Carlos Manuel Kwong v. Lo Kam Wing and Others
Read the full judgment text of CACV 128/2005 on BabelCite. This Court of Appeal judgment was delivered on 3 November 2005 before Yuen JA and Lam J.
Civil procedure – discovery – exercise of discretion – appeal – Peruvian Guano test – Order 24 Rules of the High Court – whether discovery of plaintiff's financial position was necessary – whether bank letter was adequate – whether 2nd Defendant would suffer prejudice if disclosure refused – costs of master's hearing where original summons had wider scope – securities trading – margin trading versus cash trading – flexibility benefit of margin trading – plaintiff alleged sound financial position and intention to trade on cash basis – four cheques totalling $12.8m did not match Schedule trades in date or amount – shortfall of $129,000 – $2.8m cheque misappropriated by 1st Defendant – shares sold without plaintiff's knowledge in October 1997 and March 1998 – Court of Appeal dismissed appeal but set aside paragraph (3) of judge's order as unnecessary given paragraph (4) – plaintiff ordered to pay 2nd Defendant's costs of the appeal – reasons handed down 3 November 2005 following dismissal on 26 October 2005.
Legal issues: Necessity and scope of discovery relating to plaintiff's financial position · Adequacy of the Hang Seng Bank letter as disclosure of financial position · Prejudice to the 2nd Defendant if discovery was refused · Costs of the hearing before the master where the summons had a wider scope
Outcome: Appeal dismissed. Paragraph (3) of Deputy Judge Gill's order set aside as unnecessary given paragraph (4). The substantive discovery order in paragraph (4) and the costs order before the master upheld.
Cited by 11 cases
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CACV 128/2005 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF APPEAL CIVIL APPEAL No. 128 OF 2005 (ON APPEAL FROM HCA 3124 OF 2003) ______________________ BETWEEN:
Before: Hon. Yuen J.A. and Lam J. in Court Date of hearing and judgment: 26 October 2005 Date of Reasons for Judgment: 3 November 2005 ------------------------------------- REASONS FOR JUDGMENT ------------------------------------- Hon. Yuen J.A.: 1.On 26 October 2005, we dismissed the Plaintiff’s appeal from an order made on 18 March 2005 by Deputy Judge Gill. My reasons are as follows. 2.The order was in the following terms:
The Action 3.In the action (HCA 3214/2003), the Plaintiff is suing the 1st Defendant for the sum of $2.8m., and further or alternatively for damages for fraud and/or breach of fiduciary duty and/or conversion. The Plaintiff has also sued the 2nd and/or 3rd Defendants in the alternative to the 1st Defendant for the same sum, and further or alternatively, for damages for breach of contract. 4.The 1st and 3rd Defendants are represented by one set of solicitors, and the 2nd Defendant is separately represented. The Plaintiff’s case 5.Essentially, the Plaintiff alleges that in April 1997, he entered into a contract with the 2nd Defendant to trade in securities. 6.At the same time, he also entered into a contract with the 3rd Defendant, a company which offered margin facilities to (at least some of) the 2nd Defendant’s clients. 7.The 1st Defendant was a friend of the Plaintiff and a director of both the 2nd and 3rd Defendants. 8.The Plaintiff has pleaded in paragraph 8 of the Statement of Claim that:
9.In Further and Better Particulars, the Plaintiff has pleaded that in the context of para. 8(1), the phrase ‘at all material times’ meant "the times when the Plaintiff was liable to pay for the shares that he instructed the 1st Defendant to buy for him". Of course what a trader is liable to pay and when he is so liable depends on whether he was trading on a cash basis or on margin, an issue which is at the crux of this action. This is discussed later in these Reasons. 10.The trades pleaded in Section C and tabulated in the Schedule (“the Schedule trades”) were done between 26 August and 19 September 1997. (The 2nd Defendant says that apart from the Schedule trades, the Plaintiff did other margin purchases subsequently, in October 1997: para. 9 Amended Defence of the 2nd Defendant, an allegation which has been denied by the Plaintiff : para.5 Reply). 11.Paragraph 19 pleaded:
12.The 1st to 4th Cheques referred to were cheques which the Plaintiff gave to the 1st Defendant. One was in favour of the 3rd Defendant and the other three in favour of the 2nd Defendant, totalling $12.8m. These cheques were dated 28 August 1997, 12 September 1997, 18 September 1997 and 25 September 1997 respectively. They were in round figures and do not seem to correspond to the dates or cost of the respective Schedule trades. 13.The total net cost of the Schedule trades was slightly more than $12,929,000, i.e. $129,000 more than the combined value of the 4 cheques. This has been referred to as “the shortfall”. 14.Further, the value of one of the cheques ($2.8m) was misappropriated by the 1st Defendant who was later convicted of theft in the District Court. 15.As a result of the state of the Plaintiff’s account, in October 1997 and March 1998, some of his shares were sold without his prior knowledge. 16.The Plaintiff’s case is that the sale of those shares was wrongful. He says he should have been given notice of the shortfall of $129,000, and if that had been done, given his financial position, he would have been able to make good the shortfall, and at that time the misappropriation of the $2.8m. would have come to light. The 2nd Defendant’s case 17.The 2nd Defendant has denied that the 1st Defendant was its agent for certain purposes, including the receipt of the cheque which he misappropriated (para. 6 Amended Defence). 18.The 2nd Defendant’s case is that the Plaintiff did trade on margin, and it seeks to rely on the judgment of Judge Day in the 1st Defendant’s criminal trial for misappropriation of the $2.8m. The Plaintiff was a prosecution witness at the trial and he denied that he traded on margin. Although Judge Day convicted the 1st Defendant, he made certain comments critical of the Plaintiff’s evidence. 19.As I mentioned earlier, the 2nd Defendant has also pleaded that apart from the Schedule trades, the Plaintiff also purchased shares on margin on 17 October and 31 October 1997 (para. 9 Amended Defence), an allegation which has been denied by the Plaintiff. 20.Further and perhaps more importantly for present purposes, the 2nd Defendant has not admitted the Plaintiff’s assertion of his strong financial position or his assertion that because of that, he did not trade on margin (para. 9 Amended Defence). The 2nd Defendant’s application for discovery 21.The 2nd Defendant sought discovery of documents relating to the Plaintiff’s financial position. 22.The Plaintiff provided a letter from the Hang Seng Bank dated 4 August 2004 which listed "some information regarding [the Plaintiff’s] account balances" as at 12 specific dates, the earliest being 26 August 1997 and the latest being 25 September 1997 (mistyped as 25 September 2005 in Deputy Judge Gill’s judgment). The letter was reproduced in full in that judgment and I will not repeat it here. 23.The 2nd Defendant considered the letter inadequate and issued a summons for (a) discovery of a further and better list of documents and further or alternatively, (b) specific documents. At that time, the specific documents sought related to the Plaintiff’s financial position for the entire period stretching from 1 September 1997 to 31 March 1998. 24.Master Lung dismissed the 2nd Defendant’s summons. The 2nd Defendant appealed. Deputy Judge Gill’s order 25.Deputy Judge Gill allowed the 2nd Defendant’s appeal. He accepted its submissions that the Hang Seng Bank letter only provided a “snapshot” of the Plaintiff’s financial position on the days referred to in the letter. It did not give a complete view of the Plaintiff’s financial ability to trade on a cash basis. The judge made the order reproduced in para. 2 of this judgment. This appeal 26.The Plaintiff appealed to this court. The grounds of appeal can be summarised as follows:
27.The grounds of appeal as drafted suggested that the challenge to the judge’s order on the ground of lack of necessity was separate and distinct from the challenge on the ground of error in the exercise of discretion. However the judge’s determination whether the discovery was necessary must be part and parcel of the exercise of his discretion. In fact Mr Rimsky Yuen SC for the Plaintiff accepted that the appeal was one against the exercise of the judge’s discretion. Principles 28.It is well-established that in an appeal against the exercise of a judge’s discretion, this court will not intervene unless the appellant can show that the judge had erred in principle of law, or had misapprehended material facts, or had taken into account irrelevant matters or had failed to take relevant matters into account, or where the judge’s conclusion was plainly wrong such that it was "outside the generous ambit within which a reasonable disagreement is possible" (Hong Kong Civil Procedure 2004 Vol. 1 para. 59/1/49). 29.Mr Yuen did not challenge these principles, nor did he challenge the relevance of the documents sought on the application of the Peruvian Guano test (1882) 11 QBD 55. He submitted that the discovery was not necessary under Order 24 rule 8 Rules of the High Court, but in this respect he also accepted that the burden was on the Plaintiff to satisfy the court that the discovery sought was not necessary. 30.In considering whether the judge’s exercise of discretion should be disturbed, we must consider the purpose of the discovery application in the context of the individual case. Discussion 31.Mr Yuen submitted that:
(1) Relevant dates 32.With respect, I was unable to accept those submissions. In respect of the first argument, the Plaintiff’s case on the pleadings is that his ability to pay for the shares on the dates of acquisition shows that he had no need to resort to margin trading and that in turn showed that he did not in fact trade on margin. 33.Depending on the circumstances, a person’s financial position may, or may not, show whether he intends to trade on margin. If a person does not have available funds, he would have to trade on margin, but the converse is not necessarily true. In other words, a person may still choose to trade on margin because of certain benefits that margin trading gives him. 34.So if the Plaintiff’s case is that he did not intend to trade on margin (because he could have traded on a cash basis), then one must consider what benefits margin trading could have given him that cash trading could not. 35.One of the benefits of a margin account is the flexibility it affords the trader during the time his share positions are open, not just the provision of finance on the day he buys the shares. To take a simple example: say a margin trader wishes to buy shares costing $100,000 (for convenience I shall assume that the market price of the shares stays the same and disregard minor expenses). On Day 1, he buys shares costing $100,000 on margin. His margin is 30%, so he need only pay $30,000 into his account. His interest for Day 1 for the unpaid balance of $70,000 is say, $10. On Day 2, he pays $70,010 into the account because he has no other use for his money on that day. Consequently his shares are fully paid for, and he can (if he wishes) withdraw them from the account. But the benefit that margin trading gives him is that on Day 3, he can withdraw the $70,000 he had paid into his account if he wishes to use that money for other purposes, all the while keeping his share position open. 36.Once that benefit of margin trading is recognized (and Mr Yuen offered no arguments against it), the fact that a margin trader may have enough funds to pay for shares on the day he acquired them is not necessarily an indication that he did not wish to acquire them on margin. It is one thing to show his financial position on the day when he placed an order to acquire the shares. His financial resources and liabilities (actual and contemplated) during the time those share positions were open is another matter. The fact that he paid funds into his account which represented all or nearly all the cost price of the shares is of course relevant to the trial judge’s deliberations, but that cannot conclusively show that he had intended to trade on a cash basis, when viewed against the fact that the Cheques apparently did not match the Schedule trades in settlement date or amounts, and the Plaintiff had other business activities at the time, including a margin trading account with another company. 37.Therefore I do not think that the judge can be criticized when he rejected the Plaintiff’s submission that it was not necessary to cover more than the dates of acquisition of the Schedule trades and, in the exercise of his discretion, made the order under Order 24 rules 3 and 7. 38.There is also the question of the missing $2.8m. misappropriated by the 1st Defendant. Depending on whether the 1st Defendant was the Plaintiff’s agent when he received the Cheque, and whether the 2nd and/or 3rd Defendants were consequently justified in not crediting that sum to the Plaintiff’s account, there may be the additional question whether the Plaintiff could have provided another $2.8m. in March 1998 to stop the sale of his shares. For this reason as well, discovery for the periods 1 September 1997 - 31 October 1997 and 1-31 March 1998 would have been justified and could not be said to be not necessary either for disposing fairly of the cause or matter or for saving costs. (2) Inadequacy of Bank letter 39.Secondly, we do not consider a letter along the lines of the August 2004 bank letter to be adequate. The letter did not even purport to give a full account of the Plaintiff’s portfolio at the bank itself, let alone indicate his overall financial position - an issue which the Plaintiff has himself chosen to bring into play in this action as helping to prove his intention to trade on a cash basis only. (3) Prejudice to 2nd Defendant 40.Finally we rejected Mr Yuen’s submission that the judge should not have made the order because the burden rested with the Plaintiff to establish his financial ability. He submitted that even if the Bank letter was not sufficient to establish his financial ability, that would only mean that the Plaintiff had failed to establish his case and the 2nd Defendant would not be prejudiced. 41.With respect, we could not agree. Disclosure is necessary because (a) the "litigious advantage" to the party seeking it (the 2nd Defendant) is obvious as the Plaintiff’s financial position is admittedly relevant to his intention to trade on a cash basis or on margin; (b) the information sought is not otherwise available to the 2nd Defendant; and (c) it has not been suggested by the Plaintiff that the disclosure would be oppressive, e.g. by reason of volume (Wallace Smith Trust Co. Ltd (in liquidation) v Deloitte Haskins & Sells [1997] 1 WLR 257, 272). The language of the order made by the judge 42.That leaves the language of the order made by the judge. As sealed, it says that the Plaintiff is to file a further and better list and "further or alternatively" make an affidavit relating to various matters. Whilst the words "further or alternatively" are understandable when it is in a list of options presented to the court, it was inappropriate as part of an order. An order must be clear and leave the litigant at the receiving end in no uncertainty as to what he must do and what he need not do. In my view, given para. (4) of the judge’s order, para. (3) was unnecessary. Mr Bartlett for the 2nd Defendant did not attempt to maintain it. Consequently we set aside para. (3) of the judge’s order. Costs order before the master 43.As for the costs order before the master, it was within the judge’s discretion to order that the Plaintiff bear those costs, even though the original scope of the summons was wider. The fact was that the Plaintiff never offered anything other than the Hang Seng Bank letter which, for reasons I have discussed, was not adequate. Order 44.Apart from setting aside para. (3) of the judge’s order, the appeal was dismissed with an order that the Plaintiff should pay the 2nd Defendant’s costs of this appeal. Hon. Lam J: 45.I agree and have nothing to add.
Mr Rimsky Yuen SC instructed by Kwong and Lam for the Plaintiff (Appellant) Mr Jeremy Bartlett instructed by Robertsons for the 2nd Defendant (Respondent) | ||||||||||||||||||||||||||||||||||||||||||||||||
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