App International Trading (V) Ltd v. App (Hong Kong) Ltd

HCA 3915/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 3915 OF 2003

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BETWEEN

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AND

HCMP 2420/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 2420 OF 2004

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Before: Hon Kwan J in Chambers

Date of Hearing: 3 December 2004

Date of Decision: 3 December 2004

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D E C I S I O N

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1.There are two applications for discovery in separate proceedings.  They have been ordered to be heard together.  The applications are made in somewhat unusual circumstances. 

2.The summons in HCA No. 3915 of 2003 (“the High Court Action”) is made under Order 24 rules 10, 11, 11A and the inherent jurisdiction of the court.  The High Court Action is a claim brought by APP International Trading (V) Limited (“APPIT (V)”) against APP (Hong Kong) Limited (“APP (Hong Kong)”).  The claim against APP (Hong Kong) is as a constructive trustee, for knowing and dishonest assistance in breach of fiduciary duty and or breaches of trust of Asia Pulp and Paper Company Limited.  It is claimed that APP (Hong Kong) is liable to account to APPIT (V) in the region of US$24 million.

3.The summons in HCMP No. 2420 of 2004 (“the Miscellaneous Proceedings”) is made under Order 24 rules 3, 7, 10, 11 and 11A.  The Miscellaneous Proceedings is a petition brought by APP (Hong Kong) for sanction of a scheme of arrangement with its creditors under section 166 of the Companies Ordinance, Cap. 32.

4.It would be convenient first to set out the relevant events in both proceedings in chronological order.

5.On 8 October 2003, a creditor’s petition was presented by American Home Assurance Company (“AHAC”) to wind up APP (Hong Kong).  This is HCCW No 1130 of 2003. 

6.On 22 October 2003, the writ in the High Court Action was issued.  The statement of claim was filed on 5 February 2004.  A defence has not been filed by APP (Hong Kong) for the reason that I shall come to.

7.On 16 February 2004, APP (Hong Kong) issued an originating summons seeking leave of the court to convene a meeting of creditors to consider and approve its proposed scheme of arrangement.

8.The winding-up petition was heard on 30 March 2004.  On 5 May 2004, I gave judgment adjourning the winding-up petition for 3 months for APP (Hong Kong) to take necessary action to progress with a proposed scheme of arrangement with its creditors.  The winding-up petition has been further adjourned.

9.After several extensions of time were obtained by APP (Hong Kong) to file a defence in the High Court Action, it issued a summons on 12 May 2004 under section 181 of Cap 32 that the High Court Action be stayed pending determination of the winding-up proceedings.  On 14 May 2004, the Registrar ordered the summons for a stay to be adjourned for argument and he granted an interim stay of the High Court Action pending determination of the stay application.  He also gave directions despite the interim stay for evidence to be filed by the parties in opposition and in reply in respect of the stay application.  APPIT (V) filed evidence in opposition on 18 June 2004 and APP (Hong Kong) filed evidence in reply on 25 August 2004. 

10.The stay application which was to be heard by me was twice adjourned by consent.  By the second consent order on 27 August 2004, it was ordered that the hearing date on 2 September 2004 be vacated and the interim stay granted by the Registrar to continue pending the determination or dismissal of the stay application.  Further, the parties were given liberty to restore the stay application upon 7 days’ notice.  The stay application has not been restored.

11.In the meantime, on 20 July 2004, APP (Hong Kong) obtained an order to convene a meeting of creditors to consider its proposed scheme.  The meeting was held on 1 September 2004.  APPIT (V) lodged a claim for US$24 million odd being the full amount of its claim in the High Court Action.  However, it was not entitled to vote at the meeting as its claim was rejected in full for the purpose of voting by the chairman.  The scheme of arrangement was voted in favour by a majority of creditors.

12.On 21 September 2004, APP (Hong Kong) presented its petition in the Miscellaneous Proceedings seeking sanction of the scheme.  At the directions hearing before me on 2 November 2004, I gave directions for the opposing creditors, AHAC and APPIT (V) to file evidence in opposition and for APP (Hong Kong) and any supporting creditor to file evidence in reply.

13.On 15 October 2004, APPIT (V) issued the summons for discovery in the High Court Action and on 21 October 2004, it issued the summons for discovery in the Miscellaneous Proceedings.  These are the summonses I am concerned with today. 

14.I turn to consider the summons in the High Court Action as the summons issued first in time.  In this summons, APPIT (V) seeks an order to lift the interim stay for the limited purpose of making the present application under Order 24 and the performance of all orders made upon it.  It also seeks an order that APP (Hong Kong) do provide copies of its accounts and records which show that the amount of the invoices listed in paragraph 25 of the statement of claim has been paid by APP (Hong Kong) to the sum of US$24,284,513.05 and an order for production for inspection of the original accounts and records, on the basis that such accounts and records were referred to in the affirmation filed by APP (Hong Kong) on 25 August 2004.  This is the affirmation filed in reply in the stay application pursuant to the order of the Registrar on 14 May 2004. 

15.I would like first to deal with the point raised by APP (Hong Kong) that the summons should be dismissed because no valid notice has been served under Order 24 rule 10(1).  The argument runs like this.

16.By a letter of the solicitors for APPIT (V) dated 26 August 2004, notice was served on APP (Hong Kong) for production and inspection of the documents referred to in the reply affirmation of APP (Hong Kong).

17.APP (Hong Kong) contended that as the interim stay was and is in place at all times, the notice by letter served purportedly under Order 24 rule 10(1) was irregular, and as the exercise of jurisdiction under this provision is conditional upon valid service of the notice of production, this application must be dismissed.

18.It seems to me that the interim stay is not a stay of the High Court Action for all purposes, as when the Registrar imposed the interim stay, he also gave directions on the filing of evidence in the substantive stay application.  It must be implicit in his order that the interim stay would not have applied to steps taken in the substantive stay application.  The interim stay clearly did not apply to the reply affirmation served by APP (Hong Kong) pursuant to the Registrar’s order.  Similarly, it would not have applied to a notice served under Order 24 rule 10 in respect of that reply affirmation. 

19.Provided I am satisfied of the merits to order discovery, I see no jurisdictional obstacle to order the interim stay to be lifted as sought in paragraph 1 of the summons.

20.APP (Hong Kong) contended that discovery should not be ordered as the documents sought are not relevant, whether to the substantive stay application or to any point in dispute in the High Court Action.  It was submitted that the discovery was sought for an ulterior purpose, to assist APPIT (V) in matters relating to the proposed scheme of arrangement. 

21.I am inclined to agree with APPIT (V) that it has not been shown that the documents sought are irrelevant to the substantive stay application, bearing in mind that they were referred to specifically in the reply affirmation filed by APP (Hong Kong) in that application. 

22.As for the contention that these documents are not relevant to any point in dispute in the High Court Action, I do not agree with that either.  It is alleged by APPIT (V) in the statement of claim that US$24 million was not paid to its designated account but to an unauthorised account by APP (Hong Kong), in purported settlement of the sales contracts.  No defence has yet been filed, although it is clear that APP (Hong Kong) denies liability to account to APPIT (V) in respect of such payments. 

23.In the reply affirmation of APP (Hong Kong), the deponent stated that the accounts and records of APP (Hong Kong) showed that the amount of the invoices listed in the statement of claim “has indeed been paid by APP (Hong Kong) Limited to the sum of US$24,248,513.05”.  In an affirmation filed in HCCW No. 1130 of 2003, another deponent for APP (Hong Kong) stated that “the management accounts do not reflect the amount of the APPIT (V) claim because the Company’s records indicate that the sums claimed therein were paid to APPIT (V)”. 

24.As far I can see, there is no admission that the amount of US$24 million odd had been paid to the unauthorised account.  It does not seem from the above extracts in the evidence filed by APP (Hong Kong) that the repository of the proceeds and at whose direction the payments were made would not be matters in issue. 

25.Then one turns to the context in which the chairman of the meeting had rejected the claim of APPIT (V) for voting purpose.  In the affidavit of the chairman, he stated that 3 claims were partially accepted or rejected in full “because of inconsistencies with the Company’s books and records” and that the claim of APPIT (V) was rejected as “based on the information available to the Reporting Accountants and the legal advice obtained by them, the Reporting Accountants were unable to determine whether the Company was liable to APPIT (V) for the amount claimed in the Statement of Claim or at all”.

26.APPIT (V) stated that it is not clear if the information available to the chairman was the same as the records and accounts referred to in the reply affirmation of APP (Hong Kong).  This seems to be a fair point to make. 

27.As to the contention that the discovery sought was not necessary to dispose of issues in the High Court Action but to assist APPIT (V) in its opposition to the scheme in the Miscellaneous Proceedings, this seems to me to be taking an unduly narrow view of the matter.

28.The purpose of this discovery application, according to APPIT (V), is to ensure firstly that the court has available to it all relevant material for the purpose of its determination of the sanction of the scheme in the Miscellaneous Proceedings, and secondly to ensure that APPIT (V) can pursue and prosecute to the extent it is able its claim before the scheme administrator and if necessary the scheme adjudicator.

29.I tend to look at the matter in this way.  If there were no application to stay the High Court Action and the action had proceeded in the normal way, it is unlikely that the documents sought in the discovery application would be regarded as of no relevance to any issue in dispute.  Here, APP (Hong Kong) has applied for a stay of the High Court Action for the purpose of protecting the assets of the Company against unnecessary wasted expenditure in fighting a claim which would be determined in the scheme of arrangement it wishes to put in place.  And if that scheme were to receive the sanction of the court, APPIT (V) would not be able to pursue the High Court Action, its claim would be administered under the scheme.  So one way or other, the documents sought would seem to be of relevance to the dispute of the claim of APPIT (V), whether that dispute is to be determined in the High Court Action or administered in the scheme if the High Court Action is stayed and the scheme sanctioned by the court. 

30.It is also pertinent to note that there is no right on the part of APPIT (V) under the scheme to demand or insist that APP (Hong Kong) do produce documents relevant to the adjudication of its claim by the scheme administrator or by the scheme adjudicator.  This application for discovery represents its last reasonable prospect, if the scheme proceeds, to secure relevant information for the purpose of determination of its claim. 

31.As for the suggestion that it would be in breach of the implied undertaking not to use documents disclosed in one action for other proceedings, the implied undertaking does not apply to documents to which reference is made in an affidavit under Order 24 rule 10 (Hong Kong Civil Procedure 2004, Volume 1, paragraph 24/14A/1).

32.I would grant the application in the summons in the High Court Action.  I would hear the parties on the time for discovery to be given. 

33.I turn to the summons in the Miscellaneous Proceedings.  This seeks an order that APP (Hong Kong) do provide an affidavit stating whether it has or has had in its possession, custody or power documents relating to “the information” provided by APP (Hong Kong) and made available to the chairman of the meeting concerning the claim of APPIT (V), as referred to in the affidavit of the chairman filed in the Miscellaneous Proceedings.

34.Much of the grounds have been covered in my decision in the summons in the High Court Action.  There are these additional points.

35.As mentioned, the chairman of the meeting had decided to reject the claim of APPIT (V) in full for the purpose of voting.  Whether he was right to do so would be a matter in issue in the Miscellaneous Proceedings.  APPIT (V) had requested for a copy of the information available to the chairman when he made his decision as early as 2 September 2004.  The solicitors for the chairman replied by letter on 7 September 2004, declining to provide details of the information available and provided by way of explanation that the claim was rejected because it was impossible for the chairman to determine at the time whether the claim of APPIT (V) was of any value, purporting to follow Re UDL Holdings Limited (No. 3) [2000] 3 HKC 405 and on appeal reported at [2000] 4 HKC 778.  I note that in the first instance decision of Re UDL (No. 3) at 421F to G, there is evidence before the court showing specialist review and assessment of the disputed claim were taken before the claim was rejected by the chairman.

36.Here, APPIT (V) is in the dark as to what information was made available to the chairman when he made his decision to reject its claim for voting purpose.  For APP (Hong Kong) to say that the application is premature as evidence has yet to be filed on its behalf in the Miscellaneous Proceedings as directed on 2 November 2004 is not a responsible attitude.  If indeed APP (Hong Kong) is minded to disclose the information sought by APPIT (V) in its evidence to be filed in due course, so as to render the present application unnecessary, there is no reason why APP (Hong Kong) could not have informed APPIT (V) about this.  I am not minded to adjourn this application and adopt a wait and see attitude to see what APP (Hong Kong) might come up with in its evidence to be filed. 

37.Whether it was impossible for the chairman to determine any fixed amount of the claim of APPIT (V) so that the same approach in Re UDL (No. 3) should be applied would be one of the issues to be considered in the Miscellaneous Proceedings, as would appear from the correspondence exchanged between solicitors.  I note that in the letter of the solicitors of APPIT (V) dated 9 September 2004, they stated that in the circumstances APPIT (V) can have no confidence in the bona fides of the decision reached by the chairman.  The documents sought are plainly relevant to the issues in the Miscellaneous Proceedings.

38.It was further submitted that Order 24 rule 10 is not applicable as in the affidavit of the Chairman, he mentioned “information” available to him, not documents.  I reject this submission.  It would be startling if the chairman had rejected a voting debt of US$24 million without seeing any documents provided by APP (Hong Kong).  In any event, in another part of his affidavit, the chairman mentioned inconsistencies with the Company’s books and records.

39.For the above reasons, I would also grant the application in the Miscellaneous Proceedings, subject to submissions on the time for giving discovery.  I would hear submissions whether there is any need to vary the directions I gave in the Miscellaneous Proceedings on 2 November 2004 in any way and in respect of costs in both applications.

Mr Russell Coleman, instructed by Deacons, for the Plaintiff in HCA No. 3915 of 2003 and the Opposing Creditors in HCMP No. 2420 of 2004

Mr Jose Maurellet, instructed by Tanner De Witt, for the Defendant in HCA No. 3915 of 2003 and the Petitioner in HCMP No. 2420 of 2004