Waddington Ltd v. Chan Chun Hoo Thomas and Others

CACV 136/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 136 OF 2013

(ON APPEAL FROM HCA NO. 3291 OF 2003)

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BETWEEN

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REASONS FOR DECISION AND
DECISION AS TO COSTS

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Hon Barma JA (giving the Reasons for Decision of the Court):

1.This was an appeal by the plaintiff, brought with the leave of the Court of Appeal[1], against the decision of Deputy Judge Lok on 5 June 2013[2], whereby he dismissed three applications made by the plaintiff, namely:-

(1)  an application by summons dated 28 March 2013 (“the Yugang Summons”) seeking non-party discovery against Yugang International Limited (“Yugang”);

(2)  an application by summons dated 31 May 2013 (“the WKLL Summons”) for leave to issue a writ of subpoena duces tecum against Mr Carmelo Lee of Messrs Woo Kwan Lee & Lo (“WKLL”); and

(3)  an application by summons also dated 31 May 2013 (“the Deacons Summons”) for leave to issue a writ of subpoena duces tecum against Ms Lillian Chiang of Messrs Deacons,

and ordered the plaintiff to pay the 1^st defendant’s costs of the Yugang Summons on the party and party basis, and the costs of the 1^st defendant, Mr Lee and Ms Chiang in respect of the WKLL and Deacons Summonses on the indemnity basis.

2.The plaintiff, represented by Mr Justin Lam, contended that Deputy Judge Lok was wrong to dismiss its applications and was, in any event, wrong to order it to pay the 1^st defendant’s costs of the summonses.  It did not complain of the costs orders made in favour of Mr Lee and Ms Chiang.  At the conclusion of the appeal, we dismissed the appeal and indicated that we would hand down our reasons for doing so, and our decision on costs, in due course.  This we now do.

3.The action was brought by the plaintiff on 2 September 2003.  It involves a complaint by the plaintiff as to the sale by the 5^th Defendant of its entire shareholding in Prestige Property Holding Limited (“Prestige”) on the stock market between 22 and 26 May 2000, which, although made at market prices (ranging from HK$0.60 to HK$0.70 per share), resulted in the 5^th Defendant suffering a substantial loss on its investment in Prestige, whether on the basis of its original acquisition cost or the book value of the investment (which was lower).

4.The plaintiff is a minority shareholder in the 3^rd defendant, a listed company in Hong Kong.  The 1^st defendant was, at all material times, the chairman, an executive director and the largest beneficial shareholder of the 3^rd defendant.  The 5^th defendant was a wholly owned sub-subsidiary of the 3^rd defendant, its intermediate holding company being the 4^th defendant.  The 2^nd defendant was a company controlled by the 1^st defendant, which held a substantial (34.25%) shareholding in Prestige.

5.On 28 July 2000, just over two months after the 5^th defendant had sold its shareholding in Prestige, the 2^nd defendant entered into an agreement with Yugang to sell to Yugang the whole of its shareholding in Prestige at a price of HK$2.20 per share.  Mr Lee and WKLL acted for Yugang in connection with the transaction, while Ms Chiang and Deacons acted for the 2^nd defendant.

6.The plaintiff’s complaint is to the effect that the sales by the 5^th defendant and 2^nd defendant of their respective shareholdings in Prestige were part of an overall arrangement designed to enable the 1^st defendant to dispose of his interest in Prestige (held through the 2^nd defendant) at a significant premium, on terms that Yugang would not be required to make a general offer for shares in Prestige.  Had the 5^th defendant not disposed of its shareholding in Prestige earlier, that shareholding would (because the 5^th defendant would have been regarded as a concert party of the 1^st defendant) have resulted in Yugang having to make a general offer.  It is said that the 1^st defendant brought about the 5^th defendant’s sale of its shareholding in Prestige in breach of his fiduciary duties to the 5^th defendant (and to its parent company the 3^rd defendant), in that he should have, but did not, enable the 5^th defendant to benefit from the sale of Prestige shares to Yugang by either selling part of the 2^nd defendant’s shareholding in the market instead, or by selling proportionate parts of the 2^nd and 5^th defendants’ respective shareholdings in the market, so as to reduce their combined shareholding in Prestige to below 35%.  The plaintiff also relies upon a number of other factors to suggest that the sale by the 5^th defendant of its shareholding in Prestige was questionable.  The plaintiff says that as a result of this alleged arrangement, the 5^th defendant suffered loss – both in terms of the investment loss it sustained, and also in terms of the profit it would have made had it been allowed, as the plaintiff says it should have been, to participate in the sale of Prestige shares to Yugang.

7.As the plaintiff is not a shareholder in the 5^th defendant, but is a shareholder of the 5^th defendant’s ultimate parent company the 3^rd defendant, it brings these proceedings as a multiple derivative action on behalf of the 5^th defendant[3].

8.For present purposes, it should be noted that the plaintiff’s allegations raise the following issues, to which it says the documents sought to be obtained under the three summonses are relevant:-

(1)  The timing of the sale of Prestige shares by the 2^nd defendant to Yugang – the plaintiff contends that having regard to the close proximity in time between the disposal by the 5^th defendant of its Prestige shares and the sale by the 2^nd defendant of its shareholding in Prestige to Yugang, and the terms of the latter sale, it is to be inferred that the latter sale was already in prospect in late May 2000, when the 5^th defendant disposed of its shareholding in Prestige, and therefore that the alleged overall arrangement existed.

(2)  The issue of corporate control – the plaintiff contends that the 2^nd to 5^th defendants were under the corporate control of the 1^st defendant.  This point is of relevance (at least so far as concerns the 3^rd to 5^th defendants) in the context of the question whether or not this is a case in which a multiple derivative action may be brought.

(3)  The issue of whether or not the 1^st defendant was the controlling or directing mind of the 2^nd defendant, so as to make his actions those of the 2^nd defendant for the purposes of affixing it with liability for the matters complained of.

9.The documents sought were as follows:-

(1)  Under the Yugang Summons, four classes of documents were sought, namely:-

(a) documents passing between Yugang and WKLL relating to the engagement of WKLL by Yugang to act for it in connection with the sale;

(b) documents passing between Yugang and Ernst & Young relating to the engagement of Ernst & Young by Yugang to act for it in connection with the sale;

(c) documents passing between Yugang and the 2^nd defendant relating to proposals, offers and the like in respect of the sale; and

(d) documents passing between Yugang and the 2^nd defendant relating to the negotiation and execution of documents relating to the sale.

(2)  Under the WKLL and Deacons Summonses, the following documents were sought pursuant to the subpoenas proposed to be issued:-

(a) The retainer or engagement letter, or other communication, by which the firm in question was first engaged in relation to the acquisition of the Prestige shares by Yugang from the 2^nd defendant;

(b) The file opening form or other record showing the date on which the firm opened its file in relation to the transaction;

(c) The Disclosure and Escrow Letters as defined in the written sale agreement;

(d) Drafts of the written sale agreement;

(e) Attendance notes of meetings between the two firms relating to the transaction;

(f) Time sheets and bills kept by the firms and rendered by them to their respective clients; and

(g) (in relation to WKLL only), Yugang’s circular dated 21 August 2000 containing further details of the sale agreement.

10.The plaintiff says that all of the documents are relevant to the timing issue mentioned in paragraph 8(1) above, in that they would throw light on the question of when the sale by the 2^nd defendant to Yugang was first in prospect, not least by establishing the point in time at which discussions began, or when lawyers and professional advisers were instructed (this being likely to be after the sale was in prospect).  The plaintiff also says that classes (iii) and (iv) of the Yugang documents, and all of the documents sought from WKLL and Deacons, are relevant to the other two issues relating to the control exercised by the 1^st defendant over the 2^nd to 5^th defendants, as they would be likely to throw light on those issues by revealing who oversaw and directed the negotiations, discussions and documentation leading up to the sale to Yugang.

11.The plaintiff goes on to contend that the documents sought are of particular importance in the present case given the paucity of information and documentation disclosed by the 1^st defendant – our attention was drawn to the 1^st defendant’s witness statement, which was said to consist of largely undocumented assertions as to the timing of the transactions in the Prestige shares, and to the fact that the 2^nd defendant has never taken an active role in these proceedings, or complied with discovery orders made against it.  The plaintiff suggests that in these circumstances, it is necessary for the fair and just disposal of the proceedings for the documentation sought to be made available for the trial.

12.In his judgment, dealing with the Yugang Summons, the Deputy Judge noted the issues to which the documents were said to be relevant[4], and noted that Yugang opposed the making of an order in relation to most of the documents sought (although they were prepared to disclose a small number of documents if required to do so)[5].  He then stated that he did not think it necessary to decide whether or not the documents were truly relevant or necessary for the fair disposal of the proceedings, because, even if they were, the application for third party discovery came too late in the day, with no explanation being given for previous statements by the plaintiff that no additional interlocutory steps were envisaged, and no justification being offered by the plaintiff for the delay in making the application[6].  He expressed the view that granting the application would be likely to disrupt the parties’ preparations for the impending trial of the action, and might result in the conduct of the trial becoming much more difficult, to the extent of perhaps having to be adjourned in order to give the parties adequate opportunity to deal with the matters that might arise as a result of the additional documentation that could emerge[7].

13.So far as the WKLL and Deacons Summonses were concerned, the Deputy Judge took the view that as they sought documentation directed to much the same issues, they were simply a means to obtain, by a different route, substantially the same material as was sought by the Yugang Summons, and as such should be regarded as an abuse of process, and dismissed for that reason, and also for the reasons relating to lateness and delay as the Yugang Summons was dismissed[8].

14.Having dismissed all the Summonses, the Deputy Judge made the costs orders mentioned in paragraph 1 above.

15.Before us, Mr Lam recognised that the decisions of the Deputy Judge involved matters of case management, in respect of which this court will not interfere unless the decision below was plainly wrong.  He contended, however, that the Deputy Judge had plainly erred in three main respects:-

(1)     He had erred in principle, or was clearly wrong, in making orders which involved an injustice by dismissing the Summonses on the basis of mere delay, thus failing to take account of the primary aim of securing the just resolution of disputes in accordance with the substantive rights of the parties.

(2)     He had erred in dismissing the WKLL and Deacons Summonses as an abuse of process, by mischaracterising the issue of a subpoena duces tecum  as an attempt to obtain non-party discovery by the back door.

(3)     He had erred in principle in ordering the 1^st defendant to be heard on the WKLL and Deacons Summonses, and in ordering that the plaintiff should pay the 1^st defendants’ costs of all the Summonses.

16.We deal first with the Yugang Summons.  In our view, the Deputy Judge did not err in his approach to this application and was right to dismiss it.  We do not think that it would be right to say that the Deputy Judge dismissed the application on the basis of delay alone, without regard to the relevance or importance of the documents discovery of which was sought.  On the contrary, the Judge’s approach was to assume the relevance of the documents[9], and to go on to explain that notwithstanding this, having regard to the lateness of the application, for which the plaintiff had provided no good explanation, and the likely consequences of such lateness in terms of the impending trial, justice as between the parties to the proceedings called for the dismissal of the application.

17.So far as the lateness of the application is concerned, the only explanation put forward by the plaintiff was that it had in October 2012 applied for non-party discovery against Ernst & Young, seeking some of the documents which were now the subject of the Yugang Summons, and had taken out the Yugang Summons on 28 March 2013 after the dismissal by Deputy Judge Lok earlier that month of its application against Ernst & Young, on the grounds that the application should have been made against Yugang (the client) rather than Ernst & Young (the professional advisers).  This was, with respect, no proper explanation at all.

18.As has already been noted, these proceedings were commenced on 2 September 2003.  Following the defendants’ unsuccessful attempt to strike out the proceedings, which resulted in the proceedings being reconstituted as a multiple derivative action, the Re-Amended Statement of Claim was filed on 3 August 2010.  The core allegations in relation to the alleged overall arrangement in relation to the sale of the Prestige Shares, however, remained the same throughout.  Thereafter, in two Listing Questionnaires filed by the plaintiff on 19 September 2011 and 19 March 2012, the plaintiff confirmed that discovery had been completed, all steps that should be taken to prepare its case for trial had been duly taken, and that it did not intend to take out any further interlocutory applications. On 12 June 2012, the matter was fixed for trial in consultation with counsel’s diaries, with a nine day trial being fixed to commence on 15 July 2013.  In September and October 2012, the plaintiff sought non-party discovery against the 2^nd defendant’s bankers, its accountants, and Yugang’s auditors Ernst & Young.  By this stage, it must have been clear to the plaintiff that similar applications could have been made against Yugang (and, for that matter, WKLL and Deacons)[10].  It appears, however, that the choice of targets for the non-party discovery applications was a considered one on the plaintiff’s part.  Even at this stage, the application would have been a late one, for which some explanation should have been given – but no such explanation has ever been forthcoming.  Absent any explanation, we find it difficult to see why the court should be particularly sympathetic to the late application for non-party discovery made against Yugang.

19.Moreover, the risk of disruption to the parties’ preparations for trial, and to the trial itself, were self-evident, and the Deputy Judge cannot be faulted for taking such matters into account.  Any delay to the trial would clearly be prejudicial to the defendants, who have by now been dealing with these proceedings for close to 10 years, and could legitimately expect to have the trial go ahead as scheduled.

20.For all of these reasons, we think that the Deputy Judge was plainly right to dismiss the Yugang Summons.

21.Turning to the WKLL and Deacons Summonses, Mr Lam submitted that in treating them as an attempt to obtain the Yugang documents by a different route, the Deputy Judge failed to appreciate the differences between applications for non-party discovery and applications for the issue of subpoenas duces tecum.  Our attention was drawn to these differences, as set out in paragraphs 10.03 and 10.05 of Matthews & Malek on Disclosure (4^th ed), namely that a subpoena requires the production of specified documents identified in the subpoena to the court at the hearing[11], and not disclosure of classes of documents to the parties prior to trial (as would be the case with non-party discovery).

22.However, notwithstanding these differences, it seems to us that the Deputy Judge was right to observe that the purpose of both the Yugang Summons and the WKLL and Deacons Summonses was to secure for use at the trial documentation that the plaintiffs hoped would be of use to them in making out their case against the defendants.  True it is that the procedure by which this would be done would be different, and that ordinarily, the time at which the documents would become available to the parties would be different[12], but the ultimate purpose in either case would be the same – to obtain evidence for the trial.

23.It therefore seems to us that, having rightly dismissed the Yugang Summons, the Deputy Judge was entitled to dismiss the WKLL and Deacons Summonses for the same broad reasons, and to regard them, in the circumstances of this case, as constituting an abuse of the process of the court.

24.In this connection, we would observe that it should by now be well known that parties to litigation should give careful and thorough consideration from an early stage of proceedings to the steps that will need to be taken leading up to and at the trial.  In the context of documentation for use at the trial, parties should consider from the outset, and in any event, by the time that discovery is undertaken, whether or not it may be necessary to seek to obtain documentation from non-parties for use in the proceedings.  Where this is thought necessary, consideration should be given to whether such documentation should be the subject of a non-party discovery application, or (where for example, the documents needed can be identified with some precision) the subject of a subpoena duces tecum. In either case, the need for the relevant application should be made known at the case management conference stage, so that any disputes can be resolved in good time before trial, thus avoiding any risk of disruption to the trial[13].

25.So far as the order for costs in favour of the 1^st defendant is concerned, it seems to us that the 1^st defendant, being the other party to the proceedings, clearly had an interest in decisions of a case management nature that might impact upon the trial of the action, and as such was properly given an opportunity to be heard at the hearing of the Summonses.  The 1^st defendant thus being properly a party to the hearing, it was clearly open to the Deputy Judge to make the costs orders which he did in its favour.

26.For the foregoing reasons, we dismissed the appeal.  So far as the costs of the appeal are concerned, Mr Lam did not resist the making of orders for costs in favour of Mr Lee and Ms Chiang, to be taxed on the indemnity basis.  However, so far as the costs of the 1^st defendant were concerned, while accepting that the plaintiff should pay the 1^st defendant its costs of the appeal, Mr Lam resisted the application of Mr Pun for such costs to be taxed on the indemnity basis, rather than the party and party basis.  As will be apparent from the reasons which we have given, we consider the appeal to have been lacking in merit, and in the circumstances, we are of the view that the plaintiff should bear the 1^st defendant’s costs of the appeal, to be taxed on the indemnity basis if not agreed, and certify the matter as fit for the attendance of two counsel.

Mr Justin Lam, instructed by Kao, Lee & Yip, for the Plaintiff / Appellant

Mr Hectar Pun & Mr Richard Yip, instructed by Fairbairn Catley Low & Kong, for the 1^st Defendant / 1^st Respondent

Mr Anson Wong, instructed by Cheung, Tong & Rosa, for the Respondent to the third party discovery summons / 2^nd Respondent and the 1^st Intended Witness / 3^rd Respondent

Mr Jose Maurellet, instructed by Deacons, for the 2^nd Intended Witness /4^th Respondent