Kayne Creditors v. Roderick John Sutton and Others

HCMP 463/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 463 OF 2013

____________

_____________

_____________

______________

D E C I S I O N

______________

The application

1.On 15 April 2013, upon the ex parte application of the applicants (“the Kayne Creditors”), Master Hui ordered the 1^st respondent (“Mr Sutton”) to attend before an examiner and produce documents pursuant to a letter of request issued by a California court. 

2.The ex parte application was supported by an affidavit of one Mr Nagler, an attorney representing the Kayne Creditors in US proceedings.

3.On 5 June 2013, the 2^nd and 3^rd respondents (“Accolade” and “Sino Bright” respectively) took out this summons to set aside Master Hui’s order (“the Order”).  The Kayne Creditors oppose the application but Mr Sutton maintains a neutral stance.

The background facts

4.On 13 June 2011, the Kayne Creditors obtained a judgment against a company known as MTC in the United States in the sum of approximately US$47.6m.

5.The judgment was valueless because Grande Holdings Ltd (“Grande”) had obtained control of MTC and, according to the Kayne Creditors, had systematically stripped all its assets, leaving MTC an empty shell.

6.The conduct of Grande gave rise to a cause of action vested in Kayne Creditors against Grande, colloquially known in California as the “alter ego” claim.

7.The Kayne Creditors allege that Mr Ho, the controlling shareholder of Grande, has done exactly the same (as Grande did to MTC) to strip Grande of assets and render Grande judgment proof.

8.The Kayne Creditors have filed a suit (“the US proceedings”) in 2009 against Mr Ho and his companies seeking alter ego relief against them for rendering Grande a worthless shell.  It was in the US proceedings that the subject letter of request was issued.

9.Meanwhile, a petition has been filed by Sino Bright for the winding-up of Grande in HCCW 177 of 2011.  Provisional liquidators (Mr Sutton and Mr Fok) have been appointed for Grande.  There are 2 major claims by the creditors: (1) the HK$1.86 billion claim by Sino Bright; and (2) US$47.6m by the Kayne Creditors (who have substituted Sino Bright as the petitioners). The petition was heard by Deputy Judge le Pichon on 3 September 2013 and judgment is pending.

10.In June 2012, the Kayne Creditors sought the assistance of the provisional liquidators to produce certain documents in aid of the US proceedings.  Mr Fok commented that some categories of documents were too broad and others were privileged; and that the provisional liquidators had no objection to production save that they required a court order. 

11.The Kayne Creditors revised the wording of the requested documents before applying for the letter of request.  The US District Court of the Central District of California issued the letter of request on 25 October 2012. 

12.Four and a half months later, the Kayne Creditors took out an ex parte application in Hong Kong on 8 March 2013, and the Order was made by Master Hui on 15 April 2013.  Appendix B to the Order lists out 24 items of documents (collectively “the Documents” and individually “item”). 

13.On 5 June 2013, Accolade and its wholly owned subsidiary, Sino Bright, issued the present summons to intervene and to set aside the Order, supported by the affidavit of Eleanor Crosthwaite (“EC”), a director of Accolade. 

The US proceedings

14.In the US proceedings, the Kayne Creditors sued Mr Ho, Sino Bright, Accolade and a myriad of related companies.  There were originally 3 causes of action abbreviated as:

(i)   The alter ego claim;

(ii)   The intentional interference claim[1]; and

(iii)   The RICO[2] claim.

The operative pleading at the time the letter of request was applied for was the Third Amended Complaint.

15.On 3 January 2013, Judge Kronstadt in the US proceedings imposed a discovery cut-off date.  That had the effect of prohibiting the continuation of discovery of non-expert evidence beyond 4 February 2013.

16.On 27 February 2013, the case against Sino Bright was struck out.

17.On 9 May 2013, the RICO claims were struck out against all defendants.

18.On 29 August 2013, the intentional interference claim was struck out, leaving the alter ego claim as the sole remaining cause of action.

Application to set aside the letter of request

19.Accolade and Sino Bright came to know about the Order through their attorneys (“Orrick”) in the US proceedings.  They say that the provisional liquidators are subject to an implied undertaking not to use the Documents for purposes beyond the liquidation.  They seek to discharge the Order on the grounds that:

A. The Documents are no longer relevant in the US proceedings.

B. The Documents are not particular documents but impermissible classes of documents.

C. The application for the production of the documents is in substance an impermissible application for non-party discovery and an impermissible application for an order fishing for discovery.

D. There was material non-disclosure before Master Hui.

E. The Order was wrongly directed at Mr Sutton in his personal capacity.

20.The Kayne Creditors assert that this is part of the overall tactic of delay of Mr Ho, who does not want the US court to see the Documents as they will assist in showing that he is liable on the alter ego claim. 

Implied undertaking

21.The general principle is that whenever documents are produced and/or discovered under statutory or other compulsion or in furtherance of a legal duty, there is an implied undertaking not to use them for any purpose other than for the purposes for which the power was conferred:  Marcel v Commissioner of Police [1992] Ch 225 at 262C-D; Re Barlow Clowes Gilt Managers Ltd [1992] Ch 208 at 218E-F.

22.This implied undertaking extends to documents disclosed to public authorities including, in the context of company liquidations, to liquidators: Hamilton v Naviede [1995] 2 AC 75, 104D and 104G, per Lord Browne-Wilkinson VC.

23.In Akai Holdings Ltd v Ernst & Young (2009)12 HKCFR 649Bokhary PJ cited with approval the following passage:

“51. … In considering whether the transcripts should be made available to the defendants, it was essential to distinguish clearly between the functions of the Companies Court responsible for the winding-up of B Ltd and those of the Crown Court responsible for the conduct of criminal proceedings brought against the defendants. The information concerned was obtained in circumstances of confidentiality and by assurances, express or implied, given by officers of the Companies Court that it would be used only for the purposes of the liquidation. When anyone seeks to use such information for purposes collateral to the liquidation and foreign to those for which it was obtained, it ought to be unthinkable that the Companies Court should authorise its own officers to renege on their assurances in such circumstances in the absence of some compelling reason to do so.

52. At p.222D-E Millett J observed:

Given the liquidators’ powers to obtain information by compulsion, it has become the widespread practice for responsible persons to whom requests for information are addressed by liquidators to co-operate with the liquidators and to provide them with copy documents and other information and to submit to being questioned on an informal basis and without a formal order of the court. This is done on the implicit – if not explicit – understanding that the information supplied will be treated as confidential and will not be used except for the purpose of the liquidation.

And then (at p.223F) he said that

the proper and efficient functioning of the process of compulsory liquidation would be jeopardised if transcripts of the informal interviews of witnesses carried out by liquidators were to be made generally available to defendants to criminal proceedings.”

24.However, the court may authorize disclosure of information or documents obtained by liquidators to a third party if the court is satisfied that it is for the purpose of the office or that it is justified by the balance of consideration of how justice is properly to be obtained: Re Headington Investments Ltd [1993] BCC 500; In re Pantmaenog Timber Ltd [2003] BCC 659; In re a Company (No 005374 of 1993) [1993] BCC 734.

The respondent to the letter of request

25.Mr Sutton is in possession of the Documents (if at all) solely for the purpose of discharging his statutory duties under the Companies Ordinance.  There is no dispute that the principal liquidators are subject to the implied undertaking.

26.Mr Manzoni SC submits that there is a public interest element in a liquidator’s role and that is (a) to discover or reconstitute the knowledge of the company; (b) enable authorities to take appropriate actions against those who are found to have committed misfeasance against the company; and (c) assisting foreign courts and/or regulatory bodies to bring wrongdoers to face justice.  Provision of the documents will assist to that end.

27.Primarily, in my view, it is no part of the provisional liquidators’ duty to assist a foreign court in litigation (not liquidation, prosecution or any matter involving public interest) to which Grande is not a party.  There is nothing for the provisional liquidators to discover or no knowledge of the company to reconstitute because they are not in any way involved in the US proceedings; nor is there any suggestion that any party in the US proceedings will provide any information to the provisional liquidators as a result of compliance of the Order. 

28.However, as Mr Manzoni SC submits, the provision of the Documents to the US court is likely to be beneficial to the liquidation.  This is because if the Kayne Creditors are successful in their pursuit of the US proceedings and recover from the defendants therein, it may have the effect of reducing the claims made within the Grande liquidation, thereby increasing the possible return to creditors.

29.The California court has stated that the Documents are relevant to the US proceedings.  The allegations concerning stripping of assets of Grande are certainly closely tied to the genuineness of the Sino Bright debt that is the subject of HCCW177 of 2011.  On balance, the public interest to assist the foreign court in bringing defendants guilty of stripping the assets of Grande to justice outweighs the strict adherence to the implied undertaking.  There is, in principle, power in the court to make the Order against the provisional liquidators.  See PrediWave Corp & anor v New World TMT Ltd [20017] 4 HKC207, CA; In re a Company (No. 05374 of 1993) [1993] BCC734.

The jurisdiction to order production of documents pursuant to a letter of request

30.Section 76(1) of the Evidence Ordinance, Cap 8, empowers the High Court to make an order for obtaining evidence in Hong Kong for the purpose of assisting a foreign court in civil proceedings:

“(3) An order under this section shall not require any particular steps to be taken unless they are steps which can be required to be taken by way of obtaining evidence for the purposes of civil proceedings in the court making the order (whether or not proceedings of the same description as those to which the application for the order relates); but this subsection shall not preclude the making of an order requiring a person to give testimony (either orally or in writing) otherwise than on oath where this is asked for by the requesting court.

(4) An order under this section shall not require a person –

(a) to state what documents relevant to the proceedings to which the application for the order relates are or have been in his possession, custody or power; or

(b) to produce any documents other than particular documents specified in the order as being documents appearing to the court making the order to be, or to be likely to be, in his possession, custody or power.” (emphasis added)

31.An order will be made only if the evidence is required for use at a trial.  In Rio Tinto Zinc Corporation and others v Westinghouse Electric Corporation [1978] AC 547, 619F, Viscount Dilhorne states:

“If the court is not satisfied that evidence is required, direct evidence for use at a trial, as contrasted with information which may lead to the discovery of evidence, however much the court may be disposed to accede to the request, it has no power to do so. As I see it, it has no discretion in the matter.” (emphasis added)

32.Only particular specified documents and not classes of documents will be the subject of an order.  An order for discovery is not permitted.  In the Rio Tinto v Westinghouse caseat625G – 626B, Viscount Dilhorne stated,

“…The only documents which a person can be ordered to produce under section 2 of the Act are particular documents.

It follows that, if it were the case that the court was satisfied that the application for the order was for the purpose of obtaining evidence for civil proceedings, the court could only order the production of particular documents which it specified.  It could not order the production of ‘any memoranda, correspondence or other documents relating thereto’ or, in my opinion, of ‘any memoranda, correspondence or other documents referred to herein’, for those formulae do not specify particular documents.  Subsection (3) is of general application.  As Lord Goddard said in the Radio Corporation of America case[1956] 1 QB 618 ‘fishing’ proceedings are never allowed in the English courts; and, if one concludes, as I do, that this was a fishing operation, then the consequence is that no order should, even if section 1 of the Act is satisfied, having been made for the examination of any witness or for the production of any documents.”

33.However, a compendious description of several documents is permitted provided the exact document in each case is clearly indicated.  The documents must be actual documents about which there is evidence that they exist or existed and that they are likely to be in the respondent’s possession.  In re Asbestos Insurance Coverage Cases [1985] 1 WLR 331, 337D – 338D, Lord Fraser of Tullybelton said,

“The meaning of the expression ‘particular documents specified in the order’ in subsection (4)(b) was considered by several of the noble and learned lords who took part in the Westinghouse case[1978] AC 547 decision. They were all emphatic that the expression should be given a strict construction. Having regard to the purpose of subsection (4) which, as I have already mentioned, is to preclude pre-trial discovery, it is to be construed so as not to permit mere ‘fishing’ expeditions. Lord Wilberforce said, at p. 609:

‘These provisions, and especially the words ‘particular documents specified in the order’ (replacing ‘documents to be mentioned in the order in the [Foreign Tribunals Evidence Act] 1856) together with the expressed duty of the English court to decide that the documents are or are likely to be in the possession, custody or power of the person called upon to produce, show, in my opinion, that a strict attitude is to be taken by English courts in giving effect to foreign requests for the production of documents by non-party witnesses. They are, in the words of Lord Goddard CJ, not to countenance ‘fishing’ expeditions: Radio Corporation of America v Rauland Corporation [1956] 1 QB 618, 649.’

Lord Diplock expressed perhaps an even more restrictive view of the effect of subsection (4)(b) where he said, at p. 635:

‘The requirements of subsection (4)(b), however, are not in my view satisfied by the specifications of classes of documents. What is called for is the specification of ‘particular documents’ which I would construe as meaning individual documents separately described.’

I do not think that by the words ‘separately described’ Lord Diplock intended to rule out a compendious description of several documents provided that the exact document in each case is clearly indicated. … a general request for ‘all the respondent’s bank statements for 1984’ would in my view refer to a class of documents and would not be admissible.

The second test of particular documents is that they must be actual documents, about which there is evidence which has satisfied the judge that they exist, or at least that they did exist, and that they are likely to be in the respondent’s possession. Actual documents are to be contrasted with conjectural documents, which may or may not exist. In the Westinghouse case, I said, at p. 644:

‘The reference to ‘any’ documents in the sweeping-up words in the schedule to the letters rogatory suggests to me that the draftsmen did not know whether such documents were in existence or not.  Accordingly the words seem to be an attempt to circumvent paragraph (a) of section 2(4) of the Act of 1975, an attempt which should not be allowed to succeed.’”

34.Fishing expedition is not permitted.  In re State of Norway’s Application [1987] 1 QB 433, at 482C – D, Kerr LJ said:

“It arises in cases where what is sought is not evidence as such, but information which may lead to a line of inquiry which would disclose evidence. It is the search for material in the hope of being able to raise allegations of fact, as opposed to the elicitation of evidence to support allegations of fact, which have been raised bona fide with adequate particularization.”

35.The Hong Kong court has power to accept or reject the foreign request in whole or in part, whether as to oral or documentary evidence, and it can and should delete from the foreign request any parts that are excessive either as regards witnesses or as regards documents, which is commonly known as applying a blue pencil test: Hong Kong Civil Procedure 2013, Vol 1, para 70/6/2.

36.With these principles in mind, I now analyze the grounds for setting aside the Order.

A.   The Documents are no longer relevant in the US proceedings

37.In the face of a statement in the letter of request that a certain person is a necessary witness, the Hong Kong court should not be astute to examine the issues in the action and the circumstances of the case with excessive particularity for the purpose of determining in advance whether the evidence will be relevant and admissible.  That is essentially a matter for the requesting court.  Should it appear necessary to apply some safeguard against an excessively wide-ranging examination, that can be achieved by making the order for examination subject to a suitably worded limitation.  See Rio Tinto Zinc Corp. v Westinghouse Electric Corporation [1978] AC 547 at 654F-G per Lord Keith of Kinkel, PrediWave Corporation & anor v New World TMT Ltd [2007] 4 HKC 207, CA.

38.In line with its international obligation and judicial comity to render assistance to a foreign court, the Hong Kong court should as a matter of principle give effect to the letter of request.  However, there have been changes in circumstances since the making of the letter of request that requires this court to revisit the relevance of the Documents.

39.As of this hearing, only the alter ego claim stands, the other 2 having been struck out.  In addition, the claim against Sino Bright has been struck out but items 1 and 18 in Appendix B refer to documents in connection with Sino Bright.

40.Orrick has commented that the Documents are not relevant to the alter ego claim. 

(i)   Items 4-10, 13-15, 17 refer to transactions involving Grande/Grande’s subsidiary on the one part, and a third party or Grande’s shareholders on the other.  To prove the alter ego claim, the plaintiffs must demonstrate at a minimum that defendants to the US Proceedings controlled or directed a diversion of Grande assets to the detriment of creditors.  It is not sufficient to establish, without more, that any particular transaction entered into by Grande was disadvantageous to Grande.

(ii)   Item 16 concerning Grande’s receipt of dividend from a subsidiary actually improved Grande’s liquidity so that it is unclear how it impacted Grande’s ability to pay the plaintiffs’ judgment.

(iii)           Items 21and 22 relating to the Baker & McKenzie action have no bearing on the US Proceedings.  That action concerned Grande’s unpaid legal bills and a legal malpractice claim by Grande against Baker & McKenzie

41.It is noteworthy that Mr Nagler’s supporting affidavit did not spell out which of the 24 Items were relevant to each of the 3 causes of action in the US proceedings.  Neither did the letter of request.

42.Mr Nagler’s response to Orrick’s comments is that these arguments have already been made to and rejected by the US Court.  The transactions involved Grande and parties related to the defendants.  Mr Nagler relies on an inference by Mr Justice Stone (HCCL 37/2005 and 40/2005, at para 100) that Mr Ho’s failure to identify the principals behind the parties with whom Grande transacted in relation to 2 entities known as ZKEG and Starcom indicated that they were related to Mr Ho.

43.With respect to Mr Nagler, that was at a time when all 3 causes were prevailing before the US court.

44.Mr Nagler further explained in his second affidavit the relevance of items 4- 10, 13-17 to the alter ego claim with reference to the pleas in the Third Amended Complaint.  Items 21-22 are to refute Mr Ho’s assertion that the reason publicly filed documents described him as having ownership interests in various related companies were due to “mistakes” of his former solicitors (Baker & McKenzie) or their failure to follow instructions, as the court took the view that Mr Ho’s assertions were moonshine and effectively a lie.

45.An important consideration is that the discovery cut-off date has passed by the time Master Hui made the Order.  All the Documents concern matters of fact and appear to be subject to discovery cut-off date.  It is of significance that whilst the learned Magistrate Judge (author of the letter of request) commented that this date has passed, she has not made any protective order expressly barring the Kayne Creditors from adducing evidence under the letter of request.

“I’ll start off by saying that I think that this letter of request procedure is fact discovery for the purposes of our case. I think it is properly subject to the cutoff that was set by Judge Kronstadt and for purposes – I think it is discovery for purposes of our litigation schedule.

Now I’ll grant that there’s always something of a gray area about methods for obtaining evidence to use at trial that isn’t discovery.  … I mean, there are things that are not discovery, but I just don’t think that this procedure here is really that – all that gray an area.”

46.The learned Magistrate Judge did not say that the Documents are irrelevant.  She merely exercised a discretion to leave the trial judge to decide what to do with the Documents if ever obtained.  

47.I am not satisfied that the Documents are not relevant to the trial of the US proceedings.  Whether the trial judge will give leave to have them adduced at trial is a matter that does not affect this court’s jurisdiction under section 76 but only its discretion.

48.For present purposes, I treat all Documents as relevant to the alter ego claim, save for items 1 and 18 in relation to the transaction between Grande and Sino Bright.  I will come back to this when I discuss the non-disclosure of the strike out of the claim against Sino Bright.

B. The Documents are not particular documents but impermissible classes of documents

49.Save for items 22 and 23 conceded by Mr Barlow SC to be particular documents, he submits that the rest were for discovery and not particular documents.  The Kayne Creditors have failed to lay the evidential basis for a reasonable belief that Mr Sutton is in possession of the documents sought.

50.I start by saying that the provisional liquidators’ neutral position or that they have no difficulty in identifying each item do not mean that the documents sought are particular documents within the meaning of Rio Tinto v Westinghouse.

51.Items 21 to 23 are referred to in Hong Kong judgments or affidavits in Hong Kong proceedings.  They are specific and clearly exist.  Mr Barlow SC’s concession is rightly made.  That aside, there is no averment in Mr Nagler’s affidavit or the letter of request as to the existence of other items.  This fails the requirement in In re Asbestos.  In fact, Mr Nagler says that the Kayne Creditors seek to be as specific as possible under the circumstances, but do not know the exact dates when board meetings, monetary transfers, etc took place.  I appreciate their difficulties.  However, in the context of the allegations against defendants who stripped off Grande assets for no commercial reasons to people of unknown identities, those defendants might not have followed the proper mode of documenting decisions or leaving paper trails.  The lack of averment or basis for belief that the Documents exist might turn the Kayne Creditors’ application for documents into a fishing expedition prohibited by Rio Tinto v Westinghouse.

52.In addition, I find the description of the Documents was not for particular documents but reveal one or more problems as follows:

Problem with description	Description of documents in Appendix B	Item no. in Appendix B
Agreements
In the nature of discovery	An unidentified agreement(s) reflecting a transaction in a particular month/year “and all amendments or modifications thereto”	8(a), 9(b), 10(b)
Discovery; draftsman does not know who made the disposal or whether these documents exist	An agreement (without a specified date) pursuant to which Grande or its subsidiaries disposed of their interests to a specified Group and “all amendments or modifications thereto”	15(d)
Discovery	An agreement(s) unspecified by date with a general description	4(a), 6(a), 12(b)
In the nature of discovery; not clear whether it was the “documents” or the “transactions” that was referred to in the announcement	The documents (being agreement(s)) relating to a specific transaction and “all amendments or modifications thereto” referred to in an announcement of Grande’s subsidiary  or Grande	14(a), 17(a), 19(a)
Discovery; fishing	“All agreements” relating to transfers of funds from Grande or its subsidiaries to Sino Bright from 1/1/2007 to the present, “and all amendments or modifications thereto”	18(a)
Minutes and board resolutions
Discovery	Minutes and board resolutions of Grande “relating to, approving or discussing” Grande’s indebtedness, specific agreements for disposal of Grande’s assets, debts, purchase of investments or pledge	1(c), 2(b), 3(a), 4(b), 5(a), 6(b), 7(a), 8(a), 9(a), 10(a), 11(b), 12(c), 13(b), 14(b), 15(a), 19(b)
Discovery; several classes of documents; draftsman does not know which entity received what or held any meeting	Minutes and board resolutions of Grande or its subsidiaries “relating to, approving or discussing” a certain receipt by Grande or its subsidiary	16(a), 17(b),
Discovery; draftsman does not know which entity held any meeting	Minutes and board resolutions of Grande or its subsidiaries “relating to, approving or discussing” transfers from 1/1/2007 to the present	18(b)
Appraisals or valuation documents
Discovery; property not identified	Appraisals and valuation documents prepared by or for Grande in a year prior to a specific date or month for properties or interests sold by Grande	2(c), 3(b), 4(c), 11(c), 13(d), 14(c)
Discovery; draftsman is not sure who did what appraisal or valuation	Appraisals and valuation documents prepared by Grande or its subsidiaries in a particular period concerning a group of companies	15(b)
Discovery; draftsman is not sure who did the appraisal or valuation	Documents prepared by or for Grande that valued a particular asset	8(c), 9(c), 10(c)
Mortgage statements
Discovery; loans not identified	Mortgage statements showing the amounts due as of a specific month on loans secured by the properties owned by the Property Subsidiaries	2(d)
Accounting documents
Not specific document as accounting documents can cover a whole range of documents; discovery; draftsman is not sure what documents existed	“Accounting documents” reflecting intercompany loans that were discharged in connection with a specified transaction/ agreement, or prepared in respect of a particular transaction, or prepared in connection with transfers over a period from 1/1/2007 to present	2(e), 5(b), 6(d), 15(e), 17(c), 18(c), 19(c),
Discovery; draftsman not sure if documents exist	Documents describing the reasons of the writeoff	5(c), 6(c)
Bank documents
Not specific document as accounting documents can cover a whole range of documents including account opening document, monthly statements, deposit slips, etc	“Bank documents reflecting” various transactions	1(b), 2(f), 11(d), 12(d), 13(c), 14(d), 15(f), 16(b), 7(d), 18(d), 19(d)
No suggestion these existed; fishing	“Bank documents” reflecting payments of fees for bridging loans or other costs in connection with the Akai Settlement Agreement	12(e)
Reports
Not a specific document; draftsman did not know who prepared what	Reports prepared by or for Grande concerning the fairness or reasonableness of a specific agreement or transaction	2(g), 13(e), 14(e)
Not a specific document; draftsman did not know who prepared what	Reports prepared by or for Grande or its subsidiaries concerning the fairness or reasonableness of a specific agreement or transaction	15(c), 16(c)
Fishing	Monthly or quarterly financial statements for a particular year including unaudited pro forma consolidated statement of financial position of an entity as at a particular date referred to in Grande’s announcement of a particular date	13(f)
Mr Manzoni SC agrees that this might be a class.	Communications between Grande and its auditors concerning the matters described in Items 1-19	20
Fishing	Grande’s general ledger for 1/1/06 to present	24

53.Of the remaining items, it appears that only those that seek a specific agreement(s) identified by date and all amendments or modifications thereto are a compendious description of documents that can form the subject of an order under section 76.  These are items 1(a), 2(a), 11(a) and 12(a).

C.  The application for the production of the documents is in substance an impermissible application for non-party discovery and an impermissible application for an order fishing for discovery

54.I agree that this is in substance a third party discovery by the Kayne Creditors against the provisional liquidators.  Given my analyses under Ground B, in particular paragraph 52, the ex parte application was in part a fishing exercise.

D.   Material non-disclosure requires discharge of Master Hui’s order

55.The alleged non-disclosure is as follows:

D1.    That the claim against Sino Bright has been struck out and that Sino Bright was an adversary of the Kayne Creditors in HCCW 177/2011;

D2.    That the RICO claim has been struck out;

D3.    That the discovery cut-off date had lapsed;

D4.    That since the letter of request was issued, the relevance of the documents had gone;

D5.    That the trial date of the US proceedings has been rescheduled.

D1. That the claim against Sino Bright has been struck outand that Sino Bright was an adversary of the Kayne Creditors in HCCW 177/2011

56.On 27 February 2012, the claim against Sino Bright was dismissed with leave to amend for lack of personal jurisdiction (“the February dismissal”). It was subsequent to the Order, on June 29 2013, that the Kayne Creditors applied to add back Sino Bright as a party on the alter ego claim, which was dismissed by Judge Kronstadt on 28 August 2013.  By now, it is clear that Sino Bright is no longer a party to the US proceedings.

57.Mr Nagler failed to mention the February dismissal in his supporting affidavit.  Mr Manzoni SC submits that this was the only possible non-disclosure.

58.Mr Nagler has no explanation for the non-disclosure.  He explains in his 2^nd affidavit that only items 1 and 18 in Appendix B relate to Sino Bright.  Those 2 items are central to the claim against Accolade and other defendants in the US Proceedings, that the alleged Sino Bright debt was invented by Accolade, so as to make Grande insolvent in the face of the Kayne Creditors’ judgment against Grande, regardless of whether or not Sino Bright is a party to the US Proceedings.   

59.Despite Mr Nagler’s explanation, I find the non-disclosure to be material.  The February dismissal was relevant to the scope of the documents to be produced.  If Sino Bright was no longer a party, how was the Sino Bright debt to be challenged?  Who would be liable under the alter ego claim?  Anyone reading Items 1 and 18 would have doubted their relevance.   

60.The fact that some of the documents now in the possession of the provisional liquidators came from Sino Bright becomes material immediately.  Mr Nagler never denied (and is probably unable to) that Sino Bright has provided documents to the provisional liquidators for the purpose of liquidation that might have fallen within the terms of items 1 and 18.  Mr Manzoni SC’s submission that Sino Bright (or Accolade) has no interest to protect falls away.

61.Mr Nagler also asserts that items 1 and 18 are what Grande possessed prior to the date of appointment of the provisional liquidators.  To the extent that there are any additional documents that Sino Bright has submitted to support its claim subsequent to the appointment, the Kayne Creditors requested such documents directly from Accolade and another party in discovery in the US. If that was the intention, I am afraid that is not reflected in the current drafting of Items 1 and 18. 

62.The dismissal of the claim against Sino Bright and the fact that Sino Bright had supplied documents to the provisional liquidators, were material facts that should have been put into the weighing scales for Master Hui to consider whether a non-party’s documents should be provided to the Kayne Creditors, and the principles concerning release of the implied undertaking.

63.As for the failure to disclose that Sino Bright and the Kayne Creditors are adversaries in HCCW 177/2011, EC has not explained the relevance of this non-disclosure.  I fail to see the materiality either. In any case, Mr Fok has deposed to the fact that the provisional liquidators have not provided the Kayne Creditors with access to any documents of Grande to advance their claims against Sino Bright.

D2.  That the RICO claim has been struck out

64.The RICO claim under the Second Amended Complaint had been struck out once with leave to amend: see judgment of the US Court dated 9 May 2013 referring to this fact (Bundle B(iv)/738). This occurred before the Order was made but Master Hui was not informed.

65.The RICO claims have been struck out a second time with prejudice on 9 May 2013.  This occurred after Master Hui’s order. 

66.Mr Nagler did not admit the first strike out in his 2^nd affidavit and maintained that it was impossible to make that disclosure.  He added that the documents sought are all relevant to the alter ego and intentional interference claim.  Those 2 claims were based on different theories of relief but relied on the same set of facts.  None of the documents sought were relevant only to the RICO claim.

67.I find the non-disclosure of the first strike out of the RICO claim to be material as it might have affected the scope of the Documents to be produced. It can hardly be said that having one defendant (Sino Bright) and one cause of action struck out would not have alerted Master Hui to raise questions on the scope of Appendix B.

68.The non-disclosure of the 2^nd strike out of the RICO claim is not material.   The Kayne Creditors have no continuing duty after the ex parte Order to keep the learned Master informed from time to time of developments of the US proceedings.

D3. That the discovery cut-off date had lapsed

69.It is not denied that Master Hui has not been informed of the discovery cut-off date.  There was no explanation for it.  Mr Nagler contends that the discovery cut-off date was for “pre-trial fact discovery” in the US Proceedings but what the Kayne Creditors are seeking is not pretrial fact discovery but “documents for use at trial”. 

70.With respect, that distinction has no substance. The obvious intention of the discovery cut-off date was to bar each party from introducing evidence as to facts, however obtained, beyond that date.  I expect it was, to use Hong Kong terms, for better case management so that parties could prepare their case well in advance and that there should be no ambush at trial.  Documents to be obtained under the letter of request doubtless fall within that intention. 

71.By far, I find this to be the most material non-disclosure.  It went to the heart of whether or not the learned Master would have made the Order at all.

D4. That since the letter of request was issued the relevance of the documents had gone

72.This is really a conclusion flowing from non-disclosure under sections D1 to D2.

D5. That the trial date of the US proceedings has been rescheduled

73.The original trial date has been postponed twice from 2 July to 15 October and then 29 October 2013, one postponement being made before the Order.  Such postponement could not have any impact on the learned Master’s decision.  The non-disclosure was clearly immaterial. 

74.In summary, I find that there has been material non-disclosure in respect of the strike-out of the claim against Sino Bright, the first strike out of the RICO claim and the lapse of the discovery cut-off date. 

75.Where there is material non-disclosure, it is well established that the court will usually discharge the order without investigating the merits: Yau Chiu Wah v Gold Chief Investment Ltd and anor [2002] 2 HKLRD 832, Ma J (as he then was).

“43. Material non-disclosure is rightly regarded as a serious matter and in certain cases would not only justify the setting aside of an existing order but may also constitute the determining factor in the refusal of a fresh grant. However, it is important for a court, when considering whether or not to set aside an existing order or to grant a new injunction, to consider all the circumstances of the case to arrive at what is the justice of the situation. There is of course no doubt that the court does have the residual discretion not to set aside or to grant a fresh order even in circumstances where material non-disclosure has been shown.

44. Of the relevant factors that a court would consider in the exercise of its discretion, they would include the following:-

1. Whether the non-disclosure was innocent or deliberate.

2. The excuse or reason for such material non-disclosure.

3. Whether the non-disclosure would in fact have resulted in the original order not having been made in the first place or whether, conversely, even if the material fact or facts have been disclosed, this would have made no difference. Here, the court is required to look at the merits and justice of the grant of a Mareva injunction.

4. Whether the party guilty of the non-disclosure is deserving of a locus poenitentiae.

…

46. Normally, a court would expect affidavit evidence in relation to these factors. It is in my view important, given the stringency by which the court regards ex parte applications, that at all stages, the court is given the full picture. The cautionary warnings given by the courts over the years are not simply mantras to be recited. They are to be taken seriously. No one needs reminding that ex parte applications are very much against the normal way in which courts operate. The vigilance that needs to be displayed both by the court and the applicant seeking ex parte relief is multiplied many times over precisely because the party against whom an order is to be made is not present.”

76.The Order should be discharged but should I re-grant it?

77.First of all, as rightly pointed out by Mr Barlow SC, this is not a hearing of an inter parte summons by the Kayne Creditors under the letter of request.

78.Secondly, Mr Nagler knew that there was a duty of full and frank disclosure when he made the ex parte application before Master Hui: paragraph 9 of his 1^st affidavit.  Although there was no direct evidence that the non-disclosure was deliberate, Mr Nagler has failed to confess and avoid the non-disclosure.  His explanations have not been accepted by this court.  As attorney for the Kayne Creditors since 1995, he could not have failed to remember such important facts.

79.Thirdly, I have taken into account the fact that the learned Magistrate Judge has declined, on 3 September 2013,  without prejudice to grant Accolade’s application for  a protective order to prevent untimely discovery from the provisional liquidators.   She did so in view of the hearing of the present summons and the availability of alternative remedies to address any belated production of documents.  It was better for the case to go forward sooner than later and she considered that stopping the proceedings then would be more complicated than wait and see what would happen to the present summons. 

80.However, the learned Magistrate Judge commented that the letter of request was fact discovery for the purpose of the US litigation schedule that was subject to the discovery cut-off date and that it was a risky choice if the Kayne Creditors were to ask Judge Kronstadt to extend the discovery cut-off date.

81.These were weighty comments.  The Kayne Creditors have not explained why they sat on the letter of request for four and a half months.  There are now only about four weeks ahead of trial to push Mr Sutton to produce the Documents and for the parties to study them.  Considering all circumstances, this court will not exercise its discretion to re-grant the Order.  It is thus not necessary to apply the blue pencil test.

E.  Master Hui’s order was wrongly directed at Mr Sutton in his personal capacity

82.The importance of correct description where a company is directed to produce documents has been explained by Lord Denning MR in Penn Texas Corp v Murat Anstalt [1964] 2 QB 647, 663:

“The question arises, what is to be done when the documents are in the possession of a company? How is the court to compel production of them? One thing is quite clear. It is no good serving a subpoena duces tecum on any of the officers or servants of the company: for each of them can say that he has no authority from the company to produce them, and that would be an end of any proceedings against him: see Crowther v Appleby (1873) LR 9 CP 23 and Eccles & Co v Louisville and Nashville Railroad Co [1912] 1 KB 135; 28 TLR 67 CA. The only thing to do is to serve a subpoena duces tecum on the company itself, requiring it, by its proper officer, to give evidence and produce the documents. That is what was done in Rex v Daye [1908] 2 KB 333 DC. And it seems to me to be the only way in which a company can be compelled to produce documents which are in its possession or custody. The command or requirement on the company is comparable to an order on a company, by its proper officer, to file an affidavit of documents or to answer interrogatories. The officer answering must make inquiries of the other officers as to the documents and must then produce them on behalf of the company: see Bank of Russian Trade Ltd v British Screen Productions Ltd [1930] 2 KB 90, CA.”

83.The letter of request is made against Mr Sutton acting as one of the joint and several liquidators of Grande.  There is a correct description of Mr Sutton’ capacity in paragraph 4 of the supporting affidavit of Mr Nagler, though not in the originating summons or the Order.  Appendix B states clearly the capacity of Mr Sutton as provisional liquidator.

84.No one has been misled.  Master Hui was not.  Mr Fok’s indication in a pre-summons letter to the Kayne Creditors that he had no objection in principle to the request for production was signed by him as “Joint and Several Provisional liquidators acting as agent for and on behalf of the Company without personal liability”.  Mr Lam was appearing on behalf of  the provisional liquidators.

85.Mr Lam submits that this court can amend the title to these proceedings in relation to Mr Sutton to put matters beyond doubt.  However, there has been no application for amendment so far, not even by the Kayne Creditors.  Mr Barlow SC objects to any amendment but I can hardly see any reason for opposition.  The point about the Order being directed against Mr Sutton in his personal capacity is a red-herring, in my view.  I would not have discharged the Order on this ground alone.

Other matters

86.EC alleged that the provisional liquidators acted in breach of their professional duties in providing confidential documents concerning Grande to the Kayne Creditors, including the Documents.  These have been denied by the provisional liquidators on affidavit.  Mr Barlow SC has not pursued this line of argument.

87.There have been other matters raised but they were either not pursued in arguments or otherwise have no impact on this decision.

Conclusion

88.The court has power to make an order under section 76 against the provisional liquidators.  However, there has been material non-disclosure at the ex parte stage in failure to disclose that the claim against Sino Bright has been struck out, that the RICO claim has been stuck out and that the discovery cut-off date has lapsed.  I set aside paragraph one of Master Hui’s order and decline to re-grant any part of it.

Costs

89.Mr Sutton is a neutral party.  The summons was served on him and he has attended court through counsel to assist the court.  In accordance with usual principles, he should have the costs of this application.  However, about half of his affidavit in answer to the EC affidavits was background information and quite unnecessary to explain the allegations of suspected misconduct against the provisional liquidators.  I make an order nisi that Mr Sutton’s costs up to the summons assessed at $10,000 and half of the costs after the summons assessed at $100,000 should be borne by the Kayne Creditors.

90.Costs of Sino Bright and Accolade shall on a nisi basis be borne by the Kayne Creditors with certificate for 2 counsel.  I also allow the costs of junior counsel for the appearance in June.  I summarily assess the costs at $450,000.

91.I thank counsel for their assistance.

Mr Charles Manzoni, SC, instructed by Robertsons, for the applicant

Mr Douglas Lam, instructed by Lipman Karas, for the 1^st respondent

Mr Barrie Barlow, SC and Mr Chan Pat Lun instructed by K & L Gates for the 2^nd and 3^rd respondents