Elite Consortium Ltd and Others v. Yim Wan Por and Others

HCA 66/2022

[2024] HKCFI 704

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 66 OF 2022

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BETWEEN

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DECISION

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A. Introduction

1.This is Ps’ application for specific discovery.  

2.The underlying case is as follows.  In gist, Ps operate a student recruitment agency business. 

3.D1 and D2 were directors of Ps.  

4.The allegation is that D1 and D2 caused Ps to enter into contracts with a company named Guangzhou Peishen (the Contracts). Purportedly under these Contracts, significant funds were then paid by Ps to D2-D4 (the Payments).

5.Ps allege that Ps’ entering into the Contracts, and the making of the Payments, were arranged by D1/2 in breach of their fiduciary duties owed to Ps. In particular, it is alleged that:-

(a)  D1/2 ultimately beneficially owns and controls Guangzhou Peishen.  It is alleged that D1 was responsible for managing the business structure of Guangzhou Peishen and its finance and administration. 

(b)  D1/2 arranged for the Contracts to be entered into.  They were entered into for improper purposes and were not in the best interests of Ps. 

(c)  D1/2 arranged for the Payments under these Contracts to be made to D2, D3 and D4 - the amounts involved being more than HK$30 million.  These were done in breach of D1/2’s fiduciary duties owed to Ps. 

6.Additional allegations are then made against D3 and D4 for dishonest assistance in receiving, and knowing receipt of, the Payments.  Ps ask this Court to infer that D3 and D4 were dishonest as, inter alia:-

(a)  They were close relatives of D1 and D2. 

(b)  The inference is that they were involved in D1/2’s scheme to hide their involvement in some scheme to misappropriate monies from Ps via the Contracts by receiving the Payments. 

7.Based on all of these, Ps plead the following reliefs:-

(a)  as against D1/2, amongst other things, equitable compensation, unjust enrichment, and/or “an account for or inquiry into all profits, incomes, commissions, payments and/or monies and benefits received by the 1^st and/or 2^nd Defendants as a result of the breaches of Fiduciary Duties committed by the 1^st and 2^nd Defendants” [SoC §43];

(b)  as against D3/4, dishonest assistance, knowing receipt and/or unjust enrichment;

(c)  as against all Defendants:-

(i)  an allegation that “…the Defendants are liable to hold as constructive trustees all sums received (and any traceable property or proceeds thereof)  from the Plaintiffs arising from (i)  the 1^st and 2^nd Defendants’ breach of their Fiduciary Duties; (ii)  knowing receipt and/or dishonest assistance of the 3^rd and/or 4^th Defendants; (iii)  unjust enrichment of the 2^nd to 4^th Defendants.” [Defence §46];

(ii)  based thereon, a declaration that “(i)  the Defendants hold as constructive trustees for such sums or properties as pleaded in [Defence §46]; (ii)  the Plaintiffs are entitled to trace and assert their interests over such sums or properties; (iii)  an order that the Defendants do transfer to the Plaintiffs such sums or properties…”.

8.As to defences, very broadly:-

(a)  Ds are all represented by the same firm. 

(b)  Ds’ case, it seems, is to say that there is nothing wrong with Ps’ Contracts with Guangzhou Peishen and the Payments thereunder.  They say these were proper Contracts at market value. 

(c)  It is also said that D1/2’s relationships with Guangzhou Peishen had all along been disclosed to Ps’ ultimate shareholder, and there is nothing secret about it. 

(d)  As to the fact of receipt of the Payments by D2-4, however, they take a rather curious position – their position is one of “non-admission” [Defence §16]. 

(e)  Further, insofar as the allegations of dishonesty/knowledge made against D3/4 are concerned, D3/4 had not put forward any positive case.  Instead, there is a bare denial [Defence §19].  The Defence to the allegations of dishonesty only refers back to Ds’ main case, ie that the Contracts and the Payments were proper and not secretive.  

B.  Documents and Records related to the receipt of the Payments

9.Moving on to the application proper, it is apt to consider Items 2-5 together, as the crux of such requests concerns the receipt, and current whereabouts, of the Payments.  

(a)  Item 2 concerns the bank statements of D3 from the first date of receipt of the Payments up to present. 

(b)  Item 3 concerns the bank statements of D4 from the first date of receipt of the Payments up to present.  

(c)  Item 4 requests “all records containing references to the Payments by the 1^st Plaintiff to the 2^nd, 3^rd and 4^th Defendants or containing references to the purpose of the payment made by the 1^st Plaintiff (if any)”. 

(d)  Item 5 requests “All records containing references to the subsequent recipients of the Payments (if any)”. Presumably, this means whatever written documents there may be in relation to the onward payment of the “Payments” received. 

B-1.  Tracing as a Basis for Discovery

10.Mr Chow, acting for Ps, very fairly accepted that these items, read together, basically constitute an order for disclosure in aid of what is in effect a tracing exercise and is relevant to such (although there may be other relevancies for certain items, which I deal with separately below).  

11.After reading the papers, I had concerns about whether O 24 is the proper avenue to seek such an Order.  I wrote a letter to the parties and asked for assistance.  

12.Mr Chow appeared to have been unable to locate a case to explicitly support his proposition that tracing is a good basis to seek discovery under O 24.  However, he tried to establish this from principles derived from a number of cases:-  

(a)  He started by submitting that this is a case whereby Ps have a proprietary base and pleaded constructive trust as a relief, with tracing to assist if necessary to identify P’s property (see §‎7(c)  above). 

(b)  He cited Island Records Ltd v Tring International Plc [1996] 1 WLR 1256 and Union Knopf (HK)  Ltd v Marcel Sossnowski (DCCJ 680/2010, 12 Apr 2013), basically for the proposition that the scope of discovery is dependent on what is in issue at the imminent trial – and that, in lieu of a split trial order, the default position is that all matters concerning quantum and relief are in issue at trial. 

(c)  On this basis, he argued that it is for Ps to get all evidence ready for their constructive trust claim at trial – and this includes conducting tracing and showing in whose hands the monies currently are (and presumably, joinder of the necessary defendants who currently have the monies)  – failing which the Court cannot grant the proprietary relief sought: citing this Court’s case in Semgas v Hong Kong Xin Chuang Decorative Material Co Limited [2023] HKDC 1823 at §§40-49. 

(d)  To further support his case, he also cited two other cases whereby the Court had to decide on proprietary claims by determining whether tracing was done properly: Americhip Inc v Zhu Hongling [2021] 4 HKLRD 490 at §§17-19; and ANZ Commodity Trading Pty Ltd v Excellence Raise Overseas Limited [2023] HKCFI 179 at §132. On this basis, he says, the issue of tracing is a live point at trial. 

(e)  In addition, he made a finer point still based on Island Records and Union Knopf - in cases where there are alternative claims in damages and an account for profits, there is a need to elect between them; and a party will be asked to elect in the course of the trial: see in particular Tang Man Sit [1996] 1 AC 514 as referred to in Union Knopf at §16.  This can only be done if there is proper discovery, and thus the issue of election provides yet another basis upon which to ground discovery. 

13.In opposition, Mr Ko argued that:-

(a)  None of the cases relate to discovery for tracing purposes at all. It would be surprising that none could be found, since a claim for constructive trust (and tracing, if necessary)  is not rare.  This tends to show that tracing is not generally speaking a good reason to support discovery. 

(b)  It makes no sense that a plaintiff can, in effect, seek an account and/or tracing before establishing his right to such.  In this regard, I note that, under RHC O 43, r 1(3), it is well established that a summary account should not be ordered if “there is some preliminary issue to be tried”: see also Hong Kong Century Property Development Ltd v Hui Nei Na (HCA 2284/2008, 15 June 2009)  at §88. 

(c)  Mr Ko acknowledged that there is an exception to this – and this is where a proprietary injunction and ancillary disclosure are sought.  Mr Ko however stressed that the purpose of that regime is totally different.  The purpose of that regime is to preserve properties, and once an injunction is granted, it would make sense for disclosure to be granted to aid such by ensuring that such preservation had indeed been achieved. In the present case, such an order was sought, but no injunction was granted – instead, only a partial undertaking was given by some of the defendants to preserve some assets, and no disclosure order was granted in aid.  One cannot get around this by seeking discovery under O 24. 

(d)  As to the election point, Mr Ko complained that this was completely new. He cited to me one case – Prosperfield v Tripole (HCA 5370/1993, 4 Nov 2005)  – as an example of a case whereby the Court first granted judgment, then granted discovery in aid of election between alternative remedies.  It appears that the point he is trying to make is that there is no hard and fast rule for ordering discovery for election prior to trial (or indeed, that election must take place at the end of the trial). 

14.Having heard both parties, I am of the view that the true position is as follows. 

15.It is unfortunate that, despite the industry of eminent counsel, there appears to be no case that discusses the general relationship between tracing and O 24.  One therefore has to fall back on general principles.  In my mind, the analysis is as follows.  

(a)  The starting point is still that the scope of O 24 is to determine the true issues that will be dealt with in the imminent trial.  

(b)  This, in turn, is generally based on the state of the pleadings.  What the issues are depends on how the parties have decided to plead their case (and thus which issues are put in issue).  

(c)  The default position is that all issues (as pleaded)  are to be dealt with in one go: Union Knopf.  

(d)  However, this can be augmented as the situation dictates – the most obvious example of which is a split trial order.  

(i)  Split trial is the general rule in intellectual property cases. In those cases, as per Island Records, with a view to save costs, a practice has developed whereby a split trial order would be granted, ie, the issue of liability and quantum would be separated.  This is because (1)  it is perceived that this would save costs (there is no need to discover materials early); and (ii)  it reduces invasion of confidentiality.  In such a scenario, in effect, the issues of the scope of discovery/split trial are two sides of the same coin. 

(ii)  A similar case where a split trial may be ordered (but less clear cut)  would be cases where partners split up, and there is an allegation that one partner took away the business of the partnership; and an account of the “stolen” profits/equitable compensation is requested. In such cases, there are two issues: (i)  whether or not the partner is entitled to take away the business; and (ii)  what is the value of the business taken away.  Similar issues of costs and confidentiality arise (ie whether one should engage in (ii)  without first dealing with (i)). In such cases, whether or not a split trial order would depend on a multitude of factors, eg, (1)  how ‘clean’ one can demarcate the issues and evidence underlying (i)  and (ii); (2)  whether the scope of the account has to be first resolved before conducting an account etc.

16.How, then, do these principles apply to the present case? In many ways, this is not a particularly unique case – like many other commercial cases, there is an allegation of breach of fiduciary duties and/or fraud, and it is alleged that a proprietary claim arises.  Is the issue of tracing part of the imminent trial (whereby discovery is required), or is the matter deferred to a second trial?  

17.In my view, the answer depends.  There are two main scenarios. 

18.The first scenario is a case whereby the plaintiff has, at the pleading stage, already some evidence to locate his asset, and is seeking a specific declaration that a particular property held by a particular defendant belongs to him, and an order for its return. 

(a)  An example would be the Semgas case.  In such case, the victim of email fraud, by virtue of information provided by the police, became privy to sufficient information to suggest that the monies entered into, and stayed with the 2^nd Defendant in a particular bank account (frozen usually by the JFIU).  The relief sought is thus specific, ie, a declaration that the particular monies standing in a particular account belong to the plaintiff.  In such case, the current whereabouts of the trust property (and what it has become of it)  is a live issue in trial and hence relevant.  If the underlying evidence is incomplete (eg, lack of bank statements), the Court can (and probably should)  grant discovery in aid of tracing so as to complete the evidence chain, such that the issue of whether the defendant held specific property on trust for the plaintiff can be resolved in the imminent trial.  

(b)  Another example would be cases where a proprietary injunction and ancillary disclosure had been granted.  Here, again, the plaintiff may have sufficient information to trace a particular property in the hands of a particular defendant, and seek declarations of ownership in relation thereto.  The evidential chain, however, may again be incomplete for a myriad of reasons.  O24 may be applicable in such scenarios.  

19.The second scenario is where there is a proprietary claim, but the plaintiff knows nothing or very little about the current whereabouts of the property (or indeed, whether it still exists in any traceable form).  

(a)  For example, in cases of misappropriation, the plaintiff may have little to no information save that the property had left its hands at some point and was paid to someone; time may have elapsed; and it may not be worth pursuing an injunction and conducting immediate tracing via injunctions or Bankers Trust orders.  Yet, the plaintiff is technically entitled, and seeks to retain the right, to assert a proprietary claim against the ultimate recipient of the trust property (and/or its traceable proceeds). 

(b)  In such case, a plaintiff would typically put forward the general plea as seen in §‎7(c)  above – instead of seeking a specific declaration of ownership against a specific piece of property, one seeks a declaration that some property (usually defined by description, for example, a particular asset being paid to a particular person on some past occasion), and its traceable proceeds, as being held on trust, coupled with an order for a further account to ascertain the current whereabouts of the property.  In such case, it would seem to me, the plea contemplates a split trial, and would generally leave tracing until after establishing the trust.  

(c)  To put the point differently, what the plaintiff is asking for in the second scenario is a declaration to establish his beneficial interest (sometimes described as the “proprietary base”)  which would then enable him to start his tracing inquiry.  Consequently, the question of what has become of the trust property would not be a live issue at this stage.  Evidence in this respect is therefore irrelevant to the issues in trial (which would concern whether Ps could establish their entitlement to trace).  

20.Of course, each case is unique and the above two scenarios are merely illustrative.  At the end of the day, the Court will have to look at the pleadings and also the facts to see which end of the spectrum the case lies closer to (or indeed, if it is similar to neither and requires its own custom solution).  Indeed, from an early stage and in the case management process, it would be very helpful if parties would be astute enough to think through this issue, rather than fitting boilerplates.  Plaintiffs should think through which scenario they really contemplate; defendants should also think through whether or not a strike-out/split trial application needs to be made. In this particular area, it would be unhelpful to the Court to let the tail wag the dog - it is case management which dictates the scope of discovery, rather than the other way round.  

21.Based on the above analysis, it appears to me that this is not a case where the issue of tracing is live at the imminent trial.  I am therefore not minded to regard discovery as relevant and necessary to this issue. 

22.As to the additional issue of election, I agree that this point is raised on the fly at the last minute and it would be unfair to take such into account.  In any event, however, as per the case cited by Mr Ko (Prosperfield), it would seem to me that it may be too sweeping to say that an election would necessarily have to be made at the end of the trial – there are definitely many examples where this is done after trial.  At the end of the day, when to put a party to elect is within the discretion of the Court, and the availability of information to elect is but one factor to take into account in the broader scheme of case management.  As it stands, and on the facts of this case, I am not convinced that this is an issue that has been raised sufficiently early and clearly to ground discovery. 

B-2.  Other Bases

23.It remains for me to consider whether or not there are other relevancies to the various items of discovery sought. 

24.In this regard, Mr Chow submitted that the bank statements of the recipients D3/4 are clearly relevant, as Ds do not even admit to the fact of receipt by D3/4 – and he should be able to obtain evidence to make good his case and not ask this Court, as Mr Ko seems to suggest, to only rely on the already available cheques and vouchers (which do not show receipt conclusively), and if necessary, adverse inference at trial. 

25.In this respect, I agree with Mr Chow.  Given Ds’ stance, Ps are justified in obtaining the bank statements to prove receipt. Ds could, indeed, have put this out of relevance by admitting receipt.  Ds failed and continues to fail to do so.  It feels rich, in such circumstances, to say that the bank statements are not relevant or necessary.  This justifies discovery of bank statements corresponding to the payments pleaded.  

26.Mr Chow also orally argued that, on the evidence, D3/4 are receiving monies for and on behalf of Guangzhou Peishen despite no explanation being made as to why this is the case.  This supports a case run by his client that D3/4 are being used by D1/2 as nominees [SoC §25].  As Ds had blanketly denied such a case, discovery of D3/4’s bank accounts will help show any such nominee relationship – for example, if monies in D3/4’s bank accounts go back to D1/2 or entities controlled by them in a regular pattern.  The same also shows relevance for Items 4 and 5. 

27.In opposition, Ds made the following main points in relation to Items 4 and 5:-

(a)  Ps are simply unable to show prima facie existence and possession. The fact that Ps deem it necessary to qualify the description of the classes with the words “if any” proves the point that even Ps are not sure about the existence of these classes. 

(b)  Ds also argue that discovery is unnecessary.  For example, for Item 4, Ps talk about documents “containing references” to payments made by P1 to D2-4.  Ds say that Ps already have some documents in the form of cheques and invoices – it is not clear what else they still want.  In any event, any such documents recording the purpose of the Payments would be in P1’s hands, and not D2-4. 

(c)  The descriptions are also very vague – terms such as “containing references” are difficult to pin down and are oppressive.  

28.Having considered the above, my views are as follows. 

29.I accept Mr Chow’s argument on relevance based on these other bases (as opposed to tracing).  However, for Items 2 and 3, such relevance would not justify the scope of disclosure currently sought. In my view it should be cut down as follows:

(a)  Item 2:-

“The bank statements of the 3^rd Defendant evidencing each receipt of the payments as particularized in the Annex to the Statement of Claim filed on 18 January 2022 (the Payments). The bank statements disclosed in relation to each receipt should cover transactions in the relevant account in the 15 days immediately following each such receipt”

(b)  Item 3 –

“The bank statements of the 4^th Defendant evidencing each receipt of the Payments. The bank statements disclosed in relation to each receipt should cover transactions in and out of the relevant account in the 15 days immediately following each such receipt”

30.For Item 4, I accept Mr Chow’s argument on relevance, and I agree that his client has shown prima facie existence and possession.  Given the amounts involved, it is inherently likely that some documentation would exist in relation to these Payments, not only on P1’s part but also on the recipients’ part.  I would allow disclosure under this head.  The wording should however be slightly modified for clarity:- 

“all records containing references to the Payments by the 1^st Plaintiff to the 2^nd, 3^rd and 4^th Defendants, or containing references to the purpose of the Payments”

31.For Item 5, I agree with Mr Ko.  The description is very vague and ill-defined, and can only really be justified had tracing been a legitimate aim at this stage.  I would not allow discovery under this head. 

C.  Correspondence etc. containing instructions and circumstances authorizing D3 and D4 to receive payments (Item 6)

32.Item 6 asks for “the correspondence, authorization letters, and records concerning the instructions and circumstances authorizing the 3^rd and 4^th Defendants to receive the Payments.”

33.Mr Chow argued that:-

(a)  From certain invoices, it appears clear that Guangzhou Peishen has nominated D3 and D4 to receive the Payments. 

(b)  Such nomination by Guangzhou Peishen is inherently likely to generate documents of some sort. 

(c)  Such documents are material to D3 and D4’s reasons for receiving the monies, which for now Ps have no information on. D3 and D4 had not explained why they were entitled to such nomination/Payments.  D3 and D4’s reasons may go to issues of their state of mind, which would be relevant to his client’s proprietary claim, knowing receipt and dishonest assistance. 

34.Mr Ko, on the other hand, argued that:

(a)  Ds contest existence and possession – if there are any such documents, it would be in Guangzhou Peishen’s records – not with Ds. 

(b)  The request is too vague – it does not say correspondence from whom and to whom.  It is also questionable what constitutes ‘circumstances’. 

35.In my view:-

(a)  I agree that the documents have the requisite relevance. 

(b)  I agree with Mr Chow that there is prima facie existence.  It would seem very strange, given the large amounts involved, that there would be no documentation that evidences D3/4’s entitlement, especially in this day and age.  

(c)  I also think that such communications would be in the prima facie possession of D3 and D4 as recipients, and not only with Guangzhou Peishen.  The contrary is to suppose that recipients of significant funds would have no documentation concerning their receipt of such funds, which seems inherently unlikely.  

(d)  The drafting of the request does however appear rather convoluted. It would be better if it could be clarified, say:-

“Any correspondence, authorization letters, and records which relate to the entitlement of the 3^rd and 4^th Defendants to receive the Payments”

D.  All correspondence and communications between D1-D4, and Guangzhou Peishen and its representatives (Item 7)

36.Item 7 concerns “all correspondence and communications between the 1^st, 2^nd, 3^rd and 4^th Defendants and [Guangzhou Peishen] and/or its representative either individually or collectively”. 

37.P submits that:

(a)  These documents exist – this can be shown by the fact that it has already uncovered some documents that fall within this category in relation to D1/2.  D1/2 also admitted that they were involved in the setting up and management of Guangzhou Peishen. 

(b)  These documents are relevant and necessary, as they would assist in showing:-

(i)  who the true owners and controllers of Guangzhou Peishen are, which is in live dispute; and

(ii)  the relationship between D3 and D4 and Guangzhou Peishen, which would shed light on their state of mind and knowledge in relation to their receipt of Payments as nominees of Guangzhou Peishen, which in turn are relevant to the pleas of knowing receipt and dishonest assistance. 

38.Ds’ case is that:-

(a)  Ps are unable to show prima facie existence, especially in relation to D3/4.  It is further alleged that there is no plea that D3 and D4 had any relationship with Guangzhou Peishen – thus the request is fishing. 

(b)  The request is framed too broadly, with no specificity as to the type of correspondence sought. 

(c)  The request is oppressive, as the time period is long, from 2013 to now of “all correspondence and communications”. 

39.In my view:-

(a)  I think prima facie existence can be established, given the known existence of similar documents.  Even for D3/4, given the known facts that at least apparently they received funds for Guangzhou Peishen, some documents are inherently likely to exist. 

(b)  I also agree there is prima facie relevance in relation to D1 and D2.  An issue in dispute is the extent to which D1 and D2 had connections with Guangzhou Peishen.  The correspondence between them and the staff of Guangzhou Peishen would shed light on this issue. 

(c)  It appears that the focus of objection is perhaps regarding D3 and D4’s correspondence with Guangzhou Peishen – it is said that there is no express plea as to the relationship of D3/4 and Guangzhou Peishen (other than the receipt of Payments), so the matter is not in issue. 

(d)  In my view, this is to take too narrow a view of the case.  Ps had pleaded a prima facie case of D3/4’s role, at the very least, as a nominee of D1/2, more generally: see SoC §25(b); and there is no doubt that given the receipt of Payments there is some kind of relationship between D3/4 and Guangzhou Peishen.  In my view, the documents do have relevance, especially when Ds have been so coy about D3/4’s role.  

(e)  As to the framing of the request, I agree that it is on the wide side.  However, this is not the sole responsibility of Ps – it is also partly because Ds had not been upfront about their case as to D3/4’s exact role in the scheme of things. 

(f)  As to oppression, the simple fact is that Ds did not file any evidence to suggest oppression and voluminosity.  In fact, it is notable that Ds also argue there is no prima facie existence – the two points do not sit comfortably together.  However, I do agree that the class can be defined more tightly by giving more focus to what the documents are said to be relevant to, say:- 

“all correspondence and communications between the 1^st, 2^nd, 3^rd and 4^th Defendants on the one hand, and Guangzhou Peishen and/or its representatives on the other hand, in relation to the setting-up, operation and affairs of Guangzhou Peishen”

E.  Conclusion and Costs

40.Based on the above, I make an Order in terms of the Amended Summons, save that the Schedule should be amended as per the changes noted above. 

41.As to costs, in my view, the Plaintiffs are overall the successful party, although they did not succeed on each and every request; and some of the drafting had simply been too wide/vague.  As such, I order that the Defendants do pay 60% of the costs of the Plaintiffs, with certificate for counsel, to be summarily assessed.  For such purposes, I ask that the Plaintiffs provide a bill of costs within 5 days of this decision, and for the Defendants to provide any comments thereon within 3 days thereafter. 

42.I thank Counsel for their assistance.

Val Chow, instructed by Grandall Zimmern Law Firm, for the Plaintiffs

Tony Ko and Michelle Lin, instructed by Ince & Co, for the Defendants