Chinacast Education Corporation and Others v. Chan Tze Ngon and Others

HCA 1062/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 1062 OF 2012

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BETWEEN

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Before: Mr Registrar K.W. Lung in Chambers (Open to the public)

Date of Hearing: 24 July 2014

Date of Decision: 15 August 2014

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D E C I S I O N

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THE APPLICATION

1.By application, the plaintiffs seek an order against the 1^st to the 5^th defendants for documents as set out in the schedule annexed with the summons dated 15 April 2014.  Part of the documents requested are electronic documents.

2.The plaintiffs have come to an agreement with the 1^st and the 5^th defendants[1].  Therefore, the plaintiffs’ application for discovery only concerns the 2^nd, 3^rd and 4^th defendants (collectively called “the defendants” unless otherwise stated).

3.The 2^nd defendant applies for leave to take out a summons for discovery against the plaintiffs out of time.  Leave was given to the 2^nd defendant to do so.

4.Pursuant to leave having been granted, the 2^nd defendant’s summons for discovery from the plaintiffs had been adjourned to be heard on a date fixed.

5.The parties are legally represented.[2]

E-DISCOVERY

6.The plaintiffs specifically apply for electronic discovery of the various emails and other documents from the defendants.  According to the supporting affidavits for this application, the plaintiffs had already retrieved about 120,000 emails and documents from a hard-disk of the computer of the Group of companies of the plaintiffs where the defendants had worked.  The plaintiffs now ask for electronic documents from the defendants’ personal accounts, but they have not disclosed the number of such electronic documents will be involved.  However, the plaintiffs’ application has also involved other hard-copy documents, which are to be dealt with in the same application.

7.Although electronic discovery is governed under Order 24 of RHC, because of the nature of the documents, the volume involved and their accessibility, the treatment of electronic discovery is different from the treatment of hard-copy documents discovery.  In Digicel (St Lucia) Ltd & Others v Cable & Wireless plc and Others Morgan J. 23 Oct 2008 [2009]2 All ER 1094, which will be discussed further below,  Morgan J. discussed the reasons for special treatment for electronic discovery.  At §38 of the judgment, he said:

“The Cresswell Report (Electronic Disclosure: A Report of a Working Party Chaired by the Honourable Mr Justice Cresswell, 6 October 2004, http://www.hmcourts-service.gov.uk/docs/electronic_disclosure1004.doc) makes a number of points which it is useful to record. At para 3.3, the report explains why the issues which arise in relation to disclosure of electronic documents are different from the issues which arise in relation to disclosure of paper documents. These reasons include the huge volume of documents which are created and stored electronically, the ease of duplication of electronic documents, the lack of order in the storage of electronic documents, the differing retention policies of the parties, the existence of metadata and the fact that electronic documents are more difficult to dispose of than paper documents.”

At §§41 and 42, he referred to the experiences of the United States where he said:

“It is worth quoting from two decisions of the United States courts. In Byers v Illinois State Police (2002) 53 Fed R Serv 3d 740 the court stated:

'Computer files, including e-mails, are discoverable … However, the Court is not persuaded by the plaintiffs' attempt to equate traditional paper-based discovery with the discovery of e-mail files … Chief among these differences is the sheer volume of electronic information. E-mails have replaced other forms of communication besides just paper-based communication. Many informal messages that were previously relayed by telephone or at the water cooler are now sent by e-mail. Additionally, computers have the ability to capture several copies (or drafts) of the same e-mail, thus multiplying the volume of documents. All of these e-mails must be scanned for both relevance and privilege. Also, unlike most paper-based discovery, archived e-mails typically lack a coherent filing system. Moreover, data archival systems commonly store information on magnetic tapes which have become obsolete. Thus, parties incur additional costs in translating the data from the tapes into useable form.'

The question of the cost of e-disclosure and in particular the cost of restoring back-up disks was discussed in Zubulake v UBS Warburg LLC (2003) 217 FRD 309. The court said:

'The application of these various discovery rules is particularly complicated where electronic data is sought because otherwise discoverable evidence is often only available from expensive-to-restore back-up media.  That being so, courts have devised creative solutions for balancing the broad scope of discovery prescribed in [the rules] with the cost-consciousness of [the relevant rule].  By and large, the solution has been to consider cost-shifting: forcing the requesting party, rather than the answering party, to bear the cost of discovery.'”

Practice Direction PDSL 1.2

8.The Judiciary has issued the Practice Direction PDSL 1.2 on E-Discovery (“the Practice Direction”), which will be operative on 1 September 2014 for complicated commercial cases.  But it is also applicable to other cases where the Court may direct.

9.The Practice Direction is designed for practical solutions for the problems that may arise out of e-discovery as paragraph A2 of the Practice Direction sets out the purposes:

“The purpose of this Practice Direction is to provide a framework for reasonable, proportionate and economical discovery and supply of Electronic Documents under Order 24 of the Rules of the High Court (RHC). It is also to encourage and assist the parties to reach agreement in relation to the discovery of such documents in a proportionate and cost-effective manner.”

10.Therefore, although the Practice Direction has not been in operation as of today, this Court will make reference to those practical guidelines as set out in the Practice Direction, which are general principles so far as they are applicable to the present application for the electronic documents.  For example, the following general principles are applicable to the present application:

“C General principles, scope of discovery and privilege

4. When considering discovery of Electronic Documents, the parties and their legal representatives should bear in mind the underlying objectives under Order 1A, rule 1 of the RHC including the following general principles :

(1) the cost of discovering Electronic Documents must be proportionate to the amounts claimed in the proceedings;

(2) Electronic Documents should be managed efficiently in order to minimise the cost to be incurred;

(3) technology should be used in order to ensure that document management activities are undertaken efficiently and effectively;

(4) discovery should be given in a manner which gives effect to the underlying objectives under Order 1A;

(5) Electronic Documents should generally be supplied in a form which allows the party receiving the Electronic Documents the same ability to access, search, review and display the Electronic Documents as the party giving discovery; and

(6) discovery of Electronic Documents which are of no relevance to the proceedings may place an excessive burden in time and cost on the party to whom discovery is given.”

Reference should be made to the Court’s observations to encourage parties to have strong case management by identifying and simplifying the issues in order to avoid unnecessary massive discovery in Cable & Wireless HKT Telephone Ltd. (formerly Hong Kong Telephone Company Limited) and Another v City Telecom (HK) Ltd. CACV 197/1999 [2000] HKEC 386 C.A.  See HKCP 2012 edition paragraph 24/0/12.

11.From the proposed directions of the plaintiffs’ summons, it is apparent that they had not taken into consideration the practical issues set out above.  It is therefore envisaged that those proposed directions may not be practicable for electronic discovery.  It is for this reason that this Court has, before the hearing, invited the parties to consider and discuss the matter.  This will be discussed in more detail below.

THE FACTUAL BACKGROUND

12.The facts of the matter are summarized in the Decision of Mr. Justice A. Chan delivered on 11 November 2013, which I shall respectfully adopt as follows:

“The parties

3. The 1^st plaintiff (“P1”) is a Delaware company which is the ultimate parent company of the CEC Group (“Group”). Until May 2012 it was listed on NASDAQ.

4. The business of the Group consists of the provision of post-secondary and e-learning services in the Mainland, where it operates by means of wholly foreign owned subsidiaries (“WFOEs”). The educational services are provided in two ways, namely, through a traditional university group (“TUG”) and by e-learning services (“ELG”).

5. The other 4 plaintiffs are members of the Group.

6. The 2^nd plaintiff (“P2”) is a BVI company with which each of the first 4 defendants (“D1-4”) entered into a contract of service to provide services for the Group.

7. The 3^rd and 4^th plaintiffs (“P3” & “P4”) are WFOEs in Shanghai and were the most significant of the Mainland subsidiaries in financial terms.

8. The 5^th plaintiff (“P5”) held the shares in two holding companies which respectively operated two colleges belonging to the TUG.

9. The original defendants in these proceedings are D1-4 whose relationship with the Ps was at the material time as follows:

(1) Each defendant had a service contract with P2;

(2) Mr Chan (D1) was a director, the Chairman and CEO of P1 and P2 until 26 March 2012. He was also the Chairman and Legal Representative of P3 and the General Manager, Executive Director and Legal Representative of P4;

(3) Mr Sena (D2) was the CFO and Secretary of P1 and P2 until 26 March 2012. He was also the General Manager and Legal Representative of P5;

(4) Ma (D3) was the Chief Accounting Officer (“CAO”) and Vice President of P1 and P2 and the Supervisor of P5 (Ma does not admit that he was the Supervisor of P5 but there is documentary evidence to that effect);

(5) Mr Jiang (D4) was the Chief Investment Officer and President of P1 and P2 and a director of P3.

10. Ms Fu (D5) was joined as a defendant on 27 August 2012.

11. The other defendants, D6-13, were also joined on 27 August 2012, but no cause of action is pleaded against any of them. They have been joined only for the purpose of extending the Injunction to cover assets held by them which, Ps allege, are held for one of D1-4.

Background to the litigation

12. In 2011, there was conflict at board level in P1 which gave rise to a proxy contest that resulted in new directors being appointed to the board, the appointment of these directors having been opposed by D1-3 (Ma says that he had only supported D1 and D2 passively in the proxy contest). It is alleged by Ps that in the early part of 2012, D1-4 acted together in attempting to obstruct the audit of the two main operating entities of the Group, P3 & P4 (it is right to point out that this was not pressed at the hearing because there was no evidence that Ma played a part in the alleged obstruction). This led to D1 being removed from his positions with P3 & P4 on 26 March 2012. At the same time D2 resigned. Ma was removed from all positions within the Group on 11 April 2012. On 29 March D4’s positions within the Group were terminated.

13. The new management then sought to assert control over all of the Group entities but found that important financial records and other documents held at the offices of P3 and P4 in Shanghai had been removed or destroyed. On 30 March 2012, D1 tried to prevent the new management from entering the premises occupied by P3 & P4 by changing the locks; he had earlier demanded that Mr Feng (the new CEO of the Group) and his team should leave. Personnel in the Shanghai finance office continued to destroy documents and on 16 April some 10 to 15 persons not employed by P1 entered the premises and forcibly took away the hard drives of computers. The chops and other important documentation required to allow for the running of the business had also been taken on the instructions of D1.

14. After obtaining new chops and taking control of the Shanghai companies the new management ascertained, it says, that D1-4 had acted in breach of duty by misappropriating assets of the Group and by diverting corporate opportunities from the Group for their own benefit. These wrongful acts have been pleaded under different headings in the Statement of Claim (“SOC”), which include those summarized below. In short, a fraud of considerable scale had been committed against Ps by people who were in control of them. These companies have been stripped of a massive amount of cash as well as assets of considerable value. Much of their business has also been taken away. P1 has lost its listing status as a result of the wrongdoings and Ps are now impecunious.”

THE PLAINTIFFS’ CASE AGAINST THE DEFENDANTS

13.The plaintiffs’ complaints against the defendants are mainly for their obstruction of the audit process in early 2012[3], the obstruction of investigation, destruction of records[4] and the wrongful acts against the Group[5], the particulars of which are:

a. diversion of corporate opportunities and resources of the Group for the personal benefit of the defendants;

b. unauthorized borrowings by subsidiaries of the 1^st plaintiff;

c. unauthorized pledging of the 1^st plaintiff’s cash deposits to secure bank borrowings of undisclosed third parties;

d. misappropriation of over RMB760 million from the bank accounts of the 3^rd and 4^th plaintiffs between July 2011 and April 2012;

e. misappropriation of the proceeds of allotment of shares of the 1^st plaintiff;

f. acquisition of the 1^st plaintiff’s colleges, namely, FTBC, Lijiang College, and HIUBC at inflated values;

g. unauthorized transfer of the 1^st plaintiff’s colleges to individual persons outside the Group including the 4^th defendant and his associates; and

h. mismanagement of the ELG business.[6]

14.To those allegations above, the defendants deny liabilities as pleaded in their Defences.

E-DISCOVERY TO BE MADE UNDER ORDER 24 RHC

15.The application is made under Order 24 rule 7 of the RHC:

“(1) Subject to rule 8, the Court may at any time, on the application of any party to a cause or matter, make an order requiring any other party to make an affidavit stating whether any document specified or described in the application or any class of document so specified or described is, or has at any time been, in his possession, custody or power, and if not then in his possession, custody or power when he parted with it and what has become of it. (L.N. 157 of 2003 and L.N. 199 of 2003)

(2) An order may be made against a party under this rule notwithstanding that he may already have made or been required to make a list of documents or affidavit under rule 2 or rule 3.

(3) An application for an order under this rule must be supported by an affidavit stating the belief of the deponent that the party from whom discovery is sought under this rule has, or at some time had, in his possession, custody or power the document, or class of document, specified or described in the application and that it relates to one or more of the matters in question in the cause or matter.”

Order 24 rule 8 of RHC provides:

“(1) On the hearing of an application for an order under rule 3 or 7 the Court, if satisfied that discovery is not necessary, or not necessary at that stage of the cause or matter, may dismiss or, as the case may be, adjourn the application and shall in any case refuse to make such an order if and so far as it is of opinion that discovery is not necessary either for disposing fairly of the cause or matter or for saving costs. (L.N. 152 of 2008)

(2) No order for the disclosure of documents shall be made under section 41 or 42 of the Ordinance, unless the Court is of opinion that the order is necessary either for disposing fairly of the cause or matter or for saving costs. (L.N. 152 of 2008)”

THE RELEVANT LEGAL PRINCIPLES UNDER ORDER 24

16.The plaintiffs rely upon the legal principles set out in my Decision in The Incorporated Owners of Kodak House II and No. 321 Java Road v Kai Shing Management Services Ltd (unreported, HCA 711/2011, 9 October 2012) at §§9 and 13, which are summarized below:

a. A party seeking an order for discovery must make out a prima facie case that:

(1) the specified document or class of documents exist;

(2) the party against whom discovery is sought has or had the documents in his possession, custody or power;

(3) the documents relate to a matter in question in the action; and

(4) discovery is necessary either for disposing fairly of the cause or matter or for saving costs.

(per To J at paragraph 11 of his judgment in Tullett Prebon (Hong Kong) Ltd v Chan Yeung Fong Nick & Ors HCA 2197 of 2009, 9 June 2011)

b. Even if existence, possession etc. and relevancy were established, discovery would only still be granted if it was necessary for fairly disposing of the cause or matter.  Deak & Co (Far East) Ltd v NM Rothschild & Sons Ltd & Ors (CA)[1981] HKC 78

c. The task of the court will often be to determine when “doing justice to the claim” stops and “fishing” or, to use another analogy “the scatter gun approach” starts.  At that point the onerous nature of the discovery exercise passes from the necessary and permissible to the unnecessary and impermissible”. Mariner International Hotels Ltd v Atlas Ltd & another (unreported, HCA 10714, 10752 and 10821 of 1998 Burrell J., 18 January 2002) at §11;

d. The pleadings in an action define the issues to be tried.  On the other hand the fact that an issue is raised in the pleadings is not determinative as to whether it relates to a matter.  Discovery is not required of documents which relate to irrelevant allegations in pleadings which even if substantiated could not affect the result of the action.   Cheung JA said in Paul’s Model Art Gmbh & Co KG v U.T. Limited & Ors (unreported, CACV 139 of 2005, 14  December 2005) at paragraph 25.

e. It is also clear that post CJR, the Court should give effect to the underlying objectives of the rules and procedures when it exercises its powers under Order 24 and when it interprets the provisions of Order 24.  In deciding whether any document relates to a matter in question in the action, whether any document is or has been in the possession, custody or power of a party, and whether discovery of a document sought is necessary either for disposing fairly of the cause or matter or for saving costs, the Court should always bear in mind the objectives of cost effectiveness, expeditious disposal of cases, proportionality, procedural economy and ensurance of fairness between the parties. Deputy Judge Mimmie Chan (as she then was) in Sunny Tadjudin v Bank of America, National Association (unreported, HCA 322 of 2008, 22 December 2011);

f. Whether a class of documents as a whole is relevant for discovery purposes must depend upon what information it is reasonable to suppose the documents of the class contain and whether such information may enable the plaintiffs to advance their own case or damage that of the defendant.  It must be defined by reference to the plaintiffs’ pleaded claim in its general sense, as distinct from its detailed exposition and by the defendants’ pleaded defence in the sense of its general refutation of the plaintiffs’ claim.  What matters for discovery purposes is the claim and the defence to it in the broadest sense and not to the detailed particulars of either claim or defence.  The document or class of documents must be shown by the applicant to offer a real probability of evidential materiality in the sense that it must be a document or class of documents which in the ordinary way can be expected to yield information of substantial evidential materiality to the pleaded claim and the defence to it in the broad sense.  If the document or class cannot be demonstrated to be clearly connected to issues which have already been raised on the pleadings or which would in the ordinary way be expected to be raised in the course of the proceedings, if sufficient information were available, the application should be dismissed.  Colman J in O Company v M Company [1996] 2 Lloyds LR 347, adopted by Mr. Justice Barma had, in his judgment for Moulin Global Eyecare Holdings Limited (in liquidation) (formerly known as Moulin International Holdings Limited) & Ors. v KPMG (a firm) HCA118/2007 delivered on 8 June 2010.

DISCOVERY AGAINST THE 2^ND DEFENDANT

17.For the discovery against the 2^nd defendant, the plaintiffs seek from the 2^nd defendant:

a. Electronic copies of all emails sent to and from the email addresses tony@sena,com.sg, [email protected], and [email protected] (“D2’s Emails”); and

b. All accounting vouchers, cheques and remittance advice prepared by the 5^th defendant as alleged in paragraph 19 of the Defence of the 5^th defendant (“Accounting Documents”)

The plaintiffs’ supporting affidavit

18.The plaintiffs rely upon the 4^th affidavit of Douglas Nelson Woodrum filed on 15 April 2014.[7]

19.In Mr. Woodrum’s supporting affidavit, the plaintiffs have not stated that the electronic documents are for the plaintiffs’ case of conspiracy against the defendants.  The 2^nd defendant submits that the plaintiffs have no evidential basis that they were sought in furtherance of the alleged conspiracy or conspiracies between the 2^nd defendant and other defendants or for the purpose of perpetuating the fraud.[8]

20.Paragraph 36 of the Statement of Claim pleaded that the 1^st to 5^th defendants and their accomplices had made collaborative obstruction to the 3^rd and 4^th plaintiffs in their taking control of the Shanghai Office and at the same time, activities were undertaken by or on the instructions of the 1^st and 4^th defendants to destroy and/or remove records of the plaintiffs in order to conceal or destroy evidence of their wrongdoing.

21.The plaintiffs submit that the emails are relevant to the issues to be tried, without reference to the parts of the pleaded issues.[9]

22.However, knowing that the scope of the emails may be too wide and may be oppressive, the plaintiffs submit that they are not seeking the discovery of irrelevant emails and to the extent that some of the emails in the email accounts in question are irrelevant, the plaintiffs do not seek disclosure of them.  Nevertheless, the plaintiffs have not been able to make any proposal as to how to define and determine, still less to sort out the irrelevant documents.  Nor have they stated that they will allow the 2^nd defendant to make the final determination as to what documents are relevant.  All these questions will give rise to further interlocutory proceedings, which should have been avoided before this application by discussion between the parties themselves without coming to court; or alternatively to be decided by the court before this application.

The 2^nd defendant’s grounds of objection

23.The 2^nd defendant’s objections to the discovery of the emails are that there is no evidential basis that any of D2’s Emails may be relevant to the plaintiffs’ claim of conspiracy[10]; that the emails are not identified[11]; there is no time frame for the emails to be discovered[12]; there may be private or privileged correspondence with his legal advisers for the purpose of the proceedings[13] and the discovery is fishing and oppressive.[14]

24.Mr. Woodrum in para 12 of his 6^th affidavit proposed, as an alternative, an Order be made that (1) the 2^nd defendant should try to recover the deleted emails; (2) if that could not be done, should at least disclose all emails sent to and from the 3 email addresses of his in the period from November 2011 to May 2012 “relating to any matter in question including and not limited to communications with the other Defendants, members of the Shanghai office of the 1^st Plaintiff including without limitation Ms Cheng Ying and Mr Carl You, Deloitte and other external advisors of the Group, entities allegedly owned, managed or otherwise controlled by one or more of the Defendants and persons allegedly related to or otherwise associated with any of the Defendants”.

25.The 2^nd defendant, however, argues that this alternative is not acceptable because the Court simply has no jurisdiction to make an order for those documents and they are also too wide and they are fishing and oppressive to the 2^nd defendant.[15]

THE APPROACH ON E-DISCOVERY

26.The legal principles stated in paragraph 16 supra apply to e-discovery.

27.The parties should bear in mind the Court’s approach in its case management role in the discovery exercise, which is set out in the Final Report of the Civil Justice Reform[16]:

“The court should be expected to exercise its case management powers with a view to tailoring an appropriate discovery regime for the case at hand. It should have a residual discretion both to direct what discovery is required – to narrow or widen the scope of discovery required, to include, if necessary and proportionate, full Peruvian Guano style discovery – and in what way discovery is to be given.”

The Peruvian Guano style is the starting point and the scope should be narrowed down[17], particularly for e-discovery in view of its nature – “the proliferation of copies (of emails), the decentralization of records…The ease of inserting multiple addressees in an e-mail makes it easy to send the same message to a number of persons. Documents are also thus sent to multiple recipients as attachments…”[18]

The relevant legal principles for e-discovery

28.For consideration of the plaintiffs’ application for D2’s Emails, the Court will, apart from those authorities cited in paragraph 16, supra, bear in mind the following legal principles:

a. Discovery must not be oppressive by making order of voluminous documents and it must be for fair trial or saving costs; class documents are classified by nature, not by issues. Deak and Company (Far East) Ltd. v N.M. Rothschild and Sons Limited & Others (unreported, CACV28/1981, Barker JA 4 November 1981).

b. The scope of discovery depends on issues at trial and it should limit discovery to what is necessary and the court should discourage satellite litigation and apply proportionality test of costs and importance of documents.  Full Range Electronics Co. Ltd. v General-Tech Industrial Ltd & Another (unreported, CACV59/1997, Rogers J. (as he then was), 11 June 1997).

c. By analogy, the documents to be discovered are not only relevant, but must also be necessary (for a fair trial or saving costs). Kao Lee & Yip (a firm) v Donald Koo Hoi Yan & Others (unreported, HCA8847/1993, Ma J. (as he then was), 23 April 2002).  See paragraph 7.

d. The party who has failed to comply with the court order and cooperate with the other party for discovery has to pay the extra costs that the other party had incurred in order to gain access to the electronic documents. The Joint and Several Provisional Liquidators of Moulin Global Eyecare Holdings Ltd v Ernst & Young(unreported, HCCW 470/2005, Kwan J. (as she then was) 18 June 2008.  In this case, the respondent had used a software for the electronic information for discovery, which failed to comply with the order enabling the liquidators to have full access to the documents and, as a result, the liquidators had to incur extra cost for discovery. (paras.7 & 8).  See also §26 of  Breezeway Overseas Ltd v UBSAG [2012] SGHC 41[19]

e. Following the CJR, the increasing emphasis is for the court to limit discovery in the context of its duty actively to manage the case; O 24 r 15A of the RHC was introduced giving the power to the court to limit discovery for the purpose of managing the case and furthering the underlying objectives specified in O. 1A.  HSBC Private Bank (Suisse) SA v Mission Bridge Ltd. & Another (unreported, HCA406/2008 DHCJ Lok 18 June 2012).

f. The Court should consider the features of the particular case with a view to making an order tailored to achieving a just outcome, which includes limiting, as far as possible, the costs incurred (see paragraph 27).  Fiddes v Channel 4 TV Corporation & Another [2010] EWCA Civ 516 (24 March 2010). See also §16 of of Breezeway Overseas Ltd v UBSAG [2012] SGHC 41.[20]

g. A “staged” approach can be adopted for appropriate cases so that one may start the search of the electronically stored information with the most important people at the top of the pyramid because very often the opposite party will get everything they want from those people without going down the pyramid (paragraph 22). Goodale & Others v The Ministry of Justice & Others [2009] EWHC B41 (5 November 2009) Senior Master Whitaker, adopted by the Supreme Court of Singapore in Breezeway Overseas Ltd v UBSAG [2012] SGHC 41 by Yeong Zee Kin SAR, 28 February 2012.

h. In case of dispute over privileged documents, a special committee can be set up by the court to handle the issues of sorting out privilege documents from a storage of electronic information. Avowal Administrative Attorneys Ltd & Others v The District Court at North Shore & Another HC AK CIV 2006-404-007264 21 December 2009.

i. In Digicel (St Lucia) Ltd & Others v Cable & Wireless plc and Others Morgan J. 23 Oct 2008 [2009] All ER 1094 where the cost was some £2m in fees together with disbursements of some £175,000, the process took some 6,700 man hours of lawyers’ time [25]; the defendant being criticized by the Judge that the key word search was conducted without agreement by the plaintiff, who successful challenged the appropriateness of the search and the judge held that:

i. the parties should at an early stage in the litigation discuss issues that might arise regarding searches for electronic documents.  Where keyword searches were used they should be agreed as far as possible between the parties [47].

ii. the defendants' solicitors' unilateral action had exposed the defendants to the risk that the court might require the exercise of searching to be done a second time, with the overall cost of two searches being significantly higher than the cost of a wider search carried out on the first occasion.

iii. to determine what was reasonable search, the solicitor in charge of the documents had the burden to do the reasonable search for the documents relevant to the case and the court would determine whether reasonable search should be made, taking into account the proportionality test [51];

iv. where the court found that the defendant had failed to do the reasonable search in the first place, the court would consider directing the parties’ solicitors to discuss the proper directions to be made, if a simple direction was not proper [70]; and

v. positive keyword search might be made as agreed by the parties and it was wrong to adopt the strategy of “leaving no stone unturned [80]”.

j. De-duplication of electronic documents must be ensured and the party which had failed to carry out this process should be ordered to pay the costs to the other party West African Gas Pipeline Company Limited v Willbros Global Holdings Inc [2012] EWHC 396 (TCC) (27 February 2012)  (paragraphs 93 – 95).

The parties’ cooperation

29.The court expects the parties to be cooperative between themselves and they have an obligation to cooperate with the court under Order 1A rule 3 RHC.  Case management is particularly important for cases which involve e-discovery.  At the moment e-discovery is contemplated, the parties should consider the issues of preservation of the e-information; the categorization of such information; the retrieval of it for disclosure and inspection; whether metadata should be disclosed; the form of the list for the e-documents; the mode of presentation to the other party and ultimately to the court at trial.  The Practice Direction which is operative on 1 September this year will assist the parties to make preparation for the e-documents. See section C - General principles, scope of discovery and privileges of the Practice Direction.

30.The court will encourage the parties to cooperate with one another to work out the protocol for e-discovery without the court’s intervention, if possible, giving directions on the issues of disputes at each stage if the parties are unable to reach agreement themselves.[21]  On the other hand, the court will impose sanction over the party who is attempting to abuse the system or playing games in e-discovery.  The court expects the parties to conduct e-discovery in a purposive and responsible manner, taking into account of the underlying objectives under Order 1A of CJR.  The e-discovery must be purposive, meaning that the scope must be as narrow as possibly necessary for the purpose of the party’s case only without duplication. If the party does not make the e-discovery with prudence or even abuse the use of e-discovery, the party will be sanctioned by the court and be liable for the costs wasted or incurred by the other party.  See The Joint and Several Provisional Liquidators of Moulin Global Eyecare Holdings Ltd.

Discussion – application for D2’s emails

31.Bearing in mind of the above legal principles, I shall now consider the plaintiffs’ application against the 2^nd defendant for D2’s Emails.

32.It is obvious that the plaintiffs’ application for D2’s Emails is for furthering their case against the 2^nd defendant on conspiracy, the plaintiffs having stated their claim against the 1^st, 2^nd , 3^rd, 4^th, and 5^th defendants for conspiring to convert the plaintiffs’ property to their use and for conspiring to commit breaches of contract and/or fiduciary duty in the Indorsement of Claim, which, however, is not in the nature of a pleading and does not form part of the pleadings as held by the Court of Final Appeal in Moulin Global Eyecare Holdings Ltd (in Liquidation)(formerly known as Moulin International Holdings Ltd) v Olivia Lee Sin Mei (unreported, FACV 23/2013, 17 July 2014 Gummow NPJ) at §§28(b) & 30.

33.The plaintiffs refer to the supporting affidavit saying that in April 2013, they had procured the service of a provider to obtain the Group’s hard drive with over 120,000 emails and other documents relating to the Group.  These documents include emails exchange between the 1^st to 4^th defendants.  The deponent then said that based on the limited emails available, it was clear that the defendants were using the personal emails to communicate among themselves and also with external advisers of the Group including Loeb & Loeb LLP, Deliotte and Vintage Filings, a financial filing firm, in relation to the operation and affairs of the Group.[22]  The plaintiffs further said that the 2^nd defendant should have more emails than those that he had disclosed and they asked for 2^nd defendant’s all emails during the years.

34.The proper pleadings for conspiracy was illustrated in Pido v Compass Technologies Co Ltd [2012] 2 HKLRD 537, at §17 the Court of Appeal held:

“As a matter of pleading, a case based on conspiracy, must contain the following elements (emphasis added):

a. The agreement between two or more persons. The means of carrying out the agreement, whether lawful or unlawful, must be set out.

b. The intention to injure the Plaintiff, whether predominant (in the case of a lawful means conspiracy) or merely an intention to injure (in the case of an unlawful means conspiracy).

c. The acts that were carried out pursuant to the agreement and the stated intention.

d. The damage caused to the Plaintiff.

See : Bullen & Leake & Jacob’s Precedents of Pleadings (16^th edition) Vol. 2 at paragraph 51-02.”

35.The starting point is whether the application for D2’s Emails is appropriate by reference to the applicant’s supporting affidavit under O.24, r.7(3).  Mr. Woodrum’s 4^th affidavit said that the defendants were at the core of the Group’s management for an extended period of at least 8 years.  They had raided the Group’s offices in Shanghai and Beijing and took away all the documents just as the new management was about to take control.  The defendants used their personal email accounts to communicate on matters concerning the Group, which would contain information as to their collaborative effort to defraud the Group and who had had substantial sums belonging to the Group diverted through their personal bank accounts. On these bases, the plaintiffs said that the documents were clearly relevant.[23]

36.It is apparent that the discovery of the emails is to establish the agreement and the intention to injure the plaintiffs.  They will be the most cogent evidence for the plaintiffs to establish their case of conspiracy against the defendants.  The question is whether the plaintiffs have pleaded that the defendants had used emails in their collaboration (with particulars in support) to cause damage to the plaintiffs and to establish that there is a storage of the emails of the 2^nd defendant and the basis on which the plaintiffs can make such assumption.  Also, as the emails are in the personal property of the 2^nd defendant, the 2^nd defendant should have possession or power over them.  However, due to the volume and the diversity nature of the emails, it will be incumbent upon the plaintiffs to satisfy the Court that the request is not oppressive and they are necessary for a fair trial or saving costs, regard having been made to proportionality.  See Deak and Company, HSBC Private Bank (Suisse) SA, & Citibank NA. and Kao Lee & Yip (a firm).

37.In my Decision delivered on 22 July 2014 in Sinodental Investment Ltd & Others v Sin Chung Yin Ronald & Others (unreported, HCA2176/2012), I said at §24 ‘Of course, it does not mean that whenever conspiracy is pleaded in the pleadings, the Court must allow discovery of documents even it is a fishing exercise.  The Court should not exercise its discretion mechanically.  It has to consider the other relevant facts and circumstances as pleaded in the pleadings to be satisfied that the applicants have set up a prima facie case in support of conspiracy against the defendants.  In the exercise of its discretion, the Court must follow the judicial guidelines as Ma J (as he then was) said in Wing Mou Construction Co Ltd (in Liquidation) v Cosmic Insurance Corporation Ltd & Another (unreported, HCCT40/2001, 6 June 2002) at §15(6): “…as with any exercise of discretion by the court, orders should only be made where necessary, just and convenient.” The Court must look at the context of the case itself.’

38.The plaintiffs have not been able to show, on a prima facie case, that the 2^nd defendant’s personal account does contain such information, not least to point out to me where and during what period of time can those relevant information be found.  Paragraph 10 of the 4^th affirmation of Mr. Woodrum, in which he said that the defendants used their personal email accounts to communicate on matters concerning the Group and as to their collaborative effort to defraud the Group, was not pleaded in the Statement of Claim. There are no particulars in support of such allegations – when or during which period of time they communicated to defraud the Group was not known. Nor was there any evidential basis for the plaintiffs to have such belief.

39.The plaintiffs then submit that relevance of D2’s Emails has been admitted by the 2^nd defendant himself, referring to §§54-56 [B/104] However, the 2^nd defendant in those paragraphs said that the emails did not have evidential value to establish conspiracy between himself and the other defendants.  He said that they might be relevant to the issue whether he had neglected to discharge his duties of CFO of the Group and whether he was negligent in respect of the filings with Nasdaq and SEC in the maintenance of a proper internal control system; that he had all along been under the supervision of the directors and the Auditor Committee and he would rely upon his email communications with Deloitte and the 4 defendants.[24]

40.I do not agree that the alleged admissions by the 2^nd defendant assist the plaintiffs’ application for the e-discovery for the following reasons:

a. the burden is on the plaintiffs to show to this Court that the D2’s Emails can either advance their case or damage the 2^nd defendant’s case, particularly on the issue of conspiracy (the Peruvian Guano approach)

b. the relevance of such emails must be found from the pleadings, not from the 2^nd defendant’s affidavit, which in any event, did not assist the plaintiffs’ case because the 2^nd defendant had, on oath, said that the emails had no evidential value to establish the plaintiffs’ conspiracy claim, though this is not conclusive, In the matter of Prudential Enterprise, Ltd. (unreported, HCCW594/1999, Chu J. (as she then was) 24 October 2003) ;

c. though the plaintiffs have pleaded that the 2^nd defendant is jointly liable with other defendants in the acts of torts and breach of the fiduciary duties, the plaintiffs have not been able to identify the element of agreement among the 2^nd defendant and other defendants in their pleadings.  If the agreement is express, the particulars of it should be specifically pleaded.  See the White Book 2014 edition at §18/12/1 and 18/12/8. If the agreement is to be inferred or implied from the circumstances, the factual circumstances must be set out generally.  See the White Book 2014, at 18/12/1 and Sinodental Investments Ltd & Others v Sin Chung Yin Ronald & Others (unreported, HCA2176/2012, 22 July 2014 at §19e).  The bare allegation of conspiracy, absent other circumstances, is clearly insufficient to say that they contain the element of conspiracy, which forms a separate head of tortious claim;

d. even if the plaintiffs can argue that the 2^nd defendant’s email as mentioned in his own affidavit may be relevant to their case, which I find very remote, they are not able to demonstrate to me that those emails are necessary for a fair trial or saving costs because their pleaded case does not rely upon agreement between the 2^nd defendant and the other defendants and also, the scope of the email, for a period of eight years, is too wide, for which the plaintiffs are unable to explain.  Kao Lee & Yip (a firm);

e. there has not been any attempt on the part of the plaintiffs to discuss with the 2^nd defendant as to what reasonable search should be made to the 2^nd defendant’s personal account in order to limit the scope and identify the relevant materials; given the nature of the electronic information, it is the practice that the Court will limit the scope of e-discovery, HSBC Private Bank (Suisse) SA, see also paragraph C General principles, scope of discovery and privilege at 5(3) of Practice Direction.[25]

41.In fact, the plaintiffs are alive to this difficulty as Mr. Hong submits that the plaintiffs do not seek disclosure of the irrelevant emails.  They submit that the 2^nd defendant is required to disclose all of the emails which are relevant, and to produce them in electronic form to enable the plaintiffs to carry out searches.[26]  This suggestion does not assist the plaintiffs because it is clearly a fishing exercise.

42.In accordance with Digicel, the plaintiffs are entitled to request the solicitor in charge of the 2^nd defendant’s personal email to make a reasonable search.  If the 2^nd defendant’s solicitor refuses to do so, they may make application to the Court for directions for the reasonable search.  The Practice Direction, which will be operative on 1 September 2014 has provided a comprehensive list of issues that the parties should discuss before the 1^st Case Management Conference taking care of, among other things, preservation of documents, the scope, reasonable search, category of documents, privilege, key-word search, method for de-duplication, staged approach, forms of presentation, costs to be shared etc.  At paragraph 11, it provides that the court will give directions to the parties upon its own motion or upon parties’ application.  Although this provision is only operative as from 1 September, it is obvious that the court does have the power to give directions to the parties for e-discovery before commencement of the Practice Direction under Order 1B of RHC[27].

43.If such application was made to the Court, the Court would have to be satisfied that the plaintiffs had attempted to agree the reasonable search with the 2^nd defendant before taking out the application[28].  If they were unable to reach an agreement, the plaintiff should inform the Court in the supporting affidavit what proposals had been made and refused by the 2^nd defendant and the reasons for the refusal.  The Court will be in a better position to consider the parties’ proposals and may tailor-make the directions.  See Fiddes.  If the volume of the documents is too much for one exercise of reasonable search, the Court may consider search by stages.  See Goodale & Others.

44.The plaintiffs have not attempted to agree the reasonable search with the 2^nd defendant.  From the objections raised by the 2^nd defendant, it appears that the 2^nd defendant says that there is simply no such email in support of the plaintiffs’ allegation of conspiracy.

45.In this case the 2^nd defendant has also raised the issue of intrusion of his privacy and privilege. Appropriate steps should be agreed between the parties to resolve those issues before the application for discovery and if they are unable to reach agreement, the disputed issues should be referred to the court for determination.  See Avowal Administrative Attorneys Ltd.

46.Therefore, if I were satisfied that there would be relevant emails in the 2^nd defendant’s personal account, which would support the plaintiffs’ conspiracy claims against the defendants, I had the discretion to adjourn the matter for the parties to work out the reasonable search of the 2^nd defendant’s personal emails, adopting a similar approach as decided by Burrell DHCJ in Chinaplus Wines Limited v Nicholas Frederick Pegna Berry Bros & Rudd Limited & Others (unreported, HCA 905/2011, 13 February 2014) in which the plaintiff sought about 50,000 emails from the 1^st defendant and the Deputy Judge encouraged the parties “to devise a cheaper and more costs effective way of resolving the issue rather than referring it to the court” (para. 16); bearing in mind that it must not be oppressive (Deak and Company & Full Range) and reasonable in the circumstances, referring to Digicel.  Where the 2^nd defendant raises privilege, this Court may resort to Avowal Administrative Attorneys Ltd & Others for guidance.

47.If the parties have failed to make those arrangements before the application for e-discovery, it is reasonably foreseeable that they may have problems in the exercise of e-discovery, resulting in more satellite litigations between the parties and costs will be wasted.  See Full Range, The Joint and Several Provisional Liquidators of Moulin Global Eyecare Holding and West Africa Gas Pipeline Co Ltd.

48.However, the plaintiffs have obtained about 120,000 electronic documents from the Group’s computer hard disk, in which they found some emails of the defendants.  The plaintiffs have not been able to tell this Court any of those emails are related to the conspiracy of the defendants as pleaded by the plaintiffs.  The basis that the 2^nd defendant’s personal emails would be useful is unknown.

49.This shows that it is a fishing exercise only.  As such, it will not be allowed.  Although the plaintiffs may amend the pleadings, there is no indication from the plaintiffs whether they will do so or what amendments will be made.

50.In the circumstances, I consider that the better course is simply dismiss the plaintiffs’ application on their request for D2’s Emails.

51.If the plaintiffs obtain leave of the Court and amend their pleadings and take out another application for the emails on the re-pleaded case, by then the Practice Direction should have been in operation, the parties should observe the Practice Direction and, subject to the Court’s further directions, the plaintiffs should support their applications by way of affidavit, in which they should, among other things, set out the following matters:

a. They had discussed the intended application with the defendants on the issue of whether the defendants oppose the emails wholesale or the defendants only dispute the scope of the e-discovery;

b. Whether the plaintiffs had made recourse to the Practice Direction and discussed those practical issues such as scope, reasonable search, inspection, privilege and form of presentation at trial etc. with the defendants;

c. The issues of dispute between the plaintiffs and the defendants on the application for the emails for the Court’s determination;

d. The plaintiffs’ proposal for resolving the difference and the objections of the defendants, with reasons in support of their views or proposals (see Digicel and the Practice Direction).

Discussion – D2’s Accounting Documents

52.As to the Accounting Documents, the 2^nd defendant has in his 9^th affidavit said that he had never been in possession of any of Fu’s Accounting Documents, which is not disputed by the plaintiffs, I shall apply the legal principles in  In the matter of Prudential Enterprise, Ltd. (unreported, HCCW594/1999, 24 October 2003).  The affidavit shall be conclusive for the interlocutory proceedings unless there are other inconsistent evidence in the affidavit itself or the documents referred thereto or in the pleadings, which are absent here.[29]

53.Although the plaintiffs submit that paragraph 19 of the 5^th defendant’s Defence that the Accounting Documents were sent to the 3^rd defendant by email and 1^st defendant and 2^nd defendant would be copied in those emails and therefore those documents would have been sent to the 2^nd defendant, the wording of paragraph 19 is debatable.  It states:

“The 5^th Defendant wouldprepare the accounting vouchers, cheques and remittance advices for accounting purposes. All receipts and records would be filed and sent to the 3^rd Defendant. The 1^st to 4^th Defendants would be copied into any emails.”

The 2^nd defendant argues that it is unclear that the Accounting Documents were sent to the 2^nd defendant.  I agree that the meaning as proposed by the plaintiffs is arguable.  Besides, this is the 5^th defendant’s Defence, which is contradicted by the 2^nd defendant.  The Court should not embark on cross-examination of the evidence before it and therefore the affidavit of the 2^nd defendant should be final.  See In the matter of Prudential Enterprise Ltd.

54.I therefore dismiss the plaintiffs’ summons against the 2^nd defendant.

Discussion – D3’s emails

55.The plaintiffs seek electronic copies of all emails sent to and from the email addressee [email protected] from the 3^rd defendant.  They rely upon the similar reasons as those for their application for the 2^nd defendant’s emails.  They have the same predicaments for the 2^nd defendant as for the 3^rd defendant.

56.The 3^rd defendant’s objections are that it is unnecessarily wide and that the personal emails were not used for business purposes.

57.The 3^rd defendant also submits that according to the Decision of A.  Chan J[30]., there was no direct evidence of any wrongful act committed by the 3^rd defendant.

58.The purpose of getting the emails is for proof of conspiracy against the 3^rd defendant.  Again, the plaintiffs are unable to demonstrate to this Court the element of conspiracy in the Statement of Claim.

59.For the same reasons in relation to the 2^nd defendant above, I decline to make an order for the 3^rd defendant’s all personal emails as requested by the plaintiffs.  I dismiss their application.

Discussion – D4’s emails

60.The plaintiffs seek electronic copies of all emails sent to and from the email address [email protected], relying upon similar reasons as for the 2^nd and 3^rd defendants.[31]

61.The plaintiffs object to admissibility of the 4^th defendant’s opposing affirmation for being out of time and it was not affirmed before a notary public or diplomatic or consular officer of PRC, contrary to O.41, r.12.  It is admitted that the 4^th defendant’s affirmation was not affirmed before a notary public in Shanghai.  As such, the Court has decided to read it de bene esse.  This Court will attach no weight to this affirmation.  Nevertheless, the burden remains on the plaintiffs to show that the order should be made.

62.The plaintiffs fail to discharge their burden to satisfy this Court that an order for the emails of the 4^th defendant’s personal account to be disclosed should be made on the analysis of the 2^nd defendant’s case above.  This exercise amounts to a fishing exercise, which is oppressive to the 4^th defendant.  As such, the Court declines to make an order as requested for the disclosure of the 4^th defendant’s emails.

Discussion – D4’s bank accounts etc.

63.The plaintiffs ask for the 4^th defendant’s all bank statements and vouchers of all bank accounts as set out in section 4 of the schedule attached to the summons as from 1 January 2009 to the date on which the relevant accounts were closed.[32]

64.In support of the application, the plaintiffs rely upon the 4^th affidavit of Mr. Woodrum.[33]  Although the plaintiffs have, prima facie, been able to show that the 4^th defendant’s personal bank accounts are relevant to the issues in dispute, to require the 4^th defendant to disclose all bank statements and vouchers of all bank accounts for the period between 1 January 2009 to their closures, irrespective of the amount involved, is oppressive.  I consider that the scope of the discovery of the personal accounts and vouchers should, in view of the amounts involved, be limited to the amounts of $100,000 or above.

65.I therefore dismiss the plaintiffs’ application against the 2^nd to 4^th defendants save and except that the 4^th defendant shall within 28 days from the date hereof file and serve an affirmation disclosing all bank statements and vouchers of all bank accounts of $100,000 or above as mentioned above from 1 January 2009 to the date on which the relevant accounts are closed.

Costs and order

66.As to the costs of the plaintiffs’ application, they should follow the event. I shall now make an order nisi that the plaintiffs shall pay the costs of the 2^nd and 3^rd defendants, with counsel’s certificate for the 3^rd defendant.  As to the 4^th defendant, since the plaintiffs succeed in their application for the accounts and vouchers but fail in the discovery of the emails, there should be no order as to costs between the plaintiffs and the 4 defendant.  The 2^nd and 3^rd defendants’ costs shall be, unless they are agreed, assessed under O.62, r.9A by lodging & serving of their respective schedules of costs within 14 days after this order nisi has become absolute.  The plaintiffs shall within 7 days thereafter lodge and serve the objections.  A hearing of 30 minutes will be fixed thereafter.  This order nisi shall become absolute 14 days from the date of this Decision unless any party meanwhile apply to vary this order.

67.As a matter of case management for this matter, if the parties pursue e-discovery, they must follow the Practice Direction for E-Discovery unless an order is made by consent.

Mr. Hong, of Fried, Frank, Harris, Shriver & Jacobson for the plaintiffs

Mr. Yeung, of C.L. Chow & Macksion Chan, for the 2^nd defendant

Mr. Oh, instructed by Lee & Chow, for the 3^rd defendant

Mr Marwah, instructed by Jones Day, for the 4^th defendant