Taihan Electric Wire Co Ltd and Another v. Lee Chi Yuen Arctic and Others

HCA 454/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 454 OF 2013

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D E C I S I O N

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1.P2 seeks an order against D1 (Lee), D3 (Yuanzhi) and D4 (Winful) (collectively “the defendants”) for them to produce documents referred to in Lee’s affirmation for inspection.

The legal principles

2.The principles are not in dispute.  Under Order 24, rule 10(1),

“Any party to a cause or matter shall be entitled at any time to serve a notice on any other party in whose pleadings, affidavits or witness statements reference is made to any document requiring him to produce that document for the inspection of the party giving the notice and to permit him to take copies thereof.”

3.If the other party objects to the production, then, subject to rule 13(1), the court may make an order for production of the documents in question for inspection.  Rule 13(1) provides that,

“No order for the production of any documents for inspection or to the Court or for the supply of a copy of any documents shall be made under any of the foregoing rules unless the Court is of the opinion that the order is necessary either for disposing fairly of the cause or matter or for saving costs.”

4.A recent Court of Appeal decision propounding the tests to be applied is in Moulin Global Eyecare Holdings Limited (in Liquidation) v Olivia Lee Sin Mei HCMP 2192/2012 (unrep), 8 May 2013, Fok JA:

“31. I have set out above the rules of Court relevant to the present appeal. It is clear from those rules and from the authorities that have considered them (or the precursors to those rules) that there is a distinction between discovery of documents in an action in general and an application for production of documents referred to in pleadings or affidavits: see, in this respect, Quilter v Heatly per Lindley LJ at p. 49 and Shun Kai Finance Co Ltd v Japan Leasing (HK) Ltd per Rogers VP at pp. 523J-525B.

32. In the latter situation, where a party has referred to a document in his pleading or affidavit, the opposite party has a prima facie entitlement to see it, “unless good cause to the contrary is shewn” (per Jessel MR in Quilter v Heady at p. 48), or “unless there is some sufficient ground for refusing production” (ibid per Lindley LJ at p. 50), or “unless he can shew good cause why he should not” produce it (ibid per Bowen LJ at p. 51).

33. Nevertheless, it is clear from the rules that any order for production for inspection under 0.24 r.11 is expressly “subject to rule 13(1)” and that latter rule plainly places, on an applicant for an order for production, a burden to demonstrate to the court that “the order is necessary either for disposing fairly of the cause or matter or for saving costs”.

34. In Dynamic Way, Godfrey VP expressed the position thus (at p. 142B-D):

“We are concerned here with a document referred to in an affirmation, that is to say, the list of purchase orders mentioned in para 36. Although, prima facie, the party against whom it was sought to be used had a right to inspect this document and take copies of it, the court will not order production of the document for inspection unless the court is of the opinion that such an order is necessary either ‘for disposing fairly of the cause or matter or for saving costs ’; see 0 24 r 13 of the Rules of the High Court. ”

35.     There are thus two separate stages to be considered, although in practice these will usually be examined together. First, the party who has referred to the document in a pleading or affidavit bears the burden of showing good cause why an order for production should not be made. As a matter of practicality, at that stage, the fact of reference to a document in a pleading or affidavit will make it difficult for the referring party to contend that the document does not exist and it may also make it difficult for him to contend that it is not relevant. However, that is not the end of the inquiry as there is not then a presumptive rule in favour of an order for production and the referring party may be able to show, for example, that the document is privileged from production. In any event, under 0.24 r.13 there remains, secondly, and independent of the first stage, a burden on the applicant for an order for production to show the court that the order is necessary either for disposing fairly of the cause or matter or for saving costs.”

5.Mr Zimmern, counsel for the defendants, with whom I agree, adds that, first and foremost, an applicant has to demonstrate that “a reference has been made any documents” in the affidavit so as to invoke the court’s jurisdiction under rule 10(1).

The factual background

6.The facts to this case have been set out in my decision dated 15 April 2013 (“the Decision”).  I just highlight some of the salient facts for the purpose of this summons.

7.It is P2’s case that one Mr Lau Siu Ming (Lau) and Lee were its sales agents earning commission.  Yuanzhi and Winful were vehicles set up in 2007 to sell copper rods and collect the proceeds on behalf of the P2.  With regard to Yuanzhi, Lee was the sole director and shareholder from its incorporation until 31 March 2010.  Thereafter, Lau and Lee had each been its director and 50% shareholder.  With regard to Winful, Lee had been its director and shareholder since incorporation.  Lee was the sole signatory of the bank accounts of Yuanzhi and Winful.

8.It is P2’s case that Lau and Lee had dishonestly misappropriated proceeds for investment for their own profits, and that Yuanzhi and Winful had transferred monies out other than to P2.  P2’s current estimation of loss is about US$37m.  P2 relies on, among others, on constructive trust, breach of agency/fiduciary duties and dishonest assistance to found its claim.

9.P2 settled with Lau and had obtained judgment against him in the 2011 Action.  It now relies on the affidavit of Lau, a self-confessed fraudster and conspirator of Lee, to seek an injunction against the defendants.

10.The papers for the injunction application (which were quite substantial) were not served on Lee until 2 clear days and the skeleton submission 1 clear day before the day for call over (“the April hearing”) of the injunction summons.

11.The defendants prepared Lee’s affirmation (“the Affirmation”) in opposition to injunction application in great rush and served it on P2 at the April hearing.  As it had not yet made its way into the evidence, I had declined to rely on it at the April hearing (paragraphs 30 and 53 of the Decision).

12.The defendants’ case on affirmation is that any alleged loss of P2 was caused by its own speculative activities with the aid of Lau.  Lau was the mastermind manipulating the supplies of copper rods. He was in full control of Yuanzhi. Lee wrongly trusted Lau and lent him the credit facility of Winful for some “REPO arrangements” for financing P2’s financial needs.  Lau has now turned round to implicate Lee in exchange for P2’s promise not to enforce the judgment against Lau. 

13.The subject matter of this is paragraph 17 (“Paragraph 17”)  of the Affirmation which stated as follows:

“The plaintiffs have changed their case in this new Action, and now heavily rely on the assertion of Lau that I had conspired with him to carry out various activities.  It is worthy to note, however, that other than his bare allegations, Lau has not provided any evidence or documents to support his allegations.  I intend to provide the Court in due course with full sets of accounting and bank documents to prove that the assertions of Lau are entirely bare and groundless.”  (underline and emphasis added; words in italics shall be referred to as “the qualifying words” below)

14.Subsequent to the April hearing, Lee has filed a further affirmation containing, amongst others, the following information:

(i)      That he had “reviewed Yuanzhi’s bank records and confirmed that no payment of US$700,000 has ever been received by Yuanzhi from Lau.  This is yet another one of Lau’s fabrications…[1]” He produced 6 months’ bank statements in respect of 3 of Yuanzhi accounts in support of his averment.  

(ii)     To disprove Lau’s assertion that he and Lee conspired to enter into unauthorized REPO transactions, to generate funds to conceal an alleged shortfall created by the diversion of sales proceeds out of Yuanzhi, and that only the first REPO Agreement was approved, Lau exhibited 59 sale and purchase agreements (“REPO Agreements”) executed by Winful and Standard Bank Plc.

15.P2 then issued the present summons seeking an order for inspection and copying of all bank statements of the defendants from the opening of the bank accounts to the date of the Affirmation.

16.Yuanzhi is unrepresented in the present hearing.  Lee and Winful put forth the following grounds of objection:

A. The documents sought by P2 are not documents referred to in Paragraph 17 (“the reference point”); in any event relevant bank statements had been provided by D1 to P2.

B. The documents sought are not relied on by Lee save to the extent of those already disclosed by Lee, so there is no unfairness to P2 if they are not produced (“the reliance point”).

C. The order sought is unnecessary either for disposing fairly of the cause or matter or for saving costs (“the necessity point”).

17.There is no dispute that “bank statements” form a category of “bank documents”. 

The reference point

18.Under rule 10(1), the document referred to in the affidavit need not be individually listed or specified but must be alluded to instead of being left to be inferred: Zida Technologies Ltd v Tiga Technologies Ltd [2001] 3 HKLRD 698 at 714C.

“Documents need not be identified or individually described – a general reference will suffice, as this is a compendious way of referring to a number of documents: Smith v Harris (1883) 48 LT 869 … approved in Dubai Bank Ltd v Galadari … But a direct allusion to the document is required; where a document is not specifically mentioned its existence is prohibited from being inferred.”

19.Moreover, the reference must be to a document, as opposed to a dealing/transaction: Dubai Bank Ltd v Galadari (No 2) [1990] WLR 731.

20.The task of the court must always be to extract the fair meaning of the words used in their context.  Dubai Bank Ltd at 740B.

21.The Affirmation was produced in a rush.  A further affirmation to expand on Paragraph 17 was anticipated.

22.Mr Zimmern submits that Paragraph 17 meant that only those documents that would disprove Lau’s assertions would be provided in full (as opposed to in part, in the form of extracts).  The defendants have already produced “a full set of the available bank documents” pertinent to the defence case. He submits that P2 is effectively asking this court to ignore the qualifying words.  It is not for P2 to decide what other documents the defendants should rely on to disprove Lau’s assertions and seek discovery in this manner.

23.Paragraph 17 has not identified the account holder, or delineated the period covered by the term “bank documents”.  However, in my view, the qualifying words merely revealed the purpose of using those documents but do not undermine the fact that there has been a reference to bank document generally within the meaning of Order 24, rule 10(1).

24.The purpose of the affidavit, in the litigation, is not the relevant test: Zida Technologies,at 713.

25.Moreover, in the light of the “review” done by Lee referred to in paragraph 14(i) above, clearly, the “bank documents” covered more than the 6 months’ statements already produced.

26.On a fair reading, Lee has in Paragraph 17 made a general or compendious reference to bank documents including the documents now sought by P2.

The reliance point

27.It is true that the defendants placed no reliance on the documents sought (other than those already produced).  Nor did the court rely on the Affirmation at the April hearing.

28.Nevertheless, reliance is not the right test for rule 10(1), but service is.  In Zida Technologies, at 713, it is stated that,

“35. … An affidavit which has not been filed, but a copy of which has been furnished to the opposite party, is within the rule: Re Arbitration between Fenner and Lord [1897] 1 QB 667 (CA). Lord Esher MR stating at p.669:

The party on whose behalf the affidavit was made is no doubt not obliged to use it on the hearing of the motion, but he has procured it to be sworn in the matter and has shown it to his opponent.”

The reliance point is unsustainable.

The necessity point

29.Rule 10(1) does not apply only to fair disposal of the main action but also to disposal of proceedings at various stages, in the present case, the injunction application: Zida Technologies, at 715A.

30.In determining the question of necessity for production, the court relies on the issues disclosed in the pleadings and other related documents: Hong Kong Civil Procedure 2013, Vol 1, para 24/13/1.

31.Mr Zimmern points out that P2 has failed to identify issues in the statement of claim or other related documents, disposal of which requires production of the documents sought.  There is no dispute that funds were transferred in and out of the accounts of Yuanzhi and Winful.  The issue, he submits, was whether Lee had the instructions of Lau to make the transfers.  The documents sought would not be necessary for fair disposal of this issue.  The request for all bank statements for all bank accounts is wholly out of proportion, is a fishing expedition by P2 and an attempt to obtain premature discovery of an extremely wide category of documents.

32.Mr Hughes for P2 submits, and I agree, that the documents sought are directly relevant and essential to establish that the defendants have fraudulently misappropriated money from P2.  Yuanzhi and Winful were vehicles set up for sale of P2’s copper rods and collect proceeds.  There can be nothing more relevant than bank statements of the alleged fraudsters, which may disclose the source and destination of the funds, and the scale of the fraud. The fact that the defendants only use the bank documents for a limited purpose cannot bar P2 from using them to verify or destroy the defendants’ case, or support its own case.

33.I am satisfied that the documents sought are necessary for the fair disposal of the injunction application and is not a pre-mature application for discovery.

34.One can also safely assume that the injunction application will be vigourously contested.  Production of the documents sought in good time before the hearing will ensure that the hearing will progress as set down without ambush, further delay and resultant costs. 

35.Mr Zimmern also complains that the documents sought are vastly different from and much wider than what was actually referred to in Paragraph 17 as P2 seeks:

“full sets of bank statements for all of [D1, D3 and D4’s] bank accounts from the date of opening the accounts until … 21 June 2013.”

Mr Zimmern’s point is that the Affirmation was made in April.  Lee could not possibly have referred to a bank statement in May/June which did not exist at the time.

36.Without disrespect, I see no substance in that complaint.  The court can always limit the scope of discovery as the circumstances warrant.  The period of disclosure can be cut down to the period up to the date of the Affirmation, ie 12 April 2013.  The bank accounts are limited to those already identified in the draft order, as I have seen nothing from P2 to justify disclosure of all of Lee’s accounts (including eg his personal accounts).

Conclusion

37.I am satisfied that Lee has made reference to the documents sought in his Affirmation.  The defendants have failed to show good cause why an order for production should not be made.  The documents sought are necessary for the fair disposal of the injunction application and for saving costs.

38.Lee has been in control of the accounts of Yuanzhi and Winful.  If for whatever reason the 2 companies are unable to produce the bank statements, Lee shall provide those documents on their behalf.  I make an order in terms of paragraphs 1 and 2 of the draft order.

Costs

39.The defendants have contested the application but lost.  However, the actual utility of the documents sought is unknown.  Considering the circumstances, I exercise my discretion to make an order for P2’s costs to be in the cause of the injunction application.

40.I will add that discretion has not been properly exercised by the parties in deciding what documents to be put into the hearing bundles.  In this case, contents of the bank statements already produced by the defendants are not relevant and not referred to in the submissions at all.  The importance with the bank statements in this summons lies only in the account numbers and the period for which the defendants have already made disclosure.  A table, instead of copies of the bank statements, would have sufficed.

41.The bundles will be returned to P2, the bulk of which can be reused for the injunction hearing.  Only costs for photocopying the summons and related affidavits for this hearing will be allowed.

42.I have considered the costs statements of both sides, which are not far apart in terms of quantum.  The matter is not complicated.  There is no justification for an hourly rate beyond the usual rates for the fee earners.

43.I make an order nisi that P2’ costs summarily assessed at $50,000 shall be in the cause of the injunction application.

44.I thank counsel for their assistance.

Mr Sebastian Hughes, instructed by Jones Day, for the 2^nd plaintiff

Mr Richard Zimmern, instructed by Smyth & Co, for the 1^st and 4^th ‑7^th defendants

The 3^rd defendant, was not represented and did not appear