its similarities with or differences from any previous draft). 26.In support of the amendment application the plaintiffs have adduced an expert report (“GW Report”) prepared by GW Financial Advisory Services Ltd. The GW Report offers the conclusion that there are fundamental flaws in the DD Report and the AVRs, leading to substantial overvaluation, and hence overpayment of over RMB100 million in the Qilu Transaction. Five suggested fundamental errors or mis-statements resulting in a gross overvaluation of Qilu are put forward in the GW Report. The GW Report says that the calculations and figures in the DD Report and the AVRs are highly unreliable, if not suspicious. Ms Lam submits that their contents at least cannot be taken at face value. 27.Hence, by reference to the principles relating to the duty of care owed by directors – see, for example, Miu Hon Kit v The Stock Exchange of Hong Kong Ltd [2020] HKCFI 675 at §§69-78 – Ms Lam submits that it is highly arguable that the defendants failed to exercise reasonable care, skill and diligence in causing Shandong Cement to enter into the Qilu Transaction. Put another way, Ms Lam submits that the proposed amendments cannot be said to be bound to fail. B.4 The Defendants’ Objections 28.Mr Wou submits that the latest formulation of the claim is still bound to fail, the pleading is fundamentally defective, and the proposed amendments would only serve to waste the court’s time and to escalate costs of the trial. 29.Mr Wou submits that the sum total of the intended pleaded case in negligence is that:
30.So, says Mr Wou, to succeed at trial the plaintiffs would have to establish certain elements to the requisite standard, being:
31.But, says Mr Wou, the simple answer to those elements includes that:
32.Touching briefly on the last point, I do not think I can at this stage simply dismiss the content of the GW Report. I accept that there may be proper criticisms of that content, such as has been made by Mr Wou in his submissions, and that some of the matters in the GW Report may ultimately be demonstrated to be wrong. But the main purpose of the GW Report seems to me to identify that the DD Report and the AVRs at least give rise to some potential questions as to what is stated in them, which might have been the subject of further exploration or investigation. 33.Mr Wou points out that the plaintiffs plead that the defendants owed the same fiduciary duties to the 2nd and 3rd plaintiffs (both Hong Kong companies) and Shandong Cement (being a PRC company), and that the duties alleged (§§15 and 15A) include a “duty to exercise reasonable care, skill and diligence and a duty to exercise independent judgment”, including a duty to “conduct due and proper assessment of any proposed deal, acquisitions or any other deployment and use of the companies’ assets”. But, he says the plaintiffs have unequivocally accepted that Mainland Chinese law is the substantive law governing Shandong Cement’s relationship with the defendants. This is why the Court granted leave to the parties to adduce expert evidence on the question as to what fiduciary duties the defendants owed to Shandong Cement in 2015 under Mainland Chinese law. 34.Although the defendants have filed an expert report, the plaintiffs chose not to file any evidence in response or rebuttal. Therefore, says Mr Wou, on the uncontested evidence the pleaded duties did not exist under Mainland Chinese law; there existed only a duty to exercise reasonable diligence. 35.Looking more closely at the expert evidence filed on behalf the defendants, it seems that the phrase “fiduciary duty” is not found in the provisions of basic Mainland Chinese law relating to companies. According to the Company Law of the PRC, directors and senior executives owe a “duty of diligence” and a “duty of loyalty” to their company. Article 148 of the Company Law specifies what directors and senior executives should not do, such as misappropriating the company’s funds, and other acts inconsistent with the obligation of fidelity to the company. Article 147 of the Company Law contains only general provisions on the “duty of loyalty” and “duty of diligence”. But the Company Law does not specify the meaning of duty of diligence, although the expert opines (at §23 of the expert report) that the duty of diligence means that a director or senior executive, in the performance of his/her responsibilities, “shall have the care of a prudent person and exercise the care of an ordinarily prudent person in the best interests of the company”. 36.That description of the duty seems to me to be rather similar to, or at least overlapping with, the description of the duty of care owed by directors to companies, ordinarily adopted under Hong Kong law. In other words, it may be that the practical effect of the difference between Mainland Chinese law and Hong Kong law is not different, though that will of course depend on the particular facts of any case. The expert’s description of the duty also seems to me to be consistent with the duty pleaded by the plaintiffs in the proposed §15A. 37.Therefore, on the assumption that Mainland Chinese law is to be applied to the relationship between the defendants and Shandong Cement – and I accept Ms Lam’s proposition that that is something which probably ought to be raised in the pleaded defence to the proposed amendments, if they are allowed, so as to raise or remove the issue of the applicable governing substantive law – I do not think it can be said that there has been no proper legal basis which pleads the alleged liability as attaching to the defendants. 38.Further, it seems to me that whether or not the defendants met whatever was the duty that they owed to Shandong Cement is a fact sensitive matter, requiring exploration at and decision after a trial. What a hypothetical director exercising the appropriate duties of diligence and loyalty expected of a prudent person would have done in the present case at least opens the door to enquiries as might have been made of the accountants and the Qilu Valuer on their reports. 39.It also seems to me that there is a significant area of factual evidence which is ripe for exploration at trial. In the evidence filed to meet the amendment application, the defendants seem to assert that (a) there were genuine and lengthy discussions amongst board members about the Qilu Transaction, and (b) they were entitled to rely on the various reports. But, as Ms Lam points out, there are no minutes of any discussions or particularisation of any detail as to what was discussed (though Zhang Jnr suggests in his evidence that minutes of the discussions were prepared, and ought to be in the records kept by Shandong Cement). 40.Of the documents currently available, (a) there is a simple one-page board resolution which merely approves the Qilu Transaction; and (b) there are the DD Report and the ARVs themselves (none of which were mentioned in the Defence filed or in the evidence responding to the original Mareva application and/or the strike out application, despite it being the obvious thing to have raised). There are some WeChat records which show the various reports being transmitted, as were then disclosed by the defendants, but they do not of themselves further evidence any lengthy discussion or other reason of entitlement to have relied on the content of the reports. 41.I do not accept Mr Wou’s submission that the facts he puts forward are “undisputed”, in the sense that there can be no variance in evaluation of them. 42.I also note, without necessarily reading too much into it at this stage, the careful way in which the alleged entitlement to rely on the DD Report and the AVRs was dealt with in Zhang Snr’s evidence. He simply says he has been advised by his solicitors and believes that the then Shandong Cement Board “was (as any other reasonably prudent board would be) entitled to rely on the [DD Report] and the AVRs which were prepared by independent qualified accountants and asset valuers respectively”. First, he does not himself say clearly that the board did in fact rely on the reports. Secondly, there is no statement from any other board member supporting the otherwise bare assertion (and the plaintiffs say the board members would simply act as directed by the defendants). Thirdly, the statement is pregnant with the question as to what a reasonably prudent board would have done to meet whatever were the duties of its individual directors in the circumstances. That question, and whether what was actually done met the required duties, seems to me to be a question for trial. 43.As to Mr Wou’s submission that the alleged obvious flaws (suggested by the plaintiffs) cannot be that obvious if it was necessary for the plaintiffs to obtain an expert valuation from GW, that seems to me to be a forensic point more suitable to trial. Whether something was or was not obvious, or where it might have fallen on the scale of obviousness, are matters not suitable for resolution on an amendment application. Further, as Mr Wou himself points out, the argument as to “obviousness” of the flaws is not the pleaded case. It is simply part of the argument which might arise at trial on the pleaded case. 44.Of course, Mr Wou is correct when he says that a director who has sought professional advice which turns out to be wrong may mean that there was no breach of duty on the director’s part. But I think that whether, in the particular factual circumstances of any individual case, there was or was not a breach will depend upon the analysis of the full factual circumstances. 45.I also disagree with the submission that there is no plea of the extent of the defendant’s duty or the standard of diligence expected, or the relevant factual matrix as regards individual defendants’ roles. The plea in the cause of action is sufficiently identified by the pleading of the necessary elements of duty, breach, causation and loss (see above). 46.Nor do I think it is correct to assume that the pleaded claim is really one of negligence against the accountants or valuer. In any event, the negligence of the accountants and valuer (if proved) does not necessarily negate or absolve the directors from allegations of negligence made against them. 47.In this context, whilst recognising that there may be legitimate criticisms of the approach taken in the GW Report, and it may be right that there has been a comparison between ‘apples and oranges’, I do not think that this application is the occasion on which simply to dismiss the content of that report as being never potentially helpful at trial. 48.Further, the invocation by Mr Wou of the fundamental principle of law that court will not interfere with bona fide management decisions, is something of a ‘red herring’ when the question of bona fides is not settled on the facts, and the pleaded case in any event seeks to raise a claim in negligence. It is not an answer to a claim in negligence to say ‘I honestly thought I was not being negligent’. 49.Therefore, I do not think that either of Elements 1 or 2 lead to a decision not to permit the proposed amendments. 50.As to Elements 4 to 6, I accept Ms Lam’s submission that the way in which Mr Wou puts his submission – including by reference to undisputed facts which are not yet actually accepted – tends to put the cart before the horse. The factual enquiry should come first, before the consideration as to what it was or who it was that “caused” Shandong Cement to enter into the Qilu Transaction and the ETA. 51.As to Element 3, I think there is more force in Mr Wou’s submission that the alternative case that the defendant knew or ought to have known that Qilu was worth much less than RMB659 million is somewhat lacking in particulars of the specific facts, documents or overt acts which the plaintiffs intend to rely on in support of the allegation. I agree that when making an application to amend, particularly a late application, it is no answer to the criticism to suggest that particulars can always be ordered or provided later. It is also correct that it is not the function of particulars to take the place of necessary averments or to fill gaps in order to make good an inherently bad pleading. However, though §44D(1I) does not itself contain any particularisation, I think it has to be read in the context of the preceding sub-paragraphs which essentially identify why it might be argued that the defendants knew or ought to have known as to the overvaluation of Qilu. 52.Of course, whether the misapplication plea really adds anything to the plea negligence is questionable. But I do not think the objection to the plea is sufficient to reach a firm conclusion that the plea is either bound to fail or is plainly unnecessary for permitting the real question in controversy between the parties to be determined. 53.Therefore, I allow the proposed amendments. C. Mareva Application C.1 Applicable Principles 54.It is trite that an applicant for a domestic Mareva injunction must show that: (1) there is a ‘good arguable case’ against the defendants; (2) there are assets within the jurisdiction; (3) the balance of convenience is in favour of the grant; and (4) there is a real risk of dissipation of assets or removal of assets from the jurisdiction, which would render the plaintiffs’ judgment of no effect. 55.The test of a ‘good arguable case’ requires identification of a case which is more than barely capable of serious argument, yet not necessarily one which the judge believes to have a better than 50% chance of success. The threshold is higher than the test of a ‘serious issue to be tried’ relevant to applications for some other forms of interlocutory injunction. In making the assessment as to whether the applicant has or has not demonstrated a ‘good arguable case’, the court should carefully scrutinise the materials placed before it. This is because of the potentially serious detriment which might be suffered by the defendants by the grant of such an injunction. 56.It is also trite that an applicant for a Mareva injunction must comply with the strict duty of full and frank disclosure (albeit that ordinarily that obligation specifically arises in the context of an ex parte application, rather than the rare occasion on which a Mareva injunction is applied for on an inter partes basis). C.2 Analysis 57.In opposing the application, Mr Wou submits that there is no ‘good arguable case’, and that the plaintiffs have not come with ‘clean hands’. As to the first point, he simply asks that the current materials be scrutinised, albeit mainly by reference to his earlier submission that the latest Qilu Claim has been pleaded in a fundamentally defective and unsustainable way. I have already rejected that submission by allowing the proposed amendments. Nevertheless, I still regard it as necessary and appropriate to consider the materials currently available in assessing the merits (to the extent possible at this stage). 58.Looking at the materials, and recognising what seem to me to be the proper areas for further exploration and potentially further material information, I think the plaintiffs just about satisfy demonstrating sufficient merits as constitute a good arguable case. 59.Mr Wou’s ‘clean hands’ submission is based upon the fact that the DD Report and the AVRs (or at least some of them) have been in the plaintiffs’ possession (meaning the possession of the new management) since January 2016 when they took control of the Jinan HQ. Therefore, notwithstanding having the DD Report, the plaintiffs made applications for the worldwide Mareva injunction and its continuation on a false and fictitious case. Thereafter, once the original formulation of the Qilu Claim appeared “shaky” in the face of the strike out application, the plaintiff sought to advance two further versions of a claim, both founded on the “misconception” that Qilu was valueless. In support of those claims, reference was made to the 2014 Statement and the 2015 Statement, which spoke only to book value (not market value). 60.However, Mr Wou submits, through the persistent efforts made by the defendants, they were able to obtain the copies of the DD Report and the AVRs in late May 2020, apparently shortly after those reports had been brought to the attention of the plaintiffs’ management in around April 2020. Despite that fact, at the CMC hearing on 5 May 2020, the plaintiffs chose not to inform the court that the DD Report and AVRs had been located, but applied for a continuation of the temporary stay of the reduction of the restrained sum under the Mareva injunction. They did so notwithstanding knowing that the basis of the originally proposed amendments under the 23 January 2020 summons was unsustainable in light of the newly found documents. 61.Relying on the trite proposition that allegations of fraud and dishonesty should not be lightly made, and even ignoring the original basis upon which the Mareva injunction was granted, Mr Wou submits that the plaintiffs have managed to maintain for many months the maintenance of the temporary stay of the reduction that injunction. The proper course would have been to withdraw the 23 January 2020 summons, leading to the discontinuation of the temporary stay, and at the very least to have informed the court of the location of the documents during the CMC on 5 May 2020, and then to have made a fresh application for a Mareva injunction if and when the plaintiffs were able to put up a good arguable claim. 62.There is force in these points and I accept Mr Wou’s submission that, in the exercise of discretion, I should take these matters into account when seeking to achieve fairness between the parties. I do so. This seems to me to be a part of the overall assessment as to the proper balance of convenience. 63.In that context, I note no real argument has been raised by Mr Wou about the other necessary elements to be established for the grant of Mareva injunctive relief. For the avoidance of doubt, I am satisfied that there are assets within the jurisdiction and that there is a real risk of dissipation. I have had particular regard to the previous findings that the defendants have been in contempt of court by disobeying court orders (even though there are extant appeals). 64.So, turning to the balance of convenience against these various factors, Ms Lam submits that the balance weighs in favour of the grant of Moravia injunctive relief. CSC is a listed company and able to compensate the defendants for any damage that they may suffer as a result of the Mareva injunction, if it ultimately turns out that the injunction is wrongly granted. Further, the Mareva relief operates only against the defendants’ assets in Hong Kong, and they are free to deal with their assets outside Hong Kong. Because of their apparently mainland PRC-centric lives, this is unlikely to give rise to any significant prejudice. 65.At the end of the day, and despite some discomfort about the maintenance of the temporary stay of the reduction of the Mareva injunction ‘ceiling figure’ in the interim period between my decision in the Strike Out Judgment and this decision on the Amendment Application, on balance I am persuaded that it is appropriate to grant the Mareva relief now sought, by increasing the restrained value from HK$24 million. However, on the claim as now put forward, I do not think it is right to put the restrained value simply back to HK$191 million, which was based upon the allegation that there was nil value in Qilu. Rather, in the exercise of my discretion, it seems to me that the increased restrained value should be HK$130 million (for the avoidance of doubt, that figure including the HK$24 million). D. Specific Discovery Application D.1 Preliminary Hadkinson Point 66.It is convenient to deal first with the point made by Mr Chen on behalf of the plaintiffs, that the defendants should not be heard on the Specific Discovery Application, because they remain in contempt of court. (I did, of course, hear the whole argument without prejudice to this preliminary point.) 67.Mr Chen first relies on the clear obligation of every person against whom an order is made by a court of competent jurisdiction to obey it, unless and until that order is discharged: see Hadkinson v Hadkinson [1952] P 285 at 288. The other principle set in the case is that a person in contempt of court would not ordinarily be heard by the court whose order he had disobeyed. However, there are exceptions to the rule. For example, one exception is that a person can apply to purge his contempt, another is that a person can appeal with a view to setting aside the order upon which his alleged contempt is founded. 68.In any event, it is settled that the court retains a discretion whether to hear the person in contempt. In other words, the fact that a party to a cause has disobeyed an order of the court is not of itself an absolute bar to his being heard. To refuse to hear a party, even a contemnor, is a strong thing only to be justified by grave considerations of public policy. Previous cases do not provide any hard and fast rules for the exercise of discretion, though the cases give examples which may serve as guidelines. For the sort of questions that the court might ask, see CWG v MH [2014] 4 HKLRD 141 at §12. The same case (at §16.3) also identifies that a Hadkinson application is of such significance that it should ordinarily not be made without the other party being duly forewarned by way of summons, with enough time for affidavit evidence to be adduced for and against the making of the order. 69.In exercising the discretion, the court will take into account matters such as the gravity of the effect of the contempt, whether it is wilful, and whether there are other means available for securing compliance with the order. If the contemnor’s disobedience is such that, so long as it continues, it impedes the course of justice in that case, making it more difficult for the court to ascertain the truth or to enforce the orders which it may make, then the court may in its discretion refuse to hear that person until the impediment is removed or a good reason shown why it should not be removed. 70.The court considers the proportionality principle in deciding whether or not to bar the contemnor, and what conditions to impose. Essentially, the question seems to me to boil down to whether, in the circumstances of the individual case, the interests of justice are best served by hearing a party in contempt or by refusing to do so. 71.Addressing that question, the individual circumstances of this case seem to me to identify that the interests of justice are best served by hearing the defendants’ application, rather than by refusing to do so. 72.I acknowledge some force in Mr Chen’s submissions that the defendants have been found guilty of six and three charges of contempt respectively, on account of their failure to comply with to injunction orders made in the proceedings, leading to sentences of four and three months of imprisonment respectively. Despite being ordered to do so, the defendants failed to appear personally at the sentencing hearing, and they have ignored the imprisonment orders, without making application for any stay of execution. Mr Chen is also correct in pointing out that the defendants have shown little intention to prosecute their appeal, or at least that there was a significant period of apparent inactivity. 73.On the other hand, as Mr Wou submits, in relation to the matters of contempt it appears that the defendants have a complete answer to one point, and may well have purged other aspects. There is also some force in the point that previous criticisms as to appropriate disclosure do not lie only in one direction. I think it is also correct to place weight on the fact that the defendants are the respondents (hence the designation “defendants”) to the claim made against them, and so the interests of justice point in general to hearing applications which they make which enable them fairly to defend the claim. (For the avoidance of doubt, I do not say that the plaintiffs are not also entitled to make applications to enable them fairly to prosecute the claim. Rather, I focus on the underlying objectives to achieve fairness between the parties on the proper resolution and determination of the real issues in dispute between them.) 74.Further, I do not think this is a case in which the condition suggested by Mr Chen for hearing the defendants is either necessary or appropriate. I shall therefore deal with the Specific Discovery Application on its merits, without the imposition of any prior condition. D.2 Applicable Principles 75.The principles applicable on an application for specific discovery are well-established and can be stated shortly. RHC Order 24 rule 7 permits the court, on the application of one party, to make an order requiring any other party to make an affidavit stating whether any document or class of documents specified is, or has at any time, been in his possession custody or power. If the party previously had it in his possession, custody or power but has since parted with it, he must also state what has become of it. 76.The applicant for specific discovery bears the burden of identifying a prima facie case that: (a) the documents or classes of documents exist which the other party has not disclosed; (b) the documents relate to a matter in issue in the action; and (c) the documents are in the possession, custody or power of the other party. Once those three matters are established, the court has the jurisdiction to decide in its discretion whether or not to order discovery. The court will not make that order unless the discovery sought is necessary either for disposing fairly of the cause or matter or for saving costs. 77.The test for relevance remains the Peruvian Guano test. For the purpose of discovery, the pleadings have to be looked at broadly. On the other hand, “fishing” is not permitted, and discovery should not be oppressive. Further, any order for specific discovery must identify with precision the documents or categories of documents which are required to be disclosed. 78.I also accept that as regards the giving of discovery in general, a party is required to take all reasonable steps and to use best endeavours to discover relevant documents. Those reasonable steps and best endeavours require making a reasonable search for documents. But it is also settled that a person against whom a specific discovery order is made is required to give honest disclosure. Therefore, he must ascertain the facts of his case before making his affirmation, and his affirmation must state what search or enquiry he made before making it. D.3 Time Application 79.The Time Application is made in the context of the application for specific discovery. Taking a pragmatic approach, the defendants do not oppose that summons, though Mr Wou points out that there is little if any explanation or justification for the lateness. 80.I, therefore, allow the application for the extension of time. D.4 Narrowed Scope of the Specific Discovery Application 81.Originally, there were 17 Requests in the schedule to the application. However, in light of the various developments since the application was first pursued, the scope of the application has been narrowed down. 82.Mr Wou points out that:
83.Hence, the application as pursued relates to Requests 1, 3, 4, 5, 6(1) and (2), 7(2) and (3), 8, 9(1) and (3), 10(1), 11, and 17. D.5 The Remaining Requests 84.Mr Wou submits that the various remaining Requests are pursued in the context of various agreed issues, to be found in the Agreed List of Issues in this case. Mr Wou also submits that there are two common themes that can be applied to all of the Requests. First, there is no real dispute as to the relevance of the documents sought (or, at least, there was not until the late evidence filed by the plaintiffs in Chang 7). Secondly, the plaintiffs have written to all former financial and legal advisors on the basis that there are documents which those advisers can produce, so that it is not now open to the plaintiffs to argue against existence or (former) possession. 85.For his part, Mr Chen also makes several general points. First, relying on Chang 7, he says that the plaintiffs have taken all reasonable steps and best endeavours to search for and locate the documents requested by the defendants, having regard to the number of subsidiaries and offices that comprise the CSC Group, the number of documents that are located within each office, and the complexity of the proceedings. Secondly, he points to the requests made of various third parties, only two out of eleven of whom had responded by the time of the argument (with neither providing documents to the plaintiffs). Thirdly, he points out that after further extensive search, the plaintiffs have discovered some of the documents sought and have provided them. So, Mr Chen submits that the plaintiffs have “in substance” confirmed that the outstanding documents are not in their possession, custody or power. 86.As to that point, it may be necessary to set out precisely what is said in §10 of Chang 7 (italics in original):
87.I acknowledge that in some cases achieving absolute certainty may not be possible. Nor do I think the relevant rule requires absolute certainty. What it requires is the search for documents to have been conducted reasonably, but where what is reasonable depends not just on the circumstances but on the high level of obligation to give disclosure of all relevant documents. Hence, depending on the circumstances of the case, it is probably only open to a deponent to state that to the best of his knowledge, information and belief, a certain document is not (or is no longer) in his (or the relevant party’s) possession. 88.The problem for the plaintiffs in this case is that on previous occasions they have stated they simply do not have particular documents, when subsequently it is discovered that they do. One instance relates to the late discovery of the DD Report and AVRs, which I have dealt with in the context of the Amendment Application above. Another instance arose in the context of the trial of HCMP 1574/2016 in September 2017, when the witness for the plaintiffs – Mr Yen – insisted that four particular items had not been recovered since control was taken of the Jinan HQ in January 2016, yet those items “resurfaced” (Mr Wou’s word) after the change of management – including Mr Yen – as was later confirmed in May 2019. That is material for which the Court of Appeal has now granted leave to adduce it in the appeal already mentioned. 89.I also agree with Mr Wou’s submission that, as Mr Chang himself recognises, most of the requested documents are related to the plaintiffs’ previous communications with their former financial and legal advisors, and that the remainder of the documents are much more likely to have been kept centrally in the Jinan HQ, rather than be scattered amongst 108 subsidiaries across the PRC. 90.Further, I am not sure that Mr Chang or anyone else has in fact stated that to the best of his information, knowledge and belief, the plaintiffs do not have possession of, custody of or power over the documents. That is hardly surprising, when at least a number of requests have been made to third parties for the production of documents which may be in the possession of the third parties, but over which the defendants have power, and where it is said that the search for documents is continuing. 91.Against those matters, I can turn to deal with the individual outstanding Requests. 92.Request 1: This is a request for CSC’s Extraordinary General Meeting resolution dated 13 June 2008, as referred to in the Minutes of Meeting of the Remuneration Committee dated 25 March 2011. On the basis that I do not think Chang 7 is conclusive, for the reasons I have already given, I grant this Request. 93.Requests 3 and 4: Request 3 seeks certain letters of engagement of persons in connection with the 2014 Subscription, and Request 4 seeks all notes, records and documents (including emails and correspondence) of discussions with and advice rendered to the plaintiffs’ boards and management in relation to the commercial terms and merits of the 2014 Subscription. I accept that there is a prima facie case on the evidence as to their existence, relevance and possession, custody or power. I do not think Chang 7 is conclusive, and I grant these two Requests 3 and 4. 94.Requests 5 to 7: The Requests relate to the introduction of a new form of change of control clause (“COCC”) in the Group’s 2020 loan notes. The plaintiffs’ cases that the new COCC was introduced in an illicit attempt to entrench Zhang Jnr as CSC’s Chairman. The defendants’ case is that the COCC was included at the request of one of the issuing banks. 95.Request 5 relates to all notes, records and documents (including emails and correspondence) relating to CSC’s negotiations with various banks (“BOCI”, “CS” and “MS”) in respect of the COCC, and in particular the email from CS in November 2014 requesting the inclusion of the COCC in the 2020 loan notes as referred to in Zhang Jnr’s witness statement. Request 6 seeks the opinion letters or advice in respect of the COCC rendered to CSC by two law firms, one (“LW”) on US law and one (“NRF”) on Hong Kong law. Request 7 seeks the latest draft of certain documents as referred to in the written resolution of the CSC board on 27 February 2015. Mr Chen accepts the documents and the Request 7 are likely to exist, but says the same cannot be said for the documents under Requests 5 and 6. He submits that other than the bare assertions by defendants (Zhang Jnr and D3) that the issuing banks requested the insertion of the new COCC, there are no other contemporaneous documents to suggest that the issuing banks made such a request. For example, the board resolution dated 27 February 2015 makes no reference to the new COCC. I tend to agree, in particular with the last point. Though I have previously noted that request letters have been made of the banks (Request 5) and the law firms (Request 6), as though the plaintiffs accepted that such documents existed, the letters really merely pass on the request to the persons who might have (copies of) the documents, if they exist. 96.In the circumstances, where I do not accept that Chang 7 is conclusive, I grant Request 7(2) and (3). But for the reasons I have given, I refuse Requests 5 and 6. Having said that, I think that the answers/responses that might be provided to the request letters sent to the banks and law firms might themselves be relevant, for example if the response was that no such discussions took place, or no correspondence was sent, or no advice was sought or given. So, I would expect any responses received (after any necessary chasing) would be disclosed. 97.Request 8: Request 8 seeks all notes, records and documents (including emails and correspondence) relating to the advice rendered by NRF regarding Tianrui’s requisition in June 2015. This Request is connected to the CSC announcements published between June and September 2015, the plaintiffs’ case being that the announcements were false and misleading whilst the defendants contend that they were factually correct. There is some evidence from someone other than the defendants, here from D3 in his witness statement, that the documents might exist. This seems to me to be slightly different from the previous categories (to which D3 also spoke), and I do not think Mr Chen is correct that the appropriate party against whom discovery should be sought is D3 simply because he asserted the assistance of the legal advice; the advice would not have been provided to D3 personally. In the circumstances, I grant Request 8. 98.Requests 9 and 10: These Requests seek the production of relevant fee notes and other notes, records and documents (including emails and correspondence) relating to the advice rendered by two law firms (“Conyers” and “BJ Junhe”). Other than the general arguments raised by Mr Chen, there is no specific argument raised against these Requests. On the basis that I do not think Chang 7 is conclusive, I grant Requests 9 and 10. 99.Request 11: This Request seeks the letter from the People’s Government of Jinan City to the People’s Government of Taiyuan City dated 8 December 2015, as referred to in CSC’s Announcement dated 22 February 2016. Again on the basis that there is no specific opposition to this Request, I am satisfied that it is appropriate to grant Request 11. 100.Request 17: This Request seeks a list of the following documents (both hard and soft copies) belonging to the plaintiffs that were recovered at the Jinan HQ, being: (1) accounting records; (2) banking records including bank statements; (3) employment records; (4) correspondence with SEHK and SFC; (5) litigation records, including correspondence with lawyers; and (6) Hong Kong data server. The Request is said to arise because the plaintiff’s claim that the defendants (together with other defendants D3 to D5) unlawfully removed those materials from CSC’s office in Hong Kong. Further, Mr Wou submits that in one of witness statements filed for the plaintiffs, there was reference to CSC’s efforts to “organise the books, records and documents recovered” at the Jinan HQ; and in the trial of HCMP 1574/2016 Mr Yen testified that CSC had sent staff to inspect and bring back the documents recovered at the Jinan HQ and that the staff had compiled a list of those documents that were recovered. 101.The Request 17 being a request for a list of the documents, rather than the documents themselves, it is necessary to consider whether there is any evidence which demonstrates prima facie the existence of such a list. In so far as the request might be an attempt to require the plaintiffs to compile such a list, that would plainly fall outside the scope of a specific discovery application. However, I do not think the evidence demonstrates a sufficient case of existence. Having carefully reviewed the material part of the trial transcript, it seems to me that Mr Yen’s answers make references to a list being the list compiled by D3, not a list compiled by the plaintiffs (even if that was intended to have been the thrust of the questions). In the circumstances I refuse Request 17. E. Costs 102.Given the proximity of the trial, and the degree of complexity that arises in relation to costs, it seems to me that it is appropriate to reserve most of the questions of costs arising from this Decision. I acknowledge that such an approach is perhaps more unusual since CJR, but I am also conscious that the costs arise in the context of late changes in case, late evidence, disclosure which may or may not ultimately be made (depending upon the response to the grant of some requests) and whole value remains to be assessed, and the case relating to the claim raised by way of amendment. 103.In those circumstances, other than ordering that the costs of and occasioned by the allowed amendments themselves be costs to the defendants in any event, to be taxed if not agreed, I reserve all other questions of costs to the trial.
Ms Rachel Lam SC and Mr David Chen, instructed by Haldanes, for the plaintiffs (on 30 September 2020) Mr David Chen, instructed by Haldanes, for the plaintiffs (on 22 October 2020) Mr Jean-Paul Wou, instructed by Deacons, for the 1st and 2nd defendants (on both 30 September and 22 October 2020) All other defendants excused from attendance |
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