Trophy Gold Investments Ltd v. Modern City Development Ltd and Another

HCMP 2161/2014

[2021] HKCFI 1689

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 2161 OF 2014

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BETWEEN

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DECISION

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1.This is the Petitioner’s application for leave to appeal against the Decision of this court dated 7 January 2021 ([2021] HKCFI 69) by which its Summons for expert accounting evidence and discovery was dismissed. This application is confined to the accounting evidence.

2.I remind myself of the threshold for such leave application: see SMSE v KL [2009] 4 HKLRD 125, §17.  However, it is common ground that the Decision was one of case management and the threshold for an intervention by the appellate court is very high: see Taching Petroleum Co Ltd v Meyer Aluminium Ltd [2020] HKCT 7, §§6-8. 

3.The Petitioner sought to adduce accounting evidence on 5 issues.  They were identified in the Decision as 4 types of Purported Expenses and Provision for Impairment (Decision, §§8-9). 

4.The Petitioner relied (and relies) heavily on one of the first Respondent’s (“R1”) defences that the relevant accounting entries had been audited by PwC.  This court took the view that reliance on the audit by R1 was not sufficient to justify the admission of expert evidence. The court must examine the substance of the dispute (Decision, §12). 

5.It has not been demonstrated why this view was erroneous.  Indeed, Mr Man SC, who appeared with Mr Ho for the Petitioner, did not say that it was.  The trial will not be about the quality of PwC’s audit work.  It will be about the allegations of financial misconduct by R1, and whether they constituted unfairly prejudicial conduct against the Petitioner which may justify the buy-out it seeks under the Petition.

6.Each of the 5 issues was analysed against the pleaded issues.  The court found that the issues of Management Fees and Sales to and Purchases from Subsidiaries (2 of the 4 Purported Expenses) involved largely factual questions and the legitimacy of those transactions (Decision, §12). 

7.The Petitioner says that there is no split trial order and the court should have allowed accounting evidence to assist the court on the appropriate reversal on the accounts if its case on these Expenses is made out at the trial. 

8.With respect, it was a matter of case management whether costs, expenses and time should be spent on such matter prior to the adjudication of the Petition (the court was reminded by Ms Lam, who appeared for R1, that there are a number of other issues raised in the Petition).  It was hardly unusual that such matter would be dealt with in the valuation exercise to be ordered in the event of success by the Petitioner (Decision, §13). 

9.Further, as pointed out by Ms Lam, the parties have not adduced any valuation evidence in this case, and therefore it is unlikely that the trial will deal with the issue of valuation should the Petitioner prevail on liability. 

10.In respect of the Prepayments and Payment to Previous Owners (2 remaining Purported Expenses), the court took the view that, properly understood, the former turned largely on existence and legitimacy of the Prepayments, and the latter on whether the Payment was in fact made (Decision, §§18-19). 

11.Finally, on the Provision of Impairment, the primary issue was a factual one, whether there should be any provision for aged stock (Decision, §22).  The Petitioner’s case was that the Group rarely sold its products below their purchase prices (Decision, §10(1)).  Importantly, the Provision would ultimately have to the reconciled in the accounts when the aged stock was sold or written off (eg, excessive Provision would be written back to decrease the operating loss or increase the operating profit[1]) (Decision, §15).

12.The court’s analysis of the issues in this case is not the subject matter of challenge in the 3 proposed grounds of appeal.  I see no justification for granting leave to appeal in respect of the decision declining to admit accounting evidence on the Purported Expenses. 

13.In respect of the Provision for Impairment, Ms Lam accepted that there was no established percentage for impairment under the accounting standard.  Thus, the court was misinformed (Decision, §23).  Proper reading of the Decision may not justify Mr Man’s characterisation that it was a critical part of the court’s decision.  However, it can be said that one of the reasons of the decision has been falsified. 

14.Does it follow that the court should therefore grant leave to appeal so that this case management decision would be revisited by the Court of Appeal?   

15.Whilst the court had accepted that “the evidence may call for an examination by the court on the appropriate level of provision” [emphasis added] (Decision, §22), this cannot be equated with an acceptance that a case for expert evidence had been made out. 

16.The Petitioner’s submissions (in particular, the suggestion that the court was wrong to refer to the burden of proof) overlooked the evidence which was before and considered by the court.  In R1’s evidence, the methodology and percentages applied for Impairment over aged stock were set out, eg, 30% provision for stock aged 1.5 years[2].  Such evidence was not answered by the Petitioner (both the Petitioner’s deponent, Ms Chan, and that of R1’s, Mr Cheung, were qualified accountant) (Decision, §§16 and 20).

17.Importantly, the Petitioner’s case is a factual challenge that the Provision was unjustified.  Further, any excessive Provision would ultimately have to be reconciled in the accounts.  These were (and remain) critical factors on the decision whether accounting evidence should be allowed.  There is no issue between the parties that the applicable test for admission of expert evidence is “relevance and necessity”: see Taching Petroleum Co Ltd v Meyer Aluminium Ltd [2020] HKCA 1005, §13.  

18.Also importantly, the relevant discovery on which the accounting evidence could be based had not (and has not) been obtained.  This was criticised by the court as placing the cart before the horse (Decision, §26).  The criticism remains valid. 

19.In the premises, I am unable to agree that there is a reasonable prospect of success in the appeal against the decision declining to admit accounting evidence on Provision for Impairment. 

20.Finally, Ms Lam had referred the court to the first instance decision in Taching Petroleum Co Ltd v Meyer Aluminium Ltd [2020] HKCT 7, §7, where the court held that even if the threshold for appealing against a case management decision was made out, the court retained a discretion to refuse leave in the interests of procedural economy and proportionality (citing Wong Kar Gee v Severn Villa Ltd, CA, [2012] 1 HKLRD 887, §§30-31). 

21.With respect, I agree.  This court is troubled by the disproportionality if leave to appeal on this single issue is granted. Mr Man was invited to address the court’s concern that such a course would be against all the underlying objectives enshrined in O 1A, r 1.  Whilst I can see some force in Mr Man’s submission that it would be invidious for the court to decline leave as a matter of perception, it should not be overlooked that case management decision is not set in stone.  Mr Man took no issue with the proposition that where it is justified by the circumstances the court may revisit its management decision.  For instance, where documents are obtained after specific discovery which may justify the admission of accounting evidence, the court may reconsider the issue.  I see no reason why a professional judge would not be able to disregard a matter wrongly taken into account and reconsider a management decision afresh.

22.In any case, I am of the view that it would not be a proper deployment of the scarce resources of the court for the appellate court to be burdened with the management decision when there is little underlying merit in the intended appeal. 

23.For these reasons, I decline this application. There is no issue that costs should follow the event.  I order that the costs of and occasioned by this application be to R1, to be taxed if not agreed.

Mr Bernard Man SC and Mr Martin Ho, instructed by T H Koo & Associates, for the Petitioner

Ms Catrina Lam, instructed by Morgan, Lewis & Bockius, for the 1^st Respondent