Waddington Ltd v. Chan Chun Hoo Thomas and Others
Read the full judgment text of HCA 3291/2003 on BabelCite. This High Court CFI judgment was delivered on 7 May 2013.
1. This case has been fixed for trial on 15 July 2013 with 9 days reserved. I am not the trial judge assigned to hear this case.
Cited by 13 cases · Cites 6 cases
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HCA 3291/2003 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ACTION NO. 3291 OF 2003 _____________
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__________________________ REASONS FOR DECISIONS __________________________ 1.This case has been fixed for trial on 15 July 2013 with 9 days reserved. I am not the trial judge assigned to hear this case. 2.In the hearings on 27 March 2013, I made the following decisions:
3.The PTR then came before me on 8 April 2013. Shortly before and after that hearing, the plaintiff and the 1st defendant have taken out a number of applications before the court. All these applications, except for the plaintiff’s summons dated 28 March 2013 for third party discovery against Yugang, have been adjourned for argument before me on 24 April 2013. In that hearing, I made the following decisions:
4.I now give my reasons for these decisions. 5.In the adjourned hearing on 24 April 2013, the parties have also agreed for the court to grant leave to them to file expert evidence on BVI law for the purpose of the trial, and so I do not need to deal with such application in these Reasons. BACKGROUND 6.This case has a long history. It involves a multiple derivative action brought by a minority shareholder (the plaintiff) in the listed parent company (the 3rd defendant) for wrongs done to and damage suffered by the 5th defendant, which is the 3rd defendant’s indirect wholly-owned subsidiary. The transactions complained of took place in May to July 2000. At that time, the 1st defendant was the chairman, executive director and controlling beneficial shareholder of the 3rd defendant and a director of the 5th defendant. The 2nd, 3rd and 4th defendants are intermediate holding companies of the 5th defendant which have been joined for procedural purposes in the multiple derivative action. 7.The transactions complained of consisted of:
8.The plaintiff’s case is that these transactions were part of an arrangement whereby the 1st defendant was to dispose of his own substantial shareholding in Prestige to Yugang at a significant premium (the consideration of the sale to Yugang was $600,600,000) on terms that Yugang would not be required to make a general offer, and to that end the 1st defendant had to procure the 5th defendant (which would be regarded as his concert party by reason of his beneficial ownership of the same) to dispose of the 5th defendant’s Prestige shares. The 1st defendant therefore procured the 5th defendant to dispose of its Prestige shares in the market. 9.According to the plaintiff, the wrong done to the 5th defendant was two-fold. Not only was the 5th defendant prevented from taking part in the beneficial sale to Yugang (which would have been possible if the 1st defendant had procured the disposal of part of the 2nd defendant’s shares to keep the overall percentage under 35%), the “forced sale” of the Prestige shares in the market in fact resulted in a loss to the 5th defendant in the sum of $56,000,000 (measured against the carrying value of $2.28 a share) or at least $27,700,000 (measured against book value as at 31 December 1999 at 1.46 a share). 10.It is also part of the plaintiff’s case that these transactions have a number of unusual features which cry out for explanation:
11.In reply to these allegations, the 1st defendant denies that there was any breach of fiduciary duty. The 1st defendant claims that there was ulterior purpose for the plaintiff in commencing the present proceedings against the defendants, and the plaintiff has no locus to bring this action under BVI law on behalf of the 5th defendant. In reply to the allegations about the sale of the 4.28% Prestige shares, the 1st defendant avers that the authorization given to him for such sale by the board of the 5th defendant on 18 May 2000 was “in conformity with … the Articles of Association of [the 5th defendant]”, the sale of such shares was at market price and was ratified by the Executive Committee of the board of the 3rd defendant. Further, the loss arising from the disposal of the 4.28% Prestige shares was “more than compensated by the substantial gain realised from the Harbour Ring shares”. THE DISCOVERY SUMMONSES AGAINST HSBC, PWC AND EY 12.The plaintiff took out 3 third party discovery summonses against HSBC, PWC and EY in September and October 2012. 13.There is no disagreement about the following principles for third party discovery under s 42 of the High Court Ordinance (Cap 4) and O 24 r 7A of the RHC (Cap 4) , which were summarised in Ngan In Leung & Ors v Chu Yuet Wah, unreported, HCA 388/2006 (decision of Au-Yeung DHCJ, as she then was, on 14 August 2012) at §§61-62:
(a) The HSBC Summons 14.HSBC was the banker of the 1st and the 2nd defendants at the material times. The documents sought are, namely, a charge over the securities dated 3 February 2000 made by the 2nd defendant in favour of HSBC (“the Charge”) and all communications related to the Charge and a 2nd Mortgage dated 28 February 2000 made jointly by the 2nd defendant and another in favour of HSBC in respect of the 1st defendant’s residence in Middle Gap Road (“the 2nd Mortgage”) and the dealings of the Prestige shares. 15.I ordered discovery of these documents on the ground that they are relevant to the issues arising or likely to arise in the proceedings. 16.Firstly, these documents are relevant to the issue of corporate control. It is the plaintiff’s case that up to 28 December 2001, the 1st defendant was in control of the 2nd defendant, and through the 2nd defendant, was in control of the Playmates Group, which is denied by the 1st defendant. As the Charge and the 2nd Mortgage would have imposed substantial financial liabilities on the 2nd defendant, they would have been executed by those in control of the 2nd defendant at the time. Hence, the requested documents may shed light on the issue of corporate control. 17.Secondly, these documents may explain the reasons behind the sale of the 4.28% Prestige shares by the 5th defendant and the sale of the Prestige shares by the 2nd defendant to Yugang. According to the plaintiff, the Charge and the 2nd Mortgage would have placed the 1st and the 2nd defendants under mounting pressure to repay their debts to HSBC. Such intense financial pressure may explain why the 2nd and the 5th defendants disposed of the Prestige shares so suddenly. 18.The discovery of the requested documents is therefore necessary for the court to determine the aforesaid issues. The 2nd defendant has not filed a Defence and has been absent in these proceedings. The 1st defendant has not included these documents in his list of documents, and Mr Pun, the then counsel for the 1st defendant, confirms at the hearing that the 1st defendant is not prepared to supply such documents. Under such circumstances, I allowed the HSBC Summons to enable the plaintiff to obtain such documents for the proper preparation of the trial. 19.In the hearing, Mr Pun submits that the court should not allow the application at that stage because the 1st defendant may lodge an appeal against the court’s decision. If the 1st defendant does so, the trial date may be jeopardised. 20.I agree that the application could have been made earlier. However, the HSBC Summons was taken out on 28 September 2012 which was about 10 months before the trial. Due to the state of the court diary, the application was only heard on 27 March 2013, and yet there was still by then considerable time before the commencement of the trial. Furthermore, the documents requested relate very much to the 1st defendant and the operation of the 2nd defendant, and so I do not expect that the 1st defendant would have any difficulty in dealing with the materials revealed in these documents. If the 1st defendant had no control over the 2nd defendant as alleged by him, he can simply make a further witness statement to explain the situation or to deal with it in his oral testimony at the trial. I do not foresee that the 1st defendant has to carry out extensive investigation in relation to these documents, and it is unlikely that the trial date will be jeopardised. 21.Further, possibility of appeal is not a valid consideration for the court in determining the merits of the application. In any event, there is mechanism for the Court of Appeal to deal with urgent appeals thereby minimising the risk of the disruption of the trial date. 22.The 1st defendant also argues that HSBC may not keep the documents due to the lapse of time. If that is the case, the relevant personnel of HSBC can make an affirmation to confirm that the bank is no longer in possession of these documents. At this stage, the court cannot assume that HSBC has thrown away those documents. 23.Based on these reasons, I allowed the HSBC Summons. Although the plaintiff succeeds in the application, it should only get the costs of the hearing if it eventually succeeds in the claim against the 1st defendant. I therefore made the costs order that, save that the costs of the hearing on 27 March 2013 be the plaintiff’s costs in the cause as between the plaintiff and the 1st defendant, the costs of the HSBC Summons be costs in the cause. (b) The PWC Summons 24.PWC was the auditor of the 2nd defendant at the material times. The documents sought are, namely, the Charge, the 2nd defendant’s reports and accounts for 1999 and 2000 (ie. the time around the sale of the Prestige shares to Yugang), a Disclosure Letter and the Escrow Letter which form part of the sale agreement of the Prestige shares to Yugang (“the Sale Agreement”), and communications in relation to PWC’s work on the Sale Agreement. In the hearing, I allowed the PWC Summons save that the documents required to be disclosed do not cover the 2nd defendant’s reports and accounts for 1999 and 2000. 25.According to the plaintiff, by reason of the close proximity in time between the sale by the 5th defendant of the Prestige shares at $0.60 to $0.70 a share in late May 2000 and the sale of the shares to Yugang in July 2000, the 1st defendant should have known, in May 2000, about the opportunity of selling the Prestige shares at a substantial premium. The 1st defendant denies such allegation both in the pleading and in his witness statement without supplying much particulars. The documents requested would shed light as to when the negotiation for sale of the shares to Yugang had started. As this is a crux issue of the case, the plaintiff should be entitled to the documents requested in order to investigate whether the 2 sales were unrelated as claimed by the 1st defendant. 26.However, I refused the plaintiff’s request for the discovery of the audited reports and accounts and monthly management accounts of the 2nd defendant for the years 1999 and 2000. The documents requested, in particular the monthly management accounts, should be voluminous, and so the discovery of these documents at this stage of the proceedings may cause unnecessary burden on the parties in the preparation of the trial. Further, the financial accounts of the 2nd defendant may be subject to different interpretations and the parties may seek the assistance of experts to interpret these financial accounts, which is highly undesirable in view of the limited time available before the commencement of the trial. Further, I have serious doubt about the probative or the evidential values of these accounts, and so I refused the discovery of these documents. 27.I only allowed the PWC Summons in part. I therefore made the costs order that, save that there be no order as to costs of the hearing on 27 March 2013 between the plaintiff and the 1st defendant, the costs of the PWC Summons be costs in the cause. (c) The EY Summons 28.EY was the auditor of Yugang at the material times. The documents sought are, namely, the Disclosure Letter and the Escrow Letter which form part of the Sale Agreement, a Circular by Yugang dated 21 August 2000 containing further details of the Sale Agreement and communications in relation to EY’s works on the Sale Agreement. 29.Despite that the documents requested may be relevant to the issues of the case, I refused the application for the following 2 reasons. Firstly, the documents requested are actually Yugang’s documents. The summons should have been issued against Yugang, or at least Yugang should be given the opportunity to be heard on the application. Without informing Yugang about the application, it is not appropriate for the court to make the discovery order against Yugang’s auditor. Secondly, after obtaining the documents, the parties of the present litigation may have to carry out further investigation such as approaching Yugang to seek further clarifications about the contents of these documents. After all, these documents were prepared by a third party who is not directly involved in this case. This process may take considerable time and it may jeopardise the trial date which is a milestone date. Hence, it is not appropriate to order discovery against Yugang’s auditor at such a late stage of the proceedings and I dismissed the EY Summons with costs. THE SECURITY FOR COSTS SUMMONS 30.I then turn to the 3 summonses taken out by the 1st defendant shortly before or after the PTR. 31.Firstly, the 1st defendant applies for security for costs in this action in the sum of $10,160.399.37. 32.There is serious dispute between the parties as to whether the plaintiff is ordinarily resident out of Hong Kong for the purpose of the security for costs application. However, I do not consider it necessary to rule on this particular issue as I would dismiss the Security for Costs Summons on the ground of delay alone. 33.After the implementation of the civil justice reform, the courts have repeatedly emphasised that late applications should be discouraged as such kind of applications can easily disrupt the trial dates which are milestone dates. Further, Practice Direction 5.2 (at §34) has expressly provided that the PTR is not an extension of the CMC. The court expects a case to be ready for trial at the PTR and late interlocutory applications may be dismissed on the basis of delay alone. This would have been sufficient for me to dismiss the Security for Costs Summons. 34.Further, late application for security for costs, in particular when the trial is imminent, per se constitutes very real prejudice to a plaintiff, since the plaintiff is being put in a position of having little or no choice but to put up the security in order not to abandon and waste all the work done and costs incurred in preparing for trial. In these circumstances, the application should be refused (see: BBMB Finance (Hong Kong) Ltd v China Underwriters Life and General Insurance Co Ltd [1991] 1 HKLR 617, 626-628 (per Fuad VP); Tsang Yee Mui v Personal Representatives of Mak Chik Wing, deceased, unreported, HCA 2606/2006 (decision on 21 July 2008 at §§34-38 (per Chu J, as she then was)). 35.This action was commenced in 2003. The Court of Final Appeal gave judgment in 2008 stating that the action could proceed as a multiple derivative action on behalf of the 5th defendant. In his Timetabling Questionnaire filed on 28 January 2011, the 1st defendant stated that he intended to apply for security for costs within 28 days after the close of pleadings and even sought directions to that effect. No further reference to seeking security was made in his Listing Questionnaires filed on 20 September 2011 and 19 March 2012. Instead, the 1st defendant confirmed, in his 2nd Listing Questionnaire, that he agreed not to take out any further interlocutory applications save for those which ought to be made to the listing judge or master. 36.It was only shortly before the PTR that the 1st defendant issued the Security for Costs Summons. The explanation purportedly given for the delay was that the 1st defendant was apparently uncertain as to whether the plaintiff would proceed to trial. This is neither a credible nor sufficient explanation for the very substantial delay. Further, substantial costs had already been incurred by the parties in the conduct of this action. If the 1st defendant is genuinely seeking to ask the plaintiff to provide security to cover his costs, one would expect the 1st defendant to have made such application at a much earlier time. By reason of the substantial delay, I have reason to believe that the application is only a tactical move by the 1st defendant to put undue pressure on the plaintiff to raise substantial fund in the limited time before the trial. 37.Based on these strong reasons, I dismissed the Security for Costs Summons with costs. THE INTERROGATORIES SUMMONS 38.The plaintiff served the interrogatories without order on the 1st defendant on 5 April 2013. The 1st defendant applies to the court for an order for the withdrawal of the interrogatories. 39.As I see it, the interrogatories can be divided into the following 4 broad categories:
40.Firstly, I have no hesitation in disallowing the interrogatories relating to the Charge, the 2nd Mortgage and the 2nd defendant’s indebtedness to HSBC. The court has already allowed the HSBC Summons requiring HSBC to disclose documents relating to these interrogatories. As I see it, the plaintiff should have no problem in getting the answers to these interrogatories from the documents to be disclosed under the HSBC Summons, and so it is not necessary for the plaintiff to administer such interrogatories for the fair disposal of the case or for saving costs. Further, it is not the purpose of interrogatories to test the creditability of the counter-party’s case, and so it is not appropriate for the 1st defendant to provide these answers before the completion of the discovery process against HSBC. 41.For the remaining interrogatories, I take the view that there are generally relevant to the issues of the case. Taking into account that the plaintiff knows very little about the circumstances under which the 5th defendant disposed of the Prestige and the Harbour Ring shares, I would have allowed the interrogatories had they been served earlier. 42.Despite such observation, I allowed the application for the withdrawal of the interrogatories for the following 4 reasons. Firstly, the plaintiff only served the interrogatories shortly before the PTR, and the trial of this action is going to commence in about 2.5 months’ time. In such circumstances, I doubt very much whether administering interrogatories at this stage would result in any saving in costs. Secondly, the plaintiff has failed to give any reason to explain or justify the delay in the serving of the interrogatories. Thirdly, the answers to these interrogatories may prompt another round of discovery and interrogatories which may jeopardise the trial date. Fourthly, bearing in mind the express warning given to the parties as contained in Practice Direction 5.2, it is not appropriate for the court to allow the plaintiff to administer interrogatories at such a late stage of the proceedings. 43.In fact, there is nothing to prevent the plaintiff to pursue these interrogatories during cross-examination at the trial. According to the plaintiff, it would be more desirable for the 1st defendant to provide the answers to these interrogatories before the trial. If further investigation needs to be carried out to verify the truthfulness of the 1st defendant’s answers, there may be disruption to the trial which can be avoided if the plaintiff can obtain the answers earlier. 44.I can see the advantage of obtaining the answers at the early stage of the proceedings, but I doubt whether the late provision of these answers can assist the fair disposal of the issues of the case. Quite on the contrary, administering interrogatories at this stage may prompt further applications which may unnecessarily complicate the proceedings or even jeopardise the trial date. As I see it, the plaintiff should try to get the answers during cross-examination at the trial. If further investigation needs to be carried out, the plaintiff can make the appropriate application before the trial judge, who can then decide the application based on the answers given and the overall circumstances of the case. Hence, I allowed the 1st defendant’s summons for the withdrawal of the interrogatories with costs. THE PRELIMINARY ISSUE SUMMONS 45.That leaves only the Preliminary Issue Summons, under which the 1st defendant asks the court to conduct an O 14A hearing, or alternatively a trial on preliminary issue, to determine whether the plaintiff has any right to bring the present multiple derivative action on behalf of or in the name of the 5th defendant, which is a BVI company, for the allged wrongs done to the 5th defendant. 46.Firstly, I have no hesitation in dismissing the plaintiff’s application for an O 14A hearing. According to the recent Court of Appeal’s decision in East Asia Satellite Television (Holdings) Ltd v New Cotai LLC [2011] 3 HKLRD 734, whether the plaintiff has the right to bring the present multiple derivative action on behalf of the 5th defendant would depend on the law of the place in which the 5th defendant was incorporated, which is BVI in the present case. It is also trite law that question of foreign law is question of fact and not question of law. As O 14A hearing is for a determination on a question of law, it is not appropriate for the court to order an O 14A hearing to resolve the factual issue as to whether the plaintiff, according to BVI law, does enjoy the right to bring multiple derivative action on behalf of the 5th defendant. 47.Further, taking into account the limited time before the trial, it is neither feasible nor desirable to conduct a trial of preliminary issue to determine this particular question. The trial proper will start on 15 July 2013, and the plaintiff has yet filed the expert evidence on the issue of BVI law. At this stage, the court has no idea how long the hearing on preliminary issue will take, and it is just impossible for the court to allocate a few days before the trial to determine the question about the plaintiff’s locus to sue. 48.I also doubt how much costs can be saved by ordering a trial on preliminary issue at this stage. As the trial proper will start in about 2.5 months’ time, the order for preliminary hearing will actually increase the costs as counsel would have to be retained for two instead of one hearing. Hence, there would be no separate hearing on preliminary issue before the trial. 49.In view of my ruling, Mr Lee, SC, counsel for the 1st defendant, indicates to me that the 1st defendant would reserve the right to make an application before the trial judge to determine the said preliminary issue on the first day of the trial. In order to give more flexibility to the trial judge to deal with this matter, I adjourned the Preliminary Issue Summons to be dealt with by the trial judge instead of dismissing the Summons. However, it has all along been the object of the 1st defendant’s Preliminary Issue Summons to have a separate hearing before the trial to determine the preliminary issue and the 1st defendant’s application has failed to achieve such purpose, I ordered that the costs of the Preliminary Issue Summons incurred up to the hearing of 24 April 2013 be paid by the 1st defendant. 50.Before I leave the subject on the plaintiff’s locus to sue, I would add one observation about the 1st defendant’s summons for leave to file expert evidence on BVI law. The 1st defendant has taken out such summons as early as 19 March 2012. The application was not dealt with until it came before me in the PTR. This is highly undesirable. It is only with the consent of the parties that avoids perhaps lengthy argument shortly before the trial. Even with the granting of leave, there is very limited time available to the parties, in particular the plaintiff, to prepare the expert reports for the trial. Further, since I do not have the benefit of all the expert reports at the PTR, there is no way for me to give any sensible directions for the calling of expert evidence at the trial. Hence, for case management purposes, question about the right of the parties to adduce expert evidence should not be left for determination at such a late stage of the proceedings. FINAL OBSERVATIONS 51.In this action, the parties have taken out a lot of late applications shortly before the PTR. This practice is highly unsatisfactory and should be discouraged. Apart from the prejudice likely to be caused to the parties by such late applications including the possible adjournment of the trial, there is serious disruption to the court diary as the court has to struggle to find some time during the limited time before the trial to hear the applications (see also the dicta of Lam JA in Li Xiao Yun & Anr v China Gas Holdings Ltd, unreported, CACV 39/2013, decision on 11 March 2013, at §18). 52.But for the timing of the applications, most of these applications do have merit and the courts are always puzzled as to why these applications are made so late. 53.Express warning about late applications has already been given in §34 of Practice Direction 5.2, and practitioners should be reminded that late applications may be dismissed on the basis of delay alone. Unless there are exceptional circumstances and there are good reasons for the delay, one should not expect the courts to grant any late applications taken out shortly before the PTR. This is the case even if the applications have satisfied all the other threshold requirements for the granting of the relevant orders. Practitioners should therefore give serious thought about the question relating to outstanding interlocutory applications when they fill in the listing questionnaires before the case is set down for trial, otherwise they only have themselves to blame if their late applications are rejected on the ground of delay alone. Further, as pointed out by Lam JA in Li Xiao Yun & Anr v China Gas Holdings Ltd, supra, at §18), applicant for late application should normally be expected to face an adverse costs order on indemnity basis.
Mr Elliot Fung (in the hearing on 27 March 2013), Ms Eva Sit and Mr Elliot Fung (in the hearing on 24 April 2013), instructed by Kao, Lee & Yip, for the plaintiff Mr Hectar Pun (in the hearing on 27 March 2013), Mr Martin Lee, SC, Mr Hectar Pun and Mr. Richard Yip (in the hearing on 24 April 2013), instructed by Fairbairn Catley Low & Kong, for the 1stdefendant The 2nd defendant, in person, absent The 3rd defendant, represented by King & Wood Mallesons, attendance excused The 4th defendant, in person, absent The 5th defendant, represented by Reed Smith Richards Butler, attendance excused | |||||||||||||||||||||||||||||||||||||||
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