china Medical Technologies, Inc. (in Liquidation) v. Wu Xiaodong and Others

HCA 3391/2016 & HCA 1417 /2013

[2024] HKCFI 278

HCA 3391/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 3391 OF 2016

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HCA 1417 /2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1417 OF 2013

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(Consolidated by Order of Master Chow dated the 23^rd day of July 2018)

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J U D G M E N T

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Introduction

1.Today’s hearing is principally about the second CMC in this Action.

2.This Judgment is about the summons of 3^rd Defendant Dr Chen Zhong (“Chen / 3^rd Defendant ”) dated 13 October 2023 (“D3’s Summons”) for leave to file and serve his Supplemental Witness Statement (“Chen 2”). Chen’s main witness statement (“Chen 1”) was dated 18 June 2021.

3.By way of procedural background, the Plaintiffs’ CMS was filed on 15 March 2019. The CMS was first heard on 10 May 2019 before this court. At that hearing, directions and timetable about inter alia discovery, exchange of factual witness statements and expert evidence were given. Typically in this case, there were significant failures in adhering to the court’s timetable, one of the reasons being, meanwhile, numerous interlocutory applications had been made by various parties, principally the 2^nd Defendant (“Tsang/2^nd Defendant”), and the applications as well as the leave to appeal applications had to be disposed of by this court and other courts. That contributed significantly to the delay in the progress of the Action.

4.At the present second CMC, among other things, the parties were given leave to set down the Action for trial forthwith before this court, with an estimated length of 30 days. Procedural directions were also given. Since the trial is set down for 30 days, the actual trial date will be quite a while away.

5.As stated earlier, this court has long ago given directions to the parties to inter alia file and exchange their factual witness statements. Chen filed his over 200-page witness statement (inclusive of annexures) dated 18 June 2021 ie Chen 1.

Expert directions

6.By summons dated 20 August 2021, as amended on 14 March 2023 (“Amended Summons”), the Plaintiffs applied for leave to adduce expert evidence at the trial on 3 subjects viz:

a.  The nature of the fluorescent in situ hybridization technology (“FISH”) acquired by the 1^st and the 2^nd Plaintiffs in 2007, to address the questions more particularly specified in Appendix 1 thereof including inter alia the size of the market for this technology and the likely future growth of the technology in the Mainland China (“FISH Issue”).

b.  The nature of the surface plasma resonance technology (“SPR”) acquired by the 1^st and the 2^nd Plaintiffs in 2008, to address the questions more particularly specified in Appendix 2 thereof, which are similar to the questions in Appendix 1 (“SPR Issue”).

c.  The valuation of FISH as at 1 March 2007 and that of SPR as at 4 December 2008 (“Valuation Issue”).

7.The application was opposed only by the 2^nd Defendant viz Tsang. All the other active Defendants including Chen, the 5^th Defendant, the 6^th Defendant and the 13^th Defendant did not oppose the application and their attendance was excused.

8.Originally, the 2^nd Defendant did not seek to adduce expert evidence in this case - he was simply opposing the Plaintiffs’ application to adduce evidence which they considered necessary to prove their case. Mr Lung, counsel for the 2^nd Defendant in reply to a question from the bench, indicated that if this court were to grant the application, his client the 2^nd Defendant intended to adduce expert evidence on the Valuation Issue.

9.By a Judgment dated 11 May 2023 (“11 May 2023 Judgment”) this court gave leave to the Plaintiffs to adduce expert evidence at the trial on the 3 issues in question. Notwithstanding that, none of the active Defendants including Chen indicated any interest in adducing expert evidence on any the 3 issues in reply.

10.In view of Mr Lung’s indication at the hearing, the consequential directions factored in the 2^nd Defendant’s intention to introduce expert evidence on the Valuation Issue. Yet, subsequently, he changed his mind and did not adduce any evidence on the Valuation Issue.

11.The 2^nd Defendant’s application for leave to appeal against the 11 May 2023 Judgment was withdrawn in June 2023. As a result, the Plaintiffs have filed the expert report of Yang Yi Ming (“Yang”) on FISH and SPR technologies dated 23 June 2023 (“Yang Report”) as well as the expert report of Ian Coleman (“Coleman”) on valuation dated 11 August 2023 (“Coleman Report”).

12.The factual background of this Action has been repeated again, again and again in various Judgments of this court as well as the Court of Appeal. It can conveniently be found, for instance, in the 11 May 2023 Judgment. For ease of a brief understanding of the background, this court will quote only a few paragraphs from the 11 May 2023 Judgment at [4] - [13] as follows:

“4. The 1^st Plaintiff was incorporated in the Cayman Islands in July 2004. Its shares were listed on NASDAQ in August 2005 and were delisted in February 2012. It was the holding company of a group whose principal business was said to be developing, manufacturing and marketing advanced surgical and medical equipment in the PRC. The 1^st Plaintiff was grossly insolvent with provable claims of over US$400 million. In July 2012, it was wound up by the Grand Court of the Cayman Islands. On 1 September 2014, Harris J made an ancillary winding up Order against it in HCCW 435 of 2012.

5. The 2^nd Plaintiff is the 1^st Plaintiff’s wholly owned subsidiary.

6. The 3^rd Plaintiffs were appointed as the provisional liquidators of the 1^st Plaintiff by Order of Harris J in November 2012. On 5 February 2015, they became the Liquidators of the 1^st Plaintiff (“Liquidators”).

7. The 1^st Defendant (“Mr Wu”) was at all material times the founder, Chairman, CEO, director and the largest shareholder of the 1^st Plaintiff. From January 2006 to July 2012, he was a director of the 2^nd Plaintiff.

8. The 2^nd Defendant (“Mr Tsang”) was the 1^st Plaintiff’s director from June 2007 to December 2011 as well as its CFO from January 2005 to January 2012. He was also a director of the 2^nd Plaintiff from January 2006 to December 2011. He was the second most senior executive of the 1^st Plaintiff after Mr Wu. Mr Tsang is in contempt of a High Court Order that he should attend Court in person for examination, has absconded from Hong Kong and is subject to an outstanding warrant for his arrest. Mr Tsang is also said to be a fugitive from the United States criminal justice system.

9. The Plaintiffs claim that the former senior management of the 1^st and 2^nd Plaintiffs, assisted by their associates, perpetrated, participated in and/or benefited from the fraudulent misappropriation of US$521.8 million in cash (“Fraud”) through purported acquisitions (“Acquisitions”) from the 7^th Defendant, Supreme Well Investments Limited (“Supreme Well”), and its subsidiaries, of the following alleged medical technologies:

a. FISH, acquired pursuant to a contract dated 6 February 2007 for US$176.8 million; and

b. SPR, acquired pursuant to a contract dated on or around 5 October 2008 for US$345 million.

10. It is the Plaintiffs’ case that:

a. FISH and SPR were worthless (or of no significant value) in that they were not new technologies;

b. Supreme Well, the counter party to the Acquisitions, was in fact controlled by Mr Tsang, who was the sole authorised signatory of its bank accounts with Bank of China (Hong Kong) Limited (“BOC”) and The Bank of East Asia, Limited (“BEA”) into which US$355.5 million of the consideration paid by the 1^st and 2^nd Plaintiffs were deposited. The balance was paid to Supreme Well by other means;

c. Mr Tsang authorised the transfer of funds from Supreme Well to the bank accounts of other persons and entities (“Supreme Well Payees”) all of whom were associated with or controlled by Mr Wu, Mr Tsang and/or their associates; and

d. the Supreme Well Payees subsequently transferred all or some of the funds to the bank accounts of other persons and entities (“Further Supreme Well Payees”), some of whom were associated with or controlled by Mr Wu, Mr Tsang and/or their associates, and thereafter to further recipients.

11. The 1^st Defendant orchestrated, participated and conspired in the Fraud.

12. Mr Tsang acted on both sides of the Acquisitions and directed payment of the consideration received by Supreme Well to the Supreme Well Payees. He received US$7.47 million directly and over US$379 million through entities controlled by him. The Plaintiffs claim US$524.7 million against Mr Tsang:

a. US$521.8 million misappropriated from the 1^st and 2^nd Plaintiffs by reason of, inter alia, his breaches of duty and trust and unlawful conspiracy; and

b. US$2.9 million, being salary and bonuses paid to him from January 2006.

13. Further background information can be found in this court’s Judgment in the present Action dated 21 October 2022 in relation to Mr Tsang’s security for costs application.”

13.By way of further background, in the Amended Statement of Claim, Chen was described at para 42 as follows.

a.  From or about February 2007, he was the Chief Technology Officer of the 2^nd Plaintiff and/or the 1^st Plaintiff’s FISH Technology business.

b.  From 16 November 2007, he was the Chief Technology Officer of the 1^st Plaintiff in respect of all its businesses.

c.  He reported to Wu and/or Tsang viz the 1^st and 2^nd Defendants in each of those capacities.

d.  He purported to be one of the inventors of the FISH and SPR Technologies and was or held himself out to be the Chief Scientific Advisor of one or more of Supreme Well’s subsidiaries.

14.In his Defence at para 32, in answer to para 42 of the Amended Statement of Claim, Chen only accepted that he was employed by the 2^nd Plaintiff and had a duty to report to Wu and Tsang in their capacities as directors of the 2^nd Plaintiff. While he pleaded he was an expert in FISH technology and had been held out to be Chief Scientific Advisor of CytoTrend Group before he joined the 2^nd Plaintiff in May 2007, he denied everything else including having purported to be one of the inventors of the FISH and SPR technologies and was or held himself out to be the Chief Scientific Advisor of one or more of Supreme Well’s subsidiaries.

Deliberation

15.In Mr Lam’s skeleton, he submits the purpose of Chen 2 is not to supplement Chen 1 as such, but to respond to the Yang Report and the Coleman Report adduced by the Plaintiffs following this Court’s Order dated 11 May 2023. He submits it is imperative that Chen be allowed to adduce Chen 2 so that he could properly address the Plaintiffs’ case against him. The Plaintiffs’ primary case against the Defendants, including Chen, is that they perpetrated a fraud on the Plaintiffs by causing them to acquire the FISH and SPR technologies, when they were of no or no significant value.

16.It is disingenuous for Mr Lam to submit that it was only when the Plaintiffs adduced the Yang and Coleman Reports in June and August 2023 that Chen for the very first time learned of the substantive reasons relied upon by the Plaintiffs in support of the averment that the FISH and SPR technologies were of no, or no significant, value or were each grossly overvalued.

17.The Yang Report and the Coleman Report are there to support the Plaintiffs’ case. That case has been the same from the very beginning of this Action. In the original Statement of Claim dated as early as 12 December 2017, the Overview of the Theft was pleaded as follows:

“D.1. Overview of the Theft

66. In the period from at least January 2006 until February 2012, Mr Wu, Mr Tsang, Dr Chen, Mr Zhu and/or Mr Chong Wing Hip orchestrated and/or perpetrated the Theft by which they stole US$521.8 million of the assets of the First and/or Second Plaintiffs through:

66.1 the FISH Transaction, which was presented to the Board and the public as a legitimate arm’s length acquisition of the FISH Technology by the First Plaintiff and its subsidiaries from supposedly independent third parties, Supreme Well and its subsidiaries, for purchase consideration of US$176.8 million; and

66.2 the SPR Transaction, which was presented to the Board and the public as a legitimate arm’s length acquisition of the SPR Technology by the First Plaintiff and its subsidiaries from supposedly independent third parties, Supreme Well and its subsiaries, for purchase consideration of US$345 million.

…

D.2. True Character and Effect of the FISH and SPR Transactions

68. Under the Theft orchestrated and/or perpetrated by Mr Wu, Mr Tsang, Dr Chen, Mr Zhu and/or Mr Chong Wing Hip:

68.1 no assets of any, or any significant, value were in fact acquired and/or retained by the First Plaintiff or its subsidiaries pursuant to the FISH and SPR Transactions; and/or

68.2 any assets of value with respect to the FISH and SPR Technologies were each purchased at gross overvalue.”

18.If Chen had wanted to make serious efforts to defend the value of the FISH and SPR technologies, the first time for him to do so would be in his Defence dated 28 May 2018 and in Chen 1 dated 18 June 2021. To the extent Chen argued that the Plaintiffs’ averment about the (lack of) value of the FISH and SPR technologies was lacking in particulars, he should have sought further and better particulars as and when he received the original Statement of Claim.

19.It should be noted that Chen is a self-declared expert in FISH technology and Mr Lam had referred this court to various paragraphs in Chen 1 to impress this court of Chen’s scientific qualifications and the work and research he had done on FISH technology in 2006, before he joined the 2^nd Plaintiff in 2007. Since Chen had already denied in his Defence that the FISH technology was either valueless, of little value or grossly over-valued, he could well have expanded his view in his Defence or in Chen 1.

20.If Chen believed that adducing expert evidence on the 2 technologies would assist his Defence against the Plaintiffs’ claim, he should also have sought leave to adduce his own expert evidence when the Plaintiffs themselves applied to do so. Yet for reasons best known to himself, he chose not to participate in the Plaintiffs’ application and excused himself from attending the hearing of the application. There was no legitimate reason why Chen had to wait until after the completion of the tortuous process of the Plaintiffs’ application for leave to adduce expert evidence in order to consider how to deal with the Plaintiff’s averment about the lack of value of the FISH and SPR technologies. There is no supporting affirmation to explain his failure to take the various steps suggested above or his inordinate delay.

21.In Mr Manzoni SC’s submissions, he describes Chen 2 as nothing but purported expert evidence given by one who has done nothing to set out what might qualify him to give competent and independent  expert opinion to assist the court in its task of assessing the FISH and SPR technologies or their value. This court agrees. Chen is certainly not an independent witness, given his status as a defendant. Expertise in SPR technology, as this court noted earlier, Chen has refused to admit in his Defence.

22.In Chen 2 at para 3, Chen purported to set out 2 matters:

a.  First, to give a supplemental explanation on the scientific basis on which he decided to enter the FISH industry in 2006 (“Section A”).

b.  Second, to supplement, explain and respond to the Yang and Coleman Reports – in essence, to criticise the two reports (“Sections B to E”).

23.At paras 4 to 16 of Section A, Chen explained why he considered the FISH technology to have had great scientific and commercial value in 2006. In particular, one of the most important scientific bases on which he decided to enter the FISH industry at that time was an article in relation to FISH technology and its application which had high scientific value and proactive analysis. The article was published in 2003 and entitled “Fluorescence in situ hybridization: past, present and future” and was written by two professors viz Jeffrey M. Levsky and Robert H. Singer. It is reasonably clear from Chen 2 that a substantial part of Section A was to explain what Chen had learned from that article.

24.As a general principle, it is not the function of a witness statement to provide a commentary on the documents, to set out quotations from such documents, to engage in matters of argument or to deal with other matters merely because they arise in the course of the trial: Sunni International Ltd v Kao Wai Ho Francis & Ors [2021] HKCFI 2418 at [7].

25.As this court sees it, it is difficult to understand why the fact that Chen said he had come across and been “inspired” by a medical article published in 2003 could assist this court in objectively assessing the FISH and SPR technologies or their value, which should be the remit of independent experts appointed under the mechanism set down in the Rules of the High Court. As stated earlier, Mr Lam claims Chen 2 is not meant to supplement Chen 1 as a factual statement. The assistance of Section A is highly limited, in so far as it purports to help this court in understanding and assessing the FISH and SPR technologies or their value.

26.As far as the other Sections are concerned, Chen purported to criticise principally the Yang Report and to a more limited extent the Coleman Report – he having admitted he was not a professional in the field of commercial valuation. Criticising and commenting on independent expert reports should be part of the process of exchanging expert evidence at trial, in accordance with given expert directions, and should not come in the guise of a supplemental factual witness statement.

27.In his submissions, Mr Lam relies on DHCJ William Wong SC’s decision in MG Charter Ltd v Beijing Caissa International Travel Service Co Ltd [2019] HKCFI 2800 at [4] – [5] for inter alia the propositions that:

a.  A factual witness who possesses professional expertise may proffer opinion evidence provided that such opinion evidence (1) reasonably relates to facts within his or her personal knowledge; and (2) is based on his own experience and expertise.

b.  Opinion evidence proffered by a factual witness with professional expertise should be distinguished from opinion evidence from an objectively independent expert. The weight to be given to it is a matter to be assessed by the trial judge.

28.The propositions are not controversial but Mr Manzoni SC’s reply is that it is not at all clear how the matters set out in Chen 2 as criticisms of the Yang and Coleman Reports are based on his own experience and expertise, as opposed to his review of materials in the case and academic literature. Nor has Chen filed any affirmation evidence in order to explain how Chen 2 fulfils the requisite conditions at para 27a above.

29.As this court may add, nor is the same made clearer in Mr Lam’s skeleton.

30.After citing a few short extracts from Chen 2, Mr Lam made a number of bare assertions to the effect that: (i) a factual witness is permitted to give evidence extending to his professional opinion and technical expertise as to matters within his personal knowledge, in circumstances such as the present case [5]; (ii) Chen clearly possesses the professional expertise in the medical field to provide his opinion in respect of factual matters directly within his personal knowledge, as the person who was actually involved in the development of FISH and SPR technologies at various stages, based on his own experience and expertise [5.3].

31.In Tao, Soh Ngun v HSBC International Trustee Limited [2018] HKCFI 2543 at [5] and [6], Wilson Chan J set out inter alia a number of principles governing late interlocutory applications and in particular late applications for leave to adduce expert evidence. In this court’s view, they are equally apposite to the present case (i) where the delay is totally unexplained and (ii) notwithstanding the fact that the application may not derail a trial date. Otherwise, any party may wait and choose as and when he likes to make a late application with impunity as if the rules of the High Court and directions given by the trial Judge do not count. That is not something that this court can condone.

32.The Rules of the High Court and Court orders are to be complied with strictly, rather than at the discretion of the parties as they please.

33.The principles, which this court finds pertinent to this case, are trite.

34.First, since the Civil Justice Reform, late applications are frowned upon and have a high threshold to pass. They can be dismissed on the basis of delay alone.

35.Second, a late application should be accompanied by a full and frank account for its lateness, as the court would not grant any indulgence (even on terms as to costs) without a satisfactory explanation from the applicant.

36.Third, the basic criteria are that expert evidence has to be admissible and relevant in the sense of being (a) in a recognised discipline; (b) reasonably required to enable the court to resolve the issues in dispute and (c) proportionate.

37.Fourth, the court’s discretion in deciding whether to grant leave to a party to adduce expert evidence is to be exercised within the ambit of its case management powers. Therefore, even if a prima facie case is made out for the admission of expert evidence, the court must also have regard to other relevant circumstances, such as the potential disruption to the trial, the prejudice to the other parties, and the explanation offered by the applicant in cases where a late application is made for expert evidence to be adduced.

38.Fifth, expert directions should be sought as early as possible.

39.Sixth, expert directions should be fully complied with before a case is set down for trial. That is to enable the length of the trial to be fixed with reference to what really needs to be tried in terms of the expert evidence as distilled and identified in the experts’ reports setting out their areas of agreements and disagreements and the reasons therefor.

40.Seven, where a party deliberately withholds an application to adduce expert evidence for strategic reasons or otherwise, the Court may regard such a party as having chosen to take the risk that it would be too late by the time it eventually decides to make the application.

41.D3’s Summons is not in terms to adduce expert evidence in response to the Yang and Coleman Reports but Chen 2’s effect is the same. It cannot be condoned lightly.

42.First, D3’s Summons is hopelessly late and should be dismissed on lateness alone.

43.Second, the application is not accompanied by a frank account of its lateness, let alone a full and frank one.

44.Third, the court’s discretion in deciding whether to grant leave to Chen to adduce expert evidence in the disguise of a factual statement in Chen 2 is to be exercised within the ambit of its case management powers. The lack of an explanation for such a late application is a weighty factor in favour of disallowing Chen 2.

45.Fourth and fifth, expert directions were not sought as early as possible. As far as Chen 2 is concerned, they were not sought at all, given the ample opportunity for Chen to do so.

46.For these reasons, this court is not minded to allow D3’s Summons.

Disposition and costs order

47.In the premises, D3’s Summons is hereby dismissed.

48.The parties have submitted on costs. There shall be an Order that costs of D3’s Summons be to the Plaintiffs, to be taxed on a party and party basis, and paid by the 3^rd Defendant forthwith, Certificate for 1 counsel.

Mr Charles Manzoni, SC, instructed by Mr Jason Karas, Solicitor Advocate of M/s Karas So LLP, for the Plaintiffs

Mr Justin Lam, instructed by M/s Charles Yeung Clement Lam Liu & Yip, for the 3^rd Defendant